Intellectual Property Law

Federal Circuit After Stryker/Halo

Why it matters: On June 13, 2016, the U.S. Supreme Court decided the consolidated cases of Stryker Corp. v. Zimmer, Inc. and Halo Electronics, Inc. v. Pulse Electronics, Inc. and, as had been widely anticipated, overturned the Federal Circuit's "inelastic" Seagate standard for awarding enhanced damages in patent cases. The upshot of the decision is that, with Seagate out of the picture, deference will now be given to district courts in the exercise of their statutory discretion under Section 284 of the Patent Act to increase damages up to three times the amount assessed for egregious cases of misconduct beyond typical infringement. This was recently illustrated by the actions of the Federal Circuit when the Stryker and Halo cases and a third, WesternGeco, LLC v. Ion Geophysical Corporation, came back before it on remand from the Supreme Court.

Detailed discussion: On June 13, 2016, the U.S. Supreme Court handed down its opinion in the consolidated cases of Stryker Corp. v. Zimmer, Inc. and Halo Electronics, Inc. v. Pulse Electronics, Inc., where it reviewed the standard for awarding a patent plaintiff "enhanced" damages under Section 284 of the Patent Act (35 U.S.C. § 284). We covered the February 23, 2016, oral argument in these cases before the Court in our April 2016 newsletter, where the Justices had signaled this outcome by expressing concern that the Federal Circuit's current two-part Seagate test was overly rigid. As anticipated, in their June 13 opinion the Court overturned the Federal Circuit's "inelastic" Seagate standard, making it easier for a district court to exercise its statutory discretion under Section 284 of the Patent Act to increase damages up to three times the amount assessed in infringement cases where egregious cases of willful infringement are found. The Court vacated the Stryker and Halo cases and remanded them to the Federal Circuit for further proceedings consistent with its opinion. In addition, on June 20, 2016, the week following the Stryker/Halo decision, the Court granted certiorari in WesternGeco, LLC v. Ion Geophysical Corporation (which raised similar Section 284 enhanced damages issues) and immediately vacated and remanded it to the Federal Circuit on GVR order. In each of the three cases, the Federal Circuit in turn vacated and remanded the issue of enhanced damages back to the respective district courts so that the judges could exercise their discretion under Section 284 without the constraints of Seagate.

Setting the stage: the Seagate test and procedural history

Federal Circuit precedent holds that a district court's ability to enhance patent damages (up to three times) under Section 284 of the Patent Act is limited to cases where the patent owner has established willful infringement. Up until the Supreme Court's decision in Stryker/Halo, to prove enhanced damages/willful infringement, the Federal Circuit required a plaintiff to satisfy a two-part test from its 2007 decision in In re Seagate Technology, LLC. The first prong of this Seagate test was objective in nature, and asked if the infringer "acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." The second prong was subjective in nature, and asked if "this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer." Because both prongs of the Seagate test had to be independently satisfied, an infringer's subjective intent under the second prong was irrelevant if it could show any objectively reasonable defense to its actions under the first prong.

In both Stryker and Halo, the Federal Circuit denied enhanced damages under the first prong of the Seagate test, as the infringers (in each case) were found to have set forth sufficient evidence that their actions were "objectively reasonable." The Court granted certiorari to review the Seagate test in light of its 2014 decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc., where it had unanimously rejected a comparable two-part test for awarding attorneys' fees under Section 285 of the Patent Act (35 U.S.C. § 285).

The Stryker/Halo opinion

In a unanimous opinion authored by Chief Justice John Roberts, the Court held that the Federal Circuit's Seagate test was inconsistent with Section 284. While recognizing that "[t]he Seagate test reflects, in many respects, a sound recognition that enhanced damages are generally appropriate under § 284 only in egregious cases," the Court quoted its decision in Octane Fitness to find that the Seagate test " 'is unduly rigid, and it impermissibly encumbers the statutory grant of discretion to district courts.' " The Court found the "principal problem" with the Seagate test to be that, under the first prong, it "requires a finding of objective recklessness in every case before district courts may award enhanced damages" which "can have the effect of insulating some of the worst patent infringers from any liability for enhanced damages."

The Court also rejected the Seagate test because it imposed an "unsupported" burden of proving willfulness by "clear and convincing evidence," much higher than the "preponderance of the evidence" standard used in patent litigation generally. As it had in Octane Fitness, the Court further rejected the Federal Circuit's "tripartite framework for appellate review" in Section 284 cases, holding that a district court's award of damages should be subject to review at the appellate level solely for "abuse of discretion." The Court's specific holding for determining enhanced damages was as follows:

Section 284 gives district courts the discretion to award enhanced damages against those guilty of patent infringement. In applying this discretion, district courts are "to be guided by [the] sound legal principles" developed over nearly two centuries of application and interpretation of the Patent Act. . . . Those principles channel the exercise of discretion, limiting the award of enhanced damages to egregious cases of misconduct beyond typical infringement.

In exercising discretion in awarding enhanced damages under Section 284, the Court said that the district courts should "continue to take into account the particular circumstances of each case" in a manner "free from the inelastic constraints of the Seagate test." Justice Stephen Breyer wrote a concurring opinion where he attempted to put some parameters around the district court's exercise of discretion in determining enhanced damages for egregious conduct, in which Justices Anthony Kennedy and Samuel Alito joined.

The Federal Circuit's actions on remand

The Supreme Court vacated both Stryker and Halo and remanded the cases back to the Federal Circuit for further proceedings consistent with its opinion. In addition, on June 20, 2016, the Supreme Court granted certiorari in WesternGeco, LLC v. Ion Geophysical Corporation, a case that raised similar Section 284 enhanced damages issues, and immediately vacated and remanded the case to the Federal Circuit on GVR order in light of its June 13 decision. In all three cases, the Federal Circuit in turn sent the cases back to their respective district courts to reconsider enhanced damages without the constraints of the Seagate test.

Stryker came back before the Federal Circuit on September 12, 2016. The merits panel began by reaffirming the original jury's findings that Stryker's patents were willfully infringed, even after giving effect to the "new willfulness standard articulated by the Supreme Court." The panel noted that the district court had awarded enhanced damages upon the jury's finding of willfulness, and that the first time around the Federal Circuit had overturned the enhanced damages award under the first prong of the now defunct Seagate test. Rather than merely reaffirming the district court's enhanced damages award as it had the jury's finding of willfulness, however, the panel vacated and remanded the case back to the district court so that it could exercise its discretion to review and "re-make" its enhanced damages award in light of the Supreme Court's decision.

Halo came back before the Federal Circuit on August 5, 2016. In that case, relying on Seagate, the district court had denied enhanced damages to the plaintiff. The panel thus vacated and remanded the case to the district court to reconsider the question of enhanced damages, stating that "[b]ecause the district court applied the Seagate test in declining to enhance damages … we vacate its unenhanced damages award … and remand for further proceedings consistent with the Supreme Court's opinion on enhanced damages."

Last, WesternGeco came back before the Federal Circuit on September 21, 2016. To the extent that, as in Halo, the district court had denied enhanced damages based on Seagate, the panel vacated and remanded the case on that issue (it reinstated its earlier opinion on other matters), stating that:

on remand the district court must consider two questions. The first of these is subjective willfulness… the district court must review the sufficiency of [the evidence presented to the jury for subjective willfulness] as a predicate to any award of enhanced damages, mindful of Halo's replacement of Seagate's clear-and-convincing evidence standard with the "preponderance of the evidence standard."… The second issue that the district court must consider on remand, if the jury's finding of willful infringement is sustained, is whether enhanced damages should be awarded. Halo emphasized that the question of enhanced damages under § 284 is one that must be left to the district court's discretion.

See here to read the Supreme Court's 6/13/16 opinion in the consolidated cases of Stryker Corp. v. Zimmer, Inc. and Halo Electronics, Inc. v. Pulse Electronics, Inc.

See here to read the Federal Circuit's 9/12/16 opinion on remand in Stryker Corp. v. Zimmer, Inc.

See here to read the Federal Circuit's 8/5/16 opinion on remand in Halo Electronics, Inc. v. Pulse Electronics, Inc.

See here to read the Federal Circuit's 9/21/16 opinion on GVR order in WesternGeco, LLC v. Ion Geophysical Corporation.

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Once in a [Planet] Blue Moon—Software Patents as Alice Turns Two

Why it matters: On September 13, 2016, the Federal Circuit in McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc. found claims for a software patent to be "not drawn to an abstract idea" and thus patent-eligible under Section 101 of the Patent Act. The decision in McRO is one of the few cases (out of approximately 50) since the Supreme Court's 2014 decision in Alice Corp. v. CLS Bank where the Federal Circuit has found claims for a computerized software process to be patent-eligible. Read on for a discussion of the Federal Circuit's reasoning in McRO as well as an overview of Alice's impact on the federal courts since it was decided two years ago (hint—invalidations of software patents continue at a consistently high rate).

Detailed discussion: On September 13, 2016, the Federal Circuit in McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc. reversed a Central District of California court and found that a software patent for a computerized process for synchronizing the lip movements and facial expressions of animated figures was not drawn to an abstract idea and thus patent-eligible under Section 101 of the Patent Act, thereby allowing the plaintiff graphics company to move forward with an infringement suit against Sega Inc., Electronic Arts Inc. and other large video game companies.

Review: Alice Corp. v. CLS Bank

We discussed the U.S. Supreme Court's landmark 2014 decision in Alice Corp. v. CLS Bank in detail in our December 2015 newsletter under "Down the Rabbit Hole: Trends in Software Patent Court Decisions Post-Alice." In Alice, the Supreme Court held that claims for a software method for reducing financial-settlement risk performed by a computer were "drawn to a patent-ineligible abstract idea" under Section 101 of the Patent Act, and that "[m]erely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention." The Court established a two-step test for ascertaining patent eligibility under Section 101: (1) first, determine whether the claims at issue are directed to one of the "patent-ineligible" concepts of abstract ideas, laws of nature or natural phenomena; and (2) if so, determine whether any of the remaining elements, either alone or in combination with the patent-ineligible elements, contain sufficient "inventive concept" to transform the claim to become patent-eligible; in this regard the Court noted that simply applying an abstract idea on a generic computer is not enough for patent eligibility.

In affirming the conclusion of patent ineligibility with respect to the specific facts before it, the Court urged the courts and agency tribunals to "tread carefully" going forward in construing inventions and innovations to be non-patent-eligible abstract ideas "lest [the exclusionary principles] swallow all of patent law." As discussed below, however, a review of federal court decisions on the second anniversary of the Alice opinion shows that courts have failed to heed the Supreme Court's words of caution and have invalidated software patents in consistently high percentages.

This includes the Federal Circuit on appeal, which has consistently upheld software patent invalidations in over 90% of the cases that have come before it. However, as discussed in our July 2016 newsletter under "Are 'Improvements' Key to Subject Matter Eligibility for Software Patents?" the Federal Circuit may be looking for ways to carve out meaningful exceptions to Alice. For example, one of the rare times prior to McRO where the Federal Circuit upheld a software patent was relatively recent—May 12, 2016—in the case of Enfish LLC v. Microsoft Corporation. In that case, the Court's holding turned on its finding that the software claims were directed to a "specific improvement in the way computers operate," rendering them non-abstract for Section 101 purposes. A week later, on May 17, 2016, the Federal Circuit in In re: TLI Communications LLC Patent Litigation reverted to norm and found the software claims before it to be directed to an abstract idea and patent-ineligible, distinguishing that case from Enfish because the claims did not sufficiently recite "a specific improvement in computer functionality." Following the Enfish and In re: TLI Communications holdings, the U.S. Patent and Trademark Office (PTO) issued a memo to examiners on May 19, 2016, that provided additional guidance for determining what constitutes an abstract idea in light of those cases, with specific attention given to "claims directed to improvements of existing computer technology or functionality." All of this seems to suggest that software claims will have a better chance of being found to be patent-eligible by the PTO and the Federal Circuit if they can be seen to offer specific improvements in the way a computer software program or process operates or functions. The Federal Circuit's decision in McRO bears this out.

McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc.

To briefly review the background of the case, in 2012 and 2013 plaintiff McRO, Inc., doing business as Planet Blue (McRO), filed lawsuits against Bandai Namco Games America Inc. and other video game developers and publishers (collectively, Defendants) in the U.S. District Courts for the Central District of California and for the District of Delaware (the Delaware lawsuits were subsequently transferred to the Central District of California and all the lawsuits consolidated). McRO alleged in the lawsuits that the Defendants had infringed its two patents both entitled "Method for Automatically Animating Lip Synchronization and Facial Expression of Animated Characters," which both claim a computerized process and rules for synchronizing the lip movements and facial expressions of animated figures. On September 22, 2014, the Central District of California judge granted the Defendants' motion for judgment on the pleadings after finding, relying on Alice, that McRO's asserted claims were directed to patent-ineligible abstract subject matter and therefore invalid under Section 101 of the Patent Act. McRO appealed to the Federal Circuit.

On September 13, 2016, the Federal Circuit reversed and remanded, allowing McRO's infringement lawsuit against the Defendants to go forward, holding that "the ordered combination of claimed steps, using unconventional rules that relate sub-sequences of phonemes, timings, and morph weight sets, is not directed to an abstract idea and is therefore patent-eligible subject matter under Section 101."

In a unanimous opinion written by Judge Jimmie V. Reyna, the Court began its analysis identifying the "principal dispute" between the parties as being "over the meaning and application of two Supreme Court cases in light of Alice: Parker v. Flook, 437 U.S. 584 (1978) (Flook) and Diamond v. Diehr, 450 U.S. 175 (1981) (Diehr). Both cases addressed the patentability of process claims that include steps requiring calculation (emphasis added)." The central dispute was factually complex and, to briefly summarize, focused on whether the "first set of rules," or claimed rules, evaluated sub-sequences that were directed to multiple "sequential phonemes" (McRO's position) or "individual phonemes" (Defendants' position). If the former, McRO argued that the claims were not directed to an abstract idea (relying on Diehr), and if the latter, the Defendants argued they were (relying on Flook). After reviewing both sides' arguments in support of their positions, the Court said that "the parties' dispute about whether the 'first set of rules' must evaluate sequential phonemes or can evaluate individual phonemes is resolved by the claim language" and concluded that "[w]e agree with McRO that the claims are limited to rules that evaluate sub-sequences consisting of multiple sequential phonemes" and thus the claims were not abstract for Section 101 purposes.

The Court next addressed the question of whether, under Step 1 of Alice, the claims were rendered abstract because they were based on generic technological principles and thus "preempted" (as Defendants argued) or whether they represented improvements to a technological process (citing to, in addition to Diehr and Alice, the Court's recent decision in Enfish, discussed above). The Court framed the issue as "whether the claims in these patents focus on a specific means or method that improves the relevant technology or are instead directed to a result or effect that itself is the abstract idea and merely invoke generic processes and machinery."

After specifically reviewing the claimed rules in detail, the Court rejected the Defendants' argument that "the claims simply use a computer as a tool to automate conventional activity," finding that "[t]he computer here is employed to perform a distinct process to automate a task previously performed by humans… This [human] activity, even if automated by rules, would not be within the scope of the claims because it does not evaluate sub-sequences, generate transition parameters or apply transition parameters to create a final morph weight set. It is the incorporation of the claimed rules, not the use of the computer, that 'improved [the] existing technological process' by allowing the automation of further tasks."

The Court held that claim 1 (which established the "first set of rules") in particular was not preempted because "[w]hen looked at as a whole, claim 1 is directed to a patentable, technological improvement over the existing, manual 3-D animation techniques. The claim uses the limited rules in a process specifically designed to achieve an improved technological result in conventional industry practice... Claim 1 of the '576 patent, therefore, is not directed to an abstract idea." The Court concluded, "[b]ecause we find that claim 1 is not directed to ineligible subject matter, we do not reach Alice step two."

Second anniversary of Alice, by the numbers:

The second anniversary of the Supreme Court's Alice decision was on June 19, 2016. As illustrated by the chart below, a snapshot of the federal courts through September 2016 shows that, based on Alice, while the Federal Circuit has continued to invalidate software patents at a consistently high rate, the rate of district court invalidations nationwide has dropped, leading to an overall invalidation rate below 70% for the first time since Alice was decided. While encouraging, it is too early to predict whether this downward percentage shift represents a lasting trend.

  • Nationwide (Federal Circuit and District Courts):
    • Total decisions: 363
    • Total invalid: 247
    • Percentage invalid: 68% (versus 73% as of 10/31/15)
  • Federal Circuit (appeals from district courts, PTAB, etc.):
    • Total decisions: 58
    • Total invalid: 53
    • Percentage invalid: 914% (versus 94.7% as of 10/31/15)
  • District Courts:
    • Total decisions: 305
    • Total invalid: 194
    • Percentage invalid: 63.6% (versus 70.3% as of 10/31/15)

* Statistics through 9/31/16 provided by BilskiBlog, "Alicestorm Update for Fall 2016" (10/19/16). For comparison purposes, we published federal court statistics through October 31, 2015 in our December 2015 newsletter, entitled "Down the Rabbit Hole: Trends in Software Patent Court Decisions Post-Alice."

The impact of Alice on the PTO is just as dire. As one practitioner described it, the "largely unseen, real impact" of the Alice decision is "the widespread rejection of [software] patent applications by the PTO." Statistics cited show that, two years out, over 36,000 published patent applications have been rejected by PTO examiners based on Alice, with over 5,000 published patent applications abandoned. When these statistics are factored together with the federal court statistics, the chilling effect of Alice on innovations in software and computer-based patents becomes even more evident.

See here to read the Federal Circuit's 9/13/16 opinion in McRO, Inc. d.b.a. Planet Blue v. Bandai Namco Games America Inc.

See here to read the BilskiBlog entry published on 10/19/16 entitled "Alicestorm Update for Fall 2016."

See here to read the BilskiBlog entry published on 6/20/16 entitled "Two Years After Alice: A Survey of the Impact of a 'Minor Case' (Part 2)."

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"Work for Hire" Works for Third Parties in Copyright Dispute

Why it matters: Do third parties have standing to raise the "work for hire" defense in a copyright ownership dispute? The Second Circuit says yes. On July 29, 2016, the Second Circuit in Urbont v. Sony Music Entertainment held that the district court properly determined that the defendants had standing to raise a "work for hire" defense to the plaintiff's copyright infringement claim even though they were not the party who had allegedly done the hiring. The Second Circuit reversed and remanded the case back to the district court, however, finding that the district court erred when it granted summary judgment in favor of the defendants after ruling that a "work for hire" arrangement existed as a matter of law and the plaintiff had failed to raise sufficient issues of material fact to convince the court otherwise.

Detailed decision: On July 29, 2016, the Second Circuit in Urbont v. Sony Music Entertainment held that the Southern District of New York court had properly held that Sony Music Entertainment (d.b.a. Epic Records and Razor Sharp Records, LLC) and Dennis Coles (d.b.a. Ghostface Killah) (collectively, Defendants) had standing to raise a "work for hire" defense to the copyright infringement claim filed by plaintiff Jack Urbont (Urbont) with respect to the theme song for the Marvel Entertainment Group (Marvel) character "Iron Man." This is noteworthy because the alleged hiring was done by Marvel—not a party to the lawsuit—instead of the Defendants. Even though it affirmed the district court's ruling that the Defendants had standing to assert the "work for hire" defense, however, the Second Circuit reversed and vacated the district court's grant of summary judgment in favor of the Defendants, determining that the district court had erred when it concluded that Urbont failed to raise sufficient triable issues of material fact to counter the district court's finding that a "work for hire" arrangement existed as a matter of law.

Relevant facts and procedural background

To briefly sum up the relevant background facts, what is not in dispute is that Urbont (described in the opinion as a "composer and music producer who has written theme songs for many well-known television shows") wrote theme songs for several of the characters in the Marvel Superheroes Television Show (series) in 1966, including the theme song for Iron Man (Iron Man Composition). What is in dispute is the nature of the arrangement pursuant to which he came to write those songs. Urbont claimed that he composed, recorded and produced the theme songs at his own cost and submitted them to Marvel creator Stan Lee (Lee) "on spec," hoping that Lee would use them but with no prior commitment to do so. Urbont further claimed that Marvel understood and orally agreed that this "on spec" arrangement was "contingent on his [Urbont] retaining ownership rights in the work." Urbont cited to many facts to support this claim, set forth in detail in the opinion. On the other hand, the Defendants argued and cited facts to support the argument that Marvel—again, not a party to the lawsuit—had retained Urbont to compose the theme songs under a "work for hire" arrangement pursuant to which he did not retain copyright ownership.

In 2000, Defendant hip-hop artist Dennis Coles (a.k.a. Ghost Face Killah), Sony Music Entertainment and Razor Sharp Records produced and released an album entitled "Supreme Clientele" that featured the Iron Man Composition on two of the tracks. The Defendants admittedly did not seek permission from Urbont to use the work. In 2011, Urbont filed suit against the Defendants in which he alleged copyright infringement under the federal Copyright Act as well as under New York state law (among other state law claims). As one of their defenses, the Defendants claimed that the Iron Man Composition was created under a "work for hire" arrangement with third party Marvel and therefore Urbont did not own the copyright.

In 2015, the district court granted summary judgment in favor of the Defendants after ruling that (1) the Defendants had standing to assert the "work for hire" defense, (2) as a matter of law, the Iron Man Composition was indeed a "work for hire," and (3) Urbont had not raised sufficient triable issues of material fact regarding an ownership agreement with Marvel or otherwise to persuade the court that the arrangement was not a "work for hire." The Court also dismissed Urbont's state law claims (we focus only on the federal claims here). Urbont appealed to the Second Circuit after the district court denied his motion for reconsideration.

Second Circuit decision

The Second Circuit affirmed the district court's ruling that the Defendants had standing to assert the "work for hire" defense even though they were not parties to any ownership agreement between Urbont and Marvel. However, the Court said that the district court had erred in granting summary judgment in favor of the Defendants when it concluded that Urbont had failed to raise sufficient triable issues of material fact to counter the district court's determination that the Iron Man Composition was a "work for hire" as a matter of law.

Third-party standing to raise the "work for hire" defense

The Court began its analysis by stating that the ability of a third party to assert the "work for hire" defense was one of first impression for the Court: "This Court has not explicitly decided whether a third party to an alleged employer-employee relationship has standing to raise a 'work for hire' defense to copyright infringement." The Court pointed out that the Eleventh Circuit and the Ninth Circuit, albeit under distinguishable sets of facts, have split on the issue (the Eleventh Circuit has ruled that third parties do have standing to assert the defense, while the Ninth Circuit has ruled that they do not).

The Court was "unpersuaded" by Urbont's argument that the Defendants lacked third-party standing to assert the "work for hire" defense because there was no evidence that Marvel itself had ever asserted it or had ever questioned Urbont's ownership of the copyright—Urbont likened it to third parties not being able to challenge the validity of an otherwise undisputed copyright transfer under Section 204(a) of the Copyright Act. The Court distinguished the Ninth Circuit case and others cited by Urbont in support of this argument, stating that, unlike in those cases, Marvel was not a party to the lawsuit and "has not had the opportunity to clarify its position with respect to ownership of the copyright... it is thus uncertain whether Marvel would dispute Urbont's copyright ownership."

Moreover, the Court rejected Urbont's Section 204(a) transfer of copyright analogy because "Section 204(a), a statute of frauds provision for copyright transfers, was designed to 'protect copyright holders from persons mistakenly or fraudulently claiming oral licenses.' " By contrast, "the 'work for hire' doctrine guides the determination of ownership rights as between employers and employees or independent contractors." The Court said that, in any copyright infringement suit—whether as an element of the copyright infringement claim or in order to establish standing—the plaintiff "bears the burden of proving ownership of the copyright … whether such ownership is challenged by an ostensible employer or by a third party." The Court cited case law precedent when noting that "even courts that have precluded third parties from challenging a plaintiff's ownership rights under the statute of frauds provision in Section 204 have permitted those [third] parties to challenge the validity of the underlying ownership transfer."

The Court thus concluded that "third parties to an alleged employer-employee relationship have standing to raise a 'work for hire' defense against a claim of copyright infringement."

Summary judgment vacated

After reviewing in depth the factual evidence presented by Urbont to the district court to back up his claim to copyright ownership in the Iron Man Composition, the Court reversed and remanded the case back to the district court. The Court said that, while the district court had cited many strong factors in support of its finding that the Iron Man Composition was a "work for hire" as a matter of law, "there are other factors that the district court did not explicitly consider" and that "[c]onsidering all of these factors, we conclude that genuine issues of material fact remain as to whether the Iron Man Composition was created at Marvel's instance and expense [one test for "work for hire" arrangements]." Furthermore, the Court held that "the district court erred in concluding that Urbont failed as a matter of law to produce evidence sufficient to rebut the presumption that Marvel owned the work." The Court thus concluded that "Urbont has raised genuine issues of material fact with respect to his claim of copyright infringement, and we vacate the district court's grant of summary judgment in favor of the [Defendants.]"

After remand, the two parties reached an undisclosed settlement on October 6, 2016.

See here to read the Second Circuit's 7/29/16 opinion in Urbont v. Sony Music Entertainment.

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Pirate Joe's and the Extraterritorial Reach of the Lanham Act

Why it matters: On August 26, 2016, the Ninth Circuit in Trader Joe's Company v. Hallatt reversed the district court's dismissal of a Lanham Act trademark infringement suit on lack of subject matter jurisdiction grounds and ruled that the Lanham Act could apply extraterritorially to the actions of a Canadian man who purchased Trader Joe's products in the United States and then resold them at inflated prices in his Vancouver store (designed to mimic Trader Joe's distinctive trademark and trade dress) under the name "Pirate Joe's."

Detailed discussion: On August 26, 2016, the Ninth Circuit in Trader Joe's Company v. Hallatt reversed a Western District of Washington judge and ruled that plaintiff Trader Joe's Company (Trader Joe's) could proceed with its federal Lanham Act claims against a Canadian man, Michael Norman Hallatt (Hallatt), who purchased branded items from Trader Joe's stores in the United States and then sold them at inflated prices in a store located in Vancouver, Canada, called Pirate Joe's (designed to mimic Trader Joe's distinctive trademark and trade dress).

Relevant facts and procedural history

To briefly review the relevant facts and procedural history of the case, Trader Joe's, described as "a well-known American grocery store that sells specialty goods at reasonable prices from its distinctive, South Pacific-themed stores," was first alerted to Hallatt's actions in 2011 by employees at a Trader Joe's in Bellingham, Washington, near the Canadian border who got suspicious after observing Hallatt purchasing large quantities of Trader Joe's products (branded and unbranded) several times a week. When confronted, Hallatt admitted to reselling the products at his copycat store in Vancouver, at which point the Bellingham Trader Joe's asked that he cease and desist. Undeterred, Hallatt continued to purchase items from other Trader Joe's stores in Washington, Oregon and even California (often in disguise or through locals hired for the purpose), take them over the border, and sell them in his Vancouver store Pirate Joe's.

Trader Joe's subsequently filed a lawsuit against Hallatt in the Western District of Washington alleging trademark and trade dress infringement under the Lanham Act as well as trademark infringement, unfair competition and other claims under Washington state law. The district court granted Hallatt's motion to dismiss Trader Joe's Lanham Act claims on lack of subject matter jurisdiction grounds, ruling that the Lanham Act did not apply to Hallatt's conduct in Canada. After subsequently dismissing Trader Joe's motion for reconsideration on the Lanham Act claims, the district court dismissed Trader Joe's remaining state law claims, at which point Trader Joe's appealed to the Ninth Circuit.

Ninth Circuit decision

In a unanimous opinion, the Court reversed the district court and ruled that the Lanham Act can reach extraterritorially to cover Hallatt's actions in Canada (it affirmed as to the state law claims). The Court conducted numerous multistep analyses to reach its holding, detailed below, but in short the Court found that (1) the Lanham Act has extraterritorial reach generally; (2) contrary to the district court's ruling, whether or not the Lanham Act applies specifically to any particular set of facts relating to foreign conduct is a merits question that has nothing to do with subject matter jurisdiction; and (3) Trader Joe's adequately pleaded a claim on the merits under the Lanham Act and could proceed with its federal trademark infringement lawsuit against Hallatt.

Extraterritorial reach of the Lanham Act generally

The Court began its analysis by stating that "we determine whether any statute, including the Lanham Act, reaches foreign conduct by applying a two-step framework." The Court said that the first step in this framework is to determine "whether the statute gives a clear, affirmative indication that it applies extraterritorially," while the second step is to determine " 'the limits Congress has (or has not) imposed on the statute's foreign application.' " The Court answered the question raised by the first step in the affirmative, citing to a 1952 Supreme Court case which held that the Lanham Act's " 'use in commerce' element and broad definition of 'commerce' clearly indicate Congress's intent that the Act should apply extraterritorially." With respect to the second step, the Court found no limitations imposed by Congress on the Lanham Act's extraterritorial reach.

Application of the Lanham Act to Hallatt's extraterritorial conduct

In order to ascertain whether the Lanham Act applied to Hallatt's conduct in Canada, the Court said it needed to answer the following two questions: "First, is the extraterritorial application of the Lanham Act an issue that implicates federal courts' subject-matter jurisdiction? Second, did Trader Joe's allege that Hallatt's conduct impacted American commerce in a manner sufficient to invoke the Lanham Act's protections?" The Court concluded, "[b]ecause we answer 'no' to the first question but 'yes' to the second, we reverse the district court's dismissal of the federal claims and remand for further proceedings."

With respect to the first question, the Court relied on its 2014 decision in La Quinta Worldwide LLC v. Q.R.T.M., S.A. de C.V. and Supreme Court precedent to hold that "the extraterritorial reach of the Lanham Act is a merits question that does not implicate federal courts' subject-matter jurisdiction, and that the district court erred as a matter of law when it decided otherwise."

The Court answered the second question in the affirmative after analyzing the facts in accordance with the following three-part test established by the Supreme Court in the 1976 case of Timberlane Lumber Co. v. Bank of America National Trust & Savings Ass'n:

Under Timberlane, the Lanham Act applies extraterritorially if: "(1) the alleged violations . . . create some effect on American foreign commerce; (2) the effect [is] sufficiently great to present a cognizable injury to the plaintiffs under the Lanham Act; and (3) the interests of and links to American foreign commerce [are] sufficiently strong in relation to those of other nations to justify an assertion of extraterritorial authority."

The Court concluded that "Trader Joe's satisfied its burden under Timberlane prongs one and two, at least at this early stage of the proceeding" when it alleged in its complaint, among other things, that Hallatt's conduct affected American commerce because (1) Hallatt's activities harmed Trader Joe's reputation and decreased the value of its American-held trademarks, (2) Hallatt transported and sold Trader Joe's goods in Canada without using proper quality control measures or established product recall practices, (3) Hallatt attempted to pass off Pirate Joe's as an authorized Trader Joe's retailer which caused customer confusion, harmed Trader Joe's domestic reputation and diminished the value of its American-held marks and (4) Hallatt purchased Trader Joe's goods in the United States and often hired local U.S. residents to assist him, thereby engaging in domestic commercial activity and commerce as part of his "infringing scheme."

The Court then looked to the third prong of the Timberlane test which "considers international comity … and gives effect to the 'rule that we construe statutes to avoid unreasonable interference with other nations' sovereign authority where possible.' " The Court enumerated the following "seven separate factors" that needed to be considered in a Timberlane prong three analysis:

[1] the degree of conflict with foreign law or policy, [2] the nationality or allegiance of the parties and the locations or principal places of business of corporations, [3] the extent to which enforcement by either state can be expected to achieve compliance, [4] the relative significance of effects on the United States as compared with those elsewhere, [5] the extent to which there is explicit purpose to harm or affect American commerce, [6] the foreseeability of such effect, and [7] the relative importance to the violations charged of conduct within the United States as compared with conduct abroad.

After weighing and balancing each of these separate factors, the Court concluded that prong three had been satisfied:

In sum, Timberlane's three prongs favor extraterritorial application of the Lanham Act here. On prongs one and two, Trader Joe's alleges a nexus between Hallatt's foreign conduct and American commerce sufficient to state a Lanham Act claim: Hallatt's conduct may cause Trader Joe's reputational harm that could decrease the value of its American-held trademarks, and Hallatt operates in American commerce streams when he buys Trader Joe's goods in Washington and hires locals to assist him. On prong three, the seven subfactors we use to evaluate potential "interference with other nations' sovereign authority," … taken together, do not counsel against applying the Lanham Act here. We therefore conclude that the Lanham Act reaches Hallatt's allegedly infringing activity, and we reverse the district court's dismissal of Trader Joe's' four Lanham Act claims.

See here to read the Ninth Circuit's 8/26/16 opinion in Trader Joe's Company v. Hallatt.

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USPTO Director on the Fifth Anniversary of the AIA

Why it matters: U.S. Patent and Trademark Office (USPTO) Director Michelle K. Lee recently spoke at two events in Washington, D.C., in conjunction with the fifth anniversary of the enactment of the America Invents Act (AIA). As Director Lee made clear, she believes that the AIA has made a positive impact on the USPTO's operations and its stakeholders over the past five years and looks forward to continued improvements and progress in the years to come.

Detailed discussion:

USPTO Director Michelle K. Lee recently spoke at two events in Washington, D.C., in conjunction with the fifth anniversary of the Leahy-Smith America Invents Act (AIA) in September 2011 (it was signed into law by President Obama on September 16, 2011). On September 22, 2016, Director Lee gave prepared remarks at the official America Invents Act Fifth Anniversary Event. The week before that, on September 15, 2016, Director Lee participated in a "fireside chat" at the 2016 ChIPs Women in Tech, Law and Policy Global Summit.

America Invents Act Fifth Anniversary Event

Director Lee began her speech by highlighting a few of the "far-reaching changes brought about by the AIA" over the past five years since its enactment. She started with one that was "near and dear" to her heart, which was the establishment of the first USPTO regional offices: "AIA called for creation of three such offices. Instead we created four—in Dallas, Denver, Detroit, and the Silicon Valley." Director Lee said that these regional offices, each with a "full complement of talented examiners and judges on hand," help fulfill the AIA's commitment to "provide key USPTO resources and outreach in the heart of our nation's most innovative regions" and serve to "[save] inventors and entrepreneurs a lot of money by allowing them to do business with our agency closer to where they live and work, rather than here in the nation's capital." Director Lee said that she sees "nothing but upside to these regional offices—for our stakeholders and for the Agency."

Director Lee next turned to the second positive change created by the AIA, which was the new Patent Trial and Appeal Board (PTAB) and new post-grant proceedings such as inter partes reviews (IPRs) that "provide a faster, lower cost alternative to district court litigation to test the validity of a patent." Director Lee pointed out that, since the AIA's inception in 2011, "the Board [has] received ~5,500 petitions for its new post-grant proceedings—that's more than 3x number expected. And the Board did this without missing single statutory deadline, while also maintaining a respectable affirmance rate before the U.S. Court of Appeals for the Federal Circuit." Director Lee continued,

The PTAB proceedings are helping to ensure that the patents in our system are the ones that should be; and those that should not, are not. With a total of over 270 judges—123 of them added since the Board's inception—the Agency is faithfully meeting Congress's mandate. And, importantly, looks forward to continuing to do so through further well-reasoned rulings and enhancements to our proceedings to make them even more fair and effective within our statutory authority. That's a success story, not just for patent stakeholders but also the quality of our patents more broadly in our system.

Director Lee next highlighted the fee-setting authority afforded by the AIA as a major benefit, which has allowed the USPTO to focus on the agency's mandates. Director Lee emphasized that key among these are improvements in patent quality, specifically through the "Enhanced Patent Quality Initiative, made possible by the fee-setting authority in the AIA." Director Lee said that, "[t]hrough this Initiative, we have launched almost a dozen programs designed to improve the quality of the patents we issue—before, during and after examination, all designed to make sure the Agency issues patents both accurately and clearly, all for the benefit of American innovators."

Director Lee also pointed out "[o]ther benefits of our greater financial stability enabled by the AIA's fee-setting authority" such as "the USPTO's ability to weather government shutdowns, improve our IT systems, and lower our backlog of patent applications and reduce pendencies." According to Director Lee, the reduction in backlog was especially crucial: "Due in large part to the ability to hire more patent examiners for our nationwide workforce, we've been able to reduce our backlog of newly filed patent applications by 28% from its all-time high in January 2009 to the present, despite an average ~4% year over year increase in filings. That is significant and we are well on our way to reducing our backlog further and hitting our optimal target by 2019." Director Lee said that when she testified before the House Judiciary Committee's PTO oversight committee (Subcommittee on Courts, Intellectual Property, and the Internet) on September 13, 2016, she specifically asked Congress to reauthorize this fee-setting authority as it is a "critical component in allowing us to function."

Director Lee concluded that:

during the period the Agency has been diligently implementing the AIA mandated changes, the value that patents and IP more broadly contribute to our national economy has increased. So it's important that we get this right! Highlighting the importance of IP to our economy, today, in conjunction with our partners within the Department of Commerce, we released a report on IP-intensive industries showing that IP directly and indirectly supported 45.5M jobs, nearly 1/3 of all U.S. employment. That's an increase of more than six million jobs since 2010! At the same time, the share of our national GDP attributable to IP-intensive industries increased from 34.8% to 38.2% over the same time. What this suggests, to me, is that our laws and our economy are moving in the right direction when it comes to IP. And I don't expect that trend to change any time soon, because one of the more beneficial, but perhaps unintended, changes brought about by the AIA—from my perspective—is that it has created a more truly open and dynamic patent system.

ChIPs Women in Tech, Law and Policy Global Summit

The week before, on September 15, 2016, Director Lee participated in a twenty-minute "fireside chat" as part of the 2016 ChIPs Women in Tech, Law and Policy Global Summit in Washington, D.C. According to one observer, during the chat Director Lee said that she considers the post-grant proceedings created by the AIA to be a form of "quality check" on already-issued patents. As she would reiterate a week later, Director Lee said that patent quality—something that the AIA has promoted—is critical:

I want to put an emphasis on high quality, because that's been a subject of a lot of conversation. We know that there's legislation pending on the Hill designed to curtail, among other things, abusive patent litigation. We've heard a lot of stories about various entities who are taking patents and claims and trying to stretch them to cover products and industries that, perhaps, they were not meant to cover. So in my mind it is really incumbent on the U.S. Patent and Trademark Office to issue the very best quality patents possible. We do so—and we should do so—because if we don't do so, it creates a business uncertainty and cost. So your clients, your companies, are going to have to make decisions based upon rights that may or may not be clear.

See here to read the 9/21/16 posting on USPTO.Gov entitled "Remarks by Director Michelle K. Lee at America Invents Act Fifth Anniversary Event."

See here to read the 9/15/16 article in The Recorder entitled " 'Quality Patents' Minimize Business Uncertainty, PTO's Lee Says" by C. Ryan Barber.

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