IP News

Supreme Court Requests U.S. Position on Copyright First-Sale Doctrine
Protection

On May 18, 2009, Costco Wholesale Corporation petitioned the U.S. Supreme Court for a writ of certiorari to the U.S. Court of Appeals for the Ninth Circuit in the case of Costco Wholesale Corp. v. Omega, S.A. On Oct. 5, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States, perhaps indicating that the Supreme Court intends to grant the writ.

In May 2004, Omega filed suit against Costco alleging that Costco's acquisition and sale of certain Omega watches constituted copyright infringement. The accused Omega watches had been sold by Omega to authorized foreign distributors in Egypt and Paraguay. Costco then purchased the accused watches from the foreign distributors and resold them in the United States for far less than Omega's suggested retail price or the price offered by U.S. Omega retailers. Costco argued that it was not liable for copyright infringement under the first-sale doctrine. The district court granted summary judgment in favor of Costco, but the Ninth Circuit reversed, holding that the first-sale doctrine did not apply. The Ninth Circuit held that the first sale doctrine only protects copies legally made and sold in the United States ' not those made overseas. The Ninth Circuit distinguished the Supreme Court's precedent in Quality King v. Distribs., Inc. v. L'Anza Research Int'l, Inc., 523 U.S. 135, 138 (1998), since in that case (where the first-sale doctrine was held to apply) the copies were domestically manufactured before being exported and then imported again.

Costco posed the questioned presented as:

Under the Copyright Act's first-sale doctrine, 17 U.S.C. ' 109(a), the owner of any particular copy “lawfully made under this title” may resell that good without the authority of the copyright holder. In Quality King Distribs., Inc. v. L'Anza Research Int'l, Inc., 523 U.S. 135, 138 (1998), this Court posed the question presented as “whether the 'first sale' doctrine endorsed in ' 109(a) is applicable to imported copies.” In the decision below, the Ninth Circuit held that Quality King (which answered that question affirmatively) is limited to its facts, which involved goods manufactured in the United States, sold abroad, and then re-imported. The question presented here is:

Whether the Ninth Circuit correctly held that the first-sale doctrine does not apply to imported goods manufactured abroad.

In its brief, Costco highlighted a number of nonsensical results that would result from the Ninth Circuit's holding, including:

• A Picasso fine art print purchased from a foreign dealer could not be lawfully resold or given away without the purchaser committing copyright infringement;
• Libraries could not lend foreign-language texts made abroad;
• Movie rental business such as Netflix can be shut down by shifting disc duplication to Canada or Mexico; and
• Foreign-produced automobiles whose on-board computer systems are loaded with copyrighted control software could not be rented or re-sold.

Several amicus briefs have already been filed encouraging the Supreme Court to grant the writ. The case is Costco Wholesale Corp. v. Omega S.A., docket number 08-1423.

Sixth Circuit Holds that Copyright Licenses Are Presumed Non-transferable

In Cincom Systems, Inc. v. Novelis Corp., the Sixth Circuit Court of Appeals affirmed the district court's grant of summary judgment that a series of mergers defendant Novelis underwent as part of an internal corporate restructuring resulted in a prohibited transfer of the software license plaintiff Cincom had granted to a former Novelis subsidiary.

On July 5, 1989, Cincom licensed two copyrighted software programs to Alcan Rolled Products Division (“Alcan Ohio”), an Ohio-based corporation that would later become known as Novelis. The license agreement granted Alcan Ohio “a non-exclusive and non-transferable license” to use Cincom's software and limited Alcan Ohio's use to a designated computer in Oswego, NY. The license agreement specified that Ohio law would govern its terms.

In the following years, Alcan Ohio underwent an internal reorganization involving the merger of itself into its related corporations. The new company was eventually named Novelis. As of January 2005, the software Alcan Ohio had licensed from Cincom remained on the same computer in Oswego, NY, but in a plant now owned by Novelis. Alcan Ohio never sought or obtained Cincom's written approval to continue use of the licensed software programs before restructuring.

Upon learning of the corporate changes Alcon Ohio underwent, Cincom filed suit, alleging that Novelis' actions violated the license agreement and constituted copyright infringement. Following discovery, the district court granted Cincom's motion for summary judgment that Alcon Ohio's merger effected an impermissible transfer of the copyright license.

On appeal, Novelis argued that the district court erred by failing to look at the parties' intent as expressed in the licensing agreement. The Sixth Circuit disagreed and affirmed the district court's decision. The court held that in the context of intellectual property, a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary, and when state law would allow for the transfer of a license absent express authorization, state law must yield to the federal common law rule prohibiting such unauthorized transfers. The court reasoned that a contrary rule allowing state law to permit the free assignability of patent and copyright licenses would “undermine the reward that encourages invention,” because any entity desiring to acquire a license could approach either the original inventor or one of the inventor's licensees, transforming every licensee into a potential competitor with the patent or copyright holder.

Federal Circuit Puts Limits on Inequitable Conduct

In AstraZeneca Pharms. LP v. Teva Pharms. USA, Inc., 2008-1480, -1481 (Fed. Cir. Sept. 25, 2009), the Federal Circuit held that AstraZeneca did not commit inequitable conduct by withholding from the patent examiner internal test data regarding the properties of compounds structurally similar to those claimed.

AstraZeneca is the assignee of U.S. Patent No. 4,879,288, which claims the antipsychotic drug quetiapine. The patent explains that quetiapine is an “atypical” antipyschotic drug, which means that, unlike “typical” antipsychotics, it does not produce involuntary body movements. The AstraZeneca product quetiapine (marketed as SEROQUEL') was approved by the FDA in 1997. Teva and appellant Sandoz soon filed abbreviated new drug applications (“ANDA”) certifying under “paragraph IV” that the '288 patent is invalid and/or not infringed. AstraZeneca then brought suit.

During prosecution of the '288 patent application, the applicant submitted an information disclosure statement (“IDS”) listing four prior art references that disclosed, inter alia, several compounds structurally similar to quetiapine including Compound 21076, Compound 24028, perlapine and fluperlapine. The applicant had internal test data on all four of these compounds. The examiner, in the first Office Action, cited several references including two of the four in applicant's IDS (“Schmutz II” and “Horrom”). The examiner rejected the claimed compound based on its structural similarity to a compound in Schmutz II described as Schmutz X and the Horrom compound. The examiner stated that in order to overcome the structural obviousness rejection, the applicant needed to provide proof that the prior art compounds do not possess the characteristics of the claimed product. In response, the applicant submitted an inventor declaration stating that it would be expensive to generate test data for Schmutz X, but that internal test data (which was submitted along with the declaration) showed that the Horrom compound and Schmutz B (a compound that the inventors claimed was closer structurally than Schmutz X) had “typical” antipsychotic properties. The inventor also submitted internal test data for another compound disclosed in Schmutz II called Schmutz A, which was inactive for antipsychotic activity. The applicant never submitted its internal test data for any of Compound 21076, Compound 24028, perlapine or fluperlapine, some of which showed potential “atypical” antipsychotic activity.

The district court found that AstraZeneca properly addressed the closest prior art, in response to the examiner's specific requests, and granted summary judgment in favor of AstraZeneca with respect to appellants' inequitable conduct claim. On appeal, appellants argued that applicants should have tested Schmutz X and that applicants knew that it may have “atypical” properties. The Federal Circuit disagreed, holding that while there may be situations where the failure to conduct specific tests of specific compounds can be criticized, in this case there was no evidence that if such tests had been conducted, they would have been material to patentability. Appellants further argued that applicants' submission of internal Schmutz B and Schmutz A data was an implied misrepresentation, because it omitted internal test data of potentially atypical compounds including fluperlapine, perlapine, Compound 21076, and Compound 24028. The Federal Circuit again disagreed, holding that applicants addressed the closest prior art compounds and that applicants had never asserted that no prior art compound is “atypical.” The Federal Circuit reasoned that a reasonable examiner would not have understood the inventor declaration as stating that no prior art product had the atypical properties shown by quetiapine. Having found no misrepresentation or omission of material information, the Federal Circuit ruled that intent to deceive cannot be inferred simply from the decision to withhold information where the reasons given for the withholding are plausible. Accordingly, the court affirmed the district court's grant of summary judgment.

Howard J. Shire is a partner and Matthew Berkowitz is an associate in the New York office of Kenyon & Kenyon LLP. Shire is editor-in-chief of this newsletter.

Supreme Court Requests U.S. Position on Copyright First-Sale Doctrine
Protection

On May 18, 2009, Costco Wholesale Corporation petitioned the U.S. Supreme Court for a writ of certiorari to the U.S. Court of Appeals for the Ninth Circuit in the case of Costco Wholesale Corp. v. Omega, S.A. On Oct. 5, the Supreme Court invited the Solicitor General to file a brief expressing the views of the United States, perhaps indicating that the Supreme Court intends to grant the writ.

In May 2004, Omega filed suit against Costco alleging that Costco's acquisition and sale of certain Omega watches constituted copyright infringement. The accused Omega watches had been sold by Omega to authorized foreign distributors in Egypt and Paraguay. Costco then purchased the accused watches from the foreign distributors and resold them in the United States for far less than Omega's suggested retail price or the price offered by U.S. Omega retailers. Costco argued that it was not liable for copyright infringement under the first-sale doctrine. The district court granted summary judgment in favor of Costco, but the Ninth Circuit reversed, holding that the first-sale doctrine did not apply. The Ninth Circuit held that the first sale doctrine only protects copies legally made and sold in the United States ' not those made overseas. The Ninth Circuit distinguished the Supreme Court's precedent in Quality King v. Distribs., Inc. v. L'Anza Research Int'l, Inc., 523 U.S. 135, 138 (1998), since in that case (where the first-sale doctrine was held to apply) the copies were domestically manufactured before being exported and then imported again.

Costco posed the questioned presented as:

Under the Copyright Act's first-sale doctrine, 17 U.S.C. ' 109(a), the owner of any particular copy “lawfully made under this title” may resell that good without the authority of the copyright holder. In Quality King Distribs., Inc. v. L'Anza Research Int'l, Inc. , 523 U.S. 135, 138 (1998), this Court posed the question presented as “whether the 'first sale' doctrine endorsed in ' 109(a) is applicable to imported copies.” In the decision below, the Ninth Circuit held that Quality King (which answered that question affirmatively) is limited to its facts, which involved goods manufactured in the United States, sold abroad, and then re-imported. The question presented here is:

Whether the Ninth Circuit correctly held that the first-sale doctrine does not apply to imported goods manufactured abroad.

In its brief, Costco highlighted a number of nonsensical results that would result from the Ninth Circuit's holding, including:

• A Picasso fine art print purchased from a foreign dealer could not be lawfully resold or given away without the purchaser committing copyright infringement;
• Libraries could not lend foreign-language texts made abroad;
• Movie rental business such as Netflix can be shut down by shifting disc duplication to Canada or Mexico; and
• Foreign-produced automobiles whose on-board computer systems are loaded with copyrighted control software could not be rented or re-sold.

Several amicus briefs have already been filed encouraging the Supreme Court to grant the writ. The case is Costco Wholesale Corp. v. Omega S.A., docket number 08-1423.

Sixth Circuit Holds that Copyright Licenses Are Presumed Non-transferable

In Cincom Systems, Inc. v. Novelis Corp., the Sixth Circuit Court of Appeals affirmed the district court's grant of summary judgment that a series of mergers defendant Novelis underwent as part of an internal corporate restructuring resulted in a prohibited transfer of the software license plaintiff Cincom had granted to a former Novelis subsidiary.

On July 5, 1989, Cincom licensed two copyrighted software programs to Alcan Rolled Products Division (“Alcan Ohio”), an Ohio-based corporation that would later become known as Novelis. The license agreement granted Alcan Ohio “a non-exclusive and non-transferable license” to use Cincom's software and limited Alcan Ohio's use to a designated computer in Oswego, NY. The license agreement specified that Ohio law would govern its terms.

In the following years, Alcan Ohio underwent an internal reorganization involving the merger of itself into its related corporations. The new company was eventually named Novelis. As of January 2005, the software Alcan Ohio had licensed from Cincom remained on the same computer in Oswego, NY, but in a plant now owned by Novelis. Alcan Ohio never sought or obtained Cincom's written approval to continue use of the licensed software programs before restructuring.

Upon learning of the corporate changes Alcon Ohio underwent, Cincom filed suit, alleging that Novelis' actions violated the license agreement and constituted copyright infringement. Following discovery, the district court granted Cincom's motion for summary judgment that Alcon Ohio's merger effected an impermissible transfer of the copyright license.

On appeal, Novelis argued that the district court erred by failing to look at the parties' intent as expressed in the licensing agreement. The Sixth Circuit disagreed and affirmed the district court's decision. The court held that in the context of intellectual property, a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary, and when state law would allow for the transfer of a license absent express authorization, state law must yield to the federal common law rule prohibiting such unauthorized transfers. The court reasoned that a contrary rule allowing state law to permit the free assignability of patent and copyright licenses would “undermine the reward that encourages invention,” because any entity desiring to acquire a license could approach either the original inventor or one of the inventor's licensees, transforming every licensee into a potential competitor with the patent or copyright holder.

Federal Circuit Puts Limits on Inequitable Conduct

In AstraZeneca Pharms. LP v. Teva Pharms. USA, Inc., 2008-1480, -1481 (Fed. Cir. Sept. 25, 2009), the Federal Circuit held that AstraZeneca did not commit inequitable conduct by withholding from the patent examiner internal test data regarding the properties of compounds structurally similar to those claimed.

AstraZeneca is the assignee of U.S. Patent No. 4,879,288, which claims the antipsychotic drug quetiapine. The patent explains that quetiapine is an “atypical” antipyschotic drug, which means that, unlike “typical” antipsychotics, it does not produce involuntary body movements. The AstraZeneca product quetiapine (marketed as SEROQUEL') was approved by the FDA in 1997. Teva and appellant Sandoz soon filed abbreviated new drug applications (“ANDA”) certifying under “paragraph IV” that the '288 patent is invalid and/or not infringed. AstraZeneca then brought suit.

During prosecution of the '288 patent application, the applicant submitted an information disclosure statement (“IDS”) listing four prior art references that disclosed, inter alia, several compounds structurally similar to quetiapine including Compound 21076, Compound 24028, perlapine and fluperlapine. The applicant had internal test data on all four of these compounds. The examiner, in the first Office Action, cited several references including two of the four in applicant's IDS (“Schmutz II” and “Horrom”). The examiner rejected the claimed compound based on its structural similarity to a compound in Schmutz II described as Schmutz X and the Horrom compound. The examiner stated that in order to overcome the structural obviousness rejection, the applicant needed to provide proof that the prior art compounds do not possess the characteristics of the claimed product. In response, the applicant submitted an inventor declaration stating that it would be expensive to generate test data for Schmutz X, but that internal test data (which was submitted along with the declaration) showed that the Horrom compound and Schmutz B (a compound that the inventors claimed was closer structurally than Schmutz X) had “typical” antipsychotic properties. The inventor also submitted internal test data for another compound disclosed in Schmutz II called Schmutz A, which was inactive for antipsychotic activity. The applicant never submitted its internal test data for any of Compound 21076, Compound 24028, perlapine or fluperlapine, some of which showed potential “atypical” antipsychotic activity.

The district court found that AstraZeneca properly addressed the closest prior art, in response to the examiner's specific requests, and granted summary judgment in favor of AstraZeneca with respect to appellants' inequitable conduct claim. On appeal, appellants argued that applicants should have tested Schmutz X and that applicants knew that it may have “atypical” properties. The Federal Circuit disagreed, holding that while there may be situations where the failure to conduct specific tests of specific compounds can be criticized, in this case there was no evidence that if such tests had been conducted, they would have been material to patentability. Appellants further argued that applicants' submission of internal Schmutz B and Schmutz A data was an implied misrepresentation, because it omitted internal test data of potentially atypical compounds including fluperlapine, perlapine, Compound 21076, and Compound 24028. The Federal Circuit again disagreed, holding that applicants addressed the closest prior art compounds and that applicants had never asserted that no prior art compound is “atypical.” The Federal Circuit reasoned that a reasonable examiner would not have understood the inventor declaration as stating that no prior art product had the atypical properties shown by quetiapine. Having found no misrepresentation or omission of material information, the Federal Circuit ruled that intent to deceive cannot be inferred simply from the decision to withhold information where the reasons given for the withholding are plausible. Accordingly, the court affirmed the district court's grant of summary judgment.

Howard J. Shire is a partner and Matthew Berkowitz is an associate in the New York office of Kenyon & Kenyon LLP. Shire is editor-in-chief of this newsletter.