Therasense Inc. v. Becton, Dickinson and Company—The Federal Circuit tightens the standards necessary to establish the inequitable conduct defense by requiring a “but-for” showing of materiality

In Therasense Inc. v. Becton, Dickinson and Co., Appeal No. 2008-1511(May 25, 2011), an en banc Federal Circuit issued a significant ruling on the elements necessary to establish an inequitable conduct defense. The stakes for a patent owner facing a charge of inequitable conduct are high: inequitable conduct renders the affected patent unenforceable and could support a finding that the case was exceptional, entitling the alleged infringer to attorneys fees. A party alleging inequitable conduct had to show that the patentee misrepresented or failed to disclose material information with an intent to deceive the Patent Office. The courts were then to engage in an equitable “balancing” of materiality and intent to determine whether the conduct justified finding the patents unenforceable.

While recent scholarship suggests that the defense was not particularly successful in cases that made their way to the Federal Circuit and that the Federal Circuit applied stricter standards as to the elements of the defense, the incentives to assert the defense were so great that patent litigators were alleging inequitable conduct as a matter of course. In fact, the defense of inequitable conduct was said to have been asserted in as many as 60 to 80 percent of patent infringement cases. Also, many believed that the standards for finding inequitable conduct elements had not been sufficiently articulated by the Federal Circuit.

In Therasense, a six-judge majority addressed those concerns by significantly tightening the standards to be used in assessing the materiality and intent elements. Most importantly, the majority held that in most circumstances the party asserting an inequitable conduct defense must establish that “but-for” the misrepresentation or omission, the patent would not have issued. Further, materiality and intent were held to be separate requirements and were no longer part of a sliding scale where a showing of greater materiality permitted a showing of lesser intent. The Federal Circuit did, however, recognize that in instances of egregious misconduct, a “but-for” showing would not be required.

The decision brings to a close an almost 30-year effort by the Federal Circuit to tighten up the standards for proving inequitable conduct which the Court had earlier described as “a plague” on the patent system. As a result, it was contributing to the massive citation of prior art to the PTO, which in turn contributed significantly to the backlog of patent applications. The use of the inequitable conduct defense was also said to haveFederal Circuit tightens the standards necessary to establish the inequitable conduct defense by requiring a “but-for” showing of materiality  several other negative effects, such as the potential to destroy parts of patent portfolios/families, inhibit the possibility of settlement and cast a cloud over the reputations of inventors and patent prosecutors. Indeed, the Federal Circuit prefaced its holding by stating that it “now tightens the standards for finding both intent and materiality in order to redirect [the inequitable conduct] doctrine that has been overused to the detriment of the public.” Slip Op. at 24.

The Federal Circuit created an exception to the “but-for” materiality holding in the case of “affirmative egregious misconduct.” Id. at 29. One example of such egregious misconduct would be the filing of an unmistakably false affidavit. The Federal Circuit pointed out that the egregious misconduct exception provided a measure of flexibility to capture extraordinary circumstances.

In the Therasense case, the alleged misconduct had been the failure to disclose briefs that the patent applicant had submitted to the European Patent Office regarding the European counterpart of a related patent owned by the patent applicant. The District Court had found the patent unenforceable due to this failure to disclose. The Federal Circuit reversed and remanded and instructed the District Court to determine whether the PTO would not have granted the patent but for the failure to disclose the European Patent Office briefs. The Court also vacated the District Court finding of intent to deceive because it had decided this issue under the wrong standard. The District Court was instructed to determine whether there was clear and convincing evidence demonstrating that the patent applicant knew of the European Patent Office briefs, knew of their materiality and made the conscious decision not to disclose them in order to deceive the PTO.

The four judge dissent stressed that the “but-for” test of materiality departed from Federal Circuit precedent and was inconsistent with the PTO’s standard set forth in PTO Rule 56. The majority opinion’s response to the dissent was that the PTO’s Rule 56 standard was one of the major causes of the rampant use of the inequitable conduct defense.

The Patent and Trademark Office was quick to react to the decision. On May 26, 2011 it announced that it was “carefully studying the important en banc decision by the U.S. Court of Appeals for the Federal Circuit in the case of Therasense v. Becton, Dickinson to assess how it may impact agency practices and procedures.The agency also announced that it expects to soon issue guidance to applicants related to the prior art and information they must disclose to the Office in view of Therasense.” As the press release noted, the Therasense “decision resolves uncertainties in many aspects of how district courts must apply the inequitable conduct doctrine.”

Interlocutory Appeal From Denial Of Twombly Motion to Dismiss in Text Messaging Antitrust Litigation

Judge Posner authored a unanimous opinion at the close of 2010 holding that a denial of a Rule 12(b)(6) motion to dismiss based on Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), raised a “controlling question of law” suitable for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). In re Text Messaging Antitrust Litigation, 630 F.3d 622 (7th Cir. 2010) (based largely on the uncertainty surrounding the Twombly legal standard). The court then held that the district court had properly denied the motion to dismiss based onTwombly.

Text Messaging concerned consolidated class action proceedings accusing defendants of conspiring to fix prices for text messaging services. The district court denied a Twombly motion to dismiss and certified its ruling, at defendants’ request, for interlocutory appeal, stating that the application of Twombly remained unclear; that reasonable minds could differ on its application here; that the question was controlling because granting the motion to dismiss could terminate the case; and that immediate review would materially advance the ultimate conclusion of the case. Plaintiffs opposed certification for appeal in the district court, asserting that no controlling question of law was involved, and then asked the court of appeals to refuse the required permission for an interlocutory appeal.

Judge Posner found the appeal to concern a controlling question of law, which was the legal significance of the facts as alleged, rather than the resolution of disputed facts. A question of law under 1292(b) includes the “question of the meaning of a . . . common law doctrine . . .” 630 F.3d at 626. The legal standard set forth in Twombly was not settled, but instead had placed pleading standards “in ferment.” Thus, the case did not concern the “routine application[] of well-settled legal standards to facts alleged in a complaint . . .” (630 F.3d at 626), which would not meet the requirements for a Section 1292(b) interlocutory appeal. Instead, the “question requires the interpretation, and not merely the application, of a legal standard – that of Twombly.” 630 F.3d at 625.

Granting an appeal would promote the “main task of an appellate court, which is to maintain the coherence, uniformity and predictability of the law . . .” Id. In addition, concerns underlying the holding in Twomblysupported empowering the district court and court of appeal to authorize an interlocutory appeal. Twombly is “designed to spare defendants the expense of responding to bulky, burdensome discovery unless the complaint provides enough information to enable an inference that the suit has sufficient merit to warrant putting the defendant to the burden of responding to at least a limited discovery demand.” 630 F.3d at 625. Permitting a complex case of extremely dubious merit to proceed would place defendants in a “discovery swamp,” and create “unjustifiable harm to a defendant that only an immediate appeal can avert.” Id. at 626.

The court then held that “the complaint alleges a conspiracy with sufficient plausibility to satisfy the pleading standard of Twombly” (630 F.3d at 627), discussing, inter alia, the following types of allegations as supporting that result:

— “Parallel behavior of a type anomalous in a competitive market is thus a symptom of price fixing, though standing alone it is not proof of it; and an industry structure that facilitates collusion constitutes supporting evidence of collusion.” 630 F.3d at 627-628. “[D]efendants sell 90 percent of U.S. text messaging services, and it would not be difficult for such a small group to agree on prices and to be able to detect ‘cheating’ . . .” Id.

— “[T]he defendants belonged to a trade association and exchanged price information directly at association meetings. This allegation identifies a practice, not illegal in itself, that facilitates price fixing that would be difficult for the authorities to detect.” 630 F.3d at 628.

— “[I]n the face of steeply falling costs, the defendants increased their prices.” Id.

— “[A]ll at once the defendants changed their pricing structures, which were heterogeneous and complex, to a uniform pricing structure, and then simultaneously jacked up their prices by a third.” Id., citing Twombly, 550 U.S. at 557 n. 4.

— No “smoking gun” was alleged, nor need it be. The allegations in the complaint need not “compel an inference of conspiracy” since the test at the motion to dismiss stage is “plausibility.” The “plausibility standard is not akin to a probability requirement.” Text Messaging, 630 F.3d at 629 (court’s emphasis).

— “[T]he complaint must establish a nonnegligible probability that a claim is valid; but the probability need not be as great as such terms as ‘preponderance of the evidence’ connote.” Id.

In Judge Posner’s view, the district judge was right to rule that the complaint “provides a sufficiently plausible case of price fixing to warrant allowing the plaintiffs to proceed to discovery.” Id.

Therasense Returns Common Sense to Law of Inequitable Conduct

Yesterday, in Therasense, Inc. v. Becton, Dickinson and Company (Fed. Cir. 2011) (en banc), the Federal Circuit handed down an historic and much needed update to the law of inequitable conduct.  The en banc (6-1-4) decision markedly increased the requirement for proof of inequitable conduct:  “This court now tightens the standards for finding both intent and materiality in order to redirect a doctrine that has been overused to the detriment of the public.”  The court rejected the “sliding scale” approach that previously allowed intent to deceive to be inferred from strong materiality.  The new standard makes intent and materiality separate requirements, and forbids a court from inferring intent solely from a strong showing of materiality.   Now, evidence of deceitful intent must be weighed separately from materiality, and proven by clear and convincing evidence.  The clear and convincing standard requires that a finding of deceptive intent must be “single most reasonable inference able to be drawn from the evidence.”

In addition, the court raised the standards for proof of materiality, holding that “as a general matter, the materiality required to establish inequitable conduct is but-for materiality.”  But-for materiality requires that the PTO would not have allowed a claim had it been aware of the undisclosed prior art.

The following passages from majority opinion in Therasense set forth the heart of the decision:

Intent and materiality are separate requirements. Hoffmann-La Roche, Inc. v. Promega Corp., 323 F.3d 1354, 1359 (Fed. Cir. 2003). A district court should not use a “sliding scale,” where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa. Moreover, a district court may not infer intent solely from materiality. Instead, a court must weigh the evidence of intent to deceive independent of its analysis of materiality. Proving that the applicant knew of a reference, should have known of its materiality, and decided not to submit it to the PTO does not prove specific intent to deceive. See Star, 537 F.3d at 1366 (“the fact that information later found material was not disclosed cannot, by itself, satisfy the deceptive intent element of inequitable conduct”).

Because direct evidence of deceptive intent is rare, a district court may infer intent from indirect and circumstantial evidence. Larson Mfg. Co. of S.D., Inc. v. Aluminart Prods. Ltd., 559 F.3d 1317, 1340 (Fed. Cir. 2009). However, to meet the clear and convincing evidence standard, the specific intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Star, 537 F.3d at 1366. Indeed, the evidence “must be sufficient to require a finding of deceitful intent in the light of all the circumstances.” Kingsdown, 863 F.2d at 873 (emphasis added). Hence, when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found. See Scanner Techs. Corp. v. ICOS Vision Sys. Corp., 528 F.3d 1365, 1376 (Fed. Cir. 2008) (“Whenever evidence proffered to show either materiality or intent is susceptible of multiple reasonable inferences, a district court clearly errs in overlooking one inference in favor of another equally reasonable inference.”). This court reviews the district court’s factual findings regarding what reasonable inferences may be drawn from the evidence for clear error. See Star, 537 F.3d at 1365.

…

This court holds that, as a general matter, the materiality required to establish inequitable conduct is but-for materiality. When an applicant fails to disclose prior art to the PTO, that prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. Hence, in assessing the materiality of a withheld reference, the court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed reference. In making this patentability determination, the court should apply the preponderance of the evidence standard and give claims their broadest reasonable construction. See Manual of Patent Examining Procedure (“MPEP”) §§ 706, 2111 (8th ed. Rev. 8, July 2010). Often the patentability of a claim will be congruent with the validity determination—if a claim is properly invalidated in district court based on the deliberately withheld reference, then that reference is necessarily material because a finding of invalidity in a district court requires clear and convincing evidence, a higher evidentiary burden than that used in prosecution at the PTO. However, even if a district court does not invalidate a claim based on a deliberately withheld reference, the reference may be material if it would have blocked patent issuance under the PTO’s different evidentiary standards. See MPEP §§ 706 (preponderance of the evidence), 2111 (broadest reasonable construction).

As an equitable doctrine, inequitable conduct hinges on basic fairness. “[T]he remedy imposed by a court of equity should be commensurate with the violation.” Columbus Bd. of Educ. v. Penick, 443 U.S. 449, 465 (1979). Because inequitable conduct renders an entire patent (or even a patent family) unenforceable, as a general rule, this doctrine should only be applied in instances where the patentee’s misconduct resulted in the unfair benefit of receiving an unwarranted claim. See Star, 537 F.3d at 1366 (“[j]ust as it is inequitable to permit a patentee who obtained his patent through deliberate misrepresentations or omissions of material information to enforce the patent against others, it is also inequitable to strike down an entire patent where the patentee committed only minor missteps or acted with minimal culpability”). After all, the patentee obtains no advantage from misconduct if the patent would have issued anyway. See Keystone, 290 U.S. at 245 (“The equitable powers of the court can never be exerted in behalf of one . . . who by deceit or any unfair means has gained an advantage.”) (emphasis added) (internal citations omitted). Moreover, enforcement of an otherwise valid patent does not injure the public merely because of misconduct, lurking somewhere in patent prosecution, that was immaterial to the patent’s issuance.