Exergen Corp. v. Wal-Mart Stores, Inc. (Fed. Cir. 2009)

Has Inequitable Conduct Met Its Match?

    By Kevin E. Noonan --

There have been clear indications for some time that certain members of the Federal Circuit believe that the Court's inequitable conduct jurisprudence has gone astray from the "a high bar" Judge Rader (at right) believes the Court's earlier case law requires for establishing this affirmative defense.  (See his opinion is Eisai Co. v. Dr. Reddy's Laboratories, Inc., citing Kingsdown Medical Consultants, Ltd. v. Hollister Inc., 863 F.2d 867, 876 (Fed. Cir. 1988)).  Evidence of such straying can be found in recent decisions that expanded the conduct deemed by certain panels of the court to be inequitable, including improperly claiming small entity status (Nilssen v. Osram Sylvania, Inc.), improperly filing a petition to make special (General Electro Music Corp. v. Samick Music Corp.), failing to disclose that a declarant had been a paid consultant prior to filing an expert declaration under 37 C.F.R. § 1.132 (Ferring B.V. v. Barr Laboratories, Inc.), misjoinder of inventorship (PerSeptive Biosystems, Inc. v. Pharmacia Biotech, Inc.), and inaccuracies in an expert declaration (Aventis Pharma S.A. v Amphastar Pharma, Inc.).  A determination of inequitable conduct, according to Judge Rader in the Eisai decision, should include evidence of affirmative instances of "culpable conduct" rather that mere omissions, citing the greater evidentiary difficulties that should attach when intent must be discerned from negligent conduct.  Similar sentiments have been echoed by Chief Judge Michel and Judges Schall and Dyk in Star Scientific, Inc. v. R.J. Reynolds Tobacco Co.

However, there remains a varying and inconsistent standard governing inequitable conduct (see, for example, McKesson Info. Solutions, Inc. v. Bridge Med., Inc.).  The Federal Circuit, and perhaps district court judges savvy enough to recognize the "plague" the inequitable conduct defense has become, seem to be fashioning an Alexandrian solution to this knotty problem.  This approach, which uses Federal Rule of Civil Procedure 9 as its tool, is nicely illustrated by the Court's decision in Exergen Corp. v. Wal-Mart Stores, Inc., handed down on Tuesday.  Rule 9 reads as follows:

Pleading Special Matters

(a) Capacity or Authority to Sue; Legal Existence.

                        * * *

    (2) Raising Those Issues.

    To raise any of those issues, a party must do so by a specific denial, which must state any supporting facts that are peculiarly within the party's knowledge.

(b) Fraud or Mistake; Condition of Mind.

In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

About 14 months after Exergen filed its complaint, defendant-appellant S.A.A.T. Systems Application of Advanced Technology Ltd. ("SAAT") moved under Fed. R. Civ. P. 15(a) for leave to amend its answer to assert inequitable conduct as an affirmative defense.  SAAT made the following allegations in its pleadings:

    40. The '685 patent is unenforceable due to inequitable conduct by Exergen, its agents and/or attorneys during the prosecution of the application for the '685 patent before the PTO.

    41. Prior to the filing of the '685 patent application, Exergen filed a patent application that ultimately issued as U.S. Patent No. 4,566,808 (hereinafter referred to as "the '808 patent") on January 28, 1986.  Thus, Exergen was aware of the '808 patent well before the '685 patent issued on September 18, 2001.  The '808 patent was material to the patentability of the '685 patent because it discloses a technique of scanning a radiation detector across a target to measure the maximum emitted radiation, and it is not cumulative to the information already of record in the prosecution history of the '685 patent.

    42. In addition, U.S. Patent No. 4,317,998 (hereinafter referred to as "the '998 patent") was cited in a Supplemental Information Disclosure Statement filed by Exergen on October 17, 1997 in connection with the prosecution of the '205 patent.  Thus, Exergen was aware of the '998 patent well before the '685 patent issued on September 18, 2001.  The '998 patent was material to the patentability of the '685 patent because it discloses a technique of swiping a radiation detector across a target, and it is not cumulative to the information already of record in the prosecution history of the '685 patent.

    43. Because Exergen was aware of the '808 patent and the '998 patent prior to the issuance of the '685 patent, Exergen had an opportunity to disclose each of these patents to the PTO during the prosecution of the '685 patent.  Moreover, because the '808 patent and the '998 patent were material to the patentability of the '685 patent, Exergen had an obligation to disclose each of these patents to the PTO.  Nevertheless, Exergen failed to cite either of these patents to the PTO during the prosecution of the '685 patent.  SAAT is informed and believes, and therefore alleges, that Exergen, its agents and/or attorneys intentionally withheld the '808 patent and the '998 patent from the PTO with the intent to deceive the PTO to issue the '685 patent.

    44. In addition, during the prosecution of the '685 patent application, Exergen made a number of arguments to the PTO to overcome rejections of the pending claims based upon various prior art references related to tympanic temperature detectors.  For example, in an Amendment filed on July 31, 2000, the following statements were made to the PTO:

What was nonobvious . . . was that reliable temperature measurements could be obtained from the forehead by extending techniques initially developed for the tympanic membrane.  What had not been generally appreciated by those skilled in the art of temperature measurement was that the superficial temporal artery . . . provides an exceptionally reliable temperature reading.

    45. These arguments made to the PTO were contradicted by statements from Exergen's own website, such as the following statement which appeared on the website at the time of the July 31, 2000 Amendment:

The temporal artery area has a long history of temperature measurement, dating back to the early centuries before Christ with the first recorded references to palpation of the head for fever assessment.

    46. Thus, while Exergen acknowledged on its website that the temporal artery has a long history of temperature measurement, Exergen misrepresented to the PTO that no such history existed and omitted any reference to the website.  The misrepresentation and omission were material to the patentability of the '685 patent because the information was not cumulative to the information already of record in the prosecution history of the '685 patent, and it refutes, or is inconsistent with, a position taken by Exergen in asserting an argument of patentability.  SAAT is informed and believes, and therefore alleges, that the misrepresentation and omission were made with the intent to deceive the PTO to issue the '685 patent.

The District Court denied this motion, on the grounds that the pleading "failed to allege inequitable conduct with particularity under Rule 9(b).

The Federal Circuit affirmed, in an opinion by Judge Linn joined by Chief Judge Michel and Judge Amy St. Eve (N.D. Ill.) sitting by designation.  SAAT's appeal on the inequitable conduct issue was directed to only one of the patents in suit, U.S. Patent No. 6,292,685; the defense was asserted against one of the other patents in suit (U.S. Patent No. 5,012,813) at trial but not another one (U.S. Patent No. 6,047,205).  The Court first asserted that Federal Circuit law, rather than 1st Circuit law, governed the pleading standard for inequitable conduct.  The panel then explicated the proper test, requiring the pleading to identify the "who, what, where, when and how" of inequitable conduct, which must be plead "with particularity" under Rule 9(b), citing Ferguson Beauregard/Logic Controls, Div. of Dover Resources, Inc. v. Mega Sys., LLC, 350 F.3d 1327, 1344 (Fed. Cir. 2003).  "A pleading that simply avers the substantive elements of inequitable conduct, without setting forth the particularized factual bases for the allegation, does not satisfy Rule 9(b).  See King Auto., Inc. v. Speedy Muffler King, Inc., 667 F.2d 1008, 1010 (CCPA 1981)."  The required scienter of "'[m]alice, intent, knowledge and other conditions of mind of a person may be averred generally," according to the panel.  However, the "pleadings [must] allege sufficient underlying facts from which a court may reasonably infer that a party acted with the requisite state of mind."  (Curiously, the Court cited various precedents of regional circuits but none of its own for this proposition.)

The Court then set forth its reasons for finding SAAT's pleading to be insufficient against this standard.  First, the panel faulted SAAT for referring generally to "Exergen, it agents and/or attorneys" without naming the specific individual "associated with the filing or prosecution of the application issuing as the '685 patent, who both knew of the material information and deliberately withheld or misrepresented it."  The panel decision also faulted SAAT for failing to "identify which claims, and which limitations in those claims, the withheld references are relevant to, and where in those references the material information is found – i.e. the 'what' and 'where' of the material admissions," citing Regents of Univ. of Cal. v. Eli Lilly & Co., 119 F.3d 1559, 1570 (Fed. Cir. 1997).  Also falling within the panel's objections to SAAT's pleadings are bald assertions that the withheld references were material and not cumulative, without identifying "the particular claim limitations, or combination of claim limitations, that are supposedly absent from the information of record.  Such allegations are necessary to explain both 'why' the withheld information is material and not cumulative, and 'how' an examiner would have used this information in assessing the patentability of the claims.  See Larson Mfg. Co. v. Aluminart Prods. Ltd., 559 F.3d 1317, 1333 (Fed. Cir. 2009)."

The Court also found deficient the allegations of scienter, because they could not give rise to a reasonable inference as required by the Rule.  In this regard, assertions in SAAT's pleadings that Exergen "was aware" of the references were not enough:  not only did the pleading fail to identify anyone with a Rule 56 duty that had withheld the information, what information was withheld and its materiality to patentability was not plead or supported by factual allegations.  "A reference may be many pages long, and its various teachings may be relevant to different applications for different reasons.  Thus, one cannot assume that an individual, who generally knew that a reference existed, also knew of the specific material information contained in that reference.  See FMC Corp. v. Manitowoc Co., Inc., 835 F.2d 1411, 1415 (Fed. Cir. 1987) (emphasis in original)."

SAAT had plead deceptive intent "on information and belief," and in rendering its decision the opinion states that, while this form of pleading is permitted, the pleading must "set forth specific facts upon which the belief is reasonably based" (again, citing a plethora of precedent devoid of any of the Court's own).  However, in making this determination the opinion states:

SAAT's purported basis for inferring deceptive intent is that Exergen had cited the '998 patent when prosecuting the '205 patent but then failed to cite it when prosecuting the '685 patent.  The mere fact that an applicant disclosed a reference during prosecution of one application, but did not disclose it during prosecution of a related application, is insufficient to meet the threshold level of deceptive intent required to support an allegation of inequitable conduct.  Indeed, SAAT's pleading does not contain specific factual allegations to show that the individual who had previously cited the '998 patent knew of the specific information that is alleged to be material to the '685 patent and then decided to deliberately withhold it from the relevant examiner.  In the absence of such allegations, the district court was correct not to draw any permissive inference of deceptive intent with regard to the '998 patent, lest inequitable conduct devolve into "a magic incantation to be asserted against every patentee" and its "allegation established upon a mere showing that art or information having some degree of materiality was not disclosed."  FMC Corp. v. Manitowoc Co., Inc., 835 F.2d 1411, 1415 (Fed. Cir. 1987)

(emphasis added).  While reasonable on its face, this portion of the opinion seems directly at odds with the Court's decision in McKesson Info. Solutions, Inc. v. Bridge Med., Inc.  Specifically, in McKesson, the Court held that patentees' counsel "knew or should have known" of the materiality of a reference cited by one examiner and thus was under an affirmative obligation to disclose the reference to another examiner in a related application.  Failure to do so evinced an intent to deceive.  Indeed, the Court in McKesson appeared to impose a requirement that an applicant was under a Rule 56 obligation to disclose not only the existence but the course of prosecution of related applications.  These inconsistencies merely complicate any calculus of how any particular panel can be expected to judge the substantive questions of materiality and intent, and insert additional uncertainty to patent litigation.

Perfectly clear, however, is the trend requiring an accused infringer to "connect the dots" in making its allegations of inequitable conduct in its pleadings.  This requirement may create real hardship for defendants, and will certainly foster a life cycle of patent litigation where assertions of the inequitable conduct defense will occur after substantial discovery and require amended pleadings (which fortunately are typically liberally granted by district courts).  It also shifts the leverage each party in a patent infringement lawsuit wields in favor of the patentee (who already may have the threat of a preliminary injunction early in the lawsuit).  It remains to be seen whether the heightened pleadings requirement will reduce the frequency with which the affirmative defense of inequitable conduct is plead.

Exergen Corp. v. Wal-Mart Stores, Inc. (Fed. Cir. 2009)
Panel: Chief Judge Michel, Circuit Judge Linn, and District Judge St. Eve
Opinion by Circuit Judge Linn

Comments

[Dan Feigelson]

Lots of hullabaloo about this decision, but I wonder if it's really going to matter: all the CAFC did here was to identify the hoops that must be jumped through in order avoid having an inequitable conduct pleading thrown out. In this case, it would have been easy enough for SAAT to have identified the people involved in prosecution and to provide an analysis of the (non-disclosed) references and their relevance. More work for the defendant in preparing its answer, but I'm not sure it's insurmountable.

[EG]

Kevin,

I do hope that Exergen is the coming trend from the Federal Circuit on how "particularly" inequitable conduct must plead and must also be factually proved, especially with regard to the "intent" prong. We might not even need legislation on this "plague." And if the Federal Circuit would add some FRCP 11 and 35 USC 285 bite when inequitable conduct is plead "friviously" the "plague" might even go back in the bottle where it belongs.

[SKD]

I am not sure how this opinion is in direct odds with McKesson. In McKesson, it was the same prosecuting attorney who prosecuted both the applications - therefore "should have known". Whereas, here, SAAT did not allege even remotely that there was a deceptive intent on any particular individual. So, it was the lack of sufficient meat in its allegations that the court finds fault with, not the proof to show inequitable conduct.

[Noise above Law]

Dan,

Perhaps the considerations involved in actually doing the work before lobbing the IC charges is what really matters.

We are not talking about abolishing the IC defense, just making sure that the now seemingly automatic accusations are not a plague. When the underlying work is done and IC is deemed appropriate, it can (and should) still be used. If all that the CAFC did here was limit the plague, I think all the hullabaloo is well worth it.

[Keep It Real]

Kevin: "Indeed, the Court in McKesson appeared to impose a requirement that an applicant was under a Rule 56 obligation to disclose not only the existence but the course of prosecution of related applications."

While a few notoriously panicky and over-reacting patent prosecutors might have understood McKesson to stand for this proposition, most of us understood McKesson to be largely limited to its facts, like all inequitable conduct cases. This Exergen case changes nothing. It remains true that if a material reference or other fact (e.g.,, contradicting statements made in the corresponding European case) is concealed from a USPTO Examiner, your patent is compromised and you'll be litigating inequitable conduct like your patent's life depends on it.

NAL "just making sure that the now seemingly automatic accusations are not a plague"

There is no "plague" except in the imaginations of certain jurists who feel that their profession is diminished whenever an attorney points out that someone has behaved dishonestly. The fact is that doing the right thing can be difficult for clients when $$$ is on the line and the patent is close to an allowance or issuance.

Is a patent with a cloud on it worth more than no patent at all? We all know the answer to that question.

[Noise above Law]

KiR,

I will respectfully disagree in that "plague" and the "much hullabaloo" are definitely not limited to your "certain jurists".

I will reiterate that, where appropriate the IC defense is still very much alive, and that the meat of this decision is that the underlying activity to make sure it is appropriate removes the seemingly automatic and, as this particular case point out, meritless accusations.

[Kevin E. Noonan]

Dear Dan:

I agree it isn't insurmountable, but do you think there would be a difference if SAAT had identified all of the prosecuting attorneys by name? What if the person responsible wasn an inventor who knew of an undisclosed reference? And there is certainly a requirement under this case to not only identify who was the malfeasor but to identify what was not disclose, what it said, what portions are relevant to what limitations in a claim, and so forth - like the recently unlamented ESD requirements.

I think this imposes greater evidence requirements not only to prevail in an inequitable conduct defense, but to plead it. Which may ultimately not change the outcome, but make it harder to get there.

Thanks for the comment.

[Kevin E. Noonan]

Dear SKD:

The comment is related to what can be expected of prosecutors, in terms of their obligations to inform the office of not only the existence but the substance of prosecution of related cases. I agree that McKesson had the additional feature of the same attorney being involved. Here, since the malfeasor was not identified it could have been the same person who made the arguments and submitted the reference not submitted in the '685 reference.

Thanks for the comment.

[Kevin E. Noonan]

Dear Keep:

I think Exergen changes a lot, by imposing greater pleadings requirements. We'll see how that translates in patent lawsuits, but is does disadvantage (even if temporarily) accused infringers. And that can affect settlement, since a CEO may not want to hear "we are going to have a great IC case, once we get that dep testimony of the prosecuting attorney."

Thanks for the comment

[Moury Roberts]

In a patent infringement action involving infrared thermometers, district court judgment is affirmed in part and reversed in part where: 1) the court erred in finding that the claims in plaintiff's '205 patent were not anticipated by an earlier patent, and thus defendant cannot be liable for infringement of this patent; 2) plaintiff failed to provide substantial evidence to support the jury's finding that defendant's device directly infringed on plaintiff's '813 patent and actively induced infringement plaintiff's '685 patent; and 3) the court did not abuse its discretion in denying defendant's motion for leave to add allegations of inequitable conduct to its original answer, as its proposed allegations failed to satisfy the heightened pleading requirement of Federal Rule of Civil Procedure.

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Moury Roberts

attorney<