IP UPDATE: Edited by Paul Devinsky and Rita Weeks



Supreme Court:  State Court Has Jurisdiction over a Legal Malpractice Claim 

Nothing Non-Obvious About Applying Pre-Existing Technology to the Internet

The Federal Circuit Is Not the Place for Side Bets

Early Resolution Through Focus on Claim Construction 

Acts of Direct Infringement Not Required to Establish Case and Controversy of Indirect Infringement

Federal Circuit Rules Assignor Estoppel is a Shield, Not a Sword

Covenant Not to Sue Is Not Discharged in Bankruptcy

Appellee Can Rely on Any Ground Supported by the Record to Defend the Decision Appealed from  

Federal Circuit to District Courts:  Decide Transfer Motions Early

Federal Circuit Rules on Pleading Standard for Infringement of Design Patents

Federal Circuit Finds New "Respect" for Patent, but not that "Each" of Plaintiff's Claims Are Plausible

USPTO Releases Final Rules to Implement the First to File Provisions of the AIA and New Fee Schedule


Second Circuit Affirms Willful Infringement of Fendi's Trademark


Mattel v. MGA Entertainment —The BRATZ Saga Continues

Use of Candid Photo in Poster Not Infringing

Trade Secrets

Adverse Inference Based on Destruction of Computer Evidence

Exclusive License Not Required for Standing to Claim Misappropriation of a Trade Secret Involving Subway Car Brakes 

Patents / Federal Circuit Jurisdiction

Supreme Court: State Court Has Jurisdiction over a Legal Malpractice Claim

by Christopher M. Koepke and Paul Devinsky

The U.S. Supreme Court determined that a state court had jurisdiction over a legal malpractice claim, even though resolving the claim required the state court to address an issue of federal patent law.   Gunn v. Minton, Case No. 11-1118, Feb. 20, 2013 (Roberts, C. J.).

In a unanimous decision the Supreme Court held that 28 U.S.C. § 1338(a) did not deprive a state court of subject matter jurisdiction over a legal malpractice claim that required the resolution of an issue of federal patent law.  Under § 1338(a), "[n]o State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents."  However, the Supreme Court concluded state legal malpractice claims will seldom, if ever, arise under federal patent law for the purposes of assessing jurisdiction under § 1338(a).  According to the Court, such claims are unlikely to have sufficient significance to the federal system to give the federal courts exclusive jurisdiction.

Minton brought a lawsuit in Texas state court alleging that his patent practitioner and the other petitioners committed legal malpractice in a case in which Minton had developed a computer program and telecommunications network designed to facilitate securities trading and then leased it to a securities brokerage.  According to Minton, the failure of his attorneys to raise the experimental-use argument in a timely manner caused him to lose a lawsuit and resulted in the invalidation of his patent.  Minton's former lawyers contended that the experimental-use exception did not apply to Minton's case and thus that raising the experimental-use argument earlier would not have affected the outcome of Minton's patent infringement case.  The trial court granted summary judgment in favor of Minton's former lawyers, concluding that Minton had not put forth sufficient proof that the lease was for an experimental purpose.

On appeal to a Texas appellate court , Minton argued for the first time that the state trial court did not have jurisdiction over his legal malpractice claim under 28 U.S.C. § 1338(a), which prevents state courts from exercising jurisdiction over claims "arising under" federal patent law.  According to Minton, the legal malpractice claim arose under federal patent law because it was based on an alleged error in a patent case.  Thus, Minton contended that the district court's order should be vacated and the case dismissed, allowing Minton to assert his claim of legal malpractice in federal court.  A divided panel of the Court of Appeals of Texas rejected Minton's jurisdictional argument and affirmed the judgment of the trial court on the merits.

Minton appealed again, and the Supreme Court of Texas reversed the judgment of the Texas Court of Appeals.  The Supreme Court of Texas concluded that the state trial court did not have jurisdiction over Minton's malpractice claim, determining that Minton's claim raised a substantial federal issue that should be resolved by a federal court.  Justice Guzman of the Texas Supreme Court dissented and was joined by Justices Medina and Willett.

The Supreme Court of the United States reversed the judgment of Supreme Court of Texas, applying the test set out in Grable & Sons Metal Products v. Darue Engineering & Manufacturing.  Under Grable, a state law claim arises under federal law when (1) the state law claim necessarily raises a federal issue (2) that is actually in dispute, (3) has substantial importance to the federal system as a whole and (4) can be resolved by a federal court without disturbing the balance between federal and state judicial responsibilities.

The Supreme Court acknowledged that the first two Grable factors were met but that the third and fourth Grable factors were not.  According to the Court, the resolution of Minton's malpractice claim did not implicate any significant federal interest.  The federal patent question raised in Minton's legal malpractice action was merely hypothetical: If Minton's attorneys had raised the experimental-use argument in a timely fashion, would the outcome of his patent infringement lawsuit have been different?  Because Minton's patent would remain invalid, regardless of the outcome of his malpractice lawsuit, the malpractice action would neither affect the prior federal patent litigation nor affect the development of a uniform body of patent law.

The Court also rejected Minton's contention that federal courts' expertise regarding patent law would make federal court the proper forum for resolving Minton's legal malpractice claim.  According to the Court, the possibility that a state court could err in applying federal patent law, standing alone, is not enough to require that federal courts have exclusive jurisdiction over claims of legal malpractice.

Finally, the Court determined that the fourth Grable factor was not met since Minton's malpractice claim did not implicate a substantial federal interest.  The Court, however, identified states' great interest in regulating the conduct of lawyers practicing within the state.  Consequently, the Court reasoned that resolution of Minton's malpractice claim in federal court would upset the balance between federal and state judicial responsibilities.

Patents / Obviousness

Nothing Non-Obvious About Applying Pre-Existing Technology to the Internet

by D. Jeremy Harrison

Addressing the issue of obviousness of patents directed to Internet-based software, the U.S. Court of Appeals for the Federal Circuit reversed a district court's finding of non-obviousness, reasoning that performing previously known methods through an internet web browser is obvious.  Soverain Software LLC v. Newegg Inc., Case No. 11-1009 (Fed. Cir., Jan. 22, 2013) (Newman, J.).

The dispute arose from three patents directed to software system entitled "Transact" which facilitates electronic commerce or "e-Commerce."  Individuals who purchase products online are familiar with this technology wherein a merchant's products are offered and purchased online through computers interconnected by a network.  Upon acquiring the Transact software and patents, plaintiff Soverain sued Newegg and several other online retailers for patent infringement.  While the other online retailers took paid-up licenses to the patents, Newegg refused to pay a license. 

At the close of evidence, the district court removed the question of obviousness from the jury citing insufficient evidence and then found that the claims were not obvious.  The jury found Newegg liable for infringement of two of the three patents, but not liable for infringement of the third.  The district court subsequently granted Soverain's motion for judgment as a matter of law (JMOL) of infringement of the third patent.  Newegg appealed.

On appeal, the Federal Circuit upheld the district court's decision to remove the obviousness question from jury consideration.  Under KSR, the Court concluded that although both sides had presented witnesses and evidence on obviousness, removing the obviousness question from the jury was proper since the content of the prior art, the scope of the patent claims and the level of ordinary skill in the art were not in material dispute.  The Federal Circuit, however, reversed the district court's decision of non-obviousness in view of the evidence presented by Newegg, finding that each disputed claim element was disclosed by the prior art. 

Soverain argued that the asserted claims were not obvious because its product, Transact, was adapted for use on the internet, while Newegg's cited prior art either pre-dated the internet or otherwise operated on a pre-internet network.  The Federal Circuit rejected this argument, reasoning that conducting previously known methods through an internet web browser is obvious since it amounts to no more than applying the use of the internet to existing electronic processes at a time when to do so was commonplace.  Accordingly, the Court concluded that routine incorporation of internet technology into existing processes can be considered an obvious modification of a prior art reference.

Patents / Mootness

The Federal Circuit Is Not the Place for Side Bets

by Daniel R. Foster

Addressing an appeal on non-infringement, inequitable conduct and sanctions after the parties had reached a settlement, the U.S. Court of Appeals for the Federal Circuit dismissed a patent holder's appeal as moot, finding the settlement's $50,000 "bet" to go to the winner of the appeal did not make it a live case and controversy.  Allflex USA, Inc. v. Avid Identification Systems, Inc., Case No. 11-1621 (Fed. Cir. Jan. 17, 2013) (Bryson, J.).

Avid Identification Systems appealed the district court's judgment in favor of Allflex.  Allflex and Avid are both in the business of technology used in tags attached to animals or objects to locate them if they are lost.  Allflex sued Avid for a declaratory judgment that six of Avid's patents were unenforceable due to inequitable conduct and that Allflex was not liable for infringement of any of the patents.

During the proceedings, the district court found that Avid and its former counsel "should be sanctioned" for their failure to disclose the existence of reexamination proceedings that were pending with respect to the patents in suit.  After construing the claims, the district court granted summary judgment of non-infringement.  Regarding inequitable conduct, the district court found that Avid's failure to disclose information about prior public use and offers to sell one of its products was material.  However, the district court denied summary judgment on the inequitable conduct claim because it concluded there was a genuine issue of fact regarding intent to deceive.

The parties then entered into a settlement agreement.  Under the terms of the agreement, Avid agreed to pay Allflex $6,550,000.  The agreement also allowed Avid to appeal three rulings:  the summary judgment of non-infringement, the finding of materiality on inequitable conduct and the court's ruling that Avid and its counsel should be sanctioned.  The agreement also provided that if Avid succeeded in overturning any of those three issues, Allflex would return to Avid $50,000 of the settlement payment.

The district court accepted the terms of the settlement agreement, and entered a "Stipulated Order of Final Judgment."  Avid appealed, and Allflex did not oppose.

The Federal Circuit addressed whether the district court's order was a "final decision" over which it had jurisdiction.  Although the grant of summary judgment of non-infringement finally disposed of the infringement claims, the Federal Circuit scrutinized the inequitable conduct and sanctions issues.  The Court found that the sanctions issue was not final, as it was never a final order, but instead was just a recommendation that the party and counsel "should be sanctioned."  As a result, the Federal Circuit did not have jurisdiction over the sanctions issue.  The Court found the inequitable conduct issue, however, to be final as a result of the specific posture of the

case.  The district court had dismissed all aspects of the case, except for the specific issues preserved for appeal.  Both the district court's judgment, as well as the parties' settlement agreement made clear there would be no further proceedings in the district court, including on the inequitable conduct issue.

The Federal Circuit also addressed the question of whether the case was still a live case and controversy, or whether it was moot.  In contending that the case is not moot, Avid relied entirely on the $50,000 contingent payment.  In doing so, Avid relied on a prior case in which it was involved, as well as two prior Supreme Court decisions.  The Federal Circuit distinguished the Supreme Court cases because in those cases the parties agreed to a liquidated damages sum depending on the outcome of the case.  Likewise, in the prior case involving Avid, the parties had agreed to a specific damages award that was the same amount the jury had awarded if Avid prevailed on the inequitable conduct appeal in that case.

Here, however, the $50,000 contingent payment was neither representative of either an actual damages award or a liquidated damages award.  The Federal Circuit explained that the absolute amount at stake is insufficient by itself to establish a relation to the value of the issues on appeal, especially where as in this case the amount was less than 1 percent of the partial settlement payment.  After noting that Allflex had $50,000 at stake based on the outcome of the appeal, the Court concluded this amount insufficient to even justify the filing of a brief.

The Federal Circuit concluded that the appellant identified no relationship between the valuation placed on the appeal and the issues that were challenged.  Rather, it viewed the $50,000 as simply a "side bet" on the outcome of the appeal and determined that the contingency payment was not sufficient to avoid the conclusion that the issues raised in the appeal were moot.

Patents / Claim Construction / Infringement

Early Resolution Through Focus on Claim Construction

by Christopher D. Bright

Addressing an early Markman and summary judgment ruling the U.S. Court of Appeals for the Federal Circuit affirmed the district court's claim construction and summary judgment of non-infringement, remarking that the district court implemented a creative procedure designed to streamline the case.  Parallel Networks, LLC v. Abercrombie & Fitch Co. et al., Case No. 12-1227 (Fed. Cir., Jan. 16, 2013) (Bryson, J.).   

Plaintiff Parallel Networks filed four cases against 120 defendants in the U.S. District Court for the Eastern District of Texas.  Across a variety of industries, the plaintiff accused the defendants of operating websites that infringed its patent directed to a method and apparatus for client-server communication using a limited capability client over a low-speed communications link.  Responding to the plaintiff's strategy of trying to extract early settlements from defendants, the lower court conducted an early Markman hearing on three claim terms that would be case dispositive if the defendants prevailed on claim construction.  With the aid of a technical advisor, the district court adopted the defendants' construction on one of the three terms and granted summary judgment of non-infringement for most defendants on this basis.  Parallel Networks appealed.

The Federal Circuit affirmed the district court's claim construction, primarily on the basis that plaintiff's "position would, for instance, improperly bring distinguished prior art within the scope of the claims."  The asserted patent was directed to a "dynamically generated, transient applet," a program typically dedicated to perform a specific task.  The Federal Circuit observed that applets pre-dated the asserted patent.  The intrinsic evidence distinguished prior art on the basis that the applet in the patent was generated in response to the client's request.  Based on this intrinsic evidence, the Court affirmed the district court's construction of "dynamically generated by the server in response to the request" as "constructed at the server, by combining the requisite functionality with the necessary data, at the time of and in response to the client request."  The Federal Circuit affirmed the district court's grant of summary judgment of non-infringement because the accused websites did not combine both the functionality and data in response to a client request.

The plaintiff also appealed the district court's denial of its motion to amend its infringement contentions following the district court's early Markman decision.  The Federal Circuit affirmed this decision, relying on the plaintiff's decision to pursue a theory that allowed it to accuse a larger number of defendants.  The Court found that plaintiff, having lost, may not initiate what would amount to a completely new infringement proceeding.  The Federal Circuit observed that the plaintiff could have pursued a narrower infringement theory against fewer defendants before summary judgment was entered, and that the consequences of summary judgment by its pursuit of a broader infringement theory against a larger number of defendants was not unforeseen. 

Practice Note:  Early focused claim construction efforts may maximize the chance of early resolution.  Further, a claim construction ruling does not necessarily justify later amendments to infringement contentions. 

Patents / Venue

Acts of Direct Infringement Not Required to Establish Case and Controversy of Indirect Infringement

by Charles J. Hawkins

Addressing the case and controversy requirement in the context of indirect infringement, the U.S. Court of Appeals for the Federal Circuit reversed a district court's denial of a motion to supplement a complaint to add declaratory judgment allegations, where the supplement sought to add non-infringement and invalidity allegations to patents that issued during ongoing litigation.  Arkema Inc. v. Honeywell Int'l, Inc., Case No. 12-1308 (Fed. Cir., Feb. 5, 2013) (Dyk, J.).

The plaintiffs, Arkema and Arkema France, and defendant, Honeywell International, compete in the manufacture and sale of automotive refrigerants.  Honeywell owns a number of U.S. patents relating to 1234yf refrigerant, a refrigerant with low global warming potential, and methods of using the same in automobile air conditioning systems. 

The instant appeal arose out of a much broader scope of litigations.  Honeywell began the dispute by suing Arkema in Europe.  Arkema then filed a declaratory judgment suit in the United States.  As discovery proceeded in the U.S. action, two additional patents issued to Honeywell directed to methods for using the 1234yf refrigerant.  Arkema sought to supplement its pleadings in the United States to add declaratory judgment claims, arguing that by entering into contracts to supply 1234yf refrigerant, it would not incur liability as an indirect infringer of Honeywell's newly issued method patents.  The district court denied Arkema's attempt to supplement its pleadings, finding no Article III case or controversy as Arkema was not currently or imminently in danger of facing liability for contributory infringement or induced infringement where it had not yet sold 1234yf refrigerant.  Arkema appealed.

The Federal Circuit reviewed the district court's determination that Arkema's claims were not justiciable de novo.  The Court followed that Supreme Court's test for determining when an action for declaratory judgment presents a justiciable controversy set forth in MedImmune, which looks at "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."  Using this standard, the Federal Circuit found that a case and controversy existed.

The Federal Circuit relied on, in part, the undisputed fact that Arkema had concrete plans for offering 1234yf to automobile manufacturers for use in automobile air conditioning systems and desired to enter into contracts with automobile manufacturers to supply the refrigerant.  Also, the Court noted that Honeywell had already shown a propensity to engage Arkema in litigation asserting Honeywell's patent rights.

The Federal Circuit rejected the district court's view that Arkema was required to show which customer had committed an act of direct infringement.  The Court stated that there was no requirement that Arkema identify the particular manufacturers that will purchase the 1234yf or the particular automobile purchasers who will purchase the cars from the manufacturers.  The Court instead relied on the certainty that the 1234yf that Arkema wished to sell would be placed in car air conditioners and that Honeywell believed that use of that refrigerant infringes its patents.

The Federal Circuit also rejected the notion that Arkema was required to show that Honeywell directly accused Arkema of indirect infringement, citing the Court's well established precedent that related litigation can form the basis for declaratory judgment.  The Federal Circuit found that there were no known methods of using 1234yf refrigerant that Honeywell would not argue were within the scope its patent claims. 

Finally, the Federal Circuit found that Arkema's present need to decide whether to enter into long-term contracts, even ones that do not begin for a year or more, was sufficiently immediate to warrant a justiciable controversy.

Patents / Subject Matter Jurisdiction

Federal Circuit Rules Assignor Estoppel is a Shield, Not a Sword

by Evan Boetticher

The U.S. Court of Appeals for the Federal Circuit affirmed that the doctrine of assignor estoppel does not provide a basis for federal jurisdiction.   Semiconductor Energy Labs Co. v. Nagata, Case No. 12-1245 (Fed. Cir., Feb. 11, 2013) (Lourie, J.). 

In an earlier suit by Semiconductor Energy Labs (SEL) against Samsung for patent infringement, one of the patent's co-inventors, Nagata, testified for Samsung that the signatures on the declarations and assignments in the patent prosecution file were not his.  This raised issues of inequitable conduct and brought the enforceability of the patent into question.  SEL claims that this resulted in a less advantageous settlement for SEL.  SEL then sued Nagata in district court, claiming that Nagata's repudiation of the signature was a violation of his duty under the doctrine of assignor estoppel, which prevents an assignor from challenging the validity of a patent they have assigned.

SEL sought a declaratory judgment that Nagata's testimony was a "violation of federal patent law."  SEL also sued on a number of state causes of action, claiming that their resolution depended on the federal question of assignor estoppel.  Upon motion by Nagata, the district court dismissed the case concluding that the doctrine of assignor estoppel did not provide a cause of action or state a claim arising under the patent laws.  SEL appealed.

The Federal Circuit affirmed, explaining that assignor estoppel simply prevents a patent assignor from attacking the validity of the patent when he is sued for infringement of that patent.  The Court stated that assignor estoppel is an affirmative defense to claims of invalidity when the assignee is a party to the suit, not a claim for relief on its own against a non-party who has made no claim or defense in a legal case.  Otherwise, assignor estoppel would prevent assignors from testifying as fact-witnesses even when not parties to the case – a proposition the Court has repeatedly rejected.

The Federal Circuit further agreed that the state claims were properly dismissed because they lacked a substantial federal claim or issue to support jurisdiction.  Similarly, the Court found that the district court was within its discretion to refuse supplemental jurisdiction since it had dismissed the claims over which it had original jurisdiction.  

Practice Note: This restrictive notion of "arising under" the patent laws as a basis for federal jurisdiction is consistent with the decision of the Supreme Court represented in Minton v. Gunn.

Patents / Covenant Not To Sue

Covenant Not to Sue Is Not Discharged in Bankruptcy

by Paul Devinsky

The U. S. Court of Appeals for the Third Circuit, equating a covenant not to sue under a patent with a license, has concluded that a trustee in bankruptcy cannot unilaterally reject the covenant as an executory contract.  In re Spansion, Case Nos. 11-3323, -3324 (3rd Cir., Dec. 21, 2012) (Scirica, J.).

Spansion and Apple settled a patent dispute at the U.S. International Trade Commission (ITC) regarding flash memory products, with Spansion agreeing to dismiss its case and to refrain from filing related actions.  In pertinent part, the agreement stated:

Provided that neither Spansion nor any successor in interest to any of the patents being asserted in the referenced ITC action do not bring an action of any nature asserting any such patent before any legal, judicial, arbitral, administrative, executive or other type of body or tribunal that has, or claims to have, authority to adjudicate such action in whole or in part against Apple or any Apple product, Apple agrees Spansion will not be disbarred as an Apple supplier as a result of the referenced ITC action.

In exchange, Apple agreed that Spansion would remain a primary supplier of certain flash memory "for the life-time of the [Apple] product" and will be considered for future platforms.

Spansion later filed for bankruptcy, and the trustee moved to reject the settlement as an executory contract.  Under the normal rule in bankruptcy the debtor (i.e., Spansion) can unilaterally reject executory contracts if it so chooses, and any resulting contract damages will simply be treated as an unsecured debt.  However, the Bankruptcy Code includes exception (codified in 11 U.S.C. § 365(n)) whereby a licensee can elect to retain its license rights despite a debtor's rejection.

If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect . . . (B) to retain its rights . . . under such contract . . . to such intellectual property . . . as such rights existed immediately before the case commenced."

In an appeal of the Bankruptcy Court's ruling that § 365 did not apply to the covenant (which the Bankruptcy Court concluded was not a license) the district court in Delaware, concluded the settlement agreement was a license and that Apple had the right, under § 365, to retain its rights under the subject patents.  Spansion appealed. 

On appeal, the question was whether the contract between Spansion and Apple was a license or merely a promise not to sue.  The 3rd Circuit affirming the district court, cited to the Supreme Court decision in De Forest Radio (1927):  "[A] license ... [is] a mere waiver of the right to sue by the patentee."  Further, the 3rd Circuit, citing to the Federal Circuit TransCore decision (2009) [ IP Update , Vol. 12, No. 5], explained that a license need not be a formal grant, but may instead be simply a "consent[ ] to use of the patent."

The 3rd Circuit concluded that Spansion's promise to "dismiss the ITC action" and "not re-file the ITC action or another action related to one or more of the same patents against Apple" was a promise not to sue on a patent and therefore a license of patent rights subject to § 365(n).

Practice Note:  Presumably, under the Federal Circuit decision in General Protecht Group (2011) [ IP Update , Vol. 13, No. 9] the covenant would even extend continuations of the Spansion patents that were the subject of the covenant.  Thus, as a consequence of the Spansion bankruptcy and General Protecht decision, Apple ended up with a broader covenant than it originally bargained for and no obligation to continue to use Spansion flash memory in its product.

Patents / Obviousness / Appeal Practice

Appellee Can Rely on Any Ground Supported by the Record to Defend the Decision Appealed from

by Sungyong "David" In

Addressing obviousness in the context of dimensional claim limitations, the U.S. Court of Appeals for the Federal Circuit affirmed in part and reversed in part a decision by the U.S. Patent and Trademark Office (PTO) Board of Patent Appeals and Interferences (Board), now the Patent Trial and Appeal Board (PTAB), reinstating an examiner's reexamination decision of unpatentability.  Rexnord Industries v. Kappos, Case No. 11-1434 (Fed. Cir., Jan. 23, 2013) (Newman, J.).

The case arises out of an inter partes reexamination of a patent assigned to Habasit Belting.  The validity of the patent was challenged by third-party requester, Rexnord Industries, based on prior art including patents to Palmaer and Thompson, among others.  On reexamination, the examiner determined all the reexamined claims to be unpatentable for anticipation and obviousness.

The reexamined patent was directed to a mechanical conveyor belt that is formed of rows of belt modules interlinked by transverse rods.  The mechanical conveyor belt included, inter alia, spaces between the belt modules smaller than 10 mm in diameter at its maximum extension.  Each piece of prior art disclosed a conveyor belt including modules that are assembled similarly to the claimed invention.  However, none of the prior art disclosed the size of the space when the conveyor belt is at its maximum extension, although the prior art did discuss the problem of small objects getting caught in the space between the modules and did disclose embodiments having spaces that are completely closed.  Citing to Palmaer and Thompson for showing a space sufficiently small to prevent pinching of small objects, the examiner concluded that it would have been obvious for a skilled artisan to combine the prior teachings to arrive at the reexamined claims.  Habasit appealed to the Board.

On appeal, Habasit argued that the reexamined claims are patentable because none of the cited references stated the 10 mm maximum dimension of the space and that some reference belts have no space.  Rexnord responded that a 10 mm maximum space was inherent in the prior art structures.  Upon observing that the cited art did not disclose the dimensions of the space between the modules, the Board reversed and determined that the reexamined claims were not anticipated by and non-obvious over the prior art.  Rexnord requested a rehearing, asking the Board to consider other grounds, such as design choices, that were before the examiner.  In denying the request, the Board stated that Rexnord's arguments on obviousness were not the rationale of the examiner's rejection and inherency arguments were new on the appeal to the Board.  Rexnord appealed to the Federal Circuit. 

The Federal Circuit agreed (with the Board) that the prior art did not disclose the size of the space between modules and that the less than 10 mm size limitation is not inherent in any prior art belt, and therefore concluded that the reexamined claims were not anticipated.  However, as to obviousness, the Court agreed with the examiner that, since the prior art is directed to the same problem as in the reexamined patent—preventing small objects from being caught in the conveyor belt—the disclosures of completely closed spaces between modules satisfy the less than 10 mm size limitation.  The Federal Circuit reinstated the examiner's determination of unpatentability of the reexamined claims over the prior art. 

Additionally, noting Rexnord was not the appellant before the Board, the Court stated that on judicial review, Rexnord, an appellee, can defend the correctness of the decision appealed from, based on any ground supported by the record, regardless of whether or not the appellant raised it on appeal.

Practice Note:  On inter partes reexamination or review, an appellee can rely on any ground supported by the record to defend the correctness of the decision appealed from.

Patents / Venue

Federal Circuit to District Courts:  Decide Transfer Motions Early

by Charles J. Hawkins

In a nonprecedential order addressing transfer of venue, the U.S. Court of Appeals for the Federal Circuit denied a request for writ of mandamus, emphasizing the importance of addressing motions to transfer at the outset of litigation.  In re EMC Corp., Case No. 13-142 (Fed. Cir., Jan. 29, 2013) (Dyk, J.).

The case arose out of a lawsuit filed by Oasis Research LLC, alleging that 18 defendants, including petitioners EMC Corporation, Decho Corporation, Iomega Corporation and Carbonite Corporation, infringed patents directed to online data backup and storage.  In a prior ruling, the Federal Circuit reversed the lower court's decision not to sever the case.  After severance, the lower court denied petitioners' motions to transfer venue.

In denying the transfer motions, the lower court concluded that petitioners failed to show that the transferee venues were clearly more convenient.  Among other reasons, the lower court determined that, given its familiarity with the case after the pendency of the matter, judicial economy weighed heavily against transfer, noting that transferee courts would require significant resources getting up to speed.  Petitioners requested a writ of mandamus.

On writ, the Federal Circuit applied a highly deferential standard of review, indicating that it could only grant the writ if it found that the lower court's denial of transfer was such a clear abuse of discretion that refusing transfer would produce a patently erroneous result.  The Court found that the standard had not been met.

The Federal Circuit began its analysis by emphasizing the importance of addressing motions to transfer venue at the outset of litigation.  The Court recognized that Congress' intent in enacting the transfer statute may be frustrated if defendants must endure years of litigation before transfer motions are decided.

The Court stated that motions to transfer venue are to be decided based on the situation which existed when suit is initiated.  Thus, the Federal Circuit found that it was improper for the lower court to rely on familiarity with the case gained from handling the very cases sought to be transferred as grounds for judicial economy.  The Court, however, noted that the lower court properly considered the economy of having the same judge handle the suits against petitioners seeking transfer and the suits against other defendants, a fact that would have existed as of the timing the case began.

In the facts of the case at bar, the Federal Circuit analyzed the lower court's consideration of all the relevant transfer factors and concluded that its determination was not so unreasonable as to warrant mandamus relief.

Patents / Design

Federal Circuit Rules on Pleading Standard for Infringement of Design Patents

by Gabriel Daniel

Addressing the standard for pleading infringement of a design patent, the U.S. Court of Appeals for the Federal Circuit rejected a lower court's finding that a complaint for design patent infringement must identify the new, original and ornamental aspects of the claimed invention.  Hall v. Bed, Bath & Beyond, Case Nos. 11-1165, -1235 (Fed. Cir., Jan 25, 2013) (Newman, J.) (Lourie, J., dissenting in part).

Roger J. Hall filed for a design patent for a "Tote Towel" and immediately marked it "patent pending."  While the application was pending, Hall contacted Bed Bath & Beyond (BB&B) to discuss whether BB&B would provide retail sales of the product.  Hall left behind some samples after their business meeting, where both the package and the towel were marked "patent pending."  BB&B copied the design and had it manufactured in Pakistan, for retail sale by BB&B.  After the patent issued, Hall sued for patent infringement, unfair competition under the Lanham Act, and for misappropriation under the New York statutory and common law.  The district court dismissed Hall's claims on the pleadings, finding that the complaint did not specifically identify the "new, original, and ornamental" aspects of the design. 

The Federal Circuit rejected the district court's finding that Hall failed to state a claim of infringement of a design patent and had not met the criteria for a claim of unfair competition.  The Federal Circuitstated that a design patent infringement allegation in a complaint required five elements: (i) allege ownership of the patent, (ii) name each defendant, (iii) cite the patent that is allegedly infringed, (iv) state the means by which the defendant allegedly infringes, and (v) point to the sections of the patent law invoked.

The Federal Circuit stated that claim construction is not an essential part of a patent infringement complaint.  The Federal Circuit further found that the district court erred in requiring that the complaint identify the "new, original, and ornamental" aspects of the claimed design, pointing out that in Egyptian Goddess, the Federal Circuit negated the "point of novelty" requirement for design patents.

The Federal Circuit stated that the standard for determining design patent infringement is "if, in the eye of the ordinary observer, giving such attention as a purchaser usually gives, two designs are substantially the same, if the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other, the first one patented is infringed by the other."

Practice Note:  The decision is important to design patents in that it affirms that infringement is based on the more lenient "ordinary observer" test, not on any "points of novelty." 

Patents / Claim Construction / Sufficiency of Evidence

Federal Circuit Finds New "Respect" for Patent, but not that "Each" of Plaintiff's Claims Are Plausible

by John C. Low

Reversing, in part, a summary judgment ruling of non-infringement on a motion filed five months into the case based on a revised claim construction, the U.S. Court of Appeals for the Federal Circuit held that the defendant infringed multiple claims of a first patent, but not the claims of a second patent, and affirmed both the district court's denial of additional discovery related to the non-infringed claims and its dismissal of plaintiff's trade secret claim.  Accent Packaging, Inc. v. Leggett & Platt, Inc., Case No. 12-1011 (Fed. Cir., Feb. 4, 2013) (Prost, J.).

The claims of the first patent require an "operator assembly including ... elongated operator bodies, with each of the operator bodies being operably coupled with a respective one of said gripper, knotter, cutting element and cover..."  Like the claim terms "a" and "an" used in an open-ended claim, the Court held that construction of the terms "each" and "a respective one" in the patent claims would not be limited to "one and only one" of the type of connections specified in the claim because "the preferred embodiment features an elongated operator body that is operably coupled to one or more operator elements....[and] 'a claim interpretation that excludes a preferred embodiment from the scope of the claim is rarely, if ever, correct.'" The Court concluded that the defendant's accused device infringed the properly construed claims.  However, another claim of the first patent and the asserted claims of the second patent each required a mount with a pivot "arc of at least about 90o."  The Court affirmed the previous holding that a mechanical stop limiting the otherwise free rotation of the accused device's pivot arc to 68o precluded a finding of infringement.  The Court rejected the plaintiff's assertion that the use of screws as a temporary fastener for the mechanical stop evidenced an intent or instruction to remove the part:  "'[t]he fact that it is possible' to alter the [accused device] so that the cover can be pivoted through a ninety degree arc 'is not enough, by itself, to justify a finding that the manufacture and sale' of the device infringe (sic) [Plaintiff]'s patent rights."  The Court also affirmed the denial of the plaintiff's motion for additional discovery regarding "whether [the defendant] intended or anticipated that the device would be operated without the 'stop'" the frequency of its removal, and purposes for same.  Under the U.S. Court of Appeals for the Fifth Circuit precedent, the Court found that the plaintiff failed to 'set forth a plausible basis for believing that specified facts... probably exist...' following the plaintiff's previous inspection of the defendant's device and related technical documents.  The Court affirmed the dismissal of the plaintiff's state trade secret claim because the plaintiff freely introduced its reverse-engineered product into commerce, and the plaintiff's patents publicly disclosed the allegedly secret information.

Patents / America Invents Act

USPTO Releases Final Rules to Implement the First to File Provisions of the AIA and New Fee Schedule

by Bernard P. Codd

First to File Implementation

Under the America Invents Act (AIA), the U.S. patent laws were amended to: (1) convert the U.S. patent system from a "first to invent" system to a "first inventor to file" system; (2) treat U.S. patents and U.S. patent application publications as prior art as of their earliest effective filing date, regardless of whether the earliest effective filing date is based upon an application filed in the United States or in another country; (3) eliminate the requirement that a prior public use or sale be "in this country" to be a prior art activity; and (4) treat commonly owned or joint research agreement patents and patent application publications as being by the same inventive entity for purposes of 35 U.S.C. § 102, as well as 35 U.S.C. § 103.  To achieve these objectives, the U.S. Patent and Trademark Office (USPTO) released final rules to implement the first to file provisions of the America Invents Act (AIA) (78 Fed. Reg. 11,024 (2013)). 

According to the rules, nonprovisional applications filed after March 15, 2013 that contain, or contained at any time, a claim having an effective filing date after March 15, 2013 are subject to the first to file rules.  If an application is filed after March 15, 2013 claiming the benefit of an earlier filing date and the application contains at least one claim that is not entitled to the earlier filing date, the applicant must provide a statement to that effect within the later of four months from the actual filing date of the later-filed application, four months from the date of entry into the national stage in an international application, 16 months from the filing date of the prior-filed application or the date that a first claim having an effective filing date on or after March 16, 2013 is presented in the application. 

In applications claiming foreign priority, a certified copy of the foreign application must be filed within the later of four months from the actual filing date of the application or 16 months from the filing date of the prior foreign application, according to the rules.  However, this requirement does not apply under certain conditions specified in the rules.  A "good cause" exception is provided in the rules for a belated certified copy of the foreign application.

The rules further provide that when any claim of an application is rejected in view of a disclosure that has a prior art date less than one year before the effective filing date of the application, the applicant or patent owner may submit an affidavit or declaration to disqualify a disclosure as prior art by establishing that the disclosure was made by an inventor or that the subject matter disclosed was obtained directly or indirectly from the inventor.

An applicant may also submit an affidavit or declaration to disqualify a prior art disclosure by establishing that the disclosed subject matter had, before such disclosure was made or before such subject matter was effectively filed, been publicly disclosed by the inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor if such public disclosure is less than one year prior to the filing date of the application.  The affidavit or declaration must identify the subject matter publicly disclosed and provide the date of the public disclosure of such subject matter.  If the disclosure was in a printed publication the affidavit or declaration must be accompanied by a copy of the printed publication.  

 If a rejection is based upon a U.S. patent or U.S. patent application publication having an effective filing date less than one year before the subject application of a patented or pending application naming another inventor, the patent or pending application claims an invention that is the same or substantially the same as the applicant's claimed invention and an affidavit or declaration is submitted that contends that an inventor named in the patent or patent application publication derived the claimed invention from the inventor or a joint inventor named in the application, an applicant would have to file a petition for a derivation proceeding to overcome the prior art. 

PTO Fees

The USPTO also released a new fee schedule pursuant to the fee setting authority granted by the America Invents Act (AIA) (78 Fed. Reg. 4212 (2013)).  Most of the new fees are effective March 19, 2013.  The fees will provide the USPTO with a sufficient amount of aggregate revenue to recover its aggregate cost of patent operations, while helping the USPTO implement a sustainable funding model, reduce the application backlog, decrease pendency, improve patent quality and upgrade the USPTO's information technology capability and infrastructure.  In order to spur innovation and access to the patent examination process, the total of the routine fees to obtain a patent (i.e., filing, search, examination, publication and issue fees) will decrease.  On the other hand, back-end fees, such as maintenance fees, will increase.  Fees for extensions of time, excess claims and application size will increase.  Small entity and micro entity applicants will benefit from 50 percent and 75 percent fee reductions, respectively, for most fees. 

According to the new fee schedule, the basic filing, search and examination fees for a utility application will increase from $1,260 to $1,600.  However, the pre-grant publication and issue fees will decrease from $2,070 to $960.  First-, second- and third-stage maintenance fees will rise from $1,150, $2,900 and $4,810 to $1,600, $3,600 and $7,400, respectively.

Fees for appeals and post-grant procedures will change significantly.  The fee for filing a notice of appeal increases from $630 to $800, but there is no fee for filing an appeal brief.  Rather, $2,000 is charged upon the mailing of an examiner's answer.  Therefore, there is no additional fee charged if the USPTO reopens prosecution, as frequently occurs, after filing an appeal brief.  The fee for requesting supplemental examination will decrease from $5,140 to $4,400, and the cost of the subsequent ex parte reexamination decreases from $16,120 to $12,100.  Likewise, the filing fee for an ex parte reexamination decreases from $17,750 to $12,000.  An inter partes review request for up to 20 claims will cost $9000.  If an inter partes review is granted there will be an additional charge of $14,000 for review of up to 15 claims.  Likewise, post-grant review and business method post-grant review requests will cost $12,000 for up to 20 claims and an additional $18,000 for review of up to 15 claims if the review is granted.  Additional claims can be reviewed by payment of applicable excess claim fees.

Under the new fee schedule, the USPTO will offer small and micro entity fees for filing and searching PCT international applications effective January 14, 2014.  

A notable fee being eliminated under the new fee schedule is the $40 fee for recording an assignment if the assignment is submitted electronically.

Practice Note: To avoid the prior art implications of first to file, applicants should file new patent applications not claiming priority to earlier filed applications by March 15, 2013.

Trademarks / Counterfeit / Willfulness

Second Circuit Affirms Willful Infringement of Fendi's Trademark

by Rose Whelan

In the context of counterfeit luxury good, the U.S. Court of Appeals for the Second Circuit affirmed summary judgment of willful trademark infringement by an importer of the goods.  The 2d Circuit also remanded the case for the district court to consider the full scope of the rights holder's damage claims.  Fendi Adele, S.R.L. v. Ashley Reed Trading Inc., Case No. 11-3025 (2d Cir., Jan. 4, 2004) (summary order). 

Plaintiff Fendi Adele brought suit against Ashley Reed Trading, alleging that Ashley Reed knowingly imported fake "Fendi" bags after having been put on notice by Fendi of the counterfeit nature of the goods.  The district court, on summary judgment, found Ashley Reed liable for trademark counterfeiting, false designation of origin and trademark dilution under the Lanham Act.  It also found Ashley liable for unfair competition and trademark dilution under New York law.  The district court also found the infringement to have been willful.  Fendi was awarded over $12 million in damages for the 2005-2006 period.  However, although the district court also found liability for the 2001-2006 period, it did not award any further damages.  Both sides appealed. 

Ashley Reed challenged the district court's decision on multiple grounds—all of which were rejected by the 2d Circuit.  Ashley Reed challenged the finding of infringement prior to 2005 arguing there was no "direct proof" of infringement.  The 2d Circuit affirmed the lower court's decision holding that although there was no direct proof of infringement during that period, circumstantial evidence, including counterfeit invoices, failure to keep adequate records, and failure to adequately check the authenticity of goods provided sufficient support for the summary judgment. 

Ashley Reed also challenged the district court's summary judgment finding of willful infringement, asserting there were disputed issues of fact and that, in the summary judgment context, the district court ignored reasonable inferences that should have been drawn in its favor.  The 2d Circuit disagreed, concluding that no reasonable jury could have credited Ashley Reed's proposed inferences.  Rather the evidence was undisputed that Ashley Reed was on notice that it might be infringing Fendi's trademark after Fendi sent a cease-and-desist letter in 2001, i.e., at the same time Ashley Reed was confronted with multiple infringement suits from other designers.  Furthermore, Ashley Reed's failure to adequately inquire about the authenticity of the goods purchased, its failure to maintain records and the return of merchandise to its suppliers without documentation after Fendi filed suit, all supported the district court's summary judgment ruling.

In its cross appeal for an award of damages for the period between 2000 and 2004, Fendi contended that based on the district court's finding of infringement from 2001-2006.  It was entitled to an award of damages for that period.  The 2d Circuit agreed that district court's award of damages for only 2005-2006 was facially inconsistent with its infringement finding, but acknowledged that it is within the district court's discretion to decrease the award based on principles of equity.  However, if this was the district court's reasoning, the 2d Circuit noted that it did not explain its analysis.  Accordingly the 2d Circuit vacated the damages award and remanded to the district court for a redetermination on damages. 

Copyrights / Trade Secrets

Mattel v. MGA Entertainment—The BRATZ Saga Continues

by Sarah Bro

In the latest chapter of the dispute between Mattel and MGA related to the BRATZ toys, the popular line of doe-eyed, fashion-forward dolls popular among pre-teens, the U.S. Court of Appeals for the Ninth Circuit recently affirmed in part and reversed in part the district court's judgment in the 2010 jury trial, which was instituted after remand from the 9th Circuit in the parties' original 2004 action. Mattel, Inc. v. MGA Entertainment, Inc., Case No. 11-56357 (9th Cir., Jan. 24, 2013) (Kozinski, J.).    

In the new trial (ordered by a prior remand) [ IP Update , Vol. 13, No. 8], the jury found that MGA did not infringe Mattel's copyrights by producing the BRATZ dolls.  The jury also found in favor of MGA with respect to its counterclaim against Mattel for misappropriation of trade secrets.  Mattel appealed. 

On appeal, Mattel did not challenge the holding pertaining to copyright infringement, but instead focused on the district court's ruling that MGA's trade secret counterclaim was timely because it was compulsory, as well as the district court's grant of attorneys' fees and costs to MGA under the Copyright Act. 

In this appeal, the 9th Circuit vacated the jury's verdict in favor of MGA's claim against Mattel for misappropriation of trade secrets and the related damages award of $172.5 million.  However, the Court upheld the district court's award of $137.2 million in attorneys' fees to MGA under the Copyright Act, as it concluded MGA was the prevailing party with respect to Mattel's copyright infringement claims.

Using the "logical relationship test" for compulsory counterclaims, the 9th Circuit determined that MGA's claim for misappropriation of trade secrets did not rest on the same "aggregate core of facts" as Mattel's 2006 counterclaim which alleged that MGA had stolen its trade secrets. Specifically, the court noted that Mattel's original trade secret claims centered on Mattel employees who had defected to MGA and allegedly disclosed Mattel's trade secrets.  On the other hand, MGA's claims alleged that Mattel employees stole trade secrets from MGA at toy fairs by masquerading as third-party buyers.

The 9th Circuit acknowledged the similarities of the underlying legal theories, but the court emphasized that the essential focus was not the legal theory but the predicate facts at issue by early party. The court concluded that there was not a sufficient nexus or logical relationship between the relevant facts that each party relied on to support its respective legal theory to support the characterization of the counterclaims as a compulsory counterclaim.  Therefore, under the applicable statute of limitations, MGA's 2010 counterclaim for misappropriation of trade secrets was vacated.  As the court explained, the counterclaim should never have reached the jury in the new trial. The court also vacated the damages, fees and costs awarded to MGA in relation to the vacated trade secret claim.

Mattel also appealed the award of attorneys' fees and costs awarded to MGA under the Copyright Act, arguing that its claims of copyright infringement were objectively reasonable, and thus did not warrant such fees to be paid to MGA.  On this issue, the 9th Circuit explained that the requirements of frivolousness and bad faith are no longer necessary for a defending party to be awarded such costs and fees. The court also noted that the district court properly exercised its discretion in awarding and calculating the fees and costs, and that the district court's review of MGA's attorneys' invoices in camera was a sufficient safeguard against unreasonable bills. Sensing, however, that the ongoing dispute may still not be over, the court advised the parties to "take a lesson from their target demographic: Play nice."


On Wednesday, February 13, 2013, Mattel filed an ex parte application for an injunction to prevent MGA and its subsidiaries from collecting the $137.2 million attorneys' fees award, claiming that Mattel would face multiple competing litigation by MGA and other claimants to the award without an injunction, including MGA's former attorneys and at least five insurers.  

Copyrights / Candid Picture

Use of Candid Photo in Poster Not Infringing

by Melissa Nott Davis

The U.S. Court of Appeals for the First Circuit upheld a district court's decision limiting a copyright holder's protection in a candid photograph.  Harney v. Sony Pictures Television, Inc., Case No. 11-1760 (1st Cir., Jan. 7, 2013) (Lipez,  J.).  The 1st Circuit held that where only one protectable element of the original photograph had been copied, substantial similarity could not be established.

In 2007, Donald Harney, a photographer for the Beacon Hill Times, took a picture of a man and his daughter as they left Palm Sunday church services.  This particular photograph showed Clark Rockefeller and his daughter Reigh and was published with their consent on the front page of the newspaper.  This photo was on the front page of the Beacon Hill Times long before the world knew Clark Rockefeller as Christian Karl Gerhartsreiter, the con man who claimed to be related to the prominent Rockefeller family.  In 2008 Gerhartsreiter kidnapped Reigh during a parental visit.  Without Horney's knowledge or consent, a portion of the photo was placed on a nationwide FBI poster which became the iconic image of the bizarre saga of Gerhartsreiter.  Harney subsequently licensed the photograph for use in multiple media outlets, including Vanity Fair magazine.  In 2010 Sony released the movie Who is Clark Rockefeller? and included depictions of the FBI wanted posters showing an image of the actors playing the roles of Gerhartsreiter and Reigh that was similar to the Harney photograph used by the FBI. 

Harney sued Sony and A&E Television Networks alleging copyright infringement.  The district court granted summary judgment in Sony's favor finding that the only element of the original photo Harney could claim as protectable was "the position of the individuals relative to the boundaries of the photo although in the original Clark Rockefeller's face is closer to the camera and less of his body is visible."  The court found that while the Harney photo and Sony's photo share the same factual content, they did not share "Harney's expressive elements" and accordingly were not sufficiently similar for an infringement finding.  Horney appealed.

The 1st Circuit upheld the district court's application of the dissection analysis and finding of non-infringement.  While noting that Harney's photo and the Sony image shared several important features, ultimately the 1st Circuit's dissection analysis held that Harney was attempting to "enlarge the scope of his copyright protection by attributing to the Photo an idea—Gerhartsreiter's decision—that is not discernible form the image itself and did not originate with him."  Not only was the concept of deception not protectable, the photograph was taken before Gerhartsreiter's crimes came to light.  While the 1st Circuit acknowledged there were elements of the Harney photograph that were protectable, ultimately the Sony image was not substantially similar to the original photograph.    

Trade Secrets / Destruction of Evidence and Damages

Adverse Inference Based on Destruction of Computer Evidence

by Jennifer M. Mikulina

In a case of first impression, the U.S. Court of Appeals for the Eighth Circuit affirmed the district court's adverse inference instruction to the jury regarding the destruction of evidence in a case involving trade secret misappropriation, unjust enrichment and breach of contract.  Hallmark Cards, Inc. v. Murley, Case No. 11-2855 (8th Cir., Jan. 15, 2013) (Bye,  J.) (Shepherd, J., concurring). 

Janet Murley, a former Hallmark Cards employee, allegedly breached her separation agreement with Hallmark when she disclosed confidential information to one of Hallmark's competitors during a consulting project.  At trial, Hallmark's computer expert introduced evidence that certain files had been deleted from Murley's computer hard drive, including documents related to Hallmark's business, just a few hours before it was scheduled for inspection.  The district court judge instructed the jury that it "may, but [is] not required to, assume that the contents of the files destroyed would have been adverse, or detrimental to the Defendant."  The jury decided in favor of Hallmark and awarded $860,000 in damages.

Murley sought judgment as a matter of law (JMOL) or, in the alternative, a new trial on the grounds that the adverse inference instruction was improperly given because the district court did not issue "explicit findings of bad faith and prejudice" prior to delivering the instruction.  Murley also argued that the $860,000 in damages, which consisted of her $735,000 severance payment plus the $125,000 she received for the consulting project, was excessive.

In its decision, the 8th Circuit explained that "a district court must issue explicit findings of bad faith and prejudice prior to delivering an adverse inference instruction."  This will ensure that such instructions "are imposed only after thoughtful consideration and an appropriate weighing of the evidence."  Although there were no explicit findings issued by the district court in this case, the court held that the adverse inference instruction was appropriate "in light of the overwhelming evidence of bad faith and prejudice."  The instruction by the district court was "supported by evidence that Murley deleted a number of Hallmark-related documents from her private computer just hours before it was scheduled for inspection . . . [and] Hallmark would undoubtedly have benefitted from producing actual documents."   According to the court, the district court's failure to issue explicit findings before giving the adverse inference instruction did not prejudice Murley and constituted a "harmless error."

Murley's arguments regarding the adverse inference instruction may have failed, but she did succeed in reducing the total damages awarded to Hallmark by $125,000. The Court held that Hallmark was entitled to $735,000, the total amount it paid to Murley under the separation agreement, because the primary purpose of the separation agreement was to preserve confidentiality.  However, an 8th Circuit found the award of the remaining $125,000 awarded by the lower court to be improper, because this would have "placed Hallmark in a better position that it would find itself had Murley not breached the agreement."

Trade Secrets / Misappropriation-Standing

Exclusive License Not Required for Standing to Claim Misappropriation of a Trade Secret Involving Subway Car Brakes

by Sarika Singh, Ph.D.

Addressing the issue of standing of a non-exclusive licensee to bring a trade secret misappropriation claim, the U.S. Court of Appeals for the Second Circuit upheld denial of a motion for judgment as a matter of law (JMOL) by the defendant-appellants because the 2d Circuit law simply requires possession of the trade secret and does not require any exclusive rights to the trade secret. Faiveley Transport v. Wabtec Corp., Case No. 11-3518 (2d Cir., Feb. 6, 2013) (summary order).

Malmo AB, a Swedish company, owns proprietary technology pertaining to distinctive brakes used on the New York City subway cars.  Faiveley Transportand its sister companies have enjoyed exclusive rights to manufacture, use and sell the products that use this subway car brake technology. Wabtec and its predecessors had a license to the technology and products pursuant to an agreement with Malmo's predecessors since 1993, which was terminated in 2004.  Faiveley sued Wabtec for misappropriation of trade secrets, alleging Wabtec used knowledge of the brake technology to reverse engineer the propriety products and thus represent to customers that the products belonged to Wabtec.  Faiveley alleged that this misappropriation caused it to lose several lucrative contracts with various municipal transit authorities.

In denying Wabtec's motion to dismiss during the proceeding, the district court relied on the consistent holding of the 2d Circuit that "possession of a trade secret is sufficient to confer standing on a party for a claim of trade secret misappropriation."  The district court concluded that Faiveley had shown sufficiently concrete and particularized interest to establish standing in view of Faiveley's assertion of exclusive rights to manufacture use or sell the brake products in the United States.  The court did not specifically address the matter of standing in its denial of defendant's JMOL following a jury verdict for the plaintiffs of over $18 million and prejudgment interest. Earlier, a Swedish arbitration tribunal, as per the terms of the 1993 agreement, had found for Malmo on the misappropriation claim but had expressly refused to award damages to Malmo for losses suffered by Faiveley. Malmo received a $3.9 million royalty award from the tribunal.

The 2d Circuit dismissed Wabtec's argument that Faiveley had no "express exclusive license" to the trade secret and, hence, no standing. The 2d Circuit, citing its 2009 decision on preliminary injunction matters in the same case, explained that the prima facie case for a misappropriation claim are "(1) that [Faiveley] possessed a trade secret, and (2) that [Wabtec] used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means."  The 2d Circuit further noted that its case law does not require "exclusive" possession of the trade secret.  Rather, Faiveley position as the only entity in rightful possession of the subway car brake trade secret in the United States was sufficient to give it standing to sue. However, the court reduced the damages award to $15 million because the jury had not considered in its calculations the royalties awarded to Malmo by the arbitration tribunal. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.