Last Thursday, the U.S. Government Accountability Office (GAO) issued a report on patent infringement litigation and recommended steps that may be taken to improve both litigation and the patents themselves. The 61-page report, entitled “INTELLECTUAL PROPERTY: Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality,” makes a number of recommendations, as well as providing a background in this area, including statistics summarizing recent trends in patent litigation.
We’ll be taking a look at this report in more detail and providing some commentary on it in the near future as a part of our ongoing analysis of the issues presented by NPE/PAE/patent troll litigation.
The Federal Circuit issued an opinion in Taurus IP, LLC v. DaimlerChrysler Corp. (No. 2008-1462), upholding a verdict in favor of a technology user in the continuing patent wars between non-practicing entities (NPEs) and companies. Judge Schall delivered the opinion of the Court, joined by Judges Prost and Reyna.
The case involved two separate actions—one for patent infringement and one for a breach of warranty involving a prior settlement agreement between the parties. In the patent action, the Federal Circuit affirmed the district court’s determination that Taurus’s patent was invalid, that defendants did not infringe, and that the case was exceptional because plaintiff failed to conduct proper due diligence and filed a frivolous lawsuit. In the breach of warranty action, the Court affirmed the finding that the court had jurisdiction over the parties, that plaintiff and related third parties (Orion IP, LLC and Erich Spangenberg) breached the warranty provisions, and that two of the third parties engaged in witness tampering. The Court affirmed-in-part and reversed-in-part the damage awards relating to defendants’ attorneys’ fees.
The case has a rather long and convoluted history, starting with a different lawsuit back in 2004.
Orion (an NPE owned by Spangenberg) sued DaimlerChrysler and Mercedes in 2004. Prior to filing suit, it acquired the rights to a patent (the ‘658 Patent) that would be at issue in the later lawsuit. To resolve the 2004 case (which involved different patents), the parties entered into a settlement agreement in 2006. Under that agreement, Orion warranted that had not assigned any patent rights relating to the 2004 litigation. However, five days after filing the 2004 lawsuit, Orion assigned the ‘658 Patent to another of Spangenberg’s companies and did not disclose that fact.
In 2007, Taurus (another NPE) acquired the rights to the ‘658 Patent from one of the many Spangenberg companies. Taurus then filed suit against DaimlerChrysler and Mercedes 10 days later. This is the case that was on appeal before the Federal Circuit.
The ‘658 Patent involved a “a computer system for managing product knowledge related to products offered for sale by a selling entity.” Taurus alleged that defendants infringed the patent through their internal and external web sites that allowed customers to select various options on different car models and then see if any dealers had that configuration available for sale in the area.
The District Court’s Rulings
The district court issued a claim construction that was unfavorable to Taurus. The court then granted summary judgment in favor of defendants, finding that defendants did not infringe and that the asserted claims of the patent were invalid in light of prior art that pre-dated the earliest conception date that Taurus could prove. In addition, the court found that the case was an exceptional case that warranted an award of defendants’ attorneys’ fees.
The court found that Taurus failed to conduct a proper due diligence before filing suit, that there was no reasonable basis to believe that defendants infringed, and that Taurus needless prolonged the litigation in bad faith. The court then awarded over $1,600,000 in attorneys’ fees.
With respect to the breach of warranty claims, the court found that it had jurisdiction over all of the parties and denied Taurus and the third-party defendants’ attempts to dismiss the claims. A jury then found for DaimlerChrysler and Mercedes. On post-trial motions, the court found damages caused by the breach in the amount of almost $2,500,000 for the costs incurred to defend the patent infringement lawsuit and $ 1,300,000 in attorneys’ fees relating to the breach of warranty claims.
In addition, the court found that Erich Spangenberg and an attorney working with him attempted to tamper with a witness. The attorney used to represent DaimlerChrysler in prosecuting its patents, but left to work for one of Spangenberg’s companies during the course of the litigation. Spangenberg contacted the attorney and told him that he believed that one of DaimlerChrysler’s witnesses was going to commit perjury and that the attorney should take steps to deal with it. The attorney then called and sent the witness a letter “reminding” the witness of certain “facts.” The attorney never indicated that he worked for Spangenberg.
When this contact came to light, the court conducted a closed hearing to address what happened and what should be done. The court ultimately concluded that (1) the communications were designed to intimidate the witness and influence his testimony, (2) that the attorney should have been screened from the case due to his prior employment with DaimlerChrysler, (3) that the “facts” were not supported by the record. As a sanction, the court prevented Spangenberg and his companies from evoking testimony refuting one of the elements to the breach of warranty claim.
The Federal Circuit Mostly Affirms
On appeal, the Federal Circuit affirmed all of the patent infringement-related issues in full. It upheld the claim construction, the non-infringement ruling, the invalidity ruling, and the award of attorneys’ fees.
With respect to the breach of warranty issues, the Federal Circuit largely affirmed, including the witness tampering sanctions, but did reverse on the issue of the damages for a lack of evidence presented at trial.
This was a fairly convoluted case before the Federal Circuit. While the lengthy opinion makes for an interesting read, there are some high-level take aways. First, Chief Judge Rader has repeatedly indicated that district courts should exercise their inherent and statutory powers to sanction NPEs and other litigants that bring frivolous patent infringement lawsuits. The district court apparently took that to heart and the Federal Circuit backed her up. Second, the failure to conduct appropriate pre-filing due diligence proved very costly to plaintiff. Finally, parties need to be very careful before communicating (or inducing another to communicate) with an opposing witness prior to testifying, as the sanctions can be devastating to a case.
Magistrate Judge Jeffrey J. Keyes from the U.S. District Court for the District of Minnesota issued an important report and recommendation affirming the ability of patent attorneys to use copyrighted articles during patent prosecution (e.g., to submit them to the USPTO to fulfill disclosure requirements) as fair use.
In American Institute of Physics, et al. v. Schwegman Lundberg & Woessner, P.A. (No. 12-cv-00528), various publishers sued a law firm that had copied their copyrighted scientific articles in order to assess whether the articles were prior art and, if they were, sent copies to the USPTO to fulfill its obligation to disclose prior art. The publishers originally argued that any use by the law firm of these articles without payment constituted copyright infringement. However, they dropped their claims as to the firm’s (1) making copies to be sent to the USPTO, (2) sending copies to the USPTO, and (3) retaining one copy for its files. They continued their infringement claims as to the downloading of the articles, making other copies that existed in the firm’s files, and distributing the copies to its clients or others in the firm. The law firm argued that none of these actions infringed because of the fair use exception.
THE COURT’S DECISION
In assessing the applicability of the fair use defense, a court must consider (1) the purpose and character of the accused infringer’s use, (2) the nature of the copyrighted work, (3) the amount of used, and (4) the effect of the copying on the relevant market.
The Court determined that the nature and purpose of the firm’s use was different from that of the publishers. The publishers publish the works for the betterment of science and to allow other scientists to test and validate the authors’ findings. In contrast, the firm used the articles to satisfy a legal requirement of disclosure to assist the USPTO in determining whether an invention was new and novel. The Court further found that the intended audience for the two parties was different and did not overlap. The publishers’ audience was scientists, students, libraries, etc., whereas the firm’s audience was the USPTO and lawyers in the firm.
The Court also considered the nature of the articles to slightly favor the law firm. Because the articles were primarily factual and informational in nature, they fell a bit further from the creative types of expression more strongly protected by copyright law.
The Court looked at the amount of use and also concluded that, despite the copying of the entire article, this factor also favored the law firm. In order to satisfy its obligation of disclosure, the firm had to use the entire article. Thus, its entire use was consistent with its allowed purpose.
Finally, the Court looked to whether there were any other factors that might favor either party. It concluded that the law firm’s use was consistent with the overriding Constitutional basis for both the patent and copyright laws, which is to promote the progress of the science and useful arts. Such copying ultimately furthered this objective and the public good by assisting the USPTO in weeding out improper patents.
Ultimately, in weighing all of the factors, the Court concluded that the law firm’s use of the copyrighted articles was fair use and not copyright infringement.
The Federal Circuit issued an interesting decision today in Hamilton Beach Brands, Inc. v. Sunbeam Products, Inc. (No. 2012-1581). The opinion, written by Judge O’Malley and joined by Judge Bryson, invalidated a patent based on the patentee’s contractual agreement with its own supplier to purchase a product that utilized the patented invention more than one year before the date of the patent application. The dissent, written by Judge Reyna, argued that this decision is inconsistent with the requirement that an offer for sale must by a commercial offer and that it will eviscerate the experimental-use exception.
The patentee, Hamilton Beach, developed an improved slow cooker with clips to hold the lid of the cooker to the body of the cooker. Hamilton Beach’s original design had the clips mounted to the body. Sunbeam designed a competing version of the product with clips mounted to the lid. In response, Hamilton Beach filed a continuation patent application that specifically incorporated Sunbeam’s new design. This application eventually matured into the patent involved in the lawsuit.
In defense, Sunbeam argued that it did not infringe and that the patent was invalid as anticipated because Hamilton Beach introduced new matter into its continuation application and therefore could not take advantage of the earlier filing date. Sunbeam also argued that the patent was invalid due to an offer for sale more than one year before the earliest priority date.
More than one year before the original patent application was filed, Hamilton Beach issued a purchase order to one of its foreign suppliers, asking it to manufacture nearly 2,000 slow cookers based on Hamilton Beach’s specifications and designs. The supplier agreed to fulfill the order once it obtained a release from Hamilton Beach. The supplier’s confirmation occurred more than one year before Hamilton Beach filed its patent application. Hamilton Beach issued the release to its supplier within the one-year period before it filed its application, though.
The District Court ultimately agreed with Sunbeam on all three grounds, finding that Sunbeam did not infringe and that the patent was invalid.
The Federal Circuit’s Decision
A patent can be invalidated under 35 U.S.C. § 102(b)’s on sale bar provision “when two conditions are satisfied before the critical date: (1) the claimed invention must be the subject of a commercial offer for sale; and (2) the invention must be ready for patenting.” There is an exception to the on sale bar where the use is experimental in nature, which negates the commercial requirement of § 102(b).
The Federal Circuit only addressed Sunbeam’s on-sale bar argument, finding that the offer from Hamilton Beach’s supplier to manufacturer the slow cooker once it received the release was an offer for sale under § 102(b). Because this offer occurred more than one year before Hamilton Beach filed its patent application and Hamilton Beach clearly had specifications and drawings of its invention, the patent was invalid as anticipated.
It reaching its decision, the Court noted that there need not be a binding contract for purposes of § 102(b)—only an offer is required. Moreover, the Court found that there is no “supplier exception” to the on-sale bar.
The key dispute between the majority and dissent was whether Hamilton Beach’s purchase order should have been analyzed under the experimental use exception.
The majority stated that it was expressly not considering the experimental use exception because (1) Hamilton Beach never raised this argument and (2) the order of almost 2,000 slow cookers strongly suggested that the use was not experimental. The majority went out of its way to specifically state that this opinion has no bearing on that exception:
“Experimental use” is simply not at issue. There is, thus, no threat that this decision will have any impact on that defense; it certainly will not “eviscerate” that defense as the dissent fears.
The dissent disagreed, finding that Hamilton Beach had raised this issue and that there was sufficient evidence to suggest that the 2,000 units were being ordered in order to work out a defect in the design. The dissent further expressed concern that this ruling would “eviscerate” the experimental use exception and create havoc for companies that have third parties manufacture their goods.
It is somewhat difficult to predict how this case will be used in the future, but there are certainly some points to take away from it. First, companies need to be aware that contractual negotiations and offers with their own suppliers potentially can be used against them to invalidate their patents. This highlights the need to file provisional applications and keep track of the relevant dates so as not run into this issue. Second, where a use is experimental in nature, it is helpful to document its experimental nature for use later in litigation. Third, the majority fairly clearly states that this decision does not destroy or even implicate the experimental use exception, so that exception should still be available if properly raised at the trial court. Finally, this case highlights the importance of preserving this argument explicitly and clearly.