A DISCUSSION AND ANALYSIS OF FOUR HOT IP CASES

Transcription

1 A DISCUSSION AND ANALYSIS OF FOUR HOT IP CASES Automotive Tools v. BMW, Muniauction v. Thompson, Quanta Computer v. LG Electronics and Tiffany v. EBay By: Grady M. Garrison W. Edward Ramage C.G. Moore Bryan Jones Laura P. Merritt BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ 165 Madison Avenue, Suite 2000 Memphis, Tennessee (901)

2 INTRODUCTION This Roundtable will analyze and discuss four cases that have generated considerable interest in the Intellectual Property legal community: Automotive Tools v. BMW, Muniauction v. Thompson, Quanta Computer v. LG Electronics and Tiffany v. EBay BE CAREFUL WHAT YOU ASK FOR AT THE PATENT OFFICE YOU JUST MIGHT GET IT FULL-SCOPE ENABLEMENT OF PATENT CLAIMS UNDER 35 U.S.C. 112, 1 by C.G. Moore, Ph.D., J.D. The United States Court of Appeals for the Federal Circuit recently invalidated every asserted claim of a patent because the full scope of each claim encompassed both mechanical and electronic elements, but the specification enabled only mechanical elements. Thus, the court settled any doubt that compliance with the enablement requirement of 35 U.S.C. 112, 1 requires that the specification enable the full scope of every claim. Automotive Techs. Int l, Inc. v. BMW of N. Am., Inc., 501 F.3d 1274 (Fed. Cir. 2007). In the present case, Automotive Technologies International, Inc. ( ATI ) was the assignee of U.S. Patent 5,231,253 (the 253 patent ), directed to automobile side impact crash sensors. 1 Sensors disclosed in the prior art for detecting side impacts were crush-type sensors, which closed a circuit when crushed or deformed. The sensors of the 253 patent are velocitytype sensors, configured to close a circuit when a detected change in velocity exceeds a threshold value. ATI sued various defendants in the automotive industry in May 2001, alleging infringement of the 253 patent. Representative claim 1 of that patent reads as follows: 1. A side impact crash sensor for a vehicle having front and rear wheels, said sensor comprising: (a) a housing; (b) a mass within said housing movable relative to said housing in response to accelerations of said housing; 1 U.S. Patent No. 5,231,253 (issued July 27, 1993). 2

3 (c) means responsive to the motion of said mass upon acceleration of said housing in excess of a predetermined threshold value, for initiating an occupant protection apparatus; and (d) means for mounting said housing onto at least one of a side door of the vehicle and a side of the vehicle between the centers of the front and rear wheels, in such a position and a direction as to sense an impact into the side of said vehicle. 2 Following a Markman hearing, the district court construed the means responsive to the motion of said mass upon acceleration of said housing in excess of a predetermined threshold value, for initiating an occupant protection apparatus claim limitation. 3 ATI argued that the structure corresponding to the claimed function encompassed mechanical and electronic switch assemblies, as identified in the specification, while the defendants asserted that the specification only identified mechanical switches clearly. The district court agreed with ATI that the means responsive limitation includes both mechanical and electronic means, whereupon various defendants filed a motion for summary judgment that the claims were invalid for failing to comply with the written description requirement of 35 U.S.C. 112, 1. Defendant Delphi Corporation filed a separate motion for summary judgment that the claims were invalid for failure to satisfy the enablement requirement, also under 112, 1. The district court granted both motions. 4 The Federal Circuit affirmed, finding the claims invalid for lack of enablement, and so did not address the written description requirement. 5 ATI argued that a dichotomy in Federal Circuit opinions exists, with some holding that the enablement requirement is satisfied when at least one mode of practicing the invention is enabled, while others hold that each and every claimed embodiment must be enabled. 6 Nevertheless, ATI argued, the 253 patent specification enabled both mechanical and electronic side impact sensor assemblies. 7 In support of this 2 Id. at col. 10, l. 59 to col. 11, l Automotive Techs. Int l. v. BMW of N. Am., Inc., No. 01-CV DT (E.D. Mich. Mar 31, 2004) (Claim Construction Order). 4 Automotive Techs. Int l. v. BMW of N. Am., Inc., 378 F. Supp. 2d 780 (E.D. Mich. 2005). 5 Automotive Techs. Int l. v. BMW of N. Am., Inc., 501 F.3d 1274, 1282 (Fed. Cir. 2007). 6 Id. at Id. 3

4 contention, ATI identified the following passage as providing specific support for an electronic side impact sensor: FIG. 11 is a conceptional view of an electronic sensor assembly 201 built according to the teachings of this invention. This sensor contains a sensing mass 202 which moves relative to housing 203 in response to the acceleration of housing 203 which accompanies a side impact crash. The motion of the sensing mass 202 can be sensed by a variety of technologies using, for example, optics, resistance change, capacitance change or magnetic reluctance change. Output from the sensing circuitry can be further processed to achieve a variety of sensor response characteristics as desired by the sensor designer. 8 Figure 11 of the 253 patent is shown below: The Federal Circuit addressed ATI s arguments by noting first that a patent specification must describe the manner and process of making and using [the invention], in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the [invention]. 9 The statutory enablement requirement is addressed in numerous Federal Circuit opinions, but most notably in In re Wands, which set out eight factors for assessing compliance with the enablement requirement, 10 and in AK Steel, which emphasized the importance of the undue experimentation 8 U.S. Patent No. 5,231,253, col. 10, ll (issued July 27, 1993) U.S.C. 112, 1 (West 2008). 10 See In re Wands, 858 F.2d 731, (Fed. Cir. 1988) (the eight factors include, but are not limited to: breadth of the claims; nature of the invention; the state of the prior art; the level of one of ordinary skill in the art; the level of predictability in the art; the amount of direction provided by the inventor; the existence of working examples; and the amount of experimentation needed to make or use the invention based on the content of the disclosure). 4

5 Wands factor: the enablement requirement is satisfied when one skilled in the art, after reading the specification, could practice the claimed invention without undue experimentation. 11 The court noted that the full scope of the means responsive claim limitation was construed to include both mechanical and electronic side impact sensors, that none of the parties contested that construction, and that [u]nder the district court s construction that full scope must be enabled. 12 The court observed in a subsequent decision that [e]nabling the full scope of each claim is part of the quid pro quo of the patent bargain. 13 According to the court, Figure 11 and the accompanying description do little more than provide an overview of an electronic sensor without providing any details of how the electronic sensor operates, which the court contrasted with the rather lengthy and detailed description of mechanical sensors in the same specification. 14 In particular, the court declared that the description of electronic sensors fails to provide a structure or description of how a person having ordinary skill in the art would make or use an electronic side impact sensor. Noticeably absent is any discussion of the circuitry involved in the electronic side impact sensor that would provide more detail on how the sensor operates. The mere boxed figure of the electronic sensor and the few lines of description fail to apprise one of ordinary skill how to make and use the electronic sensor. 15 ATI countered by arguing that the specification s limited disclosure of electronic sensors was sufficient because the knowledge of persons having ordinary skill in the relevant art would supply the missing information. The court disagreed, noting that [t]he novel aspect of this invention is using a velocity-type sensor for side impact sensing, and that [i]t is the specification, not the knowledge of one skilled in the art, that must supply the novel aspects of an invention in order to constitute adequate enablement AK Steel Corp. v. Sollac & Ugine, 344 F.3d 1234, 1244 (Fed. Cir. 2003). 12 Automotive Techs. Int l., 501 F.3d at Sitrick v. Dreamworks, LLC, 516 F.3d 993, 999 (Fed. Cir. 2008) (quoting AK Steel, 344 F.3d at 1244.) 14 Automotive Techs. Int l., 501 F.3d at Id. at Id. at 1283 (quoting Genentech, Inc. v. Novo Nordisk A/S, 108 F.3d 1361, 1366 (Fed. Cir. 1997)). 5

6 Finally, the court rejected ATI s assertion that the enablement requirement was satisfied by ATI s enabling disclosure of one mode of practicing the invention the mechanical side impact sensors observing that it had recently rejected a similar argument in its Liebel- Flarsheim decision. 17 The court concluded with an observation on the irony of ATI s situation: ATI sought [while prosecuting its patent application] to have the scope of the claims of the 253 patent include both mechanical and electronic side impact sensors. It succeeded, but then was unable to demonstrate [during litigation] that the claim was fully enabled. Claims must be enabled to correspond with their scope. 18 In a subsequent decision, the Federal Circuit explained full-scope enablement very plainly: [a] patentee who chooses broad claim language must make sure the broad claims are fully enabled. The scope of the claims must be less than or equal to the scope of the enablement to ensure[ ] that the public knowledge is enriched by the patent specification to a degree at least commensurate with the scope of the claims Liebel-Flarsheim Co. v. Medrad, Inc., 481 F.3d 1371, 1379 (Fed. Cir. 2007). 18 Automotive Techs. Int l., 501 F.3d at Sitrick v. Dreamworks, LLC, 516 F.3d 993, 999 (Fed. Cir. 2008) (quoting Nat l Recovery Techs., Inc. v. Magnetic Separation Sys., Inc., 166 F.3d 1190, (Fed. Cir. 1999)). 6

7 In conclusion, inventors, patent practitioners, and patent applicants may avoid the fate of ATI s patent by recalling the following simple Venn diagrams: Scope of Specification Scope of Claim NOT Enabled Scope of Specification Scope of Claim Enabled 7

8 THE DOCTRINE OF PATENT EXHAUSTION GETS FRESH LEGS By: W. Edward Ramage In a world with increasingly complex multi-stage manufacturing processes and multiplecomponent products, the manufacture of a single product such as a modern automobile can involve hundreds or even thousands of patents. And a single patent can follow a component or part that is covered by the patent through subsequent stages of the manufacturing process, giving a patent owner the potential of receiving royalties from several participants in the process. This has become of particular concern with the growth of the computer technology industry, which involves a multitude of manufacturers in the assembly and production of computer-related products. In the United States, the judicially-created doctrine of patent exhaustion has limited, at least in part, the ability of patent owners to double dip by seeking multiple royalties based on the manufacture of a single product. While the basic doctrine, as described below, is straightforward, the application of patent exhaustion by U.S. courts has been inconsistent and confusing at times. The recent unanimous decision by the Supreme Court of the United States in Quanta Computer, Inc. v. LG Electronics, Inc. on June 9, 2008 has reinvigorated the doctrine of patent exhaustion and provided some clarification, but has not eliminated all potential problems. The Doctrine of Patent Exhaustion Patent exhaustion, also known as the first sale doctrine, is a defense raised in patent litigation. It does not have a statutory basis, but was created by the U.S. Supreme Court in the mid-1800s, and has been developed in several cases since then. The simplicity of the core of the 8

9 doctrine reflects the relative simplicity of industrial development and products at the time of its creation. The basic form of the doctrine is simple and straightforward: when a patented item is once lawfully made and sold, there is no restriction on its use for the benefit of the patent owner. The right to sell is exhausted by a single, unconditional sale, with the article being sold being carried outside the monopoly of patent law, and rendered free of every restriction which the vendor may attempt to place upon it. Of course, in order for the doctrine to apply, the sale must have been an authorized sale. Authorized sales include sales from a licensee as well as the patent owner, provided the sale is authorized by the license. A person who purchases goods from a licensee, knowing that the licensee lacked authority to make the sale, can be liable for infringement. In addition, exhaustion does not apply to sales outside the United States. The doctrine has been extended to some sales of products that do not completely practice the invention. Where someone has sold an uncompleted article that embodies the essential features of the patent such that its only and intended use is to be finished under the terms of the patent, then the bar on patent restrictions following the sale of the item applies even if the uncompleted article does not completely practice the invention. The doctrine, however, is not absolute, and has been eroded in a variety of ways. A series of decisions has allowed parties to essentially contract around the doctrine of exhaustion by establishing explicit limitations in a license or agreement (as opposed to any implied restrictions, which would not survive exhaustion). The exhaustion doctrine does not protect a 9

10 purchaser of a patented item from a licensee, where the purchaser was aware of a use restriction in the license from the patentee. However, the restrictions or conditions must be express and lawful. An express restriction in violation of antitrust law or that evidences patent misuse is not a lawful restriction, and will not preclude application of the doctrine. The restriction cannot, for example, or attempt to improperly extend the scope of the patent monopoly. The principle of permissible repair is related to the doctrine of patent exhaustion. The owner of a patented article can repair the article, including disassembling and cleaning the article, and replacing worn or spent unpatented parts. However, the article cannot be so extensively reworked or reconstructed so that there is a re-creation of the patented item. This amounts to the making of a new item, which would infringe on the patent. The Quanta Decision It was against this background of case law that LG Electronics acquired a portfolio of computer-related patents in 1999, including three patents covering certain functions carried out by computer microprocessors and chipsets. The first patent disclosed a system for ensuring that the most current data was retrieved from main memory and updating main memory from the cache. The second patent disclosed a method for processing requests to read from and write to main memory. And the third patent also disclosed an efficient method for organizing read and write requests. LG Electronics licensed these patents to Intel Corporation. The license agreement authorized Intel to make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of its own microprocessor and chipset products practicing the patents. The license 10

11 agreement also expressly stated that the parties agreed that nothing in the agreement in any way limited or altered the effect of patent exhaustion that would otherwise apply when Intel sells any of its licensed products. Nevertheless, LG Electronics attempted to preserve its options to seek royalties from purchasers of the Intel products. The license stipulated that no license was granted to any third party for the combination by a third party of Intel s microprocessors or chipsets with items, components, or the like acquired from sources other than a party to the license. And in a separate master agreement, Intel agreed to give written notice to its customers informing them that, while the Intel product purchased was licensed by LG Electronics and would not infringe any patent held by LG Electronics, the license did not extend to any product that the customer made by combining any Intel product with any non-intel product. As microprocessors and chipsets are of use only in combination with other components, purchasers of Intel s processors and chipsets, such as computer manufacturers, thus were potentially infringing LG Electronics patents. The defendant Quanta Computer, Inc. (and other computer manufacturers) purchased Intel microprocessors and chipsets and manufactured computers using the Intel parts in combination with non-intel memory and buses. Quanta received notice from Intel as required by the master agreement. Quanta did not modify the Intel components, and followed Intel s specifications when incorporating the Intel parts into its computers. Taking the position that this use was not authorized, LG Electronics sued for patent infringement. would exhaust patent rights. However, it also held that patent exhaustion did not apply to 11 LG Electronics largely prevailed in the lower courts. The district court held that the Intel products did not have any reasonable noninfringing use, and therefore their authorized sale

12 method claims, and that as the LG Electronics patents included method claims, exhaustion did not apply. On appeal, the Court of Appeals for the Federal Circuit agreed that the doctrine of patent exhaustion did not apply to method claims. It further determined, in the alternative, that patent exhaustion did not apply because LG Electronics did not license Intel to sell the Intel parts to Quanta for use in combination with non-intel products. Continuing a trend in a number of recent patent cases over the past few years, the U.S. Supreme Court reversed the Federal Circuit. First, it held that the doctrine of patent exhaustion does apply to method patents. Methods may be embodied in a product, the sale of which exhausts any patent rights in the method. The Court noted that to do otherwise would allow patent owners avoid patent exhaustion by drafting their claims as describing a method rather than an apparatus. The Court recognized that patent and apparatus claims may approach each other so nearly that it will be difficult to distinguish the process from the function of the apparatus. The Court then addressed the extent to which an incomplete or unfinished product must embody a patent in order to trigger exhaustion. Following its own precedent, the Court held that patent exhaustion is triggered where the only reasonable and intended use of the product sold was to practice the patent, and where the product embodies essential features of the patented invention. With regard to the latter, the question is whether the essential, or inventive, features of the patented product or process are accomplished in producing the incomplete or unfinished product, and whether subsequent steps (such as in a finishing process) are unique. incorporate the Intel parts into Quanta s computers. The Court also found that everything 12 In this particular case, the Court held that exhaustion was triggered. First, there was no other reasonable use for the Intel microprocessors and chipsets other than incorporation into a computer system, and the only apparent object of Intel s sales to Quanta was to allow Quanta to

13 inventive about each of the LG Electronics patents was embodied in the Intel parts. While the Intel products could not carry out the patented functions unless attached to other computer components, such as memory and buses, these additions are standard components in the computer system. Quanta did not make any creative or inventive decision when added those components. The Intel parts, while incomplete, thus substantially embodied the essential features of the patents. The Court rejected an argument that patent exhaustion should not apply across patents. While agreeing that the sale of a device that practices Patent A does not, by virtue of practicing Patent A, exhaust Patent B, the Court held that devices that practice multiple patents (such as microprocessors and chipsets that practice thousands of individual patents) can exhaust each of the patents that the device substantially embodies. Finally, the Court determined that the sale by Intel to Quanta was an authorized sale, and thus exhaustion did apply. The license agreement permitted Intel to make, use or sell its products free of patent claims. While the license agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other components, exhaustion turned only on Intel s own license to sell its products. Nothing Intel did was a breach of the license agreement, and there were no conditions limiting Intel s authority to sell parts substantially embodying the patents, hence the sales were authorized sales. Post-Quanta Licensing Two aspects of the Quanta decision are fairly clear and straightforward. First, the doctrine of patent exhaustion applies to method claims and products produced by patented methods and processes. Second, the standard for determining when exhaustion is triggered by 13

14 the sale of an incomplete article has been re-affirmed. Overall, the Quanta decision, considered in context with other recent patent cases, indicates the Supreme Court s intent to continue focusing on the inventive aspects of a patented invention, and limit a patent s enforceable scope. Quanta does leave some room for patent owners to maneuver, however. The ruling was that the sale to Quanta was not, in fact, conditional. Thus, patent owners may be able to argue that Quanta does not affect their ability to continue to include lawful conditions in their license agreements. This approach may not be practical, however, for many products. Few purchasers are likely to be willing to buy products burdened in this fashion, and few large manufacturers are likely to be willing to accept licenses that limit their sales. In particular, manufacturers of end products including multiple components are likely to require that their suppliers warrant that the components being supplied are authorized and non-infringing, and indemnify them if the component leads the manufacturer being sued for patent infringement. The Supreme Court also expressly declined to consider whether LG Electronics could bring a breach of contract claim and seek contract damages even though exhaustion had operated to eliminate patent damages. Breach of a restriction or condition in the license agreement would allow the patent owner to sue the licensee for breach of contract. This approach, however, is unlikely to allow the patent owner to reach purchasers of items from the licensee, as contract law requires privity of contract. It also is less likely to be satisfactory, as patent law is considered to usually offer greater relief than contract law. reached. In addition, such arrangements may have disadvantages for a patent owner, who would 14 Some upstream manufacturers may desire to shift a portion of the royalty burden downstream. Such an arrangement may be possible, but Quanta makes clear that, at least in the United States, the explicit understanding and agreement of all parties involved would need to be

15 need to collect multiple sets of royalties from multiple parties, and possibly bring multiple breach of contract actions against multiple parties if royalties are not paid. A patent owner thus may be best served by ensuring that it receives its full royalty from its direct licensees, and not rely on bringing infringement actions against downstream purchasers of authorized items embodying its patents. 15

16 MUNIAUCTION, INC. V. THOMSON CORP. By: Bryan Jones FACTS Muniauction, Inc., holds a patent on a method for conducting original issuer auctions of municipal bonds via the internet; U.S. Patent No. 6,161,099 (filed May 29, 1998, and issued December 12, 2000) ( the 099 patent ). As described by the CAFC: [T]he invention of the 099 patent provides an integrated system on a single server that allows issuers to run the auction and bidders to prepare and submit bids using a conventional web browser, without the use of other separate software. The system of the 099 patent also allows issuers to monitor the progress of the auction and allows bidders to monitor their bid vis-à-vis the current best bid. Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318, 1322 (Fed. Cir. 2008) (citations omitted). The 099 patent criticizes several prior art systems for conducting such auctions, including a system called Parity. In particular, the 099 patent criticizes Parity because: (1) it requires bidders to obtain and install the Parity software prior to participating in an auction over the computer network; (2) it is designed to be used with non-internet bid submission methods during an auction; and (3) it operates as a sealed bid system in which the received bids are not evaluated and no feedback is provided to the bidders until the auction closes. Id. Nonetheless, according to the CAFC, Parity performed every step of the method described in independent claims 1, 9, 14, 31, 36, and 56 of the 099 patent, except for being capable of use with a web browser This was disputed by Muniauction. Relying on trademark registrations and trade press releases, Muniauction argued that Parity did not perform an automatic computation step as described in the 099 patent. Muniauction, 532 F.3d at However, the CAFC rejected this argument, holding that Muniauction s expert witness admitted that Parity did perform an automatic computation step. Id. at This effectively limited the Court s consideration of the validity of the claims to a single issue: whether it was obvious to adapt the prior art software to function with a web browser. 16

17 In 1997, Thomson Corp. and Ideal, LLC (collectively, Thomson ) acquired Parity from a third party and integrated it with one of its current products, BidComp. In 1998, the integrated BidComp/Parity system was modified for use with a web browser. 21 In 2001, Muniauction accused the modified BidComp/Parity system of infringing claims 1, 2, 9, 14, 18, 20, 24, 31, 32, 36, 40, 42, 46, and 56 of the 099 patent. A jury found that the patent was nonobvious and was infringed by Thomson, and awarded Muniauction $38,482,008 in lost profits. Thomson moved for judgment as a matter of law, arguing that various claims were obviousness in light of Parity and, nonetheless, Thomson did not infringe the patent. The trial court denied Thomson s motion, enhanced the damages to $76.9 million, and entered a permanent injunction against Thomson. ISSUES ON APPEAL A. Were Claims 1, 9, 14, 31, 36, and 56 obvious in light of Parity? As noted supra at footnote 1, the CAFC found that the only difference between Claims 1, 9, 14, 31, 36, and 56 and Parity was that Parity was not adapted to function with a conventional web browser. Id. at Accordingly, the only issue considered by the CAFC on validity was whether it would have been obvious to one of ordinary skill in the art to modify the Parity system to incorporate conventional web browser functionality. Id. at The Court concluded that Thomson established a prima facie showing of obviousness by clear and convincing evidence. Critical to this determination was the Court s opinion that, at the time the 099 patent application was filed: 1. web browsers were a well-known technology, as evidenced by the patent s use of the phrase conventional 22 web browsers ; 21 It is unclear from the opinion whether this occurred before or after Muniauction filed the 099 patent application. 22 Practitioner s note: the term conventional is implicitly time dependent and thus the literal scope of claim limitations qualified by that term [is] limited to technologies existing at the time of the invention Id. at

18 Id. at the use of internet and browser technology to conduct electronic auctions was well established, as evidenced by two patents and a speech by the Government Finance Officer s Association; and 3. adapting existing electronic processes to incorporate existing internet and web browser technology was commonplace. Muniauction asserted that secondary factors including evidence of legally appropriate praise and market-force skepticism rebutted the prima facie case of obviousness. However, the CAFC declined to afford them any substantial weight because of a lack of a nexus between the merits of the claimed invention and evidence of secondary considerations. Id. at Thus, the court concluded that claims 1, 9, 14, 31, 36, and 56 were obvious as a matter of law. Id. at 1325 and B. Could Thomson directly infringe Claims 2, 18, 20, 24, 32, 40, 42, and 46? On the remaining claims at issue, the question was not whether the claims were valid, but whether Thomson could be considered a direct infringer. It was undisputed that Thomson did not practice all of the steps of any one of the claims; rather, each of the claims required significant contributions from the bidder. Thus, the issue as framed by the CAFC was whether the actions of at least the bidder and the auctioneer may be combined under the law so as to give rise to a finding of direct infringement by the auctioneer. Id. at The Court, relying on BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007), started from the proposition that where the actions of multiple parties combine to perform every step of a claimed method, the claim is directly infringed only if one party exercises control or direction over the entire process such that every step is attributable to the controlling party. Muniauction, 532 F.3d at Accordingly, the critical question was (quoting PC Connector Solutions LLC v. SmartDisk Corp., 406 F.3d 1359, 1363 (Fed. Cir. 2005). 18

19 whether Thomson exercised sufficient control or direction over the bidders such that Thomson itself can be said to have performed every step of the asserted claims. Id. The Court held that this standard is satisfied... where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method. Id. at Under this standard, Thomson could not be considered a direct infringer. The District Court, in finding direct infringement, focused on the fact that Thomson controlled access to its system. Id. at The CAFC rejected this: That Thomson controls access to its system and instructs bidders on its use is not sufficient.... Id. at Rather, because Muniauction failed to establish [a] legal theory by which Thomson might be vicariously liable for the actions of the bidders[,]... Thomson does not infringe the asserted claims as a matter of law. Id. QUESTIONS TO CONSIDER 1. Would the obviousness result have been any different before KSR? Would the evidence cited by the CAFC satisfy the Teaching/Suggestion/Motivation test? 2. What secondary factors might the court have found compelling enough to overcome the prima facie case of obviousness? 3. Assume that the patent was found to be valid. Are you comfortable with the Court s holding regarding infringement? 4. In light of this decision, is it even possible to have an interactive system that can be enforced by a patent protection? Does the opinion leave the possibility that a valid patent could nonetheless by completely unenforceable as a practical matter? 5. Are there scenarios where this could apply outside of business method patents? Could this have implications for chemical and biotech patents? 6. How could you structure the claims to avoid this result, yet still claim an interactive system? 19

20 TIFFANY V. EBAY By: Laura P. Merritt I. INTRODUCTION Tiffany, the famous jeweler, sued ebay, the prominent online marketplace, for the sale of counterfeit Tiffany silver jewelry on its website. 23 Tiffany sought to hold ebay liable for direct and contributory trademark infringement, unfair competition, false advertising, and direct and contributory trademark dilution on the grounds that ebay facilitated and allowed counterfeit items to be sold on its website. Tiffany acknowledged that individual sellers rather then ebay are responsible for listing and selling counterfeit Tiffany items. Nevertheless, Tiffany argued that ebay was on notice that a problem existed and had the obligation to investigate and control the illegal activity of sellers. Specifically, Tiffany wanted ebay to refuse to post any listing offering five or more Tiffany items and immediately suspend sellers upon learning of Tiffany s belief that the seller had engaged in potentially infringing activity. II. DIRECT TRADEMARK INFRINGEMENT Tiffany alleged direct trademark infringement by (1) advertising availability of Tiffany jewelry on ebay and using the Tiffany name on the ebay home page and in ebay documents; (2) by purchasing sponsored links on Google and Yahoo, advertising ebay listings when a user searches for Tiffany on the search engine; and (3) by general participation in the sale of counterfeit merchandise. 23 Tiffany v. ebay, No. 04 Civ at 1 (S.D.N.Y. Jul. 14, 2008). 20

21 The court held that these descriptive uses of Tiffany s trademarks were protected as nominative fair use. 24 It found that the products sold on ebay were not readily identifiable without use of Tiffany trademarks; ebay used only so much of the mark as necessary to identify the product; and ebay did nothing to suggest sponsorship or endorsement by Tiffany. III. CONTRIBUTORY TRADMEARK INFRINGMENT The court applied the Inwood Labs test, that a manufacturer or distributor is contributorally liable for trademark infringement if it intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, 25 to find ebay not liable. Most significantly, the court held that Tiffany s generalized claims of trademark infringement were insufficient to establish that ebay knew or had reason to know of the infringement. 26 Because ebay was not willfully blind to evidence of counterfeiting and took appropriate steps to cut off its services to infringers, it was not liable. IV. DIRECT AND CONTRIBUTORY TRADEMARK DILUTION Tiffany alleged trademark dilution by blurring because it claimed ebay used the Tiffany marks to advertise and sell products that ebay knew to be counterfeit. Tiffany also alleged dilution by tarnishment because it claimed ebay s use of the Tiffany marks harmed its reputation. The court held that Tiffany failed to prove trademark dilution. 27 Further, the court noted that, even if Tiffany had established dilution, ebay s use of the trademarks is protected nominative fair use. The court also rejected Tiffany s contributory dilution claim because ebay s use of the trademark was fair use. Put simply, Tiffany has failed to demonstrate that 24 Tiffany at Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982). 26 Tiffany at Tiffany at

22 ebay knowingly encouraged others to dilute Tiffany s trademarks. Rather, to the extent that ebay may have possessed general knowledge of infringement and dilution by sellers on its website, ebay did not possess knowledge or a reason to know of specific instances of trademark infringement or dilution as required under the law. 28 V. DISCUSSION TOPICS A. The court emphasized the resources ebay dedicated to fraud prevention, including developing fraud monitoring software and offering its use to Tiffany and dedicating more than 200 employees exclusively to anti-counterfeiting initiatives. In comparison, Tiffany budged less than.05 percent of its net sales to combating counterfeiting in 2003 and dedicated the equivalent of 1.6 full time employees to monitor ebay. How can trademark owners ensure they are doing enough to police their marks? What levels of diligence are or should be sufficient for trademark owners? At what point does or should the duty to patrol for infringement shift to the broker? B. Several conflicting international court ruling have found ebay liable for trademark infringement or negligent business practices as a result of counterfeit products on its website. For example, both the Paris Commercial Court 29 and the Troyes (France) High Court 30 have charged ebay with responsibility for patrolling its site and removing infringing products. The Paris Commercial Court awarded plaintiff Louis Vuitton approximately 19 million in damages, concluding that ebay was negligent in its obligation to ensure its business model did not generate illegal activity. On the other hand, a Belgium court ruled in favor of ebay, placing the burden for patrolling the Internet for infringing products on the trademark owner. 31 How will 28 Tiffany at Louis Vuitton v. ebay, Commercial Court of Paris (June 30, 2008), General docket no (France). 30 Louis Vuitton; Hermes v. ebay, Troyes High Court (June 4, 2008), Docket no. 06/0264 (France). 31 Lancôme v. ebay, Brussels Commercial Court (Aug. 12, 2008), Docket no. A/07/06032 (Belgium). 22

23 conflicting international standards affect online and international business? How can companies adopt IP practices to comply with varying standards in different jurisdictions? 23