Supreme Court to Address Availability of Lost Profit Damages in Willful Patent Infringement Occurring Outside of the U.S.

Section 271(f) Combinations at Issue

The U.S. Supreme Court recently agreed to hear an important patent case concerning the standard for willful infringement and the availability of lost profit damages for combinations occurring outside of the United States.

Hill Wallack LLP Intellectual Property, Technology and Life Science Law Resource Center, intellectual property, attorneys, lawyers, law firm, Princeton NJ, Yardley PA, patent, infringement, litigation, intellectual property rights, copyright, trademark, innovation, technology, invention, design, novelty, discovery, authorship, creation, legal right, tradesecret, biotechnology, ANDA, Hatch-Waxman, litigation, generics, USPTO, US Copyright Office, registration, enforcement, technology, life science, blog

The Court granted petitioner WesternGeco LLC’s (“WesternGeco”) writ of certiorari on January 12, 2018 in WesternGeco LLC v. Ion Geophysical Corp., No. 16-1011, to decide the question of whether the Federal Circuit Court of Appeals (the “CAFC”) erred in holding that lost profits arising from prohibited combinations occurring outside of the U.S. are categorically unavailable in cases where patent infringement is proven under 35 U.S.C. §271(f).

By statute, patent owners who prove infringement are entitled to “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. §284.  What damages are “adequate to compensate for the infringement” depends on the application of general tort principles to the facts of each case and can include lost profits in appropriate cases.  Section 284 applies to damages for infringement under 35 U.S.C. §271(f), wherein Congress defined new acts of patent infringement: Whoever, with the requisite mental state, exports components of a patented invention from the United States for combination “outside of the United States in a manner that would infringe the patent if such combination occurred within the United States,” “shall be liable as an infringer.” 35 U.S.C. §271(f) (emphasis added).  In enacting §271(f), Congress treated a specific action within the United States (exporting from the United States with the intent to combine abroad) as sufficient to impose liability, knowing that the combination and ultimate use would occur abroad.

In WesternGeco, the jury found respondent/defendant Ion Geophysical Corp. (“Ion”) liable for infringement, and awarded damages, with a $12.5 million royalty component and a $93.4 million lost profits component.  The jury also concluded that Ion’s infringement was willful.  However, while the district court upheld the verdict, the court did not find “objective” willfulness under the CAFC’s governing standard at that time, which was before the decision by the Supreme Court in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016), which modified the standard for finding “willful” infringement.  Under the prior standard, a finding of “willful” infringement required satisfaction of both an “objective” and a “subjective” prong of willfulness.  The matter was appealed to the CAFC and a panel majority held that the jury’s award of lost profits – approximately $93 million of the $106 million award – must be reversed. WesternGeco petitioned for certiorari, which the Supreme Court granted and issued a “GVR” order, remanding the matter to the CAFC to reconsider in light of the high court’s ruling in Halo.  On remand, the CAFC panel majority vacated the district court’s judgment solely as to the denial of enhanced damages and remanded that limited issue “for further proceedings consistent with this opinion and with the Supreme Court’s decision in Halo.”  In all other respects, the Federal Circuit “reinstate[d] [its] earlier opinion and judgment,” including as to lost-profit damages.  Petitioner WesternGeco thereafter petitioned the Supreme Court yet again for a writ of certiorari, which the court granted.

While the U.S. Supreme Court essentially eliminated the “objective” prong for determining “willful” infringement – a bar that was virtually impossible to establish – in the Halo matter, the impact of the Court’s prior ruling with respect to extraterritorial infringement will now be considered. As argued by WesternGeco in its petition, with respect to Section 271(f), the CAFC erroneously required that the presumption against extraterritoriality must be applied twice: the presumption must be applied first to determine what conduct subjects a defendant to liability, and then again to limit remedies once liability is established.  As argued by WesternGeco, the plain text of Section 271(f) does not make that requirement and the CAFC imposed an unduly rigid bar to recovery for acts of willful infringement arising under Section 271(f).

The case has yet to be briefed before the Supreme Court. Oral argument has not been scheduled.  A ruling is expected from the Court before it recesses in June of this year.

Software and Reverse Engineering

Claims for Reverse Engineering are Based on Contractual Rights

As digital technologies continue to advance and encompass many aspects of everyday life, the development and use of “software” increases in direct proportion. Whether embedded system software (e.g., in mobile devices, appliances and IoT products), cloud hosted services, platform/infrastructure services, enterprise software or downloadable programs and apps, it is software that runs our computers and devices, allows for worldwide connectivity and communications, and provides for content and entertainment delivery.  Software development is a major component of the global economy, and businesses, large and small, need to undertake significant efforts to protect, enforce and defend their proprietary code.

Hill Wallack LLP Intellectual Property, Technology and Life Science Law Resource Center, intellectual property, attorneys, lawyers, law firm, Princeton NJ, Yardley PA, technology, life science, blog, patent, copyright, trademark, innovation, technology, invention, software, code, reverse engineering, infringement, API, design, novelty, discovery, authorship, creation, legal right, tradesecret, biotechnology, ANDA, Hatch-Waxman, litigation, generics, USPTO, US Copyright Office, registration, enforcement

Comprising a “literary work,” the source code of a software application is protectable as a copyrightable work. Copyright Office Circular 61 states that:

A computer program is a set of statements or instructions to be used directly or indirectly in a computer to bring about a certain result. Copyright protection for a computer program extends to all of the copyrightable expression embodied in the program.  The copyright law does not protect the functional aspects of a computer program, such as the program’s algorithms, formatting, functions, logic, or system design.

And, software companies have not hesitated to pursue claims of copyright infringement of their code. See, e.g., Antonick v. Electronic Arts, Inc., No. 14-15298, 841 F.3d 1062 (9th Cir. 2016) cert. denied __S. Ct. __ (November 6, 2017); Adobe Sys., Inc. v. Christenson, No. 12-1737, 809 F.3d 1071 (9th Cir 2015); Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed. Cir. 2014) cert. denied 135 S. Ct. 2887 (2015).

Oracle v. Google is one of the more memorable software copyright infringement cases.  In that litigation, Oracle pursued software copyright and patent infringement claims against Google and its Android operating system. Oracle alleged several distinct claims of infringement: a nine-line rangeCheck function, several test files, the structure, sequence and organization of Oracle’s Java application programing interface (API), and the API documentation.  Oracle’s copyright infringement claims were primarily directed to its Java APIs, of which Oracle alleged 37 separate acts of infringement.  While the jury found that the APIs were infringed, the jury deadlocked on Google’s fair use defense.  The trial judge, however, ultimately ruled that the structure of Oracle’s Java APIs used by Google was not copyrightable. The Federal Circuit partially reversed the district court, ruling in Oracle’s favor on the copyrightability issue, and remanding the issue of fair use to the district court.  After a second trial, the jury sided in favor of Google, ruling its actions to constitute fair use – a defense to infringement.

Although Oracle failed on its copyright infringement claims, could it have nonetheless pursued claims of “reverse engineering” against Google (setting aside the issue of whether Google legitimately acquired the API source code from Oracle predecessor, Sun Microsystems, in the first instance)? In short, the answer is “no.”  While many developers and software companies are of the opinion that software code is protected against “reverse engineering” as a matter of copyright protection, absent an express contractual limitation or prohibition against reverse engineering, there is no right – under copyright law or otherwise.

While the Copyright Act is a powerful statutory tool for pursuing claims of copyright infringement – including the ability to obtain statutory damages provided the statute’s prerequisites are established – not all “copying” of software is tantamount to copyright infringement. Where there has been copying but not infringement under the Copyright Act, contractual prohibitions against reverse engineering may well prove to vindicate the software owner’s rights.

The issue of whether copyright infringement claims – provided for in the Copyright Act – preempt reverse engineering claims has been rejected by the courts. In Bowers v. Baystate Technologies, Inc., 370 F.3d 1317 (Fed. Cir. 2003), plaintiff Harold Bowers (“Bowers”) brought claims of copyright infringement and reverse engineering against Baystate Technologies, Inc. (“Baystate”) under the terms of a “shrink wrap” license agreement.  Baystate defended the reverse engineering claim on the basis that the U.S. Copyright Act preempts the reverse engineering prohibition in the license agreement.  The lower court agreed, finding that Bowers’ contract and copyright claims “coextensive.”  As such, the district court instructed the jury that “reverse engineering violates the license agreement only if Baystate’s product that resulted from reverse engineering infringes Bowers’ copyright because it copies protectable expression.”  The Federal Circuit reversed the district court, ruling that the Copyright Act does not preempt or narrow the scope of a contract claim prohibiting reverse engineering.  370 F.3d at 1327.  As such, the Federal Circuit held that there exists a separate and distinct cause of action for the wrongful “copying” of Bowers’ software under the contractual prohibition of reverse engineering, which the trial jury found breached by Baystate.

So what is reverse engineering? The Federal Circuit’s opinion in Bowers v. Baystate is instructive.  According to the Court:

In this case, the contract unambiguously prohibits “reverse engineering.” That term means ordinarily “to study or analyze (a device, as a microchip for computers) in order to learn details of design, construction, and operation, perhaps to produce a copy or an improved version.”  [Bowers, 370 F3d at 1326, citing Random House Unabridged Dictionary (1993)].

The evidence presented in Bowers v. Baystate in support of the reverse engineering claim is also informative.  For example, Baystate scheduled two weeks in the development schedule of its competing product to specifically analyze Bowers’ software.  In fact, Baystate’s president and CEO testified that Baystate generally analyzed competitor’s products to duplicate their functionality.  In addition, the record also contained evidence of extensive and unusual similarities between the original and accused products – further evidence of reverse engineering to support the jury’s finding.  An expert on behalf of Bowers testified that he examined the relevant software programs to determine the overall structure of the programs, such as how the programs actually executed the task of walking a user through certain processes.  That expert concluded that in the larger process of taking a relevant standard “and breaking it down into its component parts to actually create a step-by-step process for a user using the software,” both the original and accused programs use “almost the identical process of breaking down that task into its individual pieces,” and that the programs are “organized essentially identically.”  Id. at 1326-1327.

In addition, a fact witness – an individual who licensed to Bowers certain software components and features that comprised Bowers’ software program – testified that he had compared the original and accused programs. When asked to describe the accused program’s interface, the witness responded:  “It looked like I was looking at my own program . . .”  As such, both the expert and fact witnesses for Bowers explained in detail the similarities between the original and accused programs – similarities that included the interrelationships between program screens, the manner in which parameter selection causes program branching, and the manner in which licensed symbols are drawn. Id. at 1327.

Even more compelling, both witnesses also testified that those similarities extended beyond structure and design to include many idiosyncratic design choices and inadvertent design flaws. The expert concluded that based on his “summary analysis of how the programs function, their errors from the standard and their similar nomenclatures reflecting nonstandard items,” the accused program is a “derivative copy” of the original program.  Id.

Hill Wallack LLP Intellectual Property, Technology and Life Science Law Resource Center, intellectual property, attorneys, lawyers, law firm, Princeton NJ, Yardley PA, technology, life science, blog, patent, copyright, trademark, innovation, technology, invention, software, code, reverse engineering, infringement, API, design, novelty, discovery, authorship, creation, legal right, tradesecret, biotechnology, ANDA, Hatch-Waxman, litigation, generics, USPTO, US Copyright Office, registration, enforcement

The court noted that both Bowers’ “copyright and contract claims both rest on Baystate’s copying of Mr. Bowers’ software.” Id. As concluded by the Federal Circuit: “The shrink-wrap license agreement prohibited, inter alia, all reverse engineering of Mr. Bowers’ software, protection encompassing but more extensive than copyright protection, which prohibits only certain copying.” Id.  As such, Bowers’ could pursue both copyright infringement and reverse engineering claims – separate and distinct causes of action that were both premised on the copying of Bowers’ software under the facts and circumstances of the case.

Contracts covering software, such as license agreements, SaaS service agreements, website services agreements, etc., should all include a prohibition against reverse engineering. While the Copyright Act is a powerful statutory tool for pursuing claims of copyright infringement – including the ability to obtain statutory damages provided the statute’s prerequisites are established – not all “copying” of software is tantamount to copyright infringement.  Developers often develop functionality through different code in as much as two persons would likely use different words to tell a story.  In such cases – where there has been copying but not infringement under the Copyright Act – contractual prohibitions against reverse engineering may well prove to vindicate the software owner’s rights.

Federal Circuit: Judicial Review Available for Timeliness Challenges to IPR Proceedings

The CAFC Overrules Prior Ruling in Achates

An en banc decision issued on January 8, 2018 by the Federal Circuit Court of Appeals (the “CAFC”) overruled that court’s prior ruling in Achates Reference Publishing, Inc. v. Apple Inc., 803 F.3d 652 (Fed. Cir. 2015) (“Achates”) concerning the appealability of whether a petition for an inter partes review was timely filed under the Leahy-Smith America Invents Act (the “AIA”).  Specifically, in Wi-Fi One, LLC v. Broadcom Corp., No. 2015-1944 (“Wi-Fi One”), the CAFC held that judicial review is indeed available for a patent owner to challenge a determination by the United States Patent and Trademark Office (the “USPTO”) as to whether a petitioner satisfied the timeliness requirement of 35 U.S.C. §315(b) governing the filing of petitions for inter partes review.

Hill Wallack LLP Intellectual Property, Technology and Life Science Law Resource Center, intellectual property, attorneys, lawyers, law firm, Princeton NJ, Yardley PA, technology, life science, blog, patent, copyright, trademark, innovation, technology, invention, design, novelty, discovery, authorship, creation, legal right, tradesecret, biotechnology, ANDA, Hatch-Waxman, litigation, generics, software, USPTO, US Copyright Office, registration, enforcement

Under the AIA, Congress prohibited the USPTO from instituting inter partes review if the petition requesting that review is filed more than one year after the petitioner, real party in interest, or privy of the petitioner is served with a complaint for patent infringement. 35 U.S.C. §315(b).  However, in another section of the AIA, Congress further provided that the USPTO’s determination “whether to institute an inter partes review under this section shall be final and nonappealable.”  Id. §314(d) (emphasis suppled).  Thus, the question presented to the CAFC in Wi-Fi One was whether the bar on judicial review of institution decisions in §314(d) applies to time-bar determinations made under §315(b).  In Achates, the CAFC answered the question in the affirmative.  In Wi-Fi One, the CAFC overruled itself, answering the question in the negative.

The question presented to the CAFC in Wi-Fi One was whether the bar on judicial review of institution decisions in §314(d) applies to time-bar determinations made under §315(b).  In Achates, the CAFC answered the question in the affirmative.  In Wi-Fi One, the CAFC overruled itself, answering the question in the negative.

By way of historical background, in 2011 Congress passed the AIA, which created inter partes review or “IPR” proceedings. See 35 U.S.C. §§311–319.  IPR and other post-grant proceedings are intended to be quick and cost-effective alternatives to litigation for third parties to challenge the patentability of issued claims.  Under 35 U.S.C. §311, a person who is not the owner of a patent may petition the USPTO to institute IPR of one or more patent claims on permitted grounds, alleging unpatentability on certain prior art bases.  Section 312 provides that the petition must, among other things, identify, “in writing and with particularity, each claim challenged, the grounds on which the challenge to each claim is based, and the evidence that supports the grounds for the challenge to each claim.”  35 U.S.C. §312(a)(3).  Section 314, subsection (a) prescribes the threshold determination required for the USPTO to institute: a “reasonable likelihood” that the petitioner will succeed in its patentability challenge to at least one of the challenged patent claims.  Subsections (b) and (c) prescribe the timing of and notice requirements for the institution decision.  And, §314(d) addresses judicial review of the USPTO’s IPR institution determination under §314.  Specifically, §314(d) provides that “[t]he determination by the Director whether to institute an inter partes review under this section shall be final and nonappealable.” (emphasis added).

Section 315, on the other hand, governs the relationship between IPRs and other proceedings conducted outside of the IPR process and sets forth an additional condition for maintaining an IPR proceeding upon petition by a third party. Specifically, §315(b), provides that “[a]n inter partes review may not be instituted if the petition requesting the proceeding is filed more than 1 year after the date on which the petitioner, real party in interest, or privy of the petitioner is served with a complaint alleging infringement of the patent.”

The underlying facts of Wi-Fi One show that in 2010, Telefonaktiebolaget LM Ericsson (“Ericsson”) filed a complaint for infringement of U.S. Patent Nos. 6,772,215 (“215 patent”), 6,466,568 (“568 patent”), and 6,424,625 (“625 patent”) in the United States District Court for the Eastern District of Texas against multiple defendants.  The case progressed to a jury trial, where the jury found that the defendants infringed the asserted claims.  Broadcom Corporation (“Broadcom”), the appellee in Wi-Fi One, was not a defendant in that litigation.  Subsequently, in 2013, Broadcom filed three separate petitions for IPR of the 215, 568, and 625 patents.  When Broadcom filed the IPR petitions, Ericsson still owned the patents, but during the pendency of the IPRs, Ericsson transferred ownership of the three patents to Wi-Fi One, LLC (“Wi-Fi”).

In response to Broadcom’s petitions, Wi-Fi argued that the USPTO was prohibited from instituting review on any of the three petitions. Specifically, Wi-Fi argued that the USPTO lacked authority to institute IPR under §315(b) because Broadcom was in privity with defendants that were served with a complaint in the Eastern District of Texas litigation.  Wi-Fi alleged that the IPR petitions were therefore time-barred under §315(b) because Ericsson, the patents’ previous owner, had already asserted infringement in district court against defendants that were in privity with petitioner Broadcom more than a year prior to the filing of the petitions.

Analyzing the two competing sections of the AIA, the CAFC in Wi-Fi One found no clear and convincing indication in the specific statutory language in the AIA, the specific legislative history of the AIA, or the statutory scheme as a whole demonstrated Congress’s intent to bar judicial review of § 315(b) time-bar determinations.  Citing the U.S. Supreme Court in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131, 2140 (2016), the CAFC noted that the parties had not cited, nor was the Court aware of, any specific legislative history that “clearly and convincingly” indicates congressional intent to bar judicial review of §315(b) time-bar determinations.  The Supreme Court in Cuozzo instructed that the “strong presumption” favoring judicial review “may be overcome by ‘“clear and convincing”’ indications, drawn from ‘specific language,’ ‘specific legislative history,’ and ‘inferences of intent drawn from the statutory scheme as a whole,’ that Congress intended to bar review.”  136 S. Ct. at 2140.  Finding no such clear and convincing indications, the CAFC in Wi-Fi One held that the USPTO’s time-bar determinations under §315(b) are not exempt from judicial review, thereby overruling Achates’s contrary conclusion.  Notably, the CAFC did not decide whether all disputes arising from §§311–14 are final and nonappealable; rather, the court’s holding applies only to the appealability of §315(b) time-bar determinations.

While determinations by the USPTO as to whether to grant IPR are final and nonappealable under Section 314 and constitutionally sound under Cuozzo, the CAFC in Wi-Fi One has carved out an exception as to timeliness under §315(b).  Given the legal standard favoring judicial review of agency actions, and the “clearly and convincingly” burden under Cuozzo and Wi-Fi One, one may expect that future judicial pronouncements will similarly find that other provisions of the AIA concerning IPR proceedings may likewise be appealable.