States Are Cracking Down on Cybersecurity Laggards

By Thomas Carey. Chair of our Business Practice Group

On May 23, the attorneys general of 47 states and the District of Columbia reached a settlement with Target Corporation of enforcement actions brought after a 2013 breach of the retail chain’s computer system.  That breach famously compromised credit and debit card information of 40 million customers.

The headline that most commonly came out of this settlement is that Target agreed to pay $18.5 million to the states.  This article is not about that penalty, because the more far-reaching aspect is the detailed obligations to ensure security that the state AGs have imposed upon Target.

To a degree, these measures resemble the requirements recently imposed on banks, insurance companies and brokerage houses by the New York Department of Financial Services.  Taken together, the Target settlement and the New York regulations reflect a growing expectation among the states that companies take strong measures to safeguard their data and that of their customers.

Both the settlement and the regulations require the adoption of a formal information-security program that details administrative, technical and physical safeguards.  While the Target settlement is directed to data regarding consumers and their credit cards, the New York regulations require financial institutions to protect all non-public information.  This would include, for example, customer lists, vendor lists, computer source code and unpublished patent applications.

Both the settlement and the regulations require the appointment of an executive experienced in information security.  That officer must advise both the CEO and the board of directors about the company’s security posture and risks.  The regulations, more specifically, require this information security officer to report at least annually to the board of directors, including details of successful or unsuccessful efforts to gain unauthorized access to the company’s systems.

The settlement goes further than the New York regulations in requiring Target to scan and map the connections between its cardholder data environment (CDE) and the rest of its computer network and to segregate the CDE from the other parts of the network. To do so, Target must restrict or disable all unnecessary network programs that provide access to the CDE.

In addition, the settlement requires Target to deploy a file-integrity monitoring system that notifies personnel of unauthorized modifications to critical applications or to operating system files within the CDE.

Both the settlement and the New York regulations require an evaluation of the cybersecurity measures of vendors to ensure they comply with the company’s cybersecurity policy.  The regulations limit this scrutiny to those vendors that maintain, process, or otherwise are permitted access to the company’s nonpublic information. Presumably, the settlement is meant to be limited in the same fashion, but its language is not clear on this point.  The New York regulations pertaining to vendors do not go into effect until March 1, 2019. More...

The On-Sale Bar Remains A Mighty Obstacle to Patentability, Even If The Sale Involves No Public Disclosure of the Invention

By Dorothy Wu Chiang. A member of our Patent Practice Group

In passing the America Invents Act (the “AIA”) in 2011, Congress changed the statutory language concerning the “on-sale bar.”  The bar prevents a party from patenting an invention that has been sold or offered for sale more than one year before the application date. The AIA added the phrase “or otherwise available to the public” to the statute. On its face, the phrase could be seen to impose a new requirement – public disclosure of the technology – in order for the on-sale bar to make a patent unavailable, but the Federal Circuit Court of Appeals recently ruled in Helsinn v. Teva Pharmaceuticals that despite the new language, the on-sale bar continues to apply to sales that do not involve a disclosure of the invention.

Helsinn owned four patents covering intravenous formulations of palonosetron that reduce the impact or likelihood of chemotherapy-induced nausea and vomiting. Because palonosetron was already known in the art, the novel feature of the patents was the unexpectedly low dosage, 0.25mg, of this substance. Because all four patents claimed priority to the same provisional application, they had the same effective filing date of January 30, 2003. However, three patents were subject to pre-AIA patent law, whereas the fourth was subject to the AIA.

In April 2001, Helsinn signed two agreements with MGI Pharma, Inc., which markets and distributes pharmaceuticals. The license required an initial $11M payment and set a future royalty on distributed products. Because Helsinn was still conducting its Phase III trials, the agreements could be terminated if the product failed to gain FDA approval. The companies issued a joint press release regarding the deals, and MGI submitted redacted copies of the agreements, which kept the dosage and agreed prices secret, in its Form 8-K filing with the Securities and Exchange Commission.

Helsinn received FDA approval for its product in July 2003 and filed its patent applications thereafter. In 2011, Teva filed an Abbreviated New Drug Application with the FDA to pursue a generic version of Helsinn’s drug, whereupon Helsinn sued for infringement.

The trial court ruled that the supply and purchase agreement was a contract for future sales under pre-AIA law, which rendered three of the four patents invalid due to the on-sale bar. However, the court interpreted the phrase “or otherwise available to the public” to imply that, in order for the on-sale bar to apply under the AIA, the offeror must have publicly disclosed the claimed features of the patented subject matter. Because MGI had redacted the dosage from agreements submitted with its Form 8-K filing, the sale was not “public” and could not invalidate Helsinn’s last patent. More...

Why China Should Top Your List of Countries for Foreign Patent Filing

By Bruce Sunstein. A member of our Patent Practice Group

China’s revamped patent system and its giant economy have now put China front and center on the patent map—even though, until recently, China was an intellectual property backwater, off of most radar screens as a place for filing patents.

This picture has changed. In 2015, more than 1 million patent applications were filed in China,[i] whereas the 2015 total for patent filings in the United States was fewer than 600,000.[ii] In 2015, China issued 359,316 patents,[iii] whereas the US issued 298,407 utility patents.[iv] In that same year the Chinese courts accepted more than 109,000 new IP cases, of which 11,607 were civil patent cases.[v] By contrast, 5,830 patent litigations were launched in the U.S.[vi]

In 2014, China established specialized IP courts in Beijing, Shanghai and Guangzhou.[vii] Chinese courts issue injunctions over 99% of the time to the winning parties,[viii] whereas in the United States, the Supreme Court’s 2006 eBay decision[ix] has reduced the rate at which injunctive relief is granted to less than 75%.[x] In Beijing IP court patent litigations, foreign plaintiffs have won about 81% of the time, a success rate that is similar to that of domestic plaintiffs.[xi] In addition to the ready availability of injunctive relief, the prospect of serious damages is now real in China.  The Beijing IP court awarded $7.2 million in December 2016 to Watchdata Data Systems Co. Ltd. in an infringement action brought against Hengbao Co. Ltd. [xii]

China’s new focus on intellectual property protection is not altruistic, but is motivated by China’s desire to foster the advancement of its science and technology.  Nonetheless, this emphasis has also benefited foreign companies.[xiii]

Moreover, the size of China’s economy and its role as a major exporter of goods make China’s patent system even more important. By some measures, China’s current gross domestic product (GDP) has reached approximately $11 trillion. (Other measures make it even larger.) China’s economy stands second only to that of the United States, with a GDP of about $19 trillion. By comparison, the GDP of the entire European Union, made up of approximately 28 member countries, stands at approximately $16 trillion. More...

[i] See Wayne Sobon, “The surprising rise of China as IP powerhouse,” Tech Crunch, posted April 11, 2017, available at https://techcrunch.com/2017/04/11/the-surprising-rise-of-china-as-ip-powerhouse/; WIPO Press Release November 23, 2016, available at http://www.wipo.int/pressroom/en/articles/2016/article_0017.html

[ii] Sobon, id., and USPTO statistics available at https://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm.

[iii] WIPO, id.

[iv] USPTO, id.

[v] Sobon, id.; Eugene Low, Skip Fisher and Deanna Wong, Hogan Lovells, “The big picture on IP litigation in China,” LimeGreen IP News, posted May 27, 2016, available at http://www.limegreenipnews.com/2016/05/the-big-picture-on-ip-litigation-in-china/.

[vi] Sobon, id.; Lex Machina 2015 End-of-Year Trends, available at https://lexmachina.com/lex-machina-2015-end-of-year-trends/

[vii] Erick Robinson, “Defending a patent case in the brave new world of Chinese patent litigation,” Intellectual Asset Management (issue 81) January/February 2017, page 9.

[viii] Robinson, id.

[ix] eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

[x] Christopher Seaman, “Permanent Injunctions in Patent Litigation After eBay:  An Empirical Study”, 101 Iowa L. Rev. 1949, 1982 (2016), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2632834

[xi] Sobon, id.; see also Robinson, id.

[xii] Matthew Bultman, “China Becoming More Attractive For Foreign Patent Owners,” Law360, April 19, 2017, available at https://www.law360.com/articles/914779/print?section=ip.

[xiii] Robinson, id.; Bultman, id.

Settlement Agreements Can Provide a Yardstick for Measuring Damages in Subsequent Patent Infringement Lawsuits

By Kerry Timbers. Co-Chair of our Litigation Practice Group

It’s easy to state that a patentee who proves infringement is entitled to recover from the infringer no less than a reasonable royalty.  It’s a lot harder to determine how to quantify these “reasonable royalty” damages.  In Prism Tech. v. Sprint Spectrum, L.P., the Federal Circuit says that, in many circumstances, judges and juries can rely on prior settlement agreement licenses as a guide to deciding these damages.

Sprint was found to infringe patents owned by Prism that involve managing access to protected information provided over “untrusted” networks. Sprint pointed to several low-rate Prism settlements in arguing for a low royalty rate, but sought to exclude a significantly higher-rate 2012 Prism settlement with AT&T.  The trial court denied Sprint’s request and allowed consideration of all the settlement agreements, and a Nebraska jury awarded Prism $30 million in reasonable royalty damages.

Prior guidance from the Federal Circuit had been murky at best:  A settlement agreement license was considered good evidence of a reasonable royalty “sometimes. . . and sometimes not.”  Without more to go on, district courts were left to view settlements through their own lens in deciding whether to allow them to be considered.

In Prism, the Federal Circuit affirmed the use of the AT&T settlement license and identified  factors which weigh in favor of using a prior settlement agreement to measure a reasonable royalty, including:

• the technology is the same or comparable
• the uses of the technology by the earlier licensee and the current infringer are comparable
• no significant market changes have transpired between the time of the settlement and the relevant time for determining the royalty
• where several patents or technologies are involved, the settlement agreement itself identifies the parties’ assessment of value of the patent or technology at issue
• in the earlier settlement, the licensee was not at risk for enhanced damages (which might artificially increase the settlement amount)
• the settlement was completed when the litigation was far along (indicating both that the parties are well informed, and that avoiding future litigation costs is not a primary motivation for settlement)

The Federal Circuit  noted that Prism had adequately demonstrated the comparability of the AT&T settlement license and the royalty rate to be assessed against Sprint.  Prism introduced expert testimony to support several of these factors, including the comparability of the technology, Sprint’s and AT&T’s uses of the patented technology, and the lesser uses made by licensees in the lower-rate settlements. More...

The Federal Circuit Limits the Scope of Covered Business Method Proceedings

By Bruce Sunstein. A member of our Patent Practice Group

The America Invents Act (AIA), signed into law in 2011, gave birth to a variety of post-grant proceedings by which patents can be attacked after issuance in the Patent and Trademark Office (PTO).  For example, the AIA permits a challenger to request an inter partes review (IPR), in which the only question is whether previously ignored prior art should invalidate the issued patent.   In the case of financial services patents, a challenger can request a covered business method (CBM) review, in which the challenger can raise any argument that would have been a basis for denying the patent in the first place.

These proceedings load the dice against the patent owner. As of the end of March 2017, a total of 6700 petitions had been filed for these types of proceedings, of which 6139 (92%) were IPRs and 510 (7%) were for CBMs. About 65% of the IPRs that resulted in final written decisions invalidated all claims of the patent.  For CBM review, this figure exceeds 80%.

Secure Axcess, LLC v. PNC Bank National Association, decided February 21, 2017, was a CBM review in which the Patent Trial and Appeal Board (PTAB) invalidated all the claims for obviousness. Although the Federal Circuit affirms PTAB decisions in post-grant proceedings 77% of the time, in this case the Federal Circuit reversed, vacating the invalidation, and therefore revived the Secure Axcess patent, ending the case then and there without a remand.

The Secure Axcess patent concerned computer security with a focus on authenticating a web page. The patent’s description referenced a bank, and for that reason, among others, the PTAB concluded that the patent should be subject to CBM review because it concerned “the practice, administration, or management of a financial product or service” called out by the statute. The PTAB noted that all of the defendants sued by Secure Axcess in litigation involving this patent were banks and that “‘customer interfaces’ and ‘Web site management and functionality,’” which were covered by the patent, were “ancillary activities. . . of a financial product or service.” More...

We’re Not in Texas Anymore: Supreme Court Drastically Limits Where You Can Sue for Patent Infringement

By Brandon Scruggs. A member of our Litigation Practice Group

The Supreme Court’s recent decision in TC Heartland v. Kraft Foods dramatically restricts where patent lawsuits can be brought.  Previously, a patent owner could sue an accused infringer in any district where the infringer was subject to personal jurisdiction, which often meant anywhere that products accused of infringement were sold.  For products sold nationwide, this led to lawsuits in odd places – courts that offered tactical advantages to plaintiffs but were often thousands of miles from either party.

Now, the Supreme Court has ensured that patent litigation plaintiffs can sue domestic corporate defendants only in either: 1) the defendant’s state of incorporation; or 2) where the defendant has committed acts of infringement and has a regular and established place of business.  This sea change in the patent litigation landscape tilts the balance in favor of defendants.

For over twenty years, many patent owners filed infringement lawsuits in perceived pro-patent jurisdictions that often have few ties to either the patent owner or the accused infringer.  For example, the Eastern District of Texas (in rural areas like Marshall and Tyler) and the Eastern District of Virginia (home of the “rocket docket”) became popular venues for patent infringement because of shorter time-to-trial schedules, higher patent-owner success rates, and trends towards higher damage awards.^[1]

For similar reasons, many patent owners have also filed patent lawsuits in the Western District of Wisconsin (in Madison) and the Middle District of Florida (with courthouses in Tampa and Orlando).  Defendants often hated those forums because the tactical advantages for patent owners are usually tactical disadvantages for accused infringers.  And plaintiffs’ choice of those forums often forced defendants to litigate cases in inconvenient places thousands of miles from home.

The longtime enabler of forum-shopping had been the Federal Circuit, the court that hears all appeals from patent decisions in the trial courts.  In its 1990 decision in VE Holding, the court interpreted a patent-specific venue statute, 28 U.S.C. § 1400(b), in conjunction with a general venue statute, 28 U.S.C. § 1391(c).

The patent-specific statute states that a patent infringement lawsuit can be brought in the district where the defendant either (a) resides or (b) has committed acts of infringement and has a regular and established place of business.  The general venue statute states that a corporate defendant will be deemed to reside anywhere it is subject to personal jurisdiction for the lawsuit in question.  In combination, the Federal Circuit interpreted the two venue statutes to allow patent owners to sue accused infringers in any district where the infringer was subject to personal jurisdiction.

In coming to this conclusion, the Federal Circuit disregarded an authoritative precedent.  In Fourco Glass (1957), the Supreme Court had held that the general venue statute did not apply to patent cases and that, for purposes of the patent venue statute, a domestic corporation “resides” only in its state of incorporation.  The Federal Circuit brushed aside Fourco by reasoning that later amendments to the general venue statute rendered the Supreme Court’s interpretation irrelevant. More...

^[1]See, e.g., PricewaterhouseCooper’s 2017 Patent Litigation Study, at 22-23, available at https://www.pwc.com/us/en/forensic-services/publications/patent-litigation-study.html

“Anyone Could’ve Come Up with That Invention.” Oh, Really. Prove It!

By Jonathan DeBlois. A member of our Litigation Practice Group

Not every great discovery can become a patent.  Many useful innovations, like DNA sequences, simply cannot be patented, because they are natural phenomena.  Yet others may be rejected because they are anticipated by previous inventions or for other reasons recognized by law. On the other hand, countless famously terrible ideas, like the sheep treadmill and jet-powered surfboard, actually were patented.

To be patentable an invention must satisfy several requirements.  One of the most significant is that the invention cannot be obvious in light of existing inventions.  This requirement is so important that even an issued patent can be found invalid (hence unenforceable) if the invention is deemed obvious.

Naturally, many people accused of patent infringement contend that the asserted invention was obvious.  Anyone making this argument must first show that all elements of the patented invention were present in existing inventions, and second point to a motivation to combine those elements.

The second part of the obviousness test requires that the challenger show that someone skilled in the art would have been motivated to combine the prior-art references to produce the claimed invention with a reasonable expectation of success.  In other words, the accused infringer must explain that this hypothetical skilled person would have recognized elements of the asserted invention in prior references and been motivated to combine them to create the same invention.

Although this test is at least a decade old, its second part (why someone would have been motivated to make the combination) is often overlooked. As an example of an insufficient obviousness defense, if I was arguing that the jet-powered surfboard was obvious, I might point out that surfboards already existed, and jet engines already existed, therefore a jet-powered surfboard is an obvious combination.  Notice how I left out any explanation of why those existing parts would have been combined?  Skipping that last step is not allowed.  More...