198 Search Results

June 3, 2009 |
California Court of Appeal Issues Decision Upholding Preemption of Claims for Breach of Confidence, Interference with Contract, and Statutory Unfair Competition under the California Uniform Trade Secrets Act

On March 3, 2009, the California Court of Appeal for Sixth Appellate District issued a significant published opinion substantively analyzing the scope of the preemption clause (Civ. Code § 3426.7) of the California Uniform Trade Secrets Act (“CUTSA”).   In K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939 (2009), the Court of Appeals takes a step beyond the California Supreme Court’s decision in Cadence Design Systems, Inc. v. Avant! Corp., 29 Cal. 4th 215, 223 (2002)–which noted that post-CUTSA claims for common law misappropriation were preempted by the Act–concluding that the Act also preempts common law claims for breach of confidence, interference with contract, and statutory unfair competition (under Cal. Bus. & Prof. Code § 17200) where those claims are “based on the same nucleus of facts as the misappropriation of trade secrets claim for relief.”  171 Cal. App. 4th at 958 (citing Digital Envoy, Inc. v. Google, Inc., 370 F. Supp. 2d 1025, 1035 (N.D. Cal. 2005)). A Common Sense Approach In reaching its decision, the K.C. Multimedia court took a straightforward, fact-based approach that both considered the plain language of the statute and the logic of several federal court opinions interpreting the Act.  First, it reasoned that CUTSA’s “comprehensive structure and breadth”–by which it “defines key terms, provides various forms of relief, spells out methods for preserving the secrecy of trade secrets, and sets forth the limitations period”–suggested a legislative intent to occupy the field.  Id. at 957 (citing AccuImage Diagnostics Corp. v. Terarecon, Inc., 260 F. Supp. 2d 941, 953 (N.D. Cal. 2003)).  Then, specifically analyzing CUTSA’s preemption clause–which states in pertinent part that CUTSA does not affect “other civil remedies that are not based upon misappropriation of a trade secret”–the court concluded that this language would be “meaningless” if common law claims based upon misappropriation were allowed to go forward.  Id. at 958 (citation omitted; emphasis added).  The court further explained that the phrase “‘based upon misappropriation’ – strongly suggests a factual inquiry, one that examines the conduct alleged in the claim.”  Id. (citation omitted).  In making this observation, the court cited recent federal court precedent applying the same type of fact-based analysis under California law.  See, e.g., Callaway Golf Co. v. Dunlop Slazenger Group Americas, 318 F. Supp. 2d 216, 219 (D. Del. 2004). The K.C. Multimedia court also pointed out that CUTSA’s preemption clause, unlike those of many other states, did not follow the language of the Model Uniform Trade Secrets Act (“UTSA”), which provides that the UTSA “displaces conflicting tort, restitutionary, and other [state] law . . . providing civil remedies for misappropriation of a trade secret.”  171 Cal. App. 4th at 955 (citing 14 West’s U. Laws Ann., UTSA, § 7(a)) (emphasis added).  While it went on to acknowledge the overarching goal of uniformity of the law among states adopting the UTSA, the court nonetheless concluded that the deviation in CUTSA’s preemption clause language was “deliberate.”  Id. at 955-56.  Thus, it held that case law interpreting the Model UTSA preemption language could not be persuasive to the interpretation of CUTSA’s “unique” preemption provision.  Id. at 956. In rejecting these non-California cases, the court also rejected the “something more” standard they applied, a rule which allows common law claims to “go forward whenever they seek ‘something more’ than trade secret relief.”  Id. at 958.  Because this rule was based in non-California authority, and because the California case law cited by Appellant did not address the specific preemption question before the court–i.e., statutory preemption of common law–the court concluded that this authority “offer[ed] no reasoned basis for allowing common law claims to go forward whenever they seek ‘something more’ than trade secret relief.”  Id.  How this language will be interpreted in practice is yet to be seen, but it should open the door for courts to engage in a more exacting preemption analysis at the pleading stage. A Beginning K.C. Multimedia is a significant addition to the otherwise almost vacant landscape of published California state authority on the scope of CUTSA’s preemption clause, but it is only a beginning.  Indeed, the opinion strongly suggests that it should not be interpreted as laying down any “hard and fast” rules concerning preemption of particular common law or statutory causes of action.  It is permeated with careful language tying its preemption analysis to a thorough fact-based inquiry–even noting, at one point, that the court below “was armed with a great deal of information derived from the long history of the case, including appellant’s prior pleadings and other submissions.”  Id. at 952; see, e.g., id. at 960 (regarding the breach of confidence claim: “[e]mploying that same fact-driven approach here, we focus on the factual predicate for the claim. . . .”); id. at 961 (regarding the interference claim:  “[f]actually, the conduct derives from ‘the same nucleus of facts’ as the trade secrets claim . . .”) (citation omitted); id. at 962 (“[A]ppellant’s statutory unfair competition claim rests squarely on its factual allegations of trade secret misappropriation.”). Moreover, at times, the court seemed to consciously insert cautionary language into its opinion–observing, for example, that “[a]s yet, it is not clear to what extent, if any, a statutory cause of action for trade secret misappropriation supersedes a cause of action for breach of confidence.”  Id. at 960 (emphasis added; citation omitted).  Likewise, it acknowledged that “Courts and commentators frequently analyze separately unfair competition and trade secrets protection.”  Id. at 961 (citation omitted).  Thus, it is unlikely that this decision will mark the end of claims for either common law breach of confidence or for statutory unfair competition based on some variation of a CUTSA claim. Practical Effects of the Decision While the court’s focus on a factual inquiry suggests that defendants may continue to face an uphill battle in asserting CUTSA preemption on demurrer, the potential remains for the early, ‘preventative’ use of Section 3426.7.  As many practitioners know, trial courts historically have shown reluctance to dismiss CUTSA companion claims on the basis of preemption–particularly when faced with a dispute as to whether the information at issue was in fact a trade secret.  But in K.C. Multimedia, the appellant presented that very issue to the Court of Appeal, and also asserted that the trial court’s preemption ruling was premature, “since no evidence had been presented” at the time of the ruling.  Id. at 951.  The court rejected these arguments and concluded that the trial court properly “acted within its inherent authority” to control the litigation when it granted a motion in limine on the preemption issue.  Id. at 951-53.   Additionally, based on its own independent review of the complaint, the court concluded that the claims were in fact preempted, and thus, that the trial court’s ruling was also substantively correct.  Id. at 953.  In reaching its decision, the court reminded litigants that the preemption inquiry looks at “the particular facts pleaded” and further pointed out that “[c]onstruction of a complaint presents a legal question.”  Id. at 958-59.  The opinion therefore can be read to suggest that trial courts can and should engage in a more rigorous preemption analysis at the demurrer stage. Only time will tell whether K.C. Multimedia will lead trial courts to require more particularized pleading for complaints asserting both CUTSA and related common law and/or statutory claims.  Should this occur, the practical effects could emerge in the form of more focused discovery, and more streamlined pretrial proceedings (due to the dismissal of claims that in substance do not differ from statutory misappropriation claims).  On the other hand, the K.C. Multimedia decision also could encourage practitioners to delay pleading a CUTSA claim until they have engaged in discovery on parallel common law, contract, and/or statutory claims and have concluded that a viable CUTSA claim in fact exists. Gibson, Dunn & Crutcher’s Intellectual Property Practice Group is available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you work or any of the following: Wayne Barsky – Los Angeles (310-557-8183, wbarsky@gibsondunn.com)Denis R. Salmon – Palo Alto (650-849-5301, dsalmon@gibsondunn.com)Angelique Kaounis – Los Angeles (213-229-7137, akaounis@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 23, 2009 |
Federal Circuit Upholds USPTO’s Limits On Patent Claims (At Least For Now)

Over the last decade, the United States Patent and Trademark Office’s patent allowance rate has decreased from over 70% in 1999 and 2000 to roughly 42% in the first quarter of 2009, notwithstanding a steady increase in the number of applications during this period.  Perhaps consistent with this trend, the USPTO has made efforts to place new limitations on the prosecution of patents, including four new rules that the agency recently attempted to implement to restrict the number of claims that may be included in each patent application, as well as the number of continuation applications that may be filed.  On Friday, March 20, 2009, in a closely watched decision, the Federal Circuit in Tafas v. Dudas upheld the USPTO’s authority to make these rules and disallowed only one of the four rules as being in conflict with the Patent Act.  The case is to be remanded to the district court to consider additional arguments pertaining to the validity of the rules. Shortly after the rules were published in the Federal Register in August of 2007, Dr. Triantafyllos Tafas, an inventor of robotic microscopes, and pharmaceutical giant GlaxoSmithKline brought suit against the USPTO in the Eastern District of Virginia.  The district court granted a preliminary injunction against implementation of the four rules at issue.  On summary judgment, the district court subsequently held that the USPTO had acted outside of its statutory rulemaking authority in violation of 5 U.S.C. § 706(2).  The USPTO appealed. Limits on Continuations and Requests for Continued Examination Final Rules 78 and 114 limit the number of continuation applications and requests for continued examination ("RCEs") that patent applicants can request as a matter of right, respectively.  Although the Federal Circuit determined that the USPTO had the authority to issue Final Rule 78, it also held that a limit on continuations was inconsistent with 35 U.S.C. § 120 and therefore invalid, because it placed additional restrictions on a patent applicant’s ability to claim priority to an earlier-filed application that were absent from the "exclusive requirements" of § 120.  The Federal Circuit upheld Rule 114, which limits an applicant to one RCE as of right for an entire family of applications.  Subsequent RCEs must be filed with a showing that the amendment, argument, or evidence sought to be entered could not have been submitted prior to the close of prosecution in the application.  37 C.F.R. § 1.114. Limits on the Number of Claims Final Rules 75 and 265 require applicants submitting more than five independent claims or twenty-five total claims with an application to provide an examination support document ("ESD") to the examiner.  The ESD imposes a number of new burdens on patent applicants, including submission of:  (1) a preexamination prior art search, (2) a list of the most relevant prior art references, (3) a list of the claim limitations disclosed by each reference, (4) an explanation of how each independent claim is patentable over the references, and (5) an identification of where in the specification each claimed limitation is disclosed and enabled, in accordance with 35 U.S.C. § 112 ¶ 1.  Notwithstanding various concerns regarding the practical implications of the ESD requirement – most notably, "that even the most diligently prepared ESD will inevitably open the applicant to inequitable conduct allegations" – the Federal Circuit dismissed such concerns as "too speculative to void the rules."  Moreover, the Court observed that "doubt about the judiciary’s ability to apply its own doctrine in a way that yields fair results and discourages frivolous allegations should not preclude the USPTO from promulgating rules that are within its statutory authority." In dissent, Judge Rader noted that the additional burdens imposed by ESDs would disproportionately affect "technologies with greater complexity and greater public interest in disclosure," where an applicant may have a compelling need for more than five independent claims – e.g., the pharmaceutical industry, where "an applicant may claim not only the genus compound, but also a number of species, intermediates, methods of making, and methods of use." "Substantive" or "Procedural" Rules? Much of the case turned on the Federal Circuit panel’s conclusion that the rules were "procedural" rather than "substantive" in nature, and therefore within the scope of the USPTO’s rulemaking authority under 35 U.S.C. § 2(b).  The majority opinion, authored by Judge Prost, emphasized that it did not "purport to set forth a definitive rule for distinguishing between substance and procedure," but that because the rules at issue governed "the timing of and materials that must be submitted with patent applications," they were more procedural than substantive.  Although they might alter the "manner" in which parties present their viewpoints to the USPTO, they did not "foreclose effective opportunity" to present those viewpoints.  (Citing the D.C. Circuit’s decision in JEM Broad. Co. v. FCC, 22 F.3d 320 (D.C. Cir. 1994).) Even though he joined in Judge Prost’s opinion, Judge Bryson wrote separately to emphasize that he did "not think it necessary, or particularly helpful, to consider whether those regulations would be deemed ‘substantive,’ ‘interpretive,’ or ‘procedural.’"  Judge Rader, on the other hand, argued emphatically that the Final Rules were substantive rather than procedural, because they "drastically change the existing law and alter an inventor’s rights and obligations under the Patent Act." The lack of consensus among the three-member panel concerning the nature of the new rules – along with the already heavy participation of numerous amici curiae – indicates that this case may be a good candidate for an en banc rehearing.  Even if the majority opinion ultimately holds, numerous issues pertaining to the new rules still need to be decided, including:  whether any of the rules are "arbitrary and capricious," whether they conflict with the Patent Act in ways not specifically addressed by the Federal Circuit, whether all USPTO rulemaking is subject to "notice and comment" rulemaking under 5 U.S.C. § 553, and whether any of the rules are impermissibly vague or retroactive.   Gibson, Dunn & Crutcher’s Intellectual Property Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:   Denis R. Salmon – Palo Alto (650-849-5301, dsalmon@gibsondunn.com) Glenn K. Beaton – Denver (303-298-5773, gbeaton@gibsondunn.com)Wayne Barsky – Century City (310-557-8183, wbarsky@gibsondunn.com)Mark Reiter – Dallas (214-698-3360, mreiter@gibsondunn.com) Josh Krevitt – New York (212-351-2490, jkrevitt@gibsondunn.com)Frederick Chung – Palo Alto (650-849-5392, fchung@gibsondunn.com)David A. Segal – Orange County (949-451-3973, dsegal@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 10, 2009 |
Federal Circuit Agrees to Reconsider Extraterritorial Reach of Patent Laws

The United States Court of Appeals for the Federal Circuit has granted en banc rehearing in Cardiac Pacemakers, Inc. et al. v. St. Jude Medical et al., a case with important ramifications for all companies that do business both in the United States and abroad.  The question that the en banc Court has agreed to decide is "does 35 U.S.C. § 271(f) apply to method claims, as well as product claims." The parties to this case are competitors in the market for implantable cardioverter defibrillators (ICDs).  Cardiac Pacemakers, Inc. ("CPI") contends that St. Jude Medical’s devices infringe a single claim of U.S. Patent No. 4,407,288, which claims a method for cardioverting the heart.  As relevant here, St. Jude asked the district court to limit any damages to devices sold within the United States, arguing that 35 U.S.C. § 271(f), which imposes liability for the supply from the United States of certain components of patented inventions for combination overseas, does not apply to method or process claims.  The district court disagreed.  On appeal, the panel affirmed on the basis of Union Carbide Chems. & Plastics Tech. Corp. v. Shell Oil Co., 425 F.3d 1366 (Fed. Cir. 2005), which had applied § 271(f) to method claims. The statute at issue, 35 U.S.C. § 271(f), provides: "Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, . . .  in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer."  In Shell Oil, the Federal Circuit held that Section 271(f) applies to the supply of "every component of every form of invention," including a patented method, and held that Shell was liable for exporting a catalyst used for practicing a patented method in a foreign facility.  425 F.3d at 1379.  In Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007), however, the Supreme Court undermined the premise on which Shell Oil was based by holding that Section 271(f) applies only to those components that are both capable of being combined so as to form the patented invention, and also capable of being supplied from the United States.  St. Jude petitioned for en banc review based on the conflict between the panel decision (and Shell Oil) and the text, structure, history and aims of Section 271, as well as the inconsistency with the Supreme Court’s interpretation of Section 271(f) in Microsoft v. AT&T.  St. Jude also highlighted the conflict within the Federal Circuit’s own jurisprudence on this issue.  Compare Shell Oil, 425 F.3d at 1379, with Standard Havens Prods., Inc. v. Gencor Indus., Inc., 953 F.2d 1360, 1374 (Fed. Cir. 1992) or NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1282, 1321-23 (Fed. Cir. 2005).  The en banc process will be important for harmonizing and clarifying this area of patent law.  As the Supreme Court’s decision in Microsoft v. AT&T indicates, the scope of liability for extraterritorial infringement under § 271(f) is a matter of significant national and international concern.  This point was reinforced in this case by two amicus briefs—one for the Federal Circuit Bar Association and the American Intellectual Property Law Association, another for Cisco Systems, Inc., Intel Corporation, Apple Inc., Oracle Corporation, Microsoft Corporation, and Symantec Corporation—filed at the petition stage.  En banc resolution of this important question will give all participants in the patent system—and the district court judges who must resolve most of these issues—clear guidance on whether overseas activities can result in infringement of process claims.  Gibson Dunn has represented St. Jude throughout the lengthy proceedings in the case, including several previous appeals.  Gibson Dunn has extensive experience in patent appeals, including Section 271(f) issues.  We successfully represented Microsoft in the Supreme Court’s Microsoft v. AT&T case, represented parties or amici in virtually every major patent case in the Supreme Court in the past decade, and we have handled numerous appeals in the Federal Circuit for a wide range of clients in many industries. The Federal Circuit has set the following briefing schedule for briefing and argument:  St. Jude’s brief is due on April 6, 2009; CPI’s response is due on April 27, 2009; St. Jude’s reply brief is due on May 6, 2009; and oral argument is set for June 1, 2009 at 2:00 PM.  The Court has specifically invited briefs from amici curiae, which need not obtain leave of court to file.  Amicus briefs supporting St. Jude’s position will be due on April 15, 2009. If you have any questions about the case, or we can provide any additional information, please contact Denis Salmon at (650) 849-5301 or Mark Perry at (202) 887-3667. © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 29, 2008 |
Mayor Signs Washington, D.C. “Anti-Spam” Law Granting Private Right of Action to Spam Recipients

On July 17, 2008, Washington, D.C. Mayor Adrian Fenty signed legislation that would prohibit unsolicited commercial e-mail, commonly known as "spam." Although forty states as well as the federal government already regulate spam, spam has increased to the point that it now constitutes roughly 80% of all email traffic. The new D.C. law, known as the "Spam Deterrence Act of 2008," is part of a growing attempt to curb this trend by expanding enforcement capacity beyond State Attorneys General offices and arming spam recipients with a private right of action against spammers. As in the majority of states to have enacted anti-spam laws, the D.C. law allows residents to act as private attorneys-general in bringing civil suits against violators. While many state anti-spam statutes allow spam recipients to recover liquidated damages, D.C.’s Spam Deterrence Act is more generous than most. Other states typically allow plaintiffs to elect to receive $10 per violation (sometimes up to a $25,000 cap) in lieu of actual damages. D.C., in contrast, would now award the lesser of $500 per e-mail or $50,000 per day in addition to any actual damages plaintiffs may have sustained. In other words, the recipient of even a few spam messages would still be able to recover thousands of dollars in court. There is a slightly different scheme for e-mail service providers, who may elect to recover the lesser of $100 per email or $500,000 per day. Because violators are obligated to pay all litigation costs, both providers as well as individual spam recipients have every incentive to file suit. The D.C. Spam Deterrence Act defines a prohibited e-mail as one that either: (1) falsely identifies mail transmission information, including header information, or other routing information; or (2) uses a third party’s internet address, domain name, or identity without the third party’s consent for the purpose of deceiving the recipient. These prohibitions apply to any person or organization that transmits or assists in the transmission of an email: From a computer located in the District of Columbia; To an e-mail address held by a resident of the District of Columbia; To an e-mail service provider with equipment or its principal place of business in the District of Columbia; To a domain name registered to a resident of the District of Columbia. Federal law does not appear to preempt the D.C. Spam Deterrence Act’s substantive provisions. While the CAN-SPAM Act preempts most state regulation of e-mail traffic, section 8(b)(1) expressly excepts any law that prohibits false or deceptive information. Because the D.C. law restricts its scope to precisely such emails, it almost certainly avoids conflict with substantive federal law. It remains unclear whether the CAN-SPAM Act, which limits enforcement to the FTC, would preempt the D.C. law’s private enforcement provisions. Under federal law governing the District Council’s legislative process, the signed bill is now subject to a pro forma thirty-day period of Congressional review before it will take effect. You can view the full text of the Spam Deterrence Act at the following internet address:http://www.dccouncil.washington.dc.us/images/00001/20080710104641.pdf. Gibson, Dunn & Crutcher’s Intellectual Property Practice Group is available to assist in addressing any questions you may have regarding this issue. Please contact the Gibson Dunn attorney with whom you work or Terence P. Ross (202-955-8664, tross@gibsondunn.com in the firm’s Washington, D.C. office. © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 7, 2008 |
The FTC’s N-Data Consent Order: A Missed Opportunity To Clarify Antitrust in Standard Setting

Dallas partner M. Sean Royall and Washington, D.C. associate Adam J. Di Vincenzo are the authors of "The FTC’s N-Data Consent Order: A Missed Opportunity To Clarify Antitrust in Standard Setting" [PDF] published in the Summer 2008 issue of ABA’s Antitrust. Reprinted with permission from Antitrust, Vol. 23, No. 3, Summer 2008, © 2008, the American Bar Association. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express or written consent of the American Bar Association.

March 24, 2008 |
So You Want To Sue For Trade Secret

Denver Of Counsel Gregory Whitehair is the author of "So You Want To Sue For Trade Secret" [PDF] published in the March 24, 2008 issue of Law Week Colorado. 

September 23, 2007 |
The Supreme Court’s Renewed Interest in Antitrust and Intellectual Property Law

Gibson Dunn of counsel James C. Ho is the author of "The Supreme Court’s Renewed Interest in Antitrust and Intellectual Property Law" [PDF] published in the ABA Antitrust Litigator. The essay is adapted from a speech given by Mr. Ho on July 17, 2007 to the Antitrust & Trade Regulation Section of the Dallas Bar Association. Mr. Ho delivered similar speeches to other audiences throughout the summer and fall of 2007, including the Appellate Law Section of the Dallas Bar Association, the Harris County Civil District Judicial Conference, and the University of Chicago Law School. Mr. Ho is a member of the firm’s Appellate and Constitutional Law, Antitrust and Trade Regulation, and Intellectual Property practice groups. Reprinted with permission, copyright 2007 American Bar Association, ABA Section of Litigation.

May 3, 2007 |
U.S. Supreme Court Issues Highly Anticipated Opinion in KSR v. Teleflex

On April 30, the Supreme Court issued a unanimous opinion in KSR Int’l Co. v. Teleflex Inc., which has the potential to reshape long-standing Federal Circuit law and United States Patent and Trademark Office practice on determining whether a patent is "obvious" under 35 U.S.C. § 103. Writing for the Court, Justice Kennedy stated that the Federal Circuit erred in transforming the "teaching, suggestion, or motivation" (TSM) test into a "rigid and mandatory formula[]" that improperly limited the obviousness inquiry in a manner "inconsistent" with the "expansive and flexible approach" of the Court’s earlier jurisprudence. The KSR case involved a patent on an adjustable gas pedal system for an automobile. The district court granted summary judgment, finding that the patent claim at issue was obvious and invalid. The Federal Circuit reversed, holding that the defendant had not demonstrated a specific suggestion to combine the prior art to arrive at the claimed gas pedal. KSR represents the first time the Supreme Court considered the standard for obviousness since long before the 1982 establishment of the Federal Circuit (to which all patent cases and decisions by the patent office whether to issue a patent are appealed). Thus, the Supreme Court’s reversal of the Federal Circuit’s decision and its criticism of the TSM test as applied in the KSR case is widely expected to have a significant impact on both the ability to obtain patents and the defenses available to defendants in patent infringement litigation. Section 103 and the Obviousness Determination Section 103 of the Patent Act provides that a "patent may not be obtained . . . if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art [(PHOSITA)]." This section comes into play when all the elements of the claimed invention are not found in a single prior art reference, for example, when elements from two or more references need to be combined. In KSR, the Supreme Court reiterated that the framework for determining obviousness under § 103 it had set out in Graham v. John Deere, 383 U.S. 1 (1966), continues to "define the inquiry that controls." As set forth in Graham, the objective analysis is as follows: First, "the scope and content of the prior art are to be determined"; Second, "differences between the prior art and the [patent] claims . . . are to be ascertained"; and  Third, "the level of ordinary skill in the pertinent art resolved." In addition, "secondary considerations [of non-obviousness, such] as commercial success, long felt but unresolved needs, failure of others, etc., might be utilized to give light to the circumstances surrounding the origin of the subject matter sought to be patented." The Supreme Court Rejects the Federal Circuit’s "Rigid Approach" of TSM as Applied in KSR In an attempt to provide "more uniformity and consistency" to the obviousness inquiry, the Federal Circuit had adopted the TSM test, pursuant to which a patent can be obvious only if "’some motivation or suggestion to combine the prior art teachings’ can be found in the prior art, the nature of the problem, or the knowledge of a person having ordinary skill in the art." Reviewing the district court’s grant of summary judgment in favor of KSR on obviousness, the Federal Circuit held the motivation prong of the TSM test required that the prior art references "address the precise problem that the patentee was trying to solve"; otherwise, "the problem would not motivate an inventor to look at those references." Because, in its view, the references upon which KSR relied were designed to solve problems different from the problem solved by the claimed invention, the Federal Circuit found that a PHOSITA would not have been led to combine the prior art references. Additionally, relying on its earlier cases, the Federal Circuit held that KSR could not prevail by showing that it might have been "obvious to try" the proffered combination of prior art. The Supreme Court acknowledged that the TSM test, as first established, "captured a helpful insight" and that there was "no necessary inconsistency between the idea underlying the TSM test and the Graham analysis." Specifically, the Court said "it can be important to identify a reason that would have prompted a person of ordinary skill in the relevant field to combine the elements in the way the claimed new invention does," as the Federal Circuit had previously required. Nevertheless, the Court "reject[ed]" what it characterized as the Federal Circuit’s "rigid approach" to the TSM test as applied in KSR and reaffirmed the "expansive and flexible approach" set forth in its prior cases, including the "broad inquiry" of Graham. The Supreme Court’s View of Obviousness In explaining the general principles of the obviousness inquiry as gleaned from its own precedents, the Supreme Court stated that a combination is obvious if it "simply arranges old elements with each performing the same function it had been known to perform and yields no more than one would expect from such an arrangement." Accordingly, if "a person of ordinary skill can implement a predictable variation, § 103 likely bars its patentability." Correspondingly, "if a technique has been used to improve one device, and a person of ordinary skill in the art would recognize that it would improve similar devices in the same way, using the technique is obvious unless its actual application is beyond his or her skill."  By contrast, "when the prior art teaches away from combining certain known elements, discovery of a successful means of combining them is more likely to be nonobvious." Thus, "[t]he fact that the elements worked together in an unexpected and fruitful manner support[s] the conclusion" that a claimed invention is not obvious. In carrying out the obviousness analysis, a court "need not seek out precise teachings directed to the specific subject matter of the challenged claim, for a court can take account of the inferences and creative steps that a person of ordinary skill in the art would employ." Because in "many fields it may be that there is little discussion of obvious techniques or combinations, and it often may be the case that market demand, rather than scientific literature, will drive design trends," it may often "be necessary for a court to look to interrelated teachings of multiple patents; the effects of demands known to the design community or present in the marketplace; and the background knowledge possessed by a person having ordinary skill in the art." For example, one way "a patent’s subject matter can be proved obvious is by noting that there existed at the time of invention a known problem for which there was an obvious solution encompassed by the patent’s claims." The Court concluded that the flaws in the Federal Circuit’s analysis "relate[d] for the most part to [its] narrow conception of the obviousness inquiry reflected in its application of the TSM test." First, the Court held that the Federal Circuit erred in "holding that courts and patent examiners should look only to the problem the patentee was trying to solve," because a patent’s subject matter may address problems beyond the one "motivating the patentee." Thus, "any need or problem known in the field of endeavor at the time of invention and addressed by the patent can provide a reason for combining the elements in the manner claimed." Second, the Court found that the Federal Circuit erred "in its assumption that a person of ordinary skill attempting to solve a problem will be led only to those elements of prior art designed to solve the same problem." Regardless of the primary purpose behind the prior art, "familiar items may have obvious uses beyond their primary purposes, and in many cases a person of ordinary skill will be able to fit the teachings of multiple patents together like pieces of a puzzle." Importantly, in this regard, a PHOSITA is "not an automaton," but instead "a person of ordinary creativity." Third, the Court rejected Federal Circuit law holding that one cannot prove a patent obvious "by showing that the combination of elements was obvious to try." Rather, such a showing can prove obviousness if "there is a design need or market pressure to solve a problem and there are a finite number of identified predictable solutions." In that situation, the Court found, such a combination would likely be "the product not of innovation but of ordinary skill and common sense." Lastly, the Court held the Federal Circuit "drew the wrong conclusion from the risk of courts and patent examiners falling prey to hindsight bias." While a factfinder should be aware "of the distortion caused by hindsight bias and must be cautious of arguments reliant upon ex post reasoning," the Court concluded that adopting "[r]igid preventative rules that deny factfinders recourse to common sense . . . are neither necessary under [Supreme Court] case law nor consistent with it." In the concluding section of its opinion, the Supreme Court summarized its view of the height of, and rationale for, the obviousness bar, explaining: We build and create by bringing to the tangible and palpable reality around us new works based on instinct, simple logic, ordinary inferences, extraordinary ideas, and sometimes even genius. These advances, once part of our shared knowledge, define a new threshold from which innovation starts once more. And as progress beginning from higher levels of achievement is expected in the normal course, the results of ordinary innovation are not the subject of exclusive rights under the patent laws. Were it otherwise patents might stifle, rather than promote, the progress of useful arts. The Impact of the Court’s KSR Ruling It is unclear if this week’s KSR decision will result in a dramatic change in the Federal Circuit’s recent jurisprudence (i.e., since the Supreme Court’s grant of certiorari in KSR). First, the Supreme Court described KSR as "challeng[ing] th[e TSM] test, or at least its application in this case." Second, and more importantly, the Supreme Court acknowledged the Federal Circuit’s apparent relaxation of its TSM test since the grant of certiorari, stating that "[t]he extent to which [the Federal Circuit’s more recent opinions in DyStar Textilfarben GmbH & Co. Deutschland KG v. C.H. Patrick Co., 464 F.3d 1356 (Fed. Cir. 2006) and Alza Corp. v. Mylan Labs., Inc., 464 F.3d 1286 (Fed. Cir. 2006)] may describe an analysis more consistent with our earlier precedents and our decision here is a matter for the Court of Appeals to consider in its future cases." The court also raised — but did not answer — the question of whether a patent is presumed valid even when the prior art that forms the basis for an obviousness challenge was not disclosed during prosecution. In KSR, the Court found the patent-in-suit was invalid under § 103 whether or not the presumption applied. The Court nevertheless thought "it appropriate to note that the rationale underlying the presumption — that the PTO, in its expertise, has approved the claim — seems much diminished" in this case, in which the prior art being analyzed was not before the examiner. This statement seems to invite the Federal Circuit to reconsider whether the presumption of validity should apply to an invalidity challenge based on a newly-discovered prior art. Finally, the Court’s analysis of the Federal Circuit’s application of the TSM test appears to invite more emphasis on the PHOSITA and "common sense." Indeed, in its discussion of the errors in the Federal Circuit’s analysis, the Court endorses the "common sense" of the PHOSITA three times, as well as the "common sense" of the factfinder. In this regard, it is anticipated that the Court’s opinion will affect patent prosecution as the opinion appears to give examiners greater ability to reject patents based on their technical knowledge and expertise, or common sense. Similarly, because one can seek reexamination of patents by raising a "substantial new question of patentability," it may be possible for a party to seek reexamination by establishing that the examiner improperly evaluated the prior art (and, thus, the patentability of the claimed invention) under an unduly narrow or rigid TSM test. * * * In sum, although not rejecting the TSM test in its entirety, the Supreme Court’s decision seems to raise the bar to patentability — thereby potentially opening the door to new challenges on obviousness. In particular, KSR may have the greatest impact on business method patents, particularly those that simply translate a technique used in everyday business onto the Internet, and incremental patents. Of course, any impact of the Supreme Court’s decision will only be fully appreciated as the Patent Office, district courts and the Federal Circuit apply KSR‘s teachings in future prosecutions and cases. Members of Gibson, Dunn & Crutcher’s Intellectual Property Practice Group are available to assist with any questions you may have regarding this recent development or any other patent issues. For further information, please contact the Gibson Dunn attorney with whom you work, David A. Segal (949-451-3973, dsegal@gibsondunn.com) in the firm’s Orange County office, or any of the following chairs of the firm’s Intellectual Property Group: Wayne M. Barsky – Los Angeles (310-557-8183, wbarsky@gibsondunn.com) Glenn K. Beaton – Denver (303-298-5773, gbeaton@gibsondunn.com) Josh Krevitt – New York (212-351-2490, jkrevitt@gibsondunn.com) Denis R. Salmon – Palo Alto (650-849-5301, dsalmon@gibsondunn.com)  © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 30, 2007 |
U.S. Supreme Court Limits the Extraterritorial Reach of U.S. Patent Law

On April 30, the Supreme Court of the United States issued a 7-1 decision in Microsoft Corp. v. AT&T Corp. that held that Microsoft is not liable under 35 U.S.C. § 271(f)–which provides that it is an act of infringement to "suppl[y] . . . from the United States" the "components of a patented invention" for combination and final assembly abroad–for exporting master versions of its allegedly infringing Windows operating system for replication overseas and installation on foreign computers. Justice Ginsburg’s majority opinion rejected the Federal Circuit’s interpretation of both the "component[] of a patented invention" and "supplie[d] . . . from the United States" requirements of Section 271(f), and narrowed the extraterritorial reach of U.S. patent law.  The Court held that software object code that is divorced from a machine-readable medium is not a "component[] of a patented invention" within the meaning of Section 271(f) because it is not capable of being combined with other elements to form the patented invention. The Court explained that abstract software object code "is an idea without physical embodiment, and as such, it does not match § 271(f)’s categorization: ‘components’ amenable to ‘combination.’" A "copy of Windows, not Windows in the abstract," the Court concluded, "qualifies as a ‘component’ under § 271(f)."  The Court further held that copies of the Windows operating system produced overseas using a U.S.-shipped master version are not "supplie[d] . . . from the United States" under Section 271(f). The Court explained that under the plain language of Section 271(f), "the very components supplied from the United States, and not copies thereof, trigger § 271(f) liability when combined abroad to form the patented invention at issue." Because the copies of the Windows operating system installed on the foreign computers were produced overseas, the Court concluded that they could not have been "supplie[d] . . . from the United States." The Court explained that AT&T’s remedy for the allegedly infringing foreign copying "lies in obtaining and enforcing foreign patents."  In reaching this holding, the Court expressly rejected the Federal Circuit’s policy-based reading of the statutory language, writing that "[i]f the patent law is to be adjusted better ‘to account for the realities of software distribution,’ the alteration should be made after focused legislative consideration, and not by the Judiciary."  Justice Alito, joined by Justices Thomas and Breyer, concurred in full in Justice Ginsburg’s majority opinion, with the exception of footnote 14, in which the Court declined to address whether Section 271(f) liability would attach if a disk shipped from the United States (rather than a foreign-made copy of a master disk) were used to install the Windows program on a foreign computer and were then removed from that computer. Justice Alito wrote that such a distribution model would not give rise to Section 271(f) liability because the software code embodied on the U.S.-shipped disk would not have been transferred to the foreign-assembled computer and thus "no physical object originating in the United States" would have been combined with the foreign-assembled computer.  Gibson Dunn’s Theodore B. Olson, Miguel A. Estrada, Mark A. Perry, Matthew D. McGill, and Amir C. Tayrani briefed the case on behalf of Microsoft, and Mr. Olson presented oral argument in the Supreme Court. Gibson Dunn’s Appellate and Constitutional Law Practice Group and Intellectual Property Practice Group are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn attorney with whom you work or Theodore B. Olson (202-955-8668, tolson@gibsondunn.com), Miguel A. Estrada (202-955-8257, mestrada@gibsondunn.com), Mark A. Perry (202-887-3667, mperry@gibsondunn.com), Matthew D. McGill (202-887-3680, mmcgill@gibsondunn.com), or Amir C. Tayrani (202-887-3692, atayrani@gibsondunn.com) in the firm’s Washington, D.C. office, or any of the following attorneys: Appellate and Constitutional Law Group:Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Daniel M. Kolkey – San Francisco (415-393-8240, dkolkey@gibsondunn.com) Intellectual Property Group: Wayne M. Barsky – Los Angeles (310-557-8183, wbarsky@gibsondunn.com) Glenn K. Beaton – Denver (303-298-5773, gbeaton@gibsondunn.com) Josh Krevitt – New York (212-351-2490, jkrevitt@gibsondunn.com) Denis R. Salmon – Palo Alto (650-849-5301, dsalmon@gibsondunn.com)  © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 1, 2007 |
Free for the “Taking”: Why States Should Not Be Able to Invoke Sovereign Immunity in Patent Infringement Disputes

Washington, D.C. associate Dr. Tanya Mazur is the author of "Free for the Taking: Why States Should Not Be Able to Invoke Sovereign Immunity in Patent Infringement Disputes" [PDF] published in the February 2007 issue of The George Washington Law Review.

January 11, 2007 |
Supreme Court Decision Removes One Procedural Obstacle to Federal Lawsuits Challenging Patents

In a recent decision of note, the U.S. Supreme Court ruled patent licensees in good standing may challenge the validity of the patent, or assert non-infringement, without first terminating their license agreements. The Court’s January 9, 2007 decision in MedImmune, Inc. v. Genentech, Inc. allows litigants to seek relief in the form of a declaratory judgment without subjecting themselves to an infringement action that could potentially be crippling. This holding, while particularly significant in potentially exposing more patents to challenges, could also be significant for commercial litigation more generally, because it expands the opportunity to seek a declaration of rights from a federal court before damages claims are asserted. The Court’s decision left open several significant issues that may still limit declaratory relief, which undoubtedly will generate future litigation. In 2004, the Court of Appeals for the Federal Circuit, the intermediate court that decides all patent appeals, held that entering into a patent license had precluded the licensee from challenging the patent as invalid – even if the license agreement contained no such explicit restriction. Federal courts’ jurisdiction is limited to “Cases” and “Controversies” by Article III of the Constitution. The Federal Circuit had ruled that there cannot be a “case” or “controversy” between a licensor and licensee about the validity of the patent being licensed. If a licensee wanted to challenge the validity of the patent, the Federal Circuit held, it had to first repudiate its license agreement and risk being sued for infringement. Then, if the patent holder sues, the former licensee can counterclaim that the patent is invalid or unenforceable. Last February, the Supreme Court agreed to decide whether this absolute jurisdictional barrier was correct. In this case, MedImmune had obtained a license from Genentech to manufacture products covered by Genentech’s patents and pending applications, in exchange for a royalty. After the license agreement was signed and one of Genentech’s pending patents issued, Genentech concluded that one of MedImmune’s products, a respiratory drug, was covered by the new patent, and demanded royalties. Genentech threatened to bring an infringement lawsuit if MedImmune refused to pay. MedImmune believed that the Genentech patent was invalid and unenforceable, and in any event that its product was non-infringing. Nonetheless, not wishing to risk a patent infringement action in which it could face treble damages, liability for attorney’s fees, and an injunction forbidding it to sell its product (which accounted for eighty percent of its sales), it paid royalties pursuant to the license, under protest. MedImmune then sued Genentech in federal court, asking for a declaratory judgment that the Genentech patent was invalid, unenforceable, or not infringed. Applying its precedent, the Federal Circuit found no “case” or “controversy” and refused to entertain the lawsuit. The Supreme Court granted MedImmune’s petition for certiorari. In an 8-1 opinion by Justice Antonin Scalia, the Supreme Court ruled for MedImmune. The Court rejected the Federal Circuit’s rule and held that licensees can sue for a declaratory judgment, without needing to give up their licenses first. Justice Clarence Thomas was the sole dissenter. The federal Declaratory Judgment Act allows litigants to obtain an adjudication of their rights without waiting to be sued. For example, a citizen who believes a criminal law is unconstitutional, or preempted by federal law, can sue for a declaratory-judgment to that effect; the citizen does not first have to violate the law and risk prosecution. As long as there is a genuine likelihood that the law would be enforced against that citizen, there is a ripe controversy and the federal courts have jurisdiction. The Court held in MedImmune’s case that the same rule applies in the context of litigation between private parties. If MedImmune could not raise its invalidity, unenforceability, and noninfringement arguments without breaching its license agreement, then it would be forced to take an enormous risk: the respiratory drug in question accounted for 80 percent of its business, and the trebled damages liability could be crippling. Under these circumstances, the Court wrote, litigants need not “bet the farm.” Plaintiffs can challenge criminal statutes without violating them, even if the only penalty for violation is a small fine; MedImmune faced “the threat of treble damages and loss of 80 percent of [its] business,” which the Supreme Court found “every bit as coercive” as a criminal fine. In other words, the Court concluded that a licensee who pays royalties under a license agreement out of fear of a patent infringement action is being coerced in a way that creates an actual controversy, and therefore confers jurisdiction to seek a declaratory judgment. Accordingly, the Court held that MedImmune had established a genuine controversy with Genentech about the validity of the patent, even though MedImmune had continued to pay royalties to Genentech throughout the dispute. The Court did strike some significant cautionary notes: First, the holding was limited to the question of federal jurisdiction. Whether MedImmune and similar licensees can prevail in declaratory-judgment lawsuits against their licensors is another question, and the Court noted that some license agreements, or even some state contract-law doctrines, may specifically prevent the licensee from bringing a lawsuit to challenge the licensed patent. In that instance, the Supreme Court said, the licensor would “win [the] case on the merits,” not based on jurisdiction. Thus, a contractual term precluding challenges to the validity of the patents might still result in the licensee losing its case on the merits. The MedImmune agreement apparently did not have an express no-challenge provision, and the Court saw no implicit prohibition; indeed, the Court held that a prohibition on challenging the licensor’s patents “can hardly be implied from the mere promise to pay royalties on patents.” Second, the Court noted that declaratory judgments are not always readily available. Ever since the Declaratory Judgment Act was enacted, federal district courts have enjoyed wide discretion to decline declaratory-judgment cases even if they do present a ripe and actual controversy. Although the Supreme Court has listed certain factors that district courts consider in deciding whether to grant a declaratory judgment, the trial courts’ discretion is broad, and their decisions to decline jurisdiction are difficult to challenge on appeal. Accordingly, some licensees may not be able to rely on the declaratory-judgment procedure; in that case, they may have to repudiate their license agreements, defend infringement suits, and assert invalidity and unenforceability as counterclaims. The Supreme Court remanded MedImmune’s case to let the district court make its discretionary determination. The MedImmune decision’s immediate significance is for patent litigants, who previously had been restricted by the Federal Circuit’s holding that licensees must repudiate their agreements, and risk a lawsuit, as the price of admission to federal court. Patents may now be subject to more potential challenges, even by licensees that continue to pay royalties under license agreements. But the decision may also have farther-reaching consequences for any litigant seeking an alternative to high-stakes litigation. Bringing an action for declaratory relief, rather than waiting to be sued or prosecuted, may offer a lower-risk strategy for obtaining a binding determination of one’s own legal rights. The Supreme Court’s decision appears to make that procedural device available to more litigants. Gibson, Dunn & Crutcher has one of the country’s preeminent practices in both intellectual property and appellate litigation, with lawyers nationwide assisting corporations with their most sensitive and challenging matters. Our lawyers regularly handle complex intellectual-property matters in federal courts nationwide, including the Supreme Court, where Gibson Dunn’s client prevailed last Term in Laboratory Corp. of America Holdings v. Metabolite Laboratories. Our lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Mark A. Perry (202-887-3667, mperry@gibsondunn.com) or William M. Jay (202-955-8256, wjay@gibsondunn.com) in the firm’s Washington, D.C. office, David A. Segal (949-451-3973, dsegal@gibsondunn.com) in the Orange County office, or the following attorneys.  Appellate and Constitutional Law Group:Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Miguel A. Estrada – Washington, D.C. (202-955-8257, mestrada@gibsondunn.com)Daniel M. Kolkey – San Francisco (415-393-8240, dkolkey@gibsondunn.com) Theodore B. Olson – Washington, D.C. (202-955-8668, tolson@gibsondunn.com) Intellectual Property Group:Wayne M. Barsky – Los Angeles (310-557-8183, wbarsky@gibsondunn.com) Glenn K. Beaton – Denver (303-298-5773, gbeaton@gibsondunn.com) Josh Krevitt – New York (212-351-2490, jkrevitt@gibsondunn.com) Denis R. Salmon – Palo Alto (650-849-5301, dsalmon@gibsondunn.com) © 2007 Gibson, Dunn & Crutcher LLP

December 31, 2006 |
Overview of the E-Discovery Amendments to the Federal Rules of Civil Procedure

New York associate Farrah Pepper is the author of "Overview of the E-Discovery Amendments to the Federal Rules of Civil Procedure," published in the December 2006 edition of the Newsletter of the Federal Bar Association, Orange County Chapter. Reprinted with permission, © 2006, Federal Bar Association, Orange County Chapter. 

September 19, 2006 |
European Court of Justice Delivers Important Judgment in Laserdisken Case on Interplay Between National and EU Copyright Law

On 12 September 2006, the European Court of Justice (ECJ) delivered an important judgment on the interplay between national and EU copyright law, a judgment which also has implications for the interplay between IP and antitrust in the EU. The Laserdisken case concerned the import and sale in Denmark of DVDs lawfully marketed outside the European Economic Area (EEA). The key legal provision is Article 4(1) of EU Copyright Directive (2001/29) which enshrines the exclusive right for authors, in respect of the original of their works or of copies thereof, to authorise or prohibit any form of distribution to the public by sale or otherwise. Article 4(2) of the Directive provides that the distribution right is not to be exhausted except where the first sale or other transfer of ownership in the Community of that object is made by the rightholder or with his consent. It follows that for the right in question to be exhausted, two conditions must be fulfilled:  first, the original of a work or copies thereof must have been placed on the market by the rightholder or with his consent and,  second, they must have been placed on the market in the Community. The ECJ found that  Article 4(2) of the Directive did not leave it open to the Member States to introduce or maintain in their respective national laws a rule of exhaustion in respect of works placed on the market not only in the Community but also in non-member countries. The WIPO Copyright Treaty does not affect the contracting parties’ power to determine the conditions governing how exhaustion of that exclusive right may apply after the first sale.  The harmonisation of national copyright laws promotes competition in the internal market. The rule of exhaustion in the Community is not a disproportionate measure in view of the fact that legal protection of intellectual property rights is necessary in order to guarantee an appropriate reward for the use of works and to provide the opportunity for satisfactory returns on investment, and  is a way of ensuring that European cultural creativity and production receive the necessary resources and of safeguarding the independence and dignity of artistic creators and performers. That the principle of equal treatment does not apply as between a producer and a licence holder established in a non-member country and a producer and a licence holder established in the Community, since the two are manifestly not comparable.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or David Wood (+32 2 554 7210; dwood@gibsondunn.com) in the firm’s Brussels office. © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 3, 2006 |
Federal Trade Commission Unanimously Rules Against Rambus in High-Profile Monopolization Case Involving DRAM Standards

On August 2, the Federal Trade Commission issued its long-awaited ruling in the agency’s monopolization suit against Rambus Inc., a semiconductor technology firm based in Los Altos, California. In its 120-page opinion (available on the FTC Rambus Docket page), the Commission finds that Rambus violated federal antitrust laws by engaging in a “course of deceptive conduct,” which distorted the outcome of a standard-setting process (sponsored by JEDEC, a non-profit standards consortium) and thereby “contributed significantly to Rambus’s acquisition of monopoly power” over technologies used in common forms of computer memory chips, known as “DRAMs.” According to FTC Commissioner Pamela Harbour, by concealing relevant patent information from JEDEC, “Rambus was able to distort the standard-setting process and engage in anticompetitive ‘hold up’ of the computer memory industry.”  The decision marks a significant extension of antitrust law principles into the realm of standard-setting activities, and clarifies the circumstances under which deceptive acts in a standard-setting context may be deemed “exclusionary” and subject to antitrust challenge. The FTC’s decision does not resolve the remedy to be imposed against Rambus for the conduct in question, but requests further briefing on this issue from Rambus and Commission staff lawyers. The decision addresses but does not fully resolve additional allegations that Rambus wrongfully destroyed documents and other evidence to reduce legal risks facing the company. The FTC’s suit against Rambus was filed in June 2002. After a three-month trial in the summer of 2003, an FTC Administrative Law Judge issued an “Initial Decision” favoring Rambus. That decision was then appealed by Commission staff lawyers to the five-member Commission, which heard arguments on the case in the fall of 2004. The matter has been pending before the Commission since that time. The FTC’s case against Rambus is predicated on the allegation that participants in JEDEC (Rambus was a member from 1991 through 1996) were required by the organization’s rules to disclose intellectual property rights that might be relevant to standards being considered by the group. In the Commission’s complaint, Rambus was alleged to have violated such rules by concealing patent applications that it believed to cover features incorporated within JEDEC’s synchronous DRAM standards, which are today the most widely adopted memory standards in the world. After leaving the organization in 1996, Rambus allegedly continued a pattern of concealment, and chose not to make its patent claims known to the memory industry until years later, when DRAM makers were “locked in” to use of JEDEC’s memory specifications. By this time, the complaint alleged, DRAM makers were unable to alter their memory designs. Rambus therefore possessed monopoly power and the ability to extract billions of dollars in patent royalties — royalties Rambus would not have been in position to collect had it complied with JEDEC’s rules and disclosed its patent claims prior to the standards being set. The FTC’s unanimous decision concludes that these allegations were proven true by the evidence submitted at trial by the Commission’s staff. Although the Commission has yet to rule on the remedy for Rambus’s antitrust violations, it is likely that the FTC will consider imposing an injunction against Rambus, barring the company from seeking to collect royalties on DRAM memory chips made in compliance with JEDEC’s standards. Based on the proof admitted at trial, absent such a remedy, Rambus is positioned to collect potentially billions of dollars of patent royalties from makers and users of DRAMs. This decision is likely to have significant implications for standard-setting organizations and companies that participate in such organizations. Companies involved in standardization activities would be well advised to ensure that they understand and comply with rules and well-established expectations relating to disclosure of intellectual property. The FTC’s decision suggests that even if the organization’s disclosure rules contain potential ambiguities, efforts by a single company to exploit a collective standard-setting effort to secure patents over the resulting standards could give rise to antitrust liability.  Gibson Dunn partner M. Sean Royall, co-chair of the Firm’s Antitrust and Trade Regulation Practice Group, served as Deputy Director of the FTC’s Bureau of Investigation from 2001 through 2003 and personally led the team that developed and tried the Rambus case. Since leaving the Commission in October 2003, Mr. Royall has published several articles addressing issues relevant to case. M. Sean Royall, Standard Setting and Exclusionary Conduct: The Role of Antitrust in Policing Unilateral Abuses of a Standard-Setting Process [PDF], 18 ANTITRUST 44 (2004) M. Sean Royall, The Art of Destruction [PDF], THE AMERICAN LAWYER (September 2004) M. Sean Royall and Sarah Vollbrecht, Avoiding the Scarlet "S": The Modern Challenges of Document Preservation and Destruction, [PDF] THE AMERICAN LAWYER (June 2005) Articles reprinted with permission. Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Sean Royall (202-955-8546 in Washington, DC or 214-698-3256 in Dallas; sroyall@gibsondunn.com ). © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 28, 2006 |
Supreme Court Dismisses Patent Case, Leaves “Law of Nature” Doctrine in Patent Law Unchanged

In a closely watched matter, the Supreme Court tossed out a patent case that it had earlier agreed to hear. The result is that the "law of nature" doctrine in patent law remains unchanged. The case was LabCorp v. Metabolite.  Metabolite, an affiliate of the University of Colorado, was set up to bring an invention by two of its medical school professors to clinical application. Also on the side of Metabolite was Competitive Technologies, a Connecticut company that assists in commercializing inventions of universities. Both were represented throughout the proceedings by Gibson Dunn & Crutcher.  The professors discovered that elevated levels of an amino acid called homocysteine are indicative of deficiencies in two vitamins, namely B12 and folate. Such deficiencies are associated with neuropsychiatric disorders, vascular disease and other medical problems. The professors’ patent covers the diagnostic method of assaying for elevated levels of homocysteine and correlating the results with deficiencies of the vitamins. LabCorp is a large medical testing company which offered homocysteine assays. Metabolite and Competitive Technologies sued LabCorp in federal court in Denver. LabCorp defended on the basis that the patent was non-infringed and invalid on several specific grounds. The jury rejected both defenses, and the judge sustained the jury’s determinations. The court awarded several million dollars in damages, doubled the infringement damages to account for the willfulness of the infringement, and awarded over a million dollars in attorney fees. LabCorp appealed to the Federal Circuit, which affirmed. LabCorp then petitioned for Supreme Court review. On its own initiative, the Supreme Court invited the Solicitor General to express his views on an issue that was not raised before in the case, namely whether the patent impermissibly claimed a "law of nature." After reviewing the case with counsel for each party, the Solicitor General recommended that the Supreme Court not take the case.  The Supreme Court decided to take the case anyway. The matter was briefed last winter, and argument was presented to the Court in March. The case attracted much attention in the press and numerous amici briefs from organizations as diverse as the American Medical Association, venture capital and investment banking firms, biotech companies, the American Heart Association, and the Federal Circuit Bar Association. Last week, the Supreme Court reversed course and dismissed the case on the grounds that its original decision to take the case was "improvident." The effect is that the lower court decisions in favor of Metabolite and Competitive Technologies stand. Three Justices filed a 15-page dissent from the decision to dismiss the case. In the view of those three Justices, the Court should not have dismissed and should have instead invalidated the patent on the grounds that it claimed a "law of nature."  It is clear that a significant minority of the Supreme Court believes that the scope of patentable subject matter as formulated by the Federal Circuit (and by Congress) is too broad. Whether the Court addresses this issue in another case remains to be seen. In the meantime, defendants in patent cases can be expected to offer this additional defense in the hope that a district court may buy it. The trial and Federal Circuit appeal of this case were handled by Glenn Beaton (Co-Chair of the Intellectual Property Group) and Greg Whitehair in the Denver office, and the Supreme Court argument was by Miguel Estrada (Co-Chair of the Appellate Group), who was assisted on the brief by Mark Perry in the Washington, D.C. office, all of Gibson Dunn & Crutcher.  Gibson, Dunn & Crutcher has one of the country’s preeminent intellectual property practices, with approximately seventy-five lawyers nationwide assisting corporations with their most sensitive and challenging matters. For more information on this decision or to discuss its impact, feel free to contact the Gibson Dunn attorney with whom you work or Glenn Beaton in Denver (303 298-5773; gbeaton@gibsondunn.com) or Miguel Estrada in Washington, D.C. (202 955-8257; mestrada@gibsondunn.com).  © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 1, 2006 |
A Hiccup for Security-Based Data Transfers to the US

On 30 May 2006 the European Court of Justice (‘ECJ’) annulled the decisions of the European Commission and the Council that led to the transfer of personal data relating to passengers on flights to, from or across US territory to US authorities. The US authorities were provided with electronic access to the data contained in air carriers’ reservation and departure control systems, called Passenger Name Records (‘PNR’) (Joined Cases C-317/04 European Parliament v Council of the European Union and C-318/04 European Parliament v Commission of the European Communities ).  On 14 May 2004, the Commission adopted a "decision of adequacy" under Directive 95/46/EC (the Data Protection Directive), finding that the US personal data protection regime provides an adequate level of protection for PNR data transferred from the EC. On 17 May 2004, the Council adopted a decision approving the conclusion of an agreement between the EC and the US to transfer PNR data held by air carriers established in EU Member States. The agreement entered into force on 28 May 2004. The European Parliament applied to the ECJ for annulment of the decisions of the Commission and the Council, contending, in particular, that adoption of the decision on adequacy does not fall under the competence of the Commission, that the EC Treaty does not provide a legal basis for the Council decision approving the conclusion of the agreement and, in both cases, that fundamental rights were infringed by the agreement.  The ECJ annulled the decisions of both the Commission and the Council, concluding that they were founded on inappropriate legal bases.  Findings of the ECJ The ECJ concluded, first of all, that the Commission could not validly adopt the decision on adequacy because the transfer of PNR data is a "processing operation" concerning public security and criminal law. As such, it falls within the exclusive competence of EU Member States, rather than the Commission (whose remit does not include processing that is necessary for safeguarding public security or for the purposes of criminal enforcement). Although PNR is initially collected for the provision of services, the Commission’s decision, according to the ECJ, concerned data processing necessary for safeguarding public security and for the purposes of criminal enforcement. The fact that the PNR data is collected by private entities (for commercial purposes), and is transferred by such entities does not prevent that transfer from being data processing that is necessary for safeguarding public security and for the purposes of criminal enforcement. Consequently, the Court annulled the Commission’s decision on adequacy.  As to the Council’s decision to agree to conclude the agreement, the ECJ found that Article 95 EC, read in conjunction with Article 25 of Directive 95/46/EC, does not create Community competence to conclude an agreement with the United States which relates to the transfer of personal data where the data processing contemplated is excluded from the scope of the Directive. Consequently, the ECJ also annulled the Council’s decision. Effects of the ECJ Judgment Firstly, if the transatlantic data flow is not to be disrupted, the EC-US agreement on PNR transfers must be re-negotiated. The question remains whether such renegotiation will have to occur with individual Member States.  Secondly, and more broadly, the ECJ’s judgment calls into question the ability of both the Commission and the Council to agree to the transfer of personal data to the US, or any other jurisdiction without "adequate" personal data protection regimes, where the contemplated transfer concerns public security and criminal law. For example, in October 2005 a similar agreement was signed with Canada. While that agreement provides a greater level of data protection, contemplates the transfer of less data, and contemplates data transfer using a “push” system (rather than the more intrusive “pull” system in use with the US), it is also based on a Commission decision regarding adequacy. In a post-September 11 environment, public security is increasingly being used as a justification for a number of international data processing arrangements. The ECJ’s judgement is likely to have knock-on effects for similarly justified data transfer agreements in a range of sectors. Thirdly, although the ECJ annulled the decisions of the Commission and the Council on the basis that neither entity had a legal basis for their decision, and did not analyse the content of the agreement, many believe that the data transfers violated the privacy of passengers. The agreement required airlines to transfer to the US authorities 39 pieces of data on passengers flying to the US, including their names, addresses, telephone numbers and credit card numbers. This data is clearly personal data, and passengers had not consented to their transfer, nor was it necessary for the performance of a contract or on any of the other grounds set out in Directive 95/46/EC. In such circumstances, data controllers need to be aware of the circumstances in which they can transfer personal data outside the European Union. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Michael Walther (mwalther@gibsondunn.com;+49 89 189 33-180) in Munich or Miranda Cole (mcole@gibsondunn.com; +32 2 554 7201) in Brussels.     © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 2, 2006 |
U.S. Supreme Court Issues Landmark Ruling Abrogating Its Decades-Old Presumption that Antitrust Market Power Arises From the Mere Ownership of IP Rights

In a landmark decision handed down by the U.S. Supreme Court on March 1, 2006, the Court unanimously abrogated its decades-old presumption, articulated most prominently in United States v. Loew’s, Inc., 371 U.S. 38 (1962), that market power arises from the mere ownership of intellectual property rights.  See also International Salt Co. v. United States, 332 U.S. 392 (1947).  In an opinion authored by Justice Stevens, a unanimous Court broadly held that “in all [antitrust] cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product,” Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. __ (Mar. 1, 2006), No. 04-1329, slip op. at 16. The Court reasoned that the market power presumption announced in Loew’s and International Salt finds no support in modern economic theory or antitrust enforcement policy, does not accord with the Court’s modern tying jurisprudence, and lacks support in the Court’s earlier patent cases.  Beginning by noting that “this Court’s strong disapproval of tying arrangements has substantially diminished” “[o]ver the years,” the Court specifically noted that “[t]he assumption that ‘[t]ying arrangements serve hardly any purpose beyond the suppression of competition,’” “has not been endorsed in any opinion” of the Court since it was “rejected in” United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977) (Fortner II).  Slip op. at 5-6.  The Court then quoted approvingly from Justice O’Connor’s concurrence in the judgment in Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984), in which Justice O’Connor and three other Justices questioned the continued viability, as a matter of antitrust law, of the Loew’s presumption, which had originated in the Court’s early patent-misuse cases. After analyzing the historical underpinnings of the Loew’s/International Salt presumption in the Court’s earlier precedents, the Court cited Congress’s 1988 amendment of the Patent Code, which eliminated “the patent-equals-market-power presumption” “in the patent misuse context,” as a reason to reexamine the continued viability of the Loew’s/International Salt presumption as a matter of antitrust law.  Slip op. at 12.  Relying on its more recent, post-Fortner II tying cases, “the vast majority of academic literature on the subject,” and modern economic theory and antitrust enforcement policy, the Court abrogated the Loew’s/International Salt presumption, and “conclude[d] that tying arrangements involving patented products should be evaluated under the standards applied in cases like Fortner II and Jefferson Parish rather than under the per se rule applied in Morton Salt [Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942)] and Loew’s.”  Slip op. at 13-16 (citing, inter alia, William J. Baumol & Daniel G. Swanson, The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power, 70 Antitrust L.J. 661, 666 (2003)).  Under such standards, any conclusion that a tying arrangement is unlawful “must be supported by proof of power in the relevant market rather than by a mere presumption thereof.”  Slip op. at 13. The Court’s holding should be read to extend to copyrights as well – an extension that Gibson Dunn had urged in an amicus brief it filed on behalf of the Motion Picture Association of America, the Association of American Publishers, the Business Software Alliance, the Entertainment Software Association, the Independent Film & Television Alliance, the National Football League, and the Recording Industry Association of America.  Although Illinois Tool Works on its facts dealt only with patents, the Court broadly “h[e]ld that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product.”  Slip op. at 16 (emphasis added).  This holding flows directly from the fact that the validity of the presumption in copyright tying cases rests on the validity of the presumption in patent tying cases.  See United States v. Loew’s, Inc., 371 U.S. 38, 46 (1962) (noting in copyright tying case that the presumption of market power “grew out of a long line of patent cases”).  As counsel for the United States acknowledged during oral argument in Illinois Tool Works, “a holding that there is no [market power] presumption in the patent context would eviscerate the underlying rationale for Loew’s,” “which was a copyright case.”  Oral Argt Tr. at 22.  Aside from its broad holding that the plaintiff must prove that the defendant has market power in “all cases,” the Court cited with approval the statement by the Department of Justice and the Federal Trade Commission in their antitrust enforcement guidelines that the agencies “’will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner.’”  Slip op. at 16 (emphasis added) (quoting U.S. Dept. of Justice and FTC, Antitrust Guidelines for the Licensing of Intellectual Property § 2.2 (Apr. 6, 1995)).  Further, in stating that the “conclusion” that a tying arrangement is unlawful “must be supported by proof of power in the relevant market rather than by a mere presumption thereof,” the Court placed great reliance on the “vast majority of academic literature on the subject,” including literature recognizing the absence of any economic basis for inferring market power from mere copyright ownership.  Slip op. at 13-14, n.4. The Court’s unanimous decision in Illinois Tool Works has enormous significance for successful individual and corporate holders of copyrights, patents, and other intellectual property rights, who are now less likely to be confronted with antitrust suits as a result of their use of package marketing arrangements that make economic sense and are procompetitive. Gibson, Dunn & Crutcher’s lawyers are available to discuss questions regarding these issues.  For further information, please contact the attorney with whom you work or: Daniel G. Swanson, (213-229-7430; dswanson@gibsondunn.com), orJulian W. Poon (213-229-7758; jpoon@gibsondunn.com). Gibson, Dunn & Crutcher is also uniquely positioned to bring to bear its considerable appellate expertise and its expertise in antitrust and intellectual property law, in representing corporations, other entities, and individuals confronted with these and other related issues.  For further information, please contact:  Antitrust and Trade Regulation co-chairs,Robert Cooper, (213-229-7179, rcooper@gibsondunn.com),Michael Denger, (202-955-8526, mdenger@gibsondunn.com),M. Sean Royall, (214-698-3256, sroyall@gibsondunn.com),Gary Spratling, (415-393-8222, gspratling@gibsondunn.com ),Peter Sullivan, (213-229-7165, psullivan@gibsondunn.com), orDaniel G. Swanson, (213-229-7430;dswanson@gibsondunn.com); Appellate and Constitutional Law co-chairs,Theodore Boutrous, (213) 229-7804, tboutrous@gibsondunn.com),Miguel Estrada, (202-955-8257, mestrada@gibsondunn.com),Daniel Kolkey, (415-393-8240, dkolkey@gibsondunn.com), orTheodore Olson, (202-955-8668, tolson@gibsondunn.com); or Intellectual Property co-chairs,Wayne Barsky, (310-557-8183, wbarsky@gibsondunn.com),Glenn Beaton, (303-298-5773, gbeaton@gibsondunn.com),Josh Krevitt, (212-351-2490, jkrevitt@gibsondunn.com), orDenis Salmon, (650-849-5301, dsalmon@gibsondunn.com). © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 2, 2005 |
The United States Patent and Trademark Office Adopts Interim Subject Matter Guidelines

The USPTO’s Motivation for The Guidelines On October 26, 2005, the United States Patent and Trademark Office adopted a set of Interim Guidelines for Examination of Patent Applications for Patent Subject Matter Eligibility (the “Guidelines”). According to the USPTO, “[t]he principal objective of these Guidelines is to assist examiners in determining, on a case-by-case basis, whether a claimed invention falls within a judicial exception to statutory subject matter (i.e., is nothing more than an abstract idea, law of nature, or natural phenomenon), or whether it is a practical application of a judicial exception to statutory subject matter.” Guidelines at 1-2. The Guidelines were adopted shortly after the USPTO’s Board of Patent Appeals and Interferences decided, in a business methods case, to overrule the Patent Office’s “technological arts” limitation on patentable subject matter. See Ex parte Lundgren, Appeal No. 2003-2088 (BPAI 2005). The “technological arts” limitation was one of many formulations that courts and the Patent Office adopted and then abandoned as the standard for patentable subject matter has evolved. The Guidelines represent the USPTO’s latest attempt to capture that standard in a form that examiners can apply to an increasing stream of patent applications. Although the Guidelines are not substantive agency rules that would have legally binding effect, they are likely to have a substantial effect on the way business method and other process patents are evaluated by examiners at the Patent Office. The Approach to Subject Matter Adopted by The Guidelines After briefly reviewing the history of the patentable subject matter standard, the Guidelines prescribe a four-step procedure for a patent examiner to follow to determine whether a claimed invention fits within that standard: First, the patent examiner should determine whether the claimed invention falls into at least one category listed in 35 U.S.C. § 101 – process, machine, manufacture or composition of matter. Guidelines at 14-15. While there is much creative material that does not fall into any of these categories and is clearly not patentable (e.g., musical compositions, data compilations), most plausible patent claims will not have trouble meeting this first requirement. Second, the examiner should determine whether the claimed invention falls within one of the exceptions to patentable subject matter – ideas, laws of nature, or natural phenomena. Id. at 15-16. For example, while a plant falls into at least one category of § 101 (as a “composition of matter”), a new plant found in the wild will not be patentable because it is a “natural phenomenon.” See Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980). Third, even if the claimed invention does fall within one of these exceptions, it may still be patentable if it constitutes a practical application of that exception. To determine whether this is the case, the examiner should apply the following test, drawn from Supreme Court and Federal Circuit opinions: (1) does the claimed invention “transform[] an article or physical object to a different state or thing; and/or (2) does the claimed invention otherwise “produce[] a useful, concrete, and tangible result.” The Guidelines do not elaborate on the physical transformation prong of this test except to say that a “reduction” of an article into a different state qualifies as a “transformation.” Guidelines at 19. For example, a new process for making diamonds from coal may be patentable despite being clearly governed by natural laws that describe the behavior of carbon under pressure, because the process physically transforms the coal. The Guidelines do elaborate on the second prong of the above test, explaining that a result is not “useful” unless the utility therein is specific, substantial, and credible, and directing patent examiners to reject claims that cover production of both useful and non-useful results. Id. at 21. Results are only “tangible,” according to the Guidelines, when they have “real world” effect and are not “abstract.” Id. at 21-22. “Concrete” results are those that are reproducible and predictable.  Fourth and finally, if a patented invention does cover only practical applications of a subject matter exception, the examiner should determine whether the patent claim “preempts” the idea, law of nature, or natural phenomenon it practically applies. Id. at 23. In other words, a claim may not validly cover every substantial practical application of an abstract idea, because such a claim would effectively cover the idea itself. The Guidelines give as an example of preemption “a computer disk that solely stores a mathematical formula.” Id. at 23. The Practical Effect of The Guidelines on Patent Applications Although the examination procedure described above may seem daunting to patent applicants, the likely effect of the Guidelines is to make rejection of patent claims on the basis of subject matter less likely. The Guidelines make clear that the patent examiner should only reject claims where it is more likely than not that the claimed invention as a whole falls outside the categories of proper subject matter and does not constitute a practical application of a subject matter exception, or that the claim preempts the exception it practically applies. Id. at 24. In other words, the burden is on the patent examiner to make a prima facie case of improper subject matter, which the applicant can then rebut if possible. For applicants whose process inventions skirt the subject matter line, the key to avoiding rejection on this basis is to emphasize during prosecution (1) that the claimed process produces useful, “real world” results; and (2) that while the invention constitutes practical application of an abstract idea, the claims sought do not cover all possible practical applications of that idea. For example, an applicant claiming an inventive method for performing surgery should focus on the medically beneficial results of the method and should draw attention to other existing applications of the “laws of nature” underlying the method to avoid a finding of preemption.    Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Glenn K. Beaton (303-298-5773, gbeaton@gibsondunn.com) in the firm’s Denver office or H. Mark Lyon (650-849-5307, mlyon@gibsondunn.com) in the Palo Alto office.  © 2005 Gibson, Dunn & Crutcher LLP