De-Turbocharging Chevron and Mayo – What Arguments Survive Mayo to Place a Check on Federal Regulatory Overreach?

Mayo Foundation for Medical Education and Research v. United States, 562 U.S. _____, 131 S. Ct. 704; 178 L. Ed. 2d 588 (2011), decided by the Supreme Court last January 11, is the most important elaboration upon Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984) that has occurred within the 27 years of Chevron‘s existence. Whether federal regulations are valid or not has long been tested by the standard set out in the Chevron case (although how Chevron applied to tax regulations was not completely settled).

Mayo is troubling because it interprets Chevron in a markedly pro-agency way — in at least two major respects:

  • Mayo takes an approach that makes it difficult to show that a regulation runs afoul of the plain text of the enacted statute (underChevron “step one”); and
  • Mayo allows an agency promulgating a regulation to rely, under Chevron step two, on administrative convenience as a justification for the regulation — even when the agency expressly admits that an administratively convenient, bright-line rule will sometimes yield a result that is incorrect and that reflects a detriment to the taxpayer that is very substantial.

The federal government, unsurprisingly, is now citing Mayo as the basis for a new and broader authority for issuing federal regulations.

There are, however, at least two non-obvious strategies for limiting Mayo:

  • When the agency has used administrative convenience as a justification for drawing a bright line that you believe overreaches, brainstorm to identify a situation that (a) is within the category encompassed by the bright-line, and (b) contradicts, or comes close to contradicting, some statute (not necessarily the one that regulation was designed to interpret), regulation, or judicial doctrine. The situation you identify would not necessarily have to be your situation.   The agency should not be able to have it both ways: invoking administrative convenience because of the government effort required to dispose of a burdensome category of situations, while at the same time arguing that a person challenging the regulation has standing to invoke only her own situation; and
  • Identify a constitutional provision (other than due process and not the non-delegation doctrine, each of which are typically non-starters) with which the regulation is in some significant tension. There are venerable rules of statutory construction, often overlooked, that direct courts to avoid constructions of a statute that raise significant constitutional questions. Under these rules of construction, Chevron shouldn’t apply at all, or should have a sharply limited, secondary role, when the regulation raises significant constitutional questions.  Again, some basic “Con Law 101” brainstorming might allow one to completely sidestep Chevron deference.

Real-world examples of how these two non-obvious strategies might be used are discussed in our recently published BNA Daily Tax Report article, The ‘Mayo’ Decision’s Problematic Tax Analysis, which may be found at http://www.gtlaw.com/NewsEvents/Publications/PublishedArticles?find=148637.

In addition, several additional strategies are suggested by the following statement in Mayo (slip op. at 12, citations and emphasis omitted):

We have explained that “the ultimate question is whether Congress would have intended, and expected, courts to treat [the regulation] as within, or outside, its delegation to the agency of ‘gap-filling’ authority.” In the Long Island Care case, we found that Chevron provided the appropriate standard of review “[w]here an agency rule sets forth important individual rights and duties, where the agency focuses fully and directly upon the issue, where the agency uses full notice-and-comment procedures to promulgate a rule, [and] where the resulting rule falls within the statutory grant of authority.”

  • First, the preamble to the regulations, issued along with the proposed, temporary, or final regulations, should be examined to determine the agency’s stated reasons for issuing the regulations. Mayo conducted its Chevron “step two” review by examining each of the Treasury Department’s stated reasons to see whether they, together, provide a reasonable justification for the regulation.  Given Mayo’s emphasis upon whether “the agency focuses fully and directly upon the issue,” it appears that the Court is inclined, in considering whether a regulation meets step two of Chevron, to take into account only those reasons that an agency offered at the time it issued the regulation;
  • Second, Mayo strongly suggests that a regulation may not be entitled to Chevron deference unless it was issued after notice and comment; and,
  • Third, the statutory grant of authority for the regulation should be examined to determine whether the regulation is authorized and consistent.

Anyone interested in understanding how to limit the reach of Chevron as “turbocharged” by Mayo should consider these and other points, and should, in addition, attempt to understand the underlying substantive tax issues addressed by Mayo. Again, the BNA article is useful on these points.

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Supreme Court of Texas Update: SCOTX Statutes-O-Rama

This recent homily in the Texas Lawyer mentioned how and why the Texas Supreme Court tends to grant statutory cases. This week’s new opinions surely reflect that statutory bias. They are wall-to-wall statutory cases.

  • Travis Central Appraisal District v. Norman involves whether the Legislature’s amendment to the Labor Code undid the Supreme Court’s prior construction of the act in City of LaPorte v. Barfield. Answer: yes. The Court had previously held that the Labor Code waived immunity of political subdivisions as against retaliatory discharge/workers comp claims.  After the amendment, the Appraisal District now had immunity. Justice Medina wrote the opinion.
  •  Loftin v. Lee involved the application of the Texas Equine Activity Limitation of Liability Act (yes, there is one), which limits liability for the inherent risks of equine activity–e.g., horse back riding. Justice Hecht, writing for the Court, broadly applied the act to risks that, in their general character, are associated with activities involving equine animals, and also held that the failure to fully assess a rider’s skill is no basis for liability if that failure did not cause the injury.
  • Roccaforte v. Jefferson County involved the question of whether personal service of notice of a claim on the county judge and county or district attorney was good enough, even though Section 89.0041 of the Local Government Code required registered or certified mail. Chief Justice Jefferson, writing for the majority, said it was. Justice Willett would have held that it was not, but concurred in the result, finding waiver because the County had engaged in litigation for two years and waited for limitations to expire before complaining.
  • On denial of rehearing in Turtle Health Care v. Linan, the Judge Per Curiam construed the Texas Medical Liability Act to the effect that claims complaining about the failure of a ventilator without properly charged batteries could not be brought outside the Act and its requirements for expert reports.

But just to keep Mr. Smarty Pants Blogger in his place, the Court granted a non-statutory petition for review, Texas Electric Utility Construction v. Infrasource Underground Construction Services, positing the question of whether attorneys fees can be recovered as damages for conversion when the unauthorized use of the converted property results in an injury and a lawsuit that the owner winds up defending.

Next week, we’ll have another very special guest expert on the blog, this time on the issue of how to write for screen readers.

Split Within Federal Circuit On Preemption In Ownership Disputes

The U.S. Court of Appeals for the Federal Circuit has denied a petition for rehearing en banc of its panel decision in Abraxis Bioscience v. Navinta LLC (see IP Update, Vol. 13, No. 11>) regarding the applicable rule of law to apply in patent ownership dispute standing issues.  Concurring and dissenting opinions were filed by several members of the Court.  Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Mar. 14, 2011) (per curiam) (concurring opinion by Gajarsa, J. joined by Linn, J. and Dyk, J.) (dissenting opinion by O’Malley, J. joined by Newman, J.).

The problem with title to the patent in suit arose from a series of mergers and asset acquisitions carried out in relatively quick succession. In chronological order, the inventors assigned ownership to Astra Lakemedel Aktiebolag (Astra L) and AB Astra. AB Astra then merged into AstraZeneca AB (AZ-AB). Astra L and AZ-AB later (in late 2007) assigned ownership to their parent, AstraZeneca (AZ-UK), but not before plaintiff Abraxis had entered (on April 26, 2006) into an asset purchase agreement (APA) with AZ-UK. Thus, even at closing on June 28, 2006, when AZ-UK made a present assignment of its ownership to Abraxis in an IP assignment agreement included in the closing documents, AZ-UK did not have legal title to the patents, which had not yet been assigned to AZ-UK by its subsidiaries Astra L and AZ-AB. When the oversight was corrected in late 2007, Abraxis had already filed its complaint against Navinta.

Although patent law is often thought to be exclusively federal, in fact many disputes over patent ownership turn on common law rules of contract and property that, at least since Erie Railroad v. Tompkins, have been considered state rather than federal.  Last November, a split panel of the Federal Circuit vacated a district court finding of infringement by generic drug maker Navinta on the grounds that the plaintiff Abraxis had not properly transferred ownership of the asserted patents prior to the filing of the complaint.  Abraxis Bioscience v. Navinta LLC (seeIP Update, Vol. 13, No. 11).  In that decision, the panel majority recognized limited federal preemption of state law in interpreting contracts of assignment.  Unfortunately for Abraxis, the APA provided only that AZ-UK “shall cause” the assignment of ownership to Abraxis. In accordance with the Federal Circuit precedent of DDB Techs. (2008) (which applies to the interpretation of assignment), the Court found that such an assignment does not operate as a present assignment of rights, but rather as a promise to assign in the future.

The dissent from the original panel opinion (by Judge Newman) and the dissent from rehearing en banc by Judge O’Malley (joined by Judge Newman) argue that the application of New York state law by the district court (which upheld Abraxis’s claim to ownership) was correct and that the majority was overextending the reach of federal jurisdiction.

Practice Note:  The concurring and dissenting opinions in connection with the rehearing en banc petition expose differences at the Court on the choice of law for interpretation of patent assignments. The precise rule of law (the issue of when an assignment is a present assignment or a promise of a future assignment) invoked by the panel majority is now under consideration by the Supreme Court in Stanford v. Roche (see IP Update, Vol. 13, No. 11).

In that case, the Federal Circuit vacated a judgment against Roche because the inventor had made only a promise to assign.  The Supreme Court agreed to review is directed to the issue of whether the Bayh-Dole Act (which permits transfer of title of federally funded inventions to universities) trumped common law rules of property. The Federal Circuit decision applied the rule of DDB without comment on the preemption of state by federal law.

In advising buyers in a merger, counsel should make closing contingent upon clear documentation of chain of title from any subsidiaries to the seller, so that a present assignment at closing includes all the bargained-for rights.

U.S. Supreme Court: FAA Preempts State Law Rule That a Collective Action Waiver in a Consumer Arbitration Clause Is Unconscionable

In AT&T Mobility, LLC v. Concepcion, No. 09-893,—U.S.—(Apr. 27, 2011), the U.S. Supreme Court held in a 5-4 decision that the Federal Arbitration Act (FAA) prohibits states from conditioning the enforceability of consumer arbitration agreements on the availability of classwide dispute resolution procedures. The Court’s decision in Concepcion will have potentially profound effects on the future of certain types of class action litigation, including litigation outside the consumer class action context. In endorsing in the strongest terms the federal policy favoring arbitration embodied in the FAA, the Court seriously undermined—if not overruled—numerous decisions that have voided as unconscionable class and collective action waivers in arbitration agreements. The ruling in Concepcion provides defendants with powerful arguments that the FAA requires enforcement of class action waivers in arbitration agreements, and thus may enable parties to reduce significantly their exposure to class action liability through properly drafted arbitration agreements.

Background

The Concepcions purchased cellular telephone service from AT&T. Their contract with AT&T provided for arbitration of all disputes between the parties, and required that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” The arbitration agreement featured terms that the district court described as notably consumer friendly. Among other things, AT&T agreed to pay all costs for nonfrivolous claims; allowed the consumer to choose whether the arbitration would take place in person, by telephone, or through written submissions; and provided that the arbitrator could award any form of individual relief. The agreement also precluded AT&T from seeking attorney’s fees and, in the event that the customer received an arbitration award greater than the amount of AT&T’s last settlement offer, required AT&T to pay a minimum award of $7,500, plus twice the claimant’s attorney’s fees.

The Concepcions sued AT&T in the U.S. District Court for the Southern District of California, alleging that AT&T violated California consumer protection statutes by charging sales tax on mobile phones that had been advertised as free. The Concepcions alleged they suffered damages of $30.22—the amount of the sales tax. AT&T moved to compel individual arbitration of the Concepcions’ claims. The district court denied the motion. Relying on the California Supreme Court’s decision in Discover Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), the lower court found the arbitration provision was unconscionable because AT&T had not shown that individual arbitration adequately substituted for the deterrent effects of class actions. In Discover Bank, the California Supreme Court held that class action waivers in consumer arbitration agreements are unconscionable in cases that involve adhesion contracts, predictably small amounts of damages, and allegations of consumer fraud, because such waivers, in violation of California law, effectively permit a defendant to exculpate itself against its own fraud.

The Ninth Circuit Court of Appeals affirmed the district court’s denial of AT&T’s motion to compel arbitration. It also held that the Discover Bank rule was not preempted by the FAA because that rule was an application of general principles of California unconscionability law.

Concepcion: A State Law Rule That Frustrates the Purposes of the FAA Is Preempted

In reversing the Ninth Circuit, the Supreme Court proceeded from the principle that “[t]he overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.” The Court noted it had long construed Section 4 of the FAA, which requires courts to compel arbitration “in accordance with the terms of the agreement,” to permit parties to structure their arbitration agreements as they see fit, such as by limiting the issues subject to arbitration, arbitrating according to specific rules, and limiting the persons with whom the parties will arbitrate their disputes. The Court found that the Discover Bank rule interferes with the FAA’s purpose of promoting arbitration because it effectively forces the parties into classwide arbitration proceedings, thus “sacrific[ing] the principal advantage of arbitration—its informality” for a procedure that is slower, costlier, and more complex.

The Court rejected the argument that California unconscionability law, as interpreted by Discover Bank, is a generally applicable defense to contract formation and thus not preempted by the FAA. Moreover, the Court stated, even a generally applicable rule of state contract law must yield to the FAA if the state-law rule “stand[s] as an obstacle to the accomplishment of the FAA’s objectives” of promoting arbitration and ensuring that arbitration agreements are enforceable according to their terms.

Implications

The full implications of the Concepcion decision are uncertain (and likely will be the subject of extensive litigation), but they are apt to be significant. Although the Court’s decision focused on California law, courts in numerous states have held class action and class arbitration waivers unconscionable, and therefore unenforceable, on grounds similar to the Discover Bank rule. Concepcion may overrule any decision that held a class action waiver in arbitration unconscionable on the basis that the waiver is presented in an adhesion contract and prevents consumers or other plaintiffs from aggregating small claims. A clearly stated class arbitration waiver will probably be enforceable.

Also, while Concepcion involved a consumer arbitration agreement, the decision is likely to have broader application. For example, the Court specifically mentioned the employment context, noting it had previously upheld arbitration agreements “despite allegations of unequal bargaining power between employers and employees.” This suggests that a class action waiver in an employment agreement is likely to be enforced as well.

To be sure, the Concepcion decision raises many questions as well. As noted, AT&T’s arbitration agreement had many consumer-friendly features. One issue is whether a class waiver would be enforceable in an arbitration agreement that is less consumer friendly (for example, one that does not allow the arbitrator to award punitive damages, or requires the parties to split the cost of arbitration). In such cases, costs and fees could easily exceed the value of the claim. Nevertheless, the Supreme Court’s analysis did not expressly turn on these consumer-friendly features, although the Court did highlight the district court’s observation that the guaranteed damages amounts would have put the Concepcions in a substantially better position than if they were participants in a class action.

Also, the Concepcion decision addressed just one basis for holding a class waiver unenforceable—state unconscionability law. Left open is whether a court may refuse to enforce a class waiver on some other basis, such as where a class waiver would undermine the vindication of an unwaivable statutory right, see Gentry v. Superior Court, 165 P.3d 556 (Cal. 2007), or where the expert costs necessary to prove a claim effectively preclude an individual claim, see In re American Express Merchants’ Litig., 634 F.3d 187 (2d Cir. 2011). Although the broad language in Concepcion, and its vigorous emphasis on the enforceability of arbitration agreements according to their terms, suggests that its holding may cover these situations as well, further litigation will undoubtedly define the contours of the Concepcion decision.

In light of this landmark decision, companies and employers should promptly review the terms of their consumer, commercial, and employment contracts. Companies and employers with existing arbitration agreements should carefully examine them to determine whether modifications are necessary to gain the full benefit of Concepcion. Employers that do not currently use arbitration agreements will need to carefully weigh the pros and cons of arbitration of individual claims in deciding whether to adopt arbitration in order to have an enforceable class action waiver. Companies that have not used arbitration agreements (or have not used class waivers) in their consumer-facing agreements should strongly consider adding them, because Concepcion provides a mechanism for significantly reducing, if not eliminating, class action risk.

Discover Bank Is Dead: The U.S. Supreme Court Rules That Federal Law Preempts State Laws That Obstruct The Enforcement Of Class Action Waivers In Arbitration Agreements

On April 27, 2011, the Supreme Court held that the Federal Arbitration Act “preempts California’s rule classifying most collective arbitration waivers in consumer contracts as unconscionable.” AT&T v. Concepcion, 563 U.S. ____, majority at 5, 18 (2011). The Court referred to this rule as the “Discover Bank rule,” after the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), though variations of this public policy-based rule have been articulated by many other court decisions in California and elsewhere. Writing for the majority in a 5 to 4 opinion, Justice Scalia concluded that state laws that undermine the enforceability of class action waivers in consumer arbitration agreements improperly obstruct the FAA.

The plaintiff in Concepcion brought a class action against AT&T for false advertising in violation of California law for charging $30.22 in sales tax for a cell phone advertised as free. AT&T moved to compel arbitration and enforce a class action waiver. The federal trial court in San Diego denied the motion based on the three prongs of Discover Bank, finding that the class action waiver was unconscionable because 1) the contract was a non-negotiable contract of adhesion, 2) the damages at issue were small, and 3) the plaintiff alleged a scheme to cheat consumers of small sums of money. The Ninth Circuit affirmed, holding that the FAA did not preemptDiscover Bank. The Supreme Court reversed.

The Court was unpersuaded by the rationale of Discover Bank: that enforcing class action waivers in cases involving small sums of money will essentially kill any such claim. As the dissent argued: “The realisticalternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.” Id., dissent at 9. The majority was untroubled: “The dissent claims that class proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system. But States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.” Id., majority at 17.

Given its broad reasoning, Concepcion should apply beyond Discover Bank to other judicially-constructed obstacles to the enforcement of consumer arbitration clauses in California. For example, some courts have held that there is an unwaiveable right to a class action under California’s Consumers Legal Remedies Act (the “CLRA”). Some courts have held that there is an unwaiveable right to a class action in the context of employment disputes. Some courts have held that claims for public injunctions under the CLRA and California’s Unfair Competition Law cannot be arbitrated.

Under Concepcion, the FAA now preempts all these judicial attacks on arbitration. According to the Court, “When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” Id., majority at 7. In his concurring opinion, Justice Thomas writes: if the FAA, “means anything, it is that courts cannot refuse to enforce arbitration agreements because of a state public policy against arbitration, even if the policy nominally applies to ‘any contract.'” Id., concurring at 1. “Contract defenses unrelated to the making of an agreement—such as public policy—could not be the basis for declining to enforce an arbitration clause.” Id., concurring at 4.

The majority recognizes that the FAA does not preempt “generally applicable contract defenses.” Id., majority at 9. Discover Bank, which purports to apply the generally applicable defense of unconscionability, went too far by refusing to enforce class action waivers in cases involving small sums of money. As an example of what the FAA does not preempt, in a footnote, the majority writes that, “Of course States remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class action-waiver provisions in adhesive arbitration agreements to be highlighted. Such steps cannot, however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms.” Id., majority at 12, n. 6. State legislatures, presumably, will have to craft such rules without singling out arbitration in a way that imposes obstacles not imposed on the enforcement other contract terms.

“Innocent” Criminals: Criminal Copyright Infringement, Willfulness and Fair Use

I. INTRODUCTION

On November 17, 2010, Gawker Media LLC published on its popular blog, Gawker, excerpts of Sarah Palin’s unreleased book America By Heart: Reflections on Family, Faith and Flag.[1]  In response to the release, Palin tweeted, “Isn’t that illegal?”[2]  Defending itself, Gawker mockingly wrote to Palin in a post titled Sarah Palin is Mad at Us for Leaking Pages From Her Book, telling her to “take a moment to familiarize yourself with the law.  . . . Or skip the totally boring reading and call one of your lawyers.  They’ll walk you through it” and attached pages on the copyright law’s fair use doctrine.[3]  After Gawker refused to remove the excerpts from its blog, Palin’s publisher, HarperCollins, filed suit against Gawker and obtained a preliminary injunction on November 20, 2010.[4]  By November 23, 2010, Gawker agreed to keep the material off its website for good and settled the suit with HarperCollins.[5]  Ignoring the underlying political and ideological tension between Gawker and Palin,[6] this incident highlights a very important issue: the complex and commonly misunderstood fair use doctrine.

The fair use doctrine has been a large source of legal uncertainty and, as a result, has led many civil copyright infringement suits to settle out of court.[7]  While it might be desirable that civil suits are settled out of court for judicial efficiency, the doctrine’s uncertainty poses a problem when fair use is used as an affirmative defense against criminal charges of copyright infringement under 17 U.S.C. § 506.[8]  In order to convict an individual of criminal infringement, the individual must have willfully infringed a copyright (1) for commercial or financial gain; (2) reproducing or distributing copies with a total retail value over $1000; or (3) making an unpublished work publicly available on a computer.[9]  The fair use doctrine states that there are certain uses, subject to a four factor balance test, where an individual can use or copy a copyrighted work without infringing.[10]  The fair use defense would then argue that either (1) the use was not infringing because it was a fair use; or (2) the individual did not willfully infringe because he or she believed the use was a fair use.

A problem arises when an individual believes in good faith his or her copying is a fair use but does not pass the factor test and is actually infringing.  Depending on the courts interpretation of “willfully,” this good faith, but mistaken belief, can be the difference between conviction and freedom.  As illustrated in the Gawker-Palin example, even sophisticated parties, who presumptively have personal legal counsel, misinterpret the bounds of the fair use doctrine.  If sophisticated individuals find difficulty in the nuances of the doctrine, what can be expected of the unsophisticated individual?  Since the mens rea of willfully is attached to a section 506(a) charge, barring a bad faith fair use defense, will a fair use defense always absolve a defendant?

This article will look at the fair use doctrine as an affirmative defense against the criminal charge of copyright infringement under section 506(a) and whether it serves as a suitable defense within the statute, or whether the statute needs to be revised to avoid the problems created by the fair use doctrine.  Part II will give a brief background of section 506(a) for a charge of criminal copyright infringement and analyze the case law defining “willfulness” generally and its application to the mens rea of section 506(a).  Part III will review the fair use doctrine and the issues created when fair use is used as a defense.  Part IV will briefly examine certain policy considerations in relation to criminal copyright infringement.  Finally, this article will conclude that the fair use doctrine is too vague of a doctrine to be an effective defense and may reduce section 506(a) to a “toothless” statute.[11]  As a result, the statute should be amended by increasing the monetary criminal trigger from $1,000 to at least $25,000 and the term “willfully” needs to be defined in accordance with the majority view.

II.  § 506(a) BACKGROUND AND WILLFULNESS STANDARD

Criminal copyright infringement is codified under 17 U.S.C. § 506(a) and the punishment guidelines is under 18 U.S.C. § 2319.[12]  Under section 506(a), criminal copyright infringement is anyone who willfully infringes a copyright (1) for commercial or financial gain; (2) reproducing or distributing copies with a total retail value over $1000; or (3) making an unpublished work publicly available on a computer if that person knew the work was intended for commercial distribution.[13]  To prove willful infringement, evidence of reproduction or distribution of a copyright work will not be sufficient.[14] The government has the burden to prove all four elements which are: (1) a valid copyright; (2) infringement of that copyright; (3) willfulness; and (4) one of the qualifying violations of section 506(a)(1)(A)-(C).[15]  The first two elements are the same that must be shown in a civil infringement case.[16]  The difference between civil and criminal infringement is the addition of the third and fourth element.

Unlike civil infringement, which is a strict liability offense, criminal infringement requires that the government prove the individual acted willfully.    However, the definition of “willfulness” has been left up to the courts’ interpretation since Congress failed to define it.[17]  Unfortunately, “willfulness” has long been a thorn in court’s side when used in the context of criminal law.[18]  It was not until United States v. Moran[19]that the court was confronted with interpreting the vague term’s meaning under section 506(a).

In Moran, Moran was a full-time police officer and owner of a “mom and pop” video rental store.[20]  Moran made a practice of purchasing legal videos, making a single duplicate of the original, renting the copy, and keeping the original to “insure” the video from theft or damage.[21]  Moran testified that he believed his actions were legal.[22]  He argued that “the word ‘willful’ implies the kind of specific intent . . . which is to say, a voluntary, intentional violation of a known legal duty.”[23]  The government argued that willful only meant “an intent to copy and not to infringe.”[24]  In coming to its decision, the court looked to a prior Supreme Court case dealing with the term “willfully” in a criminal statute.

In Cheek v. United States,[25] Cheek was charged with willfully failing to file federal income taxes and willfully attempting to evade his taxes.[26]  Cheek claimed that he believed the tax code was unconstitutional and therefore believed he did not have to pay taxes.[27]  The court held that while the “general rule that ignorance of the law or a mistake of law is no defense to criminal prosecution,” an exception is made when the term “willfully” is used in complex criminal statutes.[28]  Due to the complexity of the tax code, “willfulness . . . simply means a voluntary, intentional violation of a known legal duty.”[29]  The government then has the burden to prove that the defendant knew of the duty and voluntarily and intentionally violated it.[30]  Therefore, “a good faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable.”[31]

Using the reasoning of Cheek, the Moran court was persuaded that “willfully” carried the same meaning under 17 U.S.C. § 506(a) and was similarly exempt from the presumption that ignorance of the law or mistake of the law is no defense.[32]  Accordingly, the court held that Moran’s lack of sophistication, in addition to the totality of the circumstances, negated the willfulness requirement.[33] However, it should be noted, the lack of willfulness does not eliminate civil liability for copyright infringement.[34]

The holding in Moran has since become the majority view, while the minority view interprets “willfully” as only the intent to copy.[35]  These two views are drastically different; from who carries the burden of proof to the consequence facing an individual who believed his use was protected by fair use.  Unlike the clear complexity of the tax code, the fair use doctrine appears straight-forward but is deceptively complex.[36]  Faced with this complexity, the statute should be amended to define “willfully” in accordance with the majority view and create consistency throughout the courts.

The outcomes of a fair use balancing test can be unpredictable and creates uncertainty in its application.[37]  Applying the minor’s view, “innocent” infringers face the possibility of being labeled criminals.  By adopting the majority’s definition of “willfully”, prosecution will have the burden of showing that an individual has the mens rea warranting criminal punishment.  Additionally, by codifying the majority’s definition, there will be minimal disruption to current law.

III.  FAIR USE

Section 107 of the Copyright Act allows for the use of a copyrighted work for limited purposes such as “criticism, comment, news reporting, teaching . . ., scholarship, or research.”[38]  Whether that use is eligible for the fair use defense depends on the court’s evaluation of four factors set forth in section 107.[39] These four factors are: (1) the purpose and character of the use (i.e. whether such use is of a commercial nature or for nonprofit purposes); (2) the nature of the copyright (i.e. whether the work is fact based or creative); (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.[40]  While the courts have held that all the factors must be examined and weighed together, the fourth factor has been given the most weight.[41]

This first factor of the fair use doctrine is usually split into two separate questions.  The first question asks whether the use is “transformative,” meaning, whether it “supersede[s] the objects’ of the original creation.”[42]  The second question asks whether the use is “commercial.”[43]  Since “transformative” and “commercial” are general terms and are susceptible to various interpretations, the first factor can be confusing.  In Sony Corp. of America v. Universal City Studios,[44]the court acknowledged that time-shifting[45] was an acceptable “private, noncommercial” transformative use “in the home”.[46]  However, when compared to BMG Music v. Gonzalez,[47]which held that Gonzalez’s music downloading on a try-before-you-buy basis was a commercial use, the line between commercial and noncommercial, especially for private, personal use, becomes hazy.  Both seem like private, noncommercial uses in the home for personal use, but Gonzalez’s actions supplant her actually purchasing music.[48]  This creates a fine distinction that the unsophisticated individual could misunderstand.  What exactly is commercial if personal use can be both commercial and noncommercial?  Is loading potentially infringing content on YouTube or a similar streaming website commercial if the user does not have a financial interest in the website?[49]

If an individual posts a clip to his blog or YouTube of a scene from his favorite TV show, saying just that, he could believe he is protected by the fair use doctrine.  He believes the use is noncommercial because he’s not receiving any money from it and he is only using a small portion of the show.  He could believe that he’s making commentary on the piece by saying it is his favorite piece.  Finally, since he is not making any money from posting the video, he does not believe he has any effect on the copyrighted work’s market.  Within a 180 day period it is very possible that the video is viewed well over 100,000 times.  The $1000 or even the $2500 threshold under section 506(a) could easily be attained.

It is feasible that a court could find fair use under these facts or slightly different facts because of the variables of the balancing test.[50]  One commentator likened the fair use balancing test to “balancing a dinner plate on the pointy end of a nail.”[51]  Since each evaluation of fair use is fact specific, and all the factors vary in weight depending on those facts, the outcomes are sometimes unpredictable.  As such, the unpredictability of fair use seems to breed fertile ground for an individual to make a good faith mistake in evaluating his or her actions.

Depending on the district an individual is in, and the interpretation of “willfulness” observed, this mistake can be the difference between walking away a free man or going away a felon.  If the court is within the majority, an individual can theoretically always negate “willfully,” absent evidence that the individual’s belief was not in good faith.  “If a person can claim ‘fair use’ and escape criminal penalties, then the law has no teeth since alleged infringers will invariably assert this defense.”[52]  Alternatively, if the court is within the minority, an individual will not be allowed a mistake defense and will only avoid conviction if the fair use analysis is successful.  These two outcomes are polar opposites; one is too lenient while the other is too severe.

IV. POLICY CONSIDERATIONS

Is the infringement of $1000 worth of copyrighted material worth labeling that individual a felon or criminal, even if he did not believe his actions were illegal?[53]  “Felon is a word that should be reserved for individuals committing crimes that damage a victim beyond repair through civil means.”[54] Civil remedies are more suitable in such a case. Incarceration for up to three years for the infringement of $2500 worth of copyrighted material[55] is excessive when civil remedies are available to recover those damages.  If the basis of enacting criminal laws are for “deterring future crimes, stigmatizing offenders, expressing community values, extracting retribution, reforming the offender, and so on,”[56]what are the “retributive function[s] . . . these statutes convey?”[57]  If the offender does not know his actions are illegal, the statute does not achieve these goals.  Furthermore, public opinion does not believe the punishment fits the crime in such low level infringement, as evidenced by the outcry over a Twilight fan’s arrest for taping a birthday party during a viewing of the film “New Moon.”[58]

Additionally, the cost attributed to the enforcement and incarceration of such an offender is far too high.  Beyond the cost of prosecution, the costs of incarcerating the offender far exceeds the low infringing $2500 threshold.  Based on California’s 2008-2009 Annual Costs to Incarcerate an Inmate in Prison, the average cost per inmate per year is about $47,000.[59]  Theoretically, for a three year sentence, the government would be paying over $140,000 of taxpayer money to incarcerate a non-violent criminal for a $2500 infringement.  Additionally, the non-violent criminal would now be exposed to the dangers and violence inherent in prison.[60]

V. CONCLUSION

While these low threshold cases with fair use issues are typically not prosecuted,[61]charges are still filed.[62]  The statute has the ability to make criminals out of people that do not know their actions are illegal or believe that they are legal.  By raising the threshold of section 506(a)(1)(B) to at least $25,000, the statute would be better able to avoid prosecution of “innocent” infringers.  The other subsections of 506 would still allow for punishment of individuals selling infringing materials for personal financial gain and individuals distributing unpublished material prior to commercial releases (i.e. leaking music albums, movies, or books).  With these two other options available, raising the threshold would not make prosecution any more difficult.

Finally, “willfully” needs to be defined in the statute in accordance with the majority view.  One action should not be more or less culpable depending on the circuit where it is committed.  By defining “willfully” in the statute, all circuits would be in conformity and there would be no discrepancies between courts. Furthermore, if the purpose of the criminal copyright infringement statute is to educate, prevent, and deter, the public needs to know what is and what is not criminal.  For that reason, the definition of “willfully” is necessary to educate and assist in deterring future criminal infringement.

Why Delay? Submit Government Proposals Early

A well-known adage advises: “To be early is to be on time, to be on time is to be late, to be late is unacceptable.”  Too often, however, this warning goes unheeded by contractors submitting proposals.  Despite countless graphic illustrations of the consequences of missed deadlines, contractors continue to submit proposals within minutes of deadlines. Given that agencies, in accordance with FAR 52.215-1(c), will reject late proposals out of hand with very few exceptions, cutting it too close can be a big mistake.

One of these “very few exceptions” is the rule that a late offer may be considered for award if the government’s misdirection or improper action was the paramount cause of the late delivery and consideration of the offer would not compromise the integrity of the competitive process. U.S. Aerospace, B-403464, B-403464.2, October 6, 2010, 2010 CPD ¶ 225.  But even here, a contractor’s significant contribution to the lateness of a proposal trumps any erroneous government action and usually results in the rejection of the proposal.

As you can image, most late proposals involve some measure of “contractor contribution.” Whether it’s faxing the proposal at the last minute, arriving at the Government facility with minutes to spare, or any other illustration of remarkably poor planning, contractors often are the makers of their own undoing. But every now and then a contractor misses a deadline where it is not to blame. The Court of Federal Claims came upon such a case recently in Watterson Construction Company v. United States, No. 10-587C (March 29, 2011). 

In Watterson, Judge Braden concluded that a proposal sent via email should not have been disqualified for lateness because it reached the designated government email address by the noon deadline, although delivery of the proposal to the appropriate official’s inbox was delayed until 12:04 pm by an unexplained “mail storm.”  Judge Braden defines a mail storm as an “email sent to a large number of users, a sufficient number of whom reply to all, flooding an e-mail system and disabling it.”  Even though Watterson submitted its proposal via email at 11:01-11:02 am, less than an hour before the deadline, in this rare instance, the agency was found to be entirely culpable for the proposal’s untimely arrival.

Watterson argued that its proposal was timely filed because it had relinquished control over it before 12:00 pm. Judge Braden agreed.  Judge Braden held that the contracting officer’s email address constituted the designated government office and that the proposal “was both reached and received by” the government’s email servers prior to noon. The fact that it remained in cyberspace for approximately an hour and arrived past the deadline to the contracting officer’s inbox could not be blamed on Watterson.  Moreover, the court found that, even if the proposal were late, it should be excused under the “Government Control” exception, FAR 52.215-1(c)(3)(A)(2), despite the fact that (as Judge Braden acknowledges) the GAO has found this exception to be inapplicable to emails. The “Government Control” exception allows for the consideration of a late proposal if “it was received at the Government installation designated for receipt of offers and was under the Government’s control prior to the time set for the receipt of offers.” Because the exception does not expressly exclude emails, Judge Braden concluded Watterson’s proposal was covered.

Judge Braden further maintained that, pursuant to FAR 52.215-1(c)(3)(iv), the “mail storm” constituted an “emergency” or “unanticipated event” disrupting “normal Government processes,” which entitled Watterson to a one-day extension, making its submission timely.  Significantly though, inWatterson, two offerors’ proposals were delayed by the “mail storm” and excluded from consideration by the contracting officer, leaving only one remaining offeror, whose proposal had some issues requiring discussions.  Had Watterson been the only offeror impacted by the email server problems, this case could have come out differently.

Before all you procrastinators out there take too much comfort in the Watterson case, keep in mind that this deviation from the traditional “late is late” standard has very limited application, and the case books are filled with examples of contractors who have not fared quite so well.

In 2009, for example, the GAO upheld an agency’s decision to reject the proposal of a contractor which arrived (in person) just minutes late. The contractor’s representative arrived at the Lyndon B. Johnson Space Center in Houston, Texas only eight minutes before a 2:00 pm deadline to file its proposal in response to a NASA solicitation. The representative (surprise, surprise) found it difficult to clear security and make it across the base in eight minutes, and, consequently, submitted its proposal 29 minutes late. The agency rejected the proposal as untimely.

Against this backdrop, the GAO concluded that the contractor should have anticipated delays in gaining access to the government facility, and that the delays encountered could not be blamed on the agency. The GAO wrote: “It is an offeror’s responsibility to deliver its proposal to the proper place at the proper time, and late delivery generally requires rejection of the proposal.”

The GAO in October 2010 repeated its message that “timeliness is of the essence” in rejecting the protest of U.S. Aerospace, Inc. U.S. Aerospace, which teamed with Ukrainian state-owned Antonov to propose an An-70 tanker to replace the KC-135, protested the Air Force’s removal of its proposal from the KC-X bidding for tardiness. The RFP clearly advised offerors that proposals must be received in person at Wright-Patterson Air Force Base by 2:00 pm on July 9, 2010. A U.S. Aerospace messenger delivered U.S. Aerospace’s proposal on July 9 to the contracting officer’s representative and received a receipt indicating that proposal was delivered at 2:05 pm. A few days later, the Air Force notified U.S. Aerospace that its proposal was late and would not be considered. In its initial protest, U.S. Aerospace argued, among other things, that its messenger had been given bad directions by the Government guard.

GAO held that, even if the guard’s inaccurate directions did delay the submission of U.S. Aerospace’s proposal, U.S. Aerospace was responsible for its late submission. It was U.S. Aerospace’s “decision to attempt entry at a gate not designated for non-military visitors” less than an hour before the deadline, to “not obtain advance approval for entry,” and to not “previously ascertain the location of, and directions to, the building designated for proposal submission.”

The record books are filled with countless other examples of “almost made it” submissions. While it is comforting to see the Court recognize that not all late submissions are the fault of the contractor, this recognition should not obscure the real lesson here. Late usually is late, and demonstrating that a late submission is the Government’s fault is a steep uphill task. So file early folks. No contractor (or counsel) wants to be in the position of having to say to the boss (to quote the late great secret agent Maxwell Smart) “missed it by that much.”

Lying on an Application About Criminal Conduct Bars Defamation Claim

Employers normally require new hires to complete job applications and certify that the information contained in their applications is true and accurate before hiring them. Job applications serve many laudable purposes: you can evaluate education, ensure that the applicant has the required experience and know-how to do the job and retrieve contact information for former employers from whom you can learn about the applicant’s skills and abilities before he or she is brought into your workplace. You can compare respective applicants on an “apples-to-apples” basis. A recent case now adds another reason: an application can also provide employers with a defense to later litigation where the new hire was untruthful or omitted material facts on his or her application.

In Van Hoven v. Pre-Employee.com, Inc., 156 Wn. App. 879 (2010), the plaintiff applied for a position with a hospital and signed a background authorization under penalty of perjury in which he affirmed that he had not been charged with or committed any crime. The hospital contracted with a consumer reporting agency to conduct a background check, as it did for all applicants. The hospital hired the plaintiff “conditioned” on a positive background check. The agency reported that the plaintiff had been guilty of possession of marijuana and drug paraphernalia. The hospital confronted the plaintiff with the report, who admitted that he had been guilty of possession of marijuana and drug paraphernalia but that, as part of a plea bargain, one of the charges had been dismissed. He also claimed to have been confused by the question – “Have you ever been convicted of any crime?” – though he did not deny the results of the background check or provide any clarification. The hospital rescinded its conditional employment offer, for it would not have initially hired him with such charges, and, more importantly, because he had lied on his application. The consumer reporting agency later corrected the report to explain that the marijuana possession charge had been, in fact, dismissed in a plea bargain. The plaintiff sued the consumer reporting agency for defamation.

Consumer reporting agencies are highly regulated entities. Washington has its own statutes that regulate consumer reporting agencies. See RCW 19.182, et al.  These statutes provide that a consumer like the plaintiff cannot assert a claim for defamation, invasion of privacy or negligence with respect to the reporting of information unless false information is furnished with malice or willful intent to injure. That is an elevated standard. In Van Hoven, the plaintiff could produce no evidence that the consumer reporting agency had acted with actual malice or intent to injure. The agency thus had immunity from the plaintiff’s claims.

The Van Hoven court noted that the plaintiff could also not establish damages. To establish a defamation claim, a plaintiff must show (1) falsity, (2) an unprivileged communication, (3) fault and (4) damages. Because the plaintiff did not deny the results or provide any clarification of the background check, and the hospital stated that it would not have hired him if he had disclosed such charges, he had no damages from the consumer reporting agency’s alleged inaccurate background check. The Van Hovencourt noted that the plaintiff had lied on his application when he answered “no” to the question of whether he had been convicted of any criminal offense. Even discounting the misinformation about his marijuana possession charge, he was still convicted of the drug paraphernalia charge. Without damages, he had no defamation claim.

The takeaways from Van Hoven are that employers should always require new hires to fill out applications, which mandate a certification for truth and accuracy. Employers should not accept a resume in lieu of a job application because resumes do not normally have certifications for truth and accuracy nor do they specify that the applicant will not be hired or can be terminated for misrepresenting information. Applications reveal education and background experience and provide third-party contact information to learn about the new hire’s skills and abilities. Further, if the applicant lies or omits information, that conduct can serve as a basis for refusing to hire or terminating upon its discovery. And, in litigation, a plaintiff can have his or her damage award reduced or limited by application lies or omissions. This is known as the “after acquired evidence” doctrine. The Van Hoven court also emphasized that such information can serve as a defense to a claim of damages – if you lie, you cannot expect the employer to hire you.  The other takeaway is that the employer correctly shared the background check with the plaintiff, providing him an opportunity to respond or rebut the information before taking adverse action. Such a step is highly advisable to avoid future litigation.

Petition Granted for Rehearing en banc of Akamai Technologies v. Limelight Networks

On April 20, 2011, the Federal Circuit granted the petition by Akamai Technologies for rehearing en banc its appeal in Akamai Technologies, Inc. v. Limelight Networks, Inc.  The order vacated the earlier opinion of December 20, 2010.  The order includes a request to file new briefs addressing this question:

If separate entities each perform separate steps of a method claim, under what circumstances would that claim be directly infringed and to what extent would each of the parties be liable?

This question asks for a definition of what constitutes joint infringement and how to apportion liability.  Joint infringement is based on a theory is that one acts as a “mastermind” who orchestrates the infringement and that the activities of the other joint infringer(s) must be under the “direction and control” of the mastermind.  The result is as if the mastermind performed the infringement by itself.  BMC Res., Inc. v. Paymentech, L.P., 498 F.3d 1378, 1380 (Fed. Cir. 2007).

The latest tests for what constitutes “direction and control” have been selective.  For example, the court in BMC Resources referenced a legal principle that imposed “vicarious liability on a party for the acts of another in circumstances showing that the liable party controlled the conduct of the acting party.”  And in the Akamai opinion of December 20, 2010 (just vacated), the Federal Circuit panel had set forth a standard that required an agency relationship between the parties.  It reiterated that joint infringement occurs when a party is contractually obligated to the accused infringer to perform its part of the method, according to cases like Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008)  and BMC.

Questions of joint infringement are encountered frequently in patent litigation of software, e-commerce, and internet-related inventions.  It is not uncommon to find method claims reciting a step or two that a consumer or other user of the system might perform.  Consequently, it can be difficult to prove “direction and control” for a lot of software/internet method patents that involve more than one actor to perform the recited method steps (typically a consumer plus at least one other actor).  Accordingly, patent prosecutors endeavor to draft claims that require actions by a single actor whenever possible to avoid the extra hurdle that such cases have made to proof of joint infringement.  Of course, there are times when this is difficult to do because software systems are always evolving and it can take years for patents to issue.

Patents that have method claims requiring activities by multiple actors to infringe may not easily be corrected with reexamination, since valid claim amendments in reexamination cannot broaden claim scope.  Such corrections can be made in a broadening reissue application, but it must be filed within two years of issue of the original patent.

We shall have to wait for the decision of the en banc Court (and any resulting new law) to determine the best way to correct claims in view of any changes to joint infringement law.

Watch “Loose Lips” Statements in Terminations

Wrongful termination cases may be difficult enough to win. When you add the potential that the employee may also sue for defamation and other privacy related torts arising from termination, you increase the dangers. In Corey v. Pierce County, 154 Wn. App. 752 (2010), Pierce County learned how expensive such awards can be when the Washington Court of Appeals affirmed a $3 million award for defamation and privacy claims related to a deputy prosecuting attorney’s termination.

The plaintiff was a 30-year deputy prosecuting attorney who was promoted to chief criminal deputy. Shortly after her promotion, she raised concerns about a prosecutor in the sexual assault unit and sought to have him transferred. There were problems associated with his transfer, and the plaintiff’s superior, the Pierce County Prosecuting Attorney, became concerned about her ability to communicate and manage the transfer. When she challenged his decision, he started the process to terminate her. She, however, resigned before he could communicate the “good news.”

In her desk, the county discovered money that had been raised for a colleague whose child was ill, but had not been distributed. News of these collected funds leaked to a local newspaper which published an article about the money and her departure from the Prosecuting Attorney’s office.  In the article, her supervisor stated that he had lost confidence in her, questioned her truthfulness and claimed that she was subject to a “criminal investigation” regarding the money in her desk. In the article, her supervisor also stated that the plaintiff had told several lies in connection with the transfer of the deputy prosecutor out of the sexual assault unit. The plaintiff sued claiming that she was devastated emotionally and professionally, suffered severe depression, became suicidal and experienced epileptic seizures because of the article. She also claimed that she was unable to find another legal position and was unemployable for the rest of her life because of the article. She sued her supervisor and the County for invasion of privacy, defamation, defamation by implication, false light, outrage, intentional and negligent infliction of emotional distress and breach of contract. After a three week trial, the jury returned a verdict in excess of $3 million.

On appeal, the Court held that it could only overturn the jury verdict where there was a lack of substantial evidence and that the jury verdict would not be disturbed. Because her supervisor knew that the internal investigation had not revealed any improper conduct – simply money waiting to be disbursed to the child – his statements to the press established sufficient evidence for the defamation and false light claims. The Court also found that her supervisor’s statements concerning the investigation into missing donations, in which he had essentially accused her of criminal behavior despite knowledge that the internal investigation revealed a lack of substance, created a viable claim of intentional infliction of emotional distress.  The Court did reject the plaintiff’s claim of negligent dissemination of harmful information. It held that Washington does not impose a duty of care on employers regarding the disclosure of possibly truthful but harmful information to third parties.

The final claim related to an alleged promise by the supervisor that, before taking a management position with his administration, the plaintiff would receive “just cause” termination. Many public employees, such as assistant prosecutors, are covered by civil rules or collective bargaining agreements that provide for “just cause” termination.  Supervisors, however, do not receive the same protection. The plaintiff claimed that she had multiple conversations with her supervisor who promised that she would have such just cause termination. The supervisor disagreed and the county pointed out that there was no corroborating testimony to establish such a promise. The Court held that, because the jury believed the plaintiff, the county lost.

Finally, the Court addressed the county’s argument that it should have been allowed to introduce evidence that the plaintiff had been the subject of prior internal investigations, that her husband had been prosecuted for embezzlement and that post-employment she had filed for bankruptcy and divorce.  At the trial court level, the county sought to introduce this evidence as to the reasonableness of the investigation into the missing money and to rebut her claim that the newspaper article had damaged her reputation – i.e., it was already damaged. Although conceding such evidence was potentially relevant, the Court nonetheless affirmed its exclusion as unfairly prejudicial because this evidence stemmed from her personal life.  The Court found that such evidence did not concern her reputation in the community but about her past personal life.

The takeaways from Corey relate to post-employment publication of reasons for termination. Employers should limit the details they provide to third parties, such as new employers, friends and family, and of course, newspapers. When discussing the reasons for the termination, the employer should reveal only facts that have been substantiated. Opinions should be avoided.

When an employer knowingly publishes facts that are unsubstantiated, it faces a potential claim for defamation, false light and other privacy related claims. Another takeaway from Corey is that employers should not orally agree to alter the at-will employment relationship with an employee. Promises of just cause termination or notice can result in a breach of contract claim that includes recovery of attorneys’ fees and costs of litigation. Although an employee’s claim of just cause termination may be oral and disputed by a supervisor as in Corey, juries do not always believe an employer’s proffered reasons for the termination.  Arguably, since most juries are composed of employees and not supervisors, they may prefer to believe that an employer made a promise of just cause termination. Thus, it is prudent to memorialize the at-will nature of employment in written documents such as an employment handbook, any employment agreement, an offer letter, or even simply in an email. Finally, the Coreydecision acts as cautionary tale for employers that not all “smoking gun” evidence will be admitted at trial and they should instead focus on developing the factual bases for their decisions.

Two Respondents Receive Show Cause Order In Inv. No. 337-TA-763 – International Trade Commission

Chief ALJ Luckern issued an order to show cause why two respondents, Koko Technology Ltd. and Cyclone Toy & Hobby, should not be found in default in Inv. No. 337-TA-763, Certain Radio Control Hobby Transmitters and Receivers and Products Containing Same.  The respondents failed to respond to the complaint by April 4, 2011 and the Chief ALJ has required both respondents to respond to the show cause order by May 12, 2011.

False Patent Marketing: What You Need to Know

Patentees should implement an effective patent marking program to maximize the recovery of damages resulting from patent infringement. However, in view of recent U.S. District Court and Federal Circuit decisions, such patent marking programs must be periodically reviewed to guard against false marking.

Patent Marking

Federal law specifies that patentees give notice to the public that a patented article be “marked” by affixing to the article the word “patent,” or its abbreviation, “pat.,” followed by the relevant patent number. 35 U.S.C. § 287. Failure to mark the patented article precludes the recovery of infringement damages until notice is given to the infringer. Id. If marking the patented article itself is impractical, then the patentee should mark the packaging of the patented article. Id. The statute does not apply to patented methods.

When the claims of only a single patent cover the patented article, the marking of that patented article, or its packaging, is straightforward. However, when the claims of several patents cover the patented article, compliance with the patent marking statute is more difficult, because the patentee must determine which patent numbers should be affixed to the patented article.

False Patent Marking

False patent marking has been traditionally asserted when the patent marker is alleged to mark articles, either with an incorrect patent number or with a patent number that does not cover the article, and with the intent to deceive the public. Such false patent marking, prohibited under 35 U.S.C. § 292(a), is believed to “wrongfully quell competition…thereby causing harm to the [United States] economy.” Stauffer v. Brooks Bros., Inc., 619 F.3d 1321, 1324 (Fed. Cir. 2010). As provided under the statute, false marking is punishable by a fine of not more than $500 for every such offense. 35 U.S.C. § 292(a) Section (b) of this statute provides for a qui tam suit in which anyone may sue for the penalty and share in half of any judgment with the federal government. 35 U.S.C. § 292(b).

Recently, the false patent marking statute has been asserted against patentees that have failed to remove expired patent numbers from their patented articles. Patentees have attempted to defend against these lawsuits by claiming that just “anyone,” without a false marking injury, lacks standing. However, the Federal Circuit has recently confirmed that the statute provides broad standing for anyone to bring suit on behalf of the federal government. Brooks Bros., 619 F.3d at 1325 (emphasis added). Patentees have also unsuccessfully attempted to lessen the impact of any potential damages by arguing that the $500 fine is per decision and not per article. The Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295, 1304 (Fed. Cir. 2009) (holding that the fine is $500 per article).

In view of the increase in false patent marking litigation, patentees should establish steps to limit exposure to false marking lawsuits while observing the need to mark their patented articles. As a first step, patented articles should be regularly audited after marking to ensure that the marked patents have not expired or that the claims of the marked patents covering the articles have not been held invalid or been amended in post-grant proceedings to no longer cover the articles. As a second step, patentees should implement a plan for the timely removal of non-compliant patent numbers that are affixed to their articles, even if such removal is not immediate. Consultation with a patent attorney regarding proper patent marking as well as the execution of a written plan to audit marked patent numbers and timely remove non-compliant patent numbers may limit exposure to false marking litigation by creating at least some “credible evidence that [the patentee’s] purpose was not to deceive the public.” Peguignot v. Solo Cup Co., 608 F.3d 1356, 1363 (Fed. Cir. 2010).

The patent law is ever-changing, and future false marking litigation may be curtailed by a patent reform bill pending before Congress and/or by current appeals to the Federal Circuit challenging the constitutionality of the qui tam actions. Nonetheless, patentees should implement a proper patent marking program to maximize the recovery of any patent infringement damages while steering clear of any false marking.

More Than Just An Algorithm: Reconciling The Necessity For Disaggregating The Business Method, With Bilski’s Abstract Test

INTRODUCTION

As the airplane’s utility spread to the public sector, the 1940’s witnessed the sky’s transformation into the new highway. Like any new frontier and innovation, there was a need for regulation and legal guidance. Fortunately, property law had covered the topic since the 18th century. Cuius est solum, eius est usque ad coelum et ad inferos, whoever owns the soil, it is theirs up to Heaven and down to Hell.[1]The Supreme Court however did not agree with such dated application.[2]The court reasoned that categorizing air travel with ground travel under current property law would be naive. The two categories possessed different interest and policy consideration. Unification of the two, under traditional property laws, would essentially defeat air travel’s value and purpose. Such application had “no place in the modern world”[3].  The court made it clear that new innovation required new regulation and new legal guidance. Instead of fitting innovation into the law, new laws are created to fit innovation.

To promote, and protect innovation, for years American inventors have relied on the system of intellectual property and the patent system. The patent system, a once humble and optimistic institution, has evolved far beyond its beginnings. When the last patent act was passed over a half a century ago, aspirations were high. The 1950’s saw an innovation boom that inspired some of the most integral foundations for modern technology.[4]  Proponents of the patent system promoted exposure and accessibility for innovation, while discouraging concealment and private use.[5] Assuming the excitement of the era, congress eagerly looked to protect “anything under the sun that is made by man”.[6] However with the eruption of financial and software innovation in recent years, one would be hard-pressed to find the 1950’s anything-and-everything sentiment in today’s patent office.

In the eyes of the patent office, financial and software innovation is commonly referred to as a business method.  Subject to 35 U.S.C §101 and classified under Class 705, a business method patent is “the generic class for apparatus and corresponding methods for performing data processing operations.”[7] Software is a set of logical instructions, intended for a computer, made to perform computations, comparisons and sequential steps in order to process and produce a desired output.[8]Financial innovation, centuries older than software, began as basic mathematical principles.[9] Contemporary financial innovation however, has grown to enormous complexities. Fashioned from a set of multifaceted mathematical algorithms, the innovations have become so advanced that it is near impossible to solve without the aid of a computer.[10] Essentially, in the law’s view, today’s financial innovation is software.[11]

The business method has conflated financial and software innovation under the association of complex algorithms. While under a legal lens software and financial algorithms are near inseparable, the makings and interests of their respective innovations are however quite different. For instance, a large internet corporation may attempt to patent an online shopping method for common consumers;[12] while a large financial firm may attempt to patent a system of asset pooling for large mutual funds.[13] From the components that build the algorithm, to the industries effected by the patents, it is difficult not to acknowledge the distinctions between the two scenarios. The current patent system however does not recognize such distinctions. In both scenarios the algorithms are to be evaluated as business method patents.

Because of the realistic distinctions between financial and software innovation, formulating a cohesive judicial policy for the business method would seem destitute. Patent litigation over the past forty years has been frustrated with judicial attempts to reconcile both financial and software innovations under the business method patent. The most recent efforts in the ongoing business method saga produced the Abstract test for patentability assessment. The Abstract test was created by the Supreme Court’s ruling Bilski v. Kappos.[14] While the test is still in its early stages of development, lower courts have been hard pressed to reconcile financial and software innovation under the business method using the Abstract test.[15]

History has produced an ambiguous interpretation of financial and software innovation that fails to fit the enthusiastic “anything under the sun” patent system of the 1950’s. It is clear that the development of financial and software innovation has outgrown the traditional business method classification. The business method has “no place in the modern world”[16] and needs categorical disaggregation among financial and software innovation. Disaggregation would not only better serve the time and principles that each innovation represents, but simplify the Abstract test while preserving its purpose.

This article will examine the necessity for the disaggregation of the business method.  The first section will evaluate the judicial history and evolution of the business method leading up to the Bilski decision. The second section will discuss the Bilski decision and the Abstract test. The third section will contemplate the current future of the Abstract tests. The last section of the article will discuss how the business method and the Abstract test can be clarified in disaggregating the business method into financial and software innovation.

I.  HISTORY: THE GUIDEPOSTS: 1972-2008

The history of contemporary algorithmic innovation began in the 1970’s when the Supreme Court twice considered business method patents. Both decisions held the innovations unpatenable.  The first decision, Gottschalk v. Benson, was decided in 1972.[17]The Supreme Court considered whether algorithmic based software for converting binary code was  patentable. In a six justice majority, the court held the method unpatenable, unless “in connection with a digital computer”, because it “would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself”.[18]The decision confirmed that algorithms, made akin to software by the court, standing alone, were unpatenable subject matter.  [19]

While algorithms alone were unpatenable, the question existed of whether bringing a physical component into the application would preclude a patentability.  Six years after Benson, the Supreme Court returned to the business method issue and addressed such question. InParker v. Flook, the Supreme Court considered whether an algorithmic based method for triggering an alarm system, used to signal irregular conditions in a catalytic conversion process, was patentable.[20]In a seven justice majority, the Court held the innovation unpatenable. Although the alarms inclusion meant the innovation wasn’t wholly algorithmically based, the majority realized the only novel element in Flook’s innovation was the algorithm itself.[21]  It would have appeared that the patent system’s hole had been filled. The courts would not be fooled by crafty lawyering and mirrors attempting to hide an algorithm amongst physical components. After Benson and Flook, it appeared software and algorithms, were to be treated like any other mathematical formula, unpatenable.

Hopes of patenting an algorithm under the business method reemerged only four years later in the Supreme Court case Diamond v. Diehr.[22]Once again an application was presented, part physical, part algorithm. The invention used the Arrhenius Equation to calculate the operation timing on a physical rubber press. As the rubber curing process stood well known in the industry, clearly the only new innovation in the patent application was the algorithm itself.[23]However, in a five justice majority, the application was deemed acceptable. Arguably marking the first time an application containing software was considered statutorily patentable. Although the rulings in Benson and Flook were not overruled by the Diehr decision, it appeared that the physical component ambiguities after Benson had not truly been resolved.

After Diehr, the patent system became a virtual wild west. Floods of “ridiculous and truly absurd” business method applicants were submitted to the patent office.[24]The era was epitomized with a 1994 application from the software titan IBM.[25]The invention set out a group algorithms loaded onto a physical readable storage device. The physical component that was able to pass muster under Benson and Flook, a floppy disk. The application’s approval gained such recognition that it was even endowed its own business method idiom, a Beauregard claim.[26]After dilution of the Flook’s unpatenable ruling, the despondent future of the business method patent herald through the financial and software communities.[27]

The circular timeline of judicial clarification surfaced once again in 1998 with the case of State Street v. Signature Financial Group.[28]The court found Signature Financial’s financial purposed algorithm, one that moved assets into mutual funds to take advantage of tax benefits, to be patentable.   The State Street holding marked two significant chapters in business method history. The first was the court’s explicit recognition of the business method patent.[29]The court found that such a category was no less patentable than any other subject matter under Section 101. State Street’s judicial endorsement of the business method patent, once again, propagated a flood of financial and software patent applications.[30]The second major significance of the State Street decision was in the court’s clarification of business method eligibility. The court held that the new test for eligibility was to be the Useful, Concrete and Tangible Result test.  Although the test could hardly be awarded a bright line denomination, it marked the first judicial canon to reconcile Benson, Flook and Diehr. However, despite the court’s best efforts, the test still granted several questionable patents approval, many lacking any hint of a physical component.[31]

II. CREATION OF THE ABSTRACT TEST: IN RE BILSKI & BILSKI V. KAPPOS

Ten years after the State Street decision, judicial clarification poignantly returned to the Federal Court of Appeals. Finding an opportunity to reevaluate its holding in State Street and its significances over the past ten years, the court, sitting en banc, adjudicated In Re Bilski.[32]The court’s holding not only rejected State Street’s Useful, Concrete and Tangible Result test that had reigned supreme for ten years, but went as far to replace it with a new test for business method eligibility. The new test, the Machine-or-Transformation test, held that a business method patent was patentable subject matter if it 1) was applied by use of a machine, or else 2) transforms an article from one thing or state to another. Was the court’s new test a judicial endorsement of the Beauregard claim, or was it carefully worded to avoid the question of patentability with an additional physical component?  It would have appeared that, once again, the courts had clarified one complication, while subsequently creating another.

The thematic clarification of business method decisions past came to one of its most pivotal moments in 2009 when the Supreme Court granted writ of certiorari for Bilski’s appeal.[33]From Silicon Valley to Wall Street, software and financial innovators alike held their breath awaiting the decision. Mounting rumors held that the court would possibly eliminate the business method patent altogether.[34]While some justices of the dissent agreed with the business method’s eradication, the majority felt otherwise.[35]Delivered by Justice Kennedy, the majority opined, that business methods are indeed patentable; Bilski’s application however was not.

Bilski had developed a hedging algorithm to eliminate volatility in consumer energy costs. Using the Monte Carlo method and historical weather data, energy prices would be hedged with weather futures to lock in a more stable and predictable energy bill. The algorithm’s complexities went far beyond any pen and paper, and the necessity for a computer was evident. Although there was an implied necessity for a physical component (a computer), the majority still found the algorithm unpatenable. The majority reasoned that Bilski’s innovation was an abstract idea. Reiterating established ‘precedent’, as if such a rule were ostensibly written and obvious already, the court reasoned that business method patents are limited by “laws of nature, physical phenomena, and abstract ideas”.[36]The Machine-or-Transformation test developed in In Re Bilski was no longer to be a determinative test in patentability, but rather a “useful and important clue” to the inclusive Abstract test.[37]  The court continued to disregard the continuance of  other tests that have marked business method history through the years, declaring that “nothing in today’s opinion should be read as endorsing the Federal Circuit’s past interpretations of § 101. See, e.g., State Street.”[38]And in one sentence ten years of State Street and its progeny were erased.

The Bilski Supreme Court failed to clarify a definition of their Abstract test, both in its criteria’s inclusions and omissions. The court rather left such task of interpretation to the lower courts in coming years, advising them on a case by case basis to return to the legal “guideposts”[39]of Benson, Flook, and Diehr. Justice Potter’s illustrious commentary rang ever present, “I can’t define it, but I know it when I see it”.[40] The business method was, once again, afflicted with yet another ambiguous interpretation.

III.  THE  CURRENT FUTURE OF THE BUSINESS METHOD

In patent applications to come, federal courts are left with the assignment of interpretation mandated by the powers above. Courts now sit in a post-Bilski era with the future of the business method patent in their discretion. While courts have taken time to acknowledge the inconclusiveness of the Bilski decision[41], others have used the opportunity to expand its meaning. In a recent decision by the Federal Court of Appeals, the eligibility of algorithms specifically was discussed.[42]Not surprisingly opting to use the ‘guidepost’ of Diehr, the court held that “algorithms and formulas, even though admittedly a significant part of the claimed combination, do not bring this invention even close to abstractness that would override the statutory categories and context”.[43]Even the most confident and charitable views of the Bilski decision and its progeny echo a notice of future complications, some which have already begun to surface. [44]

Verified by a circular history blemished with flaws, mistakes, and corrections, the current business method system’s stability is noticeably far from safe.  While financial and software innovation has slowly, over the years, conjoined in the eyes of the court under the business method, the culture and society of their respective subscribers is quickly diverging. Such policy considerations, which have all but been neglected in past business method decisions, must be recognized before history reprises itself.

In efforts of slowing the arbitrary attachment of physical components (Beauregard claims), the Supreme Court in Bilski retained the possibility that a purely intangible may gain patentability.[45]However, in a digital age, it is almost inherent that financial and software innovation will rely on a physical element, likely a computer. Even under the court’s pragmatic recognition of the times, Bilski’s Abstract test is still extremely comprehensive. Susceptible to a wide array of differing interpretations, in coming years the Abstract test is capable of rooting itself into case law far beyond its intended purpose, possibly precluding any software or financial innovation entirely. To better limit the scope to which the Abstract test reaches, its application should be tested to separate confines, software and financial innovation. The question ‘what is an abstract business method’ is extremely different than ‘what is abstract financial innovation’ and ‘what is abstract software innovation’. Because software and financial innovations are inherently different, from their components to the industries they affect, the Abstract test will take on different considerations when applied to each individually.

IV.  DISAGGREGATION: A SOLUTION

A.  FINANCIAL ABSTRACT TEST

The assertion that all mathematical formulas are made of components in existence, workings of nature that have yet to be discovered, is a naive assertion in light of contemporary financial innovation.[46]The quintessential example for the unpatentability of mathematical formulas is Einstein’s relativity formula.[47]Einstein did not invent the formula; he simply codified and arranged components of nature in an assignable formula. Mass, energy, and the speed of light all existed in nature eons before Einstein was even born. Although contemporary financial innovations are based in principles of mathematics, the components and interactions of the numbers in the algorithm can hardly be described as derivatives of nature.

Far from nature, financial innovations operate solely on man-made financial markets. The extent of financial innovation is limited to the markets and can only exclusively function on this man-made medium.[48]For example, Bilski’s use of weather futures in his algorithm would not have even been possible during the time of Diehr, Benson or Flook because weather futures existence has only been recognized on the market since 1996.[49]If the market or weather futures ceased to exist tomorrow, Einstein’s relativity formula would certainly still be comprehensible, Bilski’s algorithm would not.

Because market components and financial algorithms are not of nature, does not mean they cannot be natural relative to the market and its culture. Maintaining the ability to freely use the public utilities and its components has always been an essential consideration in patentability.[50]  This is where the Abstract test in financial innovation can differentiate itself from the Abstract test in software innovation. If a patent were to impede and dominate a natural market component from its intended purpose and use, then such patent would likely fail the Abstract test. The Supreme Court toiled with such reasoning but ultimately carried it in an unusual direction.

Bound to traditional business method policy considerations of both financial and software innovation, and unable to reflect financial market specifics, the Bilski court was forced to reason broadly. The court stated that Bilski sought to patent “the concept of hedging risk…hedging is a fundamental economic practice…allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea”.[51]  Application of the court’s wide comprehensive view on any patent will ultimately render it an abstract idea. Can a machine for bending metal be unpatenable because bending is fundamental physical practice?[52]Instead of looking to whether patenting Bilski’s algorithm would have created a monopoly over a natural market strategy, the court should have looked to whether patenting Bilski’s algorithm would have created a monopoly over a natural market component. If Bilski’s algorithm positioned itself to inhibit the public use of weather futures, then the Abstract test would have denied patentability. If Bilski’s algorithm used weather futures in such a way that was useful, novel and non-obvious, while still allowing for its natural use in the market, then the Abstract test would have allowed patentability. Reducing any algorithm to its most basic functions will appear as attempts at privatization of a public utility and fail the Abstract test. Only when the court is given range to apply the Abstract test to the specifics at hand (i.e. financial innovation specifically) can it properly operate.

With such ambiguous decisions as Bilski, financial innovation in private industry has been strained. Over the past years financial innovation has given rise to high frequency, black box and the white box trading.[53]All three concepts revolve around the use of an algorithms operating millisecond market transactions, consistently adjusting to market reactions. While the extent of high frequency trading is generally unknown, the same cannot be said for its presence.[54]Uncertainties in the patent system’s protection have driven financial innovators into hiding. For fear of competitor plagiarism, private firms using algorithms are seldom to share their innovations with the world.[55]Because of a lack of protection, the utility and public benefit of some of these innovations may never be known. Consider the Black-Scholes model, the base for many contemporary algorithms, and arguably one of the most provocative financial innovations of the past century.[56]Once used as a secret investing tool, the algorithm’s utility now goes far beyond the financial sector (ironically one alternative use is in patent valuation[57]). Failing to provide a stronger outline to patentable criteria will only push innovators further into hiding, inhibiting any progress in financial innovation.

The Abstract test applied separately to financial innovation would help facilitate reassurance in the patent system. The Abstract test for financial innovation would be tried against the interests of the market and private industry. Like any public domain, the market invites innovation as long as it does not inhibit the public’s use.[58]A patent application attempting to corner off a common public utility would be abstract. In the private industry’s interest, any application that would potentially destroy the opportunity for progress would be abstract. Evaluating abstractness in financial innovation separately would suit the patent system and innovation in a way the traditional business method system could not.

B.  SOFTWARE ABSTRACT TEST

The struggle between anti-software patent movements and patent proponents has grown significantly as more and more innovations stem from the digital age.[59]While the Bilski decision has almost solidified software as patentable, the Abstract test may serve as an elementary compromise when applied to software innovation separately.

Unlike its financial counterpart, software algorithms do not operate on a public medium such as the market. Software is bound to the rules and procedures of a given programming language. Languages are constantly being created, evolving and improving. The Java language, currently the most popular programming language, was only released in 1995 with its most recent release February 15th 2011.[60]Because the medium on which software innovation operates is moving at an enormously high rate (significantly more so than financial innovation) the innovation itself must move just as fast.

Like its financial counterpart, software also has its own natural components. The Abstract test applied to software would evaluate a patent and its implications under the software culture. If the patent would preclude a natural software component, the Abstract test would reject patentability. However, because of the speed of software evolution, what is regarded as innovation today may easily be common industry practice tomorrow. As patents protection lasts for twenty years, the test for abstractness must possess a sense of foresight. An overly lenient application of the Abstract test in software innovation would inhibit further innovation in later years rather than facilitate it. Consider a software’s spell checker component. The spell checker is only forty years old, but an almost natural component in any contemporary software algorithm.[61]Patenting such component would certainly be abstract and inhibit further innovation. Only when the use of the natural component in software innovation is useful, novel and non-obvious, with a tremendous amount of creativity, can the Abstract test allow patentability.[62]Because of the fluid environment that software innovation operates in, the threshold for abstractness would be significantly lower than financial innovation. This consideration only further proves the need for disaggregation.

Unlike financial innovation, software innovation is not as easily kept secret. The public market acts as a blanket for financial innovations used by traders, with a petty possibility of reverse engineering. The private software industry however, serves no protection to software innovation as it is much more readily reversed engineered and plagiarized. [63] This puts software innovators at a disadvantage, as hiding their innovation is not even an option. Without secrecy as an alternative, the patent system must work more readily to incentivize innovation without slowing it down. On the same token because software innovations are plainly exposed, it pushes innovators to persistently improve so that they may claim the alpha position amongst competitors.

CONCLUSION

While Bilski’s Abstract test is far from definitive criteria, it is th  e hand that has been dealt. Application of the Abstract test to software and financial innovations separately alleviates a large amount of ambiguity. Disaggregating the business method and applying the Abstract test separately allows for different considerations and thresholds for each innovation.  Attention to the components and the industry of the individual innovations restores the patent system to its intended purpose, which the traditional business method has failed to do. With such differences, aggregating software and financial innovation under the business method is impractical. The traditional business method truly has “no place in the modern world”.[64]

Hyatt v. Kappos: A New Standard for the Admissibility of Evidence in a Section 145 Action

Abstract

When the Board of Patent Appeals & Interferences (the “Board”) of the United States Patent and Trademark Office (“PTO”) rejects a patent application, the applicant has two avenues available. He can appeal the decision to the United States Court of Appeals for the Federal Circuit. In that case, the record on appeal is the record from the PTO. New issues cannot be raised, and new evidence cannot be introduced. Alternatively, the applicant can file a civil action under Section 145 of the Patent Code in the U.S. District Court for the District of Columbia. As with an appeal, new issues cannot be raised. However, unlike an appeal, evidence not presented to the PTO can be introduced. In Hyatt v. Kappos, 625 F.3d 1320 (Fed. Cir. 2010), the en banc Federal Circuit recently held that there is no limitation in a Section 145 proceeding on the introduction of new evidence at the District Court level apart from limitations imposed by the Federal Rules of Evidence and the Federal Rules of Civil Procedure. Having twice had the time period extended, the PTO has until April 7, 2011, to seek certiorari.

Background

The Board confirmed the examiner’s rejection of 79 of the 117 claims in Hyatt’s patent application on the grounds that they failed to satisfy Section 112’s written description requirement. In the District Court, the PTO moved for summary judgment upholding the Board’s decision. In opposing the motion for summary judgment, Hyatt filed his declaration to provide additional support to refute the written description rejections. In granting the PTO’s motion, the Court refused to admit the declaration, holding that Hyatt had been negligent in not providing it to the PTO. Without new evidence, the Court employed the deferential “substantial evidence” standard and upheld the Board’s decision.

This decision was appealed to the Federal Circuit. On August 11, 2009, a divided panel issued its decision affirming the District Court’s exclusion of the declaration and the grant of summary judgment. This opinion was subsequently vacated. The en banc Court reversed the District Court’s decision. In the en banc decision, Judge Moore wrote the majority opinion, which was joined in by six other judges on the admissibility issue.

The En Banc Decision

After a lengthy review of the legislative history of the statute and prior statutes going back 200 years, the Court held that :

“35 U.S.C. § 145 imposes no limitation on applicant’s right to introduce new evidence before the District Court, apart from the evidentiary limitations applicable to all civil actions contained in the Federal Rules of Evidence and Federal Rules of Civil Procedure.” Id. at 1323.

The Court’s extensive review of the legislative history led it to conclude that Congress intended Section 145 to be a new “civil action in which an applicant would be free to introduce new evidence.”  Id. at 1327. Having determined that Section 145 did not impose any limitation on the evidence that could be presented in a Section 145 proceeding, the Court held that when new evidence was provided, review by the District Court would be de novo. If new evidence were not provided on an issue, substantial evidence would be the standard. In neither circumstance, was the patent applicant entitled to raise new issues in the proceedings. The Court indicated that its decision was supported not only by the legislative history, but Supreme Court precedent.

The Impact of the En Banc Decision

Although only about 30 Section 145 proceedings are filed in a year, the lack of limitation on the admissibility of evidence, coupled with de novo review for issues that rely on new evidence, indicate that the number of these actions will increase.

A patent applicant should pay particularly close attention during patent prosecution to make sure that all necessary legal issues have been raised.  New issues cannot be raised in Court, but new evidence can be presented on all issues. This includes live fact and expert testimony. Further, the pendency of a Section 145 proceeding will not shorten the patent term. Thus, for commercially important patent applications, a patent applicant should consider bypassing continuation practice and instead file a Section 145 proceeding to present a strong factual record to a new fact finder who will conduct a de novo review and decide the case without a jury.

National Labor Relations Board Once Again Rules that Bannering is Lawful

Now that the National Labor Relations Board is at full strength, it is finally addressing many important cases which have been pending for some time. In the recently announced decision of Southwest Regional Council of Carpenters (New Star General Constructors, Inc.), the Board ruled that bannering by the Carpenters Union did not violate the secondary boycott provisions of the Act, which proscribes threats of coercion against neutral employers in an effort to get them to cease doing business with a target company.

In 2004, the Southwest Regional Council of Carpenters placed large 4 ft. x 20 ft. banners on various job locations proclaiming a “labor dispute” with owners and contractors doing business with two Utah companies. In addition, the Union sent letters to secondary employers asking them not to do business with either firm. Handbills were also distributed at various job sites advising the public of the connection between the secondary or neutral employers and the targeted companies. This occurred even though, at many of the jobsites, the targeted companies were not present. At the jobsites where they were present, the targeted companies also set up a dual gate system which the carpenters’ banners refused to comply with.

The targeted companies filed unfair labor charges alleging unlawful coercion of neutrals and unlawful inducement of employees to stop doing business with the targeted companies. The Board’s General Counsel proceeded with the complaints, but the Board disagreed that the banners were “signal pickets” in violation of the Act. The Board distinguished banners from pickets and held that, absent confrontational activity by the bannerers, as well as a direct request that neutral employees not work at the jobsites, the activity was not in violation of the secondary boycott provisions and was protected under the Act. In a dissent, Board member Brian Hayes noted that bannering was the equivalent of picketing and was located at entrances used by employees of neutral companies.

It would therefore appear that absent additional evidence of a union request for a work stoppage, bannering will not be found to violate the secondary provisions of the Act. Owners, neutral companies, as well as the target companies, should therefore establish at the outset of bannering that no work stoppage is sought by the union. If the union fails to provide this assurance, an unfair labor practice charge may be successful. The Board’s position may provide little comfort to the owner who may be subject to bannering for months, but at least may allow bona fide assurances that no work stoppages will result.

New Directions in the Federal Circuit: Motivation to Combine

Through two recent panels, both including Judge Lourie, the Federal Circuit expanded upon the Supreme Court’s leading obviousness case, KSR International Co. v. Teleflex, Inc., 550 U.S. 398 (2007), finding motivation to combine references to render the patents-in-suit invalid as obvious. Both panel decisions indicate the Federal Circuit’s increasing readiness to find motivation to combine, even when explicit motivation is not present in the references.

Moreover, in both cases the Court ruled on motivation to combine without the benefit of expert testimony, perhaps illustrating a growing willingness to decide obviousness on summary judgment. Both cases involved simple mechanical inventions, however, so it remains to be seen whether the Federal Circuit will apply its apparent openness to determining obviousness on summary judgment to more complicated technologies that may require the assistance of experts.

Wyers v. Master Lock Co.1

In Wyers v. Master Lock Co., 616 F.3d 1231 (Fed. Cir. 2010), cert. denied the Federal Circuit, reversing a jury decision that three trailer hitch lock patents were valid and infringed, found that even in the absence of expert testimony, judges can make a common sense determination to combine the prior art to find patent claims obvious and thus invalid. Prior to Wyers, the Federal Circuit rarely relied on common sense as the basis for finding a motivation to combine prior art. Wyers confirms that successful obviousness challenges are possible without expert testimony. On February 22, 2011, the Supreme Court declined to grant Wyers’ petition for a writ of certiorari.

Tokai Corp. v. Easton Enterprises, Inc.

InTokai Corp. v. Easton Enterprises, Inc.,—F.3d—, 2011 WL 308370 (Fed. Cir. 2011), the Federal Circuit in a split decision affirmed a grant of summary judgment which found the patents-in-suit to be invalid as obvious. Tokai’s March 3, 2011 petition for panel rehearing and rehearing en banc is pending.

Tokai’s patents relate to automatic child-safety mechanisms for safety utility lighters. Judge Lourie wrote for the majority:

It would have been obvious to one of ordinary skill and creativity to adapt the safety mechanisms of the prior art cigarette lighters… to fit a utility lighter as disclosed by [the prior art], even if it required some variation in the selection or arrangement of particular components.

The Court concluded that “the undisputed facts in this case – including the state of the prior art, the simplicity and availability of the components making up the claimed invention, and an explicit need in the prior art for safer utility lighters – compel a conclusion of obviousness.” The Court also affirmed the exclusion of expert declarations because Tokai failed to submit expert reports.

Impact of Wyers and Tokai

These decisions support a summary judgment strategy for invalidity claims in three ways: (1) by making it easier to find a motivation to combine, (2) by not requiring expert testimony to establish a motivation to combine and, (3) in cases where a strong prima facie case of obviousness is established, by making it difficult for secondary considerations to save the patents. “[T]he ultimate inference as to the existence of a motivation to combine references may boil down to a question of ‘common sense,’ appropriate for resolution on summary judgment,” Wyers, 616 F.3d at 1240, and “expert testimony concerning motivation to combine is unnecessary and, even if present, will not necessarily create a genuine issue of material fact.” Id. at 1239, citing KSR, 550 U.S. at 427.

Tokai also makes it challenging for a simple mechanical patent to withstand an obviousness challenge particularly when there is a known need.

For a more in-depth look at this issue, please click here.

New York Court Rules Parties to International Arbitration May Attach New York Assets as Security Even Without Personal Jurisdiction

In a case of first impression, the New York Appellate Division ruled in March 2011 that parties to an international arbitration may attach assets located in New York as security for a future award in the arbitral proceeding.  This is the case even if the New York courts lack personal jurisdiction over the parties and even if the underlying dispute has no connection whatsoever to New York.


In a case of first impression, the Appellate Division, First Department, of the State of New York ruled in March 2011 that parties to a foreign arbitral proceeding may attach assets located in New York as security for a future award in the proceeding—even when there is no connection to New York by way of personal or subject matter jurisdiction.  The Appellate Division’s decision, which was a ruling of first impression, provides the only judicial affirmation to date of changes that the New York Legislature made to New York’s Civil Practice Law and Rules (CPLR) in 2005.  In light of the ruling, the New York courts will likely see a proliferation of motions for orders of attachment by foreign parties to international arbitrations.

The case in question, Sojitz Corp. v. Prithvi Info. Solutions Ltd., N.Y. Slip Op. 01741, 2011 WL 814064 (1st Dep’t March 10, 2011), concerned a dispute between Sojitz Corporation, a Japanese compay with its principal place of business in Tokyo, and Prithvi Information Solutions, an Indian company with its principal place of business in Hyderabad, India.  The parties’ dispute arose out of a contract, entered into in Delhi, whereby Sojitz agreed to provide telecommunications equipment manufactured in China to Prithvi in India.  As such, the transaction at issue had nothing to do with the United States, much less with New York state.  Moreover, neither Sojitz nor Prithvi regularly engaged in business in New York, such that the New York courts would have personal jurisdiction over the companies.

In August 2009, Sojitz made an ex parte motion in the Supreme Court of New York for an order of attachment against Prithvi.  In this motion, Sojitz stated that it intended to commence an arbitration against Prithvi in Singapore within 30 days of the order of attachment (inasmuch as the parties’ contract required Singapore arbitration), and alleged that, if the requested attachment order was not granted, Prithvi might dissipate its New York assets pending the completion of the Singapore arbitration.  The Supreme Court granted Sojitz’s motion and issued an order, under CPLR 7502(c), attaching a $18,500 debt owed to Prithvi by a company in New York, which was Prithvi’s only asset in New York state.  In so doing, the court held that it had the authority to attach the New York assets of a foreign party solely as security for a possible future award in an arbitration pending abroad.

On appeal, Prithvi maintained that it does not have any offices in New York, is not licensed to do business in New York and has no bank accounts, real estate or employees in New York.  Prithvi also maintained that the transaction in question had nothing to with the the United States.  Accordingly, Prithvi argued that because the New York courts do not have personal jurisdiction over it, or subject matter jurisdiction over the parties’ dispute, the lower court overstepped its authority in issuing the attachment order.

In rejecting Prithvi’s argument and affirming the lower court’s order of attachment, the Appellate Division held that there was “nothing fundamentally unfair about an attachment for security pending arbitration in a proper [foreign] forum.”  In reaching this decision, the court gave a brief summary of the development of the law in New York with respect to interim measures in support of arbitrations.   Until relatively recently, this form of interim relief was only available to parties in domestic proceedings.  However, in 2005, the New York Legislature amended CPLR 7502, explicitly empowering the courts of New York to issue preliminary injunctions and attachments in aid of all arbitrations, including those involving foreign parties or in which the arbitration is conducted outside of New York.  CPLR 7502(c) reads in relevant part as follows:

The supreme court … may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state, whether or not it is subject to the United Nations convention on the recognition and enforcement of foreign arbitral awards, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.

The Sojitz court noted that CPLR 7502(c) “provides several substantive and procedural safeguards intended to permit attachment consistent with due process.”  Among other things, the statute requires the movant to demonstrate that any award issued by the arbitrators in the foreign country would be rendered ineffectual if the relief was not granted.  In addition, the statute provides that if the foreign arbitration is not commenced within 30 days after the attachment order is granted, the order “shall expire and be null and void.”

The decision in Sojitz is the first time that a New York court has ever ruled on the legality and due process implications of CPLR 7502(c).  As it is often difficult to obtain security attachment orders for international arbitrations, the Sojitz  decision is likely to make New York an attractive venue for international parties seeking to preserve assets while they arbitrate in a foreign country.

Stipulations Regarding Time Loss Compensation May Tie Employers’ Hands

Pursuant to state’s worker compensation statutes, injured workers can receive paid medical treatment and compensation for lost earnings, which is known as “time loss.” Employers often stipulate that a worker has suffered an injury on the job in order to streamline the process and ensure that the worker receives compensation as soon as possible. That stipulation may have a significant impact later if the worker and/or the employer decide to appeal the resulting time loss award.  In Chunyk & Conley/Quad-C v. Braw, 156 Wn. App. 246 (2010), such an employer stipulation resulted in the Court’s setting aside a jury verdict that a worker was not injured.

In Chunyk, the worker had fractured her right wrist while playing softball resulting in an arm cast, and while at work, she slipped carrying patient binders because of the pain in her wrist. Her right arm contracted at the elbow, her hand contracted into a claw, and her whole arm became sensitive. She was one armed, slow and awkward, in pain, mentally distracted and suffered memory loss. Washington Labor & Industries (“L&I”) determined that she had sustained an industrial injury when the patient binder struck her cast and the injury aggravated her pre-existing non-work related wrist fracture (i.e., the softball game injury). The employer, for whatever reason, stipulated that such on-the-job incident had caused the worker’s injuries. The worker then began working off the clock, sleeping at the job, and/or taking work home. Her supervisor reprimanded her for taking patient files to her house. Believing that the employer would eventually fire her, the worker quit.  She took a new administrative nursing job and experienced the same limitations. She was then fired. She then worked as a home companion for an elderly woman, providing home care services. Again, she was fired. At this point, she stopped working.

L&I determined that her industrial injury caused a “temporary total disability” so that she was entitled to time loss compensation for approximately four years. This time loss award included money for chronic pain and depression. Her initial employer challenged L&I’s earning capacity determination, asserting that the worker could in fact find a job (as she had done on two separate occasions after leaving the employer). At trial, several physicians testified that the worker’s chronic pain syndrome and depression were unrelated to the industrial injury and challenged L&I’s diagnosis of the extent of her claimed injuries. The worker had extensive family history problems, which were alternate explanations for her claimed depression. The jury agreed, overturned L&I’s determination, and found that the worker was not entitled to four years of time loss compensation.

The worker appealed and argued that, because the employer had previously stipulated her work injury caused these conditions, the employer should not have been allowed to contest the “time loss” award. The reviewing Court agreed and held that the judge engaged in reversible error by allowing the jury an opportunity to evaluate whether the workplace injury, in fact, caused her chronic pain and depression.

The takeaways from Chunyk are that employers should participate and contest any claim for workers’ compensation, and also not stipulate to causation. Delaying or failing to participate in the claim process and/or administrative review can lead to an accepted condition that will entitle the worker to time loss payments. Thus, a prudent employer will be on top of workers’ compensation claims and participate in the process to ensure fair and adequate handling of claims and to limit time loss payments. Another takeaway from Chunyk is that softball can be dangerous – both for the worker and the employer.