Conley, Twombly, and Iqbal

Motion to dismiss denied!

Conley, Twombly, and Iqbal are different standards of proof to successfully initiate patent litigation. This varies between the states.  Consider this when incorporating your company.

From the standpoint of patent litigation, “Conley, Twombly, and Iqbal” are attorney speak for how much “meat” a patent infringement complaint must have in order to not get quickly tossed out of court under a motion to dismiss [rule 12(b)(6)]. So if you ever receive a patent infringement complaint, or plan to institute a patent infringement complaint, these names will become important to you.

Historically, it was very difficult for the average person to initiate litigation. In earlier centuries, pleading had to follow strict “code pleading” rules, where even minor defects could cause otherwise good cases to be tossed out of court.  In rebellion to this, in the 1930’s, when the modern Federal Rules for Civil Procedure were first established, the thinking was that everyone should be able to have their day in court. To do this, the standards for the initial pleading were set at a low “short plain statement” level (1957 Conley v. Gibson case).  So it didn’t take much to start a Federal lawsuit. The legal theory here was that deficiencies in the initial filing could be easily corrected by subsequent discovery motions. Justice for the masses – this would be great!

Fast forward to 2007 and the legal situation was actually not so great. The Federal courts were clogged with cases. Discovery motions notoriously chewed up large amounts of time and money, sometimes on the basis of initial pleadings that were a bit “thin”.

In the 2007 Bell Atlantic Corp. v Twombly case, the US Supreme Court (SCOTUS) took it upon itself to raise the standards for pleading.  As rephrased by SCOTUS in the later (2009) Ascroft v. Iqbal case: “…only a complaint that states a plausible claim for relief survives a motion to dismiss… While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.  Note the term “plausible”. It means “reasonable” or “believable”. This is where the standards get tightened, because the old standard was “possible”.

In practice, the court will initially assume that the complaint facts are correct, but then examine various alternative scenarios to see if there are plausible alternatives that are legally OK. For example, in the original Twombly case, collusion between telecommunications carriers was alleged. Facts showing that different carriers behaved in a similar manner were given, but no evidence of actual collusion was presented.  Here the “plausible” alternative scenario was that each was just independently protecting their own tuff without improper collusion. So the 12(b)(6) motion to dismiss was upheld.

Similarly, prior to Twombly, it did not take much to start a patent infringement lawsuit.  Just fill out a “Form 18” giving the patent number, an assertion of infringement, and a few other minor details and this was good enough.  In theory, after Twombly, standards should now be higher, but…

Ten years later, and due to intervening Federal Circuit rulings that encouraged continued use of “Form 18”, this higher standard is only now slowly trickling down to patent litigation. There are still significant inconsistencies between different states and different Federal District Courts. Before 2017, this didn’t matter as much because for patent infringement, a company could be sued anywhere.  But now, since the 2017 TC Heartland case, a company is usually sued in its state of incorporation.

So at present, we have a new and interesting situation where a company can apparently lower the risk of patent infringement lawsuits by incorporating in a state where the Federal Courts have higher standards.

35 USC 287: Marking inventions

Remember to mark your products!

To avoid damaging your patent rights, mark your products with patent numbers. The law covers devices but not methods, so marking software is a bit tricky.

You probably have noticed that some products are marked with the word “patent” and a list of patent numbers. These are usually written in small type somewhere on the product or on its packaging. If you (as a patent holder) are planning to start producing your own patented products, what happens if you don’t include this marking?

Because it is hard to tell what is and isn’t patented, Congress passed the 35 USC 287 statute (Federal law) to protect the public from accidental patent infringement. The law holds that absent such marking, your ability to recover past damages from an infringer can be very limited.  For example, past damages may only extend back to the time that you first sent a notice letter to the infringer. This law also covers your patent licensees (who often forget such markings) as well, so remember this for license negotiations.  Otherwise, your licensee could end up damaging your rights.

Although traditionally actual patent numbers had to be marked on the product, a few years ago it became OK to just use “virtual marking”. Here, just marking “patent or pat”, followed by a publically accessible web page address, is enough.  Virtual marking has advantages, but make sure the web page is actually “up”.

To prevent inadvertent loss of rights, it may seem safer to always err on the side of marking, but don’t overdo it.  There is a different law, 35 USC 292, designed to protect the public against false patent marking. So the general rule of thumb is to try to provide adequate patent notice, but avoid being deceptive.

35 USC 287 has some “bugs” and “features”

Bugs: Untended consequence — the law somewhat favors patent trolls. A patent holder who doesn’t produce anything (and hence has nothing to mark) can still recover past damages from up to six years earlier.

Features: Because it is hard to affix a mark to a method, 35 USC 287 generally doesn’t apply to methods patents.

But what about software and software implemented inventions? Software patents often contain a mixture of methods claims and device claims. However, software typically runs on (or is stored in) some sort of physical object. So is software covered by 35 USC 287 or not?  If so, what to mark, and how to mark it? What about websites and apps?

The courts have not been consistent here, and the law is still evolving. However, a fair number of court cases have required marking. It is safest to assume that patent marking is likely required, and then examine legal aspects as they apply to the specifics of your situation.

Selling patents

Selling patents is a bit like selling a house

For selling patents, try to create a family of commercially useful patents that are hard to design around and legally strong.  Know your market!

Although patents are best used to help inventors and startups attract funding and protect their products from copycats, sometimes the barriers to commercialization are just too high. Thus occasionally, alternative patent monetization approaches, such as sales, licensing, or litigation; may be a potential alternative. Here I discuss selling patents in a non-litigation context. Licensing and litigation will be discussed in later articles.

Your patents need to have good commercial potential, or else the game stops right here. The considerations include potential market size, market share, and value added by the patents.  The patents have to be “strong” (e.g. not easily invalidated on the basis of prior art, and not have a lot of loopholes).

To understand selling patents, consider the subject from the standpoint of a potential corporate purchaser. With the exception of “blocking patents” (which are relatively rare), for any given single patent, the corporate technologists will usually say “no problem, we can design around it”, and the corporate legal counsel will usually say, “no problem, we will come up with non-infringement/invalidity arguments”. Given this “no problem” input, if there is only one patent, the corporate decision maker will often decide to “risk it”, and if so, there will be no sale.

By contrast, when the corporate purchaser considers multiple patents, the assurances of the technologists and legal counsel decrease.  Technologist assurances that “we can design around it” become more guarded. Legal counsel, realizing that it may have to challenge multiple patents, will add up the potential costs and risks of multiple potential court cases, and also be less reassuring.  This is why, even for the strongest patents, most patent sales take place in the context of a family of related patents.

Patent valuation, and comparables: Although you may be tempted to put your pinky in your mouth and say “one hundred billion dollars”, market realities should be considered.  Just as there are real estate “comps” (average selling prices of houses in a neighborhood) and real estate valuation schemes, so there are “patent comps” and various techniques to measure patent valuation. Corporate purchasers have to justify their expenses to their upper management or their board of directors.  This justification becomes harder as the patent price moves outside of typical comps and valuation schemes. So it is important to be aware of these comps and valuation schemes, and set your expectations and negotiating strategies accordingly.

Selling methods: There are various methods of selling patents, including direct corporate deals (the traditional method), online auction sales, sales using brokers, and sales to NPE (non-practicing entities – formerly big, lately less active). As in any financial transaction, it is helpful to try to position yourself to negotiate from a position of strength (e.g. have financial means to walk away from bad deals) and to approach the transaction in an informed manner.

Medical procedure patents

tux surgeon
Patents on surgical methods?

Under Federal law 35 USC 287(C), US physicians and other medical practitioners have a limited immunity to certain types of medical procedure patents.

US patent laws allow patents for inventive methods (such as procedures), devices (such as gadgets), and compositions of matter (such as drugs). But should we allow medical procedure patents to be used against medical practitioners?

What is a medical procedure patent? Some historical examples include 1) a new and improved method of making surgical incisions on patient corneas; 2) the first medical use of ether (first anesthetic); 3) the first use of ultrasound for fetal gender evaluation.

Public policy here is a bit uncertain.  We don’t want our physicians to be afraid to try new procedures.  In fact, we want them to use the best procedures possible. But if we don’t financially reward innovation (through patents), then this could stifle further medical progress.  So in the US, and indeed throughout the world, almost everyone is debating this basic question: should medical procedure patents be allowed, or not?

Over about the last 100 years in the US, the pendulum has swung back and forth between “no” and “yes”. Our present 1997 era law, as described by 35 USC 287(C), is somewhere in the middle.  In what is a bit of a strange compromise, the US generally allows medical procedure patents but doesn’t always let you enforce them!  So unless you are aware of this unusual rule, you might accidentally end up getting a medical patent of little value because the law might not let you enforce it.

The trick to avoiding this unfortunate situation – having a medical procedure patent that lacks value due to restrictions on enforcement, is to consider 35 USC 287(C) and write claims that limit the impact of this strange exception.

The good news, from the standpoint of inventors and startups, is that the enforceability carve-out aspects of this law are quite narrow. Patents for devices and compositions of matter are just fine and can still be enforced. Further, under the patent legal rule of “contributory infringement“, you may also still be able to enforce against manufacturers who are teaching use of their products for your patented medical procedure.

So in practice, US rules regarding medical procedure patents are not all that restrictive. The trick is that if you are trying to patent a new medical procedure, think a lot about what devices or medical supplies might be needed to implement your new procedure.  Claim them, and when you get to writing the medical procedure claims, think about contributory infringement as well.

Thales patent eligibility ruling

HMD display
Not the Thales Head Mounted Display!

A recent Federal Circuit case, Thales Visionix Inc. v United States, continues the process of restoring sanity to the ongoing “Alice” patent eligibility mess.

As previously discussed, since the Supreme Court’s 2014 “Alice” decision, patent law has been burdened with an unworkable “is it abstract?” test for patent eligibility. This test is similar to a medieval test to determine witches:  Step 1:determine if the test subject is a witch abstract”;  Step 2:if so, does the witch float? is there something more?”

The Federal Circuit, charged with cleaning up patent law, has been slowly chipping away at this nonsense. In two earlier cases (Enfish and Rapid Litigation), the Federal Circuit established at least a few reasonable step 1 rules (such as read the entire claim), and now we have another.

Thales Visionix had a patent on a motion-tracking Head Mounted Display (HMD).  This patent claimed a HMD arrangement of inertial sensors and signal processing elements, used in the F-35 fighter jet. Any enemy pilot blown up by this HMD system might not consider this to be “abstract”, but a lower US court was not so easily impressed. They used their own “Alice: it’s abstract” weapon to shot down the HMD patent.

In the absence of rules (the Supreme Court thoughtfully declined to provide any), lower courts have often used a type of “guilt by association” logic, where if a given patent claim has some elements in common with another claim previously ruled to be abstract, then that claim is also abstract. The lower court argued that the Thales patent claims were abstract because the claims allegedly “used mathematical equations (previously determined to be abstract) for determining the relative position of a moving object to a moving reference frame”.

However the Federal Circuit disagreed.  They determined that just because a claim contains a patent ineligible (abstract) concept (e.g. mathematical equations) does not mean that the entire claim is (step 1) “abstract.” Rather, the question is if the patent ineligible concept (math, natural law) is being used to improve some other technique. If so, then the claim as a whole is not abstract. This is similar to their earlier, more biotech-focused, ruling in the Rapid Litigation case.

So as a medieval logic analogy, just because a woman has a cat does not automatically mean that the woman is a witch, if the cat is unusually good at catching mice. If improved mouse catching can be shown, the step 1 conclusion is that the woman is not a witch. There is no need to go on and subject the poor woman to a step 2 “witch float” test.  This is good, because there is a high casualty rate at step 2.

Patent demand letters

Frustrated patent troll
Frustrated patent troll

Patent demand letters are stressful.  Before responding or ignoring, evaluate infringement, patent prosecution history, ownership, and litigation history.

Has your startup received a “demand” letter asserting that you are infringing on a patent?  Although real infringement of valid patents does occur, and some of these letters are legitimate, many demand letters are sent in less than 100% good faith. The sender may be betting that the startup will settle quickly to avoid litigation costs, regardless of the actual merits of the situation.

Don’t immediately contact the sender, and don’t ignore the letter either.  Instead, calm down and evaluate the facts, preferably with the help of a patent attorney.  Is there a plausible infringement problem or not?  How to tell the difference?  A few common methods are discussed below.

To start, get: 1) a copy of the issued patents discussed in the demand letter, 2) the USPTO prosecution history of these patents, and 3) information about the allegedly infringing product.  If the letter doesn’t provide actual issued patent numbers, or if the letter only cites patent application numbers, the probability that the letter is bogus becomes higher.

Look at the independent claims for each patent (claim 1 is not always the broadest claim), and see if your allegedly infringing product infringes the entire wording of any independent claim. If so, look at the relevant dependent claims for more detail. If the letter argues contributory infringement, combine your product with the other accused product for this analysis, and check if your marketing literature is promoting this combination.

The patent prosecution history for the patents in question, usually downloadable from the USPTO, can be very relevant. This history will often reference if the patent has been used in litigation before; if the patent has been reevaluated by either reexamination or the Patent Trial and Appeal Board (PTAB); and if the patent applicant had to make significant concessions during the patent prosecution history.

The patent’s USPTO assignment records can be used to better understand the relationship between the sender and the actual patent owner of record. This is often obfuscated. What is this relationship, and is the purported patent owner the real patent owner?

If there is a history of litigation, check it out. Patent litigation usually takes place in Federal Courts.  This is usually available through PACER (Public Access to Court Electronic Records) and a number of other sources. Has the patent owner been filing a lot of lawsuits and then settling before the court reaches a decision, or does the patent owner usually win?

There are many other issues that can be explored as well, but this type of information can help you and your attorney better evaluate what your next steps should be.

Patent claim charts

Patent claim chart, with one row not matching
Patent claim chart, with one row not matching

Think that someone is infringing on your patent?  Worried you are infringing, or want to show a patent reads on prior art?  Analyze with patent claim charts.

The basic idea behind a patent claim chart is to first break a given patent claim down into a series of smaller sections, and then to determine if each smaller section matches a corresponding aspect of a target of interest. This target may be a potentially infringing product or service, another patent, or even a public domain product or service (to try to show that a patent may be invalid).

Patent claim charts usually follow a row and column table format.  One column contains various sections from a claim of interest, spread out over a number of rows.  Another column contains various aspects of a target of interest, also spread out over a number of rows.  Rows containing sections from the claim column are compared with rows containing aspects from the target column.

If can be shown that every row from the claim column exactly matches up to one or more rows from the target column, then this suggests that claim does describe the target. Note, however, that although every claim row must match with a target row, there is usually no reverse requirement that every target row match-up with a claim row.

Sounds simple, but the devil is in the details.  Since patent claim charts are often part of an adversarial process, each side may feel under pressure to “slant” their claim charts in a way that favors their particular position.

Claim charts can be slanted in many ways.  One of the most common ways is to write the chart in a way that skips over important details, often by not breaking the claim down into small enough sections.

Some of the comparisons may not be accurate.  Also, remember that individual claim terms can sometimes be misleading because they may have been defined in the text of the patent application (or during prosecution), in a somewhat unexpected way.

So read and write claim charts with caution and skepticism.  Don’t use sloppy claim charts to initiate any legal action.  Of course, don’t blindly accept claim charts from others without doing your own independent analysis.

Common law trademarks

Common law trademarks can shield against Federal trademarks
Common law trademarks can sometimes shield against Federal trademarks

Think that a Federal US trademark applies throughout the US? Not always. Welcome to the murky world of common law trademarks.

Under trademark law, certain types of legal rights, often called “common law trademark rights”, automatically (without any registration) go into effect as soon as someone starts using some sort of distinctive mark (word, logo) to identify a product or service that they are selling in commerce.

Common law trademarks are murky because it is often hard to determine who first used a particular mark to sell a particular product or service at a particular geographical location.

Sounds strange?  To better understand common law trademarks, think back to an earlier era when long distance communication was poor and most commerce was local. In earlier eras, Federal and state-level trademark registration systems were either non-existent or impractically hard to use.

Occasionally different merchants, located in geographically different areas and unaware of each other, would innocently start using confusingly similar marks for their local products and services. The problem might go undetected for years until one merchant eventually expanded into another’s geographic area. Customers would then get confused, and the merchants would file lawsuits.

It wasn’t fair to strip an innocent merchant of all rights to their mark.  As a compromise, at least for merchants who had been clearly acting in good faith, the courts would often award each merchant exclusive local trademark rights to their respective marks.  As a result, under common law, different merchants, operating in geographically different areas, could even legally use the same trademark.

Communications and transportation improved, and the need for a Federal level trademark system became apparent.  However Congress faced some problems: 1) due to Constitutional limitations, they believed that they lacked authority to phase out the older, state-level, common law system; 2) it wasn’t even a good idea to phase-out the older system because it was still very important to commerce. Congress’s solution was to acknowledge that the older system would continue to operate and to make the newer Federal trademark system “backward compatible” with the older common law trademark system.

The net effect is that although a Federal trademark normally gives exclusive rights throughout the US, there are some limited common law trademark exemptions or defenses, such as 15 U.S. Code § 1115 (b)(5) and (6).

Consider a merchant (company) who didn’t register a Federal trademark, but who was otherwise innocently using their mark in geographic region “A”.  Assume that this use was prior to the Federal trademark filing of a confusingly similar mark by another merchant, previously only selling in geographic region “B”.  Under 15 U.S. Code § 1115 (b)(5) and (6), the merchant in region “A” can argue “common law rights”, and with adequate proof keep using this mark in region “A”. The Federal trademark holder (the other merchant) will otherwise have full US rights outside of region “A”.

Halo and reckless infringement

The Halo decision
The Halo decision

The Halo decision; and how to avoid court-ordered punitive damages for culpable patent infringement (recklessly infringing known patents)

One problem that both startups and established corporations face is what to do in situations where their product might infringe on someone else’s patent.  If the corporation ends up in court, and a judge determines that the infringement was somehow unusually extreme (e.g. egregious), then the judge may punish the offender by awarding up to three times actual damages (punitive damages). This can severely damage or destroy the infringer.

But what is “unusually extreme”?  Is it when an engineer is worried about a particular patent, or a competitor sends a warning letter, but the company proceeds anyway?  How close does the product have to match the patent?

The law has been going back and forth on this.  Earlier the rules were strict. Then the rules became so lax that punitive damages were hardly ever awarded. Now, in the June 2016 case of Halo Electronics v. Pulse Electronics, SCOTUS (Supreme Court of the United States) has clarified that the rules are somewhat in-between these two extremes.

In the Halo decision, SCOTUS clarified that what is relevant is “culpability”, which in essence is the state of mind of the person (actor) at the time of the conduct.  In a corporate setting, this is likely the state of mind of the decision makers at the time they either decided to launch the product, or decided to keep selling in the face of some knowledge of infringement.

In particular, the issue is one of acting recklessly (not like a normal person) and/or with willful misconduct while knowing that there was a patent infringement issue.  The court can determine this if the majority of the evidence supports this conclusion (i.e. preponderance of the evidence standard).

Getting advice of legal counsel:

Earlier, when the rules were strict, the courts, in essence, created a duty to get the advice of legal counsel before acting. However later, when the rules were lax, there was not much of a need for this.  Courts in this era set the threshold for punitive damages so high that such damages were almost never awarded.

Now, with the present rules, the situation is in-between.  Failure to get the advice of legal counsel does not automatically prove that a company acted recklessly. However getting advice before acting (e.g. launching a product) can help prove lack of recklessness. Timely advice can help establish that the company acted with normal caution, thus hopefully avoiding punitive damages.  But note that there is a timing issue:  the legal standard is the state of the mind at the time of the (infringing) conduct. SCOTUS is not impressed by legal arguments concocted afterwards.

Contractor ownership of IP

Agree on IP ownership in advance
Agree on IP ownership in advance

The ownership rules for copyrights, patents, and other IP vary depending on if the IP creator is an employee or an independent contractor.

In today’s world, the distinction between employee and independent contractor is often blurred, but legally, these two forms of working are very different.  As a result, whether you are working as an employee or independent contractor, or hiring employees or independent contractors, it is good to be aware of how these different types of work engagements impact IP ownership rights.

These laws can vary from state to state.  Consider California. Generally, work done by an employee for an employer, at the employer’ request, does belong to the employer. However the IP assignment process is not always automatic (patents, for example, generally need to be assigned to the employer in writing).

One of the reasons why California has a booming high-tech economy is that California labor code sections 2870-2872 mandate (with certain exceptions) that work that does not relate to an employer’s business (and is done with the California employee’s own time and materials) generally belongs to the employee. However, this section of California law may not protect independent contractors.  So if you are an independent contractor, you may want to negotiate this.

US copyright law (writing, art, software, etc.) also distinguishes between employees and contractors. For employees, copyright ownership for works made for the employer typically goes to the employer. However for independent contractors, absent a signed written agreement (such as a work made for hire agreement) that copyright ownership is being transferred, often ownership remains with the independent contractor.  So if you are hiring an independent contractor, absent a written agreement, just because you paid for something doesn’t automatically mean that you own it!

How to distinguish an employee from an independent contractor?  Generally, the difference is the amount of control.  For an independent contractor, whoever is paying can control the work result, but generally not how the work is done.  By contrast, even an employer who gives his employees freedom still has the legal right to specify how the work is done.

Regardless of work arrangement, it is always a good idea to work out the issues of who is going to own what in writing and in advance.  For employees, spell this out with a proprietary information and inventions agreement. For independent contractors, negotiate and sign an agreement on these issues before starting work.  This topic often comes up in due diligence.