IP Litigation Winter 2010 Newsletter

15 March 2010 Publication
Authors: Marshall J. Brown Jeffrey A. Simmons

Legal News: IP Litigation

Federal Circuit Decision on False Marking Means an Uptick in Litigation and Increased Liability Exposure
By Justin E. Gray (jegray@foley.com)

The Court of Appeals for the Federal Circuit ended 2009 with a decision that is already having a significant impact on patent litigation. In Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009), the Federal Circuit held that the false marking statute, 35 U.S.C. § 292, requires that financial penalties for false marking be imposed on a per-article basis. In other words, a separate financial penalty must be imposed for each individual product that is falsely marked with a patent number. Because the statute permits a penalty of up to $500 per article, the decision creates the possibility of enormous liability for patent owners and licensees and an incentive for false marking “trolls” to file suits around the country.

The false marking statute provides that “[w]hoever marks upon … in connection with any unpatented article, the word 'patent' or any word or number importing that the same is patented for the purpose of deceiving the public … [s]hall be fined not more than $500 for every such offense.” At issue in Forest Group was the appropriate interpretation of the phrase “for every such offense.”

Historically, courts were inconsistent in their interpretation of that provision. Some used a decision-based approach (i.e., a penalty for each decision to falsely mark), others used a time-based approach, and still others used a per-article approach in determining penalties for false marking. The Federal Circuit interpreted the statute as requiring per-article penalties.

The false marking statute can be used both as a defense to an infringement claim and as the basis for initiating a qui tam lawsuit against a patent holder. The statute expressly provides for such suits, stating, “[a]ny person may sue for the penalty, in which event one-half shall go to the person suing and the other to the use of the United States.”

In its decision, the Federal Circuit relied on the “statute’s plain language” and policy considerations, stating that “[a]cts of false marking deter innovation and stifle competition in the marketplace … [and] can also cause unnecessary investment in design around or costs incurred to analyze the validity or enforceability of a patent whose number has been marked upon a product with which a competitor would like to compete.” The Court further noted that imposing just a single fine for each decision to falsely mark “would render the statute completely ineffective … [and] would be insufficient to deter in nearly all cases.”

While the Federal Circuit recognized that its per-article rule may encourage “a new cottage industry” of false marking litigation, it noted that courts have discretion to award less than the $500 maximum penalty, stating that “[i]n the case of inexpensive mass-produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty.” Regardless, the Federal Circuit’s new rule encourages plaintiffs to file false marking suits and supports large damage awards in cases involving widely sold products.

On the other hand, patent owners and licensees can take some comfort in knowing that false marking is not a strict liability offense. Negligently mismarking a product is not sufficient to impose liability. The statute requires a showing that the patent holder falsely marked “for the purpose of deceiving the public.” The Federal Circuit explained that “[a] party asserting false marking must show by a preponderance of the evidence that the accused party did not have a reasonable belief that the articles were properly marked.” In Forest Group, the Federal Circuit affirmed the district court’s finding of intent where two different district courts had construed the patent claims contrary to the patent holder’s reading of the claims and granted motions for summary judgment of non-infringement such that the patent holder could no longer reasonably believe that its own products were covered by the patent claims as construed.

Early reports suggest that the false-marking cottage industry described by the Federal Circuit is becoming a reality. In the two and a half months since the Forest Group decision, at least 100 new false marking complaints have been filed against at least 130 companies. The vast majority of complaints allege false marking only against one or two companies, but one has alleged false marking against 14 different companies. The defendants in these suits cover a wide range of industries, from software and medical equipment to cleaning products and crayons. And the suits have been brought all over the country, including district courts in Alabama, California, Connecticut, Delaware, Florida, Georgia, Illinois, Michigan, New Mexico, New York, Ohio, Oregon, Pennsylvania, and Texas.

It is too early to tell how any of these false marking suits will play out in the courts. As of this writing, no district court has applied the holding of Forest Group. For now, patent owners and licensees find themselves in a bind. They must either mark their products in order to discourage infringement and maximize their damage award in an infringement suit, or risk he possibility of a false marking suit. One thing is clear: anyone marking a product with patent numbers needs to develop a plan to ensure accurate marking. As patents are granted or expire, or products are changed, updated, or acquired, patent holders would benefit from working with counsel to develop formal marking policies to keep track of such changes in their patents and products.

 


Supreme Court’s Decision in Reed Elsevier Leaves Questions Unanswered
By Jeffrey A. Simmons (jsimmons@foley.com)

Earlier this month the U.S. Supreme Court decided its only copyright case of the current term, Reed Elsevier, Inc. v. Muchnick, -- U.S. --, 2010 WL 693679. The decision, however, turned out to be more about civil procedure than copyright law. Observers who had hoped the Court might answer some basic questions about the prerequisites for filing a copyright infringement suit will be disappointed by the narrow scope of the Court’s holding.

The decision involves the Copyright Act’s requirement that, in general, works must be formally registered with the U.S. Copyright Office before filing a copyright infringement lawsuit. In Reed Elsevier, the Court examined whether that requirement actually restricts the subject matter jurisdiction of federal courts and prohibits them from hearing suits involving unregistered works. The Court held that it does not.

The case involved the settlement of a class action brought by freelance authors, generally newspaper and magazine writers, whose works had been reproduced in electronic databases without their consent. The class was large and affected a significant portion of the publishing industry. After several years of negotiations, the parties reached a global settlement that was approved by the district court.

The class, however, contained many authors who had not registered their works with the Copyright Office. The Court of Appeals for the Second Circuit ruled that the Copyright Act’s registration requirement is jurisdictional and, as a result, the district court could not certify the class or approve the settlement. It was this jurisdictional question that was before the Supreme Court.

The relevant provision of the Copyright Act is 17 U.S.C. § 411(a), which provides, in part, that “no civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.” Copyright owners often do not think or want to spend the money to register their copyrights until they discover someone infringing, which can result in a significant delay or added expense in filing a suit. It can take nine months or more for the Copyright Office to issue a registration certificate. An expedited registration process is available for certain types of works, but that can still take several weeks and costs at least an additional $760.

Some courts have ruled that a copyright owner does not need to wait weeks or months for a registration certificate to issue before filing suit. Instead, they hold that an owner can file suit as soon as it receives confirmation that all of its application materials have been received by the Copyright Office, which reduces the delay in filing suit to just a few days. Other courts, however, hold that a suit cannot be filed until the certificate issues.

It was this split among the courts that some observers hoped would be clarified by the Supreme Court’s ruling in Reed Elsevier. But, the Court failed to address that issue. Instead, the Court focused narrowly on the question of whether § 411(a) restricts the subject matter jurisdiction of federal courts. The Court held that the statute is not jurisdictional and, as a result, does not prohibit federal courts from adjudicating claims involving unregistered works. Such jurisdictional issues, however, are unlikely to arise in most copyright infringement cases. The Court’s opinion is a primer on how to analyze statutes for jurisdictional purposes but appears to offer little of practical significance for copyright owners.

Perhaps future courts will find a way to use the Reed Elsevier decision to clarify the law regarding registration. Until then, the best advice for copyright owners is to register any works that they fear will be infringed or be mentally prepared for a delay in filing suit if unregistered works are infringed.

 

 


Federal Circuit Continues to Tighten the Reins on Reasonable Royalty Damages
By Jeffrey A. Simmons (jsimmons@foley.com)

The Federal Circuit is continuing its close scrutiny of reasonable royalty damage awards and is encouraging district courts to do the same. In February 2010, the Federal Circuit in ResQNet.com, Inc. v. Lansa, 594 F.3d 860 (Fed. Cir. 2010), vacated a district court’s award of reasonable royalty damages because the lower court failed to account for differences between the patented technology and the technology covered by licenses offered in evidence. The opinion suggests that parties need to be meticulous in presenting evidence supporting their reasonable royalty argument if they want to prevail.

ResQNet.com follows the Federal Circuit’s decision last September in Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), where the court suggested it would be tightening the reins on reasonable royalty awards. In that case, the Federal Circuit vacated a $358 million damage award because, in its view, the plaintiff failed to present sufficient evidence showing that the licenses used as a basis for the reasonable royalty calculation were comparable to the license that would have been negotiated for the patent in suit. Many observers were surprised by the degree to which the Federal Circuit analyzed the terms of the eight licenses at issue and the expert testimony regarding those licenses.

The patents at issue in ResQNet.com covered processes for downloading screen information from a mainframe computer to a personal computer. In a bench trial, the district court ruled that the patent was valid and infringed, and awarded more than $500,000 in damages based on a 12.5 percent royalty.

On appeal, the Federal Circuit drew a direct link between this case and its decision in Lucent, stating that “[t]he majority of the licenses on which ResQNet relied in this case are problematic for the same reasons that doomed the damage award in Lucent.” Those reasons being that, in the panel majority’s view, most of the licenses relied on by ResQNet’s damages expert “had no relation to the claimed invention.”

ResQNet’s expert relied on seven licenses to arrive at his reasonable royalty opinion. Only two of those licenses related to the patent in suit. Both of those licenses arose out of litigation; one contained a royalty of substantially less than 12.5 percent, and the other did not contain a running royalty rate. The remaining five licenses, on the other hand, contained rates of up to 25, 30, and 40 percent. Reviewing the trial record, the court said ResQNet’s expert gave “unconvincing reasons” for considering these licenses and found “[t]he inescapable conclusion is that [ResQNet’s expert] used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels.”

Unlike Lucent, the court’s decision in ResQNet.com was not unanimous. Judge Newman dissented from the opinion, appearing to disagree with the majority’s reading of the basic facts of the case. In particular, Judge Newman found that the five high-royalty licenses did include the patented technology and that the district court properly accounted for differences between the facts surrounding those licenses and the hypothetical negotiation relevant to the reasonable royalty analysis. Judge Newman would have deferred to the district court’s evaluation of the facts and affirmed its decision.

Regardless of which judges were reading the facts correctly, the point of both Lucent and ResQNet.com is that Federal Circuit panels are paying much closer attention to the factual bases for experts’ reasonable royalty opinions. In the past, parties may have been content to rely on whatever licenses were most favorable for them, regardless of how dissimilar they were to the patent in suit, and assume that hand-waving by a qualified economic expert would be enough to cure any evidentiary shortcomings. Lucent and ResQNet.com show that this is no longer a reasonable tactic.

Whenever possible, parties must rely on licenses for the patent in suit. If a license is ambiguous or plainly covers a different patent, the party must be thorough in setting forth the reasons why it believes the license is relevant to the hypothetical negotiation. In Lucent, for example, the court criticized the plaintiff’s expert for providing no explanation of the subject matter or patents covered by several of the licenses.

In addition, parties should be careful not to short-change other evidence that is relevant to the reasonable royalty calculation. The experts in both Lucent and ResQNet.com used the 15-factor Georgia-Pacific test that is virtually standard in reasonable royalty calculations. Only two of the Georgia-Pacific factors relate to licenses for the patents at issue or other technology. Yet those two factors are usually the primary focus of damages experts’ analyses. For example, in ResQNet.com, the court said the expert “considered a few of the other Georgia-Pacific factors, but dismissed them because ‘[f]or the most part, the other factors have no real impact here.’” And in Lucent, the court emphasized that the Georgia-Pacific factors are a “useful … framework” for assessing reasonable royalty damages and suggested that the outcome might have been different had there been more persuasive evidence under the other factors.

Essentially, Lucent and ResQNet.com can be read as directives that parties must be more thorough in presenting their reasonable royalty cases. The court in Lucent admonished that “a damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ballpark of the jury’s award.” Parties need to do a better job of developing and explaining all of the evidence relevant to their royalty arguments if they want to prevail.

 


Federal Circuit Clarifies the Test for Anticipation in Design Patent Cases
By Marshall J. Brown (mjbrown@foley.com)

The Court of Appeals for the Federal Circuit recently continued its efforts to clarify the law governing design patents. In International Seaway Trading Corp. v. Walgreens Corp., 589 F.3d 1233 (Fed. Cir. 2009), the court held that the “ordinary observer” test must be used to determine the validity of a design patent. The decision builds on the court’s 2008 decision in Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en banc), which dictated that the ordinary observer test, rather than the “point of novelty” test, should be used to determine infringement of design patents. While International Seaway was intended to clarify the law, the decision suggests that the Federal Circuit and district courts may still struggle with the application of the ordinary observer test.

Design patents fill a unique niche of intellectual property protection. A design patent covers the ornamental design of a functional item, in contrast to a utility patent, which protects the functional aspects of an item regardless of ornamental design. Design patents also differ from copyright protection, which is intended to protect artistic works that are either non-functional or separable from the functional aspects of a product. And they differ from trade dress protection, which only protects product designs that serve to identify the source of goods.  

The Federal Circuit addressed the infringement of design patents in Egyptian Goddess. Before Egyptian Goddess, courts applied two tests, both of which had to be satisfied to find design patent infringement. The first is the ordinary observer test, which the Federal Circuit described as follows:

[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.

The second test, the point of novelty test, required a court to determine whether the accused design incorporated the points of novelty of the patented design, i.e., the features in the patented design that distinguished the design over the prior art. In Egyptian Goddess, the Federal Circuit eliminated the point of novelty test as a separate test, holding that only the ordinary observer test should be used to determine design patent infringement.

International Seaway extends that reasoning, holding that the elimination of the point of novelty test also applies when determining whether a design patent is invalid. When determining anticipation using the point of novelty test, courts previously compared the patented design to a potentially anticipatory prior art reference in order to determine whether the patented design appropriated the novel features of the prior art reference. The Federal Circuit rejected this test, affirming the district court’s position that the ordinary observer test is the sole test for determining anticipation of a design patent.

In eliminating the point of novelty test, the Federal Circuit emphasized that many of the same problems associated with the point of novelty test in an infringement context also are applicable when anticipation is considered. For example, the court noted that the point of novelty test encouraged a focus on minor differences between an allegedly anticipatory piece of prior art and the patented design, rather than looking at the design as a whole. Additionally, the court recognized that the point of novelty test created difficulties when determining whether a combination of old design features could serve as a point of novelty. These factors, in combination with longstanding precedent that the same test should be used for both patent infringement and anticipation, led the court to rule that the ordinary observer test is the sole test for anticipation.

In addition to eliminating the point of novelty test for invalidity purposes, the court also clarified the role of a person of ordinary skill in the art when considering invalidity issues. The court noted that, when considering obviousness, the views of one of ordinary skill in the art are limited to determining whether two or more references should be combined to arrive at a single piece of prior art. Once this determination has been made, only the views of the ordinary observer are considered when determining whether the patented design is obvious over the prior art.

The Federal Circuit’s application of the ordinary observer test to the product at issue in International Seaway shows that courts may still struggle with this test in future. Although the Federal Circuit ruled that the district court had selected the correct legal test, it found that the district court had applied the test improperly. The products at issue were a type of clog footwear. When considering whether the patents at issue were anticipated by the prior art, the district court did not consider any aspect of the products’ insoles because, in the district court’s view, “the insoles were hidden by the user’s foot and therefore were not visible during normal use.” The Federal Circuit rejected this reasoning, noting that the normal use of a product is not limited to only one phase of the product’s lifetime. In this case, the court noted that the insoles were visible when the product was being sold, as well as during various times when the clog was not on a user’s foot. The court held that the insoles should have been considered when comparing the patented designs to the prior art.

The Federal Circuit also addressed the patentee’s argument that genuine issues of material fact existed as to whether the exterior features of the patented designs precluded a finding of anticipation. Disagreeing with the patentee, the court noted that the exterior features of the patented designs included only slight dissimilarities to the corresponding features in the prior art. The court held that “these minor variations in the shoe are insufficient to preclude a finding of anticipation because they do not change the overall visual impression of the shoe.” The Federal Circuit nevertheless remanded the case to the district court on the issue of whether the differences in the insole patents between the prior art and the patented designs precluded a finding of anticipation or obviousness.

In a partial dissent, Judge Clevenger took issue with the majority’s analysis of the exterior features in the patented designs and the prior art. Judge Clevenger disagreed with the majority’s willingness to declare that certain individual design differences did not raise genuine issues of material fact. Emphasizing that the ordinary observer test requires an assessment of the designs as a whole, Judge Clevenger asserted that the differences in the inner sole designs should have been considered in conjunction with all of the other differences in the various designs when considering the issue of anticipation.

From a procedural point of view, the Federal Circuit’s elimination of the point of novelty test in an anticipation context may make it simpler for parties to focus their invalidity arguments for the court. Rather than having to separately identify and analyze distinct points of novelty in a piece of prior art, and then determine whether the patented design includes these features, the litigants and the court will be able to focus solely on the ordinary observer test when considering anticipation.  

At the same time, Judge Clevenger’s dissent suggests that the Federal Circuit and district courts will struggle with how to consistently apply the ordinary observer test. On the one hand, the Federal Circuit has repeatedly noted that the ordinary observer test requires the comparison of designs as a whole. Such a comparison, however, inevitably involves a review of individual design features. While the majority opinion considered whether genuine issues of material fact were raised by dissimilarities in individual features, Judge Clevenger argued that the court should only compare individual features in the context of the designs as a whole. We can expect this issue to be raised again in the future, until courts settle on how individual features should be considered in the infringement and invalidity contexts for design patents.

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