Business and Technology Law

Businesses manufacturing and selling patented goods should consider the recent Seventh Circuit decision in County Materials Corporation v. Allan Block Corporation, 2007 WL 2701979 (7th Cir. 2007), where the court tackled several important issues related to non-compete covenants in agreements concerning the manufacture and sale of patented goods, including jurisdiction, patent misuse, and enforceability under the state’s laws. Of particular importance is the court’s discussion of when the provisions of a covenant not to compete constitute patent misuse.
County Materials manufactures concrete blocks, and Allan Block develops, markets, and licenses technology for the manufacture of concrete blocks. The parties entered into an agreement granting County Materials the exclusive right to manufacture Allan Block’s patented block products in northwest Wisconsin. County was granted the right “to sell these products under the Allan Block trademark.” The agreement also allowed County Materials to make and sell two specific competing block products, without time restrictions. It also specified that the 18 months following termination of the agreement, County Materials could not “directly or indirectly engage in the manufacture and/or sale of any other [competing]… block.”

Allan Block notified County Materials that it would be terminating the agreement. County Materials soon completed its own competing new design of concrete block. When County Materials began taking steps to produce the block, Allan Block threatened to sue for a violation of the non-compete clause in the agreement. County Materials beat them to court, filing a declaratory judgment action seeking a declaration that the non-compete provision of the parties’ agreement constituted patent misuse and was therefore void. The federal district court found that the non-compete clause did not violate federal patent policy or Minnesota law.

The United States Court of Appeals for the Seventh Circuit affirmed. The Seventh Circuit reviewed three issues: 1) whether this case involved question of federal patent law and should therefore be decided by the Federal Circuit, 2) whether the non-compete clause constituted patent misuse, and 3) whether the non-compete clause violated Minnesota state law. First, the court held that it was proper for it to hear the appeal because the question presented was merely one of the contractual enforceability of a non-compete clause, rather than a question of federal patent law.

The court went on to reject the claim that the non-compete clause constituted patent misuse. County Materials argued that the inclusion of the non-compete clause in the patent license was per se unlawful patent misuse and the improper result of patent leverage. Under current law, however, such per se claims are rarely recognized unless the patent owner has market power or the provisions of the non-compete clause were not reasonably within the patent grant. The court instead applied the rule of reason to County Materials’ claim that the clause was unreasonable because it allowed Allan Block to use its patent to exclude the competition in the market from unpatented products. The court concluded that the plaintiff failed to show that the non-compete clause had any effect on the broader market for concrete blocks, rather than just impacting the plaintiff. In rejecting the patent misuse allegation, the court also noted that the non-compete clause was subject to temporal and geographic limits and permitted County Materials to sell and manufacture two competing products. The court also determined that the non-compete clause did not violate Minnesota state law, finding that the agreement was reasonable particularly in light of the exclusivity provisions, explaining that that “when a licensee gets an exclusive patent license… it is benefitting from the patentee’s property rights more than it would with a non-exclusive license.”

Companies often require their employees to sign covenants not to compete as part of an employment arrangement. These covenants may include a forum-selection clause and/or a choice-of-law clause, requiring that any lawsuit arising out of the covenant be brought in a particular jurisdiction and specifying what jurisdiction’s laws are to be applied in adjudicating a dispute. Businesses with employees in Texas should consider a recent Texas Supreme Court decision enforcing a forum-selection clause in a covenant not to compete signed by a Texas resident. In In re AutoNation, Inc., 228 S.W.3d 663 (Tex. 2007), the court held that a forum-selection clause in a covenant not to compete designating Florida as the forum was enforceable in Texas. The decision means that Texans who agree to a covenant not to compete cannot count on that covenant being interpreted in a Texas court.

The case arose out of a 2003 agreement between AutoNation, a national chain of automobile dealerships, and Hatfield, a former employee who was general manager of one of AutoNation’s dealerships. As a condition of his continued employment, Hatfield was required to sign a “Confidentiality, No-Solicitation/No-Hire and Non-Compete Agreement,” which included a one-year covenant not to compete. A choice-of-law provision in the agreement stated that the agreement would be construed under Florida law, and a forum-selection clause provided that any litigation arising out of the agreement must be filed in Florida. After learning that Hatfield had resigned and accepted a position with a competitor, Auto Nation filed a suit seeking injunctive relief and damages in a Broward County, Florida state court. Before learning of the Florida action, Hatfield filed a declaratory judgment suit in a Harris County, Texas state court seeking, inter alia, a declaration that the non-compete agreement was governed by Texas law and was unenforceable.

At Hatfield’s request, the Texas trial court later signed a temporary anti-suit injunction prohibiting AutoNation from taking any further action in connection with the pending Florida law suit or filing any future litigation seeking to enforce the non-compete agreement in any non-Texas court. In its injunction order, the trial court found that “it is probable that the covenant not to compete is unenforceable in Texas.” The court of appeals, relying on the decision in DeSantis v. Wachkenhut Corp., 793 S.W.2d 670 (Tex 1990), ruled that the trial court did not abuse its discretion in issuing the injunction because in this case, “fundamental Texas public policy requires application of Texas law to the question of enforceability of a non-compete agreement.”

The Texas Supreme Court disagreed. The court noted that it is well accepted in Texas that parties have the freedom to negotiate contracts. Texas courts generally enforce forum-selection clauses, unless the opposing party clearly shows that enforcement would be unreasonable or unjust, or the clause is invalid for other reasons such as fraud or overreaching. The court disagreed with the appellate court’s reliance on DeSantis. While DeSantis and this case involved similar factual scenarios – litigation between Florida Corporations and their Texas resident Employees concerning non-compete clauses – the court explained that DeSantis actually dealt only with a choice-of-law provision rather than a forum-selection clause. In DeSantis, a Florida corporation sued a former employee in Texas for a violation of a non-compete clause. The agreement at issue between those parties included a choice-of-law provision specifying the Florida law would govern disputes. The Supreme Court in DeSantis concluded then that Texas law should govern the dispute regardless of the choice-of-law provision. In DeSantis, the court indicated that “the law governing enforcement of noncompetition agreements is fundamental policy in Texas” and “to apply the law of another state to determine enforceability of such an agreement in the circumstances of a case like this would be contrary to that policy.”

In AutoNation, however, the court clarified its holding in DeSantis, stating that there was nothing in DeSantis requiring that a suit be brought in Texas when a forum-selection clause mandates venue elsewhere. The court affirmed the necessity of judicial respect for bargained-for contractual agreements and rejected the notion that fundamental Texas policy requires that every employment dispute with a Texas resident must be litigated in Texas. According to the court, a contractual forum-selection clause is clearly enforceable in cases involving a covenant not to compete. It would be up to the Florida court to decide whether the choice-of-law provision was enforceable. In support of its conclusion, the court also noted that because AutoNation’s suit was filed first in Florida, the decision also honored principles of interstate comity. In the wake of AutoNation, companies that employ Texas residents will be able to specify the jurisdiction where disputes regarding a covenant not to compete will be heard.

Businesses involved in California appeals should review a recent decision by the California Court of Appeal clarifying when a party that prevails in an appeal can seek an award of appellate attorney’s fees. In Butler-Rupp v. Lourdeaux, 65 Cal.Rptr.3d 242 (Cal. App. 2007), the court held that a refusal to award costs on appeal does not preclude a prevailing party from later seeking an award of appellate attorney’s fees in the trial court after remand. This ruling will give companies that prevail in an appeal an opportunity to seek an award of fees from the trial court without reference to the appellate court’s determination with respect to what party was responsible for costs on appeal.

The case arose out of a commercial landlord-tenant dispute involving both tort and contract claims. In a prior opinion, the Court of Appeal reversed a $500,000 damages award for negligent infliction of emotional distress, affirmed a contract-based award of $855,000, and reversed the trial court’s order denying plaintiffs their attorney’s fees incurred in connection with the trial. At the conclusion of its opinion, the Court of Appeal stated that “the parties to the appeal are to bear their own costs on appeal.” After remand, plaintiffs filed a motion in the trial court seeking an award of attorney’s fees incurred in connection with the appeal. The trial court granted the motion, awarding $200,000 in attorney’s fees for the prior appeal.

The court rejected the defendants’ contention that the trial court had no jurisdiction to award appellate attorney’s fees. Defendants argued that by ordering each side to bear its own costs, the court foreclosed any award of attorney’s fees by the trial court. In analyzing the issue, the court noted that the authority for making any attorney’s fees award in this case was based on the parties’ contract, which provided for an award of fees to a prevailing party. Code of Civil Procedure section 1033.5 also grants a superior court the authority to award costs, including attorney’s fees, authorized by contract, statute, or law. An award of fees may be requested from the appellate court while the appeal is pending or in the trial court after the remittitur is issued.

The court concluded that its prior decision to have each party bear its own costs did not preclude the plaintiffs from seeking an attorney’s fees award. During the prior appeal, plaintiffs did not request an award of attorney’s fees. Unless specified, costs on appeal do not include attorney’s fees, and an appellate court ruling with respect to costs does not affect a party’s ability to seek an attorney’s fees award in the trial court. In the wake of Butler-Rupp, businesses involved in California appeals should be aware that after remand, appellate attorney’s fees will still be available where the appellate court did not deny a request for such fees even if the court did not award costs to the prevailing party.

In some instances, publishers who suspect their intellectual property rights are being infringed will not request an audit of the target’s network. Instead, the publishers will send a legal notice to its customer attempting to terminate their license agreement and prevent the customer from using the product. Publishers often have a contractual right to terminate the license and require customers to immediately stop using the software. A sample termination provision is below.

This Software License Agreement may be terminated (a) by your giving Altova written notice of termination; or (b) by Altova, at its option, giving you written notice of termination if you commit a breach of this Software License Agreement and fail to cure such breach within ten (10) days after notice from Altova or (c) at the request of an authorized Altova reseller in the event that you fail to make your license payment or other monies due and payable. In addition the Software License Agreement governing your use of a previous version that you have upgraded or updated of the Software is terminated upon your acceptance of the terms and conditions of the Software License Agreement accompanying such upgrade or update. Upon any termination of the Software License Agreement, you must cease all use of the Software that it governs, destroy all copies then in your possession or control and take such other actions as Altova may reasonably request to ensure that no copies of the Software remain in your possession or control. The terms and conditions set forth in Sections 1(g), (h), (i), 2, 5(b), (c), 9, 10 and 11 survive termination as applicable. See http://www.altova.com/order_license4.html.

If the software product at issue is an enterprise-wide product that cost millions of dollars, an unexpected termination notice can interrupt the business and will almost certainly escalate the dispute. Furthermore, if the businesses has unanticipated switching costs associated with identifying and researching replacement software, acquisition of the software itself, and training for employees using and supporting the software, the consequences of a termination could be devastating.

Many states have laws regulating how a holder of data must dispose of personal information. Such laws protect data if the holder decides it no longer wants to maintain that data.

There are generally two types of data destruction laws: those that specifically enumerate how the data must be destroyed and those that mandate the use of a disposal system that meets a reasonableness standard. Some states include both types, though most choose only one. States that fall into the first category typically use some variation of the following regulation: “Businesses must take all reasonable steps to destroy records by shredding, erasing, or otherwise modifying the personal information to make it unreadable or undecipherable.” Note that the statute defines how the records must be destroyed and what the final outcome of the process must yield. States that have passed this type of law include:

• Arkansas
• California
• Georgia
• Indiana
• Kansas
• Massachusetts
• Michigan
• Montana
• Nevada
• New Jersey
• New York
• Oregon
• Rhode Island
• Texas
• Vermont

The second type of data destruction law provides that: “businesses shall maintain reasonable security procedures and practices appropriate to the nature of the information to protect from unauthorized access, destruction, use, modification, or disclosure.” States that adopted this form of a records destruction law are:

• Arkansas
• Colorado
• Illinois*
• Maryland
• Nevada
• North Carolina
• Oregon
• Utah
• Washington

If your business operates in one or more of the above states, you should ensure that you are properly destroying any unneeded data. Improper destruction of records could lead to liability, unnecessary expense, and wasted time. More and more states are adopting and enforcing these laws you do not want to be caught unaware.

* Applies only to state agencies.

“What's in a name? That which we call a rose by any other name would smell as sweet.” – Romeo and Juliet by William Shakespeare.

The merger doctrine states that where an idea and its expression are inseparable, the courts will not grant copyright protection. Johnson Controls, Inc. v. Phoenix Control Systems, Inc., 886 F.2d 1173, 1175 (9th Cir. 1971). The Copyright Act does not expressly address the merger doctrine. See 17 U.S.C.A. §§ 101-914 (1976). Like the scenes à faire doctrine, the merger doctrine is a judicial creation of law and equity.

The most noted merger doctrine case is that of Herbert Rosenthal Jewelry Corp. v. Kalpakian, 446 F.2d 738 (9th Cir. 1971). In this case, the plaintiff brought a copyright infringement claim alleging that another jeweler copied the plaintiff’s design of a jewel-encrusted pin in the shape of a bee. Id. The court noted that there were only a limited number of ways in which a jeweler could create a bee shaped pin. Id. at 741. The 9th Circuit Court held, “the ‘idea’ of a jeweled bee pin and the ‘expression’ of the ‘idea’ were inseparable, thus copying the ‘expression’ would not be barred by copyright registration.” Id. at 742. Furthermore, the substantial similarity of the two expressions of the same idea was inevitable. Id.

There is a distinction between the merger doctrine and the scenes à faire doctrine. The merger doctrine applies when the idea and the expression are inseparable. Landsberg v. Scrabble Crossword Game Players, Inc., 736 F.2d 485 (9th Cir. 1984). The scenes à faire doctrine applies when substantial similarity of the expression is a natural result of the genre or common idea. Cain v. Universal Pictures Co., Inc., 47 F.Supp. 1013 (S.D. Cal. 1942). Despite this distinction, the courts often confuse scenes à faire doctrine with the merger doctrine. Both doctrines are considered an affirmative defense to a copyright claim.

Even when a court finds that a defendant fails to prove affirmative defense of scenes à faire or merger, a plaintiff must still show there is substantial similarity between the two works. In other words, it is the plaintiff’s ultimate burden of proof to prove that the alleged infringing work is as a matter of fact, substantially similar. In order to meet this substantially similar standard, the courts require a plaintiff to meet a two-pronged test: (1) a plaintiff must show that the general ideas are substantially similar using an extrinsic test; and (2) the plaintiff must show that the expression of those ideas are substantially similar using an intrinsic test. See Sid & Marty Krofft Television Productions, Inc. v. McDonald’s Corp., 562 F.2d 1157, 1163 (9th Cir. 1997).

The extrinsic test for similarity of ideas scrutinizes specific criteria which can be listed and analyzed. This extrinsic criteria may include “the type of artwork involved, the materials used, the subject matter, and the setting for the subject.” Id. at 1158. This question is usually decided as a matter of law. Id. at 1164. The intrinsic test, however, is determined by the trier of fact. Either a judge or a jury decides whether the two competing works are substantially similar enough in the expression of the idea in order to constitute infringement. The intrinsic test applies using the ordinary reasonable person standard. Id.

However, where the court recognizes that the affirmative defense of scenes à faire or merger doctrine applies, the court is in essence making a determination as to the substantial similarity of the works. The court recognizes that even though the works may be substantially similar, the scenes à faire doctrine or the merger doctrine preclude recover for infringement.

New legislation introduced in the U.S. House of Representatives could result in amendments to the Digital Millennium Copyright Act (DMCA) in favor of relaxed usage rights for digital media. On February 27, Representatives Rick Boucher (D-VA) and John Doolittle (R-CA) introduced the Freedom and Innovation Revitalizing U.S. Entrepreneurship Act of 2007 (FAIR USE Act). Among a few other modifications, the Act would create a handful of specific exemptions from the DMCA’s prohibition on “unlocking” the rights management features of certain digital media. As a result, end users might be able to legally create, for example, backup copies of DVD and other purchased content. However, in a concession to opponents of previous, similar legislation, the Act would not create a fair use defense to a claim of circumvention in violation of the DMCA unless the conduct fell within one of the Act’s six enumerated exceptions:

(i) an act of circumvention that is carried out solely for the purpose of making a compilation of portions of audiovisual works in the collection of a library or archives for educational use in a classroom by an instructor;

(ii) an act of circumvention that is carried out solely for the purpose of enabling a person to skip past or to avoid commercial or personally objectionable content in an audiovisual work;

(iii) an act of circumvention that is carried out solely for the purpose of enabling a person to transmit a work over a home or personal network, except that this exemption does not apply to the circumvention of a technological measure to the extent that it prevents uploading of the work to the Internet for mass, indiscriminate redistribution;

(iv) an act of circumvention that is carried out solely for the purpose of gaining access to one or more works in the public domain that are included in a compilation consisting primarily of works in the public domain;

(v) an act of circumvention that is carried out to gain access to a work of substantial public interest solely for purposes of criticism, comment, news reporting, scholarship, or research; or

(vi) an act of circumvention that is carried out solely for the purpose of enabling a library or archives meeting the requirements of section 108(a)(2), with respect to works included in its collection, to preserve or secure a copy or to replace a copy that is damaged, deteriorating, lost, or stolen.

Significantly, the Act also would codify the Supreme Court’s “Betamax decision,” by eliminating any potential liability for copyright infringement “based on the design, manufacture, or distribution of a hardware device or of a component of the device if the device is capable of substantial, commercially significant noninfringing use.”

If enacted, the Act would represent a major re-working of some of the more complained-about aspects of the DMCA. While opposition from media producers and copyright owners is likely to pursue the bill, it will be interesting to see if the compromises its authors have included will be sufficient to see it through to passage.

Judge Robert F. Kelly of the Eastern District of Pennsylvania ruled that viewing archived web pages, even pages that the owner intended to keep private, does not constitute copyright infringement or “hacking.” In Healthcare Advocates Inc. v. Harding, Earley, Follmer & Frailey et al., 2007 WL 2085358 (E.D. Pa. July 20, 2007), the plaintiff unsuccessfully alleged copyright infringement, violations of the Digital Millennium Copyright Act and the Computer Fraud and Abuse Act, conversion and trespass to chattels.

Law firm Harding, Earley, Follmer & Frailey LLP used a website search engine called the Wayback Machine to locate and print archived web pages central to a copyright matter it was handling for a client. An employee of the opposing party in the underlying case inserted a special line of code in the web pages’ “robots.txt” file to prevent the pages from being archived. Despite this extra code, Harding Early was nonetheless able to view some of the web pages.

The court ruled that although Healthcare Advocates satisfied the test for copyright infringement, Harding’s access constituted a fair use under the Copyright Act because Harding was not planning to resell the material or use it to undermine the web site owner’s business.

The judge also granted summary judgment against the plaintiff on its DMCA claim because the evidence did not show Harding used any improper “hacking” process to view the web pages. A technical server error caused the Wayback Machine to inadvertently reveal the files. There was no circumvention of a technological measure, which is an element of a DMCA claim. 17 U.S.C. § 1201(a)(3)(A). The plaintiff’s own expert agreed that Harding did not “hack” the web pages. Finally, the court ruled in favor of Harding on the Computer Fraud and Abuse Act claim, because Healthcare Advocates did not show the requisite minimum $5,000 loss.

If your business has been accused of copyright infringement, experienced counsel can advise you regarding whether there are any affirmative defenses that you can raise that may allow you to have the claims dismissed in a pretrial motion.

Businesses interested in copyrighting works should review a recent First Circuit decision making it clear that a prerequisite for a copyright is access to the original work. The court held that a reconstruction of the work was insufficient to meet the copyright law’s requirement that a deposit “copy” of the work be submitted with a copyright application. Companies intending to copyright a work should make certain that they maintain an original version or copyright protection may not be available.

Fernando Torres-Negrn wrote a song called “Noche de Fiesta” and made a tape recording of himself performing the song. Torres then gave the lyrics, written on a piece of paper, to a friend, along with the tape of his performance. He knew that the song would be played in public by his friend’s band. Torres, however, did not make a copy of the lyrics or the tape for himself, and he never saw the originals again. Over the next few years, the song ended up being performed by many groups and was included on a number of CD’s. None of these artists asked Toress’ permission to make the recordings.

When he learned about the wide distribution of his song, Torres submitted an application for registration of copyright to the Copyright Office in 2001. Because the application required a “copy” of the copyrighted work, Torres submitted a typed version of the lyrics. He also submitted a tape that he created in 2001, on which he had recorded himself singing the song and clapping the rhythm. Torres received a certificate of copyright on January 31, 2002. Torres then filed a copyright infringement action against numerous defendants in the District of Puerto Rico. The jury returned a verdict in favor of Torres against some of the defendants, including J & N Records, finding that J & N had infringed his copyright on “Noche de Fiesta.” The district court, however, granted J & N’s motion for judgment as a matter of law, ruling that Torres’ reconstruction of the lyrics and music did not comply with the “deposit” requirement of the copyright act.

In Torres-Negrn v. J & N Records, LLC, 2007 WL 2846117 (1st Cir. 2007), the First Circuit agreed. The court began its analysis by quoting 17 U.S.C. § 411(a), which states that “[N]o action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.” Under 17 U.S.C. § 408(b), to complete the registration process, the creator of a work must submit “a complete copy or phonorecord” of the work for which the creator seeks registration. This copy is often referred to as the “deposit copy.” The court noted that “by the time he submitted his copyright registration application, [Torres] no longer had access to either the original writing of the lyrics or the tape recording of the song.” Torres therefore submitted a reconstruction. But the court concluded that a reconstruction is not the same thing as a copy of an original for purposes of the deposit copy requirement. Citing various dictionary definitions, the court found that “a reconstruction is not a copy; a reconstruction is created without an original, whereas a copy is made from an original. Congress specified that a registration had to be accompanied by a “copy.”

Torres’ failure to include an actual copy in his registration materials was fatal to his infringement claim. The court determined that “an invalid registration (involving material errors, fraud, or an incomplete application) nullifies the federal court’s subject matter jurisdiction.” Because Torres did not submit a proper deposit copy as part of his registration, that registration was invalid. When the registration is invalid, there is no subject matter jurisdiction over an infringement claim, and it was therefore proper to enter judgment against Torres. Businesses should be aware that in the wake of this decision, federal courts will strictly enforce the deposit copy requirement.

“Lack of frankness in discovery can have unintended and sometimes damaging consequences.” So begins the decision in In re WRT Energy Securities Litigation, 2007 WL 2826624 (S.D.N.Y. 2007), where the Southern District of New York administered a stern lesson in the dangers that may arise for companies that allow the destruction of documents during litigation. The case is particularly important because the plaintiffs were actually hit with a spoliation sanction based on the destruction of documents that they did not have in their possession and did not themselves destroy.

The litigation involving WRT Energy, which began in 1995, arose out of an offering for the sale of senior notes as part of an effort by WRT to raise capital for its business of using advanced technologies to revitalize abandoned or shut-in oil and gas wells. The registration statement for the notes made a number of representations regarding the “success rate” WRT had experienced with respect to wells where it had implemented its technologies. After the notes offering, WRT’s financial condition deteriorated, the value of the notes fell significantly, and WRT ultimately filed for bankruptcy. The plaintiffs filed class action complaints alleging violations of the federal securities laws.
In the operative complaint, the plaintiffs alleged that the claims made by WRT with respect to its success in revitalizing failed wells were materially incorrect.

Discovery was suspended from 1999 through 2004 while various motions to dismiss were litigated. When discovery resumed, defendants repeatedly asked the plaintiffs through interrogatories to specify and identify the basis for their contention that the claims regarding well revitalization were incorrect. Plaintiffs responded that they had reviewed documents relating to 21 specific wells but reserved the right to supplement their responses. In the meantime, a document depository had been created to store the voluminous documents related to WRT’s business activities during the bankruptcy proceedings. After the bankruptcy was concluded, the depository was liquidated and the documents were returned to various parties, including WRT’s successor, Gulfport Energy. The bankruptcy court entered an order requiring the parties to preserve the documents until this proceeding was over.

Gulfport made the documents available for inspection, and the defense team identified and copied only the documents relating to the wells identified in plaintiffs’ interrogatory responses. In May of 2006, Gulfport’s general counsel informed the attorneys for both plaintiffs and the defendants of Gulfport’s intention to dispose of the WRT documents and gave the parties the opportunity to take possession of the documents. Counsel for the parties told Gulfport they had no further interest in the documents in Gulfport’s possession, and the documents were destroyed. Four months later, the parties exchanged expert reports, and plaintiffs’ expert identified an additional 75 wells that he characterized as failures. Defendants moved for sanctions, asking the court to preclude the plaintiffs from relying on their late-discovered theory of liability and the 75 wells on which it was based.

The court, in part, granted the motion for spoliation sanctions. In doing so, the court rejected plaintiffs’ argument that they could not be held responsible for breaching a duty to preserve evidence that they did not personally destroy. According to the court, the plaintiffs had functional control over the documents, since Gulfport gave them the opportunity to take custody of the documents, and plaintiffs therefore had an obligation to preserve them. As to culpability, plaintiffs had already seen a draft of the expert’s report that anticipated using more than the 21 wells in its analysis. The court concluded that “it was at least grossly negligent for plaintiffs’ counsel to permit the Gulfport documents to be destroyed without specifically warning [defendants] that their expert had analyzed all the wells and would likely present expert opinion regarding all of them.” The court did not allow the plaintiffs to rely on their having reserved the right to supplement their interrogatory responses, concluding that “the plaintiffs’ boilerplate reservation language does not trump the specific information that they provided concerning their theory.”

While the court agreed with plaintiffs that defendants had not established that documents relating to plaintiffs’ “cash flow model” analysis were relevant for purposes of spoliation, the court reached the opposite conclusion regarding documents containing reserve and related data. According to the court, “these documents are central to the [defendants’] argument” regarding how “success rate” was to be measured. The court stated that “any evidence of increased reserves would be favorable to the [defendants] given their broad definition of success.”

In crafting a remedy, the court rejected plaintiffs’ claims that spoliation sanctions should not be granted because the defendants had an opportunity to inspect the documents before they were destroyed. By “misleading” the defendants regarding their theory of the case, “the plaintiffs rendered the [defendants’] opportunity to review the Gulfport documents illusory . . ..” The court entered an order precluding the plaintiffs “from challenging the representativeness of the reserve information that the defendants ultimately rely upon . . . it will be conclusively presumed that similar results would have obtained for the remainder of the 97 wells if that information were available.” The court also allowed a jury instruction “explaining that this asymmetry is a consequence of a loss of evidence for which the plaintiffs were responsible.”

These devastating spoliation sanctions against the plaintiffs in WRT Energy are a reminder that a business involved in litigation should think twice before ever allowing the destruction of any documents that might be relevant.

Businesses owning the rights to trademarked terms are always mindful that those rights need to be protected and policed. If a trademarked term becomes widely used in its generic sense, trademark protection may be withdrawn – a set of circumstances that has been referred to as “genericide.” In Freecycle Network, Inc. v. Oey, 2007 WL 2781902 (9th Cir. 2007), the United States Court of Appeals for the Ninth Circuit rejected a claim based on the efforts of an individual to encourage the use of a term in its generic sense in the hopes that trademark protection for that term would be denied. Companies should be mindful that under Freecycle, it may not be possible to state a claim under the Lanham Act based solely on attempts to use or to encourage the use of a trademarked term in its generic sense.

The Freecycle Network (“TFN”) is a nonprofit corporation that encourages and coordinates the reuse, recycling, and gifting of goods. On its website, http://www.freecycle.org, TFN coordinates the efforts of over more than 4,000 Freecycle groups worldwide. On these local group webpages, individuals may post information about items they no longer want. If another member wants the offered item, an exchange is arranged between the parties, avoiding the need to dispose of it in a landfill or otherwise.

The case arose out of the use of the term “freecycle” and attempts to gain trademark protection for that term. Timothy Oey, a member of TFN since 2004, suggested that TFN more actively police the use of term “freecycle” and pursue trademark protection for it. TFN then instituted a strict usage policy, drafted by Oey, preventing use of the term “freecycle” in any sense other than to refer to TFN or TFN’s services. While TFN claims to have consistently used the marks “Freecycle” and “The Freecycle Network” and its logo since May 2003 to refer to TFN, it also admitted that it first used the term “freecycle” and various derivations to refer more generally to acts involving the recycling of goods for free using the Internet. On January 17, 2006, TFN’s proposed mark was published for opposition in the Official Gazette, an opposition was filed the next day, and the mark currently remains unregistered.

Oey subsequently experienced a change of heart and came to believe that the term “freecycle” should remain in the public domain. He urged TFN to abandon its efforts to secure a trademark and conveyed these feelings in an e-mail to fellow TFN group moderators. Subsequently, Oey made various statements on the Internet asserting that TFN lacked trademark rights in “freecycle” because it was a generic term, Oey also encouraged others to use the term in its generic sense and to contact the USPTO to oppose the pending registration. TFN severed ties with Oey, and Oey continued to publish statements on the Internet challenging TFN’s rights to the term “freecycle.”

TFN filed suit against Oey in federal court in April 2006 alleging that Oey’s statements constituted contributory trademark infringement and trademark disparagement under section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), as well as injurious falsehood, defamation, and intentional interference with a business relationship under Arizona law.
The district court granted TFN’s request for a preliminary injunction, entering an order preventing Oey “from making any comments that could be construed as to disparage upon [The Freecycle Network]’s possible trademark and logo” and requiring that he “remove all postings from the [I]nternet and any other public forums that he has previously made that disparage [The Freecycle Network]’s possible trademark and logo.” Oey filed an interlocutory appeal of the injunction order.

The Ninth Circuit reversed and vacated the injunction. The court rejected the contention that Oey was acting improperly by encouraging others to use the term “freecycle” in its generic sense. “Where the majority of the relevant public appropriates a trademark term as the name of a product (or service), the mark is a victim of ‘genericide’ and trademark rights generally cease.” The court noted that “genericide has spelled the end for countless formerly trademarked terms, including ‘aspirin,’ ‘escalator,’ ‘brassiere,’ and ‘cellophane’.”

But the court refused to recognize a cause of action for genericide. The court held that the Lanham Act itself does not contain any provision preventing individuals or businesses from using a trademarked term in its generic sense. According to the court, the Act also does not “prevent an individual from expressing an opinion that a mark should be considered generic or from encouraging others to use the mark in its generic sense.” Instead, a claim under the Lanham Act based on the generic use of a mark may only be pursued when that use also satisfies the elements of a cause of action specified by the Act, such as infringement, false designation of origin, false advertising, or dilution. While TFN may have disagreed with Oey’s opinion, its disagreement “and frustration with his activities cannot render Oey liable under the Lanham Act.”

The court also concluded that TFN was otherwise not entitled to an injunction because it had not stated any claim under the Lanham Act. Noting that the district court’s entry of the injunction was based solely on TFN’s Lanham Act claims of trademark infringement and trademark disparagement, the court concluded that the district court’s “likelihood of success” analysis did not properly analyze the necessary elements for trademark infringement. In particular, the district court erred by not assessing whether Oey’s actions constituted a “use in commerce” as required under 15 U.S.C. § 1125(a)(1). The court concluded that based on the record, it did not appear that Oey’s statements on the Internet “were made to promote any competing service or reap any commercial benefit whatsoever.” Instead, according to the court, based on his belief that the term “freecycle” was generic, “Oey simply expressed an opinion that TFN lacked trademark rights in the term ‘freecycle’ and encouraged likeminded individuals to continue to use the term in its generic sense and to inform the PTO of their opinions.”

The court also noted that even if Oey’s statements could be construed as a “use in commerce,” that use “was not likely to cause confusion, mistake, or deceive anyone as to the connection of Oey’s services (or any other) with TFN” as required under 15 U.S.C. § 1125(a)(1)(A). The court also held that there was no cause of action for “trademark disparagement” under the Lanham Act.

In the wake of Freestyle Network, companies will not be able to use the legal system to attack generic uses of their trademarks unless they can also establish the elements of a claim that is recognized under the Lanham Act.

Full Opinion Text:
http://www.ca9.uscourts.gov/ca9/newopinions.nsf/77FC32035139985C882573610078DF4B/$file/0616219.pdf?openelement

Many iPod ® video users have been frustrated by the lack of ability to load legally purchased movies in DVD format onto their devices. Although iTunes ® users can successfully load songs from CDs into iTunes ®, those users cannot load their movies. According to the MPAA, DVD purchasers must re-purchase movies in the iTunes-friendly Quicktime .mov format.

Although conversion technology exists to convert .wmv files to .mov files, some argue that such an action would violate the Digital Millennium Copyright Act (DMCA). DVDs, unlike most music compact discs, contain encryption technology to prevent buyers from copying the movie. The DMCA provides that “[n]o person shall circumvent a technological measure that effectively controls access to a work….” 17 U.S.C. 1201(a). Ripping a DVD and converting it to another format is arguably a violation of this DMCA provision.

Boston-based Load ‘N Go, is being sued by the MPAA for copyright infringement and DMCA violations. Load ‘N Go sells software that allows users to rip DVDs they own and upload them to their iPods. They will even sell an iPod pre-loaded with your DVDs. (News story here.)

These DMCA provisions and the methods the market uses to employ them struck two legislators as counter-intuitive. It does not seem logical that users can copy compact disks but not DVDs. Click here to read our blog post on a proposed amendment to the DMCA called the Freedom And Innovation Revitalizing U.S. Entrepreneurship Act of 2007 (FAIR USE Act) that seeks to remedy some of the less consumer-friendly provisions of the DMCA.

On October 1, Microsoft announced a new licensing option for Windows XP Professional directed at businesses that have discovered that their computers are running allegedly unlicensed copies of the operating system. Dubbed the “Get Genuine Windows Agreement” (GGWA), the program offers interested companies the perhaps superficially attractive opportunity to purchase operating system licenses for their affected computers at a volume licensing discount. However, in order to be eligible for the discount, those companies must sign an agreement including an “acknowledgement of legalization,” a commitment to purchase legal software in the future, and a clause giving Microsoft the right to audit the company’s computers to ensure compliance with applicable license agreements. Moreover, the licenses acquired under the agreement apply only to the computers for which they were initially purchased and are non-transferable. More details on the program are available here.

While GGWA might present a cost-effective solution for some businesses that have discovered the presence of unlicensed Windows XP operating systems on their network, those savings should be weighed carefully against the costs inherent in the agreement’s terms. Interested businesses should take care to ensure that they have an effective software compliance initiative in place before giving Microsoft or any other software publisher the right to conduct a compliance audit in their environment. Businesses should also carefully consider the legal ramifications of signing a written admission that their computers have been running unlicensed software. For many, the incremental cost associated with purchasing licenses under other licensing frameworks may present a better long-term value.

In many instances, the parties cannot resolve a software dispute with an audit. In some of these cases, there are contractual requirements or other considerations that cause the parties to employ traditional alternative dispute resolution frameworks to bring the decision makers to the table and try to resolve the case before a trial becomes necessary.

Mediation
Software publishers usually want to avoid costly litigation as much as end users do. Accordingly, a publisher may try to persuade the target to participate in mediation prior to commencing formal legal proceedings. Mediation can be valuable when there is an ongoing relationship between the parties, and the parties are interested in continuing the relationship.

One of the many advantages of mediation is that it can, relatively quickly, bring parties interested in resolution together. Mediations are typically shorter, more informal, and less costly. Parties with settlement authority attend the mediation with the goal of reaching a resolution and avoiding more formal, more costly arbitration or litigation.

Arbitration
In some instances, arbitration can be more favorable than litigation when resolving a
software dispute. In theory, the procedure is less formal, and in many instances, proceeds
more quickly than litigation. Either a single arbitrator or an arbitration panel considers the
issues of the matter and makes a decision that is binding on the parties. Arbitrators with
considerable software licensing experience and a general understanding of IT should be
selected for software disputes. In complex cases, the arbitrator selection process can be
time consuming and expensive.

There are also some significant disadvantages to arbitration. Initially, arbitrators are not required to follow the law when making their decisions. It is therefore sometimes difficult to accurately evaluate the probability of success on the merits. Additionally, whether and to what extent factual discovery will be permitted is almost always left to the arbitrator’s discretion. In reality, parties can spend years and hundreds of thousands of dollars arbitrating a software dispute.

Because the results in arbitration can be unpredictable, it is vital for a company to be in a position to accurately evaluate what is at risk in a software dispute to be arbitrated. The consequences for guessing incorrectly could result in an adverse award with catastrophic consequences.

The New York Court of Appeals has recently rejected an attempt to expand the available remedies for spoliation of evidence. The court addressed whether a plaintiff can sue a third party responsible for the destruction of evidence critical to a plaintiff’s claim against a tortfeasor. Businesses operating in New York should review the decision in Ortega v. City of New York, 2007 WL 2988760 (N.Y. 2007), where the court joined the majority of states in refusing to recognize the tort of third-party negligent spoliation of evidence.

After having it inspected at a service station, Ortega bought a used 1987 Ford minivan from a private owner. Driving down Ocean Parkway in Brooklyn, Ortega smelled fumes and pulled over. The minivan burst into flames, causing Ortega and her passenger, Manuel Peralta, to suffer severe burns. The New York City police officers who investigated the accident contacted a towing contractor to remove the vehicle from the road. The minivan was eventually transported to the New York City Police Department’s College Point Auto Pound in Queens.

Peralta filed a special proceeding against the towing company and the police department seeking to preclude destruction of the minivan until it could be inspected by Peralta. The court issued an order granting Peralta 60 days in which to inspect the vehicle and forbidding alteration or destruction of the minivan until completion of the inspection. The preservation order was served on the towing company and the police department. The police department’s legal bureau promptly forwarded a written request, along with a copy of the court order, to the property clerk at the auto pound directing preservation of the vehicle. For unknown reasons, the memo and order were either not received by the property clerk or were not properly acted upon. Instead, the vehicle was placed in a salvage auction and then, when it did not sell, it was crushed for scrap metal.

Ortega and Peralta did not pursue personal injury claims against Ford (the manufacturer of the van), the previous owner of the van, or the service station that had inspected the van. Instead, in July 2004, they sued the City of New York seeking compensation for the personal injuries they sustained as a result of the fire. Ortega and Peralta asserted, inter alia, that the City should be held liable for all damages caused by the fire because, by destroying the minivan, the City had breached its duty to preserve evidence, thereby committing the tort of negligent spoliation of evidence. The City responded by contending that the plaintiffs had failed to state a cause of action upon which relief could be granted. After the trial court dismissed the claims, the Appellate Division concluded that the plaintiffs’ claims were not viable.

The Court of Appeals affirmed, holding that New York did not recognize a claim for third-party negligent spoliation of evidence. The court noted that under New York law, a party already has a number of available remedies when evidence is destroyed. New York courts have the discretion “to provide proportionate relief to the party deprived of the lost evidence, such as precluding proof favorable to the spoliator to restore balance to the litigation, requiring the spoliator to pay costs to the injured party associated with the development of replacement evidence, or employing an adverse inference instruction at the trial of the action.” In appropriate cases, a court may “impose the ultimate sanction” of dismissing the case or striking responsive pleadings.

But the Court of Appeals refused to recognize that the destruction of evidence should be the basis of a separate tort claim. While a number of other states, including California, New Jersey, and Illinois, have recognized such a cause of action, the Court of Appeals disagreed that such a claim was available in New York. The court acknowledged the importance of discouraging the destruction of evidence, stating that “destruction of evidence by parties with a duty of preservation simply cannot be condoned, especially when that duty is imposed by court order.” The court concluded, however, that existing remedies were adequate to deter spoliation and appropriately compensate its victims.

While the destruction of the minivan placed Ortega and Peralta in a situation where discovery sanctions would be inadequate to address the problem, the civil contempt statutory scheme was available to them. The City itself conceded that if the plaintiffs had pursued a contempt claim, they would, at the very least, have been entitled to monetary damages sufficient “to reimburse them for additional investigation, research or expert expenses incurred in attempting to prove the underlying negligence claim absent inspection of the vehicle.”

The court gave other reasons for refusing to recognize the viability of a separate tort action based on the spoliation. According to the court, such a claim would be too speculative. “In a third-party spoliation case, because the content of the lost evidence is unknown, there is no way of ascertaining to what extent the proof would have benefited either the plaintiff or defendant in the underlying lawsuit and it is therefore impossible to identify which party, if any, was actually harmed.” In addition, recognizing such a tort would create significant potential liability for municipalities, which often tow and warehouse vehicles involved in accidents. The court stated that “we are not
persuaded that it would be sound public policy to create a new tort that shifts liability from responsible tortfeasors to government entities that serve as repositories of evidence that may or may not be relevant in future civil cases.” The Ortega decision makes it clear that while spoliation of evidence may still give rise to severe sanctions, the potential liability of third parties responsible for spoliation will be limited to damages available under the civil contempt statutory scheme.

Full Opinion Text: http://www.nycourts.gov/ctapps/decisions/oct07/118opn07.pdf

Erik Anderson and Rob Laney, authors of a UNIX program called BusyBox, recently filed one of the first lawsuits in the United States based on violations of the GNU General Public License, Version 2 (“GPL”). In Andersen et al. v. Monsoon Multimedia Inc., filed in the Southern District of New York, the authors claimed that a company called Monsoon infringed their copyright because Monsoon incorporated the BusyBox software into its HAVA TV product without properly making the final software product freely available to its customers.

Anderson and Laney distributed BusyBox under the GPL, a type of Copyleft license. Copyleft is a use rights system allowing free use of a creation as long as the resulting work is similarly published with free use rights. Anderson and Laney Claimed that by using BusyBox, Monsoon was required to distribute its derivative work (HAVA TV), or at least the portion of HAVA TV incorporating BusyBox, under a similar Copyleft license. The plaintiffs in the case are seeking copyright damages – money damages, disgorgement, an injunction, and attorney’s fees.

If you or your client is incorporating software licensed under the GPL into products that will be redistributed, it is important to review the GPL and understand the obligations regarding redistribution of the software.

Read about Copyleft here.

The Business Software Alliance (BSA) recently lent its support to legislation pending in the U.S. Congress that would expand the scope and power of federal criminal law pertaining to IT security matters. Under the “Cyber-Security Enhancement Act of 2007” (CSEA), section 1030 of the federal criminal code would be amended to include new offenses of extortion based on threats to gain unauthorized access to a computer and of conspiracy to commit any of the IT-related crimes defined in section 1030. More significantly, the bill would create another new offense directed at anyone who:

…intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains a unique electronic identification number, address or routing code, or access device (as defined in section 1029(e)(1)), from a protected computer.

The term “exceeds authorized access” already is defined elsewhere to mean “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” In addition, the bill amends the previous definition of “protected computer” to include any computer “affecting interstate or foreign commerce or communication” (which would seem to include any computer that is publicly accessible through the Internet). Finally, the bill would include all of these offenses, along with the other section 1030 offenses, as predicates for prosecution (as well as civil liability) under the Racketeer Influenced and Corrupt Organizations Act (RICO).

It is undoubtedly important to give law enforcement all the tools that it needs to combat organized efforts to infiltrate secure computer networks and the sensitive personal information that many of them contain (an objective that CSEA also pursues through greater funding for federal investigations into cyber-crime). However, in pursuing this end, the CSEA and its supporters seem to be casting a very wide net indeed. Questions concerning what constitutes “authorized” access or information to which a user is or is not “entitled” on a web-accessible computer could mean that more than just hardened cyber-criminals end up getting caught in CSEA’s sweep. The surprisingly broad scope of the bill, coupled with the new link to RICO and the private civil suits that statute allows, may also mean that we could see an up-tick in IT-related litigation in coming years, should CSEA see its way through to passage. It will be interesting to watch this bills progress in coming weeks and months.

You can read the text of the bill here. Section 1030 as it currently exists is available here.

There are some software licensing disputes that do not lend themselves to amicable resolutions. When there are millions of dollars in controversy and each party believes that it has acted within its legal rights, litigation may be unavoidable. Many times, even when litigation seems certain, the parties evaluate the various litigation considerations and conclude that they should try pre-litigation resolution strategies to see if they can, at the very least, narrow the issues.

Amount in Controversy
Until a client understands its potential exposure in a software dispute, choosing a strategy is almost impossible. The difficulty in software disputes is that a tremendous of amount of work and analysis is required to estimate the amount in controversy.

In trade association audits conducted by the BSA and the SIIA, the amount in controversy may be relatively easy to estimate because agencies typically employ mature alternative dispute resolution processes that permit accurate estimates of not only the amount in controversy but also the probable settlement range.

The amount in controversy is much more difficult to determine in other types of audit because the contractual audit provisions contained in software licenses frequently do not specify a formula for resolving any license compliance gaps following an audit. Regardless of the nature of the dispute, helping the client determine the amount in controversy is an important role for in-house and outside counsel.

Switching Costs
Perhaps the most overlooked issue when developing a strategy for a software dispute is the costs to discontinue use of a publisher’s software and switch to a competitor’s product. High switching costs for enterprise products places the software publisher in a position of strength from a practical perspective. By contrast, low switching costs or changing business requirements places the negotiating strength in the hands of the client. For this reason, publishers who have a dominant market share, such as Autodesk, are generally more aggressive in their approach to audits and litigation than those publishers operating in highly competitive markets.

Switching costs are also critically important because most software licenses contain a termination provision that will almost certainly be invoked when litigation is commenced or just prior to litigation. Termination provisions give the publisher a great deal of leverage in litigation and if the publisher is able to demonstrate that it properly terminated a software license, can bolster the publisher’s copyright infringement claims in the litigation.

Before choosing a strategy, audit targets should work with experienced counsel to conduct a careful analysis of the licenses in question and a disciplined assessment of the alternatives to using the auditing publisher’s products.

Probability of Success on the Merits
The next step in the strategy development process is evaluating the strength of the claims
on the merits. While software license disputes are generally pled as copyright infringement claims, the license agreements define the nature of the copyright holder’s grant of authority to use its products. Most matters that proceed to litigation arise because of ambiguous language in the license agreements defining the scope of the license, and it is this ambiguity that will determine the probability of success on the merits.

If an attorney commits malpractice in connection with patent prosecution or patent litigation, a legal malpractice claim may be filed in federal court even when there is no diversity jurisdiction and all the claims are based on state law. In a case of first impression, the United States Court of Appeals for the Federal Circuit has held that a legal malpractice case involving patent prosecution and patent litigation issues arises under federal law and must be heard in a federal court. In Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 2007 WL 2983660 (Fed. Cir. 2007), the court determined that when establishing patent infringement is a necessary element of a claim, federal jurisdiction exists. The decision will therefore be of interest to any business involved in litigation where a question of patent infringement is an essential part of the claims at issue.

Louis Stumberg and James Fulton developed technology for a safety device that could be used by firemen and other emergency personnel. This device, when integrated into self-contained breathing apparatuses (“SCBA”), measures temperature, calculates the user’s remaining airtime, and computes how long the user can safely remain in a fire environment or other hazardous situation. The device also includes an alarm that goes off if the wearer is motionless for a particular period of time. Stumberg and Fulton formed various companies, including Air Measurement Technologies, Inc., to develop, license, and market the safety device. In 1989, they hired patent attorney Gary Hamilton to secure patent protection for the safety device and related technology. Hamilton then practiced law with Akin Gump.

Some years later, Air Measurement filed six patent infringement suits in federal court against SCBA manufacturers. All six suits settled without a judicial determination of infringement, invalidity, or unenforceability of Air Measurement’s patents. During the course of the cases, Air Measurement hired new counsel, who claimed to have discovered various errors Hamilton allegedly made during the patent prosecution and the six infringement cases.

In May of 2003, Air Measurement, a Texas company, filed suit against Hamilton and several law firms in a Texas state court alleging state-law causes of action for legal malpractice, negligence, negligent misrepresentation, and breach of fiduciary duty. Air Measurement alleged that Akin Gump’s errors forced it to settle the prior cases far below the fair market value of the patents because the defendants in the prior cases were able to raise invalidity and unenforceability defenses that would not have existed without attorney error.

Akin Gump removed the case to federal court, contending that the resolution of Air Measurement’s suit required the resolution of a substantial question of patent law. Akin Gump also filed a counterclaim seeking a declaration of invalidity of the patents and a declaration that the patents were not invalid or unenforceable by reason of attorney conduct. The federal district court denied various motion to remand and certified the following question for interlocutory appeal: “whether a Texas state-law legal malpractice claim arising out of underlying patent prosecution and patent litigation necessarily raises a question of federal patent law, actually disputed and substantial, that a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.”

The Federal Circuit concluded that “the patent infringement question is a necessary element of [Air Measurement’s] malpractice claim and raises a substantial, contested question of patent law that Congress intended for resolution in federal court . . ..” 42 U.S.C. § 1338(a) provides the federal district courts with jurisdiction over “any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.” In Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988), the United States Supreme Court established a two-part test for determining whether a federal court has exclusive jurisdiction over a case under section 1338(a). Exclusive federal jurisdiction exists if a well-pleaded complaint establishes either (1) that federal patent law creates the cause of action or (2) a plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law. Because Air Measurement’s claims were entirely grounded in state law, the Federal Circuit focused on the second prong of the Christianson test and analyzed whether patent law was a necessary element of Air Measurement’s legal malpractice claim.

The court limited its analysis to the allegations in the complaint, noting that “a claim does not arise under the patent laws if a patent issue appears only in a defense to that claim.” To prevail on its Texas state-law claims for legal malpractice, Air Measurement would have to demonstrate that (1) an attorney owed it a duty stemming from the attorney-client relationship, (2) the attorney breached that duty, (3) the breach proximately caused Air Measurement’s injuries, and (4) Air Measurement suffered damages as a result of the injuries. In particular, because Air Measurement’s malpractice claim was based, in part, on unsuccessful prior litigation, Air Measurement would have to establish that it would have prevailed in the prior litigation but for Akin Gump’s negligence that compromised the litigation. Under Texas law, this is called the “case within a case” requirement of the proximate cause element of malpractice. The court found that because Air Measurement needed to establish that the underlying suit would have been won but for the attorney’s breach of duty, the “case within a case” requirement “is necessarily a component of the plaintiff’s burden on cause in fact.”

The Federal Circuit determined that “because the underlying suit here is a patent infringement action against SCBA defendants, the district court will have to adjudicate, hypothetically, the merits of the infringement claim.” Given that “proof of patent infringement is necessary” to demonstrate that Air Measurement would have prevailed in the prior litigation, the court held that “patent infringement is a ‘necessary element’” of Air Measurement’s legal malpractice claim and therefore presents a substantial question of patent law that confers exclusive jurisdiction on the federal courts under section 1338(a). In explaining this conclusion, the court stated that “we would consider it illogical for the Western District of Texas to have jurisdiction under § 1338 to hear the underlying infringement suit and for us then to determine that the same court does not have jurisdiction under § 1338 to hear the same substantial patent question in the ‘case within a case’ context of a state malpractice claim.” According to the court, this result is consistent with “the commonsense notion that a federal court ought to be able to hear claims recognized under state law that nonetheless turn on substantial questions of federal law . . ..”

The implications of the court’s holding may be significant. Indeed, the decision in Air Measurement indicates that when a state law claim turns on establishing patent infringement as a necessary element, a plaintiff should be able to demonstrate that federal court jurisdiction exists.

Full Opinion Text: http://www.cafc.uscourts.gov/opinions/07-1035.pdf