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Fresh From the Bench: Recent Patent Cases From the ‎Federal Circuit

December 29, 2014

Overview

Aqua Shield – The panel vacates (1) a decision granting patentee damages of only $10,800 since the award was inappropriately limited to the profits defendants made, and (2) a ruling that there was no willful infringement since that determination was improperly based on the denial of a motion for preliminary injunction and the court failed to consider all of the factors relevant to recklessness under Seagate.

Content Extraction – The Circuit affirms dismissal under Rule 12(b)(6) of patentee's infringement suit due to the asserted patents being patent ineligible under 35 U.S.C. § 101, and the dismissal of counterclaims for tortious interference and RICO violations.

Fleming – The panel affirms a finding of infringement and validity as to most of the asserted claims. The panel also affirms the court's finding of invalidity based on prior invention, rejecting patentee's argument that there was insufficient corroboration. Also affirmed is a ruling that the reissuance of the patent in suit was appropriate, rejecting the argument that the reason for seeking reissue did not meet the "error" precondition for reissuance.

Aqua Shield v. Inter Pool Cover Team, et. al.,
Fed. Cir. Case No. 2014-1263 (December 22, 2014)

The patent claims enclosures designed to cover pools or create sun rooms. Aqua Shield sued IPC in the E. D. of New York, and its motion for preliminary injunction was denied. The case was later transferred to the District of Utah where the court granted summary judgments of infringement and validity. The district court then conducted a two-day bench trial on issues concerning relief. The Utah court initially ruled that it lacked sufficient evidence from which to award damages, but on reconsideration awarded Aqua Shield $10,800 in damages, based on what IPC would have likely paid in a hypothetical negotiation occurring before the infringement began, and yet allowing IPC a profit on its infringing sales.

The court also found no willfulness, based primarily upon the ‎New York district court's denial of the motion for a preliminary injunction. And, after summary ‎judgment of infringement was granted, the court found that IPC made a good faith effort to design around ‎the patent.

Reasonable Royalty

The panel agrees that the infringer's actual profits earned during the period of infringement can be relevant, but finds that the court erred in the use it made of IPC's profit figures. What an infringer's profits actually turned out to have been may be relevant, but only in an indirect and limited way—as some evidence bearing on a directly relevant inquiry into anticipated profits. Thus, when the infringer is a profit-making enterprise, a reasonable royalty is the amount that a person, desiring to manufacture, use, or sell a patented article, as a business proposition, would be willing to pay as a royalty and yet be able to make, use, or sell the patented article, in the market, at a reasonable profit. In hypothetical-negotiation terms, the core economic question is what the infringer, in a hypothetical pre-infringement negotiation under hypothetical conditions, would have anticipated the profit-making potential of use of the patented technology to be, compared to using noninfringing alternatives. If a potential user of the patented technology would expect to earn X profits in the future without using the patented technology, and X + Y profits by using the patented technology, it would seem, as a prima facie matter, economically irrational to pay more than Y as a royalty—paying more would produce a loss compared to forgoing use of the patented technology.

Real-world application of this conceptual structure often involves approximation and uncertainty, and the ultimate royalty determination must reflect the two-sided nature of the posited negotiation. The inquiry, besides being hypothetical, asks about a comparative business prediction in an uncertain, complex world, and many variables may affect the hypothetical forecast, including costs and availability of non-infringing alternatives, the patented technology's role in the firm's (expected) overall business, and the (expected) actions of competing firms in the market. Moreover, various kinds of evidence, such as licenses, business prognostications, and information about cost savings or value enhancements compared to alternatives, where such evidence is reliable, relevant, and not unduly prejudicial, may be used in the inquiry to determine the economic value of the patented technology in the marketplace at the relevant time.

The district court did not err in considering IPC's profits, but it did err in treating the profits actually earned during the period of infringement as a royalty cap. That treatment incorrectly replaces the hypothetical inquiry into what the parties would have anticipated, looking forward when negotiating, with a backward-looking inquiry into what turned out to have happened.

The district court's analysis also incorrectly replaces the inquiry into the parties' anticipation of what profits would be earnedif a royalty (of amounts being negotiated) were to be paid with an inquiry into what profits were earned when IPC was charging prices without accounting for any royalty. Thus, the district court seems to have simply assumed that any royalty paid by IPC would have directly reduced its profits, dollar for dollar. But that would not be true, in general, if IPC could have raised its prices (over what it actually charged for infringing sales) to account (fully or partly) for a royalty payment. The court did not find that IPC was selling in a perfectly competitive market in which it was forced to act as a pure price-taker. Indeed, IPC has not pointed to any evidence supporting the district court's conclusion that a royalty should be a percentage of profits rather than sales revenues.

In Douglas Dynamics, LLC v. Buyers Prod. Co., 717 F.3d 1336 (Fed. Cir. 2013), this court explained: "The infringer's selling price can be raised if necessary to accommodate a higher royalty rate, and indeed, requiring the infringer to do so may be the only way to adequately compensate the patentee for the use of its technology." The court held, for that reason, that "the district court clearly erred by ensuring the ongoing royalty rate it awarded would 'leave some room for profit' by the infringer at its current prices." On the record before us, we conclude that the district court committed the same error in the present case.

Willful Infringement

To prove that its patent was willfully infringed, a patentee must make two related showings. First, it must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007). Second, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer. Id.

Here the district court gave only one reason for concluding that IPC reasonably believed that its products did not infringe—namely, the denial of the preliminary injunction. Our opinion in Seagate expressly connects findings of willfulness to preliminary-injunction rulings. ("A substantial question about invalidity or infringement is likely sufficient not only to avoid a preliminary injunction, but also a charge of willfulness based on post-filing conduct."). But it states no rigid rule, and it notes that preliminary injunctions can be denied even when a defendant has not raised substantial questions about invalidity or infringement. In a later willfulness determination, the significance of a preliminary-injunction denial depends on why the preliminary injunction was denied. Here the New York court denied Aqua Shield's motion because of personal-jurisdiction questions and because Aqua Shield lacked sufficient knowledge of IPC's product to make the required showing of a likelihood of success on the merits. The denial of the motion here is thus a legally insufficient reason for determining that IPC did not willfully infringe.

With respect to the willfulness of any infringement that occurred after summary judgment of infringement, the evidence cited by the court stops short of demonstrating that IPC did in fact design around the patent and, if so, when. The court pointed to evidence that IPC instructed its factory to fix the end panels of its pool enclosures in place, in a manner it believed to avoid the patent's claims. Questions remain about whether that change was actually implemented or whether the resulting products avoided infringement, both of which are relevant to willfulness. They may also bear on the royalty issue, because they may be relevant to the ease and cost of designing around the patented technology.

The panel therefore vacates the court's decision that IPC did not willfully infringe. If the district court determines on remand that IPC willfully infringed Aqua Shield's patent, it should reconsider its decision to deny enhanced damages and attorney's fees.

Comment: This is one of only a few decisions since Seagate reversing denial of willful infringement. More common are decisions like the one last week in Stryker Corporation v. Zimmer, Inc., Fed. Cir. Case 2013-1668 (Dec. 19, 2014) reversing a willfulness determination based upon the defendant's arguments of noninfringement and invalidity arguments being reasonable.

Content Extraction and Transmission LLC v. Wells Fargo Bank, Nat'l. Assoc. et al., Fed. Cir. Case 2013-1588, 1589 (December 24, 2014); Diebold, Inc. v. Content Extraction and Transmission LLC, et al., Fed. Cir. Case No. 2014-1112, 1687 (December 24, 2014)

CET asserted four related patents directed generally to a method of 1) extracting data from hard copy documents using an automated digitizing unit such as a scanner, 2) recognizing specific information from the extracted data, and 3) storing that information in a memory. This method can be performed by software on an ATM that recognizes information written on a scanned check.

CET filed actions against Wells Fargo and PNC Bank alleging that they were using ATMs with software that infringed its patents. Diebold, the manufacturer of the ATMs, then filed an action against CET seeking 1) a declaratory judgment that its ATMs did not infringe and that the patents were invalid, and 2) relief for tortious interference and violations of the RICO Act arising from CET's act of filing baseless infringement suits. The district court consolidated the actions and dismissed the patent infringement claims under Rule 12(b)(6) based upon the patents not being directed to patentable subject matter, and the tortious interference and RICO claims because filing lawsuits against Diebold's customers was protected under the Noerr Pennington doctrine. E.R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); and United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965).

Patentable Subject matter under section 101

An invention is patent-eligible if it claims a "new and useful process, machine, manufacture, or composition of matter." 35 U.S.C. § 101. The Supreme Court, however, has interpreted § 101 to contain an implicit exception: "laws of nature, natural phenomena, and abstract ideas" are not patentable. Alice Corp. Pty Ltd. v. CLS Bank Ina, 134 S. Ct. 2347 (2014). The panel focuses its attention here on whether the claims of the patents fall within the excluded category of abstract ideas.

The Supreme Court's two-step framework, described in Mayo and Alice, guides our analysis. Id. at 2355 (citing Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012)). We first determine whether a claim is "directed to" a patent-ineligible abstract idea. If so, we then consider the elements of the claim—both individually and as an ordered combination to assess whether the additional elements transform the nature of the claim into a patent-eligible application of the abstract idea. This is the search for an "inventive concept"—something sufficient to ensure that the claim amounts to significantly more than the abstract idea itself.

The Supreme Court has not delimited the precise contours of the "abstract ideas" category. We know, however, that although there is no categorical business-method exception, Bilski v. Kappos, 561 U.S. 593, 606 (2010), claims directed to the mere formation and manipulation of economic relations may involve an abstract idea. See Alice. We have also applied the Supreme Court's guidance to identify claims directed to the performance of certain financial transactions as involving abstract ideas. See buySAFE, Inc. v. Google, Inc., 765 F.3d 1350 (Fed. Cir. 2014) (creating a transaction performance guaranty for a commercial transaction on computer networks such as the Internet); Accenture Global Servs., GmbH v. Guidewire Software, Inc., 728 F.3d 1336 (Fed. Cir. 2013) (generating rule-based tasks for processing an insurance claim); Bancorp Servs., L.L.C. v. Sun Life Assur. Co. of Canada (U.S.), 687 F.3d 1266 (Fed. Cir. 2012) (managing a stable value protected life insurance policy); Dealertrack, 674 F.3d at 1333 (processing loan information through a clearinghouse).

Applying Mayo/Alice step one, we agree with the district court that the claims of the asserted patents are drawn to the abstract idea of 1) collecting data, 2) recognizing certain data within the collected data set, and 3) storing that recognized data in a memory. The concept of data collection, recognition, and storage is undisputedly well-known. Indeed, humans have always performed these functions. And banks have, for some time, reviewed checks, recognized relevant data such as the amount, account number, and identity of account holder, and stored that information in their records.

CET attempts to distinguish its claims from those found to be abstract in Alice and other cases by showing that its claims require not only a computer but also an additional machine—a scanner. CET argues that its claims are not drawn to an abstract idea because human minds are unable to process and recognize the stream of bits output by a scanner. However, the claims in Alice also required a computer that processed streams of bits, but nonetheless were found to be abstract. Similar to how the computer-implemented claims in Alice were directed to "the concept of intermediated settlement," and the claims in Dealertrack were directed to the concept of "processing information through a clearinghouse," CET's claims are drawn to the basic concept of data recognition and storage.

For the second step of our analysis, we determine whether the limitations present in the claims represent a patent-eligible application of the abstract idea. Alice. For the role of a computer in a computer implemented invention to be deemed meaningful in the context of this analysis, it must involve more than performance of "well-understood, routine, and conventional activities previously known to the industry." Further, "the mere recitation of a generic computer cannot transform a patent ineligible abstract idea into a patent-eligible invention."

Applying Mayo/Alice step two, we agree with the district court that the asserted patents contain no limitations—either individually or as an ordered combination that transform the claims into a patent-eligible application. There is no "inventive concept" in CET's use of a generic scanner and computer to perform well-understood, routine, and conventional activities commonly used in industry. At most, CET's claims attempt to limit the abstract idea of recognizing and storing information from hard copy documents using a scanner and a computer to a particular technological environment. Such a limitation has been held insufficient to save a claim in this context. See Alice, 134 S. Ct. at 2358; Ultramercial, Inc. v. Hulu, LLC, 772 F.3d 709, 715– 16 (Fed Cir. 2014); buySAFE, 765 F.3d at 1355.

CET contends that the district court erred by declaring its claims patent-ineligible under § 101 at the pleading stage without first construing the claims or allowing the parties to conduct fact discovery and submit opinions from experts supporting their claim construction positions. Although the determination of patent eligibility requires a full understanding of the basic character of the claimed subject matter, claim construction is not an inviolable prerequisite to a validity determination under § 101. See Ultramercial, 772 F.3d at 714-15; Bancorp, 687 F.3d at 1273-74. The district court construed the terms identified by CET in the manner most favorable to CET, necessarily assuming that all of CET's claims required a machine, even though several claims do not expressly recite any hardware structures. The district court's resolution of PNC's motion to dismiss at the pleading stage was therefore proper.

Diebold's cross-appeal and the Noerr-Pennington doctrine

Diebold's claims arise from the filing of allegedly frivolous infringement suits by CET against Diebold customers. Under Noerr-Pennington, a person's act of petitioning the government is presumptively shielded from liability by the First Amendment against certain types of claims. To overcome this presumptive immunity, a plaintiff must establish that the defendant's instigation of litigation was merely a "sham." Prof'l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993) ( PRE). This two-part test requires the plaintiff to show (1) that the litigation was objectively baseless, and (2) that the defendant subjectively intended to harm the plaintiff through the abuse of a governmental process itself, as opposed to harms flowing from the outcome of that process.

Under the first prong, a "sham" lawsuit must be objectively baseless "in the sense that no reasonable litigant could realistically expect success on the merits." Given the focus on the act of filing the complaint as the actionable event, CET's infringement suits, though unsuccessful, were not objectively baseless even though we dismiss the patent under section 101. This is because the state of the law of § 101 was deeply uncertain at the time CET filed its complaints against Wells Fargo and PNC in 2012. Under these circumstances, we cannot conclude that as a matter of law, no reasonable litigant in 2012 could have expected success on at least one of CET's claims. Therefore, since the act of filing its suits was shielded from liability by the Noerr-Pennington doctrine, the district court correctly dismissed Diebold's tortious interference and RICO violation claims against CET.

Comment: In a footnote, the panel references decisions from other circuits noting that the filing of a lawsuit, even one that is frivolous, cannot by itself constitute an act of "extortion" under RICO. According to the panel: "Treating meritless litigation as a form of extortion punishable under RICO would substantially chill even valid court petitioning, as it could subject almost any unsuccessful lawsuit or set of lawsuits to a colorable claim of a RICO violation." This shows how high the bar would be for a RICO action to survive a Federal Circuit appeal.

However, contrast the often-criticized case of Tyco Healthcare Group, L.P. v. Mutual Pharmaceutical Company, Inc., 762 F.3d 1338 (Fed. Cir. 2014), remanding a case to the district court to determine whether an infringement action was in fact baseless and thus potentially qualifying as "sham litigation."



Fleming v. Escort Inc. and Beltronics USA, Inc.,
Fed. Cir. Case No. 2014-1331, 1371 (December 24, 2014)

Hoyt Fleming owns two reissue patents related to radar detectors for detecting police signals, which incorporate a GPS unit. The incorporated GPS can reduce false alarms ( i.e., the signaling of a police presence when none exists) by allowing the detector to disregard signals from an identified location known to produce such false alarms ( e.g., a storefront door opener transmitting a radar signal that can be mistaken for a police presence).

Escort contends that Steven Orr, who works for Escort as a consultant, had invented a GPS-incorporating radar detector before Fleming did—a prior invention under 35 U.S.C. §§ 102(g) and 103 (2006). Fleming's claimed priority date is April 14, 1999—the filing date of his patent application. Orr alleged that he conceived his invention in 1988 and made a working embodiment that reduced it to practice in April 1996. From 1988 to 1996, Orr was working at Cincinnati Microwave ("Cincinnati"), and when Cincinnati entered bankruptcy, Escort acquired rights to the Orr invention. During the summer of 1997 Escort sought Orr's assistance in the new enterprise, and Orr filed a patent application to claim his alleged invention, with Escort as assignee, on June 14, 1999, two months after Fleming filed his application.

The jury in this case found most of Fleming's asserted claims to be infringed by Escort and not to be invalid. It found invalid several other claims based upon Orr's prior invention either independently or in combination with other prior art. The district court denied motions for JMOL.

Sufficiency of Orr's prior invention evidence

The invalidity verdict rested first on Orr's prior invention, which the jury found to anticipate some of the claims, and second, on the combination of Orr's prior invention and prior art patents to invalidate other claims. The content of those teachings and the motivation to combine are fact questions, which the panel assumes the jury answered in Escort's favor.

The invalidated claims do not contain a large number of limitations, so extensive testimony was not required. Nevertheless, Orr and Escort's expert together provided testimony that explained how the prior art taught the limitations of each invalidated claim. For example, Orr explained that his invention consisted of a radar detector that received frequency information, and that the radar detector was connected to a GPS navigational card and a laptop, allowing the muting of certain signals when he hit the spacebar based on position information expressed in the coordinates. Escort's expert Dr. Grindon evaluated evidence of Orr's prior invention, including files that showed routes that Orr took driving around under different conditions to collect position and velocity information from a GPS device in his car, and explained that Orr's invention shows and discloses the combination for a radar detector with a GPS system combined with a processor to suppress false alerts. With regard to the other invalidated claims, Dr. Grindon testified in some detail to the aspects of the prior art patents —as well as the motivation to combine—that would have made the claimed subject matter obvious at the relevant time.

Fleming also challenges the proof of Orr's prior invention by invoking the principle that oral testimony by an alleged inventor asserting priority over a patentee's rights must be supported by some type of corroborating evidence. Here, Orr's testimony of prior invention was sufficiently corroborated by the documentary evidence. The record contains 1992 data from GPS experiments that Orr ran at the time, and 1996 notes and correspondence from Orr pertaining to GPS and, more specifically, to realizing product features identified in a brainstorming meeting by integrating a radar detector into automotive navigation systems. Most tellingly, perhaps, the record contains a 1996 letter from Greg Blair, V.P. of Cincinnati, which refers to entering the automotive navigation system business to get speed and position to silence a detector and to patenting the concept of vehicle position muting.

This evidence makes credible Orr's general account: in 1988, when he had his specific conception, various industry participants were thinking generally about equipping radar detectors with GPS to reduce false alarms; Cincinnati, in particular, was interested in the idea; by 1992, Orr was collecting data and working toward reducing the conception to practice; and in 1996, spurred by great interest in his project, Orr reduced his invention to practice. The evidence, in referring to frequencies and to using a GPS-given location to mute a detector alarm, also provides substantial corroboration of the more specific claim limitations concerning lockout frequencies and distances that Fleming highlighted in his argument.

Fleming is correct that none of the corroborating evidence constitutes definitive proof of Orr's account or discloses each claim limitation as written. But the corroboration requirement has never been so demanding. It is a flexible, rule-of reason demand for independent evidence that, as a whole, makes credible the testimony of the purported prior inventor.

Abandoned, suppressed or concealed

Fleming's final challenge is that, even if Orr had priority of invention by virtue of his activities through 1996, he lost priority under 35 U.S.C. § 102(g)(2)'s disqualification of prior inventions that have been abandoned, suppressed, or concealed. Although the Circuit accepts the facts as found by the jury where (as here) they are supported by substantial evidence, suppression or concealment is a question of law to be reviewed de novo.

Abandonment, suppression, or concealment may be shown by proof of the prior inventor's active efforts to do so or may be inferred based upon the prior inventor's unreasonable delay in making the invention publicly known. In this case, there is no evidence of any active efforts to suppress or conceal. And the panel finds the timing of Orr's activities leading to his June 1999 patent application not to warrant an inference of abandonment, suppression, or concealment. The evidence is sufficient to establish the following facts, covering three periods starting from the April 1996 reduction to practice.

In the first period, before the February 1997 date of Cincinnati's bankruptcy, Cincinnati had great interest in the project, and Orr studied, refined, and improved his invention: he studied "selective availability," and conducted field testing and wrote additional code to perfect his invention. In the third period, after Orr started working at Escort in the summer of 1998, he was immediately put to work on his invention, and he continued this work at least until he filed for his own patent in June 1999.

What happened in the middle period— between February 1997 and summer 1998—is this: For a period of approximately 13 months after the bankruptcy, Orr joined another firm to work with a group of engineers that were designing a cordless telephone. The patent rights to Orr's radar/GPS prior invention were acquired by Escort in the bankruptcy, and Escort set priorities to get its new business going but, even so, was interested in developing this invention. Orr testified that, from the middle of 1997 to the middle of 1998, while working elsewhere, he was conferring with Escort about the invention as Escort was working on it. Escort's Kuhn testified that, from the start, Escort was motivated to hire Orr because of Orr's expertise in radar/GPS, was seeking to hire him during its startup period, and finally did hire Orr, in July 1998, to adapt his invention to "a new detection scheme" to resolve performance issues.

In these circumstances, the panel does not infer suppression, concealment, or abandonment for two reasons. First: In making his argument, Fleming's position has been that his priority date is April 14, 1999, when he filed his patent application. That date is later than the dates of Orr's conception (1988) and reduction to practice (1996). It also is later than the latest possible date—summer 1998—that the evidence establishes Orr resumed work on his prior invention when joining Escort. Even if the focus were solely on Orr (thus disregarding Escort, the patent-rights owner), and even if Orr had abandoned his invention before summer 1998, the defense of abandonment is properly rejected on the ground that Orr resumed his active work before Fleming's April 1999 priority date.

"Error" under section 251

Escort, in its cross-appeal, argues that Fleming's reissue patents are invalid because there was no "error" to qualify for reissuance under section 251. Errors are not limited to slips of the pen but encompass, and most often are, deliberate drafting choices. See In re Dinsmore, 757 F.3d 1343, 1347-48 (Fed. Cir. 2014). Not all choices qualify, though: it is important whether deficient understandings gave rise to the patenting choice that reissue is being invoked to correct. A drafting choice that rested on no cognizable false or deficient understanding of fact or law, but that was, say, an eyes-open choice made to secure the patent, "is not 'error' as required by section 251." That kind of choice is nothing but a "now-regretted choice," which is not error. But this case does not fall into that category.

The asserted error here is that, when drafting his original patent, Fleming failed to appreciate the full scope of his invention and the inadequacy of the original claims for properly capturing the full scope. This is a classic reason that qualifies as error. It identifies a deficient understanding of some combination of fact and law bearing on the meaning of claim language, the inventions disclosed in the written description, and how particular language does or does not map onto products or processes that could be claimed under section 251 consistent with the written description.

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