Draft Report on Senate Patent Reform Bill: Inequitable Conduct Provisions

    By Kevin E. Noonan --

As we reported last week, a draft of the Senate Judiciary Committee's report on the Patent Reform Act of 2007 (S. 1145) has been circulated on the internet.  The 106-page draft report contains sections on the background and purpose of the bill, the legislative history of the bill, a section-by-section summary of the bill, a placeholder for a cost estimate, a regulatory impact evaluation, and a list of the changes to Titles 15, 28, and 35 that would result if the Senate bill were passed into law.  The circulation of the draft report suggests that Senator Patrick Leahy, Chairman of the Senate Judiciary Committee, intends to keep his mid-December patent reform bill pledge to seek "favorable Senate action as early as the floor schedule permits" (see "Patent Reform Discussed on Senate Floor").  In view of the length of the draft report, Patent Docs has been providing a discussion of selected sections of the bill since the draft report began to circulate.  Today, we address section 12 of the bill.

Section 12 of S. 1145 amends Title 35 to add new Section 298, as follows:

§ 298. Inequitable conduct

A party advancing the proposition that a patent should be cancelled or held unenforceable due to inequitable conduct shall prove independently, by clear and convincing evidence, that material information was misrepresented, or omitted, from the patent application with the intention of deceiving the USPTO.  Information is material if a reasonable examiner would consider such information important in deciding whether to allow the patent application; any such information is not cumulative.  Although intent to deceive the USPTO may be inferred, it may not be done so based solely on the gross negligence of the patent owner or its representative, or on the materiality of the information misrepresented or not disclosed.  The party asserting the defense or claim shall comply with the pleading requirements set forth under Federal Rules of Civil Procedure 9(b).  If the court finds inequitable conduct, the court has discretion to (1) hold the entire patent unenforceable, (2) hold 1 or more claims unenforceable, or (3) hold that patentee is not entitled an injunction.

The draft report advises that the intent of this new section is to codify (for the first time) the inequitable conduct defense and the consequence of unenforceability to a finding that a patent (or any claim thereof) was obtained through inequitable conduct.  Like obviousness (in the context of patentability), the inequitable conduct defense was originally developed by the courts; unlike obviousness, the defense was not codified in the 1952 Patent Act.  A succinct statement of the equitable basis for the defense can be found in the Supreme Court's Precision Instrument Mfg. Co. v. Automotive Maintenance Machine Co. opinion:

A patent by its very nature is affected by a public interest.  As recognized by the Constitution, it is a special privilege designed to serve the public purpose of promoting the "Progress of Science and useful Arts."  At the same time, a patent is an exception to the general rule against monopolies and to the right to access a free and open market.  The far-reaching social and economic consequences of a patent, therefore, give the public a paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope.

324 U.S. 806, 816 (1945).  Despite this "paramount [public] interest," however, there was no positive, affirmative requirement in either the Patent Act or USPTO regulations that an applicant honor a duty of candor until 1977.  The first version of Rule 56, embodying and imposing this duty of candor, required disclosure of "[material] information where there is a substantial likelihood that a reasonable examiner would consider [the information] important in deciding whether to allow the application to issue as a patent."  This standard was modified in 1992, to recite that "information is material to patentability when it is not cumulative to information already of record or being made of record in an application, and (1) it establishes, by itself or in combination with other information, a prima facie case of unpatentability of a claim; or (2) it refutes, or is inconsistent with, a position the applicant takes in: (i) opposing an argument of unpatentability relied upon by the Office or (ii) asserting an argument of patentability"; which is the current standard.

In practice, the inequitable conduct defense is almost always asserted, becoming by the late 1980's a "plague on the patent system."  Burlington Industries Inc. v. Dayco Corp., 849 F.2d 1418 (Fed. Cir. 1988).  Part of that plague, according to the draft report, has been inconsistent definitions of what constitutes a reference "material to patentability" under the Federal Circuit's jurisprudence.  (This assertion, as well as the revisions to statutory damages provisions, both evince the same disparagement of the Federal Circuit's work by Congress as has been evidenced by the Supreme Court (see "Is It Time for the Supreme Court to Stop Flogging the Federal Circuit?") and a desire for the Court's discretion to be bounded by more certain statutory requirements.)  These five definitions are (according to the draft report):

(1) the objective "but for" standard, where the misrepresentation was so material that the patent should not have issued;
(2) the subjective "but for" test, where the misrepresentation actually caused the examiner to approve the patent application when he would not otherwise have done so;
(3) the "but it may have" standard, where the misrepresentation may have influenced the parent examiner in the course of prosecution;
(4) the old Rule 56 standard where it is likely a reasonable examiner would have considered the information important in deciding whether to issue of the patent; and
(5) the new Rule 56 standard where the information is not cumulative and (i) establishes a prima facie case of unpatentability (either alone or in combination with other references), or (ii) refutes or is inconsistent with a position the applicant has taken (the new Rule 56 standard).

See Digital Control Inc. v. Charles Machine Works, 437 F.3d 1309, 1314-16 (Fed. Cir. 2006); see also American Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1362 (Fed. Cir. 1984).  The Federal Circuit justifies these different tests on the grounds that there is "no reason to be bound by any single standard," a stance the draft report clearly rejects.

The Senate Judiciary Committee's report asserts that the new Section 298 of Title 35 "codifies and improves the doctrine of inequitable conduct."  The draft report discusses the purpose and intent of each subsection:

• Subsection 298(a) requires a party advancing an inequitable conduct argument to prove that claim by clear and convincing evidence, as does current inequitable conduct jurisprudence.

• Subsection 298(b) codifies the "reasonable examiner" test, finding a reference to be material to patentability if the reasonable examiner would consider the non-cumulative information important in deciding whether to allow the patent application.  The draft report singles out this provision as being relevant to overcoming a misapplication of the law by the Federal Circuit.  Specifically, the draft report states that the Federal Circuit has appeared "to emphasize improperly the first part of this definition (reasonably important to an examiner) without giving necessary consideration to the latter part of the definition (in deciding whether to allow the patent)," citing Nilssen v. Osram Sylvania, Inc., 2007 WL 2937322 (Fed. Cir. 2007); McKesson Information Solutions, Inc. v. Bridge Medical, Inc., 487 F.3d 897 (Fed. Cir. 2007); Ferring B.V. v. Barr Labs., Inc., 437 F.3d 1309 (Fed. Cir. 2006).  However, nothing in the cases cited in the draft report indicates that the Federal Circuit failed to consider the entire scope of the materiality standard with respect to the "ultimate" question of whether a patent would have been granted over the undisclosed prior art.

• Subsection 298(c), consistent with current case law, permits an intent to deceive the Patent Office be inferred, but limits the inference to exclude cases of merely "gross negligence" (on either the applicant's or their representative's part) and further is not to be based on the materiality of the information or reference either misrepresented or not disclosed.  This portion is the most significant change, since it prevents application of the "balancing test" used by the court to find inequitable conduct when information of high materiality is misrepresented or not disclosed.  While having some logic with regard to the "gross negligence situation," this subsection would appear to make more difficult a challenge based on nondisclosure of highly material information where there is little or no evidence of intent.  Since the Federal Circuit, and the draft report, recognize that there is rarely direct evidence of intent, this provision may reduce the effectiveness (and as a consequence, the frequency) of inequitable conduct determinations.

• Subsection 298(d) that a party asserting the defense or claim comply with the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure.  The pleadings requirement is intended to address the potential for harassment by infringers during patent litigation.

• Subsection 298(e) grants the court discretion to fashion the appropriate remedy (presumably under the "exceptional case" standard).  The remedies section is intended to address the potential for harassment by infringers during patent litigation, and the remedies section is intended to give District Courts greater discretion than they currently have (where an inequitable conduct finding renders all claims unenforceable); the provision regarding injunctions is consistent with the equitable nature of injunctive relief and inequitable conduct itself.

The entire new Section 298 is intended, the draft report asserts, to "not chill meaningful disclosures with the Office for fear of a future allegation."  The section clarifies at least three aspects of the inequitable conduct defense:  imposition of the "reasonable examiner" test; elimination of the balancing inquiry between materiality and evidence of intent; and increased discretion for courts to decide how draconian (or not) is the penalty a patentee must pay for committing inequitable conduct.  It also would appear to refute the proposition that misrepresentation is almost always material and/or evinces an intent to deceive.  In this respect it is a more certain codification of the inequitable conduct doctrine than § 103, where more than a half-century after the statute was enacted the courts are still trying to define the standard of non-obviousness (see KSR Int'l Co. v. Teleflex Inc.).  It is clear, however, that the provisions of § 298 address (and seem to correct) the problems the Committee considered in current inequitable conduct jurisprudence.

For additional information on the draft report, please see:

• "First Inventor to File Provisions," Section 2, January 17, 2008
• "Assignee Filings, Mandatory Publication, and Third Party Submissions," Sections 3 and 7, January 16, 2008
• "Late Patent Filings," Section 13 January 15, 2008
• "Draft Report on Senate Patent Reform Bill Circulated," Sections 9 and 15, January 14, 2008

For additional information regarding this topic, please see:

• "U.S. Senate Mailbox Filling with Letters against Passage of Patent 'Reform' Bill," January 18, 2008
• "Patent Reform Discussed on Senate Floor," December 21, 2007
• "Enjoined New Rules and Patent Reform Finally Appearing on Biotech Industry's Radar," December 20, 2007
• "Chinese IP Judge Discusses Implications of U.S. Patent Reform Bill and Two Congressmen Heed Warning," December 17, 2007
• "IPO President Seeks Deletion of Patent Reform Provision," December 12, 2007
• "Senate May Act on Patent 'Reform' Bill in the New Year," December 2, 2007
• "The Wall Street Journal Gets It Half Right," November 5, 2007
• "BIO CEO Provides Briefing on Follow-On Biologics and Patent Reform," September 18, 2007
• "Patent 'Reform' Bill Passes House of Representatives," September 9, 2007
• "Reversal in Microsoft Case Weakens Patent Reform Argument," August 7, 2007
• "San Francisco Chronicle Opines on Patent Reform," August 6, 2007
• "Patent Reform Bill to Be Delayed?" June 12, 2007
• "Senate Judiciary Committee Holds Hearing on Patent Reform," June 10, 2007
• "Could Creating a U.S. 'Utility Model' Patent Fulfill the 'Need' for Patent Law Reform?" May 21, 2007

Comments

[anon]

This is not so bad, it injects some common sense into the system which currently necessitates huge IDS disclosures in many biotech cases.

If 1.56 is not going to be dropped, this goes some way to recitfying the situation where ANY busy prosecutor could likely be found to have committed inequitable conduct.

[Patent Attorney]

Information is material if a reasonable WHAT IS REASONABLE -- THERE IS A PLETHORA OF CASE LAW FROM THE OLD RULE 56 TO PROVE THAT THIS IS NOT AN APPROPRIATELY DEFINITE TERM examiner would consider such information important WHAT IS IMPORTANT -- AGAIN, OLD RULE 56 PROVES THIS TERM IS NOT AN APPORPRIATE ONE FOR THIS CONTEXT in deciding whether to allow SO NOT JUST PATENTABILITY BUT ALLOWABILITY the patent application; any such information is not cumulative SO A FOREIGN EQUIVALENT IS NEVER CUMULATIVE OVER ITS US COUNTERPART -- MUST WE THEN CITE ALL COUNTERPARTS.

Although intent to deceive the USPTO may be inferred, it may not be done so based solely WHAT DOES THE TERM SOLELY MODIFY on the gross negligence WHAT IS GROSS NEGLIGENCE IN THIS CONTEXT -- AGAIN OLDER CASE LAW SHOWS THIS STANDARD TO BE VERY SUBJECTIVE of the patent owner or its representative THIS DOESN'T MATCH THE LANGUAGE OF RULE 56, or on the materiality of the information misrepresented or not disclosed AGAIN WHAT DOES SOLELY MODIFY.

The party asserting the defense or claim shall comply with the pleading requirements set forth under Federal Rules of Civil Procedure 9(b).

If the court finds inequitable conduct, the court has discretion to (1) hold the entire patent unenforceable, (2) hold 1 or more claims unenforceable, or (3) hold that patentee is not entitled an injunction. WHAT DOES IT TAKE TO GET 1, 2, OR 3 AND WHAT IS AN ABUSE OF THIS DISCRETION SO AS TO BE ABLE TO APPEAL -- THERE ARE NO STANDARDS

[Alan McDonald]

I favor this attempt to reduce "automatic" charges of inequitable conduct, but only if the "willful infringement" charges are equally reduced.

One reason every patent case has inequitable conduct charged is that every case has willful infringement charged.

Totally knocking out a patent on a technicality is the defendant's best challange to every infringement being subject to treble damages.

It's all a litigation dance and should be stopped from both sides.

[EG]

The best provision would be to ban IE as a defense entirely. Admittedly, having the IE standard codified is better than the current situation. But no matter what you do with the language on IE in the statutory provision, it will be abused, especially if the district courts and the Federal Circuit aren't vigilant to give the patentee attorneys fees for unfounded and frivilous IE allegations; so far, the district courts and the Federal Circuit show no willingness to do this. All the Federal Circuit's talk about IE being a "plague" is meaningless unless the Federal Circuit puts some teeth into removing the "plague" by taking money from the pockets of those who make such ill-founded IE allegations (i.e., the Federal Circuit needs to "walk the talk").

[Bob]

It's not clear that the proposed statute necessarily addresses the moralistic turn that the Federal Circuit has taken in recent years. See, e.g., Ferring v. Barr Labs; Cargill.

Moreover, the statute does not clarify whether the "reasonable examiner" is a subjective or an objective standard. In Cargill, for example, the Court applied a subjective reasonable examiner standard. Even though the withheld information was not objectively material to patentability, the Court held that it was material in that case because that particular Examiner would have found it to be material (because the Examiner mistakenly believed that such information would have been related to patentability). So, is the requirement based on what's objectively patentable, or is it based on what an individual Examiner believes is objectively patentable?

Also, the law should more carefully clarify that materiality should have no bearing on whether one had intent to deceive. One either has deceptive intent or not. The degree of materiality ought to have nothing to do with it.

Lastly, I object to inequitable conduct because I see it as an artifact from the Standard Oil era of moralistic judicial intervention into the marketplace. Antitrust law is much more robust today because it has largely dispensed with inquiries into parties' intent. Patent law ought to grow up and do the same.

Besides, if a patent is valid, why should the market care whether the one who procured it possessed a pure heart throughout the prosecution process? When I get change, I don't demand that every bill that I receive have been used only for the most noble of purposes.

[Kevin E. Noonan]

Dear Anon:

Even if Rule 56 were dropped, it would not eliminate the duty of candor - the Supreme Court has determined, much as it has for obviousness, that there is a Constitutional requirement that cannot be abrogated by Congress, and indeed underlies and supercedes Congressional authority to exercise its power to grant patents. What Rule 56 does is reign in allegations of what constitutes "fraud" on the Patent Office - if an applicant submits art in accordance with PTO rules, it is very hard to allege inequitable conduct (but not impossible, trust me).

I think the IDS size issue would be better addressed by considering inequitable conduct liability in a manner similar to what the Fed Cir has does for willfulness - use a recklessness standard, or require evidence of some sort of intentional concealment. That would preclude some of the rampant second guessing the fear of which fuels the massive IDS submissions.

Thanks for the comment.

[Kevin E. Noonan]

Dear Patent Attorney:

You grasp the essential conundrum (and hypocracy) of the attempt to codify inequitable conduct (at least as Congress is attempting it). Although cosmetically taking the reins out of the CAFC's hands, eventually the courts will need to interpret what the statute means. And while the CAFC has been willing to consider legislative history in its decisions, the Supreme Court has recently been using a "plain meaning" approach (which doesn't get us anywhere except a "totality of the circumstances" test)("I can't define inequitable conduct, but I know it when I see it.")

Thanks for the comment.

[Kevin E. Noonan]

Dear Alan:

Seagate may get us where you'd like to be WRT willfulness, since it should be much tougher to prove recklessness to establish willfulness. And if willfulness gets to be harder to prove, the "Jackpot" aspect of patent litigation (from a patentee (or troll) prespective) is reduced. So on that side of the ledger things may be moving in what it seems you think would be the "right" direction.

I am much less sanguine about reducing inequitable conduct, no matter what Congress does.

Thanks for the comment.

[Kevin E. Noonan]

Dear EG:

Since inequitable conduct is unlikely to disappear (see my comment earlier in this thread), the question is what can courts do to reduce the amount of "frivilous" or unfounded allegations of inequitable conduct. Judge Nichols point in his "plague" comment was that reputable lawyers were reduced to accusing other reputable lawyers of disreputable behavior, and besides the civility issue I think it probably rare for counsel to take the risk of committing inequitable conduct intentionally on behalf of a particular client or patent application.

The pleadings provisions probably won't be enough to appreciably change the frequency with which inequitable conduct is plead. Perhaps sanctioning defendants (finding a special case and granting attorneys' fees, etc.) if inequitable conduct is alleged without sufficient evidence (and liberally permitting defendants to amend their Answer to include the inequitable conduct defense once discovery produces such evidence) would have the desired effect.

Thanks for the comment.

[Kevin E. Noonan]

Dear Bob:

Welcome to the world of Supreme Court patent jurisprudence. Starting from the principle that "monopolies" are not to be tolerated, the Court has determined that the patent clause of the Constitution should be read very narrowly, to circumscribe Congressional power to grant patents. Read KSR and almost any pre-1980 obviousness case to get the real flavor of the Court's animus against patents.

In the same way, inequitable conduct is an issue for the Court because, in order to have the Federal government grant the patent right to an individual in the face of the general proscription against "monopolies," an applicant must have "clean hands" in the equity sense of the term. Thus, there is little chance that we will not always have this requirement for "pureheartedness" in patent law.

Since we are "stuck" with inequitable conduct as a precept of patent law, the point becomes how to Constitutionally balance the determination of "how pure" the applicant must be with the imperfect world in which mistakes happen. This is why affirmative misrepresentation of a material fact has always been enough to find inequitable conduct; in cases like the recent Oxycontin case where there was an affirmative misrepresentation that was not inequitable conduct, it was about something with such low materiality (and with a "good faith" explanation of why the misrepresentation was made) that it approached de minimis IC.

But these situations will be rare. The real issue is how to reduce or preclude the amount of unfounded allegations used as a litigation tactic. That one is tougher, and not really address by the proposed new statutory section.

Thanks for the comment.

[Alan McDonald]

Dear Kevin,

"The pleadings provisions probably won't be enough to appreciably change the frequency with which inequitable conduct is plead. Perhaps sanctioning defendants (finding a special case and granting attorneys' fees, etc.) if inequitable conduct is alleged without sufficient evidence (and liberally permitting defendants to amend their Answer to include the inequitable conduct defense once discovery produces such evidence) would have the desired effect."

Would you be willing to have these same sanctions for willfulness pleadings? I agree that Seagate may reduce the number of awards, but I'm not sure it will stop the charges without some teeth. And as long as it can be plead without fear and the discovery $$$ are running, the push for settlement to avoid litigation costs remains.

[Kevin E. Noonan]

Dear Alan:

Seagate being simply the announcement of a change in the standard of proof, I expect willfulness will continue to be plead with great frequency. Maybe we need to add some teeth to provisions covering willfulness as well as IC.

The one place where the pleadings requirement might do some good would be if it were interpreted as necessitating ID of relevant, undisclosed, material prior art - I think that's what Congress had in mind, albeit not stated sufficiently or explicitly enough. If you cannot plead IC unless you have identified a reference, at least there will be a bull's-eye for everyone to focus on. Since finding uncited art only requires 1) inspection of the face/file history of the patent and 2) search of the art at the time the application was filed, the increased burden comes down to finding material, uncited art - which should be the sine qua non of the defense in the first place.

Thanks for the comment.

[EG]

"Even if Rule 56 were dropped, it would not eliminate the duty of candor - the Supreme Court has determined, much as it has for obviousness, that there is a Constitutional requirement that cannot be abrogated by Congress, and indeed underlies and supercedes Congressional authority to exercise its power to grant patents."

Kevin,

Thanks for your reply to my comment. I realize getting IE squelched entirely is an uphill battle, but it's one worth fighting. Also, where's the precedential basis for a "Constitutional requirement" for the "duty of candor and good faith"? I don't see it from Precision Instruments. And for SCOTUS to say such a requirement comes out of the Patent Clause is absolute rhetorical nonsense. The only limitation expressed in the Clause is how long the rights exist (for limited times). In my opinion, for SCOTUS to exalt the "duty" and IE to a Constitutional requirement is disingenuous, not supported at all by the Patent Clause or the history surrounding it's creation, and improperly invades an area reserved to Congress. If SCOTUS can't get that through its judicial head, we've got real trouble ahead and not only in the patent area. Witness the Kelo decision on eminent domain that most of the country (including Ohio) has revolted against and for good reason.

[Kevin E. Noonan]

Dear EG:

I agree that the Court in the patent area is in a position legally (but not morally) equivalent to Plessy v. Ferguson - trapped in their precedent on everything from IC to obviousness, all stemming from precedent that the patent "monopoly" should be stingently granted. At its extemes, it would require a Constitutional amendment to overcome it (don't hold your breath). The best we can hope for is reasonable application of the rule.

Thanks for the comment.

[EG]

Kevin,

Thanks for your reply. I'll guess we'll have to "agree to disagree." I don't see the need for a Constitutional amendment here. The ability of Congress to extinguish IE, as well as have no other tests for patentability (other than 35 USC 101, 102 and 103), has never been truly tested for Constitutional muster before SCOTUS. All that I've seen in Graham to the effect that the Patent Clause is limitation on Congress as to the standard for granting patents is so much rhetorical nonsense (the support provided for this proposition is laughable), and certainly dicta. Frankly, if Congress would agree to do this legislatively, then let SCOTUS speak clearly (rather than mumbling as they so often do in the patent area) what, exactly, is Congress' reach, as well as SCOTUS' reach, on the Patent Clause. Otherwise, all we will do is wonder at "what might be done" instead of doing it, and seeing if SCOTUS will recognize that the standard for granting patents is not theirs when Congress says otherwise.

[Bob]

Dr. Noonan,

I hear what you're saying. But in antitrust law, we no longer consider monopolies to be "bad" per se. We don't even consider the general intent to create a monopoly to be "bad." Instead, antitrust plaintiffs who allege a Sherman Section 2 violation must do more than show the existence of a monopoly or the intent to create one.

Therefore, there is no reason why the Federal Circuit should continue to be beholden to the outdated 1940s notion that monopolies are always bad. If the inequitable conduct doctrine indeed hinges on the notion of the "evil" of monopolies, then the Supreme Court's antitrust precedent should not allow the this doctrine to stand (at least not in its current moralistic form).

Moreover, I think Twombly should suggest that defendants who plead inequitable conduct should almost have to fact-plead instead of notice-plead. If Congress wants to rein in charges of inequitable conduct pleadings, a statutory fact-pleading requirement would be a good place to start. Of course, dumping the whole doctrine as the primary means of enforcing Rule 56 would be a better place to start.

[Kevin E. Noonan]

Dear Bob:

I think fact pleading is the intent of proposed Sec. 298(d), since Rule 9(b) of the Fed. R. Civ. Pro. require certain defenses to be plead "with particularity," i.e. facts, while other aspects like intent can be generally plead.

The point is that I think the CAFC IS stuck with a 1940's notion of monopolies, because in the patent area that's where the Supreme Court continues to be. Read the oral argument in Quanta, or the decisions in Merck, Medimmune, AT&T, or KSR to get an idea where the Court is coming from. (Even more scary, read the opinion of the 3 justices who dissented from dismissing the Labcorp case.) As the Supreme Court has shown over the past year or so, the CAFC ignores their narrow interpretations of patent law at its peril.

Thanks for the comment.