Patent Defenses and Remedies Intro to IP – Prof Merges

Defenses 1.Inequitable Conduct 2.Patent Exhaustion

Remedies in patent infringement cases

Invalidity Defenses Clear and convincing evidence standard Exhaustion/First Sale Doctrine Implied License Reverse Doctrine of Equivalents Repair (not reconstruction) Experimental Use Prosecution History Estoppel With Authority §271(e) (Bolar Amendment – for purposes of FDA approval of generics) common law Shop Right Medical Activities § 287(c) (suits against MDs, hospitals) US Patent Claims Term: 20 years from filing § 282 Presumption of Validity

Kingsdown Med. v. Hollister Note the remedy or effect of a finding of inequitable conduct: patent is UNENFORCEABLE

Rationale Examiners are busy; patentee benefits greatly from examiner oversight Place strong penalty on patent applicant for nondisclosure or misrepresentation in patent prosecution

A Potent Defense Made more attractive when other defenses fail, when patent damages are very high

Prosecution history, p. 326 All these complex interchanges are grist for the mill under inequitable conduct All amendments, communications with PTO can and will be scrutinized

What was the mistake here? The applicant said, incorrectly, that claim 43 corresponded to allowed claim 50 in another (now issued) application Claim 43 was in fact broader than the allowed claim 50

Standard for Inequitable Conduct “Inequitable conduct resides in failure to disclose material information, or submission of false material information, with an intent to deceive....” -- p. 327

Inequitable conduct materiality intent Duty of Candor Inequitable Conduct US Patent Claims Term: 20 years from filing

Materiality and Intent Materiality: relevance, importance (established here) Intent: not established here

Intent unknowing accidental reckless deliberate lack of due care Legal Standard?

Inequitable conduct materiality intent Duty of Candor Equitable Defenses Examples : failure to disclose prior art failure to disclose rejection of claims misleading partial translation characterizing prophetic examples as real experiments false claim of small entity status failure to disclose all true inventors US Patent Claims Term: 20 years from filing Information Disclosure Statement

Patent Exhaustion To exhaust: to run out of, use up What is “used up”? The “power” of a patent When is it used up? When an item covered by the patent is sold on the market

LG Electronics (Patent Owner) Intel (Licensee) Computer Cos.

LG Electronics (Patentee) Intel (Licensee) Master License (required non- coverage notice to Intel Customers) Specific product license (no customer restrictions)

Intel (Licensee) Computer Cos. LG’s right to Sue?

End Users LG Electronics (Patentee) Intel

Intel (Licensee) End Users License? +

LG Sued End Users – Bizcom, Quanta, etc. End Users defended by claiming that they were protected against suit by virtue of the LG-Intel license agreement, and Intel’s sale of chips to them

District Court LG argued that end users were not protected by exhaustion, since the chips sold by Intel did not completely embody any claims in the asserted patents District Court disagreed: held, sales of chips by Intel exhausted LG’s rights vis- à-vis end users

Federal Circuit Partial reversal No exhaustion: LG did not authorize Intel to authorize end- users to combine Intel products with non-Intel products

Quanta Computer, Inc. v. LG Electronics, Inc. 128 S.Ct (2008) Held: licensee's sale of component computer parts that substantially embodied method patents held by patentee was “authorized” by patent holder, and had effect of exhausting patent holder's patents.

Supreme Court: Holdings 1.Method claims are subject to exhaustion 2.Embodiments substantially containing claimed technology exhaust a patent 3.Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

Supreme Court: Holdings 1.Method claims are subject to exhaustion 2.Embodiments substantially containing claimed technology exhaust a patent 3.Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

Third holding: important for future cases We can learn from the LG – Intel – End User arrangement

Basic exhaustion principles “Exhaustion is triggered only by a sale authorized by the patent holder.” –> 128 S.Ct. 2109, 2121

Two elements here [1] SALE only –> Licensing is outside this holding –> Creative licensing arrangements are still permissible

[2] Authorized by the patent holder –> Principles of implied licensing come into play

LG Electronics (Patentee) Intel (Licensee) Master License (required non- coeverage notice to Intel Customers) Specific product license (no customer restrictions)

No restriction on customers’ use of patented technology “[T]he provision requiring notice to Quanta appeared only in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement. Hence, Intel's authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta's decision to abide by LGE's directions in that notice.” S.Ct. 2109,

Patentee Licensee Quanta strongly suggests that effective restrictions/not -ice in license agreement might bind downstream users End users

LG Electronics (Patentee) Intel (Licensee) Specific product license WITH requirement to restrict customers; to give notice of no license

Remedies in licensing agreement “We note that the authorized nature of the sale to Quanta does not necessarily limit LGE's other contract rights. LGE's complaint does not include a breach-of- contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.” – 128 S.Ct. at 2122

Important issues post- Quanta Contractual remedies for Licensee’s breach of license, including unauthorized infringement by Licensee’s customers Patentee Licensee End users

Remedies Issuance Complaint filed in District Court Preliminary injunction hearing Damages assessed for this period if marking (or actual notice) Prospective Effect Final injunction issues

35 USC § 283. Injunctive relief. The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.

MercExchange, L.L.C., holds a number of patents, including a business method patent for an electronic market designed to facilitate the sale of goods between private individuals by establishing a central authority to promote trust among participants. See U.S. Patent No. 5,845,265.

United States Patent 5,845,265 Woolston December 1, 1998 “Consignment nodes” Abstract A method and apparatus for creating a computerized market for used and collectible goods by use of a plurality of low cost posting terminals and a market maker computer in a legal framework that establishes a bailee relationship and consignment contract with a purchaser of a good... in an electronic market for used goods while assuring the safe and trusted physical possession of a good with a vetted bailee. Inventors: Woolston; Thomas G. (Arlington, VA) Assignee:MercExchange, L.L.C. (Alexandria, VA) Filed: November 7, 1995

“Substantial evidence was adduced at trial showing that the plaintiff does not practice its inventions and exists merely to license its patented technology to others. Indeed, the plaintiff has made numerous comments to the media before, during, and after this trial indicating that it did not seek to enjoin eBay but rather sought appropriate damages for the infringement.” F.Supp.2d 695, at 712

Supreme Court Reversed Federal Circuit Rejected “automatic rule” Reimposed historical standard

The 4 Part Test: Plaintiff must show – (1) [T]hat it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. – book, p. 935

What was wrong with the Federal Circuit test? Too mechanical: “[T]he Court of Appeals departed in the opposite direction from the four-factor test. The court articulated a “general rule,” unique to patent disputes… Just as the District Court erred in its categorical denial of injunctive relief, the Court of Appeals erred in its categorical grant of such relief.

[S]ome patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. Such patent holders may be able to satisfy the traditional four- factor test, and we see no basis for categorically denying them the opportunity to do so.

We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.

Kennedy, Stevens, Souter & Breyer The lesson of the historical practice, therefore, is most helpful and instructive when the circumstances of a case bear substantial parallels to litigation the courts have confronted before

An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.

Damages Statute Caselaw (principles)

35 U.S.C. § 284 “[T]he court shall award [the patentee] damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer.”

35 U.S.C. § 285 “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

Damages Two measures: –Actual damages: “Lost Profits” –Reasonable royalty Actual damages & the problem of proof

Compensation principle “But for” the defendant’s infringing sales, what would the patentee’s profits have been? NOT a disgorgement remedy: patentee’s loss, NOT infringer’s gain

Willful infringement Section 284: The court “may increase damages up to three times”

1. Should a party's assertion of the advice of counsel defense to willful infringement extend waiver of the attorney-client privilege to communications with that party's trial counsel? See In re EchoStar Commc'ns Corp., 448 F.3d 1294 (Fed.Cir.2006). 2. What is the effect of any such waiver on work- product immunity? 3. Given the impact of the statutory duty of care standard announced in Underwater Devices, Inc. v. Morrison-Knudsen Co., 717 F.2d 1380 (Fed.Cir.1983), on the issue of waiver of attorney-client privilege, should this court reconsider the decision in Underwater Devices and the duty of care standard itself?

35 USC 284 When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d) of this title. The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

“Traditional” Federal Circuit rule “Where... a potential infringer has actual notice of another's patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing. Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity.” – Underwater Devices

The duty of due care standard has led to punitive damages based on nothing more than a negligent failure to proceed with “due care.” See, e.g., Stryker Corp. v. Davol, Inc., 234 F.3d 1252, 1259 (Fed. Cir. 2000) (declining to overturn jury finding of willful infringement when evidence indicated that reliance on advice of counsel was “unreasonable”)

But the duty of due care standard shifts to the defendant the burden of demonstrating that it has acted with sufficient care to forestall a finding of willful infringement. See Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmBH v. Dana Corp., 383 F.3d 1337, 1349 (Fed. Cir. 2004) (en banc) (Dyk, J.) (this “effectively shifts the burden of proof on the issue of willfulness from the patentee to the infringer”).

Seagate opinion Over the years, we had held that an accused infringer's failure to produce advice from counsel “would warrant the conclusion that it either obtained no advice of counsel or did so and was advised that its [activities] would be an infringement of valid U.S. Patents.” Knorr- Bremse, 383 F.3d at at 15

Just recently, the Supreme Court addressed the meaning of willfulness as a statutory condition of civil liability for punitive damages. Safeco Ins. Co. of Am. v. Burr, --- U.S. ----, 127 S.Ct. 2201, 167 L.Ed.2d 1045 (2007) [T]he Court concluded that the “standard civil usage” of “willful” includes reckless behavior. Id. at 2209

In contrast, the duty of care announced in Underwater Devices sets a lower threshold for willful infringement that is more akin to negligence. This standard fails to comport with the general understanding of willfulness in the civil context, Richland Shoe Co., 486 U.S. at 133, 108 S.Ct (“The word ‘willful’... is generally understood to refer to conduct that is not merely negligent.”), and it allows for punitive damages in a manner inconsistent with Supreme Court precedent

Accordingly, we overrule the standard set out in Underwater Devices and hold that proof of willful infringement permitting enhanced damages requires at least a showing of objective recklessness. Because we abandon the affirmative duty of due care, we also reemphasize that there is no affirmative obligation to obtain opinion of counsel.

When opinions are sought, NO waiver of attorney-client privilege with respect to trial counsel