IP Litigation Winter 2009 Newsletter

01 April 2009 Publication
Author(s): Andrew Baum Thomas I. Elkind

Legal News: IP Litigation

Micron v. Rambus: Beware the Consequences of Spoliation!
By Thomas I. Elkind (telkind@foley.com) and A. Bryce Rufener (brufener@foley.com)

A recent decision by the Delaware federal district court is a stern reminder that the obligation to preserve documents can arise long before litigation begins. In Micron Tech., Inc. v. Rambus Inc., 255 F.R.D. 135 (D. Del. 2009) (Rambus), the court, as a sanction for Rambus’s extensive spoliation of evidence, found 12 Rambus patents unenforceable against Micron. The court found clear and convincing evidence of bad faith by Rambus, which had ordered the shredding of thousands of relevant documents after the date when litigation was reasonably foreseeable. Rambus has filed a notice of appeal.

This case is a cautionary tale for any company contemplating litigation. First, be sure that all relevant documents are preserved, or risk dire consequences. Second, implement a document hold as soon as litigation is reasonably foreseeable.

History of the Dispute
Formed in 1990, Rambus quickly began filing patent applications for its Dynamic Random Access Memory (DRAM) inventions, which were marketed as “RDRAM.” For several years Rambus was successful in licensing RDRAM, but by the mid-1990s, Rambus was concerned that its customers and partners were using Rambus’s technology to develop competing products. Rambus’s plan to remain the industry leader was to create a “patent minefield.”

In January 1998, Rambus began preparing a licensing framework and a litigation strategy in order to protect and enforce its patent minefield. As part of the litigation strategy, Rambus employees were e-mailed a document-retention policy in July 1998 and were given two presentations relating to the policy. One of the presentations characterized the policy as a precursor to litigation, and Rambus employees testified that they were told the policy was in “preparation for litigation.” Thereafter, on September 3, 1998, Rambus held its first official company-wide “Shred Day,” which led to the destruction of approximately 400 boxes of documents. No records were kept of what was destroyed, but the trial record indicates that documents relating to contract and licensing negotiations, patent prosecution, finances, and board meetings were destroyed. By the end of 1998, Rambus had identified potential litigation targets, causes of action, and fora in which to bring suit, and had claim charts asserting infringement against Micron.

Rambus continued its litigation preparation throughout 1999. In April 1999, the company instructed outside counsel who had prosecuted several Rambus patents to “clear out” their patent files. Over the course of four months, outside counsel purged more than 60 Rambus patent files. A few months later, Rambus and its outside counsel set quarterly goals that included preparing litigation strategy for one to three manufacturers, being ready for litigation in 30 days, and having a “1999 shredding party at Rambus,” which was later referred to as “a document retention compliance event.” In August 1999, the company held another Shred Day, which resulted in the destruction of 300 boxes of documents. It was not until December 1999, one month before Rambus filed a patent infringement suit, that it instituted a litigation hold of relevant documents. After the initial litigation settled, outside counsel resumed purging Rambus patent files in June 2000. Micron filed the present litigation in August 2000, and at the end of 2000, Rambus destroyed another 480 boxes of documents in connection with an office move.

The court approved harsh sanctions against Rambus, ordering the 12 Rambus patents-in-suit unenforceable against Micron due to the spoliation of evidence. In the court’s view, Rambus’s actions were severe enough that they impugned the integrity of the litigation process. The destroyed documents were both discoverable and relevant to Micron’s defenses. The court purported to choose the least harsh sanction that would avoid unfairness to Micron and deter similar conduct. The court rejected usual sanctions such as adverse jury instructions and preclusion of evidence as “impractical, bordering on meaningless” in this case and further noted that imposition of fees and costs was “wholly inadequate.”

The message of the Rambus decision is clear: Litigants and counsel must be diligent in preserving documents as soon as litigation is “reasonably foreseeable” — when litigation is pending or imminent, or when there is a reasonable belief that litigation is foreseeable. While the court stated that Rambus’s spoliation conduct was extensive, any spoliation of documents or evidence may lead to sanctions. There simply is no safe way to game this system. As Rambus learned, “clearing out” files in advance of litigation is bound to be discovered, with dramatically adverse consequences. All companies that want to destroy electronic or paper documents for legitimate reasons should implement a document-retention policy and be prepared to put that policy on hold once litigation is imminent.

In re Ferguson: The Latest From the Federal Circuit on Patent-Eligible Subject Matter
By Adam E. Crawford (aecrawford@foley.com)

The Court of Appeals for the Federal Circuit recently issued another important decision reining in business method patents and clarifying the law regarding patent-eligible subject matter. In In re Ferguson, 2009 WL 565074 (Fed. Cir. Mar. 6, 2009), the Court relied on the “machine-or-transformation” test set forth in In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) to conclude that the method and “paradigm” claims at issue were not patentable. Judge Newman agreed with the result but issued a strong concurring opinion stating that “the panel majority goes further than is necessary and appropriate, redefining the Bilski opinion and expounding dicta that transcend the facts of this case.”

The 1999 patent application contained claims directed to a method of marketing a product and paradigms for marketing software. Claim 1, representative of the method claims, recited such limitations as “developing a shared marketing force,” “using said shared marketing force to market a plurality of different products,” “obtaining a share of total profits” from the companies that make the products, and “obtaining an exclusive right to market” the products. Claim 24, representative of the paradigm claims, recited a “paradigm for marketing software” in which a marketing company markets software from various software companies in exchange for a share of the income from the various software companies.

The Board of Patent Appeals and Interferences (Board) rejected all of the claims, stating that the method claims were directed to an abstract idea and thus were not patent eligible, and that the paradigm claims did not fit within any of the four categories of statutory subject matter under Section 101.

The Federal Circuit affirmed the Board’s decision, stating that its recent decision in Bilski was dispositive, and reiterated that “the Supreme Court’s machine-or-transformation test” is the “singular” test for determining whether a process is patentable under Section 101. Under that test, a claimed process is patentable subject matter “if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.”

On appeal, Ferguson argued that the method claims satisfied the first prong of the Supreme Court’s test because the method claims were tied to a shared marketing force. The Court rejected Ferguson’s argument, stating that a shared marketing force is not machine — a “concrete thing, consisting of parts, or of certain devices and combination of devices.” The method claims also failed to meet the second prong of the test because the only purported “transformations” in the claims were those of business or legal relationships in constructing a marketing force, and the Court emphasized that such transformations had been specifically excluded in Bilski.

In rejecting Ferguson’s unique claims for a paradigm, the Court held that these claims did not fit into any of the four categories of patentable subject matter enumerated in Section 101 (processes, machines, manufactures, and compositions of matter). Specifically, the Court held that the paradigm claims were not directed to “processes” because no series of acts was required. Nor were they directed to “manufactures” because a marketing company cannot itself be an article resulting from the process of manufacture. Lastly, the Court rejected Ferguson’s argument that a company is a physical thing and, therefore, analogous to a machine because the claims did not recite a concrete thing consisting of parts or devices. Instead, the Court held that the paradigm claims do no more than recite “an abstract idea — a business model for an intangible marketing company.”

In her concurring opinion, Judge Newman criticized the majority’s continued narrowing view of what constitutes of patentable subject matter and the uncertainty that such narrowing has created. In particular, Judge Newman commented that the knowledge-based economy of today thrived under the past law of patent eligibility, and that she can see no policy reason for now removing knowledge-based technologies from the protection of the patent system. In light of the current economic turmoil, Judge Newman opined, policy requires “enhanced incentives to innovation and investment in new things and new industries, not reduction in the existing incentives.”

Judge Newman’s comments suggest that business method patents and the boundaries of patent-eligible subject matter will continue to be vigorously debated by the Federal Circuit. In the meantime, litigants battling over the validity of business method claims must be prepared to rigorously apply the machine-or-transformation test.

Why What’s Buried in the Guts of Your Product Matters More Than Ever: The Federal Circuit Clarifies Manufacturer Liability for Contributory Infringement
By George C. Best (gbest@foley.com) and Lorna L. Tanner (ltanner@foley.com)

Many modern products are complex devices capable of doing many different things. A recent Federal Circuit decision increases the importance of understanding and analyzing the functions of each part of these devices. If even a small part of the device is adapted to perform a patented process, the seller may be liable for contributory infringement.

On December 23, 2008, the Federal Circuit reviewed and clarified the standards for finding liability for contributory infringement and inducement of infringement in Ricoh Co. v. Quanta Computer Inc., 550 F.3d 1325 (Fed. Cir. 2008). A party who sells or offers to sell an apparatus for use in practicing a patented process may be liable for contributory infringement if the party knows that the apparatus is especially made or adapted for use in an infringement and is not a staple article of commerce suitable for substantial noninfringing use. 35 U.S.C. § 271(c). Although this particular case involves computer hardware, the decision has broad applicability to other fields.

Ricoh Company appealed the District Court’s grant of summary judgment dismissing its claims against several defendants. One of the claims was that defendant Quanta Storage, Inc. had contributed to, and induced infringement of, two patents claiming methods for writing information to recordable optical discs in computer disc drives. Quanta sells optical disc drives to NU Technologies, which in turn sells the drives to consumers. When consumers use the drives to save information, the hardware and embedded software operates in a manner that allegedly infringe Ricoh’s patents.

Contributory Infringement
The District Court dismissed Ricoh’s claims for contributory patent infringement because the disc drives were capable of a substantial noninfringing use — reading information already recorded on a disc that was placed in the drive. Because the patents only claim processes involved in writing information to the discs, the District Court held that sale of the accused drives was not, as a matter of law, contributory infringement.

The Federal Circuit disagreed and vacated the decision. According to the Federal Circuit, the District Court should not have analyzed the functions and uses of the entire device sold by Quanta. Ricoh had argued that portions of the disc drives were distinct and separate components that were used only to perform the allegedly infringing methods. The Federal Circuit agreed, concluding that the contributory infringement analysis should have focused on the individual components of the disc drive.

In reaching its decision, the Federal Circuit relied on two landmark cases involving contributory infringement of copyrights — Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 415 (1984) and Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005). In particular, the Federal Circuit reviewed the Supreme Court’s discussion of the policy underlying the “substantial noninfringing use” exception. The Federal Circuit concluded that the Supreme Court did not interpret this exception as extending to cases where an infringing component was bundled together with something else.

The Federal Circuit, therefore, held that “Quanta should not be permitted to escape liability as a contributory infringer merely by embedding [a] microcontroller in a larger product with some additional, separable feature before importing and selling it.” In the Federal Circuit’s view, a contrary holding could limit infringement liability to the end user, thus defeating the fundamental purpose of contributory infringement liability.

On remand, the District Court is to determine whether the accused products contain any “hardware or software components that have no substantial noninfringing use other than to practice Ricoh’s claimed methods.” In the event that no substantial noninfringing use is found, then a finding of contributory infringement seems likely.

An Important Holding
Although this particular case involves computer hardware, the decision has broad applicability to other fields, including medical and other mechanical devices. Because noninfringing uses based solely on additional features included in a multifunctional device do not defeat liability for contributory infringement, the function of each component of the device must be understood and analyzed. Freedom-to-operate analyses, therefore, may become more detailed and time-consuming.

What should companies do? Previously, many patent applicants had interpreted Section 271(c) in the same manner as the district court. In view of the Federal Circuit’s clarification, innovator companies should not overlook method patents as a way to maintain dominance in their space. Under Ricoh, method patents will be a useful tool in discouraging competitors, especially in circumstances where the device patent is expired or is susceptible to an attack of invalidity. Further, agreements with downstream companies who package the components together should be structured to provide appropriate indemnifications and warranties.

After Winning Bratz® Case, Mattel Moves to Strip Rival MGA of Control Over Dolls
By Robert A. Lawler (rlawler@foley.com)

After a hard-fought battle spanning more than four years, the battle between toy giant Mattel Inc., maker of Barbie® dolls, and upstart MGA Entertainment Inc. continues in post-verdict maneuvering over ownership and control of the highly popular Bratz® dolls and merchandise. The conflict began in 2004, when Mattel claimed it owned the copyrights to Bratz dolls because creator Carter Bryant designed the dolls while he was employed by Mattel. MGA later intervened in the case, also claiming ownership of the lucrative franchise. (Carter Bryant v. Mattel, Inc., C.D.Cal. 2:04-cv-9049-SGL-RNB and consolidated actions). In August 2008, a jury found that MGA had engaged in copyright infringement and contract interference, and awarded Mattel $100 million in damages.

Although each company is confident that it will prevail on appeal, the interests of the parties have begun to converge in one important respect — maintaining the value of the Bratz product line and intellectual property (IP) while MGA appeals the District Court’s rulings.

Following the jury’s verdict, the Court issued three orders on December 3, 2008. In one order, the Court relied on the jury’s finding that copyrights in the sculpted forms of the dolls, the name “Bratz,” and individual Bratz characters were protectable property interests. The Court declared Mattel the owner of “all right, title, and interest … to the Bratz-related works, ideas, and concepts.” Because Mattel owned the copyrights from the time they were created, the Court further held that Bryant’s September 2000 conveyance of his designs to MGA was void, and imposed a constructive trust in favor of Mattel on all Bratz copyright registrations held by MGA.

Next, the Court issued an order prohibiting MGA from manufacturing, selling, or promoting any Bratz doll embodying the copyrights owned by Mattel. MGA was required to turn over to Mattel all records, packaging, and manufacturing technology relating to the Bratz dolls, and to recall all infringing products from retailers. Separately, the Court issued a third order imposing a constructive trust on the Bratz-related trademarks and Internet domain names, and ordering MGA to transfer them to Mattel.

The Court’s order thus placed Mattel in a position to emerge from litigation with complete ownership of the Bratz product line. At the same time, the District Court’s orders eviscerated MGA, which receives a large portion of its revenue from the Bratz product line. Faced with this bleak prospect, MGA quickly moved to stay the orders pending appeal, asserting that the injunction would cause irreparable harm to MGA and that numerous appealable issues were raised by the Court’s trial and post-trial rulings.

To preserve its interest in the Bratz product line, Mattel quickly pushed for the appointment of a receiver to take control of MGA’s Bratz operations. Pointing to MGA’s claims in District Court and Ninth Circuit filings that it faced imminent danger of insolvency, Mattel argued that MGA might be unable to pay the jury verdict and preserve Bratz-related IP. Mattel also alleged that MGA had concealed information and made contradictory statements regarding its finances during the course of litigation.

Mattel further charged that MGA and its CEO, Isaac Larian, had engaged in questionable business practices, including selling Bratz products through undisclosed entities, concealing receipt of corporate funding from off-shore companies, and diverting millions of dollars of Bratz profits to Larian’s relatives. Without a receiver, Mattel asserted, MGA would both lose market share and diminish the value of the Bratz product line and IP.

Ultimately, the Court acted to preserve the viability of the Bratz franchise, and the potential interests of both parties, by staying the permanent injunction until the end of 2009. In a blow to Mattel, the Court declined to place MGA in receivership, allowing MGA and Larian to maintain control over the production and distribution of the Bratz product line. However, in a signal that the Court was concerned with MGA’s forthrightness and financial stability, Judge Larson appointed a forensic auditor to review all aspects of MGA’s operations in the United States and abroad. The Court indicated that the results of the forensic audit would “enable the Court to determine whether or not appointment of a receiver is warranted.”

Following the August 26, 2008 jury verdict, more than 700 new entries have been added to the District Court’s docket for the case. Control over MGA’s operations and finances will likely remain a major point of contention between the parties in the District Court throughout the appeal process. Further developments in the Court’s oversight of MGA will be an area of interest, as the Court seeks to balance the interests of the parties and preserve the Bratz product line as a commercially valuable property.

As the Bratz ligation moves to the Ninth Circuit, the case is a strong reminder that post-verdict litigation can be as complex and expensive as pre-trial litigation. Where a favorable verdict may require court intervention to protect and maintain the value of IP and related consumer goodwill, litigants should budget for these activities in addition to the normal appeals process.

DMCA Protection for Online Service Providers: The Safe Harbor Gets Safer
By Andrew Baum (abaum@foley.com)

Yet another California Federal Court has given a broad reading to the online service provider “safe harbor” provisions of the Digital Millennium Copyright Act (DMCA). In UMG Recordings, Inc. et al. v. Veoh Networks, Inc. et al., 2008 U.S. Dist. LEXIS 104980 (C.D. Cal. Dec. 29, 2008), the court rejected UMG’s contentions that Veoh’s copying, processing, and offering access to uploaded video content disqualified Veoh from safe harbor immunity. In doing so, the court gave another important victory to Web site owners and operators that offer user-generated content.

Veoh operates a Web site which, like YouTube, offers access to videos uploaded by users. UMG alleged that its copyrighted works were being uploaded onto Veoh without its consent. Veoh claimed safe harbor protection as a “service provider” under Section 512(c) of the DMCA. UMG filed a motion for partial summary judgment asserting that Veoh did not qualify for safe harbor protection because Veoh’s alleged infringement of UMG copyrights did not occur “by reason of the storage at the direction of a user,” as required by Section 512 (c)(1).

The basis for UMG’s motion was that Veoh does not simply store what it receives. Rather, in order to organize, index, and make the material more accessible, Veoh uses software that engages in four functions: (1) automatically creating “Flash-formatted” copies of all uploaded videos (to make them universally viewable), (2) automatically creating copies that break the video down into 256-kilobyte “chunks” (to make them easier to transmit), (3) allowing users to access uploaded videos via streaming, and (4) allowing users to download whole video files. UMG argued that the case was simple: The statute only limits liability for “storage at the direction of a user,” and the four functions “have nothing to do with ‘storage’ and certainly are not done ‘at the direction of a user.’” In response, Veoh asserted that these functions are covered by the safe harbor provisions of the DMCA “because they occur by reason of storage at the direction of users and are meant to facilitate access to files stored by users.”

The Court agreed that the text of the statute resolved the issue, but focused on the first three words of the clause in Section 512(a) — “by reason of the storage at the direction of a user” — and found the meaning to be “pretty clear.” It held that “‘by reason of’ means ‘as a result of’ or ‘something that can be attributed to …’ So understood, when copyrighted content is displayed or distributed on Veoh it is ‘as a result of’ or ‘attributable to’ the fact that users uploaded the content to Veoh’s servers to be accessed by other means.” The safe harbor provision would be meaningless, said the court, unless there was protection not only for the storage of user material but also the necessary functions for making that material accessible to others. According to the court, the DMCA’s purpose — to “facilitate the robust development and world-wide expansion of electronic commerce, communications, research, development and education in the digital age” — would be thwarted if service providers could be exposed to liability merely by providing access to works stored at the direction of users.

UMG also argued that “service providers” protected by Section 512(c) are intended to be those entities that simply provide Web-hosting services, and that “users” are not individuals, but rather the operators of Web sites that store material on the Web host’s system or network. The court, however, gave UMG’s argument short shrift, noting that a “service provider” is defined in Section 512(k)(1)(B) as “a provider of online services or network access, or the operator of facilities therefor,” and holding without discussion that Veoh met the literal contours of this definition.

This holding is consistent with several prior decisions by district courts in the Ninth Circuit that bestowed safe harbor protection on operators of retail Web sites like Amazon and eBay: Corbis Corp. v. Amazon.com, Inc. 351 F. Supp. 2d 1090 (W.D. Wash. 2004) (protection against infringement by vendors who create Web sites using tools and forms provided by defendant); Hendrickson v. Ebay, Inc., 165 F. Supp. 2d 1082 (C.D. Cal. 2001) (same); Hendrickson v. Amazon.com, Inc., 298 F. Supp. 2d 914 (C.D. Cal. 2003) (protection against sale of infringing goods by users through Web site). The decision follows another recent one involving Veoh, IO Group, Inc. v. Veoh Networks, Inc., 2008 U.S. Dist. LEXIS 65915 (N.D. Cal. Aug. 20, 2008), which also rejected the demands of a content owner seeking to shift the burden of policing infringement to the operator of a user-generated content Web site.

While the case law relating to the safe harbor provisions of Section 512(c) of the DMCA continues to develop, the trend in the Ninth Circuit suggests that Web site owners and operators who act promptly to take down infringements after notice and otherwise comply scrupulously with the literal requirements of Section 512(c) need not fear financial liability for copyright infringement arising from the innocent posting of user-generated content.

Web Site Linking: Can Unauthorized Links Violate Trademark Rights?
By Cynthia B. Stevens (cstevens@foley.com)

Web sites routinely contain links to other Web sites or Web pages. Despite the sophistication of today’s Internet users, one district court recently held that such links potentially gives rise to liability under the Lanham Act.

In Jones Day v. BlockShopper, LLC d/b/a BlockShopper.com, Action No. 08-cv-4572 (N.D. Ill.), a law firm alleged that BlockShopper, a real estate news Web site, improperly linked to the firm’s Web site when it reported on real estate transactions by two associates at the firm. In the reports, BlockShopper used the firm’s trademark to identify the firm as the associates’ employer and used the associates’ names as deep embedded links to the firm’s Web site. When an Internet user clicked on the associates’ names in the reports, the user was taken directly to the individual associate’s bio on the law firm’s Web site. The law firm asserted that the linking diluted its mark and constituted trademark infringement, false designation of origin, and unfair competition.

BlockShopper moved to dismiss the firm’s claims, arguing that linking to the firm’s Web site could not confuse consumers or cause dilution because the firm’s mark was used to identify the associates’ employer and not as “the source identifying mark of BlockShopper’s news services.” The law firm conceded that BlockShopper was free to use its mark to identify it as the associate’s employer, and to use “publically available information” about the real estate transactions and the associates’ backgrounds. However, the firm maintained that BlockShopper’s use of the deep, embedded links constituted dilution and created a likelihood of confusion. In support of its motion to dismiss, BlockShopper cited several linking cases that held against infringement or dilution. The Court, however, denied the motion because, in its view, the complaint sufficiently pled elements of trademark confusion and dilution, and BlockShopper’s arguments presented legal and factual issues not appropriate for resolution on a motion to dismiss.

The BlockShopper case drew attention from many concerned that the Court’s decision would expose anyone who uses deep embedded links to trademark claims and substantial litigation costs. Although many observers wanted to see the case resolved on the merits, it was recently announced that BlockShopper decided to settle. As part of the settlement, BlockShopper agreed that it will no longer use the firm’s or its attorneys’ names as deep embedded links, but instead, would use the full URL to the law firm’s Web site.

The BlockShopper decision opens the door for additional claims that Web site linking can give rise to liability under the Lanham Act. It is far from clear, however, whether other courts will follow this decision’s holding or whether parties who plead such claims can actually succeed in proving that linking causes the dilution and confusion necessary to prevail on the merits.

Jon Dudas, the Nation's Former Top Patent Official, Joins Foley

Last month, Jon Dudas, former Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office (USPTO), joined Foley' s Washington D.C. office as a partner, where his practice will focus on IP litigation and public affairs. According to Mr. Dudas, "Joining Foley was a natural next step after having the honor to serve at the USPTO. The firm's intellectual property practice is consistently recognized in the top 10 nationally for both IP litigation and prosecution, and its platform offers me a tremendous opportunity to continue fostering innovation and intellectual property at this crucial time."

Mr. Dudas was appointed to head the USPTO by George W. Bush in 2004. In his role as the nation's top patent official, Mr. Dudas personally spearheaded an unprecedented number of patent cooperation and development missions with the European Union, China, Japan, Korea, and other countries. Those efforts should prove helpful to Americans establishing and enforcing patent rights in Asia and globally. Among his most notable achievements, Mr. Dudas was the first director to achieve full funding for the USPTO and prevent diversion of fees to other government programs, a feat that required intense negotiations and is universally popular with companies filing patent applications.

Prior to leading the USPTO, Mr. Dudas served in a number of high-level government posts, including Deputy Under Secretary of Commerce and Deputy Director of the USPTO, and Counsel to the U.S. House Judiciary Subcommittee on Courts and Intellectual Property. While working with the House of Representatives, Mr. Dudas was instrumental in guiding the enactment of the 1999 American Inventor’s Protection Act, the Digital Millennium Copyright Act, and the 1996 Anti-Counterfeiting Consumer Protection Act. Prior to his employment with the House of Representatives, Mr. Dudas practiced law in Chicago, where he was a litigator focusing on trademark and copyright issues.

“Jon is an incredible resource for our clients,” said Sharon Barner, Chair of Foley's IP Department. “He can provide invaluable assistance on matters ranging from patent reform legislation in Congress to multinational IP enforcement, and he will be a critical part of Foley's global IP practice.”