Patents / Injunction Bond Wrongful Injunction Raises Presumption of Recovery of Bond

In a case of first impression, the U.S. Court of Appeals for the Second Circuit ruled that wrongfully enjoined parties are entitled to a presumption in favor of recovery against an injunction bond for provable damages.  However, the Court concluded that while InterDigital contention that it deserves damages associated with a stay of patent infringement action against Nokia has merit, the case record was insufficient for appellate review.  Nokia Corp. v. InterDigital Inc. et al., Case No. 10-1358 (2d Cir., May 23, 2011) (Parker, J.).

The parties’ dispute first arose at the International Trade Commission, where InterDigital alleged that Nokia had infringed its patents.  In 2007, the ITC granted Nokia’s motion to consolidate the investigation with a separate investigation filed by InterDigital against Samsung over the same patents.  In December 2007, Nokia moved to stay the consolidated investigation, arguing that a pre-existing agreement between Nokia and InterDigital required arbitration.  The ITC denied the motion, and Nokia then sued in federal district court.  The district court granted Nokia’s motion for a preliminary injunction in March 2008 and ordered InterDigital to stay or terminate the ITC proceedings against Nokia and submit to arbitration.  The court required Nokia to post a $500,000 bond as a condition of obtaining the injunction.

The 2d Circuit subsequently vacated the injunction (see IP Update, Vol. 11, No. 8), and the district court dismissed Nokia’s suit.  Thereafter, InterDigital filed a motion in the district court to recover attorneys’ fees and expenses incurred in moving to stay the ITC proceedings and preparing to arbitrate with Nokia.   It asked to be awarded attorneys’ fees and costs incurred as a result of litigating separate proceedings against Nokia and Samsung.  The district court rejected InterDigital’s request, finding that InterDigital had failed to show that the damages sought were “proximately caused” by the injunction.  InterDigital appealed.

The 2d Circuit held that a wrongfully enjoined party is entitled to a presumption in favor of recovery, finding that the existence of such a presumption was implied by the text of Fed. R. Civ. Pro. 65(c), and that the First, Seventh, Ninth, Eleventh and D.C. Circuits followed similar rules.  However, the court ruled that the improperly enjoined party must still show that any damages claimed were proximately caused by the injunction.  Based on the lack of explanation by the district court for the denial of recovery, the 2d Circuit vacated the lower court’s order and remanded the issue for reconsideration and clarification.  However, the 2d Circuit noted that certain legal expenses, such as filing a motion to stay the ITC case with respect to Nokia that were ordered by the district court in its injunction order, should be recoverable absent a compelling reason otherwise.

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Vendor’s Economic Injury Is Insufficient to Establish DJ Jurisdiction, but Implicit Claim of Contributory Infringement Is Enough:

Patent / Declaratory Judgment Standing

The U.S. Court of Appeals for the Federal Circuit has now ruled that a supplier vendor has standing to commence a declaratory judgment action if a patent holder accuses the supplier’s customers of direct infringement and if the supplier’s product functions as a material component in the allegedly infringing system or the supplier’s product is used in the performance of the allegedly infringing method.   Arris Group v. British Telecommunications PLC, Case No. 10-1292 (Fed. Cir., May 19, 2011) (Dyk,  J.).

Arris makes and sells cable telephony and data products for use in networks with Voice over Internet Protocol (VoIP) telephone services.  British Telecommunications (BT) sent Arris’ customer, Cable One, a letter accusing Cable One’s network of infringing various system and method claims of the patents-in-suit.  Licensing discussions ensued.  BT sent Cable One a 118-page presentation comparing the patent claims to Cable One’s network, which included repeated identification of Arris’ products as meeting certain system claim elements and steps of the method claims.  BT’s presentation identified Cable One (not Arris) as a direct infringer.  Thereafter, at Cable One’s request, Arris became involved in the licensing discussions.  BT offered Cable One a license but declined to license Arris.  Arris filed a declaratory judgment action against BT; the district court dismissed the action, finding that Arris lacked standing because there was no case or controversy between Arris and BT.  Arris appealed.

The Federal Circuit rejected Arris’ argument that case or controversy exists because Arris has suffered an economic injury as a result of BT’s infringement threats.  The Court held that a mere adverse economic interest was insufficient to create declaratory judgment jurisdiction and that the Supreme Court’s MedImmune decision did not alter the prior law in this regard.  What is required to establish jurisdiction is an adverse legal interest of sufficient immediacy and reality.  However, the Federal Circuit found an adverse legal interest because BT implicitly asserted that Arris contributorily infringed the BT patents when it accused Cable One of direct infringement.  Arris’ products were “central” to the BT’s direct infringement allegations against Cable One and, for many of the asserted claims, BT identified Arris’ products as meeting virtually all of the claim elements.  The Court further found that, at a minimum, BT identified Arris’ products as satisfying at least one central element of every asserted claim.  BT allegations that Arris’ products complied with industry standards also suggested that Arris’ products were especially made or adapted for uses that infringe and are not staple articles of commerce.  Other relevant factors to the Court’s conclusion included Arris’ involvement in the prior licensing negotiations, as well as BT’s refusal to grant Arris a covenant not to sue.

Practice Note:   The “central” nature of Arris’ products in the infringement allegations entitled the Court to finding that standing existed.  However, the nature and quantity of contacts between the Arris and BT also strongly supported the Court’s conclusion.  Patent holders seeking to avoid declaratory judgment battles with indirect infringers should take care to minimize the nature of the allegations made about indirect infringers and should not rely on non-binding disclaimers that suppliers are not being accused of infringement.

The Perils of Email: Navigating the Legal Risks

In 2011, the typical corporate user will send and receive more than 110 electronic messages a day (over 40,000 per year), according to the Radicati Group. The number of worldwide email accounts is projected to increase from over 3.1 billion in 2011 to over 3.8 billion by 2014, 25% of which will belong to corporate users. As technology continues to drive growth and expansion for businesses, greater volumes of communication will be handled via email.

Although electronic messaging makes communication easier, faster and less expensive, it also creates an extraordinary set of issues. Identifying these perils and developing procedures to avoid them is critical for every company.

Information Preservation and Hold Notices

Various federal, state and local laws, rules and regulations require corporations to retain electronic communications and other information. For example, Rule 17a-4 of the Securities and Exchange Act requires SEC-regulated companies to retain all communications sent and received for at least three years, the first two in an easily accessible place. NASD Rule 3110 requires members to preserve books, accounts, records, memoranda and correspondence, and under the Sarbanes-Oxley Act, emails can become part of the business records of a company that are to be retained.

But, even when it is not required by law, an email retention policy should be in place. For example, according to a 2008 study by Osterman Research, 66% of the organizations surveyed rely upon email, IM archives or backup tapes to support and defend the organization in litigation. This should come as no surprise. Under the Federal Rules of Civil Procedure, a party generally is entitled to any document – in “hard” or “soft” (i.e., electronic) copy – that “appears reasonably calculated to lead to the discovery of admissible evidence.” Knowing this, litigation battle lines are often drawn around electronically stored information (ESI) and allegations that evidence has been destroyed (or “spoilated”). Savvy lawyers know that ESI discovery costs can drive settlement negotiations, or at least, distract parties from the real issues in the case. It is important, therefore, to have a sound retention policy to help make retrieving data for both business and legal purposes less painful.

Information Retention Policies

The adoption and enforcement of a retention policy is the first step to managing ESI. To be worthwhile, retention policies should: 1) reduce the risk of loss of critical and/or confidential business data, 2) alleviate burdens during an investigation or a lawsuit, and 3) account for information that needs to be retained to advance the goals of the business units and is legally required to be retained by the administrative and regulatory entities to which the corporation reports. What this means is that information critical for business continuity should be backed-up, retained and stored in a sensible way for retrieval. In developing retention policies, management should consider the importance and usefulness of information that is not legally required to be retained against the potentially high costs of locating and producing the information if required to do so later.

Determining what information to retain should be a collaborative process that includes at least one member of the IT department, the legal department, the affected business unit or units and human resources. That team should appoint a leader, most likely a legal department member, who is charged with mastering all facets of the policy and assuming ultimate responsibility for implementing and supervising all of its requirements. In terms of litigation, one of the requirements should include the process for retrieval, taking into consideration the time, manpower and monetary expense needed to actually assimilate relevant information for review and production.

After the policy is implemented, an ESI task force should schedule periodic reviews to test the retention procedures in order to confirm that the scope of retention adequately meets the over-arching goals, and that record-purging and backup activities are occurring and are documented. Additionally, the task force should ensure that data on all servers, desktops, laptops, PDAs, etc. is accounted for in the regularly scheduled purging cycle. When financially feasible, periodic audits of the policy and the processes, with the assistance of a third party, can verify and enhance reliability and compliance.

A lot of effort goes into formulating an effective retention policy and adequately communicating its importance to all of the persons affected by it.  As one analyzes ways to improve and enforce the policy, one should be mindful to consider whether the policy includes certain characteristics as suggested by information management firm Iron Mountain’s Records Management Best Practices Guide. These include:

  • A sound and defensible record retention schedule that captures and reviews all records created by all business units.
  • Electronic records that are migrated into a digital archive equipped with efficient and effective tools for searching, discovery organization and retention management.
  • A retention program with components integrated into an internal audit process.
  • Appropriate disposal methods, based on the different record classes or media types employed by the end-users of the electronic media.

Managing the Litigation Hold

Information retention policies that are reasonable outside the litigation context may nevertheless result in the destruction of ESI that would be relevant in litigation and give rise to a claim of spoliation. A proactive approach to thwart such a claim should require strong lines of communication between management, IT and legal and a keen appreciation for determining the date at which the company may “reasonably anticipate litigation.” Indeed, courts have insisted upon the suspension of routine document retention and destruction policies at the moment a party reasonably anticipates litigation. At that instance, a litigation hold notice should be prepared and distributed to all key personnel.

Obviously, deciding what to retain for purposes of a litigation hold is as equally important as determining when to distribute the litigation hold notice. For this reason, it is recommended that the litigation hold notice be a joint effort between in-house and outside counsel, and include language broad enough to describe categories of information that may be relevant to both the defense and prosecution of any reasonably anticipated claim. The litigation hold notice should also clearly identify one or two people to whom all questions should be directed and describe which ESI storage devices are subject to the hold. In more significant litigation, counsel should also plan to meet and interview key custodians and summarize the efforts undertaken to preserve and collect documents and ESI. While the summary should be privileged, it is an important document that counsel may refer to in defending a claim challenging the integrity of the litigation hold. In short, a well thought out and executed litigation hold plan may save a bundle of money (both in legal fees and possible sanctions) in responding to allegations of spoliation or other nonsensical litigation gamesmanship.

Avoiding Sanctions

Spoliation is “the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.” Courts have broad discretion to impose appropriate sanctions under Rule 37 of the Federal Rules of Civil Procedure when a party spoliates evidence in violation of a court order. However, in the absence of a court order, a party asserting a spoliation motion has the burden to prove spoliation occurred. As a general rule, that party should prove: 1) the party charged with destroying the evidence had an obligation to preserve it; 2) the records were destroyed with a “culpable state of mind”; and 3) the destroyed evidence was relevant to the moving party’s claim or defense.

While evidence of the third point may be under the control of the moving party, proving the first two points will usually require evidence within the possession, custody and control of the party against whom the motion is filed.

As with most prudent plans, the key is to be proactive. The first step to potentially avoid sanctions for spoliation is to initiate the litigation hold as soon as possible. Thereafter, one should immediately identify and modify retention policy features, systems and devices that, in routine operation, would destroy potentially relevant ESI. Then, one should send a notice to all personnel affected by the hold. Purging functions should be disengaged and protocols to overwrite backup media should be suspended. It is also important to be diligent and anticipate what employees will hide, destroy or alter ESI; one should guard against such tactics by interviewing key employees early and monitoring their use of company email and electronic document storage systems for signs of tampering, destruction or other troublesome behavior. An “Electronic Discovery Response Team” composed of management, IT personnel and legal counsel, should be assembled and should secure all storage media containing potentially discoverable data immediately upon receiving a request for production, and document all preservation efforts. In significant matters, consider retaining forensic experts to segregate, image and examine potentially discoverable electronic media both to meet early disclosure deadlines and to be in a better position to avoid abusive fishing expeditions.

Forensic Reviews

No discussion about ESI is complete nowadays without a reference to forensics. According to a November 2007 article in the American Bankruptcy Institute Journal entitled “Digital Forensics 101: Where to Find Critical Evidence,” authors Walt Manning and Michelle Campbell define digital forensics as a practice that “combines elements of law and computer science to collect and analyze electronic data in a way that could be admissible as evidence.” Forensic tools and techniques search every obvious and hidden space for stored data, and usually uncover evidence missed by even a diligent custodian’s review. Common places where stored data is overlooked in the data retrieval process can include computer hard drives, telephones, fax machine transaction records, USB “thumb” drives, optical media such as CD-ROM or DVD disks, backup media, online storage services, off-site archival services, shared network drives, external hard drives, cell phones or PDAs capable of containing email or text messages.

Through the use of forensic tools, techniques and experts, it is possible to: 1) recover deleted files or email messages; 2) recover fragments of data, even if a portion of the original has been permanently deleted; 3) identify and capture relevant data saved on external data storage devices; 4) capture and search data from cellular telephones and personal digital assistants; 5) capture and analyze instant messaging traffic; and 6) analyze internet history and recover images of websites visited. Given the particularly aggressive nature of some lawyers, and the evolving procedural guidelines for ESI discovery, effective internal policies should consider the ability to resurrect and unveil deleted and/or “hidden” ESI. The simple, but harsh, truth is that the days of total document destruction (i.e., shredding) are gone. The concept of “shredding electronic data” is a complex, often incomplete, process.

New Technology, New Threats

The internet and email have revolutionized the way individuals and businesses communicate with each other. As email and text-messaging increasingly become the primary forms of communication, the continued widespread use of email and texting in the corporate setting creates a whole host of interesting issues for companies and their lawyers. In litigation, for example, emails are an important component of discovery and often contain the proverbial “smoking gun.” The best defense is a good offense, which starts with a thoughtful analysis of the threats, backed by sound policies and practices that may ensure the proper use, retention and handling of emails and other ESI.

“Particular Machine” not required: Ex Parte Dietz et al., Appeal 2009-008029, BPAI

Ex Parte Dietz answers the question, at least as far as this BPAI panel is concerned, as to what structure need be recited in a “software claim” to bring it within the “machine” category of patent eligible subject matter. What is notable perhaps in its absence is any reference to the need to recite any “particular machine,” as opposed to simply just a “server” or the like, in order to bring a claim into the realm of the patent eligibility. Ex Parte Dietz et al In Ex parte Dietz, the following claim 1 was rejected under Section 101 for failure to recite at least one hardware element.

1. In a World Wide Web (Web) communication network with user access via a plurality of data processor controlled interactive receiving display stations for displaying received hypertext Web documents, transmitted from source sites on the Web, including at least one display page containing text, images and a plurality of embedded hyperlinks, each hyperlink being user activatable to access and display a respective linked hypertext Web document from source sites on the web, a system for controlling access activity from activated hyperlinks and their respective Web document source sites comprising:

means for applying said prioritization in the determination of the order in which the web documents linked to activated embedded hyperlinks in said web document are to be accessed.

means at said source sites for prioritizing said plurality of embedded hyperlinks in a Web document; and

More specifically, the examiner found that claim 1 “may be directed to software per se since the ‘means … for prioritizing’ and ‘means for applying’ are not defined in the specification as exclusively hardware.” The Examiner accordingly found that “the use of the word ‘system’ do[es] not inherently mean that the claim is directed to a machine” and absent recitation of at least one hardware element, the claim is directed to non-statutory subject matter (Ans. 3 and 16).”

The BPAI reversed the examiner, essentially finding that the “World Wide Web communication network” and the “source site” both include physical structure and serve as structural limitations:

“Appellants’ “system” claim recites a World Wide Web communication network. Claim 1 also recites source sites. Interpreting “source site” broadly, but reasonably in light of the specification and as one of ordinary skill in the art would have defined the term at the time of invention, we conclude “source site” encompasses hardware – such as a server as shown in Fig. 2 (See In re Am. Acad. of Sci. Tech Ctr., 367 F.3d 1359, 1364 (Fed. Cir. 2004); See also, FF1 and FF 2). A “machine is a ‘concrete thing, consisting of parts, or of certain devices and combination of devices.’ This ‘includes every mechanical device or combination of mechanical powers and devices to perform some function and produce a certain effect or result.” Ferguson, 558 F.3d at 1364 (quoting Nuijten, 500F.3d at 1355). Thus, a close review of Appellants’ claims shows that they do recite physical structure – the source sites and World Wide Web communication network and such recitations serve as structural limitations. Even if we were to presume the recited “means” are software based, the system still recites that embedded hyperlinks are prioritized by the means at the source sites and the various information supplied by the source sites are used to apply the prioritization. Thus, we conclude that claim 1 recites a machine and accordingly, that claim 1 is directed to statutory subject matter.”

A different result, however, was reached with respect to the following claim 17:

17. A World Wide Web (Web) hypertext document including at least one display page containing text, images and a plurality of embedded hyperlinks, each hyperlink being user activatable to access and display a respective linked hypertext Web document from source sites on the Web further including: a hypertext markup language tag associated with each embedded hyperlink indicating the priority of each hyperlink in the determination of the order in which the Web documents linked to the activated embedded hyperlinks in said Web document are to be accessed.

In the case of claim 17, the BPAI upheld the examiner’s rejection under Section 101, finding that the claim recited only a hypertext document with no functionality, and further was not a data structure tied to a non-transitory, tangible computer readable medium. Accordingly, the BPAI found that claim 17 recited a document that lacked any physical structure and further was not a process or a composition of matter. The BPAI explained:

“Claim 17 recites a hypertext document. The document does not have any physical structure and thus, does not fall within the machine category of statutory subject matter. Nor does the document fall within the process or composition of matter categories. Specifically, no “act or series of acts” is recited (See Nuijten, 500 F.3d at 1355) and the claims do not recite a composition “of two or more substances” or “composite articles” that are the result “of chemical union, or of mechanical mixture . . . whether they be gases, fluids, powders or solids.” (See id. at 1357 (quoting Diamond v. Chakrabarty, 447 U.S. 303, 308 (1980).) Although one might argue that the claims are directed toward an article of manufacture, we conclude they are not. “Articles” of “manufacture” are “tangible articles or commodities” “result[ing] from the process of manufacture.” (See Nuijten, 500 F.3d at 1356 (citing Chakrabarty, 447 U.S. at 308); Bayer AG v. Housey Pharms., Inc., 340 F.3d 1367, 1373 (Fed. Cir. 2003).) A claim that recites no more than software, logic or a data structure (i.e., an abstract idea) – with no structural tie or functional interrelationship to an article of manufacture, machine, process or composition of matter – does not fall within any statutory category and is not patentable subject matter (Warmerdam, 33 F.3d at 1361; see Nuijten, 500 F.3d at 1357). The scope of such a claim is not limited to any particular practical application. In particular, data structures in the abstract, i.e., not claimed as embodied in a non-transitory tangible computer-readable medium are descriptive material per se and are not statutory subject matter because they are not capable of causing functional change in a computer (In re Warmerdam, 33 F.3d 1354, Appeal 2009-008029 Application 10/713,726 1361 (Fed. Cir. 1994); cf. In re Lowry, 32 F.3d 1579, 1583-84 (Fed. Cir.1994); accord MPEP § 2106.01 (2007)). Claim 17 recites a hypertext document—data. Claim 17 does not recite any functionality. Claim 17 merely describes a function that the data (the hyperlink) may have – that it is user activatable. In addition, the hyperlink document is not directed to a data structure in a non-transitory tangible computer-readable medium. Therefore, we conclude since claim 17 merely recites data, claim 17 recites an abstract idea. Accordingly, claim 17 is directed toward non-statutory subject matter.

On the other hand, claim 18 which recites that the web document of claim 17 is at a source Web site was found to statutory under Section 101, as reciting a data structure with structural elements:

“More than mere abstraction, data structures are specific electrical or magnetic structural elements in a memory. In In re Lowry, 32 F.3d 1579 (Fed. Cir. 1994), the data structures provide tangible benefits: data stored in accordance with the claimed data structures are more easily accessed, stored, and erased. The opinion further notes that, unlike prior art data structures, Lowry’s data structures simultaneously represent complex data accurately and enable powerful nested operations. In short, Lowry’s data structures were found to be physical entities that provide increased efficiency in computer operation. They are not analogous to printed matter (id. at 1584). The additional recitation of the document at the source Web site moves the data into a physical structure or machine. The embedded hyperlink is user-activatable to access and display a linked hypertext Web document from source sites. Thus, the recited hypertext document is a physical entity that provides the access and display to the linked hypertext Web document from other source sites with an indicated priority. Thus, unlike claim 17 which merely recites data (which could be on paper), this claim recites a data structure including structural elements. Accordingly, claim 18 is directed toward statutory subject matter.”

The remaining 101 rejection related to whether or not the Applicant’s claim 21, which was directed to a computer program stored on a computer readable medium. This rejection was upheld, but only due to the fact that the claim had not been limited to non-transitory signals and therefore read on a signal, as prohibited by In re Nuijten, 500 F.3d 1346, 1356-57 (Fed. Cir. 2007).

Auto-Classification Review Technologies: What Every Attorney Needs to Know

A Leap in Automated Document Classification Technologies Proves to Tame the Document Review Beast – But Here’s What You Need to Know

“Watson,” a computer using machine learning and other techniques, recently made international news when it dominated Jeopardy legends for three consecutive nights, prompting IBM’s general counsel to suggest that machine learning techniques might prove useful in finding information important to litigation.

The application of linguistic analysis technologies and machine learning to improve the way large volumes of information are assessed has been around for more than a decade. For example, probabilistic latent semantic analysis (PLSA), a text-based modeling technique to predict relevance based on a subset of human-assessed documents, has been commercially applied to patent searches, business intelligence tools, online advertising optimization, and even automated essay grading.[1] And predictive coding, another machine learning technique, has been used for distinguishing SPAM from non-SPAM emails, for example. [2]

Machine Learning in E-Discovery

Such techniques are increasingly being applied in e-discovery, as attorneys’ machine learning approaches help curb the growing cost of document review. Most auto-classification tools take a manual sampling and review process and automate workflow so attorneys can get to important documents faster, with less junk to look at along the way.

For example, automated document classification technologies based on PLSA, combine attorneys’ expertise with computerized review technology and technical expertise to prioritize, or “rank,” documents for review. Attorneys review a sample of the document collection, designating them as relevant or not. Based on results, the technology “learns” how to rank documents based on their likelihood of being relevant. In this iterative process, the software progressively improves accuracy and consistency of its scoring and then ranks the entire collection. Attorneys are presented with groups of prioritized documents, and can quickly access those most likely to be relevant and prioritize (or, in some cases, eliminate) review accordingly.

When machines do the heavy lifting, review is faster and cheaper, and accuracy and consistency enhanced. A recent survey of legal professionals, conducted by Xerox Litigation Services and Acritas Research, found that 72 percent who use automated document classification solutions achieved significant time savings. Another 64 percent said it was more cost-effective than manual review, and over half cited improvements in review consistency, accuracy, and budget planning.[3]

Auto-Classification Technologies Cannot Replace Humans

Given the advantages of machine learning techniques, a whole class of do-it-yourself push button auto-classification software, referred to by some as “predictive coding,” has cropped up over the past few years.

But is technology alone enough to achieve accurate, consistent, and defensible results?

It’s becoming widely understood by attorneys and the courts alike that not only must the proper expertise, audit trail, and measurement be present; the process itself must be repeatable and yield consistent results. In fact, studies conducted by Text REtrieval Conference (TREC) Legal show that document review processes that employ a combination of computer and human input are superior.[4]

Beyond Do-It-Yourself Software: What to Look for in Automated Document Classification Technology

So when evaluating auto-classification technologies, what should legal teams look for? Below are key questions to consider:

  1. Are the software, process, and workflow transparent? Make sure you are working with a vendor who can explain their process, technology, and expertise they bring to the project – in detail.
  2. Are the right legal and subject matter experts involved? It is important that senior attorneys or subject matter experts be involved throughout the process to review documents and help “train” the technology.
  3. Are the appropriate technical experts involved? Relying on software implementation by your IT staff, or a vendor that hosts the software for you, is not sufficient. Technical experts, including statisticians and linguists, can drive the technology and process, and ensure statistically sound sampling, measurement of output, and improved results by developing additional models. A good team will also design and assign attorney workflow.
  4. How does the technology “learn” and improve? The process must be iterative, and the software must be able to adapt to additional expert review insights to improve output.
  5. How does the technology identify discrepancies in attorney assessments? Look for a process that identifies ambiguities in how expert reviewers assessed a specific document. Technical experts should be able to route these documents back to the reviewers to confirm or alter judgments on the documents and improve QC.
  6. Is there a robust audit trail?Experts should provide detailed records of key project parameters and inputs, decisions, and results throughout the process that show consistency when the same inputs and procedures are adopted.
  7. How are results validated? Statistically valid measurements, such as precision and recall, should be generated at every stage of the process for ongoing QC and final QA.

With rapid advancements in auto-classification technologies in e-discovery, the future of document review is clear. What’s becoming more clear is how and why appropriate human experts are critical in the process to ensure more accurate, consistent, and defensible results.

Social Media and Discovery: Accessing Password Protected Material

Social media is everywhere, including, with increasing frequency, in lawsuits, particularly those involving employment-related claims. For example, employers sued by potential, current, and former employees are seeking social media information to learn if on-line postings by those employees on social media sites contradict statements or contentions made by them in their lawsuit. For their part, plaintiff-employees are seeking social media information to try to bolster their claims, such as looking for information from social mediate sites to show a pattern of allegedly harassing conduct by a supervisor or co-worker that extends beyond the workplace.

In a recent case, Zimmerman v. Weis Markets, Inc., No. CV-09-1535, 2011 WL 2065410 (Pa. Com. Pl. May 19, 2011), the trial court permitted the defendant employer to access the plaintiff’s password-protected on-line information. The plaintiff brought suit against his former employer after he injured his leg on the job while operating a forklift. The plaintiff sought damages for lost wages, lost future earning capacity, pain and suffering, scarring and embarrassment. The plaintiff claimed that he could no longer participate in certain activities and that his injuries affected his enjoyment of life. At his deposition, the plaintiff stated that he never wore shorts because he was embarrassed by the scar on his leg from the accident. However, the employer discovered on various publically-available social media websites, pictures posted by the plaintiff where his scar was clearly visible.

The defendant pursued this matter further, filing a motion to obtain access to private portions of the plaintiff’s social media sites and posts. The defendant argued that there may be other relevant information contained on those sites that would pertain to the plaintiff’s damages claim. The defendant sought the plaintiff’s passwords, user names and login names. Not surprisingly, the plaintiff opposed the defendant’s efforts to gain access to his private social media sites, arguing that his privacy interest outweighed any need to obtain discoverable material.

The court granted the defendant’s motion, finding that the plaintiff’s privacy interests did not outweigh the defendant’s need to obtain the information, that liberal discovery is favored, and the pursuit of truth is paramount. The court noted that it was the plaintiff who placed his physical condition at issue, and the defendant therefore has a right to find out information about the plaintiff’s condition. The court further reasoned that because the plaintiff posted the information to share with others, he could not now claim a reasonable expectation of privacy.

The court was careful to note, however, that its ruling should not be interpreted as a blanket entitlement to dig into employees’ private social media activities in every case, or that the court would allow “fishing expeditions.” Rather, the court clarified that it would consider an application seeking private social media information if the party seeking the material could make a threshold showing that the publicly accessible portions of the site indicate that there would be further relevant postings in the non-public portions. Thus, what the court essentially held was that if the plaintiff opens the door by posting publically-available information relevant to the lawsuit, private portions of a plaintiff’s social media are fair game. At bottom, this makes sense, however, watch for this rationale to be tested further, and perhaps expanded.

Supreme Court Upholds “Clear and Convincing” Standard of Proof for Patent Invalidity While Suggesting Juries Be Instructed on the Weight of the Evidence

On June 9, 2011, the Supreme Court in an 8-0 decision authored by Justice Sotomayor, affirmed the long-standing rule that a challenger must demonstrate invalidity of a patent by “clear and convincing evidence.” Microsoft Corp. v. i4i Ltd. Partnership, 564 U.S.__, slip op. at 20 (June 9, 2011).  Microsoft had argued for a more relaxed “preponderance of the evidence” standard in a case where the prior art that formed the basis for the challenge had not been considered by the Patent Office.  While the holding puts to rest speculation over whether the Court would apply the lesser standard of proof, the Court endorsed the use of a jury instruction on the weight to be given prior art evidence that had not been considered by the Patent Office, stating that such an instruction, “when requested, most often should be given.”  Id.at 17.

Section 282 of the Patent Act of 1952 provides that “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity.”  35 U.S.C. § 282. While § 282 expressly places the burden of proof regarding validity of the patent upon an accused infringer, it does not expressly address the standard of proof.  Microsoft argued that the preponderance standard applied generally or, in the alternative, at least where the prior art asserted had not been considered by the Patent Office.  The Court rejected both contentions.

The Supreme Court rejected Microsoft’s first contention by finding that Congress had adopted the heightened standard from the common-law in 1952 when it enacted § 282.  The Court determined that by the time of the 1952 Act, the common law presumption of validity reflected the “universal understanding” that the preponderance standard was insufficient.  That understanding was reflected in the holding of Radio Corp. of America v. Radio Engineering Laboratories, Inc., 293 U.S. 1 (1934). In that case, the Supreme Court held that an accused infringer must overcome the presumption of validity by “clear and cogent evidence.” Id.at 2.  Accordingly, the Court held that the codification of the presumption in § 282 brought with it its common-law meaning, including the heightened standard proof, and there was no reason to “drop” the heightened standard simply because §282 does not explicitly recite it.

In arguing for the lesser “preponderance of the evidence” standard of proof when the prior art was not considered by the Patent Office, Microsoft relied in part on the Supreme Court’s dicta in KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398, 426 (2007), that at least in cases where the invalidating prior art was not before the Patent Office, the presumption of validity “seems much diminished.”

Notwithstanding its earlier observation, the Supreme Court rejected the notion of a variable standard of proof.  The Court acknowledged language found in “numerous courts of appeals” cases before the 1952 Act, that referred to the presumption of validity being “weakened” or “dissipated” when the evidence was not considered by the Patent Office.  However, it explained that such language could not be read as supporting a different standard.  “Instead, we understand these cases to reflect the same common sense principle that the Federal Circuit has recognized throughout its existence—namely, that new evidence supporting an invalidity defense may ‘carry more weight’ in an infringement action than evidence previously considered by the Patent Office.”   Slip op. at 17.  Accordingly, “new evidence” of invalidity may make it “easier” for a challenger to meet the “clear and convincing” standard.

The Court suggested that the weight to be given this new evidence be explained in an instruction to the jury:

[A] jury instruction on the effect of new evidence can, and when requested, most often should be given. When warranted, the jury may be instructed to consider that it has heard evidence that the PTO had no opportunity to evaluate before granting the patent. . .  [T]he jury may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence.

Id.at 17.  This language will undoubtedly increase the frequency of requests for a specific instruction on the weight of the new evidence and on the use of such instructions.

Justice Breyer, joined by Justices Scalia and Alito, wrote a concurring opinion which emphasizes the need to pay careful attention to the distinction between fact questions and legal questions, noting that the standard only applies to evidence of the facts.  The Court’s opinion, slip op. at 2, does note that the ultimate question of patent validity is a question of law and that the same factual questions underlying the Patent Office’s original examination will also be present in an infringement action.  Id.  While this language is suggestive, the Court’s opinion never expressly states that the standard of proof applies only to the factual questions.  The concurrence thus raises the question of whether a court should refrain from applying the clear and convincing standard to legal conclusions, such as whether given facts render an invention obvious.  Further, the observations of the concurrence may impact the specific questions put to the jury in the form of a special verdict and instructions regarding the standard of proof.

Thus, the development of the patent law may be more affected by dicta from Microsoft Corp. v. i4i Ltd. Partnership than by its holding, which affirms the long-standing “clear and convincing” standard.

Supreme Court Unanimously Maintains High Hurdle for Invalidity Defense

June 9th, the Supreme Court unanimously ruled1 that an accused infringer must prove its invalidity defense by clear and convincing evidence. Microsoft Corp. v. i4i Ltd. P’ship, — S. Ct. — 564 U.S. —, 2011 WL 2224428, slip op. at 1, 16 (June 9, 2011).2 In a case of first impression, the Court determined that this standard applies even when the United States Patent and Trademark Office (“Patent Office”) did not consider the evidence of invalidity currently before the jury in the patent examination process. Id. The hurdle for proving invalidity historically has been high and now remains high.

According to Justice Sotomayor (who wrote for the majority), “Congress specified the applicable standard of proof in 1952 when it codified the common-law presumption of patent validity.” Id. at 20. “Nothing . . . suggests that Congress meant to depart from that understanding to enact a standard of proof that would rise and fall with the facts of each case.” This decision thus keeps in place decades of existing jurisprudence and will continue to allow patent owners to value their portfolios based on past practices. Although accused infringers can take certain steps to minimize negative effects of the clear-and-convincing standard, “[a]ny recalibration of the standard of proof” is now solely in the hands of Congress. Id.

Historical Basis of Proving Invalidity

To receive patent protection, a claimed invention must meet the statutory requirements of patentability. The claimed invention, for example, must fall within certain patentable subject matter (§ 101), be novel (§ 102), be nonobvious (§ 103), and be disclosed in the patent application in sufficient detail to meet the enablement, best mode, and written description requirements (§ 112). Thus, the Patent Office issues a patent for a claimed invention only if its examiners determine that the claimed invention meets all of the statutory requirements. Once issued, a patent holder has the exclusive right to exclude others from using the claimed invention for the term of the patent.

An accused infringer, however, can escape liability for infringement by proving that the patent is invalid (i.e., that the Patent Office should not have issued it in the first place). Under § 282, however, “[a] patent shall be presumed valid” and “[t]he burden of establishing invalidity of a patent . . . rest[s] on the party asserting such invalidity.” 35 U.S.C. § 282. For over thirty years, the Federal Circuit has interpreted that section to require “a defendant seeking to overcome this presumption [to] persuade the factfinder of its invalidity defense by clear and convincing evidence.” Microsoft Corp., 2011 WL 2224428, slip op. at 3. According to Judge Rich, a principal drafter of the 1952 Patent Act, “Section 282 creates a presumption that a patent is valid and imposes the burden of proving invalidity on the attacker” by clear and convincing evidence. Am. Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.3d 1350, 1360 (Fed. Cir. 1984). “That burden is consistent and never changes.” Id.

Microsoft Unsuccessfully Challenged Federal Circuit’s Long-Standing Precedent

In 2007, i4i sued Microsoft claiming that Microsoft Word infringed its patent for an improved method for editing computer documents. Microsoft Corp., 2011 WL 2224428, slip op. at 4. In addition to denying infringement, Microsoft argued that § 102(b)’s on-sale bar rendered i4i’s patent invalid due to i4i’s sale of a software program, S4, prior to the filing of the i4i patent application. Id. The parties agreed that i4i had sold the S4 program prior to the filing of the patent at issue but looked to the jury to determine whether S4 embodied the claimed invention. Id. Relying on the undisputed fact that S4 was never presented to the Patent Office, Microsoft objected to i4i’s proposed instruction requiring the jury find proof of invalidity by clear and convincing evidence. Id. In its place, Microsoft requested a jury instruction limiting its burden of proof, “with regard to its defense of invalidity based on prior art that the examiner did not review during the prosecution of the patent-in-suit” to a “preponderance of the evidence.” Id. at 6 (internal quotation marks and citation omitted).

The District Court rejected Microsoft’s proposed instruction and instructed the jury that “Microsoft has the burden of proving invalidity by clear and convincing evidence.” Id. (internal quotation marks and citation omitted). Based on this instruction, the jury found that Microsoft had willfully infringed i4i’s patent and that Microsoft had failed to prove its invalidity defense. The Court of Appeals for the Federal Circuit affirmed, concluding that “the jury instructions were correct in light of [the] court’s precedent, which requires the challenger to prove invalidity by clear and convincing evidence.” i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831, 848 (Fed. Cir. 2010).

Supreme Court Rejected Microsoft’s Arguments—Invalidity Must Be Proved by Clear and Convincing Evidence

Microsoft sought certiorari from the Supreme Court as to (1) whether “a defendant in an infringement action need only persuade the jury of an invalidity defense by a preponderance of the evidence” and (2) whether “a preponderance standard must apply at least when an invalidity defense rests on evidence that was never considered by the [Patent Office] in the examination process.” Id. at 5-6. The answer to both of Microsoft’s questions is a clear and unqualified no.

In reaching this decision, the Court started with a common axiom of statutory interpretation: “Where Congress has prescribed the governing standard of proof, its choice controls absent ‘countervailing constitutional constraints.'” Id. at 6 (citing Steadman v. SEC, 450 U.S. 91, 95 (1981)). It then asked the next logical question—”whether Congress made such a choice” when it enacted § 282. To answer this question, the Court first analyzed the plain language of statute. The Court noted that the statute “establishes a presumption of patent validity, and it provides that a challenger must overcome that presumption to prevail on an invalidity defense”; however, the Court recognized that “it includes no express articulation of the standard of proof.” Id. Nevertheless, the Court concluded that Congress used the term “presumed valid” according to its settled meaning in the common law—a term encompassing “not only an allocation of the burden of proof but also an imposition of a heightened standard of proof.” Id. at 7-8.3

“The common-law presumption, in other words, reflected the universal understanding that a preponderance standard of proof was too ‘dubious’ a basis to deem a patent invalid.” Microsoft Corp., 2011 WL 2224428, slip op. at 8. Accordingly, when Congress declared that a patent is “presumed valid,” “the presumption encompassed not only an allocation of the burden of proof but also an imposition of a heightened standard of proof.” Id. Based on this wide-spread understanding of the common law term, the Court refused to conclude “that Congress intended to drop the heightened standard of proof from the presumption simply because § 282 fails to reiterate it expressly.” Id. at 9 (internal quotation marks and citation omitted). Rather, the Court concluded that it “‘must presume that Congress intended to incorporate’ the heightened standard of proof, ‘unless the statute otherwise directs.'” Id. (quoting Neder v. United States, 527 U.S. 1, 23 (1999)). Simply put, “[t]he language Congress selected reveals its intent not only to specify that the defendant bears the burden of providing invalidity but also that the evidence in support of the defense must be clear and convincing.” Id. at 12 n.7.

Notably, the Court rejected Microsoft’s attempts to distinguish nearly century’s worth of otherwise clear case law: “Squint as we may, we fail to see the qualifications that Microsoft purports to identify in our cases.” Id. at 10. Likewise, the Court rejected Microsoft’s argument that the Federal Circuit’s interpretation of § 282 must fail, because applying that interpretation of the phrase “presumed valid” renders superfluous the statute’s additional phrase, “[t]he burden of establishing invalidity of a patent . . . shall rest on the party asserting such invalidity.” Id. at 12. Although Justice Sotomayor (writing for the majority) seems to agree with Microsoft that the Federal Circuit’s interpretation renders some of the statute superfluous, the Court reminded Microsoft that “the canon against superfluity assists only where a competing interpretation gives effect ‘to every clause and word of a statute.'” Id. (citing Duncan v. Walker, 533 U.S. 167, 174 (2001)). The Court thus found the rule inapplicable here, where “no interpretation of § 282—including the two alternatives advanced by Microsoft—avoids excess language.” Id. at 13.

In addressing Microsoft’s second, more limited argument, the Court rejected Microsoft’s request for a variable standard of proof:

Our pre-1952 cases never adopted or endorsed the kind of fluctuating standard of proof that Microsoft envisions. And they do not indicate, even in dicta, that anything less than a clear-and-convincing standard would ever apply to an invalidity defense raised in an infringement action. . . . Nothing in § 282’s text suggests that Congress meant to depart from that understanding to enact a standard of proof that would rise and fall with the facts of each case.

Id. at 15-16.

Accused Infringers Have Options

The accused infringer, however, is not without options. Although the Court steadfastly affirmed the heightened standard of proof, it recognized that “new evidence supporting an invalidity defense may carry more weight in an infringement action than evidence previously considered by the [Patent Office].” Id. at 17. Indeed, the Patent Office’s judgment may lose significant force if it did not have all the material facts before it. Id. In turn, this may make it easier for the accused infringer to satisfy its burden (e.g., to use the new evidence to persuade the jury of a patent’s invalidity by clear and convincing evidence). Id. Accordingly, if faced with new evidence of invalidity, an accused infringer should consider taking the following actions:

  1. Request a jury instruction on the effect of new evidence not considered by the Patent Office. When requested, such an instruction “most often should be given.” Id. “When warranted, the jury may be instructed to consider that it has heard evidence that the [Patent Office] had no opportunity to evaluate before granting the patented.” Id.
  2. If the parties dispute whether the evidence presented to the jury differs from the evidence previously before the Patent Office, seek an instruction mandating that the jury consider that question. Id. at 18. “The jury may be instructed to evaluate whether the evidence before it is materially new, and if so, to consider that fact when determining whether an invalidity defense has been proved by clear and convincing evidence.” Id. (citing Mendenhall v. Cedarapids, Inc., 5 F.3d 1557, 1563-64 (Fed. Cir. 1993)).
  3. Remember that the clear and convincing standard of proof is an evidentiary standard that applies only to questions of fact to the trial court. Microsoft Corp. v. i4i Ltd. P’ship, — S. Ct. — 564 U.S. —, 2011 WL 2224428, at *12 (June 9, 2011) (Breyer, J., concurring). Accordingly, separate “factual and legal aspects of an invalidity claim . . . by using instructions based on case-specific circumstances that help the jury make the distinction.” Id. at *13. In addition, use interrogatories and special verdicts “to make clear which specific factual findings underlie the jury’s conclusions.” Id. “By preventing the ‘clear and convincing’ standard from roaming outside its fact-related reservation, courts can increase the likelihood that discoveries or inventions will not receive legal protection where none is due.” Id.

Conclusion

Despite Microsoft’s valiant challenge, yesterday’s unanimous opinion keeps the hurdle high for parties trying to show that a patent is invalid. Although accused infringers are not without their options, any modification of the clear and convincing standard itself now requires an Act of Congress.

___________________
1All eight participating Justices concurred in the judgment.  Justice Sotomayor delivered the opinion of the Court, in which Justices Scalia, Kennedy, Ginsburg, Breyer, Alito, and Kagan joined.  Justice Breyer filed a concurring opinion, in which Justices Scalia and Alito joined.  Although Justice Breyer joined the Justice Sotomayor opinion in full, he wrote separately to emphasize that the clear and convincing standard of proof applies only to questions of fact, not to questions of law.  Justice Thomas filed an opinion concurring only in the judgment.  According to Justice Thomas, the heightened standard of proof applies because § 292 is silent and therefore does not alter the common-law rule.  Chief Justice Roberts took no part in the consideration or decision of the case.
2This case marks the third patent-law case released by the Supreme Court during the past two weeks.  Earlier this week, the Court ruled that the Bayh-Dole Act does not eclipse inventors’ rights. See Board of Trustees of the Leland Stanford Junior Univ. v. Roche Molecular Sys., 563 U.S. —, 2011 WL 2175210 (June 5, 2011).  On May 31, 2011, the Supreme Court ruled that induced infringement of a patent required knowledge that the induced acts constituted patent infringement.  See Global-Tech Appliances, Inc. v. SEB S.A., — S. Ct. —, 2011 WL 2119109 (May 31, 2011).  Each of these cases affirmed the Federal Circuit.
3Indeed, the Court concluded that by the time Congress enacted the 1952 Patent Act, “a common core of thought” unified the decisions of courts across the country:

“[O]ne otherwise an infringer who assails the validity of a patent fair upon its face bears a heavy burden of persuasion, and fails unless his evidence has more than a dubious preponderance.  If that is true where the assailant connects himself in some way with the title of the true inventor, it is so a fortiori where he is a stranger to the [claimed] invention, without claim of title of his own.  If it is true where the assailant launches his attack with evidence different, at least in form, from any theretofore produced in opposition to the patent, it is so a bit more clearly where the evidence is even verbally the same.”

Id. (citing Radio Corp. of Am. v. Radio Eng’r Labs, Inc., 293 U.S. 1, 8 (1934).  As Justice Cardozo put it, “there is a presumption of validity, a presumption not to be overthrown except by clear and cogent evidence.”  Radio Corp. of Am., 293 U.S. at 2.

Common Sense Variation Is Unpatentable

Affirming the district court’s grant of summary judgment of invalidity, the U.S. Court of Appeals for the Federal Circuit held that a common-sense variation of known technology is unpatentable.   Odom v. Microsoft Corp., Case Nos. 11-1160 (Fed. Cir., May 4, 2011) (Lourie, J.).

In August 2008 James Odom brought suit against Microsoft, alleging infringement of its patent directed to both a method for manipulating groups of “tools” in “toolbars” commonly found in computer software applications, as well as to the ability to use the divider to hide or display selected tools, by Microsoft’s Office 2007, a suite of office productivity software.  During the litigation, Odom’s counsel withdrew from the case and, failing to retain new counsel, Odom moved to dismiss his claims without prejudice.  The district court granted Odom’s request to dismiss but declined to dismiss Microsoft’s declaratory judgment counterclaims.  Microsoft subsequently moved for summary judgment of non-infringement and invalidity.

The district court granted Microsoft’s motions for summary judgment, holding that the asserted claims of the patent were invalid for obviousness and not infringed by Office 2007.   In so finding, the court stated that the asserted claims presented “one of the clearest” cases of obviousness that had come before it because Odom had simply “cobbled together various pieces of what was already out there in a manner … that would have been obvious to anyone skilled in the art at the time of the invention.”  Odom appealed.

On appeal, Odom argues that the district court erred in its obviousness analysis by looking at separate pieces of the claimed invention rather than the invention as a whole, by impermissibly applying hindsight in determining obviousness, and argued that the manipulatable sections of the composite toolbar disclosed in the prior art are very different from the claimed tool groups.  The Federal Circuit disagreed.  The Court found that user-manipulatable toolbars (which can be customizing according to user preferences and which include groups of command buttons’ or toolbars) were known in prior art at the time the patent in suit was filed.  The Court found that the only difference between the prior art and the patent in suit was that the groups of tools claimed in the patent are on a single toolbar.  Citing KSR, the Court held that this difference “is an insignificant advance.”

Since it would have been a trivial change for a person of skill in the art designing such alterable tool groups to add an indicator that could indicate any altered condition of the tool group, the Federal Circuit concluded that the district court did not err in determining that the manner in which patent divides up toolbars into groups, and the claimed manipulation of tool groups, would have been a common sense variation for a person of skill in the art.

The Federal Circuit also rejected Odom’s arguments of secondary considerations and reiterated that weak secondary considerations generally do not overcome a strong prima facie case of obviousness.

Joint (Direct) Infringement Still Requires Control … But Stay Tuned

A sharply divided panel of the U.S. Court of Appeals for the Federal Circuit, addressing the requirements for direct infringement if more than one party performs the steps of the patented method, ruled that the doctor-patient relationship was insufficient to show that the patient was acting under the direction or control of the doctor.   McKesson Techs. Inc. v. Epic Sys. Corp., Case No. 10-1291 (Fed. Cir. Apr. 12, 2011) (Linn, J.) (Bryson, J. concurring) (Newman, J., dissenting).

McKesson’s patent is directed to a method of electronic communication between healthcare providers and patients involving personalized web pages for doctors and their patients.  Epic’s MyChart software allows healthcare providers to associate medical records with a personalized web page.  Epic did not directly use the software, but licensed MyChart to doctors  who provided the software as an option for their patients’ use.  McKesson sued Epic for inducement of infringement.  Both McKesson and Epic agreed that the first step of McKesson’s method claim (“initiating a communication”) was performed by the patient, while the remaining steps were performed by doctors.  McKesson alleged that this was sufficient to attribute the “initiating a communication” step to the doctors.  The district court disagreed and granted summary judgment in favor of Epic.  McKesson appealed.

The panel affirmed the district court’s ruling, stating that under BMC Resources v. Paymentech (see IP Update, Vol. 10, No. 10), Muniauction v. Thomson (see IP Update, Vol. 11, No. 7) and Akamai Techs. v. Limelight Networks (see IP Update Vol. 14, No. 1), which was vacated by an en banc order (see IP Update, this edition), there can only be joint infringement if there is an agency relationship between the parties who perform the method steps or when there is a contractual obligation on the part of one party to the other to perform the steps.   The patients were not agents of the doctors, nor did the doctors require their patients to use the software; therefore, the panel rejected McKesson’s argument that the doctor-patient relationship gave the doctor effective control over the “initiating a communication” step.

Judge Newman, in dissent, attacked the entire line of precedent beginning with BMC Resources, arguing that the limitations on the finding of joint infringement announced in that case contradicted both prior Federal Circuit and Supreme Court precedent and holding that previous cases had taken the position that direct infringement could be performed by two parties acting in concert, regardless of whether there was any sort of agency or other relationship between the parties.  Seemingly inviting a request for rehearing en banc, the dissent noted that these prior cases “never had an en banc reversal” and therefore should be considered the law of the circuit until an en banc panel found otherwise.

Judge Bryson’s concurrence also seemed to invite a request for rehearing en banc, noting that “the decision in this case is correct in light of this court’s decision in BMC Resources, Muniauction and Akamai Technologies.  Whether those decisions are correct is another question, one that is close enough and important enough that it may warrant review by the en banc court in an appropriate case.”

Practice Note:

As of the time of press, McKesson’s expedited consideration of a request for a rehearing en banc was granted and the Federal Circuit issued an en banc order identifying the following questions to be addressed:

1.      If separate entities each perform separate steps of a method claim, under what circumstances, if any, would either entity or any third party be liable for inducing infringement or for contributory infringement?  See Fromson v. Advance Offset Plate, Inc., 720 F.2d 1565 (Fed. Cir. 1983).

2.      Does the nature of the relationship between the relevant actors—e.g., service provider/user; doc-tor/patient—affect the question of direct or indirect infringement liability?

On April 20, 2011, the Federal Circuit granted en banc review of its decision in Akamai (see IP Update, this edition) on essentially the same issue.

Yahoo! Expands Policy on Maintaining User Data

Search company Yahoo! has announced its intention to extend user data for 18 months to meet the needs of its clients. Currently, the data is only retained for 90 days before it is made anonymous. This change is expected to take place sometime this summer.

Will this enable litigants to extract data from Yahoo! when a lawsuit arises?  Probably not.  Yahoo! will maintain all user search data for an indefinite period of time.  However, under the new policy, Yahoo! will anonymize that data after 18 months.  This means that all identifying particulars will be removed from the users’ data upon the expiration of the 18 month period.

Finding specific user data prior to the end of 18 months will be the equivalent of finding the proverbial needle in a haystack assuming it is possible at all.  Thus, subpoenas to Yahoo! (or any search provider) are usually not the recommended course of action as they are rarely worth the effort.  Rather, the better route is usually to access the target user’s computer directly which in turn requires prompt litigation hold letters and other established procedures.

Turning a Blind Eye to Critical Facts leads to Induced Infringement Under 35 U.S.C. § 271(b)

A person who actively induces another person to infringe a patent is liable as an infringer. 35 U.S.C. §271(b).  On Tuesday, May 31, 2011, the United States Supreme Court held that “willful blindness” to the existence of a patent can be sufficient evidence of knowledge of the patent to support a finding of induced infringement. Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. ___ (2011). The Court rejected a more lenient standard adopted by the Federal Circuit — deliberate indifference to a known risk that a patent exists. Nonetheless, the Supreme Court affirmed the Federal Circuit’s judgment by applying its new standard. Justice Alito wrote the majority opinion from which Justice Kennedy dissented.

Summary of the Case

SEB S.A. (“SEB”) is a French manufacturer of home appliances. It owns a patent that relates to deep fryers. Sunbeam Products, Inc. (“Sunbeam”) is a competitor of SEB in the United States.  Pentalpha Enterprises, Ltd. is a Hong Kong manufacturer of home appliance and a wholly-owed subsidiary of Global-Tech Appliances, Inc. (collectively “Pentalpha”). Slip op. at 2–3.

Pentalpha developed a deep fryer for Sunbeam by copying all but the cosmetic features of a SEB deep fryer it purchased in Hong Kong. The SEB deep fryer had no U.S. patent markings because it was made for sale in a foreign market.  Before selling the deep fryers to Sunbeam, Pentalpha retained an attorney to conduct a right-to-use study of the deep fryer it had developed for Sunbeam. Pentalpha refrained, however, from telling its attorney that it had copied SEB’s deep fryer to develop its deep fryer. Slip op. at 2.

After conducting a search that failed to locate the SEB patent, the attorney issued his opinion that the deep fryer developed by Pentalpha did not infringe any of the patents that he had found.  Pentalpha immediately began selling its deep fryer. Slip op. at 2.

SEB sued Pentalpha for patent infringement alleging direct infringement under section 271(a) and induced infringement under section 271(b) by actively inducing Sunbeam and other retailers to sell Pentalpha’s deep fryer in violation of SEB’s patent rights. Slip op. at 3. After trial, the jury returned a verdict of direct infringement under section 271(a) and induced infringement under section 271(b) and found that Pentalpha’s infringement was willful. The district court entered judgment against Pentalpha. Slip op. at 3.

On appeal, Pentalpha argued the judgment of induced infringement had to be reversed because there was no direct evidence that Pentalpha knew of the SEB patent before it received notice of the Sunbeam lawsuit. The Federal Circuit held that section 271(b) requires that the patentee “’show that the accused infringer knew or should have known that his actions would induce actual infringement’ and that this showing requires proof that the accused infringer knew of the patent.”  Slip op. at 3. The Federal Circuit found, however, sufficient evidence to support a finding that “’Pentalpha deliberately disregarded a known risk that SEB had a . . . patent.’”  Id.  According to the Federal Circuit, such disregard “’is not different from actual knowledge, but is a form of actual knowledge.’”  Id.

Section 271(b) Requires Knowledge of the Patent that is Infringed

In 1952, Congress codified the principles of contributory infringement that had been part of the case law for about 80 years. See 35 U.S.C. § 271(b) & (c). Section 271(b) addresses conduct where a person actively induces infringement of a patent. 35 U.S.C. § 271(b). Section 271(c) addresses conduct where a person sells a component that is not itself patented, but may enable another party to make or use a patented machine. Neither the language of section 271(b) nor the pre-1952 cases provided an affirmative answer to the first question before the Court- is knowledge of the patent required to find induced infringement under section 271(b).

The Court found the answer in Aro Mfg. Co. v. Convertible Top Replacement Co. 377 U.S. 476 (1964). In Aro, the Supreme Court considered the issue of contributory infringement under section 271(c). A majority in Aro concluded that knowledge of the patent was needed to violate section 271(c).  Id. at 8–9 (citing Aro, 277 U.S. at 488 n.8; id. at 415 (White, J., concurring); id. at 524–27 (Black, J., dissenting)). Since section 271(b) and (c) both were aspects of contributory infringement, the Court unanimously concluded that knowledge of the patent was likewise needed to find inducement in violation of section 271(b). Id.; Dissenting op. at 1.

The Court Adopts the Doctrine of Willful Blindness From Criminal Law to Find Knowledge of the Patent Infringed Under Section 271(b)

Lacking direct evidence that Pentalpha knew of the patent, the Court had to address whether the evidence was nonetheless sufficient to support a finding of knowledge. The Court rejected the standard applied by the Federal Circuit for two reasons. “First, it permits a finding of knowledge when there is merely a ‘known risk’ that the induced acts are infringing.” Slip op. at 14. “Second, in demanding only ‘deliberate indifference’ to that risk, the Federal Circuit’s test does not require active efforts by an inducer to avoid knowing about the infringing nature of the activities.”  Id. Instead, the Court applied the doctrine of willful blindness, which had been widely adopted by federal courts in the area of criminal law, to support a finding of knowledge. Slip op. at 10–11.

The doctrine of willful blindness has two basic requirements: (1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact.  The Court explained that these requirements “give willful blindness an appropriately limited scope that surpasses recklessness and negligence.” Id. Neither recklessness, i.e., merely knowing of a substantial and unjustified risk of such wrongdoing, nor negligence, i.e., should have know of a similar risk, but in fact did not, will suffice to prove that the accused infringer had knowledge of the patent. Accordingly, “a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.” Id.

Although the Court rejected the test applied by the Federal Circuit, it affirmed the judgment of the Federal Circuit “because the evidence in this case was plainly sufficient to support a finding of Pentalpha’s knowledge under the doctrine of willful blindness.” Slip op. at 10.

Conclusion

The affirmance in Global-Tech Appliance shows that in many cases, the result will be the same under the willful blindness test adopted by the Court as under the now rejected deliberate indifference test. Nonetheless, at the margin, proving inducement has been made more difficult where actual knowledge cannot be established.

The Hacker Who Avoided a False Marking Claim

The U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s dismissal, with prejudice, of a false marking complaint, finding that the complaint failed to properly allege an “unpatented article” under 35 U.S.C. § 292.  Juniper Networks, Inc. v. Shipley, Case No. 10-1327 (Fed. Cir., Apr. 29, 2011) (Rader, J.).

Defendant Peter M. Shipley is an alleged computer hacker who maintained a website for the hacker community.  In 1995 and 1996, Shipley developed software known as Dynamic Firewall, a self-modifying active firewall filter designed to defend against network monitors and tools.  In 1997, Shipley provided information on a “Current Projects” portion of his website regarding the Dynamic Firewall.  The website stated that the Dynamic Firewall was patented.

Plaintiff Juniper filed its false marking complaint against Shipley after the current owner of the Dynamic Firewall patents accused Juniper of infringing those patents in a separate lawsuit.  Relying on information obtained during the discovery phase of that suit, Juniper alleged that an embodiment of the Dynamic Firewall was used as a component of the website.  The Dynamic Firewall, however, was destroyed in 1999 due to a hard drive crash in a computer in Shipley’s home.  Thereafter, no other prototype or product embodying the Dynamic Firewall was created.

In its original complaint, Juniper alleged that Shipley falsely marked the website and any firewall or services operating thereon from 1999 (the date the Dynamic Firewall was destroyed) to the present.  The lower court dismissed Juniper’s original complaint and, later, Juniper’s amended complaint, finding that Juniper failed to plead facts showing that Shipley had marked an “unpatented article.”  The lower court reasoned that the markings displayed on the website referred only to the Dynamic Firewall, and not to software operating on the website, as alleged by Juniper.  Juniper appealed.

The Federal Circuit affirmed, emphasizing that Juniper only alleged that the falsely marked “unpatented article” was the Website itself.  As a side note, the Court noted that had Juniper alleged that the Dynamic Firewall was itself falsely marked, such a claim would be barred because the sole embodiment of the Dynamic Firewall was destroyed in 1999 and §292 requires that the mismarked article actually exist.

However, the Court did note that a website may qualify as an “unpatented article” under §292 because websites may both embody intellectual property and contain identifying markings.  Turning to Shipley’s website and markings appearing therein, the Court focused on whether the markings related to the website itself.  The Court reasoned that the markings appeared on the “Current Projects” page, which was intended to provide the viewer with “a list of current projects and research underway.”  The page also stated that “[m]ost or all of these projects will be released to the public upon completion.”  Accordingly, the Court found that the website categorized the Dynamic Firewall as a “current project” that was “underway.”  Additionally, nowhere did the website indicate that the Dynamic Firewall was operating on the website.  Therefore, the Court found that “when considered in context, the allegedly affixed marks relate to [the] Dynamic Firewall as opposed to the Website, software operating on the Web-site, or pages generated by the Website.”

Prevailing Antitrust Defendants Recover $367,000 in e-Discovery Costs

Recently, prevailing antitrust defendants were awarded $367,000 in e-discovery costs incurred by their vendor. See Race Tires America v. Hoosier Racing Tire Corp., 2011 WL 1748620 (W.D. Pa. May 6, 2011). While the Court labeled the facts as “unique” and that its holding was limited, the Court’s opinion is very thorough and the facts may be familiar to many antitrust defendants.

In today’s age where the costs of e-discovery can run several hundred thousand dollars or more and outside vendors are routinely hired to help, this holding can be used as a shield and a sword. During discovery, a party can alert the other side that aggressive discovery requests and a demand for many electronic search terms is a major factor in awarding costs of e-discovery – if the responding party prevails. And, if a party should prevail, the potential for an award of the costs of e-discovery can be an additional bonus and/or leverage for any post-verdict resolution without appeal.

The facts are simple. Plaintiff Specialty Tires America (STA) brought antitrust claims against Hoosier Racing, its tire supplier competitor, and Dirt Motor Sports, Inc. d/b/a World Racing Group, a motorsports racing sanctioning body. STA claimed that a so-called “single tire rule” by various sanctioning bodies like Dirt Motor Sports, as well as the related exclusive supply contracts between some of these sanctioning bodies and Hoosier violated Section 1 and 2 of the Sherman Act and caused STA in excess of $80 million in damages. See Race Tires America v. Hoosier Racing Tire Corp., 614 F. 3d 57, 62-73 (3d Cir. 2010). The District Court granted summary judgment in favor of defendants finding that STA had failed to demonstrate antitrust injury, and the Third Circuit Court of Appeals affirmed. Id. at 83-84.

The normal rule that “costs — other than attorney’s fees — should be allowed to the prevailing party” (Fed. R. Civ. P. 54(d)(1)) creates a “strong presumption” that all costs authorized for payment will be awarded to the prevailing party, so long as the costs are enumerated in 28 U.S.C. § 1920, the general taxation-of-costs statute. As prevailing parties, the defendants each filed a Bill of Costs in which the majority of amounts requested were e-discovery costs. Plaintiff objected arguing that e-discovery costs were not taxable under 28 U.S.C. § 1920(4).
Section 1920(4) allows recovery of “[f]ees for exemplification and the costs of making copies … necessarily obtained for use in the case.” 28 U.S.C. § 1920(4). There are two statutory interpretation questions that have divided Courts. First, costs of electronic scanning of documents can be recoverable as “necessary” or unrecoverable as a mere “convenience.”

The other issue takes a few different forms, but focuses on whether the terms “exemplification” and “copying”, which originated in the world of paper, should be limited to physical preparation or rather updated to take into account changing technology and e-discovery. The Court discussed a litany of these cases. Some courts that have applied § 1920(4) to today’s e-discovery demands, have limited exemplification and copying to just the costs for scanning of documents, which is considered merely reproducing paper documents in electronic form, and refused to extend the statute to cover processing records, extracting data, and converting files. Courts are also divided on whether extracting, searching, and storing work by outside vendors are unrecoverable paralegal-like tasks, or whether such costs are recoverable because outside vendors provide highly technical and necessary services in the electronic age and which are not the type of services that paralegals are trained for or are capable of providing.

In this case, because the Court and the parties anticipated that discovery would be in the form of electronically stored information and because plaintiff aggressively pursued e-discovery (e.g., directing 273 discovery requests to one defendant and imposing over 442 search terms), defendants’ use of e-discovery vendors to retrieve and prepare e-discovery documents for production was recoverable as an indispensable part of the discovery process. The Court also found that the vendor’s fees were reasonable, especially because the costs were incurred by defendants when they did not know if they would prevail at trial.

The Court also denied the plaintiff’s request for a Special Master to assess the reasonableness of e-discovery costs incurred by the prevailing defendants as an unnecessary cost and delay.

The California Court of Appeal Again Chips Away at In re Tobacco II

Knapp v. AT&T Wireless Services, Inc. (Case No. G043744, May 20, 2011) __Cal.App.4th__, is the latest in a line of recent class action cases limiting the scope of In re Tobacco II Cases (2009) 46 Cal.4th 298. In Tobacco II, the California Supreme Court held that a named plaintiff in a putative class action must have suffered injury-in-fact to bring a claim for violation under the fraud prong of California’s Unfair Competition Law (the “UCL”), but that the named plaintiff need not show actual injury to unnamed class members. The court in Knapp held that Tobacco II applies only to standing, and not commonality, which requires a separate analysis. For this reason, the Fourth Appellate District upheld the trial court’s order denying plaintiff’s motion for class certification, finding that because AT&T Wireless did not make uniform representations to proposed class members, common issues of law did not predominate over individual issues and a class should not be certified under the UCL.

Julia Knapp subscribed to AT&T Wireless’ cell phone service. She claimed that AT&T Wireless fraudulently misrepresented and failed to disclose that it rounded up a customer’s partial airtime minutes to full minutes when calculating customers’ monthly minute totals. She claimed she suffered actual injury from this practice and, in a putative class action, sued for violations of the UCL and California’s Consumers Legal Remedies Act (CLRA), as well as common-law fraud. She then moved to certify a class, in part on the basis that her claims were common among the proposed class.

AT&T Wireless opposed the motion, arguing that the alleged misrepresentations were not uniformly made to proposed class members — some representations were oral with sales representatives either over the telephone or in person, while AT&T made many other relevant representations about the cell phone service in various advertisements, including radio, television, print and direct mailings.

Plaintiff argued that Tobacco II prohibited such individual inquiries. The Court of Appeal in Knapp, however, disagreed. “We see no language in Tobacco II that suggests to us that the Supreme Court intended our state’s trial courts to dispatch with an examination of commonality when addressing a motion for class certification.” The Knapp court found that Tobacco II was “irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.'” For these reasons, the Court of Appeal affirmed the decision of the trial court finding a lack of commonality and denying the motion to certify the class.
This decision is the latest in a growing line of Court of Appeal decisions to circumscribe Tobacco II’s apparent prohibition on inquiring into the standing of individual members of a putative class under the fraud prong of the UCL. Several courts have now drawn sharp distinctions between analyzing the standing of absent class members–rejected by the Tobacco II court–and analyzing the circumstances of absent class members cases for the purposes of analyzing common issues for class certification. Drawing on recent decisions in Cohen v. DIRECTV, Inc. (2009) 178 Cal.App.4th 966, Kaldenbach v. Mutual of Omaha Life Ins. Co. (2009) 178 Cal.App.4th 830, 843 and Pfizer v. Superior Court (2010) 182 Cal.App.4th 622, the Knapp court concluded that Tobacco II “does not affect our analysis as to commonality.”

Implementing Effective Litigation Holds

Does your company have an established procedure for issuing timely litigation holds?  Recent court decisions make it clear that employers have a duty to preserve electronically stored information and paper documents they know or should know would be relevant to a current or threatened legal action.  The consequences for failing to do so can be severe.  Events which trigger an employer’s duty to preserve information/documents include, but are not limited to, the following:

  • Receiving notice that the employer is a party to a legal or an administrative proceeding, such as a charge of discrimination;
  • Receiving a letter threatening a claim on behalf of an applicant or current or former employee;
  • A verbal demand from an applicant or current or former employee relating to a legal claim;
  • Other “red flags” exist or a “totality of circumstances” indicate a claim is likely to be made by an  applicant or current or former employee.

A litigation hold notice is best made in writing,  It should instruct recipients to preserve and not destroy (or overwrite) electronically stored information and paper documents that are relevant to current or threatened litigation.

Although the litigation hold notice must be tailored to the facts of each particular situation, at a minimum, it should include the following:

  • Name of the matter or individual involved;
  • Warning of the importance of the hold and the consequences for not complying with it;
  • Direction not to alter or destroy information/documents;
  • Reason for the hold – e.g., legal action;
  • Reason the recipient (see below) is getting the hold notice;
  • Types of information included in the hold and the applicable time period.  (Information subject to the hold could include personnel files and other employment related documents, e-mail and other forms of correspondence and electronically stored information.)
  • Instructions for preserving information/documents;
  • Suspension of any routine document retention/destruction policy;

The hold notice should be issued to all employees reasonably likely to have information relevant to a claim – the “key players” in the matter.  There could also be instances in which outside vendors would also need to be issued a hold notice.

The employer’s IT department should help implement litigation holds, particularly with regard to documents housed or stored in e-mail accounts, or on computers, cell phones PDAs, or on flash drives, as well as with regard to taking control of backup tapes and stopping any automatic overwriting of electronic data.

Finally, employers should enforce litigation holds and, if a violation of the hold is discovered, take prompt action to remedy the violation if possible.  Steps also should be taken to ensure no further violations occur, such as taking disciplinary action up to termination.

Litigation hold notices must be tailored to the facts of each case and should be reviewed by counsel knowledgeable in this area.  If you have a question about litigation hold practices, The Prince Firm attorneys are experienced in minimizing legal risks through the effective use of litigation holds and are available to assist employers with any of their needs.

Is Your Company’s Social Media Launch Ahead Of Its Compliance Program

Many businesses are still coasting along enjoying the marketing advantages of social media without making sure they have a good compliance program in place. For every company with a Facebook fan page or Twitter account roughly 65 percent would admit they do not have a social media policy. For companies with a social media policy, many of those policies have been lifted from online samples that may be over broad, and include provisions that have been challenged with some success in court.

“Penny wise and pound foolish,” companies are not having their social media business practices reviewed by knowledgeable legal counsel. Companies invest time and money putting together a Facebook fan page that is promoted throughout the company without training their employees on the Do’s and Don’ts of posting comments on the fan page, or using social media in general.

Another risk of social media was highlighted by settlements that the FTC reached with Twitter and Google concerning shortcomings in their privacy guidelines. The consent decrees reached by each of the companies highlight how seriously the FTC takes the safeguarding of consumer information. In the case of Twitter, the FTC put the responsibility for hackers gaining administrative access to Twitter personal accounts on Twitter. One hacker gained access to non-public information such as users email addresses and mobile phone numbers. The same hacker changed the passwords for approximately 45 high profile Twitter users including President Obama and sent phony tweets from those accounts.

The hacker found his way into the system because Twitter did not have a feature that is commonly used with online stock brokerage accounts where the system will lock you out after a few unsuccessful attempts to enter the correct password. The hacker used an automated password guessing tool which submitted thousands of guesses until finding the correct password. The FTC identified other shortcomings in Twitter’s security system including: (1) Not requiring that passwords be unique and different from what a Twitter employee, who also had administrative control of the Twitter system, used to access third-party programs and networks; (2) not requiring periodic changes of administrative passwords; and (3) not requiring that Twitter passwords in personal email accounts be stored encrypted instead of the plain text that some Twitter employees used.

The FTC framed the complaint as Twitter not living up to its representations to consumers on its security practices. Twitter’s privacy policy stated, “Twitter is very concerned about safeguarding the confidentiality of your personally identifiable information. We employ administrative, physical, and electronic measures designed to protect your information from unauthorized access.”

Twitter settled with the FTC and agreed, among other things, to establish and maintain a comprehensive information security program so that nonpublic consumer information cannot be hacked into. This security information program will be assessed by an independent third-party auditor every other year for the next ten years. Twitter must also maintain records regarding its privacy practices and policies. Each violation of the settlement order may result in a civil penalty up to $16,000.

The recent Google Buzz settlement is a perfect example of a company forgetting to read and take into account its own privacy policy. Google’s Gmail privacy policy assured users of its email service that the information was being stored for the user’s purposes, and that Google would seek permission in advance of using the user’s personal information for a different purpose.

In launching Google Buzz, a social networking platform that Google hoped would compete with Facebook, the FTC alleged that Google tried to create instant networks of friends for its users by pulling from their email contact lists without considering this information may be very sensitive to the individual users (imagine, clients of therapists and attorneys, abusive ex-husbands, children and job recruiters).

As a result, Google has had to enter into a comprehensive settlement that goes beyond the current regulatory requirements, and will likely hamstring Google’s efforts to compete with Facebook and other social networking sites that are not subject to similar restrictions. Among other things, Google must get affirmative consent to any new or additional uses of previously collected data. Google must also implement a comprehensive privacy program that is reduced to writing, and includes an employee designated to manage the privacy program; and implement privacy controls and procedures with regular audits to make sure it is effective. Every two years, Google must have an independent auditor review the privacy program and prepare a written report. Google must comply with this comprehensive privacy program for 20 years, and that time period can be extended if Google violates the settlement consent order.

These FTC consent orders underscore the importance of making sure companies have their social media practices reviewed by knowledgeable legal counsel, risks identified and addressed, employees trained on correct usage, and new social media marketing strategies coordinated with legal counsel.

Social Media Activity In The Workplace And The Computer Fraud And Abuse Act

It should come as no surprise that employers are trying to assert a claim for violation of the Computer Fraud and Abuse Act (“CFAA”) based on employees accessing social networking sites such as Facebook from work computers. While one employer was unsuccessful in stating a claim, employers should not give up on opportunities to assert the CFAA as a claim in an employment related action.

The CFAA is a criminal statute that also allows for civil action claims. To state a claim, an employer has to assert the following elements: (1) an employee intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains information from any protected computer (e.g. used in or affecting interstate commerce) [18 U.S.C. § 1030(g)]. The other essential requirement for stating a claim under this federal statute is that the employer suffers a computer related loss totaling at least $5,000 in value.

In United States v. Nosal, the Ninth Circuit held on April 28, 2011, that the government in a criminal action stated a CFAA claim against former employee David Nosal and his co-conspirators. Nosal is alleged to have started a competing business, and conspired with current employees of Korn/Ferry, a premier executive search firm, to have them copy Korn/Ferry’s confidential database of executive candidates. The Nosalcourt held that Korn/Ferry took considerable measures to protect its confidential database, including a screen notification that appeared with every login which stated in essence:

“This computer system and information it stores and processes are the property of Korn/Ferry. You need specific authority to access any Korn/Ferry system or information and to do so without the relevant authority can lead to disciplinary action or criminal prosecution…”

The Nosal Court held that “an employee ‘exceeds authorized access’ under § 1030 when he or she violates the employee’s computer access restrictions – including use restrictions.” Further, the Court held that the majority of computer crimes prohibited by the CFAA involve taking specified forbidden actions, ranging from obtaining information to damaging a computer or computer data.

In an employment case decided on May 6, 2011, Lee v. PMSI, a federal district court in Florida granted a motion to dismiss a CFAA claim because the employee’s alleged excessive use of the company computers to access Facebook and her personal email was not alleged to have caused damage to the company’s computers. The Court held that lack of productivity due to an employee accessing Facebook does not constitute damage to a computer as required by the CFAA. Further, the Court held that since the employee was only accessing her personal information through the company’s computer, PMSI could not allege that Lee accessed or damaged any PMSI information.

On the other hand, an employer may be able to state a claim under the CFAA by alleging that the employee infected the company’s computer(s) with a virus that is traceable to Facebook or another social networking site. An Internet search shows a number of viruses that have been targeted to Facebook users. For example, there was a password stealing virus which urged Facebook users to open an attachment to obtain new login credentials, which once opened downloaded several types of malicious software including a program that stole banking passwords and other sensitive information from the user’s computer. McAfee, an antivirus software maker, estimated that the virus would succeed in affecting millions of computers.

Another virus named the Koobface virus invited people to watch a funny video with an additional prompt to upgrade their Flash player. This upgrade was actually the means for unleashing the virus, which reportedly turned “victim machines into zombie computers to form botnets.” More recently, Facebook users are warning their friends not to click on invitations “to see who has been viewing you,” or to “win a free iPad,” because they are suspected to be vehicles for spreading viruses and other malware.

In other words, an employer with a clear computer use policy that prohibits use of company computers to access social networking sites for personal business may be able to state a claim under the CFAA. If the facts are there, the employer may want to allege that the computer system was damaged by a computer virus which resulted in a loss of at least $5,000 in value, and that company data was compromised. The loss provision requirement can be satisfied by costs associated with a forensic assessment of how the computer was being accessed improperly, consequential damages incurred because of interruption of service, and costs to remove the virus and remedy any damage to the computer.

Application of the CFAA to social media activity is a new area of the law with few reported cases. With Nosal, the Ninth Circuit is now in accord with other circuits. The CFAA can be applied to employees who abuse their company’s computer access rules to the detriment of the company. As a preliminary step to being able to state a claim under the CFAA, however, businesses should consult with knowledgeable legal counsel to update their computer use policies.