IP Litigation Fall 2008 Newsletter

18 December 2008 Publication
Author(s): Marshall J. Brown James D. Dasso David G. Luettgen

Legal News: IP Litigation

The Eastern District of Texas: Is the Pro-Plaintiff Tide Turning?1
By John T. Gutkoski

The U.S. District Court for the Eastern District of Texas remains the country’s most popular court for patent litigation. In fiscal year 2007, 359 patent cases, or 12.4 percent of all the patent cases filed in the United States, were filed in the Eastern District.2 One reason the Eastern District is so popular is its perceived reputation as being a pro-plaintiff jurisdiction. Plaintiffs have come to expect several things by litigating there, including a relatively short track to trial, the strict use of specific local patent rules, a no-nonsense policy toward discovery, and a low likelihood of cases being transferred. Most important, plaintiffs have relied on the reputation that the Eastern District’s judges rarely grant defendants summary judgment and that its juries frequently decide in favor of plaintiffs. Indeed, until recently, no jury in the Eastern District had invalidated a plaintiff’s patent. This reality limited defendants for practical purposes to non-infringement defenses and provoked many, often lucrative, settlements in plaintiffs’ favor.3

Recent evidence suggests, however, that the pro-plaintiff tide may be turning in the Eastern District of Texas. As an initial matter, the sheer volume of cases filed there has taken a toll. The time from filing a case to getting to trial in the Eastern District has now doubled from one year to approximately two years.4 Beyond just increasing plaintiffs’ costs, longer case schedules buy defendants time, a key asset that can assist them in locating additional prior art, finding helpful witnesses, or otherwise developing defenses and preparing them for the most effective presentation at trial. In addition, the Eastern District’s reluctance to transfer cases to other venues may be curtailed by the recent decision in In re Volkswagen of America, Inc., 545 F.3d 304, 318-19 (5th Cir. 2008), in which the Court of Appeals for the Fifth Circuit ordered a case transferred out of that district, finding the trial court reached a patently erroneous result and abused its discretion by denying transfer.

A stronger indication of the turning tide, however, is the increasing number of patents being invalidated in the Eastern District. Research shows that from 2000 to 2005, only three patent cases in the Eastern District reached judgment for defendants on invalidity grounds, all by judge-decided motions for summary judgment.5 In 2006, however, patents were invalidated in three separate cases, including what is believed to be the first jury verdict of invalidity in the Eastern District.6 Then 2007 saw five more cases where patents were invalidated, and two of those came by way of jury verdict.7

So far in 2008, defendants have invalidated patents in four cases, most recently in Candela Corp. v. Palomar Medical Technologies, Inc., No. 9:06-CV-277, 2007 WL 738615 (E.D. Tex. Feb. 22, 2007).8 Foley represented the defendant, Palomar Medical Technologies, Inc. (Palomar).  Palomar, a leading researcher and developer of light-based systems for cosmetic treatments, prevailed in a significant patent infringement suit in the Eastern District. On October 7, 2008, a jury sitting in Lufkin, Texas found that the company’s products did not infringe Massachusetts General Hospital (MGH) and Candela Corporation’s (Candela) U.S. Patent No. 5,810,801 (‘801 Patent), titled “Method and apparatus for treating wrinkles in skin using radiation,” and also found that the asserted claims of that patent were invalid. In their complaint, MGH and Candela had accused Palomar of infringing the ‘801 Patent and two additional patents, U.S. Patent Nos. 6,120,497 and 6,659,999 (‘497 Patent and ‘999 Patent). MGH and Candela accused seven different Palomar hand piece products used in combination with four different base units. MGH and Candela also requested injunctive relief and enhanced damages because they alleged Palomar’s infringement had been willful.

Following partial summary judgment decisions in Palomar’s favor, MGH and Candela were forced to drop from the case many of their accusations against certain of Palomar’s products, and to drop all of their claims of infringement of the ‘497 and ‘999 Patents. Plaintiffs went forward at trial arguing infringement of the apparatus claims of the ‘801 Patent. The jury, however, found that none of Palomar’s products infringed any of these claims. In addition, the jury found all of these claims to be invalid. Specifically, the jury found that the asserted claims of the ‘801 Patent were anticipated by one prior art reference and found them all rendered obvious by four separate combinations of additional prior art. Following the trial, the jurors told counsel they had quickly decided non-infringement and then spent the bulk of their deliberations considering the prior art and the validity of the plaintiffs’ patent.

Why are Eastern District juries now willing to consider and, more and more, accept invalidity defenses? Perhaps defendants are now doing a better job educating juries on their role in being the ultimate decision-makers about the validity of patents. Perhaps the less patent-friendly publicity of the past few years, as Congress debates patent reform and industry complains about the costs of patent litigation, has filtered down and is making an impression. And perhaps in the current economic climate, juries are taking a harder look at whether plaintiffs really should be entitled to significant recoveries.

Whatever the specific combination of factors in play, plaintiffs can no longer take for granted some of the perceived advantages in the Eastern District. Plaintiffs undoubtedly will continue to file a large number of patent cases there. Defendants, however, should no longer assume that jurors are unwilling to analyze prior art or unlikely to carefully weigh invalidity defenses.



1 John Gutkoski and a team from Foley & Lardner LLP recently successfully represented defendant Palomar Medical Technologies, Inc. at trial in the Eastern District, together with David Beck and a team from Beck Redden & Secrest LLP.

2 Administrative Office of the United States Courts, Judicial Business of the United States Courts 2007 Annual Report of the Director, Table C-11 Intellectual Property Cases, Securities/Commodities/Exchanges Cases, and Bankruptcy Appeals Filed, Terminated, and Pending, 194-207 (2008).

3 Marius Meland, Eastern District Of Texas: A Plaintiff’s Best Bet, Law 360, Dec. 9, 2005, http://www.law360.com/print_article/4738.

4 Jesse Greenspan, ‘Rocket Dockets’ Gaining On Popular E. Texas Court, Law 360, Feb. 20, 2008, http://www.law360.com/print_article/46485.

5 Minton v. National Ass’n of Securities Dealers, Inc., 226 F. Supp. 2d 845 (E.D. Tex. 2002); Williams v. General Surgical Innovations, Inc., No. 1:00-CV-037, 2002 WL 32114466 (E.D. Tex. May 22, 2002); Touchcom, Inc. v. Dresser, Inc., 427 F. Supp. 2d 730 (E.D. Tex. 2005).

6 Halliburton Energy Services, Inc. v. M-I, LLC, 456 F. Supp. 2d 811 (E.D. Tex. 2006); Maurice Mitchell Innovations, L.P. v. Intel Corp., No. 2:04-CV-450, 2006 WL 3447632 (E.D. Tex. Nov. 22, 2006); Hyperion Solutions Corp. v. OutlookSoft Corp., No. 2:04-CV-436 (TJW) (E.D. Tex. Nov. 22, 2006).

7 Computer Acceleration Corp. v. Microsoft, Corp., No. 9:06-CV-140, 2007 WL 4223218 (E.D. Tex. Nov. 27, 2007); Forgent Networks, Inc. v. EchoStar Comm. Corp., 2007 WL 1775289 (E.D. Tex. 2007); Golden Bridge Tech., Inc. v. Nokia, Inc., No. 2:05-CV-151, 2007 WL 294176 (E.D. Tex. Jan. 29, 2007); TGIP, Inc. v. AT&T Corp., 512 F. Supp. 2d 727 (E.D. Tex. 2007); Advanceme, Inc. v. RapidPay, LLC, 509 F. Supp. 2d 593 (E.D.Tex. 2007). There was also one case where a patent was held to be unenforceable due to inequitable conduct. Avid Identification Systems, Inc. v. Phillips Electronics North America Corp., No. 2:04-CV-183, 2007 WL 2901415 (E.D. Tex. Sept. 28, 2007).

8 Black v. CE Soir Lingerie Co., Inc., No. 2:06-CV-544, 2008 WL 3852722 (E.D. Tex. Aug. 15, 2008); PureChoice, Inc. v. Honeywell International, Inc., No. 2:06-CV-244, 2008 WL 190317 (E.D. Tex. Jan. 22, 2008); Cooper Tech., Inc. v. Thomas & Betts Corp., No. 2:06-CV-242, (E.D. Tex. Sept. 11, 2008).


In re Bilski: In a Groundbreaking and Controversial Decision, the Federal Circuit Addresses the Standard for Patent-Eligibility of Process Claims Under 35 USC § 101
By David G. Luettgen

In October, the Court of Appeals for the Federal Circuit issued its highly anticipated en banc decision in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) — a decision that will impact patent lawsuits and applications involving business methods and other subject matter areas. The Court announced that the proper test for patent-eligibility of processes is a “machine-or-transformation test.” Under the machine-or-transformation test, “[a] claimed process is surely patent-eligible under § 101 if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

The Court’s reasoning centered on whether the claims of a patent or application would pre-empt the use of a “fundamental principle” such as “laws of nature, natural phenomena, and abstract ideas.” In the Court’s view, claims that completely pre-empt the use of fundamental principles are not patentable, while claims that only foreclose use of a particular application of a principle are patent-eligible.

Addressing one of the most controversial aspects of the case, the Court made clear that it was not adopting broad exclusions against business method and software patents. Rather, the Court stated that business methods and software can be patent-eligible if they meet the machine-or-transformation test. Significantly, the Court left open whether a process is “tied” to a machine by merely reciting a computer.

Turning to Mr. Bilski's patent, the Court found that the subject matter of the claims was not patent-eligible. The Court noted that the first claim involved purely mental processes coupled with a post-solution step of consummating the transaction. According to the Court, “a claimed process wherein all of the process steps may be performed entirely in the human mind is obviously not tied to any machine and does not transform any article into a different state or thing. As a result, it would not be patent-eligible under § 101.”

The machine-or-transformation test announced in Bilski will likely affect patent litigation in a number of ways. First, prior to initiating an infringement suit, companies with software or business method patents must review such patents to ensure compliance with the machine-or-transformation test. If one or more of the patent’s claims do not comply with the test, it may be desirable to pursue reissue to modify the claims.

Second, courts are likely to see an increase in the number of defendants seeking summary judgment to invalidate patents for failing to recite patent-eligible subject matter. This is particularly true for claims that were written in the context of the Federal Circuit’s previous State Street Bank standard of patent-eligibility (“useful, concrete and tangible result”) but that arguably do not comply with the machine-or-transformation test.

Third, the Bilski Court’s discussion of various considerations affecting patent-eligibility may increase the number of issues requiring expert testimony in a lawsuit. Those issues include: whether the use of a specific machine or transformation of an article imposes “meaningful limits” on the claim's scope; whether the recited machine or transformation constitutes “insignificant postsolution activity;” whether the patent claims “[m]ere field-of-use limitations;” and whether the transformation of articles is “central to the purpose of the claimed process.” The likelihood of parties presenting conflicting expert testimony on these topics may limit the ability to obtain summary judgment for invalidity under § 101.

How all of these issues will play out in district courts remains to be seen. As of yet, there are currently no published court decisions applying Bilski’s machine-or-transformation test.


Federal Circuit Issues Significant Decision Clarifying the Test for Design Patent Infringement: “Ordinary Observer Informed by the Prior Art”
By Marshall J. Brown and Heidi L. Belongia

In its most significant design patent decision in years, the Federal Circuit recently clarified the test for design patent infringement in Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en banc). In a unanimous en banc opinion, the Federal Circuit held that a design patent is infringed if an ordinary observer informed by the prior art would believe that the accused design is substantially the same as the patented design. The Court’s opinion expressly rejected the “point of novelty” and “non-trivial advance” standards that courts had previously used as separate requirements to prove infringement. The Court also held that detailed constructions of a design patent’s claims were neither required nor prohibited.

Overview of Design Patents
Design patents protect an original, ornamental shape or configuration. The design must be ornamental, novel, non-obvious, enabled, and definite to be patented. The fundamental difference between utility patents and design patents is utility; if a design is functional, rather than purely ornamental, it is not eligible for design patent protection.

Prior to the decision in Egyptian Goddess, courts analyzed design patent infringement under two tests. The “ordinary observer” test was first articulated in Gorham Co. v. White, 81 U.S. 511, 528 (1871):

[I]f, in the eye of an ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other, the first one patented is infringed by the other.

Over time, courts added another layer to the infringement analysis by applying a point of novelty test, which required:

[T]he accused device must appropriate the novelty in the patented device which distinguishes it from the prior art … That is, even though the court compares two items through the eyes of the ordinary observer, it must nevertheless, to find infringement, attribute their similarity to the novelty which distinguishes the patented device from the prior art. Litton Systems, Inc. v. Whirlpool Corp., 728 F.2d 1423, 1444 (Fed. Cir. 1984).

A Brief History of Egyptian Goddess
Egyptian Goddess sued Swisa for infringement of a patent covering an ornamental design for a nail buffer. The District Court granted Swisa’s motion for summary judgment of non-infringement. Egyptian Goddess, Inc. v. Swisa, Inc., No. 3:03-CV-0594-N (N.D. Tex. Dec. 14, 2005). In applying the ordinary observer and point of novelty tests, the Court found that Swisa’s buffer did not appropriate the point of novelty of the patented design. On appeal, a three-judge panel of the Federal Circuit affirmed the decision adding the non-trivial advance standard to its analysis. Egyptian Goddess, Inc. v. Swisa, Inc., 498 F.3d 1354, 1358-59.

The Federal Circuit Reaffirms the Ordinary Observer Test
After the panel’s decision, the Federal Circuit granted Egyptian Goddess’s petition for a rehearing before the full Court, to clarify the test for design patent infringement. On rehearing, the en banc Federal Circuit rejected both the point of novelty and non-trivial advance requirements as separate tests for proving design patent infringement. The Court determined that Litton Systems did not create a separate test for design patent infringement and instead explained:

Litton and the predecessor cases on which it relied are more properly read as applying a version of the ordinary observer test in which the ordinary observer is deemed to view the differences between the patented design and the accused product in the context of the prior art. Egyptian Goddess, 543 F.3d at 676.

Moreover, the Court pointed to a number of additional cases after the Supreme Court’s decision in Gorham that support viewing the ordinary observer as one who is informed of the prior art. Id. at 674-76. The Court then applied these holdings to the facts of Egyptian Goddess and affirmed the summary judgment of non-infringement.

The Federal Circuit also held that detailed verbal constructions of a design patent’s claims were neither required nor prohibited. While a district court’s decision to issue a detailed claim construction is not per se reversible error, a court is not required to issue such a construction. Id. at 679-80. Indeed, the Court suggested that detailed verbal claim constructions may not contribute enough to the process of analyzing the case to be worth the effort. Id. This differs from the procedure with utility patents, where district courts are typically required to construe all disputed claim terms.

Potential Implications
By rejecting separate point of novelty and non-trivial advance tests, the Federal Circuit has arguably opened the door for findings of design patent infringement in at least some instances where infringement would otherwise have been more difficult to prove. For example, the Federal Circuit discussed a hypothetical situation in which there were only small differences between a claimed design and accused designs. Using the point of novelty test, this situation presented a risk that an insignificant feature could be assigned exaggerated importance in an infringement analysis simply because that feature could be characterized as a point of novelty. By eliminating point of novelty as a separate test for infringement, such a risk should be mitigated, thereby making it potentially easier to find infringement where the differences between the claimed accused designs are minor.

Additionally, the elimination of the point of novelty test as a separate test may benefit patent holders in the situation where most but not all of a claimed design’s unique features are appropriated in an accused design. Under the point of novelty test, it was possible to find no infringement in such a situation, even though the copied elements resulted in the accused design having an overall appearance that was identical to the claimed design. Strictly using the ordinary observer test, however, may reduce the risk of such a finding.

While the Federal Circuit identified a number of scenarios where the use of a single ordinary observer test may be beneficial to the patent holder, it remains to be seen whether it ultimately will be easier for design patent holders to prevail on infringement allegations. Indeed, despite eliminating point of novelty as a separate test for design patent infringement, the Egyptian Goddess Court held that the accused design in that case did not infringe the claimed design as a matter of law. Similarly, in one of the first cases to apply the Egyptian Goddess holding, the U.S. District Court for the District of Utah granted summary judgment in favor of an accused infringer based upon the ordinary observer test in Arc’teryx Equipment Inc., v. Westcomb Outerwear, Inc., 2008 U.S. Dist. LEXIS 90028 (D. Utah Nov. 3, 2008). Whether the Egyptian Goddess decision is helpful to design patent holders will become clearer as district courts continue to apply its rule.


Federal Circuit Opens Door to Copyright Enforcement of “Open Source” Licenses
By Robert A. Lawler

In another groundbreaking decision, the Court of Appeals for the Federal Circuit recently held that the terms of a public license, sometimes referred to as an “open source” license, are enforceable under federal copyright law. The Federal Circuit in Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008), held that “copyright holders who engage in open source licensing have the right to control modification and distribution of copyrighted material.” The decision hands an important victory to software owners and proponents of public licenses. As the first decision by a court of appeals addressing the enforceability of public licenses, the case will likely be persuasive to other courts considering public licenses under copyright law.

The plaintiff in Jacobsen distributed the Java Model Railroad Interface (JMRI), a software package for interfacing home computers with specialized decoder chips used to control model railroad trains. The JMRI software was available for free download, and contained copyright notices and set forth the terms of the “Artistic License,” an open source or public license.1 The license terms required anyone copying or modifying the JMRI computer code to identify the JMRI authors, include the JMRI copyright notice and information regarding the origin of the files, and provide a description of any changes made to the JMRI files. The defendants produced a commercial software product for the model train industry called Decoder Commander, which performed a similar function to the JMRI software. While creating the product, the defendants copied portions of the JMRI computer code directly into Decoder Commander, without complying with the requirements of the Artistic License.

The District Court rejected Jacobsen’s claim of copyright infringement, reasoning that because the JMRI software was distributed under an intentionally broad non-exclusive license, any failure to comply with the license requirements did not place the defendant’s actions outside the scope of the license. In the District Court’s view, any harm caused by the defendants should be remedied through contract law, rather than copyright.

On appeal, the Federal Circuit focused on whether the license terms functioned as conditions or mere covenants that did not delineate the scope of the license. Examining the language of the Artistic License, the Federal Circuit pointed to a term stating that the “intent of this document is to state the conditions” for copying the software. Additionally, the Artistic License granted rights to copy, modify, and distribute “provided that” the conditions were met. Under the law of the forum state (California), use of the phrase “provided that” also denotes a license condition. Thus, the Court concluded that the express language of the license set forth restrictive conditions that were “vital to enable the copyright holder to retain the ability to benefit from the work of downstream users.” The Court concluded that the Artistic License set forth “enforceable copyright conditions,” the violation of which could create liability for copyright infringement.

The Jacobsen ruling is likely to increase the popularity of public licenses for distributing free software by allowing owners to retain control over use and downstream distribution. Copyright infringement actions can provide substantial benefits over breach-of-contract actions. For example, the potential to obtain statutory damages under the Copyright Act can cause dramatic increases in damage awards if liability is established. Copyright law also permits an award of attorneys’ fees for a prevailing party that demonstrates infringement of a registered work. In order to obtain these advantages, however, a software creator must register his copyright with the U.S. Copyright Office.

The lessons for authors of open source software who want to avail themselves of copyright protection are: (1) review the terms of your open source license to ensure that it contains terms that will be interpreted as conditions of use, rather than covenants, under the applicable state law; and (2) apply for copyright registration as soon as possible.



1 The “Artistic License” at issue in the case was written by Larry Wall for use with the PERL programming language, and is available at http://www.opensource.org/licenses/artistic-license-1.0.php. The JMRI software is currently distributed under the terms of version 2 of the GNU General Public License, available at http://jmri.sourceforge.net/COPYING


Seventh Circuit Holds Trademark Owners May Be Entitled to All of Infringer’s Profits
By James D. Dasso

In a decision almost certain to become a fixture in future trademark litigation briefs, the U.S. Court of Appeals for the Seventh Circuit recently held that a Lanham Act plaintiff can recover all of a willful infringer’s gross sales revenues without having to show a connection to the infringement if the infringer fails to present evidence of its costs or the portion of its sales not attributable to the infringement. The decision, WMS Gaming Inc. v. WPC Productions Ltd., 542 F.3d 601 (7th Cir. 2008), is a cautionary tale for potential trademark infringers.

WMS Gaming sells and leases gaming devices, including slot machines. It owns U.S. trademark registrations for “JACKPOT PARTY” and “SUPER JACKPOT PARTY.” WPC Productions Ltd. and its parent PartyGaming PLC (together, PartyGaming) have their base of operations in Gibraltar but provide gaming services around the globe. PartyGaming had actual as well as constructive knowledge of WMS’s registrations as a result of its unsuccessful attempts to register its own trademark “PARTYJACKPOT.” The U.S. Patent and Trademark Office (PTO) rejected PartyGaming’s proposed trademark as “confusingly similar” to WMS’s trademarks. PartyGaming, however, refused to abandon the mark and instead expanded its use of the mark at the same time that its profits from U.S. consumers also expanded. According to the Seventh Circuit, this “well-documented” and “unapologetic” infringement continued “frequently and persistently” for the next several years.

WMS sued PartyGaming in the Northern District of Illinois, but PartyGaming chose to boycott the suit despite proper service of process. The district court entered a default judgment against PartyGaming and awarded $2.7 million in damages. WMS, however, thought it deserved exponentially more — nearly $288 million — and filed a Rule 59 motion asking the district court for an equitable accounting of defendants’ profits rather than actual damages. The district court denied the motion and WMS appealed.

After concluding that WMS had properly demanded an accounting in its pleadings (a prerequisite for such an award in a default judgment), the Seventh Circuit found that the district court had committed a “fundamental error of law by failing to distinguish between WMS’s rights to the defendants’ profits and its right to damages.” Although a trademark owner can recover only so much of the profit as resulted from the use of the trademark, the Court of Appeals noted that often it is difficult to ascertain what portion of the profits result from the trademark with any reasonable certainty. In such cases, the infringer bears the burden of proving that its infringement did not have any cash value in its sales.

The Seventh Circuit explained that when a trademark owner offers evidence of infringing sales and the infringer fails to carry its burden of proving deductions, the owner can recover all of the infringer’s gross sales. While this might result in a “windfall” to the trademark owner, a contrary decision might result in a “windfall” to the wrongdoer. In the case before it, WMS introduced evidence of PartyGaming’s gross U.S. sales and PartyGaming (which had defaulted) failed to present evidence of its costs or of the portion of its sales not attributable to its infringement. The court therefore reversed and remanded the case back to the district court for an accounting consistent with its opinion.

WMS Gaming underscores two important points of trademark litigation.  First, it highlights the importance of demonstrating a defendant’s willful misconduct and disregard of the plaintiff’s trademark and other laws. In its opinion, the Seventh Circuit repeatedly emphasized the “persistent, persuasive, knowing and willing infringement for several years by PartyGaming.” PartyGaming further incensed the Court by forcing WMS to pursue litigation before the PTO to protect its mark, but then thumbing its nose at the federal court litigation seeking to enforce those marks. The Court may not have been so eager to authorize nearly $300 million in damages without such incendiary conduct. Therefore, a savvy trademark owner will seek to paint the defendant as a bad actor, while the alleged infringer will seek to portray its conduct as, at worst, an innocent and understandable mistake.

Second, the case emphasizes the importance of good financial recordkeeping and the burden of proof in assessing trademark damages. Trademark owners will want to maximize the amount of sales connected with the trademark infringement and will skip any further analysis, leaving the infringer to demonstrate its alleged costs and the portion of its sales not attributable to the alleged infringement. The infringer may find it difficult to carry this burden, as the fact-finder may resolve any reasonable doubts against the wrongdoer. A business accused (or that fears that it may be accused) of trademark infringement will want to ensure that it has kept and maintained careful records from which it can demonstrate its manufacturing, marketing, sales, overhead, and other costs. The accused infringer also may want to consider conducting surveys or developing other forms of evidence designed to show how other aspects of the product contributed to sales. Of course, the accused infringer will want to remain careful that it does not develop evidence that undercuts its case.


Federal Circuit Provides Guidance on Inequitable Conduct, But Leaves Some Questions Unanswered
By Justin E. Gray

In two recent decisions, the Court of Appeals for the Federal Circuit provided some important guidance regarding the proof necessary to invalidate a patent for inequitable conduct. The Court’s decisions in Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357 (Fed. Cir. 2008), and Praxair, Inc. v. ATMI, Inc., 543 F.3d 1306 (Fed. Cir. 2008), highlight the “materiality” and “knowledge” requirements for proving inequitable conduct. While the decisions can be reconciled, they leave some important questions unanswered.

The Federal Circuit panels (panels) in Star Scientific and Praxair agreed that in order to prevail on a defense of inequitable conduct, a party must present “evidence that the applicant (1) made an affirmative misrepresentation of material fact, failed to disclose material information, or submitted false material information; and (2) intended to deceive the [Patent and Trademark Office] (PTO).”  The panels also agreed that both prongs of the test must be proven by “clear and convincing evidence” and that “a showing of materiality alone does not give rise to a presumption of intent to deceive.”

The two panels, however, reached different outcomes that, at first glance, may seem difficult to reconcile. In Star Scientific, the Court found no inequitable conduct despite there being evidence that a material prior art reference was not disclosed to the PTO. While in Praxair, the Court affirmed a finding of inequitable conduct by inferring intent to deceive where the omitted information was, in its words, “highly material.” The seeming inconsistency in these decisions is heightened by the fact that the Praxair court failed to discuss, or even mention the existence of, the Star Scientific decision that was issued just one month earlier.

Star Scientific made clear that a defendant cannot carry its burden simply because the patentee failed to provide a credible alternative explanation for failing to disclose a material reference during prosecution — the defendant must first present some evidence that the patent holder intended to deceive the PTO. Indeed, a patentee “need not offer any good faith explanation unless the accused infringer first carried his burden to prove a threshold level of intent to deceive by clear and convincing evidence.”

On the other hand, in Praxair, the Court stated that a showing of materiality alone may give rise to a presumption of intent to deceive … when “(1) highly material information is withheld; (2) ‘the applicant knew of the information [and] … knew or should have known of the materiality of the information; and (3) the applicant has not provided a credible explanation for the withholding.’” (Emphasis added.)

In Star Scientific, the patent holder changed law firms during the prosecution of the patents. The defendant argued that the switch was made to prevent the disclosure of material information to the PTO. The defendant, however, failed to present any evidence that the patent holder knew about the existence of the information being withheld. As a result, the Federal Circuit found that the defendant had not proven its case because it failed to show that the switch in firms was due to the existence of the material information. Since the defendant did not meet its burden, the patentee was not required to provide any explanation of its actions during prosecution.

In Praxair, by contrast, the Court found that the undisclosed prior art was “highly material,” the prosecuting attorney knew of the prior art and “was aware of its obvious materiality,” and the patentee did not provide a good faith explanation for the failure to disclose. As a result, the Court affirmed the lower court’s finding of inequitable conduct.

The two discussions leave some important unanswered questions. First, can a defendant meet its burden of showing intent to deceive by the heightened standard of clear and convincing evidence merely by showing that the applicant had knowledge of the material information and that the applicant should have known of the materiality of the information? Second, does the fact that a reference is “highly material” affect the analysis and, if so, what does “highly material” mean?

Until the Federal Circuit or lower courts address these issues, litigants must be prepared to work with the guidance these two decisions provide. Defendants should always characterize undisclosed prior art as “highly material” and marshal whatever facts are appropriate to support that assertion. Defendants also must be careful to gather evidence showing that the patent holder or prosecuting attorney had knowledge of an undisclosed reference and the materiality of that reference. Patent holders, conversely, must be prepared to rebut such evidence and be prepared to present a good faith explanation for not disclosing the reference to the PTO in the event the defendant carries its initial burdens of production.