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 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.

Federal Circuit Ruling Tightens Standard For Inequitable Conduct

In patent litigation, a finding of inequitable conduct renders a patent unenforceable, exposes the patentee to an assessment of attorney’s fees, and has other significant consequences. The Federal Circuit has characterized the remedies from inequitable conduct as the “atomic bomb” of patent litigation. Therasense, Inc. v. Becton, Dickinson & Co., ___ F.3d ___, slip op. at 21 (Fed. Cir. May 25, 2011) (en banc). Yesterday, the Federal Circuit, sitting en banc, sought to limit the use of that weapon by tightening the standards for finding inequitable conduct. Under the new standard, to prevail on a claim for inequitable conduct, the alleged infringer must show “but-for” materiality and, by clear and convincing evidence, specific intent to deceive the United States Patent and Trademark Office (“PTO”).

The majority opinion was written by Chief Judge Rader and joined in full by Judges Newman, Lourie, Bryson, Linn, Moore, and Reyna; an opinion concurring in part and dissenting in part was rendered by Judge O’Malley; and a dissenting opinion was written by Judge Bryson and joined by Judges Gajarsa, Dyk, and Prost.

To establish intent to deceive for a failure to disclose a reference, “the accused infringer must prove by clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” Slip op. at 24. Mere negligence, showing that the patentee “should have known” of the reference, is insufficient. Id. In most circumstances, where direct evidence if intent to deceive is lacking, “a district court may infer intent from indirect and circumstantial evidence.” The Federal Circuit clarified that materiality and intent are separate requirements and abandoned the “sliding scale” approach. Id. at 24–25. A court may not infer intent solely from materiality. Id. at 25. While the Court did not hold that materiality was irrelevant to intent, specific intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Id.

The Court adopted a new standard for materiality required to establish inequitable conduct, “but-for materiality.” Slip op. at 27 (emphasis added). When prior art is withheld from the PTO, the prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. In other words, prior art that invalidates a claim and was withheld from the PTO is material. This is substantially narrower that the past practice of deciding whether the reference had to be disclosed under PTO Rule 56, which had previously been the standard.

The new materiality test does not mean the claims will necessarily be invalidated based upon the undisclosed prior art. A district court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed prior art. Slip Op. at 28. Unlike the clear and convincing standard required to invalidate a claim in litigation, to determine whether the PTO would have allowed the claim had it been aware of the undisclosed prior art, the district court “should apply the preponderance of the evidence standard and give claims their broadest reasonable construction.” Id. Accordingly, there may be situations where the undisclosed prior art is insufficient to invalidate a claim during litigation, but it is otherwise “material” for purposes of inequitable conduct.

In addition to announcing a new standard for materiality, the Federal Circuit carved out an exception to the but-for materiality test. “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Slip op. at 29.

The Federal Circuit expressly declined to adopt the definition of materiality set forth by the PTO in Rule 56. Slip op. at 32; but see Dissenting Op. at 3 (adopting Rule 56 definition of materiality). The Federal Circuit criticizes Rule 56 as too broad because inequitable conduct may be based on information that becomes irrelevant in view on subsequent arguments by the applicant to the PTO. Id. Nonetheless, as a practical matter, practitioners will continue to comply with the requirements of Rule 56 during prosecution.

The ruling will make it more difficult for an accused infringer to plead inequitable conduct with specificity as required by the Federal Rule of Civil Procedure 9(b). An accused infringer should now need to plead with specificity factual averments to show that the PTO would not have allowed a claim but-for non-disclosure of the prior art reference and that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.

The facts and history of the case are summarized in an earlier alert which you can review at this link: Federal Circuit Agrees To Review Standard For Inequitable Conduct.

Supreme Court Issues Decision Regarding “Cat’s Paw” Claims of Discrimination

In the recent case of Staub v Proctor Hospital, the United States Supreme Court addressed the so-called “cat’s paw” claim of discrimination under the Uniformed Services Employment and Reemployment Rights Act. In a cat’s paw case, the employee seeks to hold the employer liable for the discriminatory intent of a supervisor who was not the ultimate “decision maker” for the challenged adverse employment action. The Court’s holding in Staub now makes it easier for employees to establish liability in such cases where a biased supervisor has influenced someone else to take the adverse employment action. This case is sure to impact employers, as its holding potentially reaches beyond USERRA and into other types of federal discrimination cases.

Staub worked as an angiography technician for Proctor Hospital. He also served in the U.S. Army Reserve, and took leaves of absence from work in order to attend monthly drill. Staub’s immediate supervisor (Mulally), as well as Mulally’s supervisor (Korenchuk), were allegedly hostile towards Staub’s military obligations. Mulally issued Staub a corrective action for purportedly violating the hospital’s work rules regarding failure to remain in his work area whenever he was not working with a patient. The corrective action directed Staub to report to his supervisors when had no patients. A few months later, Korenchuk reported to the hospital’s vice president of human resources (Buck) that Staub had violated the corrective action by leaving the work area without notifying his supervisors. Buck relied on this report and, after reviewing Staub’s personnel file, made the decision to discharge Staub for failure to comply with the corrective action

Staub later sued the hospital in Federal court for wrongful discharge in violation of USERRA, claiming that his discharge was motivated by his obligations as a member of the Army Reserves. Significantly, that claim did not allege that the decision maker regarding his discharge (Buck) held a discriminatory motive. Instead, and pursuant to the cat’s paw theory, Staub claimed that supervisors Mulally and Korenchuk held discriminatory animus and that their actions influenced the discharge decision. The jury found in favor of Staub on this claim, but the Seventh Circuit Court of Appeals reversed. The Seventh Circuit held that since the decision maker conducted an albeit limited investigation of the facts, her decision to discharge Staub was not singularly influenced by the non-decision maker supervisors holding discriminatory animus. Staub then appealed to the Supreme Court, which reversed the appellate court’s decision.

Writing for the Court, Justice Scalia first noted that USERRA’s statutory language provides that an employer has violated the Act where an employee’s membership in the uniformed services is a “motivating factor” in the employer’s adverse employment action. Justice Scalia’s opinion pointed out that this language is similar to that found in another major Federal employment statute, Title VII of the Civil Rights Act of 1964 (which prohibits discrimination on the basis of race, color, religion, sex or national origin). The key issue for the Court was to define the term “motivating factor” within the context of a cat’s paw case where the decison maker was not motivated by discriminatory intent. The Court held that “if a supervisor performs an act motivated by antimilitary animus that is intended by the supervisor to cause an adverse employment action, and if that act is a proximate cause of the ultimate employment action, then the employer is liable under USERRA.” Thus, the adverse employment action must be both the intended consequence of the non-decision maker’s conduct, as well as proximately caused by that conduct. The Court noted that proximate cause requires only “some direct relation” between the supervisor’s conduct and the adverse employment action. This holding apparently rejects any rule that a decision maker’s independent investigation prior to taking the adverse action automatically precludes liability for the employer. However, the Court left open the possibility that an investigation which leads to reasons unrelated to the supervisor’s biased conduct, and which would justify the adverse employment action, would allow the employer to avoid liability.

The Supreme Court’s decision in Staub will almost certainly encourage more employees to pursue “cat’s paw” litigation. Also, because of the similarity in statutory language with respect to the requirement that unlawful discrimination be a “motivating factor” for an adverse employment action, it seems likely that this decision will be applied in Title VII as well as USERRA cases. However, while the Court’s decision has made it easier for employees to advance a cat’s paw claim, employers should keep several important things in mind. First, the employee still has the burden of proving that the non-decision maker supervisor engaged in conduct motivated by discriminatory intent. Second, whenever the employer receives information which could prompt the taking of an adverse employment action, an immediate and thorough investigation should be undertaken. A decision maker must review all the facts and interview all relevant employee witnesses in order to make an informed and proper judgment as to the proper action. Lastly, employers should make sure that all supervisors are trained with respect to equal employment opportunity and anti-harassment laws, and that the employer’s policies in these areas are up to date. These steps still provide meaningful defenses to reduce the likelihood that any adverse employment action can be challenged successfully.

Supreme Court Affirms No “First Sale” Defense for Foreign-Made Copies

On December 13, 2010, the Supreme Court affirmed the Ninth Circuit’s decision in Omega S.A. v. Costco Wholesale Corp., upholding the Ninth Circuit’s interpretation of the first sale doctrine as inapplicable to foreign-made goods covered by U.S. copyrights.

Omega, a Swiss luxury watch manufacturer, sold its products internationally through various authorized dealers in the U.S. and abroad. One such product, a watch that included a design protected by a U.S. copyright, was made overseas and sold by Omega to one of its authorized foreign distributors. Following this sale, these copyrighted watches were imported into the U.S. without Omega’s approval by an unidentified third party. The watches were then purchased by ENE Limited, a NY company, which in turn sold the watches to Costco, which then began selling them in California.

Upon learning of Costco’s sales, Omega filed a copyright infringement action in the Central District of California. In its defense, Costco argued that the first sale doctrine under 17 U.S.C. § 109(a) barred Omega’s ability to bring the action, because the watches were the subject of an authorized sale to one of Omega’s foreign distributors. This, Costco argued, shielded it from liability despite the fact that its subsequent U.S. sale was unauthorized. The district court agreed, ruling in favor of Costco on summary judgment. Omega promptly appealed.

On appeal, Omega argued that § 109(a) applies only to the sale of goods “lawfully made under [U.S. copyright law]” and, therefore, the first sale doctrine did not apply because the goods were made outside the U.S. In response, Costco asserted that Omega’s reliance on earlier Ninth Circuit case law, specifically BMG Music v. Perez1, Parfums Givenchy, Inc. v. Drug Emporium, Inc.,2 and Denbicare U.S.A. Inc. v. Toys “R” Us, Inc.,3was misplaced because these cases had been overruled by the Supreme Court in Quality King Distribs., Inc. v. L’anza Res. Int’l, Inc.4

In its opinion, the Ninth Circuit first restated that an owner of a copy “lawfully made under [Title 17]” who imports and sells that copy does not infringe under the first sale doctrine. After reviewing BMG Music, Drug Emporium, and Denbicare, the court turned to the Supreme Court’s Quality King decision. In Quality King, the copyrighted goods had been “round trip” imported: they were first manufactured in the U.S., exported through an authorized distributor, sold to an unidentified third party abroad, and then shipped back to the U.S. where they were sold without the copyright holder’s permission. The Court in Quality King ruled that the first sale doctrine provided a defense against copyright infringement under these facts. However, the Court declined to address whether the same result would be warranted if the copyrighted products were first manufactured outside the U.S.5

Picking up where Quality King left off, the Ninth Circuit concluded that the first sale doctrine provides a defense against copyright infringement “only insofar as the claims involve domestically made copies of U.S.-copyrighted works” (emphasis added).6 Thus, under this decision, the first sale doctrine is available as a defense only if the copies were legally made in the U.S. Accordingly, the Ninth Circuit rejected Costco’s position and reversed the district court, finding no inconsistency between Quality King and the rule of law established by BMG, Drug Emporium, and Denbicare. Costco then sought certiorari to the Supreme Court.

In a per curium opinion released December 13, 2010, an equally-divided Supreme Court affirmed the Ninth Circuit’s decision.7 Justice Kagan recused herself and took no part in the decision, most likely due to her role as Solicitor General in preparing an amicus brief on behalf of the U.S. In this brief, the U.S. supported Omega’s assertion that “lawfully made under this title” as used in § 109(a) means made in accordance with U.S. copyright law, which does not apply extraterritorially.

On its face, the case appears to strike a blow to one of the remaining openings in the gray market, and may provide a powerful tool for international manufacturers who maintain separate marketing and pricing structures in separate international markets. A foreign DVD, camera, or electronics manufacturer, for example, would be able to charge less for its goods in the Asian market than it does in the U.S., and could enforce that marketing decision so long as the goods themselves are manufactured outside the territory of the United States. The Ninth Circuit’s holding that foreign-made goods are excluded from the first sale doctrine, combined with the increasing trend of manufacturing luxury goods abroad, may result in higher prices due to a reduced gray market.8

But this decision may be less a “victory” for international venders than it appears at first glance. After all, the 4-4 split merely earns Omega a win by default, not an express affirmation of its legal position. Indeed, the decision may also be viewed as a near miss on a Ninth Circuit reversal, rather than as an approval of that court’s interpretation of § 109(a). While one might assume that Justice Kagan—in light of the position taken by her, as Solicitor General, on behalf of the government—would have given Omega the final, precedent-setting vote it needed had she taken part, there is no guarantee of that. Nor can one assume that, had it come to a reasoned decision, the Court would not have created its own, different interpretation of the disputed provision.

The outcome of last week’s decision leaves the Ninth Circuit at least9 in support of a narrow interpretation of the “first sale” doctrine and market division programs based on control of copyrights in products.

False Marking Claims Must Be Pled with Specificity as to Intent

The U.S. Court of Appeals for the Federal Circuit settled a split among the district courts when it held that false patent marking claims must be pled with particularity under Fed. R. of Civ. Pro. 9(b).   In granting the defendant’s petition for a writ of mandamus, the Federal Circuit held that the district court should have dismissed a false marking complaint for failure to plead, with particularity, the circumstances of defendant’s alleged intent to deceive the public.   In re BP Lubricants USA Inc., Misc. Docket No. 960 (Fed. Cir., Mar. 15, 2011) (Linn, J.).

The plaintiff had included in its complaint allegations that BP was a “sophisticated company” having experience applying for, obtaining and litigating patents.   Based on that categorization, the plaintiff claimed BP “knew or should have known” that the patent had expired.   The district court concluded that the complaint satisfied the requirements of Rule 9(b) because it had pled the who, how, what and when of the alleged fraud.  BP sought mandamus at the Federal Circuit.

The Federal Circuit clarified that in all cases sounding of fraud or mistake, Rule 9(b) requires the plaintiff to plead “with particularity the circumstances constituting the fraud or mistake.”   The Court noted that Rule 9(b) acts as a “safety valve to assure that only viable claims alleging fraud or mistake are allowed to proceed to discovery.   … Permitting a false marking complaint to proceed without meeting the particularity requirement of Rule 9(b) would sanction discovery and adjudication for claims that do little more than speculate that the defendant engaged in more than negligent action.” The Court stated that the district court erred in denying BP’s motion to dismiss because it expressly relied on the plaintiff’s general allegations that BP knew or should have known that the patent expired. The Court explained that a complaint must provide some objective indication to reasonably infer that the defendant was aware that the patent expired.  Accordingly, general allegations that the defendant is a “sophisticated company” and that it “knew or should have known” that the patent expired are insufficient under Rule 9(b).

The Court went further and provided exemplary allegations with which a court may reasonably infer an intent to deceive, “[alleging that a] defendant [had] sued a third party for infringement of a patent after the patent had, e.g., expired or made multiple revisions of the marking after expiration” may set forth facts upon which intent to deceive can be reasonably inferred.

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


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.


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.


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.


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]


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.

The Federal Circuit Court of Appeals Clarifies the Pleading Standard for False Patent Marking Claims

On March 15, 2011, the Federal Circuit Court of Appeals granted a petition for a writ of mandamus filed on behalf of BP Lubricants USA Inc. and directed the United States District Court for the Northern District of Illinois to grant a motion to dismiss a complaint pursuant to the False Marking Statute, 35 U.S.C. § 292.

The Federal Circuit decision contains two noteworthy holdings. First, the Court held that Fed. R. Civ. P. 9(b)’s particularity requirement applies to false patent marking claims. The Court explained that Rule 9(b)’s gatekeeping function is necessary to prevent relators from using discovery as a fishing expedition and to assure that only viable § 292 claims reach discovery and adjudication. The Court noted that “[p]ermitting a false marking complaint to proceed without meeting the particularity requirement of Rule 9(b) would sanction discovery and adjudication for claims that do little more than speculate that the defendant engaged in more than negligent action.”

Second, the Court held that a complaint alleging false marking is insufficient when it only asserts conclusory allegations that a defendant is a “sophisticated company” and “knew or should have known” that the patent expired. The Court explained that a false patent marking complaint must provide some objective indication to reasonably infer that the defendant was aware that the patent expired.

Are You A Foreign Company With A Relationship To A New York Company? It May Be Your Agent And Provide A Basis For Jurisdiction

In Arbeeny v. Kennedy Executive Search,Index No. 105733/2007 (Sup. Ct., NY County, Jan. 14, 2011) (“Arbeeny“), Defendants Jason Kennedy (“Kennedy”) and Kennedy Associates (“Kennedy Associates “) (collectively the “Moving Defendants”) moved to dismiss on the basis of Plaintiff Daniel Arbeeny’s failure to serve the complaint in a timely manner pursuant toCPLR § 306-b. Justice Eileen Bransten, of the New York Commercial Division, granted the Moving Defendants’ motion to dismiss as to Kennedy but denied it as to Kennedy Associates. In so doing, she addressed issues that may be important to United States-based companies that have a relationship with foreign corporations.

Plaintiff was formerly employed by Kennedy Executive Search (“KES”). KES was a New York-based executive search firm and was affiliated with Kennedy Associates, a British executive search firm. The underlying suit arose when KES allegedly lowered Plaintiff’s salary and terminated him for refusing to accept the reduction, allegedly a violation of Plaintiff’s employment agreement. Plaintiff commenced the action seeking to recover outstanding salary and commission pay.

KES and Jack Kandy, the former president of KES, were the only defendants that Plaintiff served. These defendants moved to dismiss. The court granted their motion to dismiss in April of 2008, but the First Department reversed in part in January of 2010. After the case was remanded, Kennedy Associates and Kennedy, moved to dismiss on the ground that they had not been served.

Mere Department and Agency Theories

In opposing Kennedy Associates’ motion to dismiss, Plaintiff argued that service upon KES constituted service upon Kennedy Associates because KES was a “mere department” of Kennedy Associates. Plaintiff also argued that KES was Kennedy Associates’ agent.

New York courts have repeatedly held that where a subsidiary is shown to be a “mere department” of a parent corporation, service on the subsidiary will constitute service on the parent. Though she acknowledged this history, Justice Bransten ultimately held that Plaintiff failed to show that KES was a mere department of Kennedy Associates. In so doing, she relied on a number of factors identified by the Second Circuit inVolkswagenwerk Aktiengesellschaft v. Beech Aircraft Corp., 751 F.2d 117, 120-22 (2d Cir. 1984). These factors include (i) the financial dependency of the subsidiary on the parent, (ii) the degree to which the parent corporation interferes in the selection and assignment of the subsidiary’s executive personnel and fails to observe corporate formalities, and (iii) the degree of control over the marketing and operational policies of the subsidiary. See id.  While Plaintiff alleged that these factors were present, Justice Bransten found that Plaintiff failed to submit evidence to support the allegations and, therefore, the Court held that KES was not a “mere department” of Kennedy Associates.

However, Justice Bransten found Plaintiff’s agency theory to be meritorious. Because KES and Kennedy Associates were commonly owned and KES was established to do all the business that the United Kingdom-based Kennedy Associates could do if it were present in New York, Justice Bransten held that KES was, for jurisdictional purposes, an agent of Kennedy Associates. Thus, service upon KES was sufficient for service upon Kennedy Associates.

The Moving Defendants asserted that the “mere department” and agency theories were inapplicable in actions where New York’s long-arm statute,CPLR § 302, is the alleged basis for personal jurisdiction. The Moving Defendants argued that because Plaintiff’s cause of action had a basis in New York, Plaintiff could not invoke the “presence doctrine” where another basis for jurisdiction existed.  The presence doctrine provides that if an entity is doing business in New York, it is “present” in New York for jurisdictional purposes. Justice Bransten rejected Moving Defendants’ argument. The Court held that while there is no requirement that a court undertake the presence doctrine analysis when the long-arm statute provides a basis for personal jurisdiction over the parent corporation, this does not mean that the presence doctrine cannot be used when there is an alternative basis for personal jurisdiction. See Arbeeny, at pg. 6.

International Profit Associates to Pay $8 Million for Sexual Harassment of Eighty-Two Women

First Checks Being Mailed Under Decree Ending One of Longest-Running Sexual Harassment Cases in EEOC History

CHICAGO – The U.S. Equal Employment Opportunity Commission (EEOC) has announced that checks are now being distributed pursuant to an $8 million consent decree entered by federal district judge Joan Gottschall in what is believed to be one of the longest-running sexual harassment cases in EEOC history. Defendant International Profit Associates (IPA), the employer responsible for the sexual harassment of its female employees, is a telemarketer of small business consulting packages, located in Buffalo Grove, Illinois.

The decree provides for payment and distribution of the full $8 million in installments over three years. IPA made initial payments totaling $2.5 million into a professionally administered settlement fund on March 7, 2011, and checks are now being mailed to 82 women who were the victims of the harassment. The decree also provides for wide-ranging injunctive relief against IPA. The company’s compliance with the decree will be overseen by two court-appointed monitors.

“”All employees are entitled to a workplace that is free of sexual harassment,” said EEOC General Counsel P. David Lopez. “Unfortunately, there is a continuing need for law enforcement in this area, and this consent decree makes an important contribution to our mission to eradicate sexual harassment with its strong injunctive relief provisions and the relief provided to the individual women.”

The case (EEOC v. International Profit Associates, N.D. Ill. No. 01-CV-4427), was filed in federal court in Chicago on June 12, 2001 under Title VII of the Civil Rights Act of 1964. The amount of the payments being made today varies with the severity of the harassment suffered by each of the victims, with the highest payments being $70,000 and the average payment being in the range of $30,000. When the final installment payments are made and distributed, the average of all payments per victim will be approximately $100,000 per person.

According to the EEOC, IPA had a pattern or practice of sexually harassing its female employees, and the court made a formal finding to that effect, upon IPA’s concession, on June 14, 2010, prior to trial. The EEOC had alleged that the harassment involved a systemic pattern of sexual assaults and propositions, inappropriate touching, and crude sexual comments. EEOC had also contended that the highest ranking officers of IPA not only fostered a pattern and practice of sexual harassment but personally engaged in the harassment themselves.

There were extended delays in the more than nine year course of the litigation, as IPA filed numerous motions which the EEOC described as frivolous. These included a series of unsuccessful motions for sanctions by which IPA asked the court to punish EEOC in connection with the agency’s pursuit of the case. Trial of the case began on July 6, 2010. On the first day, in the middle of jury selection, IPA advised the EEOC and the court that it was willing to meet EEOC’s demands.

The balance remaining due on the $8 million decree is being personally guaranteed by the principal founder, owner, and chief executive of IPA He has, in addition, secured his personal guaranty by signing mortgages on certain of his personal real estate interests.

John Hendrickson, EEOC regional attorney in Chicago, said, “We are convinced that the $8 million consent decree in this case—yielding more dollars per person that either our Mitsubishi or Dial sexual harassment cases—is an excellent result, but we cannot find anything positive to say about the fact that an employer strung out a piece of civil rights litigation in the federal courts for almost 10 years.”

“But whatever the employer’s strategy,” Hendrickson continued, “the EEOC never waivered. We were determined to pursue a just result which provided appropriate relief for the victims of IPA’s discrimination and served the public interest no matter how long it took. We were not going to go away. IPA’s obstruction and delay never really figured in our expectations in the case, and that will continue to be true, just as it is in all of our cases.”

Diane Smason, the EEOC supervisory trial attorney responsible for the case, said “The claims in this case were based on allegations of absolutely egregious sexual harassment. We wanted the relief provided for in the consent decree to be appropriate in that context. We also wanted the relief to reflect the fact that the court itself made a specific finding that IPA had engaged in a pattern or practice of discrimination. The decree and the fact that that sizeable checks are going out to the victims of IPA’s discrimination are signal achievements. It’s going to be a better day for all the women covered by the decree.”

The consent decree includes injunctions against sexual harassment and retaliation, and measures designed to promote the eradication of harassment and accountability on the part of managers. It requires that IPA pay for two monitors who will review its policies and practices with respect to sexual harassment, assess its compliance with the training, prevention, and other measures being imposed, accept complaints of sexual harassment from employees, and report to the EEOC and the court. IPA must also report regularly to the EEOC on its handling of sexual harassment complaints. In the event IPA fails to measure up to the legal standards memorialized in the decree EEOC is authorized to return to court to seek additional court enforcement.

In addition to Hendrickson and Smason, the case was litigated by Chicago trial attorneys Jeanne Szromba and Ann Henry, with trial attorney Aaron de Camp joining the team prior to the scheduled trial.

Is a Broad Arbitration Clause Still Effective After Granite Rock?

Bringing up arbitration at a cocktail party is more likely to provoke yawns than excitement, even when one is in the company of fellow members of the bar. But as most every litigator is aware, arbitration issues have become nearly ubiquitous in litigating everything from commercial breach-of-contract disputes to employment-discrimination claims. In many cases, whether claims are subject to an arbitration agreement may be a “make or break” issue – one that can determine whether a lawsuit is worth bringing, whether or when a defendant should settle a case, or whether a particular defendant or cause of action should be included in a complaint.

The scope of an arbitration clause – i.e., what claims fall within the language of the provision – frequently is the lynchpin issue in determining whether a party’s claims are subject to mandatory arbitration. Those who undisputedly entered into an agreement to arbitrate have little hope of resisting arbitration unless they can argue successfully that their claims fall outside the scope of the particular arbitration agreement. Traditionally, however, those arguing that their claims are outside the scope of a valid and enforceable arbitration clause have faced an uphill battle with a limited likelihood of success. Courts have consistently held that the Federal Arbitration Act (or an equivalent state law, if the FAA does not apply) manifests a presumption in favor of arbitration and that this presumption requires the scope of an arbitration clause to be broadly construed. A recent United States Supreme Court case, Granite Rock v. International Brotherhood of Teamsters, may at first blush call into question the continuing strength of this pro-arbitration presumption. A closer look at the case and a subsequent federal court of appeals opinion, however, reveals that the presumption in favor of arbitration is still intact.

Granite Rock v. International Brotherhood of Teamsters

Granite Rock is one of several cases decided by the United States Supreme Court in the last year that has the potential to affect practitioners facing any number of arbitration-related issues. In Granite Rock, which was decided in June 2010, the Court endeavored to clarify the proper framework for determining when particular disputes are subject to arbitration. While essentially synthesizing prior Supreme Court precedent, the Granite Rock Court did stake out some new ground by elucidating several broad principles concerning the interpretation and enforceability of arbitration provisions. First, the Court made it clear that the presumption in favor of arbitration has no applicability to the question of whether a contract containing an arbitration clause was ever formed in the first place. Because arbitration is “strictly a matter of consent,” a court is required to address a party’s argument that no agreement containing an arbitration provision was ever reached. Subsequent federal appellate decisions have confirmed this interpretation of Granite Rock. Thus, Granite Rock establishes that the resolution of disputed questions as to whether such an agreement was reached is not subject to determination by an arbitrator, and instead is a matter to be determined by a court.

However, Granite Rock maintains that the presumption in favor of arbitration remains applicable to determinations about the scope of a validly formed arbitration clause. To be sure, the Court appeared to downplay somewhat the strength and importance of the pro-arbitration presumption. It stated that it was “wrong to suggest that the presumption of arbitrability we sometimes apply takes courts outside our settled framework for deciding arbitrability.” It stated that the Court had never held that the pro-arbitration policy overrides the principle that arbitration is strictly a matter of consent, and that courts may not “use policy considerations as a substitute for party agreement.” Additionally, the Court noted that any pro-arbitration presumption is simply derived from the conclusion that a broadly worded arbitration clause reflects that the parties intended to arbitrate grievances between them.

Nonetheless, the Court ultimately appeared to endorse the continuing viability of this presumption whenever it is determined that the parties have agreed to an arbitration clause and that the clause is ambiguous as to whether it covers a particular dispute: “We have applied the presumption favoring arbitration, in FAA and in labor cases, only where it reflects, and derives its legitimacy from, a judicial conclusion that arbitration of a particular dispute is what the parties intended because their express agreement to arbitrate was validly formed and (absent a provision clearly and validly committing such issues to an arbitrator) is legally enforceable and best construed to encompass the dispute.”

But the Court’s interpretation of the particular arbitration provision at issue – which required arbitration of any claims “arising under” the parties’ agreement – does somewhat call into question the way the pro-arbitration presumption has been applied by lower federal courts. The Supreme Court held that the parties’ dispute about when the agreement containing the arbitration clause was ratified was not itself arbitrable because it could not be said that a dispute about when an agreement came into existence “arises under” that agreement. The Court mentioned that the “arising under” language was “relatively narrow,” and it rejected the Ninth Circuit’s reasoning that the clause was “susceptible of an interpretation” which would require the dispute to be arbitrated.

Pre-Granite Rock law on the pro-arbitration presumption

Thus, in the wake of Granite Rock, one might reasonably ask whether the Court’s decision will alter the long line of cases holding that a broad arbitration clause leads to a presumption that the parties agreed to arbitrate any disputes not clearly excluded from the terms of the agreement.

One such typical pre-Granite Rock case is Kruse v. AFLAC International, where the United States District Court for the Eastern District of Kentucky compelled the plaintiff, Kruse, to arbitrate her claims against AFLAC and other defendants. (In full disclosure, one of the authors was counsel to AFLAC in that case.) Kruse – a former regional sales coordinator for AFLAC – alleged breach of contract, violations of state and federal statutes, and a litany of common law claims, including promissory estoppel, conversion, fraud, defamation, and tortious interference. Kruse argued, among other things, that her claims other than the breach of contract claim fell outside of the scope of the arbitration agreement she had signed. That agreement required Kruse and AFLAC to arbitrate “[a]ny dispute arising under this Agreement to the maximum extent allowed by applicable law.” The court disagreed with Kruse and held that her claims were within the scope of this agreement. “The test to determine if a claim falls within the scope of an arbitration clause is to determine if the factual allegations ‘touch matters’ governed by the parties’ Agreement, not what claims the Agreement specifically mentions as plaintiff contends.” The court relied in part on prior Sixth Circuit cases holding that, where the parties agreed to arbitrate disputes “arising out of” the parties’ contract, any claim between them should be arbitrated unless there is “clear intent to exclude a particular claim.”

Because all of Kruse’s claims touched on her business relationship with AFLAC, and the agreement did not manifest any intent to exclude any of her claims from arbitration, the court found all of Kruse’s claims to be arbitrable. The court specifically rejected Kruse’s argument that claims were not arbitrable unless their subject matter was specifically made arbitrable by the contract. Although Kruse argued that the clause did not “govern disputes beyond violation of specific terms of the Agreement,” the district court did not agree. Rather, it found that all of Kruse’s claims were covered by the arbitration clause because the factual allegations supporting the claims pertained to Kruse’s contract with AFLAC in some way.

A post-Granite Rock decision

A review of a recent Sixth Circuit opinion suggests that, even after Granite Rock, decisions like Kruse will continue to be the norm whenever it is clear that the parties agreed to a broad arbitration provision. This opinion suggests that the judiciary does not believe Granite Rock altered the general rule that a broad arbitration provision is presumed to encompass any substantive disputes between the parties that are not expressly excluded from arbitration by their agreement.

In Teamsters Local Union No. 89 v. Kroger, 617 F.3d 889 (6th Cir. 2010), a case decided two months after Granite Rock, the Sixth Circuit reiterated its prior holdings to the effect that “where the agreement contains an arbitration clause, the court should apply a presumption of arbitrability, resolve any doubts in favor of arbitration, and should not deny an order to arbitrate “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” The Sixth Circuit panel in Kroger stated that the presumption in favor of arbitration is “particularly applicable” in cases involving broad arbitration clauses and that in such a case, “only an express provision excluding a particular grievance from arbitration or ‘the most forceful evidence of a purpose to exclude the claim from arbitration’” can prevent a dispute from being arbitrated. The court found that the arbitration provision before it – which required arbitration of “any grievance[,] dispute[,] or complaint over the interpretation or application of the contents of this Agreement” – was the type of broad arbitration clause that would trigger such a presumption. In so doing, the court cited to prior cases holding that agreements requiring arbitration of claims “arising under” and “related to” an agreement were broad arbitration agreements. It therefore rejected Kroger’s argument that arbitration was inappropriate because the subcontracting dispute at issue was outside of the scope of the parties’ arbitration clause. The court held that the parties’ arbitration agreement was “susceptible to an interpretation” that would provide for arbitration of the dispute, the presumption in favor of arbitration controlled.

The Kroger court did not reference or cite to Granite Rock, and it thus appeared to believe that Granite Rock did not require the Sixth Circuit to revisit its general rules that a broad arbitration clause triggers a presumption of arbitrability and that when parties have agreed to such a provision, a dispute between them is arbitrable absent clear evidence that the parties intended the particular dispute to be non-arbitrable. As described above, this “susceptible to an interpretation” standard was at least obliquely called into question by Granite Rock, but the Sixth Circuit in Kroger did not appear to believe that Granite Rock would require this standard to be revisited. Additionally, the Sixth Circuit cited favorably to prior holdings that “arising under” language was broad – even though the Granite Rock Court termed such language “relatively narrow.”

A federal district court in Missouri recently reached a similar result while citing to Granite Rock. In Utility Workers Union v. Missouri-American Water Co., the district court upheld an arbitrator’s determination that the parties’ broadly phrased agreement to arbitrate encompassed a dispute over wage amount. The court observed that Granite Rock “clarified the framework regarding the application of ‘the federal policy favoring arbitration.’” Nevertheless, the Court favorably quoted prior decisions for the proposition that a broad arbitration clause triggers a presumption that a dispute between the parties is arbitrable “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.” Like the Sixth Circuit in Kroger, the district court did not appear to believe that Granite Rock altered the application of the presumption in favor of arbitrability in any significant way.


What does this mean for the interpretation of the scope of arbitration provisions after Granite Rock? In Granite Rock, the Supreme Court appeared expressly to hold that a presumption in favor of arbitration applies only when “a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand.” The Granite Rock decision emphasized that the Supreme Court “has never held that the presumption [in favor of arbitration] overrides the principle that a court may submit to arbitration ‘only those disputes . . . the parties have agreed to submit . . . .” Kroger provides a clear indication that courts do not appear to believe that Granite Rock’s clarification of the law requires alteration of the rule that certain broadly phrased arbitration provisions trigger a presumption in favor of arbitrability.

Thus, provisions requiring arbitration of any dispute “arising out of” or “relating to” a contract that governs the relationship between parties will likely generally continue to be construed to encompass most any claim between the parties that “touches on” matters in the contract. Even though a party may be compelled to arbitrate “only those disputes” that the party has agreed to arbitrate, this does not mean that the arbitration agreement needs to enumerate particular types of disputes to make such disputes arbitrable. The holdings in cases such as Kruse – where the court held that arbitration is appropriate if the factual allegations underlying a claim “touch matters” governed by the agreement – therefore appear to remain sound even in light of Granite Rock.

Because Granite Rock is little over half-a-year old, it may be that future lower court decisions will begin to read the decision more broadly. But for now, it appears that prior decisions on the scope of a broad arbitration clause remain good law.