Category: Intellectual Property

“Lawfully Made Under This Title” – The New, Global Reach of U.S. Copyright Law’s “First Space” Doctrine

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The U.S. Copyright Act grants a copyright owner certain exclusive rights, including the right to distribute copies by sale or other transfer of ownership. 17 U.S.C. § 106(3). But while these exclusive rights are extensive, they are not limitless. Section 109(a), for one, sets forth the “first sale” doctrine:

“Notwithstanding the provisions of section 106(3), the owner of a particular         copy…lawfully made under this title…is entitled, without the authority of the copyright      owner, to sell or otherwise dispose of the possession of that copy.” 17 U.S.C. § 109(a).

In effect, Section 109(a) exhausts the distribution right by permitting the owner of a particular copy to dispose of that copy as she wishes.

Notably, however, the first sale doctrine is itself qualified in that it only applies to copies “lawfully made under this title.” 17 U.S.C. § 109(a) (emphasis added). That this language applies to copyrighted works made and distributed in the U.S. is clear enough. A more difficult question is to what extent the first sale doctrine applies to works produced and/or acquired abroad.

The U.S. Supreme Court partly addressed Section 109(a)’s reach in Quality King Distributors, Inc. v. L’anza Research International, Inc., 523 U.S. 135 (1998). In Quality King, the copyrighted works were manufactured in the U.S., but first sold abroad at prices 35% to 40% less than identical U.S. products. Some of the discounted foreign products were then imported back into the U.S. and sold to unauthorized retailers. The copyright owner sued alleging violation of the Copyright Act’s importation provision, 17 U.S.C. § 602(a)(1) (then §602(a)), which makes importation of a copyrighted work without the authority of the copyright owner an infringement of the distribution right. The Supreme Court, however, found that the first sale doctrine exhausts the copyright owner’s right to prohibit importation of U.S. produced works first sold abroad. In other words, the owner of a copy of a U.S. produced work acquired abroad is free to bring that copy into the U.S. without fear of retribution from the copyright holder.

Because Quality King involved only U.S. produced works – which are unquestionably “lawfully made under” the Copyright Act – the Court had no need to consider any broader implications of Section 109(a). And so, the reach of the first sale doctrine in connection with works manufactured abroad remained in doubt after Quality King.

As a graduate student in California, Supap Kirtsaeng (“Kirtsaeng”) learned that publishers often sell their U.S. textbooks for substantially more than the identical books in Thailand. Seeing an opportunity, Kirtsaeng had friends purchase textbooks in Thailand and mail them to the U.S. where he sold them on EBay. By this simple arbitrage, Kirtsaeng generated roughly $900,000 before one the publishers, John Wiley & Sons, Inc. (“Wiley”), sued.

Wiley claimed that Kirtsaeng’s unauthorized importation of the foreign-produced textbooks violated Wiley’s distribution right via the Copyright Act’s importation prohibition. Unlike in Quality King, however, Wiley argued that the first sale doctrine did not exhaust its rights because its foreign version textbooks were produced and distributed entirely outside the U.S., and thus were not “lawfully made under [the U.S. Copyright Act],” as required by Section 109(a).

Kirtsaeng countered that “lawfully made under this title” merely means “made in accordance with U.S. copyright law,” i.e., made without infringing copyright. According to Kirtsaeng, because Wiley had authorized the production and distribution of its foreign produced textbooks, they were “lawfully made under [U.S. copyright law]” and thus the first sale doctrine applied. In other words, Kirtsaeng argued, Section 109(a) works a global exhaustion of the copyright holder’s distribution right.

The Supreme Court found – after considerable discussion of statutory construction and the common law history of the “first sale” doctrine – that the phrase “lawfully made under this title” has no geographic significance. Rather, the first sale doctrine applies to copies of works that are lawfully made anywhere in the world. Thus, Section 109(a) effects a global exhaustion of the Copyright Act’s distribution right and the lawful owner of any lawfully made copy, wherever produced and wherever acquired, is free to bring that copy into the U.S. and dispose of it as she wishes.

The Court’s non-geographical interpretation of the first sale doctrine likely will have far reaching effects.

On the one hand, organizations such as libraries, used book dealers, and museums view the Kirtsaeng ruling as a victory because it clarifies that they will not have to seek permission from copyright holders to lend or sell their books or display their artwork acquired from foreign sources. Additionally, the Court’s majority believes its holding will protect the right of American consumers to resell a broad range of foreign produced products that contain copyrighted software.

On the other hand, in the Digital Age, where it is easy to shop for, purchase and ship products globally, Kirtsaeng will greatly limit a copyright holder’s ability to maintain geographic price disparities, as historically necessitated by regional economics. Consequently, one effect of Kirtsaeng may be a trend toward global price equilibration, at least for internationally interchangeable products, such as books. Some goods, however, such as technology products, may be less affected by Kirtsaeng, where various regulations outside of copyright law tend to make the products less internationally fungible.

Kirtsaeng may also foretell a rise in leases or rentals. By its terms, Section 109(a) extends first sale protection to the “owner of a particular copy.” 17 U.S.C. § 109(a) (emphasis added). Lessees are unprotected. So, a copyright holder can circumvent the effects of Section 109(a) by renting works to its customers. In the Internet age, where a myriad of products can be delivered, consumed, and deleted digitally, rental rather than sale may be an attractive way for some industries to protect current regional pricing structures.

Moreover, the Kirtsaeng decision may have implications for the exhaustion doctrine under U.S. patent law. Similar to the first sale doctrine, the exhaustion doctrine limits a patent owner’s exclusive rights in a particular item upon the first authorized sale. In 2005, the Federal Circuit Court of Appeals explained that the exhaustion doctrine only applies to the first sale in the U.S. because the U.S. patent system “does not provide for extraterritorial effect.” Fuji Photo Film Co., Ltd. V. Jazz Photo Corp., 394 F.3d 1368, 1376 (Fed. Cir. 2005). Kirtsaeng, however, casts that reasoning in doubt. While the Supreme Court recently denied certiorari in a case that would have reexamined the exhaustion doctrine, it is widely expected that the Federal Circuit will at some point revisit the issue in light of Kirtsaeng.

Finally, in the wake of Kirtsaeng, one would expect certain rights holders to pressure Congress to rewrite Section 109(a). After Quality King, copyright holders were successful in getting the House to pass a proposed amendment that would have limited Section 109(a) to copies authorized for distribution in the U.S. This proposed “domestic exhaustion” amendment, however, ultimately died in reconciliation. Only time will tell whether copyright holders could ultimately prevail to blunt the impact of Kirtsaeng.

Evolving into the Digital Age: Protecting Intellectual Property

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While society has evolved from an Industrial to an Information Age over the last hundred years, we’re now operating in a Digital world where technological innovations and intellectual property reign supreme. This fast-moving digital environment–including web, mobile and social media–requires a proactive stance on developing and protecting digital innovations as the global marketplace becomes even more competitive and organizations run the risk of losing critical innovations as others move quickly to steal ideas if the opportunity exists.

While digital strategy is driven largely by marketing or IT departments, every digital asset of the company is and should be treated and protected as an intellectual asset, but today these assets are  often overlooked.  Consider the long list of marketing or IT developments at your company.  Everything from user interfaces, apps, social networking functions, personalization options on web pages, subscriber perks, wi-fi offerings, e-commerce solutions, bridging offline and online experiences and new products and services related to digital activity result in digital assets that an organization deploys.  But, are you taking the next step to protect them or leaving them out in the open to steal?  Worse, are you infringing on someone else’s intellectual property (IP)?   

Innovations at Lightening Speed – Are You Giving It Away?

Today, digital assets can be protected by utility patents, design patents, copyright law and trademark law. Typically, as these innovations occur at such a rapid pace, they are not captured and translated into protected digital assets.  Further, as the use of digital strategies is exploding and the creation of digital assets is a relatively new concept, most organizations have yet to build a formal business case and required methodology for protecting these assets.  Compounding the issue, much of the innovation work is done in collaboration with outsourced vendors in marketing and IT, often in a vacuum, so there isn’t a legal or other IP advocate to even ask the question: “Should we protect this?”.  Finally, much of the technology used to develop these innovations is often open sourced which creates an additional layer of confusion and often one that the legal team won’t touch.

The world is beginning to change in response to protecting their digital assets.  Patent trolls have largely emerged in the digital and technology space attacking companies from Starbucks to Cisco for wi-fi offerings, web functionality and what was previously considered open territory for marketers and web designers. And, these trolls are finding loopholes and great financial gains. Today, the trolls monitor major innovative initiatives by world-class organizations and copy and develop their own innovations around successful ones, improve them, and then ultimately file a new patent for it.  And then in a crazy twist, they send these same organizations a cease and desist letter and ask for a license fee.  Why aren’t organizations protecting these same assets to defend themselves and even use them as additional sources of revenue?

Building and Protecting a Digital IP Portfolio

Most companies need to start by identifying the pipeline of ideas and then turn the right ideas into valuable assets.  The innovation pipeline of digital assets is likely already alive and well in most organizations but they aren’t tapping into it.  So, the first step in building a Digital IP Portfolio is to audit where that innovation is occurring.  Understand when it is outsourced to vendors and assess whether it should be retained, shared or given away.  Once you know where the innovation is occurring, it’s time to funnel it into an IP evaluation pipeline.  At that juncture, an IP business strategy team (comprised of IP strategy experts, IP lawyers, business managers, IT managers and marketers) can evaluate its potential use and strength.  Is it a good defense play against trolls or other competitors?  Is it something you can license to others?  Is it something you just want to ensure you have and your competitors don’t? By assigning values and business goals to all of these assets, you can then channel them into a protection process with budgets and clear return on investment goals.

And, the importance of having a multi-disciplined approach cannot be overstated.  Generating valuable digital assets is not just a legal or IP function, it requires understanding and contribution from other facets of the company that can identify value proposition and weigh in on risk/reward.  Digital is new and evolving and critical thinking about its value proposition is essential. Many digital assets are not worth protecting if it won’t last beyond the next fad.  But others are.  That’s why Facebook, Google, Adobe and others have become some of the top patent filers in the world.  They file for much more than just devices and consider every innovation a potential asset both offensively and defensively.

Once digital assets are channeled into protection they can then be redistributed back out to spur innovative thinking and evaluate licensing or leverage potential.  While many companies don’t see themselves as technology companies, they are quickly becoming so with their digital platforms.  From retailers to entertainment and consumer goods, soon all companies will be a digital or technology company to some extent.  If you don’t own and protect those assets, someone else will and use it against you.  The time is now for savvy IP and technology professionals to identify an untapped resource – their digital assets.

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American Invents Act (AIA) Post-Grant Practice Rapidly Integrates Federal Circuit and Board Decisions

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AIA post-grant practice has many advantages over other proceedings, but one of the great benefits of AIA post-grant practice that we have not discussed is the speed in which AIA post-grant proceedings adopt recent patent decisions from different sources.  This is really an exciting and challenging feature of AIA post-grant practice that has become even more apparent in recent filings.  One of the reasons that AIA proceedings are so quick to adopt changes in patent law is that the PTAB offers a panel of patent judges who are already versed in patent law, so the Board does not have a large learning curve to process new decisions from the Federal Circuit and laws from Congress.  Another reason is that AIA patent trials are relatively fast-paced proceedings, which by their very nature will apply legal decisions quicker than routine district court practice.  Yet another reason is that many of the changes in practical post-grant practice are being driven by the Board itself, so the Board can quickly and consistently synthesize inputs from other sources and deploy its own procedural and legal changes.  The result is a petitions practice that can adapt quickly to a rapidly changing patent legal landscape.

One example of rapid integration of recent decisions is shown by a recent CBM petition filed on behalf of LinkedIn (CBM2013- 00025) that challenges claims 1-17 of U.S. Patent No. 7,856,430 (the ’430 Patent) owned by AvMarkets, Inc.  This CBM petition is a convergence of findings from the recent Federal Circuit decision in CLS Bank lnt’l v. Alice Corp. Pty. Ltd., 2013 WL 1920941, at *9 (Fed. Cir. May 10, 2013) and the recent CBM petition and trial (SAP v. Versata, CBM2012-00001).  LinkedIn’s petition is notable for both what it includes and what it omits.  For example, the petition includes a single challenge of patent eligibility under 35 U.S.C. § 101 akin to the ultimate patentability challenge in SAP v. Versata and incorporating the recent CLS Bank decision.  For example, pages 4-5 of the LinkedIn petition borrows from the SAP v. Versata CBM:

The Board has concluded that the AlA’s definition of CBM patents should “be broadly interpreted and encompass patents claiming activities that are financial in nature, incidental to a financial activity or complementary to a financial activity.” SAP America, Inc. v. Versata Development Group, Inc., No. CBM2012- 00001, at 21-22 (P.T.A.B. January 9, 2013) (Decision regarding the Institution of Covered Business Method Review), citing 77 Fed. Reg. 157 (August 14, 2012) at 48736. In particular, the Board has held that it does “not interpret the statute as requiring the literal recitation of the terms financial products or services [and that the] term financial is an adjective that simply means relating to monetary matters.” id. at 23. “At its most basic, a financial product is an agreement between two parties stipulating movements of money or other consideration now or in the future,” and encompasses “patents [that] apply to administration of business transactions.” ld., quoting 157 Cong. Rec. S5432 (daily ed. Sept. 8 2011) (statement of Sen. Schumer).

And pages 22-23 of the LinkedIn petition also incorporates findings from CLS Bank:

Moreover, the ’430 Patent ultimately claims nothing more and nothing less than the abstract idea of generating sales leads by putting product data in a searchable index, adding only the instruction to “apply it” in the broadest field of use imaginable-the Internet. Mayo, 132 S. Ct. at 1294. That does not suffice to make these claims patentable. The idea of cataloguing customer and product data in the field of use of”the Internet” necessarily implies putting them in the formats known to be searchable on the Internet. The claims add nothing that is not already implicit in the abstract idea. Because the steps are “as a practical matter … necessary to every practical use” of the abstract idea of making commercial data searchable on the Web, they are “not truly limiting.” CLS Bank, 2013 WL 1920941 at * 11 ,citing Mayo, 132 S. Ct. at 1298 (Lourie, J. concurring); see id. at *28-*29 (Rader, J., concurring) (key inquiry is “whether the claim covers every practical application of [the] abstract idea” but even if not, ” it still will not be limited meaningfully if it . .. only … identiflies] a relevant audience, a category of use, field of use, or technological environment”). The Internet is in fact so broad an area of application, it can barely be said to limit the claim even to a field of use.  CyberSource Corp. v. Retail Decisions, Inc., 620 F. Supp. 2d 1068, 1077 (N.D. Cal. 2009) (“The internet continues to exist despite the addition or subtraction of any particular piece of hardware … [T]he internet is an abstraction …. One can touch a computer or a network cable, but one cannot touch ‘the internet.”‘), aff’d, 654 F.3d 1366.

Also notable is that LinkedIn’s filing omits several things found in other CBM petitions, like a challenge based on prior art, an expert declaration offering evidence, and use of every available page (LinkedIn’s petition is only 27 pages of a possible 80 pages afforded CBM petitions).  With this approach, LinkedIn keeps the cost of challenge to a minimum and reduces estoppel to the single ground asserted should the Board issue a final decision upholding the patent.  Of course, the petition was recently filed on May 29, 2013, so it is too early to tell if it will be successful, but the concept of challenging a patent based on a petition with relatively few pages and no initial expert testimony is the latest adaptation of post-grant practice courtesy of the America Invents Act.

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The Latest Update on the New Generic Top Level Domain (gTLD) Program

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It has been a long time since we had any notable updates on the gTLD process to report.  However, after a slow start, the new gTLD program is now in full swing.  On March 22, 2013, ICANN released the first round of Initial Evaluations to the general public. This was the first major milestone of the gTLD program.  As a reminder, there are three possible outcomes of this Initial Evaluation:  1) Pass: the application was found to be consistent with the requirements in the Applicant Guidebook and can advance to the next phase; 2) Eligible for Extended Evaluation: additional information was requested by the Financial, Technical/Operational, Registry Services, or Geographic Names evaluation panels; or 3) Ineligible for Further Review: the application was determined not to meet the relevant criteria in the Applicant Guidebook.  The next round of Initial Evaluations was released on May 24, 2013, bringing the total number of passing applications to 433.  ICANN has also announced that it has ramped up to releasing the results of these Initial Evaluations  in batches of 100 prioritized applications per week.

The most recent results of the Initial Evaluations are available here.  https://gtldresult.icann.org/application-result/applicationstatus/viewstatus

Applicants that passed the Initial Evaluations have now moved onto the contracting phase and pre-delegation testing to determine whether the applicant meets the technical requirements of the program.  However, applicants in string contention will need to wait for the string it is in contention with and resolve that contention before proceeding.

This current progress, however, could potentially be hindered if ICANN choses to implement the recent recommendations from the Governmental Advisory Committee (“GAC”). On April 11th, the GAC released its Beijing Communique, outlining recommendations for new TLDs.  Among the numerous recommendations of the new TLD program, the GAC recommended the following:

  1. The GAC identified several strings that it recommended should not proceed beyond the Initial Evaluation phase.
  2. The GAC requested a written briefing about the ability of the applicant to alter the string applied for in order to address the GAC’s concerns.
  3. The GAC suggested that ICANN reconsider its position on singular and plural strings, since the inclusion of both could lead to potential user confusion.
  4. The GAC recommended six new safeguard should apply to all new gTLDs, including WHOIS verification and checks, mitigation of abusive activities, procedures for maintaining documentation, procedures for handling complaints and stringent consequences for violation of the requirements.
  5. The GAC further advised that ICANN should carefully consider community feedback on applications from interested groups.
  6. The GAC recommended that ICANN should develop clear policies for handling applications for strings such as .WTF, .GRIPE, .SUCKS, .FAIL in order to reduce cyber bullying and misuse.

The full text of the GAC’s recommendations is available here.

For now, however, ICANN appears to be on track to complete Initial Evaluations on all applications by August 2013 and to roll out the first new gTLDs by the end of July.

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Large Damages OK, but Injunctive Relief Too Broad Re: Versata Software, Inc. v. SAP America, Inc. Patent Infringement Case

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Addressing a finding of infringement that resulted in a lost-profits and reasonable royalty damages award of more than $300 million, the U. S. Court of Appeals for the Federal Circuit affirmed a lower court’s ruling of infringement and damages, finding that sufficient evidence supported the findings.  Versata Software, Inc. v. SAP America, Inc., Case No. 12-1029 (Fed. Cir., May 1, 2013) (Rader, C.J.).

Versata sued SAP in 2007 over two patents that provide particularized pricing data based on factors such as the type of customer, type of product and size of the order.  Starting in the mid-1990s Versata sold its software, called Pricer, to many large companies, including as IBM, Lucent and Motorola.  SAP began offering software that provided customized pricing as part of its enterprise software in 1998.  As acknowledged by the Federal Circuit, when “SAP entered the market by bundling hierarchical pricing into its enterprise software, the market for Pricer disappeared.”

At a first trial, SAP was found to have infringed both patents, but the lower court later granted SAP judgment as a matter of law (JMOL) of non-infringement as to one of the patents and ordered a new trial on damages based on a change in governing law.  In a second trial, the jury awarded Versata $260 million in lost profits and $85 million in reasonable royalties.  Further, the district court permanently enjoined SAP from continuing to sell its customized pricing software. Predictably, SAP appealed.

SAP argued to the Federal Circuit that its accused products did not infringe and that, in any event,  the lost-profits and royalties damages, as well as the permanent injunction, should be set aside as improper for various reasons.  On the infringement issue, SAP argued that it could not infringe because its software is not capable of performing the necessary tasks (required by the claims) without additional computer instructions.  As for damages, SAP argued that the lost profits and reasonable royalty damages were improperly calculated as a matter of law and should be set aside.  SAP also argued that the injunction was overbroad in that it would prevent the company from offering maintenance and additional licenses to previously existing users.

As to the issue of infringement, the Federal Circuit found sufficient evidence to support the jury’s verdict of infringement.  The Court noted that the record “clearly support the jury’s conclusion that SAP’s accused products infringe the asserted claims without modification or additional computer instructions.”

In considering SAP’s arguments on damages, the Federal Circuit rejected some of SAP’s arguments on lost profits damages noting that they should have been raised under a Daubert challenge.  The Court found that sufficient evidence supported the jury’s damages findings on lost-profits and reasonable royalty damages.

However, the Federal Circuit agreed that the permanent injunction as entered was overbroad and remanded the case to the district court for modification of the injunction.

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How Monsanto Applies to Nonagricultural Biotechnology

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The facts behind the Supreme Court’s recent ruling in Monsanto v. Bowman are simple enough. Farmers are able to buy soybeans containing Monsanto’s patented glyphosate resistance technology under a license that permits them to plant and grow one generation of crops. Vernon Bowman skirted this program, however, by purchasing commodity soybeans from a grain elevator knowing that the seeds would nonetheless likely contain the very same Monsanto technology. He then planted the seeds, raised crops, and saved seeds from these crops to plant new crops. The Supreme Court held that Bowman’s actions infringed Monsanto’s patents because unlicensed growth of the seeds was a new making of the patented invention. Consequently, the doctrine of patent exhaustion did not provide any defense as to these new seeds.

This was not a surprising result for the biotechnology industry. The idea that patent rights in seed progeny are not exhausted by the original sale of their “parents” was well established in the United States, and is even codified in the European Biotechnology Directive.

The Court left us with a relatively clear answer regarding the scope of patent exhaustion related to seeds. The use of the purchased, licensed seeds for consumption and/or processing cannot be interfered with by the original seller, as the patent rights on those individual (sold) seeds have been exhausted. The planting and cultivation (i.e., replication) of those seeds, however, can only be done under a license from the patentee. In other words, even though someone sells you a bag of seed, you have no right to plant and grow that seed without a license (although there may be a good argument that the license should be implied in appropriate cases).

So, where does Bowman leave us when it comes to determining the infringement or enforceability of self-replication biotechnology patents outside of the agricultural context? For other patented self-replicating (or easily replicable) technologies, the circumstances may present more complicated questions.

Biotechnology inventions such as cell lines, bacteria, and other living material often must exist in a condition of continuous self-replication simply to be maintained for any use. Vectors, plasmids, etc., replicate within cells, and from generation to generation within host cells, allowing for production of vastly more nucleic acid copies than initially used for transfection. Even small linear nucleic acids such as those used for primers and probes may be “replicated” to generate large quantities relatively easily using PCR or other methods in molecular biology. In each case, (cells, viruses, vectors, probes), something analogous to planting, watering, cultivating, is required. In view of the Bowman decision, the question persists as to whether such replication will be permitted or considered an unlicensed “remanufacture” or new making of the original, patented item.

In this regard, we note that Justice Kagan left open the possibility that the replication might be “a necessary but incidental step in using the item for another purpose.”[1] Certainly, the replication contemplated in this part of the opinion is that which must necessarily occur in connection with some authorized practice of the invention. Maintenance of culture cells, for example, where the cells are necessarily replicating only for the purpose of maintaining the culture during its authorized use or in preparation for such use is one example that seems to fit comfortably within this aspect of the Court’s opinion.  In other words, a license for multigenerational use of a cell line may be implied in these circumstances, even if it is not given expressly.

Other technologies may not present quite so simple an analysis. DNA vectors can be used for a variety of purposes, not all of which require replication. For example, vectors can be used as probes or markers, they can be used to transport sequences of interest for further manipulation, or they can be used as immunizing agents. None of these uses require or specifically contemplate replication. Of course, some vectors are used in contexts where replication is likely or assumed (e.g., transfection of cells or bacteria, generation of transgenic tissues or organisms). The consideration of vectors under Bowman will, therefore, likely depend more heavily on context, including the sales and licensing practices of the patentee.

Some commentators have characterized the Bowman holding as “limited to the facts,” pointing to the Court’s comment that “[o]ur holding today is limited – addressing the situation before us, rather than every one involving a self-replicating technology.”[2] Attempts to limit Bowman to its specific facts should be taken carefully. Indeed, the Court cut through much of the surrounding facts to reach its core holding – that replication is a new making of the patented invention and an infringement in the absences of a license. Accordingly, it does appear that the holding may address the most important “situation” for all self-replicating technologies, even if it does not address all of the context-dependent permutations of the facts involving self-replication technologies.

Consequently, assertions of “self-replicating” material turning otherwise innocent parties into patent infringers are simply not credible. To paraphrase the Court in Bowman, the soybeans Bowman took home from the grain elevator didn’t plant themselves, didn’t spray themselves with glyphosate, and didn’t otherwise cultivate themselves to produce the unauthorized crop. Similarly, in biotechnology, it is likely that unauthorized and infringing activity will quite clearly fit the Monsanto “situation” and be easily recognizable as infringement. For example, maintaining an initial cell culture in the hands of the licensee-purchaser, although it also involves replication, should be easily distinguished from distribution of the culture (or vectors, or phage, etc.) to unauthorized third parties.

Nonetheless, given the potential for unnecessarily complex analysis and possible confusion of courts, patent holders should carefully consider how their license provisions may be used to clarify not only express grant and restriction provisions, but also how the license may shape an understanding of how the invention works and its intended use. The dividing line between authorized and infringing activity will be influenced by context, and parties are well advised to define that context by the licensing contract and not rely on the bare contours of the doctrine of patent exhaustion. The license is the place where the parties involved, the patent holder and the licensee, have a chance to agree on what is authorized and what is not. It is also the place where the patent holder has an opportunity to shape future interpretations of what the practice of the invention encompasses and what it does not. An effort to be as comprehensive as possible in the positive, express grant of the license may be as important as the restrictions that are expressly stated. If, as is quite possible, the restrictions fail to contemplate the full scope of intended unauthorized activities, a grant of authorization that is more specific may allow a court to more accurately determine what is “necessary but incidental” to the authorized practice of the invention and what is not.

The Bowman decision provides the biotech community some much needed clarity regarding self-replicating inventions. Perhaps equally important, the Court displayed a keen sensitivity to the negative implications of an overly broad exhaustion doctrine. While there will undoubtedly be further development of the law as it is applied to different technologies, the fundamental ability to control self-replicating inventions at each generation through the grant or withholding of a license places authority where it belongs – with the patentee. And, by reducing the need for complex work-arounds, the clarified authority and more calibrated level of control provided by theBowman decision should facilitate licensing negotiations to the benefit of both parties.

This article was written by guest bloggers Christopher Jeffers, Ph.D., Carl Massey, Jr., Thomas F. Poché, Ph.D.

[1]Although the Court referenced the copyright statute, 17 U.S.C. § 117(a)(1), in conjunction with this “necessary but incidental” fact pattern, the statute actually considers only computer programs and states there is no infringement if “a new copy or adaptation is created as an essential step in the utilization of the computer programin conjunction with a machine and that it is used in no other manner.” From this, better language in the Bowmanopinion might have been “necessary and essential” or even “necessary and incidental.” 

[2] Bowman Op. at 10.

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America Invents Act (AIA) Reform: An Interview with a Former Patent Judge of the U.S. Patent and Trademark Office

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With its recent overhaul to the patent system, the Leahy-Smith America Invents Act (“AIA”), enacted by Congress on September 16, 2011, makes significant changes to the way patent infringement claims are brought and adjudicated. However, whether these changes actually revolutionize the system or fall short and lack luster is a contentious topic best left to the experts, such as James T. Carmichael. Mr. Carmichael has previously served as Administrative Patent Judge on the Patent Trial and Appeals Board (“PTAB”), formerly known as the Board of Patent Appeals and Interferences, and prior to that as Associate Solicitor of the U.S. Patent and Trademark Office (“USPTO”), and currently represents inventors and patent challengers before the USPTO in private practice with Miles & Stockbridge. He has definite opinions on the overall strength and benefits of the Act. These include the potential reduction of litigation expenses by 90% and the ability for a patent to be cancelled more quickly and easily.

Patent Infringement Nuisance Lawsuits

The most significant way that the AIA revamps the patent system is by way of reducing the nuisance value of a lawsuit. Lawsuits brought by non-practicing entities (“NPE”) consist of a business or individual who is not producing or marketing the patent but nonetheless enforces the patent against alleged infringers. The average legal cost for defending patent infringement remains about $3 million. As such, defendants tend to settle rather than pay the high attorneys’ fees, even if the lawsuit is frivolous or weak. Mr. Carmichael opined that the AIA helps decrease this practice because it can cut the legal costs to $300,000. This in turn will help drive the settlement value down, providing NPEs with less incentive to pursue nuisance settlement amounts in the hundreds of thousands or more.

Critics of the AIA point out that even though plaintiff NPEs recover significantly less under the new provision, they make up for the difference in settlement amounts by simply suing a higher number of alleged infringers. As such, NPEs are developing a new business model in response to the AIA that has the “effect of spreading the pain.” Moreover, small businesses are still adversely affected by even the smaller settlement amount and may opt to settle rather than pursue litigation, thus continuing the practice of nuisance value suits before the AIA.

Mr. Carmichael concedes that the new legislation reduces the cost of litigation but not necessarily the number of suits filed. However, he insists that the AIA is a “big step in the right direction” and succeeds generally in bringing the nuisance value down. According to him, industry largely supports the AIA because it reacts and provides a solution to the high cost of striking down an invalid patent before the AIA revisions. In addition, not every patent claim is from a NPE with a nonmeritorious case and many patent claims are legitimate and should be asserted, given the value of patent rights.

Patent Post-Grant Process Under PTAB

The AIA reduces the cost of striking an invalid patent by providing for post-grant opposition which provides an alternative to litigation. Under the newly-implemented inter partes review (IPR), an entity or business may challenge the validity of the patent at the PTAB. IPR will be decided by a PTAB three-judge panel, whereas under the previous system of reexamination, patent examiners from the Central Reexamination Unit (CRU) determined the patent claim rights. According to Mr. Carmichael, the benefit of adjudication under PTAB is that it is easier for PTAB to cancel a patent then for a jury to invalidate a patent. Under the AIA, there is no presumption of validity applied in the patent review process so deference is not given to the patent examiner. Further, a patent challenger can go directly to the administrative judges to challenge the patent with more technical and nuanced arguments that cannot adequately be made to a jury. The new procedures “grant effective ways to determine if a challenge is valid,” according to Mr. Carmichael. Ultimately, striking an invalid patent is “faster and easier than before, mainly because these proceedings are conducted by PTAB, not [CRU patent] examiners or courts.”

In addition, under the AIA, patent review is provided the maximum time limit of one year, whereas under reexamination, no such time limit existed and the correction of patents was a time-consuming process. Parties could potentially add new arguments under reexamination but the new patent post-grant opposition process will be more efficient. Prior legislation did not have this time limit, which is one reason why Mr. Carmichael deemed it as ineffectual as compared to the AIA.  Courts are now likely to stay patent infringement proceedings in view of the speedier PTAB processes.

A Successful Verdict for the AIA’s Patent Reform Provisions

Ultimately, Mr. Carmichael views the AIA legislation as the “first in history” to successfully accomplish diminishing the nuisance value of a patent infringement suit and provide effective avenues of opposition to patent challengers with meritorious claims. Mr. Carmichael dismisses complaints from critics of the legislation, stating “I think it did enough for what it was trying to accomplish.” According to Mr. Carmichael, the AIA will serve as the “most powerful tool in history to challenge [patent] validity.” The final enactment of the legislation occurred recently on March 16, 2013, and only time will tell whether the rest of the legal community agrees with him or not.

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New Trademark Headaches, But Help is On the Way Re: Internet Corporation for Assigned Names and Numbers’ (ICANN) Expansion of Generic Top-Level Domains (gTLDs)

Neal Gerber

For brand owners that have often struggled to keep up with all the infringement and cybersquatting issues in the 22 existing generic top-level domain name registries, or “gTLDs”, like .com, .org, and .net, life is about to become even more challenging. The Internet Corporation for Assigned Names and Numbers’ (ICANN) planned expansion of gTLDs to potentially almost 2,000 in total has the potential to create major trademark enforcement headaches. In order to address some of those concerns and burdens, ICANN has created the Trademark Clearinghouse, which allows brand owners to submit information regarding their registered trademarks into a single database across all the new gTLDs for an annual fee of approximately $150 per trademark per year.

Registration in the Trademark Clearinghouse provides two primary benefits:

  • First, it allows brand owners priority access for registering their trademarks as domain names in any new gTLD that is available to the general public as it launches.1 For example, if Acme Car Sales owns a trademark registration covering the term ACME in any jurisdiction worldwide, as the anticipated .cars registry launches, Acme Car Sales would be able to register acme.cars before others have that opportunity.
  • Second, Clearinghouse registrants will receive notice if anyone tries to register domain names that match their marks. Thus, to take the prior example, if Acme Car Sales decides not to register acme.cars, but a third party proceeds to do so, Acme Car Sales will receive notice of the registration and then can contest it if appropriate.

Although this sounds promising, be aware that the Clearinghouse is not perfect—if Acme Car Sales’ only trademark registration is for “ACME,” the Clearinghouse does not provide any benefits pertaining to domain name registrations that differ even slightly from the trademark registration, such as acmesales.cars, or acmechicago.cars. Additionally, individual registries are permitted to determine on their own how to handle situations where multiple entities own trademark registrations for the same mark.

Despite these shortcomings, the Trademark Clearinghouse presents a good first step toward brand protection in the new gTLD space, and most brand owners will benefit from registration. Registration is now open, and will remain open as long as new gTLDs are being released.

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Patent Exhaustion Rejected: Patented Seed Purchaser Has No Right to Make Copies

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The Supreme Court in Bowman v. Monsanto Co. ruled unanimously that a farmer’s replanting of harvested seeds constituted making new infringing articles.  While the case is important for agricultural industries, the Supreme Court cautioned that its decision is limited to the facts of the Bowman case and is not a pronouncement regarding all self-replicating products.

In a narrow ruling that reaffirms the scope of patent protection over seeds, and possibly over other self-replicating technologies, the Supreme Court of the United States held that a purchaser of patented seeds may not reproduce them through planting and harvesting without the patent holder’s permission.  Bowman v. Monsanto Co., Case No. 11-796 (Supreme Court May 13, 2013).

In this case, Monsanto had asserted two of its patents that cover genetically modified soybean seeds that are resistant to herbicide (Roundup Ready® seeds).  Monsanto broadly licenses its Roundup Ready® soybean seeds under agreements that specify that the farmer “may not save any of the harvested seeds for replanting, nor may he supply them to anyone else for that purpose.”  Vernon Hugh Bowman is a farmer who purchased soybean seeds from a grain elevator.  Bowman replanted Roundup Ready® seeds in multiple years without Monsanto’s permission.  The district court granted summary judgment of patent infringement against Bowman, and the U.S. Court of Appeals for the Federal Circuit affirmed.  Bowman appealed to the Supreme Court, which granted certiorari.

On appeal, Bowman heavily relied on the “patent exhaustion” doctrine, which provides that the authorized sale of a patented article gives the purchaser or any subsequent owner a right to use or resell that article.  Bowman argued that the authorized sale of the Roundup Ready® seeds exhausted Monsanto’s patent rights in the seeds, because “right to use” in the context of seeds includes planting the seeds and reproducing new seeds.

Patent Implications

Speaking through Justice Kagan, the Supreme Court unanimously affirmed the Federal Circuit’s decision that Bowman’s activities amounted to making new infringing articles.  The Supreme Court held that “the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission.”  Specifically, the exhaustion doctrine restricts a patentee’s rights only as to the particular article sold, but “leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.”  The Supreme Court noted that if Bowman’s replanting activities were exempted under the exhaustion doctrine, Monsanto’s patent would provide scant benefit.  After Monsanto sold its first seed, other seed companies could produce the patented seed to compete with Monsanto, and farmers would need to buy seed only once.

In rebuffing Bowman’s argument that he was using the seed he purchased in the manner it was intended to be used, and that therefore exhaustion should apply, the Supreme Court explained that its ruling would not prevent farmers from making appropriate use of the seed they purchase—i.e., to grow a crop of soybeans consistent with the license to do so granted by Monsanto.  However, as the Supreme Court explained “[A]pplying our usual rule in this context . . . will allow farmers to benefit from Roundup Ready, even as it rewards Monsanto for its innovation.”

Tying the Supreme Court’s decision in this case narrowly to seed (as opposed to other self-replicating technologies), Justice Kagan noted that the decision is consistent with the Supreme Court’s 2001 decision in J.E.M. Ag. Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., in which the Supreme Court concluded that seeds (as well as plants) may simultaneously be subject to patent protection and to the narrower protection available under the Plant Variety Protection Act (PVPA).  PVPA protection permits farmers who legally purchase protected seed to save harvested seed for replanting.  However, reconciling the two forms of protection, Justice Kagan explained, “[I]f a sale [i.e., of a patented seed] cut off the right to control a patented seed’s progeny, then (contrary to J.E.M.) the patentee could not prevent the buyer from saving harvested seed.”

Other Self-Replicating Technologies

The Supreme Court’s decision in Monsanto is, of course, important for agricultural industries.  If extended to other self-replicating technologies, it may also prove important for biotechnology companies and others  that rely on self-replicating technologies, including, for example, companies that own patent rights over viral strains, cell lines, and self-replicating DNA or RNA molecules.  If subsequent cases extend the “no exhaustion” holding of Monsanto to these technologies, patent protection would extend to copies made from the “first generation” product that is obtained through an authorized sale.

However, the Supreme Court cautioned that its decision is limited to “the situation before us” and is not an overarching pronouncement regarding all self-replicating products.  The Supreme Court suggested that its “no exhaustion” ruling might not apply where an article’s self-replication “occur[s] outside the purchaser’s control” or is “a necessary but incidental step in using the item for another purpose,” citing computer software (and a provision of the Copyright Act) as a possible example.  As explained by Justice Kagan, “We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”  In this regard, the Supreme Court particularly noted that “Bowman was not a passive observer of his soybeans’ multiplication.”  Instead, Bowman “controlled the reproduction” of seeds by repeated planting and harvesting.  Thus, the Supreme Court suggests that a purchaser’s “control” over the reproduction process likely will be a key inquiry in considering the patent exhaustion doctrine as it relates to other self-replicating technologies.  Of course, it remains to be seen how broadly lower courts will interpret the Supreme Court’s ruling.

Antitrust Implications

By holding that Monsanto’s restriction on replanting was within the scope of its patent rights, the Supreme Court effectively immunized that restriction from antitrust scrutiny.  Other court decisions have called into question other license restrictions viewed as going beyond the scope of patent protection as being potentially susceptible to an antitrust or patent misuse challenge.

The Supreme Court highlighted its application of the exhaustion doctrine last addressed in Quanta, which held that “the initial authorized sale of a patented item terminates all patent rights in that article.”  This boundary line conventionally demarcated the end of a patent’s protection and the beginning of a potential antitrust minefield.  Some commentators may interpret the Monsanto decision to push that line further out.  Importantly, however, the Supreme Court deemed the seeds at issue to be a “new product.”  So construed, Monsanto’s restriction on replanting did not affect the product’s use, as in Quanta and Univis Lens, but rather came within the well-settled principle that “the exhaustion doctrine does not extend to the right to ‘make’ a new product.”

The Supreme Court not only was doctrinally conservative in its Monsanto decision, it was also careful to explain that its holding is a narrow one.  Monsanto never exhausted its patent rights in the “new” seeds; indeed, it never truly “sold” them.  Rather, Bowman created new seed from seeds that Monsanto had sold.  The decision therefore may not portend a more general inclination to construe the scope of patent protection more broadly.  In fact, the Supreme Court went so far as to clarify that it could reach a different outcome were it presented with a different technology.

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The New Generic Top-Level Domains and the New Trademark Clearinghouse: Deciding Whether to Register Your Brands

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The Internet Corporation for Assigned Names and Numbers (“ICANN”) is the organization that oversees domain names worldwide.  It recently began accepting new applications for expanding the number of generic top-level domains (“gTLDs”) on the Internet. The most popular gTLDs until now have included .com, .info, .org, and .net. With the approval of applications for new gTLDs will come an unlimited number of new opportunities on the Internet for entrepreneurs of all types, including trademark infringers. Thus, trademark owners must make some decisons on how to address this new threat. One possibility is the new Trademark Clearinghouse.

ICANN created the Trademark Clearinghouse (“Clearinghouse”),  which went live on March 26, 2013, in an effort to help trademark owners protect their brands in the midst of this expansion of available gTLDs.  Trademark owners who record their marks with the Clearinghouse under the relevant procedures are entitled to: (1) first priority in registering their recorded marks as second-level domain names under the new gTLDs during the “sunrise” period (which will vary by gTLD but will be at least 30 days before the general public would be permitted to do so), and (2)  receipt of notification when a domain has been registered under any new gTLD that matches the trademark owner’s recorded mark. The ICANN filing fee to record a trademark in the Clearinghouse is $150 (US) for one year, $435 for three years, and $725 for five years.

There is no deadline for recording a trademark with the Clearinghouse, but there are advantages to doing so during the “sunrise” periods. As stated above, recordation during this period provides trademark holders with advanced opportunities to obtain a second-level domain name under one of the new gTLDs before registration is open to the general public, e.g., twinkies.food. In addition, during the “trademark claims period,” which will run for at least 90 days after the initial operating period for general domain name registration under a new gTLD, those seeking registration of a domain name that matches a recorded trademark will be notified of the existence of the recorded mark. There is no mechanism in place which will automatically prevent the registration of a domain name matching a recorded trademark. Thus, although someone seeking to register a domain name which matches a recorded trademark may be notified about the existence of the recorded mark, that someone may still register that domain. Should this happen, the owner of the recorded trademark will be notified of the registration and will then have to make a unilateral decision on what action to take, if any, against the registered domain.

For those who have recorded their marks at the Clearinghouse, ICANN provides two global rights protection mechanisms for dealing with allegedly improper domain registrations: (1) the Uniform Domain Name Dispute Resolution Policy, and (2)  Uniform Rapid Suspension. Each mechanism operates in a slightly different manner.

Since neither recordation with the Clearinghouse nor any other ICANN procedure actually stops registration of a domain name which matches a recorded trademark, reaction by trademark owners to the Clearinghouse has been mixed. Accordingly, each trademark owner will have to engage in its own cost/benefit analysis and weigh the pros and cons of this new system in deciding whether to record any, all, or some of its trademarks.