IN THIS ISSUE:
Supreme Court
Supreme Court Finds That “First Sale” Doctrine Applies to Works
Patents
Joint Actors as It Relates to Method Claim Infringement
Federal Circuit Ruling Clears Way for Approval of Generic Version of Fentora
Federal Circuit Affirms Injunction Against Impax Labs and Bars Generic Introduction
Federal Circuit Walks Fine Line in Equitable Estoppel Bar to Infringement Claims
Component “Located Within,” as Opposed to “Parallel to,” May Meet Function-Way-Result Doctrine of Equivalents Test
Functional Preamble Claim Language Directed to the Essence of the Invention Can Be Limiting
Absent Explicit Language, Subsequent Patent Settlement Agreement Did Not Obviate Earlier Patent Settlement Agreement
Federal Circuit Will Consider De Novo Review of Claim Construction En Banc
AIA Is Now Fully Implemented
Trademarks
Joint Ownership of Trademark Rights Disfavored with Acquisitions
U.S. Polo Association Infringes Ralph Lauren Trademark in Fragrances
Modifying Circuit Court’s Mandate to PTO Requires “Exceptional Circumstances”
Copyrights
Termination of Employee Refusing to Perform Copyright Infringement Was Illegal
Proof of Copying by Circumstantial Evidence Requires More than “Mere Possibility”
Clip from The Ed Sullivan Show in Musical Jersey Boys Was Fair Use
Graphic Novel Not Substantially Similar to Heroes
Trade Secrets
Preliminary Injunction Upheld Against Misappropriated Cardiovascular Drug
Plaintiff’s Foreign Operations Result in “Lessened” Deference to Choice of Home Forum
Don’t Photograph the Machines!
Supreme Court / Copyrights / First Sale
Supreme Court Finds That “First Sale” Doctrine Applies to Works
by Sarah Bro and Paul Devinsky
In a 6–3 ruling, resolving an issue left open since the Supreme Court of the United States’ 4–4 deadlock in Costco Wholesale v. Omega S.A., (See IP Update, Vol. 11, No. 10, and IP Update, Vol. 13, No. 12), the Supreme Court has now held that the “first sale” doctrine, as codified under § 109(a) of the Copyright Act, applies to copies of a copyrighted work lawfully made abroad and then imported into the United States for sale or other disposal of the work. Kirtsaeng v. John Wiley & Sons Inc., Case No. 11-697 (Mar. 19, 2013). Justice Breyer’s majority opinion was joined by Chief Justice Roberts and Justices Thomas, Alito, Sotomayor and Kagan. Justice Kagan also issued a concurring opinion in which Alito joined. The Court’s analysis centered around interpretation of the language of the Copyright Act § 109(a) pertaining to copies or phonorecords “lawfully made under this title.”
U.S. textbook publisher Wiley & Sons brought a copyright infringement suit against Supap Kirtsaeng, a University of California graduate student from Thailand. While Kirtsaeng was studying in the United States, his family and friends in Thailand shipped him foreign editions of English-language textbooks lawfully printed abroad by John Wiley & Sons (Asia) Pte Ltd., a wholly owned foreign subsidiary of John Wiley & Sons. Because of the low cost of the books in Thailand, Kirtsaeng re-sold the imported books in the United States for a substantial profit.
In the district court, Wiley & Sons claimed that Kirtsaeng’s importation and resale of the books was an infringement of the company’s exclusive right to distribute its copyrighted works under § 106(3) of the Copyright Act, as well as a violation of the Copyright Act’s import provision (§ 602). Kirtsaeng defended his actions on the basis of the first sale doctrine, but the district court prohibited him from raising the defense and rejected its applicability to goods manufactured abroad (even when made abroad with the copyright owner’s permission). Accordingly, a jury found Kirtsaeng liable for willful copyright infringement and awarded Wiley & Sons damages of more than half a million dollars. Kirtsaeng appealed to the U.S. Court of Appeals for the Second Circuit, which affirmed the trial court. In April 2012, the Supreme Court agreed to hear the case. (See IP Update, Vol. 15, No. 5).
The Supreme Court noted that § 602(a)(1) of the Copyright Act makes it clear that importing a copy of a work without permission violates the copyright owner’s exclusive distribution right under § 106(3) of the Act. Nevertheless, the Court also explained that § 602(a)(1) explicitly refers to the § 106(3) distribution right, which is always subject to the various exceptions and limitations to a copyright owner’s exclusive rights as set forth in §§ 107 through 122 of the act, including the § 109(a) “first sale” limitation. The Court then examined its 1998 decision in Quality King Distributors v. L’anza Research International, in which the Supreme Court unanimously held that the first sale doctrine limited the scope of § 602(a), and thus a foreign distributor that re-imported copyrighted works could assert the first sale doctrine as a defense. The Quality King Court, however, did not rule on whether the first sale doctrine would apply to works manufactured outside of the United States. The Kirtsaeng Court noted that the location of the manufacture of the copyrighted work is critical when interpreting § 109(a), since the codification applies the first sale doctrine to a particular copy or phonorecord “lawfully made under this title.” The Court then analyzed the meaning of that five-word phrase in light of differing views among the circuits, and to determine whether the relevant language imposed a geographical limitation on the first sale doctrine.
After reviewing the language of § 109(a), its context in the Copyright Act and the common-law history of the first sale doctrine, the Supreme Court concluded that the statute should be read to favor a non-geographical interpretation, and that “lawfully made under this title” means “in accordance with” or “incompliance with” the Copyright Act, and thereby rejected the respondent’s arguments that the language applies to works made “in territories in which the Copyright Act is law.” The Court also considered the evolution of the Copyright Act and the inconsistency that could result from imposing a geographical limitation on the first sale doctrine, noting that such an interpretation would grant a U.S. copyright holder permanent control over the U.S. distribution chain with respect to copies of works printed abroad, but not those printed in the United States. The Court also noted the potential impact that a geographical interpretation could have on libraries, used-book dealers, technology companies, consumer-goods retailers and museums, all of which have long relied upon the protection of the first sale doctrine. The Court reversed the Second Circuit decision and remanded the case.
Justice Ginsburg filed a dissenting opinion joined by Justice Kennedy, and joined in part by Justice Scalia. The dissent stated that the Court’s decision is at odds with the intent of Congress to protect copyright owners against unauthorized importation of low-priced, foreign-made copies of copyrighted works, and insisted that the Court has placed the United States “at the vanguard of the movement for ‘international exhaustion’ of copyrights.” The dissent also stated that the “practical problems” identified by the majority with respect to libraries, businesses, museums, etc., comprise a largely imaginary “parade of horribles” with absurd hypothesized consequences.
Practice Note: This Supreme Court opinion does not mention the first sale doctrine or exhaustion as it applies in the patent context (see Federal Circuit decision in Fujifilm v. Benun (see IP Update, Vol. 13, No. 7) and Jazz Photo (see IP Update, Vol. 8, No. 1) or application of the first sale doctrine as it may apply to streaming copyrighted content from one jurisdiction to another. The Supreme Court may have occasion to address some of the patent-related issues in the seed case of Bowman v. Monsanto, argued on February 19, 2013, and awaiting decision. In addition, the Supreme Court has been asked to consider the issue of first sale exhaustion in the patent context more directly in Ninestar’s pending petition for cert in the case of Ninestar v. ITC (see IP Update, Vol. 15, No. 2), a case the Supreme Court may remand for reconsideration in view of the presently reported decision in John Wiley & Sons.
Patents / Indirect Infringement
Joint Actors as It Relates to Method Claim Infringement
by Christina A. Ondrick
Addressing infringement of a method claim by one or two actors, the U.S. Court of Appeals for the Federal Circuit vacated a district court’s grant of summary judgment of no infringement, but in doing so found no direct infringement and remanded on indirect infringement for consideration under its recent en banc decision in Akamai. Move, Inc. v. Real Estate Alliance Ltd., Case No. 12-1342 (Fed. Cir., Mar. 4, 2013) (Lourie, J.)
Real Estate Alliance Ltd. (REAL) holds a patent relating to methods for locating available real estate property using a zoom-enabled map. The claim required creating a database of available real estate properties; displaying a map of a geographic area; selecting a first area having boundaries within the geographic area; zooming into the first area to display a more detailed view of the selected first area; displaying the zoomed area; and then allowing further selecting, zooming and displaying of additional areas within the first selected area. In a prior Federal Circuit appeal, the court construed the “selecting” steps to mean “the user or a computer chooses an area having boundaries” and excluded from the term the scenario where “the computer updates certain display variables to reflect the selected area.” On remand from the first appeal, the district court granted summary judgment of no infringement because defendant’s “Search by Map” or “Search by Zip Code” website functions did not perform the selecting steps of the claims. Users performed the selecting step by entering a zip code or clicking on a city or neighborhood name. Move’s systems merely displayed the results of the selection for the user to view. The district court also concluded that Move’s systems were not liable for joint infringement because Move did not exert direction or control over the users performing the selecting step. REAL appealed again to the Federal Circuit.
The Federal Circuit affirmed the finding of no direct infringement, concluding that Move did not perform each step of the method claim and so Move alone did not directly infringe. Users of Move’s system may have performed the selecting steps, but Move did not exercise direction or control over them. Thus, a user’s use of Move’s website did not result in direct infringement under a joint actor theory of liability.
The Federal Circuit, however, did find that the district court legally erred by not analyzing inducement under § 271(b) in light of the Federal Circuit’s recent guidance provided in en banc Akamai decision. Akamai clarified that all the steps of a method claim must be performed in order to find inducement, but that it is not necessary to prove that all steps were performed by a single actor. The Federal Circuit remanded the case for the district court to consider whether all of the claimed steps were in fact performed and whether Move knew of the asserted patent and performed or knowingly induced performance of the steps of the claim methods.
Patents / Enablement
Federal Circuit Ruling Clears Way for Approval of Generic Version of Fentora
by Christopher L. May
Addressing allegations of patent infringement by a generic version of Fentora®, the U.S. Court of Appeals for the Federal Circuit reversed in part and affirmed in part the district court’s ruling for generic manufacturer, finding that New Drug Application (NDA) holder’s patents were not invalid for lack of enablement, but also finding that the Abbreviated New Drug Application (ANDA) product did not infringe those patents. Cephalon, Inc. v. Watson Pharma., Inc., Case No. 11-1325 (Fed. Cir., Feb. 14, 2013) (Wallach, J.)
The appeal grew out of Watson’s filing of an ANDA for a generic version of Fentora, a drug for the treatment of cancer pain. The U.S. Food and Drug Administration’s (FDA’s) Orange Book listed three patents as covering Fentora. After Watson made a certification under Paragraph IV of the Hatch-Waxman Act that its generic version would not infringe any patent covering Fentora and/or that any patent covering Fentora was invalid, Cephalon, the NDA holder, sued. After a bench trial, the district court found that the asserted patents were not infringed and were invalid for lack of enablement. Cephalon appealed.
On appeal, the Federal Circuit reversed the finding on lack of enablement. The Court found that the district court’s determination that Watson had made a prima facie case that Cephalon had failed to rebut was the wrong standard, and that the burden of proof by clear and convincing evidence was Watson’s alone. The panel then found that Watson’s expert had not shown by clear and convincing evidence that undue experimentation would be necessary to practice the invention.
The Federal Circuit noted that Watson’s expert had failed to apply the undue experimentation factors from In re Wands, which, while not dispositive, is a factor to be considered in judging his testimony. The Court also found that the expert’s statements that use of the patents would be “difficult” and “complicated” was insufficient to meet clear and convincing evidence standard. There was no evidence of record that testing would involve an unreasonable length of time, or that testing would not involve repetition of known or commonly used techniques.
However, the Federal Circuit upheld the district court’s finding of non-infringement either literally or under the doctrine of equivalents. The parties did not dispute the district court’s construction that the patent required that an effervescent agent be activated by human saliva. Cephalon’s experts performed tests on Watson’s ANDA product in water only, and the district court found that there was no record evidence regarding the properties of human saliva and how the ANDA product would react. The Federal Circuit found that the district court had not committed clear error, based on testimony from Watson’s expert that testing in water could not be translated to human saliva. The Court’s ruling thus cleared the way for Watson’s generic product to be approved by the FDA and marketed to the public.
Patents / Injunctive Relief
Federal Circuit Affirms Injunction Against Impax Labs and Bars Generic Introduction
by Raymond M. Gabriel
Analyzing an injunction preventing a generic pharma house from introducing a new generic drug, the U.S. Court of Appeals for the Federal Circuit upheld a lower court’s decision to issue equitable relief, finding that the generic pharma failed to file a timely appeal against an injunction. In re Cyclobenzaprine Hydrochloride Extended-Release Capsule Patent Litigation, No. 12-1280 (Fed. Cir., Feb. 1, 2013) (O’Malley, J.)
In 2007, shortly after Cephalon filed a New Drug Application for AMRIX®, Impax, Mylan Inc. and Mylan Pharmaceuticals (Mylan), and Par Pharmaceutical, among others, filed Abbreviated New Drug Applications seeking U.S. Food and Drug Administration approval to make and sell generic versions. Cephalon sued for patent infringement and on the last day of trial settled with Impax. The settlement agreement granted a non-exclusive license in the patents that cover AMRIX® and controlled the timing of Impax’s entry into the generic market.
In May 2011, the district court held the patents invalid as obvious and entered soon after an injunction enjoining Mylan and Cephalon, along with all parties “acting in active concert or participation” with them, from selling a generic version of AMRIX® so as to maintain the status quo pending an appeal on the invalidity ruling.
In November 2011, Mylan asked the district court to confirm that the May 2011 injunction covered any party in privity with Cephalon via license, settlement or contract. The district court confirmed that the injunction covered Impax because it was in active concert and participation with Cephalon via the settlement agreement. Impax then argued that a triggering event under the settlement agreed had occurred, which allowed it to sell a generic. The district court disagreed, and Impax appealed.
On appeal, the Federal Circuit found that Impax’s appeal of the district court’s injunction was untimely because Impax did not file an appeal within 30 days of the original May 2011 injunction. The Court found that Impax was covered by the original injunction because it derived its right to enter the market through the settlement agreement. The Court reasoned that a contrary result would allow Impax to get around the injunction. For the same reasons, the Federal Circuit found that the district court did not modify the original injunction, but only clarified it.
The Federal Circuit also rejected Impax’s argument that changed circumstances required a prospective modification of the injunction. The changed circumstances, including the transfer of generic product from Cephalon to Impax to go to market, did not rise to the level of modifying the injunction because they were circumstances contemplated by the original injunction and necessarily included within it.
Finally, Impax argued that a triggering event under the settlement agreement authorized its sale of generic products. The triggering event recited: “the same day that any Third Party which is not entitled to First to File Exclusivity is licensed or authorized by [Cephalon] to begin selling Generic Equivalent Product in the Territory.” The Federal Circuit rejected Impax’s argument that Cephalon’s appointment of Watson Pharmaceuticals as its sales agent was a triggering event under this provision.
The Court found that Watson was merely Cephalon’s sales agent. Essentially, Cephalon would be selling the generic product, and the settlement agreement explicitly excluded Cephalon’s entry into the generic market from the triggering events.
Patents / Equitable Estoppel
Federal Circuit Walks Fine Line in Equitable Estoppel Bar to Infringement Claims
by Philip Ou
Addressing the seldom-visited issue of equitable estoppel at the appellate level, the U.S. Court of Appeals for the Federal Circuit affirmed in part and reversed in part the district court’s grant of summary judgment of estoppel, finding that plaintiff was barred from alleging infringement claims for one patent as against an alleged infringer’s successor-in-interest that was on notice four and a half years prior through a demand letter, but was not barred from alleging infringement claims from a related patent that issued after the demand letter. Radio Systems Corp. v. Lalor, Case No. 12-1233 (Fed. Cir., Mar. 6, 2013) (Moore, J.) (Newman, J., concurring in part and dissenting in part).
Plaintiffs Lalor and Bumper Boy, Inc., sent a demand letter to Innotek (the predecessor to defendant Radio Systems) in February 2005 accusing Innotek’s UltraSmart electronic dog collar of infringing their patent. Innotek responded two months later that the patent was invalid based on prior art. Bumper Boy did not respond and remained silent for four and a half years.
In December 2005, Bumper Boy filed a continuation-in-part (CIP) of its original patent that in September 2007 matured into a new patent. In November 2009, four and a half years after Bumper Boy’s initial demand letter regarding infringement of its first issued patent, Bumper Boy sent a new demand letter to Radio Systems (which had acquired Innotek in 2006) alleging infringement of both the original and CIP patents by the UltraSmart electronic dog collar product and several other Radio Systems products. Radio Systems filed a declaratory judgment action and eventually prevailed on summary judgment on equitable estoppel grounds for the UltraSmart electronic dog collar product and non-infringement for the other products.
On appeal, the Federal Circuit affirmed that equitable estoppel barred Bumper Boy from enforcing the original patent against the UltraSmart collar because the four-and-a-half-year silence following the 2005 demand letter was misleading and Innotek relied on that silence in selling its company to Radio Systems and continuing to sell and expand its product line. The Federal Circuit also confirmed that equitable estoppel protects successors-in-interest of alleged infringement where privity is established—here, Radio Systems acquiring Innotek. However, the Federal Circuit reversed the district court’s decision to equitably estop enforcement of the CIP patent, which was never mentioned in—and didn’t even exist at the time of—the 2005 demand letter. “Regardless of whether the [CIP] patent claims are supported by the subject matter in the [original] patent—and therefore entitled to claim prior to its filing date—the patents contain claims of a different scope. Quite simply, the [CIP] patent claims could not have been asserted against Innotek or Radio Systems until those claims issued.”
Dissenting in part, Judge Newman stated she would apply equitable estoppel to the CIP patent since the subject matter of the specific claims in suit was disclosed and described in the original patent such that they did not draw on any new matter. “The force of equitable estoppel cannot be escaped by including previously disclosed but unclaimed subject matter in a continuation-in-part patent.
Patents / Doctrine of Equivalents
Component “Located Within,” as Opposed to “Parallel to,” May Meet Function-Way-Result Doctrine of Equivalents Test
by Bruce Yen
Addressing the doctrine of equivalents, the U.S. Court of Appeals for the Federal Circuit reversed summary judgment finding of no equivalence, concluding that a genuine issue of material fact existed as to whether a capacitor located within a circuit was equivalent to a patent limitation that the capacitor be “operatively disposed in parallel” to the circuit under the “function-way-result” test. Brilliant Instruments, Inc. v. GuideTech, LLC, Case No. 12-1018 (Fed. Cir., Feb. 20, 2013) (Moore, J.) (Dyk, J., concurring in part and dissenting in part).
The district court granted declaratory judgment in favor of Brilliant Instruments, finding no infringement of three U.S. patents directed to circuits measuring digital signal timing errors in high-speed microprocessors. Reviewing the summary judgment decision de novo pursuant to regional Ninth Circuit law, the Federal Circuit found from the record that the “One-Channel-Two-Edge mode” of Brilliant’s accused products raised a genuine issue of material fact regarding whether two measurement circuits were contained within a signal channel.
Reviewing literal infringement of two of the asserted patents, the Federal Circuit agreed with the district court that there was no literal infringement, reasoning that because the capacitor in question was conceded by GuideTech to be part of the “first current circuit,” it could not be “on an alternative path on which current flows from the first current circuit,” and therefore did not meet the representative “operatively disposed in parallel” limitation.
In examining infringement under a doctrine of equivalents theory, however, the Federal Circuit found that GuideTech had raised a genuine issue of material fact. Addressing Brilliant’s argument that GuideTech’s infringement theory under the doctrine of equivalents would “vitiate” the requirement that the claimed “first current circuit” and the “capacitor” are separate elements, the Court first reiterated that “vitiation” is not an exception to the doctrine of equivalents, but a legal determination that no reasonable jury could determine the elements to be equivalent. Vitiation cannot be established by noting that an element is missing from the claimed structure or process, because, by definition, the doctrine of equivalents recognizes that an element is missing that must be supplied by an equivalent substitute. The Federal Circuit concluded that summary judgment of noninfringement under the doctrine of equivalents was not appropriate, because GuideTech had created a genuine issue of material fact regarding whether Brilliant’s capacitor, even while located within the first current circuit, performed substantially the same function in substantially the same way to achieve substantially the same result as the claimed capacitor, which is “operatively disposed in parallel to the shunt.”
In a separate opinion, Judge Dyk concurred with the majority except with respect to whether a genuine issue of material fact remained as to infringement under the doctrine of equivalents. Highlighting that application of the doctrine of equivalents requires application on a limitation-by-limitation basis, Judge Dyk found that GuideTech’s expert had offered analysis of only the equivalence of the invention as a whole and failed specifically to set forth facts explaining why a capacitor in the accused device located inside the first current circuit, and not outside, was insubstantial.
Patents / Claim Construction
Functional Preamble Claim Language Directed to the Essence of the Invention Can Be Limiting
by Sungyong “David” In
In a non-precedential decision addressing patentability of rejected claims of an application, the U.S. Court of Appeals for the Federal Circuit reversed a decision by the U.S. Patent and Trademark Office (PTO) Board of Patent Appeals and Interferences (Board) and remanded the case, finding that functional language recited in a preamble was limiting. In Re Jasinski, Case No. 12-1482 (Fed. Cir., Feb. 15, 2013) (Moore, J.)
This case arose from an appeal from the decision of the Board affirming the examiner’s rejection of all claims during prosecution of a U.S. patent application. The application was directed to a method and apparatus for verifying the accuracy of logical-to-physical mapping software—in particular, to a software tool for verifying memory-testing software. During prosecution, the examiner rejected the claims of the application as being anticipated by a single reference, a U.S. patent to Adams. The Board affirmed the examiner’s decision of unpatentability, concluding that a claim recitation “[to verify/verifying] the accuracy of [said] logical-to-physical mapping software” recited in the preamble and claim body is a statement of intended use and thus does not limit the claimed invention. The Board further stated that even if the functional claim language is limiting, Adams disclosed it. Jasinski appealed.
On appeal, Jasinski argued that the functional claim language recited in the preamble should be given patentable weight, and its recitation in a claim limitation is limiting because the functional claim language is directed to the essence of the invention. The PTO responded that the functional claim language is nothing more than a statement of intended purpose because it was not positively recited. The Federal Circuit agreed with Jasinski that the functional claim language is limiting because it referred to the essence of the invention and provided the criteria by which the recited limitation is analyzed. The Court further concluded that Adams did not disclose the functional claim language, i.e., a limitation relating to verifying the accuracy of logical-to-physical mapping software, because Adams’ technique did not include defective logical-to-physical mapping software and failed to explain how the technique would be performed. Thus, the Court reversed the Board’s decision and remanded the case for further proceedings.
Patents / Infringement Settlement Agreements
Absent Explicit Language, Subsequent Patent Settlement Agreement Did Not Obviate Earlier Patent Settlement Agreement
by Donna M. Haynes
Addressing breach of a patent settlement and license agreement, the U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s summary judgment ruling that the agreement was enforceable and that license payment obligations under the agreement were not extinguished by a subsequent patent settlement contract. Tekelec, Inc. v. Verint Systems, Inc., Case No. 11-41408 (5th Cir., Feb. 13, 2013) (Higginbotham, J.)
Tekelec and Verint’s predecessors, IEX Corporation and Blue Pumpkin Software, LLC, respectively, entered into the Blue Pumpkin/IEX Settlement and Cross License Agreement (BP/IEX Agreement) to settle a dispute arising out of a patent infringement suit brought by IEX against Blue Pumpkin. The BP/IEX Agreement required Blue Pumpkin to pay a single $8.25 million lump sum fee, followed by six annual payments of $500,000. In exchange, IEX granted Blue Pumpkin an irrevocable, perpetual license to practice the patent. IEX reserved the right to terminate the BP/IEX Agreement if Blue Pumpkin failed to make any of the scheduled payments (the termination clause).
After a series of corporate restructurings, Tekelec acquired IEX’s interest in the BP/IEX Agreement, and Verint acquired Blue Pumpkin’s interest in the agreement. The lump sum payment and three annual payments were made under the BP/IEX Agreement. Verint made no further payments. Tekelec sued Verint for breach of contract. The district court awarded summary judgment in favor of Tekelec and ordered Verint to make the BP/IEX Agreement payments. Verint appealed.
On appeal, Verint argued that Tekelec lacked the right to enforce payment under the BP/IEX Agreement and that, even if it retained such a right, a non-accrual clause in a subsequent patent settlement agreement between Verint and Nice Systems, which acquired IEX (Verint/Nice Agreement), extinguished any such payment obligations. The non-accrual clause extinguished all “royalties and other patent damages that may have otherwise accrued” against Verint on IEX’s patent.
Establishing as an initial matter that Texas law applied to the parties’ contractual dispute, the Fifth Circuit addressed both of Verint’s arguments in turn. First, the Court rejected Verint’s arguments that Tekelec retained only the right to receive payments under the BP/IEX Agreement and not the right to enforce them. The Court held that a promise to pay need not be accompanied by an express grant of enforcement authority. Moreover, the termination clause in the BP/IEX Agreement was not an exclusive remedy. The right to sue for breach is an inherent enforcement right with any contract, and a specified remedy in a contract should not be construed as an exclusive remedy unless contract clearly indicates that the parties intended it to be exclusive. Second, the Court rejected Verint’s argument that the non-accrual clause in the Verint/Nice Agreement extinguished Verint’s payment obligations under the BP/IEX Agreement. The Court found that the terms of the BP/IEX Agreement were outside of the scope of the Verint/Nice Agreement and the non-accrual clause was inapplicable. Read in context, the Court explained, the phrase “royalties or other patent damages” in the non-accrual clause of the Verint/Nice Agreement referred to reasonable royalties as a measure of damages under 35 U.S.C. § 284, not to Verint’s contractually bargained for payment obligations. Moreover, the Court noted that the term “royalty” typically implies a payment that fluctuates with a licensee’s actual use of the licensed intellectual property and is distinctly different than a fixed license fee.
Practice Note: Parties entering into settlement or license agreements should explicitly define consideration terms, such as “royalties” and “damages,” and specifically carve out events that may release a party from any payment obligations. Indeed, had the Court determined that Verint’s payment obligations under the BP/IEX Agreement were within the scope of the Verint/Nice Agreement, Verint and IEX, through Nice, could have unilaterally extinguished Tekelec’s third party right to those payments, a risk for which it likely did not bargain.
En Banc Alert
Federal Circuit Will Consider De Novo Review of Claim Construction En Banc
by Paul Devinsky
In response to a petition filed by Lighting Ballast Control, the Federal Circuit has granted rehearing en banc in the case of Lighting Ballast Control v. Philips Electronics North America and instructed the parties to address the following issues:
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Should this court overrule Cybor Corp. v. FAS Technologies, Inc., 138 F.3d 1448 (Fed. Cir., 1998)?
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Should this court afford deference to any aspect of a district court’s claim construction?
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If so, which aspects should be afforded deference?
For some perspective on the Federal Circuit’s struggle with the Cybor rule, see McDermott’s IP Update reports on Retractable Technologies, Inc. v. Becton, Dickinson and Co. (IP Update, Vol. 14, No. 7) and Amgen v. Hoechst (IP Update, Vol. 9, No. 12).
Patents / AIA
AIA Is Now Fully Implemented
by Paul Devinsky
With this edition of McDermott’s IP Update, we observe the full implementation of the America Invents Act (AIA). (See IP Update, Vol. 16, No. 1). The new first-to-file regime applies to all applications filed after March 16, 2013. Under this regime, other than for the grace period (and derivation) exception, prior art is now predicated on the effective date of the application. Venerable legal concepts such as conception and reduction to practice now pass into history. Among the other notable changes to the concept of prior art is that public use and on-sale activities are no longer limited to the United States.
U.S. patent applications will continue to serve as prior art (as of its earliest priority date) upon publication or issuance. Foreign applications (unless they have U.S. counterparts) only qualify as prior art as of their publication date. For example, a published Canadian application will be considered prior art in the United States as of its publication date. However, if a counterpart U.S. application is filed that claims priority to that Canadian application, when the U.S. application is published, it will be considered prior art as of its Canadian filing date.
Although the “old” § 103(c) is gone, entities that are active in filing cases still can avoid the consequences of attack by their own prior art using mechanisms provided by § 102(b)(2)(c) and 102(c). Under those sections of the new § 102, a company’s prior-filed patent application will not count as prior art (for any reason) against the company’s later-filed application as long as the prior application has not published or issued by the filing date of the later application. Further, if the later-filed application was developed as part of a joint research agreement, then the AIA negates the prior art status of prior-filed applications of any of the parties to the joint research agreement (as long as the prior applications were unpublished as of the filing date of the later application).
The new 35 U.S.C. § 102 provides in part
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Novelty; Prior Art. 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 § 151, or in an application for a patent published or deemed published under § 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.
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Exceptions.
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Disclosures made one year or less before the effective filing date of the claimed invention. A disclosure made one year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if (1) the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or (2) the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor.
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Disclosures appearing in applications and patents. A disclosure shall not be prior art to a claimed invention under subsection (a)(2) if (1) the subject matter disclosed was obtained directly or indirectly from the inventor or a joint inventor; (2) the subject matter disclosed had, before such subject matter was effectively filed under subsection (a)(2), been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or (3) the subject matter disclosed and the claimed invention, not later than the effective filing date of the claimed invention, were owned by the same person or subject to an obligation of assignment to the same person.
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Common Ownership Under Joint Research Agreements. Subject matter disclosed and a claimed invention shall be deemed to have been owned by the same person or subject to an obligation of assignment to the same person in applying the provisions of subsection (b)(2)(c) if
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The subject matter disclosed was developed and the claimed invention was made by, or on behalf of, one or more parties to a joint research agreement that was in effect on or before the effective filing date of the claimed invention.
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The claimed invention was made as a result of activities undertaken within the scope of the joint research agreement.
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The application for patent for the claimed invention discloses or is amended to disclose the names of the parties to the joint research agreement.
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Patents and Published Applications Effective as Prior Art. For purposes of determining whether a patent or application for patent is prior art to a claimed invention under subsection (a)(2), such patent or application shall be considered to have been effectively filed, with respect to any subject matter described in the patent or application (1) if paragraph (2) does not apply, as of the actual filing date of the patent or the application for patent; or (2) if the patent or application for patent is entitled to claim a right of priority under § 119, 365(a) or 365(b), or to claim the benefit of an earlier filing date under section 120, 121 or 365(c), based upon one or more prior-filed applications for patent, as of the filing date of the earliest such application that describes the subject matter.
Trademarks / Acquisitions
Joint Ownership of Trademark Rights Disfavored with Acquisitions
by Rita J. Yoon
The U.S. Court of Appeals for the Sixth Circuit held that when acquiring the assets of a business in its entirety, the purchaser also is presumed to have acquired the entire ownership interest in the business’ trademark, even when the asset purchase agreement is silent on trademark rights. Yellowbook Inc. v. Brandeberry, Case No. 11-4267 (6th Cir., Feb. 27, 2013) (Boggs, J.) In this case, a trademark infringement action was brought by a national yellow-pages publisher, Yellowbook, and the Sixth Circuit concluded that Yellowbook acquired the entire ownership interest in the AMTEL trademark when Yellowbook purchased a local Ohio phonebook business operating under that name.
The dispute over AMTEL’s chain of title began when defendant Steven Brandeberry purchased an Ohio phonebook business operating under the AMTEL mark. Brandeberry signed this first asset purchase agreement in his individual and corporate capacity as president of his business, American Telephone Directories. Brandeberry subsequently sold American Telephone Directories to another individual. In the second asset purchase agreement, all assets of American Telephone Directories were transferred to the purchaser in their entirety. Yellowbook subsequently purchased the business in its entirety. After Yellowbook began using the AMTEL mark, Brandeberry published a competing phonebook in Ohio under the same name.
Yellowbook filed suit, asserting claims of trademark infringement, tortious interference and abandonment. On summary judgment, the district court found in favor of Brandeberry on these claims. Because Brandeberry signed the first asset purchase agreement in his individual and corporate capacity, the district court held that Brandeberry and his business held joint ownership rights in the AMTEL mark. Thus, when Brandeberry subsequently sold his business, he still retained his personal interest in the AMTEL mark and retained his right to continue using the mark. The district court also rejected Yellowbook’s abandonment claim, concluding that abandonment was only a defense to trademark infringement and could not be used offensively. Yellowbook appealed.
On appeal, the Sixth Circuit reversed and remanded, concluding that “[j]oint ownership is disfavored in the trademark context.” Because a trademark reflects the accumulated goodwill of a business, “when a business sells the entirety of its assets, the trade name is presumably one of these assets.” Further, the asset purchase agreements at issue were not structured as a sale of only certain assets and did not include licensing provisions. Thus the Court explained that it “will not presume the creation of jointly owned or non-exclusively licensed trademark rights, especially where dissipation of goodwill, and increased customer confusion, is inevitable.”
The Sixth Circuit also explained that abandonment could be asserted offensively in a trademark infringement action. To limit abandonment to a defense “would permit trademark users who abandoned their rights impunity from charges of infringement, regardless of the official registration and legitimate use in commerce of later users.” The Court concluded that even if Brandeberry retained any individual rights in the AMTEL mark, Brandeberry’s six years of non-use of the AMTEL mark was well beyond the three-year statutory presumption for abandonment.
Practice Note: The nature and overall structure of the asset purchase agreement and the absence of licensing provisions are important factors to consider when evaluating whether trademark rights have been transferred exclusively or non-exclusively.
Trademarks
U.S. Polo Association Infringes Ralph Lauren Trademark in Fragrances
by Rose Whelan
The U.S. Court of Appeals for the Second Circuit concluded that a double horse logo used on fragrances was too similar to the U.S. Polo Ralph Lauren (PRL) horse and rider mark used on the same goods. United States Polo Association, Inc. v. PRL USA Holdings, Inc., Case No. 12-1346 (2nd. Cir., Feb. 11, 2013) (Raggi, J.; Hall, J.; Droney, J.)
PRL and the United States Polo Association (USPA) have a long history of disputes over Ralph Lauren’s polo player trademark. The USPA was first found to infringe PRL’s mark in 1984. Later, in 2006, the USPA’s use of a solid double horseman mark in apparel unaccompanied by text was found to infringe PRL’s mark, but no infringement was found where the USPA used that same mark accompanied by the letters U.S.P.A or an outlined version of the mark either alone or accompanied by the letters U.S.P.A.
The latest dispute arose when the USPA moved its use of the double horseman mark, previously only on apparel, to use in connection with fragrances. The USPA filed for a declaratory judgment that its use of such a mark was non-infringing. Based on PRL’s counterclaim, the district court sided with PRL and issued an injunction barring the USPA’s use of either the double horseman logo or the word “polo” in connection with fragrances. USPA appealed.
The Second Circuit affirmed the injunction, rejecting all of the USPA’s arguments. First, the Court rejected the USPA’s contention that the 1984 and 2006 rulings precluded the district court’s finding of infringement, disagreeing with the USPA’s interpretation of those decisions. The Second Circuit also rejected the USPA’s prior use defense. Key to the Court’s rejection of both the prior litigation defense and the prior use defense was the difference between use in the apparel market and use in the fragrances market. In its similarity analysis, the Court focused on the particular industry where the marks compete and concluded that use authorized in one industry does not preclude a finding of infringement in another. The court similarly rejected USPA’s argument that the apparel and fragrance markets were so similar as to justify use in fragrances where use in apparel was permitted.
Finally, the Second Circuit affirmed the district court’s permanent injunction, finding that it was properly based on an actual finding of irreparable harm and that enjoining the use of the double horseman logo or the word “polo” alone was not improperly broad and was justified by the USPA’s long history of infringement of PRL’s mark.
Trademarks / Functionality
Modifying Circuit Court’s Mandate to PTO Requires “Exceptional Circumstances”
by Sara Sunderland
The U.S. Court of Appeals for the Second Circuit denied a motion to modify a mandate issued by the Court in an earlier decision (See IP Update, Vol. 15, No. 9) directing the U.S. Patent and Trademark Office (PTO) to change a trademark registration to limit the trademark of a red lacquered outsole on footwear to shoes where the shoe upper is a contrasting color. Christian Louboutin S.A. v. Yves Saint Laurent Am. Holding, Inc., Case No. 11-3303-cv (2d Cir., Mar. 8, 2013) (per curiam).
In its September 2012 decision, the Second Circuit overruled the district court, which held that a single color can never serve as a trademark in the fashion industry. The Second Circuit ruled that while Louboutin’s trademark for a red sole with contrasting upper was valid, the evidence did not show that the secondary meaning of Louboutin’s red sole mark extends to uses where the upper portion of the shoe does not contrast, i.e., a monochromatic shoe. Therefore, the Court directed the PTO to limit Louboutin’s trademark to only those situations where the red lacquered outsole is used with an adjoining upper that contrasts in color. (See IP Update, Vol. 15, No. 9).
Louboutin subsequently filed a letter motion with the Clerk of the Court, requesting a modification of that mandate. Louboutin explained that the PTO intended to adopt the Court’s language verbatim, and Louboutin requested that the Court modify the mandate in a manner that would be more precise.
The Second Circuit denied that motion. The Court explained that granting the request would require the Court to recall the mandate, a power that “can only be exercised in extraordinary circumstances” and “is one of last resort, to be held in reserve against grave, unforeseen contingencies.”
The Court enumerated four factors to be considered in connection with whether to recall a mandate: (1) whether the governing law is unquestionably inconsistent with the earlier decision, (2) whether the movant brought to the Court’s attention that a dispositive decision was pending in another court, (3) whether there was a substantial lapse in time between the issuing of the mandate and the motion to recall the mandate, and (4) whether the equities “strongly favor” relief.
The Court ruled that Louboutin made no showing that any of the four factors favored a recall and that the matter did not present the “exceptional circumstances” required to recall a mandate.
Practice Note: When asking a circuit court to modify a mandate, a party must make a strong showing that the circumstances are exceptional and meet the high burden required by the four factors considered by the Second Circuit in connection with such a petition.
Copyrights / Employment
Termination of Employee Refusing to Perform Copyright Infringement Was Illegal
by Ulrika E. Mattsson
The Texas Court of Appeals for the Second District found that an employee was wrongfully terminated from an architecture firm when he refused to engage in behavior that he believed would expose him to liability for criminal copyright infringement. Young v. Nortex Foundation Designs, Case No. 02-11-00470 (Tex. App., Feb. 7, 2013).
Young, employed by an architecture firm as a drafter, was asked to design a foundation plan based on the copyrighted architectural designs provided to him by his employer. The architectural designs he was asked to work on had a black stamp stating “if this stamp is not red it is an illegal set of plans.” The stamp also stated “reproduction of these plans by any means is prohibited by federal law.” In light of the black stamp Young told his supervisor that he was uncomfortable working on the plans. His supervisor told Young that he would be fired if he refused the assignment. Young refused and was terminated. He subsequently filed a claim for wrongful termination.
At trial, the jury found in favor of Young and awarded him damages. After the verdict, the defendant filed a motion for judgment notwithstanding the verdict and reiterated its argument that it had never asked Young to perform an illegal act because the homeowner owned the original design, and the copies were made on her behalf (and were therefore authorized). After the trial court granted the motion, Young appealed.
The appellate court reversed. In an employment-at-will state, such as Texas, where this case was played out, either party can terminate the relationship at any time without notice or explanation. However, there exists a narrow public policy exception to this rule (explained in Sabine Pilot Service. v. Hauck) to the effect that an employer may not fire an employee for refusing to perform an illegal act. The policy is predicated on the proposition an employee should not be forced to choose between losing his or her employment and engaging in a criminal act.
The trial court found that this exception did not apply because the homeowner had a red-stamped version of the architectural plans, which the employer knew about. The trial court reasoned that therefore the employer had a right to request that Young work on the plans.
However, the appeals court noted that the case law exception above was not entirely on point, because in Sabine Pilot the employee was terminated for refusing to dump waste, an action that both the employer and the employee knew to be illegal. In this case however, only the employer knew that the action was not illegal. The Court explained that “the copyright holder in this case (the creator of the architectural plan) granted the homeowner a license to make reproductions and derivative works from red-stamped copies. The holder did not grant the licensee the right to use black-stamped copies. To use black-stamped copies therefore would be to exceed the scope of the license granted and would violate the copyright.” Accordingly, the Court concluded that the employee could not be terminated for refusing to perform an act that he believed was illegal.
Copyrights / Copying
Proof of Copying by Circumstantial Evidence Requires More than “Mere Possibility”
by Alexander P. Ott
Addressing the standard to show copying through circumstantial evidence rather than direct evidence, the U.S. Court of Appeals for the Fourth Circuit reiterated that a plaintiff must show a “reasonable possibility” of access, not a “mere possibility,” and affirmed summary judgment holding of no infringement. Building Graphics, Inc. v. Lennar Corp., Case No. 11-2200 (4th Cir., Feb. 26, 2013) (Davis, J.) The Fourth Circuit agreed with the district court that plaintiff failed to show access, but did not address the separate holding that there was no substantial similarity between the infringed and accused works.
Building Graphics accused Lennar of infringing three of its copyrighted home designs in the Charlotte, North Carolina, area. The protected designs were available on Building Graphics’ website and distributed on sales handouts, but Building Graphics was only aware of one unit having been built in the Charlotte area for two of the models and none for the third. While Lennar had conducted due diligence before entering the Charlotte market, a Lennar employee testified that the due diligence was limited to a review of competitive homes then on the market.
The district court granted Lennar’s motion for summary judgment of no infringement, concluding that the due diligence process only showed a “mere possibility” that Lennar had viewed Building Graphics’ home designs and that the availability of the designs on the internet and sales sheets were likewise insufficient to show a reasonable possibility of access. Addressing the substantial similarity element, the district court treated the home designs as “compilations” having only “thin” copyright protection requiring “supersubstantial similarity” to show infringement. Based on this standard, the court granted summary judgment in favor of Lennar on this issue as well. Building Graphics appealed.
Reviewing the grant of summary judgment de novo, the Fourth Circuit noted certain “apparent” similarities between the protected and accused floor plans, but affirmed the grant of summary judgment based on the access element. The Court reiterated that attempting to show copying by circumstantial rather than direct evidence requires a “reasonable possibility” of access, not a “mere possibility.” The Court distinguished the facts at issue from those in Bouchat v. Baltimore Ravens, where a reasonable possibility of access was found based on evidence that a copyrighted proposed Ravens logo was presented to the chairman of the Maryland Stadium Authority who said he would present it to the Ravens for consideration.
While Lennar had failed to adequately explain how it obtained its similar floor plans, the Court explained that that failure did not absolve Building Graphics, which had the burden on the issue, of meeting its burden to show access, and that Building Graphics had not shown a reasonable chain of events or a wide enough dissemination sufficient to establish a reasonable possibility of access.
Copyrights / Fair Use
Clip from The Ed Sullivan Show in Musical Jersey Boys Was Fair Use
by Susan T. Evans
The U.S. Court of Appeals for the Ninth Circuit concluded that the use by a musical production company in the musical Jersey Boys of a seven-second clip from The Ed Sullivan Show was protected as fair use. Sofa Entertainment Inc. v. Dodger Productions Inc., 9th Cir., No. 10-56535 (9th Cir., Mar. 11, 2013) (Trott, J.)
Jersey Boys is a historical dramatization of the story of Frankie Valli and the Four Seasons. The play is broken up into four acts or “seasons,” each of which is narrated by an actor playing one of the band members. At the end of the first act, an actor playing band member Bob Gaudio describes the British Invasion and the start of the band’s own American revolution. As Gaudio finishes his lines, the Four Seasons are seen setting up for their performance on The Ed Sullivan Show, followed by a seven-second clip from the January 2, 1966, episode of The Ed Sullivan Show in which Ed Sullivan introduces the band. After the district court concluded the use was a fair use under the Copyright Act, Sofa appealed.
In considering whether Dodger’s use of the clip constituted fair use, the Ninth Circuit reviewed the purpose of fair use under the Copyright Act as set out in Twentieth Century Music Corp. v. Aiken, and then applied each of the codified four fair use factors.
The main inquiry under the first factor was whether the new work was, under Campbell v. Acuff-Rose Music, “transformative.” In considering the use of the clip in Jersey Boys, the Court found that Dodger relied on the Four Seasons’ performance on The Ed Sullivan Show to underscore an important moment in the band’s career. The Court found, “by using it as a biographical anchor, Dodger put the clip to its own transformative ends.” As a result, the Court found the first fair use factor to heavily favor Dodger.
In applying the second factor, in which the nature of the copyrighted work is considered (i.e., whether the work is close to the core of the intended copyright protection), the Court found that since the clip conveyed mainly factual information regarding who was about to perform, the second factor also favored Dodger.
The third factor looks to the amount and substantiality of the portion used in relationship to the copyrighted work as a whole. Sofa conceded that the seven-second clip was quantitatively insignificant, but argued that Dodger attempted to capitalize on the central and most beloved part of The Ed Sullivan Show, namely, Ed Sullivan’s introduction. The Court disagreed, stating that it was doubtful that the clip on its own qualified for copyright protection, much less as a significant segment of the overall episode. In response to Sofa’s reliance on Sullivan’s distinct mannerisms and style, the Ninth Circuit, citing Harper & Row v. Nation Enterprises, emphasized that charisma was not copyrightable.
The Ninth Circuit found that the fourth factor, the impact of secondary use on the market for the original work and the market for derivative works, also weighed in Dodger’s favor. The Court determined that Jersey Boys was not a substitute for The Ed Sullivan Show, and that use of the clip advanced Dodger’s own original creation without any reasonable threat to SOFA’s business model.
Finding that all of the fair use factors weighed in favor of Dodger, the Ninth Circuit concluded that use of the clip did not harm SOFA’s copyright and was a fair use.
Finally, turning to the district court’s award of attorneys’ fees, the Ninth Circuit affirmed the award, stating that “[w]hen a fee award encourages a defendant to litigate a meritorious fair use claim against an unreasonable claim of infringement, the policies of The Copyright Act are served.”
Copyrights / Substantial Similarity
Graphic Novel Not Substantially Similar to Heroes
by Sarah Bro
In an unpublished opinion, the U.S. Court of Appeals for the Ninth Circuit affirmed dismissal of a complaint for copyright infringement, unfair competition and unjust enrichment, finding that the plaintiff could not establish any substantial similarity between his graphic novels and the television series Heroes. Wild v. NBC Universal, Case No. 11-56065 (9th Cir., Feb. 28, 2013) (Callahan, J.; Ikuta, J.; Hurwitz, J.) (non-precedential).
In 2010, plaintiff and comic book artist Jazan Wild sued NBC Universal claiming that the fourth season of the NBC television series Heroes infringed Wild’s three-part graphic novel, Jazan Wild’s Carnival of Souls. Specifically, Wild alleged that characters, plot lines and other visual elements of the carnival-themed season of Heroes were copied from his Souls novels. Based on a lack of substantial similarity between Heroes and Souls, the district court dismissed the complaint without leave to amend and found all state law claims to be preempted by the Copyright Act. Wild appealed
On appeal, the Ninth Circuit explained that a plaintiff must show (1) that the alleged infringer had access to the plaintiff’s work, and (2) that the infringing work is substantially similar to the plaintiff’s work. The Court explained that in order to establish substantial similarity, a plaintiff must satisfy an extrinsic test, which compares objective elements of the relevant works, as well as an intrinsic test, which evaluates the similarity of the works at issue under an ordinary person’s subjective impressions.
Even adopting the assumption that NBC had access to Wild’s novels, the Ninth Circuit determined that Wild was unable to pass the first “extrinsic test,” and quoted the district court’s ruling with approval, stating that “[o]ther than the presence of generic carnival elements and standard scenes that logically flow from those elements, the two works differ radically in their plot and storylines, their characters, the dialogue, the setting and themes, and the mood.”
Wild also insisted that certain visual elements between the works were similar, and he compared screen shots from the television series to frames of his Souls novels, such as characters in a house of mirrors, a character approaching a carnival, and a view through a gun sight. The Court concluded, however, that the compared visual images were unprotectable “stock scenes” or “scenes a faire” that would naturally appear in a story set in the context of a carnival.
Wild further argued that the district court abused its discretion by dismissing his initial complaint without leave to amend, claiming that he might be able to provide additional facts pertaining to NBC’s alleged access to his Souls graphic novels. The Ninth Circuit emphasized that the district court had made its ruling on the assumption that NBC had access to the Souls work; therefore, any amendments to the complaint in this regard would have no impact on the Ninth Circuit’s analysis. The Court therefore affirmed the dismissal of Wild’s complaint without leave to amend.
Trade Secrets / Misappropriation / Preliminary Injunction
Preliminary Injunction Upheld Against Misappropriated Cardiovascular Drug
by D. Jeremy Harrison
Finding sufficient evidence, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s preliminary injunction blocking the sale and marketing of a purported knockoff cardiovascular drug. The Fifth Circuit, however, concluded that the preliminary injunction was overbroad and instructed the district court to narrow its scope on remand. Daniels Health Sciences, LLC v. Vascular Health Sciences, LLC, Case No. 12-20599 (5th Cir., Mar. 5, 2013) (Clement, J.)
Following a 2007 bankruptcy of a dietary supplement company, Plaintiff Daniels Health Sciences (DHS) acquired intellectual property relating to Provasca, a dietary supplement that contains a seaweed extract that allegedly helps repair and maintain blood vessel walls. In 2011, DHS disclosed the confidential science and research behind Provasca to defendant Vascular Health Sciences (VHS) and engaged VHS to market the supplement to potential investors. Licensing negotiations between DHS and VHS eventually failed in February 2012, after which VHS began marketing a rival supplement named Arterosil containing the same seaweed extract as Provasca.
DHS filed suit, accusing VHS of breach of contract, misappropriation of trade secrets and trademark violations. The district court subsequently issued a preliminary injunction preventing VHS from using DHS’s confidential information to research or sell Arterosil.
On appeal, the Fifth Circuit upheld the preliminary injunction, finding that DHS sufficiently met the standard for a preliminary injunction. The Court concluded that the compiled science and research behind Provasca disclosed to VHS constituted a trade secret compilation and, even in the absence of an express agreement, VHS should have understood that receipt of such information established a confidential relationship between the two parties. Consequently, since VHS began to market Arterosil within a few months of breaking ties with DHS, the district court did not err in concluding that VHS likely misappropriated the trade secret to develop Arterosil. The Court further concluded that DHS will likely be able to prove damages at trial since VHS’s alleged breach and misappropriation may adversely affect U.S. Food and Drug Administration approval for medical use of Provasca, thereby potentially making it difficult for DHS to secure research funding for the drug.
The Court, however, agreed with VHS that the preliminary injunction issued by the district court was overly broad. The preliminary injunction prohibited VHS from disseminating copies of publicly available journal articles disclosed to VHS during discussions with DHS, and further barred VHS from marketing or selling drugs unrelated to Provasca if they were based on general cardiovascular health information received from DHS. Accordingly, the Court remanded the case and instructed the district court to narrow the breadth of the injunction.
Trade Secrets / Venue
Plaintiff’s Foreign Operations Result in “Lessened” Deference to Choice of Home Forum
by John C. Low
Agreeing that a Texas plaintiff’s choice of litigation forum in Texas deserved “somewhat lessened” deference because of its business operations in China, the U.S. Court of Appeals for the Fifth Circuit affirmed a dismissal without prejudice of the Texas company’s claims for trade secret misappropriation against a Chinese manufacturer based on forum non conveniens grounds. Innovation First Int’l, Inc. v. Zuru, Inc., Case No. 12-10511 (5th Cir., Feb. 19, 2013) (per curium) (Stewart, J.; Davis, J.; Clement, J.)
The Texas plaintiff filed suit in Texas state court after learning of its competitor’s competing product at a trade show in Texas. Plaintiff alleged that British-Virgin-Islands-formed Zuru misappropriated trade secrets in China by contracting with plaintiff’s former Chinese employee who had designed plaintiff’s product during his previous employment as part of plaintiff’s Chinese operations. Zuru conducted its primary operations in China, where it contracted with plaintiff’s former employee. The case was removed to federal court in the Texas district where plaintiff was headquartered. Despite acknowledging proper personal jurisdiction over Zuru, the district court dismissed the case after neither party contested the availability of another adequate legal forum in China, and the court analyzed each of the Gilbert private and public interest factors. Given the facts pertinent to venue, the district court found that all but one of the private interest factors favored dismissal, with the last (inconvenience associated with language translation) being neutral. The court cited the existence of foreign witnesses, its lack of subpoena power and cost of travel as all favoring the Chinese forum. The court also concluded that the public interest factors supported transfer because the case threatened to impose the “burden of jury duty on the people of a community that has ‘no relation to the litigation.’”
Noting that the district court had performed the appropriate analysis in evaluating the motion for dismissal, the Fifth Circuit found no abuse of discretion. The Court disputed plaintiff’s first point of contention that “district court failed to afford its choice of forum proper deference.” The Court explained that “the plaintiff’s choice of forum is entitled to great weight in the balancing of factors, and unless the balance strongly favors the defendants, the plaintiff’s choice of forum should not be overturned,” but, “[w]hen the plaintiff’s choice is not its home forum, however, [this weight] in the plaintiff’s favor ‘applies with less force.’” Citing precedent, the Court further explained that a balance in the private interest factors favoring transfer negated the need for a court to consider the public interest factors, even in circumstances where the public factors may favor transfer. For example, while the Court found plaintiff’s argument that “the district court should have weighed Texas’s interest in protecting its companies from trade secret misappropriation more heavily” persuasive, it nevertheless declined to use that public interest factor to supplant the district court’s discretion.
Trade Secrets / Economic Espionage Act
Don’t Photograph the Machines!
by Melissa Nott Davis
Speaking to the Economic Espionage Act, 18 U.S.C., the U.S. Court of Appeals for the Sixth Circuit affirmed the convictions but reversed the sentences as too modest in United States v. Howley, Case Nos. 11-6040; -6071; -6194 (6th Cir., Feb. 4, 2013) (Sutton, J.)
Clark Roberts and Sean Howley worked as engineers at Wyko Tire Technology. In November 2006, Wyko entered a deal to supply tire parts to Haohua South China Rubber Company. However, Wyko had never previously made the Haohua parts. Goodyear, a Wyko customer, used machines just like the ones Wyko needed to produce the subject tire parts. Around the same time that Wyko was struggling to design and make the Haohua parts, Goodyear asked Wyko to send a technician to repair some of its tire-assembly machines. Wyko decided to send Roberts and Howley, the two engineers who happened to be assigned to the Haohua tire part project. Both men signed confidentiality agreements before their visit, acknowledging that they might be given access to Goodyear’s trade secrets and agreeing that they would not use or disclose that information. Roberts and Howley were reminded that no cameras were allowed and were escorted by Goodyear employees while they were at the plant. At one point, Roberts and Howley were briefly left unescorted. During that time, they took seven photos of Goodyear’s machines. That night, Howley sent the photos to his Wyko e-mail account and then forwarded the pictures to Roberts. Roberts forwarded them to other members of the Wyko team. A few weeks later a Wyko IT manager found the pictures and anonymously forwarded the photos to Goodyear, which notified the Federal Bureau of Investigations. Roberts and Howley were subsequently convicted of theft of trade secrets and wire fraud, and were sentenced to four months of home confinement, 150 hours of community service and four years of probation.
The Economic Espionage Act protects information as trade secret if its owner has taken “reasonable measures to keep it secret and the information derives independent economic value, actual or potential, from not being ascertainable through proper means by the public.” 18 U.S.C. § 1839(3). A defendant violates the act if he or she “steals or without authorization photographs a trade secret, intending or knowing that the offense will . . . injure the owner of that trade secret.”
The Sixth Circuit found Goodyear took reasonable measures to keep the design of its tire machines secret. The Court noted that that Roberts and Howley were required to obtain advance permission from Goodyear to visit the factory, sign confidentiality agreements and agree not to take photographs. The Court affirmed the convictions.
However, the Sixth Circuit reversed the sentences imposed by the district court. The Court noted that a district court need not reach an exact value of the lost trade secret, but explained that it must at least establish a “reasonable estimate.” In this case, the district court rejected the government’s asserted value of the trade secret but provided no explanation for its finding of zero economic loss for Goodyear. The Court found this conclusion to be at odds with Roberts and Howley’s convictions for theft of property with “independent economic value.” The Court noted that an estimate of monetary loss to Goodyear would “necessarily” increase the sentence according to the sentencing guidelines, but also noted that the district court has discretion in deciding the actual sentence to impose.