Court Opinion

ID: 8408441
Source: CourtListenerOpinion
Date Created: 2022-11-02 16:43:23.252724+00
Date Added: 2024-06-11T16:47:34.682940
License: Public Domain

PAULINE NEWMAN, Circuit Judge,
concurring in part, dissenting in part.
I write to state my concerned objection to the court’s conversion of the regulatory *1151criterion of “fraud” into the rejected substitute “inequitable conduct.” The underpayment of a fee is not a matter of “inequitable conduct” in obtaining a patent to which one is not entitled, with the penalty of permanent loss of the wrongfully obtained patent. The regulation herein is explicit in requiring the more rigorous proof of “fraud” in establishing a false claim of entitlement to reduced fees. My colleagues on this panel now change this criterion to the more readily met “inequitable conduct,” negating the regulations and ignoring the deference appropriate to the PTO Director’s administration. As the panel majority recognizes, “inequitable conduct is a broader, more inclusive concept than ... common law fraud.” Maj. op. at 1144. The difference between these causes was explained in Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed.Cir.1998):
A finding of Walker Process fraud requires higher threshold showings of both intent and materiality than does a finding of inequitable conduct. Moreover, unlike a finding of inequitable conduct, a finding of Walker Process fraud may not be based upon an equitable balancing of lesser degrees of materiality and intent. Rather, it must be based on independent and clear evidence of deceptive intent together with a clear showing of reliance.
Id. at 1070-71. The panel majority’s holding that inequitable conduct is simply fraud in other words, is contrary to law and precedent. As discussed in Consolidated Aluminum Corp. v. Foseco International Ltd., 910 F.2d 804, 812 (Fed.Cir.1990), “what we have termed ‘inequitable conduct’ is no more than the unclean hands doctrine applied to particular conduct before the PTO.” It is hornbook law that unclean hands and fraud are different wrongs, subject to different criteria.
The court now negates the Regulation, 37 C.F.R. § 1.28(d) (now at § 1.27(h)), which describes the legal status of a fraudulent claim to small entity status as “a fraud practiced or attempted on the Office.” Reference to the inequitable conduct rule had previously been dropped from the regulation. The panel majority states that it “need not decide” whether to apply “our standard” or “the standard in the PTO rule.” Maj. op. at 1145. Our authority, however, does not extend to rewriting agency regulations. From this departure from law, precedent, and administrative practice, I respectfully dissent.
DISCUSSION
A reduction in patent fees is available to an entity that qualifies as a “small business concern” in accordance with the Small Business Administration definition of such concern as an entity having less than 500 employees. 37 C.F.R. § 1.9(d). Lex has never had more than about twenty employees. The SBA regulations further qualify the definition of small business for patent fee purposes, by including the size of licensees in the calculation. 13 C.F.R. § 121.12(a). By the time Lex paid its second and third maintenance fees, Lex had granted non-exclusive licenses to entities having more than 500 employees. Lex learned of this taint on its maintenance fee payments when it was raised by Ulead in this litigation. Lex then paid the deficiency, in accordance with the procedure in the PTO Regulations:
37 C.F.R. § 1.28(c) How errors in small entity status are excused.
If status as a small entity is established in good faith, and fees as a small entity are paid in good faith, in any application or patent, and it is later discovered that such status as a small entity was established in error, or that through error the Office was *1152not notified of a loss of entitlement to small entity status as required by § 1.27(g)(2), the error will be excused upon: compliance with the separate submission and itemization requirements of paragraphs (c)(1) and (c)(2) of this section, and the deficiency payment requirement of paragraph (c)(2) of this section.
In accordance with § 1.28(c), if small entity status was established in good faith, the error is excused when the deficiency is paid in compliance with the designated procedures. See also 37 C.F.R. § 1.28(d) (“Payment of deficiency operates as notification of loss of status.”); D.H. Technology, Inc. v. Synergystex International, Inc., 154 F.3d 1333 & n. 4 (Fed.Cir.1998) (submission of the fee deficiency is treated as a representation of good faith); Changes to Patent Practice and Procedures, 62 Fed. Reg. at 53135, 53184 (Oct. 10, 1997) (submission of the fee deficiency is a representation that the original payment was made in good faith.) By this procedure, Lex’s error was excused when the Director accepted the payment and compliance with § 1.28(c).
The panel majority acknowledges that the submission of the deficiency in the fee is a representation of good faith, as the regulations provide, and is not subject to judicial review Despite this concession that the patentee’s good faith in making the reduced payment cannot be challenged, the majority then circumvents its own holding and rules that the question of bad faith may indeed be raised, by changing the question: “The question here is whether Lex committed inequitable conduct by knowingly misrepresenting that it was entitled to have the error excused.” Maj. op at 1150. I marvel at the ingenuity whereby the majority accepts that the error is correctable without further inquiry when the requirements of § 1.28(c) are met, but then holds that inequitable conduct can arise by requesting the correction. The panel majority thus negates the regulatory provisions and the precedent that has applied them.
The term “inequitable conduct” is absent from the regulations. An amendment to 37 C.F.R. § 1.28 removed the reference to 37 C.F.R. § 1.56 from an earlier version; § 1.56 is the regulation directed to the duty to disclose information material to patentability, whose violation may be deemed inequitable conduct. It is clear from the regulatory history that underpayment of a fee as a small entity was not intended to be equated with the duty to disclose information material to patentability. Underpayment of a maintenance fee is not a matter of patentability, and is not so treated in the governing regulations and in precedent.
Lex was entitled to small entity status when it paid the first (fourth year) maintenance fee. The second (eighth year) maintenance fee was due February 27, 1993. Lex paid the fee late, in November 1993, paying the $935 fee for a small entity (half the regular rate) and the $1,500 surcharge for late payment. With its payment Lex submitted PTO form PTO/SB/10, entitled “Verified Statement Claiming Small Entity Status (37 C.F.R. 1.9(f) & 1.27(c))-Small Business Concern,” from the Manual of Patent Examining Procedure § 509.03 (5th ed., rev. 14, 1992). The form stated in relevant part:
I hereby declare that the above identified small business concern qualifies as a small business concern as defined in 13 CFR 121.3-18, and reproduced in 37 CFR 1.9(d), for purposes of paying reduced fees under section 41(a) and (b) of Title 35, United States Code, in that the number of employees of the concern, including those of its affiliates, does not exceed 500 persons.... If the rights *1153held by the above identified small business concern are not exclusive, each individual, concern or organization having rights to the invention is listed below and no rights to the invention are held by ... any concern which would not qualify as a small business concern under 37 CFR 1.9(d).
No other entity was listed as having “rights to the invention,” although Lex had several non-exclusive licensees. The form was prepared by patent attorney Irving Weiner, and was signed by Simon Haber-man as president. Lex was again late in paying the third (twelfth-year) maintenance fee, again accompanied by a small entity claim, signed by Mr. Weiner:
A verified statement establishing small entity status for this patent was filed November 2, 1993. It is confirmed that the small entity status for this patent has been checked and is still in effect.
The statement was accompanied by the small entity fee of $1,580 (half the regular rate) and the $1,640 surcharge for late payment.
When the issue arose in this litigation, Lex paid the deficiency in the maintenance fees, complying with the conditions set in 37 C.F.R. § 1.28(a) for excusing an erroneous claim of small entity status. See D.H. Technology, 154 F.3d at 1341-42 & n. 8 (erroneous payment of a shall entity fee can be corrected at any time). Ulead argued to the district court that the underpayment should not be excused, stating that Lex’s sole purpose was to save money,9 and that Lex’s ignorance of the law or facts as to its small entity status is irrelevant.
Mr. Haberman testified, and it is not disputed, that Lex was a “small entity” under the Small Business Association definition and that it had small entity status for maintenance fee purposes during the first seven years of the patent’s life. He testified that he did not recognize that this status was lost when Lex obtained a large entity as a non-exclusive licensee. He testified that he was familiar with the SBA definition of a small business concern, which was set forth in the PTO form, and that Lex then and now meets the SBA definition. He testified that he read the form before he signed it, but not the regulatory sections that were referenced only by number.
The PTO form, the relevant portion of which is shown ante, did not contain the text of the SBA regulation 13 C.F.R. § 121.12 that related to including the size of licensees for reduced fee purposes, but instead paraphrased and shortened it to say that if the rights that the entity possessed “are not exclusive,” the applicant should list those “having rights in the invention.” Mr. Haberman testified that Lex indeed possessed the exclusive rights. He stated that non-exclusive licensees do not have “rights in the invention.” He said: “In my opinion, exclusive right is the right to control. And the licensees, by the very terms of the license, have no right to control the invention.” Mr. Haberman, described as a real estate lawyer, drew an analogy to real property law, in explaining that non-exclusive licensees have no “rights in the invention.” He testified:
But analogous to say, for example, real estate. If I license you to use this room for your deposition, I do not give you part of the building. I don’t give you an interest in the building. And if you *1154asked my opinion, that’s the way I understand it. A license is something temporary that you’re given to use. It’s not part of the — you’re not becoming my partner, you do not own part of the patent, you simply have a right, as explained in the patent, to use the art that is taught by the patent.
He testified that Lex was the only entity with “the right to prevent others from making a product that contained or was covered by the claims of the '188 patent.”
Mr. Haberman’s statement of the law of non-exclusive licenses cannot be faulted. A non-exclusive licensee does not have a property interest in the patent. See Spindelfabrik Suessen-Schurr v. Schubert & Salzer, 829 F.2d 1075, 1081 (Fed.Cir.1987) (“a patent license agreement is in essence nothing more than a promise by the li-censor not to sue the licensee”); Gilson v. Republic of Ireland, 787 F.2d 655, 658 (D.C.Cir.1986) (“It is well settled that a non-exclusive licensee of a patent has only a personal and not a property interest in the patent and that this personal right cannot be assigned unless the patent owner authorizes the assignment or the license itself permits assignment.”)
Lex points out that it underpaid the eighth year fee by $935, and the twelfth year fee by $1,580, and that it would not have jeopardized ten million dollars in royalty income for this saving in maintenance fees. Although Ulead argues that the mere fact that Lex saved money establishes both materiality and intent, and that the amount saved is irrelevant, a court need not reject common sense. See The Eliza Lines, 199 U.S. 119, 139, 26 S.Ct. 8, 50 L.Ed. 115 (1905) (Holmes, J.) (rejecting a position as “utterly opposed to common sense”); Stromberger v. 3M Co., 990 F.2d 974, 979 (7th Cir.1993) (“the scheme that Stromberger imputes without evidence to the company would have been Machiavellian, all right, but it would also have been stupid”). Common sense cannot reconcile Ulead’s charge that Haberman deliberately misstated the status of Lex with deceptive intent, jeopardizing millions of dollars in royalties then being paid, for a saving of $935 in the second maintenance fee (exceeded by the late-payment penalty). And if attorney Weiner filed a deliberately false (as contrasted with negligent) statement in order to save his client $1,540 of the third maintenance fee (also exceeded by the late-payment penalty), such behavior is neither rational nor comprehensible.
When the issue is fraud, scienter is essential. See Lord v. Goddard, 54 U.S. 198, 202, 13 How. 198, 14 L.Ed. 111 (1851) (“[T]he action [of fraud] cannot be maintained without showing affirmatively knowledge of its falsity.”) A knowing and intentional misrepresentation must always be present. See, e.g., Knauer v. United States, 328 U.S. 654, 657, 66 S.Ct. 1304, 90 L.Ed. 1500 (1942) (“Fraud connotes perjury, falsification, concealment, misrepresentation.”) Contrary to the position of the panel majority, the history as well as the letter of the small entity fee regulations show that the regulatory intent was to apply the more rigorous law of fraud, not the more readily satisfied standards of inequitable conduct.
Although my colleagues state their recognition that the burden of proof of inequitable conduct is on the challenger, they appear to require Lex affirmatively to prove lack of intent to deceive, for Ulead did not make a prima facie showing of either fraud or inequitable conduct. I also observe that my colleagues presume the materiality prong of inequitable conduct, without discussion or analysis. However, it is a requirement of proof of inequitable conduct that both materiality and intent be *1155established by clear and convincing evidence. The court’s casual treatment of this hard-won precision disserves this jurisprudence.
In further departure from precedent, the panel majority holds, for the first time, that inequitable conduct and ensuing unen-forceability can be based on actions after the patent has issued and unrelated to patentability. This too is contrary to established law, and raises an important principle, for it achieves forfeiture of vested property rights. In Aptix Corp. v. Quickturn Design Systems Inc., 269 F.3d 1369, 1376 (Fed.Cir.2001) the court observed that when the patent had not been procured by inequitable conduct in the PTO, “[n]o case law from the Supreme Court or this court provides a basis for nullifying property rights granted by the United States when such property rights did not themselves accrue through inequitable conduct.” The panel majority now violates this precedent.
The record in promulgating § 1.28(d) shows the intent to avoid the kind of satellite litigation that the panel majority now imports into small entity fee cases. There was administrative and public concern that the small entity rules not become a ground of disproportionate controversy. See Changes in Patent Practice and Procedures, 62 Fed. Reg. 53,132, 53,135 (Oct. 10, 1997). Deference to PTO administration and procedures, required by the Administrative Procedure Act, Dickinson v. Zurko, 527 U.S. 150, 119 S.Ct. 1816, 144 L.Ed.2d 143 (1999), requires that the Director’s rules for acceptance of deficient payments be respected. This court improperly denies that deference when it not only removes the issue from the purview of the PTO Director, but also ignores that in this case the agency procedures were met.
It is a denial of not only precedent and regulation but also of the requisite administrative deference, in now requiring Lex to litigate in the district court the question of whether the Director can accept the deficiency payment. Principles of judicial deference require the presumption that the Director correctly interpreted the governing regulations and acted within his authority. See, e.g., Auer v. Robbins, 519 U.S. 452, 462, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997); Kubota v. Shibuya, 999 F.2d 517, 520-21 (Fed.Cir.1993). The statute, regulations, and requisite agency deference do not accommodate de novo judicial determination of this administrative aspect. As discussed in Hyatt v. Boone, 146 F.3d 1348 (Fed.Cir.1998) “[a]ny technical deficiency in meeting the formal requirements of [a PTO rule concerning streamlined continuations] must be viewed in light of the agency’s acceptance of the applications as in compliance with the Rule. Regularity of routine administrative procedures is presumed, and departure therefrom, should such have occurred, is not grounds of collateral attack.” Id. at 1355.

Conclusion

The regulations implement the recognized concern lest the small entity fee status spawn new grounds of dispute. Thus the regulations provide a simple administrative method of correcting errors in such status. The record reflects various purposes, such as easing the entry of small entities into the patent system without undue risk of technical violation, and the recognition of possible human error. At the time this fee concession was adopted the courts were experiencing the “absolute plague” of charges of inequitable conduct in “almost every major patent case,” perhaps cautioning the regulators about additional fodder for that plague.
*1156The regulations governing correction of a small entity fee underpayment are explicit, and were explicitly met by Lex. From my colleagues departure from regulation, law, and administrative practice, I respectfully dissent.
IV
CROSS APPEAL
I concur in the judgment on the cross appeal.

. Ulead's attorney gave the district court a figure of $25,000 in saved fees for the nine video editing patents, an amount cited by the district court in its opinion. Ulead now concedes that this figure was incorrect, and that the total saving for all nine patents was $14,000.