Intellectual Property Law, 2013

This monumental project began in early 2004 when I met with Nora L. Crandall, a lawyer and then Director of Publishing a

876 111 6MB

English Pages 778 Year 2013

Report DMCA / Copyright

DOWNLOAD FILE

Polecaj historie

Intellectual Property Law, 2013

Table of contents :
Part I: Patents
1. Patenting Inventions (Marc V. Richards)
2. Enforcing and Defending Against Patent Rights Through Litigation (Jeffrey Marx, Laura Beth Miller)
3. Patent Antitrust, Misuse, and Inequitable Conduct (Glen P. Belvis)
4. The Attorney-Client Privilege and the Work-Product Immunity Doctrine (Glen P. Belvis)
5. Ownership and Management of Patent Rights (William H. Frankel)

Part II: Trademarks
6. Creation and Maintenance of Trademark Rights (Bradley L. Cohn)
7. Transfer or Loss of Trademark Rights (Bradley L. Cohn)
8. Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law (Bradley L. Cohn)

Part III: Copyrights
9. Copyright Subject Matter and Exclusive Rights (William T. McGrath)
10. Ownership and Transfer of Copyrights (Richard C. Balough)
11. Copyright Infringement, Fair Use, and Remedies (William T. McGrath)

Part IV: Trade Secrets
12. The Identification and Protection of Trade Secrets (R. Mark Halligan)
13. Misappropriation of Trade Secrets (Steven E. Feldman, Sherry L. Rollo)
14. Trade Secret Remedies and the Inevitable Disclosure Doctrine (Linda K. Stevens)
15. Restrictive Covenants and Post-Employment Restraints (Michael R. Levinson, Daniel F. Lanciloti)

Part V: Intellectual Property, Technology, and the Internet
16. Jurisdiction in the Information Age (André C. Frieden)
17. Licensing Online (D. James Nahikian)
18. Business Method Patents (Timothy W. Lohse, Blake W. Jackson)
19. Software Licensing (John L. Hines, Jr.)
20. Cybercrime, Digital Evidence, and Your IP Practice (Keith G. Chval)

Part VI: International Issues
21. Protecting Intellectual Property in the Global Marketplace (R. Mark Halligan, Deanna R. Swits)

Citation preview

INTELLECTUAL PROPERTY LAW (IICLE®, 2013) IICLE® is grateful to the General Editor, R. Mark Halligan, for planning and organizing this handbook, for enlisting authors, and for serving as an author. IICLE® also thanks the chapter authors, who donated their time and their knowledge to produce these materials. We are able to continue to publish current, accurate, and thorough practice handbooks because of the generous donation of time and expertise of volunteer authors like them. We would be interested in your comments on this handbook. Please address any comments to Director of Publishing, IICLE®, 3161 West White Oaks Drive, Suite 300, Springfield, IL 62704; call Amy McFadden at 800-252-8062, ext. 102; fax comments to Ms. McFadden at 217-787-9757; or e-mail comments to [email protected] Call IICLE® Customer Representatives at 800-252-8062 for information regarding other available and upcoming publications and courses.

HOW TO CITE THIS BOOK This handbook may be cited as INTELLECTUAL PROPERTY LAW (IICLE®, 2013).

Publication Date: January 25, 2013

INTELLECTUAL PROPERTY LAW 2013 General Editor: R. Mark Halligan Chapter authors: Richard C. Balough Glen P. Belvis Keith G. Chval Bradley L. Cohn Steven E. Feldman William H. Frankel André C. Frieden R. Mark Halligan John L. Hines, Jr. Blake W. Jackson

Daniel F. Lanciloti Michael R. Levinson Timothy W. Lohse Jeffrey Marx William T. McGrath Laura Beth Miller D. James Nahikian Marc V. Richards Sherry L. Rollo Linda K. Stevens Deanna R. Swits

®

This 2013 edition revises and replaces the 2008 edition. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 3161 West White Oaks Drive, Suite 300 Springfield, IL 62704 www.iicle.com Owner: ___________________________________________________________________

INTELLECTUAL PROPERTY LAW

®

Copyright 2013 by IICLE . All rights reserved. Except in the course of the professional practice of the purchaser, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. ® IICLE encourages the adaptation and use of forms, checklists, and other similar documents printed in its publications in the professional practice of its customers.

®

IICLE is a not-for-profit 501(c)(3) organization dedicated to supporting the professional development of Illinois attorneys through Illinois-focused practice guidance. ®

IICLE ’s publications and programs are intended to provide current and accurate information about the subject matter covered and are designed to help attorneys maintain their professional competence. ® Publications are distributed and oral programs presented with the understanding that neither IICLE nor the ® authors render any legal, accounting, or other professional service. Attorneys using IICLE publications or orally conveyed information in dealing with a specific client’s or their own legal matters should also research original and fully current sources of authority.

Printed in the United States of America. 1552IPL-N:1-13(780)CS PRD: 1-25-13 (1:IH)

ii

WWW.IICLE.COM

TABLE OF CONTENTS

Table of Contents Preface ................................................................................................................................... v About the Authors ............................................................................................................. vii

Part I: Patents 1. Patenting Inventions ..................................................................................................... 1 — 1 Marc V. Richards 2. Enforcing and Defending Against Patent Rights Through Litigation ..................... 2 — 1 Jeffrey Marx Laura Beth Miller 3. Patent Antitrust, Misuse, and Inequitable Conduct .................................................. 3 — 1 Glen P. Belvis 4. The Attorney-Client Privilege and the Work-Product Immunity Doctrine ............ 4 — 1 Glen P. Belvis 5. Ownership and Management of Patent Rights .......................................................... 5 — 1 William H. Frankel Part II: Trademarks 6. Creation and Maintenance of Trademark Rights ...................................................... 6 — 1 Bradley L. Cohn 7. Transfer or Loss of Trademark Rights ....................................................................... 7 — 1 Bradley L. Cohn 8. Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law ........................................................................................ 8 — 1 Bradley L. Cohn Part III: Copyrights 9. Copyright Subject Matter and Exclusive Rights ....................................................... 9 — 1 William T. McGrath 10. Ownership and Transfer of Copyrights .................................................................... 10 — 1 Richard C. Balough 11. Copyright Infringement, Fair Use, and Remedies ................................................... 11 — 1 William T. McGrath

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

iii

INTELLECTUAL PROPERTY LAW

Part IV: Trade Secrets 12. The Identification and Protection of Trade Secrets ................................................. 12 — 1 R. Mark Halligan 13. Misappropriation of Trade Secrets ........................................................................... 13 — 1 Steven E. Feldman Sherry L. Rollo 14. Trade Secret Remedies and the Inevitable Disclosure Doctrine ............................. 14 — 1 Linda K. Stevens 15. Restrictive Covenants and Post-Employment Restraints ....................................... 15 — 1 Michael R. Levinson Daniel F. Lanciloti

Part V: Intellectual Property, Technology, and the Internet 16. Jurisdiction in the Information Age .......................................................................... 16 — 1 André C. Frieden 17. Licensing Online .......................................................................................................... 17 — 1 D. James Nahikian 18. Business Method Patents ............................................................................................ 18 — 1 Timothy W. Lohse Blake W. Jackson 19. Software Licensing ...................................................................................................... 19 — 1 John L. Hines, Jr. 20. Cybercrime, Digital Evidence, and Your IP Practice .............................................. 20 — 1 Keith G. Chval

Part VI: International Issues 21. Protecting Intellectual Property in the Global Marketplace .................................. 21 — 1 R. Mark Halligan Deanna R. Swits

Index .............................................................................................................................. a — 1

iv

WWW.IICLE.COM

PREFACE

Preface This monumental project began in early 2004 when I met with Nora L. Crandall, a lawyer and then Director of Publishing at IICLE®. After some discussion, we both agreed that the time had come to prepare a handbook on intellectual property law for the Illinois bar. I knew that this would be a daunting task, but I was impressed by Nora Crandall and the IICLE® editorial staff, and I decided to accept the challenge. The next step was to assemble a “dream team” of authors who were not only outstanding lawyers in the intellectual property bar but also of a genre willing to make the deep sacrifices necessary for a pro bono project. In addition, this project called for excellent writers with a proven track record. I think you will agree that I assembled such a team to prepare this handbook. There is no doubt that this IICLE® handbook will stand the test of time and will prove to be an invaluable resource not only for Illinois lawyers but for lawyers all over the country. I am not aware of a comparable publication anywhere else in the country. For myself, I know that the INTELLECTUAL PROPERTY LAW handbook will be on my desk at all times. In a matter of seconds, I can now identify the panoply of critical issues that present themselves every day to practitioners in patent, copyright, trademark, and trade secret law as well as related antitrust, licensing, Internet, and “cyberspace” areas of the law. The revised 2013 edition follows the same format. We have revised the chapters to reflect current developments in intellectual property law over the past several years. We have also added a new Chapter 19 on Software Licensing to address the unique intellectual property issues relating to sofware development, licensing, escrow, and regulatory issues such as export controls. In addition, Blake W. Jackson, DLA Piper LLP (US), joins Timothy W. Lohse as a coauthor on Chapter 18, Business Method Patents. I want to thank the IICLE® team that worked on this project. In addition to Nora Crandall and her vision and insight that led to the development of this handbook, I want to acknowledge and thank the IICLE® publications department staff: Amy L. McFadden, Director of Publishing, Tara Burke, Managing Editor; Carole Chew, Senior Managing Editor; Angela Moody, Managing Editor; Ashley Musser, Managing Editor; Darryl Parr, Senior Editor; Laura Reyman, Managing Editor; Kim Rouland, Production Coordinator; Jennifer Routson, Communications Coordinator (a huge task); and, last but not least, Courtney Smith, Managing Editor.

R. Mark Halligan General Editor January 2013

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

v

INTELLECTUAL PROPERTY LAW

vi

WWW.IICLE.COM

ABOUT THE AUTHORS

About the Authors General Editor R. MARK HALLIGAN (General Editor; Chapters 12 and 21) is an accomplished trial lawyer who focuses his practice on intellectual property litigation and complex commercial litigation in federal and state courts throughout the United States. An experienced patent litigator, Mr. Halligan has also developed an extensive practice focused on protection and enforcement of trade secrets. Mr. Halligan has successfully represented both individuals and corporations as plaintiffs and defendants in federal and state courts in the United States. Mr. Halligan is a frequent lecturer on intellectual property issues, and he serves on the Adjunct Faculty of The John Marshall Law School in Chicago, where he teaches trade secrets law. Mr. Halligan also serves on the AIPLA Executive Committee as well as the United States Group of the International Association for the Protection of Intellectual Property (AIPPI). He was the co-chair of the Q215 Committee on Trade Secrets at the AIPPI World Congress in Paris, and Mr. Halligan is now the U.S. representative on the AIPPI Nominations Committee. Mr. Halligan was the counsel of record for amici curiae Association Internationale Pour La Protection De La Propriete Intellectuelle (AIPPI) and International Association for the Protection of Intellectual Property (AIPPI-US) in Bilski v. Doll, No. 08964 (U.S. Aug. 2009). He is the coauthor (with Richard F. Weyand) of TRADE SECRET ASSET MANAGEMENT: AN EXECUTIVE’S GUIDE TO INFORMATION ASSET MANAGEMENT, INCLUDING SARBANES-OXLEY ACCOUNTING REQUIREMENTS FOR TRADE SECRETS (Aspatore Books, 2006). Mr. Halligan has an AV Preeminent Rating from Martindale Hubbell, and peer reviews rank Mr. Halligan as a top lawyer in Intellectual Property. A leader in his field, Mr. Halligan has been named in Legal 500 United States as a leading lawyer in trade secrets litigation. For the fourth consecutive year, Chambers USA: America's Leading Lawyers for Business ranks Mr. Halligan for exceptional standing in intellectual property law. Additionally, Intellectual Asset Management (IAM) magazine listed Mr. Halligan as one of the top-flight IP strategists in its IAM 250-A Guide to the World’s Leading IP Strategists for 2011 and IAM 300 – A Guide to the Word’s Leading IP Strategists for 2012. The Illinois Super Lawyers magazine has ranked Mr. Halligan as a “Super Lawyer” every year since 2005. Mr. Halligan has been recognized in Best Lawyers 2013 for Intellectual Property Litigation.

Chapter Authors RICHARD C. BALOUGH (Chapter 10) is a founding member of Balough Law Offices, LLC, in Chicago. Mr. Balough focuses his practice on intellectual property law, the Internet, and privacy. He advises start-up, small, and medium-sized companies in e-commerce, contracts and licensing, trademarks and copyrights, privacy, trade secrets, and corporate formation. Mr. Balough has served as an adjunct professor and taught courses on representing the technology

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

vii

INTELLECTUAL PROPERTY LAW

client. Mr. Balough is the co-chair of the Mobile Commerce Subcommittee of the American Bar Association’s Cyberspace Law Committee. He is a past member of the Board of Managers of the Intellectual Property Law Association of Chicago and served as Chair of IPLAC’s Internet Law Committee from 1999 – 2003. He has written numerous articles for publications such as the John Marshall Journal of Computer and Information Law, the CBA Record, the Illinois State Bar Journal, The Business Lawyer, and the Chicago Daily Law Bulletin and has been a presenter for the American Bar Association, the Copyright Society of the United States, and IPLAC. He was Chair of the Chicago Bar Association’s Computer Law Committee from 2000 – 2001. Mr. Balough received his B.A. from Indiana University and his J.D., Masters of Law cum laude in Intellectual Property Law, and Masters of Law in Information Technology Law from The John Marshall Law School. GLEN P. BELVIS (Chapters 3 and 4) is the Chief IP Counsel for Foro Energy, Inc., a venture capital, DOE-funded company developing high power laser applications for the oil, gas, geothermal, and mining industries. Prior to joining Foro Energy in 2010, he practiced with the intellectual property law firm of Brinks Hofer Gilson & Lione in Chicago. He concentrates in all facets of intellectual property law, including patents, trademarks, copyrights, trade secrets, and related antitrust matters. He has substantial patent litigation experience, and his experience covers a wide range of technologies, including generic pharmaceuticals, high power laser, medical lasers, medical devices, biotechnology, software, Internet, polymers, offshore drilling, and heavy equipment. Mr. Belvis is also experienced in patent prosecution and interferences proceedings before the United States Patent and Trademark Office. He is a former Master in the Richard Linn Inn of Court, has testified as an expert witness, and is a former Chairperson of the DePaul Law School IP Advisory Board. He has lectured on patent-related matters at Oxford University, Peking University, the University of Illinois, and the University of British Columbia. He is the author of the book INTELLECTUAL PROPERTY IN BUSINESS TRANSACTIONS: PROTECTING THE COMPETITIVE ADVANTAGE and numerous articles and is the former Editor of the book ASPEN ANNUAL IP UPDATE. Mr. Belvis is the former Chair of the Antitrust Committee for the Intellectual Property Law Association of Chicago (IPLAC). He received his B.S. from the University of Notre Dame and his J.D. from DePaul University College of Law, where he served as an Editor of the law review and received the West Publishing Company Hornbook Award, which is presented to the student having the highest academic average. While at DePaul, Mr. Belvis also served as an extern for the Honorable William J. Bauer, United States Court of Appeals for the Seventh Circuit. KEITH G. CHVAL (Chapter 20) was the first-ever Chief of the High Tech Crimes Bureau in the Illinois Attorney General’s Office, designing and implementing one of the very first units of its kind in the country. Under his seven years as Chief, the Bureau boasted a 100 percent conviction rate. Mr. Chval is a co-founder of Protek International, Inc. (www.protekintl.com), a rapidly growing firm offering world-class electronic data discovery, computer forensic, investigative, and consulting services. Presently the president of the Chicago chapter of The American Society of Digital Forensics and eDiscovery, he is also past president of the Midwest Chapter of the High Technology Crime Investigation Association. Mr. Chval is also an adjunct professor at The John Marshall Law School. He has been asked to share his expertise in collaborative efforts with associations including the Secret Service’s Electronic Crimes Task Force, the International Association of Computer Investigative Specialists, and working groups under the auspices of the National Institute of

viii

WWW.IICLE.COM

ABOUT THE AUTHORS

Justice, the National White Collar Crimes Center, and the American Prosecutors Research Institute, as well as at Guidance Software, Inc.’s annual CEIC international training events. He has written and presented extensively on subjects ranging from authenticating online communications to protecting businesses and incident response to computer crime to “the CSI effect” on computer forensics and computer investigations, as well as on a wide range of topics relating to e-discovery. Mr. Chval is a graduate of Indiana University, where he earned a B.S. in marketing, and the IIT Chicago-Kent College of Law. BRADLEY L. COHN (Chapters 6, 7, and 8) is a partner at Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, in Chicago, where he concentrates his practice in the field of trademarks, copyrights, unfair competition, right of publicity, and advertising and marketing law. Before entering private practice, Mr. Cohn served as law clerk to the Honorable Anne C. Conway, United States District Court for the Middle District of Florida. Mr. Cohn has served as an adjunct professor at DePaul University College of Law, teaching a seminar on trademark law and writing. He has also served as a Director of the Chicago Bar Association’s 9,000-member Young Lawyers Section and as a past Chair of the Chicago Bar Association's Professional Responsibility Committee and the Young Lawyers Section’s Intellectual Property Committee. Mr. Cohn has spoken at IICLE®’s Intellectual Property Institute for Corporate Counsel on topics including product placement, trademark dilution, Internet keyword advertising, environmental and “eco-friendly” marketing claims, and ethics issues implicated when investigating potential infringements. He received his B.A. from Duke University and his J.D. from the University of Michigan Law School. STEVEN E. FELDMAN (Chapter 13) is a partner principal with the Chicago firm of Husch Blackwell LLP and a member of the firm’s Executive Board. His practice is directed to the worldwide enforcement and licensing of intellectual assets and involves litigation and counseling in the areas of trade secret, unfair competition, patent, antitrust, and copyright law as well as competitive business intelligence. An experienced trial and appellate attorney, Mr. Feldman has litigated cases and counseled clients in a variety of areas, including pharmaceuticals, semiconductor processing, high brightness LEDs, semiconductor lasers, jet engine and aircraft related parts and systems, rare-earth magnets, receivers and transmission devices, solar cells, computer hard disk drives and brushless DC motors, computer source code, and call center/e-commerce technology. Mr. Feldman has lectured extensively on trade secrets and licensing and ethics and licensing for the Licensing Executives Society, and he has lectured on competitive business intelligence for the Chicago Bar Association and for the Centre for Operational Business Intelligence. In addition, he has written numerous articles on both prosecution and litigation aspects of patents, copyrights, trademarks, and trade secrets. He served as Chairman of the Intellectual Property Law Association of Chicago Section on Trade Secrets and Unfair Competition from 1999 – 2003 and as Secretary from 2006 – 2008. Mr. Feldman received his undergraduate degree from Northwestern University and his J.D. with honors from the George Washington University Law School. WILLIAM H. FRANKEL (Chapter 5) is a shareholder with the intellectual property law firm of Brinks Hofer Gilson & Lione in Chicago, where he serves as chair of the firm’s Copyright Practice Group. He concentrates his practice in patent, trademark, copyright, trade secrets, and unfair competition litigation in jury and nonjury cases; international intellectual property litigation and counseling; and licensing. Mr. Frankel has represented clients in

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

ix

INTELLECTUAL PROPERTY LAW

federal courts, before the United States Patent and Trademark Office, before the International Trade Commission, and in alternative dispute resolution forums in connections with injunction, trial, contempt, and appellate proceedings. Mr. Frankel has written and spoken extensively on and counseled clients in all aspects of intellectual property and has taught patent law as an adjunct professor at DePaul University College of Law. He is a coauthor of DESIGNING AN EFFECTIVE INTELLECTUAL PROPERTY COMPLIANCE PROGRAM. He is also past President of Lawyers for the Creative Arts, an association of lawyers that provides pro bono legal assistance to artists and arts organizations. Mr. Frankel received both his B.S. cum laude and his J.D. cum laude from Tulane University. He was named in Euromoney Publication’s PLC GUIDE TO THE WORLD’S LEADING EXPERTS IN TRADEMARK LAW in 2000 and in Euromoney’s GUIDE TO THE WORLD’S LEADING PATENT EXPERTS in 2009. ANDRÉ C. FRIEDEN (Chapter 16) is Assistant General Counsel for IP/IT at Wolters Kluwer, a global publishing and information services company with $6 billion in annual revenue, where he manages a large IP portfolio and works with senior executives responsible for global sourcing, IT infrastructure, software licensing, and product development. Mr. Frieden has extensive in-house and law firm experience in IT licensing and cross-border technology transactions, having represented Fortune 100 companies, governmental organizations, and leading technology ventures involved in software, multimedia, healthcare, and publishing technologies. He has taught graduate courses in IP and media law at Columbia College Chicago and has published extensively on legal and technology topics, including in the National Law Journal, BNA journals, and various CLE books. He also served as General Editor of the 2002 IICLE® handbook BUSINESS, LAW, AND THE INTERNET. Mr. Frieden received a B.S. from St. Mary’s University, an M.S. from the University of Texas at Dallas, a J.D. from Loyola University New Orleans College of Law, and an LL.M. in intellectual property law, with honors, from The John Marshall Law School. He also completed legal studies at Moscow State University Law School, Russia, and the Vienna University Law School, Austria. JOHN L. HINES, JR. (Chapter 19) is a member of Clark Hill PLC’s Intellectual Property Practice Group. He concentrates his practice in the areas of intellectual property, technology licensing, cloud computing, technology procurement and outsourcing, and electronic commerce. He also advises businesses on policies and practices relating to data protection, document retention, reputation management, social media, and generally the dissemination of content in an electronic environment. He has frequently taught courses in Internet law and Intellectual Property at Northwestern University School of Law and speaks and writes regularly on legal issues related to technology and the online environment. He serves as a trustee of the Erikson Institute, a graduate school in early childhood development. BLAKE W. JACKSON (Chapter 18) is a member of DLA Piper LLP (US)’s Intellectual Property group in the Silicon Valley, California, office. He concentrates his practice on creating intellectual property strategies and solutions for his clients, while focusing on intellectual property as a real business asset. Mr. Jackson is involved in strategic patent prosecution, counseling, and patent litigation support. He has been involved in patent sales and negotiations, patent licensing, acquisition diligence analysis, and corporate training in patents and other IP. He is a former US Naval officer and enjoys working on numerous veteran’s pro bono projects.

x

WWW.IICLE.COM

ABOUT THE AUTHORS

DANIEL F. LANCILOTI (Chapter 15) is a partner in Seyfarth Shaw LLP’s Chicago office. His practice focuses on trial work and counseling in the areas of trade secrets, restrictive covenants, and complex commercial disputes, including contract and tort defense. Prior to joining Seyfarth, Mr. Lanciloti worked as an Assistant Attorney General in the Illinois Attorney General’s Office. He received his B.A. with honors from Knox College and his J.D. magna cum laude from Valparaiso University School of Law. MICHAEL R. LEVINSON (Chapter 15) is a partner at Seyfarth Shaw LLP in Chicago, focusing his practice on litigation, with particular experience in commercial and intellectual property lawsuits. He has handled cases in federal and state courts and in private arbitrations, in Illinois and throughout the country, involving sporting goods, financial services and products, electronics, food products, construction, business forms, and consulting services, among many others. Mr. Levinson has represented dozens of employers and employees at temporary restraining order and preliminary injunction hearings and at trials in fiduciary duty, noncompete, trade secrets, and computer fraud cases. Mr. Levinson earned his undergraduate degree at Claremont-McKenna College, his M.B.A. from the University of Chicago, and his J.D. from Harvard Law School. TIMOTHY W. LOHSE (Chapter 18) is a partner at DLA Piper LLP (US) in the Silicon Valley, California, office and joined the firm in 1996. Mr. Lohse has a BSEE from Tufts University College of Engineering and a J.D. from Golden Gate University School of Law. Previously, Mr. Lohse was a searcher-law clerk at Oliff & Berridge in Virginia from 1989 to 1991, a summer associate at Flehr, Hohbach, Test, et al., in 1995, an associate at Oblon Spivak, et al., from 1995 – 1996. Mr. Lohse is a member of the Institute of Electrical and Electronics Engineers, has been a member of the Law Practice Management Committee of the California Bar Association, and has been an instructor of Crafting and Drafting Winning Patents for the Patent Resources Group. Mr. Lohse also serves as a board member for the Resource Area for Teaching, which is a nonprofit organization dedicated to providing teachers in California with teaching materials and lesson plans. Mr. Lohse also participates as a judge in the Giles Rich Moot Court Competition. JEFFREY MARX (Chapter 2) practices with the intellectual property law firm of Rakoczy Molino Mazzocki Siwik LLP in Chicago, where he concentrates his practice on patent litigation under the Hatch-Waxman Act on behalf of generic pharmaceutical companies. Mr. Marx also has substantial experience drafting and prosecuting patents in a variety of fields, including biotechnology, pharmaceuticals, and the electrical and mechanical arts. Mr. Marx received his B.S. cum laude from Boston University and his J.D. cum laude from the University of Wisconsin Law School — Madison. WILLIAM T. MCGRATH (Chapters 9, 11) is a member in the Chicago law firm of Davis McGrath LLC, where he practices in the fields of intellectual property and business litigation. His primary areas of concentration are copyright, trademark, and computer law, as well as publishing law, trade secret law, software licensing, and other matters relating to the high-tech and information industry. His practice involves issues relating to the ownership, licensing, protection, and infringement of intellectual property rights. He has experience not only in counseling and litigation in these areas but also in arbitration and mediation. Mr. McGrath serves as the Associate Director of the Center for Intellectual Property at The John

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

xi

INTELLECTUAL PROPERTY LAW

Marshall Law School, where he is also an adjunct faculty member. He is a Past President of the Intellectual Property Law Association of Chicago and a past Chair of the Patent, Trademark & Copyright Committee of the Chicago Bar Association. He has served on the Board of Trustees of the Copyright Society of the U.S.A. and the Board of the Lawyers for the Creative Arts. He is the author of numerous articles and is a frequent speaker on copyright and Internet law issues. He is on the Editorial Board of the Journal of the Copyright Society of the U.S.A. LAURA BETH MILLER (Chapter 2) is a partner at the intellectual property law firm of Brinks Hofer Gilson & Lione in Chicago. She serves as Chair of the firm’s International Trade group and is a member of the firm’s China Task Force. She regularly represents clients in both Section 337 investigations and federal court litigation involving a variety of patent, trademark, unfair competition, trade secret, and copyright issues. In addition, she has extensive commercial litigation experience in the areas of contract, antitrust, RICO violations, and bankruptcy. She is a frequent speaker on intellectual property issues and an adjunct professor at the John Marshall Law School. She also was guest lecturer on intellectual property issues at St. Peter’s College, Oxford University. Ms. Miller received her B.A. from the University of Virginia and her J.D. from the Marshall-Wythe School of Law at the College of William and Mary. D. JAMES NAHIKIAN (Chapter 17) is managing principal of the intellectual property and technology law firm Nahikian Global Intellectual Property & Technology Law Group in Chicago, where he serves clients in respect of patent, trade identity, trade secrets, copyright, and digital rights matters. A registered patent attorney and active member of the Bar of the U.S. Supreme Court and other federal appellate and district court bars, Mr. Nahikian formerly worked in industry as a software engineer and holds a master’s degree in computer science. He has served in various leadership roles, including as chair of the Technology Committee of the Cook County Task Force on Electronic Courts and as chair of the Chicago Bar Association Cyberlaw and Data Privacy Committee. Mr. Nahikian was keynote presenter to the 2007 Patent Law Delegation from Zhongguancun Science Park (Peoples Republic of China) and speaks frequently on technology and intellectual property law topics. He also is proprietor and general editor of the law blog TECHNASAURUSLEX. Mr. Nahikian received his undergraduate degree from the University of Michigan at Ann Arbor, a master’s degree in computer science from DePaul University, and his J.D. with concurrent LL.M. coursework in intellectual property law from The John Marshall Law School, where he was editor of the Journal of Computer and Information Law and received the first prize award for copyright paper in the ASCAP-sponsored Nathan Burkan Competition. MARC V. RICHARDS (Chapter 1) is a shareholder with the intellectual property law firm of Brinks Hofer Gilson & Lione in Chicago. Mr. Richards counsels clients on all areas of intellectual property law with an emphasis on patent matters, including obtaining and enforcing patents and assisting clients in developing patent portfolios that align with business strategies. He works with clients in protecting their intellectual property in diverse technological fields including software, business methods, industrial chemicals, and polymers. Prior to attending law school, Mr. Richards worked in the oil refining and chemical process industry as a field service engineer and as a process control engineer and was a Licensed Professional Engineer in Illinois. He is a member of the American and

xii

WWW.IICLE.COM

ABOUT THE AUTHORS

Chicago Bar Associations, the American Intellectual Property Law Association and the International Association for the Protection of Intellectual Property, where he served in 2011 – 2012 as International Chair of the Q217 Committee studying the Harmonization of Patent Laws on Obviousness, and has been featured as a speaker on the subject at U.S. and foreign IP law conferences. He is currently Treasurer of the Intellectual Property Law Association of Chicago. He received his B.S. Chemical Eng’g from Washington University at St. Louis, an M.B.A. with honors from the University of Chicago, and his J.D. cum laude from Loyola University of Chicago School of Law. SHERRY L. ROLLO (Chapter 13) is a partner with the law firm of Husch Blackwell LLP in Chicago, where she specializes in intellectual property litigation and counseling. Ms. Rollo has successfully represented clients in a wide variety of technical areas, including pharmaceuticals, ethanol processing, recycling and industrial resource recovery, plastic films and aluminum extrusions, camera phones, ultrasonic welding, precision cutting tools, and electronic motors. Ms. Rollo also has extensive knowledge of electronic discovery issues as they pertain to trade secrets disputes and has lectured on electronic evidence discovery issues in trade secret misappropriation cases for Lorman Education Services. She has also lectured on the extraterritorial protection of trade secrets at the Review of Intellectual Property Law’s Annual Symposium and on Restrictive Covenants at the Intellectual Property Law Association of Chicago’s Annual Trade Secrets Seminar. She is the chair of the Intellectual Property Law Association of Chicago’s Trade Secrets and Unfair Competition Committee and the Chair of the Licensing Executives Society’s Chemical, Energy, Environmental, and Materials Sector. Additionally, Ms. Rollo is a member of Chicago-Kent College of Law Adjunct Faculty and teaches Intensive Intellectual Property Trial Advocacy. Ms. Rollo received her undergraduate degree from the University of Texas at Austin and her J.D. from The John Marshall Law School with a certificate from the Center for Intellectual Property Law. LINDA K. STEVENS (Chapter 14) is an intellectual property litigator and counselor. A partner in the Chicago office of Schiff Hardin LLP, Ms. Stevens’ experience includes a wide array of intellectual property issues, including trademarks, trade dress, trade secrets, confidentiality agreements, and covenants not to compete, in both the state and federal courts. She also has acted as general outside counsel to several intellectual property-focused clients, assisting them with all legal aspects of their business. Ms. Stevens has served as an adjunct faculty member at Northwestern University School of Law and for the National Institute for Trial Advocacy. She is a frequent speaker regarding trade secrets and restrictive covenants and has written numerous articles on these issues. Ms. Stevens chairs the Trade Secrets Subcommittee of the ABA Litigation Section’s Intellectual Property Committee. She received her B.A. cum laude from Kalamazoo College and her J.D. cum laude from the University of Michigan Law School. DEANNA R. SWITS (Chapter 21) is an associate in the Chicago office of Nixon Peabody LLP. Ms. Swits is a trial lawyer whose practice focuses on complex intellectual property matters involving patents, trade secrets, trademarks, and copyrights, as well as Internet and privacy law. She has represented both intellectual property owners and accused infringers in litigation, and she has significant experience with large-scale, multi-party litigation. Ms. Swits’ experience spans a wide range of technologies, creative works, and consumer

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

xiii

INTELLECTUAL PROPERTY LAW

products, including embedded systems software, applications software, telecommunications software and hardware, medical devices, SDRAM, electric toothbrushes, musical compositions and recordings, literary works, and roll-your-own tobacco and rolling papers. Ms. Swits also has extensive experience advising clients regarding e-discovery, as well as general data preservation and management issues. She also advises on corporate intellectual property protection strategies, policies, and procedures, especially in regard to international corporations, including trade secret protection, brand protection strategies, privacy issues, the CFAA, and employment agreements. She received her B.A. magna cum laude from the University of Notre Dame and her J.D. from Vanderbilt University Law School, where she was Order of the Coif and Associate Editor for the Vanderbilt Law Review.

xiv

WWW.IICLE.COM

BOARD OF DIRECTORS

IICLE® Board of Directors Chair Donald P. Seberger, Libertyville* Vice Chair Lorraine K. Cavataio, Sandberg Phoenix & von Gontard P.C., O’Fallon* Secretary William J. Anaya, Arnstein & Lehr LLP, Chicago* Treasurer Thomas A. Lilien, Office of the State Appellate Defender, Elgin* Immediate Past Chair Hon. Leonard Murray, Chicago*

Paul E. Bateman, Littler Mendelson P.C., Chicago Bradley L. Cohn, Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, Chicago Jane N. Denes, Posegate & Denes, P.C., Springfield Deborah L. Gersh, Ropes & Gray LLP, Chicago LaVon Johns, Pugh, Jones & Johnson, P.C., Chicago Michele M. Jochner, Illinois Supreme Court, Chicago James M. Lestikow, Hinshaw & Culbertson LLP, Springfield Timothy S. Midura, Huck Bouma PC, Wheaton Ben Neiburger, Generation Law, Ltd., Elmhurst Robert Z. Slaughter, Evanston* *Executive Committee Members

IICLE® Board of Directors Past Chairs H. Ogden Brainard (1962 – 1969) John S. Pennell (1969 – 1971) William K. Stevens (1971 – 1972) J. Gordon Henry (1972 – 1973) Roger J. Fruin (1973 – 1974) Joseph J. Strasburger (1974 – 1975) William J. Voelker (1975 – 1976) Harold W. Sullivan (1976 – 1977) John J. Vassen (1977 – 1978) James M. (Mack) Trapp (1978 – 1979) Theodore A. Pasquesi (1979 – 1980) George W. Overton (1980 – 1981) Peter H. Lousberg (1981 – 1982) Kenneth C. Prince (1982 – 1983) Edward J. Kionka (1983 – 1984) Joseph L. Stone (1984 – 1985) Thomas S. Johnson (1985 – 1986) Richard William Austin (1986 – 1987) J. William Elwin, Jr. (1987 – 1988) Donald E. Weihl (1988 – 1989) Tomas M. Russell (1989 – 1990)

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

John K. Notz, Jr. (1990 – 1991) Michael J. Rooney (1991 – 1992) Willis R. Tribler (1992 – 1993) Thomas Y. Mandler (1993 – 1994) Ralph T. Turner (1994 – 1995) Robert E. Bouma (1995 – 1996) Patrick B. Mathis (1996 – 1997) Michael H. Postilion (1997 – 1998) Robert V. Dewey, Jr. (1998 – 1999) Roma Jones Stewart (1999 – 2000) Hon. John A. Gorman (2000 – 2001) Michael L. Weissman (2001 – 2002) George W. Howard III (2002 – 2003) Robert E. Hamilton (2003 – 2004) Patricia A. Hoke (2004 – 2005) Thomas M. Hamilton, Jr. (2005 – 2006) Hon. Dale A. Cini (2006 – 2007) Susan T. Bart (2007 – 2008) Adrianne C. Mazura (2008 – 2009) George F. Mahoney, III (2009 – 2010) Robert G. Markoff (2010 – 2011)

xv

STAFF OF THE INSTITUTE

INTELLECTUAL PROPERTY LAW

IICLE® Staff Valerie Merrihew, Interim Executive Director and CFO Amy L. McFadden, Director of Publishing Megan K. Moore, Director of Programming Patrick Nugent, Director of Business Development (Chicago)

Assistant to Executive Director Erin Soloman Publishing Tara Burke, Managing Editor Carole Chew, Senior Managing Editor Angela Moody, Managing Editor Ashley Musser, Managing Editor Darryl Parr, Senior Editor Laura Reyman, Managing Editor Kim Rouland, Production Coordinator Jennifer Routson, Communications Coordinator Courtney Smith, Managing Editor

Business Office Dawn Bruce, MCLE Coordinator Connie Wang, Staff Accountant Betty Williams, Accounts Payable

Customer Service Diana Celano, Representative Tara Cormier, Representative David Green, Business Development Coordinator (Chicago) Cherié Miller-Kling, Data Coordination Specialist

Programming Ann Chapman, Program Materials Coordinator Melissa Coulter, Program Administration Coordinator Nykoel Dinardo, Program Attorney Stephanie Laffey, Program Production Coordinator Cara Pratt-Fleming, Program Attorney

Marketing Sara Sonnenberg, Marketing Manager Emily Haney, Graphic Designer Matt Stolze, Graphic Designer

Inventory & Delivery Jack Hartson, Coordinator Tom Mosley, Coordinator

MIS Chris Hull, Information Technology Manager Jordan Wirth, IT Specialist Bob Schafer, Multimedia Specialist

Readers may contact staff members via e-mail at [email protected] or [first initial][last name]@iicle.com (e.g., [email protected])

xvi

WWW.IICLE.COM

INTELLECTUAL PROPERTY LAW 2013 Edition | Forms on CD List of Forms The following forms are available in rich text format within this Forms on CD. They are fully editable with most modern word-processing programs. Chapter 1: Patenting Inventions 1.79

Invention Disclosure Form

Chapter 2: Enforcing and Defending Against Patent Rights Through Litigation 2.49A 2.49B 2.62 2.63 2.64 2.65 2.66

Prosecution Bar Source Code Terms Checklist of Considerations for a Patent Infringement Case Complaint for Patent Infringement Affirmative Defenses to Complaint for Patent Infringement Patentee Interrogatories Accused Infringer Interrogatories

Chapter 5: Ownership and Management of Patent Rights 5.15 5.16 5.17 5.18A 5.18B 5.19 5.30 5.32 5.33 5.34 5.35

License Grant Field-of-Use Restriction for a Lighting Technology Definition of Licensed Territory Lump-Sum Royalty Provision Running Royalty Provision Term Provision of Package Patent License Seller’s Warranties Concerning Purchased Rights Employee Agreement Regarding Confidentiality and Intellectual Property Assignment of Patent Rights Nonexclusive Patent License Agreement Exclusive Patent License Agreement

Chapter 7: Transfer or Loss of Trademark Rights 7.5

Assignment of Trademark

Chapter 8: Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law 8.85

Cease-and-Desist Letter

8.86 8.87

Complaint for Trademark Infringement, False Designation of Origin, Unfair Competition, and Deceptive Trade Practices Notice of Opposition

Chapter 10: Ownership and Transfer of Copyrights 10.6 10.13

Copyright License Accounting Provision License Agreement Between Photographer and Studio

Chapter 17: Licensing Online 17.19A 17.19B 17.19C 17.19D 17.21 17.33

Disclaimer of Warranties Warranty Narrowly Defined Warranty of Ownership Limitation of Liability Provision Arbitration Provision Hybrid Browse-Wrap and Click-Wrap Agreement for a Streaming Multimedia Service Provider

Chapter 18: Business Method Patents 18.34

Checklist for Business Method Inventions in the United States

Part I: Patents

1

Patenting Inventions

MARC V. RICHARDS Brinks Hofer Gilson & Lione Chicago

®

©COPYRIGHT 2013 BY IICLE .

1—1

INTELLECTUAL PROPERTY LAW

I. [1.1] Introduction II. Patent Basics A. [1.2] What Is a Patent? 1. [1.3] Patents Provide the Right To Exclude 2. [1.4] Historical and Constitutional Underpinnings 3. [1.5] Evolution of Patent Laws 4. [1.6] Functions of United States Patent and Trademark Office B. [1.7] Comparison with Copyrights, Trademarks, and Trade Secrets 1. [1.8] Copyrights 2. [1.9] Trademarks 3. [1.10] Trade Secrets III. [1.11] Types of Patents and Patentable Inventions A. [1.12] Utility Patents 1. [1.13] Processes 2. [1.14] Machines or Apparatus 3. [1.15] Manufactured Articles 4. [1.16] Compositions of Matter 5. [1.17] Computer Software and Computer-Related Inventions 6. [1.18] Business Methods 7. [1.19] Nonpatentable Subject Matter B. [1.20] Design Patents C. [1.21] Plant Patents IV. [1.22] Requirements for a Patent A. [1.23] Utility B. [1.24] Novelty 1. [1.25] Was the Inventor the First To Create the Invention? 2. [1.26] Was This Invention or an Identical Invention Publicly Disclosed? 3. [1.27] Changes to the Novelty Requirement Under the AIA C. [1.28] Nonobviousness V. Inventorship and Ownership A. [1.29] Who Is an Inventor? B. [1.30] Who Owns an Invention?

1—2

WWW.IICLE.COM

PATENTING INVENTIONS

VI. Deciding To Seek Patent Protection A. B. C. D.

[1.31] [1.32] [1.33] [1.34]

Advantages Disadvantages Economic Value Use of Patent Attorneys and Patent Agents

VII. [1.35] Timing Considerations A. United States Patents 1. [1.36] Prior Inventions 2. [1.37] One-Year Grace Period B. [1.38] Foreign Patents 1. [1.39] Absolute Novelty 2. [1.40] Exceptions C. [1.41] Confidentiality Agreements VIII. [1.42] Keeping Records of Inventions A. [1.43] Notebooks B. [1.44] Former Document Disclosure Program and Provisional Patent Applications C. [1.45] Sealed, Mailed Documents IX. [1.46] Patentability Search X. [1.47] Patenting Process A. [1.48] Provisional Patent Applications B. Preparing and Filing the Patent Application 1. [1.49] Contents of the Application 2. [1.50] Oath or Declaration and Related Papers 3. [1.51] Duty To Disclose Known Prior Art C. [1.52] Publication of the Application D. [1.53] Restriction Requirements E. [1.54] Office Actions F. [1.55] Responses G. [1.56] Interviews H. [1.57] Appeals I. [1.58] Allowance and Issue of Patent J. [1.59] Interferences

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—3

INTELLECTUAL PROPERTY LAW

K. [1.60] Derivation Proceedings L. Correction, Reissue, Reexaminations, and Post Grant Reviews 1. [1.61] Certificates of Correction 2. [1.62] Reissue 3. [1.63] Ex Parte and Supplemental Reexaminations 4. [1.64] Post Grant and Inter Parte Reviews M. Patent Expiration and Maintenance Fees 1. [1.65] Patent Term 2. [1.66] Patent Term Adjustment 3. [1.67] Patent Term Extension 4. [1.68] Terminal Disclaimers 5. [1.69] Maintenance Fees XI. Issued Patents A. [1.70] Anatomy of a Patent: Sample Utility Patent B. [1.71] Sample Design Patent C. [1.72] Marking Patent Numbers on Products XII. Foreign Patents A. B. C. D.

[1.73] [1.74] [1.75] [1.76]

Foreign Filing Licenses PCT International Patent Applications Foreign Priority Rights Foreign National and Regional Patent Offices

XIII. [1.77] Invention Promotion Companies XIV. [1.78] Glossary XV.

1—4

[1.79] Appendix — Invention Disclosure Form

WWW.IICLE.COM

PATENTING INVENTIONS

§1.3

I. [1.1] INTRODUCTION This chapter discusses some basic information about patents. It discusses what a patent is and how it compares with other forms of intellectual property. The chapter describes the types of inventions that may be protected with a patent, the requirements for obtaining a patent, and the patenting process with the United States Patent and Trademark Office (USPTO). The chapter also provides practical considerations, such as the importance of timely filing a patent application, and guidelines for deciding whether pursuing patent protection serves the needs of the business or the inventor. Other practical issues surrounding obtaining a patent are also addressed. A glossary of patent terms is included in §1.78 below.

II. PATENT BASICS A. [1.2] What Is a Patent? In simple terms, a patent is an official document or certificate issued by a federal governmental agency that describes a new invention. The document is typically between 5 and 20 pages (but may be longer) and includes a written description of an invention and often a few drawings of the invention. Some patents are hundreds of pages long. The original issued patent from the United States Patent and Trademark Office includes the agency’s official gold seal on the front and is often referred to as the “letters patent.” A patent signifies that the exclusive rights to the invention have been given to the owner of the patent. Those rights are given by the government in exchange for providing the public with a detailed written description of the invention and allowing the invention to fall into the public domain after the patent expires. A patent has the attributes of personal property. 35 U.S.C. §261. A patent may be compared with a land patent or land grant, which confers the exclusive rights to a plot of land transferred from the government to an individual. As with a land owner, a patent owner may prevent others from trespassing on his or her property. As with land, a patent may be sold. For transactions between individuals, the conveyance for land is a deed, and the conveyance for a patent is an assignment, which uses very similar legal language to transfer ownership rights. 1. [1.3] Patents Provide the Right To Exclude In the United States, the owner of a patent may be entitled for a limited time to exclude any person or entity from making, using, selling, or offering to sell the patented invention defined in the patent. 35 U.S.C. §271. These rights are awarded as a quid pro quo with the inventor for publicly disclosing the secrets of his or her invention. This sharing of the invention with the public is said to advance the world’s knowledge of science. As these rights are awarded exclusively by the U.S. government, patent rights may be asserted in all U.S. territories. With few exceptions, the rights are limited to protect the invention only against infringing activity occurring in the United States. A patent acts as a so-called ticket for admission to a U.S. federal court, where the patent owner may seek to have those rights enforced against others who “trespass” on the patent. This right to exclude may be enforced by obtaining a court injunction

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—5

§1.4

INTELLECTUAL PROPERTY LAW

against an infringer. A patent owner must prove that traditional equitable considerations warrant a permanent injunction; alternatively, a court may award a royalty to the patent owner in exchange for allowing the infringing activity to continue. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006). A common misconception is that the exclusive rights in a patent give the inventor or patent owner a guaranteed monopoly to use the invention. First, it is improper to refer to a patent as conferring a “patent monopoly” or describing a patent as “an exception to the general rule against monopolies.” Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n.3 (Fed.Cir. 1983). Second, it is possible that a person may be awarded a patent on his or her invention, only to find out that a prior inventor holds a so-called “dominating” or “blocking” patent on a broad category of inventions that includes that person’s invention. Thus, a patent owner may find that he or she may not be able to use his or her own invention without violating another person’s patent. For example, assume that Inventor A obtains a patent on a pencil and Inventor B obtains a patent on the improvement of a pencil with an attached eraser. Inventor A can prevent the sale of any type of pencil, including those with attached erasers described in Inventor B’s patent. Thus, the potential of a patent allowing the exclusive right to use an invention is limited by any other patents covering aspects of the invention. 2. [1.4] Historical and Constitutional Underpinnings Patents are not a new form of legal rights. Patents were reportedly granted at least as far back as 1449 in England when King Henry IV reportedly granted a monopoly for stained glass manufacturing. These royal edicts evolved in 1624 into the English Statute of Monopolies, which took away royally sanctioned monopolies for inventions or even whole industries and replaced them with legislatively awarded monopolies for new products. The founding fathers of the United States evidently appreciated the encouragement that patents provided to innovators and thus embedded such rights in the Constitution. Article I, §8, gives Congress the authority to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” At first, under this authority, Congress directly granted patents to inventors. The U.S. patent statutes were first written in 1790. As Secretary of State, Thomas Jefferson oversaw the award of patents by a patent board. In 1836, a patent office was established to undertake the examination and award of patents. The United States Patent and Trademark Office is one of the oldest agencies in the U.S. government. One of the most famous Illinoisans to obtain a patent was President Abraham Lincoln. Indeed, he is reported to be the only U.S. President ever to have received a patent. In 1849, Lincoln received U.S. Patent No. 6,469 for “A Device for Buoying Vessels over Shoals.” President Lincoln is often quoted as saying, “The patent system added the fuel of interest to the fire of genius.” 3. [1.5] Evolution of Patent Laws The U.S. patent statutes have evolved from numerous judicial rulings and the old form of the laws, which were rewritten in 1952 and codified in Title 35 of the United States Code, 35 U.S.C.

1—6

WWW.IICLE.COM

PATENTING INVENTIONS

§1.7

§1, et seq. Although there have been numerous amendments since then, the basic patterns of the laws trace their roots back to numerous U.S. Supreme Court decisions in the 1800s. In the last quarter century, significant amendments have extended patent rights to prohibit the import into the United States of products made overseas by manufacturing processes patented in the United States (35 U.S.C. §271(g)), change the duration of patents from 17 years from issue date to 20 years from the filing date (35 U.S.C. §154(a)), and provide for the publication of pending patent applications (35 U.S.C. §122(b)). In 1982, Congress created the Court of Appeals for the Federal Circuit to hear appeals of patent lawsuits from all of the federal district courts and appeals from decisions by the United States Patent and Trademark Office. In 2011, Congress passed the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), which is the most significant change in the patent laws since the 1952 patent act. The AIA, after its full implementation March 16, 2013, will have changed the U.S. patent laws to be closer in some respects to the patent laws in foreign countries. In particular, the U.S. patent laws will apply a standard in harmony with many foreign countries as to what is considered part of the state of the art to which an invention is compared when determining if a patent should be awarded. Instead of measuring the state of the art one year before a patent application is filed, it will now be measured as of the date the patent application is filed. Also, in the case of multiple inventors filing for a patent for the same invention, rather than awarding the patent to the first person to invent, the patent will be awarded to the first person who filed an application for a patent. In addition, new procedures have been established at the USPTO that allow parties to challenge the award of a patent. These changes will be implemented over an 18month period, but patents already granted will be grandfathered under the old standards. Therefore, for a period of time, a confusing set of double standards will be in effect — one standard for old patents and another standard for newer patents. These different standards are explained in more detail throughout this chapter. 4. [1.6] Functions of United States Patent and Trademark Office Established as an agency within the United States Department of Commerce, the United States Patent and Trademark Office has the full and exclusive authority to grant patents and register federal trademarks. 35 U.S.C. §§1, 2. Individual states have the right to register state trademarks but not patents. A separate government agency, the United States Copyright Office, registers copyrights. In addition to granting patents, the USPTO records title or ownership in patents, much as deeds to real estate are recorded. Also, the USPTO maintains depository libraries around the country where copies of patents are made available to the public. This same information is now available online at the USPTO website, www.uspto.gov. The bulk of the activity of the USPTO is the examination process to determine whether the requirements for patentability are satisfied by a patent application. B. [1.7] Comparison with Copyrights, Trademarks, and Trade Secrets Quite often, the general public is confused as to what form of intellectual property is needed to protect new products and ideas. In general, utility patents are useful for protecting the utilitarian or functional aspects of a product or process. These patents protect how a product is made, how it works, the shape of the product as it relates to a useful function, the interrelationship

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—7

§1.8

INTELLECTUAL PROPERTY LAW

of its parts, etc. Copyrights (see §1.8 below), trademarks (see §1.9 below), trade secrets (see §1.10 below), and design patents (see §1.20 below) can protect other aspects of products and creative endeavors.

PRACTICE POINTER 

It is important to understand the differences and similarities among the different forms of intellectual property protection. The different areas of intellectual property are not mutually exclusive in terms of the types of creations they protect. Often, creations are best protected by using combinations of different forms of intellectual property to protect the different aspects of the intellectual creations. The reader is thus encouraged to become familiar with at least the basics outlined by the different chapters in this handbook and to consult with intellectual property specialists.

1. [1.8] Copyrights A copyright protects the expressive, aesthetic aspects of an article, work of art, writing, or performance, among other things. An expressive aspect, for example, is not the basic plot outline of a play but the detailed intricacies of the plot, which are protectable with a copyright. For architectural drawings of a house, copyrights prevent not only copying of the blueprints but also building a house according to the blueprints without permission. Copyrights can protect the written codes of a software program as they would a book. Nonetheless, protecting the functions performed by the software is done with a patent. There may be some overlap between things protected by copyrights and things protected by patents, but each form of intellectual property protects different aspects. For more details on copyrights, see Chapters 9 – 11 of this handbook. 2. [1.9] Trademarks Trademarks have no overlap with utility patents. Trademarks protect names associated with goods and services and are designed to protect the public from confusingly similar marks so that the marks may become surrogates for a source identifier of the product. Unlike utility patents, trademarks do not protect any functional attribute of a product. Thus, a clever, catchy name for a new product may be protected with a trademark, while the functional product design is protected with a utility patent. Nonetheless, there is some overlap between patents and trademarks when it comes to ornamental aesthetic product designs. There is one form of patent called a “design patent,” as discussed in §1.20 below, that protects the purely ornamental features of a product. Trademark law allows the protection of such features of a product when those features are distinctive and have become associated in the public’s mind with a source of the product. For example, the shape of an old-fashioned Coca-Cola bottle has received a trademark registration. In 2008, Apple received a trademark registration for the shape of an iPod. Trademark laws protect the product shapes for as long as they are in commercial use, whereas a design patent protects a product design only for 14 years even when the patent owner is no longer using the design. For more details on trademarks, see Chapters 6 – 8 of this handbook.

1—8

WWW.IICLE.COM

PATENTING INVENTIONS

§1.12

3. [1.10] Trade Secrets Trade secrets may be considered the antithesis of patents. Trade secrets protect only that subject matter that a company has attempted to maintain in secrecy, such as secret formulas or customer lists, whereas patents are awarded only in exchange for publicly disclosing all the relevant details of the invention. Moreover, trade secrets are protected only against illegal misappropriation, whereas patents may protect against others unknowingly and independently creating the same invention. Finally, trade secrets act to protect those secrets as long as they remain secret, while patents are for a limited duration. For more details on trade secrets, see Chapters 12 – 14 of this handbook.

III. [1.11] TYPES OF PATENTS AND PATENTABLE INVENTIONS There are three basic types of patents: utility patents; design patents; and plant patents. Utility patents are awarded for the inventing of new functional things and processes and last for up to 20 years. Design patents are awarded for inventing new ornamental designs for manufactured products and last for up to 14 years. Plant patents are awarded for inventing new plant varieties through asexual reproduction and last up to 20 years. Utility patents are, by any measure, the most prevalent and common type of patent obtained to protect inventions. In 2003, the United States Patent and Trademark Office reported that it issued 169,026 utility patents, 16,574 design patents, and only 994 plant patents. In 2007, the USPTO reported that it issued 157,283 utility patents, 24,063 design patents, and 1,047 plant patents. Over that four-year span, the number of new utility patent applications filed annually increased from 342,441 to 456,154. Patent Statistics Reports are available online at www.uspto.gov/web/offices/ac/ido/oeip/taf/reports.htm. As the demand for utility patents is greatest, this chapter focuses primarily on utility patents, discussed in §§1.12 – 1.19 below. Nonetheless, design patents and plant patents are briefly discussed in §§1.20 and 1.21 below, respectively. Regardless of the type, patents are awarded only for inventions that are found useful, novel, and nonobvious. These requirements are explained in more detail below in §§1.22 – 1.28 below. A. [1.12] Utility Patents According to the patent laws, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvements thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §101. A utility patent protects the utilitarian or functional aspects of an invention, as opposed to its ornamental features or broad concept. This functionality may be in the order, structure, sequence, or combination of parts or steps that make up the invention. The invention may be defined by the patent, for example, in terms of the function or the structural configuration of parts that are able to carry out that function or as a new composition that inherently has such a function. Sections 1.13 – 1.18 below list the types of subject matter that may be protected by a utility patent, while §1.19 below lists the types of subject matter that cannot be patented. A sample utility patent is shown at §1.70 below.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—9

§1.13

INTELLECTUAL PROPERTY LAW

PRACTICE POINTER 

Other than deciding whether to file a utility, design, or plant patent, the inventor does not need to decide into what subject matter category his or her invention falls. Often, it is useful to fully consider the broadest uses to which an invention may be put and protect it in several forms, such as a product, the process by which it is made, and the process by which it is used. For product inventions, it is possible to file both a utility patent on the functional aspects of the invention and a design patent on the ornamental aspects of the invention.

1. [1.13] Processes Patents may be obtained for almost any invention relating to a process for doing something, although some processes may not be patentable as described in §1.19 below. Traditionally, process patents have been awarded for manufacturing processes, but patents are now awarded for processes relating to data processing, games, methods for doing physical therapy, medical procedures, teaching, and conducting business. New uses for known devices and materials may also be patented in the form of a process patent covering the new or improved process in which the known device or material is used. In the United States, patents may be obtained on medical procedures on humans. However, medical professionals and related healthcare facilities are exempt from infringement liability to the extent that the procedure does not involve the use of patented devices or compositions. 35 U.S.C. §287(c). Inventions relating to new business methods merit special consideration, as discussed briefly in §1.18 below and in more detail in Chapter 18 of this handbook. 2. [1.14] Machines or Apparatus Most people think about machines and equipment making up most of the patented inventions. The machines or apparatus category usually includes devices that have mechanical parts that move or interact. For a period in the 1800s, the United States Patent and Trademark Office required inventors to bring working models of machines to the patent office. Now working models are not required. 3. [1.15] Manufactured Articles The manufactured articles category of invention might be considered to be products without moving or interacting parts, such as a bottle, an ashtray, or a comb. 4. [1.16] Compositions of Matter The compositions of matter category of invention includes chemical compounds, mixtures, formulas, plastics, metal alloys, and DNA. This category also includes living organisms that are human creations, such as genetically engineered bacteria that eat oil, mice that are useful in conducting scientific studies, and plants that have had genes inserted to produce pesticides.

1 — 10

WWW.IICLE.COM

PATENTING INVENTIONS

§1.18

Because of the confusion in how to deal with biotechnological materials, the biotech industry successfully lobbied Congress to amend the patent laws to ensure fair treatment in the patenting of biotech inventions. See 35 U.S.C. §103(b). 5. [1.17] Computer Software and Computer-Related Inventions The computer software and computer-related category of invention includes computer programs. A computer program itself is an abstract sequence of code but can be considered to be bits of codes stored on memory devices. As such, patents covering computer programs may be written in a form covering computer-readable memory storing code capable of carrying out certain methods (e.g., CDs), computer systems configured to perform certain processes embodied in the software, or merely the method of transforming and/or processing the data as performed by the software. Computer programs were traditionally thought to be protected only by copyrights. However, numerous court cases since the early 1970s have opened the boundaries for patenting software. A high-profile case included Amazon.com, Inc.’s “one-click” patent. Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239 F.3d 1343 (Fed.Cir. 2001). 6. [1.18] Business Methods Currently, there is no established definition of a so-called “business method patent.” This category of invention had historically been considered to include business and accounting procedures thought by many, including the United States Patent and Trademark Office, to be nonpatentable. However, the Federal Circuit, relying on old U.S. Supreme Court caselaw, held that any method is patentable subject matter if it produces a “useful, concrete and tangible result.” State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368, 1373 (Fed.Cir. 1998), quoting In re Alappat, 33 F.3d 1526, 1544 (Fed.Cir. 1994). In 2010, this ruling was overruled by the Federal Circuit itself and thereafter confirmed in the Supreme Court decision in Bilski v. Kappos, 561 U.S. ___, 177 L.Ed.2d 792, 130 S.Ct. 3218 (2010). The Supreme Court confirmed that there is no exception that categorically disqualifies business methods from being patentable. However, the Supreme Court stated that, to be patentable, business methods must not be merely abstract ideas. Often, software patents, Internet patents, and e-commerce patents are considered business method patents when the core concept of the invention is the automation of steps useful in carrying out the function of a business as opposed to a manufacturing process. Business methods have been singled out for special treatment. Legislation was proposed in 2001 to treat the patenting of such inventions differently from other patentable subject matter. See the Business Method Patent Improvement Act of 2001, H.R. 1332, 107th Cong., 1st Sess. This legislation was not passed. In 1999, a law was enacted that allows for the secret prior use of a business method as a defense against an assertion of patent infringement. See 35 U.S.C. §273. Such secret prior use is not a defense to patent infringement as it pertains to patents on manufacturing processes or other subject matter. Under the 2011 Leahy-Smith America Invents Act, a transitional procedure for challenging so-called business method patents is included, but a specific definition of “business method” is not provided. For a detailed discussion of business method patents, see Chapter 18 of this handbook.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 11

§1.19

INTELLECTUAL PROPERTY LAW

As a practical matter, the USPTO is still backlogged from a high number of patent filings for business methods that started during the dot-com boom and continued with the transformation of the country away from manufacturing and into a service-based economy in which corporate value is derived from innovative service offerings. In some departments of the USPTO, the backlog is such that it may be three or more years until the patent application is first picked up and examined. Compare that with other departments handling areas of conventional manufacturing technology, such as cigarette manufacturing, in which the applications are usually examined about one year after being filed. The AIA included a special carveout for business method patents related to tax strategies. In §14 of the AIA, it is stated that when determining the novelty and nonobviousness of an invention, any tax strategies that are part of the invention cannot be relied on to differentiate the invention from the prior art. This is about the same as declaring that tax strategies are not patenteligible subject matter. 7. [1.19] Nonpatentable Subject Matter The United States Patent and Trademark Office will refuse to award a patent for general categories of things such as a. laws of nature; b. physical phenomena; c. abstract ideas, mental processes, or mathematical formulas; d. printed matter; e. naturally occurring substances (but these may be patented in a nonnatural purified and isolated form); f.

inventions that violate the laws of physics (e.g., perpetual motion); and

g. inventions that have only an illegal or immoral purpose (e.g., torture devices). NOTE: Categories a – c may be patented when applied to a real-world application, such as the control of a manufacturing process, or limited to a specific, nonabstract implementation, such as a process or system involving the use of specially programmed computers. B. [1.20] Design Patents According to the patent laws, “[w]hoever invents any new, original and ornamental design for an article of manufacture may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §171. A design patent covers the “ornamental features as shown” in the drawings of the patent, without specifying precisely what features are ornamental and what features are functional. The ornamentation may exist in a surface ornamentation applied to the product, or it may reside in the configuration of the product itself.

1 — 12

WWW.IICLE.COM

PATENTING INVENTIONS

§1.20

Design patents are usually cheaper and faster to obtain than utility patents. They can be an effective tool to protect against product knockoffs. Because of this, design patents are useful to provide some level of market exclusivity for a period of time to allow the consuming public to associate a product’s design with a specific company. After the product obtains this acquired distinctiveness, trademark laws and trade dress protection may extend the protection of the product design beyond the term of the design patent. The protection offered by a design patent is limited. As the design patent protects only the ornamental features of a product, if the ornamentation may be easily modified on a competitive product, the patent may be easily avoided. Likewise, if the ornamental feature is integral with the functional utility of the product and cannot be separated, then the design patent may not prevent someone else from incorporating that function into his or her product even if the product also requires the use of that same ornamentation. See Best Lock Corp. v. Ilco Unican Corp., 94 F.3d 1563 (Fed.Cir. 1996). In analyzing a design patent, the test for infringement is that if, 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. Gorham Co. v. White, 81 U.S. (14 Wall.) 511, 528, 20 L.Ed. 731, 737 (1871). Embraced within the ordinary-observer test is the implied knowledge possessed by the ordinary observer. The ordinary observer is hypothetically possessed with the knowledge of prior art designs such that a comparison of the features of the patented design with the accused design is made with the prior art as a frame of reference. Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed.Cir. 2008). The procedures and requirements for obtaining a design patent are very similar to the steps outlined in §§1.47 – 1.58 below for obtaining a utility patent. The design patent application consists primarily of drawings showing all the different sides and/or perspectives of a product. A sample design patent is shown at §1.71 below. A design patent application is limited to one specific design for a product; however, modified forms of the same design concept may be included in a single design patent application. The written portion of the application includes the title, a one-line description of each drawing, and a one-sentence patent claim to “the ornamental design for the article (specifying name) as shown.” 37 C.F.R. §1.153(a). At the United States Patent and Trademark Office, the design patent application undergoes an examination as to its originality, novelty, and obviousness over prior designs, much the same as a utility patent. A design patent is valid for 14 years from its issue date and does not require any maintenance fees to keep it in force. 35 U.S.C. §173. For more details on the design patent process, see A Guide To Filing a Design Patent Application, www.uspto.gov/web/offices/pac/design/design.html.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 13

§1.21

INTELLECTUAL PROPERTY LAW

C. [1.21] Plant Patents The patent laws provide: Whoever invents or discovers and asexually reproduces any distinct and new variety of plant, including cultivated sports, mutants, hybrids, and newly found seedlings, other than a tuber propagated plant or a plant found in an uncultivated state, may obtain a patent therefor, subject to the conditions and requirements of this title. 35 U.S.C. §161. A plant patent covers a living plant organism that has a single set of characteristics determined by its genotype, which may be only asexually reproduced. Naturally occurring mutations may be patented, provided they are discovered in a cultivated area. Bacteria are not covered by plant patents, but algae and microfungi are covered. A plant patent may be used to prevent others from asexually reproducing, selling, or using the patent plant. “Asexual reproduction” is the propagation of a plant without the use of genetic seeds. Examples of asexual reproduction include rooting cuttings, grafting budding, bulbs, division, rhizomes, runners, and tissue cultures. A sport or mutant of a “parent” plant is of a different genotype and is not covered by the patent covering the parent. For more details on the plant patent process, see General Information About 35 U.S.C. 161 Plant Patents, www.uspto.gov/web/offices/pac/plant/index.html. While genetically engineered plants may be protected by utility patents, they — along with traditional sexually bred and reproduced (by seed) plant varieties — may also be protected through the Plant Variety Protection Office. To get more information about the Plant Variety Protection Act, 7 U.S.C. §2321, et seq., click on “Science and Laboratories” at www.ams.usda.gov.

IV. [1.22] REQUIREMENTS FOR A PATENT As set forth by the patent laws, assuming that an invention constitutes patentable subject matter, there are three hallmark requirements for a patent: usefulness, novelty, and nonobviousness. 35 U.S.C. §§101 – 103. These statutes set forth the requirements that the invention have some practical use, that the invention be new, and, even if new, that the invention not be an obvious combination of features found in prior inventions or an obvious variation. Previously, the United States stood alone from the rest of the world in that patents were ultimately awarded not to the first person to file a patent application for an invention, but to the first person to create the invention. Under the Leahy-Smith America Invents Act, for new patent applications filed after March 16, 2013, as between applicants for the same invention, the patent will be awarded to the first person who filed a patent application. However, the patent laws setting forth this standard are complex. Under the old laws, the standard is combined with statutory bars, which act like a statute of limitations, allowing only one year after an inventor publicly discloses his or her invention before the inventor must file for a patent or lose the right to do so. Moreover, there are almost two hundred years of court decisions that add layers of

1 — 14

WWW.IICLE.COM

PATENTING INVENTIONS

§1.24

exceptions and complexity. The AIA adds even more complexity in that there are statutory exceptions to the new standards, and exceptions to the exceptions, some of which are explained in §1.27 below. A. [1.23] Utility The initial requirement of showing an invention to be useful, or to have utility, is easily satisfied. Almost all products have some usefulness, even if that usefulness is frivolous, such as that of a toy or game. However, if an invention is inoperative, such as a perpetual motion machine, it does not meet this standard. Likewise, if a new chemical is developed by a pharmaceutical company but it is not known what that chemical might be used for, then the utility requirement is not satisfied. See Nelson v. Bowler, 626 F.2d 853, 856 (C.C.P.A. 1980). However, the purported use for the invention need not be proven, and nearly any assertion of a specific, substantial, and credible usefulness for an invention is acceptable, provided the “specific benefit exists in currently available form.” Brenner v. Manson, 383 U.S. 519, 16 L.Ed.2d 69, 86 S.Ct. 1033, 1042 (1966). As an illustration of the legal standard for utility, the court in Juicy Whip, Inc. v. Orange Bang, Inc., 292 F.3d 728 (Fed.Cir. 2002), found that an invention for a beverage dispenser met this utility requirement when the invention was directed to simulating the appearance that a different beverage would be dispensed other than what the consumer would actually receive. The court of appeals noted that the principle that inventions are invalid if they are principally designed to serve illegal or immoral purposes has not been applied broadly in recent years. The fact that one product can be altered to make it look like another is in itself a specific benefit sufficient to satisfy the statutory requirement of utility. B. [1.24] Novelty Patents are awarded only to new inventions. Therefore, during the examination of a patent, the examiner determines whether there is evidence that someone else had earlier created or described the same invention. This condition of having a new and unique invention is also referred to as “novelty.” If something was in existence, was described in a publication prior to the invention, or was described in another patent application filed before the one under examination, and the thing in existence or the prior description expressly or implicitly included all the same features of the invention, it is said to “anticipate” the invention. In evaluating an application for a patent, the invention is defined not by specific examples but rather by the patent claims, which are long, run-on, numbered sentences found at the end of a patent that describe the boundaries of the subject matter sought to be covered by the patent. If an invention is found to be in prior existence or merely described in a prior document and the prior description would fall within the boundaries of the patent claim, then the claimed invention is not novel. For this reason, there are usually many different patent claims in a patent that try to define the invention in different ways to carve out an irregular border that avoids prior inventions. There are several different ways in which the novelty of an invention is measured, as set forth in 35 U.S.C. §102. This statute tests whether the inventor was the first to create the invention and

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 15

§1.25

INTELLECTUAL PROPERTY LAW

whether the inventor duly filed an application for a patent within one year from first publicly disclosing the invention or first commercially exploiting the invention. The Leahy-Smith America Invents Act established dual standards and grandfathered existing patent applications and patents under the old standards. Therefore, the old standards are discussed first in §§1.25 and 1.26 below, followed by a discussion of the changes under the new standards established by the AIA in §1.27. 1. [1.25] Was the Inventor the First To Create the Invention? Under the Leahy-Smith America Invents Act, the existing laws are applicable for patent applications filed before March 16, 2013, or later-filed patent applications that claim priority to earlier applications filed before March 16, 2013. For such applications to be eligible for a patent, the alleged inventor must have been the actual creator of the inventive concept. A person is not entitled to obtain a patent for something derived from or invented by another person. 35 U.S.C. §102(f). A patent will not be awarded if, prior to the patent applicant’s invention date, the identical invention was known or used by others in the United States or patented or described in a printed publication anywhere in the world. 35 U.S.C. §102(a). A patent will not be awarded if the prior public use of the invention was in the United States. If an identical invention has been sold in France but not known in the United States before the applicant’s invention, then the U.S. inventor can still obtain a patent. However, if a publication was printed anywhere in the world — for example, in France — before the U.S. inventor’s invention date and that French publication described the product being sold in France, the publication will prevent the U.S. inventor from getting a valid U.S. patent. It is possible under this scenario that neither the inventor nor the United States Patent and Trademark Office will be aware of the French product or the French publication, so a patent may be issued by the USPTO. Should the existence of the French publication later come to light, however, it can be used as evidence that the U.S. patent is not valid since there was a printed publication somewhere in the world that described the same invention before the U.S. inventor created it. For the purposes of the examination process at the USPTO, the examiner assumes that the invention date is the filing date of the patent application. However, the inventor may submit a declaration with evidence to prove an earlier invention date, if necessary, to remove certain publications or knowledge as being “prior art.” See 37 C.F.R. §1.131. In the declaration, the inventor swears that he or she created the invention prior to the publication or public use or knowledge of others. The inventor also has to swear that he or she was diligent in making the invention and filing for a patent. Thus, if an inventor abandons an invention only to be spurred on to file for a patent after learning that someone else created the same invention, the inventor will be given credit only for the date when he or she was spurred into activity. The consequence for not diligently pursuing an invention is loss of the ability to assert being the first inventor. An invention is not novel if the identical invention has been known or used by others. A public use or printed publication by the inventor is not that of another and is self-proving that the inventor made the invention at the time of that use or publication. However, a description of the inventor’s own invention may be in an article coauthored by the inventor or authored by others. The term “by others” has been interpreted to mean any other “inventive entity.” Thus, unless the

1 — 16

WWW.IICLE.COM

PATENTING INVENTIONS

§1.26

group of inventors applying for a patent is identical to the group associated with the prior use or printed publication, it is considered to be by others. However, when such a situation occurs during examination, the inventors may submit a declaration showing that the prior use or knowledge was their own or that the prior publication described their own invention. To the extent activity was within one year of the application filing date, the declaration may remove that activity as being prior art under 35 U.S.C. §102. As mentioned above, for the purposes of the examination process at the USPTO, the examiner assumes that the invention date is the filing date of the patent application. However, the inventor may submit a declaration with evidence to prove an earlier invention date, if necessary, to remove certain publications as prior art. 37 C.F.R. §1.132. An invention is not novel if the same invention has been “publicly” known or used by others in the United States. Thus, if the other inventor’s use was secret or maintained in confidence, then it is not considered a “public” use under 35 U.S.C. §102(b). However, there are two exceptions to this requirement that allow others’ prior inventions that were kept secret to prevent an inventor from getting a patent. The first exception occurs when the other’s secret invention is described in a U.S. patent application filed before the applicant’s invention and the patent application is later published or granted. See 35 U.S.C. §102(e). The second exception occurs when the prior use was not public but was by another inventor who did not abandon, suppress, or conceal the invention. See 35 U.S.C. §102(g). Often, this latter rule is invoked in situations in which two groups of inventors are seeking a patent on the same invention and the USPTO has declared an interference proceeding to determine who created the invention first. Also, this type of so-called “secret” prior art may be used later during litigation of a patent to prove that the patent was not given to the first inventor and should be found to be invalid. A determination of whether the prior inventor abandoned, suppressed, or concealed the invention is based on the specific facts of each case, which must be examined to determine whether the delay in making the invention known was reasonable under the circumstances. See Checkpoint Systems, Inc. v. United States International Trade Commission, 54 F.3d 756 (Fed.Cir. 1995). 2. [1.26] Was This Invention or an Identical Invention Publicly Disclosed? As applicable for patent applications filed before March 16, 2013, the invention, or an identical invention, for which a patent is sought must not have been publicly disclosed more than one year before the application was filed. This requirement invokes the one-year grace period or statute of limitations given to inventors before which they must file for a U.S. patent application on their inventions. As described in §§1.38 – 1.40 below, most countries do not offer any grace period and require that a patent application be filed before any public disclosure or description of the same invention. A printed publication includes any imaginable public distribution of a document in any language and includes U.S. and foreign patents. Thus, any such publication anywhere in the world in any language describing the same invention may be used to prevent the award of a patent. There is some debate as to what constitutes a “publication,” but the key to determining whether a reference has been published is its dissemination and public accessibility to those with an interest in the technology. Constant v. Advanced Micro-Devices, Inc., 848 F.2d 1560, 1568 (Fed.Cir. 1988). The court in In re Hall, 781 F.2d 897 (Fed.Cir. 1986), held that a single copy of

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 17

§1.26

INTELLECTUAL PROPERTY LAW

a graduate school thesis indexed and shelved in a college library is a publication. In Massachusetts Institute of Technology v. AB Fortia, 774 F.2d 1104, 1109 (Fed.Cir. 1985), the court held that distributing a few copies of a paper at a scientific conference is a publication. Postings on websites are also considered printed publications. Because obscure documents can be used to prevent a patent from being issued, minimal due diligence before filing for a patent to find such documents will likely not be able to turn up all potentially relevant documents that may be at any of the four corners of the earth. Neither, for that matter, do patent examiners have the time and resources to dig up such obscure documents when examining a patent application. Therefore, it is possible that patents have been granted when there were earlier publications no one located that described the invention. Nonetheless, when a patent is asserted against another party in highstakes litigation, there are specialists who do scour the four corners of the earth looking for that obscure publication to prove that the asserted patent is invalid. There must not have been any public use of the invention in the United States more than one year before the patent application was filed. The standard for what is public is similar to that noted in §1.25 above. However, the so-called “experimental use” exception allows an inventor to try out his or her invention in public in a limited manner under close supervision and control to test whether it works for its intended purpose. Tests for marketing purposes or for technical reasons unrelated to the technical features of the invention do not qualify as an experimental use. See In re Smith, 714 F.2d 1127, 1134 (Fed.Cir. 1983). The invention must not have been on sale or commercially exploited more than one year before the patent application is filed. To be “on sale,” the invention must have been sufficiently developed to be ready for patenting, and a definite offer for sale of a product embodying the invention must have been made. Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 142 L.Ed.2d 261, 119 S.Ct. 304, 311 – 312 (1998). As to what constitutes an offer for sale, the courts look to the federal common law of contracts. Linear Technology Corp. v. Micrel, Inc., 275 F.3d 1040, 1048 (Fed.Cir. 2001). This on-sale bar includes the commercial exploitation of an invention, such as a manufacturing process in which the goods being offered for sale are made by the new manufacturing process sought to be patented. See TP Laboratories, Inc. v. Professional Positioners, Inc., 724 F.2d 965 (Fed.Cir. 1984). The award of a patent should be given only to a new invention and not merely a new discovery of something that existed but was not recognized before. An invention is not novel if a missing feature was inherent in a prior invention, even if it was not recognized at the time. For example, a patent on a new titanium alloy characterized by good corrosion resistance was refused because it was found to be anticipated by a prior description of a similar alloy composition that was silent as to its corrosion resistance properties. Titanium Metals Corporation of America v. Banner, 778 F.2d 775 (Fed.Cir. 1985).

PRACTICE POINTER 

1 — 18

In evaluating an invention for a potential patent application filed before March 16, 2013, a matter of first priority is to evaluate any public disclosures of the invention. One should determine if there have been any nonconfidential disclosures by the inventor that would either start the one-year grace period for filing in the United States ticking or represent a loss of the right to file in a foreign country. One should also determine if there has been

WWW.IICLE.COM

PATENTING INVENTIONS

§1.27

any commercial activity that would suggest the invention has been on sale, which starts the one-year grace period. If none, one should determine if there is any planned activity in the near future that should be halted until a patent application can be filed or if such activity can occur under a signed nondisclosure agreement. In evaluating an invention for a potential patent application to be filed on or after March 16, 2013, the first priority is to determine if there have been any public disclosures of the invention. If such disclosures were made by the inventors or made by others who obtained the information from the inventors, there may still be a one-year grace period available from the earliest date of such first disclosure. But as the patent is awarded to the first inventor to file an application, expediency must be exercised to file the application as soon as possible within the one-year grace period. If another party has come up with the same invention and publicly disclosed it, or filed an application describing the same invention, then it may be too late for the first inventors to file a patent application in the United States and in some foreign countries.

3. [1.27] Changes to the Novelty Requirement Under the AIA There are significant changes to the novelty requirements under the Leahy-Smith America Invents Act. These standards for novelty are applicable to patent applications filed on or after March 16, 2013, that do not claim priority to a patent application filed before this date. See 35 U.S.C. §102 (eff. Mar. 16, 2013). First, under the new standard, absolute novelty is required, as in many foreign countries. By absolute novelty, it is meant that a person is not entitled to a patent if the invention was exactly described in a printed publication, in public use, or on sale or otherwise available to the public any time anywhere in the world before the patent application was filed. In comparison, the prior law required the public use, sale activity, or public availability to be only in the United States to bar a patent. In addition, the prior law allowed a one-year grace period before the patent application was filed as against any publication or prior disclosure of the invention. Also, another change under the AIA is that there is a requirement that the invention is new with respect to the same or similar inventions previously filed with the United States Patent and Trademark Office. That is to say, as between applications filed by different inventors for the same invention, the patent is awarded to the inventor who first filed a patent application — the socalled “first inventor to file” (FITF). Notwithstanding the above requirements, the new laws include several complex exceptions to absolute novelty and first-to-file entitlement. For example, under the new laws, there is a form of a one-year grace period, but it is available only when the inventor has disclosed his or her own invention before filing for a patent application. In one scenario of this exception, if an inventor makes a disclosure of the invention within one year before the filing date of the patent application, then such disclosure shall not bar the inventor from obtaining a patent. This one-year grace period applies also to disclosures made by another person who obtained the information about the invention directly or indirectly from the inventor. In another scenario of this exception, the one-year grace period applies to the disclosure of similar subject matter by others if the inventor had first publicly disclosed the invention either directly himself or herself or indirectly through others. To illustrate this latter scenario, if an inventor files for a patent application, and it is determined that another party has independently created and publicly disclosed the same

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 19

§1.27

INTELLECTUAL PROPERTY LAW

invention within one year before the patent application filing, then the inventor will not be entitled to a patent unless the inventor can show that he or she publicly disclosed the invention before that other party. In other words, the public disclosure of an invention by an inventor will start the one-year clock ticking for the deadline of the inventor to file a patent application, and such early public disclosure will prevent a later public disclosure by a third party from disallowing the patent. As one can imagine, an inventor would have to present strong documented evidence of the public disclosure of his or her invention to be able to later prove entitlement for a patent should such a situation come to light. The new laws also provide for exceptions to absolute novelty as it relates to disclosures appearing in patent applications and patents that were filed before the inventor’s patent application and published after the inventor’s application was filed. Normally, the award of a patent would go to the first inventor to file a patent application regardless of when it was published. But this exception carves out certain disclosures in earlier-filed, but later-published patent applications from disallowing an inventor’s patent. In one scenario, the disclosure in an earlier patent application will not prevent the inventor’s patent if the subject matter disclosed in the earlier patent application was obtained directly or indirectly from the inventor. In another scenario, the disclosure in an earlier patent application will not prevent the inventor’s patent if, before the filing of the earlier patent application, the inventor had directly or indirectly through another person publicly disclosed the invention. Note, however, as described above, the inventor has only a one-year grace period from the date of this public disclosure to file the patent application. Finally, an exception is also made when the disclosure in the earlier patent application and the invention were both owned by the same person or entity, or under obligation to be assigned to the same person or entity. The new laws also allow exceptions of prior disclosures in patent applications by one party to an invention made under a joint research agreement by that party with another party.

PRACTICE POINTER 

The AIA transitions the U.S. patent system from a first-inventor system to a firstinventor-to-file system. This change has caused much concern, especially among small companies and individual inventors with limited resources. A common concern is that the U.S. system will change to be a race to be the first inventor to file a patent application at the USPTO. While the change seems dramatic, it is important to note that the remainder of the world has operated on a FITF system for many years. Many U.S. corporations and U.S. patent attorneys have experience in obtaining patent protection for clients in foreign countries and thus have experience with the changes coming under the AIA. Still, the current system in the United States has benefits that should be utilized to their fullest until the new laws of the AIA take effect on March 16, 2013. The existing laws and rules will apply to all applications filed before March 16, 2013, and to continuation and divisional applications of those applications. For this reason, for all inventions conceived before March 16, 2013, it may be valuable to race to get the patent applications filed before March 16, 2013, and obtain the benefit of the existing laws. Some of those benefits include the ability to eliminate published documents as prior art that were published within one year before the filing date and to eliminate patent

1 — 20

WWW.IICLE.COM

PATENTING INVENTIONS

§1.28

applications as prior art that were filed before your patent application was filed, but after your date of invention. Thus, the strategic use of quickly prepared provisional patent applications filed before March 16, 2013, may provide the benefit of the existing laws to such inventions.

C. [1.28] Nonobviousness Even if an identical invention has not been made or described before and the invention has not been publicly disclosed, the patent is awarded only for an invention that is not obvious in light of the prior inventions. Under the existing patent statutes, a patent may not be granted “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.” [Emphasis added.] See 35 U.S.C. §103(a). Under the new laws implemented by the Leahy-Smith America Invents Act, for patent applications filed on or after March 16, 2013, the standard for obviousness has not changed. Instead, the relevant time for evaluating obviousness has changed. The relevant time frame under the AIA will not be “at the time the invention was made.” Rather, that clause has been replaced to evaluate obviousness “before the effective filing date of the claimed invention.” See 35 U.S.C. §103 (eff. Mar. 16, 2013). The “effective filing date” is either the earlier of the date the patent application was filed or the earliest date of any earlier patent applications that the specific patent application asserts it is entitled to the benefit of. Nonetheless, when all the parts of an invention are old (as measured from the relevant time frame under either the old or the new law) and found in different items or have been described in different publications, the new and unique way in which the parts are combined in the invention may be sufficient to deserve a patent if the way the parts are combined is not obvious. In determining whether an invention is obvious, the Supreme Court has set forth the following considerations: (1) the scope and content of the prior art; (2) the level of ordinary skill in the art; and (3) the number of differences between the prior art and the claimed invention. Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684, 694 (1966). Typically, inventors are considered to have extraordinary skill, so a person of ordinary skill in the art is hypothetically a person with an appropriate undergraduate or graduate-level technical degree and a few years’ experience in the relevant industry — by no means an expert in the field. See, e.g., Environmental Designs, Ltd. v. Union Oil Company of California, 713 F.2d 693, 696 (Fed.Cir. 1983). In conducting an examination of a patent application, the examiner assumes that this hypothetical person would combine features found in different publications or items in a way that uses the features for their known or intended purpose and would be motivated to combine these features based on some reason disclosed by the publications describing these features. For example, if a feature is described in a prior publication as having a certain advantage, it might be obvious to add that feature to another invention to impart those same advantages to the combination. On the other hand, it may not be obvious to make a certain combination when a reference teaches that a certain feature should be avoided. There is no single test for determining if an invention is obvious. In KSR International Co. v. Teleflex Inc., 550 U.S. 398, 167 L.Ed.2d 705, 127 S.Ct. 1727 (2007), the Supreme Court revisited this issue and upheld the broad framework announced in Graham that looks at the totality of the circumstances, including the application of common sense.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 21

§1.29

INTELLECTUAL PROPERTY LAW

In evaluating whether an invention is obvious, there are so-called “secondary considerations” or “objective factors” that may be argued to show that certain combinations are not obvious. Examples of secondary considerations include (1) the commercial success of the invention; (2) the failure of others to make the same invention; (3) a long-felt need in the industry for this invention that had been unfilled; and (4) unexpected results or a synergy achieved by the invention. B.F. Goodrich Co. v. Aircraft Braking Systems Corp., 72 F.3d 1577, 1582 (Fed.Cir. 1996). For example, mere optimization of features is typically not patentable unless there are new or unexpected properties obtained by that optimization that were not present or recognized before.

PRACTICE POINTER 

V.

Obviousness is a fact-specific analysis. As such, it is highly subjective, and the scope of allowed patent claims may depend on the particular patent examiner assigned to handle the application. Inventions that seem obvious at first glance ultimately may be proven patentable. In deciding whether to file an application for a patent in the face of questions about the obviousness of the invention, there are other considerations, such as the cost benefit if successful, the deterrence of marking a product as “Patent Pending,” etc. The potential benefit may justify the risk in proceeding when obviousness is a concern.

INVENTORSHIP AND OWNERSHIP

A. [1.29] Who Is an Inventor? Different ideas have been asserted about what activity constitutes invention. In 1941, the U.S. Supreme Court said invention was a “flash of creative genius.” Cuno Engineering Corp. v. Automatic Devices Corp., 314 U.S. 84, 86 L.Ed. 58, 62 S.Ct. 37, 41 (1941). Thomas Edison reportedly said that it is 1 percent inspiration and 99 percent perspiration. Others consider the act of inventing to be a lucky accident. The author believes that the saying “necessity is the mother of invention” is closer to reality. Most often, invention is the creation of a solution to a problem. How the solution is achieved is irrelevant as to whether something is an invention or should be awarded a patent. “Patentability shall not be negatived by the manner in which the invention was made.” 35 U.S.C. §103(a). The courts have devised a construct that invention is a two-part process: (1) the conception of the invention; and (2) the reduction to practice of the invention. The inventive activity is not complete until the actual or a constructive reduction to practice is achieved. An “actual reduction to practice” is an actual working embodiment of the invention or demonstration of it working. A “constructive reduction to practice” is the preparation of a patent application that describes the invention in sufficiently complete terms that a person in the relevant industry could make and use the invention without undue experimentation. Within the two-stage invention framework, inventors are those who made significant contributions to the conception of the invention and not those who contributed only routine skill to reduce the invention to practice. The inventive contributions must be significant and not

1 — 22

WWW.IICLE.COM

PATENTING INVENTIONS

§1.30

merely a recitation of what was known in the state of the art. In some cases, the conception and reduction to practice may occur simultaneously. In a joint inventorship, the contributions to the conception of the invention may have come from different persons at different times. Multiple inventors are considered coinventors or joint inventors. Incorrect inventorship occurs when there is a failure to correctly name all inventors, either by omission or by inclusion of non-inventors. If it later turns out that the original determination of inventors was incorrect, the list of inventors may be corrected by petition to the United States Patent and Trademark Office. Under the laws applicable to proceedings instituted before September 16, 2012, this may result in an invalid patent if the error is proven to be the result of an intent to deceive the USPTO. Under the new laws of the Leahy-Smith America Invents Act, after September 16, 2012, it is no longer necessary to assert the error in naming inventors was made without intent to deceive, and as such, having such deceptive intent will no longer be grounds to cause a patent to be invalid. See 35 U.S.C. §116. For more details on inventorship, see Chapter 5 of this handbook. B. [1.30] Who Owns an Invention? Under U.S. laws, it is presumed that inventors have initial ownership of their own inventions. In the case of joint inventors, each inventor has the right to exercise complete and independent control over the invention without interference or an obligation to account to the other inventors. Thus, a joint inventor has the right to license or assign his or her rights in the invention to any third party without permission of the other joint inventors or owners. 35 U.S.C. §262. Most states have laws that require companies to have written agreements supported by adequate consideration to assert an obligation that employees have to assign ownership of inventions made in the course of the employees’ work to the employer. See, e.g., 765 ILCS 1060/2. The United States Patent and Trademark Office records assignment documents evidencing the transfer of ownership of a patent or patent application much as deeds to real estate are recorded. The bona fide purchaser rule applies to subsequent purchasers of the patent rights as against prior purchasers who have not recorded their assignments. See 35 U.S.C. §261. An assignee has three months to submit an assignment document for recording for this rule to be effective. A transfer of an invention and patent by assignment must be in writing. Id. Oral agreements will not be enforced. The USPTO issues the granted patent to the party asserting ownership of the invention, not to the inventors.

PRACTICE POINTER 

When there is a good-faith basis for asserting that an employee is an inventor, even though it is unclear, it may be in the best interests of the employer to be over-inclusive in determining who is a joint inventor. As most inventors are contractually obliged to assign

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 23

§1.31

INTELLECTUAL PROPERTY LAW

their rights in any inventions to their employers, this avoids a situation in which a disgruntled former employee later asserts that he or she was wrongly excluded as a named inventor on a patent and attempts to assert independent rights over the invention covered by the patent.

VI. DECIDING TO SEEK PATENT PROTECTION A. [1.31] Advantages Patents are highly desirable for the competitive business advantages they provide the patent owner. Because a patent gives the patent owner the right to exclude others from copying the patented invention, the patent may give the patent owner an exclusive position in a market for the patented goods. For the duration of the patent, that exclusivity can translate into the ability to dictate a higher price for patented products for which no comparable alternative is available. Patents covering improvements to existing nonpatented products can offer the opportunity for the patent owner to market improved features to the product to distinguish its version of the product from others. A patent may have value even though it only narrowly covers the invention so as to allow competitive products on the market. For example, the patent may cover a unique low-cost way of making a product or a low-cost ingredient that forces competitors to have higher manufacturing costs and limits their price competitiveness. Even before a patent is granted, the ability to mark a product with “Patent Pending” has value in a business situation. A company may not want to copy a product marked “Patent Pending” because of the risk for potential lawsuits when the patent issues. This may deter others from copying new products even if a patent is not yet granted. Being able to advertise a product as using patent-pending technology provides a credential that may impress customers with the notion that the product contains the latest technological improvements. A patent may have some value in recording a company’s innovations as against the activity of later collaborators. For example, a company that develops ideas for new machinery may contract out the detailed engineering of the machinery. Filing for a patent may record and establish that the company had the invention before the engineers became involved and possibly prevent the engineers from later trying to patent the perfected version of the machinery. Along this same line of thought, a patent on a manufacturing process that would otherwise be kept confidential may be useful to prevent a competitor from later getting a patent on the same process. Thus, getting a patent can help ensure that the company will have the continued right to use its own manufacturing technology. B. [1.32] Disadvantages The author does not believe there are many disadvantages in filing for a patent application. One disadvantage, however, is the limited life of a patent as compared to that of a trade secret.

1 — 24

WWW.IICLE.COM

PATENTING INVENTIONS

§1.33

Patents now have a life of 20 years from their filing date. The formula for Coca-Cola, for example, is believed to have been kept secret for more than 100 years. If a patent had been sought at first, the formula for Coke would have become available to the public to copy and use more than 80 years ago. This disadvantage is exacerbated when a patent is sought but not obtained. In this situation, the technology may have been disclosed in a published patent application, so potential trade secret protection is lost. However, to guard against such instances, it is possible in limited situations to prevent the patent application from being published. For inventors with limited financial resources, the cost of obtaining a patent may be a disadvantage. The total costs to obtain a patent may be between $15,000 and $30,000, depending on the complexity of the invention and how vigorously the patentability of the invention must be argued before the United States Patent and Trademark Office. According to the American Intellectual Property Law Association 2011 Report of the Economic Survey, the median attorneys’ fees in 2010 in the Chicago region for preparing patent applications ranged from $7,500 to $12,250, depending on the technical subject matter and level of complexity. In comparison, for the same region the median attorneys’ fees in 2010 for a provisional patent application were $4,500. For some inventions with a small market for the products covered by the patent, the costs of obtaining a patent may never be recovered, especially when the patent obtained is not broad enough to exclude all competition, substitutes, and alternatives to the patented product. Another disadvantage is the length of time it takes to obtain a patent. It takes an average of about three years to get a utility patent for all categories of inventions, and longer for inventions involving software and biotechnology. For some high-tech products, the product lifecycle may be less than three years, the product may be obsolete, or the product may compete with newer technology before the patent issues. In this situation, the main benefit may be the patent pending status during the product’s lifecycle that may act as a deterrent to competitors. Ideally, the patent attorney preparing the application should work with the inventor to prepare patent claims that define the invention in technology-neutral terms. This way, a patent may be obtained that will still cover future generations of the product as it is redesigned to take advantage of newer technologies. C. [1.33] Economic Value In view of the advantages and disadvantages discussed in §§1.31 and 1.32 above, an inventor or the invention’s owner should do a cost-benefit analysis to determine whether the value of the patent justifies the cost of filing a patent application. If it is decided that the invention should not or could not be protected as a trade secret, one should consider the possible scope of protection that may be obtained with a patent and whether that scope of protection may adequately block competition to provide a competitive market advantage to the product sought to be protected by a patent. In addition, a patent has value when the inventor may not be interested in selling products but desires to license an invention to other companies that would market the product. The value to a licensee may be in the technique and know-how taught by the patent or in the power of the patent

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 25

§1.34

INTELLECTUAL PROPERTY LAW

to keep a product off the market. There are patent attorneys and licensing professionals who will work on a contingency basis to assist patent owners in the licensing of their patents, which may require the threat and pursuit of a lawsuit to convince a company to agree to a license under the patent. One prolific individual inventor, Jerome Lemelson, and later his estate, reportedly earned more than $1.5 billion dollars by licensing patents relating to machine vision manufacturing technology. Large corporations find economic value in having and maintaining a portfolio of patents for defensive purposes. Often, when one corporation is sued for patent infringement by another, the defendant may locate a patent in his or her own portfolio to countersue against the plaintiff. This can provide the defendant with some leverage to negotiate a settlement of the lawsuit with a cross-license between the parties of some of each other’s patents. Also, large corporations may be able to “mine” their large patent portfolios for unused patents that can be a source of licensing revenue. For more on this subject, see Kevin G. Rivette and David Kline, REMBRANDTS IN THE ATTIC: UNLOCKING THE HIDDEN VALUE OF PATENTS (2000). Further testament to the value of patents is found in the 2011 deal by a consortium of companies including Apple, Microsoft, and RIM that purchased the 6,000 patents of bankrupt NorTel for a total price of $4.5 billion, which is equivalent to $750,000 per patent. Admittedly, this was an unusual sale of a large portfolio of patents sold in an auction in which multiple companies formed consortiums that likely overbid the price any company would be willing to pay on its own. Still, the value of any individual patent may vary greatly depending on the technology, the market it protects, the scope of protection it offers, and the number of years of life remaining on it. Many patents may have zero value, while a few patents may have values in the tens or hundreds of millions of dollars. D. [1.34] Use of Patent Attorneys and Patent Agents Much as courts allow parties to represent themselves pro se, the United States Patent and Trademark Office allows inventors to represent themselves pro se in obtaining a patent. There are numerous self-help books on the market that purport to guide inventors through the process step by step. For example, Nolo Press has several such books available at bookstores and through its website, www.nolo.com. The USPTO has special customer service representatives and materials available at www.uspto.gov for assisting individual inventors. Despite the assistance offered to individual inventors, the author recommends hiring the services of an experienced patent attorney or patent agent. The highly specialized procedures at the USPTO are complex and require precise compliance. Failure to comply with these procedures and deadlines can result in the abandonment of the patent application. These procedures are written out in the USPTO MANUAL OF PATENT EXAMINING PROCEDURE (8th ed. 2001, rev. 9 Aug. 2012) (MPEP), www.uspto.gov/web/offices/pac/mpep. The MPEP in printed form is more than six inches thick. Registered patent attorneys or patent agents are required to have a college level science or engineering education and to pass an entrance exam into the patent bar. The entrance exam tests their knowledge of patent law and the rules set forth in the MPEP. Moreover, competent patent attorneys keep abreast of the latest developments in patent law, which is constantly changing.

1 — 26

WWW.IICLE.COM

PATENTING INVENTIONS

§1.36

Thus, while the USPTO keeps its eyes on its own rules, good patent attorneys keep their eyes on how courts are interpreting the patents so they can develop patent claims to obtain the broadest possible coverage for their clients’ patents consistent with the current trends in the law.

VII. [1.35] TIMING CONSIDERATIONS As the saying goes, “timing is everything.” This is true for patenting inventions. It is important to file for a patent application as soon as possible. Keeping an invention secret for an extended time can result in either the loss of the right to patent it or the loss of certain advantages of being the first to file for a patent. The inventor or owner of the invention should be well advised of the consequences for delaying the filing of the patent application. Such consequences should be measured against the value of delaying filing, such as time spent perfecting the invention or developing variations, and evaluating the invention’s commercial value and market potential against the resources required to try to obtain a patent. Sections 1.26 and 1.27 above discuss the timing issues in terms of the legal requirements for awarding a patent. Sections 1.36 – 1.40 below provide some guidelines on dealing practically with the inventions and deciding when to file the patent application. A. United States Patents 1. [1.36] Prior Inventions As discussed in §§1.24 – 1.27 above in connection with the novelty requirement, the U.S. patent laws are transitioning from a system in which patents are awarded to the first to invent to a system in which patents are awarded to the first inventor to file for a patent. In contrast, many foreign countries award patents to the first to file for a patent application on the invention, even if the first person to file is not an inventor. So there is the possibility that when two people independently come up with the same invention, the U.S. patent goes to Inventor A (the first to invent) and the foreign patent goes to Inventor B (the first to file a patent application). Deciding who was the first to invent can be a lengthy, expensive process at the United States Patent and Trademark Office, known as an “interference proceeding.” Certain advantages in this proceeding are given to the inventor who was the first to file for an invention. To establish the right to have an interference proceeding, the claim for the same invention must be brought to the USPTO within one year of the first patent being granted. Therefore, an inventor cannot sit back and keep an invention secret for an indeterminate amount of time thinking he or she may tinker it to perfection before filing for a patent because the inventor believes he or she is the first to have come up with it. As the U.S. patent laws transition away from the first-to-invent system, the interference proceeding will be replaced with a “derivation” proceeding for patent applications filed after March 16, 2013. As between two inventors who separately filed for patent applications on the same invention, one inventor may challenge the patent of the other inventor by asserting the other derived his or her invention from the first inventor and was thus not a true inventor. In this manner, the patent is awarded to the “true” inventor who filed for a patent application, thus giving credence to calling the new system a FITF system.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 27

§1.37

INTELLECTUAL PROPERTY LAW

2. [1.37] One-Year Grace Period A major issue for many inventors is whether to delay filing for a U.S. patent to postpone the expenses until the inventors are certain they want to commit the resources to file a patent application. As discussed in §§1.26 – 1.27 above, the United States provides inventors a one-year grace period after they publicly disclose or commercially exploit an invention, by which time an application must be filed or the right to do so is lost. Taking advantage of this one-year grace period may be valuable for small businesses and inventors to work at perfecting the invention and testing its marketability. On the other hand, there may be a recent publication unknown to the inventor that describes the same invention and would be a basis for rejecting the inventor’s patent application should he or she delay filing the application more than one year beyond the date of the publication. Under the new laws of the Leahy-Smith America Invents Act, the unknown publication may block the award of a U.S. patent completely if the inventor files the patent application after the publication date. The only exception to this under the AIA is when the inventor publicly disclosed his or her invention before the date of the publication and such public disclosure was within one year of the inventor’s application filing date. Also, with any public disclosure of an invention, there is the potential loss of rights to file for foreign patents as described in §1.39 below. As described in more detail in §1.48 below, as an alternative to completely delaying the filing of a patent application, the United States Patent and Trademark Office allows the filing of what is called a “provisional patent application.” This provisional application is intended to be a quick, low-cost option to get a patent application filed. The provisional application reserves the benefit of the early filing date for a regular patent application and any foreign patent applications covering the same invention that are filed within one year of the provisional patent application. Under both the existing laws for applications filed before March 16, 2013, and under the new laws for applications filed on or after March 16, 2013, the one-year grace period applies to the filing of a provisional application. Thus, if only U.S. patents are desired, an inventor may publicly disclose the invention, file a provisional application one year later taking advantage of the oneyear grace period, and then file a regular U.S. patent application one year after that.

PRACTICE POINTER 

One course of action is to file a provisional patent application prior to any public disclosure of an invention and then allow the inventor to devote one year for further developing and test marketing the invention without the need to keep the invention confidential. Before the end of the one year, the inventor must decide whether it is beneficial to continue the patenting process by filing a regular U.S. patent application and any desired foreign patent applications.

B. [1.38] Foreign Patents An international treaty known as the Paris Convention for the Protection of Industrial Property of March 20, 1883 (Paris Convention), gives an inventor first the right to file a patent application in the United States (or any other country where he or she resides) and then, within one year, the right to file a similar patent application in another signatory country with the benefit

1 — 28

WWW.IICLE.COM

PATENTING INVENTIONS

§1.41

of the year-earlier filing date. This is an important right as most foreign countries require a patent application to be filed before the public disclosure of an invention. Under this treaty, the foreign patent applications will be treated as though filed when the first application was filed up to one year earlier. This is also an important treaty as it gives an inventor a one-year delay after the first patent application is filed before the inventor must commit the financial resources to seeking foreign patents without any loss of rights due to the delay. For a list of the countries that have signed on to the Paris Convention, go to www.wipo.int/treaties/en/ip/paris. See also §1.75 below. 1. [1.39] Absolute Novelty Most countries other than the United States award patents only covering subject matter that has not been previously disclosed to the public. Thus, it is said that the foreign patents require “absolute novelty.” The public disclosure anywhere in the world of either the inventor’s own invention or another person’s similar invention before a first application is filed can prevent a patent from being awarded. A foreign patent application filed under the Paris Convention for the Protection of Industrial Property of March 20, 1883, gets the benefit of the filing date of the first filed application in a different country. The critical date of a public disclosure invalidating a foreign patent is the day before the patent application is first filed in that other country. Thus, filing a patent application in the United States before any public disclosure of the invention meets the absolute novelty requirements of any later-filed foreign patent applications as to the inventor’s own disclosures. 2. [1.40] Exceptions Canada allows a one-year grace period for prior public disclosures by the inventor of his or her own invention. However, the one-year period is measured not from the date the patent application is first filed in another country but one year from the actual filing date in the Canadian Intellectual Property Office. Also, the one-year grace period does not apply as against public disclosures of another person’s similar invention. A few other countries, such as Mexico, have a similar grace period for an inventor’s own disclosure of his or her invention prior to filing an application. The European Patent Office (EPO) allows a six-month grace period for the prior public disclosure by the inventor of his or her own invention at certain certified trade shows or exhibitions. A six-month grace period is allowed if the public disclosure is a result of a third party violating a written confidentiality agreement. C. [1.41] Confidentiality Agreements While an inventor cannot control prior disclosures of other persons’ inventions, the inventor can control the public disclosure of his or her own invention to avoid such disclosure destroying valuable patent rights. A chief tool to achieve this end is a nondisclosure agreement (NDA), or confidentiality agreement. In working with outside designers or consultants or even when showing the invention to potential customers to gauge their interest (short of actually offering the inventive product for sale), having those outside parties sign NDAs can preserve the secrecy of

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 29

§1.42

INTELLECTUAL PROPERTY LAW

the invention and avoid prior public knowledge of it. This can prevent such disclosures from breaching the absolute novelty requirements of foreign countries and beginning the running of the one-year grace period in the United States.

VIII. [1.42] KEEPING RECORDS OF INVENTIONS Keeping records of the creation of an invention is an important first step in seeking to protect it. There are different ways of documenting a new idea that may ultimately be used to prove either that a person was the first inventor and warrants a patent over another party or that a person was the first inventor but did not seek a patent. In the latter case, the prior invention can be used to show that another person’s patent is invalid. Likewise, such records can be used to document who had confidential access to the invention to support a claim that the other party derived his or her patent application from the true inventor. A. [1.43] Notebooks An effective recording system for new inventions is the old-fashioned, composition-style notebook. These notebooks typically have numbered pages and a stitched binding to prevent pages from being removed and replaced. The notebooks should be used to record ideas and experiments in a diary fashion to document the creation of inventions and how they were developed. Drawings and photographs are helpful. Blank spaces should be crossed out. Each page or entry should be signed and dated by the inventor or other person doing the experiments. Each page should be reviewed by one or two other persons, such as a coworker or other person who is obligated to keep the information confidential. That “witness” should sign and date each page, preferably with a statement such as, “Read and understood by [witness signature] on [date].” This witness corroborates the activity of the inventor. If needed, the witness can later be called to testify or attest to the recording of the invention on the dates so noted. New technology is available to replace paper notebooks with electronic notebooks on computer systems. Electronic lab notebooks (ELNs) provide digital records in secure authenticated and backed-up retrieval systems that can serve the same function as paper notebooks. Also, an “invention disclosure form” may be used to describe details of the invention and significant information about the invention, its comparison with known prior art, and potential disclosures. A sample is included at §1.79 below. The invention disclosure form is a useful summary of the invention that is used by many companies to evaluate the business potential of an invention and to start the patenting process. B. [1.44] Former Document Disclosure Program and Provisional Patent Applications The United States Patent and Trademark Office used to operate a program to assist inventors by officially recording documents describing inventions. This program was discontinued effective February 1, 2007. The USPTO recommends instead that inventors file a provisional patent application. See §1.48 below. The document disclosure program provided for the receipt of

1 — 30

WWW.IICLE.COM

PATENTING INVENTIONS

§1.46

invention disclosure documents and the retention of them for up to two years pending the filing of a patent application. The documents were destroyed after the two-year period unless a patent application was filed and a request was made to retain the papers with the patent application. The USPTO’s fee for submitting a disclosure document was only ten dollars. The documents filed under this program did not constitute a patent application but merely provided a way to evidence the date of the conception of an invention, at least as of the date the document was received by the USPTO. A provisional patent application may serve the same purpose but is maintained for only one year, unless a nonprovisional patent application is filed within the year. Therefore, an inventor should maintain his or her invention in confidence until a patent application is filed to preserve patent rights in the United States and foreign countries. C. [1.45] Sealed, Mailed Documents A common myth is that an inventor should mail a copy of an invention description to himself or herself and retain the unopened, postmarked envelope in a safe. This is thought to be solid evidence of the date of an invention to prove that an inventor had the idea before someone else. Unfortunately, such attempts are unreliable. Most laws require corroboration of evidence of a prior invention. There is no support, usually, other than the inventor’s own word that the envelope has not been tampered with to replace its contents. The courts and the United States Patent and Trademark Office require some corroboration by second persons and documents to support an inventor’s claim to be a prior inventor. See Thomson, S.A. v. Quixote Corp., 166 F.3d 1172, 1176 (Fed.Cir. 1999). Moreover, under the Leahy-Smith America Invents Act, patents for applications filed for the same invention after September 11, 2013, are no longer awarded to the first inventor. Therefore, evidence of being the first to have conceived of an idea may have little value unless it is used to prove another party derived his or her invention from the first inventor.

IX. [1.46] PATENTABILITY SEARCH Provided there is no urgent deadline to file a patent application, such as an upcoming public disclosure of a new invention, a patentability search may be a wise investment to probe into the existence of documents that may prove that the invention is not original. This can help save the inventor the costs of preparing and filing for a patent when it is clear that a description of the same invention was made before by others. Also, if the invention is original, this search can help determine how broad the patent coverage may be before it bumps up against not too dissimilar inventions made previously by others so that the patent application can be prepared to explain how the invention is not obvious. Patents have been reported to describe more than 95 percent of all the technology invented on this planet. It should then be no surprise that, for most inventions, a primary source for searching for prior inventions is in existing patents and published patent applications. Typically, a patent search testing an invention’s novelty can be accomplished for $500 to $1,000, not including the attorneys’ fees for providing a patentability opinion. Simple mechanical devices tend to be less expensive, and chemical compositions tend to be more expensive. Professional patent searchers, many of whom are former patent examiners, can be hired to conduct the search and try to locate prior patents that include a description of either the same invention or past inventions that may

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 31

§1.47

INTELLECTUAL PROPERTY LAW

come close to the new invention. In addition, depending on the technology, the searchers may examine scientific literature available on computer databases. Often, patent attorneys employ searchers or work with independent searchers to complete this task. The searcher locates the patents or other documents that describe the closest prior inventions. The patent attorney then analyzes those patents and provides a professional legal opinion as to the potential for obtaining a patent and the potential breadth of the subject matter that may be patented. A patent search may easily be conducted by inventors themselves. The United States Patent and Trademark Office has set up about 80 patent and trademark depository libraries around the country to serve as Patent and Trademark Resource Centers (PTRCs). The staffs at these libraries are trained to assist customers to conduct their own searches through the patents available at the libraries and online. Often, a thorough search at these libraries may take a full day. In Illinois, there are two PTRCs, the Chicago Public Library in downtown Chicago (see www.chipublib.org/cplbooksmovies/poptopics/ip.php) and Western Illinois University’s Leslie S. Malpass Library in Macomb (see http://wiu.edu/libraries/govpubs). For more information, see the USPTO’s PTRC webpage, www.uspto.gov/products/library/ptdl/index.jsp. A limited preliminary patent assessment may be made over the Internet using the patent database available on the USPTO’s website, www.uspto.gov. The search may be conducted using strings of words describing the invention. However, the word search feature is limited to patents from 1976 until the present. Another free resource on the Internet is the Google patent database, www.google.com/patents, which allows text-based searches of patents going back to the 1800s.

PRACTICE POINTER 

X.

If an inventor is interested in filing a patent application only because he or she thinks the patent will provide exclusive rights to a market, a patentability search and opinion may be valuable to provide an assessment as to the potential scope of a patent. The investment of $10,000 for a patent may not be a good investment if the patent search shows that a commercially practical alternative is in the public domain.

[1.47] PATENTING PROCESS

Sections §§1.48 – 1.58 below discuss in brief the general process and procedures for the submission to and examination by the United States Patent and Trademark Office of a patent application. The entire process from the date of filing the application to the issuance of the granted patent may take between 18 months and 5 years. The USPTO is under a severe backlog of patent applications for inventions relating to biotechnology, software, and business methods. In those areas of technology, it may take as long as 3 years before the first examination report is prepared. However, there are procedures available (but not discussed in this chapter) whereby an applicant may request that the examination be expedited. The basic outline of the process is that a patent application is filed with the appropriate fees. In turn, the application is reviewed by an examiner who also handles other patent applications covering that same field of technology. The examiner searches for evidence that the invention is not novel or is obvious and prepares a report called an “office action.” In more than 90 percent of

1 — 32

WWW.IICLE.COM

PATENTING INVENTIONS

§1.48

the cases, the examiner rejects the claimed invention in the first office action. The applicant then can prepare a response to either amend the claims or argue that the claims are patentable. This back-and-forth process may continue until the examiner is convinced that the original claims are patentable, the claims are amended sufficiently to avoid prior inventions, or the applicant decides to appeal the examiner’s rejection to an appeals board of administrative patent judges. When the claims are found patentably distinct over the prior art references found by the examiner, the application is allowed. After payment of the issue fees, the USPTO grants the patent and issues the published granted patent to the applicant. A. [1.48] Provisional Patent Applications As noted in §1.37 above, a “provisional patent application” is a patent application that is not examined but merely reserves the filing date for a period of up to one year for a later-filed regular patent application. The formal requirements for a provisional patent application are less stringent. However, the provisional patent application must meet the statutory requirements under 35 U.S.C. §112 for including an enabling description of the invention — a description that supports any later written claims to define the invention (although the provisional application itself does not require claims) and a description of the best mode known to practice the invention. Short of not requiring the inclusion of patent claims, these requirements are the same as for a regular patent application. The less stringent formal requirements are directed to the format of the text, the quality of the drawings, etc. Thus, when in a rush to get an application filed before an upcoming public disclosure of an invention, a provisional patent application may be a quick shortcut. Because of the allowable imperfections, it may cost less for an attorney to prepare and, as noted in §1.37 above, may be a low-cost alternative to delay the costs for a regular patent application until an inventor can gauge the market potential for the invention. There are pitfalls, however. Even though a provisional patent application may be filed with numerous informalities, it should not be filed without a complete description of the invention and broad definitions of all the potential subject matter that would be sought to be protected by the patent. A provisional patent application merely describing one embodiment of a proposed product may not support the claims in a later regular patent application that tries to define the broad scope of territory sought to be protected by the patent. Some foreign patent offices, such as the European Patent Office, insist on strict, literal, word-for-word support of patent claims in the priority U.S. patent applications. Failure to have adequate descriptions in a provisional patent application for broad definitions of an invention may not be fatal to a later-filed patent application, but the later-filed patent application may not be entitled to the benefit of the filing date of the provisional patent application or may be entitled to the benefit of the earlier filing date only for claims that are as narrow as the description of the embodiments described in the provisional patent application.

PRACTICE POINTER 

The author believes that a provisional patent application should be as complete and detailed as a regular nonprovisional patent application and include claims defining the invention to ensure complete support for broad protection of an invention. Such a

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 33

§1.49

INTELLECTUAL PROPERTY LAW

complete description is required to support claimed inventions in the U.S. nonprovisional application and any foreign patent applications based on the U.S. provisional application. However, if time is not available to prepare a complete application, an abbreviated version may be quickly prepared and filed that at least describes what will be shortly thereafter publicly disclosed. A more complete provisional application may then later be filed. Within one year of the filing date of the first provisional application, a U.S. nonprovisional application and foreign applications may be filed that get the benefit of both earlier filed provisional applications.

B. Preparing and Filing the Patent Application 1. [1.49] Contents of the Application A patent application includes a written specification and drawings of the invention and an oath or declaration executed by the inventors. 35 U.S.C. §111. The United States Patent and Trademark Office rules state that the specification should include the following items in the following sequence: a. title of the invention; b. a cross-reference to any related patent applications; c. a statement concerning any federal sponsorship of the research or development; d. a reference to any genomic sequence listing, table, or computer program listed in an appendix; e. the background of the invention; f.

a brief summary of the invention;

g. a brief description of the drawings; h. a detailed description of the invention; i.

a claim or claims (not required for a provisional application);

k. an abstract; and l.

an appendix of DNA sequence listing, if needed. 37 C.F.R. §1.77(b).

The specification is required to include a detailed written description of the invention and the manner for making and using the invention. The description must be “in such full, clear, concise, and exact terms as to enable any person skilled in the art or science to which the invention or discovery appertains, or with which it is most nearly connected, to make and use the same.” 37 C.F.R. §1.71(a). The description must also completely describe a specific embodiment of the

1 — 34

WWW.IICLE.COM

PATENTING INVENTIONS

§1.50

thing invented and the mode of operation or principle whenever applicable and must set forth the best mode contemplated by the inventor of carrying out the invention. 37 C.F.R. §1.71(b). These three separate requirements are commonly referred to as the “written description,” “enablement,” and “best-mode” requirements. See 35 U.S.C. §112. Failure to meet these requirements may result in a ruling by a court that the patent is invalid. See Chapter 2 of this handbook for details on asserting the lack of these requirements as a defense to an allegation of patent infringement. However, under the Leahy-Smith America Invents Act, although it is still required to include the best-mode description in the patent application, for proceedings commenced after September 16, 2012, the lack of such description may not be asserted as a defense in a patent lawsuit. See 35 U.S.C. §282(b)(3)(A). Suffice it to say that in preparing a patent application, the inventor must not withhold describing the “secret sauce” that makes the invention work or the most preferred embodiment of the invention. Fortunately, there is no requirement that a specific embodiment be marked as “best.” Therefore, including the best mode as one among a number of preferred embodiments of an invention is sufficient to meet the best-mode requirement. The claims define the subject matter sought to be covered by the patent. A patent application is required to include at least one claim “particularly pointing out and distinctly claiming the subject matter which the [applicant] regards as the invention.” 35 U.S.C. §112(b). Practically speaking, an inventor will develop a specific embodiment of a product or process or a number of alternative embodiments. The claims set forth the generic inventive concepts common to those different embodiments. It is the claims — the numbered sentences at the end of a patent — that actually define the patented invention and the scope of the protection afforded by the patent. The claims may be written in independent form or dependent form. A “dependent claim” is one that includes all the features of another claim and then adds additional features. For example, an independent claim and following dependent claim might state: Claim 1. An apparatus for applying indicia on a substrate comprising a hollow shaft and a graphite rod placed in the hollow shaft, the rod extending beyond the shaft at one end thereof. Claim 2. The apparatus of Claim 1 further comprising a cylinder of rubber at an opposite end of the shaft. A sample patent is provided in §1.70 below. 2. [1.50] Oath or Declaration and Related Papers Each inventor is required to sign an oath or declaration that is submitted along with the patent application or shortly thereafter. There are special rules that provide what to do when an inventor is uncooperative, cannot be located, or is deceased. In the oath or declaration, the inventor must swear or declare that he or she believes himself or herself to be the original and first inventor, either alone or with coinventors, of the subject matter that is sought to be patented. Also, the declaration includes an acknowledgment by the inventor of the duty to disclose material information to the United States Patent and Trademark Office.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 35

§1.51

INTELLECTUAL PROPERTY LAW

3. [1.51] Duty To Disclose Known Prior Art The United States Patent and Trademark Office imposes a duty of candor and good faith in dealing with the USPTO on all persons substantively involved in the prosecution of a patent application. See 37 C.F.R. §1.56(a). This duty is ongoing until the patent issues and includes the duty to disclose information known to the person to be material to the patentability of the claimed invention. Information is considered to be material when it is not cumulative to other material already of record and (a) establishes by itself or in combination with other information a prima facie case of the unpatentability of a claim or (b) refutes or is inconsistent with a position the applicant has taken. 37 C.F.R. §1.56(b). This information may be in the form of printed publications, such as old patents or technical articles, and may also include negative examination reports for counterpart foreign applications on the same invention. Alternatively, this information may not be documentary but may be things the inventor saw that sparked the invention or from which the invention was derived. If the information includes an assertion about a potential public disclosure of the invention more than one year prior to the filing of the patent application, the author suggests that the information about the disclosure should be submitted but evidence and argument that the disclosure was not sufficient to put the entire invention before the public or that some exception exists that disqualifies the disclosure from barring the award of the patent should also be included. The duty to disclose material information exists only as to information known to a person having such a duty. There is no duty to search for such information not known by that person, but a person must divulge all such pertinent information of which he or she is, was, or later becomes aware. The failure to comply with this duty may result in a court ruling that the patent is not enforceable due to “inequitable conduct” by the applicant. This lack of candor or good faith is said to constitute a fraud on the USPTO. Even when it can be successfully argued that the hidden information would not make the patent invalid, failure to disclose it can nonetheless render the patent unenforceable. However, the courts have recently raised the bar for proving inequitable conduct and apply a test that essentially asks whether the patent would not have been granted “but for” the failure to disclose the information and whether such failure to disclose the information was based on an intent to deceive the USPTO. See Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, (Fed.Cir. 2011). Additional details on the legal standards for finding inequitable conduct are provided in Chapter 3 of this handbook.

PRACTICE POINTER 

1 — 36

The duty of disclosure is imposed not only on inventors but also on attorneys and other business people substantively involved with the prosecution of a patent application. Because of the potential harm in inequitable conduct being asserted, it is best to disclose everything potentially relevant in compliance with the duty and to have the patent examiner evaluate it for its materiality.

WWW.IICLE.COM

PATENTING INVENTIONS

§1.53

C. [1.52] Publication of the Application It used to be the case that the United States Patent and Trademark Office kept pending patent applications and their examination or prosecution files confidential and unavailable to the public. In 1999, laws were enacted in part to end what were known as “submarine patents” (i.e., patent applications pending for years that suddenly surfaced as granted patents with claims that may have been recently drafted to specifically cover the now-standard practices of a matured industrial technology). The laws now provide that pending patent applications will be published 18 months after their filing dates and that the patent application files will then be available to the public. 35 U.S.C. §122(b). However, when a patent application is filed, a request can be made to keep the patent application confidential if the applicant certifies that the invention will not be disclosed in a foreign patent application. If later a patent application is filed in a foreign country, a request must be filed to rescind the earlier request to not publish the application upon penalty of having the patent application declared abandoned. Upon publication of an application, the applicant may have certain provisional rights against parties that copy the invention covered by the application. Those rights are limited to receiving damages in the form of a reasonable royalty. Those rights, however, are retroactive after the patent has been granted. The patent must have claims substantially the same as in the published application, and notice of the published application must have been given to the offenders. See 35 U.S.C. §154(d). D. [1.53] Restriction Requirements Though a patent application may contain many claims defining an invention in different combinations of features, a patent should cover only a single inventive concept. The patent examiner has the authority to determine whether the claims are directed to more than one invention and require the applicant to restrict the claims to a single invention or inventive concept. 35 U.S.C. §121. For example, if a patent includes some claims directed to a product, other claims directed to a method for making the product, and still other claims directed to a method for using the product, the examiner may at his or her discretion impose a three-way restriction requirement. The application must then elect one of the three inventive concepts to be examined. The applicant has the right at any time thereafter to refile the application as a “divisional” application containing claims directed to the nonelected inventions. As a practical matter, a patent examiner has broad discretion in imposing restriction requirements. The determination is highly subjective, and whether a restriction requirement is imposed may depend on which examiner is reviewing a patent application. On the positive side, in imposing the restriction, the examiner is stating that the inventive concepts are separately patentable. If one invention is found not patentable during examination, it should create no presumption that the other inventions are not patentable. See 35 U.S.C. §121. On the negative side, the total cost of obtaining full patent protection on all of the different inventive concepts disclosed in the patent application may increase by the multiple of the number of separate inventions found in the patent claims that require multiple divisional applications to be filed.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 37

§1.54

INTELLECTUAL PROPERTY LAW

In certain situations, if the examiner is persuaded that one inventive concept is patentable, he or she may be required to remove the restriction and bring the claims covering the other inventive concepts back into the application for examination.

PRACTICE POINTER 

A patent application should include claims directed to different inventive concepts created by the inventor, despite the possibility of a restriction requirement being imposed. This allows the inventor the benefit of hindsight and experience with the invention and perhaps more knowledge as to which inventive concepts are more commercially valuable if and when a restriction requirement is imposed.

E. [1.54] Office Actions A patent application is assigned to a group of patent examiners handling patent applications in a small technological niche. Unless a petition is filed requesting that the examination process be expedited, the patent application is taken up by order of its filing date. The examiner reviews the application and the claims defining the invention sought to be patented to determine if it meets the requirements for patentability discussed in §§1.22 – 1.28 above. The examiner conducts a search for public documents describing the same or a similar invention in existence before the application filing date. Typically, these documents are prior patents or published patent applications, although it is not uncommon to see nonpatent literature from technical journals, webpages, or textbooks also cited by the examiner. The examiner prepares a report called an “office action” detailing the documents found and explaining how the invention is not new or is obvious over the prior art documents found. It is usually only a small minority of cases in which the examiner may allow the patent to be granted at the first office action. At least 90 percent of the time, in the author’s estimation, the examiner makes at least some superficial argument supporting a rejection of the claims over the prior art. This at least puts the burden on the applicant to file a response and make a record. In addition to reviewing the claims for patentability over the prior art, the examiner reviews the application and claims to be sure the claims comply with 35 U.S.C. §112. This requires the claims to be supported and enabled by the application and distinctly claim the invention in a way that is not indefinite, vague, or confusing. The claims may be rejected under §112 because they are misnumbered or include grammatical errors of a nature that inject some confusion as to how the invention is defined or what the patent intends to protect. The examiner may also raise objections to the application that deal with mere formalities. Examples of such objections include typographical errors in the specification or reference numbers in the drawings not matching up with the written descriptions of the drawings. The applicant is given an opportunity to respond to the office action. The examiner may come back with a notice of allowance if the response is persuasive, or the examiner may issue another office action rejecting the response. However, even if the applicant’s response is persuasive, the examiner still may do another search to locate different prior art documents to provide new grounds to support a rejection of the invention as unpatentable.

1 — 38

WWW.IICLE.COM

PATENTING INVENTIONS

§1.55

With the initial patent application filing fee, the United States Patent and Trademark Office is obligated to provide at least two rounds of office actions. Upon payment of additional fees, the applicant may purchase additional rounds of office actions for the examiner to continue to consider additional arguments or amendments by the applicant. F. [1.55] Responses After an office action is received, an applicant typically has three months to file a response. The filing of the response may be delayed an additional three months with payment of a fee. The examiner is required to consider the response to the first office action, but thereafter, if an office action is made final, the examiner is not required to consider the response if it raises new issues. However, additional fees can be paid along with a request for continued examination that essentially withdraws the finality of the office action and continues the examination of the application for at least two more rounds of office actions. In the response, the applicant must reply to every objection and rejection made in the office action. Arguments must be made to show the specific distinctions believed to render the claims patentable over the prior art documents relied on to reject the claims. General allegations that the claims are patentable are not sufficient. In addition to mere arguments that the examiner is in error, the claims may be amended to include additional features or more narrowly draw the existing features. The response must include arguments that show how the amendment distinguishes the amended claims from the prior art documents. In some situations, it may be necessary to include declarations by the inventor or others to support the response. A “Rule 131 declaration” by an inventor may show that the invention was created before a cited document relied on by the examiner. 37 C.F.R. §1.131. This may remove the document as being prior art and is commonly referred to as “swearing behind” a reference. A “Rule 132 declaration” may be filed to support the nonobviousness of an invention or to provide evidence to rebut any rejection as to the requirements for patentability, including utility and enablement. 37 C.F.R. §1.132. As noted in §1.28 above, there are secondary considerations of nonobviousness. These considerations are usually supportable only by the introduction of facts by way of a declaration attesting to the truthfulness of the facts. The following are some examples of declarations that may be provided: 1. A declaration may be introduced by an expert in the industry related to the invention showing that there has been a long-felt need for the invention but that others had tried and been unable to achieve the invention. 2. A declaration by the inventors may include test data showing how their invention attains synergistic results or results that would be unexpected in view of the cited prior art teachings. 3. A declaration of the inventors or others may be provided to explain how a person of ordinary skill in the art would interpret a cited prior art reference differently such that the invention would not be obvious.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 39

§1.56

INTELLECTUAL PROPERTY LAW

4. A declaration may be provided with test data that rebuts an examiner’s assumption that certain materials described in a prior art document have the properties being claimed by the applicants. G. [1.56] Interviews During the examination process, the applicant is allowed to conduct a personal interview with the examiner either over the phone or in a face-to-face meeting. The face-to-face meetings are usually held in the examiner’s office or in the supervisor’s office; they are not formal hearings. The interview may range from an informal discussion to clarify the rejections in the office action to a discussion presenting fully prepared arguments to convince the examiner of the errors in the rejections. Often the interviews are helpful to clarify the examiner’s misunderstanding of the invention and focus the examiner on the differences between the invention and the prior art. After the interview, both the examiner and the inventor’s attorney must file an interview summary, which is a brief description of who attended the interview, what was discussed, and whether any agreement was reached.

PRACTICE POINTER 

The interview and the applicant’s relationship with the examiner are best viewed not as an adversarial situation but as a cooperative relationship with both parties working toward finding an agreeable scope of the claims that covers the invention but does not cover items in the prior art. One advantage of an interview is that many details may be discussed that do not get placed into the official record. This may be helpful to avoid such details being used by a court to limit the patent. See Chapter 2 of this handbook for information regarding the doctrine of equivalents.

H. [1.57] Appeals After multiple rounds of office actions and responses, if a second or later office action is made final, or even after a second nonfinal office action, the applicant has the option to appeal the rejection in the office action. The ex parte appeal is made to the United States Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB), which, prior to a September 16, 2012, name change made by the Leahy-Smith America Invents Act, was known as the Board of Patent Appeals and Interferences (BPAI). Three administrative patent judges typically hear the appeal of each case. On a rare occasion, an expanded panel of 11 judges may hear an appeal containing an important issue. The appeal process may take about 22 months to get a decision after all the briefs are filed and an optional oral hearing is conducted. As of March 2012, there were slightly more than 150 administrative patent judges on the board, who heard about 9,900 appeals in fiscal year 2012 out of about 26,000 pending appeals. For the appeal process, the applicant first files a notice of appeal. Then, within two months (or longer, if extension fees are paid), the applicant files an appeal brief. Within two months, the examiner files an answer. Then, two months later, the applicant may file a reply brief and may also request an oral hearing, which is optional.

1 — 40

WWW.IICLE.COM

PATENTING INVENTIONS

§1.59

After considering the applicant’s appeal brief, the examiner has an option to not file an answer and instead allow the application or conduct a new search and issue a new office action raising new grounds for rejecting the application. The appeal considers the record made during the prosecution of the application. No new evidence or declarations may be presented by the applicant. The PTAB may affirm in whole or in part the examiner’s rejection, restate a rejection based on new grounds, or reverse the rejection in whole or in part. In Fiscal Year 2012, the USPTO reported that about 67 percent of appeals were affirmed in whole or in part, 30 percent were reversed, 1 percent were remanded, and 2 percent were dismissed. After an unfavorable decision, the applicant has two months in which to request a rehearing, appeal the decision to the Court of Appeals for the Federal Circuit, or request continued examination of the patent application with revised patent claims. Otherwise, the application is returned to the examiner for disposition, which may include abandonment, continued examination or, if the appeal decision was favorable, allowance of the patent. For more details, see 37 C.F.R. §§1.191 – 1.198. I. [1.58] Allowance and Issue of Patent When a patent application is allowed, it is deemed that the patent application has met all the requirements for patentability, all informalities have been corrected, and the patent application is in final condition ready to be issued as a patent. Formal examination or prosecution of the application is closed, so no new amendments of a significant nature are permitted. Minor amendments to correct informalities, such as typographical errors, are permitted. The applicant is given three months after the notice of allowance is mailed to pay the issue fee. Along with payment, the applicant is permitted to designate the name of the assignee that will appear on the face of the granted patent. If there is a request to make any corrections to the drawings, the corrected drawings must be submitted no later than the time of payment of the issue fee. Usually, within two months after payment of the issue fee, the official patent is issued. A notice is usually mailed a few weeks before the patent is issued announcing the expected issue date. Any continuation applications or divisional patent applications must be filed no later than the issue date to be “co-pending” with the prior application and entitled to claim the benefit of the earlier filing date of the prior application. The issued patent is first published on the United States Patent and Trademark Office website, www.uspto.gov. Paper copies and the official ribbon copy of the patent are mailed to the applicant and usually arrive several weeks after the official issue date. For a sample and details of an issued patent, see §1.70 below. J. [1.59] Interferences As noted in §1.25 above, in the United States, patents with an effective filing date before March 16, 2013, are awarded to the first to create the invention. When two or more parties apply for a patent on the same invention, an interference proceeding may be held by the United States Patent and Trademark Office to determine the first inventor, who is thus awarded the patent. Since most other countries award patents to the first to file for a patent application, sophisticated

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 41

§1.60

INTELLECTUAL PROPERTY LAW

inventors keeping close records of the creation of their inventions may have an advantage over foreign inventors who did not foresee the need to record the creation of their inventions as closely. To establish the right to an interference proceeding, a claim must be presented in the inventor’s application that is substantially the same as the claim in the other patent application or issued patent. In the case of a published application or a granted patent, the same claim must be presented within one year of the publication of the application or invention. For more details, see generally 37 C.F.R. §§41.200 – 41.208. Interference proceedings are very costly, as much as a small lawsuit. The interference procedures are complex. There are patent attorneys who specialize only in interference proceedings. K. [1.60] Derivation Proceedings As the novelty requirements will be changing for patent applications filed on or after March 16, 2013, interference proceedings will no longer be applicable because the patent will be awarded to the first inventor who files a patent application for the same invention. However, the requirements for novelty are such that an inventor who filed his or her application later may institute a derivation proceeding to prove that the alleged inventor who filed the patent application earlier actually derived the invention from the inventor who filed later. If such proof is successful, the patent will be awarded to the inventor who filed later. The person who derived the invention from the other party is deemed not to have invented the invention, such that the patent is awarded to the first “true” inventor who filed a patent application. See 35 U.S.C. §135 (eff. Mar. 16, 2013). Derivation proceedings will be heard before the Patent Trial and Appeals Board. The USPTO has adopted final rules for derivation proceedings that take effect March 16, 2013. See 77 Fed.Reg. 56,068 (Sept. 11, 2012), adopting 37 C.F.R. §§42.400 – 42.412. Of importance is the need to file a petition for the proceeding within one year from the publication of the patent claims of the later-filed patent application. 37 C.F.R. §42.403 (eff. Mar. 16, 2013). L. Correction, Reissue, Reexaminations, and Post Grant Reviews 1. [1.61] Certificates of Correction After a patent issues, any errors by the United States Patent and Trademark Office and any clerical or typographical errors by the applicant may be corrected by presenting a request for a certificate of correction. Typographical errors, either by the applicant or by the USPTO, are the most frequent items corrected by a certificate of correction. However, additional items may be corrected by a certificate. The claim to priority of a patent may be corrected by a certificate. The list of named inventors also may be corrected by a certificate. See 37 C.F.R. §§1.322 – 1.325. Any further errors that would otherwise result in the invalidity of the patent or one of the patent claims must be corrected by reissue or reexamination.

1 — 42

WWW.IICLE.COM

PATENTING INVENTIONS

§1.63

2. [1.62] Reissue A reissue application is a request to the United States Patent and Trademark Office to reissue the patent because it includes some defect that causes it to be wholly or partly inoperative or invalid. The defect may be in the specifications, drawings, or claims. No new matter may be introduced in the reissue application. The term of the reissue patent is the same as for the original patent. A reissue application seeking to broaden the scope of the claims must be filed within two years from the issue of the original patent. See 35 U.S.C. §251. The reissue application is examined according to the same procedure as a regular patent application. The examiner may conduct a new search and reexamine the patent claims without deference to the fact that they were previously allowed. To the extent that the claims in the reissue patent are substantially identical to the claims in the original patent, the reissue patent is considered to have effect continuously from the date of the original patent. To the extent that the reissue patent claims subject matter not covered by the claims in the original patent, a court may allow a party to continue to sell such items or perform such processes that were not covered by the original patent but are covered by the reissue patent if the party was doing so or made substantial preparations to do so before the issue date of the reissue patent. See 35 U.S.C. §252. For more details on the procedures, see 37 C.F.R. §§1.171 – 1.178. 3. [1.63] Ex Parte and Supplemental Reexaminations A request to have a patent reexamined under an ex parte reexamination proceeding may be made by any party believing that a prior art patent or printed publication bears on the patentability of a patent. 35 U.S.C. §§302 – 305. The United States Patent and Trademark Office provides an initial review of the request to determine whether the prior art patent or printed publication raises a substantial new question of patentability affecting any claim of the patent. If so, the USPTO may grant a request for a reexamination. In rare situations, usually at the behest of public outcry over the issuance of a patent that seems clearly unpatentable, the Director of the USPTO may request the reexamination. The reexamination procedure performs a new examination of the invention based on the prior art submitted with the request. During ex parte reexamination, only the patent owner participates in responding to the office actions prepared by the examiner. The third-party requestor may obtain copies of the record but may not participate. See 37 C.F.R. §§1.501 – 1.570. A new proceeding has been created under the Leahy-Smith America Invents Act, similar to a reissue proceeding, wherein the patent office may consider, reconsider, or correct information relevant to a patent. This new proceeding is called a supplemental examination. 35 U.S.C. §257. A patent owner is the only party that may request a supplemental examination. The patent office first determines if the request raises a substantial question of patentability, and, if so, then a reexamination of the patent is ordered. The reexamination then proceeds following the process similar to an ex parte reexamination, except the patent owner may not file a response to the ordering of the reexamination. The supplemental examination allows a patent owner to bring material information to the USPTO’s attention after the patent grant, and the fact that this information was not brought during the original examination of the patent application then cannot be used as a defense to patent infringement under an allegation of inequitable conduct.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 43

§1.64

INTELLECTUAL PROPERTY LAW

4. [1.64] Post Grant and Inter Partes Reviews Under the Leahy-Smith America Invents Act, different post grant inter partes type proceedings have been created: the post grant review (PGR) and the inter partes review (IPR). A PGR is essentially a new type of proceeding, whereas an IPR is a replacement of the former inter partes reexamination proceeding. Both proceedings are heard by the Patent Trial and Appeal Board. The PGR has been established to allow third-parties to challenge the validity of a patent under broader categories of invalidity shortly after the patent has been granted. 35 U.S.C. §§321 – 329. The PGR will be applicable to patents issued for patent applications with an effective filing date on or after March 16, 2013. A petition for a PGR must be filed within nine months of the issue date of a patent. The basis for challenging the validity of a patent includes prior descriptions of the patented invention in printed publications (as is the only basis available for ex parte reexamination proceedings), but the PGR also allows the patent to be challenged on the basis of any other requirement for patentability, such as prior public use, lack of written support for the claimed invention, or if the claimed invention is not patentable subject matter — such as a natural phenomenon. Thus, a PGR essentially allows a party to challenge the validity of a patent in this proceeding before the PTAB on nearly any basis that could be brought as a defense in a patent lawsuit. Both the patent owner and the party challenging the patent participate in the PGR, which may proceed as a mini-lawsuit with limited discovery available. See generally 37 C.F.R. §§42.200 – 42.224. In addition, a transitional PGR proceeding is allowed for challenging certain business method patents that may already exist or have been filed before March 16, 2013. Effective September 16, 2012 (and for a period of eight years thereafter), any covered business method patent granted before, on, or after this date may be challenged under the transitional PGR proceeding. A petition for a transitional PGR may be brought only if the petitioning party has been sued or threatened under the patent. The basis for a third party challenging the validity of the patent is limited to asserting a lack of novelty or obviousness of the claimed invention. A transitional PGR may be sought any time more than nine months after the patent has issued, which is after the time window for a regular PGR has expired. See generally 37 C.F.R. §§42.300 – 42.304. The IPR proceeding allows for third parties to participate in challenging the validity of a patent on limited grounds in the United States Patent and Trademark Office rather than in court. See 35 U.S.C. §§311 – 319. The IPR replaced inter partes reexaminations. All pending interpartes reexaminations automatically converted to IPRs effective September 16, 2012. Although available against all patents now, eventually the IPR will only be able to be requested more than nine months after a patent is granted, which is after the window when a PGR may be filed. The grounds for challenging a patent in an IPR is more limited than in a PGR as the basis for invalidity in an IPR must only be published prior art documents. An IPR is barred if the requesting party has already filed a lawsuit challenging the same patent in court. On the other hand, if an IPR is filed first, a lawsuit filed later asserting the patents will be stayed. One downside to challenging a patent with an IPR is that the challenging party is estopped from later asserting in court that the patent is invalid on the same ground that was raised or “could have been raised” during the IPR proceeding. During an IPR, both the patent owner and the third-party

1 — 44

WWW.IICLE.COM

PATENTING INVENTIONS

§1.67

requestor of the review participate. Thus, the requestor may rebut all arguments the patent owner makes in an adversarial fashion to try to prove the patent invalid over the newly cited prior art. An IPR proceeds as a mini-lawsuit with limited discovery available. See generally 37 C.F.R. §§42.100 – 42.123. M. Patent Expiration and Maintenance Fees 1. [1.65] Patent Term Two regimes exist for determining the term of a utility patent. For patents that were filed before June 8, 1995, the term of the patent is the longer of either 17 years from the issue date or 20 years from the earliest filing date to which it claims priority. 35 U.S.C. §154(c). For patents filed on or after June 8, 1995, the patent term is only 20 years from the earliest filing date to which it claims priority. 35 U.S.C. §154(a). Design patents have a patent term of 14 years from their issue date. 35 U.S.C. §173. 2. [1.66] Patent Term Adjustment Effective May 29, 2000, the United States Patent and Trademark Office provides for adjustments to extend the term of a patent when the issue of the patent was delayed by the USPTO. Generally, the USPTO will extend the patent term due to its failure to mail a first office action within 14 months after the application is filed or failure to reply to an applicant’s response within 4 months. On top of that, any delay in getting the patent issued within 3 years due to failure of the USPTO will be counted toward the patent term adjustment. Any adjustments due to delays by the USPTO are offset by any delays due to the applicant. The applicant is considered to have delayed when he or she fails to respond to an office action or other request within 3 months. 35 U.S.C. §154(b)(2)(C). See also 37 C.F.R. §§1.701 – 1.705. The patent term adjustment is printed on the face of the issued patent. However, the adjustment may be appealed by an applicant, so the adjustment appearing on the patent may not be correct. For most patents, the value of the extension may not be significant as many patents are not kept in force their full term. However, for patents covering blockbuster drugs, when every day covered by a patent keeps generic competition off the market, the value of each day may be in the millions of dollars. 3. [1.67] Patent Term Extension Any patent that covers a product or method that is subject to regulatory approval, such as by the Food and Drug Administration, may have its term extended. The length of the patent extension is commensurate with the delay in obtaining the needed regulatory approval to commercially market the product. 35 U.S.C. §156. An official certificate of extension is awarded by the United States Patent and Trademark Office and made of record for the public as though it were part of the original patent. See 37 C.F.R. §§1.710 – 1.791.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 45

§1.68

INTELLECTUAL PROPERTY LAW

4. [1.68] Terminal Disclaimers A patent term may be made coextensive with the term of another related patent as the result of the filing of a terminal disclaimer. This document disclaims the term of the second patent, which may extend beyond the term of the first patent, and agrees that the second patent is enforceable only as long as it is owned by the same party together with the first patent. It is noted on the face of the patent when a terminal disclaimer has been filed. The terminal disclaimer is filed during the course of examination to remove a so-called obviousness-type “double patenting rejection” over another patent belonging to the same owner when the subject matter claimed in each patent is an obvious variation of the other so as to represent a single inventive concept that could be covered by a single patent. See 37 C.F.R. §1.321(c). 5. [1.69] Maintenance Fees Utility patents require the payment of regular maintenance fees every four years to keep them in force. The payments are due six months before the fourth, eighth, and twelfth anniversaries of the issuance of the patent. The payment may be made within six months of these anniversary dates if a late fee is also paid. According to the United States Patent and Trademark Office’s PERFORMANCE AND ACCOUNTABILITY REPORT FISCAL YEAR 2011, www.uspto.gov/ about/stratplan/ar/USPTOFY2011PAR.pdf (case sensitive), there had been a marked increase in patent renewals compared with four years earlier. In 2011, at the fourth-year stage about 100 percent of U.S. patents were renewed, compared to 87 percent in 2007. In 2011, at the eighth-year stage about 81 percent of patents were renewed, compared to 61 percent in 2007. In 2011, at the twelfth-year stage about 60 percent of patents were renewed, compared to only 40 percent in 2007. Maintenance fee payments escalate every four years. As of December 2012, the maintenance fees for a large entity patent owner for the fourth-, eighth-, and twelfth-year stages are $1,150, $2,900, and $4,810, respectively. 37 C.F.R. §1.20. A small entity patent owner pays a 50-percent reduced fee. Id. Thus, unless a patent owner is making profitable advantage of a patent, it may not pay economically to maintain the patent. It is difficult, however, to know and measure the value of a patent that is forcing a competitor to follow a more costly practice.

XI. ISSUED PATENTS A. [1.70] Anatomy of a Patent: Sample Utility Patent The issued U.S. patent is the document that describes the inventor’s creation and includes claims that define the scope of the invention covered by the patent. An example of a short U.S. patent is provided below. The front page of the patent includes all the bibliographic data about the patent. Parenthetical reference numbers are provided according to an international system to which most countries adhere that aids in deciphering such information on foreign patents. The patent number (10) and date of issue (45) are listed in the upper right corner. The front page includes the last name of the first listed inventor in the upper left corner. It is common for patents to be colloquially referred to

1 — 46

WWW.IICLE.COM

PATENTING INVENTIONS

§1.70

by this name, such as “the Jones patent.” The left column includes the title (54), inventors’ names and residences (75), any assignees (73), whether the patent is subject to a patent term extension or disclaimer (*), the application number (21), the filing date (22), prior publications of the patent application (65), and prior related patent applications (63). The term of the patent is typically 20 years from the earliest filing date of a related patent application (63) plus any term adjustments (*). Additional data in the left column includes technological classifications according to an international classification system (51) and a U.S. classification system (52), as well as the U.S. classes searched by the examiner when trying to locate prior art documents (58). The bottom of the left column continues to the top of the right column with a listing of the prior art documents cited either by the examiner or by the applicant during examination (56). The examiner’s name and the name of the law firm are included (74). The bottom of the right column concludes with the abstract of the invention (57). The abstract is written by the applicants, not the United States Patent and Trademark Office, so it may not precisely coincide with the scope of protection provided by the specific patent claims on the back of the patent. Below the abstract is a list of the number of patent claims and pages of drawings. Usually, a drawing is selected by the USPTO to include on the front page that is supposed to be representative of the main invention protected by patent claims. After the front page, the drawings pages follow, and then the written portion of the patent is presented. The written portion is in the same sequence as provided in the original patent application. As shown in the example, the detailed description of the invention includes a description of the drawings with the reference numerals from the drawings in bold print. Following the written description, the patent claims lead with a transitory phrase such as “I claim,” or, as shown, “What is claimed is.” The numbered sentences following that transition are the patent claims that define the scope of legal protection that a patent offers to its owner. Anything that falls within the definitions provided by any one of the claims is infringing the patent. Therefore, when looking at a patent for the first time, one may read the abstract or the summary of the invention to get a feel for the subject matter to which the invention relates, but one then must read the patent claims that define what is actually protected by the patent. The detailed description provides examples that illustrate preferred embodiments of the invention. The detailed description may also include special definitions of the terms used in the claims or disclaim certain subject matter from the scope of the invention defined by the claims.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 47

§1.70

1 — 48

INTELLECTUAL PROPERTY LAW

WWW.IICLE.COM

PATENTING INVENTIONS

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

§1.70

1 — 49

§1.70

1 — 50

INTELLECTUAL PROPERTY LAW

WWW.IICLE.COM

PATENTING INVENTIONS

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

§1.70

1 — 51

§1.70

1 — 52

INTELLECTUAL PROPERTY LAW

WWW.IICLE.COM

PATENTING INVENTIONS

§1.71

B. [1.71] Sample Design Patent Attached below is a copy of a representative U.S. design patent. This patent protects the ornamental design for a product as shown in the patent drawings. The information on the first page is essentially the same as for a utility patent as shown in §1.70 above, with the addition of the single claim and description of the figures. The figures show the product design from all six sides straight on and at least one perspective angle.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 53

§1.71

1 — 54

INTELLECTUAL PROPERTY LAW

WWW.IICLE.COM

PATENTING INVENTIONS

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

§1.71

1 — 55

§1.71

1 — 56

INTELLECTUAL PROPERTY LAW

WWW.IICLE.COM

PATENTING INVENTIONS

§1.74

C. [1.72] Marking Patent Numbers on Products Marking the issued patent number on the patented product provides certain legal advantages. The patent marking notation may be, e.g., “Patent 1,234,567” or “Pat. 1,234,567” or the word “Patent” followed by an Internet address where the patent numbers are listed. 35 U.S.C. §287(a). If the character of the product does not permit markings for reasons such as the product’s size or because such markings would destroy its aesthetics, the marking may be fixed to the package or on a label in such a way as to provide suitable notice to the public. Id. See, e.g., Rutherford v. Trim-Tex, Inc., 803 F.Supp. 158 (N.D.Ill. 1992). The advantage of providing notice of the patent number to the public is that patent infringement damages may be available to the patent owner from the inception of the infringement. Without such patent marking, damages may be received only after an alleged infringer has been provided actual notice of the infringement. 35 U.S.C. §287(a). The requirement to mark the patented products applies to licensees under the patent as well. If the patent includes only method claims, there is no requirement to mark the patent number of the products made by or used under the patented method. A party that falsely marks a patent number, patent pending status, or a patent owner’s name on a product or in advertising for the purpose of deceiving the public may be subject to civil penalties. See 35 U.S.C. §292(a). The civil penalties may be a fine up to $500 for every offense, but only the United States may sue for civil penalties. Id. Any person who has suffered a competitive injury as a result of this false patent marking may sue for damages adequate to compensate for the competitive injury. 35 U.S.C. §292(b). It is not considered a violation of this statue if a product has been properly marked with a patent number, but the patent has since expired. 35 U.S.C. §292(c).

XII. FOREIGN PATENTS A. [1.73] Foreign Filing Licenses Before an inventor can file a patent application in a foreign country, the inventor must obtain a foreign filing license from the United States Patent and Trademark Office. The license is required to certify that the invention does not represent technology of national interest to the United States that otherwise should be kept secret or not exported to certain countries. 35 U.S.C. §§181 – 188. Filing a U.S. patent application is considered a request for a foreign filing license, and unless specifically denied, the license is automatic six months after the U.S. filing date. 35 U.S.C. §184(a). If one files a foreign patent application before receiving the license, the penalty may be a ruling that the U.S. patent is invalid unless the failure to receive the license was through error without deceptive intent and the patent does not disclose subject matter that should otherwise be kept secret as pertaining to the national interest. 35 U.S.C. §185. Technology pertaining to the national interest usually relates to nuclear or radioactive materials and technology useful for producing advanced weapons. B. [1.74] PCT International Patent Applications Under the Patent Cooperation Treaty (PCT), 28 U.S.T. 7645, 1160 U.N.T.S. 231 (June 19, 1970), a single international patent application may be filed that serves as a delayed entry into the regional or national patent offices in foreign countries. Essentially, by filing this PCT

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 57

§1.75

INTELLECTUAL PROPERTY LAW

international patent application, the decision as to which country in which to file the patent application may be delayed up to 30 months after the filing date of the first application to which the application claims priority. As of December 2012, there are 146 countries that are signatories to the PCT. Thus, all the costs associated with those foreign filings may also be delayed. This allows the patent owner time to determine whether the invention is sufficiently marketable before having to commit the financial resources for many foreign patent filings. For a list of the countries that participate in the PCT, see www.wipo.int/pct/en/pct_contracting_states.html. Patent offices in most industrialized countries of the world, with the exception of Taiwan and many South American and Middle Eastern countries, are available through the PCT application. For a total cost including fees and expenses of about $4,000, the PCT application may be filed to reserve the right to a patent application in all of these countries. If a person is interested in eventually filing in only one or two countries, the cost for the delay available in filing a PCT application may not be economical. On the other hand, if the inventor wants to preserve the right to later file in many countries and is not sure which ones to file in or wants to wait until there is a determination by the United States Patent and Trademark Office of whether the invention is patentable before committing, it may be wise to file a PCT application. C. [1.75] Foreign Priority Rights There are several convention treaties to which the United States is a party that provide reciprocal rights to file patent applications in participating countries and claim the benefit of the earlier filing date of an application filed within the previous year in the patent office of the inventor’s home country. The Paris Convention for the Protection of Industrial Property of March 20, 1883, discussed in §1.38 above, is one such treaty. Most countries have signed the Paris Convention. The countries that participate in the Patent Cooperation Treaty, 28 U.S.T. 7645, 1160 U.N.T.S. 231 (June 19, 1970), rely on the Paris Convention to be entitled to the earlier filing date. Since Taiwan is not a member of the Paris Convention, the United States has signed a separate agreement conveying reciprocal rights to inventors to claim priority to earlier filed applications in their respective home country. For a complete list of countries and the applicable treaties or agreements, see the MANUAL OF PATENT EXAMINING PROCEDURE §201.13 (8th ed. 2001, rev. 9 Aug. 2012) (MPEP), www.uspto.gov/web/offices/pac/mpep. There are only a few countries that are not members of the Paris Convention and that do not have separate reciprocal agreements with the United States. These countries include Angola, Fiji, Kuwait, Maldives, Myanmar, and the Solomon Islands. D. [1.76] Foreign National and Regional Patent Offices Almost all countries have patent offices. However, some countries have banded together to create a regional patent office that, as an option, examines patents entering into countries in that region. The European Patent Office is the largest such regional office. Almost all Eastern and Western European countries allow patent applications to be examined first at the EPO. Upon grant of the patent by the EPO, the European patent is registered in the patent office of each desired European country. This is economical compared to paying the costs to have the application separately examined in three or more patent offices in Europe.

1 — 58

WWW.IICLE.COM

PATENTING INVENTIONS

§1.77

The other regional patent offices include the Eurasian Patent Office (consisting mainly of former Soviet republics), the African Intellectual Property Organization, and the African Regional Intellectual Property Organization.

XIII. [1.77] INVENTION PROMOTION COMPANIES Every year, thousands of individual inventors are taken in by fraudulent invention promotion companies. These fraudulent companies offer to help inventors patent their inventions and/or promote and market their inventions to other companies. The fraudulent companies lure inventors by providing a free or low-cost invention analysis that almost always shows that the invention is patentable and that there is a huge market potential for the invention, at which point high-pressure sales tactics may be used to obtain thousands of dollars for promises that rarely come through. Even if the activity is not criminally fraudulent, it may capitalize on the inventor’s ignorance of the patent system and the low level of contractual obligations made with the inventor. In better situations, the invention promotion company may actually contract with a patent attorney or agent and obtain a utility patent covering the precise picture of the prototype or a design patent covering only the ornamental features of the inventor’s prototype. Instead of obtaining a patent for clients, fraudulent companies may only submit a description of the invention to the patent office as a provisional patent application, which inventors can do themselves for $150, and this submission provides only limited patent pending status for one year. Likewise, the marketing efforts may include an abstract of the inventor’s product in a catalog of hundreds of other products, with the catalog being shown at a trade show exhibit or sent unsolicited to a dozen manufacturers, which very likely toss the catalog in the trash. That being said, there may be some invention promotion companies that are worth investigating by inventors. Some of these companies, however, typically invest their efforts and their own money only in inventions they deem of value. Some of the companies work as business incubators and work with inventors to help start a business around a patented product. In the author’s experience, this latter type of company often works with the inventors only after decent patent protection has been obtained. The United States Patent and Trademark Office provides information helpful to independent inventors, including information on how to determine whether an invention promotion company is a scam. See the USPTO’s scam prevention webpage at www.uspto.gov/inventors/scam_ prevention/index.jsp. In addition, the Federal Trade Commission has successfully pursued complaints against numerous fraudulent or misleading invention promotion companies. The FTC provides additional information on its website at www.ftc.gov/bcp/edu/pubs/consumer/products/pro21.pdf. Also, companies that operate as invention promotion or development services are governed by both federal and state statutes. See 35 U.S.C. §297 (improper and deceptive invention promotion) and the Illinois Fair Invention Development Standards Act, 815 ILCS 620/101, et seq.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 59

§1.78

INTELLECTUAL PROPERTY LAW

XIV. [1.78] GLOSSARY Anticipation: The prior description or knowledge of a complete invention in a single document or object. See §1.24 above. Applicant: An inventor or other party applying for a patent. In the United States, the inventor is the applicant. In most foreign countries, the entity that owns the invention and patent application is the applicant. Application: The complete document and drawings describing an invention submitted to the United States Patent and Trademark Office for the purpose of applying for a patent. See §1.49 above. Claims: The numbered sentences or paragraphs at the end of an application or patent that define the scope of the invention to be protected by the patent. See §1.49 above. Continuation patent application: A patent application that claims the benefit of an earlier filed patent application and may claim a similar or different invention from the invention examined in the prior application. Continuation-in-part patent application: A patent application that claims the benefit of an earlier filed patent application and contains new information not described in the earlier filed patent application. The continuation-in-part patent application may claim, but is not required to claim, an invention described by the newly added information. Derivation: A situation in which an invention is based on or derived from the inventor’s knowledge of another person’s creation. A derivation proceeding is a process in which the USPTO allows one inventor to challenge the award of a patent to another inventor on the basis that the latter derived the invention from the former. See §1.60 above. Design patent: A patent protecting the ornamental aspects of a manufactured product or computer displayed image. See §1.20 above. Divisional patent application: A patent application that claims the benefit of an earlier filed patent application but claims a different invention from the invention examined in the prior application. See §1.53 above. Effective filing date: The earlier of the actual date a patent application is filed with the USPTO or the filing date of any earlier-filed patent applications to which the application claims priority. Ex parte reexamination: A procedure in the USPTO in which a granted U.S. patent undergoes additional examination to determine the patentability of the patent in view of new prior art documents. Only the patent owner participates in the reexamination. See §1.63 above.

1 — 60

WWW.IICLE.COM

PATENTING INVENTIONS

§1.78

Inequitable conduct: The intentional withholding of material information from the USPTO or affirmative misrepresentations to the USPTO that may result in a patent being unenforceable in court. See §1.51 above. Interference: A proceeding between two applications for the same invention in which the first party to invent the invention is determined. See §1.59 above. Inter partes review: A proceeding in the USPTO requested by a third-party more than nine months after a patent is granted to challenge the validity of the patent on the grounds that it is invalid in view of prior art documents. Both the requestor and the patent owner participate adversarily. See §1.64 above. Invention: Conception of a concrete idea coupled with its reduction to practice, i.e., the creation of the inventive ideas in concrete, detailed form and the subsequent actualization of the invention; the filing of a patent application is deemed to be a constructive reduction to practice. Issue date: The date the patent is granted and published by the USPTO. See §1.58 above. Nonobviousness: A condition in which the features of an invention, even if known individually, were not previously described or suggested to be combined together as in the invention; a condition in which an invention is not an obvious combination of known elements or steps. Nonobviousness is a requirement for patentability. See §1.28 above. Novelty: A condition in which the features of an invention were not previously known or described in the same exact combination as in the invention. Novelty is a requirement for patentability. See §1.24 above. See also Anticipation above. Office action: A written examination report prepared by a patent examiner expressing reasons why an invention in a patent application is not patentable. See §1.54 above. Patentee: The owner of a patent. See also Applicant above. Post grant review: A proceeding in the USPTO requested by a third-party within nine months after a patent is granted to challenge the validity of the patent under almost any ground that could have been raised in a court lawsuit to challenge the patent. Both the requestor and the patent owner participate adversarily. See §1.64 above. Prior art: Something in existence prior to the invention or prior to the filing of the patent application that may describe features of the invention; information and documents that were part of the state of the art or known before the effective filing date of a patent application. Priority date: The date of a prior filed application that a later-filed application may be entitled to claim the benefit of. Prosecution: The activities of a party and its patent attorney in connection with the filing and examination of a patent application. See §§1.47 – 1.58 above.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 61

§1.79

INTELLECTUAL PROPERTY LAW

Provisional patent application: A patent application that serves as a place holder for the right to file a nonprovisional patent application on the same invention within one year and claim the benefit of the earlier filing date of the provisional application. See §1.48 above. Reissue: A procedure in the USPTO in which a patent owner may request that a granted U.S. patent undergo additional examination to correct a defect in the granted patent that caused it to be partially or wholly invalid. See §1.62 above. Supplemental reexamination: A procedure in the USPTO in which a patent owner may request that a granted U.S. patent undergo additional examination to consider, reconsider, or correct information relating to the patentability of the patent in view of new information. Only the patent owner participates in the reexamination. See §1.63 above. Utility: The asserted practical usefulness of an invention. See §1.23 above. Utility patent: A patent protecting the useful or functional aspects of a product, composition, or process. See §1.12 above.

XV. [1.79] APPENDIX — INVENTION DISCLOSURE FORM INVENTION DISCLOSURE FORM CONFIDENTIAL 1. Title of the Invention:

2. Project Name or Number:

3. Inventor(s):

Name: Home Address: Citizenship:

Name: Home Address: Citizenship:

(List additional inventors on separate page) 4. What problems are solved or improvements accomplished by this invention?

5. Summary of the invention: How are the above problems solved or improvements accomplished?

1 — 62

WWW.IICLE.COM

PATENTING INVENTIONS

§1.79

6. What is the value or utility of the invention for the company? What other products or industries could benefit from this invention?

7. What was the conception date of the invention? (Attach pertinent log sheets, drawings, written description, etc., to support this date.)

8. What was the date of the first drawing of the invention? (Attach pertinent drawings to support this date. Always attach the earliest drawing to support this date regardless of how rough the drawing may be.)

9. What was the date of the first written description of the invention? (Attach pertinent written documents to support this date. Always attach the earliest written description to support this date regardless of how rough the written description may be.)

10. When did you first do any experimental work toward carrying out the invention? When was the first prototype completed?

11. List the date and recipient of the earliest disclosure and subsequent disclosures of this invention. (Attach supporting documents.)

12. What is the first date of testing or production that did or will involve non-secret disclosure or commercial use of the invention? Describe the activity (proposed or completed), including whether any information or samples relating to the invention have been or will be given to customers.

13. If products relating to the invention have already been offered for sale or sold or the process has been used to commercially exploit the invention, give the date of the first offer for sale, sale, or other commercial use of the invention.

14. List the closest known technology (i.e., publications, patents, or commercial products). Describe searches conducted.

15. Provide a detailed description of the invention and its preferred embodiments. Include examples and drawings, if available. Discuss the intended purpose and environment of the invention. What equivalents could be substituted for materials or methods in the invention? Discuss the differences between any known or similar technology and the invention. (Use several sheets, as necessary.)

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 63

§1.79

INTELLECTUAL PROPERTY LAW

16. Is further experimental work now under way or contemplated for the near future? If so, give a general summary of such work and an idea of when it will be completed.

17. Signature(s) of Inventor(s): ____________________________

Date: ________________________________

____________________________

Date: ________________________________

18. Witnesses: The witnesses, in signing this form, attest to the fact that they understand the invention.

__________________________ Typed or Printed Name Address:

_____________________________________ Signature

Date: ________________________________ __________________________ Typed or Printed Name Address:

_____________________________________ Signature

Date: _______________________________

1 — 64

WWW.IICLE.COM

2

Enforcing and Defending Against Patent Rights Through Litigation

JEFFREY MARX Rakoczy Molino Mazzochi Siwik LLP

LAURA BETH MILLER Brinks Hofer Gilson & Lione Chicago

®

©COPYRIGHT 2013 BY IICLE .

2—1

INTELLECTUAL PROPERTY LAW

I. [2.1] Patent Litigation Overview II. Prefiling Considerations A. B. C. D. E. F. G. H. I.

[2.2] Identifying the Business Objectives in Pursuing Litigation [2.3] Identifying the Risks and Costs of Patent Litigation [2.4] Selecting the Litigation Team [2.5] Gathering Evidence and Building the Case [2.6] Retaining Experts or Consultants Early in the Process [2.7] Identifying the Proper Plaintiff [2.8] Investigating the Alleged Infringement [2.9] Identifying the Appropriate Defendant Evaluating the Extent of Potential Damages and Remedies 1. [2.10] Damages Under the Patent Statute a. [2.11] Reasonable Royalty b. [2.12] Lost Profits c. [2.13] Additional Awards Available 2. [2.14] Limitations on Damage Recovery 3. [2.15] Facts To Investigate in Assessing Damages 4. [2.16] Injunctive Relief

III. Initial Filings and Related Issues A. Where To Bring Suit 1. [2.17] Jurisdiction 2. [2.18] Venue 3. [2.19] District Court’s Intellectual Property Track Record 4. [2.20] The International Trade Commission B. [2.21] Preliminary Injunction Motions C. [2.22] Elements of the Complaint D. [2.23] Primer on the Law of Infringement 1. [2.24] Direct Infringement a. [2.25] Literal Infringement b. [2.26] Infringement Under the Doctrine of Equivalents (1) [2.27] Limitations on the doctrine of equivalents (2) [2.28] Prosecution history estoppel (3) [2.29] Subject matter disclosed but not claimed 2. [2.30] Indirect Infringement a. [2.31] Elements of Inducement Under §271(b) b. [2.32] Elements of Contributory Infringement Under §271(c) 3. [2.33] Willful Infringement

2—2

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

E. [2.34] Responding to Complaint (Answers, Affirmative Defenses, and Counterclaims) 1. [2.35] Defense or Claim of Noninfringement 2. [2.36] Affirmative Defense of Invalidity a. [2.37] Section 101 Defenses b. [2.38] Section 102 Defenses c. [2.39] Section 103 Obviousness Defense d. [2.40] Affirmative Defenses Based on §112 Disclosure Requirements 3. [2.41] Affirmative Defense Based on License Rights and/or Patent Exhaustion 4. [2.42] Affirmative Defense Based on Statutory Bar on Damages, Failure to Mark, and/or Intervening Rights 5. [2.43] Affirmative Defense Based on Laches 6. [2.44] Affirmative Defense of Equitable Estoppel 7. [2.45] Affirmative Defense of Patent Unenforceability a. [2.46] Inequitable Conduct b. [2.47] Patent Misuse F. [2.48] Filing of Jury Demands IV. Case Management Issues and Discovery A. Preliminary Issues 1. [2.49] Protective Orders 2. [2.50] Electronic Discovery 3. [2.51] Case Management Plan B. [2.52] Motions To Bifurcate C. [2.53] Motions To Sever and Transfer D. [2.54] Typical Discovery Sought by Patentee E. [2.55] Typical Discovery Sought by Alleged Infringer V. Claim Construction/Markman Hearings A. B. C. D.

[2.56] Court Has Responsibility of Construing Claim Terms [2.57] Evidence Considered in Construing Claims [2.58] Process of Claim Construction Special Claim Construction Considerations 1. [2.59] Preamble 2. [2.60] Construing Means Plus Function Claims

VI. [2.61] Summary Judgment, Trial, and Appeal

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—3

INTELLECTUAL PROPERTY LAW

VII. [2.62] Checklist VIII. Forms A. B. C. D.

2—4

[2.63] [2.64] [2.65] [2.66]

Sample Complaint for Patent Infringement Sample Affirmative Defenses to Complaint for Patent Infringement Sample Patentee Interrogatories Sample Accused Infringer Interrogatories

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

I. [2.1]

§2.1

PATENT LITIGATION OVERVIEW

Since the first edition of this publication, patent reform has been a theme in Congress and the courts. On September 16, 2011, the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), became law. The AIA was a major piece of patent reform legislation, and is probably the most significant change to the U.S. patent system in the last 50 years. It has the potential to substantially impact patent litigation. Some sections of the AIA were effective immediately, while others are coming into effect over time. While we can identify a timeline for the implementation of changes to U.S. patent law, it is much more difficult to predict the impact that these changes will have on patent litigation. The Federal Circuit and various district courts have promulgated a number of rules specifically directed toward patent litigation. These rules, in general, are intended to streamline the patent litigation process, which continues to be time-consuming and complex. As with the AIA, these rules, some mandatory and some recommended, may have short-term and long-term impacts on patent litigation. Finally, the U.S. Supreme Court and the Federal Circuit have issued a number of decisions that clarify basic principles of patent law in the areas of patentability, invalidity, and damages. These, too, are widely viewed as efforts to reform or at least clarify the limits of patent rights. Why all this attention on patent law? Patents provide their owners with a potentially powerful and financially lucrative property right. Patents provide businesses with a competitive advantage in terms of creating legal barriers to competition and providing licensing opportunities. Traditionally, patent litigation was brought by the patent owner against a competitor, both of whom have products on the market. Over the last ten to fifteen years, however, an increasing number of patent cases have been initiated by patentees who are not competitors in the market. These plaintiffs are referred to as non-practicing entities (NPEs) or patent acquisition companies (PACs). The perception, at least among the defendants who are being sued by the NPEs, is that the lawsuits are extracting settlement amounts that do not reflect the value of the asserted patent, but rather the cost of litigation and the risk of disproportionately higher damages awards. On the flip side, however, the value of a patent is severely diminished if a patentee delays or fails to enforce its patent rights. Companies that invest time and money applying for patents, prosecuting applications, and obtaining patents view the sale or transfer of their patents to NPEs as a means of monetizing their investment, particularly in technology areas in which they do not compete. This chapter identifies the phases of patent litigation and discusses the typical issues facing the patentee and the alleged infringer in each phase. In general, patent litigation can be broken down into the phases or components of prefiling considerations, initial pleadings, discovery, claim construction, summary judgment, trial, and appeal. As with most litigation, patent litigation is time-consuming and expensive. Depending on the jurisdiction, patent cases can take several months to several years to reach trial, with the median time to trial taking over two years. See PriceWaterhouseCoopers LLP, 2010 Patent Litigation Study: The Continued Evolution of Patent Damages Law, p. 18 (PriceWaterhouseCoopers), www.pwc.com/us/en/forensic-services/publications/assets/2010-patent-litigation-study.pdf. A party should expect to spend several million dollars in fees and expenses even if the case settles

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—5

§2.2

INTELLECTUAL PROPERTY LAW

before trial. The costs increase depending on the technology, the number of patents and products at issue, the number of disputed issues, the number of experts needed, as well as the litigation support technology and consultants used to assist in presenting a case. Throughout the 1990s, the number of patent infringement cases filed each year increased steadily. However, the number of patent case filings has seemed to level off, with 2,892 cases filed in 2010. See PriceWaterhouseCoopers, p. 18, chart 7a. Median damage awards also seem to be trending slightly downward, but the range of damage awards remains high See PriceWaterhouseCoopers, pp. 9 – 10. This slight downward trend in damage awards, may be attributable to the steps taken by the courts to bring more predictability into damage awards through demanding more exacting expert testimony and proof on damage claims, as discussed in §§2.10 – 2.16 below. Still, most cases do not proceed to trial. Instead, many cases are settled, often after the court construes the claim terms through a process referred to as a Markman hearing (Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996)) or at the summary judgment stage. The claim construction process (discussed in §§2.56 – 2.60 below), provides a framework to interpret the scope of the claims for purposes of infringement and invalidity. Given the substantial costs, time, and uncertainty involved in protracted litigation, it is important to have a firm goal in mind before bringing any patent litigation and to explore whether alternatives to litigation are possible.

II. PREFILING CONSIDERATIONS A. [2.2] Identifying the Business Objectives in Pursuing Litigation The patentee (patent owner) should identify its objectives in initiating patent litigation in light of the company’s current and anticipated business needs. For example, objectives may include maintaining exclusivity for the patented technology in the marketplace, obtaining a revenue stream, meeting contractual obligations to other licensees of the patent, and maintaining a business reputation for protecting and enforcing patent rights. The following questions, although not exhaustive, may assist the patentee and its attorneys in identifying the business objectives in bringing a patent infringement suit: 1. Is the patentee currently exploiting the patented invention? 2. Does the patentee have plans to exploit the invention? 3. How important is the patented invention to the overall business? 4. Is the patented invention exclusively available from the patentee? 5. Are others licensed to use the patent? 6. How important is it to maintain exclusivity in the marketplace?

2—6

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.3

7. How easy is it to design around the patented invention? 8. Are there other acceptable noninfringing alternatives to the patented invention already available in the marketplace that the infringer could begin using or selling to avoid future infringement? 9. What obligations does the patentee have to third parties, such as licensees, to take action against infringers? 10. Is the alleged infringer using the patented invention in direct competition with the patentee or expanding the use of the patented invention into additional markets? Are these markets of interest or accessible to the patentee? 11. What is the financial value (long term and short term) of the patent to the alleged infringer? To the patentee? 12. Is there a history of disputes between the patentee and the alleged infringer? 13. Are there other issues currently in dispute between the companies, such as unfair advertising activities relating to the product at issue? 14. What is the value of the potential damage recovery? 15. What are the financial conditions of the patentee and the alleged infringer? 16. Does the alleged infringer have patents that may be of interest or concern to the patentee’s product line? Once the business objectives are identified, the importance of meeting these objectives under the particular circumstances can be compared to the risks and financial costs of bringing a patent infringement claim. B. [2.3] Identifying the Risks and Costs of Patent Litigation Patent litigation is not without risk to the patentee. In most contested patent cases, the validity of the patent will be challenged by the alleged infringer. Often, claims of unenforceability and patent misuse are asserted by alleged infringers. Although the defendant has a high burden of proof on these issues, the risk that these defenses may succeed is real. These defenses, if successful, will render the patent invalid or unenforceable. This is particularly problematic for a patentee if the patent is generating substantial licensing revenue. Therefore, patentees should consider an invalidity analysis and an analysis for risk of inequitable conduct charges before initiating a patent suit. Another important consideration is whether the patentee has the cooperation of and/or access to the inventors and the attorneys who prosecuted the patent. These individuals can provide information relating to the development of the invention and the state of the industry at the time, as well as the events surrounding the preparation and prosecution of the application.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—7

§2.4

INTELLECTUAL PROPERTY LAW

In addition, the alleged infringer may consider bringing an antitrust counterclaim, particularly if the patentee is the dominant player in the market. Antitrust cases, even if not successful, add a layer of complexity and expense to an already complicated litigation process. Therefore, the risk of antitrust counterclaims should be considered prior to the initiation of litigation. Finally, the patentee should be aware of any risk that its own product line may have to a claim for patent infringement asserted by the alleged infringer. Such a claim could be asserted as a counterclaim in the suit brought by the patentee, or it could be brought in an entirely separate action before a different court, forcing the patentee to juggle two patent cases in two different forums. In addition to these risks, the financial and manpower investment necessary to successfully pursue patent litigation should not be underestimated. These factors should be considered and balanced against the potential benefits of obtaining injunctive and/or monetary relief for infringement. C. [2.4] Selecting the Litigation Team While companies understand the need to select patent litigation counsel carefully, they often overlook the equally important need to handpick the people within the company who will be responsible for providing the management support and technical assistance necessary for a winning result. Although a company may feel the urge to deliver a case to outside counsel and experts “to handle,” invariably the best results are obtained when the clients are involved in and committed to the litigation process. Who should be involved? In companies with a legal department, in-house counsel plays a key role in formulating litigation strategy decisions, as well as insuring (1) that key information is disseminated to the decision makers within the company and (2) that outside counsel has access to the information and resources available within the company. In companies without in-house counsel, someone within management should be identified to fill this role. In addition, it is important to identify a person within the company who can serve as a “technical” resource or liaison to answer questions about the patents and products at issue, the state of the industry, and the general nature of the technology. The person selected should be knowledgeable about the technology and the company’s products, but it is equally important that this person also have good communication skills and be motivated to work with the attorneys to find answers to the questions being asked. This role may require a significant amount of time. Therefore, outside counsel and the company need to work together to make sure that the technical liaison has the support and time necessary to serve in this function without losing focus on his or her primary job responsibilities. D. [2.5] Gathering Evidence and Building the Case At the outset of any prefiling investigation, the patentee and counsel should assess the strength of the patent, evaluate the scope and meaning of the patent claims, and determine what evidence exists within the company and possibly with third parties that bears on the issues likely to be raised during the course of litigation. Some patentees pursue “validity opinions” from their

2—8

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.6

counsel. These opinions take a fresh look for prior art that may invalidate the patent, particularly art of which the patentee was unaware at the time the patent was filed. Such opinions are particularly useful for patentees that acquired the patent after issuance and were not involved in its prosecution and/or when the patent covers technology areas that the patentee does not have strong understanding of the prior art in the field. In addition, efforts should be made to identify and interview the inventors and the prosecuting attorney to see what information they recall regarding the claimed invention and its development. Again, this is particularly useful when the patentee is unaware of the sequence of events leading up to the invention or when the prosecuting attorney is no longer involved in the project. The alleged infringer is likely to seek information on the conception and reduction to practice of the claimed invention, as well as the prosecution of the patent application. Therefore, the patentee should be aware of this information and begin gathering it as well as information that may shed light on when the claimed invention was first offered for sale, incorporated into a commercial product, discussed in a written publication, or otherwise made available to third parties or the public. E. [2.6] Retaining Experts or Consultants Early in the Process The retention of an expert early in the evaluation process can be of tremendous benefit. Usually, this means identifying a technical expert familiar with the technology involved in the case. Depending on the needs of the case, it may be helpful to retain an expert who is not expected to serve as a testifying expert. In this way, the expert can be involved in the trial strategy and initial infringement assessment without concern that the meetings, discussions, and information exchanged with the expert will be discoverable. Counsel should keep in mind that if the expert becomes a testifying expert, information exchanged with the expert — including information exchanged prior to initiation of the case — may be discoverable under Federal Rule of Civil Procedure 26 if the expert considered the information in forming an opinion. Fed.R.Civ.P. 26(b)(4). The client, and particularly the scientists and engineers at the company, can be a good source of leads for potential experts. Other sources for identifying experts include published technical literature, college and university websites (these often include detailed bios and resumes of the faculty, many of whom are available and actively solicit for consulting arrangements), and other experts used in the past. Depending on the size and complexity of the case, it also may be helpful to retain, prior to initiation of the lawsuit, a financial, economic, or licensing expert to help identify the relevant market and assess the scope of a potential damage award. Also, if there is a concern that the alleged infringer may assert an antitrust counterclaim, a consultant can provide assistance in assessing that risk. If it is expected that the expert will serve as a testifying expert at trial, Federal Rule of Evidence 702 should be kept in mind and an assessment should be made of the vulnerability of the expert to a successful Daubert challenge (Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 125 L.Ed.2d 469, 113 S.Ct. 2786 (1993)). In selecting a testifying expert, the person should have not only excellent academic credentials but also real-world experience in the relevant

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—9

§2.7

INTELLECTUAL PROPERTY LAW

technology. The expert should be an excellent teacher and communicator. Also, the need for the expert to have a likeable personality while maintaining an attitude of professionalism and confidence should not be underestimated. Finally, the expert must be free from any real or perceived bias. For this reason, former employees of a company, while they may be good technical consultants, may not be the best testifying experts because it will be difficult to overcome the perceived bias in favor of their former employer.

PRACTICE POINTER 

An “expert” with a long résumé that recites dozens of cases in which he or she has testified each year may indeed be an “expert” in testifying, but may not have the credentials that the client needs to credibly evaluate and testify about the patent and products at issue.

F. [2.7] Identifying the Proper Plaintiff Who has standing to sue for patent infringement? The answer, similar to other types of property such as real estate, is the patent owner. In the United States, patents are filed in the name of the individual inventor(s), not in the name of a corporation or joint venture. Often, however, the patent or patent application is assigned by the inventor(s) to a corporation or other entity. An assignment is a legal transfer of title to the patent. Assignments must be in writing to be effective. 35 U.S.C. §261. An assignment conveys the right of exclusivity, the right of transfer of ownership, and the right to bring suit for infringement. Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 67 L.Ed. 516, 43 S.Ct. 254, 256 (1923). Unless expressly stated, however, the assignment does not include the right to sue for past damages (i.e., damages due to the prior owner or assignee of the patent). Interestingly, an assignment may be for the entire patent, for an undivided part or interest in the patent, or for all rights to the patent but only for a specified geographic region of the United States. 35 U.S.C. §261; Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed.Cir. 1998). Once assigned, a patent may be enforced by the assignee as the “successor in title to the patentee.” 35 U.S.C. §100(d). As noted above, a patent may be issued to, or assigned to, two or more individuals or entities. In the case of joint ownership of a patent, all joint owners must join in the suit to enforce the patent. If one joint owner refuses to join in the lawsuit, the suit cannot proceed. Therefore, joint venture agreements may include a clause whereby each owner grants the other joint owner the right to bring infringement suits unilaterally and further agrees to submit to the court’s jurisdiction and to join in any infringement suit initiated by the other joint owner. In this way, the recalcitrant owner can be joined as an indispensable party under Fed.R.Civ.P. 19. In addition, an exclusive licensee may join as a coplaintiff in the litigation. Exclusive licensees do not receive all the rights to a patent, but they do receive the right to exclude others from making, selling, using, or importing the products or methods covered by the patent. Since exclusive licensees enjoy the right to exclude others from practicing the patented invention, they have standing to seek relief from patent infringement — but not on their own. The patentee must also join the suit. See Calgon Corp. v. Nalco Chemical Co., 726 F.Supp. 983, 986 – 987 (D.Del. 1989). If the patentee refuses to join in the patent litigation, it may be possible to join the patentee

2 — 10

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.8

as in indispensable party. Fed.R.Civ.P. 19. See Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128, 1131, 1133 (Fed.Cir. 1995). A licensee who has less than an exclusive license cannot bring an action for patent infringement. Therefore, in considering whether to bring a patent infringement suit, it is important for a potential plaintiff to confirm that it has all the necessary ownership rights to bring the action against the alleged infringer. If other parties must be brought into the lawsuit as plaintiffs, it is generally best to work out the arrangement with them in advance. In approaching other parties with interests in the patent, it should be considered whether all parties have a “community of interest” such that they can share confidential information and/or be represented by the same counsel. Other points to consider are cost-sharing, decision-making authority, and allocation of damage awards. Such arrangements should be fully discussed and confirmed in writing at the outset. From the alleged infringer’s point of view, it is important to consider whether the plaintiff has standing. For example, if only the exclusive licensee or fewer than all of the joint owners are joined as the plaintiff, it may be possible to have the case dismissed for failure to join an indispensable party. In addition, in the case of joint ownership, it may be possible to obtain a license from the non-suing joint owner even after the suit has begun. While all joint owners must be parties to a lawsuit, a joint owner does not need the permission of other joint owners to grant a license (unless the agreement between them states otherwise). A nonexclusive license will protect the licensee from damage claims arising after the grant of the license and will prevent the suing owner from obtaining injunctive relief. It may even be possible, under the decision in Ethicon, Inc. v. United States Surgical Corp., 135 F.3d 1456 (Fed.Cir. 1998), to have the case dismissed if the non-suing owner grants an exclusive license to the defendant. G. [2.8] Investigating the Alleged Infringement A patentee must have a reasonable basis for believing the defendant has violated the plaintiff’s patent rights before a suit can be brought, which means that the patentee must undertake an adequate prefiling investigation. In View Engineering, Inc. v. Robotic Vision Systems, Inc., 208 F.3d 981, 986 (Fed.Cir. 2000), the Federal Circuit said that, at a minimum, the patentee must compare the claims of the asserted patent to the accused device and have “a reasonable basis for a finding of infringement of at least one claim of each patent [being] asserted.” This may be a relatively low burden to meet when the allegedly infringing product is readily available and the presence or absence of the patent limitations can be determined through a visual inspection or other testing of the product. It becomes more difficult, however, to determine whether there is a reasonable basis for finding infringement when the product is difficult to obtain or the patent claims are directed to methods of manufacture, composition percentages, or other features that are not easily detected through inspection or testing of the product. The Federal Circuit recognized this dilemma in Hoffman-La Roche Inc. v. Invamed Inc., 213 F.3d 1359, 1364 (Fed.Cir. 2000). In Hoffman-La Roche, the Federal Circuit affirmed a denial of a motion for sanctions under Fed.R.Civ.P. 11 based on the defendant’s claim that the patentee had failed to conduct an adequate prefiling investigation. Prior to filing the suit, the patentee requested information on the manufacturing process for the product from the defendant. When the defendant refused to provide the requested

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 11

§2.9

INTELLECTUAL PROPERTY LAW

information, the patentee proceeded to file suit setting forth the basis for its belief of infringement (the defendant had filed a Food and Drug Administration application seeking to market a generic form of the patentee’s drug) and also included the efforts it had made to determine infringement and, finally, indicated that further analysis was not possible without the aid of discovery. After initiation of the suit, the parties reached an agreement whereby the patentee was provided with information necessary to determine whether infringement existed. The patentee concluded that infringement did not occur, and the case was dismissed. Under the circumstances, the district court determined that sanctions were not appropriate, and the Federal Circuit agreed. H. [2.9] Identifying the Appropriate Defendant Once the patentee has determined that there is a reasonable basis for concluding that infringement is occurring, the next step is to identify the proper defendant. As discussed in detail in §§2.23 – 2.33 below, infringement may occur either directly or indirectly and more than one entity may be involved in the infringement. Therefore, it is important to determine which entities should be sued for infringement, although it is not necessary to sue every entity involved in the infringing activity. For example, if the patent claim covers a manufacturing process, the manufacturer could be liable for direct infringement under 35 U.S.C. §271(a) for using the patented process in manufacturing a product. However, the seller of the product manufactured by the patented process might also be liable for infringement under 35 U.S.C. §271(g). Alternatively, the patent claim may cover a patented product. In that case, the manufacturer could be liable under §271(a) for making the product, the distributor could be liable under the same section for selling the product, and the end user could be liable for using the patented product. I. Evaluating the Extent of Potential Damages and Remedies 1. [2.10] Damages Under the Patent Statute With newspaper headlines touting the award of patent damages in the hundreds of millions of dollars, patentees can have an unrealistic estimate of the value of their case. Winning an infringement case does not guarantee a huge pot of gold at the end of the day. Section 284 of the U.S. patent statutes, 35 U.S.C. §1, et seq., provides for damages “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” The key language is that the damage award shall be “no less than a reasonable royalty for the use made of the invention.” Thus, the statute sets a floor for the damage award. The question of what constitutes adequate compensation is a question of fact for the jury to find, but §284 further provides that “[w]hen the damages are not found by the jury, the court shall assess them.” Still, significant damages awards in patent cases do occur. Increasingly, these awards have occurred in litigation between non-practicing entities and large corporate defendants. As a result, companies have lobbied Congress for patent reform directed toward damages. While a number of bills introduced in Congress over the years included damages provisions, the Leahy-Smith America Invents Act did not. However, several Federal Circuit decisions, in a sense, have imposed some “reform” on the approach litigants are taking in the area of patent damages. These cases have focused on the framework that a court or jury should apply in assessing what constitutes adequate compensation.

2 — 12

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.11

The first of these cases was Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed.Cir. 2009). The Federal Circuit ruled that the jury’s award was not supported by substantial evidence because the damages expert had not sufficiently tied the economic value of the patented feature to the proposed royalty base and royalty rate. The patentee unsuccessfully argued that the patented feature created the demand for the product as a whole, and the royalty rate, therefore, should be applied to the value of the entire accused product rather than only the value added by the patented feature. The following year, in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed.Cir. 2010), the court rejected as improper a damages expert’s reliance on the royalty rates from other licenses in the same general technology area but not specifically tied to the patents-insuit. Then, in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed.Cir. 2011), the Federal Circuit rejected the damage expert’s reliance on the “25-percent” rule, holding that use of the rule was inadmissible under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 125 L.Ed.2d 469, 113 S.Ct. 2786 (1993), because it is an arbitrary number that had no basis in the relevant facts of the case. Under the 25-percent rule, a reasonable royalty is preliminarily calculated by multiplying the infringer’s profit rate by 25-percent and then applying this percentage to net sales. The Federal Circuit explained that the 25-percent rule is inapplicable because, among other reasons, it cannot account for the unique relationship between the patent and the accused product or between the patentee and the infringer. Uniloc, supra, 632 F.3d at 1313. The court’s rationale for rejecting the 25-percent rule was understandable given the decisions in Lucent, supra, and Uniloc, supra, but it was, nonetheless, surprising, given that the Federal Circuit had apparently tolerated use of the 25-percent rule in earlier cases. See, e.g., Fonar Corp. v. General Electric Co., 107 F.3d 1543, 1553 (Fed.Cir. 1997). Following the issuance of these decisions, district court judges have been demanding more concrete proof from patentees on the issue of damages. No case may illustrate this point more clearly than the decision of Court of Appeals Judge Posner, sitting by designation, in the case of Apple, Inc. v. Motorola, Inc., 869 F.Supp.2d 901 (N.D.Ill. 2012). In this case, Judge Posner excluded experts for both sides (Apple and Motorola had each asserted claims of patent infringement) and dismissed the case, finding that neither side had sufficient evidence to proceed to trial on the issue of damages (and also finding that neither side would be entitled to injunctive relief under the eBay standard (eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006)). Judge Posner acknowledged that while §284 recognizes a prevailing patentee is entitled to adequate compensation, he concluded that the statue did not require a court to impose at least nominal damages or an injunction and that a party’s failure of proof could result in a ruling of no damages. Two basic damage models exist when calculating damages in a patent infringement case: reasonable royalties and lost profits. While most cases involve a damage demand for reasonable royalty, it is possible that a patentee may seek lost profits or a combination of lost profits and reasonable royalty. However, with the above cases in mind, litigants must give careful attention to the evidentiary proof necessary to establish a damage award. a. [2.11] Reasonable Royalty In 1970, the U.S. District Court for the Southern District of New York identified 15 factors that may be relevant in determining a reasonable royalty. Georgia-Pacific Corp. v. United States

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 13

§2.11

INTELLECTUAL PROPERTY LAW

Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970). These factors are referred to as the “Georgia-Pacific factors” and can be generally grouped into three categories: technical factors; financial or business factors; and licensing factors. However, the overriding element of the Georgia-Pacific factors has been the “15th factor,” which is referred to as the “hypothetical negotiation.” This factor attempts to answer the question of what a willing and prudent licensor and licensee would have agreed on as a reasonable royalty rate at the time the infringement began, taking into consideration the preceding 14 technical, business, and licensing factors. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed.Cir. 2011), confirmed that the GeorgiaPacific factors remain relevant in a reasonable royalty analysis, but reiterated the point that “evidence purporting to apply to [any Georgia-Pacific factors] must be tied to the relevant facts and circumstances of the particular case at issue and the hypothetical negotiations that would have taken place in light of those facts and circumstances at the relevant time.” 632 F.3d at 1317. As the Uniloc decision makes clear, not all Georgia-Pacific factors will apply in each case, and they are not given uniform weight. Rather, the facts of each situation dictate their relative utility. In Powell v. Home Depot U.S.A., Inc., 663 F.3d 1221, 1238 (Fed.Cir. 2011), the Federal Circuit held that a patentee’s profit expectation, while a legitimate Georgia-Pacific factor, is not an absolute limit to the amount of the reasonable royalty awarded. Powell awarded the patentee three and one half times its expected profits based on other Georgia-Pacific factors, such as the infringer’s estimated cost savings resulting from indirect benefits conferred through use of the patented product. The Georgia-Pacific factors are not the only factors that the courts will consider in a damages analysis. The most notable departure from the Georgia-Pacific factors was the move away from a negotiation between willing participants to a “hypothetical negotiation” between unwilling participants. In Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978), the court noted that a “reasonable royalty” did not necessitate some level of profit to the licensee and that the infringer risked little if it were held to pay only what the “routine royalty noninfringers might have paid.” Then, in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1585 n.13 (Fed.Cir. 1995) (Nies, J., dissenting), the Federal Circuit expressly stated that the concept of a “willing licensor/willing licensee” is an “inaccurate, and even absurd, characterization when, as here, the patentee does not wish to grant a license.” The Federal Circuit concluded that a royalty rate of 50 percent of the patentee’s estimated lost profits was not unreasonable. This rate was more than 75 percent of the infringer’s average net sales price of the infringing product and more than 33 times greater than the infringer’s net profit. It remains to be seen whether this approach will continue to have merit in light of the decision in Uniloc. In other cases, the courts have made an effort to balance the interests of the infringer in this hypothetical negotiation. For example, a patentee should be aware that under the right circumstances an infringer may successfully argue that the availability of noninfringing alternatives should serve as a limit on the hypothetical negotiation. This concept has been acknowledged by the Federal Circuit. Riles v. Shell Exploration & Production Co., 298 F.3d 1302, 1313 (Fed.Cir. 2002); Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341 (Fed.Cir. 1999).

2 — 14

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.14

b. [2.12] Lost Profits As indicated in §2.11 above, a reasonable royalty is the minimum amount that the patent statutes consider adequate to compensate a patentee for infringement. In some cases, damages have been based on lost profits. To recover its lost profits, a patentee must show that it is reasonably probable that “but for” the infringement the patentee would have made the sales that were made by the infringer. Under this “but for” test, the patentee must prove (1) a demand for the patented product, (2) the absence of acceptable noninfringing substitutes, (3) the ability (in terms of both the patentee’s manufacturing and marketing capabilities) to meet the demand for the patented product, and (4) the amount of profit that the patentee would have made on these sales. Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1156 (6th Cir. 1978). Cf. King Instrument Corp. v. Otari Corp., 767 F.2d 853, 863 – 864 (Fed.Cir. 1985) (noting that Panduit four-part test is not exclusive test). Interestingly, lost profits have included lost profits from sales of goods sold by the patentee not covered by the patent. See King Instruments Corp. v. Perego, 65 F.3d 941 (Fed.Cir. 1995); Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1555 – 1556 (Fed.Cir. 1995). In addition, the Federal Circuit in Lam, Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1067 – 1068 (Fed.Cir. 1983), recognized that lost profits could include price erosion, increased expenses, and damage to market growth resulting from the infringement. Still, there are limits on the ability to recover lost profits in patent infringement cases. In Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1353 – 1354 (Fed.Cir. 1999), the Federal Circuit recognized that the potential availability in a hypothetical marketplace of noninfringing substitutes could be considered before awarding lost profits. However, in Micro Chemical, Inc. v. Lextron, Inc., 318 F.3d 1119, 1122 (Fed.Cir. 2003), the Federal Circuit, in reversing the district court’s finding that a nonmarketed product was “available,” described its decision in Grain Processing as guidelines for assessing whether a noninfringing substitute is available. c. [2.13] Additional Awards Available 35 U.S.C. §284 provides for the award of interest and costs. The statute also provides that the damage award may be increased by the court up to three times the amount found by the jury or assessed by the court. This occurs most often when infringement is found to be willful and deliberate. See, e.g., Comark Communications, Inc. v. Harris Corp., 156 F.3d 1182, 1190 – 1191 (Fed.Cir. 1998). In addition, 35 U.S.C. §285 provides that in “exceptional cases” the court may also award reasonable attorneys’ fees to “the prevailing party.” The prevailing party may be the patentee or the alleged infringer. 2. [2.14] Limitations on Damage Recovery Notwithstanding the clear mandate for an award of damages following a finding of infringement, the patent statutes also limit the patentee’s rights to such an award in certain instances. First, 35 U.S.C. §286 provides a time limitation on the damage period. It prohibits recovery of damages for infringement committed more than six years prior to filing of the infringement claim.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 15

§2.15

INTELLECTUAL PROPERTY LAW

In addition, 35 U.S.C. §287 limits the ability of the patentee to recover damages in various instances. For example, §287(a) requires that the patentee who makes a product covered by a product patent (as opposed to a product made by a patented process) must “mark” the product to give notice to the public that the product is patented. If the patented product is not marked, then the patentee cannot recover damages unless there is proof that the infringer was notified of the infringement (not just the patent) and thereafter continued to infringe. Section 287(b) limits the ability of a patentee to recover damages from a party liable for infringement under §271(g). As in discussed in §2.15 below, §271(g) makes a party who imports, offers to sell, or sells a product manufactured by a process covered by a patent in the United States liable for infringement. This extension of patent liability is tempered somewhat by §287(b), which limits the scope of recoverable damages based on notice to the §271(g) infringer of the alleged infringement. The notice provisions of §287(b) are detailed and have not been heavily tested yet. Whether counsel’s client is a patentee or an alleged infringer, particular care should be given to reviewing both §§271(g) and 287(b) in assessing the scope of potential liability and damages. Sections 252 and 307(b) limit the ability of a patentee to assert against another party any claims that were amended or issued during a reexamination or reissue proceeding if the accused activities did not infringe the original claims and the activity began prior to the grant of the reexam certificate or reissued claims. 35 U.S.C. §§252, 307. An accused infringer does not have to have past knowledge of the patent to take advantage of the “intervening rights” defense, but these intervening rights apply only to the activity that began prior to the grant of the reissue or reexam certificate, and only if the amended or reissued claims are no longer identical in scope to the original claims. Revival of a patent for failure to pay a maintenance fee may give rise to similar intervening rights under 35 U.S.C. §41 for an accused infringer that begins activity after the six-month grace period following expiration of the patent and prior to the payment of a late fee to reinstate the patent. However, an infringer’s ability to assert an intervening rights’ defense is not absolute and varies based on the specific facts. For example, in Fonar Corp. v. General Electric Co., 107 F.3d 1543 (Fed.Cir. 1997), the court required evidence of reliance on the part of the infringer in order to take advantage of the intervening rights defense under §41(c)(2), while no such reliance is required to take advantage of the intervening rights granted under §§252 and 307. 3. [2.15] Facts To Investigate in Assessing Damages Whether the case is likely to turn on lost profits or reasonable royalty, there are a few basic damage-related questions that should be considered at the outset. These questions should include the following: a. Over what time period has the alleged infringement occurred? b. What is the scope of the infringement? Is the patented invention a major aspect of the alleged infringer’s product? What is the extent of sales or potential sales? c. What is the remaining life of the patent?

2 — 16

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.15

d. What is the useful life of the patent — meaning, how likely is it that the patented invention will become outdated or replaced by other technology before the patent expires? e. Does the alleged infringer have notice of the patent? f.

Has the infringer been advised of the patent and the infringement?

g. When did the patentee first become aware of the allegedly infringing activity? h. Has the patentee made any effort to contact the alleged infringer and advise the infringer of the patent and the offending activities? i. If the patent at issue is a product patent, does the patentee make, use, or sell the product? If so, is the product marked? j. If the patent at issue is a manufacturing process patent, is the alleged infringement to be asserted under 35 U.S.C. §271(g)? If so, has adequate notice under §287(b) been given to the alleged infringer? k. Do noninfringing alternatives already exist in the marketplace? l. How easy or difficult would it be for the alleged infringer to design around the patented invention? m. What is the value of the injunction regardless of any monetary damage award? In addition to these basic questions, the patentee and its attorneys should assess whether the patentee can establish a basis for claiming lost profits. Questions to consider include the following: a. Is the patentee selling the patented product? b. What is the market for the patented product? c. Has the patentee licensed others to sell the product? d. Are other noninfringing alternatives available or potentially available in the marketplace? e. Is there a market demand for the product? What is driving the sale of the patentee’s and alleged infringer’s sales? f.

Can the patentee meet the market demand for the product?

g. Are sales of other products tied to the sale of the patented product? h. Can the patentee meet the “but for” test?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 17

§2.15

INTELLECTUAL PROPERTY LAW

PRACTICE POINTER 

If it appears that there is a potential basis for claiming lost profits, it is helpful to retain the assistance of a financial or economic consultant early in the process. Damage consultants can help identify the evidence that will support a lost-profits case, define the relevant market, and, when discovery begins, evaluate the alleged infringer’s financial information.

Even if the case is more likely to result in a reasonable royalty award, there are some additional facts that should be gathered and evaluated in assessing the size of that potential award. Questions to consider include the following: a. Has the patentee licensed others under this or similar patents? If so, what are the terms of the license? b. Is the patentee aware of other patents covering similar technology? If so, what is the licensing rate? c. Is there an industry source available for reporting of licenses? d. What advantage does the patented invention provide over existing products? e. What costs are associated with using noninfringing alternatives, assuming such alternatives exist or are readily available? For example, significant capital expenditures, retooling costs for the alleged infringer or its customers, or a long customer or government approval process may be real-life barriers to switching to a noninfringing alternative that appears available in theory. f. Is there a commercial relationship between the patentee and licensee, such as competitors for the patented product or other products? g. Is the sale of the infringing product improving the sales of the alleged infringer’s other products? Conversely, is it negatively impacting the sale of the patentee’s nonpatented products? h. Is there an established or anticipated profitability of the patented product? i.

What evidence exists of the commercial success of the patented product?

j. What is the patentee’s ability to exploit or promote the patent? How is that being affected by the alleged infringer’s use of the patented invention?

PRACTICE POINTER 

2 — 18

Often, licensing and financial consultants maintain databases of licensing information by the industry that may be helpful in assessing the potential value of a license under the patent.

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.16

4. [2.16] Injunctive Relief In addition to monetary awards, a patentee may obtain injunctive relief. Section 283 of the U.S. patent statutes provides: The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable. 35 U.S.C. §283. For decades, injunctive relief following a finding of infringement was a foregone conclusion. The assumption was premised in part on the fact that a patent provides a patentee with the right to exclude others from making, using, and selling the patented invention. This right led to the corresponding presumption that a patentee would be irreparably harmed if it could not enforce its right to exclude others. In 2006, the Supreme Court issued a decision in eBay Inc. v. MercExchange LLC, 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006), that rejected this reasoning and put injunctive relief in patent cases on an equal footing with injunctive relief in nonpatent cases by requiring that the district court, in evaluating a request for injunctive relief, apply traditional principles of equity. In eBay, the Supreme Court recognized that traditional principles of equity require that a plaintiff “demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” 126 S.Ct. at 1839. It rejected the Federal Court’s assumption that 35 U.S.C. §283 eliminated the need to weigh equitable factors before granting an injunction. However, the Supreme Court also rejected the district court’s assumption that patentees who did not practice the invention or who were willing to license the patentee could not establish irreparable injury. In practice, however, that has often turned out to be the case following eBay. Among the various factors the courts will consider in evaluating whether to enter an injunction are a. whether the parties are competitors; b. whether the patentee has a pattern of licensing its patent; c. whether the infringing product is a relatively small component in a larger, noninfringing product or system; d. the costs associated with redesigning the accused product; e. whether the patentee is losing market share or there is evidence of price erosion; and f.

whether the patentee delayed in enforcing its patent rights.

Following eBay, a successful patentee can no longer assume that it will obtain injunctive relief and that monetary damages will be the more likely result.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 19

§2.17

INTELLECTUAL PROPERTY LAW

III. INITIAL FILINGS AND RELATED ISSUES A. Where To Bring Suit 1. [2.17] Jurisdiction Once the decision has been made to bring an action for either patent infringement or declaratory relief on noninfringement and/or patent invalidity, the next question is where should the action be brought? Under 28 U.S.C. §1338(a), U.S. district courts have original and exclusive subject-matter jurisdiction over any civil action “arising under” the patent laws. Patent infringement suits fall within §1338(a). In addition, 28 U.S.C. §2201 provides the basis for U.S. district courts to hear declaratory-judgment actions seeking noninfringement or patent invalidity. Therefore, any federal district court in which the defendant has sufficient minimum contacts to satisfy personal jurisdiction requirements, and where venue (as discussed in §2.18 below) is proper, is a potential judicial district for these cases. The Leahy-Smith America Invents Act added a new statute, 35 U.S.C. §299, regarding joinder of parties in patent litigation. This new joinder provision prevents patentees from alleging infringement against large groups of companies in a single suit, based only on commonality of the patents in suit or similarities between the products. Under §299(a)(1), accused infringers can only be joined in a single action if the allegations of infringement relate to “the same accused product or process.” Additionally, “accused infringers may not be joined in one action as defendants or counterclaim defendants, or have their actions consolidated for trial, based solely on allegations that they each have infringed the patent or patents in suit.” 35 U.S.C. §299(b). Two exceptions to §299 are cases filed under 35 U.S.C. §271(e)(2) (i.e., Hatch-Waxman cases) or cases in which an accused infringer has waived the limitations on joinder. 2. [2.18] Venue 28 U.S.C. §1400(b) is the venue statute that applies specifically to patent infringement cases, while the general venue provision, 28 U.S.C. §1391(b), applies to declaratory-judgment actions. Section 1400(b) provides that venue is proper “in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” Given the broad definition of “resides” provided in 28 U.S.C. §§1391(c) and 1391(d) for corporate defendants, there are often numerous judicial districts in which venue would be proper. Moreover, courts tend to view patent infringement as a nationwide activity, particularly if the defendant is selling an allegedly infringing product throughout the country. While jurisdiction and venue may be proper in multiple judicial districts, the defendant may seek to have the court transfer the case under 28 U.S.C. §1404 for the convenience of the parties or witnesses or for other reasons permitted under the statute. Regional circuit law, rather than Federal Circuit law, governs transfer motions. Generally, the plaintiff’s choice of forum is given deference, though less deference is given when the forum is not the plaintiff’s home forum. See In re Link_A_Media Devices Corp., 662 F.3d 1221 (Fed.Cir. 2011). Additional factors to consider include the convenience of the

2 — 20

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.19

witnesses and the location of the books and records, as well as public interest factors such as the enforceability of the judgment, judicial economy, and any local interest. Id. Courts tend to respect the plaintiff’s forum selection, but the plaintiff should be cognizant of the risk that a defendant may bring a motion for change of venue.

PRACTICE POINTER 

Motions for change of venue can be time consuming and can easily “derail” the case before it even begins moving, giving a defendant time to “catch up” on the learning curve. Therefore, before selecting a judicial district in which the defendant has only minimal contacts, discuss with the patentee whether its forum selection is worth the time and expense of responding to a motion for change of venue, particularly if the patentee is interested in moving the case quickly from the start.

3. [2.19] District Court’s Intellectual Property Track Record Before making the final decision on where to bring the patent case, counsel should investigate the track record for intellectual property (IP) cases in the district being considered. For example, some patentees or declaratory-judgment plaintiffs will file their cases in the District of Delaware because of the depth of experience that the bench has handling patent cases. Other patentees favor judicial districts that have a reputation for having “rocket dockets,” named for the relative speed in which the bench is able to get cases to trial. For example, the Eastern District of Virginia, the Eastern District of Texas, and the Western District of Wisconsin have reputations for quickly and efficiently moving patent cases to trial. In addition to these jurisdictions, some patentees and alleged infringers favor district courts that have standardized procedural rules for patent cases. These districts include the Northern and Southern Districts of California, the District of New Jersey, the Northern District of Illinois, the Eastern and Southern Districts of Texas, the District of Minnesota, the District of Massachusetts, the Western District of Pennsylvania, the Eastern District of North Carolina, the Northern District of Georgia, and the Western District of Washington. The expectation of the parties is that in these jurisdictions the standardized procedural rules result in fewer discovery disputes and less procedural wrangling. There is a wealth of public information available that reflects the characteristics of each district court. For example, the administrative office of the U.S. Courts provides caseload and nature-of-the-case information by court at www.uscourts.gov/fcmstat. In addition, there are numerous fee-based, online services (e.g., LEXIS) that provide information about judicial districts and even particular judges within a judicial district. For example, the attorneys may want to review a judge’s reported and unreported patent decisions. In addition, the attorneys may want to pull, through PACER (http://pacer.psc.uscourts.gov) or similar services, the electronic docket sheets for any patent cases over which a particular judge has presided. These docket sheets may reflect scheduling orders entered by the judge in other patent cases; they may reflect whether the judge is inclined to hold Markman hearings (Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996)) and the timing of events associated with those hearings; and they may show the judge’s propensity to grant or deny summary judgment motions. This information can be helpful before and after the case is filed.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 21

§2.20

INTELLECTUAL PROPERTY LAW

4. [2.20] The International Trade Commission Another potential “venue” for patent infringement cases is the U.S. International Trade Commission (ITC), the administrative agency responsible for administering the Tariff Act of 1930 (codified at 19 U.S.C. ch. 4). Relief before the ITC can be sought in tandem with a district court action, although the district court case may be stayed pending resolution of the ITC investigation. The relevant portion of the Act is defines as unlawful (B) The importation into the United States, the sale for importation, or the sale within the United States after importation by the owner, importer, or consignee, of articles that — (i)

infringe a valid and enforceable United States patent . . . or

(ii) are made, produced, processed, or mined under, or by means of, a process covered by the claims of a valid and enforceable United States patent. 19 U.S.C. §1337(a)(1). There are a number of procedural and substantive requirements that must be met before filing a complaint under §1337 with the ITC. Moreover, once a complaint is filed, there is a 30-day period of review, during which time the ITC’s Office of Unfair Import Investigations (OUII) reviews the complaint allegations and makes a recommendation to the ITC whether to institute a formal investigation. In most cases, the complainant works informally with the OUII before filing its complaint to make sure that the complaint will meet the substantive and procedural review of the OUII. The OUII remains involved throughout the investigation as a party protecting the public interest. If an investigation is instituted, the case moves quickly to hearing and final ruling. For example, unlike in district court, the parties must respond to discovery requests within 10 days. Hearings are generally set within 9 – 12 months of institution of the investigation, with a target date for resolution of the matter set at 15 months from institution. Therefore, the patentee needs to have its case well organized, its documents gathered, and its experts in place before filing the complaint. A respondent, on the other hand, may be at a significant disadvantage given the time constraints if it has no advance warning of the complaint being filed with the ITC. Some of the elements of proof are different between cases proceeding in district court and the ITC. For example, an ITC action for patent infringement can be brought against only accused imports, not domestic products. 19 U.S.C. §1337(a)(1). In addition, the complainant in an ITC proceeding under §1337 must show that the alleged unfair act (the alleged infringement) is affecting the “domestic industry.” Nevertheless, the ITC has become an increasingly popular forum because the relief available to a successful patent, which is the issuance of an exclusion order prohibiting importation of the accused product and cease-and-desist orders preventing the sale of imported goods from inventory. Unlike district court cases, §1337 investigations do not have to apply the equitable considerations outlined in the Supreme Court’s decision in eBay Inc. v. MercExchange L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006), before issuing an exclusion order. See discussion of eBay in §2.16 above.

2 — 22

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.21

There are numerous additional factors that should be evaluated before deciding whether to file a complaint for patent infringement with the ITC. Some patentees choose to proceed in the ITC and at the same time file a district court proceeding (which may be stayed pending resolution of the ITC investigation). The strategy and considerations that go into these decisions are beyond the scope of this chapter. However, more information about ITC proceedings and §1337 actions can be found at www.usitc.gov. In addition, for an informative treatise on ITC practice and procedure, see Donald K. Duvall et al., UNFAIR COMPETITION AND THE ITC (2007). B. [2.21] Preliminary Injunction Motions One question a patentee may ask is whether it is possible to get quick relief through a preliminary injunction. 35 U.S.C. §283 provides the basis for the court’s authority to grant preliminary injunctions. Preliminary injunctions, however, are extraordinary relief not routinely granted by the courts. High Tech Medical Instrumentation, Inc. v. New Image Industries, Inc., 49 F.3d 1551, 1554 (Fed.Cir. 1995). Although the success rate for preliminary injunctions is higher for patents that have been litigated before, only about two fifths of patents in litigation actually have prior litigation. Jean O. Lanjouw and Joshua Lerner, Tilting the Table? The Use of Preliminary Injunctions, 44 J.L. & Econ. 573 (2001). The statistics for the grant or denial of preliminary injunctions at the time of this handbook’s printing have not been calculated. However, it is possible that more patentees will consider moving for preliminary injunctions in cases in which evidence of willfulness is strong. There is a suggestion in the Federal Circuit decision In re Seagate Technology, LLC, 497 F.3d 1360, 1374 (Fed.Cir. 2007), that a patentee’s failure to move for a preliminary injunction may be a factor in considering whether the accused infringer’s position was objectively reckless for purposes of assessing willfulness. The failure to seek a preliminary injunction may also be a consideration in determining whether a permanent injunction should be granted. The effect of winning a preliminary injunction can give the patentee an enormous advantage throughout the remainder of the litigation. The alleged infringer must contend with the fact that the judge has already decided that the patentee has a strong case and the additional fact that the patentee has, at least initially, overcome some of the defendant’s best arguments for noninfringement and/or invalidity. Conversely, if the patentee loses, not only is its leverage for settlement reduced, but also the alleged infringer has been educated on the patentee’s litigation strategy and how the patentee intends to prove infringement of the patent. In addition, potential competitors may be tempted to use the technology disclosed in the patent without payment or license to the patentee. The factors that the district courts consider in granting or denying preliminary injunctions in patent infringement cases are the same as in other federal cases: 1. Does the moving party have a reasonable likelihood of success on the merits? 2. Will the moving party be irreparably harmed if no injunction issues?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 23

§2.22

INTELLECTUAL PROPERTY LAW

3. Does the balance of hardships, if an injunction were to issue, weigh in favor of one party or the other? 4. What effect will granting an injunction have on the public interest? See, e.g., Reebok International Ltd. v. J. Baker, Inc., 32 F.3d 1552, 1555 (Fed.Cir. 1994) (“The burden is always on the movant to show entitlement to a preliminary injunction.”); Oakley, Inc. v. Sunglass Hut International, 316 F.3d 1331, 1338 – 1339 (Fed.Cir. 2003). In order to answer the first question in the list above, the likelihood of success on the merits, it is necessary for the court to consider the question of infringement and, if raised as an affirmative defense, the questions of patent invalidity and unenforceability. In order to address the questions of infringement and invalidity, the court will need to construe the claims. By now, it should be apparent that a quick resolution of a preliminary injunction motion may not be likely. Both parties are likely to require at least some discovery. Still, there are steps that the patentee can take to increase the likelihood of successfully pursuing a motion for preliminary injunction. First, it is an advantage for the patentee if the patent has been the subject of past litigation in which patent validity was already challenged. This makes it more likely that the patentee will be successful on the merits this second time around. Second, the patentee should consider bringing the motion on just one or two of the infringed claims in order to narrow the focus of the motion. Third, the patentee should provide claim charts comparing the claims to the allegedly infringing device and should have a technical expert available and ready to provide an opinion. A defendant facing a preliminary injunction should make an effort not only to challenge the infringement charge but also to challenge the patent’s validity. If no challenge to validity is put forth, the moving party must still make some showing that the patent is valid. However, patents are presumed valid, and this presumption will control the validity issue for purposes of the preliminary injunction if no validity challenge is made. See Canon Computer Systems, Inc. v. NuKote International, Inc., 134 F.3d 1085, 1088 (Fed.Cir. 1998). If the defendant is able to put forth some evidence of patent invalidity, the burden shifts to the patentee to come forth with evidence that the invalidity defense “lacks substantial merit.” See Genentech, Inc. v. Novo Nordisk, 108 F.3d 1361, 1364 (Fed.Cir. 1997). This can be a difficult hurdle to overcome at the preliminary injunction stage. If the patentee cannot show that the invalidity defense lacks substantial merit, then the motion should be denied. See Helifix Ltd. v. Blok-Lok, Ltd., 208 F.3d 1339, 1351 (Fed.Cir. 2000). Finally, the questions of balance of hardship and public interest can be particularly helpful to the defendant. Resolution of these questions is based on the facts that are brought to the court’s attention. Therefore, if a defendant can provide particular detail about the economic effect on the company if an injunction were to issue, in terms of the number of potential layoffs, impact on suppliers, etc., this information can make the difference when the court begins balancing the respective hardships to each company. C. [2.22] Elements of the Complaint Patent infringement cases require only notice pleading. See, e.g., Fed.R.Civ.P. Form 18, Complaint for Patent Infringement. As a result, some defendants receive little more than the

2 — 24

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.23

identification of the patent at issue when served with the complaint. Some complaints are so bare-bones that the complaint does not clearly identify the claims allegedly infringed or the products accused of infringement. Such complaints may be necessitated by the circumstances but may provide tactical advantages to the patentee. However, patentees should think twice before filing a complaint that provides only minimal notice of the claims and issues in dispute. For example, in In re Bill of Lading Transmission & Processing System Patent Litigation, 681 F.3d 1323 (Fed.Cir. 2012), the Federal Circuit held that Form 18 only covers direct infringement and does not meet the pleading standards for indirect infringement, as set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 167 L.Ed.2d 929, 127 S.Ct. 1995 (2007). A complaint can be a tool to present the patentee’s side of the story to the court and others who may be monitoring patent filings. Whether laid out in detail or more generally, a complaint should include at least: 1. an identification of the parties; 2. the court’s jurisdictional basis and venue; 3. an identification of the patent(s) at issue and preferably an identification of at least one claim of each asserted patent allegedly infringed by defendant; 4. an identification of the patentee’s ownership interest in the patent(s) at issue; 5. an identification of the infringing product or service; 6. whether there is direct or indirect infringement, (or both, and, in the case of indirect infringement, an identification of the direct infringer (particularly if it is not a named defendant)); 7. whether the claims are infringed literally or under the doctrine of equivalents, or both; 8. whether the alleged infringer had actual or constructive notice of the patent(s); 9. whether the infringement is willful and deliberate; 10. whether the case is exceptional under 35 U.S.C. §285; and 11. the type of relief sought, including injunctive or monetary relief, or both, as well as prejudgment interest, any trebling of damages, and/or award of attorneys’ fees as provided by statute. D. [2.23] Primer on the Law of Infringement While there are many articles and whole treatises that address the substantive issues of patent law, this section and §§2.24 – 2.33 below are intended to provide an overview of the law of infringement to place the remaining sections on discovery and other pretrial and trial procedures in context.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 25

§2.24

INTELLECTUAL PROPERTY LAW

The patent statutes provide for three basic forms of infringement: (1) direct infringement under 35 U.S.C. §271(a), (2) inducement to infringe under 35 U.S.C. §271(b), and (3) contributory infringement under 35 U.S.C. §271(c). Determining infringement is a two-step process. North American Container, Inc. v. Plastipak Packaging, Inc., 415 F.3d 1335, 1344 (Fed.Cir. 2005). First, the court interprets the patent claims to determine their scope. Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448, 1454 (Fed.Cir. 1998). Second, the fact-finder (court or jury) compares the accused product or process to the properly construed claims to determine whether the claims cover the accused device. Carroll Touch, Inc. v. Electro Mechanical Systems, Inc., 15 F.3d 1573, 1576 (Fed.Cir. 1993). To find infringement, each element of a claim (or its substantial equivalent) must be present in the accused device or process. Lemelson v. United States, 752 F.2d 1538, 1551 (Fed.Cir. 1985). Each patent claim is considered separately, and infringement of a single claim constitutes infringement of the whole patent. Intervet America, Inc. v. Kee-Vet Laboratories, Inc., 887 F.2d 1050, 1055 (Fed.Cir. 1989). 35 U.S.C. §§271(e) – 271(g) further define infringing activities. Section 271(e) covers certain activities related to the U.S. Food and Drug Administration (FDA). Section 271(f) makes a supplier liable for infringement when the act of supplying (all or substantially all of) the components of a patented invention actively induces the combination of the supplied components outside the United States and when the combination within the United States would have constituted infringement. Since §271(a) prevents the making, using, or selling of patented inventions, §271(f) is intended to prevent suppliers from avoiding infringement by making and selling the components of the patented invention in the United States but not assembling them in the United States. Section 271(g) is directed to preventing importation, sale, or offer for sale of products manufactured by a process patented in the United States, whether or not the manufacturing occurs within the United States. Interestingly, this provision is not limited to imported products. Rather, the seller of a product manufactured within the United States may be liable for infringement even if the patentee chooses not to sue the manufacturer. Thus, this section of the patent statutes provides the owner of a manufacturing process patent with a significant right since it basically extends the scope of a process patent to cover the product as well. 1. [2.24] Direct Infringement Under 35 U.S.C. §271(a), “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.” Two forms of direct infringement are recognized — literal infringement and infringement under the judicially created doctrine of equivalents. a. [2.25] Literal Infringement For a finding of literal infringement, there must be an exact correspondence between the product in question and the limitations of the asserted claim. Frank’s Casing Crew & Rental Tools, Inc. v. Weatherford International, Inc., 389 F.3d 1370, 1378 (Fed.Cir. 2004). In other words, the accused product must include each and every element of a single claim in order to literally infringe that claim. For example, suppose an asserted claim recites “an invention

2 — 26

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.27

comprising from 5 to 40 percent by weight material X.” An accused product comprised of 30percent material X literally infringes the claim. However, if the accused product is 50-percent material X, then the hypothetical claim is not literally infringed. b. [2.26] Infringement Under the Doctrine of Equivalents If an accused product or process does not literally infringe a patent claim, it still may be found to infringe under the doctrine of equivalents. The doctrine of equivalents is a judicial creation not codified in the patent statutes. The purpose of the doctrine is to adequately protect the patentee’s right to exclude by ensuring that a minor, insubstantial alteration is still actionable as infringement so long as there is equivalence between the accused product or process and the claimed elements of the patented invention. Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 94 L.Ed. 1097, 70 S.Ct. 854 (1950). However, the doctrine of equivalents is not intended to expand or broaden the claims themselves. Wilson Sporting Goods Co. v. David Geoffrey & Associates, 904 F.2d 677, 684 (Fed.Cir. 1990). Equivalency is an objective determination to be made by the jury on an element-by-element basis. Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, 1054 (1997). The perspective for determining equivalency should be that of a person with ordinary skill in the pertinent art, evaluated at the time of infringement. The primary analysis for determining equivalency is the “insubstantial differences” test. Dawn Equipment Co. v. Kentucky Farms Inc., 140 F.3d 1009, 1015 – 1016 (Fed.Cir. 1998). In order to infringe under the doctrine of equivalents, the asserted claim’s elements and the accused products or processes must differ only insubstantially from the asserted claim limitation. Warner-Jenkinson, supra. The courts will also apply a triple-identity test (function/way/result) to assist in determining if the changes are insubstantial. Id. If a product or process “performs substantially the same function, in substantially the same way, to achieve substantially the same result,” infringement under the doctrine of equivalents will be found. Dawn Equipment, supra, 140 F.3d at 1016.

PRACTICE POINTER 

Expert testimony is particularly useful in explaining whether the differences between the accused product and the claimed invention are “insubstantial” and in explaining whether the product performs in substantially the same function/way/result as the claimed invention.

(1)

[2.27] Limitations on the doctrine of equivalents

While the doctrine of equivalents affords a patentee greater protection, certain legal limitations may preclude a patentee from relying on the doctrine of equivalents to prove infringement. Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, 1053 (1997). The primary legal limitations on the doctrine of equivalents identified by the Federal Circuit include prosecution history estoppel, the all-elements rule, prior art, dedication to the public, and vitiation of a claim limitation. Prosecution history estoppel and dedication to the public are discussed in §§2.28 and 2.29 below.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 27

§2.28

INTELLECTUAL PROPERTY LAW

(2)

[2.28] Prosecution history estoppel

The most frequently asserted legal limitation to the doctrine of equivalents is prosecution history estoppel. This limitation precludes a patentee from obtaining through litigation a range of equivalency that would encompass subject matter relinquished during prosecution. Southwall Technologies, Inc. v. Cardinal IG Co., 54 F.3d 1570, 1579 (Fed.Cir. 1995). In cases in which an amendment was made to a claim, during prosecution, that narrowed the literal scope of the claim, a rebuttable presumption arises that the narrowing amendment was made for a substantial reason related to patentability. Thus, the patentee has presumably surrendered the particular equivalent at issue. Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 152 L.Ed.2d 944, 122 S.Ct. 1831, 1839 (2002). There are some instances, however, when the amendment cannot reasonably be viewed as surrendering a particular equivalent: The equivalent may have been unforeseeable at the time of the application; the rationale underlying the amendment may bear no more than a tangential relation to the equivalent in question; or there may be some other reason suggesting that the patentee could not reasonably be expected to have described the insubstantial substitute in question. 122 S.Ct. at 1842. In other words, the patentee can overcome the presumption of estoppel by showing that, at the time of the amendment, one skilled in the art could not reasonably have been expected to have drafted a claim that would have literally encompassed the alleged equivalent. Id.

PRACTICE POINTER 

The parties should consider whether the court will admit, and whether it would be helpful to include, testimony of an expert in patent procedures in support of their assertion that an amendment was or was not made for reasons of patentability. Courts may or may not consider such testimony as usurping the function of the judge. In other cases, the parties may rely on a technical expert to argue whether the equivalent was reasonably foreseeable at the time of the amendment.

(3)

[2.29] Subject matter disclosed but not claimed

Similarly, when the patent discloses but fails to claim certain subject matter, the unclaimed subject matter is considered to be dedicated to the public. Johnson & Johnston Associates Inc. v. R.E. Service Co., 285 F.3d 1046, 1054 (Fed.Cir. 2002). Allowing the patentee, through application of the doctrine of equivalents, to recapture the deliberately unclaimed subject matter would conflict with the central role of claims in defining the scope of the patentee’s right to exclude. Id. It also would effectively permit the patentee to avoid a U.S. Patent and Trademark Office (USPTO) examination of that subject matter. Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1107 (Fed.Cir. 1996).

2 — 28

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.31

2. [2.30] Indirect Infringement Even if a defendant does not directly infringe, it may be liable to the patentee for indirect infringement under 35 U.S.C. §§271(b) and 271(c), inducement, and contributory infringement, respectively. However, before a defendant can be found liable for indirect infringement, there must be a showing of direct infringement by some person or entity. Joy Technologies, Inc. v. Flakt, Inc., 6 F.3d 770, 774 (Fed.Cir. 1993). The direct infringer need not be a party to the litigation. Typically, for indirect infringement, an accused infringer encourages others to pursue a course of conduct that leads to direct infringement (inducement) or sells a key part of the overall, infringing device (contributory infringement). These activities are considered infringing because they assist, support, or encourage a direct infringer’s actions.

PRACTICE POINTER 

Depending on the facts of the particular case, it may be more effective to sue the indirect infringer rather than the indirect infringer’s numerous customers or end users who are the direct infringers.

a. [2.31] Elements of Inducement Under §271(b) Under 35 U.S.C. §271(b), “[w]hoever actively induces infringement of a patent shall be liable as an infringer.” Though §271(b) does not expressly impose a knowledge requirement, the caselaw requires that the alleged inducer actively and knowingly aid and abet the direct infringement. Water Technologies Corp. v. Calco, Ltd., 850 F.2d 660, 668 (Fed.Cir. 1998). Thus, the inducer must have knowledge of the patent. See Insituform Technologies, Inc. v. CAT Contracting, Inc., 385 F.3d 1360 (Fed.Cir. 2004). To satisfy the knowledge requirement, the alleged inducer must have actual knowledge that the induced acts constitute patent infringement. Global-Tech Appliances, Inc. v. SEB S.A., __ U.S. __, 179 L.Ed.2d 1167, 131 S.Ct. 2060, 2068 (2011). However, a showing of “deliberate indifference to a known risk” that the induced acts may violate an existing patent is not sufficient to find inducement, whereas a showing of “willful blindness” (i.e., the accused inducer subjectively believes there is a high probability that a patent exists and takes deliberate actions to avoid learning of that fact) could satisfy the knowledge requirement. 131 S.Ct. at 2070 – 2071). Typically, inducement cases involve one individual (the inducing infringer) providing another (the direct infringer) with information about how to make or use the allegedly infringing product or perform the allegedly infringing process. It is not enough to show that the alleged inducer supplied a product that could be used in an infringing manner or that the defendant provided information or instructions on how to use the product in the infringing manner. In addition, there must be evidence of knowledge and intent to induce the infringement. See Ferguson Beauregard/Logic Controls, Division of Dover Resources, Inc. v. Mega Systems, LLC, 350 F.3d 1327, 1342 (Fed.Cir. 2003), quoting Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544, 553 (Fed.Cir. 1990) (“[I]t must be established that the defendant possessed specific intent to encourage another’s infringement and not merely that the defendant had knowledge of the acts

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 29

§2.32

INTELLECTUAL PROPERTY LAW

alleged to constitute infringement.”). The requirement that the alleged infringer knew or should have known his or her actions would induce infringement includes the requirement that the alleged infringer knew of the patent. DSU Medical Corp. v. JMS Co., 471 F.3d 1293, 1304 (Fed.Cir. 2006). The patentee should also be aware that the scope of relief may be more limited. Injunctive relief should not prevent a party from providing products that can be used in infringing and noninfringing manners. It should only prevent a party from providing instructions or otherwise encouraging others from actually using the product in an infringing manner.

PRACTICE POINTER 

Attorneys need to exercise creativity in obtaining relief that will adequately compensate the patentee when the infringer is liable for inducing infringement of others.

b. [2.32] Elements of Contributory Infringement Under §271(c) To prove contributory infringement under 35 U.S.C. §271(c), the patentee must establish (1) that the defendant sold, offered to sell, or imported a component of a patent apparatus or a material or apparatus for use in practicing a patented process; (2) that the component constituted a material part of the patented invention; (3) that the alleged contributory infringer knew the component to be especially adapted for use in the infringement of the patent; and (4) that the component did not constitute a staple article suitable for a substantial noninfringing use. See, e.g., Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476, 12 L.Ed.2d 457, 84 S.Ct. 1526, 1533 – 1534 (1964); Preemption Devices, Inc. v. Minnesota Mining & Manufacturing Co., 803 F.2d 1170, 1174 (Fed.Cir. 1986). Section 271(c) requires the alleged infringer know that “the combination for which his component was especially designed was both patented and infringing.” Global-Tech Appliances, Inc. v. SEB S.A., __ U.S. __, 179 L.Ed.2d 1167, 131 S.Ct. 2060, 2067 (2011), citing Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476, 12 L.Ed.2d 457, 84 S.Ct. 1526, 1533 (1964). 3. [2.33] Willful Infringement A potential infringer has an affirmative duty to exercise due care to determine whether it is infringing and must do so prior to infringing. In re Seagate Technology, LLC, 497 F.3d 1360, 1371 (Fed.Cir. 2007). Failure to exercise due care may result in a finding of willful infringement, and with it the potential for treble damages. 35 U.S.C. §284 (“the court may increase the damages up to three times the amount found or assessed”); 35 U.S.C. §285 (“The court in exceptional cases may award reasonable attorney fees to the prevailing party.”). Willfulness is evaluated using a two-prong test having both objective and subjective components. In re Seagate, supra. The objective prong, decided by the judge, requires clear and convincing evidence that the accused infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. Bard Peripheral Vascular, Inc. v. W.L. Gore & Associates, Inc., 682 F.3d 1003 (Fed.Cir. 2012). The subjective prong focuses on the infringer’s

2 — 30

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.34

subjective knowledge and requires the patentee to demonstrate that the objectively defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer. Seeking and obtaining competent legal advice prior to engaging in a potentially infringing activity may present a well-grounded defense to willfulness; however, the protection is not absolute. Ortho Pharmaceutical Corp. v. Smith, 959 F.2d 936, 944 (Fed.Cir. 1992). Cases in which willful infringement is found, despite the presence of an opinion of counsel, generally involve situations in which the opinion of counsel was either ignored or found to be incompetent. Read Corp. v. Portec, Inc., 970 F.2d 816, 828 – 830 (Fed.Cir. 1992). E. [2.34] Responding to Complaint (Answers, Affirmative Defenses, and Counterclaims) A defendant in a patent infringement case has the same rights under Fed.R.Civ.P. 12 as any defendant would in federal court. Rules of service, jurisdiction, standing, etc., apply as they would in any federal case. Therefore, options such as motions for judgment on the pleadings, motions to strike or dismiss, and motions for a more definite statement are available, as in any case. A defendant is reminded to review §2.7 above on what constitutes a proper plaintiff in a patent infringement action. In addition, the defendant in a patent infringement case, if answering the complaint, has the same obligation as other defendants involved in federal court litigation to respond to each allegation in accordance with the Federal Rules of Civil Procedure, including Rules 10 and 12. The purpose of this section and §§2.35 – 2.47 below is to focus on patent-specific defenses available to an alleged infringer. In general, these defenses include noninfringement, patent invalidity, patent unenforceability, laches, estoppel, license, and the like, which are explained in these sections. In addition to raising noninfringement, patent invalidity, and patent unenforceability as affirmative defenses, some defendants also assert these claims or defenses in the form of a counterclaim for declaratory judgment of noninfringement, patent invalidity, and/or patent unenforceability. By asserting these issues in the form of a counterclaim, the defendant — who bears the burden on the issues of patent invalidity and unenforceability — positions itself as a plaintiff on these issues. The alleged infringer may also exercise greater control over the patentee’s ability to dismiss the case without prejudice once a counterclaim is filed. With the exception of patent unenforceability, affirmative defenses (or their corresponding counterclaims) do not require detailed pleading. Notice pleading is typically sufficient. Often, a defendant, in asserting an affirmative defense, simply provides notice to the patentee that the defendant intends to rely on, for example, the affirmative defense of invalidity based on 35 U.S.C. §§101 – 103 and/or 112. However, a split has developed among district courts, as some courts have applied the requirements set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 167 L.Ed.2d 929, 127 S.Ct. 1955 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 173 L.Ed.2d 868, 129 S.Ct. 1937 (2009), to counterclaims for patent validity. For example, in Cleversafe, Inc. v. Amplidata, Inc., No. 11 C 4890, 2011 WL 6379300 (N.D.Ill. Dec. 20, 2011), the court dismissed counterclaims of invalidity because the defendant did not articulate why the patents were invalid

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 31

§2.35

INTELLECTUAL PROPERTY LAW

or provide any factual support. See also Groupon, Inc. v. MobGob LLC, No. 10 C 7456, 2011 WL 2111986 (N.D.Ill. May 25, 2011) (dismissing counterclaim); Tyco Fire Products LP v. Victaulic Co., 777 F.Supp.2d 893 (E.D.Pa. 2011) (dismissing counterclaim but not affirmative defense). In contrast, since patent unenforceability has, at its base, an allegation of fraud, most jurisdictions require more than just notice pleading when asserting a claim of patent unenforceability. Also, the bench views claims of patent unenforceability with great skepticism, particularly when asserted at the outset of a case, because the defense has been overused and sometimes abused in the past. Therefore, a more detailed recitation of facts in support of these defenses substantiates the allegations being made. 1. [2.35] Defense or Claim of Noninfringement Although not technically an affirmative defense because the patentee has the burden of proving infringement, an accused infringer will invariably raise as an affirmative defense the fact that it is not infringing any valid and enforceable claim of the patent. In addition to the claim or defense of noninfringement, the defendant likely will add one or more additional affirmative defenses. 2. [2.36] Affirmative Defense of Invalidity A common affirmative defense of an alleged infringer is that the asserted patent claim is invalid for failure to satisfy one or more of the statutory requirements of patentability, as set forth in 35 U.S.C. §§101 – 103 and 112. Each claim of a patent is presumed valid unless shown invalid by clear and convincing evidence. 35 U.S.C §282; Abbott Laboratories v. Baxter Pharmaceutical Products, Inc., 471 F.3d 1363, 1367 (Fed.Cir. 2006). Because the patent owner benefits from the presumption of validity under 35 U.S.C. §282, the burden rests on the accused infringer to rebut the presumption of validity. The Supreme Court reaffirmed that this burden requires “clear and convincing” evidence of invalidity and that it does not shift to a lesser standard based on the type of evidence presented by the accused infringer. Microsoft Corp. v. i4i Limited Partnership, __ U.S. __, 180 L.Ed.2d 131, 131 S.Ct. 2238 (2011). To meet its burden, the accused infringer will often present new evidence that was not considered by the patent examiner during the patent’s prosecution. When the infringer relies only on the same evidence that was already considered by the patent examiner, the burden of proof is not easily satisfied. Hughes Aircraft Co. v. United States, 717 F.2d 1351, 1359 (Fed.Cir. 1983). a. [2.37] Section 101 Defenses Under 35 U.S.C. §101, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor.” Accordingly, three possible invalidity defenses exist under §101: lack of utility; nonpatentable subject matter; and double patenting. Generally, these issues will arise during patent prosecution. See, e.g., In re Comiskey, 554 F.3d 967 (Fed.Cir. 2009); In re Nuijten, 500 F.3d 1346 (Fed.Cir. 2007). Occasionally, however, they will also arise in the context of litigation. Bilski v. Kappos, __ U.S. __, 177 L.Ed.2d 792, 130 S.Ct. 3218 (2010).

2 — 32

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.38

b. [2.38] Section 102 Defenses The Leahy-Smith America Invents Act completely redrafted 35 U.S.C. §102, as discussed below, as a result of the change from a “first-to-invent” to a “first-to-file” system. The changes to §102 are scheduled to go into effect on March 16, 2013. Accordingly, both the pre-March 16, 2013 (pre-2013) version of §102 and the March 16, 2013 (2013) version of §102 are discussed below. The pre-2013 version of §102 encompassed two basic issues: novelty and loss of the right to a patent. Novelty was covered in the pre-2013 version of §§102(a) and 102(e) – 102(g). Sections 102(b) – 102(d) were commonly referred to as the “statutory bars” and concerned situations in which the right to a patent might be lost even if the invention was novel. Several differences existed between the statutory bars and novelty, the most basic of which was the timing of events necessary to trigger their respective provisions. Novelty was directed only toward events that occurred before the time of invention. Conversely, the statutory bars were triggered by events occurring after the time of invention. If, at the time of invention, the inventor satisfied the pre-2013 version of §§102(a) and 102(e) – 102(g), then the invention was novel and eligible for a patent; the right to the patent could have been subsequently lost if post-invention events triggered one of the statutory bars. Under the pre-2013 version of §102, the primary novelty provision relied on by alleged infringers was 35 U.S.C. §102(a). Under the pre-2013 version of §102(a), an invention was “anticipated” and novelty was destroyed if, prior to the date on invention, the invention was (1) known by others in the United States, (2) used by others in the United States, (3) patented anywhere in the world, or (4) described in a printed publication anywhere in the world. For prior knowledge or use of an invention by others to anticipate and invalidate a patent’s claims, it must be knowledge or use that was accessible to the public. Similarly, printed publications, to anticipate, had to be sufficiently accessible to the interested public by customary search aids and disclose the invention adequately enough for a person of skill in the art to put it into practice. In re Hall, 781 F.2d 897, 898 – 899 (Fed.Cir. 1986); Application of Bayer, 568 F.2d 1357, 1359 – 1360 (C.C.P.A. 1978). Secrecy and confidentiality notices on printed publications could negate a finding that the document was accessible to the public. See Northern Telecom, Inc. v. Datapoint Corp., 908 F.2d 931, 936 – 937 (Fed.Cir. 1990). When the testimony of a witness was presented as evidence of public knowledge or use, the testimony had to be corroborated, regardless of the witness’ level of interest in the suit. Finnigan Corp. v. United States International Trade Commission, 180 F.3d 1354, 1366 – 1367 (Fed.Cir. 1999). The pre-2013 version of 35 U.S.C. §102(b) listed four different events that, if they occurred more than one year prior to the application’s filing, barred the right to patent an invention, regardless of its novelty. The four statutory bars were — if more than one year prior to the filing date — that the invention was (1) patented anywhere, (2) described in a printed publication anywhere, (3) in public use in the United States, or (4) on sale in the United States. The policies underlying the statutory bar of the pre-2013 version of §102(b) were (1) discouraging the withdrawal of inventions that had been placed into the public domain, (2) encouraging early filing to promote the prompt and widespread disclosure of inventions, (3)

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 33

§2.39

INTELLECTUAL PROPERTY LAW

allowing the inventor a reasonable amount of time to determine the potential economic value of a patent, and (4) prohibiting the inventor from commercially exploiting the invention for a period greater than the statutory period. Baxter International, Inc. v. Cobe Laboratories, Inc., 88 F.3d 1054, 1058 (Fed.Cir. 1996). Pre-2013, 35 U.S.C. §102(g) was the foundation for the United States’ first-to-invent system. Under the pre-2013 version of §102(g), a person was entitled to a patent unless the invention was made by another inventor and that inventor did not abandon, suppress, or conceal the invention. The pre-2013 version of 102(g)(2) controlled in litigation and required inventors to establish an invention date prior to all inventions made in the United States by another inventor that had not been abandoned, suppressed, or concealed. The AIA completely revises §102, removing subsections 102(a) – (g) and instead providing that a person shall be entitled to a patent unless: (1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention; or (2) the claimed invention was described in a patent issued under section 151, or in an application for patent published or deemed published under section 122(b), in which the patent or application, as the case may be, names another inventor and was effectively filed before the effective filing date of the claimed invention. These 2013 provisions eliminate the distinction between acts occurring in the United States and acts occurring abroad that have long defined prior art under §102. The 2013 version of §102(a)(2) defines prior art based on the “first-to-file” standard and also expands the scope of foreign-filed applications as prior art based on their earliest effective filing date, which would be the foreign filing date for such applications. The 2013 version of §102(b) provides exceptions to the prior art recited in the 2013 version of §102(a). The 2013 version of §102(b)(1) permits a one-year grace period for the inventor(s) own disclosure or a disclosure by another who directly or indirectly obtained the inventions from the inventor. The 2013 version of §102(b)(2) excludes as prior art disclosures in a patent or patent application if the disclosed subject matter was obtained directly or indirectly from the inventor(s). c. [2.39] Section 103 Obviousness Defense The Leahy-Smith America Invents Act also substantially redrafted 35 U.S.C. §103. As with the changes to 35 U.S.C. §102, the 2013 version of §103 is scheduled to go into effect on March 16, 2013. Accordingly, both the pre-March 16, 2013 (pre-2013) version of §103 and the March 16, 2013 (2013) version of §103 are discussed below. Under the pre-2013 version of §103, a patent was invalid, even if the invention was not identically disclosed or described elsewhere, if the invention as a whole would have been obvious to a person of ordinary skill in the pertinent art at the time the invention was made. Unlike the test for invalidity based on anticipation, which required strict identity between the elements of the

2 — 34

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.40

claim at issue and a single piece of prior art, the defense of obviousness allowed the combining of multiple prior art references to show that the patented invention would have been obvious to one skilled in the art at the time the invention was made. Eli Lilly & Co. v. Zenith Goldline Pharmaceuticals, Inc., 471 F.3d 1369, 1377 (Fed.Cir. 2006). The Supreme Court’s landmark opinion Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684, 698 (1966), established an analytical framework for determining the issue of obviousness. In 2007, the Supreme Court reaffirmed the Graham framework for the determining obviousness. KSR International Co. v. Teleflex Inc., 550 U.S. 398, 167 L.Ed.2d 705, 127 S.Ct 1727, 1741 – 1742 (2007). Obviousness is ultimately a question of law, but it depends on several underlying factual inquiries. Graham, supra. The following four Graham factors were relevant in an obviousness analysis: (1) the level of ordinary skill in the art; (2) the scope and content of the pertinent prior art; (3) differences between the claimed invention and the prior art; and (4) secondary considerations that serve as objective indicia of nonobviousness. Id. The AIA amends §103 to recite: A patent for a claimed invention may not be obtained, notwithstanding that the claimed invention is not identically disclosed as set forth in section 102, if the differences between the claimed invention and the prior art are such that the claimed invention as a whole would have been obvious before the effective filing date of the claimed invention to a person having ordinary skill in the art to which the claimed invention pertains. Patentability shall not be negated by the manner in which the invention was made. Due to the move to a “first-to-file” system, the main differences between the 2013 version of §103 and the pre-2013 version of §103(a) is the timing of the determination of obviousness. The 2013 version of §103 shifts the determination of what was known in the art to “before the effective filing date of the claimed invention.” d. [2.40] Affirmative Defenses Based on §112 Disclosure Requirements The disclosure requirements of 35 U.S.C. §112 are intended to fulfill the purpose of the patent system, “to promote the progress of Science and useful Arts.” U.S.CONST. art. I, §8, cl. 8. The statutory language of §112 has been interpreted as identifying four slightly different but closely related disclosure requirements: (1) written description; (2) enablement; (3) best mode; and (4) definiteness of claims. 35 U.S.C. §112. These requirements pertain to the informative quality of the patent specification, specifically, the written description and drawings. Section 112(a) provides that [t]he specification shall contain . . . the manner and process of making and using [the invention], in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains . . . to make and use the same.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 35

§2.40

INTELLECTUAL PROPERTY LAW

Enablement requires that the description teach how to achieve the claimed invention without undue experimentation. Chiron Corp. v. Genentech, Inc., 363 F.3d 1247, 1253 (Fed.Cir. 2004). Any mode of making and using the claimed invention is sufficient, and the inventor need not set forth how or why the invention works. Engel Industries, Inc. v. Lockformer Co., 946 F.2d 1528, 1533 (Fed.Cir. 1991); Newman v. Quigg, 877 F.2d 1575, 1582 (Fed.Cir. 1989). Enablement looks to placing the subject matter of the claims generally in the possession of the public. If, however, the applicant develops specific instrumentalities or techniques that are recognized at the time of filing as the best way of carrying out the invention, then the best mode requirement imposes an obligation to disclose that information to the public as well. SpectraPhysics, Inc. v. Coherent, Inc., 827 F.2d 1524, 1532 (Fed.Cir. 1987). Section 112(a) further provides that the specification “shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.” The best mode requirement is a question of fact and ensures that the public gets a full and fair disclosure of the preferred embodiment of the invention. Dana Corp. v. IPC Limited Partnership, 860 F.2d 415, 418 (Fed.Cir. 1988). Interestingly, the Leahy-Smith America Invents Act eliminated failure to disclose the best mode as a defense for an alleged infringer in a patent infringement action. However, the Leahy-Smith America Invents Act did not eliminate the best mode requirement under §112 and it might still be used to invalidate a patent in a proceeding in front of the U.S. Patent and Trademark Office. The final requirement of §112 is the requirement that the patent’s specification also contain a written description of the invention. A written description requirement is a separate requirement from an enablement requirement. See Ariad Phamarceuticals, Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1344 (Fed.Cir. 2010). The written description requirement is a legal requirement that the specification must adequately support the claims. “Adequate description of the invention guards against the inventor’s overreaching by insisting that he recount his invention in such detail that his future claims can be determined to be encompassed within his original creation.” Vas-Cath Inc. v. Mahurkar, 935 F.2d 1555, 1561 (Fed.Cir. 1991), quoting Rengo Co. v. Molins Machine Co., 657 F.2d 535, 551 (3d Cir. 1981). The purpose of the written description is to “ensure that the scope of the right to exclude, as set forth in the claims, does not overreach the scope of the inventor’s contribution to the field of the art as described in the patent specification.” Ariad, supra, 598 F.3d at 1353 – 1354, quoting University of Rochester v. G.D. Searle & Co., 358 F.3d 916, 970 (Fed.Cir. 2005). The written description requirement is not a demanding standard, and a defense of invalidity for failure to satisfy the requirement is rarely successful. In some situations, drawings alone can provide a satisfactory written description of the invention. Vas-Cath, Inc., supra, 935 F.2d at 1564. The most common scenario in which the written description requirement arises is when the patentee is attempting to get an earlier filing date by claiming that the first-filed application (the priority application) contains a disclosure adequate to support the claims in a subsequent patent. The claim definiteness requirement found in 35 U.S.C. §112(b) requires that each patent “shall conclude with one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as his invention.” Issued patents are difficult to invalidate on the basis of claim indefiniteness. The claim indefiniteness is a purely legal issue that

2 — 36

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.41

arises when claims are not “amenable to construction” or are “insolubly ambiguous.” Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 655 F.3d 1364, 1373 (Fed.Cir. 2010), cert. dismissed, 133 S.Ct. 97 (2012). However, absolute clarity is not required to find a claim term definite, as a claim term may be definite even when discerning the meaning is a “formidable [task] and the conclusion may be one over which reasonable persons will disagree.” 655 F.3d at 1373, quoting Source Search Technologies, LLC v. LendingTree, LLC, 588 F.3d 1063, 1076 (Fed.Cir. 2009). The viewpoint for determining claim definiteness is that of a person of ordinary skill in the relevant art. Hybritech Inc. v. Monoclonal Antibodies, Inc., 802 F.2d 1367, 1385 (Fed.Cir. 1986). For example, if the evidence provides “a general guideline and examples” sufficient to enable a person of ordinary skill in the art to determine the scope of the claims, then the claims are not indefinite even though the language of magnitude “not interfering substantially” does not provide reference to a precise numerical measurement. See Enzo Biochem, Inc. v. Applera Corp., 599 F.3d 1325, 1335 (Fed.Cir. 2010), cert. denied, 131 S.Ct. 3020 (2011). One notable exception that seems to have developed is “means plus function” claims directed to software means. The Federal Circuit, beginning with WMS Gaming, Inc. v. International Game Technology, 184 F.3d 1339 (Fed.Cir. 1999), and continuing in a number of cases (including Aristocrat Technologies Australia PTY Ltd. v. International Game Technology, 521 F.3d 1328 (Fed.Cir. 2008)) has consistently held that reference to a general computer with “appropriate programming” does not provide sufficient structure for purposes of §112 and will result in a finding of indefiniteness. 3. [2.41] Affirmative Defense Based on License Rights and/or Patent Exhaustion A defense to infringement may involve the existence of a license agreement permitting otherwise infringing conduct. Studiengesellschaft Kohle, M.B.H. v. Hercules, Inc., 105 F.3d 629, 634 (Fed.Cir. 1997). For example, a patentee may assert that a licensee is infringing when the licensee’s actions are believed to have exceeded the scope of the license. The licensee, in defense, will assert that the license under the patent properly excused its activities, and thus there can be no liability for infringement. Interpretation of the parties’ license agreement is a question of contract interpretation under state law. See Cyrix Corp. v. Intel Corp., 77 F.3d 1381, 1384 (Fed.Cir. 1996). Another defense, similar but distinct to a licensing defense, is patent exhaustion. In Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 170 L.Ed.2d 996, 128 S.Ct. 2109, 2122 (2008), the Supreme Court found that doctrine applies to method patents when “[t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article.” The Court justified its ruling by explaining: The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B. [Emphasis in original.] 128 S.Ct. at 2120.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 37

§2.42

INTELLECTUAL PROPERTY LAW

4. [2.42] Affirmative Defense Based on Statutory Bar on Damages, Failure to Mark, and/or Intervening Rights As discussed in §§2.10 – 2.15 above, there are a number of factors that could extinguish or limit a patentee’s ability to obtain damages following a finding of infringement. For example, no liability for damages can exist if the acts constituting infringement were committed more than six years prior to the commencement of the infringement action. 35 U.S.C. §286 (six-year limitation on recovering damages that occurred prior to filing lawsuit). A patentee’s failure to mark its own products that practice the invention may limit recovery of patent damages for some infringed claims. Also, intervening rights may accrue to the accused infringer if the patent is subject to reexamination or reissue proceedings. 5. [2.43] Affirmative Defense Based on Laches The equitable doctrine of laches may be used to assert an absence of liability under 35 U.S.C. §282(b)(1). Laches targets the patentee’s neglect or delay in bringing the suit due to the potential prejudice to the adverse party resulting from that delay. If proved, the defense of laches does not bar the plaintiff’s action in its entirety but results only in the denial of damages for infringement committed prior to the filing of the lawsuit. Laches does not prevent liability for post-filing damages or injunctive relief. The Federal Circuit has set forth two elements that an alleged infringer asserting a laches defense must satisfy: (a) the patentee’s delay in bringing suit was unreasonable and inexcusable; and (b) the accused infringer suffered material prejudice or injury due to the delay. A.C. Aukerman Co. v. R.L. Chaides Construction Co., 960 F.2d 1020, 1032 (Fed.Cir. 1992). Despite these criteria, the defense of laches is extremely fact dependent and should remain flexible in its application. Id. (“a determination of laches is not made upon the application of ‘mechanical rules’ ”). The length of time deemed unreasonable depends on circumstances unique to each case. “The period of delay is measured from the time the [patentee] knew or reasonably should have known of the [possibly infringing acts] to the date of suit.” Id. [C]onstructive knowledge of the infringement may be imputed to the patentee even where he has no actual knowledge . . . if [the] activities are sufficiently prevalent in the inventor’s field of endeavor. Wanlass v. General Electric Co., 148 F.3d 1334, 1338 (Fed.Cir. 1998). A presumption of laches arises in the defendant’s favor when the patentee has delayed in bringing suit for more than six years. Hemstreet v. Computer Entry Systems Corp., 972 F.2d 1290, 1293 (Fed.Cir. 1992). Common evidence offered by the patentee to justify the delay includes proof of the patentee’s participation in other infringement litigation, ongoing negotiations with the accused infringer, poverty, illness, dispute over ownership of the patent, and the limited extent of the infringement. Material prejudice to the alleged infringer can take the form of either evidentiary or economic prejudice. Evidentiary prejudice arises by reason of the accused infringer’s inability to present a

2 — 38

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.46

full and fair defense due to the loss of documents, the death of a witness, the loss of memory inherent in the passing of time, or the like. Alternatively, economic prejudice arises when the accused infringer has encountered a change in economic position during the period of delay that would have been prevented by an earlier filing of the suit. For example, if prior to the patentee’s filing of the suit, the defendant made a substantial investment in equipment necessary to produce the accused product that would not have occurred but for the delay, then laches may bar the infringement action. 6. [2.44] Affirmative Defense of Equitable Estoppel In contrast to laches, equitable estoppel does not require the passage of an unreasonable period of time prior to filing suit. A.C. Aukerman Co. v. R.L. Chaides Construction Co., 960 F.2d 1020, 1041 – 1042 (Fed.Cir. 1992). Additionally, equitable estoppel bars all relief on a claim of infringement, not just prefiling damages. Thus, there is no presumption in favor of the accused infringer, regardless of the delay, but the severity of the penalty for equitable estoppel is considerably more. In establishing a defense of equitable estoppel, the defendant must prove the following required elements: (a) there was misleading conduct by the patentee such that the alleged infringer reasonably inferred that the patentee did not intend to enforce its patent against the alleged infringer; (b) the defendant relied on that misleading conduct; and (c) due to its reliance, the alleged infringer will be materially prejudiced if the patentee is allowed to proceed with its claim. 960 F.2d at 1028. The first element, misleading conduct by the patentee, does not require an affirmative act by the patentee. The conduct can include inaction or silence when there was an obligation to speak. 960 F.2d at 1042. To show the second element, reliance on the misleading conduct, the infringer must have had a relationship or communication with the patentee that “lulls the infringer into a sense of security in going ahead.” 960 F.2d at 1043. Last, establishing material prejudice is similar to laches; the prejudice can be either economic or evidentiary. 7. [2.45] Affirmative Defense of Patent Unenforceability Alleged infringers also have available the affirmative defense of unenforceability. If the defense of unenforceability is proved, the whole patent may be rendered unenforceable, although perhaps not permanently. 35 U.S.C. §282. The two basic unenforceability defenses asserted under §282 are (a) inequitable conduct and (b) patent misuse. These defenses are largely equitable in nature and are applied at the court’s discretion. a. [2.46] Inequitable Conduct The defense of inequitable conduct alleges that the court should refuse to enforce a patent that the patentee procured through improper conduct before the U.S. Patent and Trademark Office. “Each individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the Office, which includes a duty to disclose to the Office all information known to that individual to be material to patentability.” 37 C.F.R. §1.56(a). Inequitable conduct can therefore be based on either a patentee’s omission or affirmative

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 39

§2.47

INTELLECTUAL PROPERTY LAW

misrepresentation of material information with the intent to deceive. Kingsdown Medical Consultants, Ltd. v. Hollister Inc., 863 F.2d 867, 872 (Fed.Cir. 1988). Both materiality and intent must be proved by clear and convincing evidence. Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1259 (Fed.Cir. 2000). Intent to deceive the USPTO is commonly inferred from circumstantial evidence since direct evidence is unlikely because few inventors will confess to intentionally misleading the USPTO to obtain the patent. The inference is especially strong when the materiality of information is particularly high. “The more material the omission or the misrepresentation, the lower the level of intent required to establish inequitable conduct.” Critikon, Inc. v. Becton Dickinson Vascular Access, Inc., 120 F.3d 1253, 1256 (Fed.Cir. 1997). However, a finding that the particular conduct amounts to “gross negligence” does not by itself justify an inference of intent to deceive. Kingsdown, supra, 863 F.2d at 873. “[T]he involved conduct, viewed in light of all the evidence, including evidence indicative of good faith, must indicate sufficient culpability to require a finding of intent to deceive.” 863 F.2d at 876. If the court determines that the patent was obtained through inequitable conduct, the patent is rendered permanently unenforceable. While both “intent to deceive” and “materiality” were recognized elements of an inequitable conduct charge, a question remained as to whether one element could be assumed if evidence of the other element was high. In Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed.Cir. 2011), the Federal Circuit clearly said “no,” and confirmed that evidence of both elements must be present. At the same time, the Federal Circuit narrowed the opportunities for proving inequitable conduct. Id. For a reference to be material, the Federal Circuit concluded that the art would have prevented issuance of the patent; that “but for” the nondisclosure or the misdescription of the reference, the patent would not have issued.

PRACTICE POINTER 

The defense of patent unenforceability, and in particular inequitable conduct, is viewed with skepticism by the courts because it has been asserted without a strong basis by many defendants in the past. Therefore, a defendant should consider delaying assertion of this defense until it has had time to gather strong evidence in support of this defense. A court should not deny a motion for leave to amend a complaint based on the fact that a defendant waited to gather additional evidence in discovery before asserting a charge of inequitable conduct, particularly since the facts that would support such a charge are often available only through the patentee.

b. [2.47] Patent Misuse An alleged infringer may also assert an affirmative defense of patent misuse under 35 U.S.C. §282. Patent misuse (broadly defined as preventing a patentee from using its patent in a manner inconsistent with the public interest) is a method of limiting abuse of patent rights separate from, but strongly influenced by, the antitrust laws. The defense of patent misuse requires the accused infringer to prove that the patentee has impermissibly exploited its patent right to exclude beyond the bounds of patent law, thereby harming competition. B. Braun Medical Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed.Cir. 1997). The crucial inquiry is whether, by imposing

2 — 40

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.48

conditions on the sale or license of a patented device or process, the patentee has “impermissibly broadened the ‘physical or temporal scope’ of the patent grant.” Windsurfing International, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed.Cir. 1986). A finding of patent misuse renders the entire patent unenforceable, at least for a period of time. The patentee may regain the right to enforce the patent if it is possible for the patentee to “purge” the misuse. Riker Laboratories, Inc. v. Gist-Brocades N.V., 636 F.2d 772, 777 (D.C.Cir. 1980). The misuse is purged and the patent is considered rehabilitated when “it is made to appear that the improper practice has been abandoned and that the consequences of the misuse of the patent have been dissipated.” Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 86 L.Ed. 363, 62 S.Ct. 402, 405 (1942). Courts have generally based determinations of patent misuse on a limited number of specific acts by the patentee, such as tying, payment of license fees beyond the scope of the patent, and/or efforts to exclude nonpatented activities. USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 510 (7th Cir. 1982). Allegations of patent misuse must be viewed in light of the safe harbors created by the 1988 patent misuse reforms, Pub.L. No. 100-703, 102 Stat. 4674 (1988), which added 35 U.S.C. §§271(d)(4) and 271(d)(5). These provisions address refusals to license and tying, respectively. Section 271(d)(4) gives patentees the right to refuse to license a patent on any terms, even if they are not practicing the invention. Section 271(d)(5) reflects the current trend in antitrust law: permitting tying arrangements and exclusive dealing agreements as long as the patent owner does not have market power in the relevant market for the patented product. F. [2.48] Filing of Jury Demands In a patent dispute, the right to a jury trial is fully protected by the Seventh Amendment whether it occurs in the context of a patent infringement suit or a declaratory-judgment action seeking invalidity or noninfringement. Patlex Corp. v. Mossinghoff, 758 F.2d 594 (Fed.Cir. 1985). There are no special rules for patent jury cases; the laws and rules of procedure generally applicable to civil jury cases apply without exception to patent jury cases. Factual patent issues triable before a jury include infringement, willfulness, content and scope of prior art, differences between prior art and patented claims, level of ordinary skill in the art, equivalents, best mode, and damages. In addition, some issues, such as obviousness, raise questions of law but are based on underlying factual inquiries. GNB Battery Technologies, Inc. v. Exide Corp., 78 F.3d 605 (Fed.Cir. 1996) (available on Westlaw). There is no infallible method for determining whether to opt for a jury trial or bench trial in a patent dispute. Some parties are concerned that, when a patent case is given to a jury instead of the court, the problems involved in submission become considerably more complex and require substantially more effort or the jury will have greater difficulty understanding the technology. However, the job of the attorneys and the witnesses is to explain the technology in such a way that it makes sense to the trier of fact, whether that ends up being the judge or the jury. Sometimes cases tried before a judge become overly complex because the parties do not make the “extra” effort that they would make in front of a jury to clearly and simply explain the technology to the judge. Still, a jury, unlike a judge, is approaching the case cold, without any advance

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 41

§2.49

INTELLECTUAL PROPERTY LAW

knowledge of the nature of the technology, the patent claims, or the parties — issues with which the judge will likely have become familiar through the discovery and pretrial process, particularly if the judge has construed the claims prior to trial. Popular perceptions of jury bias, such as favoring patentees over infringers, individuals over corporations, and local over foreign corporations, may influence the decision to make a jury demand and should not be totally ignored. See FTI Consulting, 2011 Intellectual Property Statistics, www.fticonsulting.com/ global2/media/collateral/united-states/intellectual-property-statistics.pdf (2012), for a breakdown of bench and jury patent cases for 2006 – 2011.

IV. CASE MANAGEMENT ISSUES AND DISCOVERY A. Preliminary Issues 1. [2.49] Protective Orders The parties should agree on the terms of a protective order to protect confidential business information early in the discovery process. The protective order should address whether anyone, in addition to the attorneys and the experts, should have access to the confidential business information. Some courts have very strict requirements on the terms to be included in a protective order. Other courts have standardized protective orders to be used in most cases. The parties should be particularly sensitive to the protection and handling of confidential electronic software and code. For example, a protective order may include a “prosecution bar” limitation, which restricts an attorney’s ability to prosecute patents in a defined area of technology if the attorney accesses highly sensitive technical information under the protective order. Other protective orders contain provisions that address the handling of source code. These provisions can be highly contentious, and the restrictions can have effects not just on the immediate case, but also subsequent actions. It benefits both sides to address these issues at the outset of the case and to work to a solution that will protect the clients’ interests in maintaining the secrecy of their highly confidential, proprietary information without unduly impeding the attorneys in preparing the case.

PRACTICE POINTERS 

The following is an example of a prosecution bar provision in a protective order: PROSECUTION BAR 1. “PROSECUTION BAR” materials refers to those HIGHLY CONFIDENTIAL RESTRICTED ACCESS designated materials produced in this lawsuit. However, the following documents and materials shall not be considered or classified as PROSECUTION BAR materials: (a) publicly available publications, including patents and published patent applications; (b) materials regarding thirdparty systems or products that were publicly known, on sale, or in public use; (c) information that is otherwise publicly available; and (d) documents and information related solely to damages or reasonably royalty rates.

2 — 42

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.49

2. Any person reviewing any producing party’s PROSECUTION BAR materials shall not, for a period commencing upon receipt of such information and ending one year following the conclusion of this case (including any appeals) engage in any PROSECUTION ACTIVITY on behalf of a party asserting a patent in this case or any successor in ownership of such party, or any assignee or exclusive licensee of a patent asserted in this case. Furthermore, any person reviewing PROSECUTION BAR materials of another party shall not, for a period commencing upon receipt of such information and ending one year following the date a party provides a certification of destruction or return of all HIGHLY CONFIDENTIAL RESTRICTED ACCESS INFORMATION engage in any PROSECUTION ACTIVITY involving the subject matter of this litigation. PROSECUTION ACTIVITY shall mean: (a) prepare and/or prosecute or otherwise aid in preparing or prosecuting any patent application (or portion thereof); (b) prepare or otherwise aid in the drafting or amending of patent claim(s); (c) for a patent application, interference, reissue, or reexamination proceeding, participate on behalf of a party asserting a patent in this case or any successor in ownership of such party, or any assignee or exclusive licensee of a patent asserted in this case, or (d) provide advice, counsel, or suggestions regarding claim scope and/or language, embodiment(s) for claim coverage, claim(s) for prosecution, or products or processes for coverage by claim(s), when each of (a) – (d) applies to any patent application (or portion thereof), whether design or utility, and either in the United States or abroad, any reissue or reexamination application or proceeding, any opposition, or any interference of any patent or patent application on behalf of a party asserting a patent in this case or any successor in ownership of such party, or any assignee or exclusive licensee of a patent asserted in this case. Nothing in this section shall be construed as preventing any attorney from challenging the validity or enforceability of any patent, including without limitation in proceedings in this Court or reexamination or reissue proceedings in the United States or foreign patent offices. The parties expressly agree that the PROSECUTION BAR set forth herein shall be personal to any attorney who reviews PROSECUTION BAR material and shall not be imputed to any other persons or attorneys at the attorney’s law firm or company. Attorneys and staff involved in patent prosecution of claims involving methods, apparatus, or systems relating to technology or methods described in PROSECUTION BAR materials, shall be ethically walled, in those matters, from attorneys and staff with access to PROSECUTION BAR materials. 

The following are examples of some of the terms that may be included in source code provisions. These terms vary widely depending on the nature of the source code being disclosed: SOURCE CODE TERMS 1. Native source code shall be produced in native format as it is organized and kept in the ordinary course of business. Native source code may either be produced for inspection or produced on an external media to the receiving party.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 43

§2.49

INTELLECTUAL PROPERTY LAW

2. Any source code that is produced shall be made available for inspection in electronic format at the producing party’s option, at (a) the offices of the producing party’s primary outside counsel of record in this action; (b) a producing party’s place of business; or (c) a location mutually agreed upon by the receiving and producing parties. 3. Source code shall be made available during regular business hours (8:00 a.m. to 6:00 p.m. local time) on five business days’ notice. 4. One computer without Internet access or network access to other computers shall be provided at the place of inspection. 5. Subject to the other provisions of this protective order, the requesting party may bring with it to the place of inspection a cell phone and laptop computer. 6. Beginning one week prior to the beginning of trial and continuing through the end of trial, access to the source code shall be provided within 20 miles of the trial location. 7. Prior to trial, the parties agree to negotiate in good faith the manner and logistics of said source code access. For purposes of this protective order, the term “Inspection Session” shall mean any reasonably contiguous series of days in which the Receiving Party is conducting an inspection of the source code. 8. All source code will be made available by the producing party to the receiving party’s outside counsel and/or experts in a private room on a secured computer without Internet access or network access to other computers, as necessary and appropriate to prevent and protect against any unauthorized copying, transmission, removal or other transfer of any source code outside or away from the computer on which the source code is provided for inspection (the “Source Code Computer”). 9. The producing party shall be obligated to install such tools or programs necessary to review and search the code produced on the platform produced. 10. The receiving party’s outside counsel and/or experts may request that other commercially available licensed software tools for viewing and searching source code be installed on the secured computer. The receiving party must provide the producing party with the installers/executables for such software tool(s) at least two days in advance of the inspection. 11. The receiving party’s outside counsel and/or expert shall be entitled to take notes relating to the source code but may not copy substantial portions of the source code into the notes. For purposes of this provision, 15 or more lines of code is “substantial.”

2 — 44

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.51

12. No copies of all or any portion of the source code may leave the room in which the source code is inspected except as otherwise provided herein. Further, no other written or electronic record of the source code is permitted except as otherwise provided herein. 13. At its option, the producing party may produce source code to the requesting party on electronic media in an encrypted format (as an alternative to printouts). 14. Upon request, the producing party shall produce printed copies of [insert terms] of the source code. 15. The receiving party shall maintain a log of all printed or electronic copies of the source code that are delivered by the receiving party to any qualified person. The log shall include the names of the recipients of copies and locations where the copies are stored. The log shall be provided by the receiving party to the producing party upon request.

2. [2.50] Electronic Discovery Although parties routinely seek discovery of information in electronic form, the cost and time involved in collecting and reviewing electronic data for potential production can be daunting. The parties should reach an agreement early in the case on the scope of a party’s obligation, if any, to search servers, including e-mail servers, for potentially responsive electronic documents. A number of jurisdictions, recognizing the cost and potential discovery abuses that e-discovery can impose on a case, have developed model rules for handling e-discovery. For example, Chief Judge Rader of the Federal Circuit, unveiled the Federal Circuit’s Model Rule on E-Discovery in 2011. That model rule provides a number of provisions, which according to Judge Rader, are designed to “streamline e-discovery, particularly email production, and require litigants to focus on the proper purpose of discovery — the gathering of material information — rather than on unlimited fishing expeditions.” Randall R. Rader, The State of Patent Litigation, www.ediscoverylaw.com/uploads/file/raderstateofpatentlit[1](1).pdf. The Federal Circuit’s Model Rule limits, among other things, the number of custodians from whom a party can seek e-mail as well as the number of search terms to be used when seeking e-discovery. See www.ediscoverylaw.com/uploads/file/ediscovery-model-order[1](1).pdf. 3. [2.51] Case Management Plan In many jurisdictions, there are no special rules that apply to discovery in patent cases. However, certain judicial districts, such as the Northern District of Illinois, the Northern District of California, and the Eastern District of Texas, have standardized rules that govern patent cases. These rules set forth the procedure and timing by which the parties must disclose certain basic and detailed information about their case. For example, these rules require that the patentee provide its preliminary infringement contentions to the alleged infringer at the beginning of the case. Following receipt of these contentions, the alleged infringer must provide its preliminary invalidity contentions to the patentee. Since these contentions are often critical information for

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 45

§2.52

INTELLECTUAL PROPERTY LAW

the parties to receive but also difficult to promptly obtain through discovery, these rules eliminate many of the battles and letter-writing campaigns that can bog down the discovery process. The rules further provide a schedule for identifying the claim terms that the parties believe should be construed by the court and the procedure for briefing the court on the parties’ proposed constructions of these terms. Again, this is information that the parties will inevitably need to exchange but traditionally have been reluctant to provide for fear of having to commit to a particular position in the litigation.

PRACTICE POINTER 

Even if a case is not pending in a judicial district with standardized patent rules, the standardized Patent Local Rules can act as a guide in proposing a case management plan.

B. [2.52] Motions To Bifurcate A defendant should consider moving to bifurcate certain issues for purposes of discovery and/or trial. In patent cases, it is not uncommon to informally or formally delay discovery on the issue of willful infringement and in particular the question of whether the defendant intends to rely on the advice of counsel until late in the discovery process. Delaying or bifurcating damages discovery becomes more problematic. The patentee will be interested in learning more financial details about the defendant’s infringing activities in order to better evaluate the potential scope of damages. If the alleged infringer has raised invalidity based on 35 U.S.C. §103 (obviousness) as an affirmative defense, a patentee is likely to argue that information on sales and profits of the patented product is relevant to assessing the commercial success of the patented product. The commercial success of the patented product, whether it is the success of the patentee’s patented product or the alleged infringer’s product, is evidence of “secondary considerations” that may rebut a claim of obviousness. In some cases, the parties are able to reach an agreement, or the court sets a schedule, delaying discovery on detailed financial information until the end of discovery. However, it is unlikely that a court will bifurcate the issue of damages at trial. C. [2.53] Motions To Sever and Transfer As noted in §2.17 above, the Leahy-Smith America Invents Act added a new statute, 35 U.S.C. §299, that prevents patentees from alleging infringement against large groups of companies in a single suit based only on commonality of the patents in suit or similarities between the products. However, when a patentee has sued multiple defendants alleging infringement of unrelated — and often competing — products, the defendants may wish to consider a motion to sever the claims into individual cases and transfer. In Pinpoint Inc. v. Groupon, Inc., No. 11 C 5597, 2011 WL 6097738 (N.D.Ill. Dec. 5, 2011), Pinpoint alleged infringement of three patents by L.L. Bean, Orbitz, Groupon, and Hotwire. The court granted L.L. Bean’s motion to sever and transfer to the District of Maine, concluding that L.L. Bean was misjoined in the action because the defendants were unrelated companies with nothing in common except for the claim of infringement.

2 — 46

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.54

D. [2.54] Typical Discovery Sought by Patentee The patentee bears the burden of proving by a preponderance of the evidence that the patent claims are infringed. If willful infringement is asserted, the patentee also bears the burden of proof on this issue. Finally, if infringement is proved, the patentee has the burden of proving with reasonable certainty the amount of damages adequate to compensate it for the infringement. Although the patent statutes provide for damages in an amount not less than a reasonable royalty, that damage award cannot be speculative. Therefore, a patentee is likely to have a different set of goals in discovery than the alleged infringer. The patentee should seek at least the following general categories of information through the various methods of discovery available under the federal rules: 1. technical and functional details about the accused product (practice or service); 2. development history of the accused product, including alternatives that were explored and rejected and failed attempts to develop the accused product; 3. commercial success of the accused product, such as increased sales of the product over the competition or the defendant’s prior products and documents tying these sales to the patented features; 4. information showing or suggesting that there was a long-felt need for the accused product or the claimed invention; 5. efforts to copy parts or all of the claimed invention or to design a product that achieves the same results as the claimed invention; 6. marketing and instructional materials relating to the accused product, which may show that the alleged infringer is inducing use of the accused product in an infringing manner and may highlight and promote the patented features; 7. financial information about the product, the market for the product, and other goods sold in combination with the accused product; 8. information showing or suggesting that the alleged infringer had knowledge of the patent and/or that its activities were likely to infringe the patent; 9. financial information supporting the patentee’s claim for damages as outlined in §§2.10 – 2.16 above; and 10. details, through responses to contention interrogatories and other discovery requests, that elaborate on the facts that support the alleged infringer’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), affirmative defenses, claims of noninfringement, and design-around efforts, if any.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 47

§2.55

INTELLECTUAL PROPERTY LAW

E. [2.55] Typical Discovery Sought by Alleged Infringer The alleged infringer bears the burden of proving by clear and convincing evidence that the patent is invalid or unenforceable. It also bears the burden of proving the other affirmative defenses that it has asserted in response to the complaint. In order to meet this burden, the alleged infringer should seek from the patentee, or third parties, discovery of at least the following general categories of information: 1. history of development of the claimed invention, including the date of conception of the invention and reduction to practice and evidence of the inventor’s preferred mode of practicing the invention; 2. state of the industry at the time of the invention, including steps taken by the inventor and/or others within the inventor’s company to keep current on development within the industry; 3. efforts to commercialize the claimed invention either by the inventor, by his or her company, or by third parties; 4. public use or offers to sell (particularly efforts before commercialization) the claimed invention, including evidence of display, use, or testing of the invention by the inventor or his or her company in connection with customers, potential customers, or other third parties; 5. prior art that may invalidate the patent, including exploration of industry standards and industry publications, meeting records, and governmental information about the industry at the time of the claimed invention; 6. details of the prosecution of the patent application, including prosecution of foreign counterparts, and related applications, including abandoned applications and invention disclosures; 7. acceptable noninfringing alternatives and design-around options; 8. facts that tend to refute the patentee’s claims of commercial success or the patentee’s other evidence of secondary considerations (e.g., evidence refuting claim of long-felt need for the claimed invention, evidence that the alleged inventor was designing around and not copying the claimed invention, etc.); 9. facts that tend to limit the amount of damages necessary to adequately compensate the patentee for any infringement; and 10. details through responses to contention interrogatories and other discovery requests that elaborate on the facts that support the patentee’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), claims of infringement, and damages.

2 — 48

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.57

V. CLAIM CONSTRUCTION/MARKMAN HEARINGS A. [2.56] Court Has Responsibility of Construing Claim Terms Before a determination of patent infringement or invalidity can be made, the scope and meaning of the terms used in the patent claims at issue must be interpreted to define the extent of legal protection available to the patentee. Markman v. Westview Instruments, Inc., 52 F.3d 967, 979 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996). In a patent case, claim construction is a question of law reserved exclusively for the court. The Federal Circuit (the appellate court to which all patent cases are appealed) reviews a district court’s claim construction de novo, and a number of cases are reversed each year on the ground that the district court applied the wrong claim construction in evaluating the question of infringement or invalidity. Throughout the claim construction process, the viewpoint for interpreting disputed claim terms is that of a hypothetical person having ordinary skill in the relevant art. 52 F.3d at 986. See Interactive Gift Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1332 (Fed.Cir. 2001). Often, a court’s particular construction of the disputed claims can be dispositive of the patent controversy. Courts have a large degree of flexibility in deciding when and how to construe the claims. Although the term “Markman hearing” has become synonymous with claim construction, the decision in Markman, supra, did not mandate that the court hold a separate hearing at which it hears evidence and/or argument on the scope and meaning of dispute claims terms. Still, many courts and parties are opting to pursue Markman hearings or at least separate briefing on the issue of claim construction. In cases in which the facts are not disputed and the issue of infringement boils down to a question of claim construction, resolution of the claim construction can provide the parties with some certainty and direction. In other cases, the claim construction is not a hotly contested issue and can be addressed at the summary judgment stage or before trial in connection with the jury instructions. B. [2.57] Evidence Considered in Construing Claims Whether the court holds a separate Markman hearing (Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed.Cir. 1995), aff’d, 116 S.Ct. 1384 (1996)), decides claim construction based on the briefs of the parties, or hears evidence of claim construction at trial, it is important to know what evidence the Federal Circuit has identified as relevant in construing claim terms. In construing claim terms, the Federal Circuit distinguishes between intrinsic and extrinsic evidence. Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576, 1582 (Fed.Cir. 1996). “Intrinsic evidence” is comprised of the public record of the patent, including (1) the claims, (2) the written description, and (3) the prosecution history, if in evidence. Interactive Gift Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1331 (Fed.Cir. 2001). “Extrinsic evidence” consists of any evidence external to the patent and its file history, such as technical articles, inventor testimony, expert testimony, and, when relevant, statements made in the prosecution of a related foreign application. Vitronics, supra, 90 F.3d at 1584. When interpreting a disputed claim, the court first looks to the intrinsic record, beginning with the claims themselves followed by the specification and prosecution history, respectively. Phillips v. AWH Corp., 415 F.3d 1303, 1313 (Fed.Cir. 2005). Only if the claim language remains

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 49

§2.58

INTELLECTUAL PROPERTY LAW

unclear after reference to the intrinsic evidence is it appropriate for the court to consider extrinsic evidence to resolve the lack of clarity. Interactive Gift, supra, 256 F.3d at 1332. Extrinsic evidence may never be used to vary or contradict the clear meaning of the claim language. Vitronics, supra, 90 F.3d at 1582. Although technically extrinsic evidence, dictionaries, treatises, and encyclopedias are often useful to the court to help determine the meaning of claim terms when construing patent claims. Phillips, supra, 415 F.3d at 1321. Dictionaries offer the court objective and reliable sources of information on the established meanings that would have been attributed to the terms of the claim by those of skill in the art at the time of the patent’s issuance. Id. However, dictionaries may not contradict any definition found or ascertained from the intrinsic evidence. 415 F.3d at 1322 – 1323. C. [2.58] Process of Claim Construction Claim construction begins with the words of the claim. Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576, 1582 (Fed.Cir. 1996). “In construing claims, the analytical focus must begin and remain centered on the language of the claims themselves.” Brookhill-Wilk 1, LLC v. Intuitive Surgical, Inc., 334 F.3d 1294, 1298 (Fed.Cir. 2003), quoting Interactive Gift Express, Inc. v. Compuserve Inc., 256 F.3d 1323, 1331 (Fed.Cir. 2001). It is the general rule that claim terms be given their plain, ordinary, and customary meaning to one of ordinary skill in the relevant art. Prima Tek II, L.L.C. v. Poylpap, S.A.R.L., 318 F.3d 1143, 1148 (Fed.Cir. 2003). The Federal Circuit has created a “heavy presumption” in favor of terms receiving their ordinary meaning. CCS Fitness, Inc. v. Brunswick Corp., 288 F.3d 1359, 1366 (Fed.Cir. 2002). In establishing a claim term’s ordinary meaning, the court may initially look to the claim language itself. Phillips v. AWH Corp., 415 F.3d 1303, 1314 (Fed.Cir. 2005). In some cases, the ordinary meaning of claim language may be readily apparent, and claim construction involves little more than application of the widely accepted meaning. 415 F.3d at 1313. However, in many cases that give rise to litigation, determining the ordinary meaning requires examination of terms that have a particular meaning in a field of art. Id. After reference to the claim language, the court will resolve any remaining ambiguities by looking first to the specification, then to the prosecution history. 415 F.3d at 1315 – 1317. The presumption in favor of claim terms receiving their ordinary meaning is overcome only when the party advocating departure from the ordinary meaning has demonstrated that the inventor intended to deviate from the ordinary and accustomed meaning of a claim term by (1) acting as his or her own lexicographer and clearly setting forth an explicit definition for a term, or (2) characterizing the invention in the intrinsic record in a manner that deviates from the term’s ordinary meaning. 415 F.3d at 1316. For example, in Abbott Laboratories v. Syntron Bioresearch, Inc., 334 F.3d 1343, 1354 (Fed.Cir. 2003), quoting In re Paulsen, 30 F.3d 1475, 1480 (Fed.Cir. 1994), the Federal Circuit explained that, when an inventor acts as his or her own lexicographer in the specification, the inventor must point out “with reasonable clarity, deliberateness, and precision” how these terms differ from their ordinary meaning. Typical phrases found in a patent specification in which the court has determined the patentee acted as his or her own lexicographer include “the structure defined above is,” “as used herein,” and “the invention encompassing not

2 — 50

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.60

only conventional methods, but also includes.” SciMed Life Systems, Inc. v. Advanced Cardiovascular Systems, Inc., 242 F.3d 1337, 1344 (Fed.Cir. 2001); Cultor Corp. v. A.E. Staley Manufacturing Co., 224 F.3d 1328, 1330 (Fed.Cir. 2000); Kopykake Enterprises, Inc. v. Lucks Co., No. CV 99-354 FMC (CWx), 2000 U.S.Dist. LEXIS 21610 (C.D.Cal. Apr. 26, 2000). After reviewing the specification, a court also will consider the prosecution history to determine whether statements made during the patent’s prosecution affect the claim construction. Phillips, supra, 415 F.3d at 1317; Rexnord Corp. v. Laitram Corp., 274 F.3d 1336, 1343 (Fed.Cir. 2001). For example, a statement in the prosecution history may represent an express disclaimer of a specific claim interpretation. Prima Tek II, supra, 318 F.3d at 1149. Courts, in their discretion, may refer to extrinsic evidence. Phillips, supra, 415 F.3d at 1319. For example, extrinsic evidence may educate the court regarding the field of the invention and may assist the court to determine what a person of ordinary skill in the art would understand claim terms to mean. Id. Extrinsic evidence, though, is unlikely to result in proper claim construction unless considered in the context of the intrinsic evidence. Id. D. Special Claim Construction Considerations 1. [2.59] Preamble In most claims, the preamble is not intended to be limiting. However, this is not always the case. The question of whether to treat the preamble as a claim limitation is determined on a caseby-case basis. The court will look at the claim as a whole and the invention described in the patent in reaching its conclusion. Applied Materials, Inc. v. Advanced Semiconductor Materials America, Inc., 98 F.3d 1563, 1572 – 1573 (Fed.Cir. 1996). A preamble will be treated as a limitation of the claimed invention if it recites essential structure or steps or if it is necessary to give meaning to the claim. Eaton Corp. v. Rockwell International Corp., 323 F.3d 1332, 1339 (Fed.Cir. 2003). For example, “[w]hen limitations in the body of the claim rely upon and derive antecedent basis from the preamble, then the preamble may act as a necessary component of the claimed invention.” Id. If, however, the body of the claim can stand on its own without reference to the preamble, then the language of the preamble should not serve as a limitation. 2. [2.60] Construing Means Plus Function Claims Pursuant to 35 U.S.C. §112, claims can be written in what is commonly referred to as “means plus function” format. Use of the word “means” triggers the presumption, but not the mandate, that the claim element at issue is to be interpreted as a means-plus-function element. Transonic Systems, Inc. v. Non-Invasive Medical Technologies Corp., 75 Fed.Appx. 765, 777 (Fed.Cir. 2003); Cole v. Kimberly-Clark Corp., 102 F.3d 524, 531 (Fed.Cir. 1996). To rebut the presumption and fall outside §112, the alleged means-plus-function claim element must be shown to recite a sufficient, definite structure for performing the stated function. Phillips v. AWH Corp., 415 F.3d 1303, 1311 (Fed.Cir. 2005). Whether a claim element is written in means-plus-function format is decided on an element-by-element basis based on the patent and its prosecution history. Cole, supra, 102 F.3d at 531.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 51

§2.61

INTELLECTUAL PROPERTY LAW

Claim interpretation under §112 is a two-step process. The court must (a) identify the function explicitly recited in the claim, and (b) identify the corresponding structure set forth in the written description that performs the particular function set forth in the claim. Acromed Corp. v. Sofamor Danek Group, Inc., 253 F.3d 1371, 1382 (Fed.Cir., 2001). The scope of the claimed function is derived from the claim language itself. Transonic, supra, 75 Fed.Appx. at 778. “The corresponding structure to a function set forth in a means-plus-function limitation must actually perform the recited function, not merely enable the pertinent structure to operate as intended.” Asyst Technologies, Inc. v. Empak, Inc., 268 F.3d 1364, 1371 (Fed.Cir. 2001). Likewise, for terms construed under §112, structure disclosed in the specification is the corresponding structure only if the specification or the prosecution history clearly links or associates that structure to the function recited in the claim. Northrop Grumman Corp. v. Intel Corp., 325 F.3d 1346, 1352 (Fed.Cir. 2003). In other words, structural limitations from the written description that are unnecessary to perform the claimed function may not be imported into the claim. Id. If a claim element is phrased in means-plus-function language, the scope of that element is construed to cover the corresponding structure disclosed in the specification for performing the recited function as well as equivalents thereto. Symbol Technologies, Inc. v. Opticon, Inc., 935 F.2d 1569, 1575 (Fed.Cir. 1991).

VI. [2.61] SUMMARY JUDGMENT, TRIAL, AND APPEAL Summary judgment is as appropriate in a patent case as in any other case. Most often, the issues of infringement and invalidity are addressed in a summary judgment motion. Summary judgment on the issue of patent unenforceability due to inequitable conduct is more difficult to obtain because the issue of intent to deceive is particularly difficult to resolve on summary judgment. If the case proceeds beyond summary judgment and fails to settle, the parties can expect a trial in a patent case to extend over the course of several days or weeks. It is not unusual for patent cases to exceed 20 days of trial. For this reason, a judge is reluctant to bifurcate issues for trial, particularly if it means that a jury would have to return weeks or months later to resolve bifurcated issues. In order to keep the court and the jury interested, and to make sure the technology is fully understood by the fact-finder, most parties find that multimedia presentations are the best means for presenting highly technical evidence.

PRACTICE POINTER 

It is advisable to consult with jury or litigation support consultants to get their insights on whether counsel’s presentation of highly technical issues is understandable and meaningful. This may include presentation of the materials or anticipated witness testimony to a jury focus group. To obtain the maximum benefit from this exercise, it is best to undertake these activities well in advance of trial.

Under 28 U.S.C. §1295, the U.S. Court of Appeals for the Federal Circuit has exclusive nationwide jurisdiction over appeals from any case in which the district court’s jurisdiction was based, in whole or in part, on 28 U.S.C. §1338. Prior to 1982, appeals of disputes involving

2 — 52

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.62

patent law were made to the circuit court in which the district court was located. However, in 1982, amid concerns over forum-shopping and a lack of national uniformity in patent law, Congress formed the Federal Circuit. The result has been the creation of a single, coherent body of patent law on which district courts and litigants can accurately rely. Interestingly, however, counterclaims based on federal patent law rights, in a suit in which the complaint asserts a nonpatent-based cause of action, will not cause the dispute to be one “arising under” federal patent law. In Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 153 L.Ed.2d 13, 122 S.Ct. 1889 (2002), the Supreme Court interpreted “arising under” to mean that Federal Circuit appellate jurisdiction does not extend to those cases in which only the counterclaim asserts patent law rights. Thus, a counterclaim alone cannot serve as the basis for §1338 “arising under” jurisdiction, and such cases can be appealed only to the circuit court in which the district court is located. 122 S.Ct. at 1893 – 1894.

VII. [2.62] CHECKLIST I. Business Considerations in Bringing a Patent Infringement Suit  Is the patentee currently exploiting the patented invention? • Through sale or use of the invention? • Through licensing of others? • Other?  Does the patentee have plans to exploit the invention?  How important is the patented invention to the overall business goals?  How important is the patented invention to the business goals of others in the industry?  Is the patented invention exclusively available from the patentee?  Are others licensed to use the patent?  How important is it to maintain exclusivity in the marketplace?  How easy is it to design around the patented invention?  What alternatives to the patented invention are already available in the marketplace? • Could the defendant begin using or selling these alternatives to avoid future infringement? • Is the consumer willing to accept these alternatives? Under what conditions?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 53

§2.62

INTELLECTUAL PROPERTY LAW

 Does the patentee have any obligation to third parties, such as licensees, to take action against infringers?  Is the alleged infringer using the patented invention in direct competition with the patentee or expanding the use of the patented invention into additional markets? Are these markets of interest or accessible to the patentee?  What is the financial value (long term and short term) of the patent to the alleged infringer? To the patentee?  Is there a history of disputes between the patentee and the alleged infringer?  Are there other issues currently in dispute between the companies, such as unfair advertising activities relating to the product at issue?  What is the value of the potential damage recovery?  What are the financial conditions of the patentee and the alleged infringer?  Does the alleged infringer have patents that may be of interest or concern to the patentee’s product line? II. Facts To Investigate in Assessing Damages  Over what time period has the alleged infringement occurred?  What is the scope of the infringement?  Is the patented invention a major aspect of the alleged infringer’s product?  What is the extent of sales or potential sales?  What is the remaining life of the patent?  What is the useful life of the patent — meaning, how likely is it that the patented invention will become outdated or replaced by other technology before the patent expires?  Does the alleged infringer have notice of the patent?  Has the infringer been advised of the patent and the infringement?  When did the patentee first become aware of the allegedly infringing activity?  Has the patentee made any effort to contact the alleged infringer regarding the patent and the offending activities?

2 — 54

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.62

 If the patent at issue is a product patent, does the patentee make, use, or sell the product? If so, is the product marked?  If the patent at issue is a manufacturing process patent, is the alleged infringement to be asserted under 35 U.S.C. §271(g)? If so, has adequate notice under §287(b) been given to the alleged infringer?  Do noninfringing alternatives already exist in the marketplace?  How easy or difficult would it be for the alleged infringer to design around the patented invention?  What is the value of the injunction regardless of any monetary damage award? III. Lost Profits Considerations  Is the patentee selling the patented product?  What is the market for the patented product?  Has the patentee licensed others to sell the product?  Are other noninfringing alternatives available or potentially available in the marketplace?  Is there a market demand for the product? What is driving the sale of the patentee’s and the alleged infringer’s sales?  Can the patentee meet the market demand for the product?  Are sales of other products tied to the sale of the patented product?  Can the patentee meet the “but for” test? IV. Reasonable Royalty Considerations  Has the patentee licensed others under this patent or similar patents? If so, what are the terms of the license?  Is the patentee aware of other patents covering similar technology? If so, what is the licensing rate?  Is there an industry source available for reporting of licenses?  What advantage does the patented invention provide over existing products?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 55

§2.62

INTELLECTUAL PROPERTY LAW

 What costs are associated with using noninfringing alternatives, assuming such alternatives exist or are readily available? For example, significant capital expenditures, retooling costs and/or retooling costs for the alleged infringer or its customers, or a long customer or government approval process may be real-life barriers to switching to a noninfringing alternative that appears available in theory.  Is there a commercial relationship between the patentee and licensee, such as competitors for the patented product or other products?  Is the sale of the infringing product improving the sales of the alleged infringer’s other products? Conversely, is it negatively impacting the sale of the patentee’s nonpatented products?  Is there an established or anticipated profitability of the patented product?  What evidence exists of the commercial success of the patented product?  What is the patentee’s ability to exploit or promote the patent? How is that being impacted by the alleged infringer’s use of the patented invention? V. Complaint Elements  An identification of the parties  The court’s jurisdictional basis and venue  An identification of the patent(s) at issue and preferably an identification of at least one claim of each asserted patent allegedly infringed by the defendant  An identification of the plaintiff (patentee’s) ownership interest in the patent(s) at issue  Whether there is direct or indirect infringement, or both  Whether the claims are infringed literally or under the doctrine of equivalents, or both  Whether the alleged infringer had actual or constructive notice of the patent(s)  Whether the infringement is willful and deliberate  Whether the case is exceptional under 35 U.S.C. §285  The type of relief sought, including injunctive or monetary relief, or both, as well as prejudgment interest, any trebling of damages, and/or award of attorneys’ fees as provided by statute

2 — 56

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.62

VI. Examples of Typical Discovery Sought by Patentee  Technical and functional details about the accused product (practice or service)  Development history of the accused product, including alternatives that were explored and rejected and failed attempts to develop the accused product  Commercial success of the accused product, such as increased sales of the product over the competition or the defendant’s prior products and documents tying these sales to the patented features  Information showing or suggesting that there was a long-felt need for the accused product or the claimed invention  Efforts to copy parts or all of the claimed invention or to design a product that achieves the same results as the claimed invention  Marketing and instructional materials relating to the accused product, which may show that the alleged infringer is inducing use of the accused product in an infringing manner and may highlight and promote the patented features  Financial information about the product, the market for the product, and other goods sold in combination with the accused product  Information showing or suggesting that the alleged infringer had knowledge of the patent and/or that its activities were likely to infringe the patent  Financial information supporting the patentee’s claim for damages as outlined above  Details, through responses to contention interrogatories and other discovery requests, that elaborate on the facts that support the alleged infringer’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), affirmative defenses, claims of noninfringement, and design-around efforts, if any VII. Typical Discovery Sought by Alleged Infringer  History of development of the claimed invention, including the date of conception of the invention and reduction to practice and evidence of the inventor’s preferred mode of practicing the invention  State of the industry at the time of the invention, including steps taken by the inventor and/or others within the inventor’s company to keep current on development within the industry  Efforts to commercialize the claimed invention either by the inventor, by his or her company, or by third parties

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 57

§2.62

INTELLECTUAL PROPERTY LAW

 Public use or offers to sell (particularly efforts before commercialization) the claimed invention, including evidence of display, use, or testing of the invention by the inventor or his or her company in connection with customers, potential customers, or other third parties  Prior art that may invalidate the patent, including exploration of industry standards and industry publications, meeting records, and governmental information about the industry at the time of the claimed invention  Details of the prosecution of the patent application, including prosecution of foreign counterparts, and related applications, including abandoned applications and invention disclosures  Acceptable noninfringing alternatives and design-around options  Facts that tend to refute the patentee’s claims of commercial success or the patentee’s other evidence of secondary considerations (e.g., evidence refuting claim of long-felt need for the claimed invention, evidence that the alleged inventor was designing around and not copying the claimed invention, etc.)  Facts that tend to limit the amount of damages necessary to adequately compensate the patentee for any infringement  Details through responses to contention interrogatories and other discovery requests that elaborate on the facts that support the patentee’s claim construction (including the intrinsic and extrinsic evidence on which the party intends to rely), claims of infringement, and damages

2 — 58

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.63

VIII. FORMS A. [2.63] Sample Complaint for Patent Infringement IN THE UNITED STATES DISTRICT COURT ____________ District of ____________ ABC, INC., Plaintiff,

) ) ) ) ) ) ) ) )

v. XYZ, INC., Defendant.

Case No. ____________

COMPLAINT FOR PATENT INFRINGEMENT Plaintiff ABC, Inc. (“ABC” or “Plaintiff”) alleges against Defendant XYZ, Inc. (“XYZ” or “Defendant”) as follows: NATURE OF THE ACTION 1. This action arises under the Patent Laws of the United States, 35. U.S.C. §1, et seq., to enjoin and obtain damages resulting from Defendant’s unauthorized manufacture, use, sale, offer to sell, and/or importation into the United States for subsequent use or sale of products, methods, processes, services, and/or systems that infringe one or more claims of United States Patent No. 1,234,567 (the ’567 Patent) entitled “Widgets.” A copy of the ’567 patent is attached herewith as Exhibit A. 2. On April 1, 20__, the ’567 Patent was duly and legally issued by the United States Patent Office. Plaintiff is the owner of the ’567 Patent. 3. Plaintiff seeks injunctive relief to prevent Defendant from continuing to infringe Plaintiff’s ’567 Patent. In addition, Plaintiff seeks a recovery of monetary damages resulting from Defendant’s past infringement of the ’567 Patent. 4. This action for patent infringement involves Defendant’s manufacture, use, sale, offer for sale, and/or importation into the United States of infringing products, methods, processes, services, and systems that are primarily used or primarily adapted for use of or in a Widget. 5. Plaintiff has been irreparably harmed by Defendant’s infringement of its valuable patent rights. Moreover, Defendant’s unauthorized, infringing use of Plaintiff’s patented systems and methods has threatened the value of this intellectual property because

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 59

§2.63

INTELLECTUAL PROPERTY LAW

Defendant’s conduct results in Plaintiff’s loss of its lawful patent rights to exclude others from making, using, selling, offering to sell, and/or importing the patented inventions. 6. Defendant’s disregard for Plaintiff’s property rights similarly threatens Plaintiff’s relationships with potential licensees of this intellectual property. Defendants will derive a competitive advantage over any of Plaintiff’s future licensees from using Plaintiff’s patented technology without paying compensation for such use. Accordingly, unless and until Defendant’s continued acts of infringement are enjoined, Plaintiff will suffer further irreparable harm for which there is no adequate remedy at law. PARTIES 7. Plaintiff ABC is a Delaware corporation with its principal place of business at 123 Main Street, Anywhere, USA. 8. On information and belief, Defendant XYZ is a Colorado corporation and maintains a place of business 123 High Hills, Ski City, Colorado. JURISDICTION 9. This Court has jurisdiction pursuant to 28 U.S.C. §§1331 and 1338(a). VENUE 10. Venue is proper in this judicial district pursuant to 28 U.S.C. §1400. COUNT I (Infringement of U.S. Patent No. 1,234,567) 11. Paragraphs 1 through 10 are incorporated by reference as if fully restated herein. 12. Defendant makes, uses, sells, offers to sell, and/or imports into the United States for subsequent sale or use products, services, methods, or processes that infringe directly and/or indirectly, that employ systems, components, and/or steps that make use of other systems or processes that infringe directly and/or indirectly, or that are made according to a process that infringes directly and/or indirectly, one or more of the claims of the ’567 Patent. 13. Defendant has been and continues infringing one or more of the claims of the ’567 Patent through the aforesaid acts and will continue to do so unless enjoined by this Court. Defendant’s wrongful conduct has caused Plaintiff to suffer irreparable harm resulting from the loss of its lawful patent rights to exclude others from making, using, selling, offering to sell, and importing the patented inventions. 14. Plaintiff is entitled to recover damages adequate to compensate for the infringement.

2 — 60

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.63

COUNT II (Willful Infringement of U.S. Patent No. 1,234,567) 15. Paragraphs 1 through 14 are incorporated by reference as if fully restated herein. 16. Defendant’s infringement has been willful, deliberate, and with knowledge of Plaintiff’s rights under the ’567 Patent, and unless Defendant is enjoined by this Court, such acts of willful infringement by Defendant will continue. Therefore, Plaintiff is without adequate remedy at law. ABC is entitled to recover damages adequate to compensate for the infringement of the ’567 Patent, as well as additional damages for willful infringement, including increased damages under 35 U.S.C. §284, and to attorneys’ fees and costs incurred in prosecuting this action under 35 U.S.C. §285. PRAYER FOR RELIEF WHEREFORE, Plaintiff prays for judgment against Defendant granting Plaintiff relief as follows: A. That this Court adjudge and decree that the ’567 Patent is valid and enforceable against Defendant; B. That this Court adjudge and decree that Defendant has infringed and continues to infringe the ’567 Patent; C. That this Court order an accounting of all damages sustained by ABC as the result of the acts of infringement by Defendant; D. That this Court grant injunctions enjoining the aforesaid acts of infringement by Defendant, Defendant’s officers, agents, servants, employees, subsidiaries, and attorneys, and those acting in concert with Defendant, including related individuals and entities, customers, representatives, OEMS, dealers, and distributors; E. That this Court enter an award to Plaintiff of such damages as it shall prove at trial against Defendant that are adequate to compensate Plaintiff for said infringement, said damages to be no less than a reasonable royalty together with prejudgment interest and costs; F. That this Court order an award to ABC of up to three times the amount of compensatory damages because of Defendant’s willful infringement, and any enhanced damages provided by 35 U.S.C. §284; G. That this Court render a finding that this case is “exceptional” and award to ABC its costs and reasonable attorneys’ fees, as provided by 35 U.S.C. §285; and H. That this Court grant to Plaintiff such other, further, and different relief as may be just and proper.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 61

§2.64

INTELLECTUAL PROPERTY LAW

DEMAND FOR JURY TRIAL Plaintiff demands a trial by jury of all matters to which it is entitled to trial by jury pursuant to Fed.R.Civ.P. 38. Dated: ____________, 20__

Respectfully submitted, ______________________________________

B. [2.64] Sample Affirmative Defenses to Complaint for Patent Infringement IN THE UNITED STATES DISTRICT COURT ____________ District of ____________ ABC, INC., Plaintiff,

v. XYZ, INC., Defendant.

) ) ) ) ) ) ) ) )

Case No. ____________

AFFIRMATIVE DEFENSES OF XYZ, INC. TO COMPLAINT FOR PATENT INFRINGEMENT XYZ, Inc., in addition to its Answer to the Complaint for Patent Infringement, sets forth the following affirmative defenses: FIRST AFFIRMATIVE DEFENSE 1. Noninfringement. No product of XYZ that is alleged by Plaintiff to infringe the patent-in-suit infringes that patent, directly or indirectly, either literally or under the doctrine of equivalents. SECOND AFFIRMATIVE DEFENSE 2. Laches. Upon information and belief, Plaintiff is barred by laches from recovering damages for infringement of the patent asserted in this litigation, if any. THIRD AFFIRMATIVE DEFENSE 3. Invalidity. Depending on which claims of the patent-in-suit are accused of infringement, and how Plaintiff construes the limitation of such claims, the asserted claims are invalid because such claims fail to satisfy any ground specified in Part II of Title 35 of the United States Code as a condition for patentability.

2 — 62

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.65

FOURTH AFFIRMATIVE DEFENSE 4. Estoppel. Depending on which claims of the patent-in-suit are accused of infringement, and how Plaintiff construes the limitation of such claims, Plaintiff is estopped in view of the prior art and/or by virtue of cancellation, amendments, representations, and concessions made to the United States Patent and Trademark Office during prosecution of the application for the patent-in-suit from construing any asserted claim to be infringed or to have been infringed by XYZ. FIFTH AFFIRMATIVE DEFENSE 5. Failure to mark. Upon information and belief, while it remains the plaintiff’s burden to prove its damages, Plaintiff’s damage, if any, are limited under 35 U.S.C.A. §287 because Plaintiff failed to mark its products covered by the patent. C. [2.65] Sample Patentee Interrogatories IN THE UNITED STATES DISTRICT COURT ____________ District of ____________ ABC, INC., Plaintiff,

) ) ) ) ) ) ) ) )

v. XYZ, INC., Defendant.

Case No. ____________

PLAINTIFF’S FIRST SET OF INTERROGATORIES TO DEFENDANT Pursuant to Rule 33 of the Federal Rules of Civil Procedure (Federal Rules), Plaintiff ABC, Inc., by its undersigned counsel hereby requests that, within 30 days of the date of service of these interrogatories, and in accordance with the following Instructions and Definitions, Defendant XYZ, Inc., answer in writing, under oath, by an officer or duly authorized agent of Defendant, the following interrogatories. DEFINITIONS AND INSTRUCTIONS 1. The term “person” or “persons” includes not only natural persons, but also, without limitation, firms, partnerships, associations, corporations, and other legal entities, and divisions, departments, or other units thereof and his, its, or their directors, officers, employees, and agents.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 63

§2.65

INTELLECTUAL PROPERTY LAW

2. “XYZ,” “Defendant,” or “you” means (a) XYZ, Inc., the named Defendant in this action, and/or all entities or names under which Defendant has done or is doing business; (b) anyone acting or purporting to act on behalf of persons or entities identified in subsection (a) above, including, without limitation, all present and former officers, directors, investors, employees, independent contractors, agents, representatives, attorneys, consultants, or other personnel; (c) all predecessors, successors, or owners/purchasers thereof; (d) all past or present divisions, subsidiaries, or affiliates of persons or entities identified in subsection (a) above (whether owned in whole or in part); and/or (e) all past or present directors, officers, employees, agents, or representatives of any of the foregoing entities. 3. The “ ’567 Patent” or “patent-in-suit” means U.S. Patent No. 1,234,567. 4. The term “identify” means as follows: a. With Respect to Persons. When referring to a person, “to identify” means to state, to the extent known, the person’s full name, present or last known address and telephone number, and when referring to a natural person, additionally, (i) the present or last known place of employment, (ii) his or her position or business affiliation at all times relevant to this action, and (iii) his or her position and business affiliation with any party to this action. Once a person has been identified in accordance with this subparagraph, only the name of that person need be listed in response to subsequent discovery requesting the identification of that person. b. With Respect to Documents. When referring to documents, “to identify” means to state, to the extent known, the (i) type of document; (ii) general subject matter; (iii) date of the document; and (iv) author(s), addressee(s), and recipient(s). c. With Respect to Communications. When referring to communications, “to identify” means to state, to the extent known, (i) the date and time of the communication, (ii) the identity of the parties to the communications, (iii) the substance of the communication, (iv) the means of the communication and its transmission (e.g., oral, written, mail, e-mail, in person, telephone, etc.), and (v) the identity and location of all documents or records related to the communication. 5. The connectives “and” and “or” shall be construed either disjunctively or conjunctively as necessary to bring within the scope of the request any information that might otherwise be construed to be outside its scope. “Relating to,” “relates,” and “related” mean, without limitation, constituting, discussing, pertaining to, covering, demonstrating or indicating knowledge of, mentioning, or referring to, directly or indirectly in any way, the subject matter identified in a particular request. 6. The singular form of a noun or pronoun includes the plural form, and the plural form includes the singular as necessary to bring within the scope of this request any information that might otherwise be construed to be outside its scope. The particularity or generality of any one discovery request shall not limit any other discovery request.

2 — 64

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.65

7. In answering these interrogatories, furnish all information, however obtained, including hearsay, that is available to you, including information in your actual or constructive possession or control. 8. If you exercise your option under Federal Rule of Civil Procedure 33 to produce documents in lieu of responding to any interrogatory, produce such records separately and designate the interrogatory or interrogatories to which the record(s) respond, as well as the identification of the file(s) from which the record(s) was obtained. 9. When information is withheld due to a claim of privilege or work product, provide a description of the withheld information in conformity with the requirements of the Federal Rules of Civil Procedure and applicable law. INTERROGATORIES INTERROGATORY NO. 1: Identify all persons, including, without limitation, all employees, representatives, officers, or agents of Defendant, as well as any third parties, whom Defendant knows or has reason to believe have knowledge or information concerning any factual information relevant to the validity or invalidity, enforceability or unenforceability, or infringement or noninfringement of any of the patent-in-suit, or of damages issues in this lawsuit, or of factual information relevant to any allegation of the Complaint, and state the nature and substance of each such person’s knowledge or information. INTERROGATORY NO. 2: For each of Defendant’s accused products, using a claim chart, state in detail Defendant’s bases for any assertions of non-infringement of the patent-in-suit on a claim-by-claim, element-by-element basis. Your answer should include a statement of Defendant’s interpretation of each claim element (including whether the element should be interpreted under 35 U.S.C. §112, paragraph 6, and, if so, identifying the structure in the specification of the patent that corresponds to the recited element), a statement whether Defendant’s products or activities provide(s) such an element or an equivalent and, if not, an explanation how Defendant’s products or activities are different than the claim element and a particularized statement why a component, feature, or function of Defendant’s products and activities is not a substantial equivalent of the pertinent claim element. INTERROGATORY NO. 3: Describe in detail any and all analyses, investigations, studies, reviews, or considerations by Defendant and/or any person known to Defendant, e.g., an accused infringer or prospective licensee, concerning the patentability, validity or invalidity, enforceability or unenforceability, scope, and/or infringement or non-infringement of the subject matter claimed in any of the claims of the patent-in-suit, including, but not limited to, any search, investigation, or study for prior patents, publications, literature, systems, processes, or apparatuses pertinent to any of the claims of any of the patents in suit, providing an identification of all documents constituting, reflecting, referring or relating to, reviewed, or consulted in the course of each such analysis, investigation, or study, an identification of any such prior patents, publications, literature, systems, processes, or

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 65

§2.65

INTELLECTUAL PROPERTY LAW

apparatuses identified in any such search, investigation, or study, and an identification of all persons who in any way participated in providing information for, preparing, and/or reviewing each such analysis, investigation, or study. INTERROGATORY NO. 4: State in detail all facts and contentions that support or refute Defendant’s allegations, if any, that the patent-in-suit is invalid under 35 U.S.C. §102 or §103, identifying all prior patents, literature, publications, systems, processes, or devices, including prior knowledge, public uses, sales, and offers for sale, that Defendant contends, either alone or in combination, invalidate one or more claims of any of the patents in suit, through a claim chart that identifies each element of each claim of the patent asserted to be invalid and explains where each element of the respective claim is shown in such prior patent, literature, publications, system, process, device, public use, sale, or offer for sale. INTERROGATORY NO. 5: For each of the asserted claims of the patent-in-suit, state whether Defendant contends, or will contend at trial, that such claim is invalid under 35 U.S.C. §112 and provide a detailed explanation of each fact relating to any such contention and, with respect to each fact or contention, an explanation of why such fact or contention would render the patent claim invalid under §112. INTERROGATORY NO. 6: Describe in detail all facts and contentions that support or refute Defendant’s allegations, if any, that any of the claims of the patent-in-suit are unenforceable, identifying all documents and other information that support or refute or otherwise relate to this allegation of unenforceability, and explaining in detail why such facts would or would not render any of the claims of any of the patent-in-suit unenforceable. INTERROGATORY NO. 7: State in detail all reasons and identify all facts and documents that support Defendant’s allegations, if any, that Defendant has not directly infringed, willfully infringed, contributed to the infringement of, or induced infringement of any valid, enforceable claim of the patent-in-suit and is not presently directly infringing, willfully infringing, contributing to the infringement of, or inducing infringement of any valid, enforceable claim of the patent-in-suit. INTERROGATORY NO. 8: Identify any and all revenues and the sources thereof derived by Defendant from the accused products, including, without limitation, the unit and dollar volume of gross revenue, on a monthly basis, of products made, used, offered for sale, sold, or imported. INTERROGATORY NO. 9: For each of Defendant’s accused products, on a product-byproduct basis, describe in detail all factual and legal bases, and identify all supporting documents, supporting or relating to Defendant’s allegations, if any, that preclude collection of damages under any of the patents in suit under the doctrine of laches and/or estoppel, including (a) any contention or belief that there has been a delay for any relevant period of time, what this period is, and why Defendant contends it is relevant, (b) any contention or belief that any such delay was intentional, unreasonable, or inexcusable, (c)

2 — 66

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.66

any contention or belief that Defendant suffered evidential or economic prejudice as a result of such delay, and (d) any other reason why Defendant contends laches and/or estoppel should apply or serve as a defense in this case. Dated: ____________, 20__

Respectfully submitted, ______________________________________

D. [2.66] Sample Accused Infringer Interrogatories IN THE UNITED STATES DISTRICT COURT ____________ District of ____________ ABC, INC., Plaintiff,

) ) ) ) ) ) ) ) )

v. XYZ, INC., Defendant.

Case No. ____________

DEFENDANT XYZ’S FIRST SET OF INTERROGATORIES TO PLAINTIFF Pursuant to Rule 33 of the Federal Rules of Civil Procedure (Federal Rules), Defendant XYZ, Inc., by its undersigned counsel hereby requests that, within 30 days of the date of service of these interrogatories, and in accordance with the following Instructions and Definitions, Plaintiff ABC, Inc., answer in writing, under oath, by an officer or duly authorized agent of Plaintiff, the following interrogatories. DEFINITIONS AND INSTRUCTIONS 1. The term “person” or “persons” includes not only natural persons, but also, without limitation, firms, partnerships, associations, corporations, and other legal entities, and divisions, departments, or other units thereof and his or her, its, or their directors, officers, employees, and agents. 2. “ABC,” “Plaintiff,” or “you” means (a) ABC, Inc., the named Plaintiff in this action, and/or all entities or names under which Plaintiff has done or is doing business; (b) anyone acting or purporting to act on behalf of persons or entities identified in subsection (a) above including, without limitation, all present and former officers, directors, investors, employees, independent contractors, agents, representatives, attorneys, consultants, or other personnel; (c) all predecessors, successors, or owners/purchasers thereof; (d) all past or present divisions, subsidiaries, or affiliates of persons or entities identified in subsection (a) above (whether owned in whole or in part); and/or (e) all past or present directors, officers, employees, agents, or representatives of any of the foregoing entities.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 67

§2.66

INTELLECTUAL PROPERTY LAW

3. The “ ’567 Patent” or “patent-in-suit” means U.S. Patent No. 1,234,567. 4. The term “identify” means as follows: a. With Respect to Persons. When referring to a person, “to identify” means to state, to the extent known, the person’s full name, present or last known address and telephone number, and when referring to a natural person, additionally, (i) the present or last known place of employment, (ii) his or her position or business affiliation at all times relevant to this action, and (iii) his or her position and business affiliation with any party to this action. Once a person has been identified in accordance with this subparagraph, only the name of that person need be listed in response to subsequent discovery requesting the identification of that person. b. With Respect to Documents. When referring to documents, “to identify” means to state, to the extent known, the (i) type of document; (ii) general subject matter; (iii) date of the document; and (iv) author(s), addressee(s), and recipient(s). c. With Respect to Communications. When referring to communications, “to identify” means to state, to the extent known, (i) the date and time of the communication, (ii) the identity of the parties to the communications, (iii) the substance of the communication, (iv) the means of the communication and its transmission (e.g., oral, written, mail, e-mail, in person, telephone, etc.), and (v) the identity and location of all documents or records related to the communication. 5. The connectives “and” and “or” shall be construed either disjunctively or conjunctively as necessary to bring within the scope of the request any information that might otherwise be construed to be outside its scope. “Relating to,” “relates,” and “related” mean, without limitation, constituting, discussing, pertaining to, covering, demonstrating or indicating knowledge of, mentioning, or referring to, directly or indirectly in any way, the subject matter identified in a particular request. 6. The singular form of a noun or pronoun includes the plural form, and the plural form includes the singular as necessary to bring within the scope of this request any information that might otherwise be construed to be outside its scope. The particularity or generality of any one discovery request shall not limit any other discovery request. 7. In answering these interrogatories, furnish all information, however obtained, including hearsay, that is available to you, including information in your actual or constructive possession or control. 8. If you exercise your option under Federal Rule of Civil Procedure 33 to produce documents in lieu of responding to any interrogatory, produce such records separately and designate the interrogatory or interrogatories to which the record(s) respond, as well as the identification of the file(s) from which the record(s) was obtained.

2 — 68

WWW.IICLE.COM

ENFORCING AND DEFENDING AGAINST PATENT RIGHTS THROUGH LITIGATION

§2.66

9. When information is withheld due to a claim of privilege or work product, provide a description of the withheld information in conformity with the requirements of the Federal Rules of Civil Procedure and applicable law. INTERROGATORIES INTERROGATORY NO. 1: If ABC contends that XYZ was put on notice of the patent-insuit prior to the filing of this lawsuit, identify in detail the factual basis of when and how XYZ was put on notice, including who put XYZ on notice. INTERROGATORY NO. 2: Identify the factual basis for ABC’s allegation in the complaint that XYZ’s alleged infringement is willful, including all facts that were known prior to the complaint being filed. INTERROGATORY NO. 3: Identify the factual basis for ABC’s allegation in the complaint that XYZ infringes the patent-in-suit, including a description of all facts that were known prior to the complaint being filed and all investigations that were performed prior to the complaint being filed. INTERROGATORY NO. 4: For each means plus function element in each accused claim, describe in detail the range of equivalent structure to which ABC contends the element is entitled. INTERROGATORY NO. 5: Identify whether ABC contends that laches does not bar recovery of damages for infringement of the patent asserted in this litigation and, if ABC contends that laches does not bar recovery, describe in detail the basis for ABC’s contention. INTERROGATORY NO. 6: Identify whether ABC contends that estoppel does not bar recovery of damages for infringement of the patent asserted in this litigation and, if ABC contends that estoppel does not bar recovery, describe in detail the basis for ABC’s contention. INTERROGATORY NO. 7: Identify all efforts undertaken by or on behalf of ABC to investigate whether any of XYZ’s products infringed the patent-in-suit, including relevant dates. Dated: ____________, 20__

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

Respectfully submitted, ______________________________________

2 — 69

3

Patent Antitrust, Misuse, and Inequitable Conduct

GLEN P. BELVIS Chief IP Counsel Foro Energy, Inc. Littleton, CO

®

©COPYRIGHT 2013 BY IICLE .

3—1

INTELLECTUAL PROPERTY LAW

I. [3.1] Overview II. [3.2] Introduction to Patent Antitrust III. Patent Law from an Antitrust Perspective A. [3.3] Patent “Monopoly” Defined B. [3.4] Patent Infringement C. [3.5] Transferability of the Patent’s Exclusionary Rights IV. [3.6] Antitrust Law in General A. B. C. D. E.

[3.7] Sherman Anti-Trust Act §1 [3.8] Sherman Anti-Trust Act §2 [3.9] Clayton Act [3.10] Federal Trade Commission Act [3.11] Types of Conduct Subject to Antitrust Scrutiny 1. [3.12] Horizontal Agreements 2. [3.13] Vertical Agreements 3. [3.14] Tying Arrangements 4. [3.15] Group Boycotts and Refusals To Deal 5. [3.16] Joint Ventures

V. [3.17] The Interaction of Patent and Antitrust Law A. [3.18] Patent Licensing Activity 1. [3.19] Territory and Field-of-Use Restrictions 2. [3.20] Package License Agreements 3. [3.21] Patent Pooling Agreements 4. [3.22] Grantback Agreements 5. [3.23] Tying Agreements 6. [3.24] Price Restrictions B. [3.25] Walker Process Fraud on the United States Patent and Trademark Office C. [3.26] Enforcement of a Patent Known To Be Invalid or a Noninfringed Patent D. [3.27] Improper Acquisition of Patents E. [3.28] Standard-Setting Activity and Its Effect on Patent Rights VI. [3.29] Patent Misuse VII. [3.30] Inequitable Conduct

3—2

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

VIII. [3.31] Ability To Cure Inequitable Conduct Under the AIA IX. [3.32] Best-Mode Requirement Risks to Practitioners and Clients Under the AIA

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—3

§3.1

INTELLECTUAL PROPERTY LAW

I. [3.1] OVERVIEW This chapter addresses activities that step outside the bounds of legitimate conduct by patentees (i.e., the persons who control patent rights). The consequences from improperly acquiring, maintaining, or using patent rights range from the loss of these rights to civil damages and criminal penalties. There are three basic areas of law that address and regulate a patentee’s conduct: antitrust law; the doctrine of patent misuse; and the doctrine of inequitable conduct. Patent antitrust issues arise when a patentee extends the scope of a patent beyond that which the law allows in conjunction with other factors, such as antitrust injury and market power. These issues create an independent cause of action against the patentee by private litigants as well as state and federal agencies. Antitrust violations can result in patent unenforceability, civil damages, and criminal penalties. Patent misuse issues arise when a patentee extends the scope of a patent beyond that which the law allows. These issues can be used only as a defense to an infringement action. They do not give rise to an independent cause of action against a patentee. Misuse violations can result in a finding of patent unenforceability. All antitrust violations will necessarily give rise to patent misuse. On the other hand, because the additional factors for an antitrust violation are not required for the defense of misuse, all patent misuse issues will not necessarily give rise to an antitrust violation. Inequitable conduct issues arise when a patentee or its predecessor in interest improperly obtained the patent from the United States Patent and Trademark Office (USPTO). Inequitable conduct is only a defense to patent infringement; it does not give rise to a separate cause of action. In extreme cases of fraud, however, improper conduct before the USPTO can form the basis for an antitrust violation. A finding of inequitable conduct renders the patent unenforceable. In addition to the harsh consequences from an ultimate finding of liability under any of these doctrines, there is a further consideration that should guide a patentee in these matters. The conduct that gives rise to an antitrust, misuse, or inequitable conduct allegation usually took place years before the value for the patented technology had materialized. Excluding those persons who set out with a knowing or reckless disregard for the rules, usually the conduct that gives rise to one of these issues involves activity that comes a little close to the line either intentionally or unintentionally coupled with the rationalization that an opponent would “never be able to prove up a violation.”

PRACTICE POINTER 

By coming close to the line, a patentee can give an infringer a potential defense when it otherwise would have had none. Thus, it is not enough just to position a patentee to win on an antitrust, misuse, or inequitable conduct charge; instead, the patentee should be positioned so that these charges are not raised in the first place.

These rationalizations ignore the reality of patent enforcement and litigation and play into the hands of an infringer, giving the infringer a potential defense that can enable the infringer to

3—4

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.2

delay the litigation, increase the complexity of the litigation, and perhaps have an offensive position, thus resulting in delayed settlements, increased litigation costs, and lower settlement values. Defending an antitrust charge can easily increase litigation cost for a patentee by several million dollars. Defeating an inequitable conduct charge can easily increase the cost of litigation by hundreds of thousands of dollars. Thus, a patentee should be positioned so that these charges either cannot be raised or, if raised, can be dealt with in a summary manner. The Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), provides many significant changes to the patent laws. One of these changes is to provide a new procedure before the USPTO in which a patent owner can significantly reduce the risk of an adverse finding under one of these doctrines, reduce the risk of having charges raised under these doctrines, and create a situation for the summary resolution of any such charges. This new procedure permits the patent owner to reopen patent prosecution and essentially correct conduct that could form a basis for a charge of inequitable conduct or fraud. The AIA’s changes to invalidity defenses also create substantial risks and uncertainty for patent practitioners and clients. The AIA removes the ability to challenge a patent on the ground that the best-mode requirement of 35 U.S.C. §112 was not meet. The AIA, however, does not remove best mode as a requirement for patentability. Thus, practitioners still have an ethical obligation to determine and disclose the best mode. Further, although failure to disclose the best mode cannot be used for a finding of inequitable conduct under the AIA, the AIA is silent regarding the willful, intentional, or fraudulent concealment of the best mode. Such intentional conduct may still be actionable as unfair competition, fraud, violations of antitrust laws or Federal Trade Commission rules, etc. Moreover, and in part to avoid a preemption argument, these actions may name the patent practitioner, the inventor, and the client as defendants in the litigation.

II. [3.2] INTRODUCTION TO PATENT ANTITRUST There is perhaps no more unique, confusing, and interesting area of the law than the interplay between patent and antitrust laws. A patent is a constitutionally mandated right to exclude others from making, using, selling, offering for sale, or importing the patented invention. U.S.CONST. art. I, §8; 35 U.S.C. §271. Accordingly, the patent right is at times referred to as a “monopoly.” It is perhaps the only tool that allows a company to legally stop competition. Antitrust laws, on the other hand, are intended to foster competition and create a fair playing field on which one competitor cannot overtly stop another from competing. As is often said, the antitrust laws protect competition, not competitors. Thus, there has always been a tension between these two bodies of law and their underlying policies. This tension has developed into anything but a bright line between conduct expressly permitted and encouraged by the patent laws and conduct expressly prohibited, and in fact criminalized, by the antitrust laws. Historically, this area of the law has seen its greatest activity and refinement when new technologies have moved from the workbench or lab into mainstream commerce. Perhaps it is the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—5

§3.3

INTELLECTUAL PROPERTY LAW

combination of new technology, new wealth, and the bright, aggressive individuals who make this technology profitable that gives rise to the situations in which the line between patent and antitrust laws is more readily tested. Perhaps it is a belief that the old rules, developed from old technology, no longer apply that creates the mistaken belief that there is nothing to worry about from the antitrust laws. Regardless, if history provides any guidance, as the areas of biotechnology, biopharmaceuticals, software, social networking, and e-commerce continue to move from the lab and desktop to the marketplace, they will become embroiled in the turbulent waters where the patent and antitrust laws meet. To understand this area of law, it is important to have a basic understanding of both patent and antitrust law. There is one key test to apply in determining whether antitrust red flags should be raised in evaluating a patentee’s conduct. A patent provides an exclusionary right, that is, the right to exclude another from doing something. If the agreement or the conduct of the patent extends beyond what the patentee can exclude under the patent, antitrust warning signs should go up. This is not to say that this conduct would violate the antitrust law, only to say that once the agreement or conduct extends beyond what the patent excludes, careful scrutiny should be used because at that point the potential for an antitrust issue is present. In order to understand how to apply this key test, one needs to first understand what a patent excludes. Chapters 1 and 2 of this handbook address in detail what is patentable and how a patent’s right to exclude is enforced through infringement actions. Thus, this chapter only briefly addresses these issues and from a competition standpoint. See §§3.3 – 3.5 below.

PRACTICE POINTER 

Antitrust warning flags should go up anytime an agreement or a patentee’s conduct extends to activities that the patent rights could not exclude others from doing. In other words, if the patentee could have prohibited particular conduct of a competitor under the patent, contracts or agreements that do nothing more than permit this conduct to take place should pass antitrust scrutiny.

III. PATENT LAW FROM AN ANTITRUST PERSPECTIVE A. [3.3] Patent “Monopoly” Defined Typically, a patent is defined as providing a right of exclusion, which does not confer any rights to practice the patented invention. Thus, the patent provides the ability for the patentee to exclude others from making, using, selling, offering for sale, or importing the claimed invention. 35 U.S.C. §271(a). There are, however, other definitions of a patent that are perhaps more artfully expressed. For example, Thomas Jefferson stated the following: If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea. . . . Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening

3—6

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.3

me. . . . Inventions then cannot, in nature, be a subject of property. Society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility. Graham v. John Deere Company of Kansas City, 383 U.S. 1, 15 L.Ed.2d 545, 86 S.Ct. 684, 689 n.2 (1966), quoting VI WRITINGS OF THOMAS JEFFERSON, pp. 180 – 181 (Washington ed. 1907). However, Supreme Court Justice Black, dissenting, took a harsher view of patents: Those who strive to produce and distribute goods in a system of free competitive enterprise should not be handicapped by patents based on a “shadow of a shade of an idea.” Atlantic Works v. Brady, 107 U.S. 192, [27 L.Ed. 428, 2 S.Ct. 225, 231 (1883)]. . . . It is impossible for me to believe that Congress intended to grant monopoly privileges to persons who do no more than apply knowledge which has for centuries been the universal possession of all the earth’s people — even those of the most primitive civilizations. Goodyear Tire & Rubber Co. v. Ray-O-Vac Co., 321 U.S. 275, 88 L.Ed. 721, 64 S.Ct. 593, 595 – 596 (1944). These two diverging definitions illustrate the swing from pro-patent to anti-patent sentiments that has occurred several times over the past years. This swing will likely occur at least once during the next 20 years (i.e., during the life of a patent) and will also directly influence the antitrust implications of a patentee’s conduct. Relying heavily on the right-to-exclude definition of a patent, the Court of Appeals for the Federal Circuit has attempted to cleanse the patent lexicon of the term “patent monopoly”: Nortron begins its file wrapper estoppel argument with “Patents are an exception to the general rule against monopolies . . .”. A patent, under the statute, is property. 35 U.S.C. §261. Nowhere in any statute is a patent described as a monopoly. The patent right is but the right to exclude others, the very definition of “property.” That the property right represented by a patent, like other property rights, may be used in a scheme violative of antitrust laws creates no “conflict” between laws establishing any of those property rights and the antitrust laws. The antitrust laws, enacted long after the original patent laws, deal with appropriation of what should belong to others. A valid patent gives the public what it did not earlier have. Patents are valid or invalid under the statute, 35 U.S.C. It is but an obfuscation to refer to a patent as “the patent monopoly” or to describe a patent as an “exception to the general rule against monopolies.” That description, moreover, is irrelevant when considering patent questions, including the question of estoppel predicated on prosecution history. [Emphasis in original.] Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n.3 (Fed.Cir. 1983). The Federal Circuit’s effort at eliminating the use of the term “patent monopoly” has been rejected by the Supreme Court, which has consistently used and referred to patent rights in the context of a “monopoly”: A patent by its very nature is affected with a public interest. . . . [It] is an exception to the general rule against monopolies and to the right to access to a free and open

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—7

§3.3

INTELLECTUAL PROPERTY LAW

market. The far-reaching social and economic consequences of a patent, therefore, give the public a paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope. [Emphasis added.] Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 89 L.Ed. 1381, 65 S.Ct. 993, 998 (1945). See also Mayo Collaborative Services v. Prometheus Laboratories, Inc., 566 U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289, 1296 (2012) (“the patents satisfied the Circuit’s ‘machine or transformation test,’ which the court thought sufficient to ‘confine the patent monopoly within rather definite bounds’ ”); Bilski v. Kappos, 561 U.S. ___, 177 L.Ed.2d 792, 130 S.Ct. 3218, 3253-55 (2010) (“ ‘The monopoly is a property right.’ . . . On one side of the balance is whether a patent monopoly is necessary to ‘motivate the innovation.’ . . . ‘To give appellant a monopoly, through the issuance of a patent upon so great an area . . . would in our view impose without warrant of law a serious restraint upon the advance of science and industry.’ ” Quoting Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 152 L.Ed.2d 944, 122 S.Ct. 1831, 1837 (2002), Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 142 L.Ed.2d 261, 119 S.Ct. 304, 310 (1998), and Joseph E. Seagram & Sons, Inc. v. Marzall, 180 F.2d 26, 28 (D.C.Cir. 1950).); Festo, supra, 122 S.Ct. at 1835 (“we appreciated that by extending protection beyond the literal terms in a patent the doctrine of equivalents can create substantial uncertainty about where the patent monopoly ends” [emphasis added]), citing Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 137 L.Ed.2d 146, 117 S.Ct. 1040, 1049 (1997); Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627, 144 L.Ed.2d 575, 119 S.Ct. 2199, 2218 (1999) (“The Patent Remedy Act merely puts States in the same position as all private users of the patent system, and in virtually the same posture as the United States. ‘When Congress grants an exclusive right or monopoly, its effects are pervasive; no citizen or State may escape its reach.’ Goldstein v. California, 412 U.S. 546, 560, 93 S.Ct. 2303, 37 L.Ed.2d 163 (1973) (analyzing Copyright Clause [of U.S. Constitution]).” [Emphasis added.] [Footnotes omitted.]). In Pfaff, supra, 119 S.Ct. at 310, the Court, quoting Elizabeth v. Pavement Co., 97 U.S. (7 Otto) 126, 137, 24 L.Ed. 1000 (1877), stated: It is sometimes said that an inventor acquires an undue advantage over the public by delaying to take out a patent, inasmuch as he thereby preserves the monopoly to himself for a longer period than is allowed by the policy of the law; but this cannot be said with justice when the delay is occasioned by a bona fide effort to bring his invention to perfection, or to ascertain whether it will answer the purpose intended. His monopoly only continues for the allotted period, in any event; and it is the interest of the public, as well as himself, that the invention should be perfect and properly tested, before a patent is granted for it. Setting aside the debate over the propriety of using the term “patent monopoly,” it should not be disputed that a patent provides economic power, pure and simple. A patent is the only legal way to stop a competitor from competing and to punish the competitor for competing. To illustrate this point, consider the often-used example of a patent directed to a pencil. A patent with a claim covering a wood shaft, graphite, and an eraser would give the patentee the right to stop anyone from using a pencil (at least a wood pencil) with an eraser on it. This patent,

3—8

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.4

however, would not give the patentee the right to use such a pencil. For example, if someone else had earlier obtained a patent on a pencil comprising a shaft and graphite, that patent would preclude the patentee of the eraser pencil from practicing its invention. Carrying this example further, although the patentee of the pencil could sell a pencil without an eraser, it could not sell an eraser pencil because of the eraser pencil patent. Thus, in this pencil example, there is a blocking patent — the pencil patent — that keeps all market participants except the patentee out of the market. There is an improvement patent — the eraser pencil — that keeps all market participants except the eraser pencil patentee from offering the only commercially acceptable product to the market — the pencil with an eraser. The eraser pencil patentee, however, is blocked from the market because of the pencil patent. Thus, under this scenario, the only way for the public to obtain the product it wants is for some sort of licensing or cross-licensing arrangement to be entered into. See §3.21 below, discussing patent pooling arrangements. As seen in the eraser example, the amount of economic power that is associated with a patent, however, can vary from minimal to substantial and can be contingent on other facts. Thus, depending on the scope of the patent claims, the success of the commercial embodiment of the invention, and the competitors in the industry, a patent either can have little to no economic power or can create a powerful monopoly. A few examples further illustrate this point. In the 1960s a very broad patent on a slide rule would have had substantial economic power because it would have provided an exclusionary right over a product that had substantial market demand. On the other hand, such a patent would have little to no economic power today because there is no market demand or need for the commercial embodiment of such a patent. Conversely, a relatively narrow patent on its face, which nevertheless covers a feature of a product that consumers demand, would create substantial economic power for the patent and a monopoly for the product. The monopoly would arise because the patent would prevent any competitor from having the feature that consumers demand and thus effectively entering the market. Taking this latter example to the next step, innovative and well-funded competitors might design around the patent. In doing so, they might develop a new feature that consumers would prefer over the patented feature. This new feature, or more accurately the market demand for this feature, would neutralize the prior patent’s economic power and break the patent monopoly on the market. See London v. Carson Pirie Scott & Co., 946 F.2d 1534, 1538 (Fed.Cir. 1991) (“[patent] claims must be ‘particular’ and ‘distinct,’ as required by 35 U.S.C. §112, so that the public has fair notice[, which] permits other parties to avoid actions which infringe the patent and to design around the patent”). Moreover, the competitor may obtain a patent on this new feature and thus obtain its own monopoly, at least until the next design around occurs. B. [3.4] Patent Infringement The extent to which a patent provides a legal monopoly, and thus the extent to which a patentee’s conduct is protected from antitrust scrutiny, is directly tied to the patent’s exclusionary rights. These exclusionary rights in turn are defined by the scope of what the patents protect (i.e.,

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—9

§3.4

INTELLECTUAL PROPERTY LAW

what infringes the patent). Infringement is addressed in detail in Chapter 2 of this handbook and thus is only briefly addressed here. A patentee has the right to prevent conduct that is directly or indirectly related to the patent’s exclusionary rights. Conduct that is directly related to the patent’s exclusionary rights is known as “direct infringement.” Direct infringement occurs whenever anyone makes, uses, sells, offers for sale, or imports into the United States a process or product that is covered by the claims of a patent. 35 U.S.C. §271(a). Direct infringement requires no intent or knowledge of the patent. It is a strict-liability offense. Thus, returning to the pencil and eraser example from §3.3 above, a store that sold eraser pencils would be a direct infringer of the patent on the eraser pencil and would also be a direct infringer of the blocking patent on the pencil. Conduct that does not directly relate to the patentee’s rights (i.e., the conduct itself is not infringing) but that causes another to infringe can still be prevented by the patentee. This conduct is known as “indirect infringement” and can take two forms: inducement (35 U.S.C. §271(b)); and contributory infringement (35 U.S.C. §271(c)). “Whoever actively induces infringement of a patent shall be liable as an infringer.” 35 U.S.C. §271(b). Unlike direct infringement, which has no knowledge requirement, inducement requires knowledge of the patent and active steps to cause the actions that give rise to a direct infringement. In order to find that one has induced infringement, the inducement must be successful; that is, there must be a direct infringement. Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 697 – 700 (Fed. Cir. 2008); DSU Medical Corp. v. JMS Co., 471 F.3d 1293, 1305 – 1307 (Fed.Cir. 2006); Hewlett-Packard Co. v. Bausch & Lomb Inc., 909 F.2d 1464, 1469 (Fed.Cir. 1990). Thus, applying the pencil and eraser example, if a manufacturer made pencils and erasers separately but did not combine them, it would not be a direct infringer of the eraser pencil patent (but would still directly infringe the pencil patent). If this pencil manufacturer then provided these pencils to the store but did nothing more, it would not be liable for inducing infringement. If, however, the pencil manufacturer (1) had knowledge of the eraser pencil patent and (2) gave the store instructions on how to attach the erasers to the pencil, it would be liable for inducing infringement. Contributory infringement, like inducement, requires knowledge of the patent and a direct infringement. Contributory infringement occurs when goods are sold to another and these goods basically can be used only to infringe the patent. Specifically, 35 U.S.C. §271(c) prohibits the sale of “a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use.” See generally Aro Manufacturing Co. v. Convertible Top Replacement Co., 365 U.S. 336, 5 L.Ed.2d 592, 81 S.Ct. 599 (1961); DSU Medical, supra, 471 F.3d at 1302 – 1304. The sale of a good that has both infringing and noninfringing uses will not give rise to liability for contributory infringement, provided the suggested noninfringing uses are not far-fetched, illusory, or impractical. i4i Limited Partnership v. Microsoft Corp., 598 F.3d 831, 850 – 851 (Fed.Cir. 2010); Preemption Devices Inc. v. Minnesota Mining & Manufacturing Co., 630 F.Supp. 463, 471 n.10 (E.D.Pa. 1985), aff’d in pertinent part, vacated in part on other grounds, 803 F.2d 1170 (Fed.Cir. 1986). Thus, using the eraser example, presume that the pencil manufacturer knows about the

3 — 10

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.5

eraser pencil patent and is providing pencils and erasers separately to the store. If the pencils and the erasers are made to fit easily together and the erasers are too small to be useful without being attached to the pencils, the manufacturer would be liable for contributory infringement. A unique situation regarding contributory infringement occurs in the pharmaceutical and medical device fields as a result of 35 U.S.C. §287(c), which provides that the remedies against patent infringement shall not apply to medical practitioners and related health entities for performance of a medical activity. The exception applies only to damages available for the infringement of a surgical or medical technique and applies only to the doctor or technician performing the technique. The exception, however, does not apply to manufacturers of equipment required to perform the medical activity. Because the statute does not exempt a medical technique from infringement but, rather, nullifies the patent holder’s right to obtain damages, a direct infringement of a patent may still occur. Thus, although the patent holder cannot sue the surgeon performing the technique for damages, the patent holder may sue the manufacturer of the equipment for contributory infringement and collect damages from the manufacturer. Contracts and agreements that touch on activities relating to inducement and contributory infringement issues can raise very complicated antitrust and misuse issues. As discussed in §3.5 below, the patent statutes expressly authorize the patentee to regulate activity that would constitute inducement and contributory infringement. Nevertheless, because these activities are, by their very nature, outside the direct protection of the patent, greater scrutiny will be applied to provisions restricting them, and greater care should be taken in drafting these provisions. C. [3.5] Transferability of the Patent’s Exclusionary Rights As discussed in §3.3 above, patent rights can give rise to a limited and legal monopoly that can have substantial economic power. Patent rights and their associated economic power can be transferred in whole or in part. Specifically, 35 U.S.C. §261 provides: Subject to the provisions of this title, patents shall have the attributes of personal property. Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States. This provision expressly authorizes patentees to divide their patent rights (and thus markets) horizontally, vertically, geographically, and along fields of use. For example, again using the eraser pencil example from §§3.3 and 3.4 above, the patentee could grant a license to make the eraser pencils to an East Coast manufacturer and no others. In this way, the patentee keeps the central part of the country and the West Coast markets for itself. Similarly, the patentee could grant a license to a maker of high-end mechanical pencils (i.e., a field of use) and keep all other rights regarding other types of pencils to itself or for future licensing. All of these type of transactions are expressly permitted under §261. Thus, absent other factors, these provisions in an agreement should not give rise to an antitrust violation or patent misuse.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 11

§3.6

INTELLECTUAL PROPERTY LAW

In 1988, the patent statutes were amended by Pub.L. No. 100-703, 102 Stat. 4674, Title II of which is popularly known as the Patent Misuse Reform Act, to expand the conduct by a patentee that is considered presumptively permissible and will not in and of itself give rise to an antitrust violation or patent misuse. Specifically, 35 U.S.C. §271(d) provides: No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: (1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent; (2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent; (3) sought to enforce his patent rights against infringement or contributory infringement; (4) refused to license or use any rights to the patent; or (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

IV. [3.6] ANTITRUST LAW IN GENERAL There are three basic statutory provisions that address a patentee’s action with regard to antitrust laws: the Sherman Anti-Trust Act, 15 U.S.C. §1, et seq.; the Clayton Act, 15 U.S.C. §12, et seq.; and the Federal Trade Commission Act, 15 U.S.C. §41, et seq. See also 16 C.F.R. pts. 1 – 16, relating to FTC procedures and regulations. The Sherman Anti-Trust Act was first adopted into law in 1890 in response to the economic power that the railroads had amassed. Section 1 of the Act, 15 U.S.C. §1, requires concerted action, that is, two or more actors who engage in conduct that decreases competition. Section 2 of the Act, 15 U.S.C. §2, focuses on monopolization, which can involve a single actor or a group of actors whose conduct decreases competition in an unreasonable manner. The Sherman Anti-Trust Act applies to both goods and services. The Clayton Act was first adopted into law in 1914 and prohibits price discrimination between purchasers and sellers of goods. In the patent context, the Clayton Act is principally used to address tying agreements. Unlike the Sherman Anti-Trust Act, the Clayton Act is applicable only to goods and does not apply to services. The Sherman Anti-Trust Act and the Clayton Act can be enforced by private litigants through civil actions, by the Department of Justice through civil and criminal actions, by the FTC, and by state attorneys general. Civil remedies for a violation of these Acts include injunctive relief, treble damages, and awards of attorneys’ fees. Specifically, with regard to patents, a violation of their antitrust provisions can mean the loss of patent rights for the patentee, with a finding that the patents that were involved in the antitrust violations are unenforceable.

3 — 12

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.6

The Federal Trade Commission Act established the FTC and gave that agency very broad authority to investigate, comment on, and take action against unfair methods of competition and deceptive trade practices, which would include violations of the Sherman Anti-Trust Act and the Clayton Act. The FTC can obtain injunctive relief but, in general, does not have the ability to assess civil damages. The FTC has interjected itself into all aspects of patent prosecution, enforcement, and licensing. Section 4(a) of the Clayton Act provides that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . and shall recover threefold the damages by him sustained.” 15 U.S.C. §15(a). The court in Disenos Artisticos E Industriales, S.A. v. Work, 676 F.Supp. 1254, 1276 (E.D.N.Y. 1987), noted: This expansive language has been construed to require a showing that the alleged loss is “of the type the antitrust laws were intended to prevent and that flows from that which makes [a defendant’s] acts unlawful.” Brunswick Corp. v. Pueblo Bowl-OMat, 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977). Thus, a plaintiff must show not only that there is an antitrust violation, but also that there is a causal connection between the violation and the alleged injury and that the defendant’s activities had the effect of stifling competition.

PRACTICE POINTER 

Antitrust laws protect competition — not competitors.

Thus, courts have required plaintiffs to establish what is known as “antitrust injury.” See Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 109 L.Ed.2d 333, 110 S.Ct. 1884, 1889 (1990); Brunswick, supra, 97 S.Ct. at 698. See also In re DDAVP Direct Purchaser Antitrust Litigation, 585 F.3d 677, 688 – 692 (2d Cir. 2009); Axis, S.p.A. v. Micafil, Inc., 870 F.2d 1105, 1108 – 1109 (6th Cir. 1989). To satisfy the requirement of an antitrust injury, the party must allege and prove “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Brunswick, supra, 97 S.Ct. at 697. The purpose of the antitrust injury requirement is to ensure that the harm for which the plaintiff seeks compensation corresponds to the rationale for finding a violation of the antitrust laws in the first place. See Atlantic Richfield, supra, 110 S.Ct. at 1893 – 1894. This antitrust injury requirement further ensures that plaintiffs recover only if the loss is the result of “a competition-reducing aspect or effect of the defendant’s behavior,” rather than a competition-increasing or competitionneutral aspect of that behavior. [Emphasis in original.] 110 S.Ct. at 1894. Thus, to establish antitrust injury, a plaintiff must show that the claimed injury reflects either the anticompetitive effects of the alleged violation or the effects of anticompetitive acts made possible by the alleged violation. See HyPoint Technology, Inc. v. Hewlett-Packard Co., 949 F.2d 874, 877 (6th Cir. 1991), citing Brunswick, supra. In addition to showing antitrust injury (i.e., harm to competition), a plaintiff must have antitrust standing to bring a suit. The antitrust standing analysis focuses on who is the proper plaintiff from among those classes of persons who have suffered antitrust injury. See, e.g., Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 13

§3.7

INTELLECTUAL PROPERTY LAW

U.S. 519, 74 L.Ed.2d 723, 103 S.Ct. 897 (1983); Blue Shield of Virginia v. McCready, 457 U.S. 465, 73 L.Ed.2d 149, 102 S.Ct. 2540 (1982); DDAVP Direct Purchaser Antitrust Litigation, supra; William H. Page, The Scope of Liability for Antitrust Violations, 37 Stan.L.Rev. 1445, 1484 (1985). In Associated General Contractors, the Court set forth a number of factors to be considered in determining whether a plaintiff has standing: (a) whether there is a causal connection between the antitrust violation and the plaintiff’s harm; (b) whether the defendants intended to cause this harm; (c) whether the injury is of the type intended to be prevented within the meaning of Brunswick; (d) whether the injury is direct or indirect; (e) whether the claim of damages is too speculative; and (f) whether there is a risk of duplicative recoveries and a danger of complex apportionment. 103 S.Ct. at 908 – 912. A. [3.7] Sherman Anti-Trust Act §1 Section 1 of the Sherman Anti-Trust Act prohibits “[e]very contract, combination . . . or conspiracy, in restraint of trade or commerce.” 15 U.S.C. §1. In addition to civil remedies, including treble damages under 15 U.S.C. §15, §1 provides for criminal fines for corporations up to $100 million, criminal fines for individuals up to $1 million, and prison sentences up to ten years. Commercial contracts inherently bind the parties to the contract and so restrain trade to some extent. Accordingly, the broad prohibition of §1 has been construed to apply only to those agreements that “unreasonably” restrain trade. See, e.g., Board of Trade of City of Chicago v. United States, 246 U.S. 231, 62 L.Ed. 683, 38 S.Ct. 242, 244 (1918). A claim under §1 requires a plaintiff to establish that (1) the defendants entered into a contract, combination, or conspiracy and (2) this conduct effected an unreasonable restraint on trade. 15 U.S.C. §1; Standard Oil Company of New Jersey v. United States, 221 U.S. 1, 55 L.Ed. 619, 31 S.Ct. 502 (1911); International Distribution Centers, Inc. v. Walsh Trucking Co., 812 F.2d 786, 793 (2d Cir. 1987). The focus of this provision of the antitrust laws is the existence of a contract, combination, or conspiracy (i.e., concerted action). National Society of Professional Engineers v. United States, 435 U.S. 679, 55 L.Ed.2d 637, 98 S.Ct. 1355, 1364 – 1365 (1978); Standard Oil, supra, 31 S.Ct. at 517 – 518. The concerted action may be explicit (United States v. Trenton Potteries Co., 273 U.S. 392, 71 L.Ed. 700, 47 S.Ct. 377 (1927)) or inferred. Merely coincidental behavior that can be explained on legitimate business grounds does not in itself establish a conspiracy if it is equally indicative of a series of unilateral actions. Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 79 L.Ed.2d 775, 104 S.Ct. 1464 (1984). Thus, §1 of the Sherman Anti-Trust Act has been used to strike down agreements or conduct that amounted to horizontal price-fixing; vertical price-fixing; horizontal allocations of territories or customers among actual or potential competitors; vertical allocations of territories, customers, or other non-price restraints involving firms at different levels of the market hierarchy; competitively motivated group boycotts or concerted refusals to deal; tying agreements; and exclusive dealing arrangements in which a supplier agrees to supply only a designated purchaser or a purchaser agrees to buy exclusively from a particular supplier. See William C. Holmes and Melissa H. Mangiaracina, ANTITRUST LAW HANDBOOK, 2012 – 2013 EDITION §2:2 (2012). Two approaches are used in analyzing agreements under §1 of the Sherman Anti-Trust Act: the per se approach and the rule-of-reason analysis. Under the per se approach, certain types of

3 — 14

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.7

conduct are deemed conclusively unreasonable, and, thus, evidence of any alleged pro-competitive effects of this conduct is irrelevant. Under the rule-of-reason analysis, the court will take a detailed look at the accused conduct’s impact on the market and the pro-competitive justifications of the conduct. The Supreme Court has long recognized certain restraints to be per se violations of §1. “[B]ecause of their pernicious effect on competition and lack of any redeeming virtue [these restraints] are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” Northern Pacific Ry. v. United States, 356 U.S. 1, 2 L.Ed.2d 545, 78 S.Ct. 514, 518 (1958). Thus, the Court has found horizontal price-fixing, vertical minimum price-fixing, horizontal market division, horizontal division of customers, horizontal group boycotts, and horizontal restrictions on output to be per se violations. The complexity of patent antitrust law is illustrated by the fact that horizontal territorial allocations are per se illegal, yet these agreements, if limited to patent rights, are expressly authorized under the patent laws. See §3.5 above. Guidance to resolve this conflict is provided in §§3.18 – 3.24 below. “Horizontal price-fixing,” which is defined as any agreement between competitors who are at the same level in the market that affects price, can take many forms, all of which are per se illegal: 1. agreement among creditors to eliminate short-term free credit to customers (Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 64 L.Ed.2d 580, 100 S.Ct. 1925 (1980)); 2. agreement among doctors setting maximum fees (Arizona v. Maricopa County Medical Society, 457 U.S. 332, 73 L.Ed.2d 48, 102 S.Ct. 2466 (1982)); and 3. agreement among dealers and their distributors to terminate competing dealers to maintain minimum price (see generally Monsanto, supra; Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 99 L.Ed.2d 808, 108 S.Ct. 1515 (1988)).

PRACTICE POINTER 

Sherman Anti-Trust Act §1 — per se approach (conclusively unreasonable) —



requires plaintiff only to show that practice occurred



does not require plaintiff to show anticompetitive effect



precludes defendant from attempting to justify the restraint

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 15

§3.7

INTELLECTUAL PROPERTY LAW

Per se violations include



horizontal price-fixing



vertical minimum price-fixing



horizontal market division



horizontal division of customers



horizontal group boycotts



horizontal restriction on output

If an agreement is not per se illegal, it will be evaluated under the rule-of-reason analysis. Under a rule-of-reason analysis, “the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 53 L.Ed.2d 568, 97 S.Ct. 2549, 2557 (1977). To determine whether an agreement is an unreasonable restraint on trade under the rule of reason, the fact-finder must weigh all the circumstances of the case (id.) and must analyze whether the agreement is anticompetitive in purpose or effect (Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 133 (2d Cir. 1978)). This analysis “focuses directly on the challenged restraint’s impact on competitive conditions.” National Society of Professional Engineers, supra, 98 S.Ct. at 1363. Accordingly, a plaintiff must prove not only an injury to itself, but also that competition in the relevant market was harmed. Hayden Publishing Co. v. Cox Broadcasting Corp., 730 F.2d 64, 69 – 70 (2d Cir. 1984) (“Proof that the defendant’s activities had an impact upon competition in a relevant market is an absolutely essential element of the rule of reason case.” Quoting Kaplan v. Burroughs Corp., 611 F.2d 286, 291 (9th Cir. 1979).). The threshold issue in any rule-of-reason analysis is the definition of the relevant market. See Topps Chewing Gum, Inc. v. Major League Baseball Players Ass’n, 641 F.Supp. 1179, 1189 (S.D.N.Y. 1986). See also Ralph C. Wilson Industries, Inc. v. Chronicle Broadcasting Co., 794 F.2d 1359, 1363 (9th Cir. 1986). Any culpable conduct under the antitrust laws must affect the relevant product market, that is, the “ ‘area of effective competition’ in which competitors generally are willing to compete for the consumer potential.” American Key Corp. v. Cole National Corp., 762 F.2d 1569, 1581 (11th Cir. 1985), quoting Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 5 L.Ed.2d 580, 81 S.Ct. 623, 628 (1961). See also AD/SAT, Division of Skylight, Inc. v. Associated Press, 181 F.3d 216, 227 (2d Cir. 1999) (“The relevant market for purposes of antitrust litigation is the ‘area of effective competition’ within which the defendant operates.” Quoting Tampa Electric, supra.). In Brown Shoe Co. v. United States, 370 U.S. 294, 8 L.Ed.2d 510, 82 S.Ct. 1502, 1523 (1962), the Court summarized that the relevant market has two dimensions: first, the relevant product market, which identifies the products or services that compete with each other; and second, the geographic market, which may be relevant when the competition is geographically

3 — 16

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.8

confined. Thus, “[t]he ‘market’ which one must study to determine when a producer has monopoly power will vary with the part of commerce under consideration.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 100 L.Ed. 1264, 76 S.Ct. 994, 1012 (1956).

PRACTICE POINTER 

Sherman Anti-Trust Act §1 — rule-of-reason approach —



looks at impact on market and pro-competitive justifications of arrangement



looks at market factors



can allow defendants to justify actions as pro-competitive



requires complex and expensive proofs

B. [3.8] Sherman Anti-Trust Act §2 Section 2 of the Sherman Anti-Trust Act provides: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine . . . or by imprisonment. 15 U.S.C. §2. Section 2 is subject to the same enforcement mechanism and remedies as §1. Under §2, defendants have been found liable for “actual” monopolization in which a firm acquires or retains actual monopoly power through competitively unreasonable practices, attempted monopolization, joint monopolization, conspiracies to monopolize, leveraging of monopoly power, and predatory pricing. Thus, §2 of the Act reaches both individual conduct and collective action. In Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 86 L.Ed.2d 467, 105 S.Ct. 2847, 2854 n.19 (1985), the Court, quoting United States v. Grinnell Corp., 384 U.S. 563, 16 L.Ed.2d 778, 86 S.Ct. 1698, 1704 (1966), explained that “[t]he offense of monopoly under §2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” Naturally, these proofs play out in what will be defined as the “relevant market,” the definition of which provides a key to understand the rationale of the case. The elements for attempted monopolization are “(1) anticompetitive or exclusionary conduct; (2) specific intent to monopolize; and (3) a ‘dangerous probability’ that the attempt will succeed.” International Distribution Centers, Inc. v. Walsh Trucking Co., 812 F.2d 786, 790 (2d Cir. 1987), quoting Northeastern Telephone Co. v. American Telephone & Telegraph Co., 651 F.2d 76, 85 (2d Cir. 1981).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 17

§3.9

INTELLECTUAL PROPERTY LAW

The elements for conspiracy to monopolize are (1) conspiracy, (2) specific intent, and (3) overt acts in furtherance of the conspiracy. Monopoly power or a dangerous probability of success is not needed, only a showing that the conduct will have an appreciable effect on interstate commerce. See United States of America v. Consolidated Laundries Corp., 291 F.2d 563 (2d Cir. 1961). C. [3.9] Clayton Act The Clayton Act addresses price discrimination, tying arrangements, exclusive dealing agreements, requirement contracts, and output contracts. In the patent-antitrust context, §3 of the Clayton Act is most pertinent: It shall be unlawful . . . to lease or make a sale or contract for sale of goods . . . or other commodities, whether patented or unpatented . . . on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the goods . . . of a competitor . . . where the effect . . . may be to substantially lessen competition or tend to create a monopoly in any line of commerce. 15 U.S.C. §14. Section 7 of the Clayton Act addresses mergers and acquisitions, specifically prohibiting this activity when “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U.S.C. §18. Thus, §7 has been viewed as addressing “monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding.” Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 93 L.Ed.2d 427, 107 S.Ct. 484, 496 (1986) (Stevens, J., dissenting), quoting S.Rep. No. 1775, 81st Cong., 2d Sess. 4 – 5 (1950), reprinted in 1950 U.S.C.C.A.N. 4293, 4296. D. [3.10] Federal Trade Commission Act As noted in §3.6 above, the Federal Trade Commission Act established the FTC. The FTC has very broad powers. Section 5(a)(2) of the Federal Trade Commission Act provides that the FTC can prohibit any “[u]nfair methods of competition in or affecting commerce and unfair and deceptive acts or practices in or affecting commerce.” 15 U.S.C. §45(a)(2). This has been interpreted to give the FTC the power to investigate and prohibit antitrust violations, incipient antitrust violations, violations of basic policies underlying the antitrust laws, and anticompetitive practices that substantially injure competitors or are inherently unfair. The FTC has become very active in the patent antitrust area. It forced the breakup of the Pillar Point Partners patent pool, which involved a large number of patents in the area of laser eye surgery. It also unsuccessfully tried to invalidate one of the patents in the pool. The FTC has also been quite active in standard-setting activities, which involve the conduct of companies that participate in the establishment of industry standards and then later try to sue for infringement of their patents when someone adopts the standard that the patent owner helped to develop. See §3.28 below. The FTC has moved beyond the anticipative effects of improperly using a patent to comment on the inner workings of the United States Patent and Trademark Office, the patent law, and the

3 — 18

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.12

patent system. The FTC’s position is essentially anti-patent. See, e.g., Rambus Inc. v. Federal Trade Commission, 522 F.3d 456, 467 (D.C.Cir. 2008) (overturning FTC order against patentee and noting that “[b]ecause of the chance of further proceedings on remand, we express briefly our serious concerns about strength of the evidence relied on to support some of the Commission’s crucial findings regarding the scope of JEDEC’s patent disclosure policies and Rambus’s alleged violation of those policies”). The FTC has an excellent website, www.ftc.gov, that provides a full and clear picture of its actions and policy positions regarding patents. E. [3.11] Types of Conduct Subject to Antitrust Scrutiny In analyzing agreements under the antitrust law, they are generally characterized into four types: (1) horizontal agreements; (2) vertical agreements; (3) agreements that affect price; and (4) agreements that have no effect on price (i.e., non-price agreements). Horizontal agreements arise when the parties are at the same level in the market. For example, an agreement between the suppliers of a raw material would be a horizontal agreement. Vertical agreements arise when the parties are at different levels in the chain of distribution. For example, an agreement between a retail seller and a manufacturer would be a vertical agreement. This difference between these agreements is important in determining the level of scrutiny that will be applied to the restraint. The difference between these types of agreements, however, frequently becomes blurred and often becomes a central issue in the case. For example, in the patent licensing context it is not unusual for the patent licensor and licensee both to be at multiple levels in the chain of distribution (i.e., they are both manufacturers and sellers). Would a license agreement between them be a horizontal agreement or vertical agreement? This is a difficult question to answer, and the answer will depend on the facts underlying the agreement, as well as the scope of the patent that was licensed. 1. [3.12] Horizontal Agreements Horizontal price-fixing occurs when firms at the same level of the market agree to fix or otherwise stabilize the prices that they will charge for their products or services. Horizontal pricefixing is illegal per se. The courts do not care about the reasonableness of these types of agreements. Per se illegality applies to agreements fixing either minimum or maximum prices. United States v. Trenton Potteries Co., 273 U.S. 392, 71 L.Ed. 700, 47 S.Ct. 377 (1927). Horizontal agreements can be proved by direct or circumstantial evidence, and they will be held to encompass more than express agreement to set a price. For example, the exchange of price information in a highly concentrated market has been held to be per se illegal. United States v. Container Corporation of America, 393 U.S. 333, 21 L.Ed.2d 526, 89 S.Ct. 510 (1969). Additionally, plaintiffs do not need to prove an express agreement in order to prove a horizontal price-fixing agreement. Interstate Circuit, Inc. v. United States, 306 U.S. 208, 83 L.Ed. 610, 59 S.Ct. 467 (1939). Unlike vertical non-price restraints, which are generally afforded a rule-of-reason analysis, horizontal non-price restraints are still generally subject to a per se illegality analysis. Timken Roller Bearing Co. v. United States, 341 U.S. 593, 95 L.Ed. 1199, 71 S.Ct. 971 (1951), overruled

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 19

§3.13

INTELLECTUAL PROPERTY LAW

in part by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 81 L.Ed.2d 628, 104 S.Ct. 2731 (1984). The distinction between using a per se analysis or a rule-of-reason analysis often can be critical to the legality of a restraint. If a court uses a per se analysis, no consideration will be given to justifications or efficiencies that may result from the agreement. Market share does not have to be proved, and an automatic illegal label will attach as soon as the activity is found to fall into this category. The rule-of-reason analysis, on the other hand, allows the defendant to present efficiencies and justifications and prove market share or lack of market power in defense of the allegations. 2. [3.13] Vertical Agreements Vertical price-fixing is a restraint that occurs when prices are fixed between firms at different levels of the market structure. This agreement may be to fix prices at one or both market levels, at a set amount, or within a prescribed range. In general, these types of agreements are considered per se illegal. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 63 L.Ed.2d 233, 100 S.Ct. 937, 941 – 942 (1980). Vertical maximum price-fixing (i.e., agreement that the price shall be no greater than a specified amount), however, is evaluated under the rule of reason. State Oil Co. v. Khan, 522 U.S. 3, 139 L.Ed.2d 199, 118 S.Ct. 275 (1997). A court using a rule-of-reason analysis will look to justifications for the allegedly anticompetitive act and balance the pro-competitive against the anticompetitive effects of the action. The distinction between vertical price restraints and non-price restraints is important to the legal analysis. In general, vertical non-price restraints will be examined under the rule-of-reason analysis. Courts have recognized that vertical non-price restraints can serve legitimate business objectives and, therefore, will be accorded greater judicial tolerance. The balance of competitive justifications with the competitive harm will be focused mainly on inter-brand competition as opposed to intra-brand competition. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 53 L.Ed.2d 568, 97 S.Ct. 2549 (1977). Examples of vertical non-price restraints include territorial or customer limitations imposed by a manufacturer on its dealers, assignment to areas of primary responsibility or location clauses, and agreements providing for exclusive dealerships. In terms of vertical restraints, a court will generally determine first what is the specific restraint at issue. Then it will consider the likely anticompetitive effects and the offsetting procompetitive effects. Finally, the court will look at whether the parties have sufficient market power to effect competition in the market. California Dental Ass’n v. Federal Trade Commission, 526 U.S. 756, 143 L.Ed.2d 935, 119 S.Ct. 1604, 1618 (1999) (Breyer, J., concurring in part & dissenting in part). When dealing with vertical restraints, it is advisable, though not imperative, to avoid express agreements that specifically deal with price. While courts are very hesitant to impose per se illegality on vertical restraints, they will do so if presented with explicit evidence. 3. [3.14] Tying Arrangements A tying arrangement occurs when the purchase of one item is conditioned on the purchase of another (i.e., tie-in) or the purchase of one item is conditioned on refusal to buy a competitor’s product (i.e., tie-out). See generally Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 119 L.Ed.2d 265, 112 S.Ct. 2072 (1992). Thus, using the pencil and eraser example from §§3.3 – 3.5 above, if the manufacturer of pencils also required a retailer to buy the

3 — 20

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.15

manufacturer’s note paper in order to get the pencils, there would be a tying agreement. The purchase of the tying product (the pencil) is conditioned on the purchase of the tied product (the paper). Tying agreements are subject to scrutiny under §1 (and at times §2) of the Sherman AntiTrust Act, 15 U.S.C. §§1 and 2, and §3 of the Clayton Act, 15 U.S.C. §14. They are subjected to a watered-down per se analysis. Although tying arrangements may result in significant anticompetitive effects, these arrangements can also result in market efficiencies and pro-competitive benefits. See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 80 L.Ed.2d 2, 104 S.Ct. 1551 (1984). For a tying agreement to violate the antitrust laws, the following elements must be present: a. The tied item must be separate from the tying item. b. The purchase of one item must be conditioned on the purchase of another. c. There must be sufficient economic power in the tying item to appreciably restrain free competition in the tied item’s market. d. There must be a substantial effect on interstate commerce in the tied market. Even if these four elements are present, the defendant can still make competitive reasonableness and business necessity defenses. 4. [3.15] Group Boycotts and Refusals To Deal Group boycotts and refusals to deal come within a changing area of the law. They are also of particular significance to patent antitrust issues because of the superficial similarities between an exclusive license and discriminatory nonexclusive licensing practices by a patentee, which should not violate the antitrust laws. See, e.g., In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322, 1327 – 1328 (Fed.Cir. 2000); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed.Cir. 1992). Certain group boycotts or concerted refusals to deal have been deemed to fall within the class of restraints meriting per se treatment under §1 of the Sherman Anti-Trust Act, 15 U.S.C. §1. See Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 86 L.Ed.2d 202, 105 S.Ct. 2613 (1985). The types of concerted refusals to deal that are deemed to be per se violations have been limited by the courts in various ways. The Second Circuit, for instance, has determined that vertical restraints do not fall within the traditional category of group boycott cases characterized as per se violations. See Oreck Corp. v. Whirlpool Corp., 579 F.2d 126, 131 (2d Cir.), cert. denied, 99 S.Ct. 340 (1978). Other circuits have agreed with this conclusion. See, e.g., Lomar Wholesale Grocery, Inc. v. Dieter’s Gourmet Foods, Inc., 824 F.2d 582 (8th Cir. 1987). See also Disenos Artisticos E Industriales, S.A. v. Work, 676 F.Supp. 1254 (E.D.N.Y. 1987). In Northwest Wholesale, supra, the Supreme Court further limited the kinds of refusals to deal that are deemed to be per se illegal, holding that absent a threshold showing that a defendant “possesses market power or exclusive access to an element essential to effective competition,” a restraint should be judged under the rule of reason. 105 S.Ct. at 2620 – 2621. Accord Federal Trade Commission v. Indiana Federation of Dentists, 476 U.S. 447, 90 L.Ed.2d

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 21

§3.16

INTELLECTUAL PROPERTY LAW

445, 106 S.Ct. 2009, 2018 (1986) (“the category of restraints classed as group boycotts is not to be expanded indiscriminately, and the per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers in order to discourage them from doing business with a competitor”). 5. [3.16] Joint Ventures Research joint ventures have greater protection from antitrust scrutiny than other agreements between competitors. Firms may enter into joint ventures for any of a variety of business reasons, for example, to pool resources for product research and development, to jointly manufacture an already developed product, or to share resources in the marketing or distribution of products. See the National Cooperative Research and Production Act of 1993, 15 U.S.C. §4301, et seq. These types of agreements will be afforded a broad rule-of-reason analysis, balancing the desirability of the joint venture and prohibiting those joint ventures that unreasonably restrict or threaten competition. Generally, the purpose of the venture, the industry structure and relative competitive positions of the venture participants, the scope and duration of the venture, efficiencies and other purported justifications, the impact of the venture on outside competitors, and the nature of any restraints collateral to the venture will be considered when analyzing the antitrust ramifications of a joint venture. United States v. Penn-Olin Chemical Co., 378 U.S. 158, 12 L.Ed.2d 775, 84 S.Ct. 1710 (1964); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979).

V.

[3.17] THE INTERACTION OF PATENT AND ANTITRUST LAW

The fact that patents are in essence legal monopolies should not subject them to either greater or lesser antitrust scrutiny. The patentee has the legal right to exclude all others from practicing the claimed invention. Thus, exercising this right to exclude, either in total or by any less restrictive actions, should not violate the antitrust laws. In fact, any restrictive actions that are less restrictive than total exclusion by the patentee should have pro-competitive effects. It is only when the patentee’s restrictive actions extend beyond that which it is entitled to exclude under the patent that the risk of an antitrust violation arises. As provided by the Federal Circuit: Should the restriction be found to be reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims, that ends the inquiry. However, should such inquiry lead to the conclusion that there are anticompetitive effects extending beyond the patentee’s statutory right to exclude, these effects do not automatically impeach the restriction. Anticompetitive effects that are not per se violations of law are reviewed in accordance with the rule of reason. Patent owners should not be in a worse position, by virtue of the patent right to exclude, than owners of other property used in trade. [Emphasis added.] Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed.Cir. 1992). This test explains and reconciles the vast majority of cases and provides an important tool for analyzing licensing agreements and other conduct by the patentee. If the patentee could not prevent the conduct through an infringement action, then red flags should go up if it is placing restrictions or conditions on this conduct through an agreement. As discussed in §3.29 below, this same general test is applicable to avoiding misuse issues.

3 — 22

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.19

These red flags signal a need for further analysis of the proposed conduct, not that an antitrust violation will necessarily result. As noted in §3.1 above, even if the conduct extends beyond the scope of the patent’s exclusionary rights, all of the other elements of an antitrust violation, such as market power and antitrust injury, must be present before liability could occur. There is certain conduct by the patentee that in and of itself should not give rise to an antitrust violation. Having successful and productive research activities that give rise to a large body of patents that have significant exclusionary power is not an antitrust violation. Refusing to license a patent is not an antitrust violation. Granting a nonexclusive license is not an antitrust violation. See generally In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed.Cir. 2000); Mallinckrodt, supra. On the other hand, conduct that extends beyond the patent’s legitimate exclusionary rights, including the improper assertion of a patent, can give rise to antitrust violations.

PRACTICE POINTERS 

Success is not an antitrust violation.



Obtaining patents for one’s own work is not an antitrust violation.



Refusing to license is not an antitrust violation.



Granting a nonexclusive license is not an antitrust violation.

A. [3.18] Patent Licensing Activity Patent licenses by their very nature are agreements that relate to a monopoly and affect trade and commerce. Thus, they can fall under the scrutiny of both the Sherman Anti-Trust Act and the Clayton Act, as well as the FTC. There are several types of licensing practices that raise red flags from antitrust and misuse concerns. Patent misuse is discussed in greater detail in §3.29 below. Although these restrictions are not in and of themselves antitrust violations, their presence will subject the agreement to greater scrutiny during litigation and increases the risk that the agreement may violate the antitrust laws. Thus, a careful analysis, both for the legal and business aspects, should be made before entering into these licensing practices. 1. [3.19] Territory and Field-of-Use Restrictions As discussed in §3.5 above, the patent statutes expressly authorize field-of-use restrictions and territory restrictions. Provided these restrictions are limited to the patent’s exclusionary rights, they will not violate the antitrust laws and will not be patent misuse. To continue with the pencil and eraser patents example from §§3.3 – 3.5 above, the patentee who owned the patent on just the pencil could grant a license to the manufacturer of the eraser pencil to make and sell them in New York, leaving the rest of the country to the patentee. This would be a territorial restriction, and it would not violate the antitrust laws or be considered

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 23

§3.20

INTELLECTUAL PROPERTY LAW

patent misuse because the territorial restriction is squarely within the exclusionary rights of the patent since the patentee could totally stop the manufacture and sale of eraser pencils. See, e.g., Brownell v. Ketcham Wire & Mfg. Co., 211 F.2d 121, 128 (9th Cir. 1954). Similarly, the patentee who owned the patent on just the pencil could grant a license to a manufacturer of pencils to make and sell pencils that are shorter than four inches (i.e., the little pencils used to score golf). This would be a field-of-use restriction and would not violate the antitrust laws or be considered patent misuse. See, e.g., General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 83 L.Ed. 81, 59 S.Ct. 116 (1938); B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419 (Fed.Cir. 1997). On the other hand, if the patentee who owned the eraser pencil patent granted a license to a manufacturer of pencils and limited this manufacturer’s ability to make and sell pencils without erasers to New York, serious antitrust and misuse issues would arise. In this situation, the patentee has extended a territory restriction to products that are outside the scope of its exclusionary rights. The territorial restriction applies to pencils without erasers, but the patent can exclude only pencils with erasers. Thus, this agreement is beyond the protection afforded by the patent and the patent statutes. This is not to say that there is necessarily an antitrust violation. Monopolization, market power, antitrust injury, and the other elements of an antitrust violation must still be present for a violation to occur. Nevertheless, in the latter situation, these antitrust factors would need to be evaluated. In the earlier situation, they are meaningless because the conduct is protected from antitrust and misuse scrutiny by the patent and the patent laws. 2. [3.20] Package License Agreements Package licensing occurs when more than one patent is grouped together in a license agreement. The benchmark test for analyzing this licensing activity is whether the package license was compulsory or for the convenience of the parties. If it is compulsory, serious antitrust issue may arise. For example, assume that a patentee has a large patent portfolio covering many aspects and components of a consumer electronics product. Further, assume that the licensee did not want to pay a royalty on a product-by-product, patent-by-patent basis (that is, on which patent was used in which product) because of accounting or other difficulties. In this situation, the parties could agree to a flat rate for all products sold, regardless of whether they used none, one, or a hundred of the licensed patents. See generally Automatic Radio Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 94 L.Ed. 1312, 70 S.Ct. 894 (1950), overruled by Lear, Inc. v. Adkins, 395 U.S. 653, 23 L.Ed.2d 610, 89 S.Ct. 1902 (1969); Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 23 L.Ed.2d 129, 89 S.Ct. 1562 (1969). Such an agreement would not violate the antitrust laws or give rise to patent misuse. The duration of the royalty obligation under package licenses is another important consideration. To avoid misuse and antitrust issues, the obligation to pay royalties should expire proportionally with the value of the patents as they expire. In general, however, if for the convenience of the parties it is agreed that the royalty obligations will expire with the last-toexpire patent in the package, the agreement will not be considered an antitrust violation or patent misuse. See generally Brulotte v. Thys Co., 379 U.S. 29, 13 L.Ed.2d 99, 85 S.Ct. 176 (1964).

3 — 24

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.22

3. [3.21] Patent Pooling Agreements Patent pooling agreements involve a group of patentees who bring their patents together and agree to particular conduct with respect to this collection or “pool” of patents. Patent pools usually involve competitors at the same level in the market. Thus, they are generally viewed as horizontal agreements and are subject to greater scrutiny under the antitrust laws. Additionally, the FTC has shown considerable interest in these types of agreements. For example, as noted in §3.10 above, the FTC successfully forced the breakup of Pillar Point Partners, a patent pool that related to the very popular refractive laser eye surgery. The FTC also investigated and approved a patent pool relating to DVD technology. These cases and the FTC’s rational behind them are explained in detail on the FTC’s website, www.ftc.gov. Depending on conditions placed on the pool and the criteria for compiling the pool, these agreements can be either very pro-competitive and able to survive all antitrust and misuse scrutiny or no more than a horizontal price-fixing scheme and per se illegal. Pooling agreements can be very pro-competitive and at times essential for the commercialization of new technologies. If each entrant into a market for a new technology had to avoid and litigate patent issues that arise from the other potential market participants’ patents, the market might be viewed by all as too difficult and risky to enter. Thus, the chilling effect of a large number of patents held by several potential market participants might prevent the market from obtaining the critical mass necessary for the new technology to be accepted by the consuming public. On the other hand, if a patent pool provides all market entrants with the ability to obtain nonexclusive, reasonable, nondiscriminatory licenses, this barrier to the market’s development is removed. As a general rule, patent pooling agreements will be more likely to pass antitrust and misuse scrutiny if the following apply: a. They contain patents on complementary and blocking technologies rather than patents on competing technologies. b. The patents for the pool were selected by independent experts in the field based on what was essential technology to enter the market. c. They are opened to all potential participants in the market. d. They provide for the licensing of individual patents, as well as the entire pool. e. They provide for reasonable, nondiscriminatory royalty rates. f.

They do not fix the price or place other restrictions on licensed products.

4. [3.22] Grantback Agreements Grantback agreements occur when the licensee or the licensor places restrictions on future improvements. Typically, the grantback agreement requires the licensee to grant rights on improvements to the licensed technology back to the licensor. If the licensee is required to grant back to the licensor only a nonexclusive license for improvements that directly relate to the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 25

§3.23

INTELLECTUAL PROPERTY LAW

originally licensed technology, the grant provision should pass antitrust and misuse scrutiny. Such a grantback clause essentially assures that the licensee will not be able to keep the licensor out of the market by preventing the licensor from using the licensee’s improvements, which may be the only commercially viable form of the invention. In this situation, the scope of the grantback rights is no broader than the original licensed patent rights. In this sense, the improvements could not have been made without the originally licensed technology first having been practiced, so, again, there is no improper extension of these patent rights through the grantback clause. See generally Transparent-Wrap Mach. Corp. v. Stokes & Smith Co., 329 U.S. 637, 91 L.Ed. 563, 67 S.Ct. 610 (1947). On the other hand, if the grantback clause required assignment of all improvements or if it required the granting of rights on improvements that were unrelated to the originally licensed technology, red flags should go up. Such an agreement is extending the scope of the originally licensed patent well beyond its boundaries and may not survive antitrust or misuse scrutiny, depending on what other facts are present. 5. [3.23] Tying Agreements As discussed in §3.14 above, a tying agreement occurs when the sale of one item is conditioned on the purchase of another. Using again the pencil and eraser example from §§3.3 – 3.5 above, by tying the sale of the pencil to the purchase of the paper, the manufacturer has created a tying agreement. The fact that the pencil is patented can have a significant impact on the third element of a tying analysis, whether there is sufficient economic power in the tying item (the patented pencil) to appreciably restrain free competing in the tied item’s market. See generally Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 80 L.Ed.2d 2, 104 S.Ct. 1551 (1984). In the antitrust context, the Supreme Court has maintained that there is a presumption of market power if the tying item is patented. 104 S.Ct. at 1560. This, however, must be contrasted with patent misuse, in which the presumption of market power has been legislatively overruled. 35 U.S.C. §271(d)(5). See §3.5 above. Additionally, the Federal Circuit has refused to find that a patent creates a presumption of market power for the patented product. See C.R. Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1368 (Fed.Cir. 1998) (“It is not presumed that the patent-based right to exclude necessarily establishes market power in antitrust terms.”); Abbott Laboratories v. Brennan, 952 F.2d 1346, 1354 (Fed.Cir. 1991) (“A patent does not of itself establish a presumption of market power in the antitrust sense.”). Section 2.2 of the Antitrust Guidelines for the Licensing of Intellectual Property (Apr. 6, 1995), www.justice.gov/atr/public/guide lines/0558.htm, issued by the Department of Justice and the FTC provides that the agencies will not presume that a patent, copyright, or trade secret necessarily confers market power on its owner. Although misuse and antitrust scrutiny of tying agreements have relaxed, these agreements should nevertheless be avoided. The presence of a tying provision in a license agreement gives a willful infringer a potential defense when none would otherwise have existed. It can create a very costly and problematic sideshow with substantial downside risk. At the same time, it is rare that such a provision is commercially necessary for the deal to go through.

3 — 26

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.25

6. [3.24] Price Restrictions As a general rule, patent license agreements that dictate the price of a licensed product should be avoided. Price-setting agreements are problematic, will inevitably attract antitrust scrutiny, and rarely have legitimate commercial justifications. The Supreme Court, however, has held that a licensing agreement by which the licensee agreed to sell patented products at a certain price did not violate the antitrust laws. United States v. General Electric Co., 272 U.S. 476, 71 L.Ed. 362, 47 S.Ct. 192, 197 (1926), citing Bement v. National Harrow Co., 186 U.S. 70, 46 L.Ed. 1058, 22 S.Ct. 747 (1902). The General Electric Court found that the reasoning of the Bement Court had not been overruled and was still applicable in the case before it. Furthermore, the General Electric Court stated: The very object of [the patent] laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal. 47 S.Ct. at 197, quoting Bement, supra, 22 S.Ct. at 755. This holding has been limited to the facts before the court. See generally United States v. Line Material Co., 333 U.S. 287, 92 L.Ed. 701, 68 S.Ct. 550 (1948); United States v. United States Gypsum Co., 333 U.S. 364, 92 L.Ed. 746, 68 S.Ct. 525 (1948). It is also questionable whether the Supreme Court would follow this holding if presented with the same facts today. Thus, a prudent licensor should not include such a provision in its patent licenses. B. [3.25] Walker Process Fraud on the United States Patent and Trademark Office Enforcement of a patent that was obtained through fraud on the United States Patent and Trademark Office can give rise to an antitrust violation. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L.Ed.2d 247, 86 S.Ct. 347 (1965). The issue in Walker Process was whether the maintenance and enforcement of a patent obtained by fraud on the USPTO provides the basis for an action under §2 of the Sherman Anti-Trust Act, 15 U.S.C. §2. See §3.8 above for a discussion of §2. Additionally, the Walker Process Court considered whether a patentee could be subject to a treble damage claim by an injured party under the Clayton Act. The Court held that the enforcement of a patent procured by fraud on the USPTO may violate §2 of the Sherman Anti-Trust Act, provided the other elements necessary for a §2 case are present. The Court also held that if the patentee had violated §2, the patentee would be subject to treble damages under the Clayton Act. 86 S.Ct. at 349. Inequitable conduct, discussed in §3.30 below, is insufficient for an antitrust violation. Rather, common-law fraud must be established. In Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed.Cir. 1998), the Federal Circuit addressed the relationship between Noerr-Pennington immunity and a Walker Process claim. Noerr-Pennington immunity protects a party’s right to petition the government and to take action in the courts without having this conduct subjected to antitrust scrutiny. See Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L.Ed.2d 464, 81

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 27

§3.26

INTELLECTUAL PROPERTY LAW

S.Ct. 523 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657, 14 L.Ed.2d 626, 85 S.Ct. 1585 (1965). Thus, unless this conduct is an objectively baseless sham, it will be immune from antitrust liability. See Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 123 L.Ed.2d 611, 113 S.Ct. 1920 (1993). In Nobelpharma, the Federal Circuit held that Noerr-Pennington immunity did not apply to Walker Process fraud in the USPTO claims. 141 F.3d at 1071 – 1072. See also Glass Equipment Development, Inc. v. Besten, Inc., 174 F.3d 1337, 1343 (Fed.Cir. 1999). C. [3.26] Enforcement of a Patent Known To Be Invalid or a Noninfringed Patent The enforcement of a patent that is known to be invalid or a noninfringed patent can give rise to antitrust liability, provided the other elements of an antitrust claim are established. See generally Handgards, Inc. v. Ethicon, Inc., 743 F.2d 1282 (9th Cir. 1984). These claims, however, unlike a Walker Process claim, are subject to Noerr-Pennington immunity. See the discussion of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L.Ed.2d 247, 86 S.Ct. 347 (1965), Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L.Ed.2d 464, 81 S.Ct. 523 (1961), and United Mine Workers of America v. Pennington, 381 U.S. 657, 14 L.Ed.2d 626, 85 S.Ct. 1585 (1965), in §3.25 above. Thus, it is not enough that the asserted patent is found to be invalid, unenforceable, or noninfringed. Rather, the bringing of the infringement lawsuit in the first instance must have been an objectively baseless sham. See C.R. Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1368 – 1369 (Fed.Cir. 1998); Glass Equipment Development, Inc. v. Besten, Inc., 174 F.3d 1337, 1343 (Fed.Cir. 1999). The tests and requirements for establishing sham litigation to circumvent Noerr-Pennigton immunity were further refined by the Supreme Court in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 123 L.Ed.2d 611, 113 S.Ct. 1920, 1928 (1993). Thus, in Professional Real Estate Investors the Court held that sham litigation requires both an objective and a subjective component. 113 S.Ct. at 1927. The Professional Real Estate Investors Court then set out a two-part test for determining whether sham litigation or conduct was present and thus whether Noerr-Pennigton immunity was circumvented. First, the underlying activity must be objectively baseless in the sense that no reasonable person could reasonably expect to win the suit. Second, and only after this threshold level of objective unreasonableness is established, a court will look to the subjective intent of the actor. Under this second prong of the test, a court looks to see if the actor had a subjective intent to interfere directly with the business relationship of a competitor. Only if both of these factors are met will a court then find that the subject activity was a sham, waive Noerr-Pennigton immunity, and permit the antitrust action based on the underlying activity to proceed. 113 S.Ct. at 1928 n.5. These types of cases are very difficult to bring successfully against a patentee, as noted by the Federal Circuit: Neither the bringing of an unsuccessful suit to enforce patent rights, nor the effort to enforce a patent that falls to invalidity, subjects the suitor to antitrust liability. . . .

3 — 28

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.28

The law recognizes a presumption that the assertion of a duly granted patent is made in good faith. [Citations omitted.] C.R. Bard, supra, 157 F.3d at 1369. D. [3.27] Improper Acquisition of Patents Patents have the attributes of personal property. 35 U.S.C. §261. They are also property that can have significant economic power. See §3.3 above. Thus, their improper acquisition through purchase or merger could give rise to antitrust liability, provided the other elements of an antitrust claim are established. See, e.g., Rex Chainbelt Inc. v. Harco Products, Inc., 512 F.2d 993 (9th Cir. 1975); Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416 (10th Cir. 1952). See also Eastman Kodak Co. v. Goodyear Tire & Rubber Co., 114 F.3d 1547, 1556 – 1558 (Fed.Cir. 1997), overruled in part on other grounds by Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448, 1454 (Fed.Cir. 1998). In this context, care should be taken that a grantback provision is not viewed as a means to improperly acquire patent rights. See §3.22 above. E. [3.28] Standard-Setting Activity and Its Effect on Patent Rights The intersection of standard-setting activity and patent strategies can result in the loss of rights in a patent or even antitrust liability for the patent owner. Standard-setting organizations are usually groups of competitors who join together to develop technical standards for their industry in an attempt to develop the market for their technology and provide benefits to consumers. In simple terms, standard-setting organizations are the reasons why our electronic devices communicate with each other and we have moved away from a world of incompatible technologies, such as Beta and VHS video of the 1980s. Examples of such groups are the American National Standards Institute (ANSI), which developed standards for magnetic tape, and the Joint Electronic Devices Engineering Council (JEDEC), which developed standards for single in-line memory modules (SIMMs) and for dynamic random access memory (DRAM). Although the majority of the caselaw in this area has been in the electronics industry, there is no reason that these doctrines would not apply to other business segments, such as accounting and tax. See generally Rambus Inc. v. Federal Trade Commission, 522 F.3d 456 (D.C.Cir. 2008).

PRACTICE POINTER 

Openness is the best policy in dealing with standard-setting organizations

Standard-setting issues arise when a patent owner is a member of a standard-setting organization and that organization develops standards that relate to the patent owner’s patents and pending patent applications. Depending on the degree of involvement of the patent owner in the creation of the standards, the closeness of the standards to the patents, and the rules of the standard-setting organization, the patent owner will have to identify relevant patents and potentially agree to license these patents under reasonable and nondiscriminatory (RAND) terms. The caselaw in this area addresses the situation in which patent owners fail to disclose patents and patent applications to a standard-setting organization with which they are associated. Id. The concern and potential harm that flow from a failure to identify patents are that the patent owner, through its efforts in shaping a particular standard, could drive an entire industry to

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 29

§3.28

INTELLECTUAL PROPERTY LAW

infringe its patents. Some courts have referred to this as a “patent hold-up” or “patent ambush.” Hynix Semiconductor Inc. v. Rambus Inc., 527 F.Supp.2d 1084, 1098 (N.D.Cal. 2007). Liability for the patent in this situation flows from well-established legal doctrines such as equitable estoppel, implied license, fraud, federal antitrust laws, and FTC law. A review of some of these cases shows the substantial risks facing patent owners when they participate in these organizations. The standard-setting patent body of law traces its origins to Potter Instrument Co. v. Storage Technology Corp., 207 U.S.P.Q. (BNA) 763, 1980 WL 30330 (E.D.Va. 1980), aff’d on other grounds, 641 F.2d 190 (4th Cir. 1981). In Potter, the standard at issue was proposed by IBM, which did not own the patent, but only had a license under it. The patent owner, Potter, did not propose the standard and did not advocate for its adoption. Potter, however, did have a representative at one of the subcommittee meetings when the standard was discussed. 1980 WL 30330 at *3. On these facts, the court found that Potter, the patent owner, was estopped from bringing an infringement action against a defendant that was practicing the standard: Potter actively participated with the ANSI Subcommittee in developing GCR as the industry standard — it intentionally failed to bring its ownership of the ’685 patent to the committee’s attention notwithstanding the committee’s policy to the contrary. By so doing, Potter has gained a monopoly on the GCR industry standard without any obligation to make its use available on reasonable terms to competitors in the industry. 1980 WL 30330 at *7. In Stambler v. Diebold Inc., 11 U.S.P.Q.2d (BNA) 1709, 1998 WL 95479 (E.D.N.Y. 1988), the patent owner had no involvement in the development of the standard and did not in any way influence the committee into proposing this particular standard. The patent owner, however, believed that practicing the proposed standard would infringe its patent but did not disclose this belief or the identity of its patent to the committee. The patent owner then left the committee before the standard was formally adopted. 1998 WL 95479 at *6. Under these facts, the court, using an equitable estoppel theory, held that the patent was unenforceable: Under these circumstances, plaintiff had a duty to speak out and call attention to his patent. . . . Plaintiff could not remain silent while an entire industry implemented the proposed standard and then when the standards were adopted assert that his patent covered what manufacturers believed to be an open and available standard. Id. Lucas Aerospace, Ltd. v. Unison Industries, L.P., 899 F.Supp. 1268 (D.Del. 1995), is not a national standard-setting case. Rather, in Lucas the patent owner had encouraged a customer to adopt an internal standard that made the customer infringe. In this situation, the court declined to extend the rationale of the national standard-setting cases, such as Potter and Stambler, to solely private activity. 899 F.Supp. at 1294 – 1295. In Wang Laboratories, Inc. v. Mitsubishi Electronics America, Inc., 103 F.3d 1571 (Fed.Cir. 1997), a customer “coaxed” a supplier into the SIMMs market. The customer then had these SIMMs, which were covered by the customer’s patent, designated as a JEDEC standard. 103 F.3d at 1575 – 1576. Thus, the customer-patent owner used its patents and the standard to capture a

3 — 30

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.28

supplier. Under this scenario, the court did not find that equitable estoppel prevented the customer-patent owner from enforcing its patent against the supplier. 103 F.3d at 1581. Rather, the court found that an implied license existed between the customer and the supplier. 103 F.3d at 1582. The primary difference between an estoppel analysis and an implied-license analysis is that in an implied-license analysis the focus is on whether the patent owner provided an affirmative grant of consent or permission to use the invention. An equitable-estoppel analysis, on the other hand, focuses on whether through misleading conduct the patent owner suggested that it would not enforce its patent. 103 F.3d at 1581. The distinction between a finding of equitable estoppel and implied license is not insignificant. Under an estoppel theory, the patent owner in Wang would have been barred from enforcing its patent against anyone who practiced the JEDEC standard. Under an implied-license theory, the patent owner was barred from enforcing its patents only against the particular supplier that it had induced into making the SIMMs. Thus, the patent owner was free to enforce its patent against anyone else who sold SIMMs meeting the JEDEC standard that also infringed. 103 F.3d at 1581 – 1582.

PRACTICE POINTERS 

Obtain and understand the patent policy of the standard-setting organization.



Educate the employees who participate in the standard-setting organization about its patent policy.



Have internal review procedures in place to evaluate compliance with any patent policy.



Fully disclose to the standard-setting organization your understanding of patent policy.



Fully disclose what you will and will not license under that policy.

Townshend v. Rockwell International Corp., 55 U.S.P.Q.2d (BNA) 1011, 2000 WL 433505 (N.D.Cal. 2000), illustrates the importance of open and full disclosure to the standard-setting body. In this case, the patent owner identified that it had pending patent applications that related to its proposed standard and expressly provided to the standard body the terms under which it would license these applications should they issue as patents. 2000 WL 433505 at *16. These terms were very favorable to Townshend, requiring that the licensee pay relatively high royalties and grant licenses back on any improvements to the technology. Id. Under these facts, the court rejected the infringer’s arguments that the patents were unenforceable. Id. Thus, the issuance of the standard was at a minimum an acknowledgment that the terms and conditions of the license were reasonable. Moreover, full disclosure, such as this, to the standard-setting body prevents any of the legal theories that are used to find the patents unenforceable from being applicable.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 31

§3.29

INTELLECTUAL PROPERTY LAW

VI. [3.29] PATENT MISUSE Misuse developed as a common-law equitable defense to accusations of patent infringement. Misuse is only a defense to an infringement charge; it does not give rise to an independent cause of action and does not give rise to damages. The sanction for a finding of misuse is that the patent is rendered unenforceable until such time as the misuse has been cured. B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1427 (Fed.Cir. 1997). Misuse was developed by courts to address situations in which a patentee improperly extended its patent rights to gain an unfair anticompetitive advantage. Misuse covers conduct far broader than that which gives rise to an antitrust violation. However, the licensing practices discussed in §§3.11 – 3.16 and §§3.18 – 3.24 above that raise antitrust issues also raise misuse issues. In particular, a licensing practice may avoid antitrust liability because the other elements of an antitrust case are absent yet still render the patent unenforceable for misuse. See generally Princo Corp. v. International Trade Commission, 616 F.3d 1318 (Fed.Cir. 2010); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 704 – 705 (Fed.Cir. 1992). The same general test for antitrust scrutiny, however, applies to misuse. An agreement should not give rise to misuse provided any restrictions in the agreement fall within the scope of the patent’s exclusive rights.

PRACTICE POINTERS 

Contractual restrictions within the scope of exclusive rights should not give rise to patent misuse.



The time of the agreement should not extend beyond the last-to-expire patent.



The goods and services covered should not extend beyond the scope of the claim.



Noncoerced provisions extending rights for the mutual convenience of the parties should not constitute misuse.

In 1988, Congress passed Pub.L. No. 100-703, 102 Stat. 4674, Title II of which is popularly known as the Patent Misuse Reform Act, which identified types of conduct that cannot be deemed misuse. The Act specifically provides that a patentee can refuse to license its patent or any of its individual rights associated with the patent. 35 U.S.C. §271(d)(4). It also allows a patentee to condition the license or sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product. 35 U.S.C. §271(d)(5). However, the approval of this conduct is contingent on whether the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned. Id. If the patentee is shown to have market power in one of these areas, the patentee may still be subject to a finding of misuse.

3 — 32

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.29

Thus, in Country Materials Corp. v. Allan Block Corp., 502 F.3d 730, 734 – 735 (7th Cir. 2007), the court summarized the law of misuse as follows: While at one time this argument might have had traction, in certain circumstances, it is at least disfavored today, if not entirely rejected. Today, the concept of patent misuse is cabined first by statute, 35 U.S.C. §271(d), which essentially eliminates from the field of “patent misuse” claims based on tying and refusals to deal, unless the patent owner has market power, and second by case law. As the Federal Circuit explained in Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860 (Fed.Cir. 1997), there are certain practices that court identified as “constituting per se patent misuse,” including “arrangements in which a patentee effectively extends the term of its patent by requiring post-expiration royalties.” Id. at 869; see also Brulotte v. Thys Co., 379 U.S. 29, 32, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964) (holding that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se”). The practices identified in §271(d), in contrast, may not be branded “misuse.” Va. Panel Corp., 133 F.3d at 869. If a practice is not per se unlawful nor specifically excluded from a misuse analysis by §271(d) a court must determine if that practice is reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims. If so, the practice does not have the effect of broadening the scope of the patent claims and thus cannot constitute patent misuse. If, on the other hand, the practice has the effect of extending the patentee’s statutory rights and does so with an anti-competitive effect, that practice must then be analyzed in accordance with the rule of reason. Under the rule of reason, the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect. Id. (internal citations and quotation marks omitted). The remedy resulting from a finding of misuse is unenforceability of the patent. Thus, a court of equity in a patent infringement suit may refuse to grant damages or an injunction to the patentee. Misuse of a patent, however, can be cured. Misuse merely suspends the owner’s right to recover for infringement of a patent. Senza-Gel Corp. v. Seiffhart, 803 F.2d 661, 668 n.10 (Fed.Cir. 1986). In order to cure, the improper practice must have been fully abandoned and the consequences of the misuse must have been fully dissipated. Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 86 L.Ed. 363, 62 S.Ct. 402, 405 (1942).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 33

§3.30

INTELLECTUAL PROPERTY LAW

VII. [3.30] INEQUITABLE CONDUCT All persons associated with an inventor who is seeking to obtain a patent are under an uncompromising duty of candor and good faith to the United States Patent and Trademark Office. 37 C.F.R. §1.56 sets forth this duty: (a) A patent by its very nature is affected with a public interest. The public interest is best served, and the most effective patent examination occurs when, at the time an application is being examined, the Office is aware of and evaluates the teachings of all information material to patentability. Each individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the Office, which includes a duty to disclose to the Office all information known to that individual to be material to patentability. . . . (b) [I]nformation is material to patentability when . . . (1) It establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim; or (2) It refutes, or is inconsistent with, a position the applicant takes [before the Office].

PRACTICE POINTER 

All persons have an uncompromising duty to disclose material information to the USPTO. The rule of thumb in dealing with this duty is if in doubt, disclose it.

Failing to meet this duty will give rise to a finding of inequitable conduct, which renders the entire patent unenforceable. Of equal importance, coming close to the line in this area will provide an infringer with a potential defense when it might otherwise have had none. Defending an inequitable conduct charge, even a meritless one, can be very time consuming, stressful, and costly. Thus, in dealing with the duty of candor, the rule of thumb should always be “if in doubt, disclose it to the USPTO.” Inequitable conduct is broader and more inclusive than common-law fraud. Inequitable conduct requires a showing by clear and convincing evidence of two separate and distinct elements: a. a misrepresentation or omission of material fact; and b. an intent to deceive the USPTO. The court then balances these two elements to determine whether inequitable conduct has occurred. A finding of inequitable conduct renders the entire patent unenforceable and, in rare situations, may render an entire portfolio of patents unenforceable. See, e.g., Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 78 L.Ed. 293, 54 S.Ct. 146 (1933). Unlike a Walker

3 — 34

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.30

Process claim, inequitable conduct is only a defense to a claim of infringement and not an affirmative cause of action. See the discussion of Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 15 L.Ed.2d 247, 86 S.Ct. 347 (1965), in §3.25 above. However, a finding of inequitable conduct can form a basis for an award of attorneys’ fees against the patentee. Applying this test, courts have found inequitable conduct in a wide array of factual scenarios. The following summary of these scenarios in which inequitable conduct occurred provides guidance as to how courts will apply this rule: a. Failure to name a coinventor gave rise to inequitable conduct in Frank’s Casing Crew & Rental Tools, Inc. v. PMR Technologies, Ltd., 292 F.3d 1363 (Fed.Cir. 2002). b. Writing prophetic (hypothetical) examples in the past tense was found to be inequitable conduct in Hoffman-La Roche, Inc. v. Promega Corp., 323 F.3d 1354 (Fed.Cir. 2003). c. Providing only a partial translation of a prior art reference met the materiality element of inequitable conduct in LNP Engineering Plastics, Inc. v. Miller Waste Mills, Inc., 275 F.3d 1347 (Fed.Cir. 2001). However, there was no finding of inequitable conduct because of a total absence of intent. d. Submitting false affidavits to establish small entity status for the purpose of paying lower maintenance fees was found to meet the materiality element of inequitable conduct even though the activity occurred after the patent issued. Ulead Systems, Inc. v. Lex Computer & Management Corp., 351 F.3d 1139 (Fed.Cir. 2003). e. Failure to disclose references that cast doubt on the enablement of the invention gave rise to inequitable conduct in Bristol-Myers Squibb Co. v. Rhone-Poulenc Rorer, Inc., 326 F.3d 1226 (Fed.Cir. 2003). f. Failure to cite an examiner’s rejection in one case to the examiner in a different case that involved the same issues and art met the materiality element of inequitable conduct in Dayco Products, Inc. v. Total Containment, Inc., 329 F.3d 1358 (Fed.Cir. 2003). g. Failure to disclose a material prior art reference gave rise to inequitable conduct in Driscoll v. Cebalo, 731 F.2d 878 (Fed.Cir. 1984), and J.P. Stevens & Co. v. Lex Tex Ltd., 747 F.2d 1553 (Fed.Cir. 1984). h. Failure to disclose the patentee’s own sales and use of the invention, which occurred more than a year before the filing date, gave rise to inequitable conduct in Gardco Manufacturing, Inc. v. Herst Lighting Co., 820 F.2d 1209 (Fed.Cir. 1987). i. Falsely stating in a “petition to make special” that a patent search was conducted gave rise to inequitable conduct in General Electro Music Corp. v. Samick Music Corp., 19 F.3d 1405 (Fed.Cir. 1994).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 35

§3.31

INTELLECTUAL PROPERTY LAW

VIII. [3.31] ABILITY TO CURE INEQUITABLE CONDUCT UNDER THE AIA The Leahy-Smith America Invents Act added 35 U.S.C. §257, which gives patent owners the ability to seek supplemental examination of an issued patent. This new section took effect September 16, 2012, and applies to all patents, whenever issued. See AIA §12(c). Section 257(c)(1) provides that [a] patent shall not be held unenforceable on the basis of conduct relating to information that had not been considered, was inadequately considered, or was incorrect in a prior examination of the patent if the information was considered, reconsidered, or corrected during a supplemental examination of the patent. This section further provides that making or not making a request for supplemental examination “shall not be relevant to enforceability” of the patent. Id. Notably, this provision does not limit a patent challenger’s ability to use a patentee’s failure to make a supplemental examination request as a basis to establish an exceptional case, or as evidence in an antitrust case, unfair competition case, or FTC action. Thus, under §257 a patent owner will be able to correct, i.e., cure, accidental and potentially even intentional prior prosecution mistakes and wrongdoing. Raising these issues through supplemental examination will prevent them from being raised during patent litigation. There are, however, important timing considerations. The ability to effectively cure prior prosecutorial mistakes and misconduct will not apply to issues that have been alleged in a civil action or an abbreviated new drug application (ANDA) filing before they were raised in a request for supplemental examination. 35 U.S.C. §257(c)(2)(A). Significantly, for International Trade Commission (ITC) proceedings the supplemental examination must be completed, not just requested, before the commencement of the ITC action in order to take advantage of the ability to cure prior prosecutorial mistakes and misconduct under §257(c)(1). 35 U.S.C. §257(c)(2)(B). Section 257 has two additional exceptions that may turn out to be important. The first exception provides that the Director of the United States Patent and Trademark Office is not restricted and may pursue evidence that fraud was committed in the underlying prosecution. 35 U.S.C. §257(e). This provision suggests that fraud cannot be cured under §257(c)(1).

PRACTICE POINTERS 

Supplemental examination under §257 raises complex and important timing, ethical, and privilege issues.



To cure prior prosecutorial mistakes or misconduct, the request should be filed before litigation commences.



Supplemental examination may have no effect on fraud, unfair competition, antitrust, and FTC actions.



Privileged material may have to be disclosed in the supplemental examination requests.

3 — 36

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, AND INEQUITABLE CONDUCT

§3.32

Additionally, the fraud provision creates situations in which very complex ethical, client relations, and privilege issues may arise and converge. For example, trial counsel discovers potential fraud in preparing for litigation, e.g., (a) an invoice for the sale of an item that may constitute an on-sale bar and (b) an e-mail from in-house counsel to the prosecuting lawyer, at the litigator’s law firm, rationalizing or planning on how to hide the potential on-sale activity, depending on the reader’s viewpoint. Clearly, to cure the potential inequitable conduct, the invoice must be disclosed in the supplemental examination request. The e-mail should also be disclosed to cure the potential inequitable conduct and also to meet the requester’s duty-ofdisclosure obligations. However, the disclosure of the e-mail raises complex ethical, waver of privilege, and client relations issues.

IX.

[3.32] BEST-MODE REQUIREMENT RISKS TO PRACTITIONERS AND CLIENTS UNDER THE AIA

The Leahy-Smith America Invents Act amended 35 U.S.C. §282(b)(3)(A) to remove failure to comply with the best-mode requirement as “a basis on which any claim of a patent may be canceled or otherwise held invalid or unenforceable.” This change to the law took effect September 16, 2011, and applies to all proceedings pending on and after that date. AIA §15(c). The AIA, however, does not remove the best-mode requirement from the patent laws. See 35 U.S.C. §112(a) (“The specification . . . shall set forth the best mode contemplated by the inventor or joint inventor of carrying out the invention.”). Thus, patent practitioners will still have an ethical obligation to determine and disclose the best mode. The disclosure of the best mode must be made even in situations in which an inventor or client would prefer not to do so. Maintaining the best mode as a requirement for patentability opens practitioners up to the risk of collateral accusations of wrongdoing for failing to meet that requirement and potentially being named as defendants in antitrust, unfair competition, and FTC actions.

PRACTICE POINTERS 

The AIA does not remove the best-mode requirement from §112.



Patent practitioners are still ethically obligated to determine and disclose the best mode.



Under the AIA, failure to disclose the best mode may still result in



fraud accusations against practitioners, inventors, and patent owners;



reduced damages;



inability to obtain injunctive relief; and



antitrust, unfair competition, and FTC actions.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 37

§3.32

INTELLECTUAL PROPERTY LAW

Moreover, the AIA’s restriction on defenses based on a failure to meet the best-mode defense is limited to 35 U.S.C. §282. Thus, it does not appear that the AIA excuses the intentional or fraudulent withholding of the best mode from rendering the patent invalid or unenforceable. Such a defense would focuses on, and be based on, the fraudulent intent and the defrauding of the United States Patent and Trademark Office rather than a failure to meet the best-mode requirement. Thus, the AIA may have the exact opposite effect of what was desired, moving bestmode defenses into more vitriolic, fraud-based claims. Further, the AIA does not restrict evidence of a failure to meet the best-mode requirement from being considered in other contexts, such as damages, injunctions, exceptional case, antitrust laws, FTC actions, and unfair competition laws. Thus, in the damages context the failure to meet the best-mode requirement could provide a basis for substantially reduced damages. For example there are at least two theories for this approach. First, it can be argued that it would be unfair to permit the patent owner to have full recovery under the patent since it did not live up to its half of the bargain and disclose to the public the best way of practicing the invention. Second, it can be argued that by withholding the best mode, the patentee was attempting to extend its monopoly, or get two monopolies for a single invention, by keeping the best way to use the invention as a trade secret. Thus, these arguments could be framed around the theme that substantially lower damages would be appropriate because the patentee has kept the best, i.e., most valuable, part of the invention out of the patent. In the context of an injunction, the failure to meet the best-mode requirement may prevent preliminary and permanent injunctions from issuing. The same arguments as to damages are easily, and perhaps even more appropriately, cast into equitable considerations.

3 — 38

WWW.IICLE.COM

4

The Attorney-Client Privilege and the Work-Product Immunity Doctrine

GLEN P. BELVIS Chief IP Counsel Foro Energy, Inc. Littleton, CO

®

©COPYRIGHT 2013 BY IICLE .

4—1

INTELLECTUAL PROPERTY LAW

I. [4.1] Introduction II. Attorney-Client Privilege in General A. B. C. D.

[4.2] Elements of and Policies Behind the Attorney-Client Privilege [4.3] Confidentiality Requirement [4.4] Facts and Business Advice Are Not Protected [4.5] Application of the Attorney-Client Privilege to Corporations 1. [4.6] The Control-Group Test 2. [4.7] The Subject-Matter Test

III. [4.8] Work-Product Immunity in General IV. [4.9] Waiver V. Controlling Law and Standards A. [4.10] Choice of Law B. [4.11] Burden of Proof C. [4.12] Appellate Review VI. Patent Prosecution A. B. C. D.

[4.13] [4.14] [4.15] [4.16]

In General Patent Agents Foreign Patent Prosecution Work-Product Protection for Patent Prosecution Activities

VII. [4.17] Typical Patent Department Communications A. B. C. D. E. F. G. H.

4—2

[4.18] [4.19] [4.20] [4.21] [4.22] [4.23] [4.24] [4.25]

Invention Submission Forms Draft Patent Applications Inventor Sign-Off Forms Internal Patent Department Checklists Attorney Notes Invention Review Committees Draft Agreements Invalidity Opinions and Noninfringement

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

VIII. [4.26] Commonality of Interest Doctrine A. B. C. D. E.

[4.27] [4.28] [4.29] [4.30] [4.31]

Multiple Accused Infringers Manufacturer-Buyer Indemnitor-Indemnitee Licensor-Licensee Mergers and Acquisitions

IX. Reliance on Opinion of Counsel and Waiver A. [4.32] Willfulness, Good Faith, and Objective Recklessness B. [4.33] Knorr-Bremse 1. [4.34] No Presumption of Willfulness for Asserting the Attorney-Client Privilege 2. [4.35] No Presumption of Willfulness for Failing To Seek the Advice of Counsel 3. [4.36] No Presumption of Willfulness in a Close Case C. [4.37] EchoStar D. [4.38] Seagate E. [4.39] 35 U.S.C. §298 X. [4.40] Federal Rule of Evidence 502 A. [4.41] Fed.R.Evid. 502(a) — Intentional Disclosure and the Scope of Waiver B. [4.42] Fed.R.Evid. 502(b) — Inadvertent Disclosure and the Scope of Waiver C. [4.43] Fed.R.Evid. 502(c) – 502(f) — State Proceedings and Private Agreements

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—3

§4.1

I. [4.1]

INTELLECTUAL PROPERTY LAW

INTRODUCTION

The attorney-client privilege is the oldest privilege for confidential communications in the common law. In re Seagate Technology, LLC, 497 F.3d 1360, 1372 (Fed.Cir. 2007). Nevertheless, the application of the attorney-client privilege and the work-product immunity doctrine to the practice of patent law is highly complex and fraught with conflicting and irreconcilable caselaw. In fact, because of fundamental misunderstandings by several lower courts, it was not until 1963 that the Supreme Court resolved the issue of whether practicing before the United States Patent and Trademark Office (USPTO) constituted the practice of “law” and was entitled to the protection of the attorney-client privilege. Sperry v. State of Florida ex rel. Florida Bar, 373 U.S. 379, 10 L.Ed.2d 428, 83 S.Ct. 1322 (1963). Fortunately, the Supreme Court held that practicing before the USPTO was the practice of law. Nevertheless, the highly complex nature of practicing patent law before the USPTO and in litigation, the complex subject technologies, and the global business strategies that a patent lawyer must address make the proper application and evaluation of the attorney-client privilege in patent-related matters problematic. Although it may not be the rule, it certainly is not the exception that communications that on their face appear to be and were believed to be protected by the attorney-client privilege are found to be unprotected and disclosed in litigation. Additionally, until recently patent law was one of the few areas of law in which parties were forced to waive their attorney-client privilege or face punitive damages. This Hobson’s choice created a greater likelihood that privileged communications would lose their protection and be disclosed in litigation. From 2004 to 2007, the caselaw regarding privilege, waiver, and punitive damages in patent cases substantially changed. It is now much less likely that a party will need to waive the attorney-client privilege to avoid punitive damages in patent litigation. See §§4.32 – 4.38 below. This change in the law has continued with the adoption of a proposed amendment to the Federal Rules of Evidence that greatly strengthens the attorney-client privilege and reduces the cost of protecting that privilege in litigation. See §§4.40 – 4.43 below. Further, the Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), to a certain extent codifies the changes made by the caselaw. See §4.39 below. This chapter reviews the law and pragmatic efforts of attorney-client privilege and workproduct immunity as they apply to patent-related matters. It is important, however, to remember that the law in this area is sui generis and that those communications that are believed to be privileged and thus protected from discovery may not be. Thus, the practice of patent law requires that greater care be taken than in most areas of the law when committing positions to writing.

II. ATTORNEY-CLIENT PRIVILEGE IN GENERAL A. [4.2] Elements of and Policies Behind the Attorney-Client Privilege The attorney-client privilege protects communications between lawyers and their clients. The privilege belongs to the client, not the lawyer. It provides the client the right to refuse to disclose

4—4

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.2

and to prevent others from disclosing confidential communications made while seeking or rendering legal advice. In re Seagate Technology, LLC, 497 F.3d 1360, 1372 (Fed.Cir. 2007); In re EchoStar Communications Corp., 448 F.3d 1294, 1300 – 1301 (Fed.Cir. 2006); American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 745 (Fed.Cir. 1987); In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 383 (D.D.C. 1978); Handgards, Inc. v. Johnson & Johnson, 413 F.Supp. 926, 929 (N.D.Cal. 1976). The privilege balances competing policies of the need for the client to obtain fair and frank advice and the need to find relevant information: To induce clients to make such communications [of pertinent facts], the privilege to prevent their later disclosure is said by courts and commentators to be a necessity. The social good derived from the proper performance of the functions of lawyers acting for their clients is believed to outweigh the harm that may come from the suppression of evidence in specific cases. United States v. United Shoe Machinery Corp., 89 F.Supp. 357, 358 (D.Mass. 1950), quoting Comment to the American Law Institute Model Code of Evidence Rule 201. Thus, the attorney-client privilege serves the important public policy of fostering “full and frank communication between attorneys and their clients and thereby promote[s] broader public interest in the observance of law and administration of justice.” Upjohn Co. v. United States, 449 U.S. 383, 66 L.Ed.2d 584, 101 S.Ct. 677, 682 (1981). See EchoStar, supra, 448 F.3d at 1300 – 1301 (“We recognize the privilege in order to promote full and frank communication between a client and his attorney so that the client can make well-informed legal decisions and conform his activities to the law.”). See also Seagate, supra; American Standard, supra; Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 531 (N.D.Ill. 2003). These benefits, however, come at a cost: When the privilege shelters important knowledge, accuracy declines. Litigants may use secrecy to cover up machinations, to get around the law instead of complying with it. Secrecy is useful to the extent it facilitates the candor necessary to obtain legal advice. The privilege extends no further. In re Feldberg, 862 F.2d 622, 627 (7th Cir. 1988). See also Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 522 (S.D.N.Y. 1992). In Nishika, Ltd. v. Fuji Photo Film Co., 181 F.R.D. 465, 468 (D.Nev. 1998), the court, quoting Pearse v. Pearse, 1 DeG. & Son. 28-9, 16 L.J.Ch. 153 (1846), eloquently summarized these conflicting policies: Truth, like all other good things, may be loved unwisely — may be pursued too keenly — may cost too much. And, surely the meanness and the mischief of prying into a man’s confidential consultations with his legal advisor, the general evil of infusing reserve and dissimulation, uneasiness, and suspicion and fear, into those communications which must take place, and which unless a condition of perfect security, must take place uselessly or worse, are too great a price to pay for the truth itself.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—5

§4.2

INTELLECTUAL PROPERTY LAW

The attorney-client privilege protects all types of communications, whether written or oral, provided that the requirements to maintain the privilege have been met. EchoStar, supra, 448 F.3d at 1301; Handgards, supra.

PRACTICE POINTER 

To be subject to the attorney-client privilege and thus shielded from discovery, the communication 1. must be confidential; 2. must request legal advice; and 3. must be made to a legal professional.

As a general rule, a communication is privileged if three primary factors are present: (1) the communication is or relates to a request for legal advice; (2) the communication is made to a professional legal adviser in his or her capacity as such for the purpose of obtaining legal advice; and (3) the communication is made in confidence. See In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 805 (Fed.Cir. 2000) (“central inquiry is whether the communication is one that was made by a client to an attorney for the purpose of obtaining legal advice or services”); Genentech, Inc. v. United States International Trade Commission, 122 F.3d 1409, 1415 (Fed.Cir. 1997) (“The attorney-client privilege protects the confidentiality of communications between attorney and client made for the purpose of obtaining legal advice.”); American Standard, supra (privilege “protects communications made in confidence by clients to their lawyers for the purpose of obtaining legal advice”); Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 534 (N.D.Ill. 2000) (“the question is: does the document in question reveal, directly or indirectly, the substance of a confidential attorney-client communication”). Many cases and commentators have expanded this test into eight or more factors by subdividing these factors or adding other factors regarding the effect of the privilege, such as that the client controls the privilege. See, e.g., Cavallaro v. United States, 284 F.3d 236, 245 (1st Cir. 2002), in which the court, quoting 8 John Henry Wigmore, WIGMORE ON EVIDENCE §2292 (McNaughton rev. 1961), set out an eight-factor test: (1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived. See also McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 251 (N.D.Ill. 2000); Radiant Burners, Inc. v. American Gas Ass’n, 320 F.2d 314, 318 – 319 (7th Cir. 1963); Smithkline, supra; Vardon Golf, supra.

4—6

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.4

Regardless of the additional factors or the way in which they are subdivided, the three primary factors (with confidentiality being the most critical and problematic) must always be present before a communication can be privileged. B. [4.3] Confidentiality Requirement It is the communication with the lawyer that must be confidential, not the subject matter of the communication. Thus, a confidential communication with a lawyer about facts that are generally known (e.g., the prior art) nevertheless meets the confidentiality requirement for privilege to apply. In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 388 – 390 (D.D.C. 1978). The privilege historically has been applied to protect confidences that the client communicated to the lawyer (i.e., client-to-lawyer communications): Strictly speaking, the privilege applies only to communications made by the client to the lawyer, but in practice it is generally impossible to separate those communications from the ones made by the attorney to the client, particularly when the attorney communications will reveal the substance of the ones made by the client that are privileged. Ampicillin, supra, 81 F.R.D. at 388 n.20. The same cannot be said for lawyer-to-client communications, which may or may not be privileged. It is the client confidences that are central to the privilege, not the advice that the lawyer may render. Thus, legal advice that does not in itself disclose, directly or indirectly, the substance of the confidential communication by the client is not privileged. American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 745 (Fed.Cir. 1987); Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 531 (N.D.Ill. 2003); Ampicillin, supra, 81 F.R.D. at 394. As discussed in §4.25 below, this rule can have significant effects on legal opinions that address the invalidity of a competitor’s patents. Similarly, the eight-part test from 8 John Henry Wigmore, WIGMORE ON EVIDENCE §2292 (McNaughton rev. 1961) (see §4.2 above), on its face would apply only to communications from the client to the lawyer and not to the advice that the lawyer rendered back to the client. Courts, however, have generally held that the advice rendered by the lawyer in response to a privileged communication is also protected, usually under the rationale that the advice expressly or inherently reflects the confidential communication from the client to the attorney. See, e.g., Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 517 (S.D.N.Y. 1992). C. [4.4] Facts and Business Advice Are Not Protected The factor requiring that the communication be made to a lawyer in his or her capacity as a lawyer for the purpose of obtaining legal advice has given rise to the corollary rule that the attorney-client privilege does not protect business communications and advice. In particular, the privilege does not apply to the activities of in-house counsel when counsel is making business decisions or providing business advice. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 – 254 (N.D.Ill. 2000); Sneider v. Kimberly-Clark Corp., 91 F.R.D. 1, 4 (N.D.Ill. 1980). See also Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 538 (N.D.Ill. 2000) (agendas

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—7

§4.4

INTELLECTUAL PROPERTY LAW

for meetings that were authored by lawyers did not implicate legal advice and thus were not privileged). Thus, the privilege would not apply to a business report that categorized and analyzed the competitors and their patents in a particular industry. McCook Metals, supra. This corollary rule is significant to the manner in which corporate patent department communication and meetings are structured. See §§4.17 – 4.25 below. The privilege protects communications seeking legal advice, not facts, from being discovered: [T]he privilege should protect only the client’s communications to the attorney . . . and not facts or other Information contained in the communication. In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 389 (D.D.C. 1978). The Ampicillin court elaborated on this point with the following example: Thus, a status report on the corporation’s activities does not become immune from discovery merely because a copy is transmitted to counsel with no accompanying request for legal advice. Nor do minutes of meetings become privileged by the mere presence of counsel. 81 F.R.D. at 385 n.9. Similarly, providing an otherwise non-privileged document to an attorney will not prevent the document from being discovered. McCook Metals, supra, 192 F.R.D. at 254 (letter from competitor forwarded to lawyer not privileged); Sneider, supra, 91 F.R.D. at 4 (“the courts will not permit the corporation to merely funnel papers through the attorney in order to assert the privilege”).

PRACTICE POINTER 

Things that are not protected by the attorney-client privilege and thus shielded from discovery include 1. business documents in the lawyer’s possession; 2. business advice; 3. technical advice; and 4. underlying facts.

The facts underlying a privileged communication, separate from the communication itself, also are not protected by the privilege and should always be discoverable. Sneider, supra, 91 F.R.D. at 4 (“the well-established rule [is] that only the communications, not underlying facts, are privileged”). Thus, while the communications from an inventor to a patent lawyer for the purposes of drafting a patent application are protected, the underlying facts and data regarding the invention are not. The effect of the privilege is to indirectly block access to this kind of information by shielding the discussions between the lawyer and the inventor. It does not prevent

4—8

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.7

full discovery of every fact, document, and test that the inventor knows or created in the course of developing the invention. Advanced Cardiovascular Systems, Inc. v. C.R. Bard, Inc., 144 F.R.D. 372, 374 (N.D.Cal. 1992). D. [4.5] Application of the Attorney-Client Privilege to Corporations The application of the attorney-client privilege in the context of a corporate client is complex. See generally Radiant Burners, Inc. v. American Gas Ass’n, 320 F.2d 314 (7th Cir. 1963) (extending privilege to corporations and containing detailed and well-reasoned analysis of privilege law). The fact that corporate clients are inanimate, artificial entities that can communicate with their attorneys only through their agents makes it difficult to determine when the confidentiality requirement for privileged communications has been met — how many agents and employees may know about the lawyer communications before confidentiality is destroyed? Two approaches, the control-group test and the subject-matter test, have been developed to address this issue, both of which should be kept in mind when developing procedures and practices for a corporate patent department. Sections 4.6 and 4.7 below detail these two approaches. See also §§4.17 – 4.25 below, discussing typical patent department communications. 1. [4.6] The Control-Group Test The first and narrower approach is known as the “control-group test.” To maintain the attorney-client privilege, this test requires that access to the communication be limited to personnel within the corporation who had authority to act on the legal advice rendered. If the communication or advice was disseminated beyond this “control group,” then the confidentiality requirement is not met and the protection of the privilege is lost. See In re Ampicillin Antitrust Litigation, 81 F.R.D. 377 (D.D.C. 1978) (discussing but not applying control-group test); City of Philadelphia v. Westinghouse Electric Corp., 210 F.Supp. 483 (E.D.Pa. 1962). 2. [4.7] The Subject-Matter Test The second, broader, and more widely accepted test is known as the “subject-matter test.” See Cuno, Inc. v. Pall Corp., 121 F.R.D. 198, 200 (E.D.N.Y. 1988). Under this test, for the communication to be privileged, the following must apply: a. The communication must have been made for the purpose of securing legal advice. b. The subject matter of the communication must have been within the scope of the employee’s duties. c. The communication must not have been disseminated beyond persons with a need to know the information. In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 385 (D.D.C. 1978) (discussing subject-matter test but applying broader test). See also Diversified Industries, Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978) (en banc). The subject-matter test has also been called the “Harper & Row test,” based on Harper & Row Publishers, Inc. v. Decker, 423 F.2d 487 (7th Cir. 1970), aff’d, 91 S.Ct. 479 (1971). The Northern District of Illinois has succinctly articulated the subject-matter test:

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—9

§4.8

INTELLECTUAL PROPERTY LAW

If the agent [of the corporate client] is in possession of information acquired in the ordinary course of business relating to the subject matter of his employment, and the information is communicated confidentially to corporate counsel to assist him in giving legal advice to the corporation, then the communication is privileged. Sneider v. Kimberly-Clark Corp., 91 F.R.D. 1, 3 (N.D.Ill. 1980), quoting United States v. Upjohn Co., 600 F.2d 1223, 1226 (6th Cir. 1979), rev’d, 101 S.Ct. 677 (1981).

III. [4.8] WORK-PRODUCT IMMUNITY IN GENERAL The work-product immunity doctrine is distinct from, and broader than, the attorney-client privilege. The work-product doctrine protects a lawyer’s materials that were prepared in anticipation of litigation. Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 539 – 540 (N.D.Ill. 2000); Radiant Burners, Inc. v. American Gas Ass’n, 320 F.2d 314, 323 (7th Cir. 1963) (noting that attorney work-product rule “is something separate and apart from the attorney-client privilege”). Thus, unlike the attorney-client privilege, the work-product doctrine can protect documents that do not necessarily relate to a communication with a client. Also, unlike the attorney-client privilege, the lawyer, in conjunction with the client, holds the work-product protection. See Genentech, Inc. v. United States International Trade Commission, 122 F.3d 1409, 1415 (Fed.Cir. 1997) (“The work product privilege protects the attorney’s thought processes and legal recommendations.” Quoting Zenith Radio Corp. v. United States, 764 F.2d 1577, 1580 (Fed.Cir. 1985).). The work-product doctrine was first enunciated by the Supreme Court in Hickman v. Taylor, 329 U.S. 495, 91 L.Ed. 451, 67 S.Ct. 385, 393 – 394 (1947), in which the Court set forth the policy and rule for this doctrine: Historically, a lawyer is an officer of the court and is bound to work for the advancement of justice while faithfully protecting the rightful interests of his clients. In performing his various duties, however, it is essential that a lawyer work with a certain degree of privacy, free from unnecessary intrusion by opposing parties and their counsel. . . . This work is reflected, of course, in interviews, statements, memoranda, correspondence, briefs, mental impressions, personal beliefs, and countless other tangible and intangible ways — aptly though roughly termed by the Circuit Court of Appeals in this case (153 F.2d 212, 223) as the “Work product of the lawyer.” Were such materials open to opposing counsel on mere demand, much of what is now put down in writing would remain unwritten. An attorney’s thoughts, heretofore inviolate, would not be his own. Inefficiency, unfairness and sharp practices would inevitably develop in the giving of legal advice and in the preparation of cases for trial. The effect on the legal profession would be demoralizing. The Court’s warning about unfairness, sharp practices, and demoralization of the legal profession has come to fruition in patent litigation. As addressed in detail in §§4.9 and 4.32 – 4.39 below, the issue of waiver of attorney-client privilege and work-product immunity has become a significant, confusing, and costly subset of virtually every patent litigation.

4 — 10

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.8

The work-product doctrine was codified in 1970 by the addition of Federal Rule of Civil Procedure 26(b)(3). See Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 533 – 534 (N.D.Ill. 2003). Rule 26(b)(3) provides: Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent). But, subject to Rule 26(b)(4), those materials may be discovered if: (i) they are otherwise discoverable under Rule 26(b)(1); and (ii) the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means. Unlike the attorney-client privilege, the work-product doctrine has been limited by some courts to apply only to documents. In re EchoStar Communications Corp., 448 F.3d 1294, 1301 (Fed.Cir. 2006) (“[u]nlike the attorney-client privilege, which protects all communications whether written or oral, work-product immunity protects documents and tangible things”); Akeva L.L.C. v. Mizuno Corp., 243 F.Supp.2d 418, 422 (M.D.N.C. 2003) (work-product immunity does not apply to oral communications). This distinction, however, finds no support in Hickman or Rule 26(b)(3) and at least for patent litigations was put to rest by the Federal Circuit, which stated in In re Seagate Technology, LLC, 497 F.3d 1360, 1376 (Fed.Cir. 2007): “We agree that work product protection remains available to ‘nontangible’ work product.”

PRACTICE POINTERS 

Work-product immunity protects materials prepared in anticipation of litigation. The anticipated litigation must be specific as to both the issue and the adversary. A general belief that litigation happens all the time is insufficient to form a basis for work-product protection.



Care should be taken when asserting the work-product immunity protection because the facts needed to establish that protection are very similar to the facts that create the duty to preserve documents. As such, a litigation hold should be in place at or around the date of the earliest document for which work-product protection is asserted.

There must be an anticipation of litigation before the work-product doctrine will apply to protect communications. The mere fact that litigation arises, however, does not ensure that the work-product doctrine will apply to protect particular materials. The work-product doctrine protects neither materials developed in the ordinary course of business nor materials developed because there was some remote or inarticulable risk of litigation. Rather, to be protected by the work-product doctrine, the materials must be prepared with an eye toward a particular claim

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 11

§4.9

INTELLECTUAL PROPERTY LAW

against a particular opposing party. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 259 (N.D.Ill. 2000); Sylgab Steel & Wire Corp. v. Imoco-Gateway Corp., 62 F.R.D. 454, 457 (N.D.Ill. 1974).

IV. [4.9] WAIVER The general rule is that voluntary disclosure of privileged material constitutes waiver of the attorney-client privilege and the work-product doctrine as to the disclosed material, as well as all other communications on the same subject. Genentech, Inc. v. United States International Trade Commission, 122 F.3d 1409, 1415 (Fed.Cir. 1997) (“disclosure of confidential communications or attorney work product to a third party, such as an adversary in litigation, constitutes a waiver of privilege as to those items”). This rule is based on a fundamental sense of fair play, that is, one should not be allowed to rely on the privilege as both a sword and a shield. W.R. Grace & Co.Conn. v. Viskase Corp., 21 U.S.P.Q.2d (BNA) 1121, 1991 WL 141131 (N.D.Ill. 1991). The scope of the waiver based on a disclosure can vary from great to none, depending on the circumstance of the case and the judge’s predisposition.

PRACTICE POINTER 

Disclosure of a privileged communication waives the protection of the privilege as to communications on that subject matter.

Some courts have held that if the waiver of privilege was inadvertent and reasonable safeguards to protect the privilege were in place, no waiver takes place or the waiver is limited solely to the disclosed communication. See Genentech, supra, 122 F.3d at 1415, citing Alldread v. City of Grenada, 988 F.2d 1425, 1434 (5th Cir. 1993), KL Group v. Case, Kay & Lynch, 829 F.2d 909, 919 (9th Cir. 1987), and In re Sealed Case, 877 F.2d 976, 980 (D.C.Cir. 1989). See also Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 611 (8th Cir. 1978) (en banc); Transamerica Computer Co. v. International Business Machines Corp., 573 F.2d 646, 650 – 651 (9th Cir. 1978). A series of courts have held that by raising the defense of equitable estoppel, the defendant waives attorney-client privilege as to the patent in suit. Sig Swiss Industrial Co. v. Fres-Co System USA, Inc., 22 U.S.P.Q.2d (BNA) 1601, 1992 WL 23446 (E.D.Pa. 1992); Dow Chemical Co. v. Atlantic Richfield Co., 227 U.S.P.Q. (BNA) 129 (E.D.Mich. 1985); Metropolitan Wire Corp. v. Falcon Products, Inc., 528 F.Supp. 897, 903 – 904 (E.D.Pa. 1981). This rationale was expressly rejected in International Rectifier Corp. v. IXYS Corp., 361 F.3d 1363, 1376 (Fed.Cir. 2004). Waiver should not occur from a lawyer negotiating with an opponent and, in the course of those negotiations, taking legal and factual positions, provided that a specific privileged communication is not relied on or disclosed during the negotiations. Sylgab Steel & Wire Corp. v. Imoco-Gateway Corp., 62 F.R.D. 454, 458 (N.D.Ill. 1974). Similarly, a party does not waive the attorney-client privilege or work-product protection simply by bringing suit. Zenith Radio Corp. v. United States, 764 F.2d 1577, 1580 (Fed.Cir. 1985).

4 — 12

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.10

An extrajudicial waiver may occur when statements are made in a press release or other public forum. For example, if the opinion of counsel is directly referenced in a press release, then the totality of this opinion will be waived. On the other hand, if a press release expresses a belief that is consistent with the confidential advice of a lawyer, the advice is not waived. The same rational applies to pleadings and papers filed with the court: I hasten to emphasize, moreover, that the fact that a party takes a position in a pleading that is consistent with advice that party received in confidence from its attorney is irrelevant to waiver analysis. Waiver analysis focuses on the disclosure of the content of specific communications between counsel and client — and a pleading would not effect a waiver unless the pleading disclosed specific lawyer-client communications, even if the substance of the pleading tracked what a lawyer had confidentially advised the client. [Emphasis in original.] Electro Scientific Industries, Inc. v. General Scanning, Inc., 175 F.R.D. 539, 543 (N.D.Cal. 1997). Thus, stating in a press release, “We believe that we do not infringe and that the plaintiff’s patent is invalid,” should not give rise to any waiver of the attorney-client privilege or workproduct immunity. On the other hand, stating in a press release, “Our lawyers have advised us that we do not infringe and the patents are invalid,” may give rise to a waiver regarding the underlying lawyer’s advice. Moreover, the scope of this waiver will depend on whether the press release is relied on in the litigation by the party making it. If it is not being relied on (i.e., it was an extrajudicial disclosure), then the scope of waiver will be very narrow. Electro Scientific, supra, 175 F.R.D. at 543 – 544. If the privileged communication is being relied on, the scope of waiver will be substantially broader. See, e.g., Mosel Vitelic Corp. v. Micron Technology, Inc., 162 F.Supp.2d 307 (D.Del. 2000); Novartis Pharmaceuticals Corp. v. Eon Labs Manufacturing, Inc., 206 F.R.D. 396 (D.Del. 2002); Thorn EMI North America, Inc. v. Micron Technology, Inc., 837 F.Supp. 616 (D.Del. 1993).

V. CONTROLLING LAW AND STANDARDS A. [4.10] Choice of Law In general, choice-of-law questions regarding privilege and work product are governed by federal common law. Federal Rule of Evidence 501; Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 521 (S.D.N.Y. 1992) (noting that Rule 501 was intended not to freeze law of privilege but instead to let it evolve on case-by-case basis). The applicability of the privilege is a question of fact (American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 744 (Fed.Cir. 1987)), and the scope of the privilege is a question of law (Katz v. AT&T Corp., 191 F.R.D. 433, 436 (E.D.Pa. 2000), citing In re Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120, 124 (3d Cir. 1896)). With respect to attorney-client privilege and work-product immunity issues to the extent that they involve patent-related activities, Federal Circuit law is controlling. In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 803 – 804 (Fed.Cir. 2000) (noting that relevancy-based discovery disputes and privilege issues relating to patent prosecution documents are governed by Federal

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 13

§4.11

INTELLECTUAL PROPERTY LAW

Circuit law and not law of regional circuits). With respect to all other issues (i.e., non-patentrelated issues), the law of the regional circuits applies. Spalding Sports, supra, 203 F.3d at 804; In re Regents of University of California, 101 F.3d 1386, 1390 (Fed.Cir. 1996) (applying law of regional circuit (Seventh Circuit) to determine that privilege should be narrowly drawn); McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 251 (N.D.Ill. 2000). B. [4.11] Burden of Proof The burden of establishing that a communication is subject to the protection of the attorneyclient privilege or the work-product immunity is always on the party asserting the protection. Vardon Golf Co. v. Karsten Manufacturing Corp., 213 F.R.D. 528, 531 (N.D.Ill. 2003); McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 251, 258 (N.D.Ill. 2000). Because of the conflicting policies between full discovery and encouraging frank communications between lawyers and their clients, the scope of protection will be given its narrowest possible limits. Cavallaro v. United States, 284 F.3d 236, 245 (1st Cir. 2002); McCook Metals, supra, 192 F.R.D. at 251; Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 518 (S.D.N.Y. 1992); In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 384 (D.D.C. 1978). The burden to establish entitlement to the protection of the commonality of interest doctrine (see §§4.26 – 4.31 below) is also on the party seeking this protection. C. [4.12] Appellate Review Depending on the procedural context in which the privilege issues are raised, appellate review can be had by writ of mandamus or direct appeal of a discovery ruling. In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 804 – 805 (Fed.Cir. 2000) (granting writ of mandamus to review order compelling production of privileged invention disclosure form); In re Regents of University of California, 101 F.3d 1386, 1387 – 1388 (Fed.Cir. 1996) (granting writ of mandamus to party ordered to produce privileged material); American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 738 – 739 (Fed.Cir. 1987) (direct appeal of denial of motion to compel production from third party). For general discussion regarding appellate review of discovery orders, see Truswal Systems Corp. v. Hydro-Air Engineering, Inc., 813 F.2d 1207, 1209 (Fed.Cir. 1987), and Heat & Control, Inc. v. Hester Industries, Inc., 785 F.2d 1017, 1022 (Fed.Cir. 1986).

VI. PATENT PROSECUTION A. [4.13] In General Historically, there have been two schools of thought about the applicability of the attorneyclient privilege to the preparation of patent applications and the prosecution of those applications to obtain patents. The older and now widely discredited view found that the attorney-client privilege did not apply to patent attorneys and employees of patent departments because they were supposedly not engaged in legal work. This erroneous view was perhaps based on the courts’ failure to understand the highly complicated nature of patent law and the technologies that form the underlying facts to which patent lawyers must apply these complex laws to render advice to their clients. See, e.g., Zenith Radio Corp. v. Radio Corp. of America, 121 F.Supp. 792,

4 — 14

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.14

793 – 794 (D.Del. 1954). This rationale was rejected by the Supreme Court in Sperry v. State of Florida ex rel. Florida Bar, 373 U.S. 379, 10 L.Ed.2d 428, 83 S.Ct. 1322, 1325 (1963), in which the Court expressly held that “the preparation and prosecution of patent applications for others constitutes the practice of law.” The Sperry Court further held: Such conduct inevitably requires the practitioner to consider and advise his clients as to the patentability of their inventions under the statutory criteria . . . as well as to consider the advisability of relying upon alternative forms of protection which may be available under statute law. It also involves his participation in the drafting of the specification and claims of the patent application . . . which this Court long ago noted “constitute(s) one of the most difficult legal instruments to draw with accuracy.” Topliff v. Topliff, 145 U.S. 156, [36 L.Ed. 658, 12 S.Ct. 825, 831 (1892)]. And upon rejection of the application, the practitioner may also assist in the preparation of amendments . . . which frequently requires written argument to establish the patentability of the claimed invention under the applicable rules of law and in light of the prior art. [Emphasis added.] [Citations omitted.] 83 S.Ct. at 1325. In spite of this clear and unambiguous pronouncement by the Court, several lower courts nevertheless refused to apply the attorney-client privilege to patent prosecution-related matter under what has become known as the “conduit theory.” See Jack Winter, Inc. v. Koratron Co., 50 F.R.D. 225 (N.D.Cal. 1970); Jack Winter, Inc. v. Koratron Co., 54 F.R.D. 44 (N.D.Cal. 1971) (related case); Sneider v. Kimberly-Clark Corp., 91 F.R.D. 1, 7 (N.D.Ill. 1980). The conduit theory of the Jack Winter line of cases was expressly rejected by the court in Knogo Corp. v. United States, 213 U.S.P.Q. (BNA) 936 (Ct.Cl. 1980), and the line of decisions that followed. See In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 805 – 806 (Fed.Cir. 2000); Rohm & Haas Co. v. Brotech Corp., 815 F.Supp. 793 (D.Del. 1993), aff’d, 19 F.3d 41 (Fed.Cir. 1994); Hydraflow, Inc. v. Enidine Inc., 145 F.R.D. 626 (W.D.N.Y. 1993); Fromson v. Anitec Printing Plates, Inc., 152 F.R.D. 2 (D.Mass. 1993); Advanced Cardiovascular Systems, Inc. v. C.R. Bard, Inc., 144 F.R.D. 372 (N.D.Cal. 1992) (expressly rejecting this court’s earlier decision in Jack Winter, supra, 54 F.R.D. 44); Cuno, Inc. v. Pall Corp., 121 F.R.D. 198 (E.D.N.Y. 1988); Minnesota Mining & Manufacturing Co. v. Ampad Corp., 7 U.S.P.Q.2d (BNA) 1589, 1987 WL 124334 (D.Mass. 1987); FMC Corp. v. Old Dominion Brush Co., 229 U.S.P.Q. (BNA) 150, 1985 WL 5983 (W.D.Mo. 1985). The debate over whether to apply the Jack Winter rationale or the Knogo rationale and over the unfairness that the Jack Winter line of cases imposed on clients was put to rest by the Federal Circuit when it adopted the rationale of the Knogo line of cases. Spalding Sports, supra, 203 F.3d at 805 – 806 (expressly rejecting Jack Winter conduit line of cases and holding that invention submission forms were protected under attorney-client privilege). Because Federal Circuit law controls regarding privilege issues as they relate to drafting and obtaining patents, the Jack Winter line of cases and rationale should be ended. See §4.10 above. B. [4.14] Patent Agents Patent law is unique in its use of patent agents. These individuals are not members of the bar of any state, yet they are authorized to practice law before the United States Patent and

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 15

§4.14

INTELLECTUAL PROPERTY LAW

Trademark Office. To be authorized to practice before the USPTO, one must pass the patent bar exam, which is administered by the USPTO. The only requirement to sit for the patent bar is a science undergraduate degree or equivalent experience in the industry. Although law school or a law degree is not required to sit for the patent bar, a thorough and in-depth knowledge of patent law is required. Over the years, the patent bar exam has become more difficult to pass than many state bar examinations. Thus, a patent agent working in a corporate legal department or as an outside consultant must have a detailed and complete understanding of the patent laws and the rules of practice and procedure before the USPTO, which allows the patent agent to provide legal advice to clients about the strategies and options they have to obtain patent protection for their inventions: The registered patent agent is required to have a full and working knowledge of the law of patents . . . and is even regulated by the same standards, including the Code of Professional Responsibility, as are applied to attorneys in all courts. . . . Thus, in appearance and fact, the registered patent agent stands on the same footing as an attorney in proceedings before the Patent Office. [Footnotes omitted.] In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 393 (D.D.C. 1978). Because patent agents generally are practicing law (Sperry v. State of Florida ex rel. Florida Bar, 373 U.S. 379, 10 L.Ed.2d 428, 83 S.Ct. 1322, 1325 (1963)) yet are not truly “lawyers,” they create unique and confusing issues regarding the attorney-client privilege and work-product immunity. The majority rule provides that the privilege applies to communications in which the patent agent is acting under the authority or control of a lawyer. See, e.g., Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 518 – 519 (S.D.N.Y. 1992); Gorman v. Polar Electro, Inc., 137 F.Supp.2d 223, 227 (E.D.N.Y. 2001); Saxholm AS v. Dynal, Inc., 164 F.R.D. 331, 337 (E.D.N.Y. 1996); Willemijn Houdstermaatschaapij BV v. Apollo Computer Inc., 707 F.Supp. 1429 (D.Del. 1989); Cuno, Inc. v. Pall Corp., 121 F.R.D. 198, 204 (E.D.N.Y. 1988). Other courts, however, have correctly extended the privilege to agents acting on their own and not under the authority or control of a lawyer. Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 537 (N.D.Ill. 2000); Dow Chemical Co. v. Atlantic Richfield Co., 227 U.S.P.Q. (BNA) 129 (E.D.Mich. 1985); Ampicillin, supra, 81 F.R.D. at 393 – 394; Vernitron Medical Products, Inc. v. Baxter Laboratories, Inc., 186 U.S.P.Q. (BNA) 324 (D.N.J. 1975). See generally David Hricik, Patent Agents: The Person You Are, 20 Geo.J. Legal Ethics 261, 282 – 283 (2007) (noting that split of authority still exists and arguing that agents should be subject to privilege). Thus, it is prudent when using patent agents to always have them working under the authority or control of a lawyer. Because a patent agent cannot litigate (i.e., represent a client in federal court), the workproduct doctrine would not apply to the agent unless the agent were somehow performing a task at the direction of the lawyer and thus his or her activities were the lawyer’s work product. Dow Chemical, supra. Some courts however, have found that work-product protection applies to proceedings before the Board of Patent Appeals and Interferences, as well as reexamination and reissue proceedings, and these decisions should be extended to the Patent Trial and Appeal Board. These are quasi-adversarial proceedings between the patent examiner and the inventor. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 260 – 262 (N.D.Ill. 2000). Patent agents can represent clients in these proceedings. The courts, however, did not address the issue of whether a patent agent acting alone would be entitled to work-product protection. Although no rational basis

4 — 16

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.15

exists for precluding patent agents from this protection since they are performing the exact same tasks and functions that a lawyer would be performing in the same proceeding, it is unclear how the courts will treat these issues. Thus, to make certain that work-product protection is available to these quasi-adversarial proceedings before the USPTO, an agent’s work should be under the authority or control of a lawyer. C. [4.15] Foreign Patent Prosecution In addition to seeking patent protection in the United States, companies and inventors may seek protection in foreign countries. The use of nonlawyer specialists, who are similar in status to patent agents in the United States, is more common in foreign countries. Determining privilege issues in these settings can become very complex, involving choice-of-law issues and analysis of foreign law. If a U.S. firm is used to prosecute the foreign patent application, then the privilege applies to the same extent that it applies to U.S. prosecution activities. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 256 (N.D.Ill. 2000). If, however, patent agents of a particular country are used, then a test similar to the one applied to U.S. patent agents has been applied by the courts. Thus, the privilege may extend to communications with foreign patent agents related to foreign patent activities if the privilege would apply under the law of the foreign country and this law is not contrary to the law of the U.S. forum. Id. If the foreign patent agent was functioning as an agent for the attorney, the communication is privileged to the same extent as any communication between an attorney and a nonlawyer working under the lawyer’s supervision. Thus, if the foreign patent agent is engaged in the lawyering process, the communication is privileged to the same extent as any communication between cocounsel. Id.; Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 535 (N.D.Ill. 2000); Burroughs Wellcome Co. v. Barr Laboratories, Inc., 143 F.R.D. 611, 616 (E.D.N.C. 1992). As in all cases of privilege, the burden of establishing the privilege is on the party asserting it. McCook Metals, supra, 192 F.R.D. at 258. See §4.11 above. In cases in which communications with a foreign agent or attorney are made regarding a U.S. patent, the law of the United States, not the foreign jurisdiction, should be applied. “[B]ecause the United States has a strong interest in regulating activities that involve its own patent laws, all communications relating to patent activities in the United States will be governed by the American rule.” In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 391 (D.D.C. 1978). Thus, the privilege has been extended to protect communications between in-house U.S. lawyers and French attorneys and agents and German attorneys and agents. McCook Metals, supra, 192 F.R.D. at 257 – 258. The privilege has also been extended to protect communications between U.S. clients and British patent agents. Smithkline Beecham, supra, 193 F.R.D. at 535 – 536 (acknowledging that since 1968, United Kingdom law has recognized privilege in communications with patent agents); Ampicillin, supra, 81 F.R.D. at 392. The privilege has also been extended to protect communications between an Italian corporation and its patent agents in Norway, Germany, and Israel. Golden Trade, S.r.L. v. Lee Apparel Co., 143 F.R.D. 514, 523 – 524 (S.D.N.Y. 1992).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 17

§4.16

INTELLECTUAL PROPERTY LAW

D. [4.16] Work-Product Protection for Patent Prosecution Activities The preparation and prosecution of patent applications generally has not been held to be in anticipation of litigation because they are ex parte administrative acts that are too far removed from any specific anticipated litigation. As such, work-product protection would not apply to shield these communications from discovery. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 260 (N.D.Ill. 2000); Oak Industries v. Zenith Electronics Corp., 687 F.Supp. 369, 374 (N.D.Ill. 1988). Some proceedings before the United States Patent and Trademark Office, however, are quasiadversarial and may be viewed as giving rise to a particularized threat of litigation. Thus, workproduct protection has been extended to materials prepared in anticipation of reexamination proceedings, interferences, and appeals before the Board of Patent Appeals and Interferences. McCook Metals, supra, 192 F.R.D. at 262. This rationale should also apply to provide workproduct protection for materials prepared in anticipation of the new procedures for challenging patent validity before the Patent Trial and Appeal Board.

VII. [4.17]

TYPICAL PATENT DEPARTMENT COMMUNICATIONS

There are several types of documents that are typically created during the process of preparing and prosecuting patent applications and in commercializing new technologies. See §§4.18 – 4.25 below. If a corporate in-house patent department is set up properly, these documents should be subject to the protection of the attorney-client privilege.

PRACTICE POINTER 

Typical patent department documents may be protected under the attorney-client privilege provided they independently meet the requirements of the privilege.

A. [4.18] Invention Submission Forms Invention submission forms are usually filled out by inventors for the purpose of conveying information about their invention to a patent department. They are typically used for the purposes of making patentability, inventorship, and prior art determinations by the patent department. If the requisite confidentiality is present, they should be privileged. In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 804 – 806 (Fed.Cir. 2000). Although it is not necessary to expressly request confidential legal assistance in a document to obtain the protection of the privilege (Spalding Sports, 203 F.3d at 806), it is nevertheless prudent to set up forms and documents so that they expressly reflect their privileged nature and purpose. Additionally, invention submission forms should not contain information or references to business decisions or issues. If a document is seen as reflecting principally a business decision (e.g., “do we want to spend money on this invention” or “how does this invention fit into our

4 — 18

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.21

product mix”), it will not be privileged. For example, in W.R. Grace & Co.-Conn. v. Viskase Corp., 21 U.S.P.Q.2d (BNA) 1121, 1991 WL 141131 (N.D.Ill. 1991), the court found that some invention submissions forms were protected while others were not. This holding was based on the failure of proofs on the part of the party asserting the privilege. B. [4.19] Draft Patent Applications Like any other legal document, patent applications are usually prepared in an iterative process between the lawyer and the inventor. The drafts compiled in this process necessarily reflect the communications between the inventor and the lawyer as the lawyer attempts to put forth the invention in the best light possible to protect the inventor’s legal rights. A draft patent application is no different than a draft of a contract. Internal drafts between a lawyer and client are privileged. Draft disclosures to the other party are not. Similarly, internal drafts of patent documents would be privileged, while papers filed with the United States Patent and Trademark Office are not. Thus, a draft patent application implicitly reflects both confidential communications from a client seeking legal advice and the advice that is provided in response to those communications, and as such it should be privileged. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D.Ill. 2000). For cases that improperly found that draft applications were not privileged, see the discussion of the line of cases following Jack Winter, Inc. v. Koratron Co., 50 F.R.D. 225 (N.D.Cal. 1970), and the related case Jack Winter, Inc. v. Koratron Co., 54 F.R.D. 44 (N.D.Cal. 1971), in §4.13 above. C. [4.20] Inventor Sign-Off Forms Patent departments typically have inventors sign inventor sign-off forms around the time that the patent application is filed. These forms are used to reinforce the inventor’s legal obligation to disclose the best mode of practicing the invention and to disclose all pertinent prior art. In general, they are not disclosed to the United States Patent and Trademark Office. They also can be used to confirm the prior art status of any activity relating to the invention. If the requisite confidentially is present, they should be privileged. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D.Ill. 2000). Care should be taken with these and all forms because they could be viewed as providing only legal advice void of any client confidences, which would render them non-privileged. See §4.2 above. D. [4.21] Internal Patent Department Checklists Frequently, patent departments have various checklists that lawyers go through at the time of filing a patent application and at the time a patent application issues as a patent. These checklists document the various legal issues that surround these events and the advice, based on the communications received from the inventor, that the lawyer has provided. In general, they are not disclosed to the United States Patent and Trademark Office. If kept confidential, they should be protected by the privilege. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 253 (N.D.Ill. 2000). As with the inventor sign-off forms discussed in §4.20 above, care should be taken with these and all forms because they could be viewed as providing only legal advice void of any client confidence, which would render them non-privileged.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 19

§4.22

INTELLECTUAL PROPERTY LAW

E. [4.22] Attorney Notes By their very nature, a lawyer’s notes reflect the confidential communications that were made to the lawyer and the advice that the lawyer provided. They should be protected by the privilege. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 254 (N.D.Ill. 2000). Notes written by a corporate manager discussing legal advice that was rendered to the manager also should be privileged even though the lawyer did not write the notes. Illinois Tool Works, Inc. v. KL Spring & Stamping Corp., 207 U.S.P.Q. (BNA) 806, 1980 WL 30331 (N.D.Ill. 1980). Notes from an inventor to an attorney summarizing the prior art are also privileged. FMC Corp. v. Old Dominion Brush Co., 229 U.S.P.Q. (BNA) 150, 1985 WL 5983 (W.D.Mo. 1985). F. [4.23] Invention Review Committees Documents generated by invention review committees have various names; however, they are all typically the same and involve the process of reviewing invention submission forms to determine whether a patent application should be filed. These committees and their minutes are usually under the direction of a lawyer, but there may also be businesspeople and technical people involved. Care should be taken to make sure that the committees and their minutes or reports stay on the legal side of the equation and do not cross over into the non-privileged business advice area. Cuno, Inc. v. Pall Corp., 121 F.R.D. 198, 203 – 204 (E.D.N.Y. 1988) (addressing each document individually and holding that majority of documents reflected business rather than legal advice and thus were not privileged). See §4.4 above. The communications surrounding these committees, if properly set up and documented, are typically (although not always) protected as privileged. The key to maintaining protection of the privilege is to properly establish the committee, its purpose, and its reporting mechanisms in the first place. G. [4.24] Draft Agreements Provided that the confidentiality requirement is met, draft agreements should be privileged. Internal working drafts of agreements that are shared between businesspeople and a lawyer implicitly, if not expressly, reflect confidential requests for legal advice, as well as the advice that was rendered based on those requests, and should be privileged. McCook Metals L.L.C. v. Alcoa Inc., 192 F.R.D. 242, 255 (N.D.Ill. 2000). On the other hand, drafts of agreements that are exchanged between negotiating parties do not have the requisite confidentiality and should not be protected by the privilege. H. [4.25] Invalidity Opinions and Noninfringement To avoid a finding of willful infringement and the potential for an award of increased damages, a party should seek and obtain the opinion of outside patent counsel that the party does not infringe a patent or that the patent of concern is invalid. See §4.32 below. In general, these opinions will be protected by attorney-client privilege, provided all elements to maintain the privilege are present. If an invalidity opinion, however, is based solely on publicly available, nonconfidential information, it is not privileged. In this situation, the legal advice that the patent is invalid does not disclose either directly or indirectly the substance of a confidential communication by a client

4 — 20

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.26

and the key element for privilege is absent. On the other hand, if the invalidity opinion reveals client confidences, either directly or indirectly, it will be privileged provided the other requirements of the privilege are met. American Standard Inc. v. Pfizer Inc., 828 F.2d 734, 745 – 746 (Fed.Cir. 1987). Moreover, the mere fact that the opinion is also based on publicly available information, such as United States Patent and Trademark Office records and prior art, will not preclude the privilege from applying: The view that in-house and outside patent counsels’ patent-validity opinions are never protected by the attorney-client privilege, expressed in [United States v. United Shoe Machinery Corp.], 89 F.Supp. 357, 87 U.S.P.Q. 5 (D.Mass. 1950) and American Cyanamid Co. v. Hercules Powder Co., 211 F.Supp. 85, 135 U.S.P.Q. 235 (D.Del. 1962), was dealt a fatal blow by the Supreme Court in Sperry v. [State of Florida ex rel. Florida Bar], 373 U.S. 379, 83 S.Ct. 1322, 10 L.Ed.2d 428 (1963), and was administered the coup de grace by our predecessor, the Court of Claims, in Ledex, Inc. v. United States, 172 U.S.P.Q. 538, 539 (Ct.Cl. 1972). The current weight of authority, see In re Ampicillin Antitrust Litigation, 81 F.R.D. 377, 390, 202 U.S.P.Q. 134, 143 (D.D.C. 1978); Nestle Co. v. A. Cherney & Sons, Inc., 207 U.S.P.Q. 930, 933 (D.Md. 1980), to which we would add our own, recognizes that counsel’s opinions on patent validity are not denied the client’s privilege protection merely because validity must be evaluated against publicly available information. American Standard, supra, 828 F.2d at 745 – 746.

VIII. [4.26]

COMMONALITY OF INTEREST DOCTRINE

The “commonality of interest” doctrine is an exception to the confidentiality requirement of the attorney-client privilege. The commonality of interest doctrine prevents the privilege from being waived when a privileged communication is shared with a third party who is within the commonality of interest group. The doctrine has also been known as the “joint defense,” “joint client,” and “allied lawyer” doctrine. When parties have commonly aligned business and legal interests, this doctrine permits communications between each of the clients and their lawyers to take place without losing or waiving the privilege. In re Regents of University of California, 101 F.3d 1386, 1390 (Fed.Cir. 1996) (holding that regional circuit law applied to commonality of interest issue). The doctrine has the potential to be applicable in several factual scenarios. The doctrine does not, however, provide an independent basis for claiming privilege. Thus, the communication at issue must still meet all the requirements of privilege in the first place. Cavallaro v. United States, 284 F.3d 236 (1st Cir. 2002); Smithkline Beecham Corp. v. Apotex Corp., 193 F.R.D. 530, 539 (N.D.Ill. 2000) (“The [commonality of interest] doctrine, however, is not a privilege in and of itself; it is merely an exception to the waiver of attorney-client privilege.”).

PRACTICE POINTER 

To protect the exchange of privileged communications between third parties, the commonality of interest doctrine requires that the parties have commonly aligned business and legal issues.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 21

§4.27

INTELLECTUAL PROPERTY LAW

A. [4.27] Multiple Accused Infringers The commonality of interest doctrine finds applicability in the situations in which several parties are accused of infringing the same patent. These parties’ legal interests are typically aligned. Their business interests, however, may not be as clearly aligned as would seem on first inspection to be the case. In this situation, it is quite likely that the multiple defendants are competitors and their products and noninfringement defenses may be quite different. Thus, the first defendant, who has a very strong noninfringement defense, may actually benefit if the second defendant, its biggest competitor, is found liable for infringement and subjected to substantial damages liability. While these potentially divergent interests should not normally prevent the parties from relying on the commonality of interest doctrine to protect the attorneyclient privilege, they do raise other issues. For example, in this situation, serious antitrust issues are present because the commonality of interest agreement has the potential to be a horizontal agreement between competitors that affects price and thus is per se illegal. See §3.12 of this handbook. B. [4.28] Manufacturer-Buyer The commonality of interest doctrine can find applicability in situations between the manufacturer of an accused infringing product and its customers. In this context, the issues can become quite complex because, if the customer is accused of direct infringement and the manufacturer is accused of contributory infringement, their legal and business interests may not be entirely aligned. Nevertheless, for the purpose of the initial dispute with the patentee, they are mutually aligned. In this situation, care should be taken to make sure that the commonality of interest agreement does not prejudice or unnecessarily bind the manufacturer, who may face substantially less risk than the customer. C. [4.29] Indemnitor-Indemnitee The commonality of interest doctrine finds applicability in the situation between an indemnitor and an indemnitee. This situation is different from the manufacturer-buyer situation discussed in §4.28 above because there is a contractual obligation between the parties for the indemnitor to share at least some of the risk that the indemnitee faces from the infringement accusations. In this case, there is less risk that the commonality of interest agreement will increase the indemnitor’s obligations to the indemnitee. D. [4.30] Licensor-Licensee In the context of an exclusive licensing arrangement, the business and legal interests of the licensor and licensee are sufficiently aligned that the commonality of interest doctrine typically should apply to them. The Federal Circuit has found that a relationship between the patentee and a nonexclusive licensee with an option to take an exclusive license meets the requirements for the commonality of interest doctrine to apply. In re Regents of University of California, 101 F.3d 1386, 1389 – 1391 (Fed.Cir. 1996). Thus, in Regents, the Federal Circuit upheld the applicability of the privilege to communications between these parties and their lawyers regarding the prosecution of patent applications that were the subject of the license-option agreement.

4 — 22

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.32

E. [4.31] Mergers and Acquisitions The commonality of interest doctrine can also find applications in the merger, acquisition, and financing setting. This setting, however, makes it more difficult to find applicability because arguably the parties in the merger negotiations or in the financing discussions are adverse to each other until such time as the deal is closed. In general, great care should be taken to protect the attorney-client privilege until after the deal has closed because up until this point it may very well be determined that the two parties’ business and legal interests are not sufficiently aligned for the commonality of interest doctrine to apply, regardless of what the parties may have otherwise agreed to or believed.

IX.

RELIANCE ON OPINION OF COUNSEL AND WAIVER

A. [4.32] Willfulness, Good Faith, and Objective Recklessness In patent litigation, an infringer can be subject to punitive damages if the infringement is found to be willful. 35 U.S.C. §271. Punitive damages for willful infringement can be up to three times actual damages. 35 U.S.C. §284. Until recently, to avoid a finding of willful infringement, an accused infringer had to have a good-faith belief that it did not infringe or that the patent was invalid. Although it was not an absolute, obtaining an opinion from outside counsel that there was no infringement or that the patent was invalid was vitally important to establishing the requisite good faith to avoid willful infringement. Thus, until recently, to avoid a finding of willful infringement, a defendant was required to rely on counsel’s opinion at trial. This reliance, however, destroyed the confidentiality of the communication and thus waived the privilege. See §4.9 above. Thus, a defendant was faced with the Hobson’s choice of risking treble damages or waiving attorney-client privilege. This conundrum was acknowledged by the Northern District of Illinois: [I]n patent cases, the waiver rule creates a cruel dilemma for one accused of willful infringement. While reliance on advice of counsel is not necessary per se to defend the suit, it is, as a practical matter, absolutely essential to the good faith defense [to willful infringement]. Thus the choice is between a complete sacrifice of the privilege or a complete sacrifice of the defense. Abbott Laboratories v. Baxter Travenol Laboratories, Inc., 676 F.Supp. 831, 832 – 833 (N.D.Ill. 1987). In three cases, Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006), and In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007), the Federal Circuit substantially rewrote the law of willful infringement. In these cases, the Federal Circuit eliminated the majority of inequities that had developed over the prior 20 years in the area of willful infringement. See §§4.33 – 4.38 below.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 23

§4.33

INTELLECTUAL PROPERTY LAW

B. [4.33] Knorr-Bremse The Federal Circuit in its en banc decision in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), addressed the interplay between willfulness, the need to obtain an opinion of counsel, and the decision to rely on such an opinion at trial. The Knorr-Bremse court in general noted that “[f]undamental to determination of willful infringement is the duty to act in accordance with law.” 383 F.3d at 1343. The Knorr-Bremse court then went on to maintain the affirmative duty of good care that arises upon knowledge of a patent — “ ‘where, as here, a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing,’ including ‘the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.’ ” Id., quoting Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380, 1389 – 1390 (Fed.Cir. 1993). The Knorr-Bremse court also reaffirmed the nine factors for a willfulness determination that were set out in Read Corp v. Portec, Inc., 970 F.2d 816, 826 – 827 (Fed.Cir. 1992), and Rolls-Royce Ltd. v. GTE Valeron Corp., 800 F.2d 1101, 1110 (Fed.Cir. 1986): 1. whether there was a good-faith belief on the part of the infringer that the patent was not infringed or was invalid; 2. whether the questions of validity and infringement were a close call; 3. the infringer’s litigation conduct; 4. whether the infringer intentionally copied the patented invention; 5. the infringer’s size and financial condition; 6. the duration of the infringement; 7. whether the infringer took any remedial actions; 8. whether the infringer was motivated to harm the patentee; and 9. whether the infringer attempted to conceal its infringement. 383 F.3d at 1342 – 1343. As addressed in §4.38 below, the affirmative duty to exercise due care and to seek opinion of counsel was ultimately done away with by the Federal Circuit in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007). Nevertheless, the Federal Circuit in Knorr-Bremse answered key questions regarding willfulness and privilege issues. See §§4.34 – 4.36 below.

4 — 24

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.35

CASE HIGHLIGHTS 

Knorr-Bremse — back to the future: 1. Created new options. 2. Created new risks. 3. When it is unclear if the options are worth the risks, the client decides. 4. Did away with presumptions a. of willfulness for asserting the attorney-client privilege; and b. of willfulness for failing to seek the advice of counsel.

1. [4.34] No Presumption of Willfulness for Asserting the Attorney-Client Privilege The court in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337, 1344 (Fed.Cir. 2004), held: When the attorney-client privilege and/or work-product privilege is invoked by a defendant in an infringement suit, is it appropriate for the trier of fact to draw an adverse inference with respect to willful infringement? The answer is “no.” Although the duty to respect the law is undiminished, no adverse inference shall arise from invocation of the attorney-client privilege and/or work-product privilege. The removal of this presumption created new options. Prior to Knorr-Bremse, companies were faced with a very difficult decision. The very act of seeking legal advice would give rise to an adverse inference, unless they waived their attorney-client privilege. Thus, prior to KnorrBremse, the decision to seek advice of counsel was inextricably linked with the decision to waive privilege. 2. [4.35] No Presumption of Willfulness for Failing To Seek the Advice of Counsel Although maintaining, for the time being, the affirmative duty of due care, Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), also did away with the presumption that if a potential infringer did not seek legal advice, then its infringement was willful. Specifically, the court held: When the defendant had not obtained legal advice, is it appropriate to draw an adverse inference with respect to willful infringement?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 25

§4.36

INTELLECTUAL PROPERTY LAW

The answer, again, is “no.” The issue here is not of privilege, but whether there is a legal duty upon a potential infringer to consult with counsel, such that failure to do so will provide an inference or evidentiary presumption that such opinion would have been negative. . . . Although there continues to be “an affirmative duty of due care to avoid infringement of the known patent rights of others,” . . . the failure to obtain an exculpatory opinion of counsel shall no longer provide an adverse inference or evidentiary presumption that such an opinion would have been unfavorable. 383 F.3d at 1345 – 1346, quoting L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1127 (Fed.Cir. 1993). The removal of this presumption created potentially the most alluring risk. Companies could simply forgo seeking the advice of outside counsel, because the failure to do so no longer created a presumption of willfulness. As noted by the Federal Circuit, large corporations can spend millions of dollars annually in legal fees to obtain opinions. Id. Thus, the removal of this presumption changed the cost-benefit analysis as to whether opinions of outside counsel should be obtained. However, with the Federal Circuit’s decision in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007), discussed in §4.38 below, the risk for not obtaining an opinion from outside counsel has been greatly reduced, to the point that such costly opinions should no longer be needed in most circumstances. 3. [4.36] No Presumption of Willfulness in a Close Case In Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), the Federal Circuit was also asked to create a presumption that there was no willful infringement if the accused infringer put on a strong defense. The court declined to adopt this presumption, holding: Should the existence of a substantial defense to infringement be sufficient to defeat liability for willful infringement even if no legal advice has been secured? The answer is “no.” Precedent includes this factor with others to be considered among the totality of circumstances. . . . We deem this approach preferable to abstracting any factor for per se treatment, for this greater flexibility enables the trier of fact to fit the decision to all of the circumstances. 383 F.3d at 1346. The court’s refusal to adopt this presumption left the law of willfulness fully open to a factual balancing test. While this may have been more equitable, it left companies with a high level of uncertainty. This uncertainty, however, was short lived. In In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007), the court adopted a new standard for willfulness that from all practical purposes changed the court’s answer to the above question from a “no” to a “yes.” See §4.38 below. Moreover, the only tool available to clients to reduce this uncertainty is to obtain and follow a competent opinion of counsel.

4 — 26

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.37

C. [4.37] EchoStar About a year and a half after Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), the Federal Circuit decided In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006). In that decision, the court focused on the scope and effect of the waiver that occurs if a party relies on the advice of counsel to defend a charge of willful infringement. The EchoStar court addressed the scope of waiver in the context of three types of documents and based its opinion primarily on the work-product immunity doctrine. The first type of documents involved “documents that embody a communication between the attorney and client concerning the subject matter of the case, such as a traditional opinion letter.” 448 F.3d at 1302. The court found that the privilege with these types of documents was always waived. The second type of documents involved “documents analyzing the law, facts, trial strategy, and so forth that reflect the attorney’s mental impressions but were not given to the client.” [Emphasis added.] Id. The court found that this “category of work product, which is never communicated to the client, is not discoverable” and stated that “this so-called ‘opinion’ work product deserves the highest protection from disclosure.” 448 F.3d at 1303. The third type of documents involved “documents that discuss a communication between attorney and client concerning the subject matter of the case but are not themselves communications to or from the client.” 448 F.3d at 1302. These would be the things in the lawyer’s file that “reference and/or describe a communication between the attorney and client, but were not themselves actually communicated to the client.” 448 F.3d at 1304. The court found the privilege regarding such documents is waived. However, the waiver is only to the extent it aids in determining what was communicated to the client and when. Pure, non-communicated opinion work product would still be protected and could be redacted from the documents prior to production. Id.

CASE HIGHLIGHTS 

EchoStar — defines the scope of waiver: 1. Documents that are communications between the attorney and the client — waived. 2. Documents that reflect the attorney’s mental impressions but were not given to the client — not waived. 3. Documents discussing a communication between the attorney and the client but that were not given to the client — limited waiver.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 27

§4.38

INTELLECTUAL PROPERTY LAW

D. [4.38] Seagate About a year and a half after In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006), the Federal Circuit decided In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc). In that decision, the court addressed the affirmative duty of care, did away with that standard, and set up a new two-fold test based on a threshold showing of objective recklessness and then a subjective inquiry into good faith. The court held: Accordingly, we overrule the standard set out in [Underwater Devices Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed.Cir. 1983) (requiring affirmative duty of due care)] and hold that proof of willful infringement permitting enhanced damages requires at least a showing of objective recklessness. Because we abandon the affirmative duty of due care, we also reemphasize that there is no affirmative obligation to obtain opinion of counsel. . . . Accordingly, to establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. . . . The state of mind of the accused infringer is not relevant to this objective inquiry. If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer. [Emphasis added.] [Citations omitted.] 497 F.3d at 1371. The court went on to articulate how this new test will play out regarding activity occurring after the filing of the lawsuit: However, when a complaint is filed, a patentee must have a good faith basis for alleging willful infringement. . . . So a willfulness claim asserted in the original complaint must necessarily be grounded exclusively in the accused infringer’s prefiling conduct. By contrast, when an accused infringer’s post-filing conduct is reckless, a patentee can move for a preliminary injunction, which generally provides an adequate remedy for combating post-filing willful infringement. . . . A patentee who does not attempt to stop an accused infringer’s activities in this manner should not be allowed to accrue enhanced damages based solely on the infringer’s postfiling conduct. Similarly, if a patentee attempts to secure injunctive relief but fails, it is likely the infringement did not rise to the level of recklessness. [Citations omitted.] 497 F.3d at 1374. The Seagate court additionally addressed the scope of waiver, stating: In sum, we hold, as a general proposition, that asserting the advice of counsel defense and disclosing opinions of opinion counsel do not constitute waiver of the attorney-client privilege for communications with trial counsel. We do not purport to set out an absolute rule. Instead, trial courts remain free to exercise their discretion in unique circumstances to extend waiver to trial counsel, such as if a party or counsel engages in chicanery. 497 F.3d at 1374 – 1375.

4 — 28

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.39

CASE HIGHLIGHTS 

Seagate — the new standard for willfulness: 1. No affirmative duty of due care. 2. Threshold objective recklessness standard. 3. If threshold is met, then look to subjective good faith. 4. Trial counsel privilege ordinarily is not waived.

E. [4.39] 35 U.S.C. §298 Section 17 of the Leahy-Smith America Invents Act created a new section in the patent statutes, 35 U.S.C. §298. This section provides: The failure of an infringer to obtain the advice of counsel with respect to any allegedly infringed patent, or the failure of the infringer to present such advice to the court or jury, may not be used to prove that the accused infringer willfully infringed the patent or that the infringer intended to induce infringement of the patent. Id. There is no provision in AIA §17 for the effective date of §298. The catchall provision, AIA §35, provides that “[e]xcept as otherwise provided in this Act, the provisions of this Act shall take effect upon the expiration of the 1-year period beginning on the date of the enactment of this Act and shall apply to any patent issued on or after that effective date.” Thus, it is unclear when, and to which patents, §298 will apply. In particular, those patents that issue during the phase-in period of the AIA, i.e., September 16, 2012, to March 16, 2013, may not be subject to this provision.

PRACTICE POINTER 

Care should be taken in litigation not to reopen the door and lose the benefits of §298 and Fed.R.Evid. 502.

Section 298 codifies the Federal Circuit’s ruling in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004). See §§4.34 and 4.35 above. Section 298 also appears to overrule the Federal Circuit’s ruling in Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 699 (Fed.Cir. 2008), that opinion of counsel was relevant and could be substantive evidence in an inducement-to-infringe case. See H.R.Rep. No. 98, 112th Cong., 1st Sess. 53 (2011), reprinted in 2011 U.S.C.C.A.N. 84. Care should be taken, however, in fashioning a defense to an inducement charge not to reopen the door to this issue and thus allow such evidence in as rebuttal.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 29

§4.40

X.

INTELLECTUAL PROPERTY LAW

[4.40] FEDERAL RULE OF EVIDENCE 502

Fed.R.Evid. 502 took effect September 19, 2008. This rule helps to resolve and clarify the confusing caselaw regarding inadvertent disclosure of privileged information. By clarifying the law in this area, and by eliminating some of the draconian consequences that could arise with an inadvertent production of privileged material, the rule should reduce the costs of litigation. Because of the nature of patent litigation, there are typically large amounts of privileged documents, long privilege logs, and protected privilege disputes. Thus, although applicable to all types of civil cases, Rule 502 should play a very significant and prominent role in patent litigation. Additionally, Rule 502 extends to state court proceedings to the extent that if the original disclosure occurs in a federal proceeding or to a federal agency, then a state court cannot find a broader scope of waiver than is provide by this rule. Thus, Rule 502 should provide a uniform scope of waiver across all proceedings.

RULE HIGHLIGHTS 

Fed.R.Evid. 502 — defines the scope of waiver: a. Occurs only if disclosure is intentional. b. Does not occur if disclosure is inadvertent and reasonable steps are taken. c. May apply to state court proceedings. d. Private agreements need a court order to have broad effect.

A. [4.41] Fed.R.Evid. 502(a) — Intentional Disclosure and the Scope of Waiver Fed.R.Evid. 502(a) provides: When the disclosure is made in a federal proceeding or to a federal office or agency and waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication or information in a federal or state proceeding only if: (1) the waiver is intentional; (2) the disclosed and undisclosed communications or information concern the same subject matter; and (3) they ought in fairness to be considered together. Thus, this rule provides that waiver of privilege may occur only if the production was intentional — for example, the production of an opinion of counsel for the purpose of relying on

4 — 30

WWW.IICLE.COM

THE ATTORNEY-CLIENT PRIVILEGE AND THE W ORK-PRODUCT IMMUNITY DOCTRINE

§4.43

it to defend a willfulness charge. The waiver is limited to only the same subject matter and has a fairness consideration added to it. This rule should not impact, and at most may further limit, the scope of waiver under the analysis set forth in the Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337 (Fed.Cir. 2004), In re EchoStar Communications Corp., 448 F.3d 1294 (Fed.Cir. 2006), and In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007), trilogy of cases discussed in §§4.32 – 4.38 above. B. [4.42] Fed.R.Evid. 502(b) — Inadvertent Disclosure and the Scope of Waiver Fed.R.Evid. 502(b) provides: When made in a federal proceeding or to a federal office or agency, the disclosure does not operate as a waiver in a federal or state proceeding if: (1) the disclosure is inadvertent; (2) the holder of the privilege or protection took reasonable steps to prevent disclosure; and (3) the holder promptly took reasonable steps to rectify the error, including (if applicable) following Federal Rule of Civil Procedure 26(b)(5)(B). This rule should greatly reduce the costs, risks, and burn associated with the review, withholding, and identification of privileged documents in patent litigation. The rule, however, requires that reasonable steps be taken to prevent the disclosure. It will be interesting to see if the use of contract lawyers or outsourcing to a foreign country for document production will constitute “reasonable steps” under the rule.

PRACTICE POINTER 

Outsourcing production and privilege review may not meet Fed.R.Evid. 502(b)’s reasonable steps requirement to avoid waiver.

Fed.R.Civ.P. 26(b)(5)(B), upon notice to the other party, puts a hold on the use of any inadvertently produced privileged material until the request for its return is resolved. C. [4.43] Fed.R.Evid. 502(c) – 502(f) — State Proceedings and Private Agreements Fed.R.Evid. 502(c) provides that, absent a state court order regarding waiver, if a disclosure is made in a state proceeding, it will not give rise to a waiver in a federal preceding if the disclosure would not have caused a waiver if made in a federal proceeding or if the disclosure did not cause a waiver under state law. Rule 502(d) provides that an order from a federal court that waiver has not occurred from a disclosure is binding in all other federal or state proceedings.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 31

§4.43

INTELLECTUAL PROPERTY LAW

Rule 502(e) provides that for a private agreement regarding waiver to have effect on third parties, it must be entered as a court order. This is a significant provision. For example, if during a deposition an exhibit is marked and an objection is raised that the exhibit is an inadvertently produced privileged document, and if the lawyers reach an agreement to return the document or an agreement that the document does not have to be returned but its production will not be used as a basis for waiver, this agreement will not be binding on a third party, e.g., the next defendant in a subsequent law suit. Thus, a stipulated order embodying this lawyer agreement should be entered. Alternatively, a blanket provision may be included in the case’s protective order providing that agreements between counsel regarding waiver and the return of privileged material have the effect of an order of the court. However, a federal judge may be disinclined to permit such an open-ended provision in a court’s order and thus require the filing of stipulated orders. Rule 502(f) makes it clear that with respect to state law and other rules of evidence, Rule 502 is controlling.

4 — 32

WWW.IICLE.COM

5

Ownership and Management of Patent Rights

WILLIAM H. FRANKEL Brinks Hofer Gilson & Lione Chicago

®

©COPYRIGHT 2013 BY IICLE .

5—1

INTELLECTUAL PROPERTY LAW

I. [5.1] Introduction II. Ownership of Patent Rights A. [5.2] Inventorship 1. [5.3] Joint Inventorship and Coownership 2. [5.4] Correction of Inventorship B. [5.5] Employer-Employee Relationships 1. [5.6] Illinois Employee Patent Act 2. [5.7] Shop Rights C. [5.8] Acquisition of Patent Rights 1. [5.9] Assignments vs. Licenses 2. [5.10] Assignments 3. [5.11] Licenses a. [5.12] Exclusive vs. Nonexclusive Licenses b. [5.13] Package and Hybrid Licenses c. [5.14] License Terms (1) [5.15] License grant (2) [5.16] Field of use (3) [5.17] Licensed territory (4) [5.18] Payment terms (5) [5.19] Term and termination (6) [5.20] Ancillary provisions (7) [5.21] Boilerplate provisions 4. [5.22] Licensee and Assignor Estoppel a. [5.23] Uniform Commercial Code b. [5.24] Government Interest in Patents c. [5.25] Tax Considerations 5. [5.26] Constitutional Standing To Sue for Infringement III. Management of Patent Rights A. [5.27] Patent Audits and Due Diligence 1. [5.28] Conducting a Patent Audit 2. [5.29] Due-Diligence Considerations 3. [5.30] Managing Risks Through Deal Terms B. [5.31] Strategic Deployment of Patents

5—2

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

IV. Appendix — Sample Agreements A. B. C. D.

[5.32] [5.33] [5.34] [5.35]

Employee Agreement Regarding Confidentiality and Intellectual Property Assignment of Patent Rights Nonexclusive Patent License Agreement Exclusive Patent License Agreement

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—3

§5.1

INTELLECTUAL PROPERTY LAW

I. [5.1] INTRODUCTION The CEO wants to close by noon tomorrow on a lucrative sale of a business unit. The company’s outside general counsel has a significant role in negotiating and papering the transaction. It’s 11:30 p.m., and the mergers and acquisitions attorneys in the firm are scrambling to complete the intellectual property schedules and warranties requested by the buyer of the client’s soon-to-be divested business unit. The attorneys call because they have discovered that a nonemployee coinventor has just licensed a significant competitor under the patent on the company’s flagship software product. Furthermore, the employee inventors on three other key patents never assigned their rights to the company, and two of the company’s patents have lapsed for failure to pay the requisite maintenance fees. Counsel’s legal team works through the night to resolve all the issues to the client’s and the buyer’s satisfaction, and the deal closes on schedule. This fire drill gets the CEO thinking about patents. The CEO asks what steps could have been taken to avoid these last-minute surprises and is beginning to worry about increasingly patentconscious and litigious competitors. There is a desire to know whether the company is doing everything it can to protect its innovations and to avoid the patents of its competitors. Counsel’s assessment is due within a week. The answers to the CEO’s questions lie in a fundamental understanding of the types of proprietary interests that can exist in patents, coupled with an effective program for managing patent (along with other intellectual property) opportunities and risks. The patent laws provide that “[w]hoever invents or discovers” any patentable subject matter “may obtain a patent therefor.” 35 U.S.C. §101. The same laws also define a “patentee” as including “not only the patentee to whom the patent was issued but also the successors in title to the patentee” (35 U.S.C. §100(d)), and they expressly provide that “[a]pplications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing” (35 U.S.C. §261). Thus, one can acquire a proprietary interest in a patent by contract or by operation of law, even if he or she did not originally conceive of the patented invention. Most often, transfers of patent rights occur in the context of assignments and licenses, in the context of patent and invention development agreements, or as the result of a litigation settlement. As explained in this chapter, the operative terms of a particular conveyance will dictate the extent and consequences of the transfer of patent rights. Knowing what patent rights are owned by a company and its competitors is fundamental to strategic patent management and sound business. Today, savvy businesses build patent fences around their technologies, creating obstacles for competition and using their patents as economic weapons in furtherance of business objectives. Additionally, patents can be used as equity for the purchase of, or participation in, other businesses. Companies can generate cash by selling or licensing their patents to others. On the flip side, maintaining awareness of competitors’ patent rights helps clients avoid the staggering cost and exposure of patent infringement litigation. Companies that have devised and implemented a strategic patent asset management program report a significant and lasting effect on their bottom lines. The fundamental aspects of such a program also are discussed in this chapter.

5—4

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.3

II. OWNERSHIP OF PATENT RIGHTS A. [5.2] Inventorship The patent statute provides that “[w]hoever invents or discovers” any patentable subject matter “may obtain a patent therefor.” 35 U.S.C. §101. Inventorship is determined on a claim-byclaim basis and is governed by federal patent law. “Inventorship” must not be confused with “ownership,” which concerns legal title to a patent obtained by contract or operation of law. Sewall v. Walters, 21 F.3d 411, 417 (Fed.Cir. 1994). Initially, the patent right vests with the inventor. Thereafter, it may be transferred to another. To qualify as an inventor, a person must have conceived of every feature of the invention. The inventor must have a “definite and permanent idea of the complete and operative invention.” Cooper v. Goldfarb, 154 F.3d 1321, 1327 (Fed.Cir. 1998). An idea is sufficiently definite and permanent when it can be reduced to practice with only ordinary skill, not extensive research or experimentation. Accordingly, conception has been said to be the “touchstone” of inventorship. Stern v. Trustees of Columbia University in City of New York, 434 F.3d 1375, 1378 (Fed.Cir. 2006), quoting Burroughs Wellcome Co. v. Barr Laboratories, Inc., 40 F.3d 1223, 1227 – 1228 (Fed.Cir. 1994). In order to determine proper inventorship, one must determine who conceived of the subject matter of a given patent claim or interference count. Conception and reduction to practice are questions of law that the Court of Appeals for the Federal Circuit reviews de novo on appeal, with underlying facts being reviewed for clear error. Taskett v. Dentlinger, 344 F.3d 1337, 1339 – 1340 (Fed.Cir. 2003). 1. [5.3] Joint Inventorship and Coownership More than one inventor can contribute to a given invention. The patent statute mandates that application for a patent be made only in the name of no less than and no more than all of its joint inventors. See 35 U.S.C. §§102(f) (“[a] person shall be entitled to a patent unless . . . he did not himself invent the subject matter sought to be patented”), 116(a) (“[w]hen an invention is made by two or more persons jointly, they shall apply for patent jointly”). One who makes a suggestion that “planted the seed” for an invention may or may not make a contribution that is sufficient to constitute coinventorship. Pro-Mold & Tool Co. v. Great Lakes Plastics, Inc., 75 F.3d 1568, 1576 (Fed.Cir. 1996). Usually, joint invention connotes some degree of collaboration of effort to produce a complete and operative invention. Burroughs Wellcome Co. v. Barr Laboratories, Inc., 40 F.3d 1223, 1227 (Fed.Cir. 1994). The collaboration need not even be face-to-face, and the contributions among joint inventors need not be equal. 35 U.S.C. §116. The collaboration must lead the group of coinventors to have a definite idea of the complete invention, but each coinventor does not have to have his or her own mental picture of the complete invention claimed. Vanderbilt University v. ICOS Corp., 601 F.3d 1297, 1307 – 1308 (Fed.Cir. 2010). Furthermore, an inventor may use the ideas and help of others while perfecting his or her invention without losing the right to claim sole inventorship. Shatterproof Glass Corp. v. Libbey-Owens Ford Co., 758 F.2d 613, 624 (Fed.Cir. 1985). But if a person is seeking recognition as a coinventor, he or she must actually allege and show clear and convincing evidence of collaboration. Vanderbilt University, supra, 601 F.3d at 1308. See also Maxwell v. Stanley Works, No. 3:06-0201, 2006 WL 1967012 at *5 (M.D.Tenn. July 11, 2006) (plaintiff’s

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—5

§5.4

INTELLECTUAL PROPERTY LAW

coinventorship claim dismissed because he did not allege collaboration); Huang v. California Institute of Technology, No. CV 03-1140 MRP, 2004 WL 2296330 at *22 (C.D.Cal. Feb. 18, 2004) (plaintiff could not establish collaboration because he never communicated with four of five named inventors). The emphasis is on conception of the invention, and mere reduction to practice by or with another does not in and of itself give rise to joint inventorship. What is required of a joint inventor is that he or she (a) contribute in some significant manner to the conception or reduction to practice of the invention, (b) make a contribution to the invention that is not insignificant in quality when measured against the full invention, and (c) do more than merely explain to the real inventors well-known concepts or the current state of the art. Pannu v. Iolab Corp., 155 F.3d 1344, 1351 (Fed.Cir. 1998). Joint inventors must apply for a patent jointly because a patent may be invalid if fewer or more than the true inventors are named. 35 U.S.C. §116. See also Trovan, Ltd. v. Sokymat SA, 299 F.3d 1292, 1301 – 1302 (Fed.Cir. 2002). Different claims in a patent can be drawn to inventions made by different inventorship entities, but each coinventor owns a pro rata undivided interest in each claim and the entire patent regardless of his or her individual contribution. Ethicon, Inc. v. United States Surgical Corp., 135 F.3d 1456, 1465 (Fed.Cir. 1998). Patents can be jointly owned by coinventors and coowners alike. Absent an agreement otherwise, any coinventor or coowner of a patent may make, use, or sell the patented invention. 35 U.S.C. §262. See also Harrington Manufacturing Co. v. Powell Manufacturing Co., 815 F.2d 1478, 1481 (Fed.Cir. 1986). Similarly, any coowner may license others under a jointly owned patent or patent application. One who takes a license from a joint owner of a patent may practice the invention without the consent of, and without accounting to, the other coowners of the patent. 35 U.S.C. §262. See also Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 344 (Fed.Cir. 1997). As a result, less than all of the joint owners of a patent or patent application are incapable of granting an exclusive license. 2. [5.4] Correction of Inventorship The inventors named in an issued patent are presumed to be correct, and the burden of showing otherwise is a heavy one and must be proven by clear and convincing evidence. Garrett Corp. v. United States, 422 F.2d 874, 880 (Ct.Cl. 1970). Errors in naming the correct inventor (e.g., nonjoinder, misjoinder) may be cured upon application of all the parties and assignees as long as the error arose without any deceptive intention. Correction of errors in inventorship is governed by 35 U.S.C. §§116 (pending patent applications) and 256 (issued patents). B. [5.5] Employer-Employee Relationships In the absence of a contract, the general rule is that employees own any inventions they make, subject to the equitable considerations of a shop right, discussed in §5.7 below. This rule has been affirmed by the Supreme Court. Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc., ___ U.S. ___, 180 L.Ed.2d 1, 131 S.Ct. 2188, 2195 (2011). In this case, Stanford University argued that the Bayh-Dole Act, 35 U.S.C. §200, et seq., automatically gives the patent rights in federally funded inventions to the contractors that receive the federal funds, not to their workers who create the inventions. The Supreme Court rejected this argument and clarified that the Act gave the contractors the right to “retain title to any subject invention,” but

5—6

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.5

they still had to fulfill a number of requirements imposed by the statute — including securing an assignment from their employees. 131 S.Ct. at 2193, 2197. When there is a contract between an employer and an employee covering the subject of employee-made inventions, however, the allocation of proprietary rights is governed by the terms of the contract. Thus, the solution to Stanford’s dilemma lies in crafting tight assignment agreements with its researchers, scientists, and students. Thus, it is common for companies to insist that all employees sign an employment agreement that, among other things, sets forth the terms and ownership of employee-made inventions. Usually, such an agreement will provide that the employee assigns his or her rights to any inventions to the employer. The language used in the contract to assign the rights of the employee’s inventions to the employer is crucial. An agreement can be interpreted to cover ideas, but if the court finds the text does not compel that reading, then ideas will not be included. Mattel, Inc. v. MGA Entertainment, Inc., 616 F.3d 904, 909 – 910 (9th Cir. 2010). In Mattel, other employees’ contracts expressly included the rights to their ideas as well as their inventions, but the contract in question did not, which led the court to conclude that the term “inventions” alone did not include ideas. 616 F.3d at 909. Absent an express assignment, courts will sometimes infer an implied-in-fact contract to assign in situations in which it is clear that the employee has been “hired to invent” or to give himself or herself to the task of solving a particular problem. See Banks v. Unisys Corp., 228 F.3d 1357, 1359 (Fed.Cir. 2000). In such situations, ownership of patent rights will pass to the employer. In other situations, the court will not make that inference. For example, the Federal Circuit has held that even though a prior employment contract contained language assigning patent rights to the employer, once it was terminated and a new consulting agreement was signed without such language, the new agreement was not assumed to still contain the assigning language of the prior agreement. Abbott Point of Care Inc. v. Epocal, Inc., 666 F.3d 1299, 1303 (Fed.Cir. 2012). The rules for identifying and enforcing such contracts are largely governed by state contract law and can vary from jurisdiction to jurisdiction. However, the Federal Circuit has declared that when an employment contract has patent ownership implications, federal law — not state contract law — controls. DDB Technologies, L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284 (Fed.Cir. 2008). The court considered whether a computer scientist’s patent assignment clause to his former employer was an automatic assignment or a mere obligation to assign in the future and determined that ownership was “intimately bound up with the question of standing in patent cases.” 517 F.3d at 1290. Thus, federal law controls, and the ownership determination will be based on whether the language in the clause is in the present or future tense. Compare FilmTec Corp. v. Allied-Signal Inc., 939 F.2d 1568, 1573 (Fed.Cir. 1991) (“agrees to grant and does hereby grant” was assignment as matter of law), with Arachnid, Inc. v. Merit Industries, Inc., 939 F.2d 1574, 1576, 1581 (Fed.Cir. 1991) (“all rights . . . will be assigned by [inventor] . . . to CLIENT” did not rise to level of obligation to assign). What is the effect of DDB Technologies, supra? Employers are claiming that the Federal Circuit strengthened their right to employees’ inventions as long as they have used the right contract provision. This may not be the last word on the issue, as Judge Newman wrote a

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—7

§5.6

INTELLECTUAL PROPERTY LAW

blistering dissent in DDB Technologies and the Supreme Court has recently shown an interest in patent law — and in reversing the Federal Circuit.

PRACTICE POINTER 

Regardless of the assignment language in an employment agreement, the United States Patent and Trademark Office likely will require a separately executed assignment document to pass title for any given patent application on a specific invention. Therefore, an employment agreement requiring an employee to assign inventions to his or her employer should not be deemed a suitable substitute for a separate assignment of inventions after they are made.

As for independent contractors and other nonemployees who are in a position to invent, companies are well advised to have these outside parties sign a nondisclosure agreement and an agreement as to ownership of inventions before they are given access to company information and resources. 1. [5.6] Illinois Employee Patent Act In the State of Illinois, employers contracting for rights to employee inventions must be mindful of the requirements of the Employee Patent Act, 765 ILCS 1060/1, et seq. First, any provision that purports to require an assignment of the employee’s rights in an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and that was developed entirely on the employee’s own time is void and unenforceable as against public policy unless (a) the invention relates to (1) the employer’s business or (2) the employer’s actual or demonstrably anticipated research or development or (b) the invention results from any work performed by the employee for the employer. 765 ILCS 1060/2(1). Second, the employer must provide a written notification of these requirements upon presenting invention assignment language to an employee. The Illinois Employee Patent Act does not preempt existing common law applicable to any shop rights of employers with respect to employees who have not signed an employment agreement. 765 ILCS 1060/2(2). 2. [5.7] Shop Rights When an employee develops an invention using his or her employer’s time, materials, facilities, and equipment, the law recognizes that the employer may obtain a so-called “shop right” in the invention. A shop right permits the employer to use (not to sell or license) the employee’s invention without compensation and without liability for patent infringement. The shop right is a common-law doctrine founded in equity and has the attributes of equitable estoppel or an implied license. It is an exception to the general rule that an employee inventor owns his or her own invention regardless of whether it was conceived and/or reduced to practice during the course of employment. A shop right usually arises when an employee inventor stands by without objection while permitting his or her employer to assume expenses and expend resources in connection with the

5—8

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.9

development of the employee’s invention. The principle involved is that an employer should be deemed to be vested with an irrevocable, equitable license to use an invention when the employee thus induces and assists in such use without demand for compensation or other notice of restriction on the use. The proper methodology for determining whether a shop right exists is to consider all of the circumstances surrounding the development of the patented invention and to determine whether equity and fairness require that the employer be allowed to use the invention in its business. McElmurry v. Arkansas Power & Light Co., 995 F.2d 1576, 1581 – 1582 (Fed.Cir. 1993). Shop rights have several attributes worth noting. They are personal to the employer and are not assignable; they do not automatically pass to a purchaser of the employer’s business. The holder of a shop right may duplicate the invention or procure it from others for its own use. A shop right is an affirmative defense to a patent infringement suit and, when applicable, must be pleaded when answering a complaint for patent infringement. C. [5.8] Acquisition of Patent Rights 35 U.S.C. §261 provides that patents have the attributes of personal property and that “[a]pplications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing.” Moreover, implicit in the right to exclude that is conferred on a patent owner is the ability to waive that right and to license activities that otherwise might be excluded. Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1379 (Fed.Cir. 2000). Thus, patent rights may be assigned and licensed to others. The transfer and sharing of patent rights by agreement frequently occurs in the context of straight assignments and licenses or in the context of codevelopment and joint venture agreements. The operative terms of a particular conveyance will dictate the extent and consequences of the transfer of patent rights. 35 U.S.C. §261 also provides that a patent assignment, grant, or conveyance shall be void as against a subsequent purchaser for value without notice unless it is recorded in the United States Patent and Trademark Office within three months or prior to the subsequent purchase. Since one who does not acquire title cannot assert the protection of the bona fide purchaser rule, the bona fide purchaser defense does not apply to a nonexclusive patent licensee. Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corp., 284 F.3d 1323, 1334 (Fed.Cir. 2002). 1. [5.9] Assignments vs. Licenses An assignment involves a transfer of patent rights, whereas a license constitutes more of a sharing of rights. It is important when analyzing a patent transfer to assess its operative terms. What purports to be a license may in fact be an assignment, and vice versa. By way of example, although “royalties” are generally associated with licenses, the retention of royalty rights may constitute a financing arrangement for payment and is not necessarily inconsistent with an assignment. Conversely, if the transferor in a purported assignment document retains substantial rights in the patent (such as the right to continue preexisting contracts and licenses), then the conveyance will be deemed to constitute a license rather than an assignment. Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128, 1132 (Fed.Cir. 1995).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—9

§5.10

INTELLECTUAL PROPERTY LAW

The Federal Circuit generally looks to whether three rights have been conveyed in an agreement to decide whether the grant constitutes an assignment or a mere license, including a. the exclusive right to make, use, and sell products covered by the patent; b. the right to sue for infringement of the patent; and c. a virtually unrestricted authority in the licensee to sublicense its rights under the agreement. Additionally, the court must ascertain the intention of the parties and the substance of what the agreement granted. Mentor H/S, Inc. v. Medical Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed.Cir. 2001), citing Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875 (Fed.Cir. 1991). The party asserting that it has “all the substantial rights in the patent” as the assignee has the burden to prove this assertion, evidenced in writing. Mentor, supra, 240 F.3d at 1017, citing Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1250 (Fed.Cir. 2000). The differences between a patent assignment and a patent license are not without legal consequence. Principally, an assignee has the ability to file suit for patent infringement, whereas a licensee cannot do so on its own. 35 U.S.C. §281 provides that a patentee shall have remedy by civil action for infringement of a patent. The term “patentee” is defined in 35 U.S.C. §100(d) to include successors in title to the patentee. Thus, a patent assignee effectively becomes a patentee with standing to sue for infringement in its own name. Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed.Cir. 1998). In contrast, a patent licensee does not have the right to sue for patent infringement in its own name unless the license terms are such that the licensee possesses sufficient interest in the patent to have standing to sue as a coplaintiff with the patentee. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552 (Fed.Cir. 1995). Another distinction between an assignment and a license is that patent licenses are governed by state contract law, whereas patent assignments are matters of federal patent law. Notwithstanding, the proper construction of both licenses and assignments is a matter of state contract law. Minco, Inc. v. Combustion Engineering, Inc., 95 F.3d 1109, 1117 (1996), reh’g en banc denied, 1996 U.S.App. LEXIS 31225 (Fed.Cir. Nov. 18, 1996). 2. [5.10] Assignments An assignment of the entire right, title, and interest to a patent passes both legal and equitable title to the assignee. Rights in an invention also may be assigned, and legal title to any ensuing patent will pass to the assignee upon grant of the patent. Although no magic language is essential for an assignment to occur, it must be apparent from the conveyance instrument that there was a clear intent on the part of the assignor to part with his or her legal interest. 35 U.S.C. §261 requires that the assignment of a patent or patent application be in writing. Recordation of the assignment with the United States Patent and Trademark Office is necessary only to protect the assignee from subsequent bona fide purchasers without notice. GAIA Technologies, Inc. v. Reconversion Technologies, Inc., 93 F.3d 774, 777 (Fed.Cir. 1996).

5 — 10

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.11

It should be noted that an agreement to assign is not an assignment. Thus, a contract provision that all rights to inventions developed during a joint venture relationship “will be assigned” is ineffective to transfer all legal and equitable rights in the inventions to the proposed assignee and thereby extinguish the rights of the proposed assignor. Such an agreement to assign future inventions not yet developed may vest the promisee with equitable rights in the inventions once made, but it does not by itself convey legal title to patents on those inventions. IpVenture, Inc. v. ProStar Computer, Inc., 503 F.3d 1324, 1326 (Fed.Cir. 2007). On the other hand, an actual assignment of rights in an invention yet to be made (as opposed to an agreement to assign) is viewed as a valid assignment of an expectant interest. Once the invention is made and a patent application filed, legal title passes to the assignee. FilmTec Corp. v. Allied-Signal Inc., 939 F.2d 1568, 1572 (Fed.Cir. 1991). The right to sue infringers is implicit in and an incident of an assignment, as is the right to claim damages for future infringement. However, the right to recover damages for past infringement is deemed retained by the assignor unless expressly conveyed in the assignment document. Minco, Inc. v. Combustion Engineering, Inc., 95 F.3d 1109, 1117 – 1118 (Fed.Cir. 1996), reh’g en banc denied, 1996 U.S.App. LEXIS 31225 (Fed.Cir. Nov. 18, 1996). Also, unless the language of the assignment makes specific mention of future improvements, it is ineffective to assign rights to such improvements. Filmtec, supra, 939 F.2d at 1570. See also Affymetrix, Inc. v. Illumina, Inc., 446 F.Supp.2d 292, 296 (D.Del. 2006).

PRACTICE POINTER 

If representing the assignee of patent rights, be certain that the assignment document expressly conveys to the client the right to recover damages for past infringement, or this potentially valuable right will remain with the assignor.

3. [5.11] Licenses Implicit in the patent right to exclude others from making, using, or selling that which is described by the claims of the patent is the ability to waive that right by licensing to others activities that otherwise would be excluded. Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372 (Fed.Cir. 2000). Thus, a license is merely a promise not to sue or a grant of permission to do something, not a grant of a proprietary interest in a patent. A license is revocable at the will of the licensor unless it specifies otherwise. A valid license to practice a patented invention is a complete defense to an infringement action as long as the licensee has not exceeded the terms of the license. Anthony Co. v. Perfection Steel Body Co., 315 F.2d 138, 141 (6th Cir. 1963). A merger has been found to violate the express terms of a nontransferable license. Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431, 437 – 438 (6th Cir. 2009); PPG Industries, Inc. v. Guardian Industries Corp., 597 F.2d 1090, 1095 (6th Cir. 1979). Cincom expanded the ruling from PPG to include not only patent licenses but also copyright licenses, as well as stating it is immaterial if the transferee is a competitor of the licensor. 581 F.3d at 437 – 438. A patent license need not be expressed in any formal manner to be effective and can even be implied. As explained by the Supreme Court:

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 11

§5.11

INTELLECTUAL PROPERTY LAW

No formal granting of a license is necessary in order to give it effect. Any language used by the owner of the patent or any conduct on his part exhibited to another, from which that other may properly infer that the owner consents to his use of the patent in making or using it, or selling it, upon which the other acts, constitutes a license, and a defense to an action for a tort. De Forest Radio Telephone & Telegraph Co. v. United States, 273 U.S. 236, 71 L.Ed. 625, 47 S.Ct. 366, 367 (1927). The provisions of 35 U.S.C. §261 (requiring that an assignment be in writing) do not apply to licenses. Moraine Products v. ICI America, Inc., 538 F.2d 134, 143 (7th Cir. 1976). Implied licenses may arise in a number of contexts. The shop right discussed in §5.7 above is a form of implied license. Implied licenses can also arise by acquiescence, by conduct, by equitable estoppel, or by legal estoppel. Wang Laboratories, Inc. v. Mitsubishi Electronics America, Inc., 103 F.3d 1571, 1580 (Fed.Cir. 1997). The exhaustion doctrine holds that once the first authorized sale of a patented product has been made, no further restraint on its use is permitted. United States v. Univis Lens Co., 316 U.S. 241, 86 L.Ed. 1408, 62 S.Ct. 1088, 1093 (1942). It follows that the authorized and unconditional sale of a patented article carries with it an implied license to use, and also to repair, the article. Patent licenses, and agreements embodied therein, are construed according to state-based common law of contract. Schaefer Fan Co. v. J&D Manufacturing, 265 F.3d 1282, 1286 (Fed.Cir. 2001). Thus, the enforceability of a patent litigation settlement and license agreement is governed by state contract law, including the applicable statute of frauds. Sun Studs, Inc. v. Applied Theory Associates, Inc., 772 F.2d 1557, 1561 (Fed.Cir. 1985). Because a license is a personal right, it may not be shared with others absent an express provision in the license agreement that authorizes sublicensing. The owner of a fractional portion of a patent may license whomever he or she wants, and licensees thereof may practice the invention without the consent of the other patent coowner. 35 U.S.C. §262. Moreover, a coowner has no duty to account to other coowners for royalties received absent any agreement to the contrary. Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 344 (Fed.Cir. 1997). As is discussed in §§5.12 – 5.21 below, a patent holder has considerable latitude with respect to which of the substantive rights embraced in the patent grant he or she elects to license. Furthermore, a patent holder can lawfully place restrictions on the term of the license, can limit a license according to field of use, can split up a license according to territory, and can impose minimum royalty obligations and other conditions on the license grant. Implicit within this scheme and consistent with the state contract laws that have application to patent licenses, patent rights, such as the right to sublicense and the right to assign, are not included in the license grant unless expressly so stated. It also should be noted that a patent owner may not grant a license under only some of a patent’s claims. Kabushiki Kaisha Hattori Seiko v. Refac Technology Development Corp., 690 F.Supp. 1339, 1343 (S.D.N.Y. 1988). A patentee can refuse to license or otherwise exploit his or her patent without fear of challenge. However, once a patentee decides to exploit the patent by granting licenses, there

5 — 12

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.12

arises the potential that patent rights may be used in a scheme violative of the antitrust laws. Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n.3 (Fed.Cir. 1983). Nevertheless, the Supreme Court has enunciated the principle that the patent laws (which promise freedom from competition in the practice of patented inventions) are in pari materia with the antitrust laws (which seek to suppress monopolization and foster competition) and modify them pro tanto. Simpson v. Union Oil Company of California, 377 U.S. 13, 12 L.Ed. 2d 98, 84 S.Ct. 1051, 1053 (1964). A more in-depth discussion of the antitrust considerations that relate to patent licensing is presented in Chapter 3 of this handbook. a. [5.12] Exclusive vs. Nonexclusive Licenses A patent license may be exclusive or nonexclusive, but these terms alone are insufficient to describe the grant in a particular license agreement. As with the case of contrasting assignments and licenses, one must assess the operative terms of the license agreement, and not its title, to ascertain what rights actually vest in the licensee and what rights are retained by the licensor. An exclusive license assures the licensee that the license grant includes all the rights that the licensor has with respect to a defined activity, territory, and period of time. Stated another way, an exclusive license is a license to practice the invention, accompanied by the patent owner’s promise that others will be excluded from practicing the invention with respect to the same defined activity, territory, and period. Thus, the holder of a patent on an inflation system, after assessing the relative strengths and weaknesses of a number of potential licensees, might elect to license his or her patented technology exclusively to one licensee for use with inflatable bedding products and exclusively to another licensee for use with inflatable water toys. Moreover, a license may be exclusive with respect to less than all the rights embraced in the patent. For example, a patent owner may exclusively license his or her patent only with respect to the right to make. Sometimes, a patent owner has already granted a nonexclusive license but wishes to exclusively license another subject to the prior commitment. The exclusivity of the later license is not necessarily defeated by the existence of one or more prior license agreements. Refac International, Ltd. v. VISA USA, Inc., No. C-89-2198-DLJ (ENE), 1990 WL 130032 (N.D.Cal. June 26, 1990). An exclusive license prevents the licensor from practicing the invention unless that right has been reserved in the license agreement. Cutter Laboratories, Inc. v. Lyophile-Cryochem Corp., 179 F.2d 80, 93 (9th Cir. 1949). Absent such a reservation, the exclusive license granted is sometimes referred to as an “absolute exclusive” or “true exclusive” license because not even the licensor has a right to practice the patented invention. In such a case, the exclusive licensee can sue the patent owner for patent infringement. Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268, 273 (Fed.Cir. 1985). When a license is exclusive, without reservation of rights on the part of the licensor, the licensee may possess sufficient interest in the patent to have standing to sue as a coplaintiff with the patentee. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552 (Fed.Cir. 1995). When the licensor grants an exclusive license but retains the right to continue operating under the subject matter of the license, such an exclusive license is sometimes referred to as a “sole” license. Sole licensing is generally employed when a patent owner has an existing facility that it wishes to continue to operate. A sole licensee is entitled to sue for patent infringement and, if

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 13

§5.13

INTELLECTUAL PROPERTY LAW

necessary, join the patent owner involuntarily. Independent Wireless Telegraph Co. v. Radio Corporation of America, 269 U.S. 459, 70 L.Ed. 357, 46 S.Ct. 166, 169, reh’g denied, 46 S.Ct. 224 (1926). A sole licensee may not maintain an infringement suit in the patent owner’s absence. Agrashell, Inc. v. Hammons Products Co., 352 F.2d 443, 447 (8th Cir. 1965). Sole licenses tend to be characterized in agreement documents as “an exclusive license” but are subject to an express reservation of the continued right to use. In contrast to exclusive licenses, nonexclusive licenses do not prevent a licensor from licensing the same patent rights to others but are an encumbrance on the patent that binds future assignees. Furthermore, a nonexclusive or “bare” license — a covenant by the patent owner not to sue the licensee for making, using, or selling the patented invention and under which the patent owner reserves the right to grant similar licenses to other entities — confers no constitutional standing on the licensee to bring suit or even to join a suit with the patentee because a nonexclusive (or “bare”) licensee suffers no legal injury from infringement. Ortho Pharmaceutical Corp. v. Genetics Institute, Inc., 52 F.3d 1026, 1031 (Fed.Cir. 1995); Rite-Hite, supra (en banc). b. [5.13] Package and Hybrid Licenses When the parties to a patent license agree to licensing more than one patent under a single agreement, such an agreement is known as a “package license.” Such arrangements are permissible as long as the licensee is not coerced into taking the package by the licensor. Also, any attempt to collect royalties beyond the expiration of a licensed patent has been held by the Supreme Court to constitute an unlawful patent misuse. Brulotte v. Thys Co., 379 U.S. 29, 13 L.Ed.2d 99, 85 S.Ct. 176, 179 – 180 (1964). Courts recognize that the convenience of the parties is served, and no patent misuse occurs, when the parties to a license of multiple patents bargain for a fixed royalty to cover the use of more than one patent. However, in doing so, the parties run the risk that the expiration or invalidity of any of the licensed patents could potentially jeopardize future entitlement to a royalty. The safer way to approach such arrangements, therefore, is to allocate the rate of royalty to each particular patent when it is possible to do so. Also, as a belt-and-suspenders approach, it is advisable that the license agreement include an express recitation concerning the mutual convenience aspect of the licensing arrangement. Similarly, licensing parties may enter into what is known as a “hybrid license,” in which different types of intellectual property (e.g., patents and trade secrets) are jointly licensed in the same license agreement, sometimes without allocating royalties to one type of intellectual property or the other. As with package licenses, care must be taken when drafting hybrid licenses to ensure that future and/or untoward events, such as the public disclosure of confidential trade secrets, will not render the agreements nonviable or illegal. c. [5.14] License Terms A company charged with infringing the patent of another may seek to take a license and buy peace, thus ensuring its freedom to operate and protecting its investment in the accused product. This is but one example of the numerous scenarios that give rise to patent license negotiations,

5 — 14

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.14

each requiring a tailor-made negotiation strategy to fit the circumstances. Of course, if the patentee in the above example is unreasonable and makes exorbitant royalty demands, the accused infringer may be forced to test the validity of the patent in litigation. While the lessons and lore of patent license negotiation would consume far more pages than are found in this handbook, there are some fundamental licensing considerations and basic license terms that are shared with the reader below and exemplified in the sample agreements in §§5.32 – 5.35 below. The parties to any patent license negotiation should give consideration to at least the following factors: 1. the scope and strength of the patent(s); 2. the strength of the patentee’s infringement contentions; 3. the importance of the accused activity to the alleged infringer; 4. the economic harm that the patentee is likely to suffer if the infringing activity continues; 5. the number of potential infringers and the resources available to the patentee to go after them; 6. the parties’ respective arsenals of technology and patents; and 7. the business and economic costs of litigation. Obviously, it is easier for a patentee to extract greater royalties for a patent that has broad claims and that has withstood a validity challenge in the crucible of litigation. If, on the other hand, the patent is untested and/or of limited scope, a potential licensee may be more inclined to design around the patent or challenge it than to take a license. If the accused infringer has little invested in the accused activity and the activity is of marginal importance, he or she may elect to stop the activity rather than pay for a license. Conversely, if the technology is important to either the licensee or the patentee, or both, then the parties may be motivated to do what is necessary to achieve their business objectives and/or come to terms. When there are numerous infringers, a common strategy is for the patentee to select a first potential licensee who most requires a license or who can least afford to litigate against an infringement claim, negotiate a license, and then use the first license to go after others. In all such negotiations, each party should be informed about its negotiating partner’s other technology and patents and, when necessary, should negotiate for additional protection (e.g., such as a cross-license or the inclusion of rights under other patents or pending patent applications). Licensors and prospective licensees are well advised to be mindful of the threat of patent litigation, which is always hovering outside the door of the negotiating room. There are many ways to structure a patent license agreement between a willing licensor and a willing licensee who are in general agreement as to terms. The parties should give due consideration to ease of administration of the license when negotiating payment and reporting

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 15

§5.15

INTELLECTUAL PROPERTY LAW

schedules, periodic versus lump-sum payments, dispute resolution mechanisms, and the like. It is also a good idea to build some flexibility into the license to allow for events that are reasonably anticipated to occur (e.g., an assignment provision). (1)

[5.15] License grant

The license grant is the heart of the license, the part of the agreement that specifies what rights the patent owner is conveying to the licensee. The patent owner may license another to make, use, offer to sell, and import, or the patent owner may split up these rights. For example, a patent owner that engages in the manufacture of a patented product may elect to license another to use, but not make, the product. Similarly, a patent owner may grant a license to make and use a patented product but withhold the right to sell the product. As discussed in §5.11 above, if a license grant is silent on the question of sublicensing rights, no such rights are conveyed. The license grant should state whether the licensor intends that the conveyance of rights be nonexclusive or exclusive and, in the latter case, whether it is intended that the licensor also be excluded from practicing the patented invention. Consider the following example of a license grant: Licensor hereby grants to Licensee a nonexclusive, paid-up, irrevocable, and perpetual worldwide right and license under the Licensed Patents, without the right to sublicense, make, have made for its own use, use, offer for sale, sell, and import Licensed Products on the terms and conditions set forth herein. (2)

[5.16] Field of use

Inventions can have applications in more than one field, and licensors will try to maximize their revenues by limiting prospective licensees to fields of use according to the licensees’ technical and marketing expertise. The patent rights to a drug that has both human and veterinary applications, for example, may be separately licensed for these uses. Benger Laboratories Ltd. v. R.K. Laros Co., 209 F.Supp. 639 (E.D.Pa. 1962), aff’d, 317 F.2d 455 (3d Cir. 1963). The scope of the “field of use” definition often reflects the relative bargaining strengths of the parties. Great care should be exercised in crafting such definitions to anticipate evolving technologies and to avoid ambiguity. A field of use defined simply as involving computers, for example, could raise countless questions when applied to products such as kitchen appliances, audio equipment, automotive components, avionics, medical devices, and a host of other products utilizing microprocessors. Also, if the field of use is defined too broadly or indefinitely, disputes might arise over whether specific technological developments fall within the license grant or whether a new license has to be negotiated. In the context of defining a field-of-use restriction, one must be mindful of the fact that a licensor cannot manufacture and sell a patented product and thereafter restrict its field of use because the patented monopoly on the product is exhausted with the sale. United States v. Univis Lens Co., 316 U.S. 241, 86 L.Ed. 1408, 62 S.Ct. 1088, 1093 (1942).

5 — 16

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.18

The following is an example of a field-of-use restriction for a lighting technology: The Licensed Field, as used herein, shall mean and refer to the practice of the Licensed Patent Rights to produce, sell, and/or resell Licensed Products for and in connection with outdoor sport, camping, and boating-related lighting products such as flashlights and lanterns. Notwithstanding anything herein to the contrary, the Licensed Field shall exclude any product that is intended, developed, or sold for indoor residential and commercial lighting purposes. (3)

[5.17] Licensed territory

Unless the parties intend to enter into a worldwide license, it is prudent to define the licensed territory in which the licensee is being permitted to operate. A U.S. patent is effective throughout the United States and its territories and possessions, and a patent owner may split up the license grant according to parts of the United States. 35 U.S.C. §261 (sanctioning patent owner’s grant of exclusive right under patent “to the whole or any specified part of the United States”). As long as the licensor’s use of territorial restrictions is predicated on the rights derived from the patent grant, and not on some other, anticompetitive practice, such restrictions are deemed lawful and do not violate the antitrust laws or the laws of patent misuse. See Reinke Manufacturing Co. v. Sidney Manufacturing Corp., 446 F.Supp. 1056, 1068 (D.Neb. 1978), aff’d, 594 F.2d 644 (8th Cir. 1979). Courts have extended and applied the language of §261 relating to the division of domestic patent rights among different parts of the United States to world markets. See Cryomedics, Inc. v. Frigitronics of Conn., Inc., No. Civ. B-76-113, 1977 WL 22807 (D.Conn. Oct. 27, 1977). Thus, it is permissible, for example, for a licensor to grant foreign patent rights to foreign licensees while restricting their ability to export the licensed product to the United States. Dunlop Co. v. KelseyHayes Co., 484 F.2d 407, 417 – 418 (6th Cir. 1973). The following is an example of a “licensed territory” definition: The Licensed Territory means and includes the United States and its Territories, as well as any jurisdiction in which Licensor has filed and received rights to practice, or rights to exclude others from practicing, the inventions claimed in the Licensed Patent Rights. (4)

[5.18] Payment terms

The consideration paid for patent licenses can take many forms and include such value as the furnishing of improvements to the licensor, a cross-license under patents held by the licensee, monetary payments, or any combination of these. This section focuses on monetary consideration, through the payment of a lump sum, a running royalty payment, or a combination of the two. In the case of a lump-sum payment, the patent licensor receives consideration in the form of an initial cash payment at the outset of the license, either as a single payment or in prescribed installments. A lump-sum payment is frequently advantageous to the licensor. It allows the licensor to more quickly recover on its investment in the licensed technology and to continue

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 17

§5.18

INTELLECTUAL PROPERTY LAW

funding its own research. It offers the licensor some assurance that the licensee is appropriately capitalized and sufficiently motivated to exploit the licensed technology. On the flip side, it also protects the licensor in the event that the licensee decides to shelve the technology and not produce or sell licensed products. Also, the patent licensor that has received its consideration at the outset of the license is probably exempt from claims for refund by the licensee if the patent is later held invalid. Another advantage of lump-sum payments for the licensor is that, in international transactions, they can help avoid the potential adverse consequences of future currency rate fluctuations and/or political instability. The following is an example of a lump-sum royalty provision: As consideration, Licensee agrees to pay Licensor, within 30 days of the effective date of this Agreement, the sum of $100,000. In the case of a royalty, the consideration paid by the licensee is tied to some objective standard and usually takes the form of cash consideration expressed as a percentage of net sales or a payment based on units produced or sold. Usually, licensees prefer the continuing remuneration approach of a royalty payment, which allows them to devote their capital to the necessary facilities and personnel to take full advantage of the licensed technology. Licensees also prefer to pay the licensor out of the profits being generated from their operations under the license. From an accounting standpoint, royalty arrangements permit the licensee to cost account for each unit produced. Another important advantage of a royalty form of consideration is that, if based on net sales, the royalty approach can reflect the effects of inflation (net sales tend to trend upward) and market forces (prices tend to be reduced over time due to competition, product life cycle, and other factors). If the licensor is in a strong financial position, is confident that the licensing relationship will be successful, and wants to share in the fortunes of the licensee, the licensor might be inclined to forgo up-front payments in favor of a high royalty rate. The following is an example of a running royalty provision: As consideration for the rights and licenses granted herein, Licensee shall pay to Licensor five percent of the Net Sales Price of all Licensed Products made, used, or sold by Licensee. There are many variations on the royalty form of remuneration. When the licensor is weak financially and may need to further develop the licensed technology, the parties to a license might agree to an initial advance payment, in the form of a prepaid royalty, to be applied against future running royalties. Minimum royalties are frequently employed to assure commitment and adequate performance by a licensee; frequently, though not always, minimum royalty levels are set to increase over time and then level off. Depending on the business and the product involved, the parties can specify that minimum royalties are due annually, quarterly, or at any other period. Also, a royalty may be expressed as a fixed fee per unit made, used, or sold rather than as a percentage of net sales. The crucial issues for the parties negotiating a royalty-based patent license are (a) determining the appropriate royalty for a given situation and (b) defining the royalty base. These determinations necessarily go hand-in-hand because a royalty rate has significance only in relation to the base to which it is applied. Hughes Aircraft Co. v. United States, 31 Fed.Cl. 481

5 — 18

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.19

(1994), aff’d, 86 F.3d 1566 (Fed.Cir. 1996). For example, a royalty rate of .5 percent based on a $500,000 medical scanner apparatus will yield more revenue ($2,500) than a royalty rate of 5 percent based on a $500 servomotor in the medical scanner apparatus ($25). The selection of a reasonable royalty rate is, in essence, the licensing parties’ negotiated allocation of the profit opportunity presented by the license. This conceptual underpinning has given rise to a number of “rule of thumb” royalty bases, the most commonly used until recently being the so-called “25-percent rule.” In one version of the rule, a royalty of 25 percent of net profits is used in license negotiations. W.L. Gore & Associates, Inc. v. International Medical Prosthetics Research Associates, Inc., No. CIV 84-559 PHX CLH, 1990 WL 180490 at *23 (D.Ariz. July 9, 1990). The 25-percent rate is then negotiated up or down based on a number of factors such as the licensor’s ability to continue to reinforce the licensed package with research and development and know-how, the licensor’s reputation for diligence in pursuing infringers and protecting its licensees, the licensee’s preexisting manufacturing capabilities and/or skilled marketing force, the licensee’s access to raw materials or local government approvals, and the likelihood of substantial market gyrations. However, in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed.Cir. 2011), the Federal Circuit held that “the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.” Increasingly, it is possible for licensors trying to set a reasonable royalty rate for licensing their inventions to obtain information about agreed royalty rates in relevant licenses. Although there is little published information about actual royalties in specific license agreements, such information can be gleaned from litigation documents in the public record (either case records including actual licenses or testimony and decisions reflecting a reasonable royalty analysis for a given product or industry) and through various websites (see, e.g., www.royaltysource.com). Chapter 2 of this handbook discusses determining a reasonable royalty under 35 U.S.C. §284 in the context of assessing damages for patent infringement. (5)

[5.19] Term and termination

In the absence of a specified term not to exceed the life of the licensed patent, a patent license will be deemed to run to the expiration of the licensed patent. The term provision of a package patent license agreement might read as follows: This agreement and the licenses granted hereunder to Licensee shall run until expiration of the last to expire of the Licensed Patents and shall thereupon terminate. It is customary when crafting patent license agreements to contemplate and address the scenarios, in addition to expiration of the licensed patent, that might give rise to a termination of the license agreement. These scenarios can include, among others, default in the payment of royalties, a material breach, or the insolvency or bankruptcy of one of the parties. As a result of an amendment to 11 U.S.C. §365 by the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, 92 Stat. 2549, the clause, which was customary at the time, providing for termination of the license by the licensor in the event of the bankruptcy of the licensee, has been

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 19

§5.20

INTELLECTUAL PROPERTY LAW

rendered unenforceable. Under the current law, the bankrupt estate can repudiate a patent license without immunity but also is considered to be vested with the power to transfer the license to the highest bidder, even if there is a clause in the license to the contrary. See generally Aleta A. Mills, Comment, The Impact of Bankruptcy on Patent and Copyright Licenses, 17 Bankr.Dev.J. 575 (2001). (6)

[5.20] Ancillary provisions

The number of additional provisions that can be included within a license agreement, many of which can be very important to some or all of the parties, is limited only by the imagination of the authors of the license agreement. A partial list follows: a. Definitions, in addition to those mentioned in §§5.15 – 5.19 above, can promote consistency and avoid ambiguities. Such definitions might include “licensed patents,” “licensed products,” “related companies,” and others. b. Reporting intervals and requirements concerning payments due should be specified, as well as audit provisions. c. Representations and warranties that the licensed patent rights are valid and that the claimed inventions are operable, against infringement of third-party rights, of indemnification, and of product liability are among the types of warranties addressed in license negotiations and inserted into patent licenses. d. Confidential information is always of concern to parties negotiating technology agreements, and confidential information provisions are frequently signed in advance of patent license negotiations or included within the formal license agreement. e. Improvements and grantbacks are relevant considerations when further technological innovations are contemplated as a result of licensor research or licensee improvement on the licensed technology. f. Patent infringements are always a concern to licensors (who may not want to be obligated to expend resources on chasing third-party infringers) and licensees (who do not want to be bound to pay royalties while a competitor gets a “free ride”). It is wise to address this issue during license negotiations and craft provisions concerning who may pursue third-party infringers, the sharing of litigation costs and damages obtained, and who has settlement authority. g. Most-favored licensee clauses can protect a licensee from being placed at a competitive disadvantage if more favorable license terms are granted to a competitor licensee. See Studiengesellschaft Kohle, M.B.H. v. Hercules, Inc., 105 F.3d 629, 633 (Fed.Cir. 1997). h. A working requirement is mandatory in some foreign jurisdictions, but not in the United States. Absent some undertaking by the licensee to produce a specified minimum number of patented products within a specified period of time, or some similar requirement, the licensee could simply shelve the invention and pay nothing to the licensor. A naked promise to use one’s

5 — 20

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.22

“best efforts” to exploit an invention is regarded under Illinois law as too vague to constitute an enforceable contract term. Beraha v. Baxter Healthcare Corp., No. 88 C 9898, 1990 WL 207380 at *1 (N.D.Ill. Nov. 30, 1990), aff’d in pertinent part, 956 F.2d 1436 (7th Cir. 1992). i. Arbitration, or other alternative dispute resolution mechanisms, may be specified in a license agreement. 35 U.S.C. §294 expressly sanctions the arbitration of any dispute relating to patent validity or infringement arising under a license contract. j. Patent-marking provisions can be important because failure of a licensee to mark licensed patent numbers on licensed goods can prevent the licensor from collecting damages for past infringement in a suit brought against a third party on the licensed patents. 35 U.S.C. §287. k. Restrictions on assignment may prohibit an assignment of the license or delineate terms under which a contract may be assigned. Such provisions can be especially important to a party that contemplates a change of ownership or a transfer of assets. (7)

[5.21] Boilerplate provisions

There are many so-called “boilerplate” provisions that can be included in a patent license agreement to clarify and remove ambiguity. A few of these are a. a severability clause in the event that any provision is found invalid or unenforceable; b. an integration clause affirming that the agreement contains the entire understanding of the parties; c. a notice clause identifying the parties to whom notices should be sent, their addresses, and the manner of service; d. a survival of obligations clause, such as payment of pretermination royalties and confidentiality obligations in the event of termination; and e. choice-of-law and forum-selection clauses in the event that a dispute should arise. Additional boilerplate provisions can address topics as varied as waivers of breach by either party, force majeure, the need for government approval in a licensed territory, execution in counterparts, paragraph headings being for convenience only, and signatories representing that they are authorized to sign the license agreement on behalf of the parties. 4. [5.22] Licensee and Assignor Estoppel Prior to 1969, licensees were precluded from challenging the validity of patents under which they were licensed in accordance with the traditional state contract law principle of licensee estoppel. Thus, a patent owner could license his or her invention and sit back and collect royalties for as long as the licensee used the invention. This situation changed dramatically, though, with the 1969 Supreme Court decision in Lear, Inc. v. Adkins, 395 U.S. 653, 23 L.Ed.2d 610, 89 S.Ct. 1902 (1969).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 21

§5.22

INTELLECTUAL PROPERTY LAW

In Lear, the Supreme Court struck down the doctrine of licensee estoppel in patent cases and held that a patent licensee is not estopped from contesting the validity of a licensed patent and that a licensor cannot continue to collect royalties on a patent after it has been declared invalid. The rationale behind the decision was that the public policy of placing invalid patents in the public domain outweighed the traditional requirements of state contract law. As a result, a patent licensee can challenge validity in an effort to release itself from future royalty obligations and, possibly, from making royalty payments while the challenge is pending. Under Lear, a licensee may assert invalidity of the licensed patent as a defense to a patentee’s suit for patent infringement or breach of contract. The licensee also has the option to actually cease payment of royalties and institute suit for a declaratory judgment that the patent is invalid. Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed.Cir. 1997). In any event, the licensee remains liable for royalties until the date of the validity challenge, even if the patent is ultimately held invalid. While some courts permit the licensee to seek an injunction prohibiting termination of the license and either a refund of interim royalty payments or the establishment of a court-ordered escrow account for the deposit of royalties due pendente lite, the Federal Circuit Court of Appeals has characterized such relief as constituting a misapplication of Lear. Cordis Corp. v. Medtronic, Inc., 780 F.2d 991, 994 – 995 (Fed.Cir. 1985). Cf. Cordis Corp. v. Medtronic, Inc., 835 F.2d 859, 861 (Fed.Cir. 1987) (licensee challenging not validity of patent itself, but rather scope of its license). The Federal Circuit’s view is that a licensee may withhold royalties while challenging a patent but that it would be unfair to allow the licensee “to avoid facing the consequences that such an action would bring.” 780 F.2d at 995. That view was challenged and invalidated in the Supreme Court’s decision in Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118, 166 L.Ed.2d 604, 127 S.Ct. 764 (2007). There the Court held that a patent licensee is not required to terminate its license agreement before seeking a declaratory judgment that the subject patent is invalid, unenforceable, or not infringed. Justice Scalia, writing for the Court, noted that a licensee need not materially breach prior to a justiciable U.S. Constitution Article III “case or controversy.” This decision eliminates the dilemma a licensee previously faced in either challenging the patent and risking contract damages or paying royalties for a potentially worthless patent. The public policy that favors allowing a licensee to contest patent validity is not present in the assignment context. Unlike a licensee who might be forced to pay royalties on an invalid patent, an assignor who challenges a patent already has been paid for the rights to the patent. For this and other reasons, the Federal Circuit has affirmed the doctrine of assignor estoppel, which is an equitable doctrine that prevents an assignor of patent rights from later contending that what was assigned is a nullity. Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220, 1224 (Fed.Cir. 1988). Absent an express reservation by the assignor of the right to challenge validity or an express waiver by the assignee of the assignor’s right to assert assignor estoppel, the assignor of a patent surrenders the right to later challenge the validity of the assigned patent. Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 150 F.3d 1374, 1378 (Fed.Cir. 1998). Can an accused infringer agree not to challenge the validity of a patent as part of a litigation settlement agreement, or is such an agreement void as against public policy pursuant to Lear? When an accused infringer has challenged patent validity, has had the opportunity to conduct discovery on validity issues, and has dismissed litigation under a settlement agreement that

5 — 22

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.24

contains an unambiguous undertaking not to challenge validity, the accused infringer is thereafter contractually estopped from raising any such challenge. Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1370 (Fed.Cir. 2001). a. [5.23] Uniform Commercial Code Any sale of goods, as distinguished from the provision of services, raises issues of state law. Most states, including Illinois, have adopted the provisions of the Uniform Commercial Code — Sales (UCC), 810 ILCS 5/2-101, et seq., which govern the sale of goods. In particular, Illinois has adopted, without change, §2-312 of the UCC, which is entitled, “Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement.” Under Illinois law, a seller of goods makes certain warranties to the buyer of goods and, in certain limited circumstances, the buyer makes a warranty to the seller. By way of example, under §2-312(1)(a), the seller warrants that the title conveyed is good and its transfer rightful. Rockdale Cable T.V. Co. v. Spadora, 97 Ill.App.3d 754, 423 N.E.2d 555, 558, 53 Ill.Dec. 171 (3d Dist. 1981). Related to this warranty of title, some sellers will be deemed to have additionally warranted against patent infringement. UCC §2-312(3) provides: Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications. Essentially, this section provides that the merchant seller is deemed to promise to a buyer that the goods are free of patent infringement. As a result, a buyer who is sued for infringement is given a right to indemnification from the seller. When the buyer orders goods to be assembled, prepared, or manufactured to its own specifications, however, the buyer is deemed to represent that the seller will be safe in manufacturing goods according to the provided specifications. In such a case, the seller makes no warranty against infringement and, additionally, the buyer is under a good-faith obligation to indemnify the seller for any loss suffered as a result of infringement. As indicated by the “[u]nless otherwise agreed” preface to §2-312(3), the UCC provision is a gap-filler provision. In other words, parties to a sale of goods are free to make their own agreement regarding the presence or absence of a warranty against infringement. However, to effectively exclude or modify a warrant of title, §2-312(2) requires a seller to use “[p]recise and unambiguous language.” Rockdale, supra. b. [5.24] Government Interest in Patents The U.S. government can own and assert patent rights. See United States v. Telectronics, Inc., 857 F.2d 778 (Fed.Cir. 1988). Additionally, federal agencies can license patents. 35 U.S.C. §207(a)(2).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 23

§5.25

INTELLECTUAL PROPERTY LAW

It is beyond the scope of this chapter to comprehensively review the laws relating to the government’s proprietary interest in patents on inventions made with federal assistance and federal money. These laws, comprised in part of the statutory scheme set forth in 35 U.S.C. §§200 – 212, are predicated on the policy of promoting the commercialization and availability of inventions made with federal funds and pursuant to contracts or grants (known as “funding agreements”) involving federal agencies. The extent of the government’s proprietary interest in a given invention largely will turn on the source of the inventive activity, the funding for it, and any applicable legislation. Because the doctrine of sovereign immunity prohibits suit against the government unless the government has consented thereto, 28 U.S.C. §1498 provides the exclusive judicial remedy for patent infringement by or for the United States (including its contractors, subcontractors, and others acting with the authorization and consent of the United States). Section 1498 was primarily intended to permit the U.S. government to purchase goods and services for the performance of governmental functions without the possibility that the work could not be carried out because the government supplier or contractor was subject to the threat or reality of an injunction for patent infringement. Section 1498 provides a waiver of sovereign immunity only with respect to direct government infringement of a patent; the government is not liable for infringement by inducement or for contributory infringement. Motorola, Inc. v. United States, 729 F.2d 765, 768 n.3 (Fed.Cir. 1984). The patentee’s remedy in a §1498 action is limited to “reasonable and entire compensation” for the unauthorized use and manufacture. 729 F.2d at 767. c. [5.25] Tax Considerations Patents and patent applications are treated as intangible assets under the tax laws, their transfer and acquisition giving rise to tax consequences. Individuals and corporations alike need to know the tax consequences of patents, which, though summarized below, are best left to the tax attorneys. A transfer of patent rights may subject the transferor to income taxation on the revenues derived from the transfer. Under 26 U.S.C. §1235(a), inventors can take advantage of long-term capital gain treatment of the proceeds derived from any “transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder.” Under §1235, long-term capital gain treatment is available regardless of whether the transferor has profited from the sales of patented articles and regardless of whether the payment for the transfer was made with lump-sum or periodic payments (such as royalties). Further, under §1235, there is no minimum holding period to qualify for long-term capital gain treatment. Section 1235 is designed to give the benefit of long-term capital gain treatment to individual, independent inventors and certain financial backers; it generally excludes the employer of the inventor, all corporations, partnerships, estates, trusts, and the inventor’s own relations. It should be noted that the Internal Revenue Code speaks in terms of “all substantial rights” and not in terms of assignments or licenses. Accordingly, the operative effect of a transaction needs to be considered when assessing the tax consequences. Generally speaking, the transfer of the right to make, use, and sell will be deemed to constitute an assignment of “all substantial

5 — 24

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.26

rights” in the patent, whereas a transfer that includes a reservation of valuable rights will not qualify for long-term capital gain treatment under §1235. See Blake v. Commissioner, 615 F.2d 731, 735 (6th Cir. 1980). When a patent or a patent application is acquired by purchase, the cost of acquisition can ordinarily only be depreciated. Under 26 U.S.C. §197, the cost of acquisition may be capitalized by depreciating it over a 15-year period beginning with the month in which the patent was acquired. Under 26 U.S.C. §174, a taxpayer may deduct or depreciate research or experimental expenditures that are paid during the taxable year. Expenditures incurred in prosecuting a patent application, including attorneys’ fees, are deemed a part of the cost of acquisition and may be depreciated over the life of the patent or deducted as a current expense in the year paid or incurred. 26 C.F.R. §1.174-2(a). As long as necessary and reasonable, royalties paid by a patent licensee are a deductible business expense. Similarly, “ordinary and necessary” litigation expenses associated with patent litigation are deductible, as are damages paid for patent infringement. Schnadig Corp. v. Gaines Manufacturing Co., 620 F.2d 1166, 1169 (6th Cir. 1980). Damages recovered for patent infringement, whether compensatory or punitive, are treated as ordinary income.

PRACTICE POINTER 

Many a hard-negotiated litigation settlement/license agreement has been scuttled after the company’s chief financial officer inspects the agreement and considers the tax ramifications. It is always prudent, therefore, to consult with the CFO, company accountants, or company tax attorney early in the negotiations concerning the payment terms in the agreement and the tax consequences thereof.

5. [5.26] Constitutional Standing To Sue for Infringement A conveyance of legal title by the patentee can be made only of (a) the entire patent, (b) an undivided part or share of the entire patent, or (c) all rights under the patent in a specified geographical region of the United States. A transfer of any of these is an assignment and vests the assignee with title in the patent and a right to sue infringers (either alone, in cases 1 and 3, or, in case 2, jointly with the assignor). A transfer of less than one of these three interests is a license, not an assignment of legal title, and it gives the licensee no right to sue for infringement at law in the licensor’s own name. Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336 (Fed.Cir. 2006). See also Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 873 – 874 (Fed.Cir. 1991). The Supreme Court has not spoken to what right or rights must be conveyed for a successor in interest to have constitutional standing under the “all substantial rights” analysis. Accordingly, courts are split as to which of the three rights — the right to make, use, or sell; the right to sue for infringement; and the right to alienate — is determinative to prove whether an assignment or a license was conveyed.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 25

§5.27

INTELLECTUAL PROPERTY LAW

The Federal Circuit has noted that a “key factor” is where the right to sue for infringement lies. Aspex Eyewear, supra, 434 F.3d at 1340, citing Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1380 (Fed.Cir. 2000). Withholding the right to sue was decisive in Intellectual Property Development, Inc. v. TCI Cablevision of California, Inc., 248 F.3d 1333 (Fed.Cir. 2001), because the patentee’s choice to require the licensee to obtain consent to litigation — including the right to require the licensee to withdraw at any time — was inconsistent with the notion of “conveying all substantial rights.” See Sicom Systems Ltd. v. Agilent Technologies, Inc., 427 F.3d 971, 977 (Fed.Cir. 2005) (summarizing Federal Circuit caselaw). However, more recent Federal Circuit precedent seems to turn on more than just which party retains the right to sue, but whether the licensor places substantial restraint on alienation of the patent right by the licensee. New Medium Technologies LLC v. Barco N.V., 644 F.Supp.2d 1049, 1052 (N.D.Ill. July 5, 2007), citing Propat International Corp. v. RPost, Inc., 473 F.3d. 1187, 1191 (Fed.Cir. 2007). More explicitly, the Northern District of Illinois noted that “[t]he ability to transfer patent rights is ‘particularly significant’ within the ‘all substantial rights’ analysis,” and the Federal Circuit has gone as far as to refer to a restraint on transferability as “ ‘fatal’ to the argument that the agreement transferred all substantial rights in the patent.” New Medium, supra, 644 F.Supp.2d at 1052, quoting Propat, supra, 473 F.3d at 1191. A closer reading of Sicom suggests that perhaps it is a fusion of both the factors that decides the issue of standing to sue. Amgen, Inc. v. ARIAD Pharmaceuticals, Inc., 513 F.Supp.2d 34, 41 (D.Del. 2007) (“In four of the five cases [discussed in Sicom, the Federal Circuit] found that limitations on the assignment of ownership and litigation rights prevented the licensee to sue on its own behalf.” Citing Sicom, supra, 427 F.3d at 971.). Finally, whether the licensor or the licensee is obligated to “maintain the patent” is a factor to be considered. New Medium, supra, 644 F.Supp.2d at 1052, citing Propat, supra, 473 F.3d. at 1190 – 1193. The court in New Medium found this factor to support the licensee who was obligated to pay prosecution and maintenance fees for the patent in issue because it was “an indication that the party with that obligation has retained an ownership interest in the patent.” 644 F.Supp.2d at 1057, quoting Propat, supra, 473 F.3d. at 1191. Additionally, a Delaware district court called “[m]aintenance of the patent . . . indicative of ownership.” Amgen, supra, 513 F.Supp.2d at 40.

III. MANAGEMENT OF PATENT RIGHTS A. [5.27] Patent Audits and Due Diligence An effective intellectual property compliance program provides a framework for harvesting, documenting, evaluating, protecting, and enforcing technological and business innovations. It optimizes intellectual property exploitation opportunities, controls intellectual property expenses, and minimizes the risk of infringing the intellectual property of others. Any such program involves first identifying patentable inventions and then utilizing the patents obtained therefrom as economic weapons in furtherance of the company’s business objectives.

5 — 26

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.29

1. [5.28] Conducting a Patent Audit The first step toward identifying patentable inventions is to conduct an audit of the company’s patent assets and practices. A comprehensive patent audit reviews selected aspects of a company’s business practices in light of current intellectual property law and provides an invaluable reference and planning tool for a company’s intellectual property manager. An intellectual property audit will identify patentable inventions, patent assets, patent issues, and risks that are relevant to the company’s business. Patent audits can be company-wide or limited in scope. If the company needs to review its procedures for acquiring, perfecting, maintaining, and enforcing its patent assets, a broad-scope patent audit may be warranted. Sometimes, a narrower audit can be done in response to a specific problem. Most importantly, the audit must be tailored to the needs and culture of the company, and its scope should reflect a cost-benefit analysis based on the relevant circumstances. The scope of the audit will, in part, dictate who should be on the audit team. The team should include the chief legal officer (CLO) or his or her designee, a business manager with the knowledge to help define the scope of the audit and the authority to encourage audit participation and compliance, and outside intellectual property counsel to conduct the audit and work with the CLO to formulate appropriate recommendations to management. While most business managers recognize that technological innovations can be protected by patents, few appreciate the breadth of patent issues that arise in the day-to-day operations of their businesses. It is easy to recognize that a patent application should be filed for an exciting new product. However, it may be less readily apparent that nontechnical business methods might also be patentable — or might infringe the patents of others. In addition, the patent ownership provisions found (or not found) in purchase orders, vendor agreements, joint-venture agreements, and other development or teaming agreements can significantly impact a company’s return on its research and development investments, as well as its freedom to operate in a given area. A patent audit can be used to examine all such issues and help advance corporate business objectives and intellectual property strategies. Further, the audit can help assemble, organize, and inventory patent assets; bring company practices into compliance with current intellectual property law; uncover overlooked opportunities for protecting and capitalizing on company intellectual property investment; and prevent the recurrence of adverse litigation experiences. After the internal audit, the audit team will report its findings to management. The audit report outlines the level and type of intellectual property creation in the company and discusses the company’s current procedures for identifying, organizing, and protecting patents and for avoiding the patents of others. The report will make recommendations for addressing any discovered problems and for strengthening the company’s patent asset management. 2. [5.29] Due-Diligence Considerations Companies frequently encounter the need for patent due-diligence investigations. These investigations address some of the same issues as internal patent audits but also seek to confirm the legal status and ownership of patents and to assess their strength. Due-diligence audits are

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 27

§5.29

INTELLECTUAL PROPERTY LAW

usually performed in connection with acquisitions, mergers, joint ventures and technology transfers, and licenses. They frequently involve some degree of risk assessment from the business, financial, and legal perspectives. A patent due-diligence investigation necessarily involves a thorough review of patent rights held by the owner/assignor/licensor, including ownership issues; patent rights held by third parties and possible infringement issues; patent transfer and other agreements, including the review, drafting, and recordation of documents; patent investigations, including product clearances, equipment and process operation, and documentation; and other legal considerations, such as antitrust, tax, and insurance issues. The following list outlines key patent due-diligence issues with appropriate action to be taken with respect to each: Identification of the subject patent rights. Consideration should be given to the target’s list of patents and pending patent applications, which should be compared to the list produced from an independent search. Ownership of and access to the subject patent rights. Existing licenses and other agreements should be studied to identify preexisting rights/obligations of patent inventors and owners. This entails conducting title searches and reviewing agreements, including security interests recorded against patents. Strength, scope, and value of the subject patent rights. The strength, scope, and value of the subject patent rights can be established through a six-step process: a. examine the circumstances under which the patent rights were developed and first disclosed and offered for sale; b. consider the status of the persons involved in the development of the patent rights; c. review copies of issued patents, pending applications, and their file histories; d. confirm the timely payment of maintenance fees; e. assess the scope of protection sought/obtained; and f.

confirm that the subject patent rights in fact cover the product(s) of interest.

Risk of infringing third-party patent rights. Relevant correspondence, pleadings, and opinions concerning threatened or actual litigation or United States Patent and Trademark Office proceedings should be reviewed. Depending on the nature of the transaction in which patents are being acquired or transferred, other legal considerations may warrant evaluation as well. These can include antitrust, tax, and

5 — 28

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.30

insurance and warranty issues. Also, most such transactions include pre-investigation agreement among the involved parties with respect to confidentiality of the information being exchanged and evaluated. 3. [5.30] Managing Risks Through Deal Terms In addition to conducting a thorough and comprehensive due-diligence investigation, a purchaser of patent and other intellectual property rights should also negotiate for final deal terms that can help minimize the risks associated with the subject intellectual property rights in the transaction. A set of warranties that a buyer should seek from a seller in an asset purchase agreement, for example, might read as follows: Seller’s Warranties Concerning Purchased Rights (a) [Schedule 1.2] sets forth a true and complete list of all Purchased Patents, Purchased Copyrights, and Purchased Trademarks (Purchased Rights) owned by, used by, filed by, or licensed to Seller and used, held for use, or intended to be used primarily in the operation or conduct of the Business. Except as set forth in [Schedule 1.2] (1) all the Purchased Rights have been duly registered in, filed in, or issued by the appropriate Government Entity when such registration, filing, or issuance is necessary for the activities of the Business as presently conducted; (2) Seller is the sole and exclusive owner of, and Seller has the right to make, use, offer for sale, sell, import, reproduce, display, perform, modify, enhance, distribute, prepare derivative works of, and sublicense, without payment to any other person, all products and works included in and covered by the Purchased Rights, and the consummation of the transactions contemplated hereby does not and will not conflict with, alter, or impair any such rights; and (3) to Seller’s knowledge during the past two years, Seller has not received any written or oral communication from any person asserting ownership in any of the Purchased Rights. (b) Except as set forth on [Schedule 1.2] hereof, Seller has not granted any license of any kind relating to any Purchased Rights or the marketing or distribution thereof. Seller is not bound by or a party to any option, license, or agreement of any kind relating to the intellectual property of any other person or entity for the use of such intellectual property in the conduct of the Business, except as set forth in [Schedule 1.4], [except for so-called “shrink-wrap” license agreements relating to computer software licensed in the ordinary course of the Business]. To the knowledge of Seller, the activities of the businesses presently conducted do not violate, conflict with, or infringe on the intellectual property rights of any other person. Except as set forth in [Schedule 1.2] (1) no claims are pending against Seller by any person with respect to the ownership, validity, enforceability, effectiveness, or use in the Business of any Purchased Rights, and (2) during the past two years Seller has not received any written communication alleging that it has, in the conduct of the Business, violated any rights relating to the intellectual property of any person.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 29

§5.31

INTELLECTUAL PROPERTY LAW

(c) All material technology has been maintained in confidence in accordance with protection procedures customarily used in the industry to protect rights of like importance. All current members of management and key personnel of Seller have executed and delivered to Seller a proprietary information agreement restricting each such person’s right to disclose proprietary information of Seller. No former or current management and key personnel have any claim against Seller in connection with any such person’s involvement in the conception and development of any technology, and no such claim has been asserted or is threatened. None of the current officers or employees of Seller has any patents issued or applications pending for any device, process, design, or invention of any kind now used or needed by Seller in the furtherance of the Business, which patents or applications have not been assigned by Seller, with such assignments having been duly recorded in the United States Patent and Trademark Office and with any appropriate Government Entity when such recordation is necessary for the activities of the Business as presently conducted. B. [5.31] Strategic Deployment of Patents With the patent audit results in hand, the company intellectual property manager is now ready to work with the CEO and business managers to devise patent strategies aimed at realizing economic value and important business objectives based on company patent assets. There are several common intellectual property strategies that can be employed to maximize the value of company patents. One strategy is to secure a patent position for future exploitation and to integrate patent assets with specific business objectives. Another strategy is to create bargaining chips for trading technology the company wants or needs. Further, company patents can be used as equity for the purchase of, or participation in, other businesses. Companies can seek to generate cash by selling or licensing company patents to others. Patents can be used to create obstacles for the competition or to create tax benefits for the company. Companies that have devised and implemented an overall intellectual property assetmanagement strategy report a significant and lasting effect on their bottom lines. Texas Instruments, Inc., was one of the first companies to see the financial potential in its intellectual property portfolio. In 1985, in the wake of declining profits and shrinking market share, Texas Instruments began an aggressive program of seeking royalty payment from other semiconductor companies for the use of its patents. This strategy generated billions of dollars in royalty payments over the subsequent decade. In 2000, Lucent Technologies, Inc. devoted roughly 11 percent of its $33.8 billion in revenue to research and development, obtaining an average of two new patents every day. To capitalize on that investment, Lucent set up a patent assertion team to identify and prosecute infringers and a licensing team to aggressively seek revenue from its patent portfolio. IBM Corp., which has 35,000 patents worldwide, generated over $2 billion in intellectual property licensing royalties — over 15 percent of its total profits — from licensing royalties in 2002. In contrast, consider the cost of not seeking patent protection and revenues. In 1979, Xerox Corp. decided not to patent its invention of the graphical user interface that later evolved into the Microsoft Windows Operating System.

5 — 30

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.32

Strategic intellectual property asset management can yield dividends other than licensing revenue. An increasing number of companies are setting up intellectual property holding companies and/or subsidiary intellectual property management companies for business-focused asset management and the reduction of tax liabilities. Intellectual property holding companies tend to focus on tax objectives, setting up an entity to own intellectual property and receive royalty income in a state that does not tax income, for instance. Intellectual property management companies are independent businesses focused on the aggressive exploitation of intellectual property as an economic asset. These arrangements must be carefully constructed to avoid a loss of valuable intellectual property rights. Patents are increasingly recognized and employed as economic weapons in today’s business climate. Successful litigation strategies against infringers have resulted in injunctive relief and damage awards (trebled for willful infringement) that have escalated into hundreds of millions of dollars. All it took was seven patents for Polaroid Corp. to decimate Eastman Kodak Co.’s instant photography business, at a cost to Kodak of more than $3 billion in infringement damages, lost research and development and manufacturing costs, employee layoffs, and legal fees. Other slain Goliaths include Stac Electronics’ $120 million patent victory in 1994 over Microsoft (data compression technology) and Fonar’s damages award of $103.7 million in 1997 against General Electric Co. (magnetic resonance imaging technology). Numerous companies have paid dearly for their intellectual property mismanagement, especially when they failed to keep an eye on what their competition was doing. Accordingly, patent strategies should be employed, and they should be evaluated and modified, as necessary, on an ongoing basis.

IV. APPENDIX — SAMPLE AGREEMENTS A. [5.32] Employee Agreement Regarding Confidentiality and Intellectual Property EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY AND INTELLECTUAL PROPERTY THIS AGREEMENT is made between [company], a corporation organized and existing under the laws of the State of Illinois and having a place of business at [address], and [employee], residing at [address]. CONFIDENTIALITY 1. I, [employee], am aware of [company]’s need to maintain the confidentiality of its business information. Therefore, I agree to take the utmost precautions to ensure that the confidentiality of [company]’s papers, effects, and technical and accounting matters is preserved, and I agree not to divulge or discuss with any third parties [company]’s confidential matters relating to [company]’s business. Upon termination of my employment, I will return to [company] all of its papers, effects, and materials that have been entrusted to me. Additionally, I will return all notes, memoranda, correspondence, and reports

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 31

§5.32

INTELLECTUAL PROPERTY LAW

completed, or in process, at the time of termination. This covenant for confidentiality shall survive my employment for as long as such material or information does not enter the public domain (through no fault of my own). 2. I will keep and hold in confidence all confidential information, including, without limitation, all records and documents of which I may have knowledge and all data obtained by me from [company]’s computer system, and unless required by my work with [company], I will not remove from [company]’s premises any record, information, or other document or data relating to any business of [company] or make any unauthorized copy thereof. All confidential information is recognized as property of [company] and is not to be used for my own or another’s benefit or communicated to any unauthorized person, at any time, without the written consent of [company]. ASSIGNMENT OF INTELLECTUAL PROPERTY 3. I acknowledge ownership by [company] of, and hereby assign and agree to hereafter execute any further documents as requested by [company] to assign to [company], the entire worldwide rights to all works of authorship, inventions, improvements, and developments, whether patentable or unpatentable, copyrightable or uncopyrightable, that, during the course of my employment, I make or conceive or may make or conceive in the future, either solely or jointly with others, with the use of [company]’s time, equipment, materials, supplies, facilities, trade secrets, or confidential information, or otherwise resulting from or suggested by my work for [company]. All such works of authorship, inventions, improvements, and developments shall automatically and immediately be deemed to be the property of [company] as of the date authored, made, or conceived. 4. If, during the course of my employment with [company], I create or discover any patentable or potentially patentable invention or design, within the meaning of Title 35 of the United States Code, any utility or design patent application that may be based on any such invention or design created or discovered by me during the course of my employment with [company], including patent applications related thereto and patents issuing therefrom throughout the world, shall be and hereby are assigned to [company]. The assignment of rights contemplated in this Agreement includes all rights to sue for all infringements, including those that may have occurred before the assignment, and to recover past damages. I agree to fully cooperate with [company] in filing and prosecuting any such patent applications and in obtaining any such patents, and I further agree to execute any and all documents that [company] may deem necessary to obtain such patents or to document such assignments to [company]. I hereby designate [company] as my attorney-in-fact to execute any such documents relating to any such patent or applications, issued patents, and assignments thereof to [company]. 5. I acknowledge that, under the Illinois Employee Patent Act, 765 ILCS 1060/1, et seq., the obligation that I have undertaken herein to assign my inventive rights to [company] does not apply to an invention for which no equipment, supplies, facility, or trade secret information of [company] was used and that was developed entirely on my own time, unless (a) the invention relates (1) to the business of [company] or (2) to [company]’s actual or

5 — 32

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.32

demonstrably anticipated research or development or (b) the invention results from any work performed by me for [company]. 6. I agree that any original work of authorship fixed in a tangible medium of expression, including but not limited to literary works; computer programs, software, or other associated intangible property; network configuration; musical works, including any accompanying words; dramatic works, including any accompanying music; pantomimes and choreographic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings; and architectural works, within the meaning of Title 17 of the United States Code, prepared within the scope of my involvement with [company], shall be a “work made for hire” within the meaning of 17 U.S.C. §201(b) and that all ownership rights comprised in the copyright shall vest exclusively in [company]. Should a court of competent jurisdiction hold that such work is not a “work made for hire,” I further agree to assign and hereby do assign all of my right, title, and interest in the work, including all copyrights, domestic and foreign, and to execute any assignments or other documents presented to me by [company] relating to such assignment. I shall not exercise any right under copyright or other right of [company] in the work or materials without the prior written approval of [company]. The assignment of rights contemplated in this Agreement includes all rights to sue for all infringements, including those that may have occurred before the assignment, and to recover past damages. I agree to assist in securing [company]’s rights and shall execute any and all applications, assignments, or other instruments that [company] shall deem necessary to apply for, obtain, and enforce copyright registrations in the United States or any foreign country. 7. I hereby acknowledge the existence of, and hereby expressly and forever waive, any moral rights arising under U.S. federal law, such as the rights described in 17 U.S.C. §106 and under any state law and under the laws of any other country that convey rights of the same nature or any other type of moral right or droit moral, and knowingly execute this waiver on the following terms: (a) this waiver applies to all works prepared by me within the scope of my work; and (b) this waiver applies to any and all uses and applications in which either the attribution right (and rights of a similar nature) or the integrity right (and rights of a similar nature) may be implicated. 8. If I, during the course of my employment, discover, invent, or produce, without limitation, any information, computer programs, software, or other associated intangible property — network configuration, formulas, product, device, system, technique, drawing, program, or process — that is a “trade secret” as defined within the meaning of the Illinois Trade Secrets Act, 765 ILCS 1065/1, et seq., such information, formulas, product, device, system, technique, drawing, program, or process shall be assigned to [company]. I agree to fully cooperate with [company] in protecting the value and secrecy of any such trade secret and further agree to execute any and all documents that [company] deems necessary to document any such assignment to [company]. I appoint [company] as my attorney-in-fact to execute any documents that [company] may deem necessary that relate to any such trade secret or assignment thereof to [company].

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 33

§5.33

INTELLECTUAL PROPERTY LAW

ADDITIONAL TERMS 9. I acknowledge that I have been provided a copy of this Employee Agreement Regarding Confidentiality and Intellectual Property, and I agree to the vesting of ownership in, and assignment to, [company] of all intellectual property rights described herein. 10. I agree to disclose promptly to [company] all such works of authorship, inventions, improvements, and developments when made or conceived. Upon termination of my employment for any reason, I will immediately give to [company] all written records of such works of authorship, inventions, improvements, and developments and make full disclosure thereof to the [company], whether or not they have been reduced to writing. 11. I agree that this Agreement shall be governed by, interpreted by, and construed in accordance with the laws of the State of Illinois and that any suit, action, or proceeding with respect to this Agreement shall be brought in the courts of [Cook County in the State of Illinois] [the U.S. District Court for the Northern District of Illinois]. I accept the exclusive jurisdiction of those courts for the purpose of any such suit, action, or proceeding. Venue for any such action will be ____________, Illinois. 12. This Agreement shall be binding on my heirs, executors, administrators, or other legal representatives or assigns and may not be changed or modified by me in whole or in part except by an instrument in writing signed by the President of [company]. [signatures of employee and company representatives and dates of signing] [execution date and location] [signature of witness and date of signing] B. [5.33] Assignment of Patent Rights ASSIGNMENT OF PATENT RIGHTS WHEREAS, [company] (Assignor), a corporation organized and existing under the laws of the State of ____________, having a place of business at [address], is the exclusive owner of the entire right, title, and interest in and to the invention of ____________, and the United States and foreign patents and patent applications therefore (Patent Rights) listed in Schedule I, attached hereto and made a part hereof; WHEREAS, [company] (Assignee), a corporation organized and existing under the laws of the State of ____________, having a place of business at [address], desires to acquire the entire and exclusive right, title, and interest in and to said invention and the Patent Rights; NOW, THEREFORE, in consideration of the sum of $1, and other valuable and legally sufficient consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor does hereby assign and transfer to Assignee and its successors, assigns, and nominees, without any restrictions, reservations, or limitations

5 — 34

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.33

1. the entire and exclusive right, title, and interest in and to said invention and said Patent Rights, and all continuations, divisions, renewals, reissues, reexaminations, and extensions thereof; 2. all priority rights pertaining to said invention and derived from any and all of said Patent Rights under any applicable convention; 3. the sole right to file applications for patents on said invention under the patent laws of any country of the world in its name, and the sole right to have patents granted on said applications in its name, as fully and entirely as they would have been held by Assignor had this assignment not been made; Assignor hereby covenants and agrees that it will assist Assignee in the prosecution of any such patent applications and in the prosecution of any interference or other proceedings that may arise involving the inventions of the Patent Rights and that Assignor will execute and deliver to Assignee any and all additional papers that may be requested by Assignee to carry out the terms of this assignment; and 4. the sole right to enforce the Patent Rights with the right to sue and recover for Assignee’s own use any accrued profits or damages for any and all infringements thereof, including, but not limited to, past infringements, with respect to which Assignor waives any right to receive any portion thereof. [execution date] [signature of assignor and date of signing] Subscribed and sworn to before me this ___ day of __________, 20__. _______________________________ NOTARY PUBLIC [signature of assignee and date of signing] Subscribed and sworn to before me this ___ day of __________, 20__. _______________________________ NOTARY PUBLIC

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 35

§5.34

INTELLECTUAL PROPERTY LAW

SCHEDULE I PATENT RIGHTS UNITED STATES Title

Filing Date

Publication Date

Issue Date

Patent or Application Number

FOREIGN Title

Filing Date

Publication Date

Issue Date

Patent or Application Number

C. [5.34] Nonexclusive Patent License Agreement NONEXCLUSIVE PATENT LICENSE AGREEMENT THIS AGREEMENT is made and entered into this ___ day of __________, 20__, by and between [company], [address] (Licensor), and [company], [a Delaware corporation], through its [division], located at [address] (Licensee). WITNESSETH: This Agreement is made and entered into with reference to the following facts: A. Licensor manufactures and sells, through a marketing and distribution system, a [device] under the name [device name] and is the owner of U.S. Patent No. ____________, issued [date], entitled [patent title]. B. Licensee wishes to manufacture, have manufactured, advertise, market, distribute, and sell [device] products, and Licensor is willing to grant to Licensee a nonexclusive license to do so. NOW, THEREFORE, in consideration of the mutual covenants and promises hereinafter set forth, and other good and valuable consideration, it is agreed as follows: 1. DEFINITIONS A. “Licensed Patents” shall mean U.S. Patent No. ____________ and all continuations, continuations in part, divisionals, reissues, and reexaminations thereof, as well as all foreign counterpart patents and applications.

5 — 36

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.34

B. “Licensed Product(s)” shall mean a [device] that is covered by at least one valid claim of a Licensed Patent, which is in force in the country in which such [device] is manufactured, distributed, or sold by Licensee. C. “Reporting Period” shall mean on or before the end of the first week of each calendar quarter beginning January 1, April 1, July 1, and October 1. 2. RIGHT TO MANUFACTURE, PRODUCE, MARKET, AND SELL Licensor hereby grants to Licensee the nonexclusive right to manufacture, have manufactured for it, produce, distribute, market, offer for sale, and sell Licensed Products and any modifications, alterations, or improvements of such throughout the world on the terms and conditions herein set forth. 3. WARRANTIES A. Licensor represents and warrants that (1) it is the sole owner of the Licensed Patent; (2) it has the authority to license the Licensed Patent to Licensee for use under the terms and conditions herein set out; (3) the terms and conditions of this Agreement do not violate the terms and conditions of any other agreement executed by Licensor and the performance by Licensee hereunder will not violate the terms and conditions of any such agreement; and (4) it knows of no claims or other assertions of any kind to rights in the Licensed Patent inconsistent with the granting of the license herein granted. B. Licensor hereby indemnifies Licensee against and agrees to hold Licensee harmless from any damages, expenses, liabilities, judgments, and losses, including reasonable attorneys’ fees, arising from claims or suits by third parties arising out of any breach or alleged breach of Licensors’ obligations, representations, or warranties hereunder, provided Licensee shall have given Licensor prompt written notice of any such claim or suit and cooperate fully with the defense. C. Licensee hereby indemnifies Licensor against and agrees to hold Licensor harmless from any damages, expenses, liabilities, judgments, and losses, including reasonable attorneys’ fees, arising from claims or suits by third parties arising out of any defects or alleged defects of any Licensed Products sold by Licensee, or other acts or omissions of Licensee, other than for patent infringement, relating to the Licensed Products sold by Licensee provided Licensor shall have given Licensee prompt written notice of any such claim or suit and cooperate fully with the defense. 4. ROYALTY AND REPORTING A. Licensee shall pay to Licensor a royalty of $____________ for each Licensed Product that Licensee sells during the term of this Agreement. B. For each Reporting Period during the term of this Agreement, Licensee shall pay to Licensor the royalty established as set out above for the Licensed Products sold by Licensee

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 37

§5.34

INTELLECTUAL PROPERTY LAW

during that Reporting Period. For purposes of calculating royalties due in each Reporting Period, Licensed Products shall be considered to be sold when invoiced by Licensee. C. Royalties paid on Licensed Products returned to Licensee shall be credited against royalty payments due hereunder. No royalties shall be paid on Licensed Products that are furnished to customers free of charge as replacement for returned products on which royalties previously had been paid, provided that no credit has been taken against royalty payments for such returned products. D. For each Reporting Period, payment of royalties hereunder shall be forwarded by Licensee to Licensor within 30 days following the end of the Reporting Period. Payments of royalties not made when due will bear interest at the rate of 12 percent per annum. With each payment, Licensee shall provide a statement showing the quantity of Licensed Products sold by Licensee and the calculation used to determine the amount of royalties due for that Reporting Period. E. Licensee shall keep records and books of accounts showing for each Reporting Period the quantities of Licensed Products sold. F. During the term of this Agreement, Licensee agrees to permit its books and records to be examined from time to time by Licensor to the extent necessary to verify reports provided in accordance with this Agreement. Such books and records are to be made available and examination made at the offices of Licensee, located at [address], or at another location mutually agreeable to by the parties. Such examination shall be at the sole expense of Licensor unless Licensee shall have been found to have understated the number of Licensed Products sold but not returned by ten percent or more, in which case the examination shall be at the sole expense of Licensee. The examination shall be performed by an auditor appointed by Licensor who shall be reasonably acceptable to Licensee, or by a certified public accountant appointed by Licensor, such examination to be made only during office hours and not more often than once per year, unless Licensee consents to a greater number of examinations. 5. TERM A. The initial term of this Agreement shall commence on the date of the first sale of a Licensed Product by Licensee and shall extend for the initial term of five years. This Agreement shall be renewed automatically for subsequent five-year terms beyond the initial term unless Licensee, by notice in writing to Licensor at least 60 days prior to the expiration of the initial term or any renewal term, shall advise Licensor of its desire to terminate. B. This Agreement can be terminated by Licensee with respect to a particular country if the Licensed Patents in that country or countries in which Licensed Products are sold by Licensee expire or are held invalid or unenforceable by a judgment of a court from which no appeal can or has been taken.

5 — 38

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.34

C. This Agreement can be terminated by either Licensor or Licensee upon a material breach hereof by the other, which breach remains uncorrected after the expiration of a 30-day cure period beginning on the delivery of written notice of the breach to the breaching party. If a party seeks relief based on an alleged material breach of this Agreement, the prevailing party shall be entitled to recover from the losing party reasonable attorneys’ fees and expenses incurred in connection with the proceeding. 6. PATENT MARKING It is agreed that Licensee shall apply the number of the Licensed Patents to Licensed Products and that Licensee may in the future design and manufacture other products on which the parties may agree to apply the number of Licensed Patents. Such patent marking by Licensee shall not be construed as an admission of infringement of the Licensed Patents. Licensor does not secure any rights or interests in and to any of Licensee’s products or intellectual property, and if this Agreement should be terminated, Licensor will not have any rights with respect to any of Licensee’s products or intellectual property. 7. DISPUTE RESOLUTION A. Mediation. If a dispute arising under this Agreement cannot be resolved by the personnel directly involved, either party may invoke the dispute resolution procedure set forth in this section by giving written notice to the other party designating a person with appropriate authority to be its representative in negotiations relating to the dispute. Upon receipt of such notice, the other party shall, within five business days, designate a person with similar authority to be its representative. The designated persons shall, following whatever investigation each deems appropriate, promptly enter into discussions concerning the dispute. If the dispute is not resolved as a result of such discussion, an attempt will be made to resolve the matter by a formal nonbinding mediation with an independent neutral mediator agreed to by the parties. If the parties cannot agree on the mediator within a period of 30 days, then [dispute resolution organization] shall be asked to select a mediator, and the parties agree to be bound by this choice and to enter into a mediation procedure with that mediator. Upon commencement of the mediation process, the parties shall promptly through counsel communicate with respect to a procedure and schedule for the conduct of the proceeding and for the exchange of documents and other information related to the dispute. The mediation process will be deemed ended when either party or the mediator, in good faith, asserts in writing that an impasse has been reached. B. Arbitration. Any and all disputes between the parties arising under or related to this Agreement that are not resolved in accordance with the provisions of Article 7A above within 90 days after appointment of the mediator shall be conclusively determined by final and binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then obtaining, unless the parties mutually agree in writing otherwise. No arbitration may commence until after the mediation set forth in Article 7A above has taken place. The award or determination of the arbitrator or arbitrators shall be final and binding on the parties, and judgment on the award may be entered in any court having jurisdiction thereof. The arbitrator or arbitrators shall not act as amiable compositors. The parties acknowledge and agree that the transactions

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 39

§5.34

INTELLECTUAL PROPERTY LAW

contemplated by this Agreement, and any disputes that may arise hereunder or in relation to or involving this Agreement, involve interstate commerce, and the obligations of the parties hereunder involve substantial interstate activities. The mediation and arbitration set forth here shall take place at a location mutually agreed on by the parties, which agreement shall not be unreasonably withheld. The prevailing party may be reimbursed such of its reasonable attorneys’ fees and costs, if any, as may be determined by the arbitrator. This arbitration agreement shall survive termination of this Agreement. 8. MISCELLANEOUS A. Notices. All notices, requests, demands, consents, and other communications required or permitted hereunder shall be in writing and shall be delivered personally or mailed by certified or registered mail (return receipt requested), postage prepaid, provided that any notice delivered by certified or registered mail shall also be delivered by facsimile at the same time of such delivery. When such facsimile is sent, notices shall be deemed given upon dispatch of such facsimile and the return of an acknowledgment of an acceptable transmission. Facsimiles shall be sent on business days or, if sent on a weekend or holiday, will be deemed received on the next normal business day. If the notice is delivered personally, it shall be deemed given when delivered. All communications hereunder shall be delivered to the respective parties at the following address (or to such other person or at such other address for a party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof): As to Licensor: [address] [fax number] and As to Licensee: [address] [fax number] B. More Favorable Terms. In the event Licensor shall hereafter grant to another party a license under the Licensed Patents at a royalty rate that, calculated on an equivalent basis as to price and quantity, is lower than the corresponding rate provided by this Agreement, or on any more favorable terms and conditions, Licensee shall be entitled to the benefit of such other terms or conditions taken as a whole for its manufacture, use, sale, or offer for sale of Licensed Products subsequent to the date of such grant to the other party. C. Product Appearance. Licensee agrees not to copy the nonfunctional aspects of the appearance and trade dress of the [patented device] made and sold by Licensor during the term of this Agreement.

5 — 40

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.34

D. Choice of Laws. This Agreement shall be governed by the laws of the State of Illinois and federal patent law, and any other questions arising hereunder shall be construed or determined according to such law. E. Successors. This Agreement shall not be assigned by either party without the express written consent of the other party, except in connection with the transfer of all or substantially all of the [business related to patented device] of a party. The terms, covenants, and conditions of this Agreement shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of the respective parties hereto. F. Survival. This Agreement shall survive the close of this transaction and shall remain a binding contract between the parties. G. Headings. Headings at the beginning of each section of this Agreement are solely for the convenience of the parties and are not part of this Agreement. H. Time. Time is of the essence of this Agreement, it being understood that each date set forth herein, and the obligations of the parties to be satisfied by such date, have been the subject of specific negotiations by the parties. I. Entire Agreement. This Agreement and the items incorporated herein contain all the agreements of the parties hereto with respect to the matters contained herein, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Agreement may be amended or modified in any manner whatsoever except by an agreement in writing by duly authorized officers of each of the parties hereto. J. Invalid or Unenforceable Provisions. In the event that any provision of this Agreement shall be found by an arbitrator or court of competent jurisdiction to be invalid or otherwise unenforceable, the remaining portions hereof shall continue in full force and effect. EXECUTED as an instrument under seal as of the day and date first above written. [Licensee name] [signature and title of Licensee representative] [Licensor name] [signature and title of Licensor representative]

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 41

§5.35

INTELLECTUAL PROPERTY LAW

D. [5.35] Exclusive Patent License Agreement EXCLUSIVE PATENT LICENSE AGREEMENT This AGREEMENT dated as of __________, 20__ (Effective Date), by and between ____________, having a place of business at [address] (Licensor), and ____________, a corporation organized under the laws of [business’ location] and having a place of business at [address] (Licensee). WHEREAS, Licensor is the Assignee of Serial No. ____________, for a U.S. patent application, entitled [patent title] and filed on [date], and related pending applications (Patent Applications), and has the right to license others under such rights; and WHEREAS, Licensee desires to acquire an exclusive license under the rights assigned to Licensor and potentially acquire an exclusive license under any patents that may issue relating to the Patent Applications; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, Licensor and Licensee agree as follows: 1. DEFINITIONS A. As used herein, “Licensed Product(s)” shall mean [patented device description] sold by Licensee that is covered by one or more of the Subsisting Claims of the Licensed Patents. B. As used herein, “Subsisting Claim” shall mean a claim of a Licensed Patent that has not been canceled, disclaimed, expired, or held invalid by a final judgment from which no further appeal can be taken. C. As used herein, “Licensed Patents” shall mean those U.S. patents issued from Serial No. ____________, for a U.S. patent entitled [patent title], and all foreign counterpart patents (if any), together with any continuations, continuations in part, divisionals, reissue patents, extensions, or reexamination certificates granted thereon. D. As used herein, “Subsidiary” shall mean a corporation, company, or other entity more than 50 percent of the outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) of which are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto, but such corporation, company, or other entity shall be deemed to be a Subsidiary only as long as such ownership or control exists. E. As used herein, “Net Sales” shall mean the gross revenues received by Licensee from the sale of Licensed Products less any allowances for cash discounts and other trade and quantity discounts, credits for return to stock, credits given under a warranty, credits for replacements, and, if separately stated, any charges for packaging, shipping, and insurance, and any sales, use, and excise taxes.

5 — 42

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.35

F. As used herein, “Reporting Period” shall mean a six-month period ending June 30 and December 31 of each calendar year. 2. LICENSE GRANT A. Subject to Article 5B, Licensor hereby grants to Licensee a nontransferable (except as provided for in Article 9), exclusive license under the Licensed Patents to make, use, and sell Licensed Products. B. Licensor agrees not to assert any claim of infringement of any of the Licensed Patents against customers, mediate and immediate, of Licensee or its sublicensed Subsidiaries with respect to any Licensed Product obtained directly or indirectly from Licensee or its sublicensed Subsidiaries and for which the applicable royalty is paid pursuant to this Agreement. 3. EXTENSION OF LICENSE TO SUBSIDIARIES The license granted herein shall include the right of Licensee to sublicense only its Subsidiaries. Each Subsidiary so sublicensed shall be bound by the terms and conditions of this Agreement (except to the extent that the obligations of such terms and conditions are fulfilled on its behalf by Licensee). Any sublicense granted to a Subsidiary shall terminate on the date such sublicensed Subsidiary ceases to be a Subsidiary of the Licensee, or this Agreement is terminated under any of the provisions of Article 5, whichever is the earlier. 4. ROYALTIES A. Licensee shall pay to Licensor a royalty of ten percent of Net Sales for each Licensed Product made, used, or sold by Licensee. Licensee shall be required to pay such royalty in respect of each Licensed Product that, when made, used, or sold by Licensee or its sublicensed Subsidiaries would, but for the license granted hereunder, constitute infringement of the Licensed Patents subsisting in the country where such making, using, or selling occurs. However, only a single royalty payment is required to be made in respect of each Licensed Product, and such single royalty payment shall be required to be made only in respect of the first sale thereof. B. The payments specified in Article 4A are to be paid in United States dollars. When royalties are computed based on sales in a foreign currency, the currency exchange rate for such royalties shall be computed by calculating a monthly weighted average exchange rate for the applicable Reporting Period. C. Licensee agrees to maintain accurate records of its operations under this Agreement and shall require the maintenance of similar records by its sublicensed Subsidiaries. Within 30 days after each Reporting Period as long as this agreement is in force, Licensee shall submit to Licensor a report summarizing (1) the gross receipt for sales of Licensed Product by Licensee and its sublicensed Subsidiaries during such Reporting Period, (2) the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 43

§5.35

INTELLECTUAL PROPERTY LAW

computation of any royalty payable during that reporting period, and (3) the amount of royalty due for such Reporting Period, and with such report shall pay the amount of royalty due. D. Licensee and its sublicensed Subsidiaries shall permit the records prescribed under Article 4C to be inspected during regular business hours once during each year of this Agreement by auditors paid for by Licensor as to whom Licensee has no reasonable objection, but only to the extent necessary to verify the sums due and payable. 5. TERM OF AGREEMENT; TERMINATION A. Unless otherwise terminated as set forth below, this License shall continue in force until the later of the following dates: 1. the expiration date of the last-to-expire of all U.S. patents included in the Licensed Patents; or 2. the date as of which a last remaining claim of any U.S. patent included in the Licensed Patents is finally adjudicated (without further right of appeal available) to be invalid, provided no other valid U.S. patent is included in the Licensed Patents as of that date; B. Either party shall have the right to terminate this Agreement forthwith by written notice to the other party in the event that either party is in breach of any term or obligation hereunder and, following written notice given by a party identifying such breach, the other party fails to remedy that breach or, when the breach is incapable of remedy, the other party fails to make amends to the nonbreaching party’s satisfaction within a period of 30 days beginning with the date of said notice. 6. AGREEMENTS AND REPRESENTATIONS OF LICENSOR A. Licensor shall defend, indemnify, and hold Licensee harmless from and against any and all claims, actions, liabilities, losses, fines, penalties, costs, and expenses, including reasonable attorneys’ fees, arising out of any actual or alleged infringement of any patent or other proprietary right related to Licensee’s use of the Licensed Patents. B. If Licensor becomes aware of products that potentially infringe the Licensed Patents or is notified by Licensee of any such potentially infringing products, Licensor agrees to notify and allow Licensee to prosecute the alleged infringer(s) and to defend the Licensed Patents. Licensee may decline to prosecute the infringers, in which event Licensor may exercise its best efforts to prosecute said infringers at its own cost. Each party agrees to pay its own costs relating to such prosecution and to fully cooperate with the other in the prosecution of any potential infringer. C. If Licensee prosecutes a potential infringer under Article 6B above, all recoveries made shall belong to Licensee except for the royalty amount in Article 4 per infringing unit

5 — 44

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.35

sold. If Licensor prosecutes an infringer, it may not settle with the infringer by licensing the infringer under the Licensed Property. D. Licensor agrees to provide Licensee all necessary technical assistance to support development, production, and marketing efforts in relation to Licensed Products. This technical assistance hereto shall be provided to Licensee exclusively throughout the term of this License Agreement. E. Licensor agrees to forward all Notices of Maintenance Fee Due for each of said Licensed Patents within ten days of receipt to the Licensee address listed in Article 8. F. Licensor represents and warrants that it has the full right and power to grant the license and release respectively set forth in Article 2 and that there are no outstanding agreements, assignments, or encumbrances inconsistent with the provisions of said license and release or with any other provisions of this Agreement. 7. OTHER OBLIGATIONS OF LICENSEE Licensee agrees to pay all maintenance fees due on said Licensed Patents within 30 days of receipt of a Notice of Maintenance Fee Due from Licensor. 8. NOTICES AND OTHER COMMUNICATIONS Any notice or other communication required or permitted to be made or given to either party shall be sufficiently made or given on the date of mailing if sent to such party by registered or certified mail (sent airmail or otherwise by the fastest service available) postage prepaid, addressed to a party at its address set forth below, or to such other address as the party may designate by written notice given to the other party. In the case of Licensee:

[Licensee representative address]

In the case of Licensor:

[Licensor representative address]

9. ASSIGNMENTS Licensor agrees not to assign any of the Licensed Patents to an unrelated third party unless such assignment is made subject to the terms and conditions of this Agreement and unless prior written consent is obtained from Licensee. Licensee shall not assign any of its rights or privileges under this Agreement without the prior written consent of Licensor, which consent will not be unreasonably withheld, except to a successor in ownership of all or substantially all of the assets of Licensee. The successor shall expressly assume in writing the performance of all of the terms and conditions of this Agreement to be performed by the successor as if it were named herein in place of Licensee. Any attempted assignment in derogation of the foregoing shall be void.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 45

§5.35

INTELLECTUAL PROPERTY LAW

10. CHOICE OF LAW This Agreement shall be construed, and the legal relationships between the parties hereto shall be determined, in accordance with the laws of the State of Illinois, United States of America. The parties also expressly submit to the jurisdiction of the courts of the State of Illinois for resolution of litigation relating to this Agreement. 11. MISCELLANEOUS A. LICENSOR AND LICENSEE SPECIFICALLY AGREE THAT IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES. B. No amendment or modification of this Agreement shall be valid or binding on the parties unless made in writing and signed by or on behalf of the party against whom enforcement is sought. C. This Agreement embodies the entire understanding of the parties and shall supersede all previous communications, representations, or understandings, either oral or written, between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the parties intending to be legally bound, have caused this Agreement to be duly executed as follows: [Licensee company] [signature and title of representative of Licensee] [date of signing] [Licensor company] [signature and title of representative of Licensor] [date of signing]

5 — 46

WWW.IICLE.COM

Part II: Trademarks

6

Creation and Maintenance of Trademark Rights

BRADLEY L. COHN Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago

®

©COPYRIGHT 2013 BY IICLE .

6—1

INTELLECTUAL PROPERTY LAW

I. [6.1] Scope of Chapter II. [6.2] What Is a Trademark? III. [6.3] Governing Law IV. [6.4] Types of Marks and Trade Identity A. B. C. D.

[6.5] Classification and Secondary Meaning [6.6] Geographic Terms [6.7] Surnames Colors, Sounds, and Smells 1. [6.8] Color 2. [6.9] Sound, Smell, and Flavor E. [6.10] Domain Names F. [6.11] Olympic Marks G. [6.12] Trade Dress and Product Configuration 1. [6.13] Functionality 2. [6.14] Distinctiveness 3. [6.15] Secondary Meaning V. Adoption and Use A. [6.16] Determining Availability Before Adoption B. [6.17] Establishing Trademark Rights 1. [6.18] Rights Through Use Alone 2. [6.19] Formative Rights Through Filing 3. [6.20] Rights Through Analogous Trademark Use or Public Usage C. [6.21] Priority D. [6.22] Using Trademarks and Service Marks Properly E. [6.23] Checklist for Adopting New Marks VI. Trademark Registration A. [6.24] Federal Registration 1. [6.25] Benefits of Federal Registration 2. [6.26] Acquisition and Maintenance of Federal Registrations a. [6.27] Marks Not Entitled to Registration (1) [6.28] Deceptive and deceptively misdescriptive marks (2) [6.29] Primarily geographically deceptively misdescriptive marks

6—2

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

b. [6.30] The Principal Register (1) [6.31] Descriptive, misdescriptive, geographic, and surname marks (2) [6.32] Trade dress c. [6.33] The Supplemental Register d. Application Process (1) [6.34] Filing (2) [6.35] Examination (3) [6.36] Approval (4) [6.37] Statement of use e. [6.38] Post-Registration Procedures 3. [6.39] Federal Administrative Proceedings a. [6.40] Opposition Proceedings b. [6.41] Cancellation Proceedings c. [6.42] Interference Proceedings d. [6.43] Concurrent Use Proceedings B. [6.44] State Trademark Registration VII. Use and Registration Outside the United States A. [6.45] Territoriality B. International Trademark Filings 1. [6.46] Paris Convention 2. [6.47] Madrid Protocol

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—3

§6.1

INTELLECTUAL PROPERTY LAW

I. [6.1] SCOPE OF CHAPTER Trademark law is a branch of the broader law of unfair competition, the general purpose of which is to prevent a business from misrepresenting the nature or quality of its products or services, or passing off its products or services as the products or services of another. Trademark law encompasses brand names, corporate and trade names, logos, slogans, labels, packaging, distinctive product configuration — any means of identification that distinguish the source of products or services. This chapter explains what a trademark is, discusses how one establishes trademark rights, and sets out the elements of the trademark registration process.

II. [6.2] WHAT IS A TRADEMARK? Simply stated, a trademark consists of any word, name, symbol, figure, letter, or device used by a manufacturer or merchant to identify and distinguish its products from those manufactured or sold by others. McLean v. Fleming, 96 U.S. 245, 254, 24 L.Ed. 828 (1877). See 15 U.S.C. §1127. Because trademarks serve to identify a business and distinguish its products and services, courts and practitioners refer to trademarks as a form of “trade identity.” In common parlance, the term “trademark” refers to any source-identifying device, whether used in connection with products or with services. From a technical standpoint, however, “trademark” refers to a source-identifying feature that is used in connection with products, while a source-identifying feature used in connection with services is called a “service mark.” 15 U.S.C. §1127. A “collective mark” is a trademark or service mark used by members of a cooperative, association, or organization. Id. A “certification mark” is a mark used by a person other than the owner of the mark to certify regional origin, material, mode of manufacture, quality, accuracy, or other characteristics of the user’s goods or services or that the work on the goods or services was performed by members of a labor union. Id. Trademarks, service marks, collective marks, and certification marks are all called “marks” for short. Examples of trademarks are “Nike” for running shoes, “Shell” for gasoline, and the Morton’s Umbrella Girl for salt. Well-known service marks include “Citibank” for banking services, “Orkin” for pest control services, and McDonald’s Golden Arches to symbolize restaurant services. An example of a collective mark is “UAW,” indicating membership in the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America. A wellknown certification mark is the “UL” mark of Underwriters Laboratories, which indicates that products so marked, which are neither made nor sold by Underwriters Laboratories, have met certain safety requirements established by Underwriters Laboratories.

III. [6.3] GOVERNING LAW Trademark rights have their origin in the common law, and they arise out of use of a mark in connection with an ongoing business or trade. These rights may exist independent of any statute. Nonetheless, trademark rights today are primarily governed by federal law. Under its authority to

6—4

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.4

regulate interstate commerce, Congress has enacted comprehensive federal legislation that incorporates common-law principles and adds significant statutory rules to the body of controlling trademark law. The relevant federal statute is the Trademark Act of 1946, 15 U.S.C. §1051, et seq., popularly known as the “Lanham Act.” The Lanham Act has been amended periodically since its passage. Extensive revisions were made by the Trademark Law Revision Act of 1988, Pub.L. No. 100667, 102 Stat. 3935, in part to allow applications to register marks based on bona fide intent to use them rather than, as before, requiring actual use of a mark before an application to register the mark could be filed. See 15 U.S.C. §1051(b). The Federal Trademark Dilution Act of 1995, Pub.L. No. 104-98, 109 Stat. 985, and the Anticybersquatting Consumer Protection Act, Pub.L. No. 106-113, Div. B, §1000(a)(9), 113 Stat. 1536 (1999), enacting §3001 of the Intellectual Property and Communications Omnibus Reform Act of 1999 (S. 1948)), added causes of action for dilution and cybersquatting, respectively. See 15 U.S.C. §§1125(c), 1125(d)(1)(A). In 2002, the Madrid Protocol Implementation Act, Pub.L. No. 107-273, Div. C, Title III, Subtitle D, §13401, 116 Stat. 1913, added provisions relating to the Madrid Protocol, which is discussed in §6.47 below. See 15 U.S.C. §1141, et seq. Congress subsequently amended federal dilution law through the Trademark Dilution Revision Act of 2006, Pub.L. No. 109-312, 120 Stat. 1730. Each state also has its own laws regulating trademarks, including unfair competition statutes, deceptive trade practices acts, and common-law principles. See Gardner v. Clark Oil & Refining Corp., 383 F.Supp. 151, 153 (E.D.Wis. 1974) (federal trademark law does not preempt state trademark laws). In Illinois, for example, statutes governing trademark matters include the Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., the Counterfeit Trademark Act, 765 ILCS 1040/0.01, et seq., and the Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1, et seq. As federal rights and remedies are generally coextensive with or broader than state law rights, federal law principles predominate in virtually every analysis of modern trademark rights in the United States. For example, it is common practice in trademark enforcement actions for plaintiffs to plead causes of action under both state and federal law, yet when it comes to trademark enforcement, most, if not all, state trademark, unfair competition, and deceptive trade practices laws simply track federal trademark jurisprudence. See, e.g., TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 881 (7th Cir. 1997). A notable exception is state antidilution laws, which are discussed in Chapter 8 of this handbook.

IV. [6.4] TYPES OF MARKS AND TRADE IDENTITY To be protectable, a mark must be distinctive. Deere & Co. v. MTD Holdings Inc., No. 00 Civ. 5936(LMM), 2004 WL 324890 (S.D.N.Y. 2004). That is, it must identify the source and distinguish the trademark owner’s goods or services from the goods or services of its competitors. Distinctiveness depends on what the mark is and the goods or services with which it is used. For example, the word “apple” is unable to function as a mark to distinguish one person’s brand of apples from those of other orchard owners. When used in connection with computers, however, “Apple” is a distinctive mark functioning to distinguish one manufacturer’s machines from its competitors’.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—5

§6.5

INTELLECTUAL PROPERTY LAW

The term “secondary meaning” is a common-law expression meaning “distinctiveness” or “source-indicating significance.” For example, “Sub-Zero” has a secondary meaning (i.e., sourceindicating significance) for a particular manufacturer’s refrigerator. Its primary meaning, that is, its language significance, is a level or measurement that falls below zero. A. [6.5] Classification and Secondary Meaning Word and logo marks are often classified according to one of the following categories in the spectrum of distinctiveness: coined; fanciful; arbitrary; suggestive; descriptive; or generic. The court in Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber Co., 408 F.Supp. 1219, 1243 (D.Colo. 1976), modified, 561 F.2d 1365 (10th Cir. 1977), gave the following explanatory jury instruction for the various classification of words used in trademark law: In trademark usage, words can be classified according to the degree of their distinctiveness. A coined word is an artificial word which has no language meaning except as a trademark. EXXON is a coined word used by an oil company. A fanciful word is like a coined word in that it is invented for the sole purpose of functioning as a trademark and it differs from the coined word only in that it may bear a relationship to another word or it may be an obsolete word. FAB is a shortened version for fabulous and is a fanciful word used for detergent. An arbitrary word is one which is in common linguistic use but when used with the goods in issue it neither suggests nor describes any ingredient, quality or characteristic of those goods. OLD CROW for whiskey is an example of an arbitrary word. A suggestive word is one which suggests what the product is without actually being descriptive of it. STRONGHOLD for threaded nails is suggestive of their superior holding power. A merely descriptive word is one which draws attention to the ingredients, quality or nature of the product. TENDER VITTLES as applied to cat food is descriptive. A generic word is one which is the language name for the product. BUTTER is the language word for butter. There can be no trademark rights in a generic term. They remain in the public domain as a part of our language.

6—6

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.5

The right to protection of a trademark comes from its use to identify the product. We speak of strong and weak marks in terms of the amount of use necessary to create protected rights. Words which are coined, fanciful or arbitrary are distinctive almost from their first use. Suggestive words are also protected as trademarks when used distinctively for particular products. Words which are merely descriptive do not obtain protection solely from their use as a trademark. Such words must first acquire distinctiveness from the effect of the owner’s efforts in the marketplace. This is what is called the development of secondary meaning; that is a merely descriptive term used as a trademark must have been so used that this primary significance in the minds of the consuming public is not the product itself but the identification of it with a single source. [Emphasis in original.] Marks classified as coined, fanciful, arbitrary, or suggestive are deemed “inherently distinctive” and may be immediately accorded protection under trademark law. See, e.g., Money Store v. Harriscorp Finance, Inc., 689 F.2d 666 (7th Cir. 1982) (“THE MONEY STORE” suggestive for lending and financial services); Blazon, Inc. v. Blazon Mobile Homes Corp., 416 F.2d 598 (7th Cir. 1969) (“Blazon” for sports equipment is arbitrary). Descriptive marks are not considered inherently distinctive but may acquire distinctiveness or secondary meaning over time through advertising, sales, and use. Descriptive marks that have acquired secondary meaning are also granted trademark protection. See, e.g., Thompson Medical Co. v. Pfizer Inc., 753 F.2d 208, 216 – 217 (2d Cir. 1985). Factors courts consider in determining whether a descriptive mark has acquired secondary meaning include (1) sales volume; (2) the amount and manner of advertising; (3) the length, manner, and exclusivity of use; (4) consumer testimony; (5) consumer surveys; (6) unsolicited media coverage; and (7) proof of intentional copying by others. See, e.g., Sugar Busters LLC v. Brennan, 177 F.3d 258, 269 (5th Cir. 1999). None of these factors is dispositive. Laudatory terms such as “best,” “premier,” and “supreme” are normally treated as descriptive terms and are not protectable as a mark or as part of a mark without proof of secondary meaning. Platinum Home Mortgage Corp. v. Platinum Financial Group, Inc., 149 F.3d 722, 727 (7th Cir. 1998) (“platinum” is a self-laudatory mark lacking secondary meaning because “little imagination” is required to associate it with “superiority and quality service”). Generic terms, such as “Butter” for butter, are neither inherently distinctive nor capable of acquiring distinctiveness and thus are granted no trademark protection. A.J. Canfield Co. v. Honickman, 808 F.2d 291 (3d Cir. 1986) (“chocolate fudge” as mark for diet chocolate soda is generic and hence unprotectable); Hunt Masters, Inc. v. Landry’s Seafood Restaurant, Inc., 240 F.3d 251 (4th Cir. 2001) (“The Crab House” is generic for restaurants that serve crab dishes). For marks made up of two or more words or elements, genericness must be evaluated by looking at the mark as a whole rather than simply considering whether the constituent parts are each generic. Mil-Mar Shoe Co. v. Shonac Corp., 75 F.3d 1153, 1161 (7th Cir. 1996) (“Warehouse Shoes” generic for retail shoe stores); In re American Fertility Society, 188 F.3d

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—7

§6.6

INTELLECTUAL PROPERTY LAW

1341, 1347 (Fed.Cir. 1999) (test is not whether constituent parts of mark are generic but whether primary significance of entire mark is viewed as referring to genus of product or service with which it is used). Designs and logos common in an industry also may be deemed generic and unprotectable. Kendall-Jackson Winery, Ltd. v. E. & J. Gallo Winery, 150 F.3d 1042 (9th Cir. 1998) (finding concept of grape leaf design generic for wine). B. [6.6] Geographic Terms Defining rights and the scope of exclusivity for geographic terms, such as Scotch, American, and New York, can be difficult. First, fairness dictates that these terms be available for all residents of a defined location to use. Second, geographic terms are often used merely to indicate the region from which the products or services originate, rather than as identifiers of a single business. Thus, geographic terms are generally treated as descriptive trademarks, meaning that they may be protectable only if secondary meaning has developed. Resorts of Pinehurst, Inc. v. Pinehurst National Corp., 148 F.3d 417 (4th Cir. 1998) (“PINEHURST” mark for resort and golf services had acquired secondary meaning). There are, however, two exceptions to this general rule. First, geographic terms that would not appear to the public to be descriptive of the origin of the goods or services may be protectable without proof of secondary meaning. See, e.g., In re Jacques Bernier, Inc., 894 F.2d 389 (Fed.Cir. 1990) (reversing refusal to register “RODEO DRIVE” for perfume when there was no evidence that people would believe applicant’s perfume originated on Rodeo Drive in Beverly Hills). Second, when a geographic term or element of a mark is likely to mislead the public as to the origin of the goods or services, such a mark is not protectable, and its use may even be enjoined. Black Hills Jewelry Manufacturing Co. v. Gold Rush, Inc., 633 F.2d 746 (8th Cir. 1980) (enjoining use of mark “Black Hills Gold” when defendant’s jewelry was not made in South Dakota); Scotch Whiskey Ass’n v. Consolidated Distilled Products, Inc., 210 U.S.P.Q. (BNA) 639 (N.D.Ill. 1981) (“Loch-A-Moor” for American-made liqueur deceptively suggested it was product of Scotland). C. [6.7] Surnames Surnames such as “Ford,” “Sears,” and “Dell” are among the most famous marks in the country. Yet surnames, like geographic terms, pose special problems when used as trademarks. The notion that a person should be able to use his or her name to identify his or her goods or business seems fair and reasonable. On the other hand, consumer confusion would surely result if anyone with the name “Ford” were permitted today to manufacture and sell automobiles under that name. Surnames are generally treated as descriptive trademarks, and secondary meaning must be shown to establish protectable rights. E. & J. Gallo Winery v. Pasatiempos Gallo, S.A., 905 F.Supp. 1403, 1413 (E.D.Cal. 1994) (secondary meaning shown through long use, extensive advertising, and widespread public recognition). However, rare surnames and historical surnames

6—8

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.8

are sometimes deemed inherently distinctive marks because the primary significance of these marks to the purchasing public is not merely a surname. Lucien Piccard Watch Corp. v. Since 1868 Crescent Corp., 314 F.Supp. 329, 331 (S.D.N.Y. 1970) (names of historical persons, like “Da Vinci,” are registrable, provided primary connotation of mark is historical person); In re Benthin Management GmbH, 37 U.S.P.Q.2d (BNA) 1332 (T.T.A.B. 1995) (“BENTHIN” surname protectable as mark without proof of secondary meaning). Similarly, marks consisting of personal names may be deemed inherently distinctive when the public is unlikely to view the mark as simply a person’s name. Peaceable Planet, Inc. v. Ty, Inc., 362 F.3d 986, 988 – 992 (7th Cir. 2004) (finding “Niles” suggestive mark for plush toy in shape of camel even though “Niles” can be person’s first name). When trademark infringement actions have arisen over surname marks, courts have frequently disfavored blanket injunctions against a person’s use of his or her name. Instead, they have looked for other solutions, such as requiring a defendant to use a first name with the surname mark or requiring a notice or disclaimer of relationship. E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1288 (9th Cir. 1992); Joseph Scott Co. v. Scott Swimming Pools, Inc., 764 F.2d 62, 67 (2d Cir. 1985). D. Colors, Sounds, and Smells 1. [6.8] Color Until 1995, there was considerable debate and disagreement among the courts as to whether color alone could serve as a trademark. Compare Campbell Soup Co. v. Armour & Co., 175 F.2d 795 (3d Cir. 1949) (denying protection to Campbell’s red-and-white can label), and Nutrasweet Co. v. Stadt Corp., 917 F.2d 1024 (7th Cir. 1990) (denying protection for color blue for plaintiff’s sugar-substitute package), with In re Owens-Corning Fiberglas Corp., 774 F.2d 1116 (Fed.Cir. 1985) (finding color pink for insulation material registrable as trademark given nonfunctionality and strong showing of secondary meaning). In the landmark case Qualitex Co. v. Jacobson Products Co., 514 U.S. 159, 131 L.Ed.2d 248, 115 S.Ct. 1300 (1995), the Supreme Court resolved this issue by holding that colors are protectable as trademarks. Color trademarks, however, can never be inherently distinctive; thus, protection for a color trademark requires proof of secondary meaning. Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 529 U.S. 205, 146 L.Ed.2d 182, 120 S.Ct. 1339, 1344 (2000). As indicated in Qualitex, a color that is merely functional for the goods or services with which it is used cannot be protected. 115 S.Ct. at 1306. A product feature such as a color will be deemed functional when it is essential to the use or purpose of the product or affects the cost or quality of the product or if “exclusive use of the feature would put competitors at a significant non-reputation-related disadvantage.” 115 S.Ct. at 1304. Thus, for example, the color pink was found functional and therefore not protectable for bandages. In re Ferris Corp., 59 U.S.P.Q.2d (BNA) 1587 (T.T.A.B. 2000) (pink is one of few superior Caucasian flesh colors for bandages and thus is functional and unprotectable). See also Deere & Co. v. MTD Holdings Inc No. 00 Civ. 5936(LMM), 2004 WL 324890 (S.D.N.Y. 2004) (denying protection for colors green and yellow for lawn and garden products on functionality grounds).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—9

§6.9

INTELLECTUAL PROPERTY LAW

2. [6.9] Sound, Smell, and Flavor Distinctive sounds and even smells may also serve as trademarks. See Qualitex Co. v. Jacobson Products Co., 514 U.S. 159, 131 L.Ed.2d 248, 115 S.Ct. 1300, 1303 (1995) (noting long-standing trademark registration for NBC’s three chimes). In In re Clarke, 17 U.S.P.Q.2d (BNA) 1238, 1990 TTAB LEXIS 53 at *1 (T.T.A.B. 1990), the United States Patent and Trademark Office (USPTO) permitted registration of “a high impact, fresh, floral fragrance reminiscent of Plumeria blossoms” as a mark for sewing thread and embroidery yarn. In reaching its decision, the Trademark Trial and Appeal Board (TTAB) observed that the applicant’s advertisements focused on the scent of the product and that the nature of the product was such that the scent would not be functional. The TTAB also noted that scents for products such as perfumes, colognes, or scented household products would not be accorded similar protection. Other fragrance trademarks the USPTO has approved for registration include a vanilla scent for office supplies, orchard fruit fragrances for cleaning preparations, and strawberry scent for lubricants and motor fluids. On other occasions, however, the USPTO has denied protection to sensory marks. For example, the USPTO refused registration for the scent of “combusted nitro methane racing fuel” for candles on the grounds that the scent was not inherently distinctive and would not be perceived as a mark. Similarly, the USPTO refused registration for a mint scent for face masks on the grounds that the scent was merely functional and did not serve as a trademark indicating the source of the goods. Moreover, in a case of first impression, the USPTO refused to register “an orange flavor” as a trademark for a pharmaceutical product, finding the orange flavor to be functional in that it disguised the unpleasant taste of the pharmaceutical preparation and questioning whether flavor could ever serve as an indicator of source. In re N.V. Organon, 79 U.S.P.Q.2d (BNA) 1639 (T.T.A.B. 2006). See also Nextel Communications, Inc. v. Motorola, Inc., 91 U.S.P.Q.2d 1393 (T.T.A.B. 2009) (refusing registration of electronic chirp for cellular telephones when sound mark was not inherently distinctive and lacked secondary meaning). E. [6.10] Domain Names Internet uniform resource locator (URL) addresses, commonly known as “domain names,” may be protectable trademarks, depending on how they are used. No trademark protection is afforded to the beginning of a URL (“http://www”), however, or to top-level Internet domain name elements (e.g., “.com” or “.org”). In re CyberFinancial.Net, Inc., 65 U.S.P.Q.2d (BNA) 1789 (T.T.A.B. 2002). Domain names that appear prominently on products or, when used to promote services, appear prominently in advertising or on the website itself may constitute valid marks. See 1 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §7:17.1 (4th ed. 1996, Supp. 2004). If, however, a domain name is simply used as a URL for a website and does not appear prominently on the website itself, in advertising, or on the domain name owner’s products, the domain name will likely not qualify for trademark protection. In re Eilberg, 49 U.S.P.Q.2d (BNA) 1955 (T.T.A.B. 1999). As with merely descriptive or generic word marks, a domain name consisting of a merely descriptive or generic term to sell that type of product or service may be given little or no

6 — 10

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.13

trademark protection. See, e.g., In re Martin Container, Inc., 65 U.S.P.Q.2d (BNA) 1058 (T.T.A.B. 2002) (denying registration for “CONTAINER.COM” for purchasing or renting metal shipping containers); CyberFinancial.Net, supra (upholding United States Patent and Trademark Office’s refusal to register “BONDS.COM” on grounds of mere descriptiveness); In re Steelbuilding.com, 415 F.3d 1293 (Fed.Cir. 2005) (finding “STEELBUILDING.COM” not generic, but descriptive without secondary meaning). F. [6.11] Olympic Marks Pursuant to the Ted Stevens Olympic and Amateur Sports Act, 36 U.S.C. §220501, et seq., Congress has conferred on the United States Olympic Committee exclusive rights to certain words and symbols, including “Olympic,” “Pan-American,” and the five interlocking rings design. 36 U.S.C. §220506(a). No one may use these marks in trade, to induce the sale of any products or services, or to promote any theatrical or athletic performance without authorization from the United States Olympic Committee. 36 U.S.C. §220506(c). A “grandfather” exception exists for persons that have used these marks since before 1950, and a geographic exception is made for persons operating a business primarily west of the Cascade Mountains in the State of Washington, who use the word “Olympic” to refer to the nearby mountains or geographic region. 36 U.S.C. §220506(d). Although this Act appears to impinge on ordinary language usage, it has withstood First Amendment challenge. See San Francisco Arts & Athletics, Inc. v. United States Olympic Committee, 483 U.S. 522, 97 L.Ed.2d 427, 107 S.Ct. 2971 (1987). G. [6.12] Trade Dress and Product Configuration Trade identity protection can also extend to a product’s “trade dress,” meaning either its packaging or its overall appearance and configuration. An example of protectable product packaging is the distinctive shape of a Michelob beer bottle. An example of a protectable product configuration is the design and appearance of Ferrari automobiles. Ferrari S.P.A. Esercizio Fabriche Automobili E Corse v. Roberts, 944 F.2d 1235 (6th Cir. 1991). A product’s trade dress is protectable when it is (1) not functional and (2) distinctive. 1. [6.13] Functionality Trade dress rights attach to a product’s packaging and configuration only when the packaging or configuration is nonfunctional. Woodsmith Publishing Co. v. Meredith Corp., 904 F.2d 1244 (8th Cir. 1990) (plaintiff’s alleged trade dress for how-to magazine, i.e., two-color photographic processing, type styles, how-to diagrams and instructions, brown three-ring binders, ink drawings, and classic magazine cover format, held functional and common to many publications in the field); TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23, 149 L.Ed.2d 164, 121 S.Ct. 1255 (2001) (dual spring design of sign held functional and not protectable). Product trade dress is deemed functional when it is essential to the use or purpose of the product or affects the cost or quality of the product. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 72 L.Ed.2d 606, 102 S.Ct. 2182, 2187 n.10 (1982); Jay Franco & Sons, Inc. v. Franek, 615 F.3d 855 (7th Cir. 2010) (design of round beach towel functional). A

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 11

§6.14

INTELLECTUAL PROPERTY LAW

utility patent for the product will be strong evidence that its design is functional. TrafFix, supra, 121 S.Ct. at 1260 (expired utility patent for design of highway sign is strong evidence of its functionality). Evidence of a variety of third-party designs for the same kind of product may be useful in showing nonfunctionality. AM General Corp. v. DaimlerChrysler Corp., 311 F.3d 796 (7th Cir. 2002); PAF S.r.l. v. Lisa Lighting Co., 712 F.Supp. 394 (S.D.N.Y. 1989) (finding plaintiff’s desk lamp design nonfunctional when there were hundreds of other lamp configurations). If the product configuration is deemed functional, however, the existence of alternative designs will not change this finding. TrafFix, supra, 121 S.Ct. at 1262. 2. [6.14] Distinctiveness Product packaging will be deemed inherently distinctive when it consists of inherently distinctive elements, such as the short, brightly colored plastic bottle for Tide laundry detergent. Wal-Mart Stores, Inc. v. Samara Bros., 529 U.S. 205, 146 L.Ed.2d 182, 120 S.Ct. 1339, 1344 (2000); Fiji Water Co. v. Fiji Mineral Water USA, LLC, 741 F.Supp.2d 1165 (S.D.Cal. 2010) (design of water bottle inherently distinctive); Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 120 L.Ed.2d 615, 112 S.Ct. 2753 (1992) (proof of secondary meaning not required to prevail on claim under §43(a) of Lanham Act, 15 U.S.C. §1125(a), when trade dress at issue — decor of Mexican-themed restaurant — was inherently distinctive). In contrast to product packaging, product-configuration trade dress can never be inherently distinctive. Product configuration is entitled to protection only when acquired distinctiveness or secondary meaning is shown. Wal-Mart, supra, 120 S.Ct. 1344 (product design, as opposed to product packaging, can never be inherently distinctive). Prior to the Supreme Court’s decision in Wal-Mart, there had been considerable confusion and disagreement among the courts in determining the extent to which product configuration trade dress is protectable. Compare Ashley Furniture Industries, Inc. v. SanGiacomo N.A. Ltd., 187 F.3d 363 (4th Cir. 1999) (endorsing application of traditional word mark distinctiveness categories — generic, descriptive, suggestive, arbitrary, or fanciful — to product configuration case), with Duraco Products, Inc. v. Joy Plastic Enterprises, Ltd., 40 F.3d 1431 (3d Cir. 1994) (setting forth three-part test to determine if product configuration is inherently distinctive). See also Two Pesos, supra, 112 S.Ct. at 2759 – 2760 (noting conflict among circuits on protectability for trade dress). 3. [6.15] Secondary Meaning Product packaging that is not inherently distinctive and any product configuration must be shown to possess secondary meaning to be protectable. Factors relevant to establishing secondary meaning for trade dress are similar to those considered in determining secondary meaning for descriptive marks, such as (a) the amount of sales; (b) the amount and manner of advertising; (c) the exclusivity, length, and manner of use; (d) direct consumer testimony; (e) consumer surveys; (f) the established place in the market; and (g) proof of intentional copying. See Herman Miller, Inc. v. Palazzetti Imports & Exports, Inc., 270 F.3d 298, 311 – 312 (6th Cir. 2001); PAF S.r.l. v. Lisa Lighting Co., 712 F.Supp. 394, 403 – 408 (S.D.N.Y. 1989) (finding lamp design had

6 — 12

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.16

secondary meaning, based on evidence of extensive sales and advertising, unsolicited media coverage, and defendant’s intentional copying). No single factor is determinative in the analysis. Herman Miller, supra, 270 F.3d at 312. “Look-for advertising,” which calls attention to a design element or product configuration, can enhance claims to secondary meaning if the advertising is done correctly. See, e.g., L.A. Gear, Inc. v. Thom McAn Shoe Co., No. 88 Civ. 6444(RJW), 1989 WL 282850 (S.D.N.Y. Apr. 20, 1989) (finding that “image advertising” that highlighted shoe’s design supported finding of secondary meaning), rev’d in part on other grounds, 988 F.2d 1117 (Fed.Cir. 1993); Clamp Manufacturing Co. v. Enco Manufacturing Co., 870 F.2d 512 (9th Cir. 1989) (plaintiff’s “KANTTWIST” cantilevered clamp configuration had acquired secondary meaning by being prominently featured in plaintiff’s advertising and promotional efforts). Conversely, the absence of look-for advertising may hinder a claim for trade dress protection. See, e.g., Yankee Candle Co. v. Bridgewater Candle Co., 99 F.Supp.2d 140 (D.Mass. 2000) (finding no secondary meaning in trade dress when plaintiff pointed to no advertising that emphasized product design as product identifier); Turtle Wax, Inc. v. First Brands Corp., 781 F.Supp. 1314 (N.D.Ill. 1991) (finding no secondary meaning when advertising campaign only displayed but did not emphasize product design). Also, advertising that calls attention to a product design to tout its utilitarian advantages may defeat claims to protection for the product’s configuration. See, e.g., Continental Laboratory Products, Inc. v. Medax International, Inc., 114 F.Supp.2d 992, 1001 (S.D.Cal. 2000) (advertising space-saving advantages of product design “does not engender consumer identification with the [product] design”); Thomas & Betts Corp. v. Panduit Corp., 65 F.3d 654, 662 (7th Cir. 1995) (“To the extent this advertising draws attention to the [product configuration] at all, as opposed to the clearly functional barbed locking mechanism, it is only to tout claimed functional and aesthetic advantages.”).

V. ADOPTION AND USE A. [6.16] Determining Availability Before Adoption Before adopting and using a new mark, it is advisable to perform or obtain a trademark “search,” the purpose of which is to determine if there is a mark already in use, registered, or subject to a pending application that may conflict with the proposed mark. As discussed in Chapter 8 of this handbook, a newcomer who adopts a mark confusingly similar to one already in the marketplace can be enjoined from further use by the owner of the senior mark and may be assessed monetary penalties. Thus, analyzing the availability of and risk associated with a new mark before the mark is adopted is highly recommended. A comprehensive search for confusingly similar marks should cover (1) federal registrations and applications, (2) state registrations, and (3) common-law usage disclosed by trade directories, publicly available business records, Internet searches, and the like. Complete records of federal registrations and applications are maintained at the United States Patent and Trademark Office in Washington, DC. Many records, including a database of current and past registrations and applications, can also be searched through the USPTO’s website, www.uspto.gov. In addition,

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 13

§6.17

INTELLECTUAL PROPERTY LAW

there are companies that provide trademark search services, with varying degrees of detail depending on price. While not infallible, private search services often provide a degree of thoroughness that exceeds what lawyers or laypersons can reasonably accomplish on their own. Trademark searches are not only highly desirable and customarily obtained and analyzed by practitioners in the field, but also may be evidence of good faith in a subsequent infringement action. W.W.W. Pharmaceutical Co. v. Gillette Co., 984 F.2d 567, 575 (2d Cir. 1993) (“Good faith can be found if a defendant has selected a mark which reflects the product’s characteristics, has requested a trademark search or has relied on the advice of counsel.”). B. [6.17] Establishing Trademark Rights Traditionally, trademark rights have been based on first and continuous use of a mark in commerce in connection with goods or services. For goods, “use” means a bona fide sale or shipment of marked products; for services, “use” means the mark appears in connection with the advertising or provision of the services. 15 U.S.C. §1127. The rationale for awarding trademark rights based on first and continuous use is that (1) the use of an indicia of source engenders marketplace awareness, (2) awareness results in symbolized goodwill, and (3) the use of any indicia by others should be restricted to the extent that it is likely to result in a deceptive diversion of the symbolized goodwill. Ownership in the past, therefore, was governed by a race to the marketplace rather than a race to the United States Patent and Trademark Office to register the mark. See 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §16.5 (4th ed. 1996, Supp. 2004). While first and continuous use of a mark remains a valid basis for establishing protectable trademark rights, §1(b) of the Lanham Act, 15 U.S.C. §1051(b), provides an alternative basis. Under the statute, the first to apply to register a mark, with a bona fide intent to use it, is awarded a formative ownership right as of the date of the application. That formative right becomes viable when the applicant later begins using the mark in commerce. Even with this statutory scheme, ownership rights are still contingent on actual use. A prior user without a trademark registration has rights in its geographic area of use superior to any rights of a subsequent trademark registration owner. 15 U.S.C. §1057(c). 1. [6.18] Rights Through Use Alone As noted in §6.3 above, trademark rights arise through use of a mark in connection with one’s goods or services. These rights are commonly referred to as “common-law rights.” Emergency One, Inc. v. American Fire Eagle Engine Co., 332 F.3d 264, 267 (4th Cir. 2003) (“At common law, trademark ownership is acquired by actual use of the mark in a given market.”). Commonlaw rights are limited to the geographic area in which the mark is used and, in some circumstances, a zone of natural expansion into which the trademark owner is likely to extend use. Spartan Food Systems, Inc. v. HFS Corp., 813 F.2d 1279, 1282 (4th Cir. 1987) (“common law rights are restricted to the locality where the mark is used and to the area of probable expansion”). Some courts have been reluctant to extend common-law protection to areas of natural or probable expansion, however, when the senior user’s mark had no public recognition in the area of intended expansion and the junior user did not act in bad faith in selecting its mark. See, e.g., Raxton Corp. v. Anania Associates, Inc., 635 F.2d 924, 927 – 930 (1st Cir. 1980).

6 — 14

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.18

Particularly with regard to small businesses or new products, questions arise as to the nature and amount of use of a mark that must be made to create common-law rights. Even a small amount of use in commerce may sustain trademark rights if followed by continuous commercial utilization. Allard Enterprises, Inc. v. Advanced Programming Resources, Inc., 146 F.3d 350, 359 (6th Cir. 1998) (use of mark “on at least one fax, on at least one resume, and in numerous other solicitations” in attempt to conduct genuine commercial transactions constitutes bona fide use in commerce). The use must be “open” rather than internal (i.e., a sale or shipment has to be made to the relevant class of purchasers or prospective purchasers) as a trademark is intended to identify the source to the public and distinguish the goods from those manufactured or sold by others. Blue Bell, Inc. v. Farah Manufacturing Co., 508 F.2d 1260 (5th Cir. 1975) (internal shipments to sales managers and token use of mark on clothes sold under different brand not use in commerce); Avakoff v. Southern Pacific Co., 765 F.2d 1097 (Fed.Cir. 1985) (shipment of products from contract manufacturer to trademark owner insufficient to create awareness of trademark in minds of consuming public). Moreover, use of the mark has to be sufficient in quantity to establish recognition of the mark among relevant consumers. Lucent Information Management, Inc. v. Lucent Technologies, Inc., 186 F.3d 311 (3d Cir. 1999) (single sale of $323.50 with nonpublic promotional efforts and no advertising expenditures not sufficient to establish trademark rights); Zazú Designs v. L’Oréal, S.A., 979 F.2d 499 (7th Cir. 1992) (few bottles of plaintiff’s product sold over counter in one location and few more mailed to friends in Texas and Florida did not link mark with plaintiff’s product in minds of consumers or put other producers on notice); Natural Footwear Ltd. v. Hart, Schaffner & Marx, 760 F.2d 1383, 1398 – 1399 (3d Cir. 1985) (insufficient sales and marketing activities do not establish common-law trademark rights). There is a common myth that mailing a label, prototype, or item to oneself creates trademark rights; it does not. Indeed, even initial sales to friends and family may be insufficient to establish trademark rights. Jaffe v. Simon & Schuster, Inc., 3 U.S.P.Q.2d (BNA) 1047, 1987 U.S.Dist. LEXIS 14902 at *46 (S.D.N.Y. 1987) (“[Plaintiff’s] early transactions consisted solely of nominal or token sales to personal friends and relatives. Such transactions do not constitute ‘such a bona fide commercial operation as would entitle it to claim ownership of the mark.’ ” Quoting Merry Hull & Co. v. Hi-Line Co., 243 F.Supp. 45, 52 (S.D.N.Y. 1965).). Legitimate trademark use requires that the trademark be affixed to or used in conjunction with the merchandise actually intended to bear the mark in commercial transactions (i.e., bona fide commercial use) rather than mock-ups or “token” uses in an attempt to reserve rights in a mark. Compare Blue Bell, supra (initial use of mark on different type of clothing than was ultimately intended to bear mark was not bona fide use of mark), with Ralston Purina Co. v. OnCor Frozen Foods, Inc., 746 F.2d 801 (Fed.Cir. 1984) (use of mark with cat food that was not final formulation of product eventually offered was sufficient to establish rights). Because product development and marketing can take years before sales commence, in the past some companies tried to preserve future trademarks by “token use” programs consisting of periodic shipments of products bearing the mark. Courts regarded these “token use” programs as suspect. See, e.g., La Societe Anonyme des Parfums Le Galion v. Jean Patou, Inc., 495 F.2d 1265 (2d Cir. 1974) (sale of 89 bottles of “SNOB” perfume over 20-year period held insufficient to maintain trademark rights).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 15

§6.19

INTELLECTUAL PROPERTY LAW

In addition, legitimate trademark use requires that the goods be sold in compliance with applicable laws. See, e.g., CreAgri, Inc. v. USANA Health Sciences, Inc., 474 F.3d 626 (9th Cir. 2007) (denying trademark protection for plaintiff’s “Olivenol” mark when plaintiff’s “Olivenol” tablets were sold with inaccurate labels that violated Federal Food, Drug and Cosmetic Act). 2. [6.19] Formative Rights Through Filing Filing an intent-to-use application for federal registration now establishes formative trademark rights as of the date of application. Once a bona fide use of the mark is made and the intent-to-use application matures to registration, the applicant is awarded nationwide priority dating back to the filing date of the application. 15 U.S.C. §1057(c). These nationwide rights are not absolute, however. They are subject to (a) the common-law rights of any third-party trademark owner that has been using its mark since before the application filing date, (b) any prior registrations or pending applications owned by third parties, and (c) rights accrued through a prior, foreign application, if the foreign trademark owner timely files an application with the United States Patent and Trademark Office. Id. Rights accrued through a foreign application arise under an international treaty called the Paris Convention. See §6.46 below. Under this Convention, a foreign national that has filed a trademark application overseas may obtain the filing date of its foreign application as its priority date in the United States if (a) the U.S. filing is made within six months of the filing of the foreign application and (b) the application conforms to the requirements of U.S. trademark law and the applicant states that it has a bona fide intent to use the mark in U.S. commerce. See §44(d) of the Lanham Act, 15 U.S.C. §1126(d). Thus, for example, assume a Canadian company filed an application to register a trademark in Canada on January 15, 2013. If, by July 15, 2013, that company files an intent-to-use application in the United States for the identical mark and goods and claims the priority of the Canadian application under §44(d), that company’s priority date in the United States would be January 15, 2013. Significantly, however, a foreign national that files an intent-to-use application beyond the six-month date of its foreign filing is not entitled to claim the priority date of its earlier foreign filing.

PRACTICE POINTER 

File intent-to-use applications promptly to give your client the earliest possible priority date.

3. [6.20] Rights Through Analogous Trademark Use or Public Usage Historically, first affixation of a mark on the goods themselves, not first use in advertising, was the controlling factor in determining trademark rights. Western Stove Co. v. Geo. D. Roper Corp., 82 F.Supp. 206 (S.D.Cal. 1949). This “first to affix” rule has given way to a principle that emphasizes consumer expectations. Under current jurisprudence, rights analogous to trademark rights can arise through use of a mark in advertising and publicity sufficient to create public identification of the mark with the trademark owner. See, e.g., Specht v. Google Inc., 758

6 — 16

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.22

F.Supp.2d 570, 585 – 587 (N.D.Ill. 2010) (press release and extensive media coverage sufficient to establish trademark rights); Marvel Comics Ltd. v. Defiant, Division of Enlightened Entertainment Ltd., 837 F.Supp. 546, 549 (S.D.N.Y. 1993) (announcement of “Plasmer” title to 13 million comic book readers and promotion at annual trade convention sufficient to establish protectable trademark rights though no sales had yet been made); New West Corp. v. NYM Company of California, 595 F.2d 1194, 1200 (9th Cir. 1979) (substantial advertising and subscription orders established rights despite absence of actual sales); WarnerVision Entertainment Inc. v. Empire of Carolina Inc., 915 F.Supp. 639, 646 (S.D.N.Y.) (toy manufacturer’s promotional efforts insufficient to establish priority of use when efforts consisted of few presentations and order from one buyer), aff’d in pertinent part, vacated in part, 101 F.3d 259 (2d Cir. 1996). Rights can also arise when the public creates and uses a source-identifying word to refer to a particular company’s product even when the company has not itself used the mark as a sourceidentifier in connection with its own products. See, e.g., Johnny Blastoff, Inc. v. Los Angeles Rams Football Co., 188 F.3d 427, 434 (7th Cir. 1999) (“St. Louis Rams” mark used by media and public gave rise to protectable rights); Coca-Cola Co. v. Busch, 44 F.Supp. 405 (E.D.Pa. 1942) (public’s use of “Coke” created rights in Coca-Cola even though company had not used mark itself); American Stock Exchange, Inc. v. American Express Co., 207 U.S.P.Q. (BNA) 356, 364 (T.T.A.B. 1980) (“where the public has come to associate a term with a particular company and/or its goods and services as a result, for example, of use of the term in the trade and by the news media, that company has a protectable property right in the term, even if the company itself has made no use of the term”). C. [6.21] Priority The concept of priority is important in trademark law because the senior user or registrant of a mark has the right to exclude newcomers from using confusingly similar marks in the marketplace. As discussed in §6.19 above, a trademark owner’s priority date is easily determined when based on the filing of a federal intent-to-use application or an application under §44(d) of the Lanham Act, 15 U.S.C. §1126(d). When two parties are contemporaneously and independently attempting to develop rights in the same or similar marks through use, not filing, the issue is more complicated. In these circumstances, common-law priority rights are established through use of the mark sufficient to create public recognition in specific geographic areas, as discussed in §§6.18 and 6.20 above. D. [6.22] Using Trademarks and Service Marks Properly Proper use is essential to creating and maintaining trademark rights. The Lanham Act defines what constitutes legitimate and proper use in commerce for a trademark and service mark: The term “use in commerce” means the bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark. For purposes of this chpater, a mark shall be deemed to be in use in commerce —

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 17

§6.22

INTELLECTUAL PROPERTY LAW

(1) on goods when — (A) it is placed in any manner on the goods or their containers or the displays associated therewith or on the tags or labels affixed thereto, or if the nature of the goods makes such placement impracticable, then on documents associated with the goods or their sale, and (B) the goods are sold or transported in commerce, and (2) on services when it is used or displayed in the sale or advertising of services and the services are rendered in commerce, or the services are rendered in more than one State or in the United States and a foreign country and the person rendering the services is engaged in commerce in connection with the services. 15 U.S.C. §1127. Thus, for products, trademark owners should use their marks prominently 1. on the product itself; 2. on tags or labels affixed to the product; 3. on containers, packaging, or displays for the product; or 4. when the above methods are not practical, on documents closely associated with the use, promotion, or sale of the product, such as instructional manuals. In connection with services, a mark should be displayed prominently in the advertising or sales process. Significant confusion exists among laypersons regarding use of the “TM,” “SM,” and “®” symbols. Trademark owners may use the “TM” or “SM” symbol next to a trademark or service mark, respectively, to give notice to others of a claim of trademark rights. In re Industrial Washing Machine Corp., 201 U.S.P.Q. (BNA) 953 (T.T.A.B. 1979) (use of “TM” symbol shows intent to claim word as trademark); Graham Webb International v. Helene Curtis Inc., 17 F.Supp.2d 919 (D.Minn. 1998) (failure to include “TM” symbol is evidence that term was being used as descriptor, not as trademark). Use of the “TM” and “SM” symbols does not confer any substantive rights and is not required, but their use may be beneficial. By contrast, the “®” symbol can be used only in connection with a federally registered mark. 15 U.S.C. §1111. Improper use of the federal registration symbol that is deliberate and intended to mislead the public is fraud. Copelands’ Enterprises, Inc. v. CNV, Inc., 945 F.2d 1563 (Fed.Cir. 1991) (use with intent to deceive of registration symbol for unregistered mark is grounds for denying registration for otherwise registrable mark). Thus, the “®” symbol should be used only after the mark is registered and only in connection with the goods or services for which the mark is registered.

6 — 18

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.25

E. [6.23] Checklist for Adopting New Marks When a client has adopted or wishes to adopt a new mark, the practitioner will want to undertake the following recommended steps: 1. Identify the mark. Confirm whether it will be used alone or in conjunction with a logo, design, or other marks. 2. Identify the products or services with which the mark will be used and the geographic scope of intended use. 3. Determine whether the client has already begun using the mark. If so, obtain specimens of this use and identify the date the mark was first used in commerce. 4. Determine whether any elements of the mark are generic, descriptive, functional, or otherwise unprotectable. 5. Perform or obtain a trademark clearance search. 6. Investigate potential conflicts disclosed by the search. 7. Assess any risk for the new mark based on the clearance search results and advise the client of these risks. 8. Consider applying to register the mark.

VI. TRADEMARK REGISTRATION A. [6.24] Federal Registration Ownership of a federal trademark registration is not necessary to enforce trademark rights. A trademark owner seeking to enforce rights in a common-law mark may sue in federal court under §43(a) of the Lanham Act, 15 U.S.C. §1125(a). Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 120 L.Ed.2d 615, 112 S.Ct. 2753, 2757 (1992). As discussed in §6.25 below, federal registration, however, does provide significant benefits. 1. [6.25] Benefits of Federal Registration The benefits that accrue from federal registration on the Principal Register include the following: a. nationwide constructive use (i.e., priority) as of the date of application (15 U.S.C. §1057(c));

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 19

§6.25

INTELLECTUAL PROPERTY LAW

b. prima facie evidence of the registration’s validity, of the registrant’s ownership of the mark, and of the registrant’s exclusive right to use the mark in commerce in connection with the goods or services specified in the registration certificate (15 U.S.C. §1057(b)); c. constructive notice of the registrant’s claim of ownership of the mark (15 U.S.C. §1072); d. the right, after continuous use of the mark for five consecutive years after registration, to have the registration become incontestable (15 U.S.C. §1065); e. the right to enhanced remedies and relief in cases of counterfeiting (15 U.S.C. §1116(d)(1)); f.

the right to request that U.S. Customs and Border Protection officials bar the importation of goods bearing infringing trademarks (15 U.S.C. §1124); and

g. a complete bar to any claim for dilution brought under state or common law (15 U.S.C. §1125(c)(6)). With registration, the public is charged with constructive notice of the trademark owner’s claim of rights. Thus, a third party’s use of a mark confusingly similar to a federally registered mark cannot be justified or defended by a claim of good faith or lack of knowledge of the registered mark. 15 U.S.C. §1057(c); Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2d Cir. 1959). Moreover, a registration is accorded nationwide effect, preserving the registrant’s right to move into any area of the country at a later date without fear of having the right usurped by a newcomer in a geographically remote area. Armand’s Subway, Inc. v. Doctor’s Associates, Inc., 604 F.2d 849 (4th Cir. 1979). Cf. Lone Star Steakhouse & Saloon, Inc. v. Alpha of Virginia, Inc., 43 F.3d 922, 931 – 932 (4th Cir. 1995) (court will enjoin newcomer only if senior registrant is likely to enter, or has entered, newcomer’s territory). This nationwide priority right dates back to the filing of the application. 15 U.S.C. §1057(c). As noted in §6.19 above, however, this nationwide priority right may be subject to the rights of prior users, registrants, or applicants. The owner of a mark registered on the Principal Register that has been used for five consecutive years after registration is entitled to file an affidavit to obtain incontestability status for the registration. 15 U.S.C. §1065. A registration that is incontestable constitutes conclusive evidence of the registrant’s exclusive right to use the mark on the goods or services described in the registration. 15 U.S.C. §1115(b). An incontestable trademark registration is subject only to the following specific defenses: a. fraud (the registration or incontestability was obtained fraudulently); b. abandonment (the mark has been abandoned due to nonuse and intent not to resume use or through uncontrolled licensing); c. misrepresentation (the mark is being used in a manner that misrepresents the source of goods);

6 — 20

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.27

d. fair use (third parties may make good-faith, descriptive, non-trademark use of a term that is the subject of an incontestable registration); e. prior use (a third party that began use of a confusingly similar mark before the registrant’s priority date is entitled to continue using its mark although its rights will be no greater than the geographic area in which it has continuously used the mark); f.

antitrust violations (the trademark owner is attempting to exercise trademark rights in a manner that violates the antitrust laws);

g. functionality (no protection is accorded to trade dress that is functional); h. genericness (the mark was generic at the time of registration or has become generic for the goods or services with which it is used); and i.

equitable defenses (principles including laches, estoppel, and acquiescence). Id.

Because descriptiveness is not one of the enumerated defenses, a defendant in a trademark infringement action cannot claim that a plaintiff’s incontestable mark is merely descriptive. Park ’N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 83 L.Ed.2d 582, 105 S.Ct. 658, 663 (1985). 2. [6.26] Acquisition and Maintenance of Federal Registrations The Lanham Act provides for two registers: the Principal Register (15 U.S.C. §1051) and the Supplemental Register (15 U.S.C. §1091). a. [6.27] Marks Not Entitled to Registration A mark is not registrable on either the Principal Register or the Supplemental Register if it consists of or comprises the following: 1. immoral, deceptive, or scandalous matter; 2. matter that disparages or falsely suggests a connection with persons, living or dead, institutions, beliefs, or national symbols; 3. a geographic indication that, when used in connection with wines or spirits, identifies a place other than the origin of the goods; 4. the flag, coat of arms, or insignia of any nation, state, or municipality; 5. a name, portrait, or signature identifying any living individual without the person’s written consent or identifying any deceased President of the United States during the life of a surviving spouse except by written permission of the spouse; 6. a mark likely to be confused with a federally registered mark or mark or tradename previously used in the United States and not abandoned;

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 21

§6.28

INTELLECTUAL PROPERTY LAW

7. a mark that, when used in connection with the goods or services of the owner, is primarily geographically deceptively misdescriptive of them if the mark had not acquired distinctiveness before December 8, 1993 (the effective date of the North American Free Trade Agreement Implementation Act, Pub.L. No. 103-182, 107 Stat. 2057 (1993)); or 8. in the case of trade dress or product configuration, a mark that, as a whole, is functional. 15 U.S.C. §§1052, 1091(a). A purported mark that is simply a generic name for the goods or services to which it is applied is also unregistrable. BellSouth Corp. v. DataNational Corp., 60 F.3d 1565, 1569 (Fed.Cir. 1995). Moreover, a mark found to dilute the distinctiveness of a famous mark under federal law will be refused registration, or if already registered, this registration may be canceled. 15 U.S.C. §1052. Dilution is discussed in Chapter 8 of this handbook. (1)

[6.28] Deceptive and deceptively misdescriptive marks

As indicated in §6.27 above, marks that are deceptive cannot be registered. A mark is deceptive when (a) the mark misdescribes the goods, (b) purchasers are likely to believe the misrepresentation, and (c) the misrepresentation would materially affect the public’s decision to purchase the goods. Bureau National Interprofessionnel Du Cognac v. International Better Drinks Corp., 6 U.S.P.Q.2d (BNA) 1610 (T.T.A.B. 1988). Examples of marks held to be deceptive include “LOVEE LAMB” for seat covers not made of lambskin (In re Budge Manufacturing Co., 857 F.2d 773 (Fed.Cir. 1988)) and “SILKEASE” for clothing not made of silk (In re Shapely, Inc., 231 U.S.P.Q. (BNA) 72 (T.T.A.B. 1986)). By contrast, when a mark contains a misdescriptive element but the misrepresentation would not materially affect the public’s purchasing decision, the mark is not deemed deceptive, but rather only “deceptively misdescriptive.” 15 U.S.C. §1052(e). An example of a deceptively misdescriptive mark is “Glass Wax” for a glass cleaner that does not contain wax. Gold Seal Co. v. Weeks, 129 F.Supp. 928 (D.D.C. 1955) (finding mark deceptively misdescriptive as customers were satisfied with product regardless of whether it contained wax), aff’d per curiam sub nom. S.C. Johnson & Son, Inc. v. Gold Seal Co., 230 F.2d 832 (D.C.Cir. 1956). Deceptively misdescriptive marks, unlike deceptive marks, may be capable of registration on either the Principal or the Supplemental Register, as discussed more fully in §§6.30 – 6.33 below. (2)

[6.29] Primarily geographically deceptively misdescriptive marks

Marks that are “primarily geographically deceptively misdescriptive” are also unregistrable, as noted in §6.27 above. 15 U.S.C. §1052(e). The test for “primarily geographically deceptively misdescriptive” marks is identical to the test for deceptive marks. That is, a mark is deemed primarily geographically deceptively misdescriptive when (a) the primary significance of the mark is a generally known geographic location, (b) the consuming public is likely to believe the place identified by the mark indicates the origin of the goods bearing the mark when in fact the goods do not come from this place, and (c) the misrepresentation would materially affect a consumer’s purchasing decision. In re California Innovations, Inc., 329 F.3d 1334, 1341

6 — 22

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.31

(Fed.Cir. 2003); In re Compania de Licores Internacionales S.A., 102 U.S.P.Q.2d 1841, 1843 (T.T.A.B. 2012) (refusing registration of “OLD HAVANA” for rum that does not originate in Havana, Cuba). It is important to note an apparent inconsistency in terminology. A mark is considered “deceptively misdescriptive” when the deception is not material; yet with “primarily geographically deceptively misdescriptive” marks, the deception does have to be material. b. [6.30] The Principal Register The Principal Register is the primary register of the United States Patent and Trademark Office and the repository for the vast majority of federally registered marks. (1)

[6.31] Descriptive, misdescriptive, geographic, and surname marks

A mark that is either (a) merely descriptive, (b) deceptively misdescriptive, (c) primarily geographically descriptive, or (d) primarily merely a surname is not registrable on the Principal Register unless it “has become distinctive of the applicant’s goods in commerce,” i.e., if it has acquired secondary meaning. 15 U.S.C. §1052(f). As evidence of distinctiveness, the United States Patent and Trademark Office may accept proof of substantially exclusive and continuous use of the mark in commerce for a period of five years preceding the date when distinctiveness is claimed. Id. As discussed in §6.5 above, evidence of secondary meaning can also be offered through proof of substantial sales, advertising, media publicity, consumer surveys, and other indicia of public awareness or recognition. Platinum Home Mortgage Corp. v. Platinum Financial Group, Inc., 149 F.3d 722 (7th Cir. 1998). Some marks are considered so descriptive, however, that no claim or evidence of distinctiveness will be accepted. In re Boston Beer Company Limited Partnership, 198 F.3d 1370 (Fed.Cir. 1999) (proposed mark “The Best Beer In America” so highly laudatory that it could not function as trademark and was unregistrable). As noted in §6.6 above, a geographic term may be inherently distinctive and thus immediately registrable on the Principal Register when the mark would not appear to the public to be descriptive of the origin of the products or services. For surname marks, the critical question in evaluating registrability is whether the public views the surname as identifying a single, particular source for the goods or services identified in the application. The initial burden is on the USPTO to show that the mark is primarily merely a surname. If such a showing is made, the burden shifts to the applicant to prove either that the public would not consider the mark a surname or that the mark has acquired secondary meaning. In re Hutchinson Technology Inc., 852 F.2d 552, 553 – 554 (Fed.Cir. 1988). If an applicant is able to demonstrate either that the public would not view the mark as primarily merely a surname or that the surname has secondary meaning, the surname mark will be approved by the USPTO. If the applicant fails to make such a showing, the surname will not be permitted registration on the Principal Register. In re Etablissements Darty et Fils, 759 F.2d 15 (Fed.Cir. 1985) (upholding Trademark Trial and Appeal Board’s refusal to register mark “DARTY” because it is primarily merely surname). If the mark is already in use, however, the mark may be registered on the Supplemental Register. See §6.33 below.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 23

§6.32

INTELLECTUAL PROPERTY LAW

Even if part of a mark is primarily merely a surname, the mark as a whole may be registrable. See, e.g., Hutchinson, supra, 852 F.2d at 554 (“HUTCHINSON TECHNOLOGY” for computer components registrable). (2)

[6.32] Trade dress

Trade dress that is nonfunctional and distinctive may be registered on the Principal Register. As discussed in §6.14 above, a product configuration can never be inherently distinctive. Registration of a product configuration is thus permitted only upon a showing that the configuration has acquired distinctiveness. Consequently, applications to register product configurations should always be filed on the basis of prior use of the trade dress in commerce and should not be filed on an intent-to-use basis. c. [6.33] The Supplemental Register Marks that are capable of distinguishing an applicant’s goods but that do not qualify for registration on the Principal Register may be eligible for registration on the Supplemental Register. 15 U.S.C. §1091(a). Marks falling into this category are ones that are merely descriptive, deceptively misdescriptive, primarily geographically descriptive, or primarily merely a surname and that have not yet acquired distinctiveness. 15 U.S.C. §§1091(a), 1091(c), 1052. Also, to qualify for registration on the Supplemental Register, the applicant must be using the mark in commerce. 15 U.S.C. §1091(a). Thus, applications to register a mark on the Supplemental Register are not accepted on an intent-to-use basis. Registration on the Supplemental Register confers none of the presumptions or evidentiary benefits afforded by a registration on the Principal Register. 15 U.S.C. §1094. The benefits of a registration on the Supplemental Registration are that (1) it entitles the registrant to use the “®” symbol in association with its mark; (2) it will be revealed in a search of United States Patent and Trademark Office Records, thus giving notice of the registrant’s claim of rights; (3) the USPTO will not approve registration of any mark confusingly similar to a mark on the Supplemental Register, and (4) for U.S. citizens, it permits a trademark owner to file an application for a mark otherwise not registrable on the Principal Register and use the filing date of that application as its priority date for filing in foreign countries. For more information on foreign trademark filings, see §§6.46 and 6.47 below. Once a mark registered on the Supplemental Register has acquired distinctiveness, the registrant may apply to register the mark on the Principal Register. 15 U.S.C. §1095. d. Application Process (1)

[6.34] Filing

The first step in seeking a federal registration is to file a verified written application with the Trademark Division of the United States Patent and Trademark Office, accompanied by a drawing of the mark and the statutory filing fee. See 37 C.F.R. §2.32. The application can be signed by the owner of the trademark or the owner’s attorney. 37 C.F.R. §2.33(a). An application

6 — 24

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.35

can be filed by mail, hand delivery, or electronically through the USPTO’s website, www.uspto.gov. Paper forms are also available through the website. If the mark is already being used in commerce when the application is filed, the applicant can file a use-based application by providing the dates the mark was first used anywhere and first used in commerce in or with the United States and a specimen showing use of the mark, such as a picture of the product or product packaging or, for a service mark, advertising materials. 37 C.F.R. §2.34(a)(1). If the application is filed on an intent-to-use basis, the applicant does not supply a specimen of use or first-use date at the time of the application. 37 C.F.R. §2.34(a)(2). If the applicant is already using the mark but wants to file the application without waiting to collect its first-use dates and a specimen of use, it can file the application on an intent-to-use basis and provide its first-use dates and specimen in a later filing. See §6.37 below. An additional basis for filing an application is available to non-U.S. companies and citizens under §44 of the Lanham Act, 15 U.S.C. § 1126. Under §44(d), a foreign national may file a U.S. application based on its ownership of a foreign application for the same mark and goods filed within the previous six months and thereby gain as its U.S. priority date the filing date of the foreign application, provided the foreign national declares that it has a bona fide intent to use the mark in U.S. commerce. Under §44(e), a foreign national may file an application based on its ownership of a trademark registration in its country of origin, provided the applicant declares that it has a bona fide intent to use the mark in U.S. commerce. An applicant proceeding under §44(d) or §44(e) is entitled to obtain a federal registration without having to show use of its mark in U.S. commerce, but only after the applicant has filed a certified copy of its foreign registration. 15 U.S.C. §1126(e). (2)

[6.35] Examination

The United States Patent and Trademark Office assigns each application to an examining attorney who reviews the application to ensure that it conforms to applicable rules and regulations and to determine whether the mark is registrable. As part of this determination, for example, the examining attorney will consider whether the mark consists in whole or in part of merely descriptive elements and whether the mark is confusingly similar to a mark already registered or subject to a prior-filed, pending application. The examining attorney will use as a guide the USPTO’s TRADEMARK MANUAL OF EXAMINING PROCEDURE (8th ed. Oct. 2012), which is a reference work on practices and procedures for prosecuting trademark applications in the USPTO. This manual is available at the USPTO’s website, http://tmep.uspto.gov/RDMS/detail/manual/TMEP/Oct2012/d1e2.xml#/ manual/TMEP/Oct2012/d1e2.xml (case sensitive). If the examining attorney finds a technical defect in the application or believes part or all of the mark is not registrable, the examining attorney will refuse registration and issue a nonfinal office action to the applicant explaining the grounds for refusal. An applicant has six months from the date of the nonfinal office action to resolve any technical defects or convince the examining attorney to withdraw the refusal to register. Rule 2.62 of the Trademark Rules of Practice.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 25

§6.36

INTELLECTUAL PROPERTY LAW

If no response to the office action is filed, the application will be deemed abandoned. If a response to the nonfinal office action is filed and the applicant’s clarifications and arguments are accepted, the examining attorney will approve the application. If the examining attorney rejects the applicant’s arguments, the examining attorney will issue a final refusal. In some instances, when an applicant has raised new issues as part of its clarifications and arguments, the examining attorney will issue another nonfinal office action. After a final refusal is issued, an applicant has six months to convince the examining attorney to withdraw the refusal and approve the application or else the applicant must file an appeal to the Trademark Trial and Appeal Board, the administrative law tribunal of the USPTO. If the applicant takes no action within six months after a final refusal is issued, the application will be deemed abandoned. Id. (3)

[6.36] Approval

If the application is in good form and the examining attorney believes the mark is registrable, the examining attorney will approve the application for publication in the Trademark Official Gazette of the United States Patent and Trademark Office. 15 U.S.C. §1062(a). The Trademark Official Gazette is published every week and is available by subscription and at many public libraries throughout the country. It is also available online at www.uspto.gov/web/ trademarks/tmog. When an application appears in the Trademark Official Gazette, any person who believes he or she would be damaged by the issuance of the registration has 30 days from the date of publication to file an opposition to the registration or to request an extension of time to oppose. 15 U.S.C. §1063(a). If the application is use-based and no opposition or extension request is filed within the deadline, a certificate of registration will issue. 15 U.S.C. §1063(b). If the application was filed on an intent-to-use basis and no opposition was filed, the applicant receives a notice of allowance. Id. (4)

[6.37] Statement of use

For an intent-to-use application to mature to registration, the applicant must demonstrate use of the mark in commerce. This can be done either before the application is approved for publication or after a notice of allowance has issued. If the applicant commences use of the mark before the application is approved for publication, the applicant can file what is called an “amendment to allege use,” stating the date of first use in commerce and providing a specimen of use. 15 U.S.C. §1051(c). See also Rule 2.76 of the Trademark Rules of Practice. Such a filing, if accepted by the United States Patent and Trademark Office, effectively converts the application into a use-based application. If an amendment to allege use is not filed and the application is not opposed when published, the USPTO will issue a notice of allowance. The applicant must commence use of the mark and file a document called a “statement of use” within six months of the issuance of the notice of allowance. 15 U.S.C. §1051(d)(1); 37 C.F.R. §2.88(a). The initial six-month period can be extended for an additional six months upon written application, reconfirming the bona fide intentto-use, and payment of applicable fees. 15 U.S.C. §1051(d)(2); 37 C.F.R. §2.89(a). Additional six-month extensions may be obtained, up to a total of three years from the date of the notice of allowance, upon similar applications and fee payments, plus showings of good cause. 15 U.S.C.

6 — 26

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.39

§1051(d)(2); 37 C.F.R. §2.89(e). Failure to file a timely extension of time or statement of use will result in abandonment of the application. 15 U.S.C. §1051(d)(4); 37 C.F.R. §2.88(h). Like an amendment to allege use, a statement of use must indicate the date the applicant first used the mark in commerce and must be accompanied by a specimen showing use of the mark. 15 U.S.C. §1051(d)(1); 37 C.F.R. §2.88(b). e. [6.38] Post-Registration Procedures A trademark registration remains in force for ten years, provided that, within the one-year period directly preceding the six-year anniversary of the registration date, the registrant files an affidavit attesting to continued use of the mark. 15 U.S.C. §§1058(a), 1058(b). This affidavit must show, with support by specimens, that the mark is still in use in commerce in connection with all the specified goods or services or that nonuse is due to special circumstances and not due to any intention to abandon the mark. 15 U.S.C. §1058(b). If the affidavit is not filed, the registration will be canceled by the United States Patent and Trademark Office. 15 U.S.C. §1058(a). If the affidavit is filed only as to some of the goods or services identified in the registration, the registration will be partially canceled as to the other goods or services. At any time after the five-year anniversary of the registration date, a registrant can file a declaration for incontestability status. 15 U.S.C. §1065. To obtain incontestability status for a registration, the mark must have been used for five consecutive years after registration, and the registrant must declare that there has been no final decision adverse to the registrant’s claim of ownership in or right to register the mark and that there is no pending USPTO or court proceeding involving the registrant’s rights in the mark. Id. At the expiration of the initial ten-year period, a registration may be renewed for successive periods of ten years upon the filing of a proper declaration of use and notice of renewal. 15 U.S.C. §1059(a). 3. [6.39] Federal Administrative Proceedings Challenges to the scope or registrability of a trademark application or registration can be brought before the administrative law tribunal of the United States Patent and Trademark Office, the Trademark Trial and Appeal Board. 15 U.S.C. §1067(a). These proceedings are concerned only with whether a mark is registrable or, if registered, whether the registration should be canceled. The TTAB has no authority to award monetary relief or to issue injunctions to prevent use of infringing marks. The four basic inter partes proceedings are opposition, cancellation, interference, and concurrent use. 15 U.S.C. §1067. They are quasi-judicial proceedings and generally follow the format of a federal civil action as to pleadings, motion practice, discovery, record, argument, and decision. In lieu of trial, however, the parties submit their evidence and arguments by brief. Once the trial briefs have been submitted, oral hearing may be had before the TTAB, much like an oral argument in a court action. A final decision of the TTAB may be either appealed to the Court of Appeals for the Federal Circuit (called, until 1982, when its jurisdiction was enlarged, the Court of Customs and Patent

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 27

§6.40

INTELLECTUAL PROPERTY LAW

Appeals) or reviewed by a U.S. district court. 15 U.S.C. §1071. If the case is appealed to the Federal Circuit, however, the appellee may elect instead to have the case reviewed by a district court. 15 U.S.C. §1071(a)(1). The rules governing proceedings before the TTAB are compiled in the TRADEMARK TRIAL AND APPEAL BOARD MANUAL OF PROCEDURE (3d ed. rev. June 2012), which is available online at www.uspto.gov/trademarks/process/appeal/Preface_TBMP.jsp (case sensitive). a. [6.40] Opposition Proceedings When an application is published in the Trademark Official Gazette, persons who believe they would be damaged by the registration have 30 days from the date of publication to file a notice of opposition. 15 U.S.C. §1063(a). Under a rule imposed as of November 2, 2003, a party can extend the time to file a notice of opposition up to 180 days from the date of publication in the Official Gazette. 37 C.F.R. §2.102(c). This 180-day period consists of the initial 30-day period plus up to 150 days of extensions. The extensions can be obtained in one of two ways: (1) by filing for a 30-day extension as a matter of course, for an additional 60 days beyond that for good cause, and for a final 60-day extension thereafter with the applicant’s consent; or (2) by filing for a 90-day extension for good cause, followed by a final 60-day extension thereafter with the applicant’s consent. Id. Extension requests can be filed directly through the United States Patent and Trademark Office’s website, www.uspto.gov. A notice of opposition may be filed by “[a]ny person who believes that he would be damaged by the registration of a mark.” 15 U.S.C. §1063(a). An opposition may thus be initiated, for example, by the following persons: 1. the owner of a prior registration or application to oppose registration of a confusingly similar mark; 2. the owner of prior, common-law trademark rights to oppose registration of a confusingly similar mark; 3. the owner of a famous mark to oppose registration of a mark that is likely to dilute the famous mark, either by blurring or tarnishment; or 4. one who uses in a non-trademark, descriptive, generic, or geographic manner a word or term now sought to be registered by another. Opposition may also be based on a trade name or use of a term in advertising. Knickerbocker Toy Co. v. Faultless Starch Co., 467 F.2d 501 (C.C.P.A. 1972). Standing has also been extended to persons who seek to prevent registration of marks that they deem scandalous or derogatory. Ritchie v. Simpson, 170 F.3d 1092 (Fed.Cir. 1999); Harjo v. Pro Football, Inc., 30 U.S.P.Q.2d (BNA) 1828 (T.T.A.B. 1994). If the opposition is successful, the trademark will be refused registration. 37 C.F.R. §2.136.

6 — 28

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.43

A mark approved for the Supplemental Register cannot be opposed, but after the registration issues, persons who believe they may be damaged by the registration may petition to cancel it. 15 U.S.C. §1092. A sample notice of opposition can be found in Chapter 8 of this handbook. b. [6.41] Cancellation Proceedings A cancellation petition may be filed by “any person who believes that he is or will be damaged . . . by the registration of a mark.” 15 U.S.C. §1064. Cancellation proceedings are brought against existing registrations; by comparison, opposition proceedings are brought against pending applications. If a potential opposer misses the final date to file the notice of opposition, the attack must be by way of a cancellation action. The cancellation proceeding is essentially the same as an opposition and, with certain exceptions, must be brought within five years of the date of registration. If cancellation is sought after five years of registration, it then may be based only on the grounds specified in §14 of the Lanham Act, 15 U.S.C. §1064, i.e., that the mark has become generic for any of the goods or services for which it is registered, that the mark is functional, that the mark has been abandoned, that the registration was fraudulently obtained, that the mark is being used so as to misrepresent the source of the goods or services, or that the registration was obtained contrary to the provisions of §2(a), §2(b), §2(c), or §4 of the Lanham Act, 15 U.S.C. §§1052(a) – 1052(c), 1054. c. [6.42] Interference Proceedings Interference proceedings involve conflicting applications or registrations and are extremely rare. Institution of such a proceeding requires a petition to the Director of the United States Patent and Trademark Office, who can declare an interference only upon a showing of extraordinary circumstances. 15 U.S.C. §1066; 37 C.F.R. §2.91(a). The primary issue considered in an interference is priority of use. 37 C.F.R. §2.96. As a matter of practice, disputes between applicants and registrants that involve priority-of-use issues are normally resolved through opposition or cancellation actions. d. [6.43] Concurrent Use Proceedings While federal registrations are generally nationwide in scope, occasionally there are goodfaith, concurrent uses of the same or similar marks for the same or similar goods in geographically remote areas. Because the marks are used in different areas, there may be little likelihood of confusion between the parties or their respective products and services. In these situations, an applicant may institute a concurrent use proceeding to establish the scope of the parties’ respective rights. Concurrent use registrations, which contain geographic or product and service limitations, may be issued by the United States Patent and Trademark Office. The USPTO may also issue concurrent registrations when a court finds more than one person entitled to use the same or a similar mark in commerce. 15 U.S.C. §1052(d).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 29

§6.44

INTELLECTUAL PROPERTY LAW

B. [6.44] State Trademark Registration Most states, if not all, maintain their own trademark registries. State trademark filings and registrations are usually handled by the Secretary of State’s offices. Unlike federal registrations, which provide a range of procedural and substantive advantages, state trademark registrations provide fewer benefits. In the proper circumstances, however, state trademark registrations do provide certain value, including the following: 1. State trademark registrations are relatively inexpensive to obtain and renew. 2. Applications are subject to little or no examination procedure. 3. State trademark registrations may provide notice to third parties of the trademark owner’s claim of rights. In Illinois, for example, state trademark registrations are governed by the Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., which provides that a trademark owner must have already begun using the mark in the ordinary course of trade before a trademark application can be filed. See 765 ILCS 1036/15. Thus, no intent-to-use applications are permitted. This “use” requirement is common among state trademark registries. “Use” of a mark tracks the Lanham Act definition and federal jurisprudence. Indeed, the Trademark Registration and Protection Act expressly states that “the construction given the federal [Lanham] Act shall be examined as persuasive authority for interpreting and construing this Act.” 765 ILCS 1036/90. As under federal law, the Trademark Registration and Protection Act prohibits registration of a mark that is scandalous, disparaging, merely descriptive, or primarily geographically deceptively misdescriptive; that is merely a surname; that consists of national, state, or municipal flags or insignia; or that is likely to cause confusion with another registered mark. 765 ILCS 1036/10. The term of a state registration varies by state, usually between five and twenty years. In Illinois, a registration must be renewed every five years. 765 ILCS 1036/30. State trademark registries are public and can be searched. Thus, a practitioner performing or obtaining a clearance search to uncover potential conflicts with a prospective mark will often want a review of state trademark databases included in the search results.

VII. USE AND REGISTRATION OUTSIDE THE UNITED STATES A. [6.45] Territoriality Trademark rights are territorial, and rights in a foreign country will be governed by that country’s laws. Significant disparities exist in trademark availability, enforcement, and registration practice throughout the world. Thus, if a client seeks to use or enforce a mark outside the United States, consultation with a trademark lawyer in the relevant country is advised.

6 — 30

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.47

B. International Trademark Filings 1. [6.46] Paris Convention As noted in §6.19 above, the United States is a party to an international trademark treaty called the Paris Convention for the Protection of Industrial Property, Mar. 20, 1883 (Paris Convention), which is available at the website of the World Intellectual Property Organization (WIPO) at www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html. Under the Paris Convention, a U.S. citizen owning a federal trademark application who applies to register the same mark in any Paris Convention country within six months of the filing of the U.S. application receives the priority date of the U.S. application. See Article 4 of the Paris Convention. Thus, for example, a U.S. citizen who filed a U.S. trademark application on January 15, 2013, can file an identical application in Mexico on or before July 15, 2013, and for priority purposes, the Mexican application will be treated as filed on January 15, 2013. 2. [6.47] Madrid Protocol Since November 2, 2003, the United States has also participated in an international treaty for trademark filings called the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks, June 27, 1989 (Madrid Protocol), which is available at the website of the World Intellectual Property Organization at www.wipo.int/madrid/en/legal _texts/trtdocs_wo016.html#p57_5540. Under the Madrid Protocol, U.S. citizens and companies can file trademark applications in other Protocol member states directly through the United States Patent and Trademark Office. 15 U.S.C. §1141a. Before November 2003, a U.S. citizen or company wishing to file these applications needed to hire lawyers in each separate country to file the applications. It is important to distinguish between the Madrid Agreement and the Madrid Protocol. The United States is a member of the Madrid Protocol but not the Madrid Agreement. Thus, U.S. citizens can file applications through the USPTO only in those countries that are also members of the Madrid Protocol. Madrid Protocol member states include major industrialized nations such as Australia, China, Japan, and the United Kingdom, as well as emerging and developing nations such as Colombia, Vietnam, and the Philippines. A complete list of Madrid Protocol member states can be found at the WIPO’s website at www.wipo.int/export/sites/www/treaties/en/ documents/pdf/madrid_marks.pdf. Possible advantages of using the Madrid Protocol may be (a) administrative ease, by having one central mechanism and office for filing and renewing foreign registrations, and (b) financial savings, by avoiding the cost of hiring separate lawyers in each country to file applications. To file applications through the Madrid Protocol, the applicant simply designates the countries in which registration is sought and pays the appropriate filing fees. 15 U.S.C. §1141a. The applications are then sent to the trademark offices for each of the designated countries. Each trademark office will conduct its own review of the application to determine registrability. As in the United States, an office action or opposition is possible in any of the countries designated. In the event that an applicant receives an office action or opposition, the applicant may need to hire local attorneys in that country to handle the matter.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 31

§6.47

INTELLECTUAL PROPERTY LAW

Significantly, the Madrid Protocol provides only a system for filing applications — applicants are responsible for performing any prefiling searches to determine whether a mark is available in a particular country and for determining what trademark use requirements a particular country has. Information on procedures for filing applications under the Madrid Protocol can be found through the USPTO’s website, www.uspto.gov.

6 — 32

WWW.IICLE.COM

7

Transfer or Loss of Trademark Rights

BRADLEY L. COHN Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago

®

©COPYRIGHT 2013 BY IICLE .

7—1

INTELLECTUAL PROPERTY LAW

I. [7.1] Scope of Chapter II. Transfer of Trademark Rights A. [7.2] Assignment 1. [7.3] Requirements for a Valid Assignment 2. [7.4] Federal Registrations and Applications 3. [7.5] Sample Form of Assignment 4. [7.6] Bankruptcy Estate of Trademark Owner 5. [7.7] Effect of Assignment B. [7.8] Security Interest C. [7.9] Licensing 1. [7.10] Benefits 2. Features and Requirements of a Valid License a. [7.11] Basic Form and Scope b. [7.12] License Agreement Terms c. [7.13] Quality Control (1) [7.14] Lack of quality control (2) [7.15] Sample measures d. [7.16] Disclosure or Notice 3. [7.17] Franchise 4. [7.18] Licensor’s Tort Liability for Defective Licensed Products III. [7.19] Loss of Rights A. [7.20] Cessation of Use 1. [7.21] Effect of Abandonment Through Nonuse 2. [7.22] Enduring (or Residual) Goodwill 3. [7.23] Use on Slightly Different Product 4. [7.24] Alterations or Amendments to Mark B. [7.25] Genericness 1. [7.26] Test 2. [7.27] Burden and Methods of Proof 3. [7.28] Establishing Rights in Lost Marks 4. [7.29] Tips To Avoid “Genericide” C. [7.30] Uncontrolled (or Naked) Licensing

7—2

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.3

I. [7.1] SCOPE OF CHAPTER This chapter explores underlying principles and common methods for assigning or licensing trademark rights and actions or omissions that may cause a loss of trademark rights.

II. TRANSFER OF TRADEMARK RIGHTS A. [7.2] Assignment Trademark rights, like tangible property, can be assigned or sold by the owner. 1. [7.3] Requirements for a Valid Assignment For a valid trademark assignment, the trademark must be assigned along with the goodwill of the business symbolized by the mark or the part of the business connected with the use of the mark. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:2 (4th ed. 2004); 15 U.S.C. §1060(a)(1). Assignment of the goodwill or connected business along with the mark is critically important. Failure to assign the goodwill or business associated with a mark is considered an assignment “in gross” and may void the assignment. PepsiCo, Inc. v. Grapette Co., 416 F.2d 285, 287 (8th Cir. 1969); Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999).

PRACTICE POINTER 

When preparing trademark assignment documents, always include a recitation that the mark is being assigned along with the goodwill of the business symbolized by the mark or along with the part of the business connected with the use of the mark.

Insisting that a mark be assigned with the intangible concept of “goodwill” may appear to be an empty formalism. The rule is based on the notion that a mark symbolizes the reputation of its owner and distinguishes its associated products or services from those of others. If a mark were freely transferable without its associated business or goodwill, there would be no guarantee of continuity between the products, services, and reputation associated with the mark before and after assignment, and consumer expectations would thus be undermined. Accordingly, the purpose of requiring an assignment of the goodwill or connected business along with the mark itself is to prevent consumers from being misled as to the nature or quality of the designated product or service. Green River Bottling Co. v. Green River Corp., 997 F.2d 359, 362 (7th Cir. 1993); Marshak v. Green, 746 F.2d 927, 929 (2d Cir. 1984). The requirement that a mark be assigned with its goodwill means that to constitute a valid assignment, the assignee must use the mark with a product or service having “substantially the same characteristics” as the assignor’s product. Sugar Busters, supra, 177 F.3d at 266 (no goodwill transferred when assignor had used mark for retail store services for products for diabetics but assignee used mark on diet book), quoting PepsiCo, supra, 416 F.2d at 288. As long as a substantial similarity exists between the products or services of the assignor and assignee,

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—3

§7.4

INTELLECTUAL PROPERTY LAW

courts will likely consider the trademark assignment valid even without any transfer of tangible assets. Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 956 (7th Cir. 1992) (“transfer of a mark need not be accompanied by the transfer of any physical or tangible assets in order to be valid”); In re Roman Cleanser Co., 802 F.2d 207, 208 – 209 (6th Cir. 1986) (“goodwill” does not mean machinery necessary to make products, when assignee received product formulas and customer lists); Defiance Button Machine Co. v. C & C Metal Products Corp., 759 F.2d 1053, 1059 (2d Cir. 1985). Sometimes a trademark owner purchases or obtains by assignment a competing or potentially conflicting mark to eliminate a commercial risk or clear the marketplace of a possible infringement. In these circumstances, the substantial similarity requirement becomes immaterial since the party acquiring the mark intends for the competing or potentially conflicting mark to become abandoned. Any assignment of rights in a federal registration or application must be in writing. 15 U.S.C. §1060(a)(3). There is no requirement, however, that the assignment of common-law trademark rights be in writing. 1 Jerome Gilson, TRADEMARK PROTECTION AND PRACTICE §3.06(3) (2004).

PRACTICE POINTER 

To avoid uncertainty and preserve clear title, reduce all trademark assignments to writing.

2. [7.4] Federal Registrations and Applications Trademark registrations and pending applications can be assigned. Indeed, when a trademark is assigned, any companion applications or registrations for the trademark should also be assigned to the new owner. Failure to assign any such application or registration will not nullify the assignment of the mark but may void the application or registration. Under these circumstances, the owner of record for these filings would no longer be using the mark or have any intention to use it. As noted §7.3 above, federal law requires that any assignment of a trademark application or registration be in writing. 15 U.S.C. §1060(a)(3). Assignments of federal trademark applications and registrations can be recorded with the United States Patent and Trademark Office (USPTO). Recordation provides important benefits, such as alerting third parties to the true owner of the trademark rights and supplying proper contact information for official notices regarding the application or registration. Moreover, recordation within three months of the assignment provides protection against subsequent assignments of the mark by the former owner to bona fide purchasers for value without notice. 15 U.S.C. §1060(a)(4).

PRACTICE POINTER 

7—4

Practitioners should promptly record the assignment of a federal trademark application or registration with the USPTO. The USPTO’s website, www.uspto.gov, enables practitioners to record assignments online.

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.5

Caution must be exercised before purchasing or assigning a pending federal application that was filed on an intent-to-use basis. An intent-to-use application may be properly assigned only if (a) the applicant has already filed an amendment to allege use or a statement of use or (b) the application is being assigned to a successor of an ongoing or existing business of the applicant (or portion thereof) to which the mark pertains. 15 U.S.C. §1060(a)(1). Failure to follow the requirements of this provision will result in the pending application or resulting registration being deemed void and of no value or effect. Clorox Co. v. Chemical Bank, 40 U.S.P.Q.2d (BNA) 1098 (T.T.A.B. 1996). The purpose of this provision is to prevent trafficking in trademark applications (much as we see today with domain names that people register not intending to use but rather to sell to the highest bidder). See 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:13 (4th ed. 2004). Although based on sound policy reasons, this provision is a trap for the honest but unwary. Thus, in assignments involving intent-to-use applications, practitioners will want to ensure that either (a) an amendment to allege use or statement of use has been filed before the assignment or (b) the entirety of the relevant business (or the portion thereof related to the mark in question) is assigned with the application. 3. [7.5] Sample Form of Assignment ASSIGNMENT WHEREAS, [ABC Corp.], a Delaware corporation with offices at ____________, has adopted and used the mark [ABC] in commerce and registered that mark with the United States Patent and Trademark Office, which registration was granted Registration No. __________; and WHEREAS, [ABC Corp.] wishes to assign the mark subject to the above-identified registration, as well as the goodwill of the business connected with the use of and symbolized by the mark [ABC]; and WHEREAS, [XYZ Corp.], a Delaware corporation located at ____________, desires to acquire said mark and the registration therefor; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, [ABC Corp.] does hereby assign to [XYZ Corp.] all right, title, and interest in and to the mark [ABC], and the federal registration therefor, U.S. Reg. No. __________, together with the goodwill of the business symbolized by the mark and all rights to sue and recover for past and present infringements. Signed in ____________, USA, this ____ day of __________, 20__. [ABC CORP.] By: ______________________________ Name: ___________________________ Title: ____________________________

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—5

§7.6

INTELLECTUAL PROPERTY LAW

4. [7.6] Bankruptcy Estate of Trademark Owner Goodwill can survive bankruptcy of the trademark owner and the winding down of the trademark owner’s business. Thus, trademarks can be validly transferred through a bankruptcy sale. See, e.g., Automated Productions, Inc. v. FMB Maschinenbaugesellschaft mbH & Co., 34 U.S.P.Q.2d (BNA) 1505, 1994 WL 513626 (N.D.Ill. 1994). Significantly, the rules regarding assignment of marks apply in bankruptcy and insolvency proceedings; thus, a mark should be transferred or sold only in connection with the business or goodwill connected with the mark. Johanna Farms, Inc. v. Citrus Bowl, Inc., 468 F.Supp. 866, 879 – 880 (E.D.N.Y. 1978). 5. [7.7] Effect of Assignment Once the assignment is made, the “assignee steps into the shoes of the assignor.” Premier Dental Products Co. v. Darby Dental Supply Co., 794 F.2d 850, 853 (3d Cir. 1986). See also Money Store v. Harriscorp Finance, Inc., 689 F.2d 666, 674 – 675 (7th Cir. 1982). In other words, the assignee assumes all rights and interests of the former trademark owner, as well as any weaknesses or defects in the acquired trademark rights. Thus, for example, an assignee receives the priority rights of the previous trademark owner. Carnival Brand Seafood Co. v. Carnival Brands, Inc., 187 F.3d 1307, 1310 (11th Cir. 1999). By the same token, the assignee of a trademark that the assignor had already abandoned receives no better rights than the former owner had at the time of the assignment. Pilates, Inc. v. Current Concepts, Inc., 120 F.Supp.2d 286, 310 – 311 (S.D.N.Y. 2000) (when assignor had gone out of business and abandoned mark, assignor subsequently had no goodwill to assign, and thus later purported assignment of mark was in gross and invalid). When an assignee receives an invalid assignment of a mark, the assignee can establish rights in the mark only as of the date the assignee begins using the mark in commerce. B. [7.8] Security Interest Like tangible property, interests in trademarks (which are intangible property) can be used as security or collateral for a debt or loan. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §34, cmt. e (1995). A security interest is not an assignment, however, and thus “does not affect the debtor’s ownership or priority in the use of the mark.” Id. Instead, a security interest in a trademark is treated as a conditional assignment or agreement for future assignment. L’il Red Barn, Inc. v. Red Barn System, Inc., 322 F.Supp. 98, 106 – 107 (N.D.Ind. 1970), aff’d per curiam, 174 U.S.P.Q. (BNA) 193 (7th Cir. 1972). Thus, no goodwill is or should be transferred at the time the security interest agreement is entered into. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:7 (4th ed. 2004). If the trademark owner-debtor defaults and the creditor enforces the security interest, the goodwill must pass with the mark to avoid an assignment in gross. In re Roman Cleanser Co., 802 F.2d 207, 211 (6th Cir. 1986) (Thomas, J., concurring). Thus, at a minimum, a secured party should require in the security agreement that both the mark and its attendant goodwill constitute the collateral. As discussed in §7.3 above, physical assets need not be transferred with the goodwill to effect a valid assignment of a mark. To avoid abandonment of the mark through an invalid assignment,

7—6

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.10

however, an assignee must ensure that there is substantial similarity between the products or services provided under the mark before and after the transfer. Thus, a creditor who seeks a security interest in a mark may also want to secure other assets of the debtor or otherwise take action that will enable a subsequent user of the mark to provide substantially similar products and services. At least one authority recommends that “[a] creditor who seeks to obtain the full value of a trademark as collateral must therefore obtain an interest not only in the trademark, but also in the associated line of business through a security interest in physical assets or other aspects of the debtor’s business sufficient to permit continuity in the use of the designation.” RESTATEMENT (THIRD) OF UNFAIR COMPETITION §34, cmt. e (1995). See Roman Cleanser, supra, 802 F.2d at 208 – 209 (assignment to creditor valid when creditor received product formulas and customer lists with mark). Security interests in trademarks, whether the trademark is registered or not, may be perfected through state Uniform Commercial Code filings. MCCARTHY, supra. When a federal registration covers a mark subject to a security interest, the security interest may also be filed with the United States Patent and Trademark Office. 37 C.F.R. §3.11(a); USPTO, TRADEMARK MANUAL OF EXAMINING PROCEDURE §503.02 (8th ed. Oct. 2012), available at www.uspto.gov/trademarks/resources/TMEP_archives.jsp (case sensitive). Likewise, when a mark is subject to a state registration, the creditor may also be able to record the security interest with the state registry. C. [7.9] Licensing A trademark license is an agreement whereby a trademark owner authorizes another entity to use the owner’s mark. Unlike an assignment, in which ownership of the mark passes to another entity, a license is an arrangement in which the trademark owner retains ownership interest in the mark. Through a trademark license, a trademark owner can expand use of its mark into new products and services, extend its rights and reputation geographically, and obtain financial benefits such as royalties and licensing fees. 1. [7.10] Benefits As indicated in §7.9 above, a trademark license can be an extremely valuable tool for creating and expanding trademark rights and reaping financial reward by exploiting the goodwill and reputation in a mark. Use of a mark by a licensee inures to the benefit of the trademark owner. 15 U.S.C. §1055. This means that, from a trademark rights perspective, any licensed use is deemed to be use by the trademark owner. Indeed, a trademark owner can rely strictly on licensees to maintain and develop the owner’s trademark rights. For example, a business can file a federal intent-to-use trademark application and then effect use of the mark by licensing the mark to another, without ever using the mark itself. When a licensee uses the mark in connection with products or services not previously sold by the trademark owner, or expands use of the mark to new geographic markets, this use simultaneously extends the trademark owner’s rights, as long as the use is within the scope of the license. See, e.g., Cotton Ginny, Ltd. v. Cotton Gin, Inc., 691 F.Supp. 1347, 1354 (S.D.Fla. 1988)

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—7

§7.11

INTELLECTUAL PROPERTY LAW

(in licensing arrangement, goodwill symbolized by trademark is owned by licensor even though created by licensee’s efforts, and geographic market for licensor’s use is expanded by use of licensee); Denison Mattress Factory v. Spring-Air Co., 308 F.2d 403, 409 (5th Cir. 1962) (“A trademark owner may extend the territory in which he has the right to exclusive use of his trademark, either by expanding his own operations, or he may introduce his trademark and create a demand for his variety of goods in new territory, by licenses subject to his control.”). 2. Features and Requirements of a Valid License a. [7.11] Basic Form and Scope A trademark license can be oral or written. It is advisable, however, to reduce all trademark licenses to writing to eliminate uncertainty over the parties’ respective rights and obligations. A license can be exclusive or nonexclusive as to the marks involved, the products or services licensed, and the geographic areas covered by the license. Whether a license is exclusive or nonexclusive with respect to these variables depends on many factors, such as the parties’ bargaining power, economic opportunities and expectations, and the royalty or licensing fees agreed on. A license also should have an established duration or be terminable upon certain conditions. b. [7.12] License Agreement Terms License agreements take many forms, depending on the relationship of the parties, the marks being licensed, and the economic interests involved. Careful consideration should be given to the drafting of license agreements. Failure to anticipate problems or provide for foreseeable business contingencies can cause serious rifts in the licensor-licensee relationship. When this happens, a licensor may find the reputation and goodwill of its mark in the hands of a disgruntled licensee, or the licensee may face potential loss of investment and business if the license is not renewed or is terminated prematurely. On the other hand, a license agreement that clearly delineates the parties’ respective obligations and provides guidance for the parties’ expectations may help foster a constructive and profitable commercial relationship. Basic license agreements often include the following provisions: 1. identification of the parties; 2. identification of the licensed mark; 3. specification of the licensed products or services; 4. the term, or length of time, of the license; 5. the geographic area for which the license is granted;

7—8

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.13

6. an indication of whether the license is exclusive or nonexclusive; 7. quality control requirements; and 8. royalty or licensing fee payments. License agreements may also cover such topics as the following: 1. requirements as to correct trademark usage; 2. trademark policing and enforcement responsibilities; 3. the licensee’s recognition of the licensor’s trademark rights and agreement not to contest or undermine these rights; 4. accounting and reporting requirements; 5. assignability of the license agreement; 6. any limitations on sublicensing; 7. a “best efforts” clause, under which a licensee agrees to exercise its best efforts to promote and sell the licensed products or services; 8. automatic or conditional termination options; 9. notice-and-cure provisions in the event of breach; 10. minimum sales requirements; 11. indemnification and commercial liability insurance coverage; and 12. a sell-off period after the license expires. Other terms common to license agreements, as with other commercial agreements, include merger clauses, forum selection and choice-of-law provisions for resolving disputes, and conditions for amendment. c. [7.13] Quality Control Among the most critical features of a trademark license is the quality control exercised by the trademark owner-licensor. A licensor must exercise control over the nature and quality of licensed goods or services. The principle behind the quality control requirement is to ensure that the licensed products are of the same quality that the public has come to expect of products provided under the mark so that consumers are not deceived into buying a product different from what they reasonably expect. AmCan Enterprises, Inc. v. Renzi, 32 F.3d 233, 235 (7th Cir. 1994).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—9

§7.14

INTELLECTUAL PROPERTY LAW

If a trademark owner licenses another to use its trademark but does not exercise control over the nature or quality of the licensed products or services, the owner negates the source-identifying function of the trademark. Failure to exercise this control is called “naked” or “uncontrolled” licensing, and it occurs when the licensor allows its licensee to provide goods and services under the license without the licensor’s restricting or reviewing the nature or quality of the licensed goods in any way. Stanfield v. Osborne Industries, Inc., 52 F.3d 867, 871 (10th Cir. 1995); Eva’s Bridal Ltd. v. Halanick Enterprises, Inc., 639 F.3d 788 (7th Cir. 2011). A licensor’s failure to exercise quality control is viewed as working a deception on the public and may result in complete abandonment and forfeiture of the licensor’s trademark rights. First Interstate Bancorp v. Stenquist, 16 U.S.P.Q.2d (BNA) 1704, 1990 WL 300321 (N.D.Cal. 1990). “Quality control” does not mean that the licensed products will or must be of high quality; rather, it ensures only that the nature and quality of the licensed products are consistent with and predictable to the licensor’s standards. 2 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §18:55 (4th ed. 2004). The nature and degree of quality control will vary with the type of product, service, and market involved. (1)

[7.14] Lack of quality control

A licensor that fails to exercise quality control and thus permits uncontrolled licensing may be deemed to have lost its trademark rights through abandonment. TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 885 (7th Cir. 1997). For example, in Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002), the licensor had granted a license for use of its mark on wine. The licensor engaged in random tastings of the licensee’s wine but otherwise relied on the licensee’s reputation for producing excellent wine. There was no evidence that the licensor’s tastings were systematic, the licensor had no knowledge of the licensee’s quality control standards, and the licensor made no other efforts to assess or supervise the quality of the licensee’s wine. The Ninth Circuit found that the licensor had engaged in uncontrolled licensing through its lack of quality control, and the licensor’s mark was held abandoned. Similarly, in First Interstate Bancorp v. Stenquist, 16 U.S.P.Q.2d (BNA) 1704, 1990 WL 300321 (N.D.Cal. 1990), the licensor was a real estate services firm, and the license agreement it entered into did not contain any controls or restrictions on use of the licensed mark other than to require the licensee to warrant that he or she was a real estate broker in good standing. The licensor did not supervise the licensee or the licensee’s employees in the performance of their work, and the licensor was not involved in the sales procedures or operations of the licensee’s business. Under these circumstances, the court found that the licensor had abandoned its service mark rights through uncontrolled licensing. Inclusion of a quality control provision in a license agreement may not be enough by itself; the licensor should expect to actually exercise quality review. On the other hand, the lack of an express contractual provision governing quality control procedures is not fatal if quality control is actually undertaken. Barcamerica, supra, 289 F.3d at 596. When circumstances reveal that the licensor and the licensee have a close working relationship, adequate quality control may exist even in the absence of a formal agreement on

7 — 10

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.16

quality control. Taco Cabana International, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 – 1122 (5th Cir. 1991) (licensor and licensee had close working relationship for eight years); Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1017 – 1018 (9th Cir. 1985) (adequate quality control found based on, inter alia, licensor’s involvement in manufacture of licensed products and ten-year working relationship with licensee). While a licensor must exercise quality control or risk loss of trademark rights, there have been special circumstances in which courts have found that a licensor was justified in relying on a licensee’s quality control efforts. See, e.g., Embedded Moments, Inc. v. International Silver Co., 648 F.Supp. 187, 194 (E.D.N.Y. 1986) (history of “trouble-free manufacture” and prior relationship between licensor and licensee), quoting Syntex Laboratories, Inc. v. Norwich Pharmacal Co., 315 F.Supp. 45, 56 (S.D.N.Y. 1970). These circumstances are atypical, however, and a licensor’s interests will generally be served and protected better by direct attention to quality control. (2)

[7.15] Sample measures

Because the penalty for lack of quality control is forfeiture of trademark rights, actual quality control and express quality control provisions should be an integral part of any licensing arrangement. Failure to include and follow these provisions in a written license is not per se fatal but creates risk and uncertainty. Importantly, the quality control requirement “does not give a licensor control over the day-today operations of the licensee beyond that necessary to ensure uniform quality of the product or service in question.” Oberlin v. Marlin American Corp., 596 F.2d 1322, 1327 (7th Cir. 1979). Adequate quality control measures can include the following: a. regular submission of samples for review and the right to insist on correction of defects; b. review of advertising and promotional material; c. the right to inspect a licensee’s facilities; d. guidelines for the manufacture of licensed products; e. maintenance of product testing records; f.

reporting of consumer or government complaints; and

g. termination of the license for substandard products or services. d. [7.16] Disclosure or Notice Licensed products and services do not need to identify the licensor but may properly bear only the licensed mark and the licensee’s name. 2 J. Thomas McCarthy, MCCARTHY ON

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 11

§7.17

INTELLECTUAL PROPERTY LAW

TRADEMARKS AND UNFAIR COMPETITION §18:45 (4th ed. 2004); Financial Matters, Inc. v. PepsiCo, Inc., 806 F.Supp. 480, 482 n.2 (S.D.N.Y. 1992) (“It is well-established that the public need not know the name of the trademark owner for [there] to be goodwill in a mark, nor does the name of the owner have to appear on the product itself.”). Under some circumstances, a licensor may want the public to know that certain products or services are provided under license. One benefit in providing this notice would be to capitalize on a trademark owner’s renown or reputation to increase the salability of the product. Another benefit would be to educate the public so that imitations, knock-offs, and infringements can be avoided. Common forms of notice include statements on products or promotional material, such as “Licensed product of ABC Corporation” or “XYZ operates as an authorized licensee of ABC Corporation.” 3. [7.17] Franchise While a trademark license may be an element of a broader franchise agreement, a franchise requires more than just a simple trademark license. Generally speaking, a franchise exists when the trademark owner exercises significant control over the franchisee’s business, method of operation, or marketing plan or system. 2 Jerome Gilson, TRADEMARK PROTECTION AND PRACTICE §6.01[7] (2004). Franchise arrangements are governed by rules and regulations of the Federal Trade Commission, as well as applicable state franchise laws. In Illinois, for example, franchise arrangements are subject to the Franchise Disclosure Act of 1987, 815 ILCS 705/1, et seq. 4. [7.18] Licensor’s Tort Liability for Defective Licensed Products A licensor’s potential liability for defective licensed products varies by state. In many jurisdictions, a trademark licensor is not automatically liable in tort for defects in licensed products. Patterson v. Central Mills, Inc., 112 F.Supp.2d 681, 692 – 693 (N.D. Ohio 2000); Yoder v. Honeywell Inc., 104 F.3d 1215 (10th Cir. 1997) (and cases cited therein); Oberlin v. Marlin American Corp., 596 F.2d 1322 (7th Cir. 1979) (mere use of trademark by licensee will not usually subject licensor to responsibility for acts of its licensee under principal-agent theory). For example, in In re Temporomandibular Joint (TMJ) Implants Product Liability Litigation, 113 F.3d 1484 (8th Cir. 1997), the trademark license agreement provided that the licensor could examine the quality of the licensee’s licensed products. In subsequent litigation over alleged defects in the licensed products, the Court of Appeals for the Eighth Circuit found that the license agreement’s quality control provision did not create tort liability for the licensor: “A standard trademark agreement, in and of itself, does not establish an affirmative duty to inspect that could result in tort liability to third parties.” 113 F.3d at 1494. An exception to this rule exists when the trademark owner is significantly involved in the manufacturing, marketing, or distribution of the licensed product. Under these circumstances, a trademark licensor or franchisor may be held liable for personal injuries and property damage resulting from defective products and services supplied by licensees and franchisees. See, e.g., Kosters v. Seven-Up Co., 595 F.2d 347, 353 (6th Cir. 1979) (“Liability is based on the franchisor’s control and the public’s assumption, induced by the franchisor’s conduct, that it does

7 — 12

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.19

in fact control and vouch for the product.”); Torres v. Goodyear Tire & Rubber Co., 163 Ariz. 88, 786 P.2d 939 (1990); RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY §14, cmt. d (1998). More recent decisions have confirmed this approach. See, e.g., Saldibar v A.O. Smith, No. CV095024498S, 2011 WL 7095179 (Conn.Super.Ct. Dec. 30, 2011) (unpublished, available on Westlaw); Lou v. Otis Elevator Co., 77 Mass.App.Ct. 571, 581, 933 N.E.2d 140, 458 Mass. 1108 (2010), rev. denied, 458 Mass. 1108. It appears that Illinois currently follows the majority view on licensor tort liability, though for a brief time this seemed in doubt. In 1979, the Illinois Supreme Court found that a trademark licensor could be liable for use of its mark on a defective licensed product, even when the defendant was not involved in the distribution of the product. Connelly v. Uniroyal, Inc., 75 Ill.2d 393, 389 N.E.2d 155, 27 Ill.Dec. 343 (1979). Three years later, however, Connelly was circumscribed by the Illinois Supreme Court’s decision in Hebel v. Sherman Equipment, 92 Ill.2d 368, 442 N.E.2d 199, 205, 65 Ill.Dec. 888 (1982), in which the court appears to have adopted the majority view: While [the Connelly] opinion did state that a defendant’s participation in the chain of distribution was not an essential element for strict liability to apply . . . the reference was to the fact that a defendant such as Uniroyal who is not in the direct chain of sale leading from manufacturer to consumer may nonetheless be so integrally involved in the overall producing and marketing enterprise that strict liability will follow. [Citation omitted.] With regard to a licensor’s liability for negligence in cases of defective licensed products, the Indiana Supreme Court’s decision in Kennedy v. Guess, Inc., 806 N.E.2d 776 (Ind. 2004), is noteworthy. In Kennedy, a case of first impression in Indiana, Guess, Inc., had licensed another entity to produce and distribute umbrellas bearing the “Guess” mark. One of these umbrellas allegedly caused injury to a consumer, who sued the umbrella distributor and Guess. Guess moved for summary judgment on the ground that it did not have liability as a trademark licensor. The Indiana Supreme Court rejected this argument and held that under Indiana common law, those who license their trademarks for use on products that cause injury may have negligence liability proportionate to their role in the product’s design, manufacturing, and distribution.

PRACTICE POINTER 

Trademark owners who are concerned about their liability for the defective products of their licensees should consider incorporating provisions in the license agreement requiring indemnification by the licensee or requiring the licensee to purchase liability insurance for the benefit of the licensor.

III. [7.19] LOSS OF RIGHTS Trademark rights are acquired through use of a mark as an indicator of source. See Chapter 6 of this handbook. As a corollary, trademark rights may be lost when either (a) the mark is no

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 13

§7.20

INTELLECTUAL PROPERTY LAW

longer being used or (b) the mark is being used but no longer serves as a source indicator because the mark has become a generic term or because the mark was the subject of uncontrolled licensing. A. [7.20] Cessation of Use As noted in §6.17 of this handbook, the existence of trademark rights depends on bona fide use of the mark in commerce. Consequently, trademark rights may be lost when the owner discontinues use of the mark. Loss of trademark rights through nonuse is called “abandonment.” The purpose of the doctrine of abandonment is to prevent the hoarding of marks and to permit reuse of terms that have fallen out of the public consciousness and thus are no longer serving as indicia of source. Under the Trademark Act of 1946, 15 U.S.C. §1051, et seq., popularly known as the Lanham Act, a mark is deemed abandoned when “its use has been discontinued with intent not to resume such use.” 15 U.S.C. §1127. Nonuse of a mark for three consecutive years constitutes prima facie evidence of abandonment. Id. “Use” of a mark means bona fide use in the ordinary course of trade and not use merely to reserve rights in the mark. Id. Trademarks cannot be reserved or “warehoused,” and thus to avoid abandoning its rights, a trademark owner must have bona fide use or a genuine intent to resume use in the reasonably foreseeable future. Silverman v. CBS, Inc., 870 F.2d 40, 46 (2d Cir. 1989); AmBrit, Inc. v. Kraft, Inc., 812 F.2d 1531, 1550 (11th Cir. 1986); Exxon Corp. v. Humble Exploration Co., 695 F.2d 96, 101 (5th Cir. 1983) (“The [Lanham] Act does not allow the preservation of a mark solely to prevent its use by others.”). Significantly, a temporary cessation of business or of use of a mark does not automatically and immediately terminate rights in the mark. Defiance Button Machine Co. v. C & C Metal Products Corp., 759 F.2d 1053, 1060 (2d Cir. 1985) (“goodwill does not ordinarily disappear or completely lose its value completely overnight”); Seidelmann Yachts, Inc. v. Pace Yacht Corp., 14 U.S.P.Q.2d (BNA) 1497, 1989 WL 214497 at **6 – 7 (D.Md. 1989) (no abandonment despite more than five years of nonuse), aff’d, 898 F.2d 147 (4th Cir. 1990). Rather, the hiatus in use must be accompanied by an intent not to resume use. When a case of prima facie abandonment is shown, however, a trademark owner cannot overcome the presumption of abandonment simply by asserting a subjective intent not to abandon. Rivard v. Linville, 133 F.3d 1446, 1449 (Fed.Cir. 1998). Instead, the trademark owner must “put forth evidence with respect to what activities it engaged in during the nonuse period or what outside events occurred from which an intent to resume use during the nonuse period may reasonably be inferred.” Imperial Tobacco Ltd. v. Philip Morris, Inc., 899 F.2d 1575, 1581 (Fed.Cir. 1990). 15 U.S.C. §1127 provides that intent not to resume use “may be inferred from circumstances.” Evidence of intent to resume use can take a variety of forms. See, e.g., Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 956 (7th Cir. 1992) (continuing efforts to license mark were sufficient evidence of intent to resume use, rebutting prima facie case of abandonment); Roulo v. Russ Berrie & Co., 886 F.2d 931, 939 (7th Cir. 1989) (trademark owner’s presence at trade show and testimony that she would have marketed her product but for defendant’s launch of its infringing product line supported jury verdict of no abandonment).

7 — 14

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.23

When the period of nonuse is modest, courts often find no abandonment if the nonuse was involuntary or good-faith efforts were made to resume use. See, e.g., Seidelmann, supra (trademark owner had declared bankruptcy and made continuous efforts to sell mark, and ultimate purchaser began using mark within reasonable period of time after purchase); Miller Brewing Co. v. Oland’s Breweries (1971) Ltd., 548 F.2d 349 (C.C.P.A. 1976) (financial difficulties and labor strike). 1. [7.21] Effect of Abandonment Through Nonuse A trademark owner that has abandoned its mark through nonuse has no rights to enforce against a third party. Also, once a mark is abandoned, any rights a trademark owner may subsequently possess in the mark will be newly acquired, and the priority will run only from the date when use was resumed with intent to continue this use. L. & J.G. Stickley, Inc. v. Canal Dover Furniture Co., 79 F.3d 258, 263 – 264 (2d Cir. 1996); Societe de Developments et D’Innovations des Marches Agricoles et Alimentaires-Sodima-Union de Cooperatives Agricoles v. International Yogurt Co., 662 F.Supp. 839, 850 – 851 (D.Or. 1987). Thus, if a trademark owner has abandoned its mark through nonuse, a later resumption of use cannot retroactively cure past abandonment. AmBrit, Inc. v. Kraft, Inc., 812 F.2d 1531, 1551 (11th Cir. 1986). These principles apply even when a party owns an existing federal registration governing the abandoned mark. In such circumstances, the party still has no trademark rights to enforce, and the registration is subject to cancellation on the ground of abandonment. 2. [7.22] Enduring (or Residual) Goodwill Products such as fire trucks, heavy farm equipment, and automobiles may be used, serviced, and maintained for many years. Thus, a mark affixed to one of these durable products may continue to have source-identifying significance to consumers long after the trademark owner has ceased selling products under the mark. In these instances, some courts have recognized the “residual goodwill” that remains with a mark and have declined to find abandonment despite prolonged periods of nonuse. Ferrari S.p.A. Esercizio Fabbriche Automobili e Corse v. McBurnie, 11 U.S.P.Q.2d (BNA) 1843, 1989 U.S.Dist. LEXIS 13442 at **28 – 31 (S.D.Cal. 1989). Cf. Emergency One, Inc. v. American FireEagle, Ltd., 228 F.3d 531, 537 (4th Cir. 2000) (“Because fire trucks have very long lives (often twenty to thirty years), the mark stays visible, and the good will value of the mark persists long after production of trucks with that mark has ceased”). Notably, however, not every court has embraced the concept of residual goodwill. Exxon Corp. v. Humble Exploration Co., 695 F.2d 96, 101 (5th Cir. 1983). 3. [7.23] Use on Slightly Different Product Generally, a change in the style or formula of a product sold under the same mark does not constitute an abandonment of rights in the mark. E.I. du Pont de Nemours & Co. v. G.C. Murphy Co., 199 U.S.P.Q. (BNA) 807 (T.T.A.B. 1978) (change in trademarked product from premiumpriced paint to budget-type paint with slightly different formula did not constitute abandonment). Similarly, discontinuance of use of a mark on one product will not constitute abandonment if the trademark owner uses the mark on a related product and the product would be thought by the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 15

§7.24

INTELLECTUAL PROPERTY LAW

public to come from the same source. Lucien Piccard Watch Corp. v. Since 1868 Crescent Corp., 314 F.Supp. 329, 331 – 332 (S.D.N.Y. 1970) (no abandonment of mark when products with which mark used changed from key cases, wallets, billfolds, and eyeglass cases to money clips, jewelry boxes, memo pads, and notebooks). 4. [7.24] Alterations or Amendments to Mark When a mark is altered, amended, or modernized, no abandonment will occur if the new version of the mark creates the same commercial impression as the old version. Sands, Taylor & Wood Co. v. Quaker Oats Co., 978 F.2d 947, 955 (7th Cir. 1992). Maintaining a continuity of rights when a mark is amended or modernized is sometimes called “tacking.” See Iowa Health System v. Trinity Health Corp., 177 F.Supp.2d 897, 920 – 923 (N.D. Iowa 2001). Small changes in the presentation or appearance of the mark are generally permissible for tacking purposes. See Navistar International Transportation Corp. v. Freightliner Corp., 52 U.S.P.Q.2d (BNA) 1074, 1079 n.9, 1998 WL 911776 (N.D.Ill. 1998). However, if changes to a trademark materially alter its character, a court may find that use of the new trademark cannot be tacked onto use of the former trademark for continuity of use purposes. See, e.g., Specht v. Google, Inc., 758 F.Supp.2d 570, 583 – 585 (N.D.Ill. 2010) (use of “ANDROID DUNGEON” cannot be tacked onto former use of “ANDROID DATA” to establish continuous use of “ANDROID” trademark). B. [7.25] Genericness A mark that is simply the generic name for the product or service with which it is used cannot be protected. Trademark rights will be lost when a mark that was previously source-identifying becomes the generic term for the product or service with which it is used. Singer Manufacturing Co. v. June Manufacturing Co., 163 U.S. 169, 41 L.Ed. 118, 16 S.Ct. 1002 (1896). This commonlaw principle is reflected in the Lanham Act, under which a mark is deemed abandoned when “any course of conduct of the owner, including acts of omission as well as commission, causes the mark to become the generic name for the goods or services on or in connection with which it is used or otherwise to lose its significance as a mark.” 15 U.S.C. §1127. Well-known generic terms that started out as trademarks include “cellophane,” “escalator,” and “thermos.” These terms now denote the products themselves, rather than the sources of the products. Examples of other brand names lost when they passed into general language use are yellow pages, Murphy bed, and shredded wheat. 1. [7.26] Test To determine whether a mark has become generic, the critical inquiry is the primary significance of the mark to the relevant consumers. 15 U.S.C. §1064(3). Genericness is established when the primary significance of the mark to relevant consumers of the product or service is to identify any products or services of this type and not those specifically associated with the trademark owner. Glover v. Ampak, Inc., 74 F.3d 57, 59 (4th Cir. 1996) (finding “White Tail” not generic for pocket knives: “if [defendant] had carried his burden, we would find

7 — 16

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.28

evidence in the record which establishes that when purchasers walk into retail stores and ask for white tails, they regularly mean any brand of pocket or hunting knife, and not specifically [plaintiff’s] products”). Thus, “a party who seeks to establish that a mark has become generic must (1) identify the class of product or service to which use of the mark is relevant; (2) identify the relevant purchasing public of the class of product or service; and (3) prove that the primary significance of the mark to the relevant public is to identify the class of product or service to which the mark relates.” Glover, supra, 74 F.3d at 59. See also Union National Bank of Texas, Laredo, Texas v. Union National Bank of Texas, Austin, Texas, 909 F.2d 839, 846 – 847 (5th Cir. 1990) (purported mark must be examined in light of product or service to which it is applied and audience to which relevant product or service is directed). 2. [7.27] Burden and Methods of Proof When a trademark is the subject of a federal registration, it is presumed not to be generic. Coca-Cola Co. v. Overland, Inc., 692 F.2d 1250, 1254 (9th Cir. 1982). Thus, a challenger attempting to prove that a registered mark is generic bears the burden of proof on the issue. Pebble Beach Co. v. Tour 18 I, Ltd., 942 F.Supp. 1513, 1537 (S.D.Tex. 1996), aff’d, 155 F.3d 526 (5th Cir. 1998). When a mark is unregistered, the burden is on the trademark owner to prove that its mark is not generic. Mil-Mar Shoe Co. v. Shonac Corp., 75 F.3d 1153, 1156 (7th Cir. 1996). Evidence courts have considered in determining whether a mark is generic includes dictionary definitions, the plaintiff’s usage of the mark, use by the media, exclusivity of use, testimony of purchasers or persons in the trade, and consumer surveys. Loglan Institute, Inc. v. Logical Language Group, Inc., 962 F.2d 1038, 1041 (Fed.Cir. 1992) (genericness found when, inter alia, trademark owner used its own mark in generic manner); Mil-Mar Shoe, supra, 75 F.3d at 1159; Ty, Inc. v. Jones Group, Inc., 98 F.Supp.2d 988, 994 (N.D.Ill. 2000), aff’d, 237 F.3d 891 (7th Cir. 2001); Frito-Lay, Inc. v. Bachman Co., 704 F.Supp. 432, 440 (S.D.N.Y. 1989). Testimony of language experts may also be permitted concerning the origin and use of a word by the public. WSM, Inc. v. Hilton, 724 F.2d 1320, 1329 (8th Cir. 1984) (“opry” generic for country music performances). 3. [7.28] Establishing Rights in Lost Marks Language use changes over time. Thus, it is possible to claim protectable rights in a mark that had once been lost as a generic term. In Singer Manufacturing Co. v. June Manufacturing Co., 163 U.S. 169, 41 L.Ed. 118, 16 S.Ct. 1002 (1896), the Supreme Court found that the mark “Singer” had become generic for sewing machines. Thus, a customer who ordered “a Singer” ordered a sewing machine of any make. By 1952, however, the public usage had changed, and “Singer” was held to have become once again the trademark of a single company. Singer Manufacturing Co. v. Redlich, 109 F.Supp. 623 (S.D.Cal. 1952). Significantly, this analysis involved a situation in which the trademark owner’s mark became generic and was later sought to be reclaimed as a trademark. At least one court has found that this

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 17

§7.29

INTELLECTUAL PROPERTY LAW

analysis does not apply when a manufacturer attempts to claim as a trademark a generic term that was never originally a trademark. Harley-Davidson, Inc. v. Grottanelli, 164 F.3d 806, 811 – 812 (2d Cir. 1999) (finding “hog” generic for motorcycles). The Harley-Davidson court noted that the Singer-type analysis is applicable only when a term was originally a brand name and that it does not stand for the proposition that a commonly used name for a product can be appropriated by one seller. But see Opryland USA Inc. v. Great American Music Show, Inc., 970 F.2d 847 (Fed.Cir. 1992), in which the court observed that while the Eighth Circuit had ruled “opry” a generic term for country music shows in 1984 (WSM, Inc. v. Hilton, 724 F.2d 1320 (8th Cir. 1984)), Opryland was not estopped from showing a possible change in circumstances concerning the public perception of “opry.” Accord Miller’s Ale House, Inc. v. Boynton Carolina Ale House, LLC, 745 F.Supp.2d 1359, 1370 – 1371 (S.D.Fla. 2010) (noting that prior finding of genericness can be challenged if there has been change in circumstances). 4. [7.29] Tips To Avoid “Genericide” Trademark owners should take affirmative steps to avoid a mark’s descent into genericness. Among the techniques that can be employed are the following: a. use of the TM symbol (when a federal registration is not needed) or ® symbol (if the trademark owner has a federal registration); b. use of the term “brand” following the mark (e.g., “Scotch brand tape”); c. notice of trademark ownership in footnotes (e.g., “ABC is a trademark of XYZ Corporation.”); d. use of advertising slogans that identify the mark as being associated with a single source (e.g., “If it doesn’t say Xerox, it’s not a Xerox Corporation copier.”); e. immediate objections to misuse in the media, in dictionaries or encyclopedias, or by competitors or others in the industry; f.

educational advertisements explaining the popularity of the name but emphasizing its status as a trademark;

g. use of the mark on a variety of products (e.g., “Frigidaire” on a number of appliances, not just refrigerators); h. use of the mark with the appropriate generic term (e.g., “Kleenex facial tissues”) (note that it is particularly important that the owner of the rights in a patented product have an alternative “generic” name available that the public can use when the patent expires); i.

differentiating the mark in text by use of bold, capitals, underlining, italics, color, or different font and size; and

j.

avoiding use of the mark in possessive or plural forms or in a verb or noun form.

7 — 18

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.30

Not only may use of these techniques prevent a mark from becoming a generic term, but it also may help build a useful evidentiary record against any claim that the mark is generic. See, e.g., E.I. DuPont de Nemours & Co. v. Yoshida International, Inc., 393 F.Supp. 502 (E.D.N.Y. 1975) (finding “TEFLON” not generic for nonstick finishes and citing trademark owner’s advertising and trademark protection program); Ty, Inc. v. Jones Group, Inc., 98 F.Supp.2d 988 (N.D.Ill. 2000) (finding “BEANIE” not generic for plush toys and noting that trademark owner had rigorous trademark enforcement program and did not use its mark generically), aff’d, 237 F.3d 891 (7th Cir. 2001). C. [7.30] Uncontrolled (or Naked) Licensing A party may also lose its trademark rights through uncontrolled licensing. Uncontrolled licensing is deemed an abandonment of rights because the trademark owner’s failure to exercise quality control over its licensed products or services negates the sourceidentifying function of the mark. For a fuller discussion of uncontrolled licensing, see §§7.13 and 7.14 above.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 19

8

Enforcement, Remedies, and Defenses in Trademark and Unfair Competition Law

BRADLEY L. COHN Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP Chicago

®

©COPYRIGHT 2013 BY IICLE .

8—1

INTELLECTUAL PROPERTY LAW

I. [8.1] Scope of Chapter II. [8.2] Trademark Protection and Enforcement A. [8.3] Value of Protection B. Infringement 1. [8.4] Terminology 2. [8.5] Governing Law 3. [8.6] Test a. [8.7] Strength of Plaintiff’s Mark b. [8.8] Similarity of Marks (1) [8.9] Appearance (2) [8.10] Sound (3) [8.11] Connotation c. [8.12] Similarity of Goods or Services d. [8.13] Channels of Trade e. [8.14] Degree of Purchaser Care f. [8.15] Intent g. [8.16] Actual Confusion 4. [8.17] Reverse Confusion 5. [8.18] Initial Interest Confusion 6. Third-Party Liability for Infringement a. [8.19] Contributory Infringement b. [8.20] Personal Driving Force C. Counterfeiting 1. [8.21] In General 2. [8.22] Enforcement a. [8.23] Seizure Orders b. [8.24] Special Monetary Relief D. False Designation of Origin or Description of Fact 1. [8.25] Misrepresentations and Unfair Competition 2. Direct and Reverse Passing Off a. [8.26] Direct Passing Off b. [8.27] Reverse Passing Off E. [8.28] False Advertising F. [8.29] Dilution 1. [8.30] Types of Dilution 2. [8.31] Governing Law 3. Test a. [8.32] State Law b. [8.33] Federal Law

8—2

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

G.

H. I.

J.

K.

4. [8.34] First Amendment and Non-Trademark Uses [8.35] Cybersquatting 1. [8.36] Anticybersquatting Consumer Protection Act a. [8.37] Test b. [8.38] In Rem Actions c. [8.39] Relief 2. [8.40] Dispute Resolution Policies [8.41] Proceedings Before the United States Patent and Trademark Office [8.42] Surveys and Consumer Reaction Tests 1. [8.43] Elements for Proper Survey 2. [8.44] Precedents [8.45] Cease-and-Desist Letters 1. [8.46] Content 2. [8.47] Precautions a. [8.48] Declaratory Judgment b. [8.49] Delay [8.50] Insurance Coverage

III. [8.51] Remedies A. Equitable Relief 1. [8.52] Injunctions a. [8.53] Geographic Issues b. [8.54] Disclaimer c. [8.55] Temporary Restraining Orders and Preliminary Injunctions 2. [8.56] Recall, Seizure, Barred Importation, and Destruction of Infringing Articles B. [8.57] Monetary Relief 1. [8.58] Accounting of Profits 2. [8.59] Damages a. [8.60] Treble Damages b. [8.61] Punitive Damages 3. [8.62] Attorneys’ Fees IV. Defenses A. [8.63] Fair Use 1. [8.64] Descriptive, or Classic, Fair Use 2. [8.65] Nominative Fair Use 3. [8.66] Comparative Advertising 4. [8.67] Repackaged, Repaired, Altered, or Lawfully Copied Products

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8—3

INTELLECTUAL PROPERTY LAW

B. [8.68] Estoppel 1. [8.69] Laches a. [8.70] Knowledge b. [8.71] Delay c. [8.72] Detrimental Reliance or Prejudice d. [8.73] Effect on Relief e. [8.74] Preliminary Injunction f. [8.75] Inevitable Confusion 2. [8.76] Acquiescence 3. [8.77] Progressive Encroachment C. [8.78] Concurrent Use D. Importation of Goods Originally Intended for Sale Outside the United States (Gray Market Goods) 1. [8.79] In General 2. [8.80] Issues 3. [8.81] Avenues for Relief a. [8.82] Civil Action b. [8.83] U.S. Customs and Border Protection c. [8.84] International Trade Commission V. Appendix — Sample Forms A. [8.85] Cease-and-Desist Letter B. [8.86] Complaint for Trademark Infringement, False Designation of Origin, Unfair Competition, and Deceptive Trade Practices C. [8.87] Notice of Opposition

8—4

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.3

I. [8.1] SCOPE OF CHAPTER The goals of modern trademark law are (a) to permit a trademark owner to conserve, maintain, and extend the reputation and goodwill of its business as symbolized by the trademark and (b) to protect the public from the likelihood of confusion, mistake, or deception as to the source, nature, or quality of products and services. Facets of these goals are treated in Chapters 6 and 7 of this handbook, which examine how a trademark owner can develop, exploit, and preserve its trademark rights. This chapter focuses on trademark enforcement, which involves both the trademark owner’s interest in protecting its reputation and goodwill and the public’s right to be free of confusion or deception in the marketplace. The chapter explores legal options and principles a trademark owner can employ to protect its rights and the public interest and also discusses common defenses to legal actions brought under the trademark laws.

II. [8.2] TRADEMARK PROTECTION AND ENFORCEMENT Trademark law protects against the likelihood of confusion, mistake, or deception among consumers as to the source, nature, or quality of a merchant’s products or services. Deceptively simple, this is the essential statement of what trademark protection is all about under federal and state statutes and the common law. Thus, if a party’s branding or advertising creates a likelihood that consumers will be confused or deceived about the source, nature, or quality of its products or services, an aggrieved trademark owner or competitor may have a claim for relief. A common avenue of enforcement is the claim of trademark infringement. Infringement occurs when one merchant’s trademark is confusingly similar to another’s. Other claims that may arise when there is a likelihood of confusion include counterfeiting, false designation of origin, unfair competition, deceptive trade practices, and false advertising. Notably, there is a cause of action that protects a trademark owner’s interests even without any showing of likely confusion. This cause of action is called “dilution.” Dilution law protects a trademark against tarnishment or loss of distinctiveness. The elements and issues of proof for these claims are discussed in §§8.4 – 8.34 below. A. [8.3] Value of Protection Vigilance in asserting trademark rights is an extremely important part of brand development and business preservation. This vigilance allows a business to 1. build a distinctive trade identity for marketing and brand awareness purposes; 2. protect against injury to goodwill or reputation; 3. prevent financial loss caused by a competitor’s false or deceptive advertising or sale of products under a confusingly similar mark;

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8—5

§8.4

INTELLECTUAL PROPERTY LAW

4. preserve trademark rights, as lack of enforcement may lead to an erosion of rights (see §8.7 below); and 5. deter potential future infringers. B. Infringement 1. [8.4] Terminology Trademark infringement arises when one merchant’s mark is sufficiently similar to that of another so as to be likely to cause confusion, mistake, or deception among relevant consumers as to the source or sponsorship of the merchant’s goods. When the mark at issue is used in connection with services as opposed to goods, practitioners will often use the expression “service mark infringement.” Likewise, when the confusing similarity involves trade dress or product configuration, practitioners will commonly refer to this as “trade dress infringement.” 2. [8.5] Governing Law Infringement claims can be brought under federal, state, or common law. Usually, practitioners plead claims under all three. Infringement claims under federal law are brought under the Trademark Act of 1946, 15 U.S.C. §1051, et seq., popularly known as the Lanham Act. A claim of infringement of a federally registered mark can be brought under 15 U.S.C. §1114 and a claim of infringement of an unregistered mark under 15 U.S.C. §1125(a). Trademark infringement claims may also be asserted under state trademark, unfair competition, or deceptive trade practice statutes. See, e.g., the Trademark Registration and Protection Act, 765 ILCS 1036/1, et seq., the Counterfeit Trademark Act, 765 ILCS 1040/0.01, et seq., and the Uniform Deceptive Trade Practices Act, 815 ILCS 510/1, et seq. State and commonlaw principles regarding trademark infringement generally track federal jurisprudence. See, e.g., TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 881 (7th Cir. 1997). The vast majority of modern trademark infringement actions are brought in federal court, and thus federal jurisprudence has more precedents and is more developed than state law jurisprudence. 3. [8.6] Test To prove trademark infringement, a plaintiff must demonstrate (a) ownership of prior, protectable trademark rights and (b) a likelihood of confusion between the parties’ uses of their respective marks. International Kennel Club of Chicago, Inc. v. Mighty Star, Inc., 846 F.2d 1079, 1084 (7th Cir. 1988). See Chapter 6 of this handbook for a discussion on determining and proving ownership of trademarks rights. The question of likelihood of confusion inquires as to the state of mind of nameless consumers faced with purchasing decisions. Rarely is resolution of this question black or white. A determination must be made as to whether an appreciable amount of confusion as to source will result from the use of an accused mark.

8—6

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.7

Courts weigh various factors to determine whether confusion is likely. International Kennel, supra, 846 F.2d at 1087. No one factor is dispositive, and the weight accorded to each factor varies by the circumstances of the case. Id. The following are most common factors analyzed by the courts: a. the strength of the plaintiff’s trademark; b. the similarity of the parties’ marks; c. the similarity of the parties’ respective goods or services; d. the parties’ respective marketing channels; e. the degree of care exercised by consumers when purchasing the parties’ products or services; f.

the defendant’s intent in adopting its mark; and

g. evidence of actual confusion, if any. Each federal circuit has established its own test, and some tests include additional factors. See, e.g., Polaroid Corp. v. Polarad Electronics Corp., 287 F.2d 492, 495 (2d Cir. 1961); Frisch’s Restaurants, Inc. v. Elby’s Big Boy of Steubenville, Inc., 670 F.2d 642, 648 (6th Cir. 1982); AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 348 – 349 (9th Cir. 1979). a. [8.7] Strength of Plaintiff’s Mark When courts and practitioners speak of a mark as strong or weak, they are describing the trademark’s effectiveness in identifying the source of the trademark owner’s products or services. A mark that is strong is better able to distinguish and identify a particular merchant’s products or services than a mark that is weak. The relative strength of a mark depends on (1) the degree of distinctiveness of the mark and its elements and (2) the extent to which the mark is known to relevant consumers by virtue of sales, advertising, and promotion. With respect to the degree of distinctiveness, marks that are coined, fanciful, or arbitrary are considered inherently strong, while marks that are comprised of merely descriptive terms tend to be weak. Virgin Enterprises Ltd. v. Nawab, 335 F.3d 141, 147 (2d Cir. 2003). See §6.5 of this handbook for an explanation of the spectrum of distinctiveness for marks. Numerous third-party uses of marks identical or similar to the plaintiff’s may indicate that the plaintiff’s mark or its elements are not distinctive and thus weaken the plaintiff’s mark. Bliss Salon Day Spa v. Bliss World LLC, 268 F.3d 494, 496 (7th Cir. 2001) (extensive use of “Bliss” marks for similar services made it unlikely consumers would associate defendant’s mark with that of plaintiff); Halo Management, LLC v. Interland, Inc., 308 F.Supp.2d 1019, 1034 (N.D.Cal. 2003) (noting that when there is crowded field of similar marks for similar products, “the ability of any member of this field to prevent use by others is relatively weak”). Thus, active enforcement of trademark rights may be important to prevent the erosion of those rights.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8—7

§8.8

INTELLECTUAL PROPERTY LAW

As for the second element, the extent to which the mark is known, marks that are well-known or famous to the relevant consumers are considered stronger than relatively unknown marks. Relevant facts in this determination include the length of time that the mark has been used and the amount of sales, advertising, and promotion connected with the mark. Century 21 Real Estate Corp. v. Sandlin, 846 F.2d 1175 (9th Cir. 1988). Strong marks are generally given a broader scope of protection than weaker marks. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 462 (7th Cir. 2000) (finding “PROZAC,” as fanciful mark, entitled to “the highest protection”); Frisch’s Restaurant, Inc. v. Shoney’s Inc., 759 F.2d 1261, 1264 (6th Cir. 1985) (“The more distinct a mark, the more likely is the confusion resulting from its infringement, and, therefore, the more protection it is due.”); Miles Laboratories, Inc. v. Naturally Vitamin Supplements, Inc., 1 U.S.P.Q.2d (BNA) 1445, 1986 TTAB LEXIS 173 at *8 (T.T.A.B. 1986) (“ONE A DAY” mark for vitamins and nutritional supplements “extremely well known” due to extensive advertising and sales for 45 years and, therefore, entitled to broad protection). Thus, when a plaintiff’s mark is strong, infringement may be found even when the parties’ respective marks and products are not identical. See, e.g., Caesars World, Inc. v. Caesar’s Palace, 490 F.Supp. 818, 825 (D.N.J. 1980) (confusion likely between use of “Caesars” for casino services and hairdressing services). By comparison, weak marks are generally afforded a narrow scope of protection; thus, infringement may be found only when the parties’ marks and products are very similar. See, e.g., First Savings Bank, F.S.B. v. First Bank System, Inc., 101 F.3d 645, 655 (10th Cir. 1996) (“When the primary term is weakly protected to begin with, minor alterations may effectively negate any confusing similarity between the two marks.”); General Mills, Inc. v. Kellogg Co., 824 F.2d 622, 626 – 627 (8th Cir. 1987) (no confusing similarity between “APPLE RAISIN CRISP” and “OATMEAL RAISIN CRISP,” both for cereals, when plaintiff’s mark was weak). b. [8.8]

Similarity of Marks

The parties’ marks do not have to be identical to find trademark infringement. The test is whether the marks are confusingly similar. Courts look at various elements of marks to determine whether marks are similar, including the appearance of the mark, the sound of the mark, and the mark’s connotation. This analysis is sometimes referred to as “sight, sound, and meaning.” Infringement may be found on the basis of only one of these elements, but appearance is usually given the most weight. (1)

[8.9] Appearance

When analyzing the similarity of the appearance of marks, it is necessary to consider the marks in their entireties, rather than breaking them down into separate parts. Daddy’s Junky Music Stores, Inc. v. Big Daddy’s Family Music Center, 109 F.3d 275, 283 (6th Cir. 1997). That being said, if one word or feature of a mark is the more dominant or salient element, this portion of the mark is often given more weight in this analysis. Packard Press, Inc. v. Hewlett-Packard Co., 227 F.3d 1352, 1357 (Fed.Cir. 2000) (proper to give greater weight to “PACKARD” as dominant element of mark “PACKARD TECHNOLOGIES” as “ ’technology’ is highly suggestive/merely descriptive with respect to the services at issue”); Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1115 – 1116 (7th Cir. 1997) (finding “Meridian” most salient element of parties’ marks).

8—8

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

(2)

§8.12

[8.10] Sound

When marks sound or are pronounced the same, confusion may result even if the marks are visually different. Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 462 (7th Cir. 2000) (“PROZAC” and “HERBROZAC”); Han Beauty, Inc. v. Alberto-Culver Co., 236 F.3d 1333, 1337 (Fed.Cir. 2001) (plaintiff’s family of “TRES-” marks, including “TRESemme,” “TRESchic,” and “TRESprofessional,” and defendant’s mark “TREVIVE”). (3)

[8.11] Connotation

Confusion is more likely when the parties’ marks have similar meanings or connotations. See, e.g., AMF Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979) (“Slickcraft” versus “Sleekcraft”); American Home Products Corp. v. Johnson Chemical Co., 589 F.2d 103, 107 (2d Cir. 1978) (“ROACH MOTEL” versus “ROACH INN”). When a mark contains a foreign word whose English meaning will likely be known to relevant consumers, the court will consider the English translation of the term in assessing the similarity of the parties’ marks. In re American Safety Razor Co., 2 U.S.P.Q.2d (BNA) 1459 (T.T.A.B. 1987) (“BUENOS DIAS” for soap confusingly similar to “GOOD MORNING” for shaving cream). c. [8.12] Similarity of Goods or Services The more similar the parties’ goods, the more likely infringement will be found, but even when the parties’ goods or services are different or not competitive, infringement may be found. The critical question is whether the parties’ products are sufficiently related that consumers are likely to believe that they come from the same source when marketed under identical or confusingly similar marks. Planetary Motion, Inc. v. Techplosion, Inc., 261 F.3d 1188, 1201 – 1202 (11th Cir. 2001) (e-mail software and e-mail services); Helene Curtis Industries, Inc. v. Church & Dwight Co., 560 F.2d 1325, 1331 (7th Cir. 1977) (deodorant and baking soda). Goods or services that are used with one another, such as wine and cheese, are often considered complementary and thus are more likely to be adjudged sufficiently related. E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1291 (9th Cir. 1992) (wine, cheese, and salami complementary products). However, the fact that goods or services may be used with one another does not necessarily mean that infringement will be found. See, e.g., Knaack Manufacturing Co. v. Rally Accessories, Inc., 955 F.Supp. 991, 1000 (N.D.Ill. 1997) (no confusion between plaintiff’s “WEATHER GUARD” tool boxes for automobiles and defendant’s “WeatherGUARD” automobile covers, when, inter alia, plaintiff’s mark was weak and parties’ products were noncompetitive and functionally unrelated); Edison Brothers Stores, Inc. v. Cosmair, Inc., 651 F.Supp. 1547 (S.D.N.Y. 1987) (while plaintiff’s shoes and defendant’s perfume may have been complementary fashion items, confusion unlikely when, inter alia, plaintiff’s mark was weak and parties’ respective products were targeted to different consumers in different channels of trade).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8—9

§8.13

INTELLECTUAL PROPERTY LAW

d. [8.13] Channels of Trade If goods are advertised and sold through the same marketing channels, it is more likely that consumers will associate them with the same source, increasing the likelihood of confusion. Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270, 288 – 289 (3d Cir. 2001). In part, this is because consumers will encounter the products in the same marketing environment, increasing the consumers’ mental association between the goods. It is also possible that goods sold through different outlets will be confused when the target consumers are the same, or the same consumers are likely to encounter both parties’ marks. See Frehling Enterprises, Inc. v. International Select Group, Inc., 192 F.3d 1330, 1339 (11th Cir. 1999) (finding likelihood of confusion between home furniture products sold through high-end retail outlets and furniture sold through mass market retail outlets). e. [8.14] Degree of Purchaser Care When goods and services are inexpensive or are “impulse” items, consumers are presumed to exercise little care before making their purchases. In these circumstances, confusion or mistake as to source is deemed more likely. Maxim’s Ltd. v. Badonsky, 772 F.2d 388, 393 (7th Cir. 1985). When the parties’ products are such that a consumer would exercise a great deal of care before purchasing (e.g., when the products are very expensive), confusion as to source is less likely. Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270 (3d Cir. 2001) (consumers likely to exercise higher standard of care in purchasing parties’ respective securityrelated products); Astra Pharmaceutical Products, Inc. v. Beckman Instruments, Inc., 718 F.2d 1201, 1206 – 1207 (1st Cir. 1983). f.

[8.15] Intent

The courts also consider whether the defendant intended to confuse consumers in adopting its accused mark. Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1120 (7th Cir. 1997). Even if a defendant adopted its mark in good faith, however, it will not be saved from a finding of infringement when the other factors indicate that confusion is likely. Thus, evidence of bad-faith intent is not necessary to prove infringement. Daddy’s Junky Music Stores, Inc. v. Big Daddy’s Family Music Center, 109 F.3d 275, 287 (6th Cir. 1997) (defendant’s lack of bad faith is irrelevant if consumers are likely to be confused). On the other hand, when it can be shown that a defendant selected its mark with an intent to exploit the plaintiff’s mark and goodwill, this will almost always be strong evidence of a likelihood of confusion and may lead to a presumption of infringement. Sally Beauty Co. v. Beautyco, Inc., 304 F.3d 964, 973 (10th Cir. 2002) (proof of intent leads to inference of likelihood of confusion); Fuji Photo Film Co. v. Shinohara Shoji Kabushiki Kaisha, 754 F.2d 591, 596 (5th Cir. 1985) (bad faith alone may support claim for infringement). Trademark owners often rely on circumstantial evidence to prove a defendant’s bad intent because direct evidence is rarely available. A defendant’s knowledge of a plaintiff’s rights may prove a bad-faith intent to trade on the plaintiff’s mark, particularly when the plaintiff’s mark is strong and the parties’ products or services are similar. Compare Caesars World, Inc. v. Caesars Palace, 490 F.Supp. 818, 825 (D.N.J. 1980) (defendant’s visit to plaintiff’s hotel undermined

8 — 10

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.17

defendant’s “innocent adoption” defense), with Packman v. Chicago Tribune Co., 267 F.3d 628, 642 (7th Cir. 2001) (no inference of bad faith, despite defendant’s knowledge of plaintiff’s trademark rights in phrase “the joy of six,” when defendant used phrase in its merely descriptive sense). g. [8.16] Actual Confusion The test for infringement is whether confusion is likely, not whether confusion has occurred. Thus, evidence of actual confusion is not necessary to prove a likelihood of confusion. Helene Curtis Industries, Inc. v. Church & Dwight Co., 560 F.2d 1325, 1330 (7th Cir. 1977). When this evidence exists, however, it is generally accorded substantial weight. Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1118 (7th Cir. 1997); Libman Co. v. Vining Industries, Inc., 69 F.3d 1360, 1365 (7th Cir. 1995). Actual confusion evidence is often difficult to obtain as consumers may not know they have been deceived or may be too embarrassed to come forward to admit their confusion. Accordingly, even a few instances of actual confusion may be considered highly probative of a likelihood of confusion. International Kennel Club of Chicago, Inc. v. Mighty Star, Inc., 846 F.2d 1079, 1087 (7th Cir. 1988). When the parties’ marks have coexisted over a significant period of time or with extensive sales, without any evidence of actual confusion, however, this coexistence may suggest that future confusion is unlikely. See, e.g., Nabisco v. Warner-Lambert Co., 32 F.Supp.2d 690, 699 (S.D.N.Y. 1999). The consideration given actual confusion evidence may also vary according to the particular circumstances of the case. In some circumstances, isolated instances of confusion may be discounted. Packman v. Chicago Tribune Co., 267 F.3d 628, 646 (7th Cir. 2001) (purported confusion was only among friends and family of plaintiff); Nutri/System, Inc. v. Con-Stan Industries, Inc., 809 F.2d 601, 606 (9th Cir. 1987) (discounting misdirection of several letters and checks given parties’ high volume of business). In a case in which the plaintiff must prove that its mark has acquired distinctiveness, evidence of actual confusion also may be relevant to show secondary meaning. If consumers mistakenly believe that the defendant’s product emanates from the plaintiff because of the trademark used, the confusion presumably occurred because the consumers viewed the plaintiff’s mark as indicating source. International Kennel Club, supra. 4. [8.17] Reverse Confusion The most common form of infringement is forward, or classic, confusion, in which a newcomer adopts a mark that exploits the goodwill of the more well-known senior trademark user. In these circumstances, because of the marketplace recognition of the senior user’s mark, the public is likely to believe that the newcomer’s goods under a confusingly similar mark come from the senior user. By contrast, “reverse confusion” occurs when the trademark used by a newcomer, because of the newcomer’s marketing power or popularity, overwhelms the same or a similar trademark used by a smaller, less well-known senior user. In these cases, the public is likely to believe the senior

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 11

§8.18

INTELLECTUAL PROPERTY LAW

user’s goods originate from the newcomer. Reverse confusion, like forward or classic confusion, is actionable under the Lanham Act. Big O Tire Dealers, Inc. v. Goodyear Tire & Rubber Co., 408 F.Supp. 1219 (D.Colo. 1976), aff’d as modified, 561 F.2d 1365 (10th Cir. 1977). In Big O, the plaintiff, an organization with a net worth of $200,000, sold its “BIG FOOT” brand tires to 200 independent tire dealers in 14 states. The defendant, then the world’s largest tire manufacturer, subsequently adopted and used the mark “BIGFOOT” for a line of its tires, supported by a nationwide $9 million advertising campaign. The defendant was found guilty of infringement under a theory of reverse confusion. Because the circumstances of reverse confusion vary from those found in a case of forward confusion, some courts weigh the relevant factors differently in a reverse confusion case. See, e.g., Fisons Horticulture, Inc. v. Vigoro Industries, Inc., 30 F.3d 466, 479 (3d Cir. 1994) (strength of plaintiff’s mark not as important in confusion analysis because plaintiff is acknowledged to be less well-known than defendant). 5. [8.18] Initial Interest Confusion The Internet has led to the popularity of an infringement theory called “initial interest confusion,” although the theory is applied in other contexts as well. As described by the United States Court of Appeals for the Ninth Circuit, “Initial interest confusion is customer confusion that creates initial interest in a competitor’s product. Although dispelled before an actual sale occurs, initial interest confusion impermissibly capitalizes on the goodwill associated with a mark and is therefore actionable trademark infringement.” Playboy Enterprises, Inc. v. Netscape Communications Corp., 354 F.3d 1020, 1025 (9th Cir. 2004). In the Internet context, initial interest confusion may arise when a party uses someone else’s trademark (a) in a domain name that leads to the party’s own website, (b) as a metatag for the party’s website, or (c) as a keyword for Internet searches or advertising that promotes the party’s products. See, e.g., Brookfield Communications, Inc. v. West Coast Entertainment Corp., 174 F.3d 1036, 1057 (9th Cir. 1999) (use of plaintiff’s mark in domain name and metatag); Playboy Enterprises, supra (use of plaintiff’s mark as keyword for other companies’ advertising). See also Dwyer Instruments, Inc. v. Sensocon, Inc., Case No. 3:09-CV-10-TLS, 2012 WL 2049921 at *15 (N.D.Ind. June 5, 2012) (repeated use of plaintiff’s trademark on defendant’s website could cause “initial customer confusion,” though evidence must be presented to support this theory). In each of these situations, the use of another’s trademark leads consumers to a website where they discover not the products sold under the trademark, but rather the products of a competitor or other merchant. Of course, the misdirected consumers can leave this website, or the consumers may realize the difference between the parties’ respective products before making a purchase. But from the trademark owner’s perspective, the damage has been done: its trademark has been used to lure consumers to the advertising and promotion of someone else’s product or service. In Promatek Industries, Ltd. v. Equitrac Corp., 300 F.3d 808, 813 (7th Cir. 2002), the court stated, “Customers believing they are entering the first store rather than the second are still likely to mill around before they leave. The same theory is true for websites.” In the non-Internet context, initial interest confusion may arise through use of a deceptively similar name or mark. See, e.g., Elvis Presley Enterprises, Inc. v. Capece, 141 F.3d 188, 204 (5th

8 — 12

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.20

Cir. 1998) (defendant’s advertising and use of name “The Velvet Elvis” for its bar likely to create initial interest confusion, by drawing in consumers even though they might realize upon entering bar that it had no connection to plaintiff); Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 259 (2d Cir. 1987) (defendant’s use of its confusingly similar name would make it more likely that potential customer would listen to “cold phone call” and thus give defendant credibility during initial phase of promotion). When initial interest confusion is alleged, courts consider the infringement by analyzing the traditional likelihood of confusion factors. See, e.g., Playboy Enterprises, supra. Given the differing circumstances of potential confusion, however, some courts place more emphasis on one or more of these factors, such as the relatedness of the goods or consumer sophistication. See Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270, 295 – 297 (3d Cir. 2001) (discussing factors emphasized in varying precedents). A plaintiff alleging initial interest confusion may be required to show more than simply the use of improper metatags or keywords and instead produce evidence showing that consumers have been or will be misdirected to the defendant’s website. Dwyer Instruments, Inc. v. Sensocon, Inc., No 3:09-CV-10-TLS, 2012 WL 2049921 (N.D.Ind. June 5, 2012). 6. Third-Party Liability for Infringement a. [8.19] Contributory Infringement Liability for trademark infringement may extend beyond the person using the infringing mark. Infringement liability may also be imposed on a third party, such as a manufacturer, who (1) induces or encourages the infringing conduct or (2) continues to supply its product to one whom it knows is engaging in trademark infringement. Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 72 L.Ed.2d 606, 102 S.Ct. 2182, 2188 (1982). Liability may also extend to a third party that participated in a scheme of trademark infringement carried out by another. Mini Maid Services Co. v. Maid Brigade Systems, Inc., 967 F.2d 1516, 1522 (11th Cir. 1992). In these cases, the person using the infringing mark is called a “direct infringer,” and the party encouraging or facilitating the conduct is called a “contributory infringer.” b. [8.20] Personal Driving Force When an individual, such as a corporate officer or entrepreneur, is the “moving, active, conscious force” behind a company’s infringing activities, this individual may also be held personally liable for the infringement. Chanel, Inc. v. Italian Activewear of Florida, Inc., 931 F.2d 1472, 1477 – 1478 (11th Cir. 1991), quoting Wilden Pump & Engineering Co. v. Pressed & Welded Products Co., 655 F.2d 984, 990 (9th Cir. 1981). See also Peaceable Planet, Inc. v. Ty, Inc., 185 F.Supp.2d 893, 896 (N.D.Ill. 2002).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 13

§8.21

INTELLECTUAL PROPERTY LAW

C. Counterfeiting 1. [8.21] In General Unauthorized look-alike products bearing deliberately copied trademarks are called “counterfeits.” “Counterfeiting” is the use of a mark for products or services that is identical to, or substantially indistinguishable from, a mark already used for these products or services. 15 U.S.C. §1116(d)(1)(B). Worldwide sales of counterfeit products are estimated to be in the multiple billions of dollars. Counterfeiting of trademarks encompasses a wide range of products, from designer handbags to power tools to medical devices, pharmaceuticals, automobile parts, and computer hardware and software. The damage caused by counterfeiting is two-fold: (a) the use of a spurious mark deprives the trademark owner of sales of legitimate products; and (b) counterfeit products are often of inferior quality and may pose public health and safety risks, thus damaging the trademark owner’s reputation. 2. [8.22] Enforcement Counterfeiting is a serious offense giving rise to substantial civil and criminal penalties. Penalties may be imposed not only for manufacturing counterfeit products, but also for knowingly trafficking or attempting to traffic in these products. When the copied mark is registered on the Principal Register of the United States Patent and Trademark Office, the Lanham Act provides additional protection and remedies for the trademark owner. 15 U.S.C. §1116(d). Trafficking in counterfeit products is also a “predicate act” that can result in liability under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1961, et seq. See 18 U.S.C. §§1961(1), 2320. a. [8.23] Seizure Orders Under §34(d) of the Lanham Act, a trademark owner can seek an ex parte seizure order from a court to secure counterfeit goods before they can be disposed of. 15 U.S.C. §1116(d)(1). This provision also allows seizure of the means to make the counterfeit marks and records relating to the manufacture, sale, and receipt of counterfeit goods. The procedures regarding such an order are spelled out in §34(d). To issue such a seizure order, a court must find that 1. no other adequate remedy exists; 2. the trademark owner has not publicized the requested seizure; 3. the trademark owner is likely to succeed in proving that the defendant has used a counterfeit mark; 4. immediate and irreparable injury would occur if the seizure were not ordered;

8 — 14

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.24

5. the products to be seized are at the place identified in the application for seizure; 6. the harm to the trademark owner outweighs the harm to the defendant; and 7. the defendant would destroy, move, hide, or otherwise make inaccessible to the court the allegedly counterfeit matter if advance notice of the seizure were provided. 15 U.S.C. §1116(d)(4)(B). To obtain a seizure order, a trademark owner must also post a bond as security against possible damage to the defendant if the court later determines that the seizure was wrongful. 15 U.S.C. §1116(d)(4)(A). If the seizure turns out to be wrongful, the defendant may recover its damages from the trademark owner. 15 U.S.C. §1116(d)(11). See, e.g., Waco International, Inc. v. KHK Scaffolding Houston Inc., 278 F.3d 523, 530 – 532 (5th Cir. 2002); Martin’s Herend Imports, Inc. v. Diamond & Gem Trading United States of America Co., 195 F.3d 765, 773 – 775 (5th Cir. 1999). U.S. Customs and Border Protection (CBP), a component of the Department of Homeland Security, can also assist in seizing counterfeit goods imported into the country. Owners of federal trademark registrations can record their registrations with CBP, and CBP will alert the owner if it seizes any suspected counterfeit items. See 19 C.F.R. pt. 133. b. [8.24] Special Monetary Relief In civil actions involving intentional counterfeiting, a plaintiff is entitled to an award of three times its damages or the defendant’s profits, whichever is greater, and reasonable attorneys’ fees, unless the court finds that there are “extenuating circumstances.” 15 U.S.C. §1117(b). Alternatively, the plaintiff may elect, in lieu of damages or profits, an award of statutory damages up to $200,000 per mark for each type of counterfeit product or service and up to $2 million if the use of the counterfeit mark was found to be willful. 15 U.S.C. §1117(c). Thus, for example, if a defendant made five identical jackets bearing a counterfeit reproduction of the “Nike” mark, the statutory damages (assuming no finding of willfulness) would be up to $200,000, not $1 million (5 × $200,000). Significantly, a defendant trafficking in counterfeit products may not be able to shield itself from liability by claiming that it did not know its products were counterfeit. Under certain circumstances, “willful blindness” is sufficient to satisfy the knowledge requirement of 15 U.S.C. §1117(b). Louis Vuitton S.A. v. Lee, 875 F.2d 584, 590 (7th Cir. 1989) (given fame of plaintiff’s brands and inferior and unusual qualities of merchandise in question, defendant retailer was obligated, at very least, to ask supplier whether merchandise she was buying was genuine or counterfeit). Moreover, a defendant of limited financial means should not expect to avoid serious civil penalties for counterfeiting simply by virtue of its economic condition. In Louis Vuitton, supra, the district court had granted the plaintiff permanent injunctive relief against a small and unsophisticated retailer of counterfeit merchandise but had denied the plaintiff monetary relief.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 15

§8.25

INTELLECTUAL PROPERTY LAW

Reversing the district court’s denial of monetary relief, the Seventh Circuit noted, “ ‘Equity’ is not a roving commission to redistribute wealth from large companies to small ones. The Lanham Act was not written by Robin Hood.” 875 F.2d at 589.

PRACTICE POINTER 

If your client knows or is concerned that counterfeit products bearing its registered mark are or will be imported into the United States, consider recording your client’s federal trademark registration with U.S. Customs and Border Protection. See 19 C.F.R. pt. 133 or go to www.cbp.gov for more information.

D. False Designation of Origin or Description of Fact 1. [8.25] Misrepresentations and Unfair Competition A claim for unfair competition under federal law arises under §43(a) of the Lanham Act, which provides in pertinent part: Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which — (A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities of another person . . . *** shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. 15 U.S.C. §1125(a)(1). As noted in §8.5 above, infringement claims for unregistered common-law marks may be brought under this provision. Moreover, §43(a) has been interpreted to provide a federal cause of action against a variety of commercial misrepresentations and conduct causing likely confusion or deception in the marketplace. Thus, the prohibitions of §43(a) against a “false designation of origin” and a “false or misleading representation of fact” have been broadly implemented to prevent unfair competition. See, e.g., Black Hills Jewelry Manufacturing Co. v. Gold Rush, Inc., 633 F.2d 746 (8th Cir. 1980) (enjoining use of mark “Black Hills Gold” for jewelry that was not made of gold from the Black Hills of South Dakota); Bohsei Enterprises Co., U.S.A. v. Porteous Fastener Co., 441 F.Supp. 162, 164 (C.D.Cal. 1977) (falsely suggesting product is of domestic manufacture by failing to note true country of origin was actionable under §43(a)).

8 — 16

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.27

As with infringement claims, a plaintiff seeking to prove false designation of origin and unfair competition must show that the defendant’s conduct is likely to cause confusion, mistake, or deception. Black Hills Jewelry, supra, 633 F.2d at 753. 2. Direct and Reverse Passing Off a. [8.26] Direct Passing Off Direct passing off occurs when a company sells its own products but solicits the sales for these products by advertising a sample or depiction of a product actually made by a competitor. See, e.g., Sublime Products, Inc. v. Gerber Products, Inc., 579 F.Supp. 248, 250 (S.D.N.Y. 1984) (“It is well established that using a photograph of another’s product to sell one’s own cheaper product is unfair competition under Section 43(a) [of the Lanham Act].”); Supelco, Inc. v. Alltech Associates, Inc., 1 U.S.P.Q.2d (BNA) 1149 (E.D.Pa. 1986) (defendant promoted its product by using picture of plaintiff’s product in its catalog because defendant’s product had not yet been completely manufactured). In the case of express direct passing off, the defendant delivers its own product without advising the consumer of the switch. In the case of implied direct passing off, the defendant truthfully tells the customer that it is receiving the defendant’s product, but the harm has already been done since the customer was lured by the advertising into believing that it would receive the plaintiff’s product shown in the promotion. See 4 Rudolf Callmann, CALLMAN ON UNFAIR COMPETITION, TRADEMARKS AND MONOPOLIES §22:24 (4th ed. 1981). Direct passing off can also occur by substitution of products, e.g., when a consumer requests a Pepsi and, without explanation, is given a Coke, or vice versa. Coca-Cola Co. v. Pace, 283 F.Supp. 291, 293 (W.D.Ky. 1968). Significantly, when the plaintiff’s product lacks secondary meaning or is functional in design, a court may refuse to award the plaintiff relief because there would be no source-identifying significance in displaying the plaintiff’s product. See Can Am Engineering Co. v. Henderson Glass, Inc., 620 F.Supp. 596, 602 – 603 (E.D.Mich. 1985) (when defendant used photograph of plaintiff’s unregistered product design to make sales of its own product, plaintiff obligated to show product design was nonfunctional and either inherently distinctive or had secondary meaning in order to prevail under §43(a)); Atlantis Silverworks, Inc. v. 7th Sense, Inc., No. 96 Civ. 4058 (MBM), 1997 WL 128403 at *10 (S.D.N.Y. 1997) (plaintiff’s claim for passing off under §43(a) failed when defendant used photographs of plaintiff’s rings in its catalog but sold its own; “the rings themselves do not indicate source because they are not inherently distinctive and have not acquired secondary meaning”). b. [8.27] Reverse Passing Off Reverse passing off arises when a merchant removes or obliterates the plaintiff’s trademark from the plaintiff’s products. In express reverse passing off, the defendant removes the plaintiff’s trademark and re-brands and sells the products under its own mark. Web Printing Controls Co. v. Oxy-Dry Corp., 906 F.2d 1202, 1203 – 1204 (7th Cir. 1990). In implied reverse passing off, the defendant removes the plaintiff’s mark and sells the product in an unbranded state. See 4 Rudolf Callman, CALLMAN ON UNFAIR COMPETITION, TRADEMARKS AND MONOPOLIES §22:24 (4th ed. 1981); 4 J. Thomas McCarthy, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION §25:8 (4th ed. 2004) (noting divergence of opinion as to whether

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 17

§8.28

INTELLECTUAL PROPERTY LAW

implied reverse passing off is actionable). The harm of reverse passing off is that the plaintiff is deprived of the goodwill and reputational advantage that flows from having its mark associated with its products. Smith v. Montoro, 648 F.2d 602, 607 (9th Cir. 1981). Significantly, a claim for reverse passing off may not lie when a defendant copies the plaintiff’s uncopyrightable work and sells it under the defendant’s own name. Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 156 L.Ed.2d 18, 123 S.Ct. 2041 (2003). In Dastar, the defendant had substantially copied an entire television series created by plaintiff Twentieth Century Fox, modified it slightly, labeled the resulting product with a different name, and marketed it as its own product without attribution to Fox. The copyright in Fox’s television series had expired 20 years before, so the underlying work was in the public domain. Nevertheless, the Ninth Circuit found that Dastar’s “bodily appropriation” of Fox’s original television series was sufficient to establish reverse passing off under the Lanham Act. Twentieth Century Fox Film Corp. v. Entertainment Distributing, 34 Fed.Appx. 312, 314 (9th Cir. 2002). The United States Supreme Court reversed. Analyzing the allegation of reverse passing off, the Supreme Court observed: That claim would undoubtedly be sustained if Dastar had bought some of New Line’s Crusade videotapes and merely repackaged them as its own. Dastar’s alleged wrongdoing, however, is vastly different: it took a creative work in the public domain — the Crusade television series — copied it, made modifications (arguably minor), and produced its very own series of videotapes. 123 S.Ct. at 2046 – 2047. Concluding that the Lanham Act does not prohibit the unaccredited copying of an unprotectable work, the Supreme Court found that the defendant’s conduct did not constitute reverse passing off. E. [8.28] False Advertising Section 43(a) of the Lanham Act provides in pertinent part: Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which — *** (B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. 15 U.S.C. §1125(a)(1).

8 — 18

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.29

Courts have interpreted this provision as giving rise to a cause of action for false or deceptive advertising. See, e.g., Pizza Hut, Inc. v. Papa John’s International, Inc., 227 F.3d 489, 494 – 495 (5th Cir. 2000); Cashmere & Camel Hair Manufacturers Institute v. Saks Fifth Avenue, 284 F.3d 302, 310 (1st Cir. 2002). To prove false advertising, a plaintiff must show that 1. the defendant made a false or misleading representation of fact in commercial advertising about its own or another’s product; 2. the misrepresentation is material in that it is likely to influence purchasing decisions; 3. the misrepresentation actually deceives consumers or is likely to deceive an appreciable segment of the target audience; 4. the defendant injected the false or misleading advertising into interstate commerce; and 5. the plaintiff has been or is likely to be injured by the misrepresentation. Cashmere & Camel Hair, supra, 284 F.3d at 310 – 311; Logan v. Burgers Ozark Country Cured Hams Inc., 263 F.3d 447, 462 (5th Cir. 2001). When the challenged advertising is false on its face, the plaintiff may obtain injunctive relief simply by proving actual falsity. Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharmaceuticals Co., 290 F.3d 578, 586 – 587 (3d Cir. 2002) (use of advertising message “Night Time Strength” for heartburn medicine per se false by suggesting efficacy against heartburn at night); Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312, 318 (2d Cir. 1982) (visual and aural components of television ad suggesting defendant’s pasteurized and sometimes frozen orange juice was actually fresh-squeezed and unprocessed held false on its face). In evaluating whether an advertisement is literally false, a court will likely analyze the message in context, considering both words and images. Time Warner Cable, Inc. v. DIRECTV, Inc., 497 F.3d 144, 158 (2d Cir. 2007) (holding that if words and images necessarily imply false message, advertisement is literally false). When the advertising is alleged to be deceptive or misleading but not facially false, the plaintiff has the burden to prove that consumers have been, or are likely to be, misled. Abbott Laboratories v. Mead Johnson & Co., 971 F.2d 6, 14 (7th Cir. 1992) (finding defendant’s trademark “Ricelyte” made impliedly false claim when evidence demonstrated that consumers and physicians actually believed defendant’s product contained rice). This proof can be in the form of actual consumer testimony or survey evidence. See, e.g., Novartis, supra, 290 F.3d at 590. A presumption of deception may arise when there is proof that the defendant intended to deceive consumers. Cashmere & Camel Hair, supra, 284 F.3d at 316. F. [8.29] Dilution “Dilution” is a cause of action available to trademark owners to prevent another’s use of an identical or substantially similar mark. Unlike trademark infringement, however, dilution can be found even when there is no likelihood of confusion between the parties’ marks or products.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 19

§8.30

INTELLECTUAL PROPERTY LAW

The concept of dilution does not arise out of the common law and is not motivated by an interest in protecting consumers. Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 155 L.Ed.2d 1, 123 S.Ct. 1115, 1122 (2003). Instead, dilution is based on the notion of preserving the distinctiveness of a mark. Id. Thus, under dilution theory, a distinctive mark may be protected against the use of an identical or substantially similar mark on totally unrelated products or services. 1. [8.30] Types of Dilution Dilution of a mark generally takes one of two forms: blurring or tarnishment. “Blurring” is the term used to mean dilution of the distinctive quality of a mark. Blurring occurs when a defendant uses a mark identical or substantially similar to the plaintiff’s distinctive mark. Under dilution theory, blurring reduces the selling power and magnetism of the plaintiff’s mark by lessening the public’s perception of the mark as signifying something unique and particular. Oftrepeated examples of blurring uses that dilution law was designed to prevent include “DUPONT shoes, BUICK aspirin, and KODAK pianos.” Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 155 L.Ed.2d 1, 123 S.Ct. 1115, 1123 (2003). “Tarnishment” is the term used to describe injury to a trademark owner’s business reputation when a defendant uses an identical or substantially similar mark in connection with a shoddy or unsavory product or service. Here, the trademark’s commercial value is diminished by the public’s negative associations with the mark itself. For example, in Coca-Cola Co. v. Alma-Leo U.S.A., Inc., 719 F.Supp. 725 (N.D.Ill. 1989), the court held that Coca-Cola’s business reputation was likely to be injured by the defendant’s marketing of white powder bubble gum resembling cocaine, sold in a plastic container that simulated Coca-Cola’s bottle. A third type of dilution has been found when a defendant spoofs or alters the plaintiff’s trademark in a satirical manner to promote the defendant’s own products. See, e.g., Deere & Co. v. MTD Products, Inc., 41 F.3d 39, 44 – 45 (2d Cir. 1994) (defendant’s depiction in its advertising of plaintiff’s static, graceful deer trademark as tiny deer running away from small dog and defendant’s lawn tractor diluted plaintiff’s mark). 2. [8.31] Governing Law As noted in §8.29 above, dilution is not a common-law tort and thus arises primarily out of statutory law. Well over half of the states have enacted dilution laws (sometimes called “antidilution” laws). See, e.g., 765 ILCS 1036/65. Dilution was strictly a creature of state law until the Federal Trademark Dilution Act of 1995, Pub.L. No. 104-98, 109 Stat. 985, amended the Lanham Act to adopt dilution as a federal cause of action. See 15 U.S.C. §1125(c). This provision was subsequently amended by the Trademark Dilution Revision Act of 2006 (TDRA), Pub.L. No. 109-312, 120 Stat. 1730.

8 — 20

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.32

3. Test a. [8.32] State Law Many state dilution laws protect against both the likelihood of injury to business reputation (tarnishment) and the likelihood of dilution of the distinctive quality of a mark (blurring). See, e.g., 765 ILCS 1036/65. To be entitled to protection, most state laws require that the trademark be well-known or highly distinctive. See, e.g., Deere & Co. v. MTD Products, Inc., 41 F.3d 39, 42 (2d Cir. 1994); Hyatt Corp. v. Hyatt Legal Services, 736 F.2d 1153, 1157 – 1158 (7th Cir. 1984). Factors that courts consider in determining whether dilution by blurring is likely include the similarity of the parties’ respective marks, the strength of the plaintiff’s mark, and the defendant’s marketing efforts. See, e.g., Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 468 – 469 (7th Cir. 2000); American Express Co. v. Vibra Approved Laboratories Corp., 10 U.S.P.Q.2d (BNA) 2006, 1989 WL 39679 (S.D.N.Y. 1989) (defendant’s “condom card,” a replica credit card with condom attached, bearing name “AMERICA EXPRESS” and slogan “NEVER LEAVE HOME WITHOUT IT,” held likely to dilute plaintiff’s “American Express” mark and its slogan “DON’T LEAVE HOME WITHOUT IT”). In a well-known case, Mead Data Central, Inc. v. Toyota Motor Sales, U.S.A., Inc., 702 F.Supp. 1031 (S.D.N.Y. 1988), the plaintiff Mead claimed that Toyota’s proposed use of “LEXUS” for a new car infringed its rights in the mark “LEXIS” for computerized legal research services. The district court found no likelihood of confusion but granted the plaintiff relief on dilution grounds. On appeal, the Second Circuit reversed and vacated the order. Mead Data Central, Inc. v. Toyota Motor Sales, U.S.A., Inc., 875 F.2d 1026 (2d Cir. 1989). Although the state antidilution statute did not require that confusion be likely, the Second Circuit held that the marks at issue must be “very” or “substantially” similar for a viable dilution claim. 875 F.2d at 1029. The Second Circuit also observed that the similarity analysis should be based on the use of the marks in commercial advertising. Noting that commercials generally contain precise diction and a visual reference to the mark and product, the Second Circuit held that there was no substantial similarity between Mead’s “LEXIS” mark and Toyota’s “LEXUS” mark. The Second Circuit further noted that a mark that circulates only in a limited market is unlikely to be associated generally with a mark for a dissimilar product circulating elsewhere. In the immediate case, the distinctiveness of the “LEXIS” mark was limited to a market of sophisticated consumers comprising attorneys and accountants. The Second Circuit thus concluded that it was unlikely that there would be any significant amount of blurring between the “LEXIS” and “LEXUS” marks. With respect to tarnishment, courts often look to the similarity of the parties’ marks and the nature of the defendant’s use. See, e.g., Toys “R” Us, Inc. v. Akkaoui, 40 U.S.P.Q.2d (BNA) 1836, 1996 WL 772709 (N.D.Cal. 1996) (defendant’s use of “Adults R Us” for sexual products tarnished plaintiff’s family of “R Us” marks); Pillsbury Co. v. Milky Way Productions, Inc., 215 U.S.P.Q. (BNA) 124, 1981 WL 1402 (N.D.Ga. 1981) (defendant likely to injure plaintiff’s commercial reputation when defendant’s magazine contained picture of plaintiff’s trade characters “Poppin’ Fresh” and “Poppie Fresh” engaging in sexual intercourse and picture implied that plaintiff may have placed or sponsored it as advertisement).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 21

§8.33

INTELLECTUAL PROPERTY LAW

In considering the viability of a state dilution claim, it is also important to note that a defendant’s ownership of a federal registration for its allegedly diluting mark acts as a complete bar to a claim under state dilution law. 15 U.S.C. §1125(c)(3). Significantly, state dilution laws generally protect against the likelihood of blurring or tarnishment, not simply actual blurring or tarnishment. Thus, these statutes outlaw even prospective harm to the trademark owner’s interest. In this sense, state dilution statutes are consistent with the likelihood of confusion concept in trademark infringement jurisprudence. b. [8.33] Federal Law To establish dilution under 15 U.S.C. §1125(c), a plaintiff must show that 1. its trademark is famous; 2. its trademark is distinctive; 3. the defendant is using the challenged trademark or tradename in commerce; 4. the allegedly diluting use began after the plaintiff’s mark became famous; and 5. the challenged use is likely to cause dilution by blurring or tarnishment. The Lanham Act provides a non-exhaustive list of factors that courts may consider in determining whether a mark is famous. These factors include the duration and extent of the plaintiff’s advertising of its mark, the amount and extent of the plaintiff’s sales under the mark, and whether the plaintiff’s mark has been registered. 15 U.S.C. §1125(c)(2). Under the Trademark Dilution Revision Act, a plaintiff is entitled to relief when it shows that the defendant’s challenged use is “likely to cause dilution.” 15 U.S.C. §1125(c)(1). The TDRA was passed in response to the United States Supreme Court’s holding in Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 155 L.Ed.2d 1, 123 S.Ct. 1115, 1124 (2003). Before the Supreme Court’s decision in Moseley, there was a split among the appellate circuits as to whether federal dilution law permitted a showing that dilution was likely or required the more rigorous showing of actual dilution. In Moseley, the Supreme Court resolved this dispute by concluding that relief under the federal dilution law, as it then read, required proof of actual dilution of the plaintiff’s trademark. 123 S.Ct. at 1124. The TDRA also resolved two uncertainties in federal dilution jurisprudence. First, it previously had been unclear if federal dilution law protected only inherently distinctive marks, or if marks that had acquired distinctiveness were also protected. See, e.g., TCPIP Holding Co. v. Haar Communications Inc., 244 F.3d 88 (2d Cir. 2001) (marks that lacked inherent distinctiveness not entitled to protection under federal dilution law). The TDRA expressly states that it covers both inherently distinctive marks and marks that have acquired distinctiveness. Second, there had been decisions finding marks entitled to protection under federal dilution law when they had only “niche fame,” meaning they were famous only within a discrete market. The TDRA, however, appears to deny protection to marks with only “niche fame,” as it defines a

8 — 22

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.35

“famous” mark as one that is “widely recognized by the general consuming public of the United States as a designation of source of the goods or services of the mark’s owner.” 15 U.S.C. §1125(c)(2)(A). 4. [8.34] First Amendment and Non-Trademark Uses The line between diluting a trademark and engaging in protected free speech or parody may be difficult to establish. Compare, e.g., L.L. Bean, Inc. v. Drake Publishers, Inc., 811 F.2d 26, 27 (1st Cir. 1987) (First Amendment defense trumped Maine’s antidilution statute when defendant’s adult entertainment magazine contained article entitled “L.L. Beam’s Back-To-School-SexCatalog” displaying plaintiff’s L.L. Bean mark and sexually explicit pictures), with AnheuserBusch, Inc. v. Balducci Publications, 28 F.3d 769, 778 (8th Cir. 1994) (rejecting First Amendment defense and finding tarnishment under Missouri law when magazine’s parody ad appeared on back cover and in way that “casual viewer might fail to appreciate its editorial purpose”). When the First Amendment is raised as a defense to a dilution claim, courts tend to weigh the nature of the communicative message against the likelihood that the allegedly diluting use would be considered source identifying. See, e.g., Yankee Publishing Inc. v. News America Publishing Inc., 809 F.Supp. 267, 275 – 282 (S.D.N.Y. 1992). Congress was aware of these First Amendment concerns in enacting and amending the federal dilution statute. Accordingly, under federal dilution law, the following uses of a trademark are explicitly not actionable: (a) nominative and descriptive fair use, including use of a mark in comparative advertising, and parodying or commenting on the famous mark owner or its products or services; (b) news reporting and news commentary; and (c) noncommercial uses of a mark. 15 U.S.C. §1125(c)(3). G. [8.35] Cybersquatting Generally, a “cybersquatter” is a person who registers, traffics in, or uses an Internet domain name that is identical or confusingly similar to, or dilutive of, another party’s trademark and who has a bad-faith intent to trade on or profit from the other’s trademark. From the early days of the Internet, courts have relied on infringement or dilution law to curb cybersquatting. See, e.g., Panavision International, L.P. v. Toeppen, 141 F.3d 1316 (9th Cir. 1998) (dilution); PACCAR Inc. v. TeleScan Technologies, L.L.C., 319 F.3d 243 (6th Cir. 2003) (preliminarily enjoining defendant’s use of infringing domain names that contained plaintiff’s marks). Today, however, trademark owners wanting to challenge cybersquatters have at least two additional options: (1) a federal cause of action under the Anticybersquatting Consumer Protection Act (see §§8.36 – 8.39 below); or (2) a proceeding under either the Uniform DomainName Dispute-Resolution Policy (UDNDRP) created by the Internet Corporation for Assigned Names and Numbers (ICANN) or the dispute resolution policy, if any, of the domain name registrar of the challenged domain name (see §8.40 below). To determine enforcement options against the registrant of an offending domain name, a trademark owner must first learn (1) the identity of the registrant and (2) the identity of the registrar through which the offending domain name is registered. The registrant and registration

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 23

§8.36

INTELLECTUAL PROPERTY LAW

information for most domain names may be found online in databases maintained by domain name registrars and third parties, often called “whois” databases. 1. [8.36] Anticybersquatting Consumer Protection Act In 1999, Congress enacted the Anticybersquatting Consumer Protection Act, Pub.L. No. 106113, Div. B, §1000(a)(9), 113 Stat. 1536 (1999), enacting §3001 of the Intellectual Property and Communications Omnibus Reform Act of 1999 (S. 1948), which created a new cause of action to combat cybersquatting under the Lanham Act. See 15 U.S.C. §1125(d). a. [8.37] Test To prove cybersquatting, a plaintiff must establish that (1) it is the owner of a protectable mark, (2) the defendant intended to profit in bad faith from this mark, (3) the mark was distinctive or famous at the time the domain name was registered, and (4) the domain name is identical or confusingly similar to, or dilutive of, this mark. 15 U.S.C. §1125(d)(1)(A). The Lanham Act, as amended by the Anticybersquatting Consumer Protection Act, also provides a list of nine factors that courts may consider in determining whether a defendant has the requisite bad-faith intent: (I) the trademark or other intellectual property rights of the person, if any, in the domain name; (II) the extent to which the domain name consists of the legal name of the person or a name that is otherwise commonly used to identify that person; (III) the person’s prior use, if any, of the domain name in connection with the bona fide offering of any goods or services; (IV) the person’s bona fide noncommercial or fair use of the mark in a site accessible under the domain name; (V) the person’s intent to divert consumers from the mark owner’s online location to a site accessible under the domain name that could harm the goodwill represented by the mark, either for commercial gain or with the intent to tarnish or disparage the mark, by creating a likelihood of confusion as to the source, sponsorship, affiliation, or endorsement of the site; (VI) the person’s offer to transfer, sell, or otherwise assign the domain name to the mark owner or any third party for financial gain without having used, or having an intent to use, the domain name in the bona fide offering of any goods or services, or the person’s prior conduct indicating a pattern of such conduct; (VII) the person’s provision of material and misleading false contact information when applying for the registration of the domain name, the

8 — 24

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.40

person’s intentional failure to maintain accurate contact information, or the person’s prior conduct indicating a pattern of such conduct; (VIII) the person’s registration or acquisition of multiple domain names which the person knows are identical or confusingly similar to marks of others that are distinctive at the time of registration of such domain names, or dilutive of famous marks of others that are famous at the time of registration of such domain names, without regard to the goods or services of the parties; and (IX) the extent to which the mark incorporated in the person’s domain name registration is or is not distinctive and famous within the meaning of [15 U.S.C. §1125(c)]. 15 U.S.C. §1125(d)(1)(B)(i). Bad-faith intent will not be found when the defendant believed and had reasonable grounds to believe that its use of the domain name was fair or lawful use. 15 U.S.C. §1125(d)(1)(B)(ii); Mayflower Transit, LLC v. Prince, 314 F.Supp.2d 362, 369 (D.N.J. 2004). b. [8.38] In Rem Actions When a plaintiff cannot find or obtain personal jurisdiction over a cybersquatting defendant, the plaintiff may be able to attack the cybersquatting by filing an in rem action against the offending domain name registrations themselves. 15 U.S.C. §1125(d)(2)(A). These in rem actions may be filed in the court in which the relevant domain name registry resides. Harrods Ltd. v. Sixty Internet Domain Names, 302 F.3d 214, 225 (4th Cir. 2002). At least one court has held that these in rem actions may be based not only on a cause of action for cybersquatting but also on claims of infringement and dilution. 302 F.3d at 228 – 232. c. [8.39] Relief In a standard cybersquatting case, a successful plaintiff may seek both injunctive and monetary relief. A court may enjoin the defendant from future infringing or cybersquatting activities and order cancellation of the offending domain name registration or the transfer of the domain name to the plaintiff. 15 U.S.C. §§1116, 1125(d)(1)(C). A plaintiff may also be awarded monetary relief under principles similar to other Lanham Act cases (see §§8.57 – 8.62 below) or elect statutory damages of between $1,000 and $100,000 per offending domain name. 15 U.S.C. §§1117(a), 1117(d). In an in rem action brought only under the Anticybersquatting Consumer Protection Act, relief is limited to obtaining cancellation or transfer of the offending domain name registration. 15 U.S.C. §1125(d)(2)(D)(i). 2. [8.40] Dispute Resolution Policies As an alternative to a federal lawsuit, a trademark owner may be able to file an administrative complaint against the registrant of an offending domain name.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 25

§8.41

INTELLECTUAL PROPERTY LAW

Trademark owners interested in filing an administrative complaint should review the dispute resolution policy of the domain name registrar for the offending domain name to determine what dispute resolution method, if any, the registrar uses. For any offending domain name ending in .com, .org, or .net, every domain name registrar requires that the domain name registrant submit to the Uniform Domain-Name DisputeResolution Policy set up by the Internet Corporation for Assigned Names and Numbers. Procedures for filing a UDNDRP complaint can be found online at www.icann.org. A UDNDRP complaint is often less expensive and more quickly resolved than a federal lawsuit, although there is no discovery and remedy is limited to turnover of the challenged domain name. If the offending domain name ends in a non-United States country code designation (e.g., .ca, .cn, or .eu), the trademark owner will need to determine whether the domain name registrar subscribes to the UDNDRP, has its own dispute policy, or provides no administrative dispute resolution procedure. H. [8.41] Proceedings Before the United States Patent and Trademark Office A trademark owner can challenge the registration of a confusingly similar or dilutive mark by filing an opposition or cancellation action before the Trademark Trial and Appeal Board (TTAB) of the United States Patent and Trademark Office. In such proceedings, as in a civil action, the issue is whether the challenged mark is likely to cause confusion with, or is dilutive of, the senior user’s mark. For more information on these proceedings, see §§6.39 – 6.43 of this handbook. An opposition proceeding is initiated by the filing of a notice of opposition, and a cancellation proceeding is initiated by a petition to cancel. A sample form of a notice of opposition is found in §8.87 below. The TTAB analyzes the likelihood of confusion under a multifactor test similar to the one discussed in §8.6 above for civil actions. See In re Application of E.I. DuPont DeNemours & Co., 476 F.2d 1357, 1361 (C.C.P.A. 1973). For a claim of dilution, the TTAB uses a likelihood of dilution standard. NASDAQ Stock Market, Inc. v. Antartica, S.r.l., 69 U.S.P.Q.2d (BNA) 1718, 1734 – 1735 (T.T.A.B. 2003). I. [8.42] Surveys and Consumer Reaction Tests Parties have increasingly relied on survey evidence in trademark litigation to prove issues such as likelihood of confusion, genericness, secondary meaning, dilution, and false advertising. When properly conducted and presented, a survey can provide valid, persuasive evidence of potential or actual consumer reactions. Trademark surveys are almost always designed and administered by experts, who then testify as to their methodology, results, and findings. Opposing counsel normally has no opportunity to interview or cross-examine the survey respondents, and the judge or jury cannot assess the respondents’ demeanor. Accordingly, courts scrutinize the survey process itself for reliability. A

8 — 26

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.44

well-crafted survey with statistically significant results will likely influence the outcome of the case. By contrast, a poorly designed or improperly administered survey may be rejected or accorded little weight. 1. [8.43] Elements for Proper Survey A proper survey will include the following characteristics: a. It is designed and conducted by a recognized expert. b. It uses a correct and relevant universe of respondents. c. It contains a representative and statistically significant sample of this universe. d. It contains unbiased questions. e. It uses as stimuli proper specimens of the trademarks or advertising at issue. f. The surveyors maintain proper security so that the interviewers do not know the litigation purpose of the survey. g. The data is accurately reported. h. The data is tabulated, verified, and interpreted by an expert. See, e.g., Brooks Shoe Manufacturing Co. v. Suave Shoe Corp., 533 F.Supp. 75 (S.D.Fla. 1981), aff’d, 716 F.2d 854 (11th Cir. 1983). 2. [8.44] Precedents Cases containing examples of successful surveys include Union Carbide Corp. v. Ever-Ready Inc., 531 F.2d 366, 385 – 388 (7th Cir. 1976) (likelihood of confusion and secondary meaning), President & Trustees of Colby College v. Colby College-New Hampshire, 508 F.2d 804, 809 – 810 (1st Cir. 1975) (secondary meaning), E.I. DuPont de Nemours & Co. v. Yoshida International, Inc., 393 F.Supp. 502, 518 – 520 (E.D.N.Y. 1975) (resisting claim of genericness), and Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharmaceuticals Co., 290 F.3d 578, 590 – 594 (3d Cir. 2002) (misleading advertising). Poorly constructed surveys waste the litigants’ and courts’ time and resources. Given the importance of consumer perception in trademark cases, courts do not hesitate to dismiss or reject the probative value of defective surveys. See, e.g., Starter Corp. v. Converse, Inc., 170 F.3d 286, 296 – 297 (2d Cir. 1999) (survey was improper “memory test”); Brooks Shoe Manufacturing Co. v. Suave Shoe Corp., 533 F.Supp. 75, 79 – 80 (S.D.Fla. 1981) (biased and inappropriately worded questions; failure to instruct interviewers and properly gather and verify data; wrong universe), aff’d, 716 F.2d 854 (11th Cir. 1983); Amstar Corp. v. Domino’s Pizza, Inc., 615 F.2d 252, 263 – 264 (5th Cir. 1980) (improper universe and question format).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 27

§8.45

INTELLECTUAL PROPERTY LAW

For confusion surveys, a respondent confusion rate of 12 – 15 percent or higher generally will be considered probative of the likelihood of confusion. See, e.g., James Burrough Ltd. v. Sign of Beefeater, Inc., 540 F.2d 266, 279 (7th Cir. 1976). When the confusion rate is substantially lower, however, the court may conclude that the survey favors a finding that confusion is unlikely. See, e.g., Henri’s Food Products Co. v. Kraft, Inc., 717 F.2d 352 (7th Cir. 1983) (7.6 percent confusion probative that confusion unlikely). J. [8.45] Cease-and-Desist Letters When a party is concerned over another’s confusingly similar mark or deceptive advertising, commonly this party, before filing suit, will send a letter demanding that the recipient stop using a certain trademark or stop making certain representations in advertising. This correspondence is known as a “cease-and-desist” or “demand” letter. The purpose of a cease-and-desist letter is to put the recipient on notice as to the sender’s objection and, often, to initiate a dialogue for possible out-of-court resolution of the dispute. There is no legal requirement, however, that such a cease-and-desist letter be sent before filing a lawsuit. 1. [8.46] Content Cease-and-desist letters commonly are sent by attorneys (either in-house or outside counsel) and may contain some or all of the following elements: a. the identity of the sender (e.g., “We are trademark counsel for ABC Corporation.”); b. a brief description of the business of the sender or the sender’s client; c. a recitation of salient facts, trademarks, and trademark applications and/or registrations owned by the sender; d. the identity of the recipient’s trademark or advertising to which the sender objects; e. the reasons why the recipient’s trademark or advertising is objectionable; f.

actions that the sender demands of the recipient to rectify the situation;

g. the date by which the recipient should take action or respond to the sender, or both; and h. any pertinent attachments, such as a copy of the sender’s federal trademark registration or specimens showing the recipient’s objectionable trademark use or advertising. A sample form of a cease-and-desist letter is found in §8.85 below.

8 — 28

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.50

2. [8.47] Precautions If the dispute winds up in court, the cease-and-desist letter may be an exhibit at a preliminary injunction hearing or trial. Also, in Internet-related cases, the letter may be posted by the recipient on a website for the public to see. Accordingly, the letter should be professional in tone and appearance and should avoid containing any statements or admissions that may compromise the client’s position. a. [8.48] Declaratory Judgment In preparing and sending a cease-and-desist letter, a practitioner should understand that the recipient may respond by filing a declaratory judgment action for noninfringement in a venue unfavorable or inconvenient to the party alleging infringement. A definitive statement in a ceaseand-desist letter that the sender will file a lawsuit is more likely to draw this type of response. Notably, however, when a declaratory judgment action is filed soon after receipt of a ceaseand-desist letter, a court may frown on the recipient’s “race to the courthouse.” See, e.g., Remington Arms Co. v. Alliant Techsystems, Inc., No. 1:03CV1051, 2004 WL 444574 at *4 (M.D.N.C. Feb. 25, 2004) (and cases cited therein). Thus, if the sender of the letter files an infringement action soon after the recipient’s filing a declaratory judgment action, courts may decline to follow the “first to file” rule and permit the sender’s infringement lawsuit to proceed, rather than the declaratory judgment action. Id. b. [8.49] Delay As discussed in §8.69 below, laches is an equitable defense that applies when a plaintiff has unreasonably delayed in taking action against a defendant, to the defendant’s detriment. When laches is successfully raised, a court may deny the plaintiff some or all relief. When a trademark owner sends a cease-and-desist letter but does not follow up to ensure the recipient’s compliance, the trademark owner may be susceptible to a claim of laches or acquiescence if it unreasonably delays in pursuing the infringer after sending the letter. ProFitness Physical Therapy Center v. Pro-Fit Orthopedic & Sports Physical Therapy P.C., 314 F.3d 62, 69 (2d Cir. 2002). Thus, a practitioner will want to exercise reasonable diligence under the circumstances once a cease-and-desist letter has been sent, particularly when the recipient refuses or fails to respond to the letter. K. [8.50] Insurance Coverage A defendant in a Lanham Act or unfair competition case may have insurance to cover the claim. Many commercial general liability insurance policies provide protection for insureds who are sued for causing “advertising injury.” Some courts have interpreted these “advertising injury” clauses to include claims for trademark infringement. See, e.g., Charter Oak Fire Insurance Co. v. Hedeen & Cos., 280 F.3d 730, 735 – 736 (7th Cir. 2002). In other jurisdictions, however, these clauses have been interpreted as not covering trademark infringement claims. See, e.g., ShoLodge, Inc. v. Travelers Indemnity Company of Illinois, 168 F.3d 256, 258 – 260 (6th Cir. 1999).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 29

§8.51

INTELLECTUAL PROPERTY LAW

Also, it may be attorney malpractice when a law firm representing a defendant in a trademark infringement case does not advise the client that it might have insurance coverage for the claim. See Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison, 18 Cal.4th 739, 958 P.2d 1062, 1066 – 1067, 76 Cal.Rptr.2d 749 (1998).

PRACTICE POINTER 

If your client has been sued for a Lanham Act violation or a state unfair competition or deceptive trade practice, have your client consult its commercial general liability insurance policy to determine whether there is coverage.

III. [8.51] REMEDIES Available remedies in Lanham Act cases include injunctions, seizures, destruction orders, accountings of profits, awards for damages, and attorneys’ fees. These remedies are specifically provided for under federal law (15 U.S.C. §§1116 – 1118) and often under parallel or analogous state statutes or common law. Sections 8.52 – 8.62 below discuss each of these remedies in turn. A. Equitable Relief 1. [8.52] Injunctions The most common form of relief obtained in trademark and unfair competition cases is an injunction. An injunction is designed to prevent future likelihood of confusion or deception in the marketplace. The terms of the injunction will be tailored to meet the specific facts of each case. Thus, for example, the injunction may be limited geographically or by product or service, require the defendant’s use of a disclaimer, house mark, or explanatory language, or constitute a blanket prohibition on continued use of a particular trademark. a. [8.53] Geographic Issues When a plaintiff’s protectable trademark rights are limited to a certain geographic area, injunctive relief normally will likewise be limited to this area of protection. Some courts extend the protection to a “zone of natural expansion.” See, e.g., Emergency One, Inc. v. American Fire Eagle Engine Co., 332 F.3d 264, 268 n.2 (4th Cir. 2003); Planetary Motion, Inc. v. Techplosion, Inc., 261 F.3d 1188, 1201 (11th Cir. 2001). b. [8.54] Disclaimer In the trademark enforcement context, a “disclaimer” is a notice appearing with a product or service that denies a connection or affiliation between different parties or their respective products or services. A typical disclaimer in advertising or on product packaging might read, “This product is neither sponsored by nor affiliated with XYZ Corporation.” In theory, the

8 — 30

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.56

purpose of a disclaimer is to eliminate or reduce confusion as to the source or sponsorship of a particular product or service when there is something about the marketing or branding of the product or service that might cause someone to be confused or deceived. There is substantial divergence of opinion among academics and courts as to the efficacy of disclaimers in dispelling confusion. Beverly W. Pattishall et al., TRADEMARKS AND UNFAIR COMPETITION §9.02[A] (4th ed. 2000). Under appropriate circumstances, however, courts have found disclaimers to be helpful in remedying any confusion or likely confusion. See, e.g., Consumers Union of United States, Inc. v. General Signal Corp., 724 F.2d 1044, 1053 (2d Cir. 1983) (adequate disclaimer in advertisement sufficient to avoid confusion). c. [8.55] Temporary Restraining Orders and Preliminary Injunctions Temporary restraining orders and preliminary injunctive relief may be sought when a trademark owner or business is looking for immediate relief from potential or actual confusion or deception in the marketplace. This relief is commonly sought in counterfeiting cases, as well as in circumstances of egregious infringement or false advertising, when the plaintiff will likely suffer irreparable harm to its business or reputation if the defendant’s actions continue pending final judgment on the merits. A court considering a preliminary injunction request under the trademark laws will follow its standard test for obtaining preliminary injunctions. This test generally involves weighing the plaintiff’s probability of success on the merits, the possibility that the plaintiff will suffer irreparable harm if the injunction is not granted, the balance of hardships to the respective parties if the injunction is granted, and the public interest. Meridian Mutual Insurance Co. v. Meridian Insurance Group, Inc., 128 F.3d 1111, 1114 (7th Cir. 1997). Traditionally, when a plaintiff showed it was likely to succeed on the merits of an infringement or false advertising claim, a court would often presume that the plaintiff would suffer irreparable harm if the preliminary injunction was not granted. See, e.g., 128 F.3d at 1120. After the United States Supreme Court’s decision in Winter v. National Resources Defense Council, Inc., 555 U.S. 7, 172 L.Ed.2d 249, 129 S.Ct. 365 (2008), however, it seems this presumption will no longer apply in trademark infringement cases. Boomerangit, Inc. v. ID Armor, Inc., Case No. 5:12-CV-0920 EJD, 2012 WL 2368466 (N.D.Cal. June 21, 2012). Moreover, courts generally find that the public interest favors the granting of preliminary injunctions in trademark cases to prevent consumer confusion. See, e.g., Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 469 (7th Cir. 2000). 2. [8.56] Recall, Seizure, Barred Importation, and Destruction of Infringing Articles Under appropriate circumstances, a trademark infringer may be ordered to recall all products bearing the offending mark from any distributors and retailers to prevent further consumer confusion. Cybermedia, Inc. v. Symantec Corp., 19 F.Supp.2d 1070, 1079 (N.D.Cal. 1998); Nabisco, Inc. v. PF Brands, Inc., 191 F.3d 208, 228 (2d Cir. 1999). A court may also order the seizure of goods bearing a counterfeit mark. Procedures for obtaining such an order are expressly provided for under federal law. 15 U.S.C. §1116(d). A trademark owner can also enlist the aid of U.S. Customs and Border Protection to bar the import of goods bearing a counterfeit mark. For more information on seizures, see §8.23 above.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 31

§8.57

INTELLECTUAL PROPERTY LAW

Federal law also permits a court to order that all labels, signs, prints, packages, wrappers, receptacles, and advertisements bearing the offending mark or representation and all plates, molds, matrices, and other means of making them be delivered up by the defendant for destruction. 15 U.S.C. §1118. B. [8.57] Monetary Relief While an injunction will prevent future confusion, it obviously does not compensate for harm caused by past confusion. Monetary penalties may also be necessary to deter further infringement and destroy the incentive to compete unfairly. Some federal circuits have identified six nonexclusive factors in considering whether a monetary award is appropriate in an infringement case: (1) whether the defendant had the intent to confuse or deceive; (2) whether sales have been diverted; (3) the adequacy of other remedies; (4) any unreasonable delay by the plaintiff in seeking relief; (5) the public interest in making misconduct unprofitable; and (6) whether the case involved palming off. See, e.g., Synergistic International, LLC v. Korman, 470 F.3d 162, 174 (4th Cir. 2006); Quick Technologies, Inc. v. Sage Group PLC, 313 F.3d 338, 348 – 349 (5th Cir. 2002). 1. [8.58] Accounting of Profits A court may award a successful plaintiff the profits of the defendant attributable to the use of the infringing mark. 15 U.S.C. §1117(a). Courts previously tended to grant this monetary relief when there had been a showing that the defendant had been unjustly enriched, the plaintiff had sustained damage from the infringement, or the accounting was deemed necessary to deter a willful infringer from engaging in future, similar conduct. Roulo v. Russ Berrie & Co., 886 F.2d 931, 941 (7th Cir. 1989). Several courts have indicated that willfulness is not a prerequisite for awarding a plaintiff the infringer’s profits. See, e.g., Banjo Buddies, Inc. v. Renosky, 399 F.3d 168 (3d Cir. 2005); Quick Technologies, Inc. v. Sage Group PLC, 313 F.3d 338 (5th Cir. 2002). When a defendant’s profits have been awarded, a plaintiff need prove only the amount of the defendant’s infringing sales; the defendant has the burden of proving any costs or deductions associated with these sales. 15 U.S.C. §1117(a). 2. [8.59] Damages A successful plaintiff also may be entitled to compensation for any damages that it sustained by virtue of the defendant’s unlawful acts. An award cannot be based on speculative damage or on some number unrelated to the plaintiff’s actual injury. See, e.g., Zazú Designs v. L’Oréal, S.A., 979 F.2d 499, 505 – 507 (7th Cir. 1992); Badger Meter, Inc. v. Grinnell Corp., 13 F.3d 1145, 1157 (7th Cir. 1994) (“the amount must be provable, although some uncertainty in making this calculation is allowed”). A court may require a showing of bad faith or actual confusion to justify an award of damages. George Basch Co. v. Blue Coral, Inc., 968 F.2d 1532, 1537 (2d Cir. 1992). When a plaintiff’s damages are in the form of the plaintiff’s own lost profits, the measure of damages may overlap with the amount of the defendant’s profits from its infringing sales. In these circumstances, a plaintiff is generally not entitled to a double recovery but may elect between an award of its lost profits or of a defendant’s profits. In addition to compensation for lost profits,

8 — 32

WWW.IICLE.COM

ENFORCEMENT, REMEDIES, AND DEFENSES IN TRADEMARK AND UNFAIR COMPETITION LAW

§8.62

courts have awarded damages based on a loss of goodwill and costs for corrective advertising. Mobius Management Systems, Inc. v. Fourth Dimension Software, Inc., 880 F.Supp. 1005, 1025 (S.D.N.Y. 1994) (loss of goodwill due to defendant’s false advertising); Adray v. Adry-Mart, Inc., 76 F.3d 984, 988 – 989 (9th Cir. 1995) (corrective advertising). As noted in §§8.24 and 8.39 above, statutory damages are available for counterfeiting and cybersquatting. a. [8.60] Treble Damages A court may, in its discretion and depending on the circumstances, award monetary relief up to three times the amount of actual damages. 15 U.S.C. §1117(a). A damage award thus may be enhanced, provided the award is compensatory and not punitive. ALPO Petfoods, Inc. v. Ralston Purina Co., 997 F.2d 949, 955 (D.C.Cir. 1993). Enhanced or treble damages are not common and are awarded primarily in cases of deliberate infringement or false advertising, particularly when the plaintiff’s damages are difficult to measure or the harm to the plaintiff’s goodwill is manifest. Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989); Mobius Management Systems, Inc. v. Fourth Dimension Software, Inc., 880 F.Supp. 1005, 1025 – 1026 (S.D.N.Y. 1994). b. [8.61] Punitive Damages Any award of profits or damages under the Lanham Act is compensatory only and not a penalty. 15 U.S.C. §1117(a). Thus, federal trademark law does not permit an award of punitive, or exemplary, damages. Caesars World, Inc. v. Venus Lounge, Inc., 520 F.2d 269, 274 (3d Cir. 1975). Punitive damages for infringement, unfair competition, or deceptive trade practices may be available, if at all, under state law. 3. [8.62] Attorneys’ Fees Under the Lanham Act, attorneys’ fees may be awarded to the prevailing party only in “exceptional cases.” 15 U.S.C. §1117(a). An “exceptional case” typically arises when the defendant has acted willfully or in bad faith in its infringing or deceptive conduct. Gorenstein Enterprises, Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 435 – 436 (7th Cir. 1989); Tamko Roofing Products, Inc. v. Ideal Roofing Co., 282 F.3d 23, 30 – 34 (1st Cir. 2002). For a prevailing defendant to be awarded its attorneys’ fees, the plaintiff’s suit must have lacked all merit or had elements of abuse of process. See, e.g., Secalt S.A. v. Wuxi Shenxi Construction Machinery Co., 668 F.3d 677, 687 – 688 (9th Cir. 2012); Bretford Manufacturing, Inc. v. Smith System Manufacturing Co., 389 F.Supp.2d 983, 986 (N.D.Ill. 2005); S Industries, Inc. v. Centra 2000, Inc., 249 F.3d 625, 627 (7th Cir. 2001); Baltimore Luggage Co. v. Samsonite Corp., 727 F.Supp. 202, 210 (D.Md. 1989). In practice, it is uncommon for courts to award prevailing plaintiffs their attorneys’ fees and extraordinarily rare for courts to award them to prevailing defendants. When the defendant is guilty of counterfeiting, however, the plaintiff is entitled to an award of its reasonable attorneys’ fees unless there are extenuating circumstances. 15 U.S.C. §1117(b).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 33

§8.63

INTELLECTUAL PROPERTY LAW

IV. DEFENSES A. [8.63] Fair Use Under certain circumstances, the law allows a party to use another’s trademark or a term that another has claimed as a trademark. This permitted use is called “fair use.” The common-law concept of fair use has been codified in the Lanham Act. See 15 U.S.C. §1115(b)(4). Fair use can arise when (1) a party uses a term in good faith and in a descriptive manner only to describe its own products or services or (2) a party uses another’s mark to identify or to refer to this other party’s products or services in a nondeceptive manner. 1. [8.64] Descriptive, or Classic, Fair Use There is no infringement when a party uses a term not as a trademark, but rather in good faith merely to describe its own product or service. Packman v. Chicago Tribune Co., 267 F.3d 628, 639 (7th Cir. 2001) (defendant newspaper’s use of phrase “The joy of six” as front page headline in recognition of Chicago Bulls’ sixth championship held fair use and not infringing of plaintiff’s registered mark “t