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By James Kachmar

A recent decision in the case Jobscience, Inc. v. CVPartners, Inc. (N.D. Cal. Jan. 9, 2014) shows the interplay between the various theories of intellectual property claims. There, the plaintiff asserted claims for both copyright infringement and trade secret misappropriation arising out of the alleged theft of its software code. The court was required to deal with the issue of whether plaintiff’s trade secret claim was preempted by its claim for copyright infringement.

Jobscience develops and licenses recruiting software applications, including its JS 2 Jobscience Recruiting Package. In 2010, Jobscience entered into a master agreement with defendant CVPartners that contained an End User License and Agreement, which provided the defendant with a license to use plaintiff’s job recruiting software application. The license was renewed in 2011.

In November 2011, defendant Brandon Metcalf, who was formerly the Senior Director of Technology at CVPartners, was alleged to have assisted with the formation of defendant Skipan SAAS LLC and within months, defendants were alleged to have recreated and began marketing a software application that was similar to that of Jobscience. In August, 2012, defendant CVPartners notified Jobscience that it was terminating the license agreement and plaintiff alleged that shortly thereafter it discovered a “replica of the Jobscience job board” on defendant’s website. Plaintiff claimed that the job board was one of the “functional elements” of its own software and that defendant’s job board “was so similar to Jobscience that Jobscience’s own employees were fooled to believe that the Jobscience job board was still up on the CVPartners website.” Plaintiff sued the defendants for numerous claims, including copyright infringement and trade secret misappropriation. The defendants moved to dismiss all of plaintiff’s claims.

The Court began by examining plaintiff’s copyright infringement claim. The defendants argued that plaintiff’s complaint failed to state a claim. The Court recognized that a plaintiff must plead the following to state a copyright infringement claim: “(1) ownership of a valid copyright; and (2) copying of protected expression by the alleged infringers.” The Court noted that a plaintiff could establish the second element “by showing that the works in question are substantially similar in their protected elements and that the alleged infringers had access to the copyrighted works.” Defendants did not dispute that plaintiff had a valid copyright in its Jobscience software application. The defendants argued that the complaint failed to plead the second element, specifically there were no allegations as to what any defendant allegedly did to infringe on plaintiff’s copyright, that defendants had access to the works entitled to copyright protection or that there was virtual identity of works entitled to copyright protection. They also argued that because plaintiff had alleged that the job board “was one of the functional elements of plaintiff’s software solution,” it was not entitled to protection as a functional element under the Copyright Act.

The Court rejected these arguments and found that there were sufficient allegations in the complaint that defendants had developed an application called Talent Rover which was alleged to have infringed on plaintiff’s Jobscience software program. The Court also noted that plaintiff had alleged that one of the defendants’ websites allegedly contained a “replica” of plaintiff’s job board and that this was sufficient to allege the “virtual identity of works entitled to copyright protection.” Thus, the Court denied the motion to dismiss plaintiff’s copyright infringement claim.

However, given the survival of the copyright infringement claim, the Court then turned to the issue of plaintiff’s trade secret misappropriation claim and whether it was preempted by plaintiff’s copyright infringement claim. The Court noted that section 301(a) of the Copyright Act provided the “exclusive rights” within the general scope of copyright law and that “no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any state.” The Court noted that copyright “preemption” applies if the content of the protected right falls within the subject matter of the Copyright Act and the rights asserted under state law are equivalent to those protected by the Copyright Act.

The Court then considered the nature of plaintiff’s trade secret misappropriation claim to see whether it was “based on the same nucleus of facts as the copyright infringement claim.” Plaintiff had alleged that defendant Metcalf “gained access to plaintiff’s trade secrets consisting of software code and other proprietary information” and that plaintiff had made substantial investments of time and money “in developing its proprietary software application software code methods and other trade secrets.”

The Court noted the definition of a trade secret under California’s Uniform Trade Secret Act, which requires the following to state a claim: (1) the existence of a trade secret; and (2) misappropriation of the trade secret. The Court observed that plaintiff’s complaint did not plead the separate existence of a trade secret but instead simply referred to “proprietary software applications” that it noted were the basis of plaintiff’s copyright infringement claim. The Court further found it significant that plaintiff could not show that it had taken reasonable steps to maintain the secrecy of its alleged trade secret “because it received copyrights for its software applications.”

Given that plaintiff’s claim for trade secret misappropriation was based on the “same nucleus of facts” as its copyright infringement claim, the Court found that plaintiff’s trade secret misappropriation claim was preempted by the Copyright Act. It therefore granted defendants’ motion to dismiss this trade secret claim.

The Jobscience decision demonstrates that while a plaintiff may plead multiple claims of liability in an intellectual property case, a defendant has several important defenses at its disposal such as preemption. A defendant in such a case should carefully examine the interplay between the various claims to determine whether certain of the claims can be dismissed under preemption doctrine.

The Federal Circuit has loosened the standard for recovering attorneys’ fees in patent infringement cases, making it easier for winning defendants to obtain their fees from plaintiffs.

The case is Kilopass Technology, Inc. v. Sidense Corp. (Fed. Cir. Dec. 26, 2013), 2013 U.S. App. LEXIS 25671. Kilopass and Sidense were competitors in the market for memory cells used in transistors. Kilopass obtained several patents on its technology. After reviewing a published patent application of Sidense for its memory cells, Kilopass embarked on an interesting course of conduct.

First, Kilopass engaged counsel to determine whether Sidense infringed Kilopass’ patents. Based on the product described in Sidense’s patent application, Kilopass’ counsel believed that there might be an infringement case, and sent Sidense a letter inviting Sidense to license Kilopass’ patents or explain why Sidense’s products did not infringe Kilopass’ patents. Sidense replied with a specific explanation of why its products did not infringe Kilopass’ patents. Sidense also offered to subject its products to a confidential infringement analysis by a third party expert to prove its position. Kilopass then obtained a diagram of Sidense’s product and provided it to Kilopass’ counsel.  Counsel then concluded that Sidense had designed around Kilopass’ patents and that its products probably did not literally infringe the patents. In response, Kilopass retained a second counsel to analyze infringement. The second counsel made a preliminary finding that Sidense’s products probably did not literally infringe the patents, but might infringe under the doctrine of equivalents, and said that further investigation was needed to confirm this. Kilopass did not conduct further investigation with this counsel, but instead engaged a third counsel to analyze infringement. Then, based primarily on Kilopass’ own engineer’s findings, Kilopass concluded that Sidense infringed under the doctrine of equivalents.

In 2010, Kilopass sued Sidense in the Northern District of California for patent infringement. Kilopass alleged claims for both literal infringement and infringement under the doctrine of equivalents. During the litigation, the district court admonished Kilopass for making claim construction arguments in the case that contradicted its arguments in a concurrent reexamination of the patent before the United States Patent and Trademark Office. The court also found that Kilopass had improperly attempted to assert different infringement contentions than it had disclosed to Sidense in discovery.

Sidense moved for summary judgment of noninfringement. The district court granted the motion. Kilopass appealed to the Federal Circuit Court of Appeals, who affirmed the district court’s decision. Sidense then moved for attorneys’ fees under 35 U.S.C. §285. The motion was denied on the grounds that Sidense had not shown by clear and convincing evidence that Kilopass had prosecuted its case in bad faith.  In denying the motion, the district court relied on its prior 2005 decision in Brooks Furniture Manufacturing v. Dutailer, Inc. (Fed. Cir. 2005) 393 F.3d 1378.

Sidense appealed to the Federal Circuit. The Court of Appeals held that the district court had not applied the correct legal standard, vacating and remanding the case.

The appellate court explained that an award of attorneys’ fees under 35 U.S.C. §285 requires two steps: (1) the prevailing party must show by clear and convincing evidence that the case is “exceptional;” and (2) the court must decide whether it is appropriate to award attorneys’ fees. The court discussed its Brooks Furniture decision. There, the court had held that a case could be found to be exceptional if there was inappropriate conduct by the losing party, such as willful infringement, or misconduct during the litigation, such as a violation of Rule 11. If there was no misconduct in the litigation, the court had held that fees could be awarded only if: (1) the case had been brought in subjective bad faith; and (2) the case was “objectively baseless.” In ruling on Sidense’s motion, the district court had applied this standard and found that Sidense had not proved that Kilopass had acted in subjective bad faith.

On appeal, Sidense argued that it had proved that Kilopass had acted in subjective bad faith or that, alternatively, the legal standard should be changed.

The appellate court first clarified that prior Federal Circuit cases that suggested that a defendant had to prove that a plaintiff had actual knowledge of the objective baselessness of its suit were dicta, and not the law.

“[S]ubjective bad faith only requires proof that the ‘lack of subjective foundation for the claim “as either known or so obvious that it should have been known” by the party asserting the claim’ [Citations omitted.]”

Id.  at *19. This finding was necessary to make the burden on a defendant seeking fees the same as that on a plaintiff seeking fees: that the other party acted willfully or recklessly.

Next, the court held that subjective bad faith need not be proved by direct evidence, but may be inferred from the objective baselessness of the case. Id.  at *23-25. The court stated “[l]ack of direct proof of subjective bad faith should not alone free a party from the threat of assessment of attorneys’ fees under §285…” Id. at *22. The court held that district courts should consider the totality of the circumstances, especially the objective merits of the case. Id. Because direct evidence of subjective bad faith is so rare, district courts should consider circumstantial evidence of bad faith, including objective evidence of baselessness, as well as factors such as failure to perform a proper pre-litigation investigation, vexatious litigation tactics, or an oppressive purpose. Id. at *24.

According to the court, at *23:

“The totality of the circumstances does include an evaluation of subjective good faith, but mostly as a negative. If a smoking gun is found, revealing that a patentee knew that he had no chance of winning a lawsuit, then subjective bad faith is easily shown. But one’s misguided belief, based on zealousness rather than reason, is simply not sufficient by itself to show that a case is not exceptional in light of objective evidence that a patentee has pressed meritless claims.”

The appellate court declined to adopt Sidense’s request that it eliminate the subjective bad faith prong of the standard for an exceptional case. However, the court emphasized that its new interpretation of subjective bad faith was not the “obstacle to fee shifting that the district court…believed.” Id.  at *33.

“[A] wide variety of proofs can provide the requisite showing of bad faith under § 285, which must be assessed in light of the totality of the circumstances. Objective baselessness alone can create a sufficient inference of bad faith to establish exceptionality under § 285, unless the circumstances as a whole show a lack of recklessness on the patentee’s part. [Citation omitted.] Thus, the retention of the subjective bad faith requirement may prove to have little effect on this case, as well as many that follow.” Id.

The court also considered, but chose not to alter, the moving party’s burden of proof from clear and convincing evidence to a preponderance of the evidence. Id. at *38. In addition, the court did not accept Sidense’s argument that the objectively baseless standard should be lowered.

The court remanded the case to the district court to determine whether Kilopass’ theories of infringement were objectively baseless, and, if so, whether the totality of the circumstances supported a finding of subjective bad faith. If both prongs were met, then the district court should determine, in its discretion, whether to award fees to Sidense.

This case is significant in that the standard for awarding attorneys’ fees to a successful defendant has been relaxed and the importance of the objective test of merit has been elevated. Subjective bad faith, although still required, has been loosened to allow inferences to be drawn from an objective analysis of the merits of the case. Patent infringement defendants should be encouraged, while plaintiffs should be careful in analyzing infringement and deciding to file suit.