IP Advisor - Summer 2013

Your company holds U.S. patents that protect a process for making solar panels. Your company has just discovered that another company is practicing your patented process in Singapore and is importing the solar panels into the United States. Can you obtain damages from the infringing importer?  Yes.

According to the patent statute, an importer of products made outside of the United States by a process that is patented in the United States may be liable for infringement. 35 U.S.C. §271(g). Infringement allegations under this statute are adjudicated in federal district court. Can you stop the infringing importations?  The answer is also yes according to the trade statute, which states that the importation of articles made by a process covered by the claims of a U.S. patent is unlawful. 19 U.S.C. §1337(a)(1)(B)(ii). Allegations of violations of the trade statute are adjudicated in the International Trade Commission (“ITC”).

A patentee therefore has a choice of where to file an infringement case for product by process claims. Is it better to file your case in district court or in the ITC?  Many different factors should be considered, and in some instances a complaint alleging infringement of process claims should probably be filed in both jurisdictions.

One important factor to consider is whether the infringing importer will likely defend against the allegations in the complaint with evidence that the imported product is materially changed by subsequent processes. Also worth considering is whether the product manufactured by the patented process is a trivial and nonessential component of the product that is actually imported into the United States.

Product by Process Claims in District Court versus the ITC

Both the ITC and district court are suitable for asserting process patent claims against an infringing importer. However, in district court, the infringing importer can allege the defenses enunciated in section 271(g) of the patent statute, namely:  (i) “[the imported product] is materially changed by subsequent processes” or (ii) “[the product made by the patented process] becomes a trivial and nonessential component of another product.”

The first defense applies when a manufactured product is produced by the patented process but additional process steps are performed that materially change the product from the product that would have been produced by practicing the patented process. The second defense applies when a product is manufactured by the patented process but the manufactured product is incorporated into a downstream product that renders the manufactured product a nonessential component of the downstream product. These defenses are known as the section 271(g) defenses and are only available to an accused infringing importer in district court; these defenses are not available in the ITC. The Federal Circuit in Kinik Co. v. Int’l Trade Commission, 362 F.3d 1359 (Fed. Cir. 2004), found that the accused infringer could not rely on the section 271(g) defenses in the ITC.

As background, in Kinik, the imported product was an abrasive material and the claimed process required several steps, including a sintering step. The respondent, Kinik, argued at the ITC and to the Federal Circuit that its imported abrasive material did not infringe the claimed process because it performed an additional blazing process that heated at a higher temperature for a longer period of time than the sintering step in the claims. Relying on the section 271(g) defense from the patent statute, Kinik argued that the additional blazing step imparted a material change to the imported product.

Both the ITC and the Federal Circuit ruled, however, that the section 271(g) defenses are exclusive to the patent statute and these defenses are not applicable when applying the trade statute in an ITC proceeding. The appellate court emphasized that Congress explicitly proclaimed when enacting section 271(g) that this section was “for purposes of this title” and the defenses would have no effect on any other statute. Furthermore, both the ITC and the Federal Circuit agreed that the legislative history of both the patent and trade statutes and precedent made it clear that there was a distinction between the patent and trade statutes.

Related Defenses Under Sucralose

It seems that this would be the end of the story – because there are no section 271(g) defenses in the ITC, a patentee should bring its patent infringement case with this fact pattern to that forum. But there is more. A few years after the Kinik decision, the section 271(g) defenses issue resurfaced at the ITC in Certain Sucralose, Sweeteners Containing Sucralose, and Related Intermediate Compounds Thereof, Inv. No. 337-TA-604, Comm’n Op. (Apr. 29, 2009). This time, the ITC shed light on a possible defense that resembled the section 271(g) defenses without implicating the patent statute.

In Sucralose, three patents were at issue, two of which covered a process for making an intermediate compound of sucralose and the other which covered a process for recovering a tin catalyst used in the process for making the intermediate sucralose compound.

With respect to the two patents directed to the intermediate compound, the importer of the sucralose product argued that:

• the imported article was not the intermediate compound covered by the asserted patents.
• in order to produce the actual imported sucralose sweetener, additional process steps were performed subsequent to the patented process steps for producing the intermediate compound.
• with respect to the catalyst recovery patent, the imported sucralose did not contain the tin catalyst and that the tin catalyst itself was not imported.

The Administrative Law Judge (“ALJ”) and the Commission agreed that — although there was subsequent processing after the patented process steps were performed to produce the intermediate compound — there was a sufficient “close interdependence between the patented processes and the production of sucralose.”  The Commission focused on factors such as: (i) the proximity of the intermediate compound and the final imported product (sucralose) in the process chain for producing sucralose; (ii) whether the intermediate compounds had any alternate uses other than being used in the production of sucralose; and (iii) the purpose of the patent.

With respect to the catalyst recovery patent, the ALJ and Commission determined that the claims covering the process of removing and recycling the tin catalyst from the process of making the intermediate compound were not contemplated by the trade statute under section 1337(a)(1)(B)(ii); because the tin catalyst was neither a precursor of sucralose nor the imported article, there was no “close interdependence between the patented process and the production of sucralose.”  The ITC noted that the catalyst, once recycled, could have been used for other processes not related to the production of sucralose.

The ITC’s reasoning for finding a sufficient “close interdependence” with respect to the intermediate patent claims and the imported sucralose — and not finding a “close interdependence” with respect to the catalyst patent claims and the imported sucralose — is analogous to the section 271(g) defenses which the Federal Circuit held were unavailable in Kinik. However, the Commission’s reasoning is carefully articulated to implicate the reach of the trade statute and not imply that section 271(g) directly applies in the ITC. Ultimately, the ITC determined that the patentee failed to prove all elements of the intermediate process claims and did not find a violation against the participating respondents.

From Sucralose we learn that the Commission will consider subsequent processing as an answer to a charge of importation of a product made by a patented process. What is unclear, however, is the precise extent to which subsequent processing will be a viable defense. The Commission found that the Federal Circuit in Kinik did not resolve the issue of the extent of subsequent processing, stating “there remains the distinct question of the extent to which the statutory language ‘articles . . . made . . . under, or by means of, a patented process’ encompasses articles that are further processed prior to importation.”  Thus, whether a “section 271(g)-ish defense” applies in the ITC and to what extent is still an open question.

The Practice Tip

Sucralose and Kinik are important decisions for a patentee to consider in deciding which jurisdiction is best for asserting process claims; these decisions also inform an ITC respondent of viable defenses. If your company decides to assert process patents to protect its solar panel industry in the United States, as in the example above, then the ITC may be the best place to do so. The accused importer will not be able to explicitly rely on the section 271(g) defenses. Thus, subsequent processing that does not remove the product from the reach of the trade statute will still be actionable in the ITC. The accused importer will have a harder time establishing that subsequent processing of the imported article is to such an extent that the article is no longer within the jurisdiction of the Commission under section 1337(a)(1)(B)(ii).

On May 16, 2013, the U.S. House Subcommittee on Courts, Intellectual Property and the Internet held the first hearing intended to commence a comprehensive review of copyright law, with a view toward legislation to modernize the federal copyright statute. The hearing followed an announcement by new Judiciary Committee Chairman Rep. Goodlatte (R-VA) that the committee would undertake this review, as well as a call by the Register of Copyrights, Maria Pallante, for comprehensive reform.

The last comprehensive legislative reform of copyright law occurred in 1976, long before the advent of the digital age which has radically transformed the means by which much copyrighted content is distributed and used. In 2010, a group of prominent academic and private sector copyright practitioners participated in the Copyright Principles Project (“CPP”), which considered numerous reform proposals but, tellingly, did not reach consensus on many of them. Nonetheless, the CPP report identified more than two dozen issues that will likely provide some focus to the House Committee’s review.

The following is a list of the issues most likely to be considered as a part of any comprehensive copyright reform:

• Clarifying the scope of the copyright owner’s exclusive rights. Central to any significant copyright reform will likely be an evaluation of the overall balance between the rights of copyright owners and the various countervailing interests of technology providers, content users and consumers. Congress will attempt to assess whether the current balance is adequate to protect against infringement and counterfeiting on the one hand, or whether it improperly impedes the use and dissemination of copyrighted content on the other.
  
  These considerations may be influenced by international concerns, in that the United States has generally advocated that other countries agree to and abide by international treaties such as the Anti-Counterfeiting Trade Agreement (“ACT”) and the Trans-Pacific Partnership (“TPP”), and any reform will not likely depart from the policies of those agreements. Congress may consider the duration of the copyright term, fair use, whether a right of public performance ought to be extended to sound recordings and whether streaming of content constitutes a reproduction or public performance.
  
  The CPP Report even suggested that the Copyright Office consider some means to provide the public with additional guidance, perhaps even opinion letters, about what constitutes fair use. The 2013 Joint Strategic Plan on Intellectual Property Enforcement, recently issued by the U.S. Intellectual Property Enforcement Coordinator, indicated that the Copyright Office would publish and maintain an index of major fair use decisions to help educate authors with respect to fair use.

• DMCA Reform. The Digital Millennium Copyright Act (“DMCA”) was enacted in 1998 and, among other things, provided a notice and take down process to protect content providers and online service providers in connection with the digital distribution of copyrighted works. This “safe harbor” has been central to the advent of Internet-based businesses with user-generated content.
  
  The Judiciary Committee will likely review the effectiveness and detriments of the DMCA, and determine whether any reforms would be beneficial. Among other things, the committee will likely consider whether content owners have been overly aggressive in demanding “take downs” where there is arguably fair use of a copyrighted work, and whether content owners have been adequately protected under a system that requires that they constantly police widespread digital distribution of their content.

• Orphan works. The Copyright Office previously endorsed legislation to address this issue, which pertains to works for which the author cannot readily be determined or located. Some have argued that, under current law, the threat of an infringement claim deters the use of such works, even when it is impractical or impossible to locate the copyright owner to obtain a license or permission. Although there is much agreement that a solution is necessary to enable the use of such works, reform efforts have fallen short of a solution to date.

• Statutory damages. High-dollar verdicts in some cases involving illegal downloading have given rise to arguments that the current statutory damage scheme is excessive and in need of reform. Currently, statutory damages are available up to $30,000 for each act of infringement, or $150,000 for willful infringement. Proponents of the current damages scheme, however, point out the massive extent of ongoing infringement, and argue that reducing the damages available would give prospective infringers even less concern that their conduct will be addressed. Expect Congress to consider options for providing additional guidance to courts in imposing statutory damages.

• Registration and recordation. Some commentators have suggested that it would be beneficial for Congress to address the extent to which registration and recordation of copyright ownership is required. The CPP Report suggested consideration of a new registration system to provide additional incentives for copyright holders to register their works, in order that the public has proper notice of those rights. In addition, Congress might clarify whether the mere filing of a copyright registration is sufficient to provide standing to bring a copyright infringement claim in federal court.
  
  Congress may also consider ways to improve the current system for maintaining public records of copyright ownership. For example, Congress might consider imposing additional requirements on copyright owners to inform the registry of updated information regarding assignments, successors in interest, and the like.

• Exceptions for libraries and archives. Another aspect of reform likely to be considered is Section 108 of the Copyright Act, which contains exceptions to allow libraries and archives to reproduce and distribute works under specified conditions. Many such institutions seek to broaden and/or clarify those exceptions, particularly with respect to digital preservation, conversion and lending of copyrighted materials.

• Compulsory licensing. Current law provides a compulsory license for broadcast satellite transmissions, but this provision expires at the end of 2014. Legislation to extend that compulsory license could provide a vehicle for a more substantial reform of copyright law. In addition, the Register of Copyrights recently suggested that Congress take another look at reforming the system of compulsory licensing for music publishers under Section 115, possibly by adopting a blanket-style compulsory license similar to that provided under Section 114. This, alone, is a complex, daunting issue for which developing a consensus may prove very difficult.

• Anti-circumvention procedures. The DMCA included anti-circumvention prohibitions to preclude consumers from unlocking the Digital Rights Management (DRM) protections on DVDs and other software, as well as cell phones, for otherwise legal uses. Congress is likely to consider whether these prohibitions go too far in light of the otherwise legal uses, particularly with respect to the issue of unlocking cell phones.

• First sale doctrine. In the Kirtsaeng v. John Wiley & Sons decision rendered in March, the Supreme Court held that the first sale doctrine of Section 109(a) of the copyright statute applied to “gray market products,” that is, foreign-made textbooks lawfully made and purchased abroad and later imported and resold in the United States. Publishers and other content owners vigorously opposed the decision, and may attempt to have Congress legislatively address the ruling.

• A “small claims court” for copyright? Congress previously asked the Copyright Office to study the effectiveness of the federal district court system for resolution of minor copyright disputes, and assess alternatives for resolving such claims at a lesser expense for litigants. The Copyright Office’s report is due later this year, and may spur consideration of reform proposals, including the possibility of a small claims process to provide cheaper enforcement mechanisms for independent artists. The 2013 Joint Strategic Plan on Intellectual Property Enforcement also recommended consideration of an alternate forum for enforcement of rights.

Prospects for Comprehensive Legislation

The enactment of comprehensive copyright reform will surely require a long and arduous process, as there are sharp divisions over how many of these issues should be addressed. It is worth recalling that the comprehensive revisions of 1976 were themselves the product of more than a decade of consideration and debate, and consumers are more attuned than ever to the relevance of copyright law to their daily lives. Even an issue such as orphan works reform has evaded resolution thus far, and the fierce battles over the Stop Online Piracy Act (“SOPA”) do not encourage optimism that agreement over the “next great Copyright Act,” as the Register of Copyrights has called it, will be easily reached.

With the advertising awards season having recently passed, this is a useful time to consider “scam ads” and what, if anything, advertisers can do to prevent them. A “scam ad” (also known as a “fake ad” or “phantom ad”), loosely defined, is an advertisement, submitted by an agency to an awards show, which uses a real advertiser’s brand name or product, but which is neither approved by, nor used by, the advertiser, such as spec work. In short, it is an agency’s way to show off its creativity in a manner that was not actually approved by the advertiser and used in the marketplace. On occasion, such ads are created expressly for submission to awards shows, and run only once to qualify for entry.

The danger of this practice is that an advertiser’s brand names and trademarks are being used publicly in a manner that it has not approved, and sometimes these ads are intentionally provocative and controversial. Moreover, until an advertiser expends considerable effort explaining and apologizing through crisis PR, consumers and the media may not distinguish between scam and real ads. The potential for embarrassment to the advertiser is extremely high, and explanations about whether the advertisement was authorized or not may be lost amidst the noise.

Major Advertisers Stung by Scam Ads

There have been some egregious examples, many of which have resulted in an initial firestorm of criticism against the advertiser (whose name, of course, is prominent in the scam ad). These examples range from instances where the advertiser had no business relationship whatsoever with the agency, to situations where the advertiser was working with the agency but did not approve the particular ad. This practice has affected a wide breadth of major consumer goods advertisers, including Ford, Kia, J.C. Penney, Kraft, Pepsi, Coca-Cola, McDonald’s, Gap, Pizza Hut, Burger King, Mentos and Guinness, among others.

Ford was recently subjected to criticism over an ad for the Ford Figo, which depicted the car being driven by Silvio Berlusconi with several female celebrities thrown into the trunk — some bound and gagged. The ad was created by Ford’s agency in India, and submitted to a major awards show in that country. Nonetheless, Ford had not approved the ad, and the incident resulted in the agency firing at least two employees. Ford spent considerable effort apologizing and explaining its lack of approval. In a similar incident, a J.C. Penney commercial that appeared to condone teenage sex won a prestigious Cannes Lions Award, only to have the advertiser condemn the commercial as one created and submitted without its knowledge or consent, apparently in violation of the Cannes competition rules.

Two years ago, an ad agency in Brazil created a series of ads for the Kia Sportage that juxtaposed family-friendly images on one side with racy, adult fantasies on the other. Kia denied approving the ads or even having any business relationship with the agency. This after-the-fact revelation resulted in the Cannes Awards show stripping the agency of two awards, and banning five agency creatives from the festival the following year.

Several years ago, the World Wildlife Fund was subjected to withering criticism for an advertisement created by a local agency, again in Brazil, portraying dozens of jetliners flying toward New York City skyscrapers, ostensibly to demonstrate the death toll of the 2004 Asian tsunami. The ad was submitted to awards shows. In this case, however, although WWF Brazil first contended that the ad was merely an unapproved concept proposed by the agency, it was subsequently determined that the ad was actually approved and appeared very briefly in a single market. WWF Brazil and the agency involved apologized for the ad, and characterized it as a mistake that was the result of a lack of experience on the part of a few professionals involved.  

At the far end of the spectrum, a U.K.-based awards show called the Chip Shop Awards highlights other crude ads using major brand names, many of which were created entirely without the knowledge of the advertiser. Many of the ads are little more than crude parodies which are difficult to imagine would have been seriously considered, much less approved by, the advertiser. Nonetheless, nearly all of them use major brand names and trademarks.

This year’s edition featured advertisements using Apple, Nike, Facebook, Starbucks, Adidas, and other major advertisers, including the actual trademarks, logos, taglines and corporate identities. See R. Parekh, “Amid Ford Figo Flap, U.K. Awards Show Applauds Scam Ads,” Advertising Age (Mar. 27, 2013). The judges for the competition include professionals from several prominent agencies.

Some of the major awards shows expressly prohibit the submission of spec work and require that all entries have been used and authorized by the advertiser. The eligibility requirements for the Cannes Awards show expressly state that, “[i]t is the responsibility of the entrant to ensure that the commissioning client has the rights to use the intellectual property of the brand advertised. Entries must not be made without the prior written permission of the client/owner of all rights that subsist in the advertisement.”  Further, “[a]ll entries must have been made within the context of a normal paying contract with a client.” Likewise, the rules for the CLIO Awards require that “[e]ntries cannot be made without the permission of the client and/or owner of the rights of the work. All entries – excluding student work – must have been created for a paying client except pro bono work for charities and non-profit organizations. Spec ads and director’s cuts are NOT eligible.”

Advertisers spend considerable time and money developing brand recognition and goodwill, as well as a particular image the advertiser hopes to convey to its consumers. They also expend considerable effort in vetting advertising agencies and, of course, pay the agencies for their work. It seems inconceivable, then, that the advertiser could walk into a firestorm over an ad that it has never approved. Regardless of whether the incident can be explained, it is a controversy that the advertiser simply does not need, and will likely sour, if not terminate, the relationship between the advertiser and its agency.

Advertisers Encouraged to Be Vigilant

A recent commentary in Advertising Age proposed that it was time for advertisers to start “kicking ass and taking names.”  K. Wheaton, “Scam Ads Don’t Boost Creativity; They Damage Brands, Hurt Agency Credibility,” Advertising Age (Apr. 1, 2013). But short of expressing outrage, explaining that the spec work was unapproved, and perhaps firing the agency, what can advertisers do to prevent such occurrences?  When an advertiser has no business relationship with the agency involved, it has little leverage other than to send an immediate cease and desist letter, and take steps on the crisis PR side to get out the word that it did not approve the ad.

Nonetheless, even in these situations advertisers can be proactive. Just as advertisers monitor the marketplace for possible trademark infringements and actionable advertising, they can monitor the awards shows for the unauthorized use of their brand names. Advertisers know the major awards shows, and they can review the ads nominated for consideration. Many of these controversies have arisen after an award has been won, so identifying scam ads early in the process can prevent a much larger problem later on.

And in the case of an agency with whom the advertiser has a relationship, the advertiser can, and should, help prevent such incidents when initially negotiating the contract. In fact, many agency professionals are sympathetic to ridding awards shows of scam ads and will be receptive to a frank discussion of the issue.

A typical agreement between an advertiser and its agency will contain an ownership provision delineating the parties’ respective rights in materials created by the agency. These provisions are important and can be a delicate issue, as advertisers often seek to obtain ownership of all materials, while the agency understandably balks at foregoing the rights to materials that the advertiser never makes use of, and in some cases paid nothing for. A typical ownership provision in an advertiser-agency agreement might include something similar to the following: 

All campaigns, trademarks, service marks, slogans, artwork, … or other materials that are subject to copyright, trademark, patent, or similar protection (collectively, the “Work Product”) produced by Agency are the property of the Client provided: (1) such Work Product is accepted in writing by the Client within twelve (12) months of being proposed by Agency; and (2) Client pays all fees and costs associated with creating and, where applicable, producing such Work Product. Work Product that does not meet the two foregoing conditions shall remain Agency’s property.

Such provisions, however, often say nothing specific about the agency’s ability to use campaign materials for awards shows or other promotional efforts, whether or not approved by the advertiser. Neither does this provision expressly require the agency to notify the advertiser and obtain its consent before submitting one of its ads for an awards show. The agency agreement is an opportunity for the parties to bring focus to the importance of this issue, provide the advertiser with additional security and also preserve the agency’s need to demonstrate its creativity in future pitches.

There are several options the parties can consider:

• Requiring the agency to notify the advertiser, and obtain its consent, prior to the submission of any ads using its brand name or trademarks, to an awards show;
• Relatedly, prohibiting the use of any unapproved spec work using the advertiser’s brand name or logo in connection with awards shows (and possibly marketing pitches);
• Delineating between the agency’s uses of spec work in public awards shows, as opposed to confidential uses in marketing pitches to prospective clients;
• Providing that any violation of the above such provisions will constitute cause for the advertiser to terminate the agency agreement; and
• Requiring the agency to indemnify the advertiser for any legal or crisis PR costs incurred in dealing with a breach of these provisions.

Not all of these provisions may be necessary in every instance, depending on the relationship between the parties and the agency’s history with respect to scam ads. But the advertiser and its agency will benefit from a candid discussion of this issue in the course of negotiating the agency agreement. Addressing the issue at that time can provide additional protection for the advertiser from having its brand and trademarks misused, and will provide the agency with clear instructions with respect to permitted uses of unapproved spec work.

PLI’s Understanding Patent Law 2013
6/28/13
This PLI program will cover all types of patent issues that may arise in the context of every day practice and business management. Patent licensing, and patent issues that arise in the context of transactions such as mergers and acquisitions will be also be addressed. Goodwin counsel Sarah Solomon is on the “Doing the Deal: M&A, Licensing and Other Patent Transactions” panel.