Tag: Litigation

Summary of Amendments to the Federal Rules of Civil Procedure and a Potential Impact on NPEs

Posted on by Kinney & Lange, P.A.

By:  Tony Salmo

On December 15, 2015 amendments to the Federal Rules of Civil Procedure went into effect. Congress passed and the Supreme Court adopted amendments to Rules 1, 4, 16, 26, 30, 31, 33, 34, 37, 55, and 84. The amendment to rule 84 effectively eliminated the Appendix of Forms. On April 28, 2016, the Supreme Court approved amendments for review by congress for: Federal Rules of Appellate Practice, Rules 4, 5, 21, 25, 26, 27, 28, 28.1, 29, 32, 35, and 40, and Forms 1, 5, and 6, new Form 7 and new Appendix; Bankruptcy Rules 1010, 1011, 2002, 3002.1, 7008, 7012, 7016, 9006, 9027, and 9033, and new Rule 1012; Civil Rules 4, 6, and 82; and Criminal Rules 4, 41, and 45.

This article includes a brief discussion of amendments and proposed amendments to the Federal Rules of Civil Procedure, followed by a discussion of the impact caused by the amendment to Rule 84 of the Federal Rules of Civil Procedure, specifically the impact of the elimination of Form 18 on non-practicing entities (NPEs).

2015 Amendments to Federal Rules of Civil Procedure

On December 15, 2015 amendments to Rules 1, 4, 16, 26, 30, 31, 33, 34, 37, 55, and 84 of the Federal Rules of Civil Procedure went into effect. The amendments are each briefly explained below.

Rule 1 was amended to emphasize that all parties to a suit share with the court the responsibility to employ the rules in favor of a just, speedy, and inexpensive manner. See Fed. R. Civ. P.  1, committee notes 2015, available at

http://uscode.house.gov/view.xhtml?path=/prelim@title28/title28a/node85/titleI&edition=prelim.

The most significant change to Rule 4 reduced the time to serve a defendant from 120 days to 90 days. Accompanying the change to rule 4 was a change to Rule 16 which reduced the time to issue a scheduling order to the earlier of 90 days (from 120 days) after any defendant has been served, or 60 days (from 90 days) after any defendant has appeared before the court. The committee noted that the changes to Rules 4 and 16 are in effort to reduce delays in early stages of litigation.

Perhaps the most expansive amendment is that of Rule 26(b)(1), which now requires discovery to be relevant to a party’s claim or defense and restores the requirement that discovery must be proportional to the needs of the case. Rules 30, 31, and 33 were amended in parallel to reflect the recognition of proportionality in Rule 26. Rule 26 was also amended to allow for requests for production after 21 days of serving that party, even if that request is prior to the Rule 26(f) conference.

Rule 34 was amended to reduce potential unreasonable burdens from being imposed by objections to requests to produce documents and things. Rule 34(b)(2)(B) now requires that objections to Rule 34 requests be stated with specificity. This requirement is tied to the amendment to Rule 34(b)(2)(c), which provides that objections to Rule 34 requests must state whether anything is withheld on the basis of the objection. Additionally, Rule 34(b)(2)(B) now explicitly allows for the production of copies of documents or electronically stored information as opposed to inspection, provided that the response to the request states what copies will be produced.

New Rule 37(e) seeks to address growing problems presented by electronically discoverable information. Rule 37(e) provides guidelines for the court when electronically stored information was not preserved that should have been preserved and cannot be recovered, the court may act:  (1) upon determining the loss of information causes prejudice to another party; and (2) upon finding the party failing to preserve the electronically stored information acted with intent to deprive the other party. If the court determines these conditions exist, the court may: (A) presume the information was unfavorable to the party; (B) instruct the jury that it may or must presume the information was unfavorable to the party; or (C) dismiss the action under a default judgment.

Rule 55 was amended to clarify that a default judgment failing to dispose of all claims among all parties is not a final judgment unless the court directs entry of final judgment. The amendment to rule 55 relates to the issue of parallel proceedings, such as those in the United States Patent and Trademark Office.

Rule 84, which previously contained the Appendix of Forms, has been abrogated. The committee notes state that the purpose of the forms, “to demonstrate the simplicity and brevity of statement which the rules contemplate,” has been fulfilled and therefore the forms are no longer necessary. See Fed. R. Civ. P. 84, advisory committee’s note (2015), available at

http://uscode.house.gov/view.xhtml?path=/prelim@title28/title28a/node85/titleI&edition=prelim.

Patent Trolls Without Form 18 — Amended Rule 84

Patent Trolls, or non-practicing entities (NPEs), leverage the high cost of patent defense to obtain nuisance settlements for questionable claims of infringement. A typical strategy consists of filing a large number of suits against potential infringers; but filing large volumes of lawsuits comes with associated costs of preparing pleadings. NPEs often minimized legal fees by filing bare minimum complaints based on Form 18. Now-abrogated Form 18, which was specific to patent suits, only required: (1) a statement that the patent at issue is owned by the plaintiff; (2) that the defendant’s product infringed the plaintiff’s patent; and (3) infringement resulted in damages suffered by the plaintiff. The simplicity of Form 18 allowed NPEs to easily file a large number of complaints for a given patent.

After the Supreme Court holdings in Iqbal and Twombly set a heightened pleading standard of plausibility, many argued that “plausible” pleadings should be required for patent infringement complaints. Ashcroft v. Iqbal, 556 U.S. 662 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). In 2012, the United States Court of Appeals for the Federal Circuit in In re Bill of Lading addressed the patent pleadings issue, holding that Form 18 satisfied the Iqbal and Twombly pleading standards for cases of direct infringement, but not for indirect infringement. In re Bill of Lading Transmission and Processing System Patent Litigation, 681 F.3d 1323, 1334; 1336 (Fed. Cir. 2012). In re Bill of Lading therefore allowed NPEs to continue their practice of filing complaints using Form 18.

Now that Form 18 has been eliminated by the abrogation of Rule 84, experts anticipate that suits for patent infringement will be required to meet the heightened pleading standards of Iqbal and Twombly. However, as the Iqbal and Twombly cases are not patent-specific, a new set of case law is likely to emerge to address patent-specific pleadings. While there is uncertainty as to the exact pleading standard for patent infringement complaints, NPEs may be required to provide more detailed pleadings than under old Form 18. One possible requirement is a fact-specific statement from a plaintiff explaining how a defendant’s product infringes the patent at issue.

More detailed pleadings mean more work for NPE attorneys and heightened pleading standards may cause an increase in Rule 12(b)(6) motions to dismiss (failure to state a claim for which relief can be granted), both of which will increase an NPE’s cost of doing business. Neither the additional cost of pleadings or the cost of responding to more 12(b)(6) motions will cripple the NPE economic model. However, additional up-front operating expenses will shift the economic model for NPEs and may at least curb the number of suits filed by NPEs.

2016 Proposed Amendments to Federal Rules of Civil Procedure

On April 28, 2016, the Supreme Court approved amendments for review by congress for the Federal Rules of Civil Procedure, Rules 4, 6, and 82. These proposed rules must pass through congress before they are implemented in December of 2016. The proposed amendments are each briefly explained below.

Rule 4 is proposed to be amended to address time limits for service and correct an ambiguity regarding service abroad on a corporation. Proposed Amendments to Federal Rules of Civil Procedure Adopted by The Supreme Court for Congressional Review (April 28, 2016), available at http://www.uscourts.gov/file/document/2016-04-28-final-package-congress. The amendment clarifies that the time limit set forth in Rule 4(m) (90 days) does not include service under Rule 4(h)(2) (service on a corporation outside the United States judicial district).

The proposed amendment to Rule 6 addresses an ambiguity from the term “after service” that was added in the 2005 amendment. The term “after service” could be interpreted as meaning either the party performing service or the party receiving service. To reduce confusion, Rule 6(d) is proposed to be amended to replace “after service” with “after being served,” to indicate the party being referenced is the party served.

The proposed amendment to Rule 82 is a technical amendment to address venue for admiralty and maritime claims, deleting reference to now-repealed §1391 and 1392 and adding reference to §1390 of venue statutes of Title 28.

Supreme Court Clarifies Standard of Review for Claim Construction

Posted on by Kinney & Lange, P.A.

■ Nicholas J. Peterka

In Teva Pharmaceuticals USA, Inc. v. Sandoz, Inc., 574 U.S. ___, No. 13-854 (2015), the Supreme Court held that the Federal Circuit must apply the clearly erroneous standard when reviewing a district court’s resolution of subsidiary factual matters made during the court’s patent claim construction.

At dispute was the meaning of the term “molecular weight.” Each party presented extrinsic evidence in the form of expert testimony and, relying on patent owner Teva’s expert, the district court determined that “molecular weight” was not indefinite. Sandoz appealed the claim construction to the Federal Circuit, which reviewed de novo all aspects of the district court’s claim construction and determined that “molecular weight” was indefinite. The Supreme Court granted certiorari and found that, while the determination of questions of law (such as the final claim construction) are reviewed de novo, underlying determinations of subsidiary facts are reviewed for clear error. The Court stated that subsidiary factual matters arise when the court uses extrinsic evidence, such as expert testimony, to aid in claim construction. The Court’s holding will factor into whether a party uses extrinsic evidence, for a party aiming to add more finality to a district court’s claim construction may frame the issues so that extrinsic evidence is vital to the court’s claim construction and, conversely, a party seeking to overturn a claim construction may argue that intrinsic evidence is dispositive and extrinsic evidence is unnecessary. This decision will also affect summary judgment. Because the Court’s holding seemingly elevates the importance of factual determinations in claim construction, factual issues may become potential obstacles to summary judgment, which requires no genuine dispute as to any material fact.

 

The Federal Circuit’s Second En Banc Decision In Akamai Technologies v. Limelight Networks

Posted on by Kinney & Lange, P.A.

■ John P. Fandrey

In August of 2015, the Federal Circuit Court of Appeals issued its second en banc decision in Akamai Techs., Inc., v. Limelight Networks, Inc., Nos. 2009-1372, 2009-1380, 2009-1416, 2009-1417 (Fed. Cir., August 13, 2015), a case which began in 2006. The underlying issue is whether there is liability for so-called “divided” or “split” infringement involving multiple actors. The Federal Circuit explained that in patent infringement cases the acts of one actor may be attributed to another where the other “conditions participation in an activity or receipt of a benefit upon performance of a step or steps of a patented method and establishes the manner or timing of that performance.” This test is in addition to the agency relationships, contractual relationships, and joint enterprises that may give rise to direct infringement attributable to a single entity. Despite Akamai’s long procedural history, the Supreme Court’s 2014 opinion and the Federal Circuit’s most recent en banc decision provide two straightforward propositions. First, the Supreme Court has stated that a party cannot be liable for induced infringement where no direct infringement has occurred. Second, the Federal Circuit has expanded the scope of what constitutes direct infringement, holding that where “more than one actor is involved in practicing the steps [of a claimed method], a court must determine whether the acts of one are attributable to [another] such that a single entity is responsible for the infringement.”

Procedural History:

In 2006, Akamai Technologies sued Limelight Networks for infringement of three of Akamai’s patents, U.S. Patent No. 6,108,703, U.S. Patent No. 6,553,413, and U.S. Patent No. 7,103,645. Akamai Techs. Inc. v. Limelight Networks, Inc., 629 F.3d 1311, 1316 (Fed. Cir. 2011). Akamai’s patents claim methods for serving web page content over the internet. A jury found that Limelight infringed Akamai’s 6,108,703 patent and awarded over $40 million to Akamai. Akamai Techs. Inc. v. Limelight Networks, Inc., 629 F.3d 1311, 1316 (Fed. Cir. 2011). Akamai proceeded on a theory of joint liability because the defendant, Limelight, did not perform all the steps of the asserted claims itself. Instead, Limelight’s customers performed a step known as tagging. The jury was instructed that Limelight could only be found liable if the jury found that Limelight’s customers were acting under Limelight’s direction and control.

Limelight moved for judgment as a matter of law after the jury returned its verdict. At first, the district court denied the motion. However, shortly after the jury returned its verdict the Federal Circuit Court of Appeals issued its decision in Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008). Limelight then moved for reconsideration and the district court granted Limelight’s motion finding that Limelight did not infringe Akamai’s patents. On appeal, the Federal Circuit affirmed the district court’s finding of noninfringement citing its decision in Muniauction for the proposition that there can be no infringement unless every step of a patented process is carried out under the control or direction of one party.

The Federal Circuit reheard the case en banc and reversed the district court. Akamai Techs. Inc. v. Limelight Networks, Inc., 629 F.3d 1301 (Fed. Cir. 2012); See also Katherine J. Rahlin, Induced Infringement Broadened, K&L IP News™ (Winter 2012). The Federal Circuit explained that the trial court was correct in its holding that Limelight did not directly infringe Akamai’s patent because it did not direct and control the actions of content providers. However, the Federal Circuit reversed and remanded because it believed Limelight could be liable for inducing infringement.

The United States Supreme Court granted certiorari on the question of “whether a defendant may be liable for inducing infringement of a patent under 35 U.S.C. §271(b) when no one has directly infringed the patent under §271(a) or any other statutory provision.” The Supreme Court, citingAro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336, 341 (1961), provided that one cannot be liable for inducement if there has been no direct infringement. Limelight Networks, Inc. v. Akamai Techs., No. 12-786 (United States Supreme Court, June 2, 2014). The Court also stated that “[a] method patent claims a number of steps; under this Court’s case law, the patent is not infringed unless all the steps are carried out.”

On remand a three judge panel of the Federal Circuit affirmed the district court’s finding of non-infringement. Akamai Techs. Inc. v. Limelight Networks, Inc., 786 F.3d 899 (Fed. Cir. 2015). The panel, with one judge dissenting, held that Akamai did not show that the allegedly infringing activities of Limelight’s customers could be attributed to Limelight. The panel relied on the fact that Akamai did not show that Limelight’s customers were Limelight’s agents, that they were contractually obligated to Limelight or that they were acting in a joint enterprise with Limelight.

2015 En Banc Decision:

The Federal Circuit granted rehearing en banc and ultimately reversed the district court, holding that the jury had substantial evidence upon which to base its verdict of infringement. Akamai Techs. Inc. v. Limelight Networks, Inc., Nos. 2009-1372, 2009-1380, 2009-1416, 2009-1417 (Fed. Cir. August 13, 2015).

The Federal Circuit stated that in a case of divided infringement “a court must determine whether the acts of one entity or party are attributable to another such that a single entity is responsible for the infringement.”

The Court explained that in applying the direction or control test it continues to consider general principles of vicarious liability, such as agency, contractual relationships and joint enterprises. Direction or control will be found if there is an agency relationship or one party contracts with another to perform one or more steps of a claimed method. However, the Court added that liability can also be found when a party “conditions participation in an activity or receipt of a benefit upon performance of a step or steps of a patented method and establishes the manner or timing of that performance. In those instances, the third party’s actions are attributed to the alleged infringer such that the alleged infringer becomes the single actor chargeable with direct infringement.”

In supporting this rule, the court cited Metro-Goldwyn-Mayer Studios, Inc. v. Grokster. 545 U.S. 913 (2005). In Grokster, the Supreme Court found that distributors of software could be held liable for inducing copyright infringement where the distributors knew their software was primarily used for copyright infringement and the distributors encouraged such use.

In applying the test above the Federal Circuit, in Akamai, focused on several facts to find that the jury had substantial evidence to support a finding that performance of the claimed steps was a condition to participating in Limelight’s service. Specifically, Limelight’s contract with its customers outlined the steps that customers had to perform in order to use the service. Limelight’s contract also required that customers provide Limelight with all the “cooperation and information reasonably necessary” for Limelight to implement its service. The court also found that there was substantial evidence to support a finding that the timing or manner of performance was established by Limelight. Here the court highlighted: Limelight’s assignment of a technical account manager to each customer to implement Limelight’s service; Limelight providing a hostname for customers to integrate into their webpages; and Limelight’s engineers assisting with installation and performing quality assurance testing.

Implications:

It’s easy to see that some method claims provided little protection to patentees. Prior to the Federal Circuit’s most recent Akamai decision, a would-be infringer could avoid infringement liability by doing two things: 1) allowing a third party to practice some of the steps of a claimed method while 2) avoiding creating an agency relationship, a contractual relationship, or a joint enterprise with the third party.

The most recent Akamai decision may strengthen some patents that were not previously seen as being infringed by the acts of single entities or persons. This is because the decision adds to the list of ways to establish liability for direct infringement when the alleged infringement involves more than one actor. In its second en banc opinion the Federal Circuit provided that “a court must determine whether the acts of one are attributable to [another] such that a single entity is responsible for the infringement.” In addition to the traditional tests of vicarious liability such as, agency and contractual relationships, now an entity that “conditions participation in an activity or receipt of a benefit upon performance of a step or steps of a patented method and [establishes] the manner or timing of that performance” may be liable for direct infringement.

Akamai may strengthen some method claims. However, attorneys drafting claims should always try to structure the claims so that only one actor’s conduct will be needed to establish direct infringement. This may not always be possible. If the claims involve computer networks this may be extremely difficult. This is because of the ease with which the steps can be distributed among different actors.

B&B HARDWARE: TTAB PROCEEDINGS CAN CREATE ISSUE PRECLUSION

Posted on by Kinney & Lange, P.A.

■ Andrew W. Werner

On March 24, 2015 the U.S. Supreme Court decided in B&B Hardware, Inc. v. Hargis Industries, Inc., 575 U.S. ___ (2015); holding that when trademark usages adjudicated by the Trademark Trial and Appeal Board (“TTAB”) are materially the same as those before a district court, issue preclusion should apply so long as the other ordinary elements of issue preclusion are met.

B&B Hardware stems from a 1996 trademark registration by Hargis Industries, Inc. (“Hargis”) for the SEALTITE mark for “self-piercing and self-drilling metal screws for use in the manufacture of metal and post-frame buildings.” B&B Hardware, Inc. (“B&B”) filed an opposition at the TTAB in response to Hargis’s registration of SEALTITE, due to B&B’s 1993 registration of the mark SEALTIGHT for “threaded or unthreaded metal fasteners and other related hardwar[e]; namely, self-sealing nuts, bolts, screws, rivets and washers, all having a captive o-ring, for use in the aerospace industry.” In its opposition, B&B argued that the SEALTITE mark could not be registered

The TTAB determined there was a likelihood of confusion between the SEALTITE mark and the SEALTIGHT mark

because it is confusingly similar to B&B’s SEALTIGHT mark given both companies have an online presence, the largest distributor of fasteners sells both companies’ products, and consumers sometimes call the wrong company to place orders. Hargis contended that Hargis and B&B sell different products, for different uses, to different types of consumers, through different channels of trade. The TTAB determined that the SEALTITE mark could not be registered because it so resembled the SEALTIGHT mark as to be likely to cause confusion, after concluding that the most critical factors in a likelihood of confusion analysis were the similarities of the marks and the similarity of the goods.

In a concurrent suit for trademark infringement, B&B argued to the District Court that Hargis could not contest likelihood of confusion following the TTAB’s decision because of the preclusive effect of the TTAB decision. The District Court disagreed with B&B, reasoning that the TTAB is not an Article III court. The jury returned a verdict for Hargis, finding no likelihood of confusion. Upon appeal to the Eighth Circuit, the District Court’s decision was affirmed for three reasons: first, because the TTAB uses different factors than the Eighth Circuit to evaluate likelihood of confusion; second, because the TTAB placed too much emphasis on the appearance and sound of the two marks; and third, because Hargis bore the burden of persuasion before the TTAB, while B&B bore it before the District Court.

The three issues before the U.S. Supreme Court were:

(1) whether an agency decision can ever ground issue preclusion;
(2) whether there is an “evident” reason why Congress would not want TTAB decisions to receive preclusive effect, even in those cases in which the ordinary elements of issue preclusion are met; and
(3) whether there is a categorical reason why registration decisions can never meet the ordinary elements of issue preclusion.

Agency Decisions & Issue Preclusion
Relying on Astoria Federal Savings & Loan Association v. Solimino, 501 U. S. 104 (1991) and United States v. Utah Construction & Mining Co., 384 U. S. 394, 422 (1966), the Court reasoned that where a single issue is before a court and an administrative agency, preclusion often applies. Proclaiming the common law principle of issue preclusion as “well established”, the Court stated “in those situations in which Congress has authorized agencies to resolve disputes, ‘courts may take it as given that Congress has legislated with the expectation that the principle [of issue preclusion] will apply except when a statutory purpose to the contrary is evident.’” The Court then relied on previous holdings where courts have not hesitated to apply res judicata in situations “[w]hen an administrative agency is acting in a judicial capacity and resolves disputed issues of fact properly before it which the parties have had an adequate opportunity to litigate[.]”

 

Agency decisions can ground issue preclusion for future Article III determinations when the parties have had an adequate opportunity to litigate

In so reasoning, the Court determined that an agency decision, such as from the TTAB, can ground issue preclusion for future Article III determinations.

“Evident” Congressional Reason for TTAB Non-Preclusion
The Court pointed out that trademark registration is not a prerequisite to an infringement action but is rather a separate proceeding to decide separate rights. In the instance of where exhausting an administrative process is a prerequisite to a suit in court, giving preclusive effect to the agency’s determination in that very administrative process could render the judicial suit “strictly pro forma” and thus issue preclusion could not be grounded. This however was not the instance in this case. Additionally, the Court relied upon

 

 

“We conclude that nothing in the Lanham Act bars the application of issue preclusion in such cases. The Lanham Act’s text certainly does not forbid issue preclusion. Nor does the Act’s structure.”

ordinary preclusion law (citing Restatement (Second) of Judgments §28, Comment a and Illustration 1) to assert that if a party to a court proceeding does not challenge an adverse decision, that decision can have preclusive effect in other cases, even if it would have been reviewed de novo. The Court concluded that neither the Lanham Act’s test nor its structure rebuts the “presumption” in favor of giving preclusive effect to TTAB decisions where the ordinary elements of issue preclusion are met.

Categorical Preclusion of Registration Decisions
The Court asserted that it does not matter that the statutory provisions and the factors used to assess likelihood of confusion are different as between trademark registration and trademark infringement. The Court determined the Eighth Circuit had erred in holding that issue preclusion could not apply due to the TTAB relying too heavily on “appearance and sound.” The fact that the TTAB may have erred in placing too much emphasis on certain factors in this instance does not necessarily prevent preclusion in all instances.

Next, the Court reasoned that although the TTAB and the district courts often use different procedures, procedural differences by themselves do not defeat issue preclusion. Instead of focusing on whether procedural differences exist, the Court focused on whether the procedures

Procedural differences themselves do not defeat issue preclusion

used in the first proceeding were fundamentally poor, cursory, or unfair. The Court determined there was no categorical reason to doubt the quality, extensiveness, or fairness of the TTAB’s procedures in part because they are exactly the same as in federal court, given the TTAB has adopted almost all of Federal Rule of Civil Procedure 26. Additionally, the Court asserted the ordinary law of issue preclusion already accounts for those “rare” cases where a “compelling showing of unfairness” can be made. The Court then closed by stating that “Congress’ creation of this elaborate [trademark] registration scheme, with so many important rights attached and backed up by plenary review, confirms that registration decisions can be weighty enough to ground issue preclusion.”

Trends
With the holding in this case, it is interesting to compare the Court’s trademark usage centric analysis with Fresenius USA v. Baxter Int’l, No. 2012-1334 (Fed. Cir. July 2, 2013), which considered a similar issue with respect to patent invalidity in reexamination proceedings. In Fresenius, the Federal Circuit ruled that a USPTO decision of invalidity in reexamination prevails over a prior, Federal Circuit affirmed, jury decision of validity and infringement of the same claims in view of the same prior art. With the preclusive effect of TTAB decisions, the IP community has generally received yet another indication of incentivizing the use of administrative procedures to determine who wins and who loses.