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9th Circuit: Users Have to Agree to TOS to Be Bound By It

In 2011, retailers across the country steeply discounted the ill-fated HP Touchpad. After being inundated with requests for the short-lived WebOS device, retailers including Barnes & Noble cancelled many of the orders. One spurned customer filed a class action lawsuit against Barnes & Noble in state court, which then removed the case to federal court, and sought to compel arbitration, as required in Barnes & Noble terms of service.

But, as in many cases, there was a rub. Barnes & Noble’s website did not require users to assent to their terms of service at any time, nor do they require it to this day.

The Federal Circuit begins its opinion with a pair of apt quotes from the Second Circuit:

“While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract.”, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004). One such principle is the requirement that “[m]utual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract.” Specht v. Netscape Commc’ns Corp., 306 F.3d 17, 29 (2d Cir. 2002) (applying California law).

The court distinguished this browsewrap agreement (through which assent is implied through continued use of the website, or sometimes a button click with a link to the terms) and clickwrap agreements (through which assent is affirmatively given through clicking a button accompanied by the terms of service themselves).

Thus far, courts have occasionally enforced browsewrap agreements where parties had knowledge of the terms of the contract. But in this case, there was no evidence on the record that the named plaintiff had any such knowledge, and Barnes & Noble’s argument that “the placement of the ‘Terms of Use’ hyperlink in the bottom left-hand corner of every page on the Barnes & Noble website, and its close proximity to the buttons a user must click on to complete an online purchase, is enough to place a reasonably prudent user on constructive notice,” was unavailing.

I would be curious to know if there was A/B testing on pages with “Click to button to indicate you agree to the TOS” against pages without a TOS to see if there’s a sales difference. Part of me has trouble imagining that the lost sales, if any, would weigh against the actual risk of your terms not being enforceable, but the continued and varied efforts to make their terms harder to find would indicate otherwise.

Posted in: Analysis, Commentary by Ben Snitkoff.
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Inequitable Conduct Not Dead Yet

Unenforceability of a patent through inequitable conduct is a equitable defense to a claim of patent infringement. It exists when a defendant can prove that the patent they are being accused of infringing was obtained through misrepresentations or omissions to the Patent Office, intentionally committed by the patentee with an intent to deceive.

In 2011, the Federal Circuit Court of Appeals decided Therasense v. Becton, Dickenson, and Co., a case that was hailed by some as the death of inequitable conduct. There have been only a handful of cases since 2011 finding, or upholding findings of inequitable conduct.

The Federal Circuit held that in order to support a finding of inequitable conduct, the party raising the claim has to prove that an alleged bad act was material to patentability, and that the act was undertaken with intent to deceive. Intent to deceive would be difficult to prove, and the number of successful claims of inequitable conduct dropped.

Proving that the doctrine isn’t dead yet, the Federal Circuit affirmed a finding of inequitable conduct by a district court. But don’t hold your breath that the doctrine is revived, the facts in this case are absurd.

In and around 2000, Apotex filed a patent application in Canada for moexipril magnesium, a blood pressure medication. In 2001, Apotex filed a related American application. There were two other medications, Univasc and Uniretic, that used the same active ingredient and were on sale for several years before Apotex applied for a patent.

During the prosecution of the patent, the inventor, Dr. Sherman, became aware of facts that he should have disclosed to the Patent Office. Specifically, he became aware that Univasc was likely made by the same process that he claimed in his application, and withheld that information.

Sherman was familiar with patent prosecution and would have known of his duty to disclose this information to the Patent Office, but he did not. Sherman, in lab notes, indicated that he believed the prior art overlapped with his claimed invention, but submitted misleading test results to show otherwise.

When confronted with many of these allegations at trial, “Dr. Sherman selectively displayed. . . a lack of memory and responsibility that led the court to conclude he was not a credible witness.” There were several additional acts that violated his duty of candor to the Patent Office that I have not recounted here.

This is still a pretty high bar to reach, and a finding of unenforceability is likely possible without such overwhelming evidence of intent to deceive the patent office. Regardless, it’s good to know that such findings are still possible under the heightened standard.

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Federal Circuit Lacks Jurisdiction on Consumer Protection Action

MPHJ Technology Investments, LLC (MPHJ) is the owner of several patents relating to scanning documents on network-attached hardware. MPHJ has forty wholly-owned shell subsidiary companies.

Each shell company purported to be the exclusive licensee of MPHJ’s patents with respect to certain geographic areas, or commercial fields. These companies identified business in Vermont and around the country that they thought infringed the MPHJ patents and would then send a form letter stating that they believed there was infringement, and requesting that the businesses confirm they do not infringe, or take a license. If no response came (and allegedly, in some cases where no initial letter was sent) the shell company would send second and third follow-up letters asking for a response and threatening litigation. At no time did MPHJ or any shell company file a patent infringement suit in Vermont, nor did they retain counsel.

Vermont’s Attorney General, after receiving several complaints, began an investigation and eventually filed suit in state court for violation of the Vermont Consumer Protection Act, alleging that the defendants made deceptive statements in these letters.

MPHJ, a Delaware LLC, removed the case to Federal Court based on federal subject matter (relating to patents) and diversity between MPHJ and the State of Vermont. After some motion practice, the State Amended its complaint, and the Federal Circuit remanded the case to state Court. MPHJ petitioned the Federal Circuit for a writ of mandamus, seeking review of the remand order.

In its original complaint the State of Vermont was alleging that MPHJ’s enforcement of its patent rights was giving rise to the violations of the Consumer Protection Act. However, in the amended complaint Vermont narrowed that allegation to MPHJ’s deceptive tactics, and removed a request for a permanent injunction to stop MPHJ from threatening Vermont businesses. In the eyes of the district court, these amendments removed federal subject matter jurisdiction. Diversity jurisdiction would have been defeated by there not being more than $75,000 at issue.

The Federal Circuit heard the case on a petition for mandamus. Because the district court remanded for lack of subject matter jurisdiction under 28 USC 1447(c), the Federal Circuit lacked jurisdiction over the appeal under 1447(d), which states:

An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise.

In its demand letters, the MPHJ subsidiaries would often request license fees in excess of $900 per employee. The letters were often sent to small businesses and non-profits. Businesses without the ability to means to mount a legal defense to a patent infringement case – not that it appears MPHJ was willing to mount a case. However, MPHJ would grant licenses to these businesses for less than $900 if the business called to negotiate with the shell company.

Interestingly, this case was one of two opinions released today by Federal Circuit Courts of Appeal relating to Section 1447. The other was from the Seventh Circuit.

Posted in: Analysis, Commentary by Ben Snitkoff.
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Mexican Trademark Law Potentially Relevant in Evaluating an Injunction in US

Quinta Real is an upscale hotel that has operated in Mexico since the 1980s. La Quinta is an American hotel chain that operates in over 80 major cities, and has been operating the US since the 1960s.

Over the past few decades, Quinta Real has made a two failed attempts to enter the US market. After Quinta Real’s most recent attempt to enter the US market, La Quinta filed a case seeking a permanent injunction preventing Quinta Real from using that name in US. After the district court granted that injunction, Quinta Real appealed on multiple grounds.

The Ninth Circuit affirmed the finding of a likelihood of confusion, but reversed the order of an injunction.

One of Quinta Real’s primary attacks on appeal was that the court lacked jurisdiction, because the Quinta Real name had never been used in commerce in the United States. The Ninth Circuit disagreed that “use in commerce” was a jurisdictional requirement. While it is necessary to prove use in commerce under certain provisions of the Lanham Act, the jurisdictional grant contains no such requirement.

When reviewing the court’s decision to grant an injunction, the court first recited the eBay factors:

(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of the hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

The court also noted that, “If the district court ‘identified and applied the correct legal rule to the relief requested,’ we will reverse only if the court’s decision ‘resulted from a factual finding that was illogical, implausible, or without support in inferences that may be drawn from the facts in the record.”

Somewhat bafflingly, the court found that the district court applied the proper test, but vacated the grant of an injunction, holding:

We are concerned that the district court’s analysis does not discuss a fact we think relevant to weighing the equities in this case: That a permanent injunction in favor of La Quinta here would bar Quinta Real from opening a hotel in the United States under its own name, while at the same time La Quinta would remain free to open hotels and do business in Mexico as “La Quinta.”

Traditionally, judges making determinations regarding equitable relief are granted broad discretion, and are not often overturned. While the court brings up a relevant fact, it strikes me as a stretch that the court’s perceived failure to consider an element of Mexican law demands that the district court’s order be vacated, particularly when the Ninth Circuit does “not decide that this fact is determinative and we express no opinion on whether the district court should issue a permanent injunction after having taken account of all the relevant facts.” Rather, the court believes that this may affect the balance of hardship analysis, and would like to see it addressed.

Since eBay, the likelihood of a party obtaining an injunction in an intellectual property case has dropped dramatically. There is little, if any, discussion of under what conditions La Quinta is allowed to operate in Mexico, and what aspects of Mexican Trademark law allow La Quinta, the junior user in Mexico, to have a name so similar to Quinta Real. It’s difficult to imagine how operation of Mexican trademark law would have a relevant bearing on whether to grant an injunction in the United States.

More worrisome is the application of this principle to patent cases. It is rare for anyone other than major corporations to have patents that cover many jurisdictions. This case brings a potentially new factor into determining whether to grant an injunction in patent cases. In what way are hardships affected if Samsung and Apple can both sell their devices in Japan, but Samsung is prohibited from selling certain devices in the USA? It is simply unclear how that question is relevant when discussing the operation of US Patent or Trademark law.

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On Dismissing the Podcast Lawsuits

There’s been a lot of coverage of the past few years about a patent alleged to cover podcasting. The company behind the suit has dismissed several defendants recently, after realizing that there isn’t a lot of money in podcasting.

Details around this most recent spat are a little sparse, but Personal Audio, the company that owns the patent, put out a press release essentially saying “we offered to dismiss the case against Adam Corolla, but he said no.” Corolla has been crowd funding his defense against the patent lawsuit, and the press release is likely targeted to get the crowd funding to dry up.

Corolla responded, saying that he’s going to keep on fighting for the next guy down the line. He’s out to kill the patent.

Drawing some inferences here, it appears that Personal Audio approached Corolla offering to dismiss its claims of patent infringement, if Corolla also dismissed his counterclaims for declamatory judgment of invalidity and non-infringement: essentially an independent claim asking the court to find that the patent is invalid and not infringed. When Corolla declined to dismiss his counterclaims, Personal Audio declined to dismiss its affirmative claims of infringement.

Including counterclaims for declaratory judgement of non-infringement and invalidity is a common tactic in patent litigation. It’s a bargaining chip for instances exactly like this. The plaintiff wants out of the suit, but these counterclaims may prevent the plaintiff from backing away without giving something up to the defendants. Though, this practice has recently been called into question in some jurisdictions.

What’s unclear is if Personal Audio offered Corolla a settlement in exchange for dismissing his claims against them. The press releases stated that, “court orders prevent . . . Adam from discussing the matter in further detail.” A reasonable assumption is that the offer to dismiss the claims was part of some confidential settlement offer, potentially including compensation for dismissing the declaratory judgment claims. This would explain Corolla’s reluctance to expound on the matter, but it is only speculation.

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Patently-O: Data Structures Patent Ineligible

It’s been a slow couple of weeks in tech-law news, so here’s some great analysis by Patently-O on a recent software patent case.

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Hallmark Cards, PowerPoint, and Trade Secrets

The Eighth Circuit affirmed a strong win for Hallmark in an appeal of a trade secret case.

In 2001, Hallmark contracted with Monitor, a consulting group, to do research on the greeting card industry. The research was to be kept strictly confidential. Monitor delivered a series of PowerPoint presentations with their findings. Hallmark then presented a few general conclusions from the presentations at a conference.

Monitor was closely affiliated with Clipper, a private equity firm that leveraged its relationship with Monitor to invest in companies. After Monitor began its relationship with Hallmark, Clipper became interested in another greeting card company that was up for auction Recycled Paper Greetings (RPG).

Clipper asked Monitor for, and received, at least five PowerPoint presentations that Monitor had confidentially prepared for Hallmark. Clipper went on to win the auction, and used the confidential information in running RPG.

Upon hearing of this acquisition, Hallmark asked Monitor and Clipper to retain all documents relating to the acquisition of RPG and to investigate whether Hallmark’s data was used in the acquisition. Monitor and Clipper denied any wrongdoing, but proceeded to destroy communications between the two companies, and erase hard drives.

Hallmark entered mediation with Monitor and settled for $16.6 million, but Hallmark pursued litigation against Clipper.

Clipper argued that the PowerPoint presentations were not trade secrets under Missouri law, that Hallmark already recovered for the injury from Monitor, and that the $10 million in punitive damages awarded by the jury, on top of a $21.3 million judgment, were excessive and violated the due process clause.

Trade secret law is peculiar in that it varies from state to state. While is there a Uniform Trade Secrets Act, it has not been adopted by all states, and case law does not always agree across jurisdictions.

In this case, the Eighth Circuit affirmed the lower court’s findings on all accounts. That the PowerPoint presentations were a few years old at the time Clipper acquired them did not render them valueless, as Clipper argued. Similarly, Hallmark’s presentation of a few conclusions from those papers did not mean that the more detailed PowerPoint presentations were not the “subject of efforts that are reasonable under the circumstances to maintain [their] secrecy.”

The court also rejected Clipper’s argument that Hallmark was recovering twice. Rather, as the jury instructions required, Hallmark had recovered for the disclosure of the trade secrets from Monitor, and recovered for the subsequent use of those secrets from Clipper.

Finally, the court agreed that punitive damages, less than 50% of compensatory damages, were appropriate here given the extreme lengths that Clipper went through in order to cover-up any wrongdoing, including destruction of evidence after being informed to retain those documents.

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Tenth Circuit Gives a Lesson in Writing Copyright Infringement Reports

The Tenth Circuit Court of Appeals released an opinion strongly chastising a special master for deficiencies in his report analyzing whether certain software infringed a copyright.

As discussed here recently, when determining whether software infringes copyright the proper analysis is whether the accused code copies original and protecable aspects of the original software product.

This appeal arose out of a dispute between relatives over a payroll company. An uncle went into business with a niece and nephew. After relations soured, the uncle started his own business and allegedly copied the software he developed at his previous company. The nephew registered the copyright on the original code and sued for copyright infringement. Pursuant to a consent decree, the parties agreed to the use of a special master to determine whether there was infringement, and whether an injunction should issue.

After the special master submitted his report, both parties agreed that the report was deficient and should be redone. However, after cajoling from the trial court judge, the plaintiff supported the report that the court then adopted.

On appeal, the defendant argued that the report failed to apply a the “abstraction-filtration-comparison” test and was too narrowly focused on actual copying. The appeals court agreed.

At the core of the court’s opinion was the test mentioned above. The steps of that test are:

[a]t the abstraction step, we separate the ideas (and basic utilitarian functions), which are not protectable, from the particular expression of the work. Then, we filter out the nonprotectable components of the product from the original expression. Finally, we compare the remaining protected elements to the allegedly copied work to determine if the two works are substantially similar.

The court held that there was little evidence that the special master applied the abstraction test at its most basic, or its most-indepth levels. When abstracting code, the Court suggests that one proceed by looking at, “(i) the main purpose, (ii) the program structure or architecture, (iii) modules, (iv) algorithms and data structures, (v) source code, and (vi) object code.” Rather than taking these steps, the special master wrote that “[b]ecause of the extensive literal copying, it is not necessary [to] spend much time on abstracting the nonliteral elements.” That view misses the point. Without abstraction, it is impossible to determine whether that extensive copying was impermissible. Again – only copying original and protectable code is prohibited.

The special master’s preoccupation with the literal copying continued. In the next step, filtration, he filtered only the menus as unprotectable. But in a program such as payroll handling, much more of the code would have to be unprotectable beyond just the menus.

Finally, the special master spent much effort explaining the steps defendant allegedly took to obfuscate the literal copying of the software. However, the infringement analysis does not begin and end with literal copying.

In a perhaps tongue-in-cheek conclusion, the court writes:

In fairness, it could be the case that Román applied the complete abstraction-filtration-comparison test during his work prior to drafting his report. Perhaps Román did an exemplary job, and perhaps his conclusions are unassailable. But with only the meager support included in his report, we cannot know for sure. Therefore, we vacate the district court’s order and remand.

This case provides a good, though partially incomplete, rubric for applying and reporting on the abstraction-filtration-comparison test that has been widely adopted in the US. More importantly, it really emphasizes the universal importance of experts both following the relevant case law, and documenting how they followed and applied that case law in writing their reports. Here, both parties initially asked for the special master to revisit the report. The district court judge would have been wise to follow that advice.

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Put This In Your Hookah and Smoke It

The Ninth Circuit, appealing to my unending love of utility defense to copyright and trademark suits, held that the shape of a hookah is not protected by copyright law.

The opinion, first published in early June but recently revised, follows a dispute between two companies selling hookahs in the United States. The plaintiff, Inhale, Inc., obtained a copyright registration on a hookah with a skull and crossbones printed on the glass. After obtaining the registration, they filed suit against Starbuzz Tobacco, Inc., alleging that Starbuzz’s hookah, which did not feature the skull and crossbones, infringed their copyright. Inhale rested its case on the shape of the hookah.

There was no dispute that the hookah itself was a useful article: that is something that had a function, as opposed to solely artistic value – like a painting or work of writing.

Because copyright only protects expressions of ideas, and not the design of a functional object, the court had to inquire as to whether the design of the hookah was separable from its function. Quoting from the Copyright Office’s manual, the court held that, “[a]lthough Inhale’s water container, like a piece of modern sculpture, has a distinctive shape, “[t]he shape of the alleged ‘artistic features’ and of the useful article are one and the same.” Thus, the shape itself was not protectable.

The court went on to uphold an award of over $110,000 in attorneys fees to Starbuzz, the prevailing party below, and further awarded Starbuzz attorneys fees for defending the appeal, to be calculated by the lower court.

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Raise or Waive – The Federal Circuit on Appellate Strategy

The Federal Circuit sent a strong message regarding what relief you ask for in your appellate briefs: in short, if you don’t raise the argument, you waive it, even if it seems unfair.

Becton was involved in a patent dispute with plaintiff Retractable Technologies. After a jury trial, Becton was found to infringe a patent with regard to its 1 ml and 3 ml syringes. The jury returned a verdict in favor of Retractable for $5 million, but did not apportion damages across the two infringing devices.

On appeal, Becton argued that the court should order a new trial on infringement and validity of the patent, but did not raise the issue of damages. The Federal Circuit reversed the lower court with regard to infringement of the 3 ml syringes, but affirmed with regard to the 1 ml syringes and validity of the patent. Due to the relief requested and outcome, the court did not remand the case to the lower court for further proceedings.

After achieving a win, Becton went back to the lower court seeking for a reduction in damages and modification of an injunction against Becton selling the 3 ml syringes. Retractable agreed to modify the injunction, but did not agree to a reduction in damages. The lower court found that it could not modify the judgment, and Becton appealed again.

On appeal, Becton raised a series of arguments regarding why the lower court had the ability to modify the damages order under Verizon Servs. Corp. v. Vonage Holdings Corp., 503 F.3d 1295, 1310 (Fed. Cir. 2007). In that case, and others cited by Becton, the Federal Circuit specifically remanded the issue of damages back to the lower court. Here, because Becton did not request relief with respect to damages there was no remand.

Becton raised other, more tenuous, arguments for the court to reduce the damages award. The Federal Circuit rejected those arguments as well.

The case serves a strong reminder that in seeking to craft a narrowly tailored strategic appeal, it is easy to overlook (or strategically omit) some important and fundamental issues. The Federal Circuit and Becton agree that this could have been resolved by adding a single sentence, or sentence fragment to their first appeal brief, asking for a remand and damages issues. However, because Becton failed to raise that issue, it is waived.

In the end, Becton is likely happy that they can once again sell their 3 ml syringes, and the long-term revenue from that win will likely off-set any limited losses from not reducing the damages award.

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