1995 Review of Intellectual Property Developments in the Federal Circuit

Patents

1. MAJOR DEVELOPMENTS

A. Claim Construction

1. Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed. Cir.) (en banc), cert. granted, 116 S. Ct. 40 (1995).

HOLDING: Construction of patent claims, which define the scope of the patentee's rights under the patent, is a matter of law reserved exclusively for the court. While the court is required to look to the claims, specification, and prosecution history to determine the meaning of the patent's claims, it may receive extrinsic evidence to help determine the true meaning of the language employed in the patent.

The Federal Circuit, in Markman, significantly clarified the nature of patent litigation when it redefined the respective roles of judge and jury in patent infringement actions. The court, en banc, held that claim interpretation (or claim construction),(1) although requiring factual determinations, is always treated as a matter of law for the court to decide rather than a fact issue to be put before the jury. That is, in patent infringement cases tried before juries, "the court has the power and obligation to construe as a matter of law the meaning of language used in the patent claim[s]."(2) Thus, patent infringement suits entail two major steps. The court first interprets the relevant claims of the patent as a matter of law, and then submits the properly construed claims to the finder of fact, who determines whether the accused device infringes the patent-in-suit.

The Markman opinion sets forth the methodology of interpreting patent claims, instructing courts to look to the claims themselves, the specification, and the prosecution history. Because the specification must contain a description of the invention sufficient to enable one skilled in the art to make and use the invention, the specification acts as "a sort of dictionary" for claim construction purposes, explaining the invention and defining particular terms. The patent's prosecution history, as the "undisputed public record" of the proceedings in the Patent and Trademark Office, is of "primary significance" in ascertaining the true meaning of the language used in the patent. Courts also have discretion to receive extrinsic evidence to aid claim interpretation. Nevertheless, the court reiterated that while the specification, the prosecution history, and extrinsic evidence can properly assist the court's claim interpretation, they cannot "enlarge, diminish, or vary" the claim limitations.

Markman left unresolved the question of when the trial court invokes its claim interpretation determination. Markman neither requires nor prohibits the presentation of oral or written testimony directed to claim interpretation. The trial courts appear to have several options: (1) interpret the claims on the paper record either with or without evidence of the meaning of the disputed terminology to one of ordinary skill in the art (3); (2) hold a separate bench trial or "Markman" hearing addressing the contested claim interpretation issues either early in the case or after the close of discovery; or (3) wait until all the evidence has been presented at the actual trial and rule on the claim interpretation issues just prior to charging the jurors. Trial court judges are presently wrestling with this problem.

The ultimate impact of the Markman decision is presently uncertain because the Supreme Court has granted certiorari on the question: whether, in patent infringement suits, the Seventh Amendment of the United States Constitution guarantees a right to jury trial to resolve genuine factual disputes about the meaning of a patent. Oral arguments were heard January 8, 1996. Unlike the Federal Circuit, several Justices appeared to accept the position that claim interpretation requires the resolution of a disputed material fact.

B. Doctrine of Equivalents

1. Hilton Davis Chemical Co. v. Warner-Jenkinson Co., 62 F.3d 1512 (Fed. Cir. 1995) (en banc).

HOLDING: In Hilton Davis, the Federal Circuit held that infringement under the doctrine of equivalents is always an issue of fact to be decided by a jury, that application of the doctrine is not discretionary with the court, and that the applicable test is an objective one -- whether there is an "insubstantial difference" between the language of the claims and the accused product or process. The court said it was "restating -- not revising" the test for infringement. Semantics aside, the shift in "focus" was major. Specifically, the court noted that the function-way-result test of Graver Tank, while helpful, is neither necessary nor sufficient. Instead, all evidence relevant to the substantiality of the differences, including the nature of the infringer's activity (e.g. designing around or copying), must be considered.

The holdings in Hilton Davis were the Federal Circuit's en banc answer to the following three questions: (1) Does a finding of infringement under the doctrine of equivalents require anything in addition to the function-way-result test(4) articulated by the Supreme Court in Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 70 S. Ct. 854, 94 L. Ed. 1097 (1950)? (2) Is infringement under the doctrine of equivalents an issue of law or fact? (3) Is the application of the doctrine of equivalents a matter within the discretion of the trial court?

The Federal Circuit held that the test for infringement under the doctrine of equivalents is now, and always has been, whether the differences between the accused product or process and the patent-in-suit are "insubstantial." "[A]n accused product or process, to avoid infringement under the doctrine, must include 'substantial and not merely colorable' differences from the patent claims." In addition, the court noted that this test is an objective one, resting on objective evidence and not unexplained subjective conclusions. Therefore, evidence of the accused infringer's motives or intent is irrelevant to the question of infringement.(5) Nevertheless, evidence of the method of development, such as copying or designing around, is relevant because it may suggest whether the differences are in fact unsubstantial. Evidence of independent development is only relevant in rebuttal when the patent owner asserts copying.

The court continued by stating that although the function-way-result test is "often enough" for a determination of infringement by equivalents and that such a test "often discloses the substantiality of the differences between the accused and claimed products or processes," satisfaction of the Graver Tank standard is neither necessary nor sufficient. Instead, the identities of function, way, and result should merely be considered useful categories of evidence submitted to the trier of fact.

The majority opinion also suggested other categories of evidence that might assist the trier of fact. The court explained that evidence that the accused infringer designed around the patented product or process weighs against infringement, stating that "when a competitor becomes aware of a patent, and attempts to design around its claims, the fact finder may infer that the competitor, presumably one of skill in the art, has designed substantial changes into the new product to avoid infringement."

On the other hand, infringement is suggested where persons "reasonably skilled in the art" would have known that an ingredient not contained in the patent was effectively interchangeable with an ingredient contained in the patent. This "known interchangeability," the court explained, is "potent evidence" that one of ordinary skill in the art would have considered the difference between the two elements "insubstantial." Evidence of copying, the court held, also suggests infringement, "not because the doctrine of equivalents rests on the subjective awareness or motivation of the accused infringer, but rather because copying suggests that the differences between the claimed and accused products or processes ... are insubstantial."

In resolving conflicts among panels to answer the three questions addressed, Hilton Davis will materially aid patent attorneys in evaluating and preparing their client's cases and in advising clients who are developing products which may conflict with other's patents. It is fair to say that the doctrine of equivalents, which some commentators had declared to be effectively dead, is alive and well. Prior to Hilton-Davis, the judges of the Federal Circuit had been divided over the doctrine of equivalents and the proper circumstances for its application. Some had suggested that the Graver Tank function-way-result test is the exclusive test for determining infringement under the doctrine. Others had suggested that the doctrine requires some additional "equitable showing" in additional to the traditional Graver Tank inquiry. A third group advocated a less structured "insubstantial differences inquiry." Although the closely split decision claimed "to restate -- not to revise -- the test for infringement under the doctrine of equivalents," it has, at least temporarily, settled this three way split in the Federal Circuit in favor of those espousing the less structured approach.

In essence, the debate regarding the scope and application of the doctrine of equivalence involves the balance to be struck between encouraging innovation through patent monopolies and discouraging invention by protecting patent holders to a greater extent than they deserve. The dissents generally express the belief that (1) the majority opinion goes too far toward protecting the patentee and (2) gives too much power and not enough direction to juries. The result, in their opinion, will be an inefficient uncertainty as to the scope of a patentee's rights.

C. Lost Profits and Reasonable Royalty Damages

1. Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538 (Fed. Cir. 1995) (en banc).

HOLDING: A patent holder is entitled to recover lost profit damages for lost sales of a patented product not covered by the patent-in-suit where the infringing product competed with the non-covered invention, as well as the patented invention, such that the lost profit damages suffered by the patent owner were foreseeable. The court also reversed the lost profits award attributable to another non-covered product that was sold in conjunction with the patented invention, affirmed the calculation of reasonable royalties as a percentage of profits on both non-covered products, held third parties lacked standing to join the patentee in claiming damages, and affirmed the district court's reasonable royalty and interest calculations awards to the patentee.

Rounding out the busy en banc year, the Federal Circuit addressed a variety of damage calculation issues in Rite-Hite. The test for "lost profits," the scope of products on which lost profits can be recovered, when reasonable royalties should be awarded, the manner of calculating reasonable royalties, the manner of calculating interest on the judgment, and even the persons entitled to infringement damages were all discussed.

Rite-Hite's U.S. Patent 4,373,487 ("the '847 patent") claims a device for securing a vehicle to a loading dock. Rite-Hite sued Kelley, alleging that Kelley's "Truk Stop" vehicle restraint infringed the '847 patent. After prevailing in the infringement stage of the trial, Rite-Hite sought lost profit damages for two types of vehicle restraint devices: the Manual Dok-Lok model 55 ("MDL 55"), which was an embodiment of the '874 patent and the Automatic Dok-Lok model 100 ("ADL 100"), which while covered by other patents was not covered by the '847 patent. Rite-Hite also sought lost profit damages for its unpatented dock levelers -- bridging platforms that were sold with the restraints. The district court found that "but for" Kelley's sale of 3,825 infringing devices, Rite-Hite would have sold 80 more MDL 55's, 3,243 ADL 100's, and 1,692 dock levelers. Accordingly, the court awarded Rite-Hite lost profits for all three devices.

On appeal, the Federal Circuit, en banc, upheld the lost profit awards with regard to the ADL 100. Applying a tort law analysis, the court found that the patentee must establish both causation and proximate cause to recover damages. Specifically, the court held that "[t]o recover lost profits damages, the patentee must show a reasonable probability that, 'but for' the infringement, it would have made the sales that were made by the infringer."

Kelley argued that the damages for the ADL 100, even if in fact caused by the infringement, are not legally compensable because the ADL 100 is not covered by the '847 patent. The court analyzed this argument in terms of proximate cause. While emphasizing that proximate cause must be determined on a case-by-case basis, it stated that foreseeable injuries inflicted by an infringing competitor should generally be compensable absent a compelling reason to the contrary. The court found "no basis" for Kelley's conclusion that the lost sales must be of the products covered by the patent-in-suit. Rather, the court held that awarding the lost profits attributable to the ADL 100 was the correct manner of satisfying the "full compensation" goal of the patent damage statute, as interpreted by the Supreme Court and Federal Circuit precedent. The court accordingly affirmed the award of lost profits.

The court reversed the lost profits award for sales of the dock levelers(6) under the "entire market value rule," which provides that courts should award damages on unpatented components sold in conjunction with an infringed device only where "the patented and unpatented components were analogous to a single functioning unit." The court noted that the rule has not "extended liability to include items that have essentially no functional relationship to the patented invention and that may have been sold with an infringing device only as a matter of convenience or business advantage." The court distinguished the ADL 100's -- non-covered products for which lost profits were awarded -- from the dock levelers by emphasizing that the infringing Kelley Truk Stops were in direct competition with the ADL 100's while the dock levelers were merely sold together with the restraints for convenience and business advantage. The court stressed the difference between the two situations, explaining that while patent law was clearly meant to "redress competitive damages resulting form [patent] infringement," no basis exists for extending that recovery to damages for items that are neither competitive substitutes nor functional components of the patented device.

Turning to the reasonable royalty damages, the court affirmed a "reasonable royalty" calculated by the district court as fifty percent (50%) of Rite-Hite's profit on units sold by Kelley for which Rite-Hite could not satisfy the "but for" test. This amount was 75% of Kelley's expected selling price and was 33 times Kelley's expected net profits on the units. In affirming this, till now, extremely high reasonable royalty rate, the court emphasized that the patentee was an "unwilling" licensor in the hypothetical negotiation, and, as such, would not have licensed its product for less than one half of the per-unit profits it was foregoing. As noted by the dissent, until this case, courts had considered the hypothetical negotiation to be between a willing buyer and willing seller. The dissent also noted that the district court did not appear to consider Kelley's side of the negotiation or the fact that the royalty was grossly in excess of Kelley's expected profits.

1. King Instrument Corp. v. Perego, 65 F.3d 941 (Fed. Cir. 1995).

Because of "overlapping damage issues," the decision in King Instrument was delayed until the Federal Circuit decided Rite-Hite. The King Instrument panel was then given the case for "disposition in accordance with Rite-Hite." However, even though every member of the panel filed a dissent in Rite-Hite, the King Instrument decision appears to have further expanded the availability of lost profit damages to include situations where the patentee does not manufacture any product embodying its patent.

The patent-in-suit was directed to a splicing device for audio and video tapes. Although the patentee did not manufacture any product which embodied the patent, several of its products competed in the marketplace with the defendant's infringing product. The Federal Circuit, in a decision the dissent characterized as a "quantum leap from Rite-Hite," held that the patentee could obtain lost profits damages provided it could prove that its lost sales were caused by the defendant's infringing product because those lost profits were the "direct and forseeable result of infringement."

As a result of Rite-Hite and King Instrument, patent owners may now obtain lost profit damages based solely on the lost profits of products which do not embody the infringed patent. The Federal Circuit's stated goal is now to award patentees "full compensation for 'any damages' suffered as a result of the infringement," as was articulated by the Supreme Court in General Motors v. Devek Corp., 461 U.S. 648, 103 S. Ct. 2058, 76 L. Ed. 2d 211 (1983).

II. STANDING OF LICENSEES TO BRING INFRINGEMENT SUITS

A. Ortho Pharmaceutical Corp. v. Genetics Institute, Inc., 52 F.3d 1026 (Fed. Cir. 1995).

HOLDING: A licensee has standing to bring suit as a co-plaintiff only if the licensing agreement grants the licensee some of the patentee's proprietary rights as opposed to a mere license to manufacture or use the patent. Only assignees have standing to bring a suit for infringement in their own name.

In Ortho Pharmaceutical, the Federal Circuit addressed the issue of whether and under what conditions a patent licensee has standing to bring an infringement suit. Although the specific facts are not especially pertinent, the court's statement of the law and analysis are significant and therefore are summarized.

The Patent Act of 1952 provides that a patentee "shall have remedy by civil action for infringement of his patent." The term "patentee" includes the patentee's "successors in title." Without the patentee as plaintiff, the remedies provided in the patent statutes are unavailable except under extraordinary circumstances. Where a licensing agreement amounts to an assignment of all significant rights conferred by the patent, the licensee will effectively be deemed a patentee and accordingly have standing to independently bring an infringement suit in the licensee's name. Any other party seeking enforcement of the patent may bring suit, if at all, only as a co-plaintiff in a suit under the patentee's name.

Licensees will have co-plaintiff standing only if the license agreement grants some of the patent's proprietary rights. The proprietary rights granted by a patent are the rights to exclude others from making, using, or selling the invention in the United States. Many licenses amount to no more than a covenant by the patentee not to sue the licensee for making, using, or selling the patented invention, with the patentee reserving the right to grant others the same right. Holders of such "non-exclusive," or "bare," licenses suffer no legal injury from infringement, and accordingly have no standing to bring suit, regardless of any financial injury suffered.

If the licensing agreement grants a proprietary interest such that a licensee is found to have co-plaintiff standing, they will be allowed to bring suit on the patent, although only in the name of the patentee, whether or not the license so provides, and regardless of the patentee's cooperation. Moreover, patentees are bound by the outcome of suits brought in their name by co-plaintiff - licensees.

To resolve the issue of co-plaintiff standing, courts look to the substance of a licensing agreement to determine whether it merely provides a covenant not to sue or makes the licensee the owner of some identifiable portion of the patentee's proprietary rights to exclude others. Although licensees with proprietary rights are often described as "exclusive" licensees, the parties' lexicography is irrelevant. Rather, it is the licensee's beneficial ownership of a right to prevent others from making, using, or selling the invention that provides the right to bring suit as a co-plaintiff, regardless of whether the terms "bare" or "exclusive" are used to describe the license.

Moreover, even a "right to sue" clause is irrelevant to the licensee's standing to bring suit as a co-plaintiff. That is, while licensing agreements may contain express covenants requiring the patentee-licensor to bring suit on behalf of the licensee, the parties cannot, by contract, alter the statutory requirement that the suit be brought by the patentee. Thus, the key issue to determine whether licensees have standing is whether the licensing agreement grants an exclusive property interest in the patent itself.

B. Abbott Laboratories v. Diamedix Corp., 47 F.3d 1128 (Fed. Cir. 1995).

HOLDING: Because even exclusive licensees do not have a statutory right to independently bring an action for patent infringement unless the licensing agreement transfers to them all the patent's substantial rights, the patent owner must be allowed to intervene in an infringement suit brought by anyone other than an assignee.

Diamedix, the patent owner, entered into a license agreement with Abbott Laboratories. While the worldwide license permitted Abbott to make, use, and sell products incorporating the inventions claimed in the patents, it also reserved several rights to Diamedix. These included the right to make and use products that exploited the patents, the right to sell such products to parties with whom Diamedix had pre-existing contracts, the right to enforce the patent through an infringement suit if Abbott failed to bring a similar action within 6 months, and the right to prevent Abbott from assigning its rights to any party other than a successor in business.

Diamedix filed a motion to intervene in a subsequent infringement suit filed by Abbott. The district court denied the motion, holding that Diamedix's interests were already adequately represented.

On appeal, the Federal Circuit reversed, holding that Diamedix must be allowed to intervene regardless of whether its interests were adequately represented by Abbott because Abbott was a licensee rather than an assignee and accordingly did not have standing to independently bring an infringement suit. The court noted that unless the patent owner has made a complete assignment of rights under the patent, its presence is indispensable in an infringement suit "not only to give jurisdiction under the patent laws," but also "to enable the alleged infringer to respond in one action to all claims of infringement."

1. Rite-Hite on Standing

In Rite-Hite, discussed supra, the court dismissed the claims of Rite-Hite's independent sales organizations ("ISOs") for lack of standing. The distributors had maintained that they were proper co-plaintiffs because each possessed what they described as a "virtually exclusive" license to sell Rite-Hite's products in an exclusive territory. The court disagreed, finding that the distributorship contracts did not convey exclusive patent licenses, but rather, merely permitted the ISOs to make and solicit sales of Rite-Hite's products in an exclusive sales territory. Significantly, the contracts did not grant the ISO's the right to exclude anyone from making, using, or selling the claimed invention. In fact, the ISOs could not exclude from their respective territories other ISO's, third parties, or even Rite-Hite itself. In essence, the court found, the contracts were no more than simple sales agreements between Rite-Hite and its distributors. They did not convey any of the patent's proprietary rights to exclude, and accordingly, the ISO's lacked standing to sue for patent infringement.

III. PROCEDURAL MATTERS

A. Right to Jury Trial/Mandamus

1. In re Lockwood, 50 F.3d 966 (Fed. Cir.), vacated, 116 S. Ct. 29 (1995).

NOTE: This case was vacated by the Supreme Court on September 1, 1995.

HOLDING: A patentee, whose claim for infringement has been dismissed, retains a Seventh Amendment right to a jury trial with respect to the accused infringer's surviving counterclaim for declaratory judgment of patent invalidity. The patentee's right to a jury trial can be protected by Mandamus.

In In re Lockwood, Lockwood filed suit against American Airlines alleging infringement of two patents related to a ticket reservation system. American counterclaimed for a declaration that its activities were non-infringing and, alternatively, that Lockwood's patents were invalid or unenforceable.

American moved successfully for summary judgment on Lockwood's original infringement claim. However, when the court proceeded to consider American's counterclaim related to patent invalidity, it refused Lockwood's demand for a jury trial because, in the court's opinion, only equitable issues remained. Lockwood petitioned the Federal Circuit for a writ of mandamus directing the district court to reinstate his jury demand.

In Seventh Amendment jurisprudence, a jury demand must be granted as a matter of right so long as the action would have entailed either the adjudication of legal rights or the implementation of legal remedies at common law. Where a right or a remedy was unknown at common law, the court relies on their most satisfactory analog. Because of the preeminence of the right to a jury trial, as reflected in Supreme Court jurisprudence, the "extraordinary showing" required for a writ of mandamus was met.

Although it was unavailable at common law, the Federal Circuit determined that the closest analog to a declaratory judgment action which evaluates the validity of a patent is a suit for patent infringement in which the affirmative defense of invalidity has been plead -- an action long recognized as involving a right to trial by jury. Therefore, a patentee has the same right to a jury trial on factual questions related to validity in a declaratory judgement action that the patentee would have had if validity had been adjudicated as a defense in the infringement action. The court noted that even though this analog involved an inversion of the parties, the inversion did not frustrate Lockwood's Seventh Amendment rights. The court accordingly ordered the district court to reinstate Lockwood's demand for a jury trial of American's counterclaim for a declaration of patent invalidity.

B. Claim Preclusion -- Choice of Law

1. Mars Inc. v. Nippon Conlux Kabushiki-Kaisha, 58 F.3d 616 (Fed. Cir. 1995).

HOLDING: The law of the regional circuit from which the case arose, rather than the law of the Federal Circuit, governs whether claim preclusion can be invoked by a corporate parent following final judgment against its wholly owned subsidiary.

Because the principles of claim preclusion are not committed to the Federal Circuit's exclusive jurisdiction, federal district courts should follow regional circuit precedent, not Federal Circuit precedent, when applying such principles.

IV. PATENTABILITY ISSUES.

A. Best Mode Requirement.

1. Glaxo, Inc. v. Novopharm, Ltd., 52 F.3d 1043 (Fed. Cir. 1995).

HOLDING: A corporate patent applicant for a new chemical compound did not violate the best mode requirement by failing to disclose the preferred production method because the inventor, who was an employee of the corporation, did not know about a concealed production method and knowledge of corporate officials is not imputed to an inventor with regard to the best mode requirement.

In Glaxo, the Federal Circuit discussed the "best mode" requirement in a corporate setting. The relevant facts are as follows. Glaxo employee Derek Crookes invented a new chemical compound which eventually became the subject of the patent-in-suit. Other Glaxo scientists developed a novel commercial production method for the new compound. The U.S. patent application was eventually filed in Crookes's name with the required inventor's oath. The application disclosed the new compound, but not the novel production method. There was no evidence that Crookes was aware of the existence of the novel production method at the time the application was filed.

In a subsequent infringement suit, defendant Novopharm argued that Glaxo's patent was invalid under the best mode requirement, which provides that "[t]he specification ... shall set forth the best mode contemplated by the inventor of carrying out his invention." 35 U.S.C. 112. Novopharm argued that even though Crookes was apparently ignorant of the novel production method, the court should impute his employer's knowledge or the knowledge of his patent agent to him because his employer prepared the application and owned the rights to it. The court rejected this argument, holding that the best mode requirement demands only that the application set forth the best mode contemplated by the inventor. This holding, the court stated, is compelled by the language of the statute and supported by the case law. Moreover, the court continued, "the practical reality is that inventors in most every corporate scenario cannot know all of the technology in which their employers are engaged."

The Glaxo decision is significant because, as the dissent points out, it allows corporations, through "organizational gerrymandering and willful ignorance," to secure the "monopoly of a patent while hiding the best mode of practicing the invention the law expects in return for its protection." Because of the clear language of the statute, the majority rejected that position, suggesting that the statute's language would govern even if the company had intentionally isolated the inventor.

B. On-sale Ban

1. Mahurkar v. Impra, Inc., 71 F.3d 1573 (Fed. Cir. 1995).

HOLDING: A plaintiff's sale of prototype catheters more than one year prior to the filing date application's did not place the invention "on sale," and thus invalidate the patent, because (1) the sale was not an ordinary commercial transaction, but rather was a "sham" transaction made in an attempt to satisfy the requirements of a licensing agreement; (2) the transaction did not place the invention in the public domain or lead the public to believe that the device was freely available; and (3) the transaction was not "sales activity" that would help the inventor determine the value of the patent. The court also awarded the Mahurkar patent the filing date of an earlier filed design patent application.

In Mahurkar, the court addressed the issue of what constitutes a "sale" that would invalidate a patent under 35 U.S.C. 102(b). The relevant facts are as follows. In 1980, plaintiff Mahurkar conceived the double lumen catheter that eventually led to the patent-in-suit. In February, 1982, Mahurkar granted Quinton an exclusive license to make, use, and sell his catheter provided that Quinton begin marketing the catheter by September 30, 1982. By August, 1982, Quinton was unable to make the catheters to Mahurkar's specifications. To preserve its license, Quinton sold twenty of the prototype catheters to the Northwest Kidney Center. Northwest's chief of staff had purchased the catheters as a favor to Quinton, and upon receipt, stored them in a cabinet where they remained, unused, as of the commencement of the litigation. Subsequent tests showed that these prototype 0catheters were unusable. More than one year after the Northwest transaction, but less than one year after the catheter was commercially marketed, Mahurkar filed his patent application.

In a subsequent infringement suit, the defendant asserted that the patent was invalid under 35 U.S.C. 102(b) because the catheter had been "in public use or on sale in this country" for more than one year prior to the filing date of the U.S. patent application. In rejecting this assertion, the court first noted that the "on-sale" determination depends on the totality of circumstances, considered in light of the statute's underlying policies -- especially the policy of preventing inventors from exploiting the commercial value of their inventions while deferring the beginning of the statutory term. The court then concluded that because the Northwest sale was essentially a sham transaction with no resultant commercialization of the invention, it did not constitute a "sale" within the meaning of the statute. The court based this conclusion on the following facts: (1) Quinton did not advertise the catheters or offer them to anyone but Northwest prior to the critical date; (2) the Northwest sale was a special deal made to satisfy the requirements of a licensing agreement rather than an ordinary commercial sale; (3) the catheters were unusable for their specified commercial purpose; and (4) the transaction did not place the invention in the public domain or otherwise indicate that the catheters were freely available.

C. Non-obviousness Requirement

1. In re Ochiai, 71 F.3d 1565 (Fed. Cir. 1995).

HOLDING: In determining whether prior art renders an invention obvious and thus unpatentable, the reviewing entity must make a fact-intensive comparison of the claimed process with the prior art rather than relying on a mechanical application of any per se rules.

The patent application at issue claimed a process of using a new, non-obvious reactant to make a new, non-obvious product. The other reactant and the process itself were conventional and widely known. The claims were limited to a process using the new, non-obvious reactant to produce the new, non-obvious product. The application was rejected based on application of a supposed per se rule that process claims are obvious "if the prior art references disclose the same general process using 'similar' starting materials." On appeal, the Federal Circuit reversed the rejection, holding that the obviousness determination is a fact-intensive one that must

be made on a case-by-case basis. Accordingly, the court held, reliance on per se rules of obviousness drawn from prior decisions is legally incorrect.

D. Biotechnology Patents

1. In re Deuel, 51 F.3d 1552 (Fed. Cir. 1995).

In In re Deuel, the Federal Circuit reversed a finding of obviousness on appeal from the Patent and Trademark Office Board of Patent Appeals and Interferences. The issue before the court was whether the previously known partial amino acid sequence for a particular protein rendered claims to the DNA sequence for the protein obvious. The Federal Circuit noted that obviousness is a question of law which the Federal Circuit decides de novo and held that the Patent Office Examiner bears the burden of establishing a prima facie case of obviousness. The court noted that normally a prima facie case of obviousness is based on a structural similarity. In Deuel, the Federal Circuit reversed the holding of obviousness because the prior art was found not to disclose the claimed invention. The court further noted that the fact that one can conceive a general process in advance for preparing an undefined compound does not mean that a claimed specific compound was precisely envisioned and therefore obvious.

E. Computer Technology Patents

1. In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995).

HOLDING: A computer usable storage medium (i.e. a floppy disk, hard disk, CD-ROM, ect.), on which a particular piece of computer software is stored, is considered patentable subject matter (35 U.S.C. 101) by the United States Patent and Trademark Office.

On April 25, 1995, the Patent Office Solicitor withdrew his opposition to the appeal in In re Beauregard -- a case then pending before the Federal Circuit. On May 12, 1995, the Federal Circuit issued a precedential order dismissing the appeal in Beauregard, therefore binding the Patent Office to the holding detailed above.

Prior to the Solicitor's action, the Board of Patent Appeals & Interferences had sustained an Examiner's rejection of the Beauregard claims on the basis of the "printed matter" exception to 35 U.S.C. 101 (statutory subject matter). This exception holds that an article, consisting of "printed matter" stored in or imprinted on a "substrate," is not patentable when (1) the novelty of the article resides in the "printed matter" and (2) the primary purpose of the printed matter is non-functional (e.g. to convey information to humans). Finding that the requisite functional interaction did not exist between the claimed software (the "printed matter") and the computer usable medium on which it was stored, the Board found the exception precluded patentability.

By withdrawing the appeal, the Patent Office has now acquiesced in the view that the "printed matter" exception to patentable subject matter does not apply to the storage of general purpose software on a computer storage medium.

Nevertheless, it is important to note that Beauregard does not dispense with this "printed matter" rejection in the context of an obviousness analysis. For an excellent discussion of the interplay between these two issues and the current state of the law, see Robert C. Laurenson, Computer Software "Article of Manufacture" Patents, 77 J. Pat. & Trademark Off. Soc'y 811 (Oct. 1995).

V. TRADE DRESS -- DAMAGES

A. Imagineering, Inc. v. Van Klassens, Inc., 53 F.3d 1260 (Fed. Cir. 1995).

HOLDING: In a trade dress infringement case, a punitive damage award of $4,000,000 was found to be excessive in light of the fact that the defendant's total sales were less than $1,500,000.

Imagineering manufactured a successful line of furniture known as Weatherend. When Van Klassens began to manufacture a similar line, Imagineering brought a suit against Van Klassens alleging trade dress infringement, false advertising under section 43(a) of the Lanham Act, and unfair competition under New York law.

The jury found for Imagineering on all three counts and awarded $860,000 in compensatory damages, $4,000,000 in punitive damages, $250,000 in "enhanced" Lanham Act damages under 15 U.S.C. 1117(a), $44,251 in sanctions, $659,790 in attorneys fees, and $54,604 in taxable costs for a total of $5,868,815. In addition, the trial court permanently enjoined Van Klassens from advertising or selling furniture "sufficiently similar" to be confused with the Weatherend line, from advertising comparisons between Van Klassens and Imagineering furniture, and from unfairly competing with Imagineering in any way.

On appeal, the Federal Circuit affirmed the jury's conclusion that Van Klassens infringed Imagineering's trade dress, but held that the $4,000,000 punitive damage award was excessive and accordingly remanded. Applying the two-part test announced by the Supreme Court in Two Pesos, Inc. v. Taco Cabana, Inc., __ U.S. __, 112 S. Ct. 2753, 120 L. Ed. 2d 615 (1992), the court found that substantial evidence established (1) that the Imagineering trade dress was inherently distinctive or had acquired distinctiveness through secondary meaning; and (2) that a likelihood of confusion existed between its product and the defendant's. Nevertheless, because Van Klassens total sales were at most only $1,490,000, the court vacated the punitive damage award and remanded the case.

VI. MISCELLANEOUS MATTERS

A. Doctrine of Repair and Replacement

1. Sage Products, Inc. v. Devon Industries, Inc., 45 F.3d 1575 (Fed. Cir. 1995).

HOLDING: Replacement of unpatented inner container, once it was full of medical waste, constituted permissible repair of patented waste disposal system because the inner container was essentially a disposable replacement part of the patented combination.

In Sage Products, the Federal Circuit clarified the doctrine of repair as it applies in the context of replacing the non-patented components of a patented system. The patent in issue was Sage Products, Inc.'s ("Sage's") medical waste disposal system comprising an unpatented outer container and an unpatented, disposable inner container. The patent's specification indicated that the inner container is intended to be disposable and is preferably discarded when full. Sage's literature and marketing instructs its users to dispose of the inner containers after a single use. Sage actively campaigns against reuse of the inner containers.

Devon Industries, Inc. ("Devon") manufactures an inner container that can be used in the Sage waste disposal system. Devon, however, does not manufacture an outer container that, together with its inner enclosure, would infringe Sage's patented combination. Sage brought suit against Devon, alleging that use of Devon's inner replacement containers with Sage's outer containers infringes Sage's patent.

On appeal, the Federal Circuit affirmed the district court's grant of partial summary judgment, holding that the unpatented inner container was a disposable element of the patented combination, and that replacing the container constituted permissible repair of the system. Sage argued that because it is physically possible to empty and reuse Sage's inner containers, the full containers are not in fact spent or in need of repair, and therefore, replacing them with Devon's inner containers constitutes impermissible reconstruction of Sage's system. In rejecting this argument, the court reiterated that the doctrine of repair is construed broadly, encompassing all repairs necessary to maintain the "'use of the whole' of the patented combination," including replacement of spent, unpatented elements. Significantly, the court then held that an unpatented element of a combination is effectively spent and in need of repair when "it is neither practical nor feasible to reuse it." Thus, because Sage itself considered reuse of the inner containers unreasonable, replacing the inner containers, when full, constituted permissible repair even though it was technically possible to reuse them.

B. Willful Infringement and Treble Damages

1. Graco, Inc. v. Binks Manufacturing Co., 60 F.3d 785 (Fed Cir. 1995).

HOLDING: In Graco, the Federal Circuit held that a district court abused its discretion by awarding treble damages to the plaintiff in a patent infringement suit because there was no basis in the record for the court's conclusion that the defendant engaged in willful infringement.

In Graco, the Federal Circuit discussed the requirements for a finding of willful infringement. Because a finding of willfulness authorizes the court to award treble damages, the issue is significant. The district court cited two bases in support of its finding of deliberate, willful infringement: (1) that the defendant could not have reasonably relied on its counsel's opinion of non-infringement because the opinion failed to address either the prosecution history or the validity of the patent in question, and (2) that the defendant failed to follow the advice of counsel when it, without obtaining an opinion, manufactured products it later admitted (through a stipulation) infringed.

With respect to the first ground cited by the district court, the Federal Circuit found the opinion letter did in fact report the prosecution history. In addition, the court found opinions are not required to address a patent's validity to negate a finding of willful infringement as to that patent. Rather, "the test is whether, under all the circumstances, a reasonable person would reasonably conduct himself with any confidence that a court might hold the patent invalid or not infringed." Moreover, the fact that a district court disagrees with an opinion's conclusion does not in and of itself render reliance on that opinion unreasonable. Whether or not an opinion was "legally" correct is not the proper focus.

With respect to the second ground cited by the district court, the court found that while a small number of infringing devices were made without the approval of Bink's counsel, the record clearly indicated this was due to carelessness or inadvertency by technical personnel, not disregard for patent rights by management, and accordingly was insufficient to support a finding of willfulness.

Footnotes:

1. Patents contain a "specification" and "claims." The specification is a written description of the invention, sometimes supplement ed by figures or drawings. Claims are the numbered paragraphs appearing at the end of the patent's specification. The claims contain the words used by the inventor to describe the invention and define the scope of the patent's protection.

2. As a corollary to this holding, the court noted that because claim interpretation is a matter of law, it is reviewed de novo on appeal.

3. Some have suggested that claim interpretation issues could be determined on a motion for summary judgment. However, if there is genuine dispute as to an issue of fact it could be argued that summary judgment is improper under Fed. R. Civ. P. 56. See B.R. Pravel (Houston, Texas), Is the Jury System Working in Patent Cases, speech delivered at Inventor's Hall of Fame Program at Akron, Ohio (July 21, 1995).

4. The "function-way-result" test provides that a patent is infringed under the doctrine of equivalents if the accused product or process and the patented product or process perform substantially the same function in substantially the same way to obtain the same result.

5. Evidence of the infringer's state of mind is, of course, relevant to damages. A finding of willful infringement can be the basis for awarding treble damages.

6. Kelley did not appeal the award of lost profits for the MDL 55.