Source: https://www.mwe.com/insights/2017-12-ip-update/
Timestamp: 2019-04-21 00:07:58+00:00

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In remanding a case back to the district court, the US Court of Appeals for the Federal Circuit held that the Supreme Court of the United States’ 2017 decision in TC Heartland v. Kraft Foods qualifies as a change of law, and that an alleged infringer’s defense of improper venue was not waived by its earlier failure to raise that defense in motions filed before the TC Heartland decision issued. In re Micron Tech, Inc., Case No. 17-00138 (Fed. Cir., Nov. 15, 2017) (Taranto, J).
In June 2016, Harvard College filed a patent infringement case in the District of Massachusetts against Micron, which is incorporated in Delaware and has its principal place of business in Idaho. In August 2016, Micron moved to dismiss the complaint for failure to state a claim under Fed. R. Civ. Pro. § 12(b)(6), but it did not include an objection to venue under § 12(b)(3). In December 2016, the Supreme Court granted review in TC Heartland to address the correct interpretation of the term “resides” in 28 USC C 1400(b), which addresses venue in patent cases. In May 2017, the Supreme Court issued its decision, holding that under C 1400(b), “a domestic corporation resides only in its State of incorporation for purposes of the venue statute” (IP Update, Vol. 20, No. 5).
After the Supreme Court’s decision, Micron filed a second motion to dismiss or transfer the case, arguing that venue was improper in the District of Massachusetts because Micron is not incorporated there. The district court denied the motion, finding that under Rules 12(h)(1)(A) and 12(g)(2), Micron waived its venue defense by not objecting to venue in its first motion to dismiss filed in August 2016. Crucial to the district court’s holding was its finding that TC Heartland was not a change of law and that the venue defense now asserted by Micron was available when Micron filed its first motion. Micron thereupon filed a writ of mandamus to the Federal Circuit.
Recognizing the widespread disagreement over whether TC Heartland changed the law on venue, the Federal Circuit granted mandamus. The Court found that TC Heartland was a change in law and that the venue defense was not available to Micron when it filed its original motion to dismiss. The Court explained that prior to TC Heartland, district courts were required to follow the Federal Circuit’s 1990 decision in VE Holding v. Johnson Gas as binding precedent. Under VE Holding, venue was proper in Massachusetts. The Court went on to note that the Supreme Court’s 1957 decision in Fourco Glass v. Transmirra Products did not address the post-1988 amendments to the patent venue statute, and thus there was no intervening Supreme Court precedent before TC Heartland. As a result, the Court concluded that the venue defense now raised by Micron was not available prior to the TC Heartland decision.
The Federal Circuit noted, however, that even though TC Heartland was a change in law, an accused infringer may forfeit an otherwise meritorious venue defense. While the Court left it up to future cases to elaborate on circumstances in which forfeiture is appropriate, it observed that timeliness, including when the defense became available and the stage of the litigation when the defense was raised, may be considered in deciding whether a defendant forfeited a venue defense based on TC Heartland.
Adhering to its now-familiar two-step framework for determining patent eligibility under the Supreme Court of the United States’ 2014 decision in Alice (IP Update, Vol. 17, No. 7), the US Court of Appeals for the Federal Circuit affirmed the district court’s judgment on the pleadings, finding all of the asserted claims invalid under 35 USC § 101 because the claims were directed to abstract ideas. Two-Way Media Ltd. v. Comcast Cable Communications, LLC, Case Nos. 016-2531; -2532 (Fed. Cir., Nov. 1, 2017) (Reyna, J).
Two-Way asserted four patents related to a “multicasting” system for streaming audio/visual data over a communications system such as the internet. While “unicast” internet systems typically transmit data packets on a point-to-point basis, a multicasting system allows for transmitting packets to multiple recipients. The patents explain that this technology had previously been used to provide internet-based audio/visual conferencing servicing, and describe the invention as an improved scalable architecture for delivering and monitoring real-time information.
The district court determined that under Alice step 1, the patents were directed to the abstract ideas of “sending and monitoring the delivery of audio/visual information” and “measuring the delivery of real-time information for commercial purposes.” Under Alice step 2, the district court found that the claims recited only ordinary functions associated with computer components and therefore provided no inventive concept that could save the otherwise abstract ideas. In finding no inventive concept, the district court applied Two-Way’s proposed claim constructions.
The district court also rejected Two-Way’s attempt to submit evidence from proceedings in the US Patent and Trademark Office and other district courts related to the patents’ validity under § 102 and § 103, including expert reports, expert testimony and a press release. The district court declined to consider such materials, explaining that novelty and non-obviousness are unrelated to § 101 subject matter eligibility. Two-Way appealed.
The Federal Circuit affirmed, noting that even under the patent owner’s proposed claim construction, the results-based claim language failed to sufficiently describe how to achieve the claimed results in a non-abstract way. Although the Court agreed with Two-Way that the specification may have described a purportedly inventive “architecture,” this did not save the claims, because they (and Two-Way’s proposed construction of those claims) failed to specify any particular rules or transmission parameters associated with such an architecture. Thus, no inventive concept was claimed that could render the claims patent eligible. Moreover, the Federal Circuit found no error in the district court’s adoption of Two-Way’s claim construction for the limited purpose of the § 101 inquiry, and it found that the district court was correct to decline to consider materials that related to §§ 102 and 103 issues.
The US Court of Appeals for the Federal Circuit reversed a finding of non-obviousness, concluding that the district court clearly erred in relying on selective expert testimony, rather than a totality of the evidence, in finding that a skilled artisan would not have been motivated to make the claimed combination. Bayer Pharma AG v. Watson Laboratories, Inc., Case No. 16-2169 (Fed. Cir., Nov. 1, 2017) (Moore, J).
Bayer is the owner of a US patent directed to an oral dissolving tablet (ODT) formulation of the erectile dysfunction (ED) drug vardenafil (Staxyn). Watson filed an abbreviated new drug application seeking US Food and Drug Administration (FDA) approval to market its own generic form of Staxyn. Bayer sued for patent infringement. During the district court proceeding, Watson alleged that the claims were obvious based on several prior art references teaching that ED drugs would be good candidates for ODT formulations. Watson argued that one of ordinary skill in the art would have been motivated to formulate an ODT version of vardenafil based on these prior art disclosures. In response, Bayer argued that the claims at issue were non-obvious, relying on expert testimony and publications showing that ODT formulations were rare and generally inapplicable in the field of ED pharmaceutical technology.
The district court agreed with Bayer, finding the claims non-obvious. The district court’s finding rested largely on the testimony of Bayer’s expert, who testified that Bayer’s competitors had not developed ODT formulations of ED drugs before the patent’s priority date and that a person of skill would not consider ED drugs to be good candidates for ODT formulations. Watson appealed.
The Federal Circuit reversed the district court’s finding of non-obviousness. First, the Court found that the district court clearly erred by selectively considering Bayer’s expert testimony over the totality of evidence supporting Watson’s position, which not only established that ED drugs were viable candidates for ODT formulations but also provided express suggestion to develop such formulations. Second, the Court found that the fact that no ODT versions of ED drugs had been approved by the FDA did “not negate an otherwise apparent motivation to formulate [the patented ODT] product.” Third, the Court found that while the district court was free to find that ODT vardenafil would be less favorable than a delayed-release formulation given its bitter taste and increased bioavailability, the district court erred when it elevated these findings to a teaching away. Instead, the Court found that ODT vardenafil would still have been productive, and absent a showing that the prior art “was somehow so flawed that there was no reason to upgrade it,” the record as a whole did not lead one of ordinary skill in the art away from the patented formulation.
Practice Note: An expert’s conclusion of non-obviousness is one of many factors that a Court will consider in its factual determination of obviousness. It is important to ensure that an expert addresses the totality of the evidence.
Addressing the issues of reasonable expectation of success and induced infringement of claims directed to a method of treatment in a particular patient population based on the results of a clinical trial, the US Court of Appeals for the Federal Circuit upheld the district court’s finding that the claimed method was not obvious and that language in the proposed package inserts induced infringement. Sanofi v. Watson Labs Inc., Case Nos. 16-2722; -2726 (Fed. Cir., Nov. 9, 2017) (Taranto, J).
Watson and Sandoz filed abbreviated new drug applications seeking to market generic versions of Sanofi’s Multaq®. Sanofi sued, alleging infringement of a patent directed to decreasing a risk of cardiovascular hospitalization in patients meeting certain clinical criteria by administering dronedarone—the active ingredient in Multaq®. After a bench trial, the district court found infringement and rejected defendants’ obviousness argument. Defendants appealed.
On appeal, the Federal Circuit focused on obviousness and inducement of the method claims in the asserted patent. As to obviousness, the only issue on appeal was the district court’s finding of no reasonable expectation of success. Defendants had to prove by clear and convincing evidence that, as of the February 2008 critical date, a person of ordinary skill in the art would have reasonably expected dronedarone to effectively reduce cardiovascular hospitalization in the claimed patient population. Sanofi conducted a large-scale clinical trial called ATHENA from 2005 to 2008 that was designed to answer this very question. The results of the ATHENA trial formed the basis for the patents but did not constitute prior art.
Addressing indefiniteness under Nautilus, the US Court of Appeals for the Federal Circuit reversed a district court’s finding that the claim term “effective for catalyzing” was indefinite even though the claim did not specify a way of measuring or a standard for determining “effectiveness.” BASF Corporation v. Johnson Matthey Inc., Case No. 16-1770 (Fed. Cir., Nov. 20, 2017) (Taranto, J).
BASF sued Johnson Matthey for infringement of a patent directed to systems for performing catalytic conversion of nitrogen oxides in an exhaust gas stream. The claimed systems included a novel arrangement of two catalytic surfaces, one coated with “material composition A” and the other with “material composition B.” Each of these materials was claimed as being “effective for catalyzing” or “effective to catalyze” respective chemical reactions. The district court found the claims indefinite because they did not recite a minimum level of function necessary to meet the “effective” limitation or a particular measurement method to determine whether a composition is “effective” enough to fall within the claims. Thus, the district court reasoned that a person of ordinary skill in the art could not determine which materials were within the “material composition A” or “material composition B” limitations and which were not. BASF appealed.
On appeal, the Federal Circuit found that it was the arrangement of the catalysts, rather than the selection of particular catalysts, that purportedly rendered the claimed inventions a patentable advance over the prior art. The Court interpreted the functional language of the claims to refer to any known catalysts for the particular chemical reactions and considered significant that both the claims and the specification provide exemplary material compositions. The Court further stated that although the class of known catalysts was large, “the inference of indefiniteness simply from the scope finding is legally incorrect.” Accordingly, the Court reversed the district court’s indefiniteness finding and remanded for further proceedings.
Practice Note: The Federal Circuit has signaled a relaxed standard for definiteness when a claim term does not concern an invention’s point of novelty. Practitioners should be aware of the context of a claim term in developing arguments under 35 USC § 112.
On remand from the Supreme Court of the United States, the US Court of Appeals for the Federal Circuit affirmed a district court decision granting defendant’s motion for judgment as a matter of law (JMOL) that patent owner failed to prove its infringement case under 35 USC §§ 271(a) and 271(f), and denying plaintiff’s motion for a new trial on damages and infringement. Promega Corp. v. Life Technologies Corp., Case Nos. 13-1011; -1029; -1376 (Fed. Cir., Nov. 13, 2017) (Chen, J).
This case generally concerns genetic testing kits assembled in the United Kingdom and sold by Life Technologies. The kits comprised five components, at least one of which was supplied from the United States. Promega, the exclusive licensee of a patent claiming methods and kits for analyzing DNA, sued Life Technologies for infringement, seeking damages. The Federal Circuit initially found that all of the accused products were infringing under § 271(f)(1). However, on review, the Supreme Court held that a single component does not constitute a substantial portion of the components that can give rise to liability under § 271(f)(1), thereby nullifying the Federal Circuit’s conclusion that all of the accused products made by Life Technologies in the United Kingdom infringed under § 271(f) (IP Update, Vol. 20, No. 3).
On remand, the Federal Circuit considered whether a subset of the accused products was liable for infringement under § 271(f). At the district court, Promega had urged an “all or nothing” damages approach based on defendants’ total worldwide sales under § 271(f). Promega did not set forth any evidence to support a damages award based on a subset of total sales. Promega provided no damages expert at trial and made no arguments that damages could be based on a figure other than worldwide sales, despite several reminders from the district court that Promega had not put in evidence to prove liability separately under § 271(a) and § 271(f)(1).
The Federal Circuit affirmed the district court’s finding that Promega waived any argument that the trial record could support a damages award based on a subset of total sales by failing to oppose Life Technology’s Rule 50(b) motion argument to the effect that Promega had only set forth evidence as to defendants’ total worldwide sales, but provided no evidence to support a damages award based on a subset of the total sales. Thus, the Federal Circuit upheld the district court’s grant of Life Technology’s JMOL that Promega was entitled to no damages.
The Federal Circuit further found that the district court properly relied on its waiver finding (from its JMOL ruling) to support its decision to deny Promega’s motion for a new trial on infringement and damages. Promega’s failure to raise any argument that the evidence at trial supported a damages calculation based on anything other than worldwide sales in response to Life Technology’s Rule 50(b) motion was a deliberate choice and a waiver. The Court found that Promega was on notice that it had not put in evidence to prove liability separately under § 271(a) and § 271(f)(1) because the district court gave Promega a second chance to admit such evidence and Promega declined that opportunity. Thus, the Federal Circuit held that it was not an abuse of discretion to refuse to give Promega unlimited chances to correct deficiencies in its arguments on the record, and that the district court properly denied Promega’s motion for a new trial.
Practice Note: A damages theory not raised in the district court in the first instance cannot be later added when the relied-upon damages theory fails.
The US Court of Appeals for the Federal Circuit affirmed in part, reversed in part, vacated in part and remanded the district court’s findings of definiteness, grant of absolute intervening rights, denial of enhanced damages, award of lost profits and grant of permanent injunction. Presidio Components, Inc. v. American Technical Ceramics Corp., Case Nos. 16-2607; -2650 (Fed. Cir., Nov. 21, 2017) (Dyk, J).
Presidio sued American Technical Ceramics (ATC) alleging infringement of a patent that claims a multilayer capacitor design and teaches a multilayer integrated network of capacitors electrically connected in series and in parallel. While the district court infringement suit was pending, ATC sought an ex parte re-examination of the asserted patent claims. Presidio amended the claims after the examiner rejected the claims as anticipated and obvious. The US Patent and Trademark Office issued a re-examination certificate amending certain claims at issue in the district court action. Thereafter, Presidio amended its complaint to assert these claims.
The district court granted ATC’s motion for summary judgment on the affirmative defense of absolute intervening rights. After a jury trial, ATC was found to infringe and induce infringement of the asserted claims. The jury awarded Presidio more than $2 million in lost profit damages and also found that ATC’s infringement was willful. The district court rejected ATC’s contention that the asserted claims were indefinite and denied ATC’s motion that Presidio had failed as a matter of law to prove lost profits. The district court also denied Presidio’s motion for enhanced damages despite the jury’s willful infringement finding, and entered a permanent injunction against ATC. ATC appealed the district court’s indefiniteness ruling, lost profits award and permanent injunction. Presidio cross-appealed the district court’s intervening rights ruling and denial of enhanced damages.
The Federal Circuit affirmed the district court’s holding that the claims were not indefinite, finding that the method of measuring capacitance was sufficiently well known in the art and referenced in the patent. (See also BASF Corp. v. Johnson Matthey, Inc., in this issue of IP Update). The Court agreed with the district court’s grant of absolute intervening rights, noting that a patentee is only entitled to infringement damages for the period following issuance of the re-examination certificate if an amendment during re-examination makes a substantive change to an original claim. Here, the Court found that under the claim construction of the original claims in an earlier infringement suit between the parties, fringe-effect capacitance could be determined by theoretical calculations that are insufficient under the amended claims. As such, the Court found there was a substantive change in claim scope.
Moving to remedies, the Federal Circuit reversed the district court’s award of lost profits and remanded for determination of a reasonable royalty. Focusing on the second prong of the four-factor Panduit test, the Court explained that the correct inquiry is “whether a non-infringing alternative would be acceptable compared to the patent owner’s product, not whether it is a substitute for the infringement product.” The Court explained that the district court erred by relying on evidence of sales of a non-infringing ATC capacitor product in competition with its infringing capacitor products, rather than comparing the non-infringing ATC capacitor to Presidio’s BB capacitors in a hypothetical market without the infringing capacitors.
Lastly, the Federal Circuit vacated the permanent injunction and remanded with instructions to consider the relevant evidence and to determine whether Presidio had established the first factor of the eBay test—that “it has suffered an irreparable injury.” In particular, the Court noted that the injunction may have created the hypothetical market necessary to determine whether consumers would purchase Presidio’s BB capacitors in the absence of the infringing capacitors.
Wading into the merging streams of antitrust and patents, the US Court of Appeals for the Ninth Circuit upheld dismissal of an antitrust suit where a jury verdict in a parallel case found no patent infringement. Cascades Computer Innovation, LLC v. RPX Corp. and Samsung Electronics Co. Ltd., Case No. 16-15782 (9th Cir., Dec. 11, 2017) (Clifton, J) (Friedland, J, concurring) (Sessions, J, concurring).
Cascades owns 38 patents (collectively known as the Elbrus portfolio) allegedly used to optimize Android devices. Cascades intended to license these patents to numerous companies, including Motorola, HTC, Samsung, LG Electronics, Dell and RPX (a defensive patent aggregator that purchases patents on behalf of subscriber organizations using membership fees). After being unable to reach an agreement to license the Elbrus portfolio, Cascades filed lawsuits in Illinois against Samsung, Motorola, HTC and others, alleging infringement of one of the patents in the Elbrus portfolio. At trial, a jury found no infringement of the patent.
Cascades also filed an antitrust action in California alleging that it could not reach a licensing deal with the defendants because there was a conspiracy between the defendants, using RPX, to not seek licenses for use of the Elbrus portfolio. Cascades alleged that this conspiracy was a violation of antitrust law. The defendants moved to dismiss, and the court granted the motion. The district court noted that “[o]nly those who possess antitrust standing by virtue of having suffered antitrust injury may bring a private action for damages for violation of the antitrust laws” before ruling for the defendants on a motion for judgment on the pleadings. The district court reasoned that in order to show antitrust injury, there must be harm to competition, not any particular competitor. The court reasoned that a “failure to license a non-infringed patent typically cannot serve as the basis for a cognizable antitrust injury.” Because of the jury verdict in Illinois that the defendants did not infringe the patent, the court concluded that Cascades did not suffer a cognizable antitrust injury and therefore dismissed the complaint. Cascades appealed.
In a non-precedential opinion, the Ninth Circuit affirmed, finding that the district court “properly recognized the preclusive effect of [the Illinois decision] and correctly reasoned that because the defendants did not infringe the patent, Cascades’ failure to license the patent was not a cognizable antitrust injury.” The Court further explained that the failure to license had no effect on price or quantity of any consumer goods.
Practice Note: Although seeking an antitrust remedy where no patent infringement is found represents a relatively novel tactic, alleging an injury without an infringement doesn’t appear to be a winning strategy in private causes of action.
In November 2017, the Patent Trial and Appeal Board (PTAB) issued Standard Operating Procedure (SOP) 9, explaining the procedures it will use to address remands from the US Court of Appeals for the Federal Circuit. The PTAB explained that it has established a goal to issue decisions on remanded cases within six months of its receipt of the Federal Circuit’s mandate.
SOP 9 addresses appeals from both post-grant trials and ex parte procedures, and explains that the chief judge and/or the deputy chief judge and/or their delegates will discuss each remanded case with each respective panel before the Federal Circuit issues its final mandate and before the panel expends substantial effort on the case. This meeting will normally occur within 30 days of receiving notice of the Federal Circuit’s decision and prior to the Federal Circuit issuing its mandate.
SOP 9 includes two appendices: Appendix 1 provides discretion to panels in preparing for panel meetings, and Appendix 2 provides guidance to parties on remand procedures and includes illustrative examples of remand procedures followed by the PTAB in recent cases.
These remand teleconferences with the panel are expected to take place within the first month after the mandate.
SOP 9 also explains that, although the panel will consider procedures proposed by the parties, the panel itself will ultimately decide the procedures to be followed on remand, e.g., whether to permit additional briefing and additional evidence (testimonial and documentary) or hold additional hearings following a remand. SOP 9 further explains that while there is currently no statutory time limit for completing a re-opened proceeding following remand, delays caused by re-opening the record after remand may be inconsistent with the goal of issuing a remand decision within six months from the mandate.
For the benefit of the parties, SOP 9 includes a guide in Appendix 2 that provides a set of Default Trial Procedures for Common Remand Scenarios, specifically listing Erroneous Claim Interpretation, Failure to Consider the Evidence, Inadequate Explanation by the Board, Erroneous Application of Law, Lack of Due Process/Denial of APA [Administrative Procedure Act] rights, and Improper Consideration of the Arguments. The guide explains that in most situations, the parties may submit new briefing but no new evidence or oral arguments for all typical scenarios, except due process and APA violations. Only those latter two scenarios are contemplated by the PTAB as being amenable to new evidence and new oral arguments.
Practice Note: The common scenarios chart in SOP 9 shows that the PTAB expects new briefing to be the primary mechanism to address issues on remand from the Federal Circuit. Parties can expect that opportunities to introduce new evidence or participate in a new oral argument will be narrowly limited to remands addressing lack of due process or denial of APA rights.
Addressing the issue of trademark infringement specific to the title of an expressive work, the US Court of Appeals for the Ninth Circuit affirmed the district court’s conclusion that Twentieth Century Fox’s use of the name “Empire” is protected by the First Amendment and is therefore outside the reach of the Lanham Act. Twentieth Century Fox Television v. Empire Distribution, Inc., Case No. 16-55577 (9th Cir., Nov. 16, 2017) (Smith, J).
Twentieth Century Fox launched its musical television series Empire in 2015. The show portrays a fictional New York hip-hop music label named Empire Enterprises and features songs in every episode, including original music. Fox promotes the show and its associated music through live performances, radio play and merchandise bearing the “Empire” brand. Defendant Empire Distribution is a record label and publishing company that distributes urban, hip-hop and R&B music, including the work of artists such as Snoop Dogg. Empire Distribution sent Fox a letter demanding that Fox stop using “Empire,” claiming that its use was infringing on Empire Distribution’s rights in its EMPIRE registered trademark.
Fox filed a declaratory judgment action against Empire Distribution, seeking a declaration that the Empire show and its associated music releases did not violate Empire Distribution’s trademark rights under either the Lanham Act or California law. Empire Distribution counterclaimed for trademark infringement, trademark dilution, unfair competition and false advertising. After Fox moved for summary judgment, the district court determined that Fox’s use of “Empire” is protected by the First Amendment under the two-prong test laid out by the US Court of Appeals for the Second Circuit in Rogers v. Grimaldi (1989). Under the Rogers test, the title of an expressive work does not violate the Lanham Act unless the title “has no artistic relevance to the underlying work whatsoever, or, if it has some artistic relevance, unless it explicitly misleads consumers as to the source or content of the work.” After the district court granted summary judgment on all claims and counterclaims, Empire Distribution appealed.
Empire Distribution argued that the district court erred substantively and procedurally in finding that Fox’s use of the name “Empire” was protected by the First Amendment and was therefore outside the reach of the Lanham Act. The Ninth Circuit began its analysis by noting that general claims of trademark infringement under the Lanham Act are governed by the likelihood-of-confusion test laid out by the Ninth Circuit in Mattel v. MCA Records (2002). When the alleged infringing use is in the title of an expressive work, however, the proper test is the Rogers test.
Applying the Rogers test, the Ninth Circuit found that the first prong of the test was satisfied because Fox used the word “Empire” for artistically relevant reasons. The Court determined that the show is set in New York, the Empire State, and its subject matter relates to an entertainment conglomerate, which is a figurative empire. The Court further noted that the first prong of Rogers distinguishes cases in which the use of the mark has some artistic relation to the work from cases in which the use of the mark is arbitrary. The court found that the title of Empire has artistic relevance by supporting the themes and geographic setting of the work sufficient to pass the first prong.
To fail the second prong of the Rogers test, the creator must explicitly mislead consumers. The Court noted that use of a mark alone is not enough to satisfy the second prong. The Court found that Fox’s Empire show made no overt claims or explicit references to Empire Distribution, and therefore concluded that it was not explicitly misleading.
The Ninth Circuit accordingly concluded that Fox’s use of “Empire” in relation to its television series and related music satisfied the Rogers test, and therefore such use was protected by the First Amendment and was outside the scope of the Lanham Act.
The US Court of Appeals for the Sixth Circuit concluded that summary judgment on the basis of the doctrine of res judicata was inappropriate because the two actions did not involve the same parties or their privies. AuSable River Trading Post, LLC v. Dovetail Solutions, Inc., Case No. 17-1283 (6th Cir., Oct. 23, 2017) (Donald, J).
The City of Tawas, Michigan, hosts a yearly winter festival known as Perchville, and the Tawas Area Chamber of Commerce owns a federal trademark registration for “Perchville.” In 2013, the mark was temporarily cancelled for failure to file a renewal application on time, but a new application was filed within three weeks.
The Trading Post, a wholesale provider of miscellaneous products, sold merchandise displaying the term “Perchville.” In 2016, the Chamber sued Salvatore Agnello, an employee of the Trading Post, seeking to obtain an injunction against the use of “Perchville.” The Chamber did not include the Trading Post in its lawsuit because it was unaware that Mr. Agnello was selling the goods on behalf of the Trading Post. In a court hearing, Mr. Agnello expressed confusion as to the lawsuit but ultimately consented to the permanent injunction, and both Mr. Agnello and the Trading Post have since complied with the injunction.
Later in 2016, the Trading Post filed a complaint in district court, challenging the Chamber’s trademark. The Chamber argued that Trading Post’s claims were barred by the doctrine of res judicata. After the district court agreed with the Chamber, the Trading Post appealed.
The Court further noted that the Trading Post did not appear at the scheduled hearing and the Chamber made no effort to include it. Therefore, the Chamber failed to meet its burden of showing that Agnello and the Trading Post were in privity such that the doctrine of res judicata would bar the Trading Post’s claims as a matter of law.
Two recent decisions from the Fourth and Fifth Circuits—with similar outcomes—have contributed further guidance and consistency on the issue of federal preemption with respect to state law claims pertaining to conversion and computer fraud, as well as unfair competition.
Both circuits explained that federal preemption, as it applies to federal intellectual property laws, is intended to maintain balance by preventing states from offering intellectual property protections that the federal Copyright or Patent Acts do not provide. Citing § 301 of the Copyright Act, both courts examined the facts of their respective cases under the Act’s two-pronged inquiry to determine when a state law claim is preempted. First, the work at issue must be within the scope of the subject matter of copyright. If it is, then a state-law claim is preempted if the rights granted thereunder are equivalent to those protected by federal copyright.
The US Court of Appeals for the Fourth Circuit addressed the issue of whether the federal Copyright Act preempted a plaintiff’s state law claims arising from the copying and transfer of certain computer data. In finding such claims preempted, the Court affirmed the district court’s grant of summary judgment in favor of the defendant. OpenRisk, LLC v. MicroStrategy Services Corporation, Case Nos. 16-1852; -4906 (4th Cir., Nov. 13, 2017) (Harris, J).
OpenRisk, a startup company, contracted with MicroStrategy for cloud computing and hosting services in relation to OpenRisk’s data and programming. Shortly thereafter, OpenRisk faced insolvency, and three of OpenRisk’s principal officers resigned and started their own company, Spectant Group LLC. The next year, OpenRisk sued MicroStrategy in district court in Virginia, claiming conversion and computer fraud under state law based on allegations that MicroStrategy had copied and transferred OpenRisk’s data from the MicroStrategy cloud to a new cloud environment created for Spectant. After close of discovery, the district court granted MicroStrategy’s motion for summary judgment arguing that the federal Copyright Act preempted OpenRisk’s state law claims. OpenRisk appealed.
Starting with the two-prong preemption inquiry of § 301 of the Copyright Act, the court noted that there was no dispute as to the first prong since the materials in question (a computer program and associated data) fall within the subject matter of copyright. Thus, the case hinged on the second prong of the inquiry, i.e., whether the rights that OpenRisk wanted to protect under state law are “equivalent to the exclusive rights reserved to the owner of a copyright.” Finding that the unauthorized copying of a computer program falls squarely within the Copyright Act’s grant of exclusive rights to “reproduce” and “distribute” copies of a copyrighted work, the Court held that OpenRisk’s conversion and computer fraud claims were preempted.
The Court rejected OpenRisk’s arguments that the Virginia Computer Crimes Act upon which it based certain state law claims contains “extra elements” that save its case from preemption. The court explained that preemption may be avoided only when an extra element of a state law claim “changes the nature of the action so that it is qualitatively different from a copyright infringement claim.” Here, the Court found that the core of OpenRisk’s claim remains the unauthorized copying and transfer of its data, which is “equivalent to” a copyright infringement action and thus preempted.
Just one day after the Fourth Circuit’s OpenRisk decision, the US Court of Appeals for the Fifth Circuit granted judgment as a matter of law in favor of a defendant, finding the plaintiff’s unfair competition claim under Texas state law to be preempted by the federal Copyright and Patent Acts. Motion Medical Technologies, L.L.C., et al. v. ThermoTek, Incorporated, et al., Case No. 16-11381 (5th Cir., Nov. 14, 2017) (Higginson, J).
ThermoTek, a medical device company, filed suit against its distributor, Mike Wilford, and his related companies in Texas state court for unfair competition after Wilford developed and sold a competing product for thermal and compression therapies that ThermoTek alleged was created with its proprietary information obtained by Wilford. Wilford removed the case to the Northern District of Texas, where a jury decided in favor of ThermoTek. Wilford then renewed a motion for judgment as a matter of law, arguing that federal copyright and patent law preempted ThermoTek’s state unfair-competition-by-misappropriation claim. The district court agreed and dismissed all claims in the matter.
On appeal, the Fifth Circuit examined whether Wilford waived the preemption argument by failing to plead the affirmative defense. The panel agreed with the district court findings (1) that Wilford raised the affirmative defense at a “pragmatically sufficient time” since the issue first arose at the summary judgment stage before discovery closed, which was nearly two years before trial, and (2) that ThermoTek was not prejudiced in its ability to respond.
Turning to the issue of whether federal copyright law preempted ThermoTek’s unfair-competition-by-misappropriation claim under Texas state law, the Fifth Circuit referred to the § 301 two-prong test. Regarding prong one, the Court quickly concluded that the misappropriated information, which included manuals, reports, billing information and other written documents, was “within the subject matter of copyright.” Moving on to prong two, the Court noted that it has “twice held that Texas’s unfair-competition-by-misappropriation tort does not afford protection qualitatively different from federal copyright law,” and thus affirmed the district court’s finding of copyright preemption.
Practice Note: As the circuits provide further detailed guidance on the issue of preemption, it is critical for parties on both sides of a matter to carefully examine state law claims to see if preemption can or should be addressed from an offensive or defensive position.
Addressing whether to exercise personal jurisdiction over defendants whose only tie to the forum was an allegedly infringing newsletter sent to 10 California residents, the US Court of Appeals for the Ninth Circuit upheld the district court’s dismissal of a copyright infringement action for lack of personal jurisdiction. Axiom Foods, Inc. v. Acerchem Int’l, Inc., Case No. 15-56450 (9th Cir., Nov. 1, 2017) (Smith, J).
Axiom Foods supplies organic and chemical-free products to customers in the food, beverage and nutraceutical industries. Acerchem International, based in Shanghai, China, is a wholesale manufacturer of health and nutritional products. Acerchem UK is a wholly owned subsidiary of Acerchem International that does not conduct business in the United States.
An Acerchem UK employee sent a newsletter that included Axiom’s “As Good as Whey” and “Non-GMO” logos to 343 email recipients. Axiom applied for and registered its copyrights for these logos with the US Copyright Office, and subsequently sued Acerchem International and Acerchem UK for copyright infringement. Following jurisdictional discovery, the district court granted Acerchem UK’s motion to dismiss for lack of personal jurisdiction. Axiom appealed.
On appeal, the Ninth Circuit relied on the “purposeful direction” or “effects,” assessing whether the defendant “(1) committed an intentional act, (2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be suffered in the forum state.” Axiom easily satisfied the first prong by showing that Acerchem UK added the logos to the newsletter and sent it. However, Axiom was not able to satisfy the second requirement—whether the intentional act was expressly aimed at the forum state.
The Ninth Circuit also declined to exercise jurisdiction over Acerchem UK pursuant to Fed. Rule of Civ. Pro. 4(k)(2), which allows a federal court to exercise personal jurisdiction when it is consistent with the US Constitution and laws and when the defendant is not subject to any state’s courts of general jurisdiction, finding that doing so would not comport with due process.
This case involved a dispute between a multi-level marketing company, Signature Management Team (SMT), and an anonymous blogger and critic of the industry (Doe). Doe posted a link on his blog to a downloadable copy of one of SMT’s full textbooks. SMT sent Doe a take-down notice. Doe quickly removed the hyperlink. Nevertheless, SMT sued Doe, alleging one count of copyright infringement. Doe asserted defenses of fair use and copyright misuse.
During discovery, SMT sought to compel disclosure of Doe’s identity. The district court denied the request, applying the balancing test set forth by the Northern District of California in the 2011 case Art of Living Foundation v. Does 1–10. Under that test, a plaintiff seeking to unmask a defendant during discovery must first produce competent evidence supporting a finding of each fact essential to a given cause of action. Once the plaintiff satisfies this burden, the court must weigh the harm that unmasking would work upon the defendant’s First Amendment right to anonymous speech against the plaintiff’s need to pursue its claims. In denying SMT’s request, the district court concluded that because there was a chance that Doe could prevail on his fair-use defense, he faced significant and irreversible harm if unmasked. However, the district court did compel Doe to reveal his identity to the court and to SMT’s lawyer, subject to a protective order barring them from sharing this information with SMT.
Ultimately, the district court granted summary judgment for SMT, but only limited injunctive relief. The injunction required Doe to destroy all copies of the infringing work in his possession. However, the court declined to enter a permanent injunction or to unmask Doe. In declining to unmask Doe, the district court again applied the balancing test in Art of Living. SMT appealed.
Addressing what it called an “issue of first impression,” the Sixth Circuit noted that “very different considerations” apply at the judgment stage than at the discovery stage. The Court explained that an adverse judgment diminishes, but does not necessarily obviate, an anonymous infringer’s First Amendment interest in continued anonymity. The Sixth Circuit ordered a remand and instructed the district court to also consider the public’s general interest in open court proceedings and the plaintiff’s specific interest in unmasking the defendant.
The Sixth Circuit panel declined, however, to adopt a per se rule in favor of automatically unmasking a liable defendant. It concluded that although the First Amendment does not protect infringing speech, unmasking might hinder a defendant’s ability to engage in protected anonymous speech in the future. It further concluded that SMT had “no practical need” to monitor Doe’s future activities because Doe had already complied with the terms of the district court’s injunction and the district court had not entered any ongoing injunctive relief.
In dissent, Judge Suhrheinrich likened the majority to “an overprotective parent” and dismissed the issue of whether unmasking would chill future speech as “collateral” to the issue before the court and thus not properly considered. He noted that the Art of Living test applied during discovery to prevent irreparable harm should the court later determine that the defendant did not infringe—a concern that was no longer present following judgment. In addition, the dissent concluded that “ordering injunctive relief against Doe without identifying him minimizes the effect of the court’s order, downplays the significance to Doe, encourages future misconduct, and hinders SMT’s ability to monitor compliance.” Judge Suhrheinrich would have remanded with instructions to unmask Doe.

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