New Trends in U.S. IP Litigation Relevant to German Companies

ROPES & GRAY LLP

New Trends in U.S. IP Litigation Relevant to German Companies Presentation at German American Lawyers Association – Apr. 24, 2010

By: Eric R. Hubbard

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New Trends in U.S. IP Litigation

Following recent U.S. Supreme Court decisions, lower U.S. Federal courts are rendering decisions that may favor German corporate defendants and their U.S. subsidiaries in IP actions

• Pleading requirements: Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 129 S. Ct. 1937 (May 18, 2009)

• Federal court jurisdiction: Hertz Corp. v. Friend, 130 S. Ct. 1181 (Feb. 23, 2010)

• Extra-territorial reach of U.S. patents: Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007); Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348 (Fed. Cir. 2009)

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Pleadings

A pleading that states a claim for relief requires “a short and plain statement of the claim showing the pleader is entitled to relief.” - Fed. R. Civ. P. 8(a)(2)

Bell Atlantic v. Twombly, 550 U.S. 544 (2007) • New York suit alleging Antitrust “unlawful agreement” claim• Challenged sufficiency of pleading that defendants engaged in “parallel

conduct” without alleging additional facts concerning an agreement• Appellate Court allowed, following low standard in Conley v. Gibson,

355 U.S. 41 (1957):− The rules “do not require a claimant to set out in detail the facts upon

which he bases his claim”− A “complaint should not be dismissed for failure to state a claim

unless it appears beyond doubt that plaintiff can prove no set of facts . . . which would entitle him to relief”

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Pleadings

Bell Atlantic v. Twombly, cont.

• U.S. Supreme Court reversed and imposed a new requirement: the plaintiff must plead facts that plausibly suggest, and are not “merely consistent with” an unlawful agreement

• Basic “plausibility” inquiry: whether party pled enough facts to raise a “reasonable expectation that discovery will reveal evidence of” the asserted claim

• Court focused on policy concerns: observing the high cost of discovery in antitrust cases; and the inability of district courts to reasonably limit those costs

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Pleadings

Post Twombly—confusion in the lower courts—e.g., does heightened pleading standard apply to non-antitrust cases?

Ashcroft v. Iqbal, 129 S. Ct. 1937 (May 18, 2009):

• An arrested Pakistani Muslim claimed violation of his constitutional rights by post-9/11 policy classifying detainees as persons of “high interest” solely based on race, religion, and national origin

Appellate Court:

• Twombly mandates a “flexible plausibility” standard: some factual allegations are required in those contexts where amplification is needed to render the claims plausible

• Held: Iqbal was not one of those contexts

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Pleadings

Ashcroft v. Iqbal, cont.

• U.S. Supreme Court reversed: Twombly’s “plausibility” standard is the governing pleading standard in all federal cases

• Two-pronged analysis: (1) identify factual allegations in pleading; and (2) do they show a plausible entitlement to relief?

• Held: Iqbal pleadings were not sufficient since pleaded “facts” equally consistent with a lawful purpose

− Not surprising that a legitimate policy would produce a “disparate, incidental impact on Arab Muslims, even though purpose was not to target Arabs or Muslims”

• In determining plausibility, courts should rely on “judicial experience and common sense”

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Pleadings

Twombly and Iqbal effect on IP litigation:

• Requirement of more factual pleading may pose an early obstacle to IP plaintiffs in bringing suit

• Defendants may now have more ammunition in dismissing spurious infringement and trade-secrets claims

• U.S. Litigants depend heavily on extensive discovery during litigation. Some plaintiffs will be forced to obtain more factual information by means other than litigation discovery

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Twombly & Iqbal applied by lower courts

After Iqbal, some Federal District Courts are requiring more factually detailed pleading in patent infringement cases

Federal Rules Suggested Form for Patent Infringement Complaint -- Form 18 (pre-Iqbal) --

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Colida v. Nokia, Inc., 2009 U.S. App. LEXIS 21909 (Fed. Cir. 2009) (Iqbal requires heightened pleading in design patent litigation)• Pled cell-phone infringed “clam-shell design” in four patents

• Dismissed as failed to plead which patents contained the clam-shell design, where the design appears in the accused product, or “any other facts relevant to the question of infringement”

• Observed that, while no argument was made that complaint was sufficient under Federal Form 18 – “Form 18 is a sample pleading for patent infringement, but is not tailored to design patents and was last updated before the Supreme Court's Iqbal decision”

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Bender v. Motorola, Inc., 2010 U.S. Dist. LEXIS 26076 (N.D. Cal. Feb. 26, 2010) (Iqbal requires specificity in identifying accused product)

• Utility Patent case, pled infringement by broad general categories of defendant’s products

− “products [including], without limitation, cell phones, computers, network drivers, high definition television sets, ultrasound machines, MRI machines, lab equipment, . . . [etc.]”

• Held: not required to plead “each element of the claims of the asserted patent,” but must “provide fair notice of the basis” of the infringement claim

• Dismissed as failing to accuse a particular product or line of products

− Necessary “to give the Defendant fair notice of the claims being alleged against it”

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R&L Carriers, Inc. v. Affiliated Comp. Servs., Inc., 2010 U.S. Dist.LEXIS 16110 (S.D. Ohio Feb. 23, 2010) (Iqbal requires heightened pleading for Indirect Infringement claims)

• Indirect Infringement: inducement and contributory infringement

− Inducement: An act intended to induce another to infringe a known patent

− Contributory Infringement: Offering a non-staple material component of a known patented invention, knowing component is especially made or adapted for use to infringe

• Indirect Infringement requires a predicate of direct infringement

• No Federal Form for pleading Indirect Infringement

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R&L Carriers, Inc. v. Affiliated Comp. Servs., Inc., cont.

• Court dismissed pleadings for:

− (i) not properly pleading inducement – no supporting facts that defendants knew of the asserted patent and specifically intended to induce infringement

− (ii) not properly pleading contributory infringement – no supporting facts that defendants “especially designed their product for infringing use by others” and that those products lacked substantial noninfringing uses

• Court also noted that pleadings were deficient because the plaintiff did not “plead specific facts plausibly establishing that direct infringement of the [p]atent has occurred, i.e., that a third party has actually performed each step of the patented method.”

− Open question whether required to plead more factual support of direct infringement (than required by Federal Form 18) when pleading indirect infringement

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Brinkmeier v. Graco Children’s Prods., 2010 U.S. Dist. LEXIS 12916 (D. Del Feb. 16, 2010) (Iqbal requires heightened pleading for False Marking claims)

• False marking requires: (1) marking an unpatented article and (2) an intent to deceive the public

− fine of < $500 for “each offense”

− Right for “any person” to sue for false marking. Civil plaintiff and U.S. Government split damages

• Recent increase in false marking cases stemming from decision that “each offense” = each falsely marked product

− Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009)

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Brinkmeier v. Graco Children’s Prods., cont.

• Plaintiff pled the marked patents were either (i) expired or (ii) didn’t cover the products, therefore the defendant:

− “cannot have any reasonable belief that such products are protected by such patents”

− “upon information and belief [] marked products … for the purpose of deceiving the public …”

• Court dismissed most of the pleadings as “‘mere labels and conclusions’ prohibited by Twombly,” without supporting facts

• Court found sufficient factual support for one false marking claim: when pled that defendant had twice litigated the allegedly falsely marked patent, and at least 3 times revised its patent markings since that patent had expired

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Other courts are resistant to changing the pleading standard

Mark Iv Indus. Corp. v. Transcore, L.P., 2009 U.S. Dist. LEXIS 112069 (D. Del. Dec. 2, 2009)

• Given “the practical difficulties of pleading patent infringement with more specificity than that required by Form 18, it is evident that Iqbal does not require the degree of specificity demanded by” the defendant

Elan Pharma Int’l Ltd v. Lupin Limited, 2010 U.S. Dist. LEXIS 32306 (D.N.J. March 31, 2010)

• Generic counterclaim pleading of non-infringement and “invalid under one or more provisions of 35 U.S.C. §§ 101-105” is sufficient

• Highlighted that local patent rules require greater specification from both parties early in the discovery process

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Tune Hunter, Inc. v. Samsung Telcoms. Am., LLC, 2010 U.S. Dist. LEXIS 31980 (E.D. Tex. Apr. 1, 2010)

• Iqbal does not require pleading additional facts for Indirect Infringement claims

• Found pleading of infringement by “music identification systems, devices, products, and/or components thereof” sufficient to give notice of accused product

• “[I]t is in the discovery phase of litigation, not pleading, that the parties are required to conscientiously develop facts that support the various theories of infringement, or non-infringement as the case may be”

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Heightened Pleading for Inequitable Conduct Claims

The Federal Circuit has recently raised the requirements for pleading inequitable conduct (“IC”) claims

Background

• In U.S. - Each individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the USPTO, which includes a duty to disclose all information known to that individual to be material to patentability

• IC requires a finding of both that information allegedly withheld or misdescribed is Material to patentability, and that the actor has an Intent to deceive the USPTO

• Claims of IC have historically been required to meet the special pleading standard of Fed. R. Civ. P. 9(b): “state with particularity the circumstances constituting fraud or mistake.”

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Exergen Corp. v. Wal-Mart Stores, Inc.

• Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312 (Fed. Cir. Aug. 4, 2009): Exergen’s patents related to infra-red thermometers to read human body temperatures. Lower court held that initial pleading did not satisfy the heightened pleading standard for inequitable conduct claims

• Federal Circuit: Agreed. Pleading inequitable conduct requires “identification of the specific who, what, when, where, and how of the material misrepresentation or omission committed before the PTO”

• Pleadings must also “allege sufficient underlying facts from which a court may reasonably infer that a party acted with the requisite state of mind” – facts concerning intent to deceive

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Exergen Corp. v. Wal-Mart Stores, Inc.

• Specific Pleading Deficiencies− “Who” – pled IC by “Exergen, its agents and/or attorneys.” Did Not

name the specific person who knew of materiality and had intent to deceive PTO

− “What” and “Where” – pled withheld references were material generally. Did Not “identify which [patent] claims, and which limitations in those claims, the withheld references are relevant to, and where in those references the material information is found”

− “Why” and “How” – pled which references were withheld. Did Not identify the specific portions of the references that were not cumulative, showing why material and how the examiner would use the information

− Intent: Failed to plead knowledge by a specific person of a specific material portion of the alleged withheld reference

• Net effect: Similar to Iqbal, heightened pleading standard required more factual detail to plead IC, and puts burden on alleged infringer to try and obtain this information before pleading IC

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Practical Advice for German Corporate Defendants

Careful analysis of emerging law in specific jurisdictions can benefit German defendants

1. Utilize heightened pleading requirements to gain early information about opponent’s case

2. Assert that Iqbal/Exergen require heightened pleading in other unexplored IP contexts, particularly where claims require proof of specific intent

3. Assert more facts of “direct infringement” are required in pleading indirect infringement claims against German companies

4. Anticipate requirements of pleading Inequitable Conduct

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Hertz Corp. v. Friend

The U.S. Supreme Court clarified the standard for jurisdiction based on diversity of the litigant’s state citizenship

Background

• Federal Courts can hear cases on questions of federal law or when the parties have a diversity of state citizenship and seek a monetary amount greater than the statutory threshold. 28 U.S.C. §§ 1331-32

• For Corporate parties, “citizenship” is (i) in state of incorporation and (ii) in state of principal place of business

• Lower courts have used a variety of inconsistent tests to determine “principal place of business” (nerve-center, business activities, total activities) – with different courts possibly considering companies as having “principal places of business” in different U.S. states

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Hertz Corp. v. Friend, 130 S. Ct. 1181 (Feb. 23, 2010): “principalplace of business” where “nerve-center”—typically corp. headquarters, where “high level officers direct, control, and coordinate the corporation’s activities”

• Rules meant to make determining federal jurisdiction “as simple as possible” creating predictability in whether federal courts are open to corporations

Litigation Effect:

• Reduces the amount of states where U.S. subsidiaries of German corps. can be found as “citizens” – so more likely to be diverse from plaintiff’s citizenship

• Companies faced with state law based IP claims – such as trade secret misappropriation claims – may have greater ability to remove state-court proceedings to federal court if desired

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Hertz Corp. v. Friend, cont.

• Open question whether language in Hertz could defeat diversity of Germany-based corporation with U.S. controlling officer or board member

− Cf Astra Oil Trading NV v. Petrobras Am. Inc., 2010 U.S. Dist. LEXIS 21921 (S.D. Tex. Mar. 10, 2010): examining whether company incorporated in the Netherlands has a “principal place of business” in California, based solely on U.S. address of CEO

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Extra-Territorial Scope of U.S. IP Laws

Recent U.S. Supreme Court decision and its progeny have reduced the extra-territorial scope of U.S. patents

Background

• 35 U.S.C. § 271(f): prohibits supplying components of a patented invention for combination abroad

− 271(f)(1) – prohibits supplying “a substantial portion of the components of a patented invention” uncombined to actively induce the combination outside the U.S.

− 271(f)(2) – prohibits supplying “any component” especially made for use in an infringing invention and not a staple article of commerce, “intending that such component will be combined outside of the United States”

• Allows patent holders to sue U.S. suppliers of German products/components, where the components are combined into any infringing article outside the U.S.

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Microsoft Corp. v. AT&T Corp.

Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007): Microsoft shipped computer code on a master disk or by electronic transmission to vendors outside the U.S. for copying onto computer-readable disks and installing onto allegedly infringing computers

• Supreme Court limited the scope of § 271(f), holding:

− Code on a Master disk or electronic transmission is not loaded onto any infringing computer - only the foreign-copied CD-ROMS are - therefore not a component for purposes of § 271(f)

− Foreign made “copy” was not made in the U.S. – therefore not supplied from U.S. for purposes of § 271(f)

− Rationale: The Supreme Court “[r]ecogniz[ed] that § 271(f) is an exception to the general rule that our patent law does not apply extraterritorially, we resist . . . an expansive interpretation”

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Cardiac Pacemakers, Inc. v. St. Jude Med., Inc.

In Cardiac Pacemakers, the Federal Circuit applied the reasoning in Microsoft, and limited the extra-territorial reach of § 271(f) further

Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348 (Fed. Cir. 2009): Patent on a heart stimulation method using an implantable cardiac defibrillators. Patentee sought damages on ICDs shipped overseas to be used in alleged infringing method

• Held (en banc): § 271(f) does not apply to method claims

• Rationale:

− the Supreme Court in Microsoft Corp. v. AT&T Corp. “sent a clear message that the territorial limits of patents should not be lightly breached”

− intangible steps of method claims are not components for purposes of § 271(f)

− “physical impossibility” to supply an intangible step of a method claim for purposes of § 271(f)

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Conclusion

• The U.S. Supreme Court decisions concerning pleading standards may reduce some of the substantial discovery-related costs of spurious cases by deterring them at an early stage

− Some U.S. courts are willing to extend this rationale into IP actions, posing early obstacles for IP plaintiffs

− Whether this view will become universal is yet to be seen

• The U.S. Supreme Court has simplified U.S. federal jurisdiction concerning corporate citizenship

• U.S. Courts have reduced the overseas reach of U.S. patents

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QUESTIONS

• For more information, please contact:

Eric R. HubbardRopes & Gray1211 Avenue of the AmericasNew York, New York 10036-8704U.S.A.Phone: 212.596.9146Fax: 646.728.2552E-mail: [email protected]

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New Trends in U.S. IP Litigation Relevant to German Companies