IP Advisor - October 2006

If your technology company does business with foreign nationals, either domestically or abroad, it is possible that your company is undertaking activities subject to laws and regulations that govern the export of technology. These laws and regulations serve an important role in safeguarding our nation and its interests. However, their complexity can serve as a trap for the unwary, and the penalties for non-compliance can be substantial. Here are 10 things to keep in mind as you pursue business activities with foreign nationals:

1.  There are several bodies of law that can apply to technology exports.

These laws and regulations include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the United States Munitions List (“USML”), the Export Administration Regulations (“EAR”), the Commerce Control List (“CCL”) and the various sanctions lists maintained by the Office of Foreign Assets Control (“OFAC”). Their coverage is broad in scope and oftentimes overlapping, with different bodies of law applying to the same export transaction.

When analyzing an export transaction, it is important to consider all of the applicable bodies of law, as the violation of any one can be subject to criminal penalties, including time in jail, or civil penalties. These penalties may be applied both to your company and to you as an individual.

2.  Export activities are a privilege, not a right.

Under U.S. law, the ability to engage in export activities is a privilege, not a right. If you do not comply with the relevant bodies of law that apply to technology exports, one of the penalties that you and your company may face is a blanket prohibition on your export activities.

3.  “Exports” may happen domestically or abroad.

The classic definition of an export is a good transported across country lines. However, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) has made it clear that an “export” of technology or source code occurs even when it is released to a foreign national within the United States.

This is known as the “deemed export” rule, and it is a good example of how the law in this area can be counterintuitive.

4.  “Exports” may involve an employee or a contractor.

Again, the classic concept of an export involves a sale to a foreign third party. There is no such restriction inherent in the legal definition of an “export.” The BIS has made it clear that you may “export” technology or source code even to a foreign national that you employ or have retained as an independent consultant. This does not apply to foreign nationals that have been granted permanent residence in the United States or U.S. citizenship.

5.  You may be prohibited from doing business with certain countries.

By law, U.S. citizens and residents are prohibited from transacting many or all forms of business with certain countries, including countries deemed by the State Department to support terrorism. These countries currently include Burma, Cuba, Iran, Liberia, North Korea, Sudan, Syria and Zimbabwe. The scope of prohibited business activities varies by country, and can include trade, aid and financial transactions.

6.  You may be prohibited from doing business with certain individuals.

By law, U.S. citizens and residents are prohibited from doing business with certain individuals. These individuals are enumerated in several lists maintained by the government that, even when reviewed on the Internet, may be more or less out-of-date. These include the BIS’s Entity List, Denied Persons List and Unverified List, and the OFAC’s Specially Designated Nationals and Blocked Persons List.

7.  Liability may result from subsequent improper “export” of your legal export.

Even if the export process is handled properly, your company may still face liability if your receiver improperly exports your technology to a national from yet another country. This is the BIS’s “deemed re-export” rule. For example, with reference back to points (3) and (4), if your receiver employs a foreign national who is not a permanent resident of the receiver’s country, and the receiver provides your technology to the third-party national in a way that constitutes an export violation, your company (and the receiver, obviously) may face export liability under U.S. law.

8.  You are obligated to watch for “red flags.”

You may have heard that “ignorance of the law is no excuse.” Like other areas of law, you and your company are presumed to have knowledge of the laws that govern your export activities. However, export law goes one step further. If you “know” that a technology export that is otherwise permissible will be used for certain types of weapon systems, you are required to seek permission from the appropriate government agencies.

What if you don’t “know” anything, but suspect something? You are obligated to watch for potential “red flags” and to investigate them if they arise. Moreover, you cannot take steps to prevent “red flags” from coming to your attention.

These “red flags” include a name or address similar to that of a denied person; a reluctance by the receiver to offer information about the end uses for your technology; a mismatch between the product’s capabilities and the buyer’s line of business or the technical level of the country to which it is shipped; a willingness to pay cash for items which are typically financed; the receiver’s ignorance of the product’s characteristics; vague delivery dates; out-of-the-way delivery destinations or an abnormal shipping route; unusual packaging; and a refusal of routine services such as installation and training.

9.  You may not need a license to export your products.

Assuming that you are not dealing with a prohibited country or individual, or in furtherance of a prohibited end-use, and your commercial goods consist of, for example, low-level technology or consumer goods, you may not need a license to export your products. Even so, you will still need to make the appropriate statements on your export declaration and keep proper records of your transaction.

10.  Administrative procedures exist to facilitate these determinations.

Assuming that time and resources permit, the best way to resolve questions concerning export law is to seek appropriate permissions or licenses from the various government agencies involved before exporting your technology.

For example, the Directorate of Defense Trade Controls, an arm of the State Department, will accept what is known as a Commodity Jurisdiction Request to decide whether your export is on the USML. Similarly, the BIS will accept a Commodity Classification Request to decide whether your export is subject to the CCL. Be advised that these requests can take several months to process.

While some of the government agencies involved will field telephone requests concerning export transactions, it is important to remember to handle such communications, if necessary, in a manner that would preserve later claims of attorney-client privilege and work product.

It is unquestioned that technology is becoming more complex, building on what has come before. In 1965, Gordon Moore prophesized that the number of transistors on a chip would double about every 2 years. To put this in context, in 40 years, the number of transistors on a chip has risen from mere thousands to nearly 1 billion. See www.intel.com/technology/silicon/mooreslaw/. A corollary to Moore’s law is that the price will necessarily decrease each generation, putting more computing power into consumers’ hands at ever-lower costs. The technologies that allow more information to be packed into an ever-smaller space at lower costs are increasingly complex.

Similarly, patent law is generally acknowledged as one of the more complex bodies of law. In light of the complexity of modern day inventions, it is not surprising that defining the scope of protection afforded to these inventions is complicated. As put by one patent practitioner: “Patents are complex legal documents, and the rules for interpreting these documents are constantly evolving.” See David J.F. Gross et. al, You Must Be Mistaken: Federal Circuit “Corrections” of District Court Claim Constructions (2002-03), in PATENT LITIGATION 2003, at 47 (PLI, Handbook Series No. G-766, 2003); see also John R. Allison & Mark A. Lemley, The Growing Complexity of the United States Patent System, 82 B.U. L. REV. 77 (2002) (comparing patents from the 1970s with patents from 1990s and finding increasing complexity). The Manual of Complex Litigation acknowledges this trend with special sections dedicated to the handling of patent cases.

Indeed, the Court of Appeals for the Federal Circuit was formed in 1982 in large part to deal with this complexity. As noted by Peter O. Huang, The Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc.: The Return of Patent Appeals to the Regional Circuits, 5 J. APP. PRAC. & PROCESS 197, 203 (2003):

Patent cases can also involve particu­larly complex issues of law and procedure ... The Senate Report accompanying the Federal Courts Improvement Act of 1982 promised that the Court of Appeals for the Federal Circuit would have a ‘rich docket,’ composed of ‘unusually complex and technical’ cases. Since then, the richness and complexity of the court’s docket has grown as the court has applied the patent laws to increasingly sophisticated technologies.

In light of the increasingly complex technology, legislators and scholars have recently considered whether even the focused Court of Appeals is sufficient. Congress is proposing to have trial court judges within select districts assigned to patent cases. A summary of the proposals circulating in Congress can be found in the article by Erik Larson, Bill Would Create Patent “Rocket-Docket” Within Courts, IP LAW360, Feb. 7, 2006, at www.iplaw360.com/Secure/ViewArticle.aspx?id=5245. As Kimberly A. Moore notes, something “special” may be needed, be it “specialized trial judges or special masters; specialized trial courts; alternative dispute resolution; expert (‘blue ribbon’) juries; or Patent Office reexamination or opposition procedures.” Jury Demands: Who’s Asking?, 17 BERKELEY TECH. L.J. 847, 849 (2002) (hereinafter “Jury Demands”). Others have suggested a National Patent Board to resolve all patent matters, because the courts do not appear capable. Richard P. Cusick et al., A Critical Analysis of the Proposed National Patent Board, 13 J. OHIO ST. J. ON DISP. RESOL. 461 (1997).

In light of the complexity of technology and law, the question then arises, are patent cases so complex that it would vio­late a patent holder’s due process rights to have a trial by jury?

Can Any Case Be Too Complex?

Maybe. The Supreme Court has not ruled on the issue as to whether a case can be so complex as to violate due process by sending the case to a jury. However, a number of Appellate Courts have addressed the issue as to whether com­plexity should form part of the equation in determining if there should be a jury trial. Interestingly, there is a split in the circuits going back over 25 years. In 1979, the Ninth Circuit in In re U.S. Fin. Sec. Litig., 609 F.2d 411 (9th Cir. 1979) held that complex­ity is not a factor in determining the right to a jury trial. One year later, in 1980, the Third Circuit in In re Japanese Elec. Prods. Antitrust Litig., 631 F.2d 1069 (3d Cir. 1980) came to the opposite conclusion. Since that time, the Seventh Circuit has cited more favorably to the logic of In re U.S. Fin. Sec. Litig. See Soderbeck v. Burnett City, 752 F.2d 285 (7th Cir. 1985), while the Fifth and Eleventh Circuits have paid deference to In re Japanese. See Cotten v. Witco Chem. Corp., 651 F.2d 274 (5th Cir. 1981) and Phillips v. Kaplus, 764 F.2d 807 (11th Cir. 1985). The Second Circuit has straddled the fence. See N.Y. v. Pullman Inc., 662 F.2d 910 (2d Cir. 1981) (leaning toward In re Fin. Sec. Litig.); Cohen v. Franchard Corp., 478 F.2d 115 (2d Cir. 1973) (leaning toward In re Japanese).

The cases in support of complexity not being a factor point out that due process requires trials to be fair, but not perfect, and question whether a judge is better equipped than a jury to deal with the com­plexities. Other courts have stated that “[i]f there is such a thing as a complexity exception to the Seventh Amendment, it cannot be applied where it would merely be ‘most difficult, if not impossible, for a jury to reach a rational decision.’ … [W]e are confident that if such an exception exists, it is only to be applied when the trial judge finds that the case is so complex that a jury could not render a rational decision based upon a reasonable under­standing of the evidence and applicable rules of law.” Cotten, 651 F.2d at 276.

Can Patent Cases Be Too Complex?

Shortly after its formation, the Court of Appeals for the Federal Circuit addressed, for the first and only time, the issue of whether a patent case could be too com­plex to send to a jury. The Federal Circuit in SRI Int’l v. Matsushita Elec. Corp. of Am., 775 F.2d 1107 (Fed. Cir. 1985) engaged in a long, detailed analysis of the issues involved, touching on the Fifth, Seventh, and Fourteenth Amendments to the Constitution. The court also analyzed both In re Japanese and In re U.S. Fin. Sec. Litig., before deciding that there was no com­plexity exception to a right to a jury trial in patent cases. In so holding, the Federal Circuit stated:

Empirical support is simply lacking for the assumption that the process provided in a properly conducted jury trial is necessarily less ‘due’ than that provided in a bench trial … We discern no authority and no compelling need to apply in patent infringement suits for damages a ‘complexity’ exception denying litigants their constitutional right under the Seventh Amendment. There is no peculiar cachet which removes ‘technical’ subject matter from the competency of a jury when competent counsel have carefully marshaled and presented the evidence of that subject matter and a competent judge has supplied carefully prepared instructions. SRI Int’l, 775 F.2d 1107, 1128-30 (citations omitted).

And there is some support for the Federal Circuit’s rejection of a complexity exception in SRI Int’l. Indeed, the process in a jury trial may not be less “due” than that provided in a bench trial. There is certainly no guarantee that a district court judge will be familiar with patent law. See Tenth Annual Judicial Conference of the United States Court of Appeals for the Federal Circuit, 146 F.R.D. 205, 372 (1993) (comments of Cohn, J. (E.D. Mich.)) (“[T]here’s an under-appreciation of the general lack of experience of district judges [regarding patent law] ... They simply can­not keep current with developments in the law.”). Since the Federal Circuit’s 1995 holding in Markman v. Westview Insts., Inc., 53 F.2d 967 (1995), the reversal rate by the Federal Circuit on claim construction issues, which are judicially handled (as opposed to handled by the trier of fact) has been approximately 33%. See Kimberly A. Moore, Are District Court Judges Equipped to Resolve Patent Cases?, 15 HARV. J.L. & TECH 1 (Fall 2001). Furthermore, in 1999­2000, the Federal Circuit reversed the same percentage of cases decided by juries as by judges (22%), indicating that juries may be holding their own in this field. Kimberly A. Moore, Judges, Juries, & Patent Cases — An Empirical Peek Inside The Black Box, 99 MICH. L.R. 365, 395 (2000) (hereinafter “Judges, Juries”).

However, since the Federal Court’s pro­nouncements in SRI Int’l, the number of patent applications filed has gone from 126,788 in 1985 to 382,139 in 2004. The number of issued patents has gone from 77,245 in 1985 to 181,302 in 2004. U.S. Patent Statistics Chart, UNITED STATES PATENT & TRADEMARK OFFICE, at www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm (last visited Feb. 16, 2006). More patents on more obscure and technical inventions make it potentially more likely that a jury may be overwhelmed in a patent trial. See Paul Z. Zegger & Peter Lee, The Paper Side of Patent Jury Trials: Jury Instructions, Special Verdict Forms And Post-Trial Motions, in PATENT LITIGATION 2004, at 756-57 (PLI Hand-book Series No. 3149, 2004). Moore worries that juries simply “ … replace rationality with emotion in adjudicating patent disputes.” Jury Demands at 848. Notably, the evidence suggests that juries seem to be swayed by ruling in favor of the party that filed the suit, while judges appear immune to such influences. In jury-handled suits, there is a 68% patentee win rate in infringement decisions and only a 38% pat­entee win rate in declaratory judgments, while bench-handled suit results are uni­form. Judges, Juries at 368. In addition, the Federal Circuit uniform reversal statistics above may be misleading because of deferential standards of review. See Reynolds v. Chicago, 296 F.3d 524, 526-27 (7th Cir. 2002).

Conclusion

The due process concerns raised in SRI Int’l have not yet been erased, and the question remains whether juries can adequately understand complex patent litigation. Statistics aside, there is a stark difference between a judge erroneously deciding a case because of an alternate interpretation of the law, and a jury erroneously deciding a case due to incomprehension. One district court judge, when asked about having a jury handle a patent case stated:

Honest to God, I don’t see how you could try a patent matter to a jury. Goodness, I’ve gotten involved in a few of these things. It’s like somebody hit you between your eyes with a four-by-four. It’s factually so complicated. Judicial Panel Discussions on Science and the Law, 25 CONN. L. REV. 1127, 1144 (1993) (statement of Judge Covello, U.S. District Judge, Dist. of Conn.).

More recently, Judge Wilson of the Central District of California in handling a complex patent case on networking tech­nologies stated: “I don’t see how any jury would ever deliver an enlighten[ed] verdict in this case … [but] it’s my responsibility to make sure that the trial is as clear and enlighten[ed] as possible.” He then posed the question of “whether a case can be so inherently complicated that it’s beyond the pale of a jury, therefore, com­pelling a jury trial under the Seventh Amendment denied the same parties their due process rights.” See Hearing Transcript in Alcatel Internetworking, Inc. v. Cisco Systems, Inc., C.D.CA., CV 00-05799-SVW (CWx), Nov. 4, 2002.

It is time for a closer look at this issue.

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This article is reprinted with permission from the July 2006 edition of the LAW JOURNAL NEWSLETTERS - PATENT STRATEGY & MANAGEMENT. © 2006 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited. For information, contact ALM Reprint Department at 800-888-8300 x6111 or visit www.almreprints.com. #055/081-08-06-0006.

Lou Sorell, a partner in the firm’s Litigation Department, practices in the field of patent law, and focuses primarily on providing patent opinions and related client counseling. He also has extensive experience in patent litigation, as well as patent application preparation and prosecution, for clients in the chemical, petrochemical, pharmaceutical and aerospace industries. Mr. Sorell has represented numerous clients in patent matters, including Teva Pharmaceuticals, ExxonMobil Chemical Corporation, Geneva Pharmaceuticals, Goodrich Corporation and United Technologies Corporation. He has represented clients in diverse areas of technology, including pharmaceuticals, polymers, catalysts, enzymes, textile chemicals, lubricants, fuel additives, metal alloys, lithographic printing plates, semiconductors, aerospace components and roofing products.

Q: What got you interested in IP law?

Lou: I was working as a research chemical engineer on synthetic fuel technology and became involved as a co-inventor on several patents. This was my first real exposure to patent law, and I became interested in the patenting process. After I learned more about patent law, I decided to go to law school. After law school, I first worked as an in-house patent lawyer for a few years, drafting and prosecuting patent applications and working closely with the research and business groups. Subsequently, I entered private practice and worked on a number of patent litigations, including several cases that went to trial. I also handled a number of trademark and copyright matters, although my primary area of expertise was and remains in patent law.

Q: Why do you like IP law?

Lou: It’s just the right mix of technology and law for me. As part of my job, I get to break down complex technical concepts into understandable pieces and integrate those pieces into a legal analysis. If it’s done right, it is a very satisfying experience. In addition, I've had the opportunity to meet lots of interesting people, including a number of technical experts I've worked with in various technologies. Most of these people are college professors, so learning from them is like having a one-on-one seminar with a really great teacher. It's also a lot of fun to work in depth with people like that on a complicated problem, and watch how somebody really smart approaches a difficult problem.

Q: Tell us about your interesting clients and cases.

Lou: Although my formal technical education was in chemical engineering, I've worked on matters involving widely different technologies, including voicemail, perfume, textile chemicals, jet engine components, microwaveable food, plastics and pharmaceuticals. I was co-counsel recently on a case involving patents and copyrights covering inflatable lawn decorations like the inflatable Santa Claus often seen around Christmas. There were some really interesting copyright issues concerning whether various depictions of Santa, a snowman and a stack of jack-o-lanterns were copyrightable expressions or already in the public domain. We also had the opportunity to haul all of these different lawn ornaments into court for the judge to see, which was a lot of fun.

Conferences, Seminars and Speaking Engagements

Patent Litigation
Date: November 6, 2006
Location: Practising Law Institute, New York, NY
Elaine Blais will participate in the panel entitled “The Paper Side of Jury Litigation: Instructions, Special Interrogatories, Motions Special to Jury Practice.”

MIT $100K Competition – IP Seminar
Date: October 26, 2006
Location: MIT, Cambridge, MA
This is an IP-focused panel hosted by the $100K competition organizers for entrants. The seminar will give entrants general IP information as well as guidelines for navigating the patent process. Duncan Greenhalgh will participate in this session.

Monetizing Intellectual Property
Date: October 12, 2006
Location: Goodwin Procter Offices, Boston and New York
This internally-produced seminar is part of the Securitizations and Derivatives CLE Seminar Series and covered: road map of the IP securitization market; securitizable intellectual property and royalties and special issues for certain asset classes. Mitch Bloom and Kingsley Taft presented this session.

 

Publications

Jacqueline Klosek and Kendrick Nguyen published “French Solidarity Tax: Providing Access to Medicine Without Compromising IP Rights,” in Global Intellectual Property Asset Management Report.

Stephen Charkoudian published “Establishing a Patent Licensing Programme,” in Licensing in the Boardroom, August 2006.

Ira Levy was interviewed by The Wall Street Transcript, July 2006.

Jacqueline Klosek published “Second Draft of GPLv3 Is Released and Concerns Are Raised,” in World Copyright Law Report, June 8, 2006.

Jacqueline Klosek and Kendrick Nguyen published “Vendor Management: A Critical Component of Privacy Compliance,” in The Privacy Advisor, June 2006.

 

Client Service

Aegerion Pharmaceuticals, Inc.
Cross-license relationship with Pfizer Inc. and the University of Pennsylvania to independently pursue product development opportunities involving microsomal triglyceride transfer protein-based (MTP) therapies as potential treatments to reduce LDL cholesterol. Duncan Greenhalgh, Edmund Pitcher, Kingsley Taft.