Blog: The Litigation Law Blog

Is the work product of an attorney always protected? No, according to the First Circuit in a decision which may draw the attention of the U. S. Supreme Court. The First Circuit, sitting en banc (the “Court”) ruled that the attorney work product doctrine did not protect tax accrual work papers prepared by in-house attorneys to support defendant Textron Inc.’s (“Textron”) calculation of tax reserves. United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009). Practitioners, especially in-house counsel, need to be aware of this decision and determine whether it influences how they practice.

The work product doctrine, initially pronounced by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), and later codified in Rule 26(b)(3) of the Federal Rules of Civil Procedure, provides, in pertinent part:

“[A] party may obtain discovery of documents and tangible things otherwise discoverable under [Rule 26(b)(1) of the Federal Rules of Civil Procedure] and prepared in anticipation of litigation or for trial by or for another party or by or for that other party’s representative . . . only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.”

Fed. R. Civ. P. 26(b)(3)(emphasis added). Among other things, the purpose of this doctrine is “to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy ‘with an eye toward litigation’ free from unnecessary intrusion by his adversaries.” United States v. Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (citing Hickman v. Taylor, 329 U.S. 295, 510-11 (1947)). Unlike the attorney-client privilege, which protects all confidential communication between a client and his or her attorney in connection with legal advice sought by the client, the attorney work product doctrine’s protections are far narrower. The latter’s protections apply only to documents prepared by attorneys for their clients in anticipation of litigation or for trial. Textron, 577 F.3d at 30-31.

In determining whether a document was prepared “in anticipation of litigation,” courts have utilized two different tests: (1) the Fifth Circuit’s “primary purpose” test, under which documents are deemed to be prepared in anticipation of litigation when the “primary motivating purpose behind the creation of the document was to aid in possible future litigation.” United States v. El Paso Co., 682 F.2d 530, 542 (5th Cir. 1982); and (2) the “because of” test, where the “relevant inquiry is whether the document was prepared or obtained ‘because of’ the prospect of litigation.” United States v. Textron Inc. and Subsidiaries, 507 F.Supp.2d 138, 149 (D.R.I. 2009) (citing Adlman, 134 F.3d at 1205). The First Circuit has adopted the “because of” test. Maine v. Dept. of the Interior, 298 F.3d 60, 68 (1st Cir. 2002).

Other circuits, including the Ninth, have also adopted the “because of“ standard, which, rather than considering “whether litigation was a primary or secondary motive behind the creation of a document,” considers “the totality of the circumstances and affords protection when it can fairly be said that the ‘document was created because of anticipated litigation, and would not have been created in substantially similar form but for the prospect of that litigation.’” In re Grand Jury Subpoena, 357 F.3d 900, 907-08 (9th Cir. 2004) (citations omitted); see, also, Logan v. Commercial Union Ins. Co., 96 F.3d 971, 976-77 (7th Cir. 1996) (adopting “because of” test); PepsiCo, Inc. v. Baird, Kurtz & Dobson LLP, 305 F.3d 813, 817 (8th Cir. 2002) (adopting the “because of” test). Given that the “because of” standard does not consider whether the primary motive behind the document creation was litigation, it is arguably a more protective standard than the “primary purpose” one, especially with respect to dual purpose documents.

Publicly traded companies like Textron must prepare audited financial statements to comply with federal securities laws. Textron, 577 F.3d at 22 (citing 15 U.S.C. §§ 78l, 78m (2006)). In doing so, the company “must calculate reserves to be entered on the company books to account for contingent tax liabilities.” The possibility and amount of the company’s potential future tax liabilities is often the subject of both legal and financial analysis. Textron, 577 F.3d at 22-23. After the Enron debacle, the IRS began obtaining companies’ tax accrual work papers if the IRS suspected the company had engaged in transactions that the IRS considered to be tax avoidance transactions. Id., citing 26 C.F.R. § 1.6011-4(b)(2)(2009)). In Textron, the IRS determined that Textron had engaged in a number of sale-in, lease-out (“SILO”) transactions – transactions deemed by the IRS to be tax avoidance transactions. Textron, 577 F.3d at 23-24.

The IRS sought accounting work papers, but also sought copies of memoranda prepared by Textron’s in-house expressing their judgments regarding Textron’s chances, in percentage terms, of prevailing in any possible litigation and calculating a tax reserve amount in the event Textron did not prevail in such litigation. Textron and Subsidiaries, 507 F.Supp.2d at 142-43. The IRS also sought work papers “consisting of the previous year’s spreadsheet and earlier drafts of the spreadsheet together with notes and memoranda written by Textron’s in-house tax attorneys, reflecting their opinions as to which items should be included in the spreadsheet and the hazard of litigation percentage that should apply to each item.” Id. at 143. Textron refused to produce the documents, claiming, among other things, that the documents were privileged attorney work product. Textron, 577 F.3d at 25. The IRS brought an enforcement action in federal court to obtain the work papers. Id. The district court denied the IRS’ petition, concluding that the papers were protected by the work product doctrine. Id. On appeal, a divided 1st Circuit court upheld the district court’s decision. Id.

The IRS sought, and was granted, a rehearing en banc. The Court found that, based on the evidence presented in the trial court, that the purpose of the work papers was to make financial entries, to file quarterly and annual financial statements with the SEC, and to obtain a clean audit. Id. at 27. Textron’s director of tax reporting also testified that Textron, as a publicly traded company, was required to file its financial statements with the SEC, including any tax reserves. Id. at 28. The Court rejected the claim of privilege finding that “only work done in anticipation of or for trial . . . is protected.” Id. at 30. The Court even ordered the attorney memorandum evaluating the chances of prevailing in any future litigation.

The Court observed that, in adopting FRCP 26, the advisory committee noted that “materials assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes,” even if prepared by attorneys or representing legal thinking, are not protected by the work product doctrine. Id., quoting Fed. R. Civ. P. 26 advisory committee’s note (1970). The Court stated that Textron’s tax audit work papers were prepared in the ordinary course of business, and “would have been created in essentially similar form irrespective of the litigation.” Textron, 577 F.3d at 30, citing Maine, 298 F.3d at 70. The Court further determined that the “only purpose of Textron’s papers was to prepare financial statements” and that there was no evidence in this case that the work papers were prepared for potential use in litigation. Id. The Court concluded that the work product doctrine is not “designed to help the lawyer prepare corporate documents or other materials prepared in the ordinary course of business,” especially when there is “a legal obligation to prepare such papers.” Id. at 31. In Textron’s case, the tax audit papers had to be prepared to comply with the securities laws and accounting principles for certified financial statements. Id. In short, the court concluded that the work product doctrine protects “work done for litigation, not in preparing financial statements.” Id. at 31.

In its most liberal construction, it is possible that the ruling could make all documents created by attorneys in the normal course of business discoverable. Alternatively, the ruling can be narrowly read as limited to the tax context. The Court noted that its decision, at least in part, rested on public policy grounds – “[u]nderpaying taxes threatens the essential public interest in revenue collection.” Id. Further, the opinion notes that “[o]ther circuits have not passed on tax audit work papers and some might take a different view.” Id. at 30 (emphasis added). The opinion also discusses that the “work product protection for tax audit work papers has been squarely addressed only in two circuits,” the First and the Fifth. Id. (emphasis added). Thus, while other circuits have ruled on the applicability of the attorney work product doctrine as it applies to dual documents in general, only the First and Fifth circuits have ruled on the doctrine’s applicability to tax audit work papers, which arguably makes the Court’s opinion more narrow. Given the First and the Fifth Circuit split, the decision could possibly be reviewed by the Supreme Court. In the interim, this ruling makes tax accrual work papers prepared by in-house attorneys potentially discoverable in litigation.

To safeguard both attorney-client privilege and work product, in-house and outside counsel should use caution in preparing memoranda or letters to be placed within accounting records to support management positions and judgments, and should not communicate with outside auditors with respect to interpretations and judgments or conclusions. These judgments are to be made by management of a company (with or without consulting counsel). Counsel’s written memoranda and letters to the client should always be framed in anticipation of a challenge in positions where questions on treatment or judgment may be challenged, and circulation of such guidance should be limited. Still, regardless of how the courts apply the attorney work product doctrine, it is important to note that the decision does not alter other confidential communications between clients and attorneys under the more traditional attorney client privilege.

The United States Government, which created the courts and a legal system to provide an avenue to seek redress for injury, is immune from suit in that system unless the Government agrees to be sued by waiving its immunity. This is commonly known as “sovereign immunity,” and allows many lawsuits to be dismissed at the pleading stage. On July 25, 2008, the U.S. Court of Appeals for the Federal Circuit issued an opinion regarding the scope of sovereign immunity as applied in a copyright infringement case.

The Federal Government has waived its immunity for suits based on its infringing the rights of copyright owners. It is a rather limited waiver, however, and allows the Government to infringe much more freely than a private party. Last week’s Federal Circuit decision, Blueport Co., LLC v. United States, shows how easy it can be for a government employee to lose his rights to work he has created.

In Blueport, Air Force Technical Sergeant Mark Davenport was employed as a manager of the Air Force Manpower Data System, a database containing manpower profiles for the Air Force. He was also a member of the Air Force Manpower User Group, a group of manpower personnel that provided guidance on the use of the MDS. Davenport believed that the software used to run the MDS was not adequate, and set out to write his own software. The Air Force refused to train him on computer programming, so Davenport learned programming on his own, on his own time, and at his own expense.

Davenport wrote a software program – the AUMD program – to use with the MDS. He wrote it on his own time at his home computer. He brought the finished program to work and installed it on his work computer, shared it with his co-workers, and posted it on the Air Force’s website so that Air Force manpower personnel could download and use it. He modified the program based on feedback he received, and added an automatic expiration to require users to download the newest version of the AUMD program. He even gave a presentation on the AUMD program to senior Air Force manpower officers at an annual conference.

The Air Force decided it needed the AUMD program, and asked Davenport for the source code. Davenport refused to simply turn it over; it was his program, after all. The Air Force threatened him with demotion and a pay cut. Davenport responded by assigning all his rights to Blueport, who contacted the Air Force to negotiate a license agreement for the use of the AUMD program. The Air Force had other ideas, and went to SAIC to recreate the program. SAIC modified the AUMD program’s source code to extend the expiration date, which allowed Air Force personnel to continue to use the program. Davenport sued.

Common sense screams “This is not right!” Davenport wrote the program on his own, at his own expense, not using any government computers, so he should own the rights to it. The Air Force can’t just take it! That may be, but remember, it’s the Government, and since the Government makes the rules, it gets to decide which ones to play by. And in this case, it brought out the sovereign immunity rule.

Section 1498(b) of title 28, United States Code, contains the waiver of immunity for copyright infringement. As the Federal Circuit pointed out, it “grants copyright owners a right of action for copyright infringement against the United States, subject to three provisos.” First, there is no right of action where the employee “was in a position to order, influence, or induce use of the copyrighted work by the Government.” Next, there is no right of action where the employee prepared the work as part of his or her “official functions.” Finally, there is no right of action when “Government time, material, or facilities were used” in the creation.

After first deciding that these three provisos are jurisdictional limitations and not affirmative defenses, the Court of Appeals agreed that Blueport’s claim was subject to the first proviso, in that Davenport “influenced or induced” the AUMD program’s use by the Air Force. “Davenport’s position as a member of the Air Force manpower community gave him access and authority to distribute the AUMD program freely to his colleagues.” Therefore, his claim was precluded by the first proviso, and the court did not reach the other provisos. The lower court had held that all three provisos each barred Blueport’s suit. The Government’s waiver of immunity is rather limited.

Blueport also sued for violations of the Digital Millennium Copyright Act of 1998, which provides that “no person shall circumvent a technological measure that effectively controls access to a work protected under” the Copyright Act. Blueport claimed that the modification of the expiration date violated this statute. The Federal Circuit didn’t reach the merits of this claim, however. Instead, it held that the Government has not waived its sovereign immunity for claims under the DMCA, and therefore is immune from suit. The court based its opinion on finding that the term “person” in the DMCA does not include the term “sovereign.” Likewise, section 1498(b) does not include a waiver for claims under the DMCA, and a waiver of sovereign immunity must be express, not implied.

An interesting, although for Davenport unsatisfying, distinction can be drawn between this case and a case involving a “work for hire” under the Copyright Act. The copyright of a work for hire is owned by the employer, not the employee. The Government never claimed that it owned the copyright here. It just couldn’t be sued for infringing Davenport’s rights. The lesson to be learned is simple. If you are a government employee, and write a program (or book, manual, etc.) that will make your work place better or more efficient, think before you simply bring it to work and share it. You may be giving your employer a gift you didn’t intend to give.

By: Dale C. Campbell and Serena Crouch, Third Year Law Student at McGeorge School of Law

Internet users and privacy advocates across the nation fear they are losing the continuing battle to protect internet privacy rights. A court decision in a lawsuit between Viacom and YouTube.com is the most recent battlefield regarding data likely to provide the video viewing habits of millions around the world.

In March 2007, Viacom sued YouTube and Google, Inc. in the United States District Court, Southern District of New York, seeking at least $1 billion in damages for alleged copyright infringement. Viacom claims that YouTube built its business by willfully offering Viacom’s copyright protected material such as episodes of “The Daily Show with Jon Stewart” and the cartoon “SpongeBob SquarePants.” Viacom claims that neither YouTube nor its users are licensed to upload its material in the manner it is being used.

Viacom recently sought a court order requiring YouTube to produce various documents, one of which was YouTube’s Logging database. Each time a video is watched, the Logging database records the login ID of the viewer, the IP address of the computer being used, and the time it was watched. Viacom requested this information to prove that Viacom’s protected videos are being watched in a higher proportion than the non-protected videos on YouTube. With this information, Viacom hopes to prove that YouTube is gaining a financial benefit, one prong necessary to prove YouTube is vicariously liable for its users’ infringement of Viacom’s copyrighted material. Viacom also hopes the information can be used to bar YouTube’s defense that its website is capable of substantial non-infringing uses.

YouTube opposed Viacom’s request, claiming the request was unduly burdensome because it would be expensive and time-consuming for YouTube to determine which information in the database is privileged or work product material. However, the Court rejected that argument, holding that YouTube failed to rebut Viacom’s argument that the content of the database does not need to be viewed for privileged information because it simply records the number of times each video was viewed by members of the public. The Court also ruled that production of the database would not be unduly burdensome because the contents, while containing twelve terabytes of information, could be copied onto a few over-the-counter hard drives. Therefore, the burden on YouTube did not outweigh Viacom’s need for the information.

YouTube made a second argument that disclosure of the information violated the rights of third parties because the contents of the database would disclose the viewing habits of its users. YouTube, however, did not provide independent evidence concerning how the database could be used to identify specific users. In response, Viacom argued that the login ID of YouTube’s users is an anonymous pseudonym that users create themselves and could not identify any specific individual without more information. Viacom even cited Google’s own representations on its website that, “[i]n most cases, an IP address without additional information cannot [identify its user].” As a result, the Court found YouTube’s concern regarding privacy rights was speculative and did not outweigh Viacom’s need for the information.

The Court also noted in passing that YouTube had cited the Video Privacy Protection Act (VPPA), which prohibits videotape service providers from disclosing personal information of its customers. However, the Court paid little attention to the law and, in fact, only mentioned it in a single footnote. While some have argued that the Court ignored the VPPA because it narrowly interpreted the statute to apply only to videotape cassette service providers, it seems that even a broad interpretation to encompass videos on the internet would still not have benefited YouTube since YouTube failed to establish that the Logging database actually contained personal information of the viewers.

Internet privacy advocates, such as Electronic Frontier Foundation, argue that this ruling is a “set-back to privacy rights.” The opinion of the Court, however, does not appear to overrule the VPPA nor does it appear to set a new legal precedent for future cases.

For any disclosure of information to fall under the VPPA, the provider must disclose personally identifiable information of its customers. The Court’s ruling is based on a finding that YouTube and Google failed to meets its burden of proving that YouTube’s Logging database contains any personally identifiable information.

Privacy advocates are properly concerned that an IP address is the first step needed to identify a specific person. Once an IP address is obtained, a computer expert can determine the internet service provider and then subpoena the internet service provider to obtain the name of the person assigned the specific IP address. Also, Electronic Frontier Foundation has made the argument that a user’s login ID can identify a specific person if the creator, for example, decides to use their name as their login ID.

While all these arguments are correct, YouTube and Google failed to make these arguments in opposition to Viacom’s request for production of its Logging database. In fact, YouTube failed to refute Viacom’s argument that a user’s login ID is anonymous and, without more information, cannot identify a specific person. YouTube also failed to provide expert information that an IP address in some cases cannot identify a person, while in other cases, with a few simple steps, can be used to identify a specific person.

The Court was mindful of third parties’ rights to privacy, but found, in this case, that the Logging database did not contain such information. The Court never stated that personally identifiable information should not be protected nor did it overrule the VPPA. It simply stated, in its brief discussion, that YouTube and Google failed to prove that their Logging database contains personally identifiable information.

Our internet privacy rights have not been fully eroded . . . yet. Individuals should not fear the possibility of companies suing them individually by using this ruling to obtain their personal information and viewing habits. The Court’s ruling is based on the type of information in YouTube’s Logging database and the arguments (or lack thereof) presented by both sides. Individuals and privacy advocates should not critique the Court for granting Viacom’s motion, rather advocates should be concerned that YouTube and Google did not make a convincing argument that the information stored in their Logging database contains personally identifiable information. The Logging database is being produced because YouTube and Google failed to meet its burden, not because the Court has cut new ground in reducing privacy rights or overruled the VPPA.

Search engine websites sell keywords as a component of their advertising programs. By purchasing an advertising keyword, a business’s advertisement will appear next to the search results whenever a person enters the advertising keyword as a search term. Trademark questions arise whenever a competitor purchases an advertisement keyword that is confusingly similar to the protected mark of another competitor, thereby causing its advertisement to pop up next to the search results.

The Northern District Court recently addressed this issue in Storus Corp. v. Aroa Marketing (2008) WL 449835 (N.D. Cal.). Storus sells a money clip under the mark “Smart Money Clip.” Defendant Aroa also sells money clips in addition to other luxury personal items. Aroa purchased the advertisement keyword “smart money clip” offered by Google as part of its internet advertising program known as “AdWords.” By typing “smart money clip” in Google’s search engine, Aroa’s advertisement would appear to the right of all other search results. Aroa’s advertisement appeared as:

“Smart money clip

www.steinhouseonline.com Elegant Steinhouse accessories. Perfect to add to any collection.

Storus sued, claiming that Aroa had used a mark that was confusingly similar to Storus’s valid, protectable trademark. Storus claimed that Aroa’s use of its mark created “initial interest confusion.”

“Initial interest confusion occurs when the defendant uses the plaintiff’s trademark in a manner calculated to capture initial customer attention, even though no actual sale was finally completed as a result of the confusion.” (Intrastellar Starship Services Ltd. v. Epix, Inc., 304 F.3d 936, 941 (9th Cir. 2002).) Initial interest confusion does not mean that a customer purchases one product, believing that they are actually purchasing the product of another. This is known as “source confusion.” Rather, initial interest confusion occurs when a defendant uses a plaintiff’s mark to divert people looking for the plaintiff’s product to the defendant’s website, thereby inappropriately benefiting from the goodwill plaintiff had established in its mark. (See Brookfield Communications, Inc. v. West Coast Entertainment Corp., 174 F.3d 1036, 1058 (9th Cir. 1999).)

In Storus, the Northern District Court found, without discussion, that Aroa had “used” plaintiff’s mark and focused its analysis on whether there was a likelihood of confusion by utilizing the eight Sleekcraft factors. (See AMF, Inc. v. Sleekcraft, 599 F.2d 341, 348-49 (9th Cir. 1979).) However, in the context of infringing use on the internet, the Court first evaluates what has been termed the “internet trinity”: (1) similarity of the marks; (2) relatedness of the goods or services; and (3) the parties’ simultaneous use of the Web as a marketing channel. If the “internet trinity” analysis suggests confusion, the burden shifts to the defendant to prove that the remaining Sleekcraft factors “weigh strongly against the likelihood of confusion.” (See Perfumebay.com v. eBay, Inc., 506 F.3d 1165, 1174-75 (Fed. Cir. 2007).)

The Storus court found a likelihood of confusion after evaluating the internet trinity. The Court also found that defendant had failed to present any evidence concerning a lack of actual initial interest confusion and failed to present any evidence weighing against the likelihood of confusion.

However, the Court came to a different conclusion with respect to the second defendant sued by Storus – SkyMall. Storus contended that SkyMall’s web page infringed its trademark because when a customer typed in the phrase “smart money clip,” the customer was directed to a page showing the Aroa money clip. However, the Court found a lack of factual evidence that SkyMall actually “used” the mark “smart money clip.” The evidence presented to the Court established that the reason the customer was directed to the Aroa money clip was because the search mark phrase “smart money clip” also included the phrase “money clip.” To prevail at trial, Storus will have to prove that SkyMall’s search engine directs a customer searching for “smart money clip” to a page in SkyMall’s electronic catalog that contains the entire phrase “smart money clip.” The evidence presented was insufficient to draw that conclusion at summary judgment.

The findings in Storus are consistent with prior Ninth Circuit opinions prohibiting a defendant from using a plaintiff’s mark in “metatags” by causing initial customer confusion. Although a customer immediately notices upon entering the website that it is not the website of the trademark holder and, therefore, there is no actual source confusion, the misdirection of the user as a result of the embedded metatags violates the initial confusion doctrine.

However, at least one other circuit court comes to a different conclusion. The Second Circuit Court of Appeals that the use of protected marks in metatags does not infringe another’s trademark. The Second Circuit, rather than focusing on the element of confusion, instead focuses on whether a defendant “uses” a mark in commerce by employing hidden metatags. Courts in the Second Circuit have consistently held that there is no trademark “use” if the mark is not placed on any product, good, or service or where the mark is not used in a way that would indicate source or origin. (See 1-800 Contracts, 14 F.3d 400 and FragranceNet.com, Inc. v. FragranceX.com, Inc., 493 F.2d 545, 550 (E.D.N.Y. 2007).) The Second Circuit Court has criticized the Ninth Circuit, accusing it of jumping to the “likelihood of confusion” prong without first properly analyzing whether the mark is “used in commerce.”

Defendants who find themselves appearing in courts in the Ninth Circuit need to focus on the “use” element of trademark infringement and encourage the court to heed the viewpoints set forth by Circuit Judge Berzone in his concurring opinion in Playboy Enterprises, Inc. v. Netscape Communications, 354 F.3d 1020, 1034 (C.A. 9 2004). Judge Berzon argues that the “initial interest confusion” doctrine should not be expanded into situations where a party is never confused. For example, Judge Berzon felt that a different result would occur if an internet advertisement, such as in Storus, clearly stated that the ad is not for the trademark owner’s product. Judge Berzon analogized the situation to a department store carrying multiple brands of jeans. If a customer asked the store clerk where she can locate Levi’s jeans, no trademark violation occurs when the clerk directs the customer to the area of the store containing Levi’s jeans as well as Calvin Klein jeans. Judge Berzon cautioned that the initial interest confusion doctrine should not expand to internet advertisements where a potential customer is simply advised of alternative competitive products through advertisements that clearly do not identify themselves with the mark of another.

One of the requirements of a valid patent is enablement. As set forth in 35 U.S.C. section 112, paragraph 1, a patent’s specification must contain “a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same.” The Court of Appeals for the Federal Circuit has explained that the enablement requirement is met “when one skilled in the art, after reading the specification, could practice the claimed invention without undue experimentation.” AK Steel Corp. v. Sollac, 344 F.3d. 1234, 1244 (Fed. Cir. 2003). Although anticipation or obviousness based on the prior art is a more frequently asserted basis for invalidating a patent in patent infringement litigation, the Federal Circuit’s decision in Sitrick v. Dreamworks, LLC, 516 F.3d. 993 (Feb. 1, 2008) suggests that lack of enablement may be becoming a far more powerful tool.

In Sitrick, the plaintiff owned two patents that covered technology that allows integration of a user’s audio signals or visual image into a preexisting video game or movie. The specifications of the two patents described the invention as it was used in video games, but the claims covered both video games and movies. Dreamworks produced DVDs that included a product that permitted users to add their own voice to movies. Sitrick sued Dreamworks for infringement of both patents.

During claim construction, Dreamworks argued that the claims should be narrowed to cover only video games. The plaintiff opposed that construction, and the court construed the claims as plaintiff requested, to cover both video games and movies.

Dreamworks moved for summary judgment, including for invalidity for lack of enablement. The District Court for the Central District of California granted the motion, finding all of the challenged claims invalid for lack of enablement with respect to movies.

The Court of Appeals affirmed. The court explained that in order to satisfy the enablement requirement, “the full scope of the claimed invention must be enabled.” Sitrick, supra, at 999. The court explained its rationale:

“Enabling the full scope of each claim is ‘part of the quid pro quo of the patent bargain.’ AK Steel, supra, 344 F.3d. at 1244. A patentee who chooses broad claim language must make sure the broad claims are fully enabled. ‘The scope of the claims must be less than or equal to the scope of the enablement’ to ‘ensure that the public knowledge is enriched by the specification to a degree at least commensurate with the scope of the claims.’[citation omitted].”

The court found that because the district court had construed the claims to cover both video games and movies (as the plaintiff had argued), the patents had to enable both embodiments. The specifications described the detailed steps required for integrating a visual image into a video game, but these steps were not usable for the same process in movies and the patents did not describe how to integrate an image into a movie.

The court stated that it was irrelevant if the patents were enabled for video games – the enablement requirement was not met unless the patents were enabled for both embodiments of the invention, video games and movies. Sitrick, supra, at 1000.

The court held that Dreamworks’ evidence, consisting of the specifications of the two patents and expert testimony, was clear and convincing evidence of lack of enablement. The patents did not teach how to use, in movies, the technology described for using the invention in video games. In addition, defendants’ experts testified that a person skilled in the art could not use the specifications to utilize the invention in movies because video games and movies differed in many respects.

In an earlier case, Automotive Technologies International, Inc. v. BMW of North America, Inc. 501 F.3d. 1274 (Fed. Cir. 2007), the court reached the same conclusion. In that case, the plaintiff’s patent covered side impact sensors used in airbags. The patent’s specification described mechanical sensors in detail, but also mentioned electronic sensors, and the claims covered both types of sensors. The district court granted a defendant’s motion for summary judgment on invalidity on the grounds that the full scope of the claims covered electronic sensors as well as mechanical sensors, but the specification did not teach a person skilled in the art how to make and use the invention with an electronic sensor.

On appeal, the plaintiff argued that because one embodiment, mechanical sensors, was enabled, the claims were enabled. The Court of Appeals held to the contrary, at 1285:

“…[T]he claim construction of the relevant claim limitation resulted in the scope of the claims including both mechanical and electronic side impact sensors. Disclosure of only mechanical side impact sensors does not permit one skilled in the art to make and use the invention as broadly as it was claimed, which includes electronic side impact sensors. Electronic side impact sensors are not just another known species of a genus consisting of sensors, but are a distinctly different sensor compared with the well-enabled mechanical side impact sensor that is fully discussed in the specification. Thus, in order to fulfill the enablement requirement, the specification must enable the full scope of the claims that includes both electronic and mechanical side impact sensors, which the specification fails to do.”

The plaintiff also argued that a person skilled in the art would be able to figure out how to use an electronic sensor in the invention. The court disagreed. “‘It is the specification, not the knowledge of one skilled in the art, that must supply the novel aspects of an invention in order to constitute adequate enablement.’ Although the knowledge of one skilled in the art is indeed relevant, the novel aspect of an invention must be enabled in the patent.” Id. at 1283. The court explained that “when there is no disclosure of any specific starting material or of any of the conditions under which a process can be carried out, undue experimentation is required.” Id. at 1284.

Thus in both Strick and Automotive Technologies, the plaintiffs had sought and obtained a broad claim construction, but had lost the case on summary judgment due to their failure to show that the scope of the claims was enabled.

Some commentators have questioned whether the Federal Circuit is setting the enablement standard too high. That remains to be seen. At this point, however, it is clear that patent litigation plaintiffs should carefully consider the specification in seeking a broad claim construction, and defendants should scrutinize the broad claims to see if invalidity based on lack of enablement can be asserted.

On March 5, 2008, the United States District Court for the Northern District of California (“District Court”) in First Advantage Background Services Corp. v. PrivateEyes, Inc., (“First Advantage”) found, inter alia, that the California Uniform Trade Secrets Act, California Civil Code section 3426, et seq. (“CUTSA”) preempts common law claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets. The First Advantage opinion holds that claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets may be preempted by CUTSA.

PrivateEyes, a California corporation who conducts background checks for employers, entered into an agreement with First Advantage’s predecessor, whose duties First Advantage assumed. First Advantage agreed not to use confidential information received from PrivateEyes to solicit business from vendors with whom PrivateEyes was in contract. First Advantage solicited business despite the agreement not to, and also disclosed PrivateEyes’ confidential and proprietary information to the same vendor. After First Advantage sued PrivateEyes alleging a number of claims related to their agreement, PrivateEyes filed a counterclaim asserting various causes of action. First Advantage filed a motion to dismiss some causes of action found in PrivateEyes’ counterclaim. The District Court granted First Advantage’s motion in part, allowing PrivateEyes leave to amend some of the claims, which PrivateEyes did when it filed its First Amended Counterclaim. Thereafter, the District Court entertained First Advantage’s motion to dismiss.

The District Court began its discussion by addressing First Advantage’s motion to dismiss PrivateEyes’ fifth cause of action: intentional interference with prospective economic advantage. Citing Korea Supply Co. v. Lockheed Martin Corp., the District Court noted that PrivateEyes would need to satisfy the following elements in order to prevail: “(1) an economic relationship between the plaintiff and some third party, with the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentional acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the defendant.”

In dismissing PrivateEyes’ intentional interference claim in PrivateEyes’ initial counterclaim, the District Court found that the intentional interference claim failed to “allege an independently wrongful act outside a simple breach of contract,” a necessary requirement to satisfy the intentional interference claim’s third element. To survive a motion to dismiss, PrivateEyes would have to “plead and prove that the defendant’s acts are wrongful apart from the interference itself.” An independently wrongful act is one that “is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” PrivateEyes’ amended counterclaim alleged three specific independently wrongful acts in an attempt to satisfy the third element of the intentional interference claim: misappropriation of trade secrets, breach of confidence, and trade libel.

PrivateEyes alleged that First Advantage misappropriated trade secrets in violation of CUTSA because it improperly disclosed PrivateEyes’ confidential information, including PrivateEyes’ profit margins. First Advantage argued, however, that CUTSA preempted PrivateEyes’ intentional interference claim because CUTSA preempts any common law claim based on conduct which could support a trade secret claim. Relying on Reeves v. Hanlon, a California Supreme Court case, PrivateEyes argued that trade secrets misappropriation can form the basis of an intentional interference claim.

In Reeves, the court found the defendants “violated CUTSA for stealing a confidential client list, and found to have committed intentional interference based on wrongful acts including destruction of the plaintiffs’ computer files, misappropriation of confidential information, and improper solicitation of plaintiffs’ clients.” The District Court disagreed with PrivateEyes’ reading of Reeves. Specifically, the District Court stated that although Reeves discussed misappropriation in its analysis of the intentional interference claim, that discussion in and of itself did not “foreclose preemption” for a number of reasons. First, the District Court noted that the defendant in Reeves had not raised the issue of preemption. This was important because in San Jose Constr., Inc. v. S.B.C.C., Inc., the appellate court refused to rule on CUTSA preemption because the issue of preemption had not been raised below. Second, Reeves is distinguishable as it was specifically limited to whether an employer could bring an intentional interference claim against a competitor that hired the employer’s former at-will employees. Lastly, because there was no dispute as to the wrongful acts beyond misappropriation, the preemption analysis would have had no impact on the court’s decision. The District Court recognized that in Cadence Design Sys., Inc. v. Avant! Corp., the only other California Supreme Court decision on point, the court suggested that CUTSA preempted all common law claims based on trade secret misappropriation.

The District Court also discussed California Civil Code section 3426.7(b), which identified the three categories of cases not preempted by CUTSA. Specifically, in addition to cases based on breach of contract and criminal remedies, any claims not based on trade secret misappropriation are not preempted by CUTSA. As a result, courts have interpreted this statute to mean that all claims which are based on trade secret misappropriation are preempted by CUTSA.

Applying this rule to PrivateEyes’ allegations in their First Amended Counterclaim, the District Court recognized that PrivateEyes had specifically alleged a CUTSA violation. Because the intentional interference claim was a common law claim based on trade secret misappropriation, the District Court held that CUTSA preempted the claim.

The District Court also addressed PrivateEyes’ additional support of its intentional interference claim. Specifically, PrivateEyes alleged that First Advantage had engaged in a common law breach of confidence because it had improperly disclosed PrivateEyes’ “confidential and proprietary information to CCE in violation of its agreement to maintain the confidential nature of this information.” However, the District Court was critical of PrivateEyes’ breach of confidence claim because the language and facts used “in support of its allegation of breach of confidence are identical to those [PrivateEyes] offered in support of its misappropriation claim.” Further, the District Court noted that the only other difference between the two claims was the existence of a contract, which by itself is inadequate to avoid preemption. Thus, the District Court held that CUTSA preempted the intentional interference claim based on breach of confidence because this was “still a common law claim based on facts which would amount to the misappropriation of trade secrets.”

The District Court’s decision in the First Advantage case suggests that CUTSA will preempt any claims for intentional interference that are based on wrongful acts amounting to misappropriation of trade secrets. Although the plaintiff in First Advantage attempted to avoid preemption by CUTSA by basing its intentional interference claim on misappropriation of trade secrets and breach of confidence, the District Court followed an increasing body of authority holding that any common law claims based on trade secret misappropriation are preempted by CUTSA.