The Federal Circuit Affirms the Delaware District Court’s Summary Judgment of Invalidity for Failure to Disclose the Best Mode

In Wellman, Inc. v. Eastman Chemical Co., No. 2010-1249 (Fed. Cir. Apr. 29, 2011), the Federal Circuit affirmed the U.S. District Court for the District of Delaware’s grant of summary judgment on invalidity of Wellman’s patent claims for failure to disclose the best mode.

Plaintiff-patentee Wellman filed an action against Eastman Chemical, claiming it infringed U.S. Patent Nos. 7,129,317 (the ’317 patent) and 7,094,863 (the ’863 patent), which claim polyethylene terephthalate (PET) resins for use in plastic beverage containers. More particularly, the Wellman patents disclose “slow crystallizing” PET resins that purportedly retain exceptional clarity and do not shrink or become hazy from crystallization when “hot-filled” with product at temperatures of 180° C to 205° C.

Eastman Chemical defended by moving for summary judgment of invalidity on the grounds of indefiniteness and failure to set forth the best mode of practicing the claimed invention under 35 U.S.C. § 112, ¶ 1. The district court found that the patents were invalid, and Wellman appealed.

In its opinion, the Federal Circuit reaffirmed the law of “best mode.” Determining compliance with the best-mode requirement requires a two-prong inquiry. First, it must be determined whether, at the time the application was filed, the inventor possessed a best mode for practicing the invention. This is a subjective inquiry that focuses on the inventor’s state of mind at the time of filing. Second, if the inventor has a subjective preference for one mode over others, the court must then determine whether the inventor “concealed” the preferred mode from the public. The second prong inquires into the inventor’s disclosure of the best mode and the adequacy of that disclosure to enable one of ordinary skill in the art to practice that part of the invention. This second inquiry is objective, depending on the scope of the claimed invention and the level of skill required in the relevant art.

With respect to the first inquiry, the Federal Circuit agreed with the district court’s finding that the inventors possessed a best mode for practicing the invention. In particular, the district court found, based on the testimony of the inventors, that one inventor believed a specific formula for a slow-crystallizing, hot-fill PET called Ti818 to be the best mode of carrying out the claimed invention. The parties agreed that all but five of the asserted claims encompassed Ti818. Additionally, the Federal Circuit agreed with the district court that another inventor believed the use of carbon black (N990), an ingredient in its Ti818 PET formula, to be the best mode at the time of filing the application.

With respect to the second inquiry, the Federal Circuit agreed with the district court’s finding that Wellman effectively concealed the best mode from the public. Specifically, the district court found, and the Federal Circuit agreed, that Wellman effectively concealed the recipe for Ti818 by identifying preferred concentration ranges for certain ingredients that excluded those used in Ti818 and by identifying preferred particle sizes for an additive other than that used in Ti818. Thus, Wellman did not disclose the specific recipe for Ti818 or any other specific PET resin recipes. “By masking what at least one inventor considered the best of these slow-crystallizing resins, Wellman effectively concealed its recipe for Ti818.”

The Federal Circuit agreed with the district court and further held that Wellman not only failed to disclose its use of carbon black N990 in its Ti818 PET formula, but also deliberately chose to protect that ingredient as a trade secret, and, therefore, “intentionally concealed” the best mode. The Federal  Circuit found that the Wellman patents “lead away” from the use of carbon black N990 in Ti818.

While affirming the district court’s decision on invalidity based on the best mode, however, the Federal Circuit reversed the district court’s grant of summary judgment on the issue of indefiniteness. Specifically, the Federal Circuit found that the district court erred when it concluded that the patents did not provide sufficient guidance to those skilled in the art for construing the temperature (TCH) at which the sample crystallized the fastest during heating in a differential scanning calorimetry machine. The specifications of the patents supported construing the TCH term to require testing of amorphous materials.

The Federal Circuit affirmed the district court’s summary judgment that all asserted claims of the ’317 and ’863 patents that covered the PET recipe Ti818 were invalid for failure to disclose the best mode of practicing the claimed invention. The Federal Circuit, however, reversed the district court’s judgment that the asserted claims were indefinite under 35 U.S.C. § 112, ¶ 2, and remanded the case for further proceedings.

A copy of the opinion can be found at http://www.cafc.uscourts.gov/images/stories/opinions-orders/10-1249.pdf.

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New York Court of Appeals Upholds Purchase Agreement’s Broad Release in Affirming Dismissal of $900 Million Fraud Claim

On June 7, 2011, the New York Court of Appeals affirmed the dismissal of a $900 million lawsuit brought by former shareholders against America Movil SAB (“Movil”), Latin America’s largest mobile phone carrier, on the grounds that a general release entered into by the parties in 2003 barred Plaintiffs’ claims. Centro Empresarial Cempresa SA et al. v. America Movil SAB de CV et al., — N.E. 2d –, 2011 WL 2183293, slip op. at 1, 14 (June 7, 2011).  The unanimous decision by New York’s highest court underscores the extent to which sophisticated parties to arms-length transactions can contract away future claims, even “fraud claims  .  .  . unknown at the time of contract.” Id at 9.

Factual Background

The facts underlying the litigation date back to 1999 when Plaintiffs Centro Empresarial Cempresa SA (“Centro”) and Conecel Holding Ltd. — two British Virgin Island entities holding a combined majority interest in the Ecuadorian telecom company Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel (the “Company”) — sought financing from Mexican billionaire Carlos Slim Helu (“Slim”).

Slim’s company, Telmex Mexico (“Telmex”) injected $150 million into the Company in 2000, taking a majority interest. Following the transaction, Plaintiffs and Telmex held their interests in the Company through a new entity, Telmex Wireless Ecuador LLC (“TWE”). The parties agreed that in the event Slim consolidated his Latin American telecommunications interests into one entity, Plaintiffs would have the right to exchange their units in TWE for equity shares of the new entity.

That consolidation occurred in late 2000, when Movil was spun off from Telmex Mexico, triggering Plaintiffs’ right to negotiate an exchange of their units in TWE for shares of Movil. This exchange never happened. Rather, pursuant to a Purchase Agreement entered into in 2003, Plaintiffs sold their units in TWE to Defendants for cash.

The Purchase Agreement released Telmex and its affiliates, shareholders, and agents from:

all manner of actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands, liability, whatsoever, in law or equity, whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of, based upon, attributable to or resulting from the ownership of membership interests in [TWE] or having taken or failed to take any action in any capacity on behalf of [TWE] or in connection with the business of [TWE].” (Emphasis added.)

In 2008, Plaintiffs filed suit, accusing Movil and the Defendants of fraudulently inducing them to sell their interest in TWE. According to the Complaint, in connection with a possible exchange of their TWE units for shares in Movil, Plainitffs allegedly were provided inaccurate financial information about the Company, and never received other information, despite repeated requests. The Complaint alleges that if Plaintiffs had exchanged their TWE units for shares in Movil rather than selling them outright for cash, they would have been entitled to receive approximately $900 million in Movil stock. The allegations included breach of contract, fraud, fraudulent inducement, unjust enrichment, and a claim for accounting.

Last year, a divided panel in the Appellate Division, First Department, held that the Plaintiffs’ suit was “barred by the general release they granted defendants in connection with the sale of their interest.” Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 76 A.D.3d 310 (1st Dep’t 2010). Last week, the Court of Appeals affirmed.

The Holding

In a unanimous opinion, Judge Carmen Beauchamp Ciparick held that “[a]s sophisticated entities, [the plaintiffs] negotiated and executed an extraordinarily broad release with their eyes wide open. They cannot now invalidate that release by claiming ignorance of the depth of their fiduciary’s misconduct.” As detailed below, the Court’s opinion centered around the broad nature of the release and Plaintiffs’ failure to conduct thorough due diligence in the face of red flags:

  1. Plaintiffs Released “Unknown Fraud Claims.”  The Court relied on the broad language of the release; specifically, that the phrase “all manner of actions,” in conjunction with the reference to “future” and “contingent” actions “indicate[d] an intent to release defendants from fraud claims, like this one, unknown at the time of contract.” America Movil, 2011 WL 2183293, slip op. at 9.  The Court stated that, to circumvent such a broad release, Plaintiffs would have had to plead facts from which the court could infer that “the release itself was induced by a separate fraud” (which they did not.) Id.
  2. Fiduciary Relationship Irrelevant.  The Court noted that Telmex, as TWE’s majority shareholder, owed a fiduciary duty to Plaintiffs, which required Defendants to  “disclose any information that could reasonably bear on plaintiffs’ consideration of [its purchase] offer.” Id. at 11. However, the Court also held that a sophisticated principal is able to release its fiduciary from claims, “at least where, as here, the fiduciary relationship is no longer one of unquestioning trust — so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into.” Id. The Court noted that: (1) Plaintiffs were large corporations engaged in complex transactions in which they were advised by counsel; and (2) as sophisticated entities, they negotiated and executed an extraordinarily broad release “with their eyes wide open.”  Id. at 12.
  3. Plaintiffs Failed to Allege Justifiable Reliance On Defendants’ Fraudulent Statements In Executing The Release.  Citing its recent decision in DDJ Mgt., LLC v. Rhone Group LLC, 15 NY3d 147, 153-43 (2010), the Court held that Plaintiffs failed to allege justifiable reliance because “plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value the TWE units, and that they were entitled to that information.” America Movil, 2011 WL 2183293, slip op. at 12-13. The fact that Plaintiffs cashed out their interests and released defendants from fraud claims without demanding either access to the information or assurances in the form of representations and warranties was fatal to Plaintiffs’ case. Plaintiffs “have been so lax in protecting themselves that they cannot fairly ask for the law’s protection.” Id. at 13.

Implications

The America Movil decision is instructive for parties seeking to foreclose future litigation in connection with Asset Sales and Purchases. A broad release, even one that waives future, unknown and contingent claims, will be enforced by New York courts, as long as the release itself is not procured by fraud. It is imperative that parties conduct thorough due diligence, and that in the face of uncertainty, purported inaccuracies or other red flags, parties demand further warranties and access to information prior to agreeing to any release in connection with an asset purchase or sale.

U.S. Supreme Court Limits Scope of Primary Liability Under Federal Securities Laws

In Janus Capital Group, Inc. v. First Derivative Traders, the U.S. Supreme Court established a bright-line test that strictly limits the ability of plaintiffs to sue secondary actors under the federal securities laws. To state a claim under section 10(b) of the Securities Exchange Act, the defendant must have “ultimate authority” over an allegedly false statement, or the statement must be publicly attributed to him. The Supreme Court has made it clear that a third-party professional who drafts someone else’s public statement cannot be sued for primary violations of the securities laws.

Previously, in Central Bank of Denver v. First International Bank of Denver and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., the Supreme Court had prohibited aiding and abetting claims against third parties who did not make any misleading public statements. In Janus, the Supreme Court rejected the plaintiffs’ efforts to avoid Central Bank and Stoneridge by phrasing their claims as “primary” rather than “aiding and abetting” claims. This is the third strike against the plaintiffs’ bar, and it essentially closes the book on private third-party claims.

In Janus, the plaintiffs alleged that Janus Capital Group (“JCG”) and Janus Capital Management (“JCM”) made false statements in mutual fund prospectuses filed by Janus Investment Fund, for which JCM was the registered investment advisor and administrator. While JCG formed the Janus Fund, it was governed by an independent Board of Trustees and owned by the mutual fund investors. The district court dismissed the plaintiff’s complaint, finding that the shareholders could not sue JCM for statements in the Janus Funds’ prospectuses. The Fourth Circuit reversed the district court, holding that “by participating in the writing and dissemination of the prospectuses, JCM ‘made the misleading statements contained in [those] documents.’”

In a 5-4 decision split along ideological lines, the Supreme Court reversed the Fourth Circuit. The key issue before the Court was whether a third party can be held liable for “making” a materially false statement or omission in connection with the purchase or sale of a security. The Court found that JCM did not “make” the statements in the Janus Fund prospectuses, even though it was significantly involved in preparing them. Therefore, there was no private right of action against JCM.

Writing for the majority, Justice Thomas stated:

[T]he maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed.

Justice Thomas analogized to the relationship between a speechwriter and a speaker, explaining: “Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said.”

The Court emphasized that it was drawing a “clean line” distinguishing “between those who are primarily liable (and thus may be pursued in private suits) and those who are secondarily liable (and thus may not be pursued in private suits).” The Court succinctly stated that “the maker is the person or entity with ultimate authority over a statement and others are not.”

Applying this test, the Court concluded that while JCM may have been involved in drafting the Janus Funds’ prospectuses, it did not “make” any of the statements because the prospectuses were “subject to the ultimate control” of the Janus Funds. The Court rejected the argument that the “uniquely close relationship” between JCM and the Janus Funds should intertwine the entities for Rule 10b-5 purposes. The Court explained that “[a]ny reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.”

The Impact of Janus

The Supreme Court has made it abundantly clear that it “will not expand liability beyond the person or entity that ultimately has authority over a false statement.”  In the aftermath of Central Bank and Stoneridge, the plaintiffs’ bar made a series of attempts to recast their third-party claims, using concepts like “scheme” liability and an expansive definition of who should be deemed a “primary” violator. In Janus, the Supreme Court slammed the door on these efforts. While one should never underestimate the creativity of the class action plaintiffs’ bar, they now have little to work with. In the aftermath of Janus, third-party service providers such as banks, accountants, lawyers and financial advisors have strong arguments that they simply are not proper defendants in private securities actions under section 10(b).

Importantly, the Court refused to defer to the SEC’s “broad view” of Rule 10b-5, which may have implications in SEC enforcement proceedings. For years, the SEC has taken a very broad view of who may be primarily liable under Rule 10b-5, frequently arguing that those who create alleged false statements may be held primarily liable even when they did not make the public statement. Although Janus addressed private litigants rather than SEC claims, the Court’s rejection of the SEC’s expansive arguments concerning primary liability may provide SEC defense attorneys with a powerful new tool in defending SEC investigations and suits.

New Americans are among the Nation’s Top Entrepreneurs

Apple, Inc.

Anyone who fails to recognize that immigration fuels a sizable chunk of the U.S. economy would be well-advised to read the report released this week by the Partnership for a New American Economy, entitled The “New American” Fortune 500. According to the report, two in five Fortune 500 companies (41%) “had at least one founder who was either an immigrant or raised by someone who immigrated to the United States.” Collectively, these companies had $4.2 trillion in annual revenues and employed 10.9 million people worldwide. This is compelling evidence, argues the report, that “immigrants and their children create American jobs and drive our economy.” Yet, the report concludes, our immigration laws all too often force immigrant workers and entrepreneurs away, rather than welcoming them. As New York City Mayor Michael Bloomberg recently put it, that amounts to “national suicide.”

Among the more detailed findings of the Partnership’s report are that Fortune 500 companies founded by immigrants:

  • account for 18% (or 90) of all Fortune 500 companies.
  • generate $1.7 trillion in annual revenue.
  • employ 3.7 million workers worldwide.
  • include AT&T, Verizon, Procter & Gamble, Pfizer, Kraft, Comcast, Intel, Merck, DuPont, Google, Cigna, Kohl’s, Colgate-Palmolive, PG&E, Sara Lee, Sun Microsystems, United States Steel, Qualcomm, eBay, Nordstrom, and Yahoo!

Fortune 500 companies founded by the children of immigrants:

  • account for 23% (or 114) of all Fortune 500 companies.
  • generate $2.5 trillion in annual revenue.
  • employ 7.2 million workers worldwide.
  • include General Electric, Bank of America, Ford, Citigroup, IBM, Costco, Boeing, Home Depot, State Farm, UPS, Apple, Walt Disney, Amazon.com, Staples, McDonald’s, Loews, Office Depot, Estée Lauder, and Harley-Davidson.

The report points out that the contributions of the “New American” entrepreneurs who founded these companies “have been essential to American prosperity.” But the report argues against complacency, saying there is “no guarantee that the next generation of top entrepreneurs will build their businesses in this country.” Other countries are becoming increasingly competitive with the United States in attracting the best and brightest from around the world. And some countries have “more welcoming immigration systems” than do we.

The report concludes that, in order to compete globally,

“we must modernize our own immigration system so that it welcomes, rather than discourages, the Fortune 500 entrepreneurs of the 21st century global economy. We must create a visa designed to draw aspiring entrepreneurs to build new businesses and create jobs here. We must give existing American companies access to hire and keep the highly skilled workers from around the world whom they need to compete. And we must stem the loss of highly skilled foreign students trained in our universities, allowing them to stay and contribute to our economy the talent in which we’ve invested.”

In short, we need an immigration system that acts in the best interests of the U.S. economy, recruiting and retaining the entrepreneurs and workers we need in order to fuel innovation and growth for decades to come.

Photo by Jorge Quinteros.

Dept. of Homeland Security Has Access to Expunged Criminal Records

It came as a surprise to me that the Department of Homeland Security has access to criminal records that were “expunged” by courts. Furthermore, DHS may use convictions that were “expunged” as the basis for deporting LPRs from the U.S. It is noteworthy that in one case, DHS waiting some 10 years after the conviction to start removal proceedings – after the time had run for all relief for which the LPR could have availed himself regarding the conviction. Please tell me that this offends someone else’s sense of justice other than mine.