Non-Competition Agreements: Massachusetts Meets California Halfway

By Thomas Carey. Chair of our Business Practice Group

California has long led the nation in its disdain for noncompetition agreements.  Pressed by venture capitalists who believe that this gives California an advantage over other states, the Massachusetts legislature has finally adopted a statute that curtails, but does not eliminate, noncompetition agreements. It applies whether the person bound by it is an employee or a consultant.

The recently enacted statute contains no grandfather provision that would allow existing noncompetition agreements to remain effective.  Thus, it is time to dust off old agreements to see whether they are still valid and, if not, to determine whether it is possible to amend them to make them enforceable.

Under the new statute, a noncompetition agreement generally must not have a term that exceeds one year and must be supported by continuing consideration such as “garden leave” pay that provides at least 50% of the annualized base salary of the former employee or consultant during the last two years of employment.  The “garden leave” clause allows for “other mutually-agreed upon consideration … specified in the non-competition agreement.”  It is not clear whether non-monetary consideration, such as accelerated vesting of a stock option, might be sufficient.

An employee or consultant who is terminated because of a breach of fiduciary duty or because he/she has unlawfully taken the employer’s physical or electronic property may be subjected to a second year of noncompetition obligation, and that second year need not be supported by garden leave or other consideration.

A noncompetition agreement will not be enforceable if:

• It is not in writing
• It is not signed by the employee or consultant
• It does not advise the employee or consultant of a right to consult with counsel and give that person 10 days to do so
• It is broader than need be to protect trade secrets, confidential information or goodwill of the employer
• It covers an unreasonably broad geographic reach. The region in which the employee or consultant provided services, or had a material presence or influence in the last two years of employment is presumed reasonable
• The employee or consultant is
  • nonexempt under the Federal Fair Labor Standards Act (FLSA), or
  • a student partaking in an internship or short-term employment relationship, or
  • age 18 or younger.
• The employer terminates the employee or consultant without cause or by a layoff.

No provision in the noncompetition agreement choosing the law of another state will be effective if the employee has been a resident of or employed in Massachusetts for at least 30 days immediately preceding his or her termination of employment.

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Revisions to Bayh-Dole Act Regulations Governing Rights to Federally Funded Inventions

By Kathryn Noll. A member of our Patent Practice Group

Rules affecting recipients of federal research and development funding have recently been revised, adding new deadlines and obligations. Changes to the regulations implementing the Bayh-Dole Act went into effect on May 14, 2018. The Bayh-Dole Act governs the rights to inventions made under government grants, contracts, and co-operative agreements, even if the federal government is not the sole source of the funding. The Act applies to funding provided to nonprofit organizations, large and small businesses, and universities.

The final rule that changes the regulations applies to funding agreements that are executed after May 14, 2018.  Existing funding agreements that are subsequently amended may be made subject to the revised regulations at the discretion of the funding agency.

The Bayh-Dole Act and its implementing regulations require the recipients of federal funding, or “contractors”, to take certain actions to properly manage inventions conceived during projects that receive federal funding. The following is a summary of some of the key requirements in the revised regulations and the changes made to them:

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Section 101 Gains a Toehold in IPRs

By W. John Keyes, Ph.D. and Robert Asher. Member of our Patent Practice and Chair of our Patent Office Litigation Practice

August 2018 PTAB Alert

Inter partes reviews (IPR) are limited by statute to grounds of invalidity under 35 U.S.C. §§ 102 (novelty requirement) and 103 (nonobviousness requirement) and on the basis of prior art patents or printed publications.

Other grounds for challenging patent validity, such as insufficient written description or lack of enablement, are unavailable. Also unavailable are challenges under 35 U.S.C. § 101, which excludes abstract ideas, laws of nature and natural phenomena from subject matter eligibility.

Or so we thought, until we read the recent decision in Praxair Distribution, Inc. v. Mallinckrodt Hospital Products IP Ltd. A crack can now be discerned in the prohibition on asserting section 101 issues in IPR proceedings.

Under the “printed matter doctrine,” which has its roots in 35 U.S.C. § 101, claim limitations directed to the content of information were not entitled to patentable weight unless there was a functional relationship to the substrate on which the printed matter was applied. While the printed matter doctrine was originally limited to matter physically printed on substrates like labels and information leaflets, its current reach extends to information stored on electronic media such as databases.

A claim element denied patentable weight is effectively plucked out of the claim when its subject matter is compared to the prior art, so the excluded element can no longer be relied upon to uphold claim patentability under 35 U.S.C. §§ 102 and 103.

In Praxair, the Federal Circuit brought not only the “printed matter doctrine” into play, but further extended the doctrine’s reach to include certain mental steps. As a result, even though 101-based challenges are formally prohibited by the IPR statute, they have now found an expanded role in IPR proceedings.

Patentability of Informing Steps

U.S. Patent 8,846,112 claims methods of distributing nitric oxide gas cylinders for treating neonates with hypoxic respiratory failure. Praxair researchers discovered a side effect of nitric oxide treatment, namely, that in neonates with left ventricular dysfunction, inhaled nitric oxide may lead to pulmonary edema.

In an effort to obtain patent protection for this finding, a number of claims are aimed at distributors that supply medical providers with nitric oxide in combination with a warning against treating a patient with left ventricular dysfunction.

For example, claim 1 includes the steps of:

“supplying […] nitric oxide gas to a medical provider […]” and

“providing to the medical provider

(i) information that a recommended dose of inhaled nitric oxide gas for treatment of neonates with hypoxic respiratory failure is 20 ppm nitric oxide and

(ii) information that, in patients with preexisting left ventricular dysfunction, inhaled nitric oxide may increase pulmonary capillary wedge pressure (PCWP), leading to pulmonary edema,

the information of (ii) being sufficient to cause a medical provider considering inhaled nitric oxide treatment for a plurality of neonatal patients […] to elect to avoid treating one or more of the plurality of patients”

In construing the claims, the PTAB applied the printed matter doctrine, finding that claim limitations directed to the content of information supplied to the medical provider are not entitled to patentable weight.

The CAFC affirmed, citing to precedent establishing that (1) a claimed step of informing someone about an inherent property of a method is printed matter, and (2) merely adding an instruction sheet or other informational content to a drug product is not sufficient to create a functional relationship.

Mental Steps Are Also Not Entitled to Patentable Weight

Importantly, the PTAB expanded the reach of the printed matter doctrine to steps where the printed subject matter is mentally processed. Claim 3 of the patent, for instance, included evaluating steps performed in a medical provider’s mind on the basis of the information supplied in combination with the results of a diagnostic test:

“performing at least one diagnostic process […]

evaluating the potential benefit of treating [a] patient in order to arrive at a decision of whether or not to treat the […] patient […]”

Claim limitations reciting mental steps are not entitled to patentable weight, said the PTAB. The Federal Circuit agreed, stating that the evaluating limitation in claim 3 is directed to a mental step that

is also printed matter […] This limitation merely requires a medical provider to think about the information claimed in the providing information limitation of claim 1. But adding an ineligible mental process to ineligible information still leaves the claim limitation directed to printed matter. To hold otherwise would make the printed matter doctrine a dead letter, requiring no more than a “think about it” step to give patentable weight to a claim limitation directed to information content.

Struggling to preserve the patentable weight of the mental steps, the patent owner objected that whether claims are directed to mental steps may only be considered in determining patent eligibility, not obviousness. The Federal Circuit disagreed, effectively opening the door to eligibility-based challenges in IPR proceedings, at least where mental steps can be defined as the processing of patent-ineligible information.

Though eligibility challenges are not part of IPR proceedings, the customary novelty and obviousness analyses may now be influenced by denying patentable weight to certain types of mental steps based on their subject matter ineligibility.

The Right to Try Act: A New Avenue for Use of Experimental Drugs

By Amy DeCloux, Ph.D.. A Member of our Biotech Patent Practice Group

On May 30, President Trump signed the Right to Try Act.  The Act authorizes the use of experimental drugs without pre-approval or oversight by the Food and Drug Administration. Both the patient and the drug must meet certain qualifications.

The patient must have been diagnosed with a life-threatening condition, have exhausted approved treatment options, have provided to the treating physician written informed consent regarding the drug, and be unable to participate in clinical trials involving the drug.

For the drug to qualify under the Act, it must have completed an FDA phase 1 clinical trial, must not have been approved for use in humans by the FDA as a new drug or as a biologic (e.g., virus, toxin, vaccine, blood component), and be the subject of ongoing development and investigation.  In addition, production of the drug must not have been discontinued by the manufacturer.

The drug need not be used to treat the condition to which the FDA phase 1 clinical trial was directed.  The Act protects the sponsor or manufacturer against any liability with respect to treatment with the drug, and insulates the prescriber or dispenser against liability absent reckless or willful misconduct, gross negligence, or an intentional tort.  Manufacturers and sponsors are also exempt from liability for not providing drugs under the Act.

The Act exempts the manufacturer or sponsor from having to obtain initial approval from an FDA-designated Institutional Review Board to use the drug in the treatment of humans.  The use of a drug under the Act will not be monitored periodically by the FDA as is the case under new drug applications. Outcomes of use under the Act will generally not be used by the FDA in evaluating the drug’s new drug application unless the sponsor requests such use.

The manufacturer or sponsor must provide the FDA with an annual summary describing the use of the drug under the Act, reporting the number of doses supplied, the number of patients treated, the uses for which the drug was made available, and any known serious adverse events.

The manufacturer or sponsor is exempted from the need to comply with several of the FDA requirements for labeling the packaging of FDA-approved drugs. However, as with investigational new drug applications, the Act requires that the packaging of the drug state: “Caution: New Drug – Limited by Federal (or United States) law to investigational use.” The packaging must not represent that the drug is safe or effective for the purposes for which it is being investigated.

Neither the sponsor nor the investigator of the drug can promote the drug as safe or effective.  Further, a sponsor cannot unduly prolong an investigation after finding that the results of the investigation appear to establish sufficient data to support a marketing application.

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In Limited Circumstances, the Supreme Court Permits Businesses to Recover Patent Damages for Sales Made Outside the U.S.

By Lawrence Green. A member of our Patent Practice Group

The Supreme Court recently answered the question whether a patent owner can collect damages caused by an infringer’s sales outside the U.S.  Federal law typically reaches only conduct within the country, but the justices made an exception for a section of the Patent Act that makes it an act of infringement to supply U.S.-made components of an invention to be combined overseas in an infringing device. The Court held that lost profits are available from foreign sales if the patent owner proves such infringement.

The defendant in WesternGeco LLC v. ION Geophysical Corp. made components of its ocean-surveying products in the U.S. and shipped them abroad where they were assembled into an infringing product. All of ION’s profits from the infringing products arose from sales outside the United States.

The Court was careful to state that its holding was based on the patent statute at issue, 35 U.S.C. § 271(f)(2), which labels as infringing the shipping of components from the U.S. to be combined abroad.  This statute was enacted after the 1972 Supreme Court decision in Deep South Packing Co. v. Laitram Corp., in which the defendant was exporting components made in the U.S. for assembly in Brazil of a shrimp deveiner.

The Deep South patentee held so-called combination patents covering certain portions of the fully assembled deveiner, but had no patents covering the components.  The Supreme Court held that merchandise protected by a combination patent is “made”– and thus liable to be found infringing–only when it is fully assembled in the U.S. Because assembly of the deveiner occurred outside the U.S., the defendant was not liable for infringement under the statute as it then stood.  The Court suggested that only Congress, if it so chose, could close this loophole in the patent statute. Congress accepted this invitation and passed what now has become § 271(f)(2) of the Patent Act.

In the WesternGeco decision, the Court stated the established presumption that federal statutes “apply only within the territorial jurisdiction of the United States.”  Under the two-step framework for deciding whether this presumption should be overridden, a court first asks whether the text of the statute provides a “clear indication of an extraterritorial application.”  If it does not, the second step asks whether the case involves a domestic application of the statute.  Courts make this determination by identifying “the statute’s focus” and asking whether the conduct relevant to that focus occurred in the United States territory.  If it did, the case involves a permissible domestic application of the statute.

The Court skipped the first step, concerned that “resolving that question could implicate many other statutes besides the Patent Act.” Under the second step, the Court concluded that the statutory focus of Section 271(f)(2) is domestic. The statute provides that a company shall be liable as an infringer if it supplies certain components of a patented invention in or from the United States with the intent that they be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States.

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New Guidance for Patenting Method-of-Treatment Inventions

By Alexander Smolenski, Jr.. A member of our Patent Practice Group

The U.S. Patent and Trademark Office (USPTO) issued a memorandum on June 7 (the “Memorandum”), providing much-needed guidance to patent examiners as to whether method of treatment claims are to be considered patent-eligible subject matter under 35 U.S.C. §101.  Guided by the recent Federal Circuit  decision in Vanda Pharmaceuticals Inc. v. West-Ward Pharmaceuticals, the Memorandum explains that a method-of-treatment claim that practically applies natural relationships, as opposed to being directed to them (e.g., diagnostic steps aimed at gathering data about natural relationships), may be considered patentable subject matter.  The Memorandum provides a level of clarity for the life sciences industry, which has struggled with subject matter eligibility before the USPTO and the distinction between diagnostic and therapeutic claims.

At issue in Vanda were claims of a patent directed to a method of treating schizophrenia patients with iloperidone.^[i]  Iloperidone is a drug known to cause QTc prolongation (a disruption of the heart’s normal rhythm that can lead to serious health problems) in patients having a particular genotype associated with poor drug metabolism.

The claims of the patent include a diagnostic step of determining if a patient has the genotype associated with poor drug metabolism, followed by administering a quantity of the iloperidone based on the determination in order to treat a particular disease.  If the patient is found to have the genotype associated with poor drug metabolism, a smaller quantity of the iloperidone would be administered.

In Vanda, West-Ward challenged the claims of the patent as being directed to a natural relationship and thus covering unpatentable subject matter.  While § 101 of the Patent Act contains broad language regarding patent eligibility, the Supreme Court has long recognized important implicit exceptions for laws of nature, natural phenomena, and abstract ideas, which are not patentable.

The Federal Circuit panel in Vanda held that the claims at issue were patent eligible under § 101 because they are not directed to one of the judicial exceptions.  In doing so, the court applied the “two-step rule”  that has its roots in the Supreme Court’s 2012 decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc,  and its 2014 decision in Alice Corp. Pty. v. CLS Bank Int’l. Under step 1, a court determines whether the claims at issue are directed to a patent-ineligible concept.

If they are, then under step 2, the court searches for an inventive concept by considering elements of each claim both individually and as an ordered combination to determine whether they contain additional elements that transform the nature of the claim into a patent-eligible application.   In determining whether the claim contains such transformative elements, the court asks whether the claims contain matter beyond what is well-understood, routine and conventional. More...

^[i] A representative claim of the patent at issue in Vanda reads as follows:

1. A method for treating a patient with iloperidone, wherein the patient is suffering from schizophrenia, the method comprising the steps of:

determining whether the patient is a CYP2D6 poor metabolizer by: obtaining or having obtained a biological sample from the patient; and performing or having performed a genotyping assay on the biological sample to determine if the patient has a CYP2D6 poor metabolizer genotype; and
if the patient has a CYP2D6 poor metabolizer genotype, then internally administering iloperidone to the patient in an amount of 12 mg/day or less, and if the patient does not have a CYP2D6 poor metabolizer genotype, then internally administering iloperidone to the patient in an amount that is greater than 12 mg/day, up to 24 mg/day, wherein a risk of QTc prolongation for a patient having a CYP2D6 poor metabolizer genotype is lower following the internal administration of 12 mg/day or less than it would be if the iloperidone were administered in an amount of greater than 12 mg/day, up to 24 mg/day.

^[ii] A representative claim at issue in Mayo reads as follows:

1. A method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder, comprising:
(a) administering a drug providing 6-thioguanine to a subject having said immune-mediated gastrointestinal disorder; and
(b) determining the level of 6-thioguanine in said subject having said immune-mediated gastrointestinal disorder,
wherein the level of 6-thioguanine less than about 230 pmol per 8×108 red blood cells indicates a need to increase the amount of said drug subsequently administered to said subject and wherein the level of 6-thioguanine greater than about 400 pmol per 8×108 red blood cells indicates a need to decrease the amount of said drug subsequently administered to said subject.

PTAB Proceedings Becoming More Indefinite

By Robert Asher. Chair of our Patent Office Litigation Group

Last month, I argued that indefinite claims would become more vulnerable to inter partes review (IPR) after the SAS Institutedecision. Days later, the USPTO confused matters by issuing a Notice of Proposed Rulemaking, calling for a change in the claim construction standard that will benefit all patent owners. Instead of the broadest reasonable interpretation, the PTAB is on the verge of moving to the narrower Phillips standard used by federal courts.

Several years ago before inter partes reviews had gone into effect, I wrote Inter Partes Review: The New Markman Hearing? Favoring a single standard for claim construction in the courts and the PTO, I wrote “A unitary approach to claim construction of issued U.S. patents should create greater certainty and enhance confidence in the judicial system.” The article envisioned the PTAB taking the lead on claim construction. It appears that this day is about to arrive.

While a unified approach to claim construction will have its benefits, questions abound when it comes to indefinite claims, in particular, means-plus-function claims which lack a sufficient showing of corresponding structure in the specification. Courts are well equipped to deal with indefinite claims. If a court cannot construe a claim, it can declare the claim invalid for indefiniteness. But the PTAB is different. The Supreme Court has noted that “canceling a patent claim for ‘indefiniteness under §112’ in inter partes review” is outside the statutory limits of the PTAB. Cuozzo Speed Technologies, LLC v. Lee, 1316 S.Ct. 2131, 2141-2142 (2016). Thus constrained, how will the PTAB address indefinite claims?

To date, the PTAB has simply refused to institute challenges made against claims considered indefinite. But now, in view of SAS Institute, if the PTAB institutes an IPR, it will necessarily address all grounds and claims raised in the petition.

As to indefinite claims, uncertainty will reign until the PTAB adopts a uniform approach. To continue its practice of refusing to institute challenges against indefinite claims would be a drastic approach, because in the aftermath of SAS Institute it mean dismissal of the entire petition.

While denying institution might be palatable when the indefiniteness permeates a large portion of the challenged claims, when the indefinite claims make up only a small portion of the claims, such an approach will be quite disturbing to petitioners.

A better approach would have the PTAB devise a method for construing indefinite claims under the guise of Phillips construction. The courts have not established a controlling claim construction method for claims deserving to be adjudged invalid for indefiniteness. So the PTAB should be free to proceed on a clean slate. Without clear guidance from the claim language or the specification, a broad construction can be expected to flow naturally.

For example, a means-plus-function claim element lacking corresponding structure in the specification could encompass any structures that perform the recited function. The patent owner would then be faced with a broad construction that may subject the claim to a strong prior art challenge. Patent owners may need to resort to a motion to amend the claim to distinguish it over the prior art and make it acceptably definite. Petitioners will need to weigh whether the possibility of amendment is more of a concern than the cost and uncertainty of mounting an indefiniteness challenge in federal court.

The PTAB Notice states that according to Phillips a claim is construed to preserve its validity if “after applying all the available tools of claim construction, that the claim is still ambiguous.” On the other hand, the Notice continues, “the Federal Circuit ‘repeatedly and consistently has recognized that courts may not redraft claims, whether to make them operable or to sustain their validity.’” Moreover, even district courts will strike down indefinite claims rather than construing them to preserve their validity.

While it is possible the PTAB could use Phillips to find indefinite claims valid, such a result would be too incongruous to become an established practice. More likely, the PTAB will seek to operate in a manner consistent with the overall intent of the patent statutes. It should find a way to construe indefinite claims broadly so that they can be invalidated or amended. If the PTAB instead finds itself compelled to give a helping hand to indefinite claims that should otherwise be invalidated, the legislature may need to bail it out with a statutory change to allow indefiniteness to be asserted in IPR petitions.

The Notice is especially harsh in that it proposes to apply Phillips construction retroactively to all pending IPR proceedings. The PTAB believes that a change in claim construction standard will not impact the construction of most claims. Nevertheless, if retroactive effect is given to this change it would create enormous turmoil in hundreds of pending IPR proceedings, to the dismay of many petitioners. Comments concerning the proposed new rule are being solicited through July 9. Stay tuned.