Jan
13

NON- DISCLOSURE AGREEMENT WORDING:  THE POTENTIAL TO IMPACT THE OUTCOME OF A PATENT-INFRINGEMENT LAW SUIT

These days, Non-Disclosure Agreement (NDA) templates are readily available on-line, often free-of-charge, making them an attractive alternative for many.  The problem with these templates is they are not necessarily applicable to the contracting parties’ unique circumstances and/or do not properly anticipate dealings between the parties. A poorly drafted, one-size-fits-all NDA can make or break a patent-infringement case many years into the future.   These assertions are supported by the Dec. 7, 2020 decision in Sionyx, LLC v. Hamamatsu Photonics K.K. by the Court of Appeals for the Federal Circuit (CAFC).

In Sionyx, the CAFC concluded that the district court mistakenly concluded that it lacked authority to compel the transfer of ownership of foreign patents from Hamamatsu Photonics, K.K. (Hamamatsu) to Sionyx, LLC (Sionyx).  Moreover, the lower court abused its discretion in distinguishing between the U.S. and foreign patents at issue in the case. The CAFC affirmed the district court on most other issues, including that Hamamatsu breached its non-disclosure agreement (NDA) with Sionyx, and that Sionyx was entitled to co-inventorship and sole ownership of the U.S. patents, as well as damages and an injunction.

The decision is largely based on the NDA signed by the parties in 2006.  This blog discusses the decision and emphasizes that an NDA can have consequences years later.  As the decision demonstrates, had the NDA lacked certain wording, Sionyx may well not have prevailed.

Background

In 1998, Professor Eric Mazur and his student, James Carey, discovered a novel process for creating “black silicon.” The two inventors filed a provisional patent application on May 25, 2001, from which U.S. Patent 8,080,467 ultimately issued, among other patents. Four years later in 2005, the inventors founded Sionyx and met with Hamamatsu – a company that produces silicon-based photodetector devices – a year later.  The two companies entered into an NDA to share confidential information for the purpose of “evaluating applications and joint development opportunities of pulsed laser process doped photonic devices.”

The NDA stipulated that a party receiving confidential information “shall maintain the information in strict confidence for seven years after the expiration of the agreement, after which the receiving party may use or disclose the confidential information.”  Commentator’s emphasis. The NDA also said that the receiving party of confidential information acknowledged that the disclosing party claims ownership of the information and all patent rights “in, or arising from” the confidential information.  Commentator’s emphasis.   The NDA also required that all confidential information received must be returned within 30 days of the termination of the agreement.  The term of the NDA was three years.

Hamamatsu and Sionyx worked together for about two years, at which time Hamamatsu said it wished to develop its products alone. Surprisingly, Sionyx did not request the return of any confidential information from Hamamatsu.  Hamamatsu began developing its own products and emailed Sionyx in 2009 to alert the company that it would be releasing a new photodiode at an upcoming exhibition that it did not believe infringed Sionyx’s IP or breached the confidentiality obligations. Hamamatsu then filed Japanese patent applications for photodetector devices and later filed in several other countries, including the United States, claiming priority to the Japanese patents.

One of Simony’s customers alerted the company to Hamamatsu’s U.S. patents five years later, in 2014.  When discussions between the two company’s failed, Sionyx sued Hamamatsu in the District of Massachusetts for (1) breach of contract; (2) unjust enrichment; (3) infringement of the ’467 patent; and (4) the equitable relief to transfer the foreign to Sionyx and name Carey as an inventor.

District Court Declines to Transfer Foreign Patents

A jury found in favor of Sionyx, awarding almost $800K for breaching the NDA in February 2009, when it first referred to Sionyx’s confidential information in an internal report, and almost $600K in damages for unjust enrichment. The jury also found that Carey should be added as a co-inventor to the U.S. patents. At the post-trial motion stage, the district court then granted Sionyx sole ownership of the disputed U.S. patents, injunctions on Hamamatsu’s accused products practicing those patents and the ’467 patent, pre- and post-judgment interest on damages for breach of contract, and pre-judgment interest on damages for unjust enrichment. The court denied Sionyx’s motions for ownership of the disputed foreign patents because it was uncertain that it had jurisdiction to grant ownership of foreign patents and because Sionyx had failed to adequately identify the foreign patents for which it was requesting ownership.

Sionyx appealed the district court’s decision to refrain from transferring the foreign patents.  The CAFC agreed with Sionyx, holding that “the evidence that established Sionyx’s right to sole ownership of the Disputed (Hamamatsu) U.S. Patents also applies to the Disputed Foreign Patents.” The decision added:

As we discussed above with respect to the Disputed (Hamamatsu) U.S. Patents, we agree that the jury’s findings compel the conclusion that those patents arose from Sionyx’s confidential information and that Hamamatsu has not shown that it contributed [its own] confidential information entitling it to joint ownership. And because the Disputed U.S. Patents claim priority from Hamamatsu’s Japanese patent applications, the Japanese applications must be for the same inventions as the Disputed U.S. Patents. See 35 U.S.C. § 119(a). Thus, Hamamatsu’s Japanese patent applications and any applications claiming priority from the Japanese applications in other countries must also have arisen from Sionyx’s confidential information.

Simply put, the CAFC found that Hamamatsu’s Japanese and U.S. patents emanated from Sionyx’s confidential information which Hamamatsu became privy to under the terms of the 2005 NDA.  According to the court, Hamamatsu itself never provided its own confidential information to Sionyx, which might have justified joint inventorship of the patent with Cary as the jury had concluded.

Abuse of Discretion Standard

Accordingly, Sionyx was entitled to sole ownership of the Japanese applications and any foreign applications claiming priority therefrom. The CAFC further explained that “it is well established that courts have authority to compel parties properly before them to transfer ownership of foreign patents, just as they would any other equitable remedy,” since such an order is “an exercise of the court’s authority over the party, not the foreign patent office in which the assignment is made.” As such, the district court abused its discretion in distinguishing between the two groups of patents.

The CAFC denied Sionyx’s motion for fees under 35 U.S.C. § 285 on cross-appeal, declined to address the issue of willfulness, and affirmed the following findings by the district court: a) Hamamatsu breached the NDA; b) Sionyx is entitled to the damages and pre-judgment interest awarded by the jury, as well as post-judgment interest at the statutory rate for its breach of contract and unjust enrichment claims; c) Carey is a co-inventor of Hamamtsu’s U.S. Patents; Sionyx is entitled to an injunction prohibiting Hamamatsu from practicing its U.S. Patents for breach of the NDA; and d) Sionyx is entitled to an injunction prohibiting Hamamatsu from practicing its 467 patent.

Conclusions

The outcome may well have been different had the NDA not “directed” the ownership of all future patents emanating from Sionyx’s confidential information to Sionyx.   Furthermore, any resulting patent relying on confidential information emanating from both parties should have designated both Cary and an Hamamtsu inventor as joint inventors no matter where the patent applications were filed.  Inventorship does not, however, mean that the inventor(s) is also the owner(s) of the patent.  Generally, R&D and engineering personnel who work for companies assign any patent rights they may have over to their employer-company (e.g., Hamamtsu).  Or, where inventors establish a business entity, the inventors often assign their patent-related interests over to the company as part of their capital contribution.  (e.g., Sionyx).

As this case illustrates, an NDA can be a critical factor in determining patent (and other IP) ownership.  An NDA should be tailor-made for the particular situation at hand with particular emphasis on protecting the disclosing party which is often an individual inventor or a small start-up company.  Anticipate problems into the future since patents in particular can take several years to issue meaning that infringement lawsuits, patent ownership disputes, etc. may occur many years down the road.  It is also important that the disclosing party take steps consistent with protecting its confidential information upon early termination of the NDA or expiration by time.  For example, it is not clear why Sionyx did not insist on the return of all its confidential information when Hamamatsu indicated negotiations were over.

Take Home Points

1. Do not presume a generic NDA template will adequately protect your interests.  An NDA should reflect the parties’ particular situation and the nature of their business relationship under which confidential information may be disclosed.

2. Know and follow the procedures required of you and your company in the NDA as the Disclosing or Receiving Party.

Contact Susan at 305-279-4740 on matters related to your NDA to ensure it addresses potential scenarios consistent with the particular circumstances involving the contracting parties.   We are here to serve you and answer your questions related to intellectual property & business law in both transactional matters and litigation.  Check her reviews at AVVO.com where she has received Client’s Choice Badges for both 2019 and 2020.  She is a registered patent attorney.

WE THANK YOU FOR READING THIS BLOG AND HOPE YOU FOUND IT INFORMATIVE.  HOWEVER, THE CONTENT IS PROVIDED FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.

 

©2021

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

(305) 279-4740

 

 

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OTHER RECENT POSTS

Sep
15

HOLDING COMPANIES AS A STRATEGY FOR IP ASSET PROTECTION – UNDERSTANDING THE PROS AND CONS

Posted by Susan Dierenfeldt-Troy, Esq.

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

Intellectual property assets may comprise as much as 70% of an average company’s value according to the Harvard Business Review.  Not surprisingly, businesses large and small are concerned about: 1) protecting their intellectual property from theft or infringement and potential creditors; and 2) reducing their income taxes as part of an overall IP asset management strategy.  Intellectual property holding companies (IPHCs) became a popular means through which companies sought to protect their IP assets and reduce taxes by establishing a wholly-owned subsidiary whose purpose was only to control and own IP assets such as patents, copyrights, trademarks, trade secrets, and other proprietary information in the 1990s.

The IPHC, established by the parent company, does not itself use the IP it owns (e.g., by manufacturing and distributing a patented product).   Instead, the holding company licenses its IP rights to affiliated operating companies that handle the day-to-day business activities but do not themselves own any of the IP assets.  The holding company as the licensor then receives royalties from its licensee(s).    For example, say ZYX, Inc. owns a U.S. patent for a product it manufactures and sells under a registered trademark.  It has decided to form a Delaware IPHC, CBA, Inc., for holding its patent and registered trademark.  CBA, Inc., now as the IPHC, licenses the patent and registered trademark to ZYC, Inc. in return for a two percent royalty on the patented and trademarked product’s sales.  For states such as Delaware which does not charge income tax on royalties, the tax savings can be substantial. Additionally, ZYX, Inc. can likely take the royalty payment as a tax expense write-off.

States eventually figured out that holding companies were costing them a lot of money and the majority of them have enacted different types of reporting requirements for IPHCs to recover tax monies:  a) mandatory combined reporting (requiring companies to file a single comprehensive tax return for all of their subsidiaries when they calculate their taxes); b) add back statues (requires companies to add back any tax deductions they have taken for royalties paid to their IPHC); and c) the economic nexus approach wherein courts are tasked with finding if an economic nexis (a/k/a/ the Geoffrey rule after a 1993 South Carolina case involving Geoffrey, Inc. as the IHPC for the Toys “R” Us trade name) exists.  As such, IPHCs are not used as much as they were over a decade as a tax “shelter.”  Delaware, however, still continues to be an IPHC tax haven.

What about Florida?  Florida does have a corporate income tax but remains one of a handful of “corporate income” tax states that hasn’t adopted an add-back or combined reporting statute to try and reclaim lost tax revenue attributable to Florida IPHCs.  Furthermore, Florida IPHC law is complicated by the fact that only mining companies, by statute, must count royalties when calculating their income taxes.  For an excellent discussion on the politics surrounding the issue of Florida IPHC taxation see Florida Tax Laws and Intellectual Property by Jason Garcia, Florida Trend Magazine.

Despite the fewer taxation benefits now afforded by most states to IPHCs, IPHCs can still offer IP asset-protection benefits, for example by allowing a company to quarantine its intellectual property from claims brought against the operating companies.  For instance, in the event the affiliated operating company is sued, the separation of IP assets from the affiliate to an IPHC may well protect that property from potential judgments in a lawsuit.

Any business entity, including an IPHC should be structured in a manner that best fits the business model.  All business entities, whether a C-Corp, S-Corp, or Limited Liability Company have their own considerations which should be discussed with in attorney knowledgeable in IP asset protection. Any such IP transfer needs to be in writing and is generally executed as an assignment of rights document.  The assignment of any issued patent and registered trademarks and copyrights should be recorded with the United States Patent and Trademark Office and/or the U.S. Copyright Office.

Anybody considering forming an IPHC should of course understand the taxation requirements of the state where the IPHC entity will be formed.  Additionally, any IPHC owner needs to understand that infringement actions involving the IP owned by an IPHC may result in unintended consequences for the unwary.  For example, whether or not a plaintiff has standing to sue is a threshold question in any lawsuit.  For a patent infringement action, only patent owners or exclusive licensees have standing to sue for infringement.  A typical exclusive licensing agreement may not be “exclusive” for patent infringement purposes. That is, absent a provision within the exclusive licensing agreement that the patent licensee has the right to sue, the exclusive licensee may be found to have no independent right to sue.

Why is this important to an IPHC?  Because the IPHC may be able to obtain an injunction as the patent owner, but will be limited in its ability to seek lost profits as damages.   For example, a patent-holding IPHC normally does not manufacture or sell a product itself.  The IPHC thus suffers no lost profits damages as a result of any infringement of its patent and any recovery will likely be limited to reasonable royalty damages which are generally substantially lower than lost profits.  Rite-Hite Corp. v. Kelly Co., 56 F.3d 1538, 1553 (Fed. Cir. 1995).

As for non-exclusive patent licenses, the IPHC cannot claim lost profits and will be limited to an award of reasonable royalty damages.  However, non-exclusive patent licenses may provide the IPHC with additional opportunities to exploit its IP beyond just one licensee.

In the context of trademark rights, the IPHC holding company must have sufficient quality control over the goods/services provided under the licensed trademarks.  Failure to exercise sufficient quality control may create what is known as “naked licensing”, resulting in potential cancellation of the registered marks.  Click here for a previous blog on the ramifications of naked licensing.

Take Home Points:

  1. Before setting up an IPHC, understand the tax laws of the proposed entity-formation state by consulting with a knowledgeable CPA or tax attorney.
  2. Before setting up an IPHC, determine the best type of business entity by consulting with a knowledgeable IP asset protection attorney.
  3. Ensure that the assignment of IP assets to the IPHC is done via a formal assignment agreement.
  4. Ensure that an exclusive patent licensing agreement includes appropriate provisions giving the exclusive licensee the right to sue for patent infringement. Utilize the services of a knowledgeable IP licensing attorney.
  5. For trademark licensing, ensure that the licensing agreement includes appropriate provisions allowing the IPHC to monitor the quality and goodwill of the licensed marks. As with patent-licensing agreements, utilize the services of a knowledgeable IP licensing attorney.

 

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

Call us for a complimentary consultation on IPHCs or IP-licensing or any of your IP legal needs at 305-279-4740.

May you and your loved ones stay safe & be well during these challenging times.


© 2020 by Troy & Schwartz, LLC

 

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Jul
11

PROTECT THAT DOMAIN NAME!

Domain names can be extremely valuable business assets in today’s Internet-connected business world.   During the last two months, we have been contacted by two small businesses which have both encountered the unpleasant surprise of learning that they no longer have control of their domain names.  This blog discusses the steps that every business owner should proactively take to ensure their business is indeed in “charge” of their domain name(s) throughout the company’s existence, until the business no longer wishes to have an Internet presence under the registered domain name, or until the domain name is sold as an asset, e.g., in a business asset sale and transferred to the new owner pursuant to the Registrar’s domain transfer process.

A.    Domain Name Registration by Employees

An employee (“the Registrant”) registered the domain name for her company’s new website through www.godaddy.com (the “Registrar”) in her own name.  Her personal information and not the company’s is listed on the account’s contact details, payment details, and domain name registration details.  Under this scenario, there is no proof that her company has any right to it (aside from the domain itself as a potential trademark).  As the Registrant, she has administrative control over the company’s domain name.  Consider the following scenarios:

  1. Her employment is later terminated during a round of layoffs. Feeling her severance package is unfair, she disables the domain name in hopes that the company will pay her for the rights to its domain name.   The company sues the employee for conversion and trademark infringement; or
  2. She becomes ill and needs to take an extended leave-of-absence.  During her absence, she misses annually-sent e-mail notification from the Registrar reminding her that the domain name must renewed.  The domain name is not renewed and becomes available for purchase.    The company’s website and associated email addresses are subsequently disabled.

B.  Won’t the Registrar Just Grant Access to the Domain Name or Give the Company a Chance to Renew the Registration of an Expired Domain Name?

Much easier said than done.  Registrars generally require considerable proof before they will allow anyone but the original Registrant to access the domain.  They are not in the process of sorting out domain name disputes and will generally recommend that the parties seek legal advice, work it out among themselves, or use the Uniform Domain Resolution Process (UDRP), an alternative dispute resolution process which every Registrant must agree to as part of the domain registration process.  Scenario B is not a dispute per se but unfortunately can have serious legal complications unless the company is quickly able to secure the domain name rights by repurchasing the name.

C.  What Should a Company Do to Prevent Either of the Above Scenarios from Occurring?

  1. Provide clear instructions in the writing to the employee that the organization’s name and contact information are to be listed on the account as the Registrant and not just her name personally.
  2. Maintain a copy of the domain name registration confirmation from the Registrar with the company’s business records.
  3. Ensure that the email address to access the company’s account is accessible by more than one person at the company rather than one specific person. A departmental or generic, non-person-specific e-mail address is preferable, e.g., admin@yourcompany.com or info@yourcompany.com rather than janedoe@yourcompany.com.

D.  Website Developer Registration of the Domain Name

Website developers will often register the domain names for the websites they are developing.  Here, it is important to ensure that the website developer uses your company’s contact information as the account contact information.  Remember that the “contact” details help establish true ownership.  The website developer may be listed as the technical contact for the domain name, but that’s as far as it should go to ensure that your company will have primary account access and thereby be able to have a proof of ownership if it ever becomes an issue.

E.   A Final Suggestion

If the Registrar allows the inclusion of multiple e-mail addresses for account login. contact/notification and domain name registration contact, consider including an address not associated with the domain name.  Should your domain go down, e g., if the domain name expires, not only will the website no longer be accessible but no emails associated with that domain name will be received.  A backup e-mail using another domain or free account like G mail may still allow correspondence with clients until other steps can be taken to protect to address the issue.

If you have any questions about protecting your domain name or believe your situation may merit a UDRP proceeding, contact us at 305-279-4740 or complete the “Do I have a case” option at the website.

WE THANK YOU READING THIS BLOG AND HOPE YOU FOUND IT INFORMATIVE.  HOWEVER, THE CONTENT IS PROVIDED FOR INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE.  IF YOU ARE CONTEMPLATING ANY ACTION THAT MAY HAVE LEGAL CONSEQUENCES, CONSULT WITH AN ATTORNEY.

 

©2020

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

(305) 279-4740

 

 

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Jun
28

Understanding a Trademark Licensor’s Obligations: Avoiding a “Naked License” Finding

This blog describes an area of trademark law that is often given short shrift.  The licensor of a registered trademark has important obligations during the term of the licensing agreement.  Failure to follow these obligations could result in loss of registered trademark rights.

Background on Trademark Law

A trademark or service mark is a distinctive word, phrase, logo, or graphic symbol that allows consumers to identify the manufacturer, merchant, or service provider responsible for the goods or services.  Basically, a trademark or services mark is a brand.   In contrast to inventions and creative works, both of which have an express basis in the U.S. Constitution, trademarks are not specifically referred to within the Constitution.  Instead, trademark law derives from the Constitution’s commerce clause which provides Congress with the power to regulate interstate commerce

The Lanham Act is the federal statute governing federal trademark registration.  It pertains to marks used in interstate commerce which Congress has the right to regulate under the Constitution.  The United States Trademark and Patent Office (USPTO) is the administrative agency in charge of determining whether an applied-for mark is eligible for federal trademark registration. States, including Florida, also provide for registration of trademarks & service marks. Marks used within only one state are limited to relying on state law protections. Marks which are registered simultaneously in both a state and the USPTO may rely on both federal and state law protections.

Trademark law’s focus is on the protection of the consumer. The objective is to prevent consumer confusion as to the source of the goods and to prevent “palming off” where one producer attempts to pass of its goods as originating from another producer.   That is, the consumer has the right to know that what they are buying is actually from the owner of the mark.  A registered trademark is given to the business/individual to signify to consumers the origin of the product or service bearing the registered mark symbol (the circled R).   Hence the reason why trademark law is encompassed by U.S. commerce law. The other three types of IP are instead focused on protecting the rights of the inventor, creative works creator, and trade secret developer.

Once a registered trademark is granted by the USPTO, the continuation of registration status is dependent upon periodic proof filed with the USPTO that the mark is still in interstate commerce and the payment of a maintenance fee.  Registered TM protection can go on indefinitely as long as the fees are paid and the mark is indeed being used in commerce.

 Trademark Licensing Considerations

As with patents and copyrights, trademarks can be licensed.  Patent and copyright licensors generally stay out of the licensee’s “commercialization” endeavors unless the licensee’s involvement is required to get the invention or work to market.  Trade secret licensing is a really tricky proposition and not something often recommended.   Trademark licensors, on the other hand, have on-going obligations!  Failure to follow these obligations can result in a loss of registered trademark rights if the license is viewed as a naked license by courts or the USPTO.

Example

Mary has developed an organic spice mixture as a seasoning which she has been selling through a website.  She has been featured on HSN and developed a loyal following.  She specifically developed the spice rub for individuals having a histamine intolerance like herself so they too could enjoy tasty food.  She secured a catchy registered trademark under which the spice mixture is sold.  She has been approached by Spiced Right, a national spice manufacturing and distribution company to sell her product on a nationwide scale under her brand name.   They have promised her that her product’s quality will be maintained with large scale manufacturing processes.  The royalty payment is attractive and will allow her to put money away for retirement.  She entered into a detailed exclusive licensing agreement which was devoid of any role on her part.  The agreement also failed to clearly specify component sourcing – specifically organic components from specified suppliers all certified by an independent organic certification authority.

A couple of years later, Spiced Rights started substituting non-organic spices to increase profits.   A substantial number of Mary’s previous customers started complaining on social media that her brand’s quality had declined.  Almost immediately thereafter Spiced Right stopped paying royalties.

Mary sued Spiced Right under 15 U.S.C. §§ 1117, 1125(a) for violation of her rights as a trademark owner (right to receive royalties in this case).  The case was dismissed on the ground that Mary abandoned her mark by engaging in naked licensing – that is, by allowing Spiced Right to use the mark without exercising “reasonable control over the nature and quality of the goods, services, or business on which the mark is used by the licensee.” Restatement Third of Unfair Competition §33 (1995).

Naked licensing issues may also come up during application opposition and registered mark cancellation proceedings before the Trademark Trial & Appeal Board.   See e.g., Barcamerica International USA Trust v. Tyfield Importers, Inc., 289 F.3d 589 (9th Cir. 2002)(finding that the trademark should be cancelled).

What Happened?

  1. Mary relinquished control over the quality of her spice. For trademark licensing purposes, quality does not mean “high end” goods and services. The sort of supervision required for a trademark license (REMEMBER FOCUS ON THE CONSUMER) is the sort that produces consistent quality and expectations in the mind of the consumer.
  2. Mary’s licensing agreement should have specified, g., that she would be policing Spiced Right’s product and the specific quality assurance steps she would take. For example, by regularly buying and sampling the products and receiving reports of the suppliers being used by Spiced Right to formulate her product.  Contingencies for addressing product deficiencies should also have been delineated.
  3. As an aside, generally, the licensor, as the owner of the registered mark, is responsible for filing the necessary documentation for establishing that the mark is in commerce at the Lanham Act’s specified renewal time frames.

 KEY TAKEAWAYS

  1. Trademarks are indicators of consistent and predictable quality assured through the trademark owner’s control over the use of the designation.” Restatement Third of Unfair Competition 33, comment b.
  2. A trademark’s function is to tell shoppers what to expect. Mary’s customers had come to expect a certain taste/quality and it was her reputation that was at stake.   Similarly, a franchise restaurant licensee is expected to provide food/cleanliness/service (the experience) consistent with the franchisor’s requirements as detailed in lengthy franchise agreements.  The licensor’s reputation is at stake in every restaurant outlet so it invests to the extent required to keep the customer satisfied by ensuring a repeatable experience and overseeing the activities of its licensees.
  3. The failure to monitor one’s trademark is seen as an effective relinquishment of a trademark owner’s responsibility under the law.
  4. All IP licensing agreement should be reviewed by an experienced IP attorney who is well-versed in IP licensing nuances. This is especially true for trademark licensing agreements where the licensor/trademark owner has important obligations.  Failure to comply with these obligations may result in loss of valuable registered trademark rights.

 

THANK YOU FOR YOUR INTEREST IN THIS BLOG.   THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.  WE SUGGEST YOU CONSULT WITH AN ATTORNEY IF YOU ARE CONSIDERING AN ACTION WHICH COULD HAVE LEGAL CONSEQUENCES.

©2020

Troy & Schwartz, LLC

Where Legal Meets Entrepreneurship™

(305) 279-4740

 

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Posted in Business Law, IP Licensing, Trademark Law - Current Issues on June 28,2020 08:06 PM
Apr
30

New Guidance by the Patent Trial & Appeal Board on Overcoming Obviousness Rejections: Part I – Lectrosonics, Inc. v. Zaxcom, Inc.

Patent Law Alert from the Law Offices of Troy & Schwartz, LLC

April 30, 2020

New Guidance by the Patent Trial & Appeal Board on Overcoming Obviousness Rejections:  Part I  – Lectrosonics, Inc. v. Zaxcom, Inc

One way for the patent applicant to try and overcome an obvious rejection is to prove nonobviousness through secondary considerations (also known as “objective indicia of nonobviousness”). Yet, proving nonobviousness through secondary considerations to the satisfaction of the Patent Trial & Appeal Board (“Board”) has always been challenging even before Supreme Court’s KSR decision.  On April 14, 2020, the Board issued guidance in arguing secondary considerations by designating its most recent decision as precedential (Lectrosonics, Inc. v. Zaxcom, Inc., Case IPR 2018-00129 (P.T.A.B. Jan. 24, 2020)) and two earlier decisions as informative (Ex parte Thompson, Appeal 2011-011620 (P.T.A.B. March 21, 2014) and Ex parte Whirlpool Corp., Appeal 2013-008232 (P.T.A.B. Oct. 30, 2013)).

This blog discusses the precedential decision in Lectrosonics, Inc. v. Zaxcom, Inc., Case IPR 2018-00129 (P.T.A.B. Jan. 24, 2020). Given the importance of this topic, the two other decisions will be summarized in a forthcoming blog. The three decisions address nonobviousness issues in three different proceedings before the Board: an applicant’s exparte appeal, an AIA trial, and a reexamination proceeding.

Secondary considerations involve evidence “outside” the four corners of the application with a caveat: the applicant must demonstrate a nexus between the proffered evidence and the claimed invention.  If established, the Board will consider the strength of the objective-indicia evidence itself.

The Board’s Discussion of the Threshold for Establishing “Nexus”

Secondary considerations are generally related to the invention’s commercialized product. For objective indicia of nonobviousness to be accorded substantial weight, its proponent (the applicant or patent owner) must establish a nexus between the evidence and the merits of the claimed invention.  This means that the proponent must show that the asserted objective evidence is actually tied to a specific product and that product indeed “embodies the claimed features and is coextensive with them.”

Courts have considered the following secondary considerations in determining obviousness; (1) the invention’s commercial success, (2) long felt but unresolved needs, (3) the failure of others, (4) skepticism by experts, (5) praise by others, (6) teaching away by others, (7) recognition of a problem, (8) copying of the invention by competitors, and (9) other relevant factors.

The product for which objective evidence is presented must be claimed in its entirety within the patent or application.  CAFC precedent, which the Board must follow, requires that a nexus between the invention and evidence of secondary considerations is only presumed “when the product is the invention as fully disclosed and claimed – that the product embodies the claimed features and is coextensive with them.”  See Fox Factory, Inc. v. SRAM, LLC, 944 F.3d 1366 (Fed. Cir.  2019). 

Nevertheless, all is not lost if an “automatic” nexus presumption is deemed inappropriate.  The patent owner is still afforded an opportunity to prove nexus by showing that the proffered evidence of secondary considerations is the “direct result of the unique characteristics of the claimed invention.”   The ultimate decision depends on the fact finder who “must weigh the secondary considerations evidence presented in the context of whether the claimed invention as a whole would have been obvious….”

Secondary Considerations as to the Original Claims

The Board considered the nexus requirements twice  – first with respect to the patent’s original claims and again with the patent owner’s proposed substitute claims as discussed below.  Relying on Fox, the Lectrosonics Board found that the patent owner had not demonstrated a nexus between the evidence presented and the merits of the invention as originally claimed because the evidence presented was directed to an unclaimed feature of the invention.  Secondary evidence is inapplicable if it does not apply to the patent’s actual claims.

Secondary Considerations as to the Substitute Claims

The patent owner filed a contingent motion to amend the patent to replace the six problematic patent claims with six substitute claims; the written description had disclosed features that had not been claimed and the patent owner now sought to claim these features.    The Board first held that the Motion to Amend complied with the statutory and regulatory requirements for amending found in a previous precedential order for assessing the merits of a Contingent Motion to Amend in Feb. 2019.

The Board then considered whether the proposed substitute claims were obvious, finding that the Petitioner’s (the party seeking claims invalidation of the patent) proposed prior-art combination (the combining of references in an obviousness rejection) “at best only weigh slightly weigh in favor of a conclusion of obviousness.”

The Board then turned to the patent owner’s secondary consideration case but now focusing on the substitute claims.  Had the inquiry only involved the original claims, the patent owner would have been out of luck.  The Board found, however, that the substitute claims shared a nexus with the patent owner’s proffered secondary consideration evidence: the affidavit of two declarants tying long-felt need directly to the newly added claim limitations and an industry award.

After finding a nexus, the Board then considered the secondary consideration evidence itself.  As to long-felt need as a secondary consideration, the Board was convinced that the two declarations demonstrated “a persistent need, recognized by those of ordinary skill in the art.”

Next, the Board considered the evidence of industry praise, citing the testimony of one of the patent owner’s declarants who stated that he “can’t emphasize enough the revolution these recording radios brought on.” The Board recognized that the award also “specifically praises features of the proposed substitute claims including the digital recording of microphone signals in the wireless transmitter.” Although some of the industry praise the patent owner supplied was “directed to features not explicitly recited by [the proposed substitute claims],” the patent owner’s evidence of industry praise ultimately weighed in favor of nonobviousness.

Lastly, the Board considered the evidence of the failure of others. Here, the Board determined that the patent owner’s testimony submitted in support of this factor was “conclusory and without adequate [evidentiary] support for the proposition that others failed.” This factor thus weighed in favor of the Petitioner’s obviousness arguments.

The Board ultimately concluded that, although the failure of others weighed in favor of the Petitioner because of lack of evidentiary support favoring the patent owner, the long-felt need and industry praise weighed heavily in favor of nonobviousness.  The Board concluded that the substitute claims were nonobvious, thereby saving the day for the patent owner.

Take Home Points

It has been historically very difficult to win on a secondary consideration argument before the Board and appellate courts. The following lessons can be drawn from the Lectrosonics decision:

  • In presenting an objective-indicia case, practitioners during patent prosecution or the patent owner in a post-patent proceeding must present solid evidentiary support (e.g., long-felt need, failure of others, industry praise, copying, etc.).
  • Conclusory statements are not evidence. Additionally, the nexus between that evidence and the claimed invention must be proven in those cases where the Board or a court determines that the patent applicant or patent owner are not entitled to a nexus presumption.  Such a nexus will be found lacking if the evidence does not relate to the patent’s claims.   Here, the patent owner’s win is because the Board agreed that the patent could be amended to include substitute claims after finding that the original claims had no nexus with the proffered objective evidence.
  • The Lectrosonics decision is also a good reminder for practitioners to claim everything the applicant is entitled to claim based on the written disclosure to help ensure that the required nexus between the claims and secondary considerations will be found in any “obviousness” contest. Here the patent owner won because the Board first granted its contingent motion to amend the claims to include substitute claims which then were found to be “covered” by objective secondary consideration evidence.  If a patent owner plans to file such a motion during a patent claim contest, it would be well advised to review the Board’s requirements for granting this type of motion as set forth in the decision available here. The outcome would have been far different absent the Board’s approval of the motion to amend.

©Troy & Schwartz, LLC

THANK YOU FOR YOUR INTEREST IN THIS BLOG.  AS USUAL THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE.

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