New Standards for Litigants in Patent Cases: Inequitable Conduct is No Longer a Boiler Plate Defense

In recent years, an all too common defensive strategy to patent infringement claims has been to cry foul on the patent-holder and allege misconduct during the patenting process. Inequitable conduct, a judicially created equitable doctrine, is a defense to patent infringement allegations, which if successfully proven, can bar enforcement of the patent. However, inequitable conduct allegations may not have the same legal luster they once held based on the recent Federal Circuit holding in Therasense, Inc. v. Becton, Dickinson & Co.

Years of fluctuating opinions on the issue of inequitable conduct and its remedies, coupled with the over-use of the defense, has “plagued not only on the courts but also the entire patent system.” Fearing the guillotine-like effects of inequitable conduct charges, those applying for patents have deluged the PTO (Patent and Trademark Office) with often hundreds of unnecessary documents in an attempt to comply with the disclosure requirements during the patenting process. Such document submissions have created a backlog at the PTO. Moreover, fearing their clients may lose a patent infringement claim, an estimated “80 percent of patent infringement cases included allegations of inequitable conduct” as a defense. However, those days may now be over as Therasense will likely be a dramatic game-changer in the strategic side of patent litigation.

The Federal Circuit’s en banc decision under Chief Judge Rader sets forth new standards for establishing a defense of inequitable conduct. First, the opinion clarified what is meant by the term intentionally deceive: “to prevail on a claim of inequitable conduct, the accused infringer must prove that the patentee acted with the specific intent to deceive the PTO.” Rather than the amorphous criteria for intent that previously included negligence, gross negligence, and that the applicant “should have known,” now claims must be supported by clear and convincing evidence. Further, if nondisclosure of information regarding prior art is the foundation of an inequitable conduct claim, there must be clear and convincing evidence that the “applicant made a deliberate decision to withhold a known material reference.” Thus, a defendant can no longer just point to a general nondisclosure, but rather, must have sufficient evidence to show the applicant “knew of the reference, knew that it was material, and made a deliberate decision” to withhold it from the PTO.

Unlike cases that treat intent and materiality interchangeably, Judge Rader clarified that the two are “separate requirements” under an inequitable conduct defense. This distinction abolishes the use of a “sliding scale” by courts whereby a weak showing of intent could simply be supplemented with a strong showing of materiality and vice versa. Because these two elements are separate, neither can be inferred based on the existence of the other, forcing courts to now “weigh the evidence of intent to deceive independent of its analysis of materiality.”

The court also discussed the form of proof for intent, recognizing that “direct evidence of deceptive intent is rare,” therefore allowing judges to make inferences from “indirect and circumstantial evidence.” Because varying judicial inferences previously encouraged the proliferation of inequitable conduct claims, the court established that a clear and convincing evidence standard again must be met. However, the specific intent to deceive must be the “single most reasonable inference able to be drawn from the evidence.” Therefore, if “multiple reasonable inferences” as to the applicant’s intent can be drawn, then the defense will fail to meet this heightened standard.

Second, the ruling held that “but-for materiality” is required to prove inequitable conduct on the part of an applicant. The stringent standard of but-for materiality comes down to a simple question- had the PTO known of the prior art that an applicant failed to disclose, would the PTO have allowed their claim? If the PTO “would not have allowed a claim had it been aware of the undisclosed prior art,” the prior art is but-for material. However, like with most rules, the court carved out an exception– but-for proof is not necessary in cases of “affirmative egregious conduct”. Thus, if a company filed an “unmistakably false affidavit” then the misconduct is per se material. According to Judge Rader, this exception will help to restore a needed balance in patent law between encouraging “honesty before the PTO” and reducing “unfounded accusations of inequitable conduct.”

Finally, the remedy for inequitable conduct was dramatically changed. Previously, the remedy for inequitable conduct had earned itself the title of being the “‘atomic bomb’ of patent law” because of its far-reaching and potentially devastating financial, reputational and intellectual effects. A successful inequitable conduct defense could “render[] the entire patent unenforceable,” was unable to be “cured by reissue or reexamination” and could “spread from a single patent to render unenforceable other related patents and applications in the same technology.” Thus, once the trigger was pulled on an inequitable conduct defense, a company’s entire patent portfolio could face the firing squad. However, this majority holding recognized the concept of basic fairness undergirding the doctrine of inequitable conduct and held that courts should limit their application of the complete unenforceability remedy to “instances where the patentee’s misconduct resulted in the unfair benefit of receiving an unwarranted claim.”

The Therasense ruling will require patent attorneys to curb their inclination to over-use the defense of inequitable conduct and may alleviate the prior art research pressures of filing for a patent. Attorneys will also need to revise their trial strategies since those who do not update their playbook with the Federal Circuit’s new rules will likely fail on their inequitable conduct allegations. With stricter standards for proving intent and materiality and new limits on the application of inequitable conduct as a remedy, courts can predict more hesitation from alleged patent-infringers and the PTO can expect less prior art paperwork flooding their office.

Federal Circuit Attempts to Eradicate the Plague of Inequitable Conduct, Sets New Standards

The Federal Circuit issued its much anticipated en banc decision in Therasense, Inc. v. Becton, Dickinson & Co. on May 25, 2011 regarding inequitable conduct by patent applicants and attorneys during prosecution of patents. The Federal Circuit established a new standard for materiality and clarified its contradictory precedent on intent to deceive—the two factual predicates that must be established to prove inequitable conduct.  The Court thus recognized the problems created by the overuse of inequitable conduct claims by litigants and the differing standards applied by federal courts in evaluating issues of materiality and intent to deceive.

Inequitable conduct is an affirmative defense to a claim of patent infringement. At its most fundamental level, the battle cry of inequitable conduct is an assertion that the patent applicant or lawyer acted fraudulently before the United States Patent and Trademark Office. Therefore, notwithstanding any finding of infringement, the patent should be rendered unenforceable.

Because of the frequency with which it is plead, the potential devastating effects it has on the rights of the patent owner, the potential harm it may cause to the reputation of patent lawyers associated with the prosecution of the patent and the harm it has caused the examination process before the Patent and Trademark Office, the Federal Circuit has described inequitable conduct as both an “atomic bomb” and a “plague” on the patent system.

Court Creates “But-For” Test for Materiality

The Court laid out a new test for materiality that significantly raises the bar. With one exception, the Federal Circuit explained that information is material only when a claim would not have been allowed by the Patent and Trademark Office had the office been aware of the information. The one exception to this “but-for” test is in cases of affirmative egregious misconduct. For example, where the patent applicant “deliberately planned and carefully executed scheme[s]” to defraud the Patent and Trademark Office or courts, such information and misconduct is always material.

Court Adopts “Single Most Reasonable Inference” Test for Intent

Addressing the “intent” prong, the Federal Circuit clarified that a party must show, by clear and convincing evidence, that the patentee made a deliberate decision to withhold a known material reference. The Court was careful to note that the intent prong is independent of the materiality prong and that the sliding scale approach where a party could demonstrate a lower level of intent if the information was highly material is no longer acceptable. Instead, to meet the test, the evidence must be sufficient to require a finding of deceitful intent in light of all the circumstances. The specific intent to deceive must be the single most reasonable inference able to be drawn from the evidence. Finally, the Court noted that a patentee need not offer any good faith explanation to counter a finding of intent until the accused infringer first proves a threshold level of intent to deceive by such clear and convincing evidence.

Overall, the Federal Circuit adopted a more stringent standard for proving inequitable conduct that is likely to reduce the high number of meritless inequitable conduct claims in litigation. Notwithstanding the high hurdles introduced by way of this landmark opinion, patent applicants still need to take care in managing the disclosure of information during prosecution and be ever mindful of material information including disclosures and arguments made in related foreign applications.

Making Therasense of the Inequitable Conduct Doctrine

In a split in its decision (6-1-4), the Federal Circuit’s May 25, 2011 en banc opinion in Therasense, Inc. v. Becton, Dickinson and Co. attempts to unify the patch work of opinions on inequitable conduct, which is a judicially-created doctrine rooted in the U.S. Supreme Court’s cases on the doctrine of “unclean hands” where egregious conduct had occurred.1 (Full decision(opens in a new window)). The Federal Circuit emphasized that the previous assertions of the inequitable conduct doctrine based on its precedent have “plagued not only the courts but also the entire patent system.”2

The majority opinion of the Federal Circuit in Therasense tries to balance the importance of patent applicants being honest in dealings with the United States Patent Office (“Patent Office”) with the appropriate standard of review in determining whether inequitable conduct has actually occurred. As the Federal Circuit explained, the “low standards for intent and materiality” created by its previous opinions “have inadvertently led to many unintended consequences” including “increased adjudication cost and complexity, reduced likelihood of settlement, burdened courts, strained PTO resources, increased PTO backlog, and impaired patent quality[.]” Therefore, the Federal Circuit finally intervened to tighten the standard and redirect the application of the inequitable conduct doctrine to benefit the public and the patent system by protecting against “egregious misconduct, including perjury, the manufacture of false evidence, and the suppression of evidence.”3

The Decision

In Therasense, the Federal Circuit redefined the requirements for both the materiality and intent prongs, both of which are required to be proved by clear and convincing evidence, in making a determination of an inequitable conduct. The following charts illustrates the fractured nature of previous Federal Circuit opinions and how the en banc opinion unified the previous patch work of opinions:

Materiality

Before

At least 5 different standards, including:

  • refutes or is inconsistent with a position the applicant takes in … asserting an argument of patentability;
  • a “reasonable examiner” would have considered the information or prior art “important” in deciding whether to allow the application;
  • the misrepresentation was so material that the patent should not have issued;
  • the misrepresentation actually caused the examiner to approve the patent application when he would not otherwise have done so; and
  • the misrepresentation may have influenced the patent examiner in the course of prosecution.
After

But-For Test

  • the deception is only material if the USPTO would not have allowed the claim if it had been aware of the undisclosed information.

 

Intent

Before

General intent to deceive based on totality of circumstances.

After

Specific intent to deceive with evidence of knowing and deliberate decision to deceive.

Although actual evidence is not required, the Federal Circuit found that “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.'”4 The Federal Circuit further explained “[i]n making this patentability determination, the court should apply the preponderance of the evidence standard and give claims their broadest reasonable construction.”5

Finally, the Federal Circuit clarified that “a [district] court must weigh the evidence of intent to deceive independent of its analysis of materiality.”6 Consequently, the Federal Circuit has abolished the sliding scale of intent and materiality.

Sliding Scale

Before

A strong showing of intent may be allow a weak showing of materiality, and vice versa.

After

No sliding scale.

Response by Patent Office

In its ruling, the Federal Circuit expressly rejected the definition of materiality in 37 C.F.R §1.56 (“Rule 56”). The Court stated that it was not bound by Rule 56, and that Rule 56 “sets such a low bar for materiality, adopting this standard would inevitably result in patent prosecutors continuing the existing practice of disclosing too much prior art of marginal relevance and patent litigators continuing to charge inequitable conduct in nearly every case as a litigation strategy.”7

In reply to the Federal Circuit ruling, the Patent Office quickly issued a press release indicating that it is carefully studying the opinion and “expect to soon issue guidance to applicants regarding the materials they must submit to the Patent Office under their duty of disclosure.”8 It is unclear what actions the Patent Office may take, but if it amends Rule 56 to correspond with the en banc decision in Therasense, it could further strengthen the certainty of the standards required for equitable practice before the Patent Office.

What Does the Future Hold?

Going forward, the Therasense opinion may allow patent practitioners to reassess what documents they list in information disclosure statements and other filings with the Patent Office.  Moreover, future Patent Office guidance should clarify the issue of what needs to be disclosed to the examiner. Additionally, it is anticipated that the Therasense opinion will reduce the number inequitable conduct allegations, but it may also require more flexibility from various patent rules of district courts, which routinely require allegations of inequitable conduct to be made before the close of discovery.

Notably, it did not take long for a U.S. district court to rely on this new ruling in deciding to deny a motion for a finding of unenforceability due to inequitable conduct. In Ameranth, Inc. v Menusoft Systems Corp., et al.,9 the district court applied the new Therasense standard the day after it was issued, finding that although the “but-for” standard was met, the defendants failed to prove, by clear and convincing evidence, that there was specific intent to deceive the Patent Office.10

The Federal Circuit decision, however, did leave some potential new battlegrounds regarding the application of inequitable conduct. First, the Federal Circuit recognized the ability of district courts to infer intent from indirect evidence. Although the Court attempted to limit this loophole by stating “when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found,”11 it remains to be seen how district courts will apply this standard. Additionally, the Federal Circuit provided that when a “patentee has engaged in affirmative acts of egregious conduct” the misconduct is deemed to be material. This level of intent may overcome the requirement of “but-for” materiality having to be proved. The Federal Circuit suggests that this analysis should incorporate elements of the unclean hands doctrine, but it does not provide clear guidance on how this should be interpreted and suggests that this egregious conduct exception will allow for “flexibility to capture extraordinary circumstances.”12

Although this is a way to curtail the allegations of inequitable conduct, it is not the end of the story, and it remains to be seen if the U.S. Supreme Court will weigh in on the application of inequitable conduct or attempt to harmonize the Federal Circuit’s “but-for” test with the standards applied by other administrative agencies like the Securities Exchange Commission. We will continue to monitor the case and provide updates as it proceeds.

Federal Circuit Significantly Restricts the Doctrine of Inequitable Conduct in Therasense v. Becton Dickenson

On May 25, 2011, the U.S. Court of Appeals for the Federal Circuit issued an en banc decision in Therasense v. Becton Dickenson, No. 2008-1511 (Fed. Cir., May 25, 2011), outlining a heightened standard for inequitable conduct in patent infringement cases, requiring a finding of both specific intent to deceive and a “but-for” materiality.

The doctrine of inequitable conduct is a defense to patent infringement that, if proved, bars enforcement of the patent. In making its decision, the Federal Circuit noted that the doctrine evolved from three early U.S. Supreme Court Cases, which involved particularly egregious misconduct, including perjury, the manufacture of false evidence, and the suppression of evidence, to a broader scope of misconduct including the mere nondisclosure of information to the PTO. In addition, the doctrine evolved from a mere dismissal of the suit, to the unenforceability of the entire patent and its continuations and divisionals. In order to prove inequitable conduct, the accused infringer must prove intent and materiality by clear and convincing evidence. If the infringer meets this burden, the court must then weigh the equities to determine whether the applicant’s conduct before the PTO warrants rendering the entire patent unenforceable. The Federal Circuit noted that the standards for materiality have fluctuated over time, and the standard has been weakened by placing intent and materiality on a sliding scale, thus both conflating and diluting the standards at the same time. As a result, inequitable conduct has become a significant litigation strategy, increasing the complexity, duration, and cost of patent litigation. According to the Federal Circuit, one study estimated that eighty percent of patent infringement cases included allegations of inequitable conduct. This has plagued the courts and the whole patent system.

In this en banc decision, the Federal Circuit adopted a much more restrictive test for inequitable conduct. With regard to intent, an accused infringer must now prove that the patentee acted with specific intent to deceive the PTO. For example, the accused infringer must prove by clear and convincing evidence that:

(1) the applicant knew of the reference,

(2) knew that it was material to the prosecution of the application, and

(3) made a deliberate decision to withhold it.

With regard to materiality, the Federal Circuit adopted a “but-for” standard, e.g. but-for the non-disclosure of the reference, the patent would not have issued.This is a much more restrictive standard than the prior standard and even the patent office’s own standard under Rule 56. In fact, the Federal Circuit said specifically that they do not adopt the PTO’s definition of materiality under Rule 56.

The Therasense decision has strictly limited the usefulness of the inequitable conduct doctrine as a defense to patent infringement. It is likely that this decision will help to simplify patent infringement cases and may lead to more patents being upheld and infringed.

Therasense Makes Sense of Inequitable Conduct Defense

On May 25th, the Federal Circuit, sitting en banc, issued a decision reversing and remanded the district court’s holding that the patent-in-suit was invalid due to inequitable conduct. The patent remained invalid as anticipated, but the bar has been substantially raised for accused infringers attempting to prove the inequitable conduct defense – the “atomic bomb” of patent law, as Chief Judge Rader described it. With respect to the element of intent, the accused infringer must prove by clear and convincing evidence that the patentee acted with specific intent to deceive the PTO.

“The accused infringer must prove…that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” Intent can still be established by circumstantial evidence, but a high level of materiality cannot satisfy the burden to prove intent. Also, the evidence “must be sufficient to require a finding of deceitful intent in the light of all the circumstances….The absence of a good faith explanation for withholding a material reference does not, by itself, prove intent to deceive.”

The materiality element of inequitable conduct was adjusted by the majority as well. The court held that, except for a narrow exception for truly egregious acts of misconduct, like false Rule 132 affidavits, the materiality required is now but-for materiality. This but-for materiality is a stricter standard than that imposed by current Rule 56 and the accused infringer must now show that the claim would not have issued but for the omitted information. The court declined to give any deference to current Rule 56, finding that part 1 was deficient in not giving weight to rebuttal evidence of the prima facie case of obviousness established by the omitted art and that part 2 was deficient because, well, it was just too broad.

Interestingly, though not addressing the issue head-on, the court made it clear that inequitable conduct cannot be proven based on acts by patentee relating to claims they did not ultimately obtain:

“Because inequitable conduct renders an entire patent (or event 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… After all, the patentee obtains no advantage from misconduct if the patent would have issued anyway….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.”

Not just pretty words! Still, it is hard to see how this decision will deter applicants from sending in paper snow drifts of prior art. The minority made it clear that they felt that, even under these standards, the patent should be found unenforceable. Hal Wegner has noted that, for the disclosure burden to lighten on both applicants and the PTO, the PTO must respond proactively to this decision.

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.”