Intellectual Property Law, 2017

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

959 45 6MB

English Pages 854 Year 2016

Report DMCA / Copyright

DOWNLOAD FILE

Polecaj historie

Intellectual Property Law, 2017

Table of contents :
Part I: Patents
1. Patenting Inventions (Marc V. Richards, Keith D. Weiss)
2. Litigating U.S. Patent Rights in a Changing Landscape (Jafon Fearson, Laura Beth Miller)
3. Patent Antitrust, Misuse, Exhaustion, 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 (John S. Paniaguas)

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 (Matthew F. Prewitt, Matthew W. Callahan)
17. Licensing Online (Seth I. Appel, 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 Intellectual Property Practice (Keith G. Chval)

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

Citation preview

INTELLECTUAL PROPERTY LAW (IICLE®, 2017) 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

i

HOW TO CITE THIS BOOK This handbook may be cited as INTELLECTUAL PROPERTY LAW (IICLE®, 2017).

Publication Date: November 28, 2016

ii

WWW.IICLE.COM

NOTICE RE: ACCESSING EDITABLE FORMS FILES FOR THIS PUBLICATION Thank you for purchasing INTELLECTURAL PROPERTY LAW (IICLE®, 2017). In response to customer demand and technological advances, we are now offering a web link to deliver editable forms files that accompany IICLE® publications in lieu of a Forms CD. PLEASE NOTE: IICLE® FORMS ARE NOT INTENDED TO TAKE THE PLACE OF PROFESSIONAL JUDGMENT AS TO THE LEGAL SUFFICIENCY AND LEGAL ACCURACY OF ANY MATERIAL CONTAINED IN THE FORM. ALWAYS PERFORM INDEPENDENT RESEARCH TO VERIFY THE APPLICABILITY OF ANY FORM TO THE SPECIFIC FACTS AND CIRCUMSTANCES OF YOUR MATTER BEFORE USING AN IICLE® FORM. To access the Rich Text Format files for this book, please follow the instructions below: 1. Type this exact URL into the address bar of your Internet browser (e.g., Google Chrome, Internet Explorer, Firefox):

http://www.iicle.com/download/forms/iplaw17.zip *Please note that the “.zip” extension must be included in the URL for the download to work. Without it, you will receive an error message. 2. Once you have entered the link, a download notification will appear in your browser (the location of which varies depending on your browser of choice) and may prompt you to decide what to do with the file. In that event, please choose the “Save” or “Save As” option, give the file a name, and save it to your directory of choice. 3. Clicking on the zip file itself will automatically open a window displaying the files in your computer directory. The file name of the form corresponds to the section in the handbook where the form is found. Simply double-click the subfolder of the chapter of, then the particular file for, the form you are looking for. Once you click on the form file name, it will automatically open in your word processing program, where you may then edit the form to your specifications. Alternatively, you can access the forms by clicking on the “Start” button on your desktop. Choose the “Documents” option, and a window will open. Select the “Downloads” folder option on the left of the window. Within the “Downloads” folder, you will see the forms files and may select the particular file you wish to open by clicking on it. If you are unable to access the forms files using these instructions, please contact IICLE® for technical support, at 800-252-8062 between 8:30 a.m. and 4:30 p.m. CST.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

iii

iv

WWW.IICLE.COM

INTELLECTUAL PROPERTY LAW 2017 General Editor: R. Mark Halligan Chapter authors: Seth I. Appel Richard C. Balough Glen P. Belvis Matthew W. Callahan Keith G. Chval Bradley L. Cohn Jafon Fearson Steven E. Feldman R. Mark Halligan John L. Hines, Jr. Blake W. Jackson Keith D. Weiss

Daniel F. Lanciloti Michael R. Levinson Timothy W. Lohse William T. McGrath Laura Beth Miller D. James Nahikian John S. Paniaguas Matthew F. Prewitt Marc V. Richards Sherry L. Rollo Linda K. Stevens

®

This 2017 edition revises and replaces the 2013 edition. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 3161 West White Oaks Drive, Suite 300 Springfield, IL 62704 www.iicle.com Owner: ___________________________________________________________________

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

v

INTELLECTUAL PROPERTY LAW

®

Copyright 2017 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. 16IPLAW-N:11-16(854)CS PRD: 11-28-16 (1:CTP)

vi

WWW.IICLE.COM

TABLE OF CONTENTS

Table of Contents Preface ..................................................................................................................................ix About the Authors ...............................................................................................................xi

Part I: Patents 1. Patenting Inventions ..................................................................................................... 1 — 1 Marc V. Richards Keith D. Weiss 2. Litigating U.S. Patent Rights in a Changing Landscape ............................................ 2 — 1 Jafon Fearson Laura Beth Miller 3. Patent Antitrust, Misuse, Exhaustion, 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 John S. Paniaguas

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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

vii

INTELLECTUAL PROPERTY LAW

11. Copyright Infringement, Fair Use, and Remedies ................................................... 11 — 1 William T. McGrath

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 Matthew F. Prewitt Matthew W. Callahan 17. Licensing Online .......................................................................................................... 17 — 1 Seth I. Appel ....................................................................... 2017 update author D. James Nahikian .......................................................................... 2013 author 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 Intellectual Property Practice .......................................................................... 20 — 1 Keith G. Chval

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

viii

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 2017 edition follows the same format. We have revised the chapters to reflect current developments in intellectual property law over the past several years. 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: Director of Publishing, Amy L. McFadden, Manny Banks, Carole Chew, Matt Lund, Angela Moody, Darryl Parr, Laura Reyman, Kim Rouland, Courtney Smith, Megan Smith, Stephanie Thompson, and Joy Wolfe.

R. Mark Halligan General Editor November 2016

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

ix

INTELLECTUAL PROPERTY LAW

x

WWW.IICLE.COM

ABOUT THE AUTHORS

About the Authors General Editor R. Mark Halligan is a member of FisherBroyles, LLP, in Chicago. He is an accomplished trial lawyer who focuses his practice on intellectual property litigation including patent, copyright, trademark, and trade secret litigation in federal and state courts throughout the United States and abroad. Mr. Halligan has also developed a nationally recognized trade secrets litigation practice focused on all aspects of trade secret law. He represents individuals, middle-market companies, and large corporations, both as plaintiffs and defendants, in trade secret and noncompete disputes. He has become a “go-to” litigator on some of the most complex intellectual property matters in the United States and worldwide. Mr. Halligan has an AV Preeminent Rating from Martindale Hubbell, and peer reviews rank him as a top lawyer in Intellectual Property in Chambers USA and Best Lawyer. Legal 500 has recognized him as a leading lawyer in trade secrets litigation every year since 2008. He has also been ranked as one of the world’s Leading IP Strategists in IAM 250 and IAM 300 and recently was recognized as a leading TMT lawyer in Who’s Who Legal Telecommunications Media & Technology: Information Technology (2016). Mr. Halligan is a frequent lecturer on intellectual property issues; his speaking engagements include the American Intellectual Property Law Association (AIPLA), the Licensing Executives Society (LES), the United States Patent and Trademark Office (USPTO), and the Illinois Intellectual Property Law Association (IPLAC). He earned his J.D. from Northwestern University School of Law and B.A. from the University of Cincinnati summa cum laude. Mr. Halligan completed his 21st year as an adjunct professor in Trade Secret Law at The John Marshall Law School in Chicago in 2016.

Chapter Authors Seth I. Appel is a Partner at Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, in Chicago, where he focuses his practice on all aspects of trademark, copyright, unfair competition, and false advertising law, including IP clearance, prosecution, licensing, and enforcement. Mr. Appel has extensive experience litigating in federal courts and before the Trademark Trial and Appeal Board. He is the Cochair of the Copyright Society of the USA (CSUSA), Midwest Chapter, and serves on the Editorial Board of the CSUSA’s Journal. He is also a regular contributor to AIPPI e-News (the bimonthly newsletter of the International Association for the Protection of Intellectual Property), and he is active in the International Trademark Association (INTA) and ABA, Intellectual Property Law Section. Mr. Appel received his J.D. from Columbia Law School and his B.A. from Cornell University. Richard C. Balough is a Founding Member of Balough Law Offices, LLC, in Chicago, and concentrates his practice on intellectual property, cyberspace, and business law. Mr. Balough is Cochair of the Mobile and Connected Devices Subcommittee of the American Bar

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

xi

INTELLECTUAL PROPERTY LAW

Association’s Cyberspace Law Committee, Past Chair of the Chicago Bar Association’s Computer Law Committee, and a former member of the Board of Manager’s for the Intellectual Property Law Association of Chicago. Mr. Balough earned his LL.M. cum laude in addition to his J.D. Glen P. Belvis is a Partner at Steptoe & Johnson LLP, in Chicago, and practices in patent litigation and high tech startups. Mr. Belvis is a Master of the Richard Linn Inn of Court, an Illinois Super Lawyer, and the author of INTELLECTUAL PROPERTY IN BUSINESS TRANSACTIONS: PROTECTING THE COMPETITIVE ADVANTAGE. He graduated from DePaul University Law School, where he earned the West Publishing Company Hornbook Award, presented to the student with highest academic average in the class; he received his B.S. from the University of Notre Dame; and he was an extern for Judge Bauer, U.S. Court of Appeals for the Seventh Circuit. Matthew W. Callahan is an associate at Schiff Hardin LLP, in San Francisco, where he focuses on general litigation. Mr. Callahan earned his A.B. cum laude from Harvard University and his J.D. from New York University School of Law. Keith G. Chval is Founder of Protek International, Inc., in Willowbrook, and focuses on his practice on e-discovery, computer forensics, and investigations. Mr. Chval is an adjunct professor at The John Marshall Law School and a member of the FBI InfraGard Program. He was the first Chief of the High Tech Crimes Investigations Association, and the Association had a 100-percent conviction rate during his 7-year tenure as Chief. Mr. Chval received his B.S. from Indiana University and his J.D. from IIT-Chicago-Kent College of Law. Bradley L. Cohn 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, U.S. 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. He received his B.A. from Duke University and his J.D. from the University of Michigan Law School. Jafon Fearson is an associate at Brinks, Gilson & Lione, in Chicago, where he concentrates his practice on patent and copyright litigation. Mr. Fearson is a member of the Federal Circuit, Chicago, and American Bar Associations. He received his B.S. from the University of Alabama at Birmingham and his J.D. from the University of Missouri-Columbia.

xii

WWW.IICLE.COM

ABOUT THE AUTHORS

Steven E. Feldman is a Partner at Hahn Loeser & Parks LLP in Chicago, where he concentrates his practice on complex intellectual property litigation and counseling involving patents, trade secrets, trademarks and unfair competition, and copyrights. Mr. Feldman is a member of the Intellectual Property Law Association of Chicago, the Licensing Executives Society, and the Executive Counsel of the Northwestern University Institute for Sustainability and Energy. 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. John L. Hines, Jr. is a member of Clark Hill PLC’s Intellectual Property Practice Group, in Chicago, where he focuses on IP and technology transactions. Mr. Hines was selected as an Illinois Leading Lawyer in Computer & Technology Law and Intellectual Property Law (Illinois Leading Lawyers Network, 2016). He serves as a trustee of the Erikson Institute (a graduate school in early childhood development) and of the Chicago Institute of Psychoanalysis. Mr. Hines earned his J.D. from Northwestern University School of Law and his A.B. from Princeton University. Blake W. Jackson is a member of DLA Piper LLP (US), in East Palo Alto, California. 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 U.S. Naval officer and enjoys working on numerous veteran’s pro bono projects. Mr. Jackson received his B.S. from the United States Naval Academy and his J.D. from Chicago-Kent College of Law. Daniel F. Lanciloti is a Partner at Freeborn & Peters LLP, in Chicago, where he focuses on trial work and counseling in the areas of trade secrets and restrictive covenants litigation. Prior to joining Freeborn, Mr. Lanciloti was a Partner at Seyfarth Shaw, LLP, where he was a member of the firm’s Trade Secrets, Computer Fraud and Non-Compete Practice Group. Mr. Lanciloti also 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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

xiii

INTELLECTUAL PROPERTY LAW

and preliminary injunction hearings and at trials in fiduciary duty, noncompete, trade secrets, and computer fraud cases. Mr. Levinson earned his undergraduate degree at ClaremontMcKenna College, his M.B.A. from the University of Chicago, and his J.D. from Harvard Law School. Timothy W. Lohse is a Partner at DLA Piper LLP (US) in East Palo Alto, California, where he concentrates his practice in patent prosecution, litigation, and counseling. 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. Mr. Lohse has a BSEE from Tufts University College of Engineering and a J.D. from Golden Gate University School of Law. William T. McGrath is a Partner at Davis McGrath LLC, in Chicago, where his areas of concentration are copyright, trademark, and Internet law, as well as publishing law, trade secret law, and software licensing. Mr. McGrath serves as an arbitrator for the AAA on intellectual property and other commercial disputes and is a mediator for the Lanham Act Mediation Program in the U.S. District Court for the Northern District of Illinois. He is an adjunct professor and Associate Director of the Center for Intellectual Property Law at The John Marshall Law School and writes a column on intellectual property law for the Chicago Daily Law Bulletin, for which he has twice won the Lisagor Award from the Chicago Headline Club. Mr. McGrath is Past President of the Intellectual Property Law Association of Chicago and has served on the Board of Trustees of the Copyright Society of the USA and the Board of the Lawyers for the Creative Arts. He received his B.A. from the University of Notre Dame and his J.D. from Washington University in St. Louis. Laura Beth Miller is a Shareholder at Brinks Gilson & Lione, in Chicago, where 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 is Managing Principal of Nahikian Global Intellectual Property & Technology Law Group, in Chicago, where he serves clients in respect to patent, trade identity, trade secrets, copyright, and digital rights matters. Mr. Nahikian received his undergraduate degree from the University of Michigan at Ann Arbor, M.S. from DePaul University, and 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

xiv

WWW.IICLE.COM

ABOUT THE AUTHORS

Law and received the first prize award for copyright paper in the ASCAP-sponsored Nathan Burkan Competition. John S. Paniaguas is a Partner at Clark Hill PLC, in Chicago, and focuses his practice on patent law. Mr. Paniaguas is Chair of the International Patent Law Committee of the Intellectual Property Law Association of Chicago; is Chair Emeritus: Center for Intellectual Property Law and Information Technology at DePaul University College of Law; and is on the Board of Governors for the Lake County (IN) Bar Association. He is also an adjunct professor of law at DePaul University College of Law (Advanced Patent Law) and at The John Marshall Law School (Intellectual Property Licensing). Mr. Paniaguas earned his B.S.E. from Purdue University-Calumet and his J.D. from DePaul University College of Law. Matthew F. Prewitt is a Partner at Schiff Hardin LLP, in Chicago, and concentrates his practice on trade secrets, data security and privacy, and employee mobility. Mr. Prewitt is a Certified Information Privacy Professional (CIPP-US) and a member of the Sedona Conference Working Groups 1 and 11; Drafting Team Commentary on Bring Your Own Device (BYOD) Security, Privacy, and Discovery; and Drafting Team for U.S. Data Privacy Law Primer. He is an adjunct professor at Chicago-Kent College of Law. Mr. Prewitt received his B.A. from Delta State University and his J.D. with honors from the University of Chicago School of Law. Marc V. Richards is a Shareholder at Brinks Gilson & Lione, in Chicago and concentrates on intellectual property law and patents. Mr. Richards is Vice-Chair of the International Association for the Protection of Intellectual Property — U.S. Division, a board member of the Patent Trial and Appeal Board Bar Association, and former Treasurer and board member of the Intellectual Property Law Association of Chicago. He received his J.D. from Loyola University of Chicago, M.B.A. from the University of Chicago, and B.S. from Washington University in St. Louis. Sherry L. Rollo is a Partner at Hahn Loeser & Parks LLP, in Chicago, where she concentrates her practice on patents, trade secrets, trademarks and unfair competition, copyrights, and associated licensing issues, both domestically and internationally. Ms. Rollo is a member of the International Association for the Protection of Intellectual Property (AIPPI), is on the Board of Managers and Chair of the Trade Secrets and Unfair Competition Committee of the Intellectual Property Law Association of Chicago (IPLAC), is the YMC Chair Elect and Vice-Chair Communications for the Licensing Executives Society International, is a Pro Bono Committee Member of the International Trademark Association, and is a Member of Women in BIO. 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 is a Partner at Schiff Hardin LLP, in Chicago, and is a Cochair of the firm’s Trade Secrets and Restrictive Covenants Client Service Team. Ms. Stevens has served as an adjunct faculty member at Northwestern University School of Law and for the National Institute for Trial Advocacy, as well as Chair of 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

xv

INTELLECTUAL PROPERTY LAW

Keith D. Weiss is an associate at Brinks Gilson & Lione, in Ann Arbor, Michigan, where his focus is intellectual property law and patents. Mr. Weiss has over 20 years of corporate research and development experience and is listed as an inventor on more than 30 patents. He received his B.S. magna cum laude from Clemson University, where he was the recipient of the Mark Bernard Hardin Award; his Ph.D. from the University of Florida; and his J.D. cum laude from Thomas Cooley Law School, where he was the recipient of an Honors Scholarship.

xvi

WWW.IICLE.COM

BOARD OF DIRECTORS

IICLE® Board of Directors Chair Thomas A. Lilien, Office of the State Appellate Defender, Elgin* Vice Chair Robert Z. Slaughter, Avison Young, Chicago* Secretary Ben Neiburger, Generation Law, Ltd., Elmhurst* Treasurer Paul E. Bateman, Littler Mendelson P.C., Chicago* Immediate Past Chair William J. Anaya, Greensfelder, Hemker & Gale, P.C., Chicago* Mark Brittingham, SIU School of Law, Carbondale Bradley L. Cohn, Pattishall, McAuliffe, Newbury, Hilliard & Geraldson LLP, Chicago Jane N. Denes, Posegate & Denes, P.C., Springfield* LaVon M. Johns, Goldstein & McClintock LLLP, Chicago Michele M. Jochner, Schiller DuCanto & Fleck LLP, Chicago James M. Lestikow, Hinshaw & Culbertson LLP, Springfield Hal R. Morris, Arnstein & Lehr, LLP, Chicago Katherine Opel, Weinheimer Law Firm, PC, Edwardsville Stacy E. Singer, Northern Trust, Chicago Hon. Ronald D. Spears, Taylorville Kathy H. Xiahou, Attorneys’ Title Guaranty Fund, Inc., Chicago *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) John K. Notz, Jr. (1990 – 1991) Michael J. Rooney (1991 – 1992)

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

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) Hon. Leonard Murray (2011 – 2012) Donald P. Seberger (2012 – 2013) Lorraine K. Cavataio (2013 – 2014) William J. Anaya (2014 – 2015)

xvii

STAFF OF THE INSTITUTE

INTELLECTUAL PROPERTY LAW

IICLE® Staff Michael J. Rooney, Executive Director Amy L. McFadden, Director of Publications Megan K. Moore, Director of Programs

Publications

Programs

Manny Banks, Publications Administrative Assistant Carole Chew, Executive Managing Editor Matthew Lund, Editor Angela Moody, Managing Editor Darryl Parr, Editor-in-Chief Laura Reyman, Managing Editor Kim Rouland, Publications Compositor Courtney Smith, Managing Editor Megan Smith, Publications Marketing Associate Stephanie Thompson, Subscriber Services Associate Joy Wolfe, Managing Editor

Suzanne Dennis, Planner Konner Dudley, Programs Marketing Associate Stephanie Laffey, Online Education Coordinator Richard Martineau, Programs Associate Christopher Noel, Volunteer Coordinator Angela Wanger, Program Administration Coordinator

Curt Conrad, Manager of Sponsorship Growth and Development

Administrative Services Dawn Bruce, Accounts Payable Diana Celano, Customer Service Representative Jennifer Cook, Assistant to Executive Director Chris Hull, Information Technology Manager Jeff Kurmann, Human Resources & Accounting

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

xviii

WWW.IICLE.COM

INTELLECTUAL PROPERTY LAW 2017 Edition List of Forms Chapter 1: Patenting Inventions 1.79

Invention Disclosure Form

Chapter 2: Litigating U.S. Patent Rights in a Changing Landscape 2.67 2.68 2.69 2.70 2.71 2.72 2.73 2.74 2.75 2.76 2.77

Checklist of Business Considerations in Bringing a Patent Infringement Suit Checklist of Facts To Investigate in Assessing Damages Checklist of Lost Profit Considerations Checklist of Reasonable Royalty Considerations Checklist of Complaint Elements Checklist of Categories of Typical Discovery Sought by Patentee Checklist of Categories of Typical Discovery Sought by Alleged Infringer Sample 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

Sample Language — License Grant Sample Language — Field-of-Use Restriction for a Lighting Technology Sample Language — Definition of Licensed Territory Sample Language — Lump-Sum Royalty Provision Sample Language — Running Royalty Provision Sample Language — 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 10.8 10.15

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 Browsewrap and Clickwrap Agreement for a Streaming Multimedia Service Provider

Chapter 18: Business Method Patents 18.40

Checklist for Business Method Inventions in the United States

Chapter 20: Cybercrime, Digital Evidence, and Your Intellectual Property Practice 20.40

Checklist for an Effective Intellectual Property Plan

Part I: Patents

1

Patenting Inventions

MARC V. RICHARDS Brinks Gilson & Lione Chicago

KEITH D. WEISS Brinks Gilson & Lione Ann Arbor, MI

®

©COPYRIGHT 2017 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 Leahy-Smith America Invents Act 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] After Final Consideration Pilot 2.0 and Post-Prosecution Pilot Program J. [1.59] Allowance and Issue of Patent

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—3

INTELLECTUAL PROPERTY LAW

K. [1.60] Interferences and 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 Patent Cooperation Treaty 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. The patent concludes with numbered paragraphs that are long run-on sentences, written in legalese or “patent-ese,” which contain the patent claims that define the scope of the invention that is protected by the patent. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—5

§1.4

INTELLECTUAL PROPERTY LAW

“trespass” on the patent. This right to exclude may be enforced by obtaining a court injunction 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, 21 Jac. 1, ch. 3, 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. Since the late 20th 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) (1988)), change the duration of patents from 17 years from the issue date to 20 years from the filing date (35 U.S.C. §154(a) (1995)), and provide for the publication of pending patent applications (35 U.S.C. §122(b) (1999)). 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 has 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 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 is now 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 is awarded to the first person who filed an application for a patent. In addition, the USPTO has procedures that allow parties to challenge the award of a patent. These changes apply to patent applications filed after March 16, 2013, but patents granted on patent applications filed before the implementation of the AIA 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 available 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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1—7

§1.8

INTELLECTUAL PROPERTY LAW

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 15 years even when the patent owner is no longer using the design. For more details on trademarks, see Chapters 6 – 8 of this handbook. 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

1—8

WWW.IICLE.COM

PATENTING INVENTIONS

§1.12

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 15 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. From 2003 –2015, the number of utility patents granted and applied for has nearly doubled, while design patents have increased moderately and plant patents have remained the same. 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 2015, the USPTO reported that it issued 298,407 utility patents, 25,986 design patents, and 1,074 plant patents. Over that 12year span, the number of new utility patent applications filed annually increased from 342,441 to 589,410. U.S. Patent Statistics Report, 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. 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 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 improvement 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. See §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 machines and equipment make 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. Because of the confusion in how to deal with biotechnological materials, the biotech industry

1 — 10

WWW.IICLE.COM

PATENTING INVENTIONS

§1.18

successfully lobbied Congress to amend the patent laws to ensure fair treatment in the patenting of biotech inventions. See pre-2011 35 U.S.C. §103(b). Because these provisions were rarely used, this section was removed from the revised statue under the Leahy-Smith America Invents Act. 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 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. 593, 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. Following Bilski, the Supreme Court addressed this issue again in Alice Corporation Pty. Ltd. v. CLS Bank International, ___ U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014). See §1.19 below for a discussion on Alice Corporation. 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. See 35 U.S.C. §102 note. This is about the same as declaring that tax strategies are not patent-eligible 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). The determination of what is considered patentable or nonpatentable subject matter has received considerable debate in the courts. In 2012 – 2014, the Supreme Court decided three cases that reiterated that the three main exceptions to patent-eligible subject matter are (a) laws of nature, (b) physical phenomena, and (c) abstract ideas. In Mayo Collaborative Services v. Prometheus Laboratories, Inc., ___ U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289 (2012), the Court held that an invention for a method of treatment was not patent-eligible subject matter when it relied on a law of nature to determine a relationship between concentrations of metabolites in a person’s blood and the need to administer more or less of a drug, that is, the combination of a diagnostic method to determine the need for a drug. The Mayo Court ruled that the steps of administering the drug were routine and conventional and did not transform the unpatentable natural correlations into patent-eligible subject matter. In other words, something other than routine or conventional steps or things needs to be combined with a law of nature to make it eligible to be patented. The following year, the Supreme Court ruled in Association of Molecular

1 — 12

WWW.IICLE.COM

PATENTING INVENTIONS

§1.20

Pathology v. Myriad Genetics, Inc., ___ U.S. ___, 186 L.Ed.2d 124, 133 S.Ct. 2107 (2013), that an invention directed to isolated DNA in a form not naturally found in nature was not patent eligible because it essentially had the same structure as naturally occurring DNA; that is, the patent essentially claimed material that fell into the natural phenomena exception to patent-eligible subject matter. In contrast, in Myriad, the Court found that synthetically manufactured cDNA was patent eligible because its structure was not the same as found in nature; i.e., it was not a natural phenomenon. Following these two decisions, the USPTO released guidelines extrapolating from these two decisions and explaining how its examiners should analyze patent claims reciting or involving laws of nature, natural principles, natural phenomena, and/or natural products. As a result, it has been far more difficult to obtain patents on life science inventions involving diagnostic methods and genetic materials. Following Myriad, the Supreme Court issued a decision in Alice Corporation Pty. Ltd. v. CLS Bank International, ___ U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347 (2014), restricting what is considered patent-eligible subject matter involving software or computer-related inventions. In Alice Corporation, the Court ruled that an invention directed to the abstract idea exception of patent-eligible subject matter must include something more than conventional or routine methods, steps, or computer elements to transform the abstract idea into patent-eligible subject matter. Following this decision, the USPTO released guidelines explaining how examiners should analyze computer-related patent claims involving abstract ideas. As a result, it has been far more difficult to obtain patents on computer-related inventions, especially those inventions involving financial services or business operations. 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. 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 13

§1.21

INTELLECTUAL PROPERTY LAW

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 – 1.60 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 filed after May 13, 2015, is valid for 15 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 United States Patent and Trademark Office, Design Patent Application Guide, www.uspto.gov/patents-getting-started/patent-basics/types-patent-applications/designpatent-application-guide. 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,

1 — 14

WWW.IICLE.COM

PATENTING INVENTIONS

§1.23

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 United States Patent and Trademark Office, General Information About 35 U.S.C. 161 Plant Patents, www.uspto.gov/patents-getting-started/patent-basics/types-patentapplications/general-information-about-35-usc-161. 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, Pub.L. No. 91-577, 84 Stat. 1542, see United States Department of Agriculture, Plant Variety Protection, www.ams.usda.gov/services/plant-variety-protection.

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 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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 15

§1.24

INTELLECTUAL PROPERTY LAW

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 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. §§100, 135(b). 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

1 — 16

WWW.IICLE.COM

PATENTING INVENTIONS

§1.25

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 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). Prior to the implementation of the AIA, there were two exceptions to this requirement that allowed others’ prior inventions that were kept secret to prevent an inventor from getting a patent. The first exception occurred when the other’s secret invention was described in a U.S. patent application filed before the applicant’s invention and the patent application was later published or granted. See pre-AIA 35 U.S.C. §102(e). The second exception occurred when the prior use was not public but was by another inventor who did not abandon, suppress, or conceal the invention. See pre-AIA 35 U.S.C. §102(g). Often, this latter rule was invoked in situations in which two groups of inventors were seeking a patent on the same invention and the USPTO declared an interference proceeding to

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 17

§1.26

INTELLECTUAL PROPERTY LAW

determine who created the invention first. This type of so-called “secret” prior art may be used 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). Currently, under the provisions of the AIA, a dispute as to the identity of the first inventor to file can be addressed through the implementation of a derivation proceeding. See §1.60 below. 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 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).

1 — 18

WWW.IICLE.COM

PATENTING INVENTIONS

§1.27

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 

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 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 Leahy-Smith America Invents Act 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 19

§1.27

INTELLECTUAL PROPERTY LAW

March 16, 2013, that do not claim priority to a patent application filed before this date. See 35 U.S.C. §102. 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. 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 so-called “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 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

1 — 20

WWW.IICLE.COM

PATENTING INVENTIONS

§1.28

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 first-inventor-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 has changed to be a race to be the first inventor to file a patent application at the United States Patent and Trademark Office. 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 that have come under the AIA. The preexisting laws and rules apply to all applications filed before March 16, 2013, and to continuation and divisional applications of those applications. Some of the benefits under the old system include the ability to eliminate published documents as prior art that were published within one year before the filing date and to eliminate patent applications as prior art that were filed before the patent application was filed, but after the date of invention. Thus, it may be useful to strongly consider pursuing continuation and divisional applications to retain the benefit of the preexisting 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. The previous version of 35 U.S.C. §103(a) stated that 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.] Under the 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.” [Emphasis added.] See 35 U.S.C. §103. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 21

§1.28

INTELLECTUAL PROPERTY LAW

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). This framework is still applicable under the revisions to the law under the AIA. 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. 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 

1 — 22

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.

WWW.IICLE.COM

PATENTING INVENTIONS

V.

§1.30

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 authors believe 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 negated 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 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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 23

§1.31

INTELLECTUAL PROPERTY LAW

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 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.

1 — 24

WWW.IICLE.COM

PATENTING INVENTIONS

§1.32

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 authors do 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. 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 120 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 100 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 2015 Report of the Economic Survey, the median attorneys’ fees in 2014 in the Chicago region for preparing patent applications ranged from $7,500 to $15,500, 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 $5,000. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 25

§1.33

INTELLECTUAL PROPERTY LAW

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 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.

1 — 26

WWW.IICLE.COM

PATENTING INVENTIONS

§1.36

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 authors recommend 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 (9th ed. rev. Nov. 2015) (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. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 27

§1.37

INTELLECTUAL PROPERTY LAW

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 has been replaced with a “derivation” proceeding for patent applications filed after March 16, 2013. See §1.60 below. 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 a patent application, thus giving credence to calling the new system a FITF system. 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 §1.27 above, under the 2013 Leahy-Smith America Invents Act laws, 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 2013 laws of the AIA, 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 preexisting laws for applications filed before March 16, 2013, and under the laws

1 — 28

WWW.IICLE.COM

PATENTING INVENTIONS

§1.40

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 one-year 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, March 20, 1883 (Paris Convention), www.wipo.int/treaties/en/text.jsp?file_id=288514, 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 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 §1.76 below. 1. [1.39] Absolute Novelty Most countries, but not 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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 29

§1.41

INTELLECTUAL PROPERTY LAW

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 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 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. If it turns out that the other party filed a patent application on the invention derived by the first inventor before the first inventor filed his or her application, the first inventor may file a derivation proceeding at the patent office to have the other party’s patent application disqualified as prior art against the first inventor’s patent application. See §1.60 below. 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

1 — 30

WWW.IICLE.COM

PATENTING INVENTIONS

§1.45

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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 31

§1.46

INTELLECTUAL PROPERTY LAW

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 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) and Western Illinois University’s Leslie S. Malpass Library in Macomb (see http://wiu.edu/libraries/govpubs/patents.php). For more information, see www.uspto.gov/ learning-and-resources/support-centers/patent-and-trademark-resource-centers-ptrcs. 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.

1 — 32

WWW.IICLE.COM

PATENTING INVENTIONS

§1.48

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 – 1.60 below briefly discuss the general process and procedures for the submission of a patent application to and examination by the United States Patent and Trademark Office. The entire process from the date of filing the application to the issuance of the granted patent may take on average between 16 months and 3 years. The USPTO continues to have a backlog of patent applications for inventions relating to computer architecture, information security, software, mechanical engineering, and product manufacturing. In those areas of technology, it may take as long as 2 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 the cases, the examiner rejects the claimed invention in the first office action. The applicant then can prepare a response to amend the claims and/or argue that the claims are patentable. This back-and-forth process may continue until the examiner is convinced that the claims are amended sufficiently to avoid overlap with the subject matter claimed in prior inventions, the applicant abandons the application, or the applicant decides to appeal the examiner’s rejection to an appeals board of administrative patent judges. On average, two to three office actions are issued by the examiner on a patent application prior to the final disposition of the application (i.e., either allowed or abandoned). When the claims are found patentably distinct over the prior art references cited 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 establishes the priority 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 that 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 33

§1.49

INTELLECTUAL PROPERTY LAW

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. In fact, a copy of the pending public disclosure (e.g., presentation slides, etc.) may be included as part of the specification in a provisional patent application. Because of the allowable imperfections, a provisional patent application 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. In this sense, it may be wise to draft several broad independent claims that fully encompass the scope of the subject matter for which protection will be sought. A provisional patent application that merely describes one embodiment of a proposed invention may not support the claims in a later regular patent application that tries to define the broad scope of the subject matter 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 authors believe that a provisional patent application should be as complete and detailed as a regular nonprovisional patent application and include claims that define the invention to ensure complete support for obtaining broad protection of the invention. Such a 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 sections in the following sequence:

1 — 34

WWW.IICLE.COM

PATENTING INVENTIONS

§1.49

a. title of the invention; b. a cross-reference to any related patent applications (if applicable); c. a statement concerning any federal sponsorship of the research or development (if applicable); d. a reference to any genomic sequence listing, table, or computer program listed in an appendix (if applicable); 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, but recommended, for a provisional application);

j.

an abstract; and

k. an appendix of DNA sequence listing, if needed. See 37 C.F.R. §1.77(b). The specification must meet three separate and distinct requirements, which are commonly referred to as the “written description,” “enablement,” and “best mode” requirements. See 35 U.S.C. §112. In order to meet the written description requirement, the specification must describe the invention in a sufficient amount of detail that demonstrates the inventors have possession of the subject matter that is set forth in the claims of the patent application. In order to meet the enablement requirement, 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.” See 37 C.F.R. §1.71(a). The description must also completely describe a specific embodiment of the 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 at the time the application is filed. See 37 C.F.R. §1.71(b). Failure to meet any of these three 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 35

§1.50

INTELLECTUAL PROPERTY LAW

The claims define the subject matter sought to be covered or protected 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. An “independent claim” is a claim that stands alone without reference to any other claims. A “dependent claim” is a claim that refers to another claim and adds at least one additional narrowing feature to the other claim. In other words, a dependent claim includes all of the features of the claim to which it refers along with the additional feature(s) specifically introduced within the dependent claim. A dependent claim may refer back to or depend from an independent claim or another dependent claim. For example, an independent claim and associated 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. In the above example, the apparatus of Claim 2 contains all of the features defined in independent Claim 1 along with the inclusion of “a cylinder of rubber at an opposite end of the shaft.” Further examples of independent and dependent claims, along with an example of the various other sections required in the specification, are provided in the sample patent 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 swears or declares 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. The declaration also includes an acknowledgment by the inventor of his or her duty to disclose to the United States Patent and Trademark Office any prior art that he or she becomes aware of while the application remains pending before the USPTO. 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 that may 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

1 — 36

WWW.IICLE.COM

PATENTING INVENTIONS

§1.52

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 issued patents, published patent applications, or published technical articles, and may also include negative examination reports for counterpart foreign applications regarding the same invention. Alternatively, this information does not have to be documentary in nature, but rather can be something 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 authors suggest that upon submitting the information about the disclosure additional evidence and/or arguments should also be included that demonstrate 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. 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 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 

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.

C. [1.52] Publication of the Application 35 U.S.C. §122(b) provides 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. Since a provisional application is pending only for a period of 12 months, the provisional application is not published. Rather, the nonprovisional application that is filed, which claims priority to the provisional application, will be published 6 months after its filing.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 37

§1.53

INTELLECTUAL PROPERTY LAW

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 or infringe the invention claimed in 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). This last point is important to consider because the claims in the patent application may have to be amended (e.g., changed) during prosecution in order to overcome either novelty (35 U.S.C. §102) or obviousness (35 U.S.C §103) rejections made by the examiner in view of the prior art that is identified. 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. A patent application may include up to 3 independent claims and 17 dependent claims for a total of 20 claims without incurring any additional surcharges or fees. The independent claims are usually drawn to a material composition, a product containing the material composition, a method of making the material composition or the product, and/or a method of using the product. 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 claims directed to the unelected inventions are marked as “withdrawn” during the remainder of the prosecution. 37 C.F.R. §1.142(b). When the claims directed to the elected invention are in a condition for allowance, the examiner may request that the applicant cancel the claims to the nonelected inventions from the application or reexamine the withdrawn claims to rejoin them into the application, provided the nonelected claims meet certain requirements. A claim to a nonelected invention is eligible for rejoinder if it depends from or otherwise requires all the limitations of an allowable claim. The applicant has the right at any time prior to the issuance of a patent that claims the elected invention 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

1 — 38

WWW.IICLE.COM

PATENTING INVENTIONS

§1.54

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. In certain situations, the need for a divisional application may be tempered if the applicant amends the withdrawn claims during prosecution to require all of the limitations of the elected invention, thereby maintaining the right for claim rejoinder when the elected invention is found to be allowable.

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 given one or more United States Patent Classification (USPC) codes that signify the general technical area associated with the subject matter in the application. The application is then assigned to a group of patent examiners located in a technical unit that handles patent applications related to that technical area. 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 publicly available documents describing the same or a similar invention in existence before the application filing date. Typically, these documents include issued 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 in view of the prior art documents found. It is usually only a very small minority of cases in which the examiner may issue a notice of allowance as the first office action. In fact, if such a first action is received, the subject matter may have been too narrowly claimed in the filed application. In this situation, the authors suggest that the applicant consider the different ways in which claimed subject matter can be broadened (i.e., file a continuation application or a broadening reissue application). Most of the time, the examiner makes at least some superficial argument supporting a rejection of the claims over the prior art in the office action. This at least puts the burden on the applicant to file a response and make a record or create a file history. 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 compliance requires the claims to be supported and enabled by the application and to distinctly claim the invention in a way that is not indefinite, vague, or confusing. The claims may be rejected under 35 U.S.C. §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. One example of such a grammatical error that is commonly encountered is an element in a

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 39

§1.55

INTELLECTUAL PROPERTY LAW

dependent claim being described in a way that lacks proper antecedent basis in the claim(s) from which the dependent claim depends, thereby, rendering the claimed subject matter ambiguous. 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 description of the drawings in the specification. 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 that provide new or additional grounds for supporting a rejection of the invention as being unpatentable. 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 examination by considering additional arguments or amendments made by the applicant as further described in §1.55 below. 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 an extension 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 regarding patentability. 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 to overcome a rejection. In addition to mere arguments describing how or why the examiner is in error, the claims may be amended to include additional features or more narrowly define the existing features. The response must include arguments that show how the amendment distinguishes the amended claims from the prior art documents. The response should also show the examiner where in the original specification and/or drawings written support for the amendment is provided. 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

1 — 40

WWW.IICLE.COM

PATENTING INVENTIONS

§1.56

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. 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 request 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. Even amendments to the claims can be proposed and openly discussed during the interview. 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. However, the applicant should keep in mind that any written document, even if it is marked for discussion only, that is provided to the examiner will most likely find its way into the record or file history for the application. See Chapter 2 of this handbook for information regarding the doctrine of equivalents.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 41

§1.57

INTELLECTUAL PROPERTY LAW

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 set forth 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 September 16, 2012 (implementation of 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 July 2015, there were slightly more than 224 administrative patent judges on the board, who heard about 9,964 appeals to that point in fiscal year 2015 with about 22,722 appeals still pending. See Nathan K. Kelley and Scott R. Boalick, Patent Trial and Appeal Board Update, presented at Patent Public Advisory Committee Quarterly Meeting, Aug. 20, 2015, www.uspto.gov/sites/default/files/documents/20150820 _PPAC_PTAB_Update.pdf (case sensitive). 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. 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 only considers the record established 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 2014, 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. Id. 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, 1.197 – 1.198. I. [1.58] After Final Consideration Pilot 2.0 and Post-Prosecution Pilot Program The United States Patent and Trademark Office has implemented a pilot program to assist in advancing prosecution of applications with the timely review and disposition of responses meeting certain criteria that are made after final rejection. This After Final Consideration Pilot 2.0 (AFCP 2.0) program allows the examiner to execute an additional prior art search, conduct an interview with the applicant, and provide additional time to consider an amendment filed in response to a final rejection. In order for a response to be eligible for consideration, the response must be filed under 37 C.F.R. §1.116 and include a request for consideration under the pilot program, as well as make a narrowing amendment to at least one independent claim. A response will be accepted under the AFCP 2.0 program provided the amendment that is made only requires the examiner to perform a limited search and/or consideration in order to determine patentability.

1 — 42

WWW.IICLE.COM

PATENTING INVENTIONS

§1.60

On July 11, 2016, the USPTO implemented a six-month trial of a Post-Prosecution Pilot Program (P3), which provides an alternative way in which one can respond to a final rejection. P3 combines the effective features of the existing pre-appeal program with some of the features offered by the AFCP 2.0 program. In P3, a panel of examiners will review the applicant’s response and allow the applicant to make a 20-minute presentation during the review process. A notice of decision, which includes a brief written summary as to the examiners’ reasoning, is provided to the applicant by the examiner panel. This notice of decision will inform the applicant that the final rejection is upheld, the application is allowed, or prosecution is reopened. P3 may be useful for consideration when no agreement with the examiner can be reached prior to filing a response to the final office action. The time frame over which an applicant can file a response under the AFCP 2.0 program has been extended multiple times with the current extension allowing the program to be fully operative through September 30, 2017. The authors expect that the success of this program will give rise to a further extension of time as this due date approaches. The time frame associated with the P3 pilot program may also be extended or made permanent if this pilot program is found to be successful. J. [1.59] 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. An issue notification is usually mailed to the applicant a few weeks before the patent is issued announcing the expected issue date and the assigned patent number. Any continuation applications or divisional patent applications must be filed no later than the issue date to be “copending” 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. K. [1.60] Interference and Derivation Proceedings As noted in §1.25 above, in the United States, patents with an effective filing date before March 16, 2013, were awarded to the first to create the invention. When two or more parties applied for a patent on the same invention, an interference proceeding was held by the United States Patent and Trademark Office to determine the first inventor, who was thus awarded the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 43

§1.61

INTELLECTUAL PROPERTY LAW

patent. Since most other countries award patents to the first to file for a patent application, sophisticated inventors keeping close records of the creation of their inventions may have an advantage over foreign inventors whom 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 have been presented in the inventor’s application that was 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 have been 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 expensive, with costs approaching that of a small lawsuit. For patent applications filed on or after March 16, 2013, interference proceedings are not applicable because the implementation of the Leahy-Smith America Invents Act awards the patent to the first inventor who files a patent application for the same invention. However, the requirements for novelty have also changed, 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. Derivation proceedings are heard before the Patent Trial and Appeals Board. The USPTO has adopted final rules for derivation proceedings that took 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 laterfiled patent application. 37 C.F.R. §42.403. L. Correction, Reissue, Reexaminations, and Post-Grant Reviews 1. [1.61] Certificates of Correction After a patent has issued, any errors made by the United States Patent and Trademark Office and any clerical or typographical errors made by the applicant can 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. For example, 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. However, 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. 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

1 — 44

WWW.IICLE.COM

PATENTING INVENTIONS

§1.64

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. During the reexamination procedure, an examination of the invention based on the prior art submitted with the request is conducted. 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 was 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. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 45

§1.64

INTELLECTUAL PROPERTY LAW

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 is 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). However, 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 proceeding replaced inter partes reexamination; all pending inter partes reexaminations were automatically converted to IPRs, effective September 16, 2012. An IPR can be requested if (a) it has been more than nine months since the patent issued (e.g., past the date in which a PGR can be filed) or (b) any post-grant review instituted regarding the patent has been terminated. 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 until the completion of the IPR proceeding. 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(s) that were raised or “could have been raised” during the IPR proceeding. During an IPR proceeding, both the patent owner and the third-party 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. Since the implementation of IPR proceedings in 2012, a total of 3,953 IPR petitions have been filed with 1,737 being filed during 2015. As of December 31, 2015, a total of 2,447 petitions have been completed with 1,243 being dismissed and 1,204 resulting in a trial. Thus, only about 49 percent of the IPR petitions that are filed reach the stage of undergoing a trial. During these trials, an additional 472 petitions were terminated (e.g., settled, dismissed, etc.), leaving only

1 — 46

WWW.IICLE.COM

PATENTING INVENTIONS

§1.66

about 30 percent of the original IPR petitions in which the PTAB reached a decision. For the 732 trials that have been conducted and a final written decision reached, a total of 529 petitions resulted in all of the instituted claims being declared unpatentable, 107 petitions resulted in some of the instituted claims being declared unpatentable, and only 96 petitions resulted in no instituted claims being found unpatentable. See USPTO, Patent Trial and Appeal Board Statistics (Dec. 31, 2015), www.uspto.gov/sites/default/files/documents/2015-12-31%20PTAB.pdf (case sensitive). M. Patent Expiration and Maintenance Fees 1. [1.65] Patent Term Two regimes exist for determining the term of a utility patent. For utility 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 20 years from the earliest filing date to which it claims priority. 35 U.S.C. §154(a). Design patents have a much shorter enforceable term than utility patents: 15 years from their issue date (or 14 years if filed before May 13, 2015). 35 U.S.C. §173; MANUAL OF PATENT EXAMINING PROCEDURE §1502.01(A) (9th ed. rev. Nov. 2015), www.uspto.gov/web/offices/pac/mpep. It is on this date that the provisions implementing the Geneva Act (1999) of the Hague Agreement Concerning the International Registration of Industrial Designs, www.wipo.int/edocs/pubdocs/en/designs/453/wipo_pub_453.pdf, became effective in the United States. See the Patent Law Treaties Implementation Act of 2012, Pub.L. No. 112-211, 126 Stat. 1527. Design patents as used herein include patents that are issued from design applications filed domestically under 35 U.S.C. §111 and those filed internationally under 35 U.S.C. §385. 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. 37 C.F.R. §1.705(a). 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 47

§1.67

INTELLECTUAL PROPERTY LAW

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. 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 portion of the term of the second patent that extends beyond the term of the related patent and agrees that the second patent is enforceable only as long as it is owned by the same party together with the related 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 have been 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 2015, see www.uspto.gov/sites/default/files/documents/USPTOFY15PAR.pdf (case sensitive), there had been a marked decrease 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 only about 85 percent in 2015. In 2011, at the eighth-year stage about 81 percent of patents were renewed, compared to only about 66 percent in 2015. In 2011, at the twelfth-year stage about 60 percent of patents were renewed, compared to only about 47 percent in 2015. Maintenance fee payments escalate every four years. As of July 2016, the maintenance fees for a large entity patent owner for the fourth-, eighth-, and twelfth-year stages are $1,600, $3,600, and $7,400, 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 be economically viable 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.

1 — 48

WWW.IICLE.COM

PATENTING INVENTIONS

§1.70

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. See §1.49 above. 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 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 from the application is selected by the applicant to be included on the front page that is supposed to be representative of the main invention protected by the 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. See §1.49 above. 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 provides 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 and figures provide 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. In other words, the detailed description and figures provide support for the claimed subject matter.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

§1.70

1 — 53

§1.70

1 — 54

INTELLECTUAL PROPERTY LAW

WWW.IICLE.COM

PATENTING INVENTIONS

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

§1.70

1 — 55

§1.71

INTELLECTUAL PROPERTY LAW

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.

1 — 56

WWW.IICLE.COM

PATENTING INVENTIONS

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

§1.71

1 — 57

§1.71

1 — 58

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 that is important to the national security of 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 automatically granted 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 national security. 35 U.S.C. §185. Technology pertaining to national security usually relates to nuclear or radioactive materials and technology associated with producing advanced weapons. B. [1.74] Patent Cooperation Treaty International Patent Applications Under the Patent Cooperation Treaty, June 19, 1970 (PCT), www.wipo.int/pct/en/texts/ articles/atoc.htm, 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 a PCT

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 59

§1.75

INTELLECTUAL PROPERTY LAW

international patent application, the decision as to which countries to file the patent application in may be delayed up to 30 months after the filing date of the first application to which the application claims priority. As of June 2016, there are 150 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. National patent applications in most industrialized countries of the world, with the exception of Taiwan and many South American and Middle Eastern countries, may be filed that claim priority to a PCT application. For a total cost including fees and expenses of about $4,000, the filing of a PCT application reserves the applicant’s right to file a patent application in all of the member countries. If a person is interested in eventually filing in only one or two countries, the cost for the delay of filing national applications made available by filing a PCT application may not be economical. On the other hand, if the applicant 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 incurring the expense of filing multiple national applications, 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, discussed in §1.38 above, is one such treaty. As of June 2016, a total of 176 countries have signed the Paris Convention. The countries that participate in the Patent Cooperation Treaty 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 States Party to the PCT and the Paris Convention and Members of the World Trade Organization (status on 23 September 2016), www.wipo.int/export/sites/www/pct/ en/texts/pdf/pct_paris_wto.pdf. 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, the Maldives, Myanmar, and the Solomon Islands. D. [1.76] Foreign National and Regional Patent Offices Almost all countries have national 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. These regional patent offices, include the European Patent Office (EPO); the Eurasian Patent Organization (EAPO), consisting mainly of former Soviet republics; the Organisation Africaine de la Propriété Intellectuelle (OAPI); and the African Regional Intellectual Property Organization (ARIPO). The EPO is the largest such regional office. Almost

1 — 60

WWW.IICLE.COM

PATENTING INVENTIONS

§1.77

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.

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 put forth by these companies 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 discard the catalog as 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 authors’ experience, this latter type of company often works with the inventors only after decent patent protection has been obtained. 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. 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/patents-gettingstarted/using-legal-services/scam-prevention. In addition, the Federal Trade Commission has successfully pursued complaints against numerous fraudulent or misleading invention promotion companies. The FTC provides additional information at www.consumer.ftc.gov/articles/0184invention-promotion-firms.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 61

§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 presumed to be the applicant unless another party (e.g., employer, etc.) to whom the inventor has assigned its rights or is under an obligation to assign, requests to be designated as the applicant. In many foreign countries, only the entity that owns the invention and patent application is rightfully considered to be 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 claims a similar or different invention from the invention examined in the prior application. A continuation patent application may not incorporate any new information, but rather relies on the specification and drawings provided 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 an invention that was withdrawn from examination in the prior application as a result of a restriction requirement. See §1.53 above. A divisional application may not incorporate any new information, but rather relies on the specification and drawings provided in the prior application. Effective filing date: The earlier of the actual date a patent application is filed with the USPTO or the filing date of any patent applications to which the application claims priority.

1 — 62

WWW.IICLE.COM

PATENTING INVENTIONS

§1.78

Ex parte reexamination: A procedure in the USPTO in which a granted U.S. patent undergoes additional examination to determine the patentability of the claimed subject matter in view of new prior art documents. Only the patent owner participates in the reexamination. See §1.63 above. 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 §1.60 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 adversarially in the proceeding. See §1.63 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 §1.59 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. Obvious: An invention is considered to be obvious (i.e., lacking inventiveness) when the features of the invention were previously described or suggested in separate written documents or articles that were publicly sold, and a person of ordinary skill in the art would have had a reasonable motivation and the know how to combine those features to create the invention. See also Nonobviousness 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. The applicant may file a response to the office action that rebuts the examiner’s reasoning and/or amends the claims in order to place the application in condition for allowance. Patentee: The owner of a patent. See also Applicant above.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 63

§1.78

INTELLECTUAL PROPERTY LAW

Patent Cooperation Treaty international patent application: A patent application that reserves the applicant’s right to file a patent application in any country that is a member of the Patent Cooperation Treaty for a period of 30 months after the filing date of the first application to which the PCT application claims priority. 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 adversarially in the proceeding. See §1.64 above. Prior art: Information or documents that were 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 – 1.60 above. 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. Reexamination: A procedure in which a U.S. patent may undergo examination after being granted. See Ex parte reexamination above, Supplemental reexamination below, and §1.63 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.

1 — 64

WWW.IICLE.COM

PATENTING INVENTIONS

§1.79

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?

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?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

1 — 65

§1.79

INTELLECTUAL PROPERTY LAW

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. Provide copies of any nonpatent literature.

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.) 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 — 66

WWW.IICLE.COM

2

Litigating U.S. Patent Rights in a Changing Landscape

JAFON FEARSON LAURA BETH MILLER Brinks Gilson & Lione Chicago

The contribution of Jeffrey A. Marx to previous editions of this chapter is gratefully acknowledged. ®

©COPYRIGHT 2017 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 Damages 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] District Court Jurisdiction 2. [2.18] Venue 3. [2.19] Joinder 4. [2.20] District Court’s Intellectual Property Track Record 5. [2.21] The United States International Trade Commission B. [2.22] Preliminary Injunction Motions C. [2.23] Elements of the Complaint D. [2.24] Primer on the Law of Infringement 1. [2.25] Direct Infringement a. [2.26] Literal Infringement b. [2.27] Infringement Under the Doctrine of Equivalents (1) [2.28] Limitations on the doctrine of equivalents (2) [2.29] Prosecution history estoppel (3) [2.30] Subject matter disclosed but not claimed

2—2

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

2. [2.31] Indirect Infringement a. [2.32] Elements of Inducement Under 35 U.S.C. §271(b) b. [2.33] Elements of Contributory Infringement Under 35 U.S.C. §271(c) 3. [2.34] Willful Infringement E. [2.35] Responding to Complaint (Answers, Affirmative Defenses, and Counterclaims) 1. [2.36] Defense or Claim of Noninfringement 2. [2.37] Affirmative Defense of Invalidity a. [2.38] Defenses Under 35 U.S.C. §101 b. [2.39] Defenses Under 35 U.S.C. §102 c. [2.40] Defenses Under 35 U.S.C. §103 d. [2.41] Affirmative Defenses Based on the Disclosure Requirements of 35 U.S.C. §112 3. [2.42] Affirmative Defense Based on License Rights and/or Patent Exhaustion 4. [2.43] Affirmative Defense Based on Statutory Bar on Damages, Failure To Mark, and/or Intervening Rights 5. [2.44] Affirmative Defense Based on Laches 6. [2.45] Affirmative Defense of Equitable Estoppel 7. [2.46] Affirmative Defense of Patent Unenforceability a. [2.47] Inequitable Conduct b. [2.48] Patent Misuse F. [2.49] Filing of Jury Demands IV. Case Management Issues and Discovery A. Preliminary Issues 1. [2.50] Protective Orders 2. [2.51] Electronic Discovery 3. [2.52] Case Management Plan B. [2.53] Motions To Bifurcate C. [2.54] Motions To Sever and Transfer D. [2.55] Typical Discovery Sought by Patentee E. [2.56] Typical Discovery Sought by Alleged Infringer V. Claim Construction/Markman Hearings A. [2.57] Court Has Responsibility of Construing Claim Terms B. [2.58] Evidence Considered in Construing Claims C. [2.59] Process of Claim Construction

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—3

INTELLECTUAL PROPERTY LAW

D. Special Claim Construction Considerations 1. [2.60] Preamble 2. [2.61] Construing Means-Plus-Function Claims VI. [2.62] Summary Judgment, Trial, and Appeal VII. Post-Grant Procedures Under the Leahy-Smith America Invents Act A. [2.63] Brief Overview: Inter Partes Review, Post-Grant Review, and Cover Business Method B. [2.64] Inter Partes Review C. [2.65] Post-Grant Review D. [2.66] Covered Business Methods VIII. Checklists A. B. C. D. E. F. G.

[2.67] [2.68] [2.69] [2.70] [2.71] [2.72] [2.73]

Business Considerations in Bringing a Patent Infringement Suit Facts To Investigate in Assessing Damages Lost Profits Considerations Reasonable Royalty Considerations Complaint Elements Categories of Typical Discovery Sought by Patentee Categories of Typical Discovery Sought by Alleged Infringer

IX. Forms A. B. C. D.

2—4

[2.74] [2.75] [2.76] [2.77]

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

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

I. [2.1]

§2.1

PATENT LITIGATION OVERVIEW

The U.S. Constitution empowers Congress to grant patents to inventors in order to “promote the Progress of Science and useful Arts.” U.S.CONST. art. I, §8. While there were some writings debating the value of (and potential abuses of) granting patents at the time of the Constitutional Convention, the concerns expressed then pale in comparison to the concerns raised more recently about whether patents help or hinder the progress of science, or perhaps more accurately, help or hinder commerce and innovation. While the debate has included discussion about the effectiveness of the United States Patent and Trademark Office (USPTO) in reviewing and issuing patents, nowhere has this debase drawn more heated discussion than in the context of patent litigation. A myriad of factors has contributed to the intense focus on patent litigation, including the increased rate of patent litigation filings over the last 20 years, the increased cost of that litigation, and the increased, and perceived uncertainty, in patent damages, particularly in instances in which the litigants were not competitors, but rather alleged infringers being sued by well-financed individuals and companies that had secured the patent rights from the original inventor for the purpose of initiating litigation. To address these concerns, the courts, Congress, and industry leaders have taken various actions in the name of “patent reform.” 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. Its impact can be seen in the way parties are approaching patent litigation, particularly with respect to the way alleged infringers are challenging the invalidity of asserted patents. For example, the AIA provides alleged infringers (and others) with a mechanism for challenging the validity of patents through quasi-judicial, administrative proceedings. The administrative proceeding typically proceeds more quickly than a court proceeding and applies a lower standard than a court for invalidating a patent, making it a potentially low-cost option for alleged infringers or others seeking to clear the patent landscape before launching or continuing to sell a product in the market. The U.S. Supreme Court also has taken renewed interest in patent cases, granting certiorari petitions in a number of areas, including patent-eligible subject matter and damages. In addition, the federal and district courts have promulgated a number of rulings specifically directed toward patent litigation. In general, these rulings have tended to streamline the patent litigation process and provide clarity on complex substantive issues. In fact, throughout the 1990s, the number of patent infringement cases filed each year increased steadily. See PriceWaterhouseCoopers LLP, 2015 Patent Litigation Study: A change in patentee fortunes, p. 3, Figure 1, www.pwc.com/us/en/forensic-services/publications/assets/2015pwc-patent-litigation-study.pdf (May 2015). After a brief leveling off period between 2004 and 2009, patent filings were again on the rise, peaking in 2013 with over 6,000 cases filed. Id. Since then, however, patent filings have been on the decline; whether this is a permanent change, or just a temporary change as parties adjust their strategies in light of the AIA procedures and court decisions, remains to be seen. Median damage awards also seem to be trending slightly downward, but the range of damage awards remains high. 2015 Patent Litigation Study, p. 4. This

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—5

§2.2

INTELLECTUAL PROPERTY LAW

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. Why all this attention on patent law? Patents provide their owners with a potentially powerful and financially lucrative property right. Patents encourage innovation and provide businesses with a competitive advantage. A legal system that protects those rights, while recognizing the limits of those rights and protecting against abuses, is essential to securing the intended purpose of the patent grant. In that regard, some of the patent reforms initiated over the last decade have hit the mark, while others have fallen short. Counsel of Economic Advisers Issue Brief, The Patent Litigation Landscape: Recent Research and Developments, www.whitehouse.gov/sites/default/files/page/files/201603_patent_litigation_issue_brief_cea.pdf (Mar. 2016). As such, we can expect that the landscape for patent litigation will continue to change and evolve, but it will not go away. Therefore, 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.

II. PREFILING CONSIDERATIONS A. [2.2] Identifying the Business Objectives in Pursuing Litigation 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; the median time to trial is over two years. PriceWaterhouseCoopers LLP, 2015 Patent Litigation Study: A change in patentee fortunes, p. 14, www.pwc.com/us/en/forensic-services/publications/assets/2015-pwcpatent-litigation-study.pdf (May 2015). A party should expect to spend several million dollars in fees and expenses, including expert fees if a case proceeds through trial. The costs vary depending on the technology, the number of patents and products at issue, the number of disputed issues, and the number of experts needed, as well as the litigation support technology and consultants used to assist in presenting a case. This is but one of the reasons why alleged infringers, with strong invalidity defenses, may opt to challenge the validity of an asserted patent before the Patent Trial and Appeal Board (PTAB). See §§2.63 – 2.66 below. Still, most cases do not proceed to trial. Instead, many cases are often settled, either after the court construes the claim terms through a process referred to as a Markman hearing (see 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 §§2.57 – 2.61 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 initiating any patent litigation and to explore whether alternatives to litigation are possible.

2—6

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.2

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 list of 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? 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?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—7

§2.3

INTELLECTUAL PROPERTY LAW

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. Moreover, post-grant procedures under the Leahy-Smith America Invents Act impose a lower burden of proof than that imposed by the courts when challenging the validity of an issued patent. See §§2.63 – 2.66 below. 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. 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. 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 human resources 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, including counsel that can assist in evaluating options under the Leahy-Smith America Invents Act concerning post-grant procedures, companies 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.

2—8

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.6

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 ensuring (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 counsel. Even if a formal opinion is not pursued, it is a good practice for an attorney to 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 steps 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 in which the patentee does not have a strong understanding of the prior art in the field. A patentee should expect that the alleged infringer will look for prior art that can be used to initiate post-grant proceedings under the Leahy-Smith America Invents Act. 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 along with 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2—9

§2.6

INTELLECTUAL PROPERTY LAW

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). See also 1-20 Donald S. Chisum, CHISUM ON PATENTS §20.07 (2006 ed.). In selecting a testifying expert, the person should have not only excellent academic credentials but also real-world experience in the relevant 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 POINTERS 

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.



A number of services exist to assist in identifying experts. In addition, many universities have professors who are available and have experience providing expert testimony in litigation. When interviewing experts, consider including a member of your client’s technical team in the process. He or she can assist in evaluating the knowledge and communication skills of the proposed expert.

2 — 10

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE



§2.7

Also consider the venue when assessing the experience and presentation style of your expert. Not every proceeding may include a jury assessing the credibility of your expert. For example, there are no juries at United States International Trade Commission (USITC) proceedings. Instead, the final hearing or “trial” is held before an administrative law judge. Some ALJs will permit live direct testimony of an expert, but some expert testimony may be presented in the form of a written statement, with live testimony reserved for cross-examination or redirect and possibly questions from the bench.

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. STC.UNM v. Intel Corp., 767 F.3d 1351, 1354 (Fed.Cir. 2014) (“Case law indicating that Rule 19 is available to an owner to join a coowner under circumstances in which there is an agreement by the co-owner to join, or available to someone who, by agreement, is an exclusive licensee, only underscores the importance of absent owners’ consent to joinder. Under circumstances in which a plaintiff has a contractual right to unilaterally enforce the patent, Rule 19 unremarkably allows that plaintiff to join involuntary plaintiffs. Without agreement, no precedent has held that a co-owner may be involuntarily joined.” [Emphasis added.]). However, if the license is not exclusive, and the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 11

§2.8

INTELLECTUAL PROPERTY LAW

patentee refuses to join in the patent litigation, it may be possible to join the patentee as an 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. In re Regents of University of California, 101 F.3d 1386, 1390 (Fed.Cir. 1996). 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 Ethicon, Inc. v. United States Surgical Corp., 135 F.3d 1456, 1468 (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, in which it 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

2 — 12

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.10

to filing the suit, the patentee requested information on the manufacturing process for the product from the defendant. 213 F.3d at 1364. When the defendant refused to provide the requested 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), including the efforts it had made to determine infringement, and, finally, indicating 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. 213 F.3d at 1366. 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 §§2.24 – 2.34 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 “in no event 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 a jury, the court shall assess them.” Still, significant damages awards in patent cases do occur. Increasingly, these awards have occurred in litigation between nonpracticing entities and large corporate defendants. As a result, companies have lobbied Congress for patent reform directed toward damages. While a number of

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 13

§2.11

INTELLECTUAL PROPERTY LAW

bills introduced in Congress over the years included damages provisions, the Leahy-Smith America Invents Act did not. However, several court decisions 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. 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, 869 – 870 (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-in-suit. Then, in Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed.Cir. 2011), the Federal Circuit rejected the damages 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 ResQNet.com, 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. Two basic models exist when calculating damages in a patent infringement case: reasonable royalties and lost profits. While most cases involve a damages demand for a reasonable royalty, it is possible that a patentee may seek lost profits or a combination of lost profits and a reasonable royalty. However, with the above cases in mind, litigants must give careful attention to the evidentiary proof necessary to establish a damages 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 Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970). These factors are referred to as the “GeorgiaPacific 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.” 318 F.Supp. at 1121. 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

2 — 14

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.12

infringement began, taking into consideration the preceding 14 technical, business, and licensing factors. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1316 – 1318 (Fed.Cir. 2011), confirmed that the Georgia-Pacific 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 – 1318. 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 non-infringers might have paid.” Then, in Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1585 n.13 (Fed.Cir. 1995), 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, 1312 – 1313 (Fed.Cir. 2002); Grain Processing Corp. v. American Maize-Products Co., 185 F.3d 1341, 1353 (Fed.Cir. 1999). 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 15

§2.13

INTELLECTUAL PROPERTY LAW

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 n.9 (Fed.Cir. 1985) (noting that Panduit four-part test is not exclusive test), abrogated on other grounds by Pfaff v. Wells Electronics, Inc., 525 U.S. 55, 142 L.Ed.2d 261, 119 S.Ct. 304, 311 n.11 (1998), as recognized in Medicines Co. v. Hospira, Inc., 827 F.3d 1363, 1372 (Fed.Cir. 2016). 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, 949 (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 providing 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 damages 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. See Comark Communications, supra, 156 F.3d at 1186 (“[P]ursuant to its authority under 35 U.S.C. §§284 – 285 (1994), the district court doubled the damages awarded by the jury . . . in light of the jury's finding of willfulness and also awarded attorney fees.”). 2. [2.14] Limitations on Damages 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 damages period. It prohibits recovery of damages for infringement committed more than six years prior to filing of the infringement claim.

2 — 16

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.15

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 35 U.S.C. §271(g). As in discussed in §2.24 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 35 U.S.C. §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 reexamination 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 reexamination 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. 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 damages-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? 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?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 17

§2.15

INTELLECTUAL PROPERTY LAW

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 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?

2 — 18

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.15

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. Damages 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 

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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 19

§2.16

INTELLECTUAL PROPERTY LAW

4. [2.16] Injunctive Relief In addition to monetary awards, a patentee may obtain injunctive relief. 35 U.S.C. §283 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. 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 1838. 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.

2 — 20

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.18

III. INITIAL FILINGS AND RELATED ISSUES A. Where To Bring Suit 1. [2.17] District Court 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 arise under §1338(a), as well as any suit in which a well-pleaded complaint establishes either that (a) federal law “creates the cause of action” or (b) “the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law [when] patent law is a necessary element of one of the well-pleaded claims.” Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 100 L.Ed.2d 811, 108 S.Ct. 2166, 2174 (1988). 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 in which venue (as discussed in §2.18 below) is proper, is a potential judicial district for these cases. 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. Given the breadth of the jurisdiction and venue statutes, patentees often have a host of jurisdictions to choose in bringing an action for patent infringement. For this reason, evaluation of the jurisdiction’s patent track record (discussed §2.20 below) becomes important. 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, 1223 (Fed.Cir. 2011). Additional factors to consider include the convenience of the 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. 662 F.3d at 1223 – 1224.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 21

§2.19

INTELLECTUAL PROPERTY LAW

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] Joinder The Leahy-Smith America Invents Act added a new statute, 35 U.S.C. §299, regarding joinder of parties in patent litigation. This joinder provision was intended to prevent patentees from litigating infringement actions against numerous, unrelated companies in a single suit. Under §299(a)(1), alleged infringers can be joined in a single action only 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 (see the Drug Price Competition and Patent Term Restoration Act of 1984, Pub.L. No. 98-417, 98 Stat. 1585, commonly known as the HatchWaxman Act)) and cases in which an accused infringer has waived the limitations on joinder. In practice, this patent reform has done little to avoid some of the imbalances created in these “multi-defendant” litigations. Although the patentee is now required to file separate complaints against each alleged infringer, these filings often occur at or around the same time. As a result, the cases are often consolidated at least for discovery purposes. 4. [2.20] 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. Among these districts are 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

2 — 22

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.21

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. With the advent of post-grant proceedings under the Leahy-Smith America Invents Act, parties also will want to consider the court’s track record concerning the grant of a stay during the pendency of any such proceedings. Some courts may be inclined to grant a stay as soon as a petition is filed, while other courts may prefer to grant a stay only upon institution of a proceeding. Still others may not be inclined to grant a stay at all, or to grant it only if the request is filed at the early stage of the court proceeding. 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/statistics-reports/analysis-reports. 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 (www.pacer.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, 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; they also 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. 5. [2.21] The United States International Trade Commission Another potential “venue” for patent infringement cases is the United States International Trade Commission, the administrative agency responsible for administering the Tariff Act of 1930, Pub.L. No. 71-361, 46 Stat. 590. Relief before the USITC can be sought in tandem with a district court action, although the district court case may be stayed pending resolution of the USITC investigation. The relevant portion of the Act is defines as unlawful [t]he 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)(B). There are a number of procedural and substantive requirements that must be met before filing a complaint under 19 U.S.C. §1337 with the USITC. Moreover, once a complaint is filed, there is

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 23

§2.22

INTELLECTUAL PROPERTY LAW

a 30-day period of review, during which time the USITC’s Office of Unfair Import Investigations (OUII) reviews the complaint allegations and makes a recommendation to the USITC 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. Traditionally, the OUII remained involved throughout the investigation as a party protecting the public interest. More recently, the OUII may elect to participate in only selected proceedings or in certain aspects of proceedings. 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 USITC. Some of the elements of proof are different between cases proceeding in district court and the USITC. For example, a USITC 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 a USITC proceeding under §1337 must show that the alleged unfair act (the alleged infringement) is affecting the “domestic industry.” Nevertheless, the USITC 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. In 2015, the Federal Circuit made clear that imported goods also may be excluded under an indirect infringement theory. That is, if a seller induces an importer to infringe at the time of importation, and the importer later uses the goods to directly infringe a U.S. patent, those goods will qualify as “articles that infringe” and may be excluded by the USITC. See Suprema, Inc. v. International Trade Commission, 796 F.3d 1338 (Fed.Cir. 2015). 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. There are numerous additional factors that should be evaluated before deciding whether to file a complaint for patent infringement with the USITC. Some patentees choose to proceed in the USITC and at the same time file a district court proceeding (which may be stayed pending resolution of the USITC investigation). The strategy and considerations that go into these decisions are beyond the scope of this chapter. However, more information about USITC proceedings and §1337 actions can be found at www.usitc.gov. In addition, for an informative treatise on USITC practice and procedure, see Donald K. Duvall et al., UNFAIR COMPETITION AND THE ITC (2015). B. [2.22] 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

2 — 24

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.22

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). In addition to the legal criteria set forth below, a number of practical considerations go into the calculation of whether to seek a preliminary injunction, including whether the patent has been litigated successfully in the past, as each consideration militates against extended discovery prior to a ruling on the motion; whether the parties are direct competitors; and whether there is strong evidence of 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? 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 25

§2.23

INTELLECTUAL PROPERTY LAW

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. [2.23] Elements of the Complaint Previously, patent infringement cases required only notice pleading. However, as of December 1, 2015, the Federal Rules of Civil Procedure were amended, abrogating Fed.R.Civ.P. Form 18, Complaint for Patent Infringement, and subjecting patent complaints to the “plausibility” standard of Ashcroft v. Iqbal, 556 U.S. 662, 173 L.Ed.2d 868, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 167 L.Ed.2d 929, 127 S.Ct. 1955 (2007). Tannerite Sports, LLC v. Jerent Enterprises, LLC, No. 6:15-cv-00180-AA, 2016 WL 1737740, *3 (D.Or. May 02, 2016) (“the salient fact is Twombly/Iqbal dictates directinfringement pleading standards as of December 1, 2015”). Now, rather than requiring only “a statement” that the defendant has infringed its patent, a patentee must “explicitly plead facts to plausibly support the assertion that a defendant ‘without authority makes, uses, offers to sell, or sells any patented invention during the term of the patent.’ ” Ruby Sands LLC v. American National Bank of Texas, No. 2:15-cv-1955-JRG, 2016 WL 3542430, *2 (E.D.Tex. June 28, 2016). In theory, the plausibility standard should subject pleadings of direct infringement to greater scrutiny. In practice, however, district courts have applied the plausibility standard to direct infringement claims with varying degrees of scrutiny, with some courts requiring that a party allege how an accused product relates to each limitation of an asserted claim (see Atlas IP, LLC v. Exelon Corp., No. 15 C 10746, 2016 WL 2866134 (N.D.Ill. May 17, 2016), and RainDance Technologies, Inc. v. 10x Genomics, Inc., No. 15-152-RGA, 2016 WL 927143 (D.Del. Mar. 04, 2016)), and others requiring only a general description of the accused product and an allegation

2 — 26

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.23

that it infringes at least one claim (see InCom Corp. v. Walt Disney Co., No. 15-cv-3011-PSG, 2016 U.S. Dist. LEXIS 7131 (C.D.Cal. Feb. 04, 2016), and Solocron v. Healthstream, No. 2:16cv-00016, Dkt. 81 (E.D.Tex. June 7, 2016)). This pleading standard has many implications for patent litigants. First, a plaintiff should be aware of the various degrees of specificity required for alleging a claim in a particular court. The defendants should also review the level of specificity required for asserting counterclaims, such as invalidity. See RAH Color Technologies LLC v. Ricoh USA Inc., No. 2:15-cv-05203-JCJ, 2016 WL 3632720, *4 (E.D.Pa. July 06, 2016) (plausibility standard not satisfied when alleging that “claims of the [Asserted Patent] are invalid for failure to satisfy one or more of the conditions for patentability specified in Title 35”). Second, requiring a more detailed factual investigation at the outset of the case could be more burdensome on plaintiffs, but could save resources and time for all parties involved. A more detailed investigation may also provide defendants with more opportunities to bring pre-answer motions targeted at dismissing weak or baseless claims. However, 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 an identification of at least one claim of each asserted patent allegedly infringed by the 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 and a description of what the patent at issue does compared to what the alleged infringing product does; 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 27

§2.24

INTELLECTUAL PROPERTY LAW

D. [2.24] 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 §§2.25 – 2.34 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. 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. Clare v. Chrysler Group LLC, 819 F.3d 1323, 1326 (Fed.Cir. 2016). 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. [2.25] 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 therefor, infringes the patent.” Two forms of direct infringement are recognized — literal infringement and infringement under the judicially created doctrine of equivalents.

2 — 28

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.27

a. [2.26] 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 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. [2.27] 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 as 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 29

§2.28

INTELLECTUAL PROPERTY LAW

(1)

[2.28] 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 §§2.29 and 2.30 below. (2)

[2.29] 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)

[2.30] 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.

2 — 30

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.32

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 United States Patent and Trademark Office examination of that subject matter. Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1107 (Fed.Cir. 1996). 2. [2.31] 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) (inducement) and 271(c) (contributory infringement). 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. [2.32] Elements of Inducement Under 35 U.S.C. §271(b) Under 35 U.S.C. §271(b), “[w]hoever actively induces infringement of a patent shall be liable as an infringer.” Induced infringement is a type of indirect infringement by multiple actors. Though §271(b) does not expressly impose a knowledge requirement, the Supreme Court has held that inducement requires that the alleged inducer actively and knowingly aid and abet the direct infringement. Commil USA, LLC v. Cisco Systems, Inc., ___ U.S. ___, 191 L.Ed.2d 883, 135 S.Ct. 1920 (2015). See also ePlus, Inc. v. Lawson Software, Inc., 789 F.3d 1349, 1360 (Fed.Cir. 2015). To satisfy the knowledge requirement, the alleged inducer must have actual knowledge that the induced acts constitute patent infringement. Commil, supra (leading another to engage in conduct that amounts to infringement is not enough; party accused of inducement must know that actions being induced are direct infringement); Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 766, 179 L.Ed.2d 1167, 131 S.Ct. 2060, 2068 (2011). 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 2069 – 2071).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 31

§2.33

INTELLECTUAL PROPERTY LAW

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) (“[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 alleged to constitute infringement.”), quoting Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544, 553 (Fed.Cir. 1990). Direct proof of intent is not necessary; rather, the “requisite intent to induce infringement may be inferred from all of the circumstances.” Warsaw Orthopedic, Inc. v. NuVasive, Inc., 824 F.3d 1344, 1347 (Fed.Cir. 2016). 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. [2.33] Elements of Contributory Infringement Under 35 U.S.C. §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 that 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., 563 U.S. 754, 179 L.Ed.2d 1167, 131 S.Ct. 2060, 2067 (2011), citing Aro Manufacturing, supra, 84 S.Ct. at 1533.

2 — 32

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.34

3. [2.34] Willful Infringement Under 35 U.S.C. §284, district courts have the discretion to enhance damages up to three times the amount found or assessed for “egregious cases of misconduct beyond typical infringement.” Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1935 (2016). In Halo Electronics, the Supreme Court changed the applicable legal standard for finding willful infringement by overruling the Federal Circuit’s two-part test for determining willful infringement that had an objective and subjective prong. Id. Particularly, the Court overruled the objective prong of the test, declaring that an infringer’s “subjective willfulness [alone], whether intentional or knowing, may warrant enhanced damages.” 136 S.Ct. at 1926. The relevant timeframe for measuring an alleged infringer’s subjective willfulness is “at the time of the challenged conduct.” Id. Further, the Court made clear that willfulness must be proved only by a preponderance of the evidence, rather than the clear and convincing standard that was associated with the Federal Circuit’s objective prong, and that a finding of willfulness is to be reviewed for abuse of discretion, rather than the Federal Circuit’s purported three-part review framework for reviewing the objective, subjective, and award of enhanced damages findings by a district court. 136 S.Ct. at 1926 – 1927. In applying its discretion as to what does and does not constitute egregious misconduct, district courts should consult the “‘sound legal principles developed over nearly two centuries of application and interpretation of the Patent Act.” 136 S.Ct. at 1935. Further, judges are not required to enhance damages just because egregious misconduct is found. Rather, “as with any exercise of discretion, courts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.” 136 S.Ct. at 1933. Halo has largely been seen as a “pro-patent holder” opinion. Particularly, Halo provides greater leverage in litigation for patent holders by providing a more flexible test for willfulness, by lowering the burden of proof, and by simplifying and lowering the standard for appellate review. Patent holders may also be more likely to get their stories heard by a jury, which is important as some courts have interpreted Halo to mean that a judgment of willfulness may be supported by a jury verdict alone, giving juries a much greater role in determining willfulness. See Sociedad Espanola De Electromedicina Y Calidad, S.A. v. Blue Ridge X-Ray Co., No. 1:10:cv-00159-MR, 2016 WL 3661784 (W.D.N.C. July 8, 2016). For accused infringers, however, Halo presents a greater risk for a finding of enhanced damages and highlights the importance of pursuing noninfringement or invalidity opinions sooner, rather than later. Because the timeframe for measuring subjective willfulness is at the time an alleged infringer has knowledge of the challenged conduct, a defense developed during litigation to refute willfulness can no longer be used. The Supreme Court commented that among “the most culpable offenders [are] the ‘wanton and malicious pirate[s]’ who intentionally infringes another’s patent — with no doubts about its validity or any notion of a defense.” [Emphasis added.] Halo Electronics, supra, 136 S.Ct. at 1932, quoting Seymour v. McCormick, 57 U.S. 480, 489, 14 L.Ed. 1024 (1853). Accordingly, potential infringers should review all past

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 33

§2.35

INTELLECTUAL PROPERTY LAW

and present threats of infringement and consider obtaining a legal opinion prior to litigation regarding invalidity or noninfringement to mitigate the risk of an enhanced damages judgement. It may also be wise to consult counsel early on in the development process of new products and carefully consider the costs of getting an early clearance opinion since actual notice is not a prerequisite to filing a suit for infringement. E. [2.35] 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 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 §§2.36 – 2.48 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. In light of the abrogation of Fed.R.Civ.P. Form 18, Complaint for Patent Infringement, defendants asserting invalidity will be held to the same heightened pleading standard of Ashcroft v. Iqbal, 556 U.S. 662, 173 L.Ed.2d 868, 129 S.Ct. 1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 167 L.Ed.2d 929, 127 S.Ct. 1955 (2007), faced by plaintiffs asserting infringement. See RAH Color Technologies LLC v. Ricoh USA Inc., No. 2:15-cv-05203-JCJ, 2016 WL 3632720, *4 (E.D.Pa. July 06, 2016) (insufficient pleading of invalidity counterclaim under Iqbal/Twombly when defendant only “assert[ed] that five sections of Title 35 of the [U.S.C.] may make Plaintiff’s asserted patents invalid”). However, even before Form 18’s abrogation, some district courts applied the requirements set forth in Iqbal and Twombly. See Cleversafe, Inc. v. Amplidata, Inc., No. 11 C 4890, 2011 WL 6379300, *2 (N.D.Ill. Dec. 20, 2011) (dismissing invalidity counterclaim when defendant failed to articulate why patents were invalid or provide any factual support). Now, a defendant should anticipate that the previous bare-bones invalidity assertions will no longer be sufficient.

2 — 34

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.38

Form 18’s abrogation may not change much in the specificity required when asserting patent unenforceability that contains an allegation of fraud, which most district courts already required to be supported by more than just notice pleading. Also, the bench views claims of patent unenforceability with great skepticism, particularly when asserted at the outset of a case, because that 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. [2.36] 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. [2.37] 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, 564 U.S. 91, 180 L.Ed.2d 131, 131 S.Ct. 2238 (2011). a. [2.38] Defenses Under 35 U.S.C. §101 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). Increasingly, however, the issue of nonpatentable subject matter has been raised in the context of litigation and in post-grant proceedings. The Supreme Court has set out a two-part test for determining whether a claim is patent eligible: first, a court should “determine whether the claims at issue are directed to . . . [a] patentineligible concept[ ]” such as (1) abstract ideas, (2) laws of nature, and (3) physical phenomena. Alice Corporation Pty. Ltd. v. CLS Bank International, ___ U.S. ___, 189 L.Ed.2d 296, 134 S.Ct. 2347, 2355 (2014), citing Mayo Collaborative Services v. Prometheus Laboratories, Inc., ___ U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289 (2012). Second, if the claims at issue are directed to a patent-ineligible concept, the court should consider “whether the claim’s elements, considered

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 35

§2.39

INTELLECTUAL PROPERTY LAW

both individually and ‘as an ordered combination,’ ‘transform the nature of the claim’ into a patent-eligible application.” 134 S.Ct. at 2350. If they do not, then the claims will be patent ineligible under §101. The Supreme Court has not explicitly defined “abstract idea.” Enfish, LLC v. Microsoft Corp., 822 F.3d 1327, 1334 (Fed.Cir. 2016) (“The Supreme Court has not established a definitive rule to determine what constitutes an ‘abstract idea’ sufficient to satisfy the first step of the Mayo/Alice inquiry.”). Rather, instead of “labor[ing] to delimit the precise contours of the ‘abstract idea’ category,” the Court compares the claims at issue with those claims that have been found to be abstract ideas in the past. Alice Corp., supra, 134 S.Ct. at 2357 (“It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here.”). As a result of these decisions challenging the subject-matter eligibility of patents, particularly in the “business method” and “medical treatment” areas, §101 defenses have increased in popularity and success, both before the district courts and the Patent Trial and Appeal Board. b. [2.39] Defenses Under 35 U.S.C. §102 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 went into effect on March 16, 2013. However, because the AIA changes apply only to patent applications filed on or after March 16, 2013, there are still many patents that these provisions may not apply to, including those valid as of March 16, 2013, and those that were pending before 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

2 — 36

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.39

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’s 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) 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 revised §102, removing §§102(a) – 102(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. 35 U.S.C. §102(a). 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 37

§2.40

INTELLECTUAL PROPERTY LAW

§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. c. [2.40] Defenses Under 35 U.S.C. §103 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 went into effect on March 16, 2013. Accordingly, both the pre-2013 version of §103 and the 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 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 amended §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. 35 U.S.C. §103.

2 — 38

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.41

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. [2.41] Affirmative Defenses Based on the Disclosure Requirements of 35 U.S.C. §112 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. 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, 1581 (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 AIA 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 United States Patent and Trademark Office. The final requirement of §112 is that the patent’s specification must also contain a written description of the invention to support the claims that would “reasonably convey to a person skilled in the art that [the inventor] had possession of the claimed subject matter at the time of

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 39

§2.41

INTELLECTUAL PROPERTY LAW

filing.” LizardTech, Inc. v. Earth Resource Mapping, Inc., 424 F.3d 1336, 1346 (Fed.Cir. 2005). The level of detail required “varies with the nature and scope of the invention at issue, and with the scientific and technologic knowledge already in existence.” Capon v. Eshhar, 418 F.3d 1349, 1357 (Fed.Cir. 2005). A written description requirement is a separate requirement from the enablement requirement. See Ariad Pharmaceuticals, Inc. v. Eli Lilly & Co., 598 F.3d 1336, 1344 (Fed.Cir. 2010). “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 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, 921 (Fed.Cir. 2005). The written description requirement is not a demanding standard. Literal support in the specification for the claim language is not required (Blue Calypso, LLC v. Groupon, Inc., 815 F.3d 1331, 1346 (Fed.Cir. 2016)), examples are not required (Falko-Gunter Falkner v. Inglis, 448 F.3d 1357, 1366 (Fed.Cir. 2006)), and an actual reduction to practice in not required (id.). Thus, a defense of invalidity for failure to satisfy the requirement is rarely successful. In some situations, even the drawings alone can provide a satisfactory written description of the invention. Vas-Cath, 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 inventor or a joint inventor regards as the invention.” Issued patents are difficult to invalidate on the basis of claim indefiniteness. Claim indefiniteness is a purely legal issue that arises if claims, when “read in light of the patent’s specification and prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.” Nautilus Inc. v. Biosig Instruments, Inc., ___ U.S. ___, 189 L.Ed.2d 37, 134 S.Ct. 2120, 2123 (2014). While absolute clarity is not required to find a claim term definite, there is likely an indefiniteness problem “if the claim language ‘might mean several different things and “no informed and confident choice is available among the contending definitions.” ’ ” Interval Licensing LLC v. AOL, Inc., 766 F.3d 1364, 1371 (Fed.Cir. 2014). 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). In short, “[t]he claims, when read in light of the specification and the prosecution history, must provide objective boundaries for those of skill in the art.” Interval Licensing, supra, 766 F.3d at 12371.

2 — 40

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.42

Lastly, 35 U.S.C. §112(f) allows a patentee to express a claim element by referring to the element’s function (a “means”), rather than its structure (e.g., task X is carried out by a control means). However, functional claims cover only “the structure, materials, or acts described in the specification as corresponding to the claimed function and equivalents thereof” and if a person of skill “would be unable to recognize the structure in the specification and associate it with the corresponding function in the claim, a means-plus-function clause is indefinite.” Williamson v. Citrix Online, LLC, 792 F.3d 1339, 1347, 1352 (Fed.Cir. 2015). One notable exception relates to means-plus-function claims directed to software means. The Federal Circuit, beginning with WMS Gaming, Inc. v. International Game Technology, 184 F.3d 1339, 1358 (Fed.Cir. 1999), and continuing in a number of cases (including Aristocrat Technologies Australia Pty Ltd. v. International Game Technology, 521 F.3d 1328, 1331 – 1332 (Fed.Cir. 2008)) has consistently held that when a claim element requires a “special purpose computer” to be implemented, it is not enough to simply disclose a general purpose computer or microprocessor as structure. Williamson, supra, 792 F.3d at 1352. In such cases, a general purpose computer will not provide sufficient structure for purposes of §112 and will result in a finding of indefiniteness. Id. Instead, when a claim element subject to §112(f) must be implemented in a special purpose computer, the specification must contain an “algorithm for performing the claimed function” that can be expressed “as a mathematical formula, in prose, or as a flow chart, or in any other manner that provides sufficient structure.” Id. 3. [2.42] 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 — 41

§2.43

INTELLECTUAL PROPERTY LAW

4. [2.43] 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. [2.44] Affirmative Defense Based on Laches Traditionally, the equitable doctrine of laches has been 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. 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 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. In A.C. Aukerman Co. v. R.L. Chaides Construction Co., 960 F.2d 1020, 1032 (Fed.Cir. 1992), the Federal Circuit identified two elements that an alleged infringer asserting a laches defense must satisfy: (a) that the patentee’s delay in bringing suit was unreasonable and inexcusable; and (b) that the accused infringer suffered material prejudice or injury due to the delay. The court recognized that 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’ ”). In 2015, however, the Federal Circuit, overruled in part what it described as a “bright-line” test established by A.C. Aukerman, in light

2 — 42

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.45

of Petrella v. Metro-Goldwyn-Mayer, Inc., ___ U.S. ___, 188 L.Ed.2d 979, 134 S.Ct. 1962 (2014). See SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 807 F.3d 1311, 1332 (Fed.Cir. 2015) (“We, accordingly, reject Aukerman’s bright line rule regarding the interplay between laches and injunctive relief.”). Whether the defense of laches will remain a defense to patent infringement is a question pending before the Supreme Court. In 2014, the Supreme Court rejected laches as a defense to copyright infringement. See Petrella, supra. In 2015, the Federal Circuit went en banc in SCA Hygiene Products, supra, to determine whether laches remains a defense to patent infringement in light of Petrella, supra. In affirming laches as a defense to patent infringement claims and distinguishing Petrella, the SCA Hygiene Products court concluded that Congress had codified laches under 35 U.S.C. §282 as a defense to patent infringement suits. 807 F.3d at 1315. The Federal Circuit also noted that, unlike copyright law in which independent creation is a defense, “the calculus is different” under patent law because innocence is not a defense. 807 F.3d at 1330. The Federal Circuit observed that “without laches, innovators have no safeguard against tardy claims demanding a portion of their commercial success.” Id. Regarding ongoing relief, the Federal Circuit rejected a bright-line rule limiting laches to presuit damages and stressed that “[p]aramount in both [the injunction and ongoing royalty analyses] are the flexible rules of equity and, as a corollary, district court discretion.” 807 F.3d at 1333. Regarding injunctive relief, the SCA Hygiene Products court held that the evidence of laches should be considered in conjunction with the four-factor test established in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 164 L.Ed.2d 641, 126 S.Ct. 1837 (2006). 807 F.3d at 1331. Additionally, the Federal Circuit expanded laches by finding that laches can serve as a defense to injunctions. Id. In its decision granting certiorari, the Supreme Court recounted from Petrella that it “ha[s] never applied laches to bar in their entirety claims for discrete wrongs occurring within a federally prescribed limitations period.” 134 S.Ct. at 1965. The question presented to the Court was whether and to what extent the defense of laches may bar a claim for patent infringement brought within the six-year statutory damages period provided in §286 of the patent statute. As of this writing, laches remains a defense to patent infringement. 6. [2.45] 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. SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 807 F.3d 1311, 1332 (Fed.Cir. 2015). 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 43

§2.46

INTELLECTUAL PROPERTY LAW

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. A.C. Aukerman Co. v. R.L. Chaides Construction Co., 960 F.2d 1020, 1027 (Fed.Cir. 1992). 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. [2.46] 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. [2.47] 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 United States 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 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

2 — 44

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.48

the other element was high. In Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1291 (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. [2.48] 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 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.” H-W Technology, L.C. v. Overstock.com, Inc., 758 F.3d 1329, 1335 (Fed.Cir. 2014), citing Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 86 L.Ed. 363, 62 S.Ct. 402 (1942), abrogated on other grounds by Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 164 L.Ed.2d 26, 126 S.Ct. 1281 (2006). 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 45

§2.49

INTELLECTUAL PROPERTY LAW

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, Title II, 102 Stat. 4676 (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. [2.49] 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). 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 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 Forensic & Litigation Consulting, 2013 Intellectual Property Statistics, (Sept. 22, 2014), www.fticonsulting.com/insights/capabilities/2013-intellectual-property-statistics, for a breakdown of bench and jury patent cases for 2008 – 2013.

2 — 46

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.51

IV. CASE MANAGEMENT ISSUES AND DISCOVERY A. Preliminary Issues 1. [2.50] 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 affect not just 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 POINTER 

It is not uncommon for a party to insist on a prosecution bar provision in a protective order. The prosecution bar prevents those attorneys with access to highly confidential technical information from engaging in patent prosecution activities before the United States Patent and Trademark Office (or other patent office) for a period of time after last access to the highly confidential information. With the advent of post-grant proceedings under the Leahy-Smith America Invents Act, attorneys considering prosecution bars should evaluate whether the prosecution bar should extend to (i.e., bar) participation in post-grant proceedings.

2. [2.51] 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 47

§2.52

INTELLECTUAL PROPERTY LAW

3. [2.52] Case Management Plan Increasingly, 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 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 rules of other districts can act as a guide in proposing a case management plan.

B. [2.53] 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. However, consideration should also be given to advancing certain discovery items, such as production of licensing and settlement agreements, sales numbers, and similar information that may help the parties assess the value of the case, if infringement of a valid claim were to be found. 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.

2 — 48

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.55

C. [2.54] Motions To Sever and Transfer As noted in §2.19 above, the Leahy-Smith America Invents Act added a new statute, 35 U.S.C. §299, that was intended to prevent patentees from asserting patent infringement against numerous companies in a single suit based only on commonality of the patents in suit or similarities between the products. Given that courts have routinely consolidated separately filed actions, effectively negating the impact of this reform, a defendant still should consider moving to transfer the case to another forum, or at least sever the action for purposes of trial. D. [2.55] 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 damages 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;

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 49

§2.56

INTELLECTUAL PROPERTY LAW

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. E. [2.56] 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 developments 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.);

2 — 50

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.58

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.

V. CLAIM CONSTRUCTION/MARKMAN HEARINGS A. [2.57] 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 (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 disputed claims terms. Still, many courts and parties are opting to pursue Markman hearings or at least a 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. [2.58] 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 51

§2.59

INTELLECTUAL PROPERTY LAW

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 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. [2.59] 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. Thorner v. Sony Computer Entertainment America LLC, 669 F.3d 1362, 1365 (Fed.Cir. 2012). 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. 415 F.3d at 1314. 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

2 — 52

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.60

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 1319. 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 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. Shire Development, LLC v. Watson Pharmaceuticals, Inc., 787 F.3d 1359, 1365 (Fed.Cir. 2015). 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. [2.60] 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 53

§2.61

INTELLECTUAL PROPERTY LAW

2. [2.61] 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. Whether a claim element is written in means-plus-function format is presumed by the presence or absence of the word “means.” Using the word “means” in a claim element creates a presumption that the element is subject to §112(f). To rebut this 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). Conversely, absence of the word “means” in an element creates the presumption that §112(f) does not apply, although this presumption is no longer a “strong” one as clarified by the Federal Circuit in Williamson v. Citrix Online, LLC, 792 F.3d 1339, 1349 (Fed.Cir. 2015). The presumption that §112(f) does not apply in absence of the word “means” can be rebutted “if the challenger demonstrates that the claim term fails to ‘recite sufficiently definite structure’ or else recites ‘function without reciting sufficient structure for performing that function.’ ” 792 F.3d at 1349. 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. 792 F.3d at 1351. “If the patentee fails to disclose adequate corresponding structure, the claim is indefinite.” 792 F.3d at 1352. The scope of the claimed function is derived from the claim language itself. Transonic Systems, Inc. v. Non-Invasive Medical Technologies Corp., 75 Fed.Appx. 765, 778 (Fed.Cir. 2003). “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. Further, “[e]ven if the specification discloses corresponding structure, the disclosure must be of ‘adequate’ corresponding structure to achieve the claimed function.” Williamson, supra, 792 F.3d at 1352. “[T]herefore, if a person of ordinary skill in the art would be unable to recognize the structure in the specification and associate it with the corresponding function in the claim, a means-plus-function clause is indefinite.” Id.

VI. [2.62] 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

2 — 54

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.64

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 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.

VII. POST-GRANT PROCEDURES UNDER THE LEAHY-SMITH AMERICA INVENTS ACT A. [2.63] Brief Overview: Inter Partes Review, Post-Grant Review, and Covered Business Method The Leahy-Smith America Invents Act provided several avenues for challenging an issued patent’s validity at the United States Patent and Trademark Office, including inter partes review, post-grant review, and the Transitional Program for Covered Business Method Patents (CBM). These procedures are adjudicative in nature. That is, they are decided before a panel of three judges from the Patent Trial and Appeal Board, and limited discovery (i.e., pretrial discovery, depositions) is available. As of June 30, 2016, there have been over 5,000 AIA petitions (90 percent of petitions for inter partes review). USPTO, Patent Trial and Appeal Board Statistics, www.uspto.gov/sites/default/files/documents/2016-6-30%20PTAB.pdf (June 30, 2016) (case sensitive). AIA procedures may cost less than a challenge to a patent’s validity in a federal district court, may provide tactical advantages, and may have significant effects on any copending litigation regarding the same patent in a district court. See §§2.64 – 2.66 below for a short description of each type of trial. B. [2.64] Inter Partes Review Inter partes review is more frequently used than either post-grant review or the Transitional Program for Covered Business Method Patents and may be instituted only upon a showing that

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 55

§2.65

INTELLECTUAL PROPERTY LAW

there is a “reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.” 35 U.S.C. §314(a). A patent may be challenged only under either 35 U.S.C. §102 or 35 U.S.C. §103, and only on the basis of prior art consisting of patents or printed publications. See 37 C.F.R. §42.104. Nearly anyone except the owner of a patent has standing to petition the Patent Trial and Appeal Board to institute an inter partes review. 35 U.S.C. §311(a). However, two exceptions exist. First, a petitioner will not have standing if he or she has been served with an infringement complaint relating to the challenged patents more than a year prior to petitioning for review. 35 U.S.C. §315(b). Second, a petitioner will not have standing if he or she has filed a civil action challenging validity of the patent. 35 U.S.C. §315(a)(1). However, raising invalidity as a counterclaim does not affect standing for inter partes review. In addition to these standing constraints, a party must still wait to file an inter partes review petition until nine months after the grant of the patent, issuance of a reissue patent, or, if a post-grant review is instituted, the termination of the post-grant review (whichever is later). See 37 C.F.R. §42.102. As of June 30, 2016, an inter partes review has been instituted in 50 percent of the cases in which a petition was filed. Out of those cases that reached a final decision, 70 percent of the time all of the instituted claims have been held unpatentable. United States Patent and Trademark Office, Patent Trial and Appeal Board Statistics, p. 10 (June 30, 2016) www.uspto.gov/sites/default/files/documents/2016-6-30%20PTAB.pdf (case sensitive). C. [2.65] Post-Grant Review Post-grant review may be instituted only upon a showing that it is more likely than not that at least one of the challenged claims are unpatentable or upon a showing of a novel or unsettled legal question that is important to other patents or patent applications. 35 C.F.R. §42.208. Postgrant review is substantively much broader in scope than inter partes review. Specifically, a petitioner may challenge a claim or patent on any ground that could be raised under 35 U.S.C. §282(b)(2) or 35 U.S.C. §282(b)(3). See 35 U.S.C. §321(b); 37 C.F.R. §42.204. This includes double patenting and §§101, 102, 103, and 112 issues, but does not include patentability due to defects with the best mode. See 35 U.S.C. §321(b); 37 C.F.R. §42.204. A party has standing to file a petition for post-grant review if the patent in question was filed under the post-Leahy-Smith America Invents Act first-to-file system and the petitioner has not already filed an invalidity suit against the patent owner. See 37 C.F.R. §42.201. The petition must be filed within the first nine months after the grant of the patent, unlike inter partes review, which can be filed after the ninemonth window is closed and for the remaining life of a patent. See 37 C.F.R. §42.202. Compared to inter partes review, post-grant review petitions are rare, accounting for only one percent of total AIA petitions filed as of June 30, 2016. United States Patent and Trademark Office, Patent Trial and Appeal Board Statistics, (June 30, 2016), www.uspto.gov/sites/default/ files/documents/2016-6-30%20PTAB.pdf (case sensitive). D. [2.66] Covered Business Methods The Transitional Program for Covered Business Methods is a Patent Trial and Appeal Board trial proceeding instituted in order to review the patentability of one or more claims in a covered

2 — 56

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.67

business method patent. CBM review may be instituted only upon a showing that it is more likely than not that at least one claim of the challenged patent is unpatentable and is available only until September 15, 2020. 35 U.S.C. §324; 37 C.F.R. §42.300(d). Unlike an inter partes review, and similar to post-grant review, a petitioner may challenge a claim or patent on any ground that could be raised under 35 U.S.C. §282(b)(2) or 35 U.S.C. §282(b)(3). See 35 U.S.C. §321(b); 37 C.F.R. §42.304. The standing requirements for filing a CBM petition are more strict than the requirements for filing either an inter partes review or a post-grant review. Specifically, a party has standing to file a CBM petition only if (1) the petitioner, the petitioner’s real party-in-interest, or a privy of the petitioner has been sued for infringement of the patent or has been charged with infringement under that patent; and (2) the petitioner is not estopped from challenging the claims on the grounds identified in the petition; and (3) the petitioner or a real party-in-interest has not yet filed a civil action challenging the validity of a claim of the patent. 37 C.F.R. §42.302. However, if a petitioner meets all the standing requirements, the only timing restriction is that the petition must be filed after the grant of the patent. 37 C.F.R. §42.303. As of June 30, 2016, CBM petitions account for 9 percent of total AIA petitions and have about a 50-percent institution rate. United States Patent and Trademark Office, Patent Trial and Appeal Board Statistics, p. 11 (June 30, 2016), www.uspto.gov/sites/default/files/documents/ 2016-6-30%20PTAB.pdf (case sensitive). Out of those trials that reach a final decision, about 80 percent of the time all instituted claims have been held unpatentable. Id.

VIII. CHECKLISTS A. [2.67] 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?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 57

§2.68

INTELLECTUAL PROPERTY LAW

 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?  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? B. [2.68] 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 (i.e., how likely is it that the patented invention will become outdated or replaced by other technology before the patent expires)?

2 — 58

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.69

 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?  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? C. [2.69] 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?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 59

§2.70

INTELLECTUAL PROPERTY LAW

D. [2.70] 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?  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? E. [2.71] 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

2 — 60

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.72

 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 F. [2.72] Categories 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  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 — 61

§2.73

INTELLECTUAL PROPERTY LAW

G. [2.73] Categories of 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  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 — 62

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.74

IX. FORMS A. [2.74] Sample Complaint for Patent Infringement IN THE UNITED STATES DISTRICT COURT District of Delaware 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., resulting from Defendant’s unauthorized manufacture, sale, and offer to sell of THE WIDGET WONDER (“Infringing Product”) in the United States, which Infringing Product infringes at least claim 1 of United States Patent No. 1,234,567 (the ’567 Patent). A copy of the ’567 patent is attached herewith as Exhibit A. PARTIES 2. Plaintiff ABC is a Delaware corporation with its principal place of business at 123 Main Street, Some City, Delaware. 3. On information and belief, Defendant XYZ is a Delaware corporation with a principal place of business at 123 High Hills, Ski City, Colorado. JURISDICTION 4. This Court has jurisdiction pursuant to 28 U.S.C. §§1331 and 1338(a). VENUE 5. Venue is proper in this judicial district pursuant to 28 U.S.C. §1400.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 63

§2.74

INTELLECTUAL PROPERTY LAW

THE ASSERTED PATENT 6. On April 1, 20__, the ’567 Patent was duly and legally issued by the United States Patent and Trademark Office. 7. Plaintiff is the owner of the ’567 Patent. COUNT I (Infringement of U.S. Patent No. 1,234,567) 8. Paragraphs 1 through 8 are incorporated by reference as if fully restated herein. 9. Defendant manufactures, sells, and offers to sell the Infringing Product in the United States. By manufacturing selling, and offering to sell the Infringing Product, Defendant has and is continuing to infringe at least claim 1 of the ’567 Patent. On information and belief, Defendant’s actions also have and are continuing to infringe claims 2 – 4 of the ’567 Patent. 10. Plaintiff notified Defendant of Plaintiff’s rights in the ’567 Patent and of Defendant’s infringement of those rights and demanded that the infringing conduct cease. 11. With knowledge of Plaintiff’s rights and its own infringing conduct, Defendant willfully ignored Plaintiff’s demand and has continued to infringe the ’567 Patent. 12. Plaintiff has been and continues to be irreparably harmed by Defendant’s infringement of its valuable patent rights. Plaintiff is without adequate remedy at law. 13. Plaintiff also 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 Defendant has infringed and continues to infringe the ’567 Patent; B. 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, original equipment manufacturers, dealers, and distributors;

2 — 64

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.75

C. 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; D. That this Court order an award to Plaintiff 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; E. 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 F. That this Court grant to Plaintiff such other, further, and different relief as may be just and proper. 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. [2.75] Sample Affirmative Defenses to Complaint for Patent Infringement IN THE UNITED STATES DISTRICT COURT District of Delaware 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:

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 65

§2.76

INTELLECTUAL PROPERTY LAW

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. At least claim 1, and to the extent also asserted, claims 2 – 4 of the ’567 Patent, when properly construed, are invalid under at least 35 U.S.C. §102 in light of the ’123 Patent, and are invalid as obvious to one of ordinary skill in the art, under at least 35 U.S.C. §103, in light of the ’123 Patent in view of the ’890 Patent. FOURTH AFFIRMATIVE DEFENSE 4. Failure to mark. Upon information and belief, while it remains the Plaintiff’s burden to prove its damages, Plaintiff’s damages, if any, are limited under 35 U.S.C.A. §287 because Plaintiff failed to mark its products covered by the patent. C. [2.76] Sample Patentee Interrogatories IN THE UNITED STATES DISTRICT COURT District of Delaware 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.

2 — 66

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.76

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 claims 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 noninfringement 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 noninfringement 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 the patent 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 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 the patent 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: State in detail all reasons and identify all facts and documents that support Defendant’s allegations, if any, that Defendant has not directly infringed,

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 67

§2.77

INTELLECTUAL PROPERTY LAW

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. 6: 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. 7: 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 the patent in suit under the doctrine of laches, 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) 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 should apply or serve as a defense in this case. Dated: ____________, 20__

Respectfully submitted, ______________________________________

D. [2.77] Sample Accused Infringer Interrogatories IN THE UNITED STATES DISTRICT COURT District of Delaware 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.

2 — 68

WWW.IICLE.COM

LITIGATING U.S. PATENT RIGHTS IN A CHANGING LANDSCAPE

§2.77

INTERROGATORY NO. 1: If Plaintiff contends that Defendant was put on notice of the patent in suit prior to the filing of this lawsuit, identify in detail the factual basis of when and how Defendant was put on notice, including who put Defendant on notice. INTERROGATORY NO. 2: Identify the factual basis for Plaintiff’s allegation in the complaint that Defendant’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 Plaintiff’s assertions of infringement of the patent in suit on a claim-by-claim, element-by-element basis. Your answer should include a statement of Plaintiff’s interpretation of each claim element (including whether the element should be interpreted under 35 U.S.C. §112(f) and, if so, identifying the structure in the specification of the patent that corresponds to the recited element) and a statement whether Defendant’s products or activities provide(s) such an element or an equivalent. 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 Plaintiff contends that laches does not bar recovery of damages for infringement of the patent asserted in this litigation, and, if Plaintiff contends that laches does not bar recovery, describe in detail the basis for that contention. INTERROGATORY NO. 6: Identify all efforts undertaken by or on behalf of Plaintiff to investigate whether any of Defendant’s products infringed the patent in suit, including relevant dates. INTERROGATORY NO. 7: Identify the factual bases for Plaintiff’s contention that it has and continues to be irreparably harmed by the Defendant’s actions. INTERROGATORY NO. 8: Identify the factual bases for Plaintiff’s contention that it is entitled to monetary damages, including the bases for any claims of lost profits. Dated: ____________, 20__

Respectfully submitted, ______________________________________

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

2 — 69

3

Patent Antitrust, Misuse, Exhaustion, and Inequitable Conduct

GLEN P. BELVIS Steptoe & Johnson, LLP Chicago

®

©COPYRIGHT 2017 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] Grant Back 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

3—2

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

VII. [3.30] Inequitable Conduct VIII. [3.31] Ability To Cure Inequitable Conduct Under the Leahy-Smith America Invents Act IX. [3.32] Best-Mode Requirement Risks to Practitioners and Clients Under the LeahySmith America Invents Act X. [3.33] First-Sale Doctrine; Exhaustion of Patent Rights

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—3

§3.1

INTELLECTUAL PROPERTY LAW

I. [3.1] OVERVIEW This chapter addresses activities that are permitted but may come close to the line of prohibited activities, as well as those 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. The first-sale, or exhaustion, doctrine provides that once a patented article is placed into the stream of commerce, the initial purchaser and all subsequent purchasers are permitted to use and resell that product free from any obligations under the patent. This doctrine can significantly reduce the value of an invention by enabling completion from a patentee’s own products in parallel, new, and downstream markets. These risks can be mitigated by contractually restricting the first-sale doctrine. However, such restrictions can draw challenges based on patent misuse and antitrust theories. Thus, they must be carefully tailored for each particular situation. 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 takes place years before the value for the patented technology materializes. 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.”

3—4

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.1

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 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. Licensing, sales, and distribution agreements have similar future risks and consequences. Years after they are entered into, these agreements can give rise to significant competitive harm, through the application of the first-sale doctrine, as the product and its markets grow and evolve. Thus, restrictions on the first-sale doctrine should routinely be considered and must be crafted with an eye to long-term product and market evolutions. At the same time, these forward-looking restrictions should avoid antitrust and misuse challenges.

PRACTICE POINTER 

The growth of products and their markets should be carefully evaluated in restricting the application of the first-sale doctrine to avoid inadvertently creating competitors in highvalue markets. At the same time, these restrictions should be crafted to avoid antitrust and misuse issues.

The Leahy-Smith America Invents Act (AIA), Pub.L. No. 112-29, 125 Stat. 284 (2011), has been fully implemented. The AIA 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 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 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 created substantial risks and uncertainty for patent practitioners and clients. The AIA removed 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 may still have an ethical obligation to determine and disclose the best mode.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—5

§3.2

INTELLECTUAL PROPERTY LAW

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 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. This test is also applicable in evaluating restrictions on the first-sale doctrine. If the restrictions prohibit future conduct that otherwise falls within the scope of the patent rights, they

3—6

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.3

will generally not raise antitrust concerns. Similarly, if the restrictions are only limitations on the scope of patent rights accompanying the product (e.g., the purchaser has no rights, or license, to perform a certain activity), then any restrictions on later conduct will necessarily be limited to the scope of the patent rights. 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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—7

§3.3

INTELLECTUAL PROPERTY LAW

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 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 Federal Trade Commission v. Actavis, Inc., ___ U.S. ___, 186 L.Ed.2d 343, 133 S.Ct. 2223, 2231 (2013) (“this Court has indicated that patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’ ”); Mayo Collaborative Services v. Prometheus Laboratories, Inc., ___ U.S. ___, 182 L.Ed.2d 321, 132 S.Ct. 1289, 1296 (2012) (“the patents

3—8

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.3

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. 593, 177 L.Ed.2d 792, 130 S.Ct. 3218, 3253 – 3255 (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 WarnerJenkinson 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, 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3—9

§3.4

INTELLECTUAL PROPERTY LAW

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., 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

3 — 10

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.4

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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 11

§3.5

INTELLECTUAL PROPERTY LAW

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. In medical device fields, as well as others, single-use devices are sold. These single-use devices directly implicate the first-sale doctrine, which can directly affect the profitably of the device. Turning again to the pencil example, if a mechanical pencil was sold with no restrictions, the first purchaser could resell the empty pencil, and the buyer could refill it with lead and resell it in competition with the patentee. In this situation, the patentee would have no ability to enforce the patent against the subsequent seller, who would be a competitor to the patentee. The patentee’s rights regarding that pencil have been exhausted. Moreover, the subsequent seller may have a competitive advantage because it does not need equipment and raw materials to make the pencil body. One the other hand, if the pencil was sold with a single-use restriction, the later refilling and sale would not be protected under the first-sale doctrine, and the patentee could enforce the patent against those activities. (NOTE: The sale of the empty pencil would not be an infringement because the empty pencil would not meet all of the elements of the claim.) 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

3 — 12

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.6

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. 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, ch. 647, 26 Stat. 209 (1890); the Clayton Act, ch. 323, 38 Stat. 730 (1914); and the Federal Trade Commission Act, ch. 311, 38 Stat. 717 (1914). 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 13

§3.6

INTELLECTUAL PROPERTY LAW

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. 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, 697, 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 Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477, 50 L.Ed.2d 701, 97 S.Ct. 690, 698 (1977). 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 competition-neutral aspect of that behavior. [Emphasis in

3 — 14

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.7

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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 15

§3.7

INTELLECTUAL PROPERTY LAW

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 conduct are deemed conclusively unreasonable, and, thus, evidence of any alleged procompetitive 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 procompetitive 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)).

3 — 16

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.7

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

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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 17

§3.8

INTELLECTUAL PROPERTY LAW

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 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 procompetitive 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

3 — 18

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.10

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). 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 or 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 19

§3.11

INTELLECTUAL PROPERTY LAW

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 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

3 — 20

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.13

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 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 procompetitive 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 21

§3.14

INTELLECTUAL PROPERTY LAW

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 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 procompetitive 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).

3 — 22

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.16

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 2614. Accord Federal Trade Commission v. Indiana Federation of Dentists, 476 U.S. 447, 90 L.Ed.2d 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, Pub.L. No. 98-462, 98 Stat. 1815. 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). Additionally, under the Leahy-Smith America Invents Act, joint research activity agreements can provide strategic and prior-art-based advantages to the patentee. See 35 U.S.C. §§100(h), 102(b)(2)(C), and Chapters 1 and 2 of this handbook. Joint research activity agreements should have the same level of protection from antitrust scrutiny that joint venture and joint development agreements have.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 23

§3.17

V.

INTELLECTUAL PROPERTY LAW

[3.17] 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 procompetitive 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. These red flag signals have been somewhat moved toward the antitrust violation side, at least in the context of generic drugs and abbreviated new drug application (ANDA) settlement agreements. In Federal Trade Commission v. Actavis, Inc., ___ U.S. ___, 186 L.Ed.2d 343, 133 S.Ct. 2223, 2234 (2013), the Supreme Court found that Noerr-Pennington immunity (see Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 5 L.Ed.2d 464, 81 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); §3.26 below) did not protect reverse payment settlements. A reverse payment settlement is a situation in which the patentee pays money to the accused infringer to respect the patent and stay out of the market. See Actavis, supra, 133 S.Ct. at 2227. In addressing this situation, which is somewhat unique to ANDA litigation, the Actavis Court reviewed key patent-antitrust doctrines. The Court then provided a five-part framework for a rule of reason analysis to determine if a reverse payment agreement violated the antitrust laws. 133 S.Ct. at 2234 – 2238. Thus, the Actavis Court took a step back from the clear line of demarcation used by the Federal Circuit in Mallinckrodt, supra. Solvay’s patent, if valid and infringed, might have permitted it to charge drug prices sufficient to recoup the reverse settlement payments it agreed to make to

3 — 24

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.17

its potential generic competitors. And we are willing to take this fact as evidence that the agreement’s “anticompetitive effects fall within the scope of the exclusionary potential of the patent.” 677 F.3d., at 1312. But we do not agree that that fact, or characterization, can immunize the agreement from antitrust attack. . . . The FTC alleges that in substance, the plaintiff agreed to pay the defendants many millions of dollars to stay out of its market, even though the defendants did not have any claim that the plaintiff was liable to them for damages. . . . Given these factors, it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well. . . . To strike that balance, the Court asked questions such as whether “the patent statute specifically gives a right” to restrain competition in the manner challenged; and whether “competition is impeded to a greater degree” by the restraint at issue than other restraints previously approved as reasonable. [Emphasis added.] 133 S.Ct. at 2230 – 2331, quoting United States v. Line Material Co., 333 U.S. 287, 92 L.Ed. 701, 68 S.Ct. 550, 562 (1948). The Actavis Court’s decision can be read as a consistent application of the general red flag signal of Mallinckrodt because the patent monopoly does not extend to paying someone to avoid that monopoly. However, the above language in Actavis could also be read as moving the demarcation line to include as a potential antitrust violation other conduct that falls purely within the scope of the patent monopoly. These red flags, as potentially expanded by Actavis, signal a need for further analysis of the proposed conduct and 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 25

§3.18

INTELLECTUAL PROPERTY LAW



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 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

3 — 26

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.21

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). In Kimble v. Marvel Entertainment, LLC, ___ U.S. ___, 192 L.Ed.2d 463, 135 S.Ct. 2401, (2015), the Court reaffirmed the holding of Brulotte that, absent some other consideration, royalty payments could not extend beyond the life of the patent. The Kimble Court set out several ways in which the post-royalty payment prohibition of Brulotte could be circumvented. 135 S.Ct. at 2416. (deferred royalties, amortized royalties, royalties tied to nonpatent intellectual property could all be used to extend royalties beyond expiration of patent). The Kimble Court, however, found that unless these work arounds are expressly set forth in the agreement, an agreement that simply extends royalty payments beyond the life of the patent will end upon the expiration of that patent. Id. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 27

§3.22

INTELLECTUAL PROPERTY LAW

§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 procompetitive 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 procompetitive 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] Grant Back Agreements Grant back agreements occur when the licensee or the licensor places restrictions on future improvements. Typically, the grant back 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 originally licensed technology, the grant provision should pass antitrust and misuse scrutiny. Such a grant back 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 grant back rights is no broader than the original licensed patent rights. In this sense, the improvements could

3 — 28

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.24

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 grant back 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 grant back 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). 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/antitrust-guidelineslicensing-intellectual-property, 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. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 29

§3.25

INTELLECTUAL PROPERTY LAW

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 E. Bement & Sons 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 no[t] 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). For a while, it was questionable whether the Supreme Court would follow this holding if presented with the same facts today. However, in Federal Trade Commission v. Actavis, Inc., ___ U.S. ___, 186 L.Ed.2d 343, 133 S.Ct. 2223, 2232 – 2333 (2013), the Court expressly reaffirmed both General Electric, supra, and Standard Oil Co (Indiana) v. United States, 283 U.S. 163, 75 L.Ed 926, 51 S.Ct. 421 (1931). In Standard Oil, the Court approved a patent pool between horizontal competitors that set the royalty price for the pool and divided the royalty payments between the participants. Thus, while a prudent licensor may avoid such provisions in its patent licenses, in view of Actavis, these provisions can at least be evaluated and considered. 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

3 — 30

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.26

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 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). Walker Process causes of action have been extended to provide a direct purchaser of a patented article the ability to sue the patentee for an antitrust violation. As discussed in §3.33 below, under the first-sale doctrine, a direct purchaser of a patent article cannot be sued for patent infringement and would have no apprehension of an infringement suit. Thus, a direct purchaser, absent some other circumstances, could not bring a declaratory judgment action against the patentee. In spite of this, Ritz Camera & Image, LLC. v. Sandisk Corp., 700 F.3d 503, 506 – 508 (Fed.Cir. 2012), held that a direct purchaser of a patent article had standing to sue the patent for a Walker Process-based antitrust violation. This opens up an interesting possibility in which a direct purchaser may establish the but-for standard of materiality through invalidating the patent in an inter parties review and then leverage that finding to recover antitrust damages in a Walker Process-based suit if the other elements of a Walker Process violation are present. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 31

§3.27

INTELLECTUAL PROPERTY LAW

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. . . . 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 grant back 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 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 services. See generally Rambus Inc. v. Federal Trade Commission, 522 F.3d 456 (D.C.Cir. 2008).

3 — 32

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.28

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 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, 1988 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. 1988 WL 95479 at *6. Under these facts, the court, using an equitable estoppel theory, held that the patent was unenforceable:

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 33

§3.28

INTELLECTUAL PROPERTY LAW

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 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.

3 — 34

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.29

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.

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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 35

§3.29

INTELLECTUAL PROPERTY LAW

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). 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. Id. 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. 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

3 — 36

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.30

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).

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.

In Therasense, Inc. v. Becton Dickenson & Co., 649 F.3d 1276 (Fed.Cir. 2011) (en banc), the Federal Circuit revisited the doctrine of inequitable conduct and significantly narrowed its reach. The court, in evaluating the history of the doctrine, focused on the fact that during its early development inequitable conduct was only found in situations in which there was “ ‘deliberately planned and carefully executed scheme[s] to defraud’ not only the PTO but also the courts.” 649 F.3d at 1287, quoting Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 88 L.Ed 1250, 64 S.Ct. 997, 1001 (1944). The Therasense court went on to note that this doctrine evolved into a “plagu[e] not only [for] the courts but also [for] the entire patent system [b]ecause allegations of inequitable conduct are routinely brought on ‘the slenderest grounds.’ ” 649 F.3d at 1289 quoting Burlington Industries, Inc. v. Dayco Corp., 849 F.2d 1418, 1422 (Fed.Cir. 1988).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 37

§3.30

INTELLECTUAL PROPERTY LAW

Thus, the Federal Circuit “tighten[ed] the standards for finding both intent and materiality in order to redirect a doctrine that has been overused to the detriment of the public.” 649 F.3d at 1290. Thus, the court held that to establish inequitable conduct the accused infringer must prove, by clear and convincing evidence, that the “patentee acted with the specific intent to deceive the PTO.” Id. In cases involving nondisclosure of information, the evidence must show that the patentee made a “deliberate decision to withhold a known material reference.” Id. Intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Id. “Hence, when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found.” 649 F.3d at 1290 – 1291. The court also significantly tightened the materiality standard, holding that “the materiality required to establish inequitable conduct is but-for materiality.” 649 F.3d at 1291. In so holding, the court expressly rejected using the USPTO’s definition of material, which is set out above in 37 C.F.R. §1.56. Id. These changes will greatly reduce the chances of an inequitable conduct finding. A finding of inequitable conduct will still render 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 had evolved to be broader and more inclusive than common-law fraud, but the Therasense court has limited it to common-law fraud. Thus, inequitable conduct requires a showing by clear and convincing evidence of two separate and distinct elements: a. deliberate intent to deceive the USPTO; and b. the patent would not have issued but for the deceptive conduct.

PRACTICE POINTER 

Greatly heighted requirements to find inequitable conduct.



Must show by clear and convincing evidence actual intent to deceive the USPTO.



If any reasonable explanation exists, intent to deceive cannot be found.



Materiality is now but-for materiality — the patent would not have issued but for the deceptive conduct.

The court then balances these two elements to determine whether inequitable conduct has occurred. However, under the new heighted standards of actual deceptive intent and but-for materiality, it is unlikely that, once these two factors are found, a court would not reach the

3 — 38

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.30

conclusion that 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 Process claim, inequitable conduct, to date, 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. Moreover, in light of Ritz Camera & Image, LLC. v. Sandisk Corp., 700 F.3d 503, 506 – 508 (Fed.Cir. 2012) (holding that direct purchaser of patent article has standing to sue patentee for Walker Process-based antitrust violation), inequitable conduct could readily be extended to permit a competitor or consumer to sue for unfair competition if the patentee concealed the best mode. This may very likely be the case because inequitable conduct has returned to being closely aligned with common-law fraud. The majority of prior inequitable conduct findings will not be sustainable under the test set out in Therasense. The following summary of these scenarios in which inequitable conduct was found under the old test provides guidance as to how significant this change in the law will be: 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). Under Therasense, supra, this conduct would probably not meet the deceptive intent requirement and would not meet the but-for materiality requirement. See 35 U.S.C. §§116(c), 256, which provide that errors in naming inventors can be corrected and will not invalidate a patent, and which remove the preLeahy-Smith America Invents Act requirement that the error be without deceptive intent. 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). Under Therasense, this conduct would not meet the deceptive intent requirement and would not meet the but-for materiality requirement. 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. Under Therasense, the same outcome is likely. 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). Under Therasense, this conduct would not meet the deceptive intent requirement and would not meet the but-for materiality requirement. Under Therasense, bad lawyering and gross negligence do not give rise to inequitable conduct. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 39

§3.31

INTELLECTUAL PROPERTY LAW

(Fed.Cir. 2003). Under Therasense, this conduct would probably not meet the deceptive intent requirement, and only if the references established that the invention would not work, would they meet the but-for materiality requirement. 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). Under Therasense, this conduct would probably not meet the deceptive intent requirement and would not meet the but-for materiality requirement. 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). Under Therasense, this conduct would probably not meet the deceptive intent requirement and may not meet the but-for materiality requirement. In nondisclosure cases, there will generally be too many passable explanations to establish deceptive intent. 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). Under Therasense, this conduct may likely not meet the deceptive intent requirement and would meet the but-for materiality requirement. 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, 1407 (Fed.Cir. 1994). Under Therasense, this conduct would probably not meet the deceptive intent requirement and would not meet the but-for materiality requirement.

PRACTICE POINTER 

Although the risk of an inequitable conduct charge and finding have been significantly reduced, the rule of thumb in dealing with the duty of disclosure should still be — if in doubt, disclose it. This rule will always provide for a stronger patent and only serve to further reduce any risk of an inequitable conduct charge.

VIII. [3.31] ABILITY TO CURE INEQUITABLE CONDUCT UNDER THE LEAHY-SMITH AMERICA INVENTS ACT 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 section took effect September 16, 2012, and applies to all patents, whenever issued. See AIA §12(c). Section 257(c)(1) provides that

3 — 40

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.31

[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 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.

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 or (b) an e-mail from in-house counsel to the prosecuting lawyer, at the

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 41

§3.32

INTELLECTUAL PROPERTY LAW

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, waiver of privilege, and client relations issues.

IX. [3.32] BEST-MODE REQUIREMENT RISKS TO PRACTITIONERS AND CLIENTS UNDER THE LEAHY-SMITH AMERICA INVENTS ACT 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.

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

3 — 42

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.33

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. For example, the rationale of Ritz Camera & Image, LLC v. Sandisk Corp., 700 F.3d 503, 506 – 508 (Fed.Cir. 2012), holding that a direct purchaser of a patent article has standing to sue the patentee for a Walker Process-based antitrust violation, could readily be extended to permit a competitor or consumer to sue for unfair competition if the patentee concealed the best mode. 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.

X.

[3.33] FIRST-SALE DOCTRINE; EXHAUSTION OF PATENT RIGHTS

Basically, when a patentee sells a patented article, all patent rights on that article are exhausted, and the patentee cannot enforce those rights against the first or subsequent purchasers. Thus, this doctrine has become known as the first-sale doctrine or the exhaustion doctrine. The doctrine applies to all sales by the patentee, its licensees, and other authorized sellers. See, e.g., Lexmark International, Inc. v. Impression Products, Inc., 816 F.3d 721, 726 (Fed.Cir. 2016). This doctrine can pose significant risks to the patentee if downstream products or parallel markets have higher value or are significant to the patentee. In these situations, the doctrine can significantly reduce the value of an invention by permitting competitors to use the patentee’s own articles to compete against the patentee in the high value or parallel market. These risks can be significant in areas such as seeds and crops, raw materials, disposable devices and parts, and component parts for larger systems.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 43

§3.33

INTELLECTUAL PROPERTY LAW

PRACTICE POINTERS 

The first-sale doctrine, if not restricted, permits purchases to sell, use, reuse, and resell the purchased item in any manner.



The first-sale doctrine applies on an item-by-item basis.



The first-sale doctrine applies to all domestic sales.



The first-sale doctrine does not apply to foreign sales.

While a patentee may wish to sell its patented products into one market at a lower price, it might not want to see those same products resold into a higher priced and more profitable market in competition with its own sales. It is important for patentees to recognize this issue early in a product’s life cycle and identify any risks to price, profit, and their competitive situation. If such risks exist, the patentee should place restrictions on all products that it authorizes to be placed into the stream of commerce. These restrictions, however, can draw challenges based on patent misuse and antitrust theories. Thus, they must be carefully tailored for each particular situation. However, if properly drafted, these restrictions are generally upheld and enforced, permitting the patentee to effectively control the movement of its products through the stream of commerce. In Bowman v. Monsanto Co., __ U.S. __, 185 L.Ed.2d 931, 133 S.Ct. 1761, 1764 (2013), the Court addressed whether a patentee could prohibit a farmer who bought patented seeds from reproducing the seeds by planting and harvesting them in order to regrow additional crops. The Court held that the patent could prohibit such use of the newly grown seeds. Id. The Court in Bowman first articulated the doctrine: The doctrine of patent exhaustion limits a patentee’s right to control what others can do with an article embodying or containing an invention. Under the doctrine, “the initial authorized sale of a patented item terminates all patent rights to that item.” . . . And by “exhaust[ing] the [patentee’s] monopoly” in that item, the sale confers on the purchaser, or any subsequent owner, “the right to use [or] sell” the thing as he sees fit. [Citations omitted.] 133 S.Ct. at 1766. Thus, the Bowman Court noted that the patentee could not enforce the patent against the farmer to stop the farmer from planting the seeds, feeding them to livestock, and then selling the livestock or reselling the seeds. Id. In Bowman, the patentee had not placed any contractual limits on resale. The Court, however, expressly noted that the first-sale doctrine only applies to the particular item sold. Thus, it did not apply to, and did not give the farmer the right to create (i.e., grow and reuse) new patented seeds. 133 S.Ct. at 1767 – 1768. In Lexmark, supra, the Federal Circuit evaluated the type of contractual restrictions, and other restrictions, that can be placed on an article to limit the application of the first-sale doctrine.

3 — 44

WWW.IICLE.COM

PATENT ANTITRUST, MISUSE, EXHAUSTION, AND INEQUITABLE CONDUCT

§3.33

First, the court reaffirmed the nature of the first-sale doctrine and that it applies to all authorized sales. “The doctrine of patent exhaustion (or ‘first sale’ doctrine) addresses the circumstances in which a sale of a patented article (or an article sufficiently embodying a patent), when the sale is made or authorized by the patentee, confers on the buyer the ‘authority’ to engage in acts involving the article, such as resale, that are infringing acts in the absence of such authority.” 816 F.3d at 726. Lexmark then went on to expressly hold that restrictions on the first-sale doctrine are permitted to a patentee. Thus, “a patentee, when selling a patented article subject to a singleuse/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied.” Id.

PRACTICE POINTERS 

The first-sale doctrine results in the patentee’s loss of all control over all downstream activities with the patented item.



The first-sale doctrine can result in a patentee unknowingly establishing its own competitor.



Contractual restrictions on the first-sale doctrine are permissible, but they must be clearly communicated to the purchaser.



To protect long-term value of a patented invention, the patentee must take a long-term and broad view of the invention’s value proposition and restrict the first-sale doctrine to protect that value proposition.

The ability to restrict downstream activity can be placed on licensees and authorized sellers, as well as direct purchasers. Id. It is significant, however, that these restrictions are not really restrictions in the sense of enforceable rights to stop activity. They instead are carveouts, in which the patentee is reserving the right to enforce the patent against certain stated activities. Thus, it is not the contract or terms of sale that are enforced against the downstream purchaser, but, rather, it is the patent itself. 816 F.3d at 727 (viewing restrictions on first-sale doctrine as way for patentee to “preserve its §271 rights”). Additionally, a sale abroad does not trigger the first-sale doctrine as to U.S. patent rights, even if there are no restrictions placed on that sale. Id. A significant risk to a patentee can come early in a patented invention’s product life cycle or in the growth of the company. In these early stages of commercial activity, there can be considerable pressure to get sales quickly and to show increasing sales numbers. This drive for quickly increasing sales can result in the patentee signing longer-term sales contracts, distributorship agreements, and licenses for its first-generation product. The problem that may not be foreseen is that these first-generation products, having the benefit of the first-sale doctrine, can be resold or reused in their original markets as well as other markets that directly compete

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

3 — 45

§3.33

INTELLECTUAL PROPERTY LAW

with the patentee’s later sales of high profit second- and third-generation products. In essence, to get quick sales early, and because of its failure to restrict the first-sale doctrine, the patentee has unwittingly established a long-term competitor. To avoid this problem, it is important that the patentee takes a very long-term and broad (e.g., across may markets and applications) view of its invention’s value. With this long-term value proposition in mind, the patentee should carefully place restriction on later downstream activity for any high-volume direct sales, long-term sales agreements, distributorship agreements, and licensee agreements it enters into. The patentee, especially early in an invention’s product life cycle, must protect and control the long-term value proposition for that invention. A key element in this protection is clearly communicated and carefully drafted restrictions on the first-sale doctrine that accompany the sale of any patented product.

3 — 46

WWW.IICLE.COM

4

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

GLEN P. BELVIS Steptoe & Johnson LLP Chicago

®

©COPYRIGHT 2017 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] Enhanced Damages 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 and Its Overruling by Halo E. [4.39] 35 U.S.C. §298 X. [4.40] Federal Rule of Evidence 502 A. [4.41] Federal Rule of Evidence 502(a) — Intentional Disclosure and the Scope of Waiver B. [4.42] Federal Rule of Evidence 502(b) — Inadvertent Disclosure and the Scope of Waiver C. [4.43] Federal Rules of Evidence 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) (en banc). 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 U.S. 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 the mid-2000s 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 continued with the adoption of a 2008 amendment to the Federal Rules of Evidence that greatly strengthened the attorney-client privilege and reduced 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. Thus, in spite of Sperry, supra, and In re Queen’s University at Kingston, 820 F.3d 1287 (Fed.Cir. 2016) (express finding patent agent privilege), a Texas state appellate court came to an entirely difference conclusion, finding that patent agent-client communications were not privileged. In re Silver, 119 U.S.P.Q.2d (BNA) 1758, 2016 WL 4386004 (Tex.App. 2016).

4—4

WWW.IICLE.COM

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

§4.2

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 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) (en banc); 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 the evidence in specific cases. United States v. United Shoe Machinery Corp., 89 F.Supp. 357, 358 (D.Mass. 1950), quoting Comment to 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. & Sm. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—5

§4.2

INTELLECTUAL PROPERTY LAW

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. 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, 828 F.2d at 745 (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.

4—6

WWW.IICLE.COM

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

§4.4

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. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—7

§4.4

INTELLECTUAL PROPERTY LAW

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 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 nonprivileged 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 not 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

4—8

WWW.IICLE.COM

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

§4.7

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 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). See generally Upjohn Co. v. United States, 449 U.S. 383, 66 L.Ed.2d 584, 101 S.Ct. 677, 683 – 685 (1981) (tax case discussing and criticizing shortcomings of control-group test). 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4—9

§4.8

INTELLECTUAL PROPERTY LAW

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: 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

4 — 10

WWW.IICLE.COM

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

§4.8

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. 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 communication 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 was put to rest, at least for patent litigations, by the Federal Circuit, which stated in In re Seagate Technology, LLC, 497 F.3d 1360, 1376 (Fed.Cir. 2007) (en banc): “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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 11

§4.9

INTELLECTUAL PROPERTY LAW

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 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 circumstances 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 the 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, 1985 WL 71991 (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).

4 — 12

WWW.IICLE.COM

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

§4.10

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). 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). The risk of inadvertent waiver during discovery has been greatly reduced with the adoption of Fed.R.Evid. 502, which is discussed in §§4.40 – 4.43 below.

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. Fed.R.Evid. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 13

§4.11

INTELLECTUAL PROPERTY LAW

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 Queen’s University at Kingston, 820 F.3d 1287, 1290 – 1291 (Fed.Cir. 2016) (in patent cases, and for privileged matters that relate to substantive patent issues, such as validity and infringement, Federal Circuit will apply its own law and not look to law of regional circuits); 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 Circuit law and not law of regional circuits). With respect to all other issues (i.e., non-patent-related 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 Queen’s University at Kingston, 820 F.3d 1287, 1291 – 1294 (Fed.Cir. 2016) (mandamus); 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).

4 — 14

WWW.IICLE.COM

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

§4.13

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, 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.] Id. 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, 1980 WL 39083 (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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 15

§4.14

INTELLECTUAL PROPERTY LAW

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 (see §4.10 above), the Jack Winter line of cases and rationale should be ended. 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 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, 1985 WL 71991 (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, 1975 WL 21161 (D.N.J. 1975). See

4 — 16

WWW.IICLE.COM

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

§4.14

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.

PRACTICE POINTER 

To assure that the attorney-client privilege and work-product immunity protections are available, a patent agent’s work should always be done under the direction 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. Although no rational basis exists for precluding patent agents from work-product 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. The Federal Circuit in In re Queen’s University at Kingston, 820 F.3d 1287 (Fed.Cir. 2016), addressed the issue of whether the attorney-client privilege applied to a patent agent working without lawyer supervision. In Queen’s, the court found that such activities were privileged. However, the court created a new privilege, the “patent-agent privilege,” rather than placing these activities under the attorney-client privilege. 20 F.3d at 1294. The court based the creation of this new privilege on the powers granted federal courts under Fed.R.Evid. 501 and Sperry, supra (finding that patent prosecution by patent agents was practice of law). The Queen’s court, however, went on to note that the scope of this privilege was limited, applying only to activities that patent agents are authorized to do before the USPTO. Thus, if a patent agent opined on the validity of a competitor’s patent, the communication would not be privileged. 820 F.3d at 1301 – 1302. In spite of Queen’s and Sperry, a Texas state appellate court came to an entirely different conclusion, finding that patent agent-client communications were not privileged. In re Silver, 119 U.S.P.Q.2d (BNA) 1758, 2016 WL 4386004 (Tex.App. 2016). This is a poorly written and irrational opinion. Nevertheless, the party’s privilege is lost and the communications are a part of the litigation.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 17

§4.15

INTELLECTUAL PROPERTY LAW

Unfortunately, to make certain that patent agents prosecuting matters before the USPTO are privileged, their work should be done under the supervision 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 United Kingdom law has recognized privilege in communications with patent agents since 1968); 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). 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

4 — 18

WWW.IICLE.COM

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

§4.18

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 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 (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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 19

§4.19

INTELLECTUAL PROPERTY LAW

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 are 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 only providing legal advice void of any client confidences, which would render them nonprivileged. 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 only providing legal advice void of any client confidence, which would render them nonprivileged. 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.

4 — 20

WWW.IICLE.COM

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

§4.25

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 nonprivileged 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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 21

§4.26

INTELLECTUAL PROPERTY LAW

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 

4 — 22

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.

WWW.IICLE.COM

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

§4.30

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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 23

§4.31

INTELLECTUAL PROPERTY LAW

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] Enhanced Damages In patent litigation, an infringer can be subject to punitive damages for infringement that can be up to three times actual damages. 35 U.S.C. §284. Section 284 provides that “the court may increase the damages up to three times the amount found or assessed.” The law of enhanced damages has seen several significant changes. First, the Leahy-Smith America Invents Act has been put into place, with its protections against de facto waiver of attorney-client privilege. See §4.39 below. Second, the Supreme Court, in Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), rejected the Federal Circuit’s objectively reckless standard and clear and convincing evidence burden of In re Seagate Technology LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). Thus, after Halo, it is unlikely that the law will return to the days when, 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. It is too soon to know, after Halo, the extent to which subjective intent of the infringer will again be front and center in an enhanced damages award case. Prior to Halo, 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).

4 — 24

WWW.IICLE.COM

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

§4.33

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 Seagate, supra, 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. Knorr-Bremse and EchoStar are untouched by Halo. Further, Halo commented favorably on the goals of the Seagate test, but rejected it as having no basis in §284. 136 S.Ct. at 1932 (“The Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases. That test, however, ‘is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to the district courts.’ ”), quoting Octane Fitness, LLC v. Icon Health & Fitness, Inc., ___ U.S. ___, 188 L.Ed.2d 816, 134 S.Ct. 1749, 1755 (2014). Thus, all three Federal Circuit cases are still important to consider and evaluate. See §§4.33 – 4.38 below. 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;

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 25

§4.34

INTELLECTUAL PROPERTY LAW

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) (en banc), which has now been rejected by Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923 (2016). Thus, the Federal Circuit in Knorr-Bremse answered key questions regarding willfulness and privilege issues, and the significance of that case may have been reinvigorated by Halo. See §§4.34 – 4.36 below.

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 and/or workproduct 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.

4 — 26

WWW.IICLE.COM

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

§4.36

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? 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. [Citation omitted.] 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. The Federal Circuit’s decision in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc), discussed in §4.38 below, reduced the risk for not obtaining an opinion from outside counsel to the point that such costly opinions were no longer needed in most circumstances. It is unclear whether the rejection of Seagate in Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), will again require the costly practice of seeking opinion from outside counsel. 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?

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 27

§4.37

INTELLECTUAL PROPERTY LAW

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 1347. 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) (en banc), 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. However, Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), overruled this holding of Seagate and criticized Seagate for placing too great a reliance on a good defense at trial to avoid willfulness. 136 S.Ct. at 1926 (“The Seagate test further errs by making dispositive the ability of the infringer to muster a reasonable defense at trial, even if he did not act on the basis of that defense or was even aware of it.”). Halo has not only reinvigorated the uncertainty over Knorr-Bremse’s refusal to adopt such a presumption, it has heightened it. Thus, it may be that the only tool available to clients to reduce this uncertainty is to obtain and follow a competent opinion of counsel. 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

4 — 28

WWW.IICLE.COM

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

§4.38

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.

D. [4.38] Seagate and Its Overruling by Halo 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. In Halo Electronics, Inc. v. Pulse Electronics, Inc., ___ U.S. ___, 195 L.Ed.2d 278, 136 S.Ct. 1923, 1929 (2016), the Court rejected this two-fold test of Seagate. The Halo Court expressly rejected the threshold requirement of objective recklessness. 136 S.Ct. at 1932 – 1933. The Court also rejected the clear and convincing burden of proof standard for enhanced damages, finding that only a preponderance of evidence was required. 136 S.Ct. at 1934. The Halo Court again turned the focus back to the subjective intent of the infringer. See, e.g., 136 S.Ct. at 1932 (conduct warranting enhanced damages is “willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or — indeed — characteristic of a pirate”). The Halo Court, however, expressly noted that Seagate “reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases.” 136 S.Ct. at 1932. Thus, those sections of Seagate that were not expressly overruled may still prove pertinent under the more freewheeling, open-ended subjective analysis of Halo. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 29

§4.39

INTELLECTUAL PROPERTY LAW

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.

CASE HIGHLIGHTS 

Halo — the standard for willfulness: 1. Unclear under Halo’s subjective approach the extent to which this duty will reemerge. 2. Look to subjective intent. With Halo’s preponderance of the evidence standard, proof of bad faith, versus a requirement to show good faith, could have great significance. 3. 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.” Pub.L. No. 112-29, §35. 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.

4 — 30

WWW.IICLE.COM

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

§4.41

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. 67, 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.

X.

[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 provided 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] Federal Rule of Evidence 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 31

§4.42

INTELLECTUAL PROPERTY LAW

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 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] Federal Rule of Evidence 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 

4 — 32

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

WWW.IICLE.COM

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

§4.43

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] Federal Rules of Evidence 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. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

4 — 33

5

Ownership and Management of Patent Rights

JOHN S. PANIAGUAS Clark Hill PLC Chicago

The contributions of William H. Frankel to previous editions of this chapter are gratefully acknowledged.

®

©COPYRIGHT 2017 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 and Loss 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

I.

[5.1]

INTELLECTUAL PROPERTY LAW

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 is 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 that 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 new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. §101. The same laws also define a “patentee” as including “not only the [person] 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, 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. Absent an assignment, the inventor is the owner of the patent rights by operation of law. Patents are valuable to a company in many ways. For example, knowing what patent rights are owned by a company and what patent rights are owned by 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 collateral for loans as well 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

5—4

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.3

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.

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. 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 in the name of all of its joint inventors. See 35 U.S.C. §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 collaborative effort by inventors 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. To constitute a joint invention, it is necessary that each of the inventors work on the same subject matter and make some contribution to the inventive thought and to the final result. Vanderbilt University v. ICOS Corp., 601 F.3d 1297, 1302 (Fed.Cir. 2010), quoting Monsanto Co. v. Kamp, 269 F.Supp. 818, 824 (D.D.C. 1967).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—5

§5.4

INTELLECTUAL PROPERTY LAW

The Vanderbilt court went on to state, “Each inventor must contribute to the joint arrival at a definite and permanent idea of the invention as it will be used in practice.” Vanderbilt, supra, 601 F.3d at 1303. Furthermore, an inventor may use the ideas and the 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). However, 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 Kimberly Clark Corp. v. Proctor & Gamble, 973 F.2d 911 (Fed.Cir. 1992) (plaintiff could not establish collaboration because he never communicated with other named inventors). It may also be important to show a common development time among the coinventors. Credle v. Bond, 25 F.3d 1566 (Fed.Cir. 1994). The emphasis is on conception of the invention, and mere reduction to practice by or with another may not — in and of itself — give rise to joint inventorship if the reduction to practice only required routine skill or the person reducing the invention to practice was merely following directions from an inventor. What is required of a joint inventor is that he or she a. contributes in some significant manner to the conception or reduction to practice of the invention; b. makes a contribution to the invention that is not insignificant in quality when measured against the full invention; and c. does 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 an 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

5—6

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.5

(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. The 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 was affirmed by the U.S. Supreme Court. Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc., 563 U.S. 776, 180 L.Ed.2d 1, 131 S.Ct. 2188, 2195 (2011). In this case, Stanford University argued that the Bayh-Dole Act (Bayh-Dole University and Small Business Patent Procedures Act), Pub.L. No. 96-517, 94 Stat. 3019 (1980), codified at 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 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); Teets v. Chromalloy Gas Turbine Corp., 83 F.3d 403 (Fed.Cir.), cert. denied, 117 S.Ct. 513 (1996). In such situations, ownership of patent rights will pass to the employer by operation of law. 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. Lear, Inc. v. Adkins, 395 U.S. 653, 23 L.Ed.2d 610, 89 S.Ct. 1906 – 1907 (1969) (construction of patent license agreements governed by state law).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—7

§5.6

INTELLECTUAL PROPERTY LAW

However, the Federal Circuit has declared that when an employment contract has patent ownership implications and includes language assigning future inventions, 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). See also Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed.Cir. 2000). The DDB Technologies 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. The court determined that ownership was “intimately bound up with the question of standing in patent cases.” DDB Technologies, supra, 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 blistering dissent in DDB Technologies and the Supreme Court has 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).

5—8

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.8

Second, the employer must provide a written notification of these requirements upon presenting invention assignment language to an employee. The 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 then 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 providing compensation and without causing 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 employeeinventor 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 development of the employee’s invention. The principle involved is that an employer should be deemed 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. Shop rights are nonexclusive rights. Tin Decorating Company of Baltimore v. Metal Package Corp., 37 F.2d 5 (2d Cir.), cert. denied, 50 S.Ct. 410 (1930). C. [5.8] Acquisition and Loss of Patent Rights The U.S. Code 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.” 35 U.S.C. §261. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5—9

§5.9

INTELLECTUAL PROPERTY LAW

The U.S. Code 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. 35 U.S.C. §261. 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. RhonePoulenc 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 it 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). Another exemplary retention of rights relates to a field-of-use restriction. For example, restricting the right of the assignee to sell to commercial customers while the assignor retains the right to sell to military customers. Retention of rights, in this case, restricts the assignee’s rights to sell the patented invention to military customers, and the assignee does not have the exclusive right to sell the invention. Thus, the retention of rights will be considered a “substantial” retention of rights. In general, any retention of rights that interferes with the assignee’s rights to (a) make, use, and sell the patented invention or (b) sue in its own name may be considered “substantial,” thus converting a purported assignment to a license. See Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed.Cir. 2000). To be specific, the Federal Circuit, generally, looks to whether three rights have been conveyed in the agreement to decide whether the grant constitutes an assignment or a mere license: 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, supra, 211 F.3d at 1250.

5 — 10

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.10

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. The U.S. Code provides that a patentee shall have remedy by civil action for infringement of a patent. 35 U.S.C. §281. 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 language, as discussed above, may be considered a matter 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. The U.S. Code requires that the assignment of a patent or patent application be in writing. 35 U.S.C. §261. 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). There are many reasons why a company should record all of its patent and patent application assignments with the United States Patent and Trademark Office. One reason relates to an asset purchase of the target company by an acquiring company. In this case, it is important that the target company record all of its patents and patent applications so that they can be properly transferred to the acquiring company at the close of the transaction. Another reason relates to use of the patents and patent applications as collateral for a loan In an asset purchase, as part of the due diligence of the acquiring company, the acquiring company will require assignments of all patents and patent applications of the target company. The acquiring company also will require that all patents and patent applications reflect a proper chain of title from the inventor(s) all the way up to the target company. This will allow the patents and patent applications to be assigned to the acquiring company and vest the entire right, title, and interest in all of the patent applications and patents in the acquiring company. A company can also put its patents and patent applications up for collateral in order to obtain financing. In this situation, a company can put either a part or its entire portfolio of patents and

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 11

§5.11

INTELLECTUAL PROPERTY LAW

patent applications up for collateral for a loan. In exchange for loan, the lending institution will either require a security assignment or a security interest in the patents and patent applications. The security assignment or security interest is recorded against the borrower’s patents and patent applications. For the security assignment or security interest to be effective against the borrower, the chain of title of the patent applications and patents must be proper. 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 is 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). In addition, 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 Patents confer on the patentee certain exclusionary rights in the subject matter of the claims. These exclusionary rights include the right to exclude others from making, using, or selling the claimed invention. Implicit in these exclusionary rights 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. Endo Pharmaceuticals Inc. v. Actavis, Inc., 746 F.3d 1371 (Fed.Cir. 2014). A merger has been found to violate the express terms of a nontransferable license. Cincom

5 — 12

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.11

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, supra, expanded the ruling from PPG, supra, 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: 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. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 L.Ed.2d 996, 128 S.Ct. 2109 (2008). 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). Some patent licenses are considered to confer personal rights. Such licenses 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 13

§5.12

INTELLECTUAL PROPERTY LAW

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. In Helferich Patent Licensing LLC v. New York Times Co., 778 F.3d 1293 (Fed.Cir. 2015), the Court of Appeals for the Federal Circuit addressed the issue of patent exhaustion in a situation in which only some the claims in a patent are licensed. The doctrine of patent exhaustion clearly applies to the licensed claims. What about the unlicensed claims — are they exhausted as well? The court concluded that the judicially-created doctrine of patent exhaustion should not be expanded to cover unlicensed claims. 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 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 U.S. 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. Stated another way, an exclusive license is a license to practice the invention, accompanied by the patent owner’s promise that others will not be licensed 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 referred to as a manufacturing license. An exclusive license prevents the licensor from practicing the invention unless that right has been reserved in the license agreement. CoreBrace LLC v. Star Seismic LLC, 566 F.3d 1069 (Fed.Cir. 2009); 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

5 — 14

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.13

“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. WiAV Solutions LLC v. Motorola, Inc., 631 F.3d 1257 (Fed.Cir. 2010); Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1552 (Fed.Cir. 1995) (en banc). 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 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. 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 U.S. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 15

§5.14

INTELLECTUAL PROPERTY LAW

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. Courts have found that “hybrid licenses” that involve tying arrangements can result in one or more of the patents being rendered unenforceable. See U.S. Philips Corp. v. ITC, 424 F.3d 1179 (Fed.Cir. 2005). In such tying arrangements, the licensee is coerced to purchase a product or take a license under an unwanted patent in exchange for the hybrid license. 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 with respect to the licensed patent and protecting its investment in the accused product. This is but one example of the numerous scenarios that give rise to patent license negotiations, 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.

5 — 16

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.15

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/infringer 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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 17

§5.16

INTELLECTUAL PROPERTY LAW

(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). 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.

5 — 18

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.18

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 recover more quickly on its investment in the licensed technology and to continue 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. In addition, 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 19

§5.18

INTELLECTUAL PROPERTY LAW

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 develop further 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 (1994), aff’d, 86 F.3d 1566 (Fed.Cir. 1996). For example, a royalty rate of 0.5 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, *23 (D.Ariz. July 9, 1990). The 25-percent rate is then negotiated up or down based on a number of factors, such as (a) the licensor’s ability to continue to reinforce the licensed package with research and development and know-how, (b) the licensor’s reputation for diligence in pursuing infringers and protecting its licensees, (c) the licensee’s preexisting manufacturing capabilities and/or skilled marketing force, (d) the licensee’s access to raw materials or local government approvals, and (e) 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

5 — 20

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.20

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, was 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 21

§5.21

INTELLECTUAL PROPERTY LAW

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 “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, *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. The U.S. Code expressly sanctions the arbitration of any dispute relating to patent validity or infringement arising under a license contract. 35 U.S.C. §294. 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

5 — 22

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.22

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 then 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). 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) (Cordis I). Cf. Cordis Corp. v. Medtronic, Inc., 835 F.2d 859, 861 (Fed.Cir. 1987) (licensee challenging not

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 23

§5.23

INTELLECTUAL PROPERTY LAW

validity of patent itself, but rather scope of its license) (Cordis II). 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.” Cordis I, supra, 780 F.2d at 995. That view was challenged and invalidated in the U.S. 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 eliminated 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 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 810 ILCS 5/2-312(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.

5 — 24

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.24

The UCC 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. 810 ILCS 5/2-312(3). 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, 423 N.E.2d at 558. 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). It is beyond the scope of this chapter to review comprehensively 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 25

§5.25

INTELLECTUAL PROPERTY LAW

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 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 they are necessary and reasonable, royalties paid by a patent licensee are a deductible business expense. Similarly, “ordinary and necessary” litigation expenses associated

5 — 26

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.26

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 a and b, or, in case c, 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 U.S. 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. 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. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 27

§5.27

INTELLECTUAL PROPERTY LAW

[t]he ability to transfer patent rights is “particularly significant” within the “all substantial rights” analysis, and the Federal Circuit has gone so 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, supra, 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 using the patents obtained therefrom as economic weapons in furtherance of the company’s business objectives. 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.

5 — 28

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.29

The scope of the audit will dictate, in part, who should be on the audit team. The team should include a. the chief legal officer (CLO) or his or her designee; b.

a business manager with the knowledge to help define the scope of the audit and the authority to encourage audit participation and compliance; and

c. 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 have a significant impact on 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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 29

§5.29

INTELLECTUAL PROPERTY LAW

A patent due diligence investigation necessarily involves a thorough review of a. patent rights held by the owner/assignor/licensor, including ownership issues; b. patent rights held by third parties and possible infringement issues; c. patent transfer and other agreements, including the review, drafting, and recordation of documents; d. patent investigations, including product clearances, equipment and process operation, and documentation; and e. 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.

5 — 30

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.30

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 insurance and warranty issues. In addition, 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 “shrinkwrap” 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 31

§5.31

INTELLECTUAL PROPERTY LAW

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. (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 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 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 seek revenue aggressively from its patent portfolio. IBM, 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.

5 — 32

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.32

In contrast, consider the cost of not seeking patent protection and revenues. In 1979, Xerox decided not to patent its invention of the graphical user interface that later evolved into the Microsoft Windows Operating System. 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 to decimate Eastman Kodak’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 (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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 33

§5.32

INTELLECTUAL PROPERTY LAW

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 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 — 34

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.32

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 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 35

§5.33

INTELLECTUAL PROPERTY LAW

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]. 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 [city], [state]. 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 [name of state], having a place of business at [address], is the exclusive owner of the entire right, title, and interest in and to the invention of [invention, process, etc.], 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 [name of state], 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;

5 — 36

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.33

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 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 [signature date]. _______________________________ NOTARY PUBLIC [signature of assignee and date of signing] Subscribed and sworn to before me this [signature date]. _______________________________ NOTARY PUBLIC

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 37

§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 [execution date], 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 — 38

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 — 39

§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 — 40

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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

5 — 41

§5.34

INTELLECTUAL PROPERTY LAW

as amiable compositors. The parties acknowledge and agree that the transactions 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 — 42

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 — 43

§5.35

INTELLECTUAL PROPERTY LAW

D. [5.35] Exclusive Patent License Agreement EXCLUSIVE PATENT LICENSE AGREEMENT This AGREEMENT dated as of [execution date] (Effective Date), by and between [licensor’s name], having a place of business at [address] (Licensor), and [licensee’s name], 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 — 44

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 — 45

§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.

5 — 46

WWW.IICLE.COM

OWNERSHIP AND MANAGEMENT OF PATENT RIGHTS

§5.35

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 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 — 47

§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 — 48

WWW.IICLE.COM

Part II: Trademarks

6

Creation and Maintenance of Trademark Rights

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

®

©COPYRIGHT 2017 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, Smells, and Flavors 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

6—2

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

(2) [6.29] Primarily geographically deceptively misdescriptive marks 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.

6—4

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.3

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 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, ch. 540, 60 Stat. 427, codified at 15 U.S.C. §1051, et seq., and 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. 100-667, Title I, 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 (1996), and the Anticybersquatting Consumer Protection Act, Pub.L. No. 106-113, Div. B, §1000(a)(9), 113 Stat. 1536 (1999), enacting Title III of the Intellectual Property and Communications Omnibus Reform Act of 1999, S. 1948, 106th Cong, 1st Sess. (1999)), 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, 116 Stat. 1913 (2002), added provisions relating to the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—5

§6.4

INTELLECTUAL PROPERTY LAW

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. Feb. 19, 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’. 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), aff’d as 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.

6—6

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.5

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. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—7

§6.6

INTELLECTUAL PROPERTY LAW

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 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)

6—8

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.8

639, 1981 WL 40524 (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 “McDonald’s” 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 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, 1995 WL 789509 (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, Smells, and Flavors 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6—9

§6.9

INTELLECTUAL PROPERTY LAW

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, 2000 WL 33417507 (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. Feb. 19, 2004) (denying protection for colors green and yellow for lawn and garden products on functionality grounds). 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 WL 354572, *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. See USPTO Application Serial No. 77207143. 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, 2006 WL 1723556 (T.T.A.B. 2006). See also Nextel Communications, Inc. v. Motorola, Inc., 91 U.S.P.Q.2d (BNA) 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).

6 — 10

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.12

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, 2002 WL 1980117 (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). 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, 1998 WL 1015894 (T.T.A.B. 1998). 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 trademark protection. See, e.g., In re Martin Container, Inc., 65 U.S.P.Q.2d (BNA) 1058, 2002 WL 1285909 (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, Pub.L. No. 105-225, 112 Stat. 1253 (1998), codified at 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,” “PanAmerican,” 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 who 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 11

§6.13

INTELLECTUAL PROPERTY LAW

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 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 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 Brothers, Inc., 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 (C.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 re Frankish Enterprises Ltd., 113 U.S.P.Q.2d (BNA) 1964, 2015 WL 1227729, *4 (T.T.A.B. 2015) (trade dress for services can be 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

6 — 12

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.15

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 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, *12 (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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 13

§6.16

INTELLECTUAL PROPERTY LAW

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.”). Evidence that a defendant intentionally copied a plaintiff’s trade dress may support a plaintiff’s position that its trade dress has acquired distinctiveness. See, e.g., Weber-Stephen Products LLC v. Sears Holding Corp., 116 U.S.P.Q.2d (BNA) 1927, 2015 WL 5161347, *1 (N.D.Ill. 2015).

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, 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 promotion of the services and the services are provided. 15 U.S.C. §1127. The rationale for awarding trademark rights based on first and continuous use is that (1) the use of an

6 — 14

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.18

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). 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). 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 15

§6.19

INTELLECTUAL PROPERTY LAW

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 WL 124312, *4 (S.D.N.Y. 1987) (“[The 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). 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, ch. 675, 52 Stat. 1040 (1938)). 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

6 — 16

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.20

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 for the Protection of Industrial Property, March 20, 1883 (Paris Convention), www.wipo.int/treaties/en/text.jsp?file_id=288514. See §6.46 below. Under the Paris 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, 2017. If, by July 15, 2017, 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, 2017. 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 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, Inc., 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 17

§6.21

INTELLECTUAL PROPERTY LAW

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, 1980 WL 30139, *9 (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 chapter, a mark shall be deemed to be in use in commerce — (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

6 — 18

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.23

(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, 1979 WL 24829 (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. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 19

§6.24

INTELLECTUAL PROPERTY LAW

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 United States Patent and Trademark Office’s Principal Register (see §§6.30 – 6.32 below) include the following: a. nationwide constructive use (i.e., priority) as of the date of application (15 U.S.C. §1057(c)); 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);

6 — 20

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.25

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); 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);

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 21

§6.26

INTELLECTUAL PROPERTY LAW

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 trademark 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; 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).

6 — 22

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.29

The statutory provisions denying registration for immoral, scandalous, and disparaging marks are currently facing First Amendment challenge. See In re Tam, 808 F.3d 1321 (Fed.Cir. 2015) (Lanham Act provision denying registration to disparaging marks is unconstitutional), cert. granted, 2016 WL 1587871 (Sept. 29, 2016). 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 such a mark is 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, 1988 WL 252488 (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, 1986 WL 83693 (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 Register 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 (Fed.Cir. 2003); In re Compania de Licores Internacionales S.A., 102 U.S.P.Q.2d (BNA) 1841, 1843, 2012 WL 1267898 (T.T.A.B. 2012) (refusing registration of “OLD HAVANA” for rum that does not originate in Havana, Cuba).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 23

§6.30

INTELLECTUAL PROPERTY LAW

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.

6 — 24

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.34

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 those 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 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 can be filed by mail, hand

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 25

§6.35

INTELLECTUAL PROPERTY LAW

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. 15 U.S.C. §1126(d). 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. 15 U.S.C. §1126(e). 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. Id. (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 (Oct. 2016), 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, https://tmep.uspto.gov/RDMS/TMEP/current. 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. 37 C.F.R. §2.62.

6 — 26

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.37

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 at www.uspto.gov/trademark/guides-andmanuals/manuals-guides-official-gazette. 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 37 C.F.R. §2.76. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 27

§6.38

INTELLECTUAL PROPERTY LAW

§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(k). 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. Notably, TTAB decisions concerning likelihood of confusion can have a preclusive effect in subsequent district court infringement actions. B&B Hardware, Inc. v. Hargis Industries, Inc., ___ U.S. ___, 191 L.Ed.2d 222, 135 S.Ct. 1293 (2015). In B&B Hardware, the Supreme Court held that “so long as the other ordinary elements of issue preclusion are met, when the issues adjudicated by the TTAB are materially the same as those before a district court, issue preclusion should apply.” 135 S.Ct. at 1302 – 1310.

6 — 28

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.40

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 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 (June 2016), which is available at https://tbmp.uspto.gov/RDMS/TBMP/current (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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 29

§6.41

INTELLECTUAL PROPERTY LAW

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, 1994 WL 262249 (T.T.A.B. 1994). If the opposition is successful, the trademark will be refused registration. 37 C.F.R. §2.136. 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

6 — 30

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.44

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). B. [6.44] State Trademark Registration Most if not all states 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 31

§6.45

INTELLECTUAL PROPERTY LAW

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. 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. 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 Paris Convention art. 4. Thus, for example, a U.S. citizen who filed a U.S. trademark application on January 15, 2017, can file an identical application in Mexico on or before July 15, 2017, and for priority purposes, the Mexican application will be treated as filed on January 15, 2017. 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), www.wipo.int/wipo lex/en/wipo_treaties/text.jsp?file_id=283484. 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 Concerning the International Registration of Marks, April 14, 1891 (Madrid Agreement), www.wipo.int/treaties/en/ registration/madrid, 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 World Intellectual Property Organization’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.

6 — 32

WWW.IICLE.COM

CREATION AND MAINTENANCE OF TRADEMARK RIGHTS

§6.47

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. 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

6 — 33

7

Transfer or Loss of Trademark Rights

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

®

©COPYRIGHT 2017 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. 2015); 15 U.S.C. §1060(a)(1); Ford Motor Co. v. Thermoanalytics, Inc., 116 U.S.P.Q.2d (BNA) 1934, 2015 WL 6522857, *4 (E.D.Mich. 2015) (while goodwill was not explicitly spelled out in assignment, it was implied when trademark was assigned with broad property grant of all “other intellectual or industrial property rights”). 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—3

§7.4

INTELLECTUAL PROPERTY LAW

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, 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 Anne Gilson, GILSON ON TRADEMARKS §3.06(3) (2014).

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).

7—4

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.5

PRACTICE POINTER 

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.

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, 1996 WL 579826 (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. 2015). 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 a 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, [trademark owner], a Delaware corporation with offices at [trademark owner location], has adopted and used the mark [trademark name] in commerce and registered that mark with the United States Patent and Trademark Office, which registration was granted Registration No. ____________; and WHEREAS, [trademark owner] 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 [trademark name]; and WHEREAS, [potential buyer], a Delaware corporation located at [potential buyer location], 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, [trademark owner] does hereby assign to [potential buyer] all right, title, and interest in and to the mark [trademark name], 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—5

§7.6

INTELLECTUAL PROPERTY LAW

Signed in [signing location] this [signing date]. [trademark owner] By: ______________________________ Name: ___________________________ Title: ____________________________ 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. 2014).

7—6

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.10

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, 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 (Oct. 2016), www.uspto.gov/trademark/guides-and-manuals/tmep-archives. 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

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—7

§7.11

INTELLECTUAL PROPERTY LAW

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) (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;

7—8

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.12

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; 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7—9

§7.13

INTELLECTUAL PROPERTY LAW

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). 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. 2015). 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

7 — 10

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.15

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 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 a 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;

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 11

§7.16

f.

INTELLECTUAL PROPERTY LAW

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 TRADEMARKS AND UNFAIR COMPETITION §18:45 (4th ed. 2014); 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 Anne Gilson, GILSON ON TRADEMARKS §6.05[1] (2009). 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); In re Temporomandibular Joint (TMJ) Implants Product Liability Litigation, 113 F.3d 1484 (8th Cir. 1997) (“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.”). For example, in Dzhunaydov v. Emerson Electric Co., No. 12-CV-2188 (FB) (RER), 2016 WL 1069067 (E.D.N.Y. Mar. 17, 2016), Emerson Electric owned the trademark “Ridgid” for construction tools. Emerson licensed the brand to Home Depot for a line of power tools, including a table saw. While operating a

7 — 12

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.18

Ridgid-brand table saw, the plaintiff was injured and sued Emerson and Home Depot, among others. On Emerson’s motion for summary judgment, the court noted that under New York law, a “trademark licensor cannot be held liable for injuries caused by a defective product bearing its label where the licensor did not design, manufacture, sell, distribute or market the allegedly defective item.” 2016 WL 1069067 at *1, quoting D’Onofrio v. Boehlert, 221 A.D.2d 929, 635 N.Y.S.2d 384, 385 (1995). The license agreement with Home Depot revealed that Emerson retained quality control authority over the Ridgid mark, but there was no evidence that Emerson actually exercised any control over the design or manufacture of the saw. Thus, the court granted summary judgment for Emerson. 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 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., Aquarulo v A.O. Smith, No. CV095024498S, 2011 WL 7095179 (Conn.Super. Dec. 30, 2011) (unpublished; text available on Westlaw); Lou v. Otis Elevator Co., 77 Mass.App.Ct. 571, 933 N.E.2d 140, 148, review denied, 458 Mass. 1108 (2010). 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,

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 13

§7.19

INTELLECTUAL PROPERTY 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 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, ch. 540, 60 Stat. 427, 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 overnight”); Seidelmann Yachts, Inc. v. Pace Yacht Corp., 14 U.S.P.Q.2d (BNA) 1497, 1989 WL 214497, **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.

7 — 14

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.22

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). 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 WL 298658, *8 (S.D.Cal. 1989). Cf. Emergency

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 15

§7.23

INTELLECTUAL PROPERTY LAW

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, 1978 WL 21268 (T.T.A.B. 1978) (change in trademarked product from premium-priced 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 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, 1998 WL 1120389, *4 n.9 (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 Manuf’g Co. v. June Manuf’g Co., 163 U.S. 169, 41 L.Ed. 118, 16 S.Ct. 1002 (1896). This common-law 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.

7 — 16

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.27

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 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.” Id. 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

7 — 17

§7.28

INTELLECTUAL PROPERTY LAW

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 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.

7 — 18

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

WWW.IICLE.COM

TRANSFER OR LOSS OF TRADEMARK RIGHTS

§7.30

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.

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 2017 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 4. [8.34] First Amendment and Non-Trademark Uses 8—2

WWW.IICLE.COM

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

G. [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 H. [8.41] Proceedings Before the United States Patent and Trademark Office I. [8.42] Surveys and Consumer Reaction Tests 1. [8.43] Elements for Proper Survey 2. [8.44] Precedents J. [8.45] Cease-and-Desist Letters 1. [8.46] Content 2. [8.47] Precautions a. [8.48] Declaratory Judgment b. [8.49] Delay K. [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, ch. 540, 60 Stat. 427, 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 trademark 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 the 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 WL 83319 (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, 1987 WL 123818 (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). When an exlicensee deliberately continues using a formerly licensed trademark, a court often finds the exlicensee liable for trademark infringement. See, e.g., Ford Motor Co. v. Thermoanalytics, Inc., 116 U.S.P.Q.2d 1934, 2015 WL 6522857 (E.D. Mich. 2015). 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

8 — 10

WWW.IICLE.COM

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

§8.17

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 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.

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 11

§8.18

INTELLECTUAL PROPERTY LAW

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 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., 873 F.Supp.2d 1015, 1033 (N.D.Ind. 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.”

8 — 12

WWW.IICLE.COM

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

§8.19

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 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, supra. Indeed, clear language on websites and growing consumer familiarity with the way Internet search results are generated have made initial interest confusion a more difficult theory for plaintiffs to rely on in the Internet context. See, e.g., Multi Time Machine v. Amazon.com, Inc., 804 F.3d 930, 938 (9th Cir. 2015) (finding Amazon.com not liable under initial interest confusion theory, when “[t]he search results page makes clear to anyone who can read English that Amazon carries only the brands that are clearly and explicitly listed on the web page. The search results page is unambiguous — not unlike when someone walks into a diner, asks for a Coke, and is told ‘No Coke. Pepsi.’ . . . In light of the clear labeling Amazon uses on its search results page, no reasonable trier of fact could conclude that Amazon’s search results page would likely confuse a reasonably prudent consumer accustomed to shopping online as to the source of the goods being offered.”); 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229, 1244 (10th Cir. 2013) (noting lack of evidence that defendant’s AdWord advertising on Google created initial interest confusion; AdWords data showed that only 1.5 percent of consumers searching for plaintiff’s products were actually lured into clicking on defendant’s AdWords advertisement). 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 13

§8.20

INTELLECTUAL PROPERTY LAW

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). 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 (RICO), Pub.L. No. 91-452, Title IX, 84 Stat. 941 (1970). 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

8 — 14

WWW.IICLE.COM

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

§8.24

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; 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 its damages or defendant’s profits, an award of statutory damages that can range from $1,000 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).

ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION

8 — 15

§8.25

INTELLECTUAL PROPERTY LAW

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. 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 by 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).

8 — 16

WWW.IICLE.COM

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

§8.26

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)). 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, 1986 WL 9282 (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 Louis Altman and Malla Pollack, CALLMAN ON UNFAIR COMPETITION, TRADEMARKS, AND MONOPOLIES §22:30 (4th ed. 2016). 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) (