IP Advisor - January 2014

Patent reform legislation gained momentum with the passage of H.R. 3309, the “Innovation Act,” on December 5, 2013, which is purported to “address the ever increasing problem of abusive patent litigation.”  The legislation was introduced by the Chairman of the House Judiciary Committee, Robert Goodlatte (R-VA), on October 23, 2013, and has several prominent cosponsors, including Howard Coble (R-NC), Chairman of the House Subcommittee on Courts, Intellectual Property, and the Internet, and Lamar Smith (R-TX), Chairman of the House Committee on Science, Space, and Technology.  Chairman Goodlatte stated that the legislation seeks to promote innovation, “eliminate the abuses of [the] patent system, discourage frivolous patent litigation and keep U.S. patent laws up to date.”

The following sets forth the major changes the Goodlatte bill would make to patent litigation and Patent and Trademark Office (“PTO”) practice.

Heightened Pleading Requirement

The bill would replace the normal notice pleading standard and require the entity asserting a patent to identify the specific asserted claim(s), the allegedly infringing products or services, and state “with detailed specificity” how the product or service meets each of the asserted claims’ limitations.  For each alleged indirectly infringed claim, the complaint would also have to identify what and who is directly infringing, and the acts of the indirect infringer that contribute to or induce the direct infringement.  The complaint would also have to identify any other cases asserting the same patent, and whether the patent in suit has been declared “essential, potentially essential, or having potential to become essential to any standard setting body.”  The result of this heightened pleading requirement would be that infringement complaints would look a lot like infringement contentions, which are normally filed much later in a case.  Notably, the bill specifically excludes Hatch-Waxman type litigation under 35 U.S.C. § 271(e)(2) from these pleading standards.

Fee Shifting

The bill would amend current section 285, which allows courts “in exceptional cases” to award attorney fees to the prevailing party, by expressly creating a presumption of fee shifting.  The bill would provide that  the court “shall award, to a prevailing party, reasonable fees and other expenses incurred by that party … unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust.”  If the nonprevailing party is unable to pay, the bill provides that a court may make the fees and expenses recoverable against other interested parties, such as parent entities.  The discussion drafts of the bill included a provision that would award costs and attorney fees to a party who submitted a settlement offer to the opposing party at least 10 days before trial and ultimately obtained a more favorable outcome, but this provision was not included in the bill as introduced.

Limiting Discovery

The Goodlatte bill would provide that if a court finds that discovery is required to construe the claims, such discovery “shall be limited … to information necessary for the court to determine the meaning of the terms used in the patent claim, including any interpretation of those terms used to support the claim of infringement.”  There are exceptions to this limitation, such as when discovery would assist in resolving a pending motion, or in a Hatch-Waxman case when the resolution of a case within a set period “will necessarily affect the rights of a party with respect to the patent.”

Section 6 of the bill sets forth requirements that the Judicial Conference must use in developing additional rules and procedures related to discovery.  These requirements include that discovery be divided into two parts: “core documentary discovery” and “additional discovery.”  Each party would be entitled to core documentary discovery that is within the possession or control of each party, and such discovery would not be subject to cost shifting, i.e., each party would pay its own core discovery costs.  Core documentary evidence is defined as documents relating to conception, reduction to practice, technical operation of the allegedly infringing product or process, relevant prior art, damages, corporate structure of the parties, and documents related to the accused infringer’s knowledge of the patent prior to the suit.

Core documentary evidence specifically excludes electronic communications such as email and instant messaging; therefore these documents would constitute “additional discovery.”  Under the bill, electronic discovery cannot occur until after the exchange of initial disclosures and core discovery, and requests for such discovery would have to be “specific and … not … a general request for the production of information relating to a product or business.”  There would be a limit of five custodians for electronic discovery, but if the parties agree or the court finds there is a distinct need, parties could obtain additional discovery from five additional custodians.  A party requesting electronic communication discovery from more than 10 custodians would have to bear the costs of such discovery.  The parties would be entitled to seek additional document discovery permitted under the Federal Rules of Evidence but would have to pay for the cost of such discovery, including attorney fees.  When a party seeks additional discovery, it would have to post a bond for the expected costs unless the parties agree otherwise.

Disclosure of Patent Ownership

The bill would amend the statute to require any patentee who files a patent infringement complaint to disclose to the PTO, the district court and adverse parties exactly who has a legal or financial interest in the patents such as assignees, sublicensees and parent entities.  Complaints filed under 25 U.S.C. § 271(e) would be exempt from this requirement.  Failure to comply with this reporting requirement would result in forfeiture of any right to recover fees and expenses from the nonprevailing party or any damages for infringement during the period of noncompliance.

Double Patenting

While Chairman Goodlatte claims the bill only codifies obviousness-type or non-statutory double patenting, this provision could be argued as a major change in double patenting law.  The bill proposes a new section, § 106, which would provide:

A claimed invention of a patent issued under section 151 (referred to as the “first patent”) that is not prior art to a claimed invention of another patent (referred to as the ”second patent”) shall be considered prior art to the claimed invention of the second patent for the purpose of determining the nonobviousness of the claimed invention of the second patent under section 103…

Under current double patenting law, the claims of the first patent, often referred to as the reference patent, and not the patent as a whole are compared to the claims of the patent in suit to determine whether the claims in suit are obvious.  The specification of the reference patent is not considered prior art in an obviousness-type double patenting analysis.  A plain reading of this provision is that the reference patent as a whole would be prior art against the second patent.  Being able to use the entirety of a reference patent in a double patenting analysis would likely result in more invalidated patents on this ground.  Also, because of the reference to § 103, this section could arguably expand the bases for inter partes review.  

Small Business Education, Outreach, Information Access and Studies

The bill would create additional resources for small business owners at the PTO, including a user-friendly website to notify the public when patent litigation commences.

Changes to the Post-Grant Review Process Created by the AIA

First, the bill would limit estoppel after post-grant reviews to grounds actually raised in the review.  Under the AIA, after a final written decision on a post-grant review, a petitioner is estopped from raising arguments of invalidity “on any ground that the petitioner raised or reasonably could have raised.”  The bill would thereby permit more invalidity defenses in district court after a post-grant review.

Second, during post-grant review at the Patent Trial and Appeals Board, claims would be construed using the same standard as that used at the International Trade Commission and district courts – “in accordance with the ordinary and customary meaning of such claims as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent.”  Currently the PTAB construes claims with the “broadest reasonable interpretation.”

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Dozens of diverse associations representing the hotel and lodging, financial services and banking,  insurance, and mobile application industries have publicly supported the bill.  However, groups like the Innovation Alliance, which represents patent owners and stakeholders, have expressed opposition to the bill and say it will have “serious negative unintended consequences on U.S. inventors and the economy” by favoring large companies over small inventors.  Others like the Business Software Alliance have specifically criticized the portion of the bill expanding the CBM patents program, fearing it would endanger software-related patents.

While these changes would undoubtedly impact patent litigation practices and strategies, the focus of debate will be whether these changes will accomplish Chairman Goodlatte’s stated goals, or have unintended and undesirable consequences.  For example, the proposed heightened pleading requirements might deter some frivolous lawsuits and allow parties to move for dismissal early in a case.  However, they could also make it harder for patent owners, particularly small owners or inventors, from pleading with particularity at such an early stage in the litigation.  This is particularly true for product-by-process or other claims that typically require some discovery about the accused product before a patentee can adequately describe the alleged infringement.  Similarly, having a presumption of fee shifting can discourage small patent owners or inventors from bringing otherwise meritorious lawsuits because of the high costs for all sides in patent litigation.

While some believe that district court judges already have adequate tools and flexibility to curtail abusive litigation practices, the House passage of the Innovation Act shows that these proposals will receive serious consideration.  The Innovation Act now heads to the Senate, which is currently considering a “patent reform bill” of its own, the Patent Transparency and Improvements Act, which was introduced by Senators Leahy (D-VT) and Whitehouse (D-RI).

In 2013, privacy issues became top of mind for policy-makers, businesses and the public alike.  The Edward Snowden disclosures about NSA data-gathering propelled a host of privacy questions to the forefront of public debate.  The year also saw an increase in privacy-related litigation, as well as numerous legislative proposals and regulatory enforcement efforts.

Notably, few of the privacy issues raised over the past year were resolved.  The following is a list of privacy issues that are likely to receive significant attention in 2014:

1. Legal challenges to NSA data collection will continue.  The issue of NSA bulk collection of metadata continues to promise headlines and further legal action.  During the past few months, two federal district courts – in the Klayman and ACLU cases – have reached diametrically opposite results over the legality of the NSA’s practices.  News stories have suggested that further revelations about government surveillance efforts are yet to come.  Last month a presidential review panel offered additional recommendations about reforms of data collection for national security purposes.  Caught in the middle are private telecom providers and other tech companies, which the presidential review panel proposed should hold consumer metadata until required to disclose it by court order.  Expect the NSA story to continue to percolate throughout 2014.
2. EU data protection measures will raise challenges for U.S. businesses.  U.S. businesses will need to carefully monitor EU privacy developments in the coming year, because those developments may well impact businesses that provide services to EU citizens.  In recent years, Safe Harbor protections have provided U.S. businesses with a reliable means of privacy clearance for handling European personal data.  The Safe Harbor procedures are now under sharp scrutiny, and there is serious concern that the Safe Harbor will be substantially narrowed.  European privacy regulators have also stepped up enforcement against U.S. businesses operating in Europe.
3. FTC’s authority over privacy issues will be addressed.  The Wyndham and LabMD cases raise a fundamental challenge to the FTC’s authority to establish data security standards under Section 5 of the FTC Act.  The Wyndham case is pending in a New Jersey federal district court, where Wyndham’s position is backed by several notable amici, including the National Chamber Litigation Center; the LabMD case is an administrative action currently before the FTC.  With the FTC showing heightened attention to privacy issues (including planned seminars on mobile device tracking, consumer-generated health information and predictive behavioral “scoring”), the results of these cases will be closely watched.  Relatedly, FTC Chairwoman Edith Ramirez recently stated that she favored additional federal legislation requiring companies to notify consumers of data breaches, and providing the authority to impose civil penalties.
4. Commercial applications of geolocation, biometrics, and the Internet of Things will raise further privacy issues.  Technology that enables geolocation tracking, and the use of facial recognition or other biometrics continues to emerge, with new uses increasingly appearing in stores and mobile apps.  The FTC also appears to be keenly interested in the privacy implications of the interconnectivity of personal devices (also known as the Internet of Things), such as wearable health and fitness devices, home appliances and the like.  Expect these issues to receive increased attention from federal and state legislators, regulators and the plaintiff’s bar. 
5. Is there privacy in social media?  Businesses, educational institutions and others will continue to be challenged by the privacy implications of social media.  When, for example, should an employer be forbidden from scrutinizing its employees’ use of social media?  On the other hand, when should an employer be held liable for potentially tortious conduct that is manifested in some way by an employee’s use of social media (for example, an employee stalking or harassing a fellow employee or customer)?  Similar questions of balancing privacy and security face educational institutions, which may seek to screen applicants and current students for a variety of reasons, including character checks and campus safety. 
6. Will drones be cleared for takeoff?  Privacy issues relating to the use of drones gained increased attention with Jeffrey Bezos’ revelation on 60 Minutes that commercial package delivery might be accomplished via drones.  While this particular use of drones remains experimental, the story showed how drone technology has become increasingly accessible, as it is currently used for research, environmental monitoring, aerial photography and the like.  In November, the Federal Aviation Administration released a “road map” for the use of domestic drones.  This road map, however, did not impose specific privacy protections, leaving those issues for site operators and legislators to resolve.  Several members of Congress, as well as state legislators, have already shown an intent to more rigorously address privacy issues relating to the use of commercial drones in the coming year.
7. State AGs are not expected to go away soon.  It is clear that state attorneys general have become active players in policing privacy issues, particularly those involving data collection and use by businesses.  Because of the national scope of services offered by many businesses, it is increasingly common for a business to find its activities subject to a patchwork of privacy requirements imposed by numerous states, particularly California.  Expect this trend to continue in 2014.
8. Big Data poses big questions in public and private sectors alike.  What, exactly, is being done with all the data gathered by government and commercial entities, is the question many have asked over the past year.  The extent of the data collected, the responsible and ethical use of the data, and the security of the data, are issues that lie at the core of the public debate over privacy regulation.  In 2014, watch for more questions to be raised regarding the use of data gathered by non-profits, particularly political parties. 
9. Cybersecurity regulation still in the starting blocks, for now.  In 2013, negotiations over federal legislation to establish formal cybersecurity standards failed to result in an agreement, largely due to disputes over liability protections for businesses compliant with proposed standards, and the proper balance between security and privacy.  Although Congress is expected to continue to consider this issue, it is more likely that voluntary cybersecurity guidelines will emerge through the work of the National Institute of Standards and Technology.  While these voluntary standards will receive considerable attention, expect them to be given time to work before Congress is able to reach agreement on mandatory standards.
10. Data breach litigation will continue to influence best practices in cloud computing and data security.  The privacy class action bar continues to aggressively pursue data breach cases, often facilitated by a changing landscape of state law.  Of particular interest as businesses move to cloud technology will be questions regarding the parties’ respective duties when personal data is stored and shared through the cloud.  Standing and damages issues are also likely to be prominent in data breach litigation.

Under the patent statute, “[w]hoever actively induces infringement of a patent shall be liable as an infringer.”  35 U.S.C. § 271(b).  A finding of liability for inducement “requires knowledge that the induced acts constitute patent infringement.”  Global–Tech Appliances, Inc. v. SEB S.A., ___ U.S. ___, 131 S.Ct. 2060, 2068 (2011).  In DSU, the Federal Circuit stated that induced infringement “necessarily includes the requirement that [the inducer] knew of the patent.”  DSU Med. Corp. v. JMS Co., 471 F.3d 1293, 1304 (Fed. Cir. 2006).  But when does an accused infringer need to possess this knowledge?  Of course the filing of a complaint identifying a patent-in-suit will provide notice to an accused infringer.  But is it necessary for a patentee to assert pre-suit knowledge of the patent by the accused infringer to adequately state a claim of inducement and survive a motion to dismiss pursuant to Fed. R. Civ. P. 12?

Two Supreme Court decisions set the general standard for pleading a case in federal court.  As set forth in those cases, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).  In considering a motion to dismiss, the allegations in the complaint are taken as true, and all reasonable inferences are drawn in favor of the plaintiff.  In re Bill of Lading Transmission and Processing System Patent Litigation, 681 F.3d 1323, 1331 (Fed. Cir. 2012).  “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 677.

Following Twombly & Iqbal, the Federal Circuit held that for a claim of direct patent infringement, the pleading requirements are satisfied by Form 18 of the Federal Rules.  In re Bill of Lading, 681 F.3d at 1334.  Form 18 does not set a high bar; its language consists of a statement of ownership of the patent and the following basic statement:  “The defendant has infringed and is still infringing the [patent-in-suit] by making, selling, and using [the accused products] that embody the patented invention, and the defendant will continue to do so unless enjoined by this court.”  So for a claim of direct infringement, a complaint that follows Form 18 will be considered sufficient.  But the In re Bill of Lading decision also held that – for claims of indirect infringement, including inducement – the Twombly/Iqbal standard applies.  681 F.3d at 1336.

Competing District Court Approaches to the Knowledge Element

It appears that a majority of districts, including many hotbeds of patent litigation such as the Northern District of California, the Eastern District of Texas and the Eastern District of Virginia, have consistently held that knowledge of the patent as a result of the filing of the complaint is sufficient to survive a motion to dismiss.  See Bascom Research LLC v. Facebook, Inc., 2013 WL 968210 *4 (N.D. Cal. Mar. 12, 2013); Achates Reference Pub., Inc. v. Symantec Corp., 2013 WL 693955 *2 (E.D. Tex. Jan. 10, 2013); Rembrandt Social Media, LP v. Facebook, Inc., ___ F. Supp. 2d ___, 2013 WL 2950342 *4-5 (E.D. Va. June 12, 2013).

Courts in several other districts have also taken this approach.  See Unisone Strategic IP, Inc. v. Life Technologies Corp., 2013 WL 5729487 (S.D. Cal. Oct. 22, 2013); Service Solutions U.S., LLC v. Autel U.S. Inc., 2013 WL 5701063 *10 (E.D. Mich. Oct. 18, 2013); Silver State Intellectual Techs., Inc. v. FourSquare Labs, Inc., 2013 WL 5437363 *3 (D. Nev. Sept. 26, 2013); Pacing Techs., LLC v. Garmin Int’l, Inc., 2013 WL 444642 *2 (S.D. Cal. Feb. 5, 2013); Intellect Wireless Inc. v. Sharp Corp., 2012 WL 787051 *11 (N.D. Ill. Mar. 9, 2012).

A minority of courts, however, have held to the contrary, including the Middle District of Florida and the District of Massachusetts.  In the Brandywine decisions, the district court held that inducement of infringement requires a plaintiff to allege that defendant had pre-suit knowledge of the patent-in-suit.  The court stated, “because notice of the patent is necessarily provided by a complaint, finding that a complaint provides sufficient knowledge for induced infringement would vitiate the Supreme Court’s holding in Global-Tech that an allegation of knowledge of the patent is required to state a claim for induced infringement.”  Brandywine Comms. Techs., LLC v. T-Mobile USA, Inc., 904 F. Supp. 2d 1260, 1267-69 (M.D. Fla. 2012); see also Brandywine Comms. Techs., LLC v. Casio Computer Co. Ltd., 912 F. Supp. 2d 1338, 1345-46 (M.D. Fla. 2012).  A handful of other courts have adopted this position as well.  See Proxyconn Inc. v. Microsoft Corp., 2012 WL 1835680, at *5 (C.D. Cal. May 16, 2012); see also Aguirre v. Powerchute Sports, LLC, 2011 WL 2471299, at *3 (W.D. Tex. June 17, 2011); Zamora Radio, LLC v. Last.FM, Ltd., 758 F. Supp. 2d 1242, 1257 (S.D. Fla. 2010).

There is even a division of authority within the District of Delaware, but more recent cases (since 2012) appear to favor the majority view.  See Fairchild Semiconductor Corp. v. Power Integrations, Inc., 935 F. Supp. 2d 772, 777 (D. Del. 2013); Walker Digital, LLC v. Facebook, Inc., 852 F. Supp. 2d 559, 565 (D. Del. 2012) (“there is no legal impediment to having an indirect infringement cause of action limited to postlitigation conduct”); Apeldyn Corp. v. Sony Corp., 852 F. Supp. 2d 568, 573 (D. Del. 2012) (same); SoftView, LLC v. Apple Inc., 2012 WL 3061027 *7 (D. Del. July 26, 2012); but see Mallinckrodt Inc. v. E–Z–Em Inc., 670 F. Supp. 2d 349, 354 (D. Del. 2009) (“The Court is not persuaded by Plaintiffs’ contention that the requisite knowledge can be established by the filing of the Plaintiffs’ Complaint.”) and Xpoint Techs, Inc. v. Microsoft Corp., 730 F.Supp.2d 349, 357 (D. Del. 2010) (same).

Differing Rationales

The district courts taking the majority view have set forth the following rationales.  First, if only “pre-filing” knowledge were sufficient, a patentee could inform the accused infringer of the patent mere hours before filing a complaint and still technically meet the requirement.  Thus, the requirement could be argued as pointless.

Moreover, in such situations the patentee would typically be allowed to file an amended complaint, so the patentee could re-file and assert knowledge based on the earlier original complaint.  Again, such a requirement may seem a pointless elevation of form over substance.  Thus it is arguably more efficient and conducive to judicial economy to allow claims based on knowledge provided by virtue of the filing of the complaint.

One argument for the minority view, however, is that requiring pre-suit knowledge can encourage parties to obtain resolution of their dispute before any litigation need occur.  However, this argument might be countered by noting that the patentee is not required to show that the accused infringer’s knowledge arose by way of a cease and desist letter or the like.  For example, a patentee can assert that an accused infringer obtained knowledge due to the patent-in-suit being cited as prior art in another litigation in which the accused infringer was involved, or in a patent prosecution context.  In such a situation, the patentee and accused infringer would not necessarily be motivated to seek out a resolution outside litigation.

Another argument for the minority view is that finding post-filing knowledge sufficient undermines the Supreme Court’s holding in Global-Tech, which requires knowledge of the patent to state a claim for induced infringement.  But identifying the patent in a complaint necessarily satisfies this requirement going forward, and any damages for inducement are limited to the time period in which all elements of inducement are satisfied.

What Other Factual Assertions Are Sufficient?

A patentee is required to plead sufficient facts to make its inducement claim facially plausible, but it need not “prove its case at the pleading stage.”  In re Bill of Lading, 681 F.3d at 1339.  Nonetheless, recent decisions make clear that something more than conclusory allegations are required to render an inducement claim sufficiently plausible.  See, e.g., Bascom, 2013 WL 968210 at *4 (“Although the complaints allege that defendants ‘knowingly induced’ infringement, there are no facts alleging whether, when or how defendants became aware of the patents-in-suit.”).  Moreover, the Supreme Court’s Global-Tech decision held that “willful blindness” may suffice to show the requisite knowledge of the patent.  131 S.Ct. at 2070-71.

Practice Points

Overall, the competing approaches may present a distinction without a real difference.  First, for those districts in the majority that allow knowledge as of the time of the filing of the complaint, any inducement damages will be limited to the time period in which both elements of inducement – knowledge and specific intent – were satisfied.  And in the minority of districts which will dismiss a complaint for failure to adequately assert pre-filing knowledge, the dismissal will be without prejudice.  A patentee can then file an amended complaint, and the defendant will necessarily have knowledge of the patent at the point in time the amended  complaint is filed.  This process would result in a delay of the case, but perhaps little else of substance.

In addition, regardless of how the patentee successfully pleads the knowledge element, a complaint may still fail if the patent does not present a plausible case under Twombly/Iqbal for the other element of inducement, namely specific intent to encourage another’s infringement.

Finally, although the majority of cases on the issue have held that knowledge as of the filing date is sufficient, there are obvious benefits to a patentee if it can plead pre-suit knowledge.  In addition to extending the time period for inducement-related damages, in many circumstances pre-filing knowledge is ordinarily required for a willfulness claim.

Advanced Licensing Agreements 2014
January 29-30, 2014
San Francisco

March 20-21, 2014
New York City

April 24-25, 2014
Chicago

Licensing transactions are more complex and more important than ever. The constantly evolving legal, regulatory and technical landscape drives the need to stay current in a wide variety of key areas. This program will feature updates on current legal developments, present case studies highlighting best practices, provide tactical guidance for negotiating frequently contested issues, and provide a framework for identifying and avoiding common pitfalls, keeping the relationship on track, litigation planning and avoidance, and addressing ethics concerns. Goodwin Procter partner Ira Levy will speak on two panels: “Litigation and Case Law Issues for Licensing Lawyers” and “Ethical Considerations in Licensing.”

NYIPLA Judges Dinner 2014
March 28, 2014
New York City

Goodwin Procter is pleased to support the New York Intellectual Property Law Association’s 92nd Annual Dinner in Honor of the Federal Judiciary. This year, the keynote speaker will be The Honorable Kenneth W. Starr, President and Chancellor of Baylor University, former Solicitor General of the United States, and former judge for the U.S. Court of Appeals for the District of Columbia Circuit. The Honorable Gregory M. Sleet, Chief Judge of the U.S. District Court for the District of Delaware, will be awarded the 12th Annual Outstanding Public Service Award. Goodwin will be hosting clients and guests in the hospitality suite in the Waldorf Astoria’s Peacock Alley, before and after the dinner.