Federal Circuit Split Over Inequitable Conduct for Late Payment of Maintenance Fee

01 October 2013 IP Litigation Current Blog

In Network Signatures, Inc. v. State Farm Mut. Auto. Ins. Co., No. 2012-1492 (Fed. Cir. Sept. 24, 2013), a divided Federal Circuit panel reversed a district court’s finding of inequitable conduct based on the late payment of a maintenance fee. The majority held that using the standard PTO form without providing an explanation for the late payment could not support a finding of inequitable conduct.

A scientist at the Naval Research Laboratory (“NRL”) developed technology relating to internet security and obtained U.S. Patent No. 5,511,122 (“the ’122 patent”). Finding no commercial interest, the NRL permitted the patent to lapse for nonpayment of the 7.5-year maintenance fee. Two weeks after the lapse became effective, the NRL received an inquiry that Network Signatures was interested in licensing the patent. Network Signatures had unsuccessfully tried to contact the NRL prior to final expiration but problems with the agency’s phone system and an absent employee prevented the connection. The NRL petitioned the Patent and Trademark Office (“PTO”) to accept late payment of the maintenance fee using the PTO’s standard form. The form is prepopulated with the statement that “[t]he delay in payment of the maintenance fee to this patent was unintentional.” The PTO accepted delayed payment of the fee and the NRL licensed the ’122 patent to Network Signatures.

Seven years later, Network Signatures sued State Farm Mutual Automobile Insurance Company for infringement of the ’122 patent. In defense, State Farm asserted that the patent was permanently unenforceable because the NRL patent attorney had engaged in inequitable conduct by falsely representing to the PTO that the NRL’s non-payment of the maintenance fee was “unintentional.” The NRL’s patent attorney testified that the late payment was indeed unintentional because it resulted from a “mistake of fact.” He further testified that the NRL would have routinely paid the maintenance fee had it known of Network Signature’s commercial interest. Finding that the omission of an explanation of why the delay was considered unintentional was but-for material, the district court granted summary judgment of inequitable conduct. Network Signatures appealed.

Writing for the majority, Judge Newman, joined by Judge Wallach, wrote that failing to provide a reason for the delay did not establish inequitable conduct. The majority explained that the NRL patent attorney used the standard PTO form, which does not require any details for “unintentional delay.” The form also contains the preprinted statement:  “The delay in payment of the maintenance fee to this patent was unintentional,” without requesting further detail about the delay. The majority held that the patent attorney’s compliance with the standard PTO procedure for delayed payment and use of the PTO form for delayed payment did not provide clear and convincing evidence of withholding material information with the intent to deceive the Director when an explanation was not required by the PTO. Thus, the majority reversed the judgment and remanded the case for proceedings on the merits of the complaint.

In dissent, Judge Clevenger stated that he believed the district court was correct in granting summary judgment on materiality but it should not have granted summary judgment on intent. He asserted that the correct question on materiality is whether the PTO would have granted the revival petition if the patent attorney had disclosed the circumstances surrounding revival. He noted that, although the PTO’s cases suggest that a petitioner can rely on a mistake of fact to revive an expired patent, Network Signatures could not cite to any case where the PTO actually granted revival under that theory. Moreover, he held that the NRL intentionally allowed the patent to lapse and failed to learn of the commercial interest by its own fault. Thus, Judge Clevenger concluded that had it known the reason behind the delay, the PTO would not have excused the late payment.

Although the case concerned revival of an abandoned patent, the decision does not provide much clarity as to what constitutes an “unintentional” abandonment. Nor does it address the “mistake of fact” defense in detail. The majority opinion expressly deferred to the PTO’s procedure for “matters unrelated to the substantive criteria of patentability.” Nonetheless, this case emphasizes the need to use caution regarding statements (or the lack of statements) made to the PTO, and litigants should be aware that even statements arising out of form language provided by the PTO may still provide a basis for inequitable conduct claims in some circumstances.

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