Inequitable Conduct

Taking a page from the Federal Circuit's own analysis of the issue, we will examine the who, what, when, where (and why) of the decision in Exergen Corporation v. Wal-Mart Stores, Inc., Nos. 06-1491, 07-1180, slip op. (Fed. Cir., Aug. 4, 2009).

Who?

Who decides whether an inequitable conduct pleading is sufficient? Well, the Federal Circuit, of course. But that was not a foregone conclusion.

In Exergen, defendant-appellants S.A.A.T. Systems Application of Advanced Technology, Ltd. and Daiwa Products, Inc. (collectively “SAAT”) had moved the U.S. District of Massachusetts for leave to amend their answer under Federal Rule of Civil Procedure 15(a), to assert the inequitable conduct defense. The district court denied SAAT's motion under Rule 9(b), which requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”

On appeal, SAAT argued that First Circuit law ' the law of the Circuit where the case was brought ' should apply to a Rule 9(b) analysis of the sufficiency of inequitable conduct pleadings. The Federal Circuit disagreed. Citing Century Admixture v. Advanced Cardiac Solutions, 482 F.3d 1347 (Fed. Cir. 2007), the Federal Circuit applied its own law on the grounds that the issue of whether inequitable conduct has been adequately pleaded “pertains to or is unique to patent law.” Id. at 1356.

What?

What is the inequitable conduct pleading standard under Federal Circuit law? In answering this question it is useful to first look at the standard for actually proving the defense. The Federal Circuit has held that, “[t]o successfully prove inequitable conduct, the accused infringer must present evidence that the applicant (1) made an affirmative misrepresentation of material fact, failed to disclose material information, or submitted false material information, and (2) intended to deceive the [PTO].” Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1365 (Fed. Cir. 2008).

The Federal Circuit's interpretation of Rule 9(b) requires inequitable conduct to be “pled with particularity.” See Ferguson Beauregard/Logic Controls, Div. of Dover Resources, Inc. v. Mega Systems, LLC, 350 F.3d 1327, 1344 (Fed. Cir. 2003). And, it has long been required that pleadings under Rule 9(b) “contain explicit rather than implied expression of the circumstances constituting fraud.” See King Automotive, Inc. v. Speedy Muffler King, Inc., 667 F.2d 1008, 1010 (CCPA 1981).

In Exergen, however, the Federal Circuit was inspired by the Seventh Circuit to require that the Rule 9(b) “circumstances constituting fraud or mistake” must include “the specific who, what, when, where, and how of the material misrepresentation or omission committed before the PTO.” Exergen, slip op. at 22.

When?

When should a patent litigant raise the defense of inequitable conduct? Clearly, when it has sufficient information to meet the Exergen test. This may not be on the date that the answer is due, however. As such, if inequitable conduct is suspected, but details are lacking, a litigant in most districts has two choices: 1) plead the defense initially, on information and belief, and make a Rule 15(a)(2) motion for leave to file an amended pleading once discovery has revealed the specifics of the circumstances giving rise to the defense; or 2) omit the defense initially, and later make a Rule 15(a)(2) motion to add the defense. Neither of these strategies is without risk.

Leave to amend under Rule 15(a)(2) rests within the discretion of the court. But the Rule also dictates that “[t]he court should freely give leave when justice so requires.” In general, the legion of cases interpreting Rule 15(a)(2) requires the court to allow the amendment unless there was a good reason not to. One would hope that the Federal Circuit would support an expansive reading of Rule 15(a)(2) that allows litigants to raise a well-supported inequitable conduct defense.

Where?

Where did SAAT go wrong in its inequitable conduct pleading? Recall that the defense of inequitable conduct requires proof of material misrepresentation, and intent. Star Scientific, 537 F.3d at 1365. The Federal Circuit wanted to see two things that it did not see in SAAT's amended answer. It wanted to see “the specific who, what, when, where, and how” of the material misrepresentation. Exergen, slip op. at 24. And, it also wanted to see the who, what, when, where, and how of the “intent.” Id.

It is with respect to the second proof point, intent, that the Federal Circuit made its greatest departure from prior practice. The court acknowledged that “knowledge and intent may be averred generally.” Id. But, the court went on to require that “a pleading of inequitable conduct under Rule 9(b) must include sufficient allegations of underlying facts from which a court may reasonably infer that a specific individual (1) knew of the withheld material information or of the falsity of the material misrepresentation, and (2) withheld or misrepresented this information with a specific intent to deceive the PTO.” Id. at 24-25. In other words, SAAT went wrong by failing to identify at least one, individual, “bad guy,” having bad intentions.

This “specific individual” requirement, it appears, is new ground. In establishing this requirement, the Federal Circuit relied upon the text of 37 C.F.R. ' 1.56(a), which states that “[e]ach individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the [PTO]. '” See Exergen, slip op. at 25.

The Federal Circuit's intention here is well taken. It appears that the court wants the defense of inequitable conduct to be based upon an identifiable individual's intent to deceive. One might argue, however, that the use of the term “individual” in the CFR's establishment of the duty of candor is intended to make each person with responsibility for candor to the PTO individually responsible for failing to live up to that duty. In other words, the “individual” requirement in the CFR is intended to broaden the scope of responsibility for candor to the PTO. It is not, as the Federal Circuit seems to suggest, intended to require that all bad acts be traceable to one lone gunman.

How?

How can a litigant meet this new standard and avoid SAAT's fate? Well, it may be impossible to meet the Federal Circuit's new pleading standard based upon generally ascertainable facts. The “new normal” for inequitable conduct pleading may be by way of an amended answer after discovery, or may have to depend upon the local patent rules of patent-savvy districts. But there are some specific points worth noting where the Federal Circuit felt that SAAT went wrong.

The Federal Circuit ruled that SAAT failed to identify “which claims, and which limitations in those claims, the withheld references are relevant to, and where in those references the material information is found ' i.e., the 'what' and 'where' of the material omissions.” Exergen, slip op. at 26. This requirement seems to demand that SAAT should have offered a claim construction as part of the assertion of the inequitable conduct defense. As Exergen is applied, perhaps it will be sufficient to broadly state the relevance of prior art with respect to individual claim limitations.

In addition, the court observed that SAAT's amended answer “states generally that the withheld references are 'material' and 'not cumulative to the information already of record,' but does not identify the particular claim limitations, or combination of claim limitations, that are supposedly absent from the information of record.” Id.

Here, the Federal Circuit makes it clear that a litigant must present specific evidence that the record before the examiner lacked material information that the individual (having the duty of candor) withheld. That much is uncontroversial. What is perhaps more controversial, however, is the observation that, “[a] reference may be many pages long, and its various teachings may be relevant to different applications for different reasons. Thus, one cannot assume that an individual, who generally knew that a reference existed, also knew of the specific material information contained in that reference.” Exergen, slip op. at 27.

And Why?

Exergen had prevailed at trial. The district court found that SAAT infringed three Exergen patents, the “'205,” “'813,” and “'685″ patents. On appeal the Federal Circuit invalidated the '205, and found the '813 and '685 patents not infringed, handing SAAT a complete victory. Further action by the Federal Circuit, it would seem, would violate principles of judicial parsimony.

Nonetheless, the Federal Circuit seized upon the opportunity to address, under an abuse of discretion standard, the dangling issue of the denial of SAAT's motion for leave to amend its answer to allege inequitable conduct. In other words, the Federal Circuit elected to elaborate, at length, upon an issue of no lingering relevance to the parties, under a very restrictive standard of review, in order to ultimately concur with the district court.

Why did the Federal Circuit do this? It is possible the court decided to seize control of the inequitable conduct issue before the issue was legislated out of its hands. Why else would the Federal Circuit refer to “unleash[ing] the mischief” of inequitable conduct pleadings, citing Ferguson Beauregard/Logic Controls Div. of Dover Res., Inc. v. Mega Sys., LLC, No. 99-CV-437, slip op. at 10 (E.D. Tex. Aug. 14, 2000), or worry aloud about the inequitable conduct defense becoming a magic incantation to be asserted against every patentee.

The Federal Circuit was clearly concerned about these magic incantations and the mischief they might unleash. But as onerous as the new standard is, the Federal Circuit did give us a detailed exposition of what it will require of us in the future. Let us hope that the new standard is applied in fairness, and in combination with a lenient standard for amending pleadings after discovery.

Gregory F. Wesner is a partner in the Seattle office of K&L Gates, where he focuses his practice on intellectual property litigation and related counseling. He can be reached at [email protected].

Taking a page from the Federal Circuit's own analysis of the issue, we will examine the who, what, when, where (and why) of the decision in Exergen Corporation v. Wal-Mart Stores, Inc., Nos. 06-1491, 07-1180, slip op. (Fed. Cir., Aug. 4, 2009).

Who?

Who decides whether an inequitable conduct pleading is sufficient? Well, the Federal Circuit, of course. But that was not a foregone conclusion.

In Exergen, defendant-appellants S.A.A.T. Systems Application of Advanced Technology, Ltd. and Daiwa Products, Inc. (collectively “SAAT”) had moved the U.S. District of Massachusetts for leave to amend their answer under Federal Rule of Civil Procedure 15(a), to assert the inequitable conduct defense. The district court denied SAAT's motion under Rule 9(b), which requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”

On appeal, SAAT argued that First Circuit law ' the law of the Circuit where the case was brought ' should apply to a Rule 9(b) analysis of the sufficiency of inequitable conduct pleadings. The Federal Circuit disagreed. Citing Century Admixture v. Advanced Cardiac Solutions , 482 F.3d 1347 (Fed. Cir. 2007), the Federal Circuit applied its own law on the grounds that the issue of whether inequitable conduct has been adequately pleaded “pertains to or is unique to patent law.” Id. at 1356.

What?

What is the inequitable conduct pleading standard under Federal Circuit law? In answering this question it is useful to first look at the standard for actually proving the defense. The Federal Circuit has held that, “[t]o successfully prove inequitable conduct, the accused infringer must present evidence that the applicant (1) made an affirmative misrepresentation of material fact, failed to disclose material information, or submitted false material information, and (2) intended to deceive the [PTO].” Star Scientific, Inc. v. R.J. Reynolds Tobacco Co. , 537 F.3d 1357, 1365 (Fed. Cir. 2008).

The Federal Circuit's interpretation of Rule 9(b) requires inequitable conduct to be “pled with particularity.” See Ferguson Beauregard/Logic Controls, Div. of Dover Resources, Inc. v. Mega Systems, LLC, 350 F.3d 1327, 1344 (Fed. Cir. 2003). And, it has long been required that pleadings under Rule 9(b) “contain explicit rather than implied expression of the circumstances constituting fraud.” See King Automotive, Inc. v. Speedy Muffler King, Inc., 667 F.2d 1008, 1010 (CCPA 1981).

In Exergen, however, the Federal Circuit was inspired by the Seventh Circuit to require that the Rule 9(b) “circumstances constituting fraud or mistake” must include “the specific who, what, when, where, and how of the material misrepresentation or omission committed before the PTO.” Exergen, slip op. at 22.

When?

When should a patent litigant raise the defense of inequitable conduct? Clearly, when it has sufficient information to meet the Exergen test. This may not be on the date that the answer is due, however. As such, if inequitable conduct is suspected, but details are lacking, a litigant in most districts has two choices: 1) plead the defense initially, on information and belief, and make a Rule 15(a)(2) motion for leave to file an amended pleading once discovery has revealed the specifics of the circumstances giving rise to the defense; or 2) omit the defense initially, and later make a Rule 15(a)(2) motion to add the defense. Neither of these strategies is without risk.

Leave to amend under Rule 15(a)(2) rests within the discretion of the court. But the Rule also dictates that “[t]he court should freely give leave when justice so requires.” In general, the legion of cases interpreting Rule 15(a)(2) requires the court to allow the amendment unless there was a good reason not to. One would hope that the Federal Circuit would support an expansive reading of Rule 15(a)(2) that allows litigants to raise a well-supported inequitable conduct defense.

Where?

Where did SAAT go wrong in its inequitable conduct pleading? Recall that the defense of inequitable conduct requires proof of material misrepresentation, and intent. Star Scientific, 537 F.3d at 1365. The Federal Circuit wanted to see two things that it did not see in SAAT's amended answer. It wanted to see “the specific who, what, when, where, and how” of the material misrepresentation. Exergen, slip op. at 24. And, it also wanted to see the who, what, when, where, and how of the “intent.” Id.

It is with respect to the second proof point, intent, that the Federal Circuit made its greatest departure from prior practice. The court acknowledged that “knowledge and intent may be averred generally.” Id. But, the court went on to require that “a pleading of inequitable conduct under Rule 9(b) must include sufficient allegations of underlying facts from which a court may reasonably infer that a specific individual (1) knew of the withheld material information or of the falsity of the material misrepresentation, and (2) withheld or misrepresented this information with a specific intent to deceive the PTO.” Id. at 24-25. In other words, SAAT went wrong by failing to identify at least one, individual, “bad guy,” having bad intentions.

This “specific individual” requirement, it appears, is new ground. In establishing this requirement, the Federal Circuit relied upon the text of 37 C.F.R. ' 1.56(a), which states that “[e]ach individual associated with the filing and prosecution of a patent application has a duty of candor and good faith in dealing with the [PTO]. '” See Exergen, slip op. at 25.

The Federal Circuit's intention here is well taken. It appears that the court wants the defense of inequitable conduct to be based upon an identifiable individual's intent to deceive. One might argue, however, that the use of the term “individual” in the CFR's establishment of the duty of candor is intended to make each person with responsibility for candor to the PTO individually responsible for failing to live up to that duty. In other words, the “individual” requirement in the CFR is intended to broaden the scope of responsibility for candor to the PTO. It is not, as the Federal Circuit seems to suggest, intended to require that all bad acts be traceable to one lone gunman.

How?

How can a litigant meet this new standard and avoid SAAT's fate? Well, it may be impossible to meet the Federal Circuit's new pleading standard based upon generally ascertainable facts. The “new normal” for inequitable conduct pleading may be by way of an amended answer after discovery, or may have to depend upon the local patent rules of patent-savvy districts. But there are some specific points worth noting where the Federal Circuit felt that SAAT went wrong.

The Federal Circuit ruled that SAAT failed to identify “which claims, and which limitations in those claims, the withheld references are relevant to, and where in those references the material information is found ' i.e., the 'what' and 'where' of the material omissions.” Exergen, slip op. at 26. This requirement seems to demand that SAAT should have offered a claim construction as part of the assertion of the inequitable conduct defense. As Exergen is applied, perhaps it will be sufficient to broadly state the relevance of prior art with respect to individual claim limitations.

In addition, the court observed that SAAT's amended answer “states generally that the withheld references are 'material' and 'not cumulative to the information already of record,' but does not identify the particular claim limitations, or combination of claim limitations, that are supposedly absent from the information of record.” Id.

Here, the Federal Circuit makes it clear that a litigant must present specific evidence that the record before the examiner lacked material information that the individual (having the duty of candor) withheld. That much is uncontroversial. What is perhaps more controversial, however, is the observation that, “[a] reference may be many pages long, and its various teachings may be relevant to different applications for different reasons. Thus, one cannot assume that an individual, who generally knew that a reference existed, also knew of the specific material information contained in that reference.” Exergen, slip op. at 27.

And Why?

Exergen had prevailed at trial. The district court found that SAAT infringed three Exergen patents, the “'205,” “'813,” and “'685″ patents. On appeal the Federal Circuit invalidated the '205, and found the '813 and '685 patents not infringed, handing SAAT a complete victory. Further action by the Federal Circuit, it would seem, would violate principles of judicial parsimony.

Nonetheless, the Federal Circuit seized upon the opportunity to address, under an abuse of discretion standard, the dangling issue of the denial of SAAT's motion for leave to amend its answer to allege inequitable conduct. In other words, the Federal Circuit elected to elaborate, at length, upon an issue of no lingering relevance to the parties, under a very restrictive standard of review, in order to ultimately concur with the district court.

Why did the Federal Circuit do this? It is possible the court decided to seize control of the inequitable conduct issue before the issue was legislated out of its hands. Why else would the Federal Circuit refer to “unleash[ing] the mischief” of inequitable conduct pleadings, citing Ferguson Beauregard/Logic Controls Div. of Dover Res., Inc. v. Mega Sys., LLC, No. 99-CV-437, slip op. at 10 (E.D. Tex. Aug. 14, 2000), or worry aloud about the inequitable conduct defense becoming a magic incantation to be asserted against every patentee.

The Federal Circuit was clearly concerned about these magic incantations and the mischief they might unleash. But as onerous as the new standard is, the Federal Circuit did give us a detailed exposition of what it will require of us in the future. Let us hope that the new standard is applied in fairness, and in combination with a lenient standard for amending pleadings after discovery.

Gregory F. Wesner is a partner in the Seattle office of K&L Gates, where he focuses his practice on intellectual property litigation and related counseling. He can be reached at [email protected].