Winter 2011

Clear And Convincing” Standard for Invalidity Evidence May Soon Be Extinguished
The U.S. Supreme Court will hear the case of Microsoft Corporation v. i4i. A decision is expected in the first half of 2011. Microsoft is appealing a verdict that its Word program infringed upon i4i’s patent, as well as a judgment of $290 million in damages. On appeal, Microsoft argues that the “clear and convincing” evidentiary burden (evidence establishing a very high probability) of proving patent invalidity is improper because the standard renders it extremely difficult to invalidate patents of questionable validity.

Microsoft argues that in cases where a patent examiner has not considered the prior art (the products, publications, etc. that could be considered similar to the product seeking patent protection) that is presented during trial, the invalidity standard should be reduced to that of “more likely than not.” The “more likely than not” standard is considerably less burdensome than the “clear and convincing” standard, presently applied when finding infringement. More than a dozen technology companies, including Apple and Google, have filed amicus briefs (documents indicating support) in favor of Microsoft’s position.

Some patent practitioners believe that the Supreme Court will side with Microsoft and extinguish the “clear and convincing” evidence standard, at least with respect to prior art that the patent examiner did not evaluate during the prosecution. Others speculate that the Court will address whether the “clear and convincing” evidence standard should be eliminated for all prior art, regardless of whether or not it was originally cited to the patent examiner.

Copyright Exhaustion Issue Remains Undecided
In Costco v. Omega Int’l, the Supreme Court had to decide whether the “first-sale” doctrine of copyright law holds up in the context of international sales. The first-sale doctrine, also known as “copyright exhaustion,” allows the purchaser of a lawfully made copy of a copyrighted work to legally re-sell the item. Consequently, the copyright holder’s ownership of the item ends once that first sale occurs, on the condition that no additional copies of the work are made. Costco had legally purchased genuine Omega watches abroad and imported them into the U.S. The watches included a U.S.-copyrighted design on the back surface. Omega argued that the importation and further distribution of the watches constituted copyright infringement.

Copyrights, however, are territorial in nature, and the first-sale abroad arguably did not “exhaust” the U.S. copyright. The 9th Circuit had originally decided in favor of Omega—holding that the first-sale doctrine did not apply to copies manufactured in foreign companies and purchased abroad.

But when the case went to the Supreme Court, the Court simply affirmed the decision without writing an opinion, and in a 4-4 split. Because of the 4-4 split and the lack of an opinion, the case will not be seen as precedent-setting. Therefore, although Omega won their case, the question of the law remains unanswered. Thus, within the Ninth Circuit only, the first-sale doctrine will not apply to foreign manufactured copies purchased abroad, and such articles will be seen to infringe U.S. copyrights.

Supreme Court Will Decide State of Mind Requirement for Induced Infringement
In Global-Tech v. SEB, the Supreme Court is addressing the “state of mind” requirement for inducing patent infringement. Inducing infringement occurs when a person or group encourages infringement by another person or group. The present standard for inducing infringement requires that a person have a certain level of knowledge and intent to cause the other party’s infringement.

In the Global-Tech case, the Federal Circuit affirmed induced infringement, based upon the evidence that the defendant had purchased SEB’s product in Hong Kong, copied it nearly detail by detail, and hired an attorney to conduct a patent search but did not tell him that it had based their product on SEB’s product. The president of Global-Tech testified that he was well versed in the U.S. patent system, and along with the previous evidence, this was sufficient to satisfy the “state of mind” requirement under a “deliberate indifference” standard for induced infringement. On appeal to the Supreme Court, the defendant argues that inducement should require the higher standard of specific knowledge of the patent in question and a specific intent to infringe upon it. In contrast, SEB argues that there is no basis for requiring evidence that the accused party possess actual knowledge of the patent; rather, the defendant’s conduct constituted “willful blindness,” sufficient for inducement under either this “deliberate indifference” standard or as a form of “constructive” knowledge of the patent in question.

Third parties have filed briefs in support of both sides of the argument. Some of these note that the Federal Circuit’s “deliberate indifference” standard in this case constitutes a lower state of mind standard than required in either contributory patent infringement or willful direct patent infringement.

Supreme Court to Decide Reverse Payment Case
Even though patent holders enjoy a certain monopoly over their patented inventions, sometimes they take additional steps to secure a term of exclusivity – namely paying would-be competitors to (1) not enter the market; (2) not challenge the patent’s validity, enforceability, or scope; and/or (3) delay market entry. This most often happens in the pharmaceutical industry between innovator companies and generic manufacturers. The question has been whether such agreements run afoul of antitrust laws, which prohibit anti-competitive agreements between competitors within an industry, such as price-fixing agreements or agreements not to compete. In Louisiana Wholesale Drug Co. v. Bayer AG, the Supreme Court will decide whether such arrangements are per se illegal – automatically illegal in all cases – or whether their legality should be considered on a case-by-case basis.

Federal Circuit Rejects 25 Percent Royalty Rule
In Uniloc USA, Inc. v. Microsoft Corp., the Federal Circuit rejected the oft-used “Twenty Five Percent (25%) Rule” when awarding damages to Uniloc for Microsoft’s infringement on its patents. The 25% rule of thumb had been used to approximate the reasonable royalty that the manufacturer of a patented product would pay the patentee during a hypothetical negotiation. 25% of the infringer’s profits had been the starting point for that royalty number, and then would move up or down depending on analysis of “Georgia Pacific factors” – factors named after a famous damages case which include real market value and the excessiveness of damages. In this case, Uniloc hoped for $564 million based on the rule, but in an interesting turn of events the Court turned away from the 25% rule and awarded only $388 million instead.

In rejecting this rule, the Court stated “This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue…Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion.” It will now be more difficult for patent owners to prove damages, as they can no longer rely on a 25% starting point.

Patent Holding Giant Intellectual Ventures Files its First Suit
Intellectual Ventures, a patent-holding company that claims to own more than 30,000 patents and
applications, filed its first suit late last year, against Check Point Software, McAfee, Symantec, and Trend
Micro for infringement of patents originally owned by Ameritech, which merged with SBC. Intellectual
Ventures issued a warning for other infringers that it would be filing more suits in the future.

Attorney Fee Awards May Be Limited to Objectively and Subjectively Baseless Cases
In iLOR, LLC v. Google, Inc. the Federal Circuit reversed a district court’s award of attorneys’ fees in favor of Google. The district court had awarded the fees because it determined that plaintiff iLOR’s legal position on the meaning of a “critical patent claim term” to support its patent infringement claim was “not close,” and that iLOR has knowingly acted in subjective bad faith.

The Federal Circuit, however, reversed the award of attorneys’ fees finding that iLOR’s position on the meaning of the critical patent claim term was not objectively baseless because the claim language itself did not preclude such a meaning, and the specification did not clearly refute such a meaning. The Federal Circuit further found that it was not frivolous for iLOR to argue that statements in the prosecution history limiting the meaning of the patent claim term did not apply to the patent claim in question. The Federal Circuit ultimately concluded that iLOR’s position on the meaning of the disputed patent claim term was not unreasonable, and thus its patent infringement claim against Google was not frivolous. The Court reiterated that a legal position must be objectively baseless to support a possible award of attorneys’ fees. Because the Court found that iLOR’s position on the meaning of the disputed patent claim term was not objectively baseless and it did not constitute subjective bad faith, which is also required for a finding of exceptional case and the award of attorney fees. It seems that the Federal Circuit went out of its way, for whatever reason, to deny attorneys’ fees to Google.

FTC Busts an Environmental Certification Scheme
Tested Green, a firm that sold environmental certificates that proved to be neither tested, certified, nor green, and its owner have been banned from the business by the Federal Trade Commission. Between February 2009 and April 2010, Tested Green advertised, marketed, and sold environmental certifications using both the website and mass e-mails to prospective consumers. The company’s marketing claimed that Tested Green was the “nation’s leading certification program with over 45,000 certifications in the United States.”

The FTC complaint alleged, however, that Tested Green never tested any of the companies it provided with environmental certifications, and would “certify” anyone willing pay a fee of either $189.95 for a “Rapid” certification or $549.95 for a “Pro” certification. After customers paid, Tested Green gave them its logo and the link to a “certification verification page” that could be used to advertise their “certified” status. The agency charged that the respondents violated the FTC Act by providing the means to deceive consumers. The FTC also alleged that Tested Green deceived consumers by citing its endorsements from the National Green Business Association and the National Association of Government Contractors – implying that these were independent organizations when, in fact, both are owned and operated by Tested Green’s owner. The FTC settlement bars Tested Green and its owner Jeremy Claeys from making misrepresentations when selling any product, and that is likely to hold for the next 20 years.

Peter S. Veregge, Esq.- Newsletter Editor