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.

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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.

CAFC: USPTO May Not Refuse Registration of Scandalous Marks

Refusal to Register Vulgar or Lewd Marks Violates Applicant’s First Amendment Rights

Taking a cue from the U.S. Supreme Court, on December 15, 2017, the U.S. Court of Appeals for the Federal Circuit (the “CAFC”) issued a precedential ruling in In re: Erik Brunetti, No. 2015-1109 (“Brunetti”), holding that the United States Patent and Trademark Office (the “USPTO”) may not constitutionally refuse to register a scandalous or immoral trademark under Section 2(a) of the Lanham Trademark Act, 15 U.S.C. §1052(a) (“§2(a)”).  Section 2(a) of the Lanham Act provides that the USPTO may refuse to register a trademark that “[c]onsists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute . . . .”

In re: Erik Brunetti, CAFC, Federal Circuit Court of Appeals, No. 2015-1109, December 15, 2017, USPTO, TTAB Trademark Trial and Appeal Board, Section 2(a), Lanham Act, scandalous mark, First Amendment, SCOTUS, U.S. Supreme Court, Matal v. Tam, trademark, registration

Previously, on June 19, 2017, in Matal v. Tam, 137 S.Ct. 1744 (2017) (“Tam”), the Supreme Court unanimously held that trademarks are private, not government, speech, and in two separate opinions authored by Justice Alito and Justice Kennedy, the Court concluded that the bar on the registration of disparaging marks under §2(a) discriminated based on viewpoint.  The Court explained in Tam that the disparagement provision of §2(a) “offends a bedrock First Amendment principle: Speech may not be banned on the ground that it expresses ideas that offend.” Id. at 1751 (Alito, J.); accord id. at 1766 (Kennedy, J.).

In Tam, as I reported in an article published on LinkedIn on June 21, 2017, U.S. Supreme Court: Disparagement Clause of Lanham Act Violates First Amendment, a dance-rock band had sought federal trademark registration of the band’s name, “The Slants” – a derogatory term for persons of Asian descent. Simon Tam, the lead singer of “The Slants,” chose the name for the band – of which all of the members are Asian-Americans – on the basis that by taking that slur as the name of their group, the band will help to “reclaim” the term and drain its denigrating force.  Mr. Tam sought federal registration of “THE SLANTS,” on the Principal Register of the USPTO, but his application was rejected by the examining attorney on the basis that “there is . . . a substantial composite of persons who find the term in the applied-for mark offensive.”  The U.S. Supreme Court disagreed with the USPTO and sided with Mr. Tam, holding that the disparagement clause of the Lanham Act, §2(a), violates the Free Speech Clause of the First Amendment and is therefore unconstitutional.

“There are words and images that we do not wish to be confronted with, not as art, nor in the marketplace. The First Amendment, however, protects private expression, even private expression which is offensive to a substantial composite of the general public. The government has offered no substantial government interest for policing offensive speech in the context of a registration program such as the one at issue in this case.”

In Brunetti, the applicant sought to register the mark FUCT, but the examining attorney at USPTO refused registration on the basis that the applied-for mark comprises immoral or scandalous matter under §2(a).  The Trademark Trial and Appeal Board (the “TTAB”) upheld the ruling, holding that the mark is unregistrable.  Mr. Brunetti appealed.

The CAFC concluded that the applied-for mark is indeed vulgar and therefore scandalous (the USPTO “may prove scandalousness by establishing that a mark is ‘vulgar.’ Vulgar marks are ‘lacking in taste, indelicate, [and] morally crude . . . .’”) (citations omitted; see the Court’s opinion for a full analysis). However, under Tam, the CAFC further concluded that §2(a)’s bar on registering immoral or scandalous marks is an unconstitutional restriction of free speech and reversed the TTAB’s holding that Mr. Brunetti’s mark is unregistrable.

The Court’s conclusion is worth noting for its discourse as to the rights protected under the First Amendment:

The trademark at issue is vulgar. And the government included an appendix in its briefing to the court which contains numerous highly offensive, even shocking, images and words for which individuals have sought trademark registration. Many of the marks rejected under §2(a)’s bar on immoral or scandalous marks, including the marks discussed in this opinion, are lewd, crass, or even disturbing. We find the use of such marks in commerce discomforting, and are not eager to see a proliferation of such marks in the marketplace. There are, however, a cadre of similarly offensive images and words that have secured copyright registration by the government. There are countless songs with vulgar lyrics, blasphemous images, scandalous books and paintings, all of which are protected under federal law. No doubt many works registered with the Copyright Office offend a substantial composite of the general public. There are words and images that we do not wish to be confronted with, not as art, nor in the marketplace. The First Amendment, however, protects private expression, even private expression which is offensive to a substantial composite of the general public. The government has offered no substantial government interest for policing offensive speech in the context of a registration program such as the one at issue in this case.

For decades, the USPTO has refused registration of vulgar words and marks under §2(a). One can only imagine the number of applications that will likely flood the USPTO filing system in the weeks and months to come as parties whose applications incorporating vulgar and lewd terms that were previously rejected will seek vindication under the banner of the First Amendment’s sacrosanct protection of freedom of speech.

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Federal Circuit: State Law Claims Are Preempted by the Biologics Price Competition and Innovation Act

CAFC Writes Next Chapter in Amgen v. Sandoz BPCIA Litigation

Another chapter has been written in the continuing saga of judicial construction of the Biologics Price Competition and Innovation Act of 2009 (the “BPCIA”), codified as amended at 42 U.S.C. §262, 35 U.S.C. §271(e), 28 U.S.C. §2201(b), 21 U.S.C. §355 et seq.

In an article I wrote for New Jersey Lawyer magazine and published in the August 2017 edition devoted to biotechnology, The Biologics Price Competition and Innovation Act: “Do You Wanna Dance?”, I outlined the complex statutory regime of the BPCIA and developing case law under the statute, including the matter before the U.S. Supreme Court, Sandoz Inc. v. Amgen Inc. et al., Nos. 15–1039 and 15–1195, 582 U. S. __, 137 S. Ct. 1664 (2017), which had just been decided on June 12, 2017 (the collective litigation resulting in the Supreme Court’s decision referred to simply as “Amgen v. Sandoz”).  A full discussion of the BPCIA is beyond the scope of this post and I refer to my prior article, which may be downloaded here, for a full review of the BPCIA and the Sandoz v. Amgen matter.

Amgen v. Sandoz, Federal Circuit Court of Appeals, No. 15-1499, December 14, 2017, Biologics Price Competition and Innovation Act of 2009, BPCIA, Biologics Price Competition and Innovation Act 2009, Federal Circuit Court of Appeals, CAFC, Amgen, Sandoz, federal preemption, biologics, biosimilar, reference product, patent, patent dance, litigation, patent statute

While the Supreme Court construed critical provisions of the BPCIA and provided much needed guidance, the Court remanded to the Federal Circuit Court of Appeals (the “CAFC”) remaining questions as to whether Amgen, the plaintiff, may pursue various California based state law claims against Sandoz for the latter’s noncompliance with §262(l)(2)(A) of the BPCIA.  In its decision, while the Supreme Court held that “[t]he remedy provided by §262(l)(9)(C) [of the BPCIA] excludes all other federal remedies, including injunctive relief,” for failure to comply with §262(l)(2)(A), 137 S. Ct. at 1675, the Court did not decide whether a reference product sponsor plaintiff may nonetheless simultaneously pursue state law claims for the identical non-compliant acts.  Specifically, the Court directed:

On remand, the Federal Circuit should determine whether California law would treat noncompliance with §262(l)(2)(A) as “unlawful.”  If the answer is yes, then the court should proceed to determine whether the BPCIA pre-empts any additional remedy available under state law for an applicant’s failure to comply with §262(l)(2)(A) (and whether Sandoz has forfeited any pre-emption defense).  The court is also of course free to address the pre-emption question first by assuming that a remedy under state law exists. [137 S. Ct. at 1676–77 (citations omitted)].

In an opinion issued today in Amgen v. Sandoz, the CAFC affirmed the district court’s dismissal of Amgen’s state law unfair competition and conversion claims on the basis that those claims are preempted under federal law on both field and conflict grounds.  Amgen v. Sandoz, No. 2015-1499 (December 14, 2017).

As to the issue of field preemption, Amgen had argued that the BPCIA does not preempt state law remedies for failure to comply with §262(l)(2)(A), contending that the CAFC had previously “held that patent law does not fully preempt related state-law doctrines,” including “state unfair-competition laws.”  According to Amgen, field preemption does not apply to its state law claims because “the federal statute does not provide a meaningful remedy for the state-recognized interests that have been injured by Sandoz’s failure to comply with 42 U.S.C. §262(l)(2)(A).”  Slip Opinion at 18.

Sandoz countered that field preemption bars Amgen’s state law claims because the BPCIA’s comprehensive framework demonstrates Congressional intent that federal law exclusively occupy the field of patent dispute resolution triggered by the filing of a biosimilar application.  According to Sandoz, the inference of Congressional intent to occupy the field is particularly strong because the scheme “touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.”  Sandoz further argued that no presumption against preemption applied in the matter.  Slip Opinion at 18.

The CAFC sided with Sandoz, holding that the BPCIA preempts state law claims predicated on an applicant’s failure to comply with §262(l)(2)(A).  As an initial matter, the Court found that no presumption against preemption applied in the case because biosimilar patent litigation is hardly a field which the States have traditionally occupied and that patents are inherently federal in character because a patent originates from, is governed by, and terminates according to federal law.  Indeed, Congress has granted federal courts exclusive jurisdiction over cases arising under any Act of Congress relating to patents, and similarly, the FDA has exclusive authority to license biosimilars pursuant to the provisions of the BPCIA.  Slip Opinion at 19.  In support of its reasoning, the CAFC cited the Supreme Court’s decision leading to the remand that the BPCIA is a “complex statutory scheme . . . [that] establishes processes both for obtaining FDA approval of biosimilars and for resolving patent disputes between manufacturers of licensed biologics and manufacturers of biosimilars,” 137 S. Ct. at 1669, and that the BPCIA “sets forth a carefully calibrated scheme for preparing to adjudicate, and then adjudicating, claims of [patent] infringement” as part of the statute’s objective of carefully balancing innovation and consumer interests.  Slip Opinion at 19.

Continuing to quote the Supreme Court, the CAFC further noted that “[t]he remedy provided by §262(l)(9)(C) excludes all other federal remedies, including injunctive relief,” for failure to comply with §262(l)(2)(A), and that the Supreme Court described the BPCIA as possessing a “carefully crafted and detailed enforcement scheme” thereby “provid[ing] strong evidence that Congress did not intend to authorize other remedies that it simply forgot to incorporate expressly,” and that Congress left no room for the States to supplement it.  Slip Opinion at 19-20 (citations omitted).  Because §262(l)(9)(C) provides the exclusive federal remedy for failure to comply with §262(l)(2)(A), and federal law does not permit injunctive relief or damages for such failure, permitting a state remedy for alleged violation of federal law would conflict with the careful framework Congress adopted – thereby underscoring the reason for field preemption.  Slip Opinion at 20.

As for conflict preemption, the CAFC also agreed with Sandoz’s position, finding that Amgen’s state law claims “clash” with the BPCIA, and the differences in remedies between the federal scheme and state law claims support concluding that those claims are preempted.  Additionally, compliance with the BPCIA’s “detailed regulatory regime in the shadow of 50 states’ tort regimes,” and unfair competition standards, could “dramatically increase the burdens” on biosimilar applicants beyond those contemplated by Congress in enacting the BPCIA.  Slip Opinion at 22.

As such, according to the CAFC, the conflict in the method of enforcement between the BPCIA and state law creates an obstacle to the regulatory system Congress chose.  Since Congress made a deliberate choice not to impose certain penalties for noncompliance with federal law as embodied in the BPCIA, state laws imposing those penalties would interfere with the careful balance struck by Congress.  Slip Opinion at 23.

And so it appears that the remaining issues in Sandoz v. Amgen as to construction of rights and remedies under the BPCIA have been finally adjudicated – unless a petition for certiorari is filed by Sandoz, which this writer believes the Supreme Court is likely to deny.

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Supreme Court to Decide Constitutionality of USPTO Inter Partes Proceedings

SCOTUS Hears Oral Argument in Oil States

The U.S. Supreme Court heard oral argument on November 27, 2017 in the significant patent matter, Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, et al, No. 16-7212.  The issue before the Court in Oil States is whether inter partes review – an adversarial process used by the U.S. Patent and Trademark Office (the “USPTO”) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.

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With the passage of the Leahy-Smith America Invents Act (the “AIA”) in 2011, Congress established inter partes review, an administrative proceeding which effectively allows private third parties to remove patent infringement and validity cases from Article III federal courts and transfer them to the USPTO’s Patent Trial and Appeal Board (the “PTAB”), an administrative agency within the executive branch. Inter partes reviews are essentially “trial proceedings” presided over by PTAB “judges,” who serve for no particular term, who depend on superior executive officers for raises and promotions, and who ultimately answer to a political appointee of the President, the Director of the USPTO.

Does inter partes review – an adversarial process used by the U.S. Patent and Trademark Office (the “USPTO”) to analyze the validity of existing patents – violate the Constitution by extinguishing private property rights through a non-Article III forum without a jury?  That is the issue before the Supreme Court in Oil States.

Like litigation, inter partes review begins with the filing of a petition – almost always by an alleged patent infringer – that asks the PTAB to invalidate a patent on the ground that it was anticipated by or rendered obvious in view of identified prior art. 35 U.S.C. §311(b).  The petitioner and patent owner then participate in an adversarial proceeding before the PTAB expressly referred to as a “trial.” See Office Patent Trial Practice Guide, 77 Fed. Reg. 48,756, 48,758 (Aug. 14, 2012) (codified at 37 C.F.R. §42).  As with patent infringement litigation in federal court, the parties take discovery, engage in motion practice regarding evidence, and cross-examine fact and expert witnesses via depositions. See id. at 48,757-48,768.  Indeed, many of the procedural rules that govern the inter partes proceedings are based expressly on the Federal Rules of Civil Procedure.  As such, through the patent review authority inherent in inter partes proceedings, Congress vested in the PTAB – for the first time – the authority to extinguish patent rights after adjudicating a litigation-like adversarial proceeding between the patent owner and a third party. See 35 U.S.C. §§ 311(a) & 318(a).

Over the last several years, the PTAB has more than tripled in size in large part due to the establishment of inter partes reviews.  In fact, the PTAB has received thousands of petitions since passage of the AIA.  Currently, more than 200 judges serve on the Board and the vast majority – more than 80 percent – is comprised of former patent attorneys with extensive experience in patent litigation.

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The underlying facts in Oil States clearly demonstrate the need for the Supreme Court to address the question on review.

Petitioner Oil States Energy Services, LLC (“Oil States”), an industry leader in providing support and service equipment to the global oil and gas industry, owns U.S. Pat. No. 6,179,053 (the ’053 Patent), which is directed towards apparatuses and methods of protecting wellhead equipment from the pressures and abrasion involved in the hydraulic fracturing of oil wells. In 2012, Oil States filed an infringement suit against Greene’s Energy Group, LLC (“Greene’s”).  In response, Greene’s filed an answer, asserting the affirmative defense and counterclaim of invalidity.  Almost a year into the infringement litigation, as the case neared the close of discovery, Greene’s petitioned the PTAB to institute inter partes review of the ‘053 Patent, arguing – as it was arguing in the district court litigation – that the ’053 Patent was anticipated by prior art, i.e., a previous patent application filed by the same inventor of the ’053 Patent, an employee of Oil States.  Over Oil States’ opposition, the PTAB granted Greene’s petition, thereby instituting inter partes review of the ’053 Patent.

After the PTAB granted Greene’s petition, the district court issued its claim construction decision in the underlying civil infringement litigation, construing the terms of the ’053 Patent in a way that (as Greene’s conceded) conclusively resolved against Greene’s position that the prior application anticipated the ’053 Patent – the same argument advanced by Greene’s in its inter partes review petition.

As the inter partes review proceeding continued in parallel with the federal court litigation, Oil States argued that the Board should adopt the same claim constructions as the district court, but the PTAB refused to do so.  While acknowledging that the district court came to a different conclusion, the PTAB nevertheless held that the ‘053 Patent was anticipated by the previous patent application.  As a result, the PTAB concluded that the claims were “unpatentable,” denied Oil States’ application to amend its claims, and instead invalidated the claims of the ‘053 Patent.

Oil States appealed the Board’s final judgment to the Federal Circuit, challenging both the merits of the Board’s decision and the constitutionality of inter partes review under Article III and the Seventh Amendment.  Before briefing closed, however, the Federal Circuit issued its decision in MCM Portfolio LLC v. Hewlett-Packard Co., 812 F.3d 1284 (Fed. Cir. 2015), which rejected the same challenges to the constitutionality of inter partes review, and thereby foreclosed Oil States’ Article III and Seventh Amendment arguments.

After Oil States filed a petition for writ of certiorari, the Supreme Court agreed to hear the matter. The case has been fully briefed and oral argument was held on November 27, 2017.  Oil States’ argument is summarized as follows:

Congress may not remove cases from the federal courts because it does not like their judgments. As this Court has long held, “Congress may not ‘withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.’” Stern v. Marshall, 564 U.S. 462, 484 (2011) (quoting Murray’s Lessee v. Hoboken Land & Improvement Co., 18 How. 272, 284 (1855)). That is just what Congress has done with inter partes review, which wrests patent-validity cases from federal courts and entrusts them to administrative-agency employees, who decide questions of law that Article III reserves to judges and questions of fact that the Seventh Amendment reserves to juries. Neither Article III nor the Seventh Amendment tolerates this circumvention.

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Oil States presents the Supreme Court with a critical issue requiring resolution.  The number of patents invalidated by the PTAB is staggering – for example,  one report states that at least 84 percent of patents reaching a final written decision in a PTAB validity challenge are adjudicated to have at least one invalid claim (usually many more than one claim), with 69 percent having all claims invalid.  These rates of invalidity are far greater than those adjudicated in the federal courts.  More importantly, if patents are a private property right – long held as such under our nation’s jurisprudence – then the constitutionality of inter partes proceedings in which third parties may extinguish those rights before an executive branch administrative body comprised of political appointments is troublesome.

The use of PTAB inter partes proceedings as a means of circumventing the judicial process to invalidate patents is controversial and has divided corporate America and individual inventors.  See, e.g., Wall Street Journal article “Supreme Court Debates a Patent Case That Is Splitting Corporate America,” November 27, 2017.  While the intent of the AIA’s inter partes provision was to allow patents of questionable quality challenged in a faster, more efficient manner, the process has opened to abuse – a victory for a patent holder in the PTAB may be immediately followed by yet another petition from another third party seeking to invalidate the same patent.  Ask Josh Malone, inventor of “Bunch of Balloons,” who has spent more than $17 million in legal fees fighting invalidity challenges before the USPTO from several alleged infringers.

As intellectual property rights continue to increase in importance as technology advances, guidance is needed from the highest court in the land.

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