Weiswasser: I’m going to cover a few of the patent cases that are before the Court this term. This term, the Court is going to be testing certain core questions of what can be patented and what is needed to show patent infringement, and also scrutinizing the circumstances in which fee-shifting is warranted in patent infringement disputes.
The Supreme Court has continued to look for ways to test the limits on the ability of patent holders to pursue companies for patent infringement. The first case that I’ll be talking about today is Alice Corp. v. CLS Bank, a case for which the Supreme Court heard oral arguments at the end of March. This case addresses the question of how abstract a principle can be and still be entitled to patent protection. This case in particular involved various patent claims related to a method of exchanging payment obligations between a buyer and a seller. The Patent Act provides that any new and useful process is patentable, but it has long been the law that natural phenomena, laws of nature and abstract ideas are excluded from patent eligibility. Since the 2010 Term, the Supreme Court has decided three cases on patentable subject matter under Section 101 of the Patent Act – Bilski, Prometheus and Myriad – emphasizing that abstract, scientific ideas are not patentable. In this case, the Court continues to address that issue.
Silbert: We’re going to turn to another extremely interesting case, American Broadcast Company v. Aereo, which was recently argued at the Supreme Court.
Larson: I should start by saying we served as counsel in one of the various strands of the Aereo case. So, what I’m presenting today is not on behalf of our clients, but my own views. At its most basic level, Aereo is a service that allows subscribers to stream broadcast television programming over the Internet.
On a rooftop somewhere in Brooklyn is an “antenna” farm – essentially large boards on top of which are thousands of little dime-sized individual antennas that connect to the hard drives of computer servers. When a particular subscriber chooses to watch a program over Aereo, the program gets assigned to one of these mini-antennas, which is unique to a particular subscriber. It’s basically that subscriber’s personal antenna for the time that he or she is watching a program. The service works by actually making a personal recording in a separately segregated hard drive space for each subscriber. The user watches the programming either live or later, not streamed directly through but from the copy that’s made on the server. Many people can watch the same program live at the same time. One might ask why they went through the trouble of engineering it this way.
The reason relates back to another very well-known 2008 case – what most people refer to as the “Cablevision case” or the “Cartoon Network case.” Cablevision’s innovation was to move the recording function to a central Cablevision server, allowing users to schedule and record programs on a central server. Users would then watch programs streamed from the Cablevision servers. Back in 2008, the Second Circuit held that Cablevision, by offering that technology, was not making public performances of the underlying programs, despite the fact that they were allowing many users to watch the recordings that they’d made on these servers. The theory, to put it simply, was that essentially there were lots of private performances going on each time different users decided to watch their recorded copy, but you couldn’t conclude that Cablevision was making a public performance of the programming when people watched their recorded copies.
Aereo, admittedly hoping to take advantage of that decision, came up with a mechanism for offering streaming broadcast programming over the Internet, essentially making personal, private copies for each user so that they could say – just like in Cablevision – that people were just watching their own private copies and not a public performance.
Aereo was promptly sued by a variety of networks for making unlicensed retransmissions to the public of their programming. Judge Nathan in the Southern District of New York reasoned that this is essentially on all fours with the Cablevision case. Aereo is simply allowing subscribers to make private copies. The case went up to the Second Circuit. Again, the Second Circuit affirmed on the basis of the reasoning it used in the Cablevision case. While this was going on, there were a variety of other cases percolating up around the country.
Before we wrap up, the question really is this: what is the basic issue here? The “Transmit” Clause is actually part of the definition in the Copyright Act of what it means to publicly perform a work. Just looking at the first sentence, the clause defines public performance as basically to transmit or otherwise communicate a performance of the work to the public. The position of the networks is essentially that they’ve made a performance when they broadcast their works, and Aereo is taking that performance and transmitting it or communicating it out to the public, and hence it’s a public performance.
The Second Circuit disagreed with that reading. They said to transmit or otherwise communicate a performance to the public, you don’t look at the prior broadcast performance, you look at what happens when the transmission is made. They read it as saying to transmit a performance is to make a performance by virtue of sending it out over the airwaves. If only one person can see that performance, then it’s private. I recognize that’s quite complicated.
The Supreme Court may view Aereo as more or less a new version of a private VCR or DVR that just happens to be stored in the cloud and streamed down for a private viewing later. On the other hand, the Court may, as the networks argue, treat what Aereo offers as a newfangled version of cable retransmission and no different from what is offered by a cable company. (Editor’s note: These issues were argued before the Supreme Court on Tuesday, April 22, with the Supreme Court likely to hand down its opinion by early summer.)
Silbert: In broader terms, what else is at stake in this case, would you say? Obviously we can’t make any specific predictions, but how does it play out if Aereo wins, and how does it play out if the networks win?
Larson: If the networks prevail, then they’ll be in a position where services like Aereo will need to pay retransmission fees or face copyright infringement penalties. There’s a lot of concern from cloud computing companies – think of Amazon or Google – many of which moved storage from devices located on the user side to devices located in the cloud. For example, I can store all my mp3 files with Amazon on a central server. If Aereo were to lose the case, a lot of people are of the view that cloud computing services such as this would be threatened. There’s a possibility that even if there’s no public performance liability, Aereo might still be on the hook for reproduction rights liability for its role in the server copies that get made. Then you run into issues of the fair use right as under the Sony case – and whether the user is making the copy as on a VCR or whether Aereo is making them. That is another avenue that is still being litigated.
Silbert: We’re going to go back to the patent area and talk about two cases that deal with fee-shifting under the Patent Act – another tool that is being used to fight the troll problem.
Weiswasser: Let’s go back to Alice, our patent holder who got a patent on a method of making sure that banks don’t pay out more money than is in the bank account holder’s account. Suppose that after years of litigation, the courts conclude that Alice’s patent is invalid. So the defendant bank comes back to Alice and says, “I want my attorneys’ fees. I want to be made whole from this nonsense you put me through.”
Section 285 of the Patent Act says that the court in exceptional cases may award reasonable attorneys’ fees to the "prevailing party.” In patent cases, fee-shifting has been quite uncommon because of the difficulty in establishing that a case is “exceptional” under Section 285. The Court this term has taken on a pair of cases to determine the standard by which district courts should make the assessment as to whether a case is exceptional warranting shifting of attorneys fees under the Patent Act. One addresses the circumstances in which a district court should decide that a case is exceptional. The other focuses on appellate review and how much discretion the Federal Circuit has to give to the district courts when they review their decision that the case is exceptional.
In the oral arguments in both of these cases, which were held as a pair on February 26 before the Supreme Court, the justices focused on whether there should be more of a totality of the circumstances test that would focus on who the patent holder is, what the motivations are for bringing the suit, and whether this is the kind of suit we want to deter.
[Note that since the panel discussion, the Supreme Court issued both decisions on April 29, 2014. In Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 121184, 2014 WL 1672251 (U.S. Apr. 29, 2014), the Supreme Court overturned the U.S. Court of Appeals for the Federal Circuit’s “overly rigid” position that fee-shifting under 35 U.S.C. § 285 is only warranted (1) if the district court finds material inappropriate conduct, or (2) if the litigation was brought in subjective bad faith, and the litigation was objectively baseless. See id. at *6. It held that under § 285, an “exceptional” case meriting fee-shifting is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. Id. at *5. The Court emphasized that this determination should be made on a case-by-case basis, considering the totality of the circumstances. Id. In Highmark, Inc. v. AllCare Health Management System, Inc., 121163, 2014 WL 1672043 (U.S. Apr. 29, 2014), the Supreme Court held that appellate courts should review a district court’s determination under 35 U.S.C. § 285 for abuse of discretion. Id. at *2.]
Silbert: One interesting set of questions around these cases is, who is the better decision maker with respect to the shifting of attorney’s fees? Is it the district court or the Federal Circuit? The Federal Circuit’s mission was to create uniformity in the application of patent law. When you look at the fee-shifting provision, the standard that it sets is whether a case is exceptional. Generally, each district court hears only very few patent cases while the Federal Circuit hears every single patent appeal. Therefore, the Federal Circuit would seem to be in a much better position to judge whether a particular case was or was not exceptional. But, on the other hand, you want the court to apply discretion and the totality of the circumstances test based not simply on whether this particular patent or patent claim has merit, but also on other factors. What was litigation conduct like? Is there reason to think there was subjective bad faith in bringing the claim? These are very factbound considerations that the district court would be in a better position to judge.
We are going to turn now to a false advertising case under the Lanham Act and to a standing question. Randi?
Singer: Lexmark v. Static Control came down on March 25, so I have the luxury of telling you that all my speculations about the case were absolutely correct. Lexmark manufactures laser printers as well as replacement cartridges. Static Control was in the business of refilling used toner cartridges so they could be sold again. Lexmark decided it would really much prefer consumers buy Lexmark cartridges, so it installed a chip that would disable the cartridge after the first use. Unless it went back to Lexmark to be reset, the cartridge supposedly wouldn’t work. Static Control figured out how to get around that. Lexmark then set up a program in which it would give people a discount off the initial price if they would agree to send back the cartridges to Lexmark. Lexmark sued Static Control under a number of theories, including under the Digital Millennium Copyright Act for disabling the chip. Static Control countersued for false advertising under the Lanham Act based on letters that Lexmark had sent out claiming it was illegal for Static Control to refill the cartridges.
Lexmark moved to dismiss the Lanham Act case, contending that Static Control is not a direct competitor and has no standing to sue under the Lanham Act. Please keep in mind that the Lanham Act has two prongs: the trademark prong and the false advertising prong. The trademark prong is the false association prong, which we’re not talking about here. This case focused on standing under the false advertising prong, Section 43(a)(1)(B) as opposed to 43(a)(1)(A). The district court agreed with Static Control and dismissed the case for lack of standing. The Sixth Circuit reversed, saying, in fact, Static Control does have standing – siding with the Second Circuit in the three-way circuit split over who has standing under the Lanham Act.
Prior to the Lexmark decision, there were three different tests for standing under the false advertising prong of the Lanham Act. Basically, the Supreme Court decided none of these tests was any good and substituted its own multi-factor test.
The Third, Fifth, Eighth and Eleventh Circuits followed a multi-factor test based on Associated General Contractors of California v. California State Council of Carpenters, which is a 1983 Supreme Court case that set out a five-factor test on antitrust standing. A number of these circuits redid the factors a bit to make it a test for false advertising standing. This test was criticized because it was overly reliant on the existence of an injury and the nature of the injury, and under the Lanham Act, one can get injunctive relief without necessarily having to show an actual injury.
There was also something generally referred to as the categorical test in the Seventh, Ninth and Tenth Circuits. That test very narrowly relied on the language of the Lanham Act, and interpreted it as saying that only direct competitors have standing to sue. In this case, Static Control would not have been a direct competitor because Static Control wasn’t in the business of selling laser printers. They were selling refurbished toner cartridges in the secondary market.
In contrast to this narrow categorical test, the absolute broadest test was the Second Circuit’s reasonable interest test, which asked, “Do you have a reasonable interest to be protected, and do you have a reasonable basis for believing that this interest is likely to be damaged?” The Sixth Circuit chose to adopt this test in Lexmark.
The Supreme Court took a look at this and found this interpretation to be a mess. Justice Scalia, writing for the unanimous Court, basically said the issue of standing to sue should be very much grounded in statutory considerations, not simply prudential considerations. According to Justice Scalia, Congress explains who has a cause of action under the statute, and if you meet the Article Three test of standing, you have a cause of action under the statute; it’s really not for the courts to decide that you can’t sue under those circumstances.
The Supreme Court established its own two-part test for standing. The first prong presumes that the statutory cause of action extends only to plaintiffs whose interests fall within the zone of interests protected by the law invoked. In this case, it was very easy to determine who has a cause of action under the statute because the Lanham Act actually has a very clear statement of what it’s meant to do and whom it’s meant to protect.
The second part of the test is proximate causation. It presumes that a statutory cause of action is limited to plaintiffs whose injuries are proximately caused by violations of the statute. The Court again fairly easily found that Static Control met this test because its injury flowed directly from the false advertising and the statements that Lexmark had made about Static Control doing illegal things.
It’s important to note that this decision does not actually bring any closure to this action, which has been going on since 2002; it merely says that Lexmark in fact has standing to bring these claims and remands everything for a decision with respect to the facts of the case.
Silbert: Randi, it’s interesting what happened here because you have the Court of Appeals divided into these three factions, and when the case got up to the Supreme Court, Justice Scalia, who came out of the DC Circuit along with Justice Ginsburg and Justice Thomas, rejected all of these tests and applied what is very much an administrative law way of thinking about statutory construction – something that the DC Circuit typically does, applying the zone of interest test, which was developed under the Administrative Procedure Act. How different is the test that the Supreme Court has now adopted from the test that the circuit courts had previously applied?
Singer: I think the Court’s treatment is broader than the categorical test in the sense that there’s room for you not to be a direct competitor. It tries to pull back the reasonable interest test, but it’s still a very subjective test at the end of the day.
Silbert: So they’ve put a little more meat on the bone than the reasonable-interests test at the Second Circuit (and later at the Sixth), but it seems they’re using a more forgiving standard for standing than seven circuit courts had previously done. Do you think this is going to open the floodgates for a lot of new false advertising claims?
Singer: Maybe yes, and maybe no. What had really happened was that savvy attorneys had a beat on this, so you saw an awful lot of forum shopping going on in terms of where you’d bring the case. Depending on who you were, you’d pick your forum. There are some who are predicting that this will open the floodgates, and there are others who are saying this is a much narrower test than these other seven circuits. At the end of the day, it’s probably just going to make it easier for people to sue in their home courts.
Silbert: We’re going to talk about a patent case that concerns divided infringement, which is where there is no one single actor who performs all of the steps necessary for infringement, but there are multiple actors who are allegedly acting in collaboration and together they perform all of the steps that would add up to infringement.
Weiswasser: The third patent case we will discuss today is Akamai Technologies, Inc. v. Limelight Networks, Inc., which concerns the standards for proving infringement. Let’s take as an example the claim at issue in the CLS case. That claim is basically a method of exchanging payment between a buyer and a seller where they both have a bank account, there is a bank that maintains the account and a supervisory institution that watches over the transaction to ensure that the bank never drops the buyer’s account below zero.
Let’s say we’ve got a bank called CLS, and we’ve got a supervisory institution called XYZ. The bank is the one that holds the accounts of the buyer and the seller. They implement these payment transactions when they are directed to release payment to a seller. Alice says, “Hmm, I really want to establish infringement of my patent, but I don’t have a situation where either CLS or XYZ does everything. I’ve got one supervising and one maintaining the accounts, but I will assert infringement based on each of them performing certain steps of the method even though neither performs all of the steps." That is, there is no direct infringement insofar as there is no single actor performing each step of the method claims.
The way the law used to work with a method claim was that infringement would require a proof of one single actor performing or directing the performance of every step in the method – one actor to maintain the accounts, debit the accounts, and supervise the accounts. Wihtout that single one actor, there is no infringement and can be no inducement of infringement. There has been an effort by plaintiffs in cases over the years to allow claims for inducement without proof of direct infringement, and that is the question before the Supreme Court in this case.
What the Federal Circuit held in Limelight, which the Supreme Court is now reviewing, was that you can establish infringement without one actor doing or directing the doing of every step in the method.
The Court has not yet heard argument on this case; oral argument is scheduled for Wednesday, April 30. Much of the briefing focuses on general tort principles – whether one can induce a tort that never happened. If patent infringement is a tort, how can one induce something where there is no infringer insofar as no single actor has practiced every step of the claimed method.
A number of amici are pushing to defer to a legislative fix, if one is needed, arguing that the statute has been set up clearly to require direct infringement as a prerequisite to inducement.
Amici are asserting that what the Federal Circuit has done basically by getting rid of direct infringement as a prerequisite to show inducement is to end-run the statute and are arguing that is not a job for the courts, but for Congress.
Published May 2, 2014.
