Intellectual Property

The deadline for business to implement compliance with the California Consumer Privacy Act is just around the corner and chances are most businesses are not ready.

On June 28, 2018, Governor Brown signed into law the California Consumer Privacy Act of 2018.  The Act applies to any business which does business in California, and i) has annual gross revenues in excess of $25 million; ii) buys, receives, sells, or shares for commercial purposes, the personal information of 50,000 or more consumers, households, or devices; or iii) earns more than half of its annual revenue from selling consumers’ personal information.

The purpose of the Act is to provide California residents with significant new rights related to their personal information.  The Act provides:

1. That California residents have the right to know the type of personal information being collected about them, to know whether such information is being sold or disclosed to any third parties and the identification of such third parties;
2. That California residents have the right to prohibit the sale of their personal information;
3. That California residents have the right to access their personal information and may request a business delete any or all of their personal information; and
4. That California residents may not be discriminated against for exercising these rights.

The Act defines “personal information” broadly to include any information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.  Examples of personal information include identifiers such as a real name, alias, postal address, unique personal identifier, online identifier, Internet Protocol address, email address, account name, social security number, driver’s license or state identification number and a passport number.  Personal information also includes an insurance policy number, employment history, a bank account number, credit card number, debit card number, or any other financial information, medical information, or health insurance information. Characteristics of protected classifications under California or federal law (e.g., race, religion, age, etc.) are considered personal information as is biometric information.  Additionally, commercial information, including records of personal property, products or services purchased, obtained, or considered, or other purchasing or consuming histories or tendencies; internet or other electronic network activity information, including, browsing history, search history, and information regarding a consumer’s interaction with an Internet Website, application, or advertisement; geolocation data; audio, electronic, visual, thermal, olfactory, or similar information is considered personal information under the Act, as is any inferences drawn from any of the above to create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes.  Personal information does not include information that is publicly available or “aggregate consumer information,” which is data that is “not linked or reasonably linkable to any consumer or household.”

The Act does not delineate personal information based on the means of collection or the consumer’s relationship with the business.  Accordingly, the Act applies to personal information collected in both digital and non-digital means, and covers not only business customers but employees, contractors, vendors, etc.

If a business collects personal information, the business must, at or before the point of collection of the personal information, provide two methods, one of which must be a toll-free number and a website address (if the company maintains a website), for consumers to submit requests to be provided with a wide variety of information, including the categories of personal information the business has collected about that consumer, the business propose for collecting such information and the third parties with whom the business shares such personal information. Such requests must be responded to, generally, within 45 days.

For any business that sells personal information, the Act requires that it create a link on its internet homepage and privacy policy to a page entitled “Do Not Sell My Personal Information” that permits a consumer to exercise their right not to have their personal information sold. Additionally, the Act requires that businesses inform consumers of their right to have their personal information deleted.

Existing online privacy policies should also be revised (or business should consider creating a separate privacy policy for California residents) for compliance with the CCPA.  A revised privacy policy should disclose the California consumer’s right to request information about the collection and use of personal information.  The revised privacy policy must also list the categories of personal information (as enumerated in the Act) the business has collected from California consumers in the last 12 months, the categories of sources of such information, the business purpose for collecting such information, the categories of third parties with whom the business shares such personal information, and the categories of personal information the business has sold in the last 12 months. If a company provides a financial incentive for providing personal information, this must be disclosed in the privacy policy.

Compliance with the Act will be enforced by the Attorney General of California through substantial civil penalties. The Act also provides remedies where a California consumer’s personal information is accessed or disclosed due to a data security breach where such breach is due to the failure to “implement and maintain reasonable security procedures.”  The Act provides for statutory damages and allows such claims to be made on a class-wide basis.

Merely updating an online privacy policy will not guarantee compliance with the CCPA.  A business will need to create internal processes for responding to consumer requests, be mindful of monetization restrictions, and ensure CCPA compliance (and obtain indemnification) from vendors that process personal information on its behalf.

In Curver Luxembourg SARL v. Home Expressions Inc., case number 18-2214, the U.S. Court of Appeals for the Federal Circuit recently held that the claim language of a design patent can limit its scope where the claim language supplies the only instance of an article of manufacture that appears nowhere in the figures.

Plaintiff Curver had asserted U.S. Design Patent No. D677,946 (’946 patent), entitled “Pattern for a Chair” and claiming an “ornamental design for a pattern for a chair.” Curver sued defendant Home Expressions alleging that Home Expressions made and sold baskets that incorporated Curver’s claimed design pattern and thus infringed the ’946 patent. The design patent’s figures, however, merely illustrate the design pattern disembodied from any article of manufacture.

At the district court level, Home Expressions moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that its accused baskets could not infringe because the asserted design patent was limited to chairs only. To determine whether the complaint stated a plausible infringement claim, the district court conducted a two-step analysis. First, it construed the scope of the design patent. Second, it compared the accused products to the claimed design as construed to determine whether the products infringed. Under the “ordinary observer” test, an accused product infringes a design patent if “in the eye of an ordinary observer . . . two designs are substantially the same,” such that “the resemblance is such as to deceive such an observer, inducing him to purchase one supposing it to be the other . . . .”.

At the first step, the district court construed the scope of the ’946 patent to be limited to the design pattern illustrated in the patent figures as applied to a chair, explaining that “[t]he scope of a design patent is limited to the ‘article of manufacture’— i.e., the product—listed in the patent.” At the second step, the district court found that an ordinary observer would not purchase Home Expressions’ basket with the ornamental “Y” design believing that the purchase was for an ornamental “Y” design applied to a chair, as protected by the ’946 patent.

Accordingly, the district court dismissed the complaint pursuant to Rule 12(b)(6) for failing to set forth a plausible claim of infringement.  The Federal Circuit then had to decide whether the district court correctly construed the scope of the design patent as limited to the illustrated pattern applied to a chair, or whether the design patent covers any article, chair or not, with the surface ornamentation applied to it. In doing so, the Federal Circuit for the first time had to decide whether claim language specifying an article of manufacture can limit the scope of a design patent, even if that article of manufacture is not actually illustrated in the figures because all of the drawings fail to depict an article of manufacture for the ornamental design. Thus, this was a case of first impression in which the Federal Circuit said it was confronted with an “atypical situation.”

In making its decision, the Federal Circuit noted that since the figures fail to illustrate any particular article of manufacture, Curver’s argument effectively collapses to a request for a patent on a surface ornamentation design per se.  However, the Federal Circuit reasoned the law and long-standing precedent has never sanctioned granting a design patent for a surface ornamentation in the abstract such that the patent’s scope encompasses every possible article of manufacture to which the surface ornamentation could be applied.  Therefore, the Federal Circuit did not want to construe the scope of a design patent so broadly merely because the referenced article of manufacture appears in the claim language, rather than the figures.

Next, the Federal Circuit reasoned the Patent Office has made clear that it does not grant patents for designs disembodied from an article of manufacture.  In so doing, 1) the claim is not directed to a design per se, but a design for an identified article, and 2) the scope of the design claim can be defined either by the figures or by a combination of the figures and the language of the design patent. Thus, to obtain a design patent requires that the design be tied to a particular article, and the claim language, and not just illustration alone, can identify that article.

Next, turning to the specifics of this case, the Federal Circuited noted the prosecution history shows that here Curver specifically amended the title, claim, and figure descriptions to recite “pattern for a chair” in order to satisfy the article of manufacture requirement necessary to secure its design patent. And, under the ordinary observer test, Curver does not dispute that the district court correctly dismissed Curver’s claim of infringement, for no “ordinary observer” could be deceived into purchasing Home Expressions’ baskets believing they were the same as the patterned chairs claimed in Curver’s patent.

Thus, in sum, given that long-standing precedent, unchallenged regulation, and agency practice all consistently support the view that design patents are granted only for a design applied to an article of manufacture, and not a design per se, the Federal Circuit held that claim language can limit the scope of a design patent where the claim language supplies the only instance of an article of manufacture that appears nowhere in the figures.

LinkedIn is a popular professional networking website with more than half a billion members. Many of its users, in an effort to enhance their networking capabilities, make their profile public and available to anyone to review their personal details such as their employment, education, skill sets and other personal information. Although LinkedIn disclaims any ownership of the information its users post, this information has enormous value in the online marketplace.

For instance, web analytics companies have “harvested” this information for the purpose of analyzing it and/or selling their resulting analyses to third parties. One such company, HiQ Labs is a data analytics company that uses automated bots to harvest or “scrape” information from LinkedIn’s publicly available profiles, including data like names, job titles, work history and skills. HiQ Labs uses this information for two analytical products: (1) “Keeper,” which is used by employers to identify which employees are at the greatest risk of being recruited away so that they may take preventive measures; and (2) “Skill Mapper,” which aggregates the skill sets of employees in a particular workforce so that employers can determine where they may have “skill gaps.”

In May 2017, LinkedIn sent a cease and desist letter to HiQ Labs stating that it must stop accessing and copying data from LinkedIn’s servers and stated that LinkedIn would consider HiQ to be in violation of the Computer Fraud and Abuse Act (“CFAA”) (as well as other state and federal laws) if it continued its “scraping” activities. LinkedIn also warned HiQ that it had “implemented technical measures to prevent HiQ from accessing and assisting others to access LinkedIn’s site through systems that detect, monitor and block scraping activity.”

HiQ sued LinkedIn and sought a preliminary injunction preventing LinkedIn from taking these actions, claiming that they violated California law. HiQ also sought declaratory relief that LinkedIn could not invoke the CFAA (or other similar statutes) to shut down HiQ’s efforts. The District Court granted HiQ a preliminary injunction against LinkedIn after finding that HiQ had demonstrated a substantial likelihood of prevailing on the merits of its claims against LinkedIn and would suffer severe irreparable injury, i.e., the loss of its business model if such injunctive relief was not granted. LinkedIn immediately appealed this ruling to the Ninth Circuit.

After finding that the District Court did not abuse its discretion in finding the presence of irreparable harm, as well as the likelihood that HiQ would prevail under various state theories, the Ninth Circuit turned its attention to the applicability of the CFAA and whether LinkedIn could invoke it in an attempt to preempt HiQ’s state law claims. The CFAA prohibits a person or entity from “intentionally access[ing] a computer without authorization or exceed[ing] authorized access, … thereby obtain[ing] … information from any protected computer.…” (18 U.S.C. § 1030(a)(2).) The CFAA provides various criminal penalties and civil liability for violations of its provisions.

Under the CFAA, almost any computer that is attached to the internet is covered as a “protected computer.” This would include the servers that LinkedIn used to host its members’ public profiles from which HiQ Labs would “scrape” data.

The primary issue that the Ninth Circuit considered was whether the sending of the cease and desist letter by LinkedIn to HiQ Labs meant that any further access of LinkedIn’s public member profiles by HiQ constituted access “without authorization” in violation of the CFAA. The Ninth Circuit began by recognizing that in other contexts, it had recognized that “without authorization” should have a non-technical meaning, essentially meaning the accessing of “a protected computer without permission.” For instance, in United States v. Nosal, 844 F.3d 1024 (9th Cir. 2016), the Ninth Circuit had held that an employee who used other employees’ log-in credentials to access his former employer’s computer system had accessed a “protected computer” “without authorization” in violation of the CFAA. HiQ Labs argued that where access to the computer information is open to the general public (such as LinkedIn’s public member profiles), CFAA’s requirement of “without authorization” was not applicable. The Ninth Circuit agreed with this reasoning, or in any event, concluded that it had “raised a serious question as to this issue” so that the District Court did not err in granting the injunction.

Next, the Ninth Circuit examined the CFAA’s legislative history and concluded that it also supported its decision. It noted that the CFAA “was enacted to prevent intentional intrusion onto someone else’s computer – specifically, computer hacking.” For instance, the original CFAA, in 1984, was limited to a narrow range of computers, primarily those containing national security information and financial data, or those operated by the government. In 1996, the CFAA was brought into any “protected computer” in order “to increase protection for the privacy and confidentiality of computer information.” The Ninth Circuit reasoned that “the CFAA is best understood as an anti-intrusion statute and not as a `misappropriation statute.'”

The Ninth Circuit also distinguished two cases, the Nosal case and Power Ventures v. Facebook, 844 F.3d 1058 (9th Cir. 2016), upon which LinkedIn was relying. The Court easily distinguished Nosal by finding that Nosal had used other employees’ log-in credentials to access his former employer’s computers and thus, the computer information that was accessed was “plainly one which no one could access without authorization.”

Likewise, in the Power Ventures v. Facebook case, Power Ventures had developed tools to circumvent I.P. barriers and gain access to password-protected Facebook profiles. Thus, Power Ventures was accessing data on Facebook servers that were protected by Facebook’s user name/password authentication system, which the Court reasoned was distinguishable from what HiQ was doing by “scraping” publicly available information.

The Ninth Circuit also stated that its limitation on the applicability of the CFAA to publicly available computer information was similar to its analysis of cases brought under the Stored Communication Act (“S.C.A.”), which contains a similar “without authorization” provision. Furthermore, given that the CFAA provides for criminal penalties (as well as civil liability), the “rule of lenity” favored adopting a narrow interpretation of the CFAA’s “without authorization” provision. Thus, the Ninth Circuit concluded that when a computer network generally permits public access to its data, especially given that LinkedIn claimed to have no ownership of the information posted by its users, the Court will generally find that no violation of the CFAA. The Ninth Circuit noted, however, that there could be other remedies available to LinkedIn for this type of conduct, including copyright infringement, misappropriation, unjust enrichment, and/or breach of privacy.

The Ninth Circuit’s decision in HiQ demonstrates that the Ninth Circuit is willing to place some limitations as to the scope of the CFAA’s applicability. However, given that the case is still in its preliminary stages, it is possible that the Court will allow LinkedIn to pursue other legal theories in an attempt to try to stop HiQ from “scraping” its publicly available member profiles. Stay tuned.

Landlords whose tenants sell counterfeit goods can be liable for trademark infringement if they have knowledge of the infringing acts or are willfully blind to the infringement.

In Luxottica Group v. Airport Mini Mall, LLC, 932 F.3d 1303 (11th Cir. August 2019), Oakley, Inc. and its parent Luxottica sued the owners of a shopping mall in Georgia for contributory trademark infringement under the Lanham Act (15 U.S.C. §1114).  Luxottica and Oakley make and sell high-end sunglasses under the Ray-Ban and Oakley trademarks.  The defendants owned and managed an indoor mall, and subleased space in several hundred booths in the mall to vendors of various products.  The defendants were aware of three raids by law enforcement of certain booths that sold counterfeit sunglasses; in which thousands of items bearing Luxottica’s trademarks were seized.  The vendors were selling the infringing eyewear for $15 to $20, while Luxottica’s eyewear sold for $140 to $220.

The defendants received copies of the search warrants and knew which booths had been raided.  Luxottica sent two letters to the defendants, informing them that certain of their subtenants were selling counterfeit sunglasses.  After the lawsuit was filed, the defendants met with law enforcement and discussed the subtenants’ sales of counterfeit Oakley products.

At no time, however, did the defendants take any action to stop the subtenants’ sales of the counterfeit products.  The defendants did not evict the subtenants or terminate their leases.

At trial, a jury found the defendants liable to Luxottica for contributory trademark infringement, and awarded $1.9 million in damages to Luxottica.

The defendants appealed.  The Eleventh Circuit Court of Appeals affirmed the jury’s verdict, finding sufficient evidence to support the verdict.

The Lanham Act provides that a defendant is liable for contributory infringement if the defendant induces or knowingly facilitates the trademark infringement.  In order to establish contributory trademark infringement, the plaintiff must show: (1) that there was direct trademark infringement by someone; and (2) that the defendant intentionally induced the direct infringer or supplied a product to the direct infringer, with either actual knowledge or constructive knowledge of the infringing acts.  Willful blindness, which occurs when a defendant suspects a wrongful act but deliberately fails to investigate the act, is one type of constructive knowledge.

The court noted that whether contributory trademark infringement applies in a landlord-tenant situation was a question of first impression, but that it did not decide the issue because the defendants did not contest the issue.  However, the court said that the application of contributory infringement in the landlord-tenant context was consistent with tort liability in general.

The court held that the plaintiffs had provided sufficient evidence that the defendants had constructive knowledge of, or were willfully blind to, the subtenants’ acts of direct infringement.  The defendants supplied a service to the subtenants (the leased space, utilities, maintenance, and parking).  The plaintiffs relied on substantial evidence, including the defendants’ knowledge of the three law enforcement raids and seizures of large volumes of counterfeit goods, the defendants’ meeting with law enforcement, and the defendants’ ability to inspect the products the subtenants sold.

The court also affirmed the verdict against several of the individual defendant owners and managers of the shopping mall.

Have you ever driven away from your home and then had that irritating doubt in your mind as to whether you remembered to close your garage door? I know I have. No matter how hard I try to search my brain’s archives, I really don’t remember whether I closed the garage door even though I close it 99.9% of the time! In that moment, you wish there was a way to check that doesn’t require turning around and going back home to see if you really left the house wide open for anyone to walk in.

Well The Chamberlain Group, Inc. (“Chamberlain”) thought it had patented an invention that could help with this type of problem—a garage door opener that wirelessly transmits information such as whether the door is open or closed. See U.S. Patent No. 7,224,275 (the “’275 Patent”). Specifically, the patent “relates to an apparatus and method for communicating information about the status of a movable barrier, for example, a garage door.”

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The USPTO recently refused legendary quarterback Tom Brady’s application to register the mark TOM TERRIFIC. If you’re like me, you’re wondering why Tom Brady would want to register such a trademark. Well, according to Brady, he wanted to obtain the rights to the mark to prevent people from referring to him by that nickname. But that response isn’t satisfactory for those of us who know about trademark law for a couple of reasons.

First, and perhaps most importantly, even if Tom Brady were to have obtained a trademark registration for TOM TERRIFIC, it would not have given Brady the right to preclude people from referring to him by that nickname. Trademark rights are not that broad. They do not allow you to prevent people from utilizing a word, although I’m often surprised by how many people think that’s the case. Instead, trademark rights provide the owner with the exclusive right to utilize the mark in commerce in connection with the goods designated in the application, and to some extent, related goods. So, for that reason alone, Brady’s response indicate he was either misinformed, which I can’t imagine given his access to the best intellectual property lawyers, or simply untruthful.

Second, Brady would not have been able to obtain a trademark simply because he did not want others to utilize the nickname. There are two ways to obtain trademark rights from the USPTO. You can either use the mark in commerce and provide proof of the use, or you can swear under penalty of perjury an intent to use the mark in commerce within a designated period of time. As such, if Brady simply intended to prevent others from using the mark, it’s unclear how he would have obtained such rights as he is neither using the mark in commerce, and clearly wouldn’t lie under oath simply to obtain trademark rights if he had no intent of using the mark in commerce, right? After all, he’s Tom Brady, the NFL’s golden boy.

I suspect we’ll never know why Brady actually applied for the mark, but for the reasons above, I don’t think he’s been forthcoming in his public statements. To be clear, it isn’t Brady’s motivation for seeking the mark that resulted in the USPTO rejecting his application. In fact, the denial was based on the USPTO’s finding that the mark TOM TERRIFIC is associated with Tom Seaver, the Hall of Fame pitcher for the New York Mets, which could cause Brady’s use of the mark to create consumer confusion. According to Brady, he intended no disrespect toward Seaver by trying to register the mark, and while I question his statement concerning his motivation for seeking the registration, I legitimately believe Brady did not intend to disrespect Tom Seaver. Say what you will about Brady, but he’s a class act.

The Supreme Court is set to hear the case of Allen v. Cooper which addresses the constitutionality of the Copyright Remedy Clarification Act (“CRCA”). The purpose of the CRCA is to abrogate sovereign immunity enjoyed by States and State actors under the Eleventh Amendment for claims of copyright infringement. The CRCA provides as follows:

Any State, any instrumentality of a State, and any officer or employee of a State or instrumentality of a State acting in his or her official capacity, shall not be immune, under the Eleventh Amendment of the Constitution of the United States or under any other doctrine of sovereign immunity, from suit in Federal Court by any person, including any governmental or nongovernmental entity, for a violation of any of the exclusive rights of a copyright owner provided by sections 106 through 122, for importing copies of phonorecords in violation of section 602, or for any other violation under this title.

The CRCA was passed in 1990 but had been struck down as unconstitutional by district courts in the 1st, 2nd, 4th, 5th, 6th, and 9th Circuits, and the appellate court of the 11th Circuit. In each of these cases the Court held that the Eleventh Amendment prohibits Congress from using its Article I powers to abrogate states’ sovereign immunity.

The facts underlying Allen v. Cooper include the famous pirate ship, Blackbeard’s Queen Anne’s Revenge. The notorious pirate used Queen Anne’s Revenge as his flagship vessel, operating in the 1700s from the eastern coast of the American colonies to the West Indies. Blackbeard is known to have used the shallow inlets of North Carolina’s Outer Banks as cover to aid in ransacking and pillaging unsuspecting ships.  Shortly after blockading Charleston harbor in May 1718, Blackbeard ran the Queen Anne’s Revenge aground at Beaufort, North Carolina.

In 1996, the shipwreck was discovered, and Allen and his company documented the salvage operation of the famous pirate ship which took twenty years. Allen registered his copyright interest in the various videos and still images of the salvage operation.

The State of North Carolina and its Department of Natural and Cultural Resources copied and publicly displayed a number of Allen’s videos and still images online without permission. The State then attempted to insulate itself from liability for that subsequent infringement by passing “Blackbeard’s Law,” which purportedly converted Allen’s footage into “public record” materials that can be freely used by the State.

On December 1, 2015, Allen sued the State of North Carolina for copyright infringement. The State promptly moved to dismiss the copyright claim on the ground that the sovereign immunity enjoyed by the state under the Eleventh Amendment shields the State from suit in federal court. While the district court denied the State’s motion to dismiss, holding that the CRCA abrogated the State’s sovereign immunity under the Eleventh Amendment, on appeal the Fourth Circuit reversed. On January 4, 2019 Allen filed a petition for a writ of certiorari with the United States Supreme Court, which the Court granted on June 3, 2019.

The issue before the Supreme Court is whether Congress validly abrogated state sovereign immunity when it enacted the CRCA. If the Court were to find the CRCA unconstitutional, little could be done to prevent states from infringing copyright with impunity and without fear of reprisal.

In CELGENE CORPORATION v. PETER, the Federal Circuit recently affirmed the PTAB’s decisions finding appealed claims obvious. However, more importantly, the Federal Circuit also held that the retroactive application of IPR proceedings to pre-AIA patents is not an unconstitutional taking under the Fifth Amendment.

Regarding the constitutional issue of whether the retroactive application of IPRs to pre-AIA patents is an unconstitutional taking, the Federal Circuit noted that The Supreme Court left open this challenge with the following passage near the end of its decision in Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 138 S. Ct. 1365, 1379 (2018) as follows: “Moreover, we address only the precise constitutional challenges that Oil States raised here. Oil States does not challenge the retroactive application of inter partes review, even though that procedure was not in place when its patent issued. Nor has Oil States raised a due process challenge. Finally, our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause.”

The Takings Clause of the Fifth Amendment states that private property shall not “be taken for public use, without just compensation.” A valid patent is private property for the purposes of the Takings Clause. Celgene thus argued that the retroactive application of IPRs to their pre-AIA patents without just compensation is an unconstitutional taking under the Fifth Amendment. Specifically, Celgene advanced a regulatory takings theory and argues that subjecting its pre-AIA patents to IPR, a procedure that did not exist at the time its patents issued, unfairly interferes with its reasonable investment-backed expectations without just compensation.

The PTO responded on two fronts. First, the PTO argued that when the PTAB finds claims unpatentable in an IPR, it does not effectuate a taking under the Fifth Amendment because the patent owner “never had a valid property right because the patent was erroneously issued in the first instance.” Second, the PTO argued that Celgene’s takings claim fails “because patents have been subject to reconsideration and cancellation by the USPTO in administrative proceedings for nearly four decades, and Celgene’s own patent[s were] issued subject to this administrative revocation authority.” And, the PTO maintains that the AIA “merely revised the procedures by which [the] USPTO conducts these administrative proceedings” and that the procedural differences therefore do not effect a Fifth Amendment taking.

In determining whether the retroactive application of IPRs to pre-AIA patents is an unconstitutional taking, the Federal Circuit first considered the effect that doing so has on the patent right granted by the PTO, and specifically whether IPRs differ from the pre-AIA review mechanisms significantly enough, substantively or procedurally, to effectuate a taking. The Federal Circuit concluded that they do not.

The Federal Circuit also noted that the validity of patents has always been subject to challenge in district court. And for the last forty years, patents have also been subject to reconsideration and possible cancellation by the PTO. The Federal Circuit reasoned that IPRs do not differ significantly enough from preexisting PTO mechanisms for reevaluating the validity of issued patents to constitute a Fifth Amendment taking.

Celgene’s pre-AIA patents were therefore granted subject to existing judicial and administrative avenues for reconsidering their validity. Not only were they subject to challenge in district court, “[f]or several decades, the Patent Office has also possessed the authority to reexamine—and perhaps cancel—a patent claim that it had previously allowed.” In this case it thus sufficed that IPRs do not differ sufficiently from the PTO reconsideration avenues available when the patents here were issued to constitute a Fifth Amendment taking.

In sum, Patent owners have always had the expectation that the validity of patents could be challenged in district court. For forty years, patent owners have also had the expectation that the PTO could reconsider the validity of issued patents on particular grounds, applying a preponderance of the evidence standard. Although differences exist between IPRs and their reexamination predecessors, those differences do not outweigh the similarities of purpose and substance and, at least for that reason, do not effectuate a taking of Celgene’s patents.

Thus, the Federal Circuit held that the retroactive application of IPR proceedings to pre-AIA patents is not an unconstitutional taking under the Fifth Amendment. However, as noted, it is still possible the Supreme Court may weigh in on this issue before too long.

The Ninth Circuit recently asked the California Supreme Court to provide it with guidance concerning certain types of non-compete provisions that could have huge ramifications for California’s business environment.  In essence, the Ninth Circuit asked the California Supreme Court whether section 16600 of the California Business and Professions Code bars agreements between businesses that place a restriction on one business from doing business with another.  Depending on how the California Supreme Court answers the inquiry, the result could have a massive impact on a wide range of agreements in California such as franchise agreements, manufacturer/distributor agreements, joint ventures, etc.

When cases are brought in federal court concerning state law, the federal court is often required to look to case law from that state to determine how a state court would rule on the law at issue.  If there is insufficient guidance from the state courts on a particular issue, then a federal court, such as the Ninth Circuit Court of Appeals can “certify” an issue to that state’s highest court in order to obtain guidance on how it should rule in the particular matter before it. This is the procedural mechanism by which the Ninth Circuit in the case, Ixchel Pharma, LLC v. Biogen, Inc., recently certified the following issue to the California Supreme Court: “Does section 16600 of the California Business and Professions Code void a contract by which a business is restrained from engaging in a lawful trade or business with another business?”

In other words, does the prohibition set forth in section 16600 on non-competes apply beyond the employer-employee context?

By way of background, Ixchel Pharma is a biotechnology company that is involved in the development of drugs used to treat mitochondrial disease.  It was working on a drug containing dimethyl fumarate that it hoped could be used to treat Friedreich’s Ataxia, a rare neurological disease.

In January 2016, to further its development efforts, Ixchel entered into a Collaboration Agreement with a Danish company, Forward Pharma.  Under the terms of that agreement, the two companies would work together to develop a new dimethyl fumarate drug and the agreement set forth the parties’ respective obligations with regard to clinical trials, manufacturing and marketing the new pharmaceutical drug.  Ixchel was to receive a percentage royalty based on the sale of the new drug when it was approved for market.  The Collaboration Agreement also allowed Forward to terminate the agreement upon 60 days written notice.

Later in 2016, Forward began negotiations with a different pharmaceutical company, Biogen, to settle a dispute between the two companies. Ixchel alleges that during those negotiations, Forward improperly shared a copy of the Collaboration Agreement with Biogen and Biogen concluded that the development of the new drug could harm its own sales.  As part of the negotiations, Biogen is alleged to have requested Forward terminate its Collaboration Agreement with Ixchel.  In January 2017, Forward and Biogen entered into an agreement by which Biogen agreed to pay Forward $1.25 billion and Forward agreed to terminate its relationship with Ixchel.  Section 2.13 of the agreement between Forward and Biogen provided, “Ixchel.  Each of the Additional Parties and [Forward] shall, and shall cause of each of its respective controlled Affiliates to, terminate any and all existing, and not enter into any new, Contracts or obligations to Ixchel Pharma, LLC … to the extent related to the development of any of the Additional parties, [Forward] or any of their respective controlled Affiliates of any pharmaceutical product having dimethyl fumarate as an [active pharmaceutical ingredient] for the treatment of a human for any indication, including Friedreich’s Ataxia.”  After entering into the agreement, Forward sent written notice to Ixchel that it was terminating the Collaboration Agreement.

Ixchel filed suit in federal court against Biogen claiming that it was liable for tortious interference with contract, intentional/negligent interference with prospective economic advantage and violations of California’s unfair competition law.  The district court dismissed the complaint with leave to amend, concluding that Ixchel had failed to state a claim because it had not alleged that Forward had engaged in any independently wrongful act in entering into its agreement with Biogen.

Ixchel filed an amended complaint to allege that Forward, by entering into the agreement with Biogen that contained section 2.13, violated section 16600 of the Business and Professions Code and its prohibitions on non-competes.  Once again, the district court disagreed with Ixchel and dismissed the claims finding that Ixchel had again failed to allege an independent wrongful act.  Ixchel appealed the decision to the Ninth Circuit which, after briefing, decided to certify the above question to the California Supreme Court.

The Ninth Circuit’s certification request began by recognizing that historically California allowed contractual restrains on a profession or trade “as long as they were reasonably imposed.”  However, this view changed in 1872 when California, in support of its strong public policy favoring open competition, adopted the law that became section 16600 of the Business and Professions Code, which provided a broad right for individuals “to pursue any lawful employment and enterprise of their choice.”  In 2008, the California Supreme Court, in Edwards v. Arthur Andersen, LLP, recognized that under this broad right, “an employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business, unless the agreement falls within one of the exceptions to the rule” [i.e., concerning the sale of a business, partnership or LLC interest].  The Ninth Circuit held that in its Edwards decision, the California Supreme Court was rejecting prior Ninth Circuit case law that had recognized a “narrow restraint” exception to section 16600, which allowed for non-compete provisions if they barred an individual “from pursuing only a small or limited part of the business trade or profession.”

In 2015, the Ninth Circuit decided Golden v. California Emergency Physical Medical Group, which involved the incorporation of a provision into a settlement agreement between a terminated employee and his former employer that operated in essence as a non-compete.  In holding that that provision could violate section 16600, the Ninth Circuit recognized that “because the California Supreme Court `has articulated a broad understanding of what constitutes a void contract under section 16000,’ we concluded that the prohibition imposed by section 16600 extended to all `contractual restraints on professional practice’ between employers and employees.”

The Ninth Circuit continued by recognizing that neither it nor the California Supreme Court had decided an issue involving whether section16600 extends to agreements beyond the employee/employer relationship such as to contractual restraints on business operations. Ixchel argued to the Ninth Circuit that nothing in the plain language of section 16600 prevented it from being applied to such agreements.  The Ninth Circuit recognized that section 16600 referenced the term “anyone” which was not defined.  However, it could be interpreted to mean “any person,” which was well settled under numerous other California laws that “person” could include a corporation, partnership or other business entity.

Ixchel urged the Ninth Circuit to read section 16600 broadly in light of the Edwards decision “to bar any contracts restraining a business from engaging in a lawful business.”  Because section 2.13 of the agreement between Forward and Biogen prevented Forward from entering into a business relationship with Ixchel, it claimed it violated section 16600 of the Business and Professions Code.

Biogen, on the other hand, urged the Ninth Circuit to limit the applicability of section 16600 to the employment context.  First, it argued that applying section 16600 more broadly “would be contrary to the rule of reason in the federal antitrust context and invalidate ordinary commercial restrictions in contracts.”  For instance, adopting such a broad reading of section 16600 would place in jeopardy exclusive dealing agreements and agreements between manufacturers and its dealers limiting the geographic location in which the dealers could sell the manufacturer’s products.  Other legal commentators have noted that a broad interpretation of section 16600 could put at risk “every joint venture, lease, distribution agreement, license agreement and many other widely used business agreements.”  (Citing, Perry & Howell, “A Tale of Two Statutes: Cipro, Edwards, and the Rule of Reason,” 24 Competition: J. Anti., UCL & Privacy Sect. St. B. Cal. 21-22 (2015).)  Biogen argued that California’s legislature could not have intended such a drastic impact that would result from such a broad application of section 16600.

As a result of these competing arguments, and in light of the fact that there had been no prior California Supreme Court guidance on this issue, the Ninth Circuit certified this very important issue to the California Supreme Court before it would take up the merits of Ixchel’s appeal.  The California Supreme Court could always decline to review the certified question presented, but it is unlikely to do so in this case given the potential stakes at issue. We expect the California Supreme Court to act on this issue by mid-2020. If the California Supreme Court accepts certification and agrees with Ixchel as to a broad reading of section 16600 beyond the employer/employee context, all companies doing business in California should consult with legal counsel about reviewing and/or drafting agreements to ensure compliance with this potentially new reading of section 16600.

The federal patent laws provide for an award of attorneys’ fees to the prevailing party in exceptional patent infringement cases.  35 U.S.C. §285.  An exceptional case is determined based on the totality of the circumstances.  A case can be exceptional due to a substantive legal position taken by a party or a party’s unreasonable litigation tactics.  Courts can and will award attorneys’ fees to a prevailing defendant if the plaintiff was not justified in filing a patent infringement suit in the first place by failing to conduct a proper investigation of infringement before filing suit.

ThermoLife International LLC v. GNC Corp., 922 F.3d 1347 (Fed.Cir. 2019) is a recent example of this.  The District Court for the Southern District of California awarded the defendants their attorneys’ fees because the plaintiffs did not adequately investigate the issue of defendants’ infringement before suing them.

Stanford University licensed four patents to ThermoLife.  The patents covered compositions of amino acids and a method of use to promote vascular function and performance in humans.  In 2013, ThermoLife and Stanford filed 81 lawsuits for patent infringement against multiple defendants, including Hi-Tech Pharmaceuticals, Inc., Vital Pharmaceuticals, Inc., and several GNC entities.  The plaintiffs alleged that the defendants infringed the patents by making and selling the patented compositions and by performing the patented methods by treating humans directly, and by inducement through their labeling and advertising.

The cases were consolidated for pretrial procedures.  The parties agreed to conduct discovery in phases, with claim construction, invalidity, and unenforceability to be done before infringement and damages.  Many of the defendants settled with plaintiffs for small amounts of money.

In 2016, the cases against Hi-Tech, Vital, and the three GNC entities were consolidated for a bench trial on invalidity.  At trial, the district court held that all of the claims of the patents were invalid as either anticipated or obvious.  Because of the holding of invalidity, the issue of infringement was never addressed – there was no trial on infringement and there had been no discovery on infringement.

After trial, Hi-Tech and Vital filed motions for their attorneys’ fees under 35 U.C.S. §285.  The defendants argued that their products did not infringe because they had less than the claimed amounts of the amino acids and because studies (published before the plaintiffs filed suit) showed that the amounts contained in the defendants’ products were not enough to provide the claimed vascular benefits.  The defendants pointed out that the plaintiffs’ own expert had acknowledged the conclusions of the published studies.  The defendants contended that had the plaintiffs read the labels on the defendants’ products and performed simple tests, they would have known that there was no infringement.

The plaintiffs did not disagree with the defendants’ points, but only argued that they did not file the suits just to force the defendants to settle for nuisance value.

The district court granted defendants’ motions for attorneys’ fees.  The court found that plaintiffs “had conducted an inadequate pre-filing investigation, resulting in objectively unreasonable infringement contentions.” Id. at 1355.  The plaintiffs had not read the defendants’ product labels and had not conducted basic testing.  The court also found that the plaintiffs had exhibited a pattern of filing many lawsuits “without carefully reviewing their claims as a calculated risk that might yield nuisance-value settlements” and settling with a lot of defendants for small, nuisance-value amounts.  Id.  The court stated: “plaintiffs’ pre-filing investigation was severely lacking, thus resulting in frivolous claims and the objective unreasonableness of certain infringement contentions; [plaintiffs’] motivation was seemingly to extract nuisance-value settlements from a large number of defendants; [and] awarding fees here will advance compensation – and deterrence-oriented goals.” Id.  The court awarded Hi-Tech $903,890 and Vital $406,131 in attorneys’ fees.

On appeal, the Federal Circuit Court of Appeals affirmed the district court’s judgement.  The appellate court held that the district court had not abused its discretion in finding the case exceptional, and in awarding fees based on plaintiffs’ lack of inadequate investigations of infringement before filing suit and on the plaintiffs’ pattern of filing suits without a full investigation of infringement. Id. at 1362.

The appellate court held that the fact that the district court based its exceptional case finding on the infringement issue, which had not been fully investigated, was unusual, but was within the discretion of the district court. Id. at 1357.

The appellate court explained that while a plaintiff is not required to test an accused product to determine infringement in order to perform an adequate pre-suit investigation, testing may be necessary depending on factors such as the availability of the products, cost of the testing, and existence of other information. Id. at 1360.  According to the court, the defendants’ products were publicly available and the testing was simple; the plaintiffs should have read the defendants’ product labels and conducted testing of those products whose labels were not clear. Id. at 1361.

The appellate court found that the district court had done a thorough analysis of the exceptional case issue. “The district court, however, did not draw a bottom-line exceptionality conclusion after finishing its discussion of the Hi-Tech and Vital cases.  It continued with its analysis, addressing the full range of cases filed by plaintiffs and finding a ‘pattern of action’ – specifically, a pattern of misconduct – that, together with the discussion tied to the Hi-Tech and Vital cases, supported the ultimate exceptional-case determination.” Id. at 1362.  Emphasizing the deterrence policy of awarding attorneys’ fees in exceptional cases, the court stated that “the ‘pattern’ part of the district court’s opinion thus rests on a finding, which we accept, that plaintiffs’ irresponsible filing of infringement allegations extended widely beyond the two cases before us.”  Id. at 1364.

The holding could not be more clear: always conduct a pre-filing investigation of infringement in a patent infringement case.  Of course, all cases should be thoroughly investigated before filing suit.  It is especially important in patent infringement cases, however, because plaintiffs often want to proceed quickly to stop the infringement.  Infringement must always be analyzed first, even though it may be expensive or time-consuming.