COPYRIGHT (AND PATENT) MISUSE - IT'S NARROWER THAN YOU THINK

The copyright misuse doctrine does not prohibit a copyright owner from requiring that licensees use the copyrighted work only on it own products. It only prohibits the copyright owner from imposing conditions that prohibit the licensee from making competing products. That is one of the rulings in the recent Ninth Circuit case of Apple v. Pystar. Other discussions of interest in that case concern the validity of software developers issuing “licenses” rather than engaging in “sales” to avoid application of the first sale doctrine, and application of injunction standards in the absence of a presumption of irreparable harm. (See my post of July 13, 2011 for a discussion of the elimination of the presumption of irreparable injury in copyright cases.)

The doctrine of copyright misuse derives from the similar doctrine of patent misuse. Basically, it prohibits a copyright owner from using his copyright to inhibit competition in either products that compete with the copyrighted work or “tied” products. So, for example, in the patent context, once cannot require a licensee of a salt shaker patent to buy salt only from the licensor. One might think, then, that it could be copyright misuse to require that a user of copyrighted software use it only on the licensor’s hardware.

Not so, says the Ninth Circuit. In the Ninth Circuit, copyright misuse occurs only when the copyright owner seeks to prevent a licensee from using a competing product. In the Apple case, the court held that although Apple prohibited use of its software on non-Apple hardware, it did not commit copyright misuse because it did prevent the licensee from developing or using competing software or hardware.

With respect to the license/sale distinction, the court endorsed the principle that so long as the copyright owner restricts the uses that can be made of his product, he can call it a license and avoid the first sale doctrine (the principle that once there has been an authorized sale, the buyer can resell or use the product without restriction).

Notwithstanding the absence of a presumption of irreparable harm, the court found irreparable harm sufficient to impose an injunction, based on the facts that liability had been determined against the defendant, there was a history of infringement, and a significant (albeit unexplained in the court’s opinion) threat of future infringement remains. Hopefully that means that the demolition of the presumption of irreparable harm will not, as a practical matter, curtail the issuance of injunctions in many infringement cases, and infringers will not be able to successfully adopt the “infringe now, pay later” model.
 

Exergen and Bose: The Federal Circuit Revisits Fraud

The United States Court of Appeals for the Federal Circuit (“Federal Circuit”) recently published two opinions, a first enunciating a heightened standard for pleading inequitable conduct in a patent case under Rule 9(b) of the Federal Rules of Civil Procedure (“Rule 9(b)”); and a second clarifying the test for determining whether an applicant of a trademark application or registration renewal has committed fraud on the U.S. Patent & Trademark Office (“PTO”). In Exergen v. Wal-Mart Stores, Inc., et. al., despite the Federal Circuit’s reversal concerning both the validity of one Exergen patent and alleged infringement of two other patents by defendants, the court nonetheless proceeded to address the remaining inequitable conduct issue. The court took the opportunity to clarify and heighten at least the initial burden on an accused infringer attempting to allege patentee inequitable conduct. First noting that determination of an adequate pleading under Rule 9(b) alleging inequitable conduct in a patent case poses a question for Federal Circuit law, the court took the lead from the Seventh Circuit Court of Appeals, holding that there are two distinct requirements for pleading inequitable conduct under Rule 9(b); a factual requirement and a scienter requirement:

(i) factual requirement - the pleading party must first identify, with specificity, the who, what, when, where, and how the material misrepresentation or omission was committed; and,

(ii) scienter requirement - the pleading party must show sufficient facts from which a court can reasonably infer knowledge of the withheld material and a specific intent to deceive the PTO.

Specific intent, the court went on to say, must include a plausible suggestion of a “‘deliberate decision to withhold a known material reference’ or to make a knowingly false misrepresentation.” While acknowledging that scienter may be averred to generally using knowledge and belief type pleadings, the Court stressed that the pleading must nevertheless set forth specific facts upon which a belief is reasonably based. Thus, the Exergen court states that mere knowledge of the existence of a material prior art reference and the patentee’s failure to disclose that reference during prosecution falls below the threshold level for pleading inequitable conduct under Rule 9(b).

The court clearly noted that even when a party successfully pleads inequitable conduct by the patentee under Rule 9(b), that “to prevail on the merits, the accused infringer must prove both materiality and intent by clear and convincing evidence.” (citing Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1365 (Fed. Cir. 2008)). Thus, the Exergen court does not distinguish Star, but instead inserts a early, clear, and substantial hurdle to an accused infringer alleging inequitable conduct by requiring a substantial depth of factual knowledge regarding patentee conduct in order to reach through to the scienter requirement to provide an adequate pleading under Rule 9(b); a depth of ‘knowledge’ which in most cases will not be available to the accused infringer during the initial stages of litigation. While scienter has always been an element to inequitable conduct, the logical effect of the Exergen holding may be to curb accused infringers from generically including an inequitable conduct defense at the pleading stage. As suggested by Judge Pauline Newman in her dissent in McKesson Information Solutions v. Bridge Medical, litigation tends to distort the complex procedures of patent prosecution. Judge Newman argued that this distortion should be reduced by requiring a clear showing of deceptive intent on the part of the patentee. While McKesson directly addressed the merits of an inequitable conduct allegation during the trial phase, this concept, through Exergen, now seems to be in play at the early pleading stage through application of a strict factual requirement supporting an inference of the patentee’s specific intent to commit fraud on the PTO. Thus, for all intent and purpose, the Exergen holding may stem early accusations of inequitable conduct, at least leaving any such action to flow from information obtained during discovery in the form of a later amended pleading under Rule 15(a)(2).

The Federal Circuit again addressed the issue of fraud on the PTO in In re Bose, Appeal No. 2008-1448 (Fed. Cir., Aug. 31, 2009) (“Bose”). Bose initiated an opposition against the HEXWAVE trademark application, with Hexwave, Inc. filing a counterclaim for cancellation of Bose’s WAVE trademark, asserting that the Bose committed fraud on the PTO by submitting their Section 8/9 renewal application, a renewal application where Bose stated that the WAVE mark was still being ‘used in commerce’ on various products, including audio tape recorders and players. The Trademark Trial and Appeal Board (“Board”) determined that the tape recorder and players were no longer being manufactured and sold by Bose, but instead were presently subjected only to warranty-based repairs. The Bose General Counsel who signed the Section 8/9 affidavit testified to his believe that such activity constituted use in commerce, as required for renewal of a trademark registration. The Board disagreed, ruling that Bose committed fraud on the PTO, cancelling the WAVE registration in its entirety. Bose appealed. The Federal Circuit reversed, and methodically reviewed their own precedent on trademark fraud cases as well as their predecessor court, the Court of Customs and Patent Appeals, noting “[f]raud in procuring a trademark registration or renewal occurs when an applicant knowingly makes false, material representations of fact in connection with his application.” (quoting from Torres v. Cantine Torresella S.r.l., 808 F.2d 46, 48 (Fed. Cir. 1986)). And subsequently honing in on the intent of the applicant, based on the knowledge of the applicant; noting the prohibition of applicants “making knowingly inaccurate or knowingly misleading statements.” (quoting from Bart Schwartz Int’l Textiles, Ltd. V. Fed. Trade Comm’n, 289 F.2d 665, 669 (CCPA 1961), with emphasis provided in Bose). And so again, similar to Exergen, a showing of fraud under the Lanham Act requires a showing of a misrepresentation of a material fact, and that such misrepresentation was made knowingly by the applicant.

With this review in hand, the Bose court quickly zeroed in on an earlier Board decision in Medinol v. Neuro Vasx, Inc., 67 USPQ2d 1205 (T.T.A.B. 2003), where the Board held that a trademark applicant commits fraud when a representation of fact has been made to support an application, and that the applicant knows or should know that such a representation was false or misleading. The court took express exception with the Board, stating that the linking of subjective intent to the concept of “should have known” effectively, and erroneously, equates the fraud standard in trademark law to a simple negligence standard.

The Bose court, in similar fashion to Exergen (with Chief Judge Michel sitting on both panels) expressly stated that “[s]ubjective intent to deceive, however, difficult it may be to prove, is an indispensable element in the analysis” of fraud in procuring or retaining a trademark registration. While the court acknowledged that intent to deceive the PTO in these situations can be “inferred from indirect and circumstantial evidence,” nonetheless “such evidence must still be clear and convincing, and inferences drawn from lesser evidence cannot satisfy the deceptive intent requirement.” (citing Star at 1366).

The Exergen and Star decisions show the Federal Circuit’s desire to briefly and succinctly define and/or clarify the parameters required to support a showing inequitable conduct or fraud on the PTO. These decisions effectively signal that any such allegation must be supported by a stable of facts showing that the accused party understood that questionable actions amounted to deceitful activity in their dealings with the PTO.