Federal Circuit Review - October 2017

Federal Circuit Denies En Banc Rehearing in Mentor Graphics v. EVE-USA

In Mentor Graphics Corp. v. Eve-USA, Inc., Appeal Nos. 2015-1470, 2015-1554, 2015-1556, the Federal Circuit denied Synopsys’ and EVE’s petition for en banc rehearing on issues of lost profits apportionment and assignor estoppel.

Following the Federal Circuit’s decision in Mentor Graphics Corp. v. EVE-USA, Inc. on March 16, 2017, Synopsys and EVE petitioned the Federal Circuit for en banc rehearing on the assignor estoppel and apportionment issues. In the panel decision, the Federal Circuit affirmed the lost profits damages award and held that when the Panduit factors are met, no further apportionment is required. The Federal Circuit also held in the panel decision that assignor estoppel barred Synopsys from challenging the validity of the asserted patent.

The Federal Circuit denied Eve’s petition for rehearing en banc to consider whether the jury properly applied apportionment when calculating the damages due to lost profits. The concurrence, written by Judge Stoll and joined by Judges Newman, Moore, O’Malley, Reyna, and Wallach, concluded that it was proper for the jury not to apportion between the patented and unpatented features of the product, because the facts showed that the market value of the product was attributable to the patented features of the product and that there were no non-infringing alternatives. Thus, the Panduit factors, which include 1) demand for the patented product and 2) absence of non-infringing alternatives, were satisfied. Importantly, because the demand for the product was due to the patented features, the concurrence concluded that but-for causation was satisfied. As a result, further apportionment beyond showing that the Panduit factors were satisfied was unnecessary. Thus, the concurrence concluded that the jury had properly applied apportionment and, therefore, the Federal Circuit properly denied the petition for rehearing.

The dissent, written by Judge Dyk and joined by Judge Hughes, concluded that apportionment should have been applied even though the Panduit factors were satisfied. Specifically, according to the dissent, even if but-for causation is shown, damages for lost profits still must be apportioned between the patented and unpatented features of a multi-component product.

Judges Moore and Chen also wrote a separate concurrence explaining that the record and the arguments presented on the assignor estoppel issue were not sufficiently developed enough to warrant an en banc rehearing on the issue.

No Declaratory Judgment Standing Based on Foreign Lawsuits Against Foreign Customers

In Allied Mineral Products, Inc. v. OSMI, Inc., Appeal No. 2016-2641, the Federal Circuit held that subject matter jurisdiction for a declaratory judgment action does not exist when the patent holder has only sought to enforce a foreign patent against foreign customers of the declaratory judgment plaintiff.

Stellar filed infringement actions against Allied’s Mexican distributers in Mexico, accusing the distributors of infringing its Mexican patent. Allied, which does not allege it was obligated to indemnify the distributors, then filed a declaratory judgment action against Stellar in the Southern District of Florida seeking, among other things, a declaratory judgment of non-infringement of Stellar’s sister U.S. patent. The district court dismissed the complaint for lack of subject matter jurisdiction.

Subject matter jurisdiction requires a justiciable case or controversy. In particular, the Federal Court noted that Stellar sent notice letters to Allied’s Mexican distributors in Mexico, and it sued the distributors in Mexico. Stellar did not correspond with Allied regarding the Mexican Patent, nor did Stellar take any action in the U.S. or any action on the U.S. Patent. Thus, the Court determined it would merely be providing an advisory opinion if it were to reach the merits of Allied’s dispute. Accordingly, the Federal circuit affirmed the district court’s dismissal for lack of jurisdiction for failing to establish a case or controversy regarding Stellar’s U.S. patent in the United States.

Ex-Employee’s Arbitration Agreement Did Not Bind Parties in Trade Secret Case Where Ex-Employee Was Intervenor

In Waymo LLC v. Uber Technologies, Appeal No. 2017-2130, the Federal Circuit held that an arbitration clause in an employment agreement between a trade secret owner and its former employee does not require arbitration of a claim for trade secret misappropriation, because the trade secret claim does not rely on the employment agreement.

Plaintiff Waymo and Defendants Uber, Ottomoto, and Otto Trucking are companies developing autonomously controlled vehicles. Intervenor Levandowski is an ex-employee of Waymo that Waymo accused of misappropriating documents for the benefit of the Defendants. The employment agreement between Waymo and Levandowski included an arbitration clause, and Defendants sought to compel arbitration in the present suit based on the arbitration clause in the employment agreement. The district court denied the motions to compel arbitration.

The Federal Circuit affirmed the district court’s decision, noting that Defendants were not signatories to the arbitration contract. Under the Kramer test, non-signatories to an arbitration contract are bound if 1) the claims are “intimately founded and intertwined with the underlying contract” and 2) when “concerted misconduct by the nonsignatory and another signatory” is alleged that is “intimately connected with the obligations of the underlying agreement.” Kramer v. Toyota Motor Corp., 705 F.3d at 1128-29. Scrutinizing Waymo’s complaint, the Federal Circuit noted that the employment agreement was only “referenced,” but the claims did not “rely” on the agreement. The agreement was referenced in the complaint only to establish that Waymo had taken reasonable measures of secrecy, rather than as a basis for the trade secret claims. As such, the Kramer test was not met, and the non-signatory Defendants were not entitled to arbitration.

Federal Circuit Clarifies Standard for Infringing Use of a System Claim

In Intellectual Ventures LLC v. Motorola Mobility LLC, Appeal No. 2016-1795, the Federal Circuit held that, in order to “use” a patented system, an accused infringer must control and benefit from each and every element of the claimed system.

Intellectual Ventures filed a district-court action against Motorola alleging infringement of two patents. The jury found all the asserted claims infringed and not invalid, and the district court denied Motorola’s motions for judgment as a matter of law. Motorola appealed.

The Federal Circuit held that substantial evidence supported the jury’s verdict regarding validity of the asserted claims. The Federal Circuit found that the scope of a disputed claim was limited when viewed in light of the specification and therefore satisfied the written description requirement. Furthermore, the court found that the jury’s non-obviousness findings for the asserted claims were supported by substantial evidence because the jury was entitled to credit the testimony of one expert witness over another. Therefore, the Federal Circuit affirmed the district court’s judgment regarding invalidity.

However, the Federal Circuit also held that substantial evidence did not support the jury’s verdict regarding infringement. The Court explained that direct infringement under Centillion requires that an infringing “use” of “system comprising” claims requires the direct infringer to control and benefit from each and every element of the claimed system. The Court rejected the district court’s holding that the accused infringer need only benefit from the system as a whole. Because no evidence was presented that Motorola’s customers or Motorola itself benefited from each limitation of the claim, the Federal Circuit reversed the district court’s judgment regarding infringement.

Judge Newman concurred in part and dissented in part. Judge Newman concurred with respect to noninfringement, but disagreed with the majority’s holding that an infringer must benefit from each element of a system claim. Judge Newman also argued that no reasonable jury could have found the asserted claims to be non-obvious.

A Hypothetical Claim Drafted in Response to an Ensnarement Defense Cannot Narrow the Original Claim

In Jang v. Boston Scientific Corp., Appeal Nos. 2016-1275, 2016-1575, the Federal Circuit affirmed vacatur of a jury verdict of infringement under the doctrine of equivalents where the patentee failed to assert a proper hypothetical claim in response to an ensnarement defense.

In 2002, Jang assigned patents to Boston Scientific in exchange for a lump-sum payment and additional payments contingent on sales of any stents covered by the patents. Boston Scientific eventually began selling a stent that Jang believed practiced the patents. In 2005, he sued Boston Scientific for breach of contract for failing to make the additional payments, arguing Boston Scientific practiced the claims either literally or under the doctrine of equivalents.

A jury found that Boston Scientific’s stents did not literally fall within the claims of Jang’s patents but that the stents were equivalent to the claimed invention. After trial, the district court heard Boston Scientific’s ensnarement defense to Jang’s doctrine-of-equivalents claim. A doctrine-of-equivalents claim cannot “ensnare” or cover the prior art. A “hypothetical claim” analysis is one test for ensnarement. In response to an ensnarement defense, a patentee must propose a hypothetical claim that 1) illustrates the alleged infringement and 2) is broader than the patented claim. If that hypothetical claim does not ensnare the prior art, then the prior art does not bar application of the doctrine of equivalents. The court found that Jang failed to propose a satisfactory hypothetical claim and thereby failed to prove that his doctrine-of-equivalents theory did not ensnare the prior art, so the court entered judgment for Boston Scientific.

The Federal Circuit affirmed, finding that one of Jang’s hypothetical claims, while broader in some ways than the asserted claim, was narrower in other aspects and thus was flawed. The Federal Circuit observed that a patentee’s hypothetical claim may not add any narrowing limitations. Additionally, “the district court was under no obligation to undertake a hypothetical claim analysis” on the patentee’s behalf because the patentee bears the burden of “proposing a proper hypothetical claim that only broadens the issued asserted claims.”

Federal Circuit Clarifies Patent Venue After TC Heartland

In In Re: Cray Inc., Appeal No. 2017-129, the Federal Circuit held that for a defendant to have a “regular and established place of business” within the meaning of 28 U.S.C. § 1400(b), it must (1) have a physical place in the district; (2) that is a regular and established place of business; and (3) that is the place of the defendant.

Raytheon sued Cray in the Eastern District of Texas for patent infringement. Cray moved to transfer the suit under 28 U.S.C. § 1406(a). Cray argued that it did not “reside” in the district in view of the Supreme Court’s TC Heartland decision. The district court agreed because it was undisputed that Cray was incorporated in the State of Washington. Cray further argued that venue was improper in the district because Cray had neither committed acts of infringement nor maintained a regular and established place of business within the district. The district court rejected that argument. Cray petitioned for a writ of mandamus.

At the Federal Circuit, the primary dispute concerned whether the home of one of Cray’s employees, located in the Eastern District of Texas, constituted “a regular and established place of business” of Cray. The mere fact that Cray allowed its employee to work from home in the Eastern District of Texas was insufficient to make that home “the place of the defendant.” The Federal Circuit distinguished In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985), where transfer was denied because it was clear that the defendant’s business specifically depended on employees being physically present in the district. Here, the facts did not show that Cray maintained a regular and established place of business in the Eastern District of Texas; they merely showed that there existed within the district a physical location where an employee of the defendant carried on certain work for his employer. Accordingly, the Federal Circuit granted Cray’s petition for a writ of mandamus and directed the district court to transfer the case.

Notably, the Federal Circuit rejected the four-factor “venue test” which Judge Gilstrap used in exercising his decision to deny Cray’s transfer motion. The Federal Circuit said that the test ran afoul of § 1400(b)’s statutory language, noting that “[t]he district court’s four-factor test is not sufficiently tethered to this statutory language and thus it fails to inform each of the necessary requirements of the statute.”