Nikolai & Mersereau P.A. Attorneys At Law

Unanimous Supreme Court Makes it Easier for Patent Owners to Recover Enhanced Damages from Infringers

June 22, 2016 By: Peter Nikolai Category: nm_news

Section 284 of the Patent Act provides, when patent infringement is found, courts “may increase the damages up to three times the amount found or assessed.” In 2007 the Court of Appeals for the Federal Circuit announced a two-part test to be used by District Courts when considering whether to award enhanced damages under §284. This week a unanimous Supreme Court, in Halo Electronics, Inc. v. Pulse Electronics, Inc. Et Al, threw out the Federal Circuit’s test, and gave trial court judges far greater discretion to award enhanced damages under §284.

The case before the Supreme Court involved a $70 million jury verdict to which a District Court added $6.1 million in supplemental damages and then tripled the full amount, finally entering judgement for $228 million. The Federal Circuit later reversed the enhanced damage award applying its two-part test. Under the Federal Circuit’s test, to recover increased damages under §284, the patent owner must show by clear and convincing evidence that: (1) the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent; and (2) the risk of infringement was either known or so obvious that it should have been known to the accused infringer. The patent owner appealed the Federal Circuit’s decision to the Supreme Court seeking reinstatement of the full amount of the District Court’s $228 million judgment.

Section 284 contains no explicit limit or condition on whether to award enhanced damages. Further, the Supreme Court noted that the word “may” clearly connotes discretion is afforded to the trial court. The Supreme Court further noted, “[a]wards of enhanced damages under the Patent Act over the past 180 years establish that they are not to be meted out in a typical infringement case, but are instead designed as ‘punitive’ or ‘vindictive’ sanctions for egregious infringement behavior. The sort of conduct warranting enhanced damages has been variously described in our cases as willful, wanton, malicious, bad-faith, deliberate, consciously wrongful, flagrant, or—indeed—characteristic of a pirate.”

While the Supreme Court indicated that the two-part Federal Circuit test reflects sound recognition that enhanced damages are generally appropriate under §284 only in egregious cases, the Supreme Court indicated there were three problems with the Federal Circuit’s test:

The principal problem with the [Federal Circuit’s] two-part test is that it requires a finding of objective recklessness in every case before district courts may award enhanced damages. Such a threshold requirement excludes from discretionary punishment many of the most culpable offenders, such as the ‘wanton and malicious pirate’ who intentionally infringes another’s patent—with no doubts about its validity or any notion of a defense—for no purpose other than the steal the patentee’s business…[a] district court may not even consider enhance damages for such a pirate, unless the court first determines that his infringement was “objectively” reckless.

Second, the Supreme Court indicated that the Federal Circuit’s test improperly requires clear and convincing evidence to prove recklessness. The Supreme Court said, instead, that the burden of proof placed on the patent owner is a preponderance of the evidence, a much lower evidentiary threshold. Third, the Supreme Court held “because we eschew any rigid formula for awarding enhanced damages under §284, we likewise reject the Federal Circuit’s tripartite framework of appellate review.”

So what is the right test? According to the Supreme Court, “Section 284 gives district courts discretion in meting out enhanced damages. It ‘commits the determination’ whether enhanced damages are appropriate ‘to the discretion of the district court’ and ‘that decision is to be reviewed on appeal for abuse of discretion.’”

And what happens now? The case will go back to the Federal Circuit and the parties will argue about whether the District Court abused its discretion when it awarded $152 million in enhanced damages. The lowering of the standard for awarding a patent owner enhanced damages will likely embolden patent owners to seek such damages. At least in the short term, this will also likely mean that patent owners will become more aggressive with respect to settlement demands since the infringer will realistically have so much more at risk. Not only is there a greater risk that enhanced damages will be awarded, but also that the patent owner will be able to recover its attorney fees in view of a 2014 Supreme Court decision.

The only sure way for a potential infringer to protect against enhanced damages awards is to exercise due diligence regarding any relevant patent of which the potential infrigner has notice. This due diligence may include having the patent reviewed by counsel to see if there is a good faith basis to conclude there is no infringement. This due diligence may include making design changes to avoid infringement. This due diligence may also include having counsel analyzing the validity of the patent to determine whether a good faith basis exists for concluding the patent is invalid. It is also important to document the due diligence process and the opinions reached as a result of that process. In certain cases, a formal legal opinion may be advised.

These steps are, of course, nothing new. But these steps just became all that more important because of the the decision of the Supreme Court this week. Please call us to assist you with such due diligence efforts.

An Opposite Reaction: the Federal Circuit Breathes New Life Into Software Patents.

May 18, 2016 By: Peter Nikolai Category: Litigation, Patent Litigation, Patents

A decision by the Federal Circuit late last week may have breathed new life into the viability of software patents. Many patent practitioners and commentators had begun to declare software patents dead in light of recent Supreme Court precedent related to “patentable subject matter.” Lower courts and the U.S. Patent and Trademark Office were almost routinely finding software inventions ineligible for patent protection. However, on May 12, 2016, the Federal Circuit declared in Enfish, LLC v. Microsoft Corporation, that there is “no reason to conclude that all claims directed to improvement in computer-related technology, including those directed to software, are abstract” and necessarily ineligible for patent protection.

The Patents At Issue

Enfish owns U.S. Patent No. 6,151,604 and U.S. Patent No. 6,163,775, both issued in late 2000 and both claiming priority to the same application filed in March 1995. The ’604 and ’775 patents are directed to an innovative logical model for a computer database. A logical model is a model of data for a computer database explaining how the various elements of information are related to one another. Contrary to conventional logical models, the patented logical model includes all data entities in a single table, with column definitions provided by rows in that same table. The patents describe this as the “self-referential” property of the database.

The patents teach that multiple benefits flow from this design. First, the patents disclose an indexing technique that allows for faster searching of data than would be possible with the relational model. Second, the patents teach that the self-referential model allows for more effective storage of data other than structured text, such as images and unstructured text. Finally, the patents teach that the self-referential model allows more flexibility in configuring the database.

Enfish sued Microsoft of infringing the ‘604 and ‘775 patents, specifically accusing Microsoft’s ADO.NET software of infringement. Microsoft moved for summary judgment, and the district court found all the claims invalid as not being patent eligible. In addition, the district court found all the claims invalid as being anticipated under 35 U.S.C. § 102, and one claim was not infringed. The Federal Circuit reversed the district court on the questions of patent eligibility and anticipation, and affirmed that one of the claims was not infringed. The Federal Circuit remanded the case to the district court for further proceedings.

Patent Eligible Subject Matter

In order for an invention to be entitled to patent protection in the United States, it must overcome four statutory hurdles. First, the invention must be “patent eligible subject matter.” Second, the invention must be useful. Third, the invention must be novel. Fourth, the invention must be “non-obvious.”

Until only recently, the issue of “patent eligible subject matter” received little attention under U.S. law. This is because patent-eligible subject matter in the US includes four statutory categories defined in title 35, section 101 (§101) of the U.S. code as “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” One important exception to § 101 is that laws of nature, natural phenomenon and abstract ideas are not patent eligible.

With regard to software patents, two Supreme Court cases, Bilski v. Kappos, 561 U.S. 593 (2010), and Alice Corp. v. CLS Bank International, 573 U.S. __, 134 S. Ct. 2347 (2014), tightened the reigns on when patents covering software could be considered “patent eligible subject matter.” In Bilski and Alice, the Court created a two-step test for determining patent eligibility: (1) determine whether the claims are directed to a patentineligible concept; and (2) determine whether the claim’s elements, considered both individually and as an ordered combination, transform the nature of the claims into a patent-eligible application.

With regard to the first step, the Supreme Court declined to establish a definitive rule for determining what constitutes an “abstract idea” that is an ineligible concept. Instead, courts compared any claims at issue to claims already found to be directed to an abstract idea. In the wake of Alice many lower courts were, almost routinely, finding software patents as “patent ineligible.” As a result, many patent practitioners and commentators declared software patents dead, since they can almost always be characterized as an “abstract idea.”

The Federal Circuit appears to have swung the pendulum back to allow courts and patent examiners to find at least some software patent eligible. The Federal Circuit in the Enfish case declared that there is “no reason to conclude that all claims directed to improvement in computer-related technology, including those directed to software, are abstract and necessarily analyzed at the second step of Alice.”

Instead, the Federal Circuit has directed that the first step of the Alice inquiry should ask “whether the focus of the claims is on a specific asserted improvement in computer capabilities…or, instead, on a process that qualifies as an ‘abstract idea’ for which computers are invoked merely as a tool.”

In Enfish the court found that the claims at issue were not directed to an abstract idea because “the plain focus of the claims is on an improvement to computer functionality itself, not on economic or other tasks for which a computer is used in its ordinary capacity.” Thus, the Enfish Court has, perhaps, rescued software patents from a categorical ban by recognizing that “describing the claims of [a software patent] at such a high level of abstraction and untethered from the language of the claims all but ensures that the exception to § 101 swallow the rule.”

Blurred Lines

April 27, 2016 By: Peter Nikolai Category: Patent Litigation, Patents, Trade Secrets

The U.S. Congress and the Minnesota legislature are working on separate pieces of legislation related to intellectual property that will blur long‐established lines between the respective roles of the state and federal government. Specifically, the U.S. Congress is on the verge of creating a private federal cause of action for trade secret misappropriation which has historically been a matter of state law, and the Minnesota legislature is considering a bill that would regulate the enforcement of patents which historically has been a matter of federal law.

The New Federal Trade Secret Act

Last week, the Judiciary Committee of the U.S. House of Representatives unanimously approved “Defend Trade Secrets Act” previously passed unanimously by the U.S. Senate. The full House is expected to vote on the bill this week and the White House has indicated the President will sign it into law.

The legislation authorizes an owner of a trade secret that is misappropriated to bring a civil action in Federal Court if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. The legislation also authorizes the courts to order the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action. The Court may also issue injunctions and award damages for actual losses of the plaintiff and for any unjust enrichment of the defendant. In lieu of damages, the Court can also award a reasonable royalty for the defendant’s unauthorized disclosure or use of the trade secret. The Court may also double the damage award in cases of willful and malicious misappropriation of trade secrets or if the claim of trade secret misappropriation is made in bad faith. Until now, such claims and remedies were a matter of State law such as the Minnesota Uniform Trade Secrets Act, Minn. Stat. Chapter 325C.

The New Minnesota Patent Legislation

This week the Minnesota House of Representatives passed unanimously a bill that would create a state action that the Attorney General could pursue for bad faith assertion of patent infringement. The Minnesota Senate is expected to vote on the bill this week. Specifically, the proposed law would make it illegal for a person to “send to an end user located or doing business in this state a written or electronic communication that is a bad faith claim of patent infringement.” An “end user” is anyone who purchases, rents, leases, or otherwise obtains a product, service, or technology in the commercial market that is not for resale and that is, or later becomes, the subject of a patent infringement assertion due to the person’s use of the product, service, or technology. A claim of infringement is in “bad faith” if any of the following apply:

  • the communication falsely states that the sender has filed a lawsuit in connection with the claim;
  • the sender or a person the sender represents does not have a current right to license the patent to or enforce the patent against the end user;
  • the patent has been held invalid or unenforceable in a final judgment or administrative decision;
  • the infringing activity alleged in the communication occurred after the patent expired; or
  • the communication is likely to materially mislead a reasonable end user because the communication does not contain information sufficient to inform the end user of (a) the identity of the person asserting the claim; (b) the patent that is alleged to have been infringed; and (c) at least one product, service, or technology obtained by the end user that is alleged to infringe the patent or the activity of the end user that is alleged to infringe the patent.

This last bullet point will require that cease and desist letters be far more specific then they have been in the past to avoid potential liability. The proposed law would allow the Attorney General to seek an injunction enjoining the person from further violation. The Attorney General could also seek imposition of a civil penalty of up to $50,000 for each violation, reimbursement to the state for the reasonable value of the investigation and prosecution of the violation, and an order requiring restitution to be paid to the victim for legal and professional expenses related to the violation.

The bill pending before the Minnesota Legislature makes clear that the proposed statute “shall not prohibit a person who owns or has a right to license or enforce a patent from notifying others of the person’s ownership or right; offering the patent to others for license or sale; notifying any person of the person’s infringement of the patent as provided by United States Code, title 35, section 287; or seeking compensation for past or present infringement of the patent or for a license to the patent. This section shall not be construed to apply to a person who has demonstrated good faith business practices in previous efforts to enforce the patent, or a substantially similar patent, or who has successfully enforced the patent, or a substantially similar patent, through litigation.”

Interestingly, the proposed law will not apply at all to certain types of patent owners who assert their patents, even if they do so in bad faith. These include:

  • any owner of a patent who has engaged in substantial research, commercial development, production, manufacturing, processing, or delivery of products or materials related to the patent or substantially similar patents;
  • any institution of higher education; or
  • a charitable institution.

Both of these pieces of legislation are likely to be adopted. Both are likely to make it more difficult for people to navigate and address issues related to intellectual property.

Our firm is focused on intellectual property and keeps current on the relevant changes in the law. We have at our disposal the tools and experience necessary to help our clients develop strategies necessary to navigate the intellectual property landscape when our clients enter into contracts or when our clients are seeking to enforce or defend against claims related to intellectual property.

Copyright and Digital Downloads

April 25, 2016 By: Peter Nikolai Category: Copyrights

The music industry is growing and changing.  Year to year world-wide revenues were up in 2015 for the first time in twenty years.  For the first time ever, revenues from digital downloads and streaming (45%) exceeded revenues from music distributed in physical forms (39%) including vinyl, tapes and CDs.  Streaming revenues are likely to soon overtake download revenues.  Performance rights revenues made up the bulk of the remaining 16%.

All of this is generally good news for consumers.  Consumers have more music available to them at a lower cost.  A vast amount of music in all genres is available free to consumers with an Internet connection on ad-sponsored digital sites.  Consumers who do not want to listen to ads can subscribe to various music services like Pandora and Spotify.

Not all of this is good news for musical artists, or even for subscription services.  Many ad-sponsored digital sites are making huge profits from the distribution of music and music videos without paying royalties to artists.  These sites, instead, take advantage of “safe harbor” rules related to copyright liability adopted in many countries in the early days of the Internet.  In the U.S., these rules are part of the 1998 Digital Millenium Copyright Act (DMCA).

According to a U.S. Copyright Office report, copyright holders blame the safe harbor provisions for allowing digital providers to profit from the unauthorized use of copyrighted music without paying licensing fees.  This report quotes music producer Jason Rys as arguing, “due to the DMCA there’s nothing you can realistically do to stop your songs from appearing on YouTube.”  According to published reports, Google bought YouTube in 2006 for $1.65 billion in stock.

The safe harbor rules are intended to protect passive online intermediaries, such as ISPs, social networks, and search engines, from copyright liability.   Such online intermediaries are immune from copyright liability for the distribution of copyrighted music if the intermediaries comply with “takedown notices” from rights holders.  All the intermediaries are required to do after receiving a takedown notice is remove infringing material posted on their site by some third party.

Take down notices are often ineffective.  The U.S. Copyright Office report suggests the DMCA’s takedown rules result in an impossible game of “whack-a-mole” since removed content is frequently reposted requiring the copyright holder to serve another takedown notice.  One organization representing artists and producers claims 94% of the takedown notices it sends out are duplicates, i.e., “they relate to recordings uploaded repeatedly to sites already notified the content was infringing.”  Google received 345 million takedown notices in 2014, i.e., 940,000 takedown notices every single day of the year, according to the U. S. Copyright Office report.

Sites taking advantage of the safe harbor rules also steal market share from subscription services that do pay royalties to distribute the same content.  One media consultant estimates YouTube has more than 800 million monthly music video views.  That is 10 times the number of viewers paying subscription fees to subscription services.

All of this hurts artists in several ways.  First, their music is being made widely available via sites that pay little or no compensation to artists for use of the music.  Second, the market is shrinking for  music distributed in forms that result in royalties paid to the artists.  Third, companies that do pay royalties to artists, during licensing negotiations, cite the competition from non-royalty paying enterprises as a reason for paying lower royalties to artists.  Fourth, the availability of music for free causes companies that do pay royalties to look for ways to reduce royalty costs when launching new endeavours.

Apple, for example, pays royalties each time someone purchases a song, album or music video through the iTunes Store.  However, when Apple launched its streaming service, it initially anounced it would not pay royalties on music distributed to a customer during customer’s initial 30-day trial period. Apple reversed course only after high profile artists like Taylor Swift complained.

What can be done to ensure artists receive a fair return for the enterainment they provide?  Consumers can elect to only use services that pay royalties.  Congress can act to prevent abuse of the safe harbor rules.  Congress could amend the safe harbor rules to make a single takedown notice applicable to all posts including the same copyrighted content.  Congress could require all Internet distributors of music to account for the songs they distribute and pay royalties for such distribution.  Radio stations, satellite radio providers, subscription streaming services, and others are already required to do so.

Of course, in certain situations takedown notices are effective.  Also, parties that post copyrighted material are not passive online intermediaries and are not immune from liability.  If infringement is occuring,  we can advise you of the steps to be taken to abate that infringement.  Call us at (612) 339-7461.

USPTO Announces Proposed Fee Increases

April 25, 2016 By: Peter Nikolai Category: nm_news

Last month the U.S. Patent and Trademark Office announced proposed increases in the government fees it charges related to certain patent and trademark matters. Advisory committees have scheduled public hearings for this month to solicit input from the public before the proposed fee changes are formally adopted and take effect. These hearings will take place at the headquarters of the U.S. Patent and Trademark Office in Alexandria, Virginia

For utility patent applications, the proposal includes a 7% increase in the basic filing fee, a 10% increase in the excess claim fees, a 10% increase for the search fee, a 6% increase for the examination fee, and a 4% increase in the issue fee.  Maintenance fees will remain unchanged.  For design patent applications, the proposal includes an 11% increase in the basic filing fee, a 33% increase in the search fee, a 30% increase in the examination fee, and a 79% increase in the issue fee.  Government fees would also increase substantially under the proposal for inter partes review of an issued patent (50% or more) and for post grant review (33% or more).

The largest government fee increases for trademark matters apply only to paper applications.  These will have little or no impact on our clients because we typically file electronically. The proposal, however, does increase the fee required for an extension of time to file a statement of use by 66% if electronically filed.  The fee for such a request filed on paper will increase 133%.  The fee for instituting an opposition or cancellation proceeding will increase 33%.

Given the substantial nature of these fee increases, clients should consider taking advantage of the current lower fees while the clients still can.  Please contact us to discuss your particular situation and any new applications you plan to file so that such applications can be prepared and filed before the government increases these fees.