CAFC: Bad Actor Makes Bad Inequitable Conduct Law

In a decision handed down earlier today in Avid Identification Systems v. The Crystal Import Corporation, a bad acting President of a closely-held company managed to create potentially bad inequitable conduct law for the rest of us. Intent to deceive was admitted, if you can believe that, but as it turns out the prior art withheld, a prior sale, was not invalidating and would not have lead to an appropriate rejection by the Patent Office. Nevertheless, the prior sale of an earlier version of the invention in question was the closest prior art and the Federal Circuit, per Judge Prost, explained that materiality does not require that the the withheld prior art lead to a good rejection. So Judge Prost applied the Patent Office law relative to materiality as it existed prior to the 1992 revision of 37 CFR 1.56. In a feat of mental gymnastics, however, Judge Prost quoted the current Rule 56 to support her decision, muddying the waters even further in the area of inequitable conduct. Who would have thought muddying the inequitable conduct waters was even possible!

Avid challenged the district court’s finding that the trade show demonstration was material and that Dr. Stoddard had a duty of candor to disclose this information. Avid did not dispute on appeal that Dr. Stoddard withheld the information with specific intent to deceive the PTO for the purposes of obtaining a patent, so it is admittedly hard to feel sorry for him or Avid, yet this case is one that patent practitioners and litigators need to know about and deal with since the President of the company, who was not the inventor, was deemed to be substantively involved in patent prosecution such that he had a duty to disclose material prior art he know of, which he did not fulfill.

On appeal, Avid argued that the district court’s finding of materiality was clearly erroneous because Dr. Stoddard’s trade show demonstration related to a precursor product that did not contain all of the elements of the ’326 patent claims. Avid’s arguments against materiality focused on the fact that a jury was presented with the trade show information and still found the patent not invalid. Avid argued that the jury must have found that the trade show demonstrations were not § 102(b) prior art. Judge Prost, however, was not convinced, explaining that Avid was confusing the concepts of “material” and “invalidating.” She wrote that the CAFC has “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.” Those familiar with patent prosecution will recall that the reasonable examiner standard was written out of Rule 56 by the Patent Office nearly 20 years ago. Recently, over the last several years an increasing number of Federal Circuit panels have retreated to the reasonable examiner standard as if it were the law.

In one tremendous bit of irony, recall that it was Judge Prost who sided with the Patent Office in the claims and continuations challenge and found that the USPTO should be given deference with respect to implementation of procedural rules. See Tafas v. Doll (now vacated).  Judge Prost even cited to Rule 56 and explained that the Patent Office authority to promulgate the rule has been addressed and upheld by the Federal Circuit. So pardon me for noticing the intellectual dishonesty involved here. If the USPTO deserves deference and the USPTO has expressly written out the reasonable examiner standard from the duty of candor set forth in Rule 56, exactly who is Judge Prost and those other members of the Federal Circuit to ignore the express desire of the USPTO and refuse to give the USPTO the deference it deserves? Why do members of the Federal Circuit ignore the obligations set forth in Rule 56 and instead apply its own precedent? Can’t we all agree that is not an appropriate showing of deference to the USPTO? That much should be unanimously agreed to if you ask me.

In any event, returning to the case at hand, the district court found that sales demonstrations would be important to a determination of patentability under § 102(b) despite the fact that a valid rejection could not be made based on the prior device. The district court found that the precursor product, while not invalidating, reflected the closest prior art, and thus was highly material to patentability, despite the fact that the current Rule 56 would specifically disagree with this interpretation. Nevertheless, the panel of the Federal Circuit, with Judge Linn dissenting in part, held that the district court’s analysis of materiality is not clearly erroneous.

Now, we all know how this case will be used in some trial proceedings, and we all know how it will be stretched and pulled by some panels of the Federal Circuit. But before we overstate the ridiculousness and intellectual dishonesty of the ruling, lets be clear. The district court determined that Dr. Stoddard’s testimony at trial was not credible, his memory of facts was suspiciously selective, and he refused to acknowledge certain incontrovertible events. All of those are bad facts no doubt, but inequitable conduct is a sliding scale test, although the en banc rehearing of Therasence, Inc. v. Becton Dickinson and Co. may change that. See Federal Circuit to Consider Inequitable Conduct En Banc. But when there is no materiality there should be no inequitable conduct, and based on the current Rule 56 which no longer adheres to the reasonable examiner standard there could not be any materiality, despite what Judge Prost thinks or wrote.

In conclusion, allow me to notice another bit of irony. The Federal Circuit reverses district courts with great frequency when the issue relates to claim construction, showing no deference whatsoever, despite Chief Judge Michel being on the record in multiple places saying that he thinks the Federal Circuit got it wrong when it decided not to give any deference whatsoever to claim construction decisions. But in the realm of inequitable conduct whenever the district court finds inequitable conduct it seems that extreme deference is provided. At the same time there is no deference given to the USPTO’s current Rule 56 which did away with the reasonable examiner standard.

The one overwhelmingly important issue for patent reform was the establishment of a uniform set of inequitable conduct standards that even the Federal Circuit had to accept. As we seemingly march toward patent reform and the culmination of over 5 years of legislative efforts there is no inequitable conduct reform or standards in the current bill. That is a terrible missed opportunity. Let’s hope that Congress doesn’t put patents aside now for another decade, which they might do. It could become a lost decade where inequitable conduct once again becomes the scourge of patent litigation.

Share

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Join the Discussion

22 comments so far.

  • [Avatar for IANAE]
    IANAE
    April 29, 2010 10:47 am

    Gene @16: “The trouble here is that the President seems to have thought it was material. He turned out to be wrong.”

    He turned out to be right. Both the district court and the Federal Circuit held that the reference was material. This wasn’t a mere attempt, it was actual withholding of an actually material reference that the PTO could not have known about in any other way, by a person who knew it was material and owed the duty of candor.

    Gene @21: “In criminal law not ever crime will support an attempt charge. The one that comes to mind is the charge of statutory rape. Can you be found guilty of attempted statutory rape if the person you were with was not under age? What about if you thought they were under age and intended to engage in statutory rape? It is my understanding that in this situation and where there are statutes and regulations that clearly define the elements of a crime you cannot be convicted of attempt unless going through with the action would support the higher charge.”

    I respectfully disagree. You can be convicted of an attempt even though the underlying crime was impossible in fact, as long as you have the requisite state of mind. Imagine selling powdered sugar that you sincerely believe is cocaine, or shooting a dead person you believe is sleeping. The “statutory” part of statutory rape simply removes the ability to consent, and consent is largely in the mind of the accused, so attempted statutory rape with intercourse might even be actual rape.

  • [Avatar for Gene Quinn]
    Gene Quinn
    April 29, 2010 10:14 am

    Step-

    You say: “That sort of sounds like the mistaken belief line of criminal cases.”

    Exactly! That was where I was going. So the question really becomes whether attempted inequitable conduct renders a patent unenforceable. This is a wholly new theory and one that will send shivers through the spine of ever patent practitioner and horribly overwork the USPTO and slow the process. Under the current law, which admittedly may be changed en banc in the coming months, inequitable conduct requires both materiality and intent. No amount of intent without materiality can lead to a finding of inequitable conduct. That is why so many panels of the CAFC have stopped applying the standard in Rule 56 and moved back to the pre-1992 standard that asked about a reasonable examiner. If a reasonable examiner would want to know and you have a lot of intent then the mere fact that you attempted to commit inequitable conduct renders a patent unenforceable.

    In criminal law not ever crime will support an attempt charge. The one that comes to mind is the charge of statutory rape. Can you be found guilty of attempted statutory rape if the person you were with was not under age? What about if you thought they were under age and intended to engage in statutory rape? It is my understanding that in this situation and where there are statutes and regulations that clearly define the elements of a crime you cannot be convicted of attempt unless going through with the action would support the higher charge. For example, attempted murder is a crime and I believe in order to be convicted of attempted murder you have to demonstrate that murder at least would have been the logical outcome had you been successful with the attempt. Could a good samaritan be convicted of attempted murder if they were attempted to help someone in need and a death ultimately resulted? I don’t think so.

    My point here is that in order to uncover what is really going on at the CAFC I think we need to have a discussion about whether attempted inequitable conduct leads to unenforceability. It seems that is in fact the only way to explain so many of the truly outrageous CAFC decisions.

    -Gene

  • [Avatar for step back]
    step back
    April 29, 2010 07:52 am

    Gene,

    Another way to look at this case is from a criminal law perspective.

    You suggested that the president thought it was material information and therefore intentionally hid it, but he turned out to be wrong in his beliefs. It wasn’t material.

    That sort of sounds like the mistaken belief line of criminal cases.

    Let’s say you have a professional fraudster and he is working over a new mark under the belief that he is going to defraud this new mark. But his belief is mistaken because this is a sting operation. The mark is not being defrauded because the mark is an undercover policeman. However, that does not vitiate the crime of attempted fraud. The fraudster attempted to defraud somebody, and even though it was never going to work in the first place, the attempt itself is something that society cannot allow.

  • [Avatar for step back]
    step back
    April 29, 2010 07:41 am

    Sorry, I meant @16

  • [Avatar for step back]
    step back
    April 29, 2010 07:40 am

    I agree with Gene @ 17.

    There is no way that anything would ever move forward if patent attorneys/agents had to sit there all day, deeply studying every badly written prior art reference and filing an IDS on it, and then asking every Examiner to do roughly the same at his/her end; namely study every IDS submitted reference and give each an in-depth consideration.

    On the other hand, this case was not at all about a documentary reference.

    It was about a demonstrative event, that only the president of the company and perhaps a handful of other people knew about. There was no way that the Examiner would come to know about it.

    And I think that is the point the court was trying to make (although with poorly written explanation). This case should not be seen as a generic prescription to file “everything” via IDS. On the other hand, if there was some esoteric public demo that the president or some other fiduciary of the company was involved in, then the Hey I’m not a named inventor excuse should not be a completely exonerating excuse. Clearly the court did not believe Stoddart’s testimony that he was not intimately and substantively involved.

  • [Avatar for Noise above Law]
    Noise above Law
    April 28, 2010 07:52 pm

    Then lets tell… that they have 15 hours to wrap up the entire case”

    Let’s just shine the light on the problem that we should be focusing on.

  • [Avatar for Gene Quinn]
    Gene Quinn
    April 28, 2010 05:00 pm

    Alan-

    The good reason to allow for the purposeful withholding would be if it were not material, as is the case here. I intentionally and willfully withhold all kinds of irrelevant references, just like every patent attorney out there. So does that mean there is inequitable conduct because I don’t file an IDS with millions of patents? Of course not.

    The trouble here is that the President seems to have thought it was material. He turned out to be wrong. So the question is really whether attempted breach of the duty of candor can and should lead to a finding of inequitable conduct. Judge Prost seems to think that attempted inequitable conduct is one and the same. Sadly, that is not what Rule 56 says. So even if a reasonable examiner would want to know you cannot violate Rule 56 without the reference supporting a good rejection. Therefore the CAFC has had to ignore Rule 56 and supplant the USPTO decision with its own standard in order to gut the patent system.

    Rather than have the CAFC judges sit by designation at the district court they really ought to be forced to sit by designation at the USPTO as patent examiners. Lets assign them a case where hundreds or thousands of references are submitted in an IDS that don’t support a good rejection because intellectually, if given enough time, they could be interesting to the decision maker. Then lets tell the CAFC judges sitting by designation that they have 15 hours to wrap up the entire case, including reviewing all the references, reading the patent application, dealing with the patent attorney, creating the Office Action on the Merits, etc. etc. Then we tell them that if they make a mistake they could have their pay docked. I bet they would in a heartbeat undue this mess of inequitable conduct and actually give the deference the USPTO deserves.

    -Gene

  • [Avatar for EG]
    EG
    April 28, 2010 04:37 pm

    Geeh Alan, you want me to delve into the murky mind of a higher up in the client “food chain” to figure out why they have a rational excuse to do something we would think is completely irrational and dangerous to do. BTW, this brings back memories of when I was in a corporate patent department (for over 19 years) trying to explain to R&D folks why you had a choice between: (1) disclosing what they even knew was the “best mode” in a patent application (because they wanted to keep it as a “trade secret” versus competition); or (2) keeping this knowledge as a “trade secret” and foregoing trying to get patent coverage. I didn’t always make friends with these R&D folks by keeping them from committing an automatic invalidity as well as IC offense, but I sure did sleep better at night.

    The only circumstance I can think of not to punish someone this high up in the “food chain” of a patentee who knew the “material” info and deliberately withheld it is as follows: (1) the reason they withheld the “material” info was unrelated to it’s potential damaging effect as prior art (e.g, they forgot or overlooked its existence); and (2) they were “blissfully ignorant” of their duty of disclosure obligation. The latter is definitely possible and certainly believable, as I’ve known and even had clients who are completely clueless on the duty of disclosure obligation and might not even understand it if you explained it to them. (If you think only individuals don’t understand the basics of patenting, there were several executives I dealt with in my corporate life who might astonish you with their lack of even basic patent knowledge). The former is much more problematic to believe could happen (unless this higher up suffered amnesia or some other mental condition that caused it to slip their mind). But then again, it can’t be ruled out.

  • [Avatar for breadcrumbs]
    breadcrumbs
    April 28, 2010 04:03 pm

    Alan,

    Would the Avid president be aware of the assumption that the examiner would want to know the withheld information? Perhaps there is a reason why the issue of intent simply wasn’t challenged here.

    Not even getting to the ethics involved, I cannot see why a company would tempt fate in trying to withhold a public event type of information. Surely if the patent is obtained and you run into litigation, this type of blackmark is rather easily discoverable. Why go through the pains of prosecution to have such a tainted patent? Such a gamble isn’t worth the risk, is it?

  • [Avatar for Alan McDonald]
    Alan McDonald
    April 28, 2010 02:54 pm

    Question:

    Can anyone give me a reason why it would be a good thing to allow the Avid president to purposefully withhold this information, assuming the examiner would want to know it.

    This time I AM talking about intent (even though I don’t believe intent should be an issue, as everyone here knows).

  • [Avatar for Gene Quinn]
    Gene Quinn
    April 28, 2010 10:44 am

    Les-

    You say: “you have to disclose everything you are aware of that MIGHT be used in a 103 rejection.”

    I agree. The trouble here is the patent claims in question were not determined to be invalid. We can guess why 103 wasn’t addressed here, but I think the fair take-away from this case is that even when a claim remains valid over a reference the reference needs to be disclosed if a reasonable examiner would want to consider it for themselves. That is certainly how defendants will cite this case, and likely how many district courts will apply inequitable conduct.

    -Gene

  • [Avatar for Gene Quinn]
    Gene Quinn
    April 28, 2010 10:42 am

    Les-

    You say: “We can’t wait until prosecution is concluded before we determine the duty to disclose something during prosecution, can we?”

    I don’t see why not. The Patent Office won’t ever know if there was inequitable conduct, so it is always argued in hindsight during a litigation where the alleged infringer is claiming the entire patent should fall. So if the entire theory is only ever applied in hindsight why shouldn’t the reality of the materiality also matter? I understand what you are saying, but the USPTO doesn’t want to be buried with prior art that is of marginal relevance, which is what responsible attorneys really have to do now given the CAFC continues to find inequitable conduct when the reference withheld was not actually material and could not have resulted in a valid rejection. So the take home is you have to turn everything over even if it doesn’t support a valid rejection. I just don’t understand how an intellectually honest approach to inequitable conduct cannot take into consideration the reality of the reference.

    What a mess the CAFC has made of something as foundational as inequitable conduct and the duty of candor.

    -Gene

  • [Avatar for EG]
    EG
    April 28, 2010 10:32 am

    “Don’t read into this case that the president of GM has a duty of disclosure on every automatic transmission case filed by GM.”

    Alan,

    I don’t. But unfortunately some ignorant district court might. That’s how bad the subject of inequitable conduct has gotten.

  • [Avatar for Les]
    Les
    April 28, 2010 08:38 am

    Gene –
    The fact that the info that was not disclosed couldn’t ultimately support a rejection might be a mitigating factor. But that couldn’t be known until after prosecution was completed. We can’t wait until prosecution is concluded before we determine the duty to disclose something during prosecution, can we?

  • [Avatar for Les]
    Les
    April 28, 2010 08:22 am

    Gene –

    All I know about the case is what I read in the funny papers. What I read here only seemed to consider 102(b) and said that the wrong version of rule 1.56 was applied.

    However, my read of 1.56 is that you have to disclose everything you are aware of that MIGHT be used in a 103 rejection. Since the combine-able in 103 bar is set very low by 90% of office actions on my desk (documents about features of Microsoft Word being combined with documents regarding industrial controllers against system control claims for example), I would think that a publicly disclosed prior version of the device, the thing that would be in the preamble if the claim were drafted the way the EPO like ’em, would usually qualify as something that should be disclosed.

    In fact, I think it is for things like this that rule 1.56 was drafted. That is, the whole system is based on examiners being able to find any published art there might be. If they can’t do that, the whole examination process is a farce. Therefore, I believe, despite what it literally says, the drafters of 1.56 drafted it so things like this earlier public version, which the examiner is not likely to learn about on his own, get disclosed. They didn’t envision that rule 1.56 would get interpreted to require us to tell examiner A the crap that examiner B, whom examiner eats lunch with on Tuesdays and Thursdays and whom works in the next cubical, cited in a related application. Art which examiner A, if he thought it relevant, would have found and cited on his or her own. Its meant to catch exactly this non-published prior activity.

  • [Avatar for Alan McDonald]
    Alan McDonald
    April 28, 2010 08:04 am

    Let’s remember here that the president of Avid conceived the idea behind the invention, formed Avid to develop the invention, hired the inventors to reduce the concept to practice and made the trade show presentation. He was the motivating force behind the patent.

    He was not just the president of a company who didn’t know everything that went on within the company.

    Don’t read into this case that the president of GM has a duty of disclosure on every automatic transmission case filed by GM.

  • [Avatar for EG]
    EG
    April 28, 2010 07:52 am

    To all:

    The big issue iin this case was who is in the “target zone” (as I call it) for owing the “duty of disclosure” under 37 CFR 1.56. Prost with Mayer ruled that the president of the patentee was in that “target zone”, i.e., was “substantially involved” within the meaning of 37 CFR 1.56(c)(3) and thus owed the “duty of disclosure” to the PTO regarding the potential “public use” (trade show demo) that was deemed not invalidating under 102(b) but nonetheless “material” to support a finding of inequitable conduct. That’s where Linn parted with the majority and dissented. Hope this helps understand what’s really important about this case.

  • [Avatar for anonymousAgent]
    anonymousAgent
    April 27, 2010 09:26 pm

    Do the judges THINK about the consequences before coming out with these rulings?
    I means, its getting ridiculous. As prosecutors, we need to:
    (i) tell the USPTO about its OWN cases
    (ii) be careful not to contradict ourselves between what we say in the EPO and what we say in the USPTO;
    and NOW
    (iii) IDS things that can’t even reject any claim.

    If ANY of these judges had ever prosecuted a patent OR worked as an Examiner, they would THINK before coming out with this type of ruling.

  • [Avatar for passerby]
    passerby
    April 27, 2010 08:02 pm

    I really hope this ruling doesn’t cause any increase in the practice of filing an IDS which cites 100’s of references to a type of device wherein most of the cited references have no relationship to the applicant’s improvements. The amount of irrelevant information considered by the examiners when examing applications is already high enough without forcing them to consider unrelated prior art with the extra scrutiny given to cited references.

  • [Avatar for Gene Quinn]
    Gene Quinn
    April 27, 2010 06:01 pm

    Les-

    I don’t think that is the issue, or at least not critical to this case. Certainly, the 103 aspect of what might reasonably need to be turned over is important, but in this case the prior device was not deemed to have supported a proper validity challenge. Said another way, the patent claims were valid even after considering the previous device. That being the case it was not capable of supporting an appropriate rejection. Nevertheless, Prost ruled that it was still material because a reasonable examiner would have wanted to know about it, even though they would have and should have properly determined it was irrelevant.

    Did you take something different out of the case?

    -Gene

  • [Avatar for EG]
    EG
    April 27, 2010 05:42 pm

    Gene,

    As I’ve commented to other patent attorneys, don’t be surprised if Avid ends being considered en banc by the Federal Circuit, given that the Federal Circuit is already considering Therasense en banc on related or overlapping inequitable conduct issues. We’re definitely under a “full moon” in the inequitable conduct area.

  • [Avatar for Les]
    Les
    April 27, 2010 05:26 pm

    Isn’t the issue that the trade show might have been 103/102(b) art and might have been combine-able with something else and therefore should have been disclosed?