Intellectual Property

6/25/16-  At the 7^th Annual  VidCon in Anaheim, CA , Weintraub Tobin Shareholder Scott M. Hervey and Rian Bosak, Head of Network Operations Full Screen, presented  “Fair Use and Youtube- A Creator’s Take” to a standing room only audience of digital media creators and industry professionals.  Check out their presentation below:

Up until now, it has been nearly impossible for a plaintiff to recover enhanced (up to treble) damages in patent infringement cases.  The current test for enhanced damages, set forth by the Federal Circuit Court of Appeals in 2007 in In Re Seagate Technology, LLC, 497 F.3d 1360 (2007), was so rigid that it essentially slammed the door on plaintiffs seeking enhanced damages.  On June 13, 2016, however, the Supreme Court decision changed all that, in a unanimous decision in Halo Electronics v. Pulse Electronics, 2016 U.S. LEXIS 3776 (June 13, 2016).  The Court opened the door for plaintiffs to recover enhanced damages – no one is sure yet how far – but it is clear that plaintiffs have been given a boost and would-be infringers a cause for anxiety.

In Halo, the Court made three rulings that affect patent infringement suits.  First, the Court changed the test for recovery of enhanced damages from a rigid test to a flexible one.  Second, the Court lowered the plaintiff’s burden of proof for enhanced damages.  Third, the Court eased the standard of appellate review of district courts’ decisions on enhanced damages, leaving the district courts with more discretion and making it more difficult for defendants to overturn awards of enhanced damages.

The patent laws permit a trial court, in its discretion, to award enhanced damages to a plaintiff who prevails in a patent infringement suit.  35 U.S.C. § 284.  In Seagate, the Federal Circuit held that in order to obtain enhanced damages under § 284, a plaintiff had to prove willful infringement.  The court established a two-part test for willfulness.  The first part is objective – the plaintiff must show that there was an objectively high likelihood that the defendant’s actions were infringing.  This part of the test, referred to as “objective recklessness,” is determined by the judge based on the record, and cannot be found if the defendant raises a substantial question during the litigation as to noninfringement or invalidity.  The second part of the Seagate test is subjective – the plaintiff must show that the defendant knew or should have known that its actions were risking infringement.  The Seagate court held that a plaintiff must prove both parts of the test by clear and convincing evidence.  In Seagate, the court also established three different standards for appellate review: de novo for objective recklessness, substantial evidence for subjective knowledge, and abuse of discretion for the decision to award enhanced damages.

The Supreme Court’s Halo decision is a single decision issued in two cases:  Halo Electronics v. Pulse Electronics and Stryker Corp v. Zimmer, Inc.  In the Halo case, plaintiff Halo and defendant Pulse competed in electronic components.  Halo owned patents for electronic packages with transformers used to attach to circuit boards.  Halo offered Pulse the opportunity to license the patents.  Pulse declined and continued to sell the accused products, after deciding that the patents were not valid.  Halo sued Pulse.  The jury found that Pulse had infringed the patents and that the infringement was likely willful.  Halo sought enhanced damages, but the district court denied the request on the grounds that Pulse had asserted a defense at trial that was not baseless, such that the first part of the Seagate test could not be met.  On appeal, the Federal Circuit affirmed.

In Stryker, Stryker and Zimmer competed in the sale of an orthopedic surgical device.  Stryker sued Zimmer for patent infringement, and won a jury verdict of $70 million for willful infringement.  The willfulness was based on evidence that Zimmer had flagrantly decided to copy Stryker’s products.  The district court awarded an additional $6.1 million in damages and trebled the award, for a total of over $228 million.  On appeal, the Federal Circuit affirmed the finding of infringement, but reversed the award of treble damages, relying on the same rationale as in the Halo case, that the defendant had presented reasonable defenses at trial, such that the first part of the Seagate test could not be met.

The Supreme Court explained that § 284 provides a district court with discretion to award enhanced damages and does not specifically limit that discretion.  Halo, at *14.  However, the Court emphasized that the district court’s discretion should only be exercised in “egregious” cases.  Id. at *15.  Egregious cases are those in which the defendant’s conduct is “wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or . . . characteristic of a pirate.”  Id. 

In tossing out the Seagate test, the Court said that the first part of the Seagate test – objective recklessness – is wrong because it excludes defendants who wantonly infringe a patent, but later, during litigation, assert a defense that they may not even have known existed at the time of the infringement.  Id. at *16-17.  According to the Court, “someone who plunders a patent – infringing it without any reason to suppose his conduct is arguably defensible – can nevertheless escape any comeuppance under §284 solely on the strength of his attorney’s ingenuity.”  Id. at *17.  The Court found no basis under §284 for a threshold requirement of objective recklessness, holding that a defendant’s culpability should be “measured against the knowledge of the actor at the time of the challenged conduct.”  Id.  The Court further found that the high burden of proof of clear and convincing evidence was inappropriate and not consistent with § 284.  Id. at *20.

The Court set forth the proper test for enhanced damages, at *19:

“[C]ourts should continue to take into account the particular circumstances of each case in deciding whether to award damages, and in what amount.  Section 284 permits district courts to exercise their discretion in a manner free from the inelastic constraints of the Seagate test.  Consistent with nearly two centuries of enhanced damages under patent law, however, such punishment should generally be reserved for egregious cases typified by willful misconduct.”

Thus, in discarding the Seagate test, the Court did not replace it with a new test.  Instead, the Court simply held that the Seagate test is “unduly confining” and that district courts should “be guided by sound legal principles developed over nearly two centuries of application and interpretation of the Patent Act . . . [and limit] the award of enhanced damages to egregious cases of misconduct beyond typical infringement.”  Id. at *24.

Lastly, the Court changed the standard of review of a district court’s decision on enhanced damages.  The Court held that because the district court has full discretion to award enhanced damages, its discretion should be subject to a single standard of review, abuse of discretion.

Halo has significant ramifications for patent owners and potential infringers, and for patent litigation itself.  Among them are:

• Because the test is now more flexible and because the plaintiff’s burden of proof is lower, there may be more patent infringement cases filed.
• Because the accused infringer may face allegations of willfulness that will likely survive to trial, cease and desist letters from patent owners to accused infringers may carry more weight.
• Because the test is now determined by the defendant’s conduct at the time of the infringing acts, plaintiffs may conduct more extensive discovery into the defendant’s knowledge and when the defendant had that knowledge.
• Without the benefit of the objective recklessness part of the Seagate test, defendants will have a more difficult time obtaining summary judgment of no willfulness; thus, the issue of willfulness and the plaintiff’s supporting evidence of the defendants willfulness will be presented at trial.
• Because defendants will not want to risk evidence of willfulness at trial and an award of enhanced damages, settlement discussions will become more important, and more cases may settle before trial.
• Because the “new” test is more flexible and because the burden of proof on the plaintiff is lower than under Seagate, plaintiffs may be more likely to recover enhanced damages at trial.
• Because the test is now determined by the defendant’s conduct at the time of the infringing acts, companies developing new technology may become more diligent in conducting early infringement and invalidity analyses of key patents in their industry.
• For the same reason, defendants may become more cautious in how they conduct themselves during the development of new technology, and in the written records of their conduct.

While most view Halo as very favorable to patent owners, its effect will not be known until the district courts start applying the test and the Federal Circuit rules on their decisions.  Until that time, potential infringers may not really know what type of conduct will result in enhanced damages, and should act accordingly.

Patent litigators and prosecutors have been waiting to hear whether the U.S. Supreme Court would require the United States Patent and Trademark Office (“USPTO”) to apply the same claim construction standard as the district courts.  The answer is “No.”

For over 100 years, the USPTO has used the “broadest reasonable construction” standard to interpret patent claims.  But the district courts apply a different standard, which gives claims their ordinary meaning as understood by a person of skill in the art.  Questions have arisen as to whether it makes sense for these standards to be different.  In its ruling on June 20, 2016, the U.S. Supreme Court addressed this question as it relates to an inter partes review (“IPR”), which is a procedure created by the America Invents Act, 35 U.S.C. §100 et seq.   The IPR procedure allows someone other than the patent owner to petition the USPTO to review claims of an issued patent and cancel claims that are found to be unpatentable in light of prior art.  The Patent Trial and Appeal Board (“PTAB”) handles IPR petitions and reviews at the USPTO.

In 2012, Garmin International, Inc., and Garmin USA, Inc., filed an IPR petition seeking to invalidate the claims of Cuozzo Speed Technologies, LLC’s patent relating to speedometers that alert drivers when they exceed the speed limit.  Among other requests, Garmin asked the USPTO to review claim 17 in light of three prior art patents.  Claim 17 depended from claims 10 and 14.  While Garmin had not expressly challenged claims 10 and 14, the USPTO granted the petition as to all three claims explaining that claims 10 and 14 were implicitly challenged.  The PTAB concluded that these claims were obvious in light of the prior art, denied Cuozzo’s motion to amend the claims as futile, and cancelled the claims.  Cuozzo appealed to the Court of Appeals for the Federal Circuit arguing 1) the PTAB improperly applied the “broadest reasonable construction” standard instead of the district courts’ standard, and 2) the USPTO improperly instituted review of claims 10 and 14 because Garmin had not challenged those claims “with particularity.”  The Federal Circuit rejected both arguments.  The Supreme Court granted certiorari and affirmed.  The Court found that the USPTO has the authority to issue a reasonable rule specifying the standard for claim construction and that the broadest reasonable construction standard is a reasonable rule.  Further, the Court found that 35 U.S.C. §314(d) precludes appeal of the USPTO’s decision to institute review of claims 10 and 14.

In considering the claim construction standard, the Court considered Cuozzo’s argument that the USPTO did not have the authority to issue a regulation instructing that in inter partes review, the PTAB “shall [construe a patent claim according to] its broad­est reasonable construction in light of the specification of the patent in which it appears” 37 CFR §42.100(b)(2015).  Cuozzo argued that the PTAB should be required to apply the same claim construction standard used by the district courts.  The Supreme Court, however, disagreed citing §316(a)(4) of the statute, which grants the USPTO authority to issue “regulations … establish­ing and governing inter partes review.”  The Court explained that the statute contains a gap because it does not unambiguously tell the USPTO what claim construction standard to use.  Where a statute is ambiguous or leaves a gap, the Court pointed out that it typ­ically interprets the statute “as giv­ing the agency leeway to enact rules that are reasonable in light of the text, nature, and purpose of the statute.”

The Court was not persuaded by Cuozzo’s argument that Congress must have designed IPR proceedings as a “surrogate for court proceedings,” and thus must have intended the USPTO to use the same standard as the district courts.  The Court reasoned that in other ways IPR proceedings are more like a specialized agency proceeding than a judicial proceeding.  For example, parties initiating the proceedings do not have to have a stake in the outcome, petitioners may lack constitutional standing and need not remain in the proceeding, and the Patent Office may intervene in a later judicial proceeding to defend its decision.  In addition, the burden of proof to cancel claims in an IPR is preponderance of the evidence, whereas in district court, a challenger must prove invalidity by clear and convincing evidence, which is a higher standard.  Further, “neither the statutory language, its purpose, or its history suggest that Congress considered what standard the [USPTO] should apply … in inter partes review.”  Therefore, the Court found that the USPTO has the authority to enact reasonable rules specifying the claim construction standard to fill this gap in the statute.

The Court then turned to the question of whether the rule is a reasonable exercise of that authority.  The Court noted that “the broadest reasonable construction helps to protect the public.”  It encourages patent applicants to draft claims narrowly, which promotes “precision while avoiding overly broad claims” and “helps prevent a patent from tying up too much knowledge” while helping the public “draw useful information from the disclosed invention and better understand the lawful limits of the claim.”  The Court also noted that past practice at the USPTO supports use of the broadest reasonable construction.

Cuozzo argued that there is a critical difference between the initial examination of a patent and the examination during an IPR that supports use of the district courts’ standard.  In an initial examination, the examiner applies the broadest reasonable construction, and if claims are rejected, the applicant can amend them as a matter of right.  In contrast, there is no absolute right to amend claims during an IPR.  Instead, amendment requires a motion, which has rarely been granted.  But the Court did not find this argument persuasive.  Instead, the Court found that use of the broadest reasonable construction was not unfair in any obvious way because there is an opportunity to amend during an IPR, albeit rarely granted, and the “original application process may have presented several additional opportunities to amend” the patent claims.

Cuozzo also argued that the use of one standard in IPR proceedings before the PTAB and a different standard in district courts “may produce inconsistent results and cause added confusion.” A district court could find a patent claim valid, and then the USPTO could later cancel the claim in its review.  The Court noted that that possibility “has long been present in our patent system, which provides different tracks … for the review and adjudication of patent claims.”  Given that inter partes review imposes a different burden of proof than that of the district courts, “the possibility of inconsistent results is inherent to Congress’ regulatory design.”  Further, the USPTO uses the broadest reasonable construction in other proceedings, which may be consolidated with inter partes review.  Thus, the Court could not find it unreasonable that the patent office prefers “a degree of inconsistency between the courts and the [USPTO] rather than among [USPTO] proceedings.”

Therefore, according to the Supreme Court, the PTAB and district courts can continue to apply different standards for interpreting patent claims.  Thus, when seeking to invalidate claims, patent challengers will likely continue to favor IPRs because of the broadest reasonable construction standard and the lower burden of proof.

In a high-profile case, a jury recently found that Google’s use of portions of Oracle’s Java software code was allowable under the fair use doctrine and thus did not constitute copyright infringement.  Oracle sought as much as $9 billion in damages from Google for incorporating approximately 11,000 lines of Oracle’s Java software code into Google’s Android software.  Not only were billions of dollars in monetary damages at stake in this dispute, but also a controversial legal concept that could have repercussions for the entire software industry.

The issue is whether Oracle can claim a copyright on Java APIs and, if so, whether Google infringes these copyrights by implementing them into their Android software.  APIs, or Application Programming Interfaces, are a set of routines, functions, specifications, etc., that allow software programs to communicate or interact with each other.  APIs are one of the most common ways technology companies integrate software and applications with each other and allow for third-party developers to write programs (i.e. Apps) to run on their products.  Google, and those on its side, said an Oracle victory would stifle software innovation by discouraging third-party programmers and developers from using APIs.  Oracle, and those on its side, said a Google victory hurts innovation by weakening intellectual-property protections for software and discouraging companies from creating new software platforms.

The dispute itself traces back to 2010 when Oracle sued Google in United States District Court for the Northern District of California, case number 3:10-cv-03561, for both patent infringement and copyright infringement.  Oracle alleged that Google’s Android software illegally used key pieces from Java that related to 37 APIs created to help programmers more easily write in Java.  Java was originally developed by Sun Microsystems beginning in 1991.  Oracle purchased Sun in January 2010, and continued the Java platform.  Google first released a beta version of its Android mobile phone operating system in 2007, and noted from the beginning that it would incorporate some Java pieces.  Google wrote its own version of Java for Android, but in order to allow third-party developers to write programs for Android, Google also used the same names, organization, and functionality as the Java APIs.

In May 2012, a jury found that Google did not infringe any asserted claim of Oracle’s two patents-in-suit, but the jury did find that Google had copied the “structure, sequence and organization” of parts of the 37 Java APIs.  “Structure, sequence and organization” is a legal term used to define a basis for comparing one software work to another in order to determine if copyright infringement has occurred when one software code is not a literal copy of the other.  However, District Court Judge William Alsup overturned the jury finding on copyright infringement and ruled that the structure of the Java APIs used by Google was not copyrightable.  Judge Alsup reasoned that “so long as the specific code used to implement a method is different, anyone is free under the Copyright Act to write his or her own code to carry out exactly the same function or specification of any methods used in the Java API.”

Oracle appealed Judge Alsup’s copyright ruling to the Court of Appeals for the Federal Circuit, which had appellate jurisdiction instead of the Ninth Circuit Court of Appeals because the District Court case also contained patent claims.  The Federal Circuit reversed the District Court on the copyright issue, holding that the “structure, sequence and organization” of an API could be copyrightable. The Federal Circuit acknowledged that Oracle’s APIs were somewhat functional, but that does not “automatically” put them beyond the scope of copyright law.  Google petitioned for review from the United States Supreme Court, but the Supreme Court denied Google’s request in June 2015, and the case was remanded back to the district court for the current proceedings on the fair use defense and damages.

Trial in the current case began on May 9, again in front of Judge Alsup in the Northern District of California, on whether Google’s use of the APIs was protected by the fair use doctrine and therefore exempt from copyright infringement.  The fair use doctrine is a defense or exemption to copyright infringement that allows the incorporation of copyrighted material in another’s work if a four-factor balancing test is met.  In determining whether the use made of a work in any particular case is a fair use, the factors to be consider are: (1) the purpose and character of the use, including whether the use is commercial or for nonprofit/educational purposes and whether it is transformative; (2) the nature of the copyrighted work; (3) the amount used in relation to the copyrighted work as a whole; and (4) the effect of the use on the potential market for or value of the copyrighted work.  Per the jury instructions, Google had the burden of proof to show fair use.

During the trial, Google argued that its use of the Java APIs was transformative under the first factor because it used the Java APIs as part of a new platform for mobile devices.  Google argued under the second factor, the nature of the work, that APIs rank low on the creativity scale because they are more functional in nature.  Under the third prong, Google argued that it used only a small amount of the overall code that was necessary to effectively use the open-source Java language, and that the 11,000 lines of Java code it used was less than 0.1% of Android’s 15 million lines of code.  Finally, under the fourth prong, Google argued there was little market harm to Oracle because no one was using the APIs for mobile devices at the time.

Oracle argued under the first prong that the Java APIs were already being licensed and adapted by Sun at the time for mobile devices, and that the use by Google was commercial anyway. As to the second and third factor, Oracle argued the APIs represent a lot of skill and creativity, and that Google did not have a right to use exact lines of Java code or the overall structure, sequence, and organization of the 37 APIs.  In addition, Oracle argued, 11,000 lines of code is still a significant amount of code.  For the fourth factor, Oracle argued that the success of Android shows harm to the market because Oracle would have been able to license its Java code in the mobile space if Google had not copied its APIs without permission.

On May 26, after three days of deliberations, the jury came back with a unanimous verdict in favor of Google, finding Google’s use of the Java APIs in Android to constitute fair use.  Regardless, the case is still far from over as Oracle has already said it will appeal to the Federal Circuit.  Oracle’s appeal will likely focus on the District Court’s jury instructions and how closely those instructions capture the Federal Circuit and Ninth Circuit’s application and analysis of fair use.  Moreover, no matter which way the Federal Circuit goes, we can expect the losing party to ask the Supreme Court to review the issue.  So, while the current result is a big win for Google and other supporters of open-source software, the road to final resolution of this issue is still a long one.

So what is a trade secret?  Generally, a trade secret is information that the owner has taken reasonable measures to keep secret, derives independent economic value from not being generally known, and cannot be readily ascertainable by proper means, such as reverse engineering or independent development.  Many businesses rely on trade secret protection rather than patent protection for confidential information such as product recipes (e.g., the recipe for Coca-Cola), software algorithms (e.g., Google’s search engine), customer lists, business plans, wholesale price lists, and manufacturing processes for semiconductor chips.  Trade secrets have the advantage that they are protected indefinitely as long as they remain a secret, unlike patents and copyrights that expire after a specific time period.  Of course, a disadvantage of trade secrets is that they can be lost instantly and forever if they are disclosed or independently developed by another.  But, unlike other forms of intellectual property, such as patents and copyrights, until now federal law applied only to criminal prosecution for trade secret misappropriation.  As a civil matter, trade secrets were only protected under state law.  That all changed on May 11, 2016, when President Obama signed the Defend Trade Secrets Act (“DTSA”), which amends the Economic Espionage Act to create a federal civil cause of action for trade secret misappropriation.  The DTSA, codified as 18 U.S.C. §1836(b), went into effect when it was signed and applies to any misappropriation that occurs on or after that date.

Trade secret misappropriation can occur in a variety of circumstances.  One of the most common is when an employee leaves one company to a join competitor or a start-up and impermissibly takes protected business or technical information belonging to their former employer to the new company.  As another example, hackers capitalizing on computer security weaknesses pose a threat for the misappropriation of a company’s trade secrets.  To protect against such misappropriation, 48 states (all except New York and Massachusetts, which still rely on common law) have adopted some version of the Uniform Trade Secrets Act (“UTSA”), providing some uniformity in trade secret law.  But there are still a number of significant differences between the states’ laws as adopted, and it can be difficult, if not impossible, to enforce state laws when misappropriators flee the state or country with the trade secrets.  For example, it can be difficult or impossible to effect service of process and obtain discovery to prove misappropriation outside of a state’s jurisdiction.  One goal of the DTSA, which in many aspects mirrors the UTSA, is to provide a harmonized federal trade secret law, which will allow businesses that operate across multiple states to have uniform policies for protection and enforcement of trade secrets.

It, however, is important to note that the DTSA does not preempt state laws, but instead it provides an additional layer of potential protection on top of the state laws.  This complication has led some to argue that the DTSA will increase legal costs and increase the number of trade secret lawsuits.  For example, we can expect plaintiffs to bring both state and federal claims because differences between the state and federal laws may make it possible for a plaintiff to win under one law but not the other.  More claims implicating differing state and federal laws will likely lead to higher costs for litigation.  Further, more plaintiffs may be willing to pursue trade secret claims because it will be easier to file the claims in federal court, and some plaintiffs prefer federal court for complex lawsuits such as trade secret cases.  The volume of trade secret lawsuits may also increase because plaintiffs will effectively be given two bites at the apple (state claims and federal claims in the same lawsuit), which likely gives them a higher probability of success.

Unlike the UTSA, the DTSA includes a seizure provision that allows a court to issue an order to seize the allegedly stolen trade secret items (e.g., hard drives and flash drives containing trade secrets, software, hardware, and lists) in the defendant’s possession.  The plaintiff can request and receive an order for this seizure ex parte, which means without having to inform the defendant.  The goal is to allow recovery of the misappropriated items before the defendant can move, hide or destroy them.  Early recovery also can minimize the harm caused by the misappropriation.  The DTSA has numerous safeguards designed to avoid abuses of this seizure provision.  It also provides a cause of action for wrongful or excessive seizure.

Once misappropriation is proven, the DTSA provides for damages.  The Court can grant an injunction.  But if exceptional circumstances render an injunction inequitable, a court can order a reasonable royalty for the continued use of the trade secret.  The DTSA also provides for compensatory damages for either 1) actual loss of the trade secret and any unjust enrichment not compensated as part of the actual loss or 2) a reasonable royalty.  Exemplary damages up to two times the actual damages can be awarded for willful and malicious misappropriation.  For cases involving bad faith or willful misappropriation, a party can also recover attorneys’ fees.  It is important to note that under the DTSA, injunctive relief cannot be used to prevent a person from entering into an employment relationship merely based on the information the person knows.  Rather, an injunction must be based on evidence of actual or threatened misappropriation.  Further, an injunction preventing or limiting employment cannot conflict with an applicable state law prohibiting restraints on the practice of a lawful profession, trade, or business.  This limitation appears to recognize that certain states place limits on the applicability of non-compete agreements.  It is interesting to note that the White House also recently released a report criticizing certain types of non-compete agreements and state laws that broadly enforce them.

The DTSA also provides whistleblower immunity from liability for confidential disclosure of a trade secret to the government for the purpose of reporting or investigating a suspected violation of law or in a sealed court filing in a lawsuit.  The DTSA places the burden on employers to notify employees, including any individuals such as contractors and consultants, of these whistleblower immunity provisions.  Failure to do so comes with a penalty.  If an employer sues an employee for trade secret misappropriation, unless the employer has provided the employee with notice of the whistleblower immunity, the employer is prohibited from recovering attorneys’ fees and exemplary damages.  The notice must be in writing in any agreement governing the employee’s use of trade secrets or confidential information.

The DTSA will have an immediate impact on all businesses.  Every new or modified employment agreement and contract with a non-disclosure or confidentiality clause will need to be revised.  Further, trade secret protection only exists to the extent that reasonable efforts have been made to keep the information secret.  Don’t risk losing valuable intellectual property because you didn’t take the time to enter into a non-disclosure agreement, password protect accounts, encrypt data, train employees, mark documents as confidential, etc.  Take this opportunity to evaluate whether your company’s trade secrets are adequately protected and put into place additional safeguards as necessary.  While trade secrets can be extremely valuable, that value can evaporate instantly if the secret is disclosed.

Senate and House of Representatives Pass the Defend Trade Secrets Act (DTSA).  First federal trade secret bill awaiting presidential signature.

More details can be found at the following Forbes article:  “The New Defend Trade Secrets Act is the Biggest IP Development in Years,” dated April 28, 2016.