The First Circuit Allows a Chapter 11 Debtor to Terminate A Trademark License

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

By filing for chapter 11 bankruptcy, a financially distressed company may take advantage of special ways to turn itself around and reorganize instead of liquidating its assets and going out of business. The chapter 11 debtor may, for example, petition a bankruptcy court for relief from those contracts that it deems undesirable  (known as “rejecting” a contract).

In theory, freeing a company from unwanted commitments allows the debtor to devote its time to more profitable pursuits that will enable it to regroup quickly. However, bankruptcy law does not completely shortchange the debtor’s business partners; they may still sue for breach of contract and recover monetary damages, although recovery is often limited to a small residue of assets.

However, when a debtor seeks to reject a license of “intellectual property,” as that term is defined in the bankruptcy code[i], the licensee may opt to retain the granted rights.

Trademarks are absent from the bankruptcy code’s definition of intellectual property.  The legislative history of the statute is unclear as to whether Congress intended to leave trademark licenses vulnerable to rejection.  As a result, the effect of a chapter 11 debtor’s attempt to reject a trademark license remains uncertain, with different courts reaching different conclusions.

The First Circuit Court of Appeals recently held that chapter 11 debtors may reject trademark licenses. In re Tempnology concerns an insolvent company that made products (e.g., towels, socks, headbands) that remained at low temperatures when used during exercise.  Tempnology had granted Mission Products, a marketing and distribution company, exclusive marketing and distribution rights to a group of its products and an accompanying license to use Tempnology’s trademark and logo.

The trademark agreement, in typical fashion, explicitly forbade Mission Products from using Tempnology’s trademarks inaccurately or disparagingly, and Tempnology retained the right to review and approve all of Mission Products’ use of its trademarks.

When Tempnology’s business faltered, the company filed for chapter 11 protection in bankruptcy court in Massachusetts. Attributing its dim financial outlook to Mission Products’ poor marketing efforts, Tempnology asked for court permission to reject its agreements with Mission Products.

Mission Products responded that the bankruptcy code protected both its distribution agreement and its trademark license as intellectual property licenses, leaving both in force. The bankruptcy court dismissed this characterization, concluding the distribution rights were not protectable as intellectual property rights; and that because the bankruptcy code’s definition of “intellectual property” does not include trademarks, the Tempnology trademark license was not shielded from rejection.

[i]  The term “intellectual property” means—

(A) trade secret;

(B) invention, process, design, or plant ..,

(C) patent application;

(D) plant variety;

(E) work of authorship …; or

(F) mask work …
to the extent protected by applicable nonbankruptcy law.

11 USC § 35A

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For Want of an Immediate Assignment of Patent Interests, Enforcement Rights Were Lost

By Christopher Lacenere, Ph.D.. A member of our Patent Practice Group

Employers, look over the language of your employment agreements.  It can be critical in determining who owns an employee’s inventions. “I hereby assign all inventions” may provide an employer with immediate ownership, but “I will assign all inventions” may fail the employer if the inventor does not execute a later assignment.

This fate befell the supposed patent owner in a recent case before the Federal Circuit, Advanced Video Technologies LLC v. HTC Corporation. Advanced Video Technologies’ (AVT’s) patent infringement suit was dismissed for lack of standing because a co-owner of U.S. Patent No. 5,781,788 was not a party to the suit.  To have standing in a patent infringement suit, either all of the inventors must be party to the suit or the plaintiff must be the assignee of each inventor’s rights.  Here, one of the inventor’s interests in the ’788 patent had not been assigned to AVT.

The controversy dates back to 1995 when the parent application to the ’788 patent was filed and two of the three inventors assigned their interests to AVC Technology Inc. (“AVC”), while the third, Vivian Hsiun, refused.  AVC believed it had acquired ownership of the parent application through a series of transfers that ultimately began with an invention made at company called Infochips.

In 2015, AVT acquired any patent rights held by AVC and filed three patent infringement lawsuits against HTC Corporation and others.  AVT argued that three provisions of Ms. Hsiun’s employment agreement entitled it to her interests: a “will assign” provision, a trust provision, and a quitclaim provision. These terms read as follows (emphases added):

I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and will assign to the Company all my right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company.

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Divided Patent Infringement: The Federal Circuit Doubles Down on a New Standard

By Lawrence Green. A member of our Patent Practice Group

For over a decade, the courts have wrestled with the issue of “divided infringement,” where multiple parties share infringement by performing different steps of a method claim.  At various times, the requirements for proving divided infringement have been tightened, loosened and retightened, in part because of a decision by the U.S. Supreme Court.

In the most recent installment of this ongoing saga, the Federal Circuit now seems to have loosened the requirements for establishing divided infringement by no longer requiring that all of the steps in such method claims be performed by one central actor and by other parties who are controlled by that actor or are under some legal obligation to him.

The most recent chapter in this saga is set forth in Travel Sentry, Inc. v. David A Tropp, decided by a panel of the Federal Circuit on December 19, 2017.  The claims at issue are directed to methods of improving airline luggage inspection through the use of dual-access locks.  Claim 1 of the Tropp patent includes four steps, two of which are admittedly performed by the alleged infringer, Travel Sentry, while the last two steps are performed by a luggage screening entity.

Travel Sentry entered into a memorandum of understanding (MOU) with the Transportation and Security Administration (TSA), which screens airport luggage. The MOU sets forth certain responsibilities of both parties, but does not establish any kind of agency relationship, or other type of legal relationship, between the parties.

The district court held on summary judgment that Travel Sentry could be held liable as a direct infringer only if it controls the TSA’s performance of the last two claim steps.  The district court determined that there was no evidence at all that would morph the MOU into a contract that renders Travel Sentry vicariously liable for the TSA’s actions.  The district court stated that the MOU does not subject the TSA to any concrete or enforceable obligations, expressly absolves the TSA of liability, does not provide for any consequences for a failure to comply with the terms of the MOU, and can be unilaterally terminated by either party.

The district court found these facts to be analogous to those in a previous Federal Circuit decision, Muniauction, Inc. v. Thomson Corp., which held that a defendant is not liable for direct infringement when it merely controls access to its system and instructs third parties on its use.  The district court went on to hold that in the absence of a showing that any entity has directly infringed Tropp’s patents, any claim against Travel Sentry for indirect infringement fails as a matter of law because under the prevailing law, liability for indirect infringement can arise only in the presence of direct infringement.

This litigation paralleled and was intertwined with the extensive litigation in Akamai Technologies, Inc. v. Limelight Networks, Inc., in which very similar issues were raised.  We reported on that case in January 2011 and again in June 2014.

In January 2011, we reported that “mere directions or instructions to another entity – absent a legal obligation of that entity to perform the steps – is insufficient to establish infringement of a split claim.” In June 2014, we reported that the Supreme Court held in that “there is no infringement, direct or by inducement, unless one party performs every step of the method, either itself or through control of another, such as by contract.”  However, the Court declined to review the merits of Muniauction and its standard for direct infringement, stating that “on remand the Federal Circuit will have the opportunity to revisit” the direct infringement question “if it so chooses.” More...

The Federal Circuit Continues to Uphold Some Software Patents Despite Alice

By Bruce Sunstein. A member of our Patent Practice Group

The Federal Circuit has added another decision to a series of recent decisions (reported here last month) making it less difficult to overcome challenges to software patents, although the Supreme Court’s 2014 decision in Alice v. CLS Bank remains an obstacle to patenting many computer-implemented inventions.

In Alice, the Supreme Court adopted a two-step process for evaluating patent eligibility.  Under step one, a court is to determine whether the claims at issue are directed to an abstract idea.  If so, under step two, the court will next “examine the elements of the claim to determine whether it contains an ‘inventive concept’ sufficient to ‘transform’ the claimed abstract idea into a patent-eligible application.”

In Aatrix Software, Inc. v. Green Shades Software, Inc., decided February 14, 2018, the Federal Circuit reversed a trial court’s patent invalidity determination based on Alice. The case involved a pair of patents directed to systems and methods for designing, creating, and importing data into a viewable form on a computer so that a user can manipulate the form data and create viewable forms and reports.

These patents described and claimed a data processing system having three main components: a form file (to model the physical characteristics of an existing form), a data file (to allow data from third-party applications to be “seamlessly imported” into the form file program to populate the form fields), and a viewer (to generate a report by merging the data in the data file with the fields in the form file, performing calculations on the data, and allowing the user to review and change the field values).

The trial court had ruled, on a motion to dismiss the patent owner’s complaint, that claim 1 of one of the patents was not directed to any tangible embodiment and so not directed to eligible subject matter.  It also ruled that the other claims, under Alice step one, were directed to the abstract idea of “collecting, organizing, and performing calculations on data to fill out forms: a fundamental human activity that can be performed using a pen and paper.” Moreover, under Alice step two, the trial court found that the claim elements do not supply an inventive concept.

In response to this ruling, Aatrix asked permission to amend its complaint to supply additional allegations and evidence that would overcome the dismissal based on Alice. The trial court denied this motion.

On appeal, the Federal Circuit held that the trial court erred in holding claim 1 ineligible as directed to intangible matter and should have instead analyzed that claim under the two-step procedure specified by Alice. Further, the trial court’s refusal to permit an amended complaint was erroneous because at that stage there were allegations of fact that, if Aatrix’s position were accepted, would preclude the dismissal. Specifically, part two of the Alice test is satisfied when the claim limitations “involve more than performance of well-understood, routine, and conventional activities previously known to the industry.” More...

SUNSTEIN’s Federal Circuit Win in Exergen: Diagnostic Patents Survive Eligibility Challenge

BOSTON, MA – March 9, 2018 - The Federal Circuit on March 8 decided the appeal in Exergen v. Kaz, affirming nearly all of the $16 million judgment entered in favor of Exergen by the federal district court in Massachusetts.  Exergen Corporation, a Watertown, MA-based maker of temporal artery thermometers, had alleged that similar thermometers, sold by Kaz USA, Inc. under the Vicks and Braun labels, infringed two of Exergen’s patents.   This is the first Federal Circuit decision upholding the patentability of a diagnostic patent since the Supreme Court struck down a diagnostic invention on patent eligibility grounds in Mayo v. Prometheus in 2012.

Exergen was represented at the jury trial and on appeal by Sunstein Kann Murphy & Timbers LLP, the Boston-based intellectual property firm.  Kerry Timbers was lead counsel.

Kaz had challenged the patent-eligibility of Exergen’s invention under 35 U.S.C.  § 101, arguing that three key steps underlying Exergen’s method and apparatus claims were known in the prior art.  But Judge Richard Stearns of the District of Massachusetts found that, though these claim elements may have been known, they had never previously been combined to solve the problem of detecting arterial temperature beneath the skin. 

The Federal Circuit affirmed the lower court’s conclusion that these claim elements of one of Exergen’s patents were not “well-understood, routine, and conventional,” a threshold for patent eligibility announced by the Supreme Court in Mayo. 

The Federal Circuit decided that, even if Exergen’s invention is directed to measuring a natural phenomenon, it was “incorporated . . . into an unconventional method of temperature measurement.”  Exergen’s discovery therefore represented an inventive concept, a hallmark of patent-eligibility under the test established by the Supreme Court in Alice v. CLS Bank (2014). 

The court distinguished Exergen’s invention from the diagnostic-test patents the Supreme Court found ineligible in Mayo and in Ariosa v. Sequenom (2016), because the methods for determining the existence of a natural phenomenon in those cases were well-known. 

The Exergen v. Kaz decision notably reinforces very recent Federal Circuit jurisprudence to the effect that whether claim elements are “well-understood, routine and conventional” is a question of fact to which “we must give clear error deference.” The court also clarified that “[s]omething is not well-understood, routine, and conventional merely because it is disclosed in a prior art reference.”

The court concluded that substantial evidence was lacking to support infringement of a second Exergen patent, so reversed that part of the jury’s verdict.  This part accounted for only a small percentage of the jury’s damages award.

The damages aspect of the Exergen case is noteworthy, as the Federal Circuit upheld a reasonable royalty that amounted to 71% of Kaz’s projected net profit (or a per-unit rate of 32%). The jury reasonably based this award, said the court, on expert testimony that the parties were “fierce competitors;” that Exergen had a policy of never granting licenses; that practically every Kaz sale would be  a sale lost to Exergen; and that the patent had many more years to run at the time of the parties’ hypothetical negotiation.   

Risks of Disclaiming Before Institution of an IPR

By Elizabeth Spar, Ph.D. A member of our Patent Practice Group

Faced with an inter partes review (IPR) challenging one of its patents, Arthrex sought to avoid getting a decision that could subvert its other patents and patent applications. So it simply disclaimed the challenged claims, thereby precluding institution of the IPR. Arthrex also filed a Preliminary Response arguing that an IPR should not be instituted because, according to 37 C.F.R. § 42.107 (e), “[n]o inter partes review will be instituted based on disclaimed claims.”

Nevertheless, to Arthrex’s dismay, the Patent Trial and Appeal Board (PTAB) entered an adverse judgment against the challenged patent claims with full estoppel effect against claims in pending patent applications that were not “patentably distinct” from the disclaimed claims. Arthrex appealed, but the Federal Circuit affirmed. Arthrex, Inc. v. Smith & Nephew, Inc.

In a concurring opinion, Judge O’Malley expressed doubts about whether the Patent and Trademark Office (PTO, of which the PTAB is an administrative branch) had statutory authority to issue the regulation pertaining to adverse judgment and, if so, whether the regulation was properly promulgated. This potential challenge to the regulation was not briefed by the parties or decided by the court, so it remains an open issue for future litigants.

The PTO regulation in question, 37 C.F.R. § 42.73(b), relates to judgments rendered by the PTAB in an IPR and states that a disclaimer of all challenged claims will be construed as a request for an adverse judgment. In an attempt to evade this regulation and save the claims in its related patent applications, Arthrex simply asserted in its Preliminary Response that the disclaimer was not a request for an adverse judgment.

Nonetheless, the Board entered an adverse judgment against Arthrex pursuant to the regulation, concluding that the Board is permitted to construe a statutory disclaimer of all challenged claims as a request for adverse judgment, even if the disclaimer occurs before the Board has entered a decision on institution of the IPR.

When the Board entered the adverse judgment, an estoppel effect attached because 37 C.F.R. § 42.73(d)(3)(i) prevents a patent owner “from taking action inconsistent with the adverse judgment, including obtaining in an patent… [a] claim that is not patentably distinct from a finally refused or canceled claim.” This was critical because Arthrex had pending applications at the time of the decision that would be undermined by this estoppel provision.

On appeal, Arthrex argued that adverse judgment was not appropriate because Arthrex specifically stated that it was not requesting an adverse judgment when it disclaimed the challenged patent claims.

Arthrex also argued that the rule does not apply because it pertains to a patentee’s “disclaimer of a claim such that the party has no remaining claim in the trial” and, in this instance, the PTAB did not institute a trial.

The Federal Circuit affirmed the Board’s decision to enter adverse judgment against Arthrex, and, as a result, Arthrex could not avoid estoppel by disclaiming the challenged claims prior to institution of the IPR. The court asserted that the rule governing requests for adverse judgment would be rendered a nullity if a patent owner could avoid an adverse judgment by merely arguing that it was not requesting one.

The court disagreed with Arthrex’s interpretation, asserting that the rule states that a patent owner may request an adverse judgment at any time during a “proceeding”, which is defined by the Patent and Trademark Office as “a trial or preliminary proceeding,” which “begins with the filing of a petition for instituting a trial.”

In the concurring opinion, Judge O’Malley disagreed that Arthrex’s disclaimer should have inflicted such sweeping harm on patent claims in its pending applications. She reasoned that if the Board lacks authority to institute a review based on statutorily disclaimed claims, it similarly lacks authority to take any action with respect to disclaimed claims, particularly prior to institution of an IPR.

As to the issue of the Board’s authority to issue the rule governing requests for adverse judgment, Judge O’Malley stated that the IPR statute “does not grant the Board the rulemaking authority to, in effect, make patentability determinations with estoppel effect – particularly prior to institution.” Judge Newman, in a dissenting opinion, also raises these issues.

Patent owners should be aware of the consequences of disclaiming claims challenged in an IPR prior to institution if there are pending claims in related patent applications. Nevertheless, an opportunity remains for someone to question the PTO’s authority to issue Rule 42.73(b).

Three New Federal Circuit Decisions Support Software Patents

By Bruce Sunstein. A member of our Patent Practice Group

The Supreme Court’s 2014 decision in Alice v. CLS Bank held that software claims to computer-based financial hedging were patent ineligible because they were directed to an abstract idea and, taken as a whole, they failed to define an inventive concept “significantly more” than the ineligible abstract idea of hedging.  Although Alice was viewed as potentially the death knell for software patents, a cluster of recent decisions by the Federal Circuit has made it less difficult to overcome challenges to software patents based on Alice.

In Alice, the Supreme Court adopted a two-step process for evaluating patent eligibility.  Under step one, a court is to determine whether the claims at issue are directed to an abstract idea.  If so, under step two, the court will next “examine the elements of the claim to determine whether it contains an ‘inventive concept’ sufficient to ‘transform’ the claimed abstract idea into a patent-eligible application.”

In Finjan, Inc. v. Blue Coat Systems, Inc., decided January 10, 2018, the Federal Circuit affirmed a trial court’s ruling that claims to “identifying and protecting against malware” are eligible for patenting, even in the face of the Alice decision.  In doing so, the Federal Circuit said that it did not even have to reach step two in the Alice patent eligibility analysis.

The Federal Circuit had previously held that “[b]y itself, virus screening is well-known and constitutes an abstract idea.”  Similarly, “performing the virus scan on an intermediary computer—so as to ensure that files are scanned before they can reach a user’s computer—is a ‘perfectly conventional’ approach and is also abstract.”  According to the Federal Circuit, the claimed method “does a good deal more” than these abstract ideas.

Normally, doing “a good deal more” would seem to take the analysis to step two of the Alice analysis. However, the Federal Circuit said that the analysis need not go beyond step one.  Because “the security profile ‘identifies suspicious code,’” it “allows the system to accumulate and utilize newly available, behavior-based information about potential threats.  The asserted claims are therefore directed to a non-abstract improvement in computer functionality, rather than the abstract idea of computer security writ large.”  As a result, the Court said that the eligibility analysis ends at step one.

In Core Wireless Licensing S.A.R.L. v. LG Electronics, Inc., decided on January 25, 2018, the Federal Circuit affirmed a trial court’s ruling that claims to a user interface, particularly useful for devices like smart phones that have limited screen real estate, define subject matter that is patent eligible.

The claimed interface enables faster access to desired data and applications.  An application summary window displays “a limited list of common functions and commonly accessed stored data which itself can be reached directly from the main menu listing some or all applications.”  The application summary window can be reached in two steps: “first, launch a main view which shows various applications; then, launch the appropriate summary window for the application of interest.” More...