Avid Identification Systems, Inc. v. Crystal Import Corp. (Fed. Cir. 2010)

    By Kevin E. Noonan --

Last week, the Court of Appeals for the Federal Circuit in Therasense Inc. v. Becton Dickinson & Co. issued an order granting plaintiffs' motion for rehearing en banc on the Court's previous affirmance that the patents-in-suit were unenforceable for inequitable conduct.  In its order, the Court certified six questions relating to its inequitable conduct jurisprudence, asking the parties and amici to provide their views on the standards of materiality and intent and the "balancing" test first enunciated in Kingsdown Medical Consutants Inc. v. Hollister (see "Federal Circuit Grants En Banc Review in Therasense v. Becton Dickinson").  The very next day, a panel of the Federal Circuit nicely illustrated the current disjointed state of the Court's inequitable conduct jurisprudence, suggesting that whatever decision the Court reached en banc in Therasense may not "solve" for long the doctrinal inconsistencies that seem to arise inexorably when courts attempt to decide whether a patent has been obtained through inequitable conduct.

The technology involved will be familiar to most pet owners:  detection of biocompatible chips used to identify lost pets unambiguously.  Plaintiff Avid Identification Systems was started by its president, Dr. Hannis Stoddard, after losing his own dog.  Dr. Stoddard testified that he realized that most of the animals in pounds and shelters were lost pets, but that there had been no way to reunite the pets and their owners.  While the company first used chips obtained from an independent supplier, Dr. Stoddard testified that he changed the business model in 1985, by developing a chip reader that could read both Avid's own encrypted chips as well as unencrypted chips then commercially available.  Not being an engineer, Dr. Stoddard testified that he hired "at least" three engineers, the named inventors of the patent-in-suit, U.S. Patent No. 5,235,326.  These engineers had developed both specifically-encrypted chips as well as the desired chip reader that recognized both encrypted and unencrypted chips.

More than a year before filing a patent application on this technology, it was undisputed that Dr. Stoddard demonstrated "some of Avid's technology" at a livestock trade show.  At trial, the District Court granted defendant's motion that this demonstration was material prior art under 35 U.S.C. § 102(b), that this information was withheld from the patent examiner during prosecution of the '326 patent, and that the information was withheld with deceptive intent.  In making this determination, the District Court specifically found that Dr. Stoddard had a duty of candor to the U.S. Patent and Trademark Office under 37 C.F.R. § 1.56.  This was the issue decided by the Federal Circuit in affirming the District Court's judgment.

The Federal Circuit opinion was written by Judge Prost joined by Judge Mayer and joined in part (relating to a standing issue) by Judge Linn, who also filed an opinion dissenting in part (on the Court's substantive decision on who owes a duty of candor to the office).  Avid conceded the issue of deceptive intent on appeal, relying on a challenge to whether Dr. Stoddard's demonstration was material and whether he fell within the scope of the individuals owing a duty of candor to the Office.

With regard to materiality, the panel applied the definition contained in Rule 56 itself:  "Information is material where a reasonable examiner would find it important to a determination of patentability," citing Astrazeneca Pharm. LP v. Teva Pharm. USA, 583 F.3d 766, 773 (Fed. Cir. 2009).  The majority rejected Avid's contention that the reference was not material by clear and convincing evidence because the jury did not find the claims invalid over evidence of the disclosure.  Illustrating at least one of the principles underlying the ad hoc nature of inequitable conduct determinations, the Court stated that "[w]e have often held that a reasonable examiner may find a particular piece of information important to a determination of patentability, even if that piece of information does not actually invalidate the patent," citing Praxair, Inc. v. ATMI, Inc., 543 F.3d 1306, 1314-15 (Fed. Cir. 2008), Upjohn Co. v. Mova Pharm. Corp., 225 F.3d 1306, 1312 (Fed. Cir. 2000), and Molins PLC v. Textron, Inc., 48 F.3d 1172, 1179-80 (Fed. Cir. 1995).  Regarding Avid's contention that what was demonstrated was not what was patented, but a precursor that did not comprise all the features of the patented invention, the Court held that as such the precursor "reflected the closest prior art" and thus was material to patentability.  The majority found that this determination was not clearly erroneous.

The majority's decision depended on whether Dr. Stoddard was bound by a duty of candor under Rule 56, it being hornbook law that only individuals having the duty could have committed inequitable conduct in procuring a patent.  Individuals having a duty of candor are defined in Rule 56(c):

"[I]individual[s] associated with the filing or prosecution of a patent application" as (1) each named inventor, (2) each attorney or agent that prepares or prosecutes the application, and (3) every other person who is substantively involved in the preparation or prosecution of the application and who is associated with the inventor or assignee. 37 C.F.R. § 1.56(c).

Here, it was "undisputed that Dr. Stoddard is not an inventor of the '326 patent, or an attorney or agent who prepared the '326 patent application."  Thus, in order for Dr. Stoddard's actions to constitute inequitable conduct, the Court considered whether he was "substantively involved in the preparation or prosecution of the application" and "associated with the inventor or assignee," citing 37 C.F.R. § 1.56(c)(3).  Calling the question of who other than an inventor or a patent attorney/agent is "substantively involved an the preparation or prosecution of a patent application" one that the Court had not previously considered, the Court considered the meaning of the phrase "substantively involved."  One thing the majority determined it was not was involvement that was "wholly administrative or secretarial in nature."  The District Court made three findings of fact with regard to what was known by Dr. Stoddard (although seemingly attributing either his knowledge to Avid or vice versa):

1)  That Avid was aware of the consequences of selling or offering to sell its reader and tag before filing the '326 patent application,
2)  That Avid attempted to file the '326 patent application in advance of the 102(b) date, i.e., within one year after its first sales, but failed, and
3)  That Avid intentionally withheld evidence of such sales from the PTO in an effort to deceive the PTO and secure allowance of the '326 patent.

The District Court was express in its linkage of Avid and Dr. Stoddard.  According to the majority, these included "the nature of his position as president and founder of Avid, that Avid is a closely held company, and that Stoddard hired the inventors to reduce his encrypted chip concept to practice," and thus that Dr. Stoddard satisfied the requirementa of 37 C.F.R. § 1.56(c)(3) that individuals in Dr. Stoddard's position must be "associated" with the inventors.  Moreover, the District Court found that Dr. Stoddard was "substantively involved" in preparing or prosecuting the application because he was "involved in all aspects of the company's operation, from marketing and sales to research and development."  This led to the "reasonable inference" that Dr. Stoddard was also involved in preparing an application.  The District Court also cited as evidence two communications relating to the patent, one to the European associate from one of the named '326 inventors relating to the European counterpart (Dr. Stoddard was included in a cc) and one from the inventor to Dr. Stoddard regarding nondisclosure of the invention.  This evidence, Dr. Stoddard's role in the company, and "the nature and content of these communications," strongly supported the District Court's decision regarding the "inference."

In addition, the Court found that Dr. Stoddard's testimony at trial was not credible, because "his memory of facts was suspiciously selective, and he refused to acknowledge certain incontrovertible events."  In addition, the panel stated that "[o]ur conclusion that the district court's duty of candor analysis was not clearly erroneous is reinforced by our own review of the entire record and relevant case law, which reveals sufficient reason to uphold the district court's judgment."  And what was Dr. Stoddard's contribution?

Dr. Stoddard was personally responsible for the disputed prior art demonstrations.  He was in contact with at least one of the inventors during the preparation of the '326 patent application regarding patent-related matters.  He was also advised by that inventor to check with a patent attorney before disclosing information about Avid's technology to the public.  He signed the small entity status affidavit shortly before the application was filed.  These facts lend further support to the inference that Dr. Stoddard was substantively involved in preparations for filing the application, and demonstrate that Dr. Stoddard spoke for Avid in representations to the PTO.

Although Dr. Stoddard did not contribute enough to the patentable features of the claims to be considered an inventor, the functionality of the system described in the '326 patent was his idea.  The inventors he hired were specifically instructed to reduce his idea to practice.  Dr. Stoddard's inclusion on substantive communications related to the preparation of the European counterpart to the '326 patent application further support the more general conclusion that he was substantively involved in preparation of the patent application covering the system he conceived.

Under the terms of Rule 56, the PTO does not assign a duty of candor to persons not associated with a patent application, or to those involved only in a ministerial capacity.  Such persons would not be in a position to appreciate that their conduct or knowledge might be relevant to the PTO.

The district court did not clearly err in determining that Dr. Stoddard was not such an exempt person.  Indeed, to accept Avid's argument that a person such as Dr. Stoddard owes no duty of candor would allow intentional deception by the types of people most likely to have knowledge of § 102(b) prior art, i.e., those on the commercial side of patented product development.

The majority then rebutted the dissenting Judge's views on the grounds that the Rule 56 requirement for substantial involvement was not the same (and did not require) "knowledge that the undisclosed information is material."  There is no such "knowledge" requirement, according to the majority, and thus materiality (even after-appreciated materiality) plus intent equals inequitable conduct.

Dissenting Judge Linn took a different view.  Initially Judge Linn "parted company" with the majority on the issue of whether Dr. Stoddard was "substantively involved" with preparing or prosecuting the application.  The Judge "finds no basis" in either Rule 56 or policy to extend the scope of the duty of candor as the majority has done, particularly with regard to "those on the commercial side of patented product development," because they are "the types of people most likely to have knowledge of § 102(b) prior art."  The Judge's point is simple:  since the Rule imposes a duty to disclose any information "material to patentability," anyone having the duty must of necessity have "knowledge of the technical details or legal merits of an application"; otherwise how would they know whether something was material (and thus needed to be disclosed) or not.  Unlike the majority view, Judge Linn's view seems to reasonably require that those having a duty to disclose know what it is that they are required to disclose.  Thus, excluded from the duty are not only "'typists, clerks, and similar personnel who assist with the application' in a non-substantive way" but also but also corporate officers, managers, employees, and all other individuals who are neither aware of the technical details or legal merits of the application nor engaged in the preparation or prosecution thereof."  For Judge Linn, "[s]imply having a general interest or even a financial interest in the invention or a general awareness of the application is not enough."  Contrary to the majority, Judge Linn contends that the key phrase in Rule 56(c)(3)is "substantively involved," which requires "specific understanding of the substance of the application" as  a threshold for imposing the duty of candor.  Otherwise, according to the Judge, the duty would be imposed on individuals insufficiently informed about the content of the application to be able to know what was and was not material, and thus what needed to be disclosed:

The majority's interpretation places on persons who are not in a position to assess materiality an obligation to disclose information the relevance of which they have no way of determining.  The effect is either to encourage the filing of information regardless of its materiality, just to be on the safe side, or to widen the net of inequitable conduct that may be cast by accused infringers after the fact in litigation.

The decision, and the dissent, in this case illustrate some of the problems with how inequitable conduct is determined.  It seems from the record that the District Court did not credit Dr. Stoddard's testimony, particularly in view of the uncontested nature of his intent to deceive on appeal.  Whatever culpability he may have had in this regard certainly seems to have amounted to a "something smells" instinct in the District Court.  Moreover, the "coulda-woulda-shoulda" nature of the ex post facto determination of what is (or is not) material, the determination that Dr. Stoddard's presentation must represent the "closest prior art" to claims presented (and drafted) months after that presentation, makes it easy for a defendant to satisfy the two prongs (materiality and intent) of the current inequitable conduct standard.  And once a District Court has made that determination, having the Federal Circuit use the "abuse of discretion" standard of review effectively insulates the District Court's decision from any kind of skeptical (or even neutral) reconsideration.  Requiring some objective indicia of both intent and materiality (for example, evidence of mens rea or a determination that the undisclosed information invalidated one or more claims) would avoid the kind of hindsight reconstruction of both the facts, and the motivations, that characterize this and so many other inequitable conduct cases.

Avid Identification Systems, Inc. v. Crystal Import Corp. (Fed. Cir. 2010)
Panel:  Circuit Judges Mayer, Linn, and Prost
Opinion for the court by Circuit Judge Prost, concurring-in-part and dissenting-in-part opinion by Circuit Judge Linn

Comments

[6]

"2) That Avid attempted to file the '326 patent application in advance of the 102(b) date, i.e., within one year after its first sales, but failed, and"

EPIC FAIL!!!!!!!!!!!!!!!!!!!!!!!

How you could possibly fail to write a few sentences on a sheet of paper, file out a few forms and send it in is entirely beyond me.

I note that I still haven't filled out my census...

[Dan Feigelson]

Even worse, if this really was a case of first impression, the all subsequent *panels* are bound by its decision unless and until overturned by an en banc panel or by the SCOTUS. Not that later panels necessarily follow ealier panel decisions of first impression, or even en banc decisions - witness the wholesale abandonment of Kingsdown. Here, if a subsequent panel deviates, it will mean a dumb decision has been ignored, but it will also reduce legal predictability. So by getting this one wrong the panel in essence struck out twice.