Reining in the Inequitable Conduct Defense

Responding to views from the U.S. Patent and Trademark Office (“PTO”) and elsewhere about the unintended consequences of the current inequitable conduct doctrine, a divided en banc Federal Circuit decision issued on May 25, 2011 adjusted the standard of the materiality element to make this defense harder to establish. Writing for the majority in Therasense, Inc. v. Becton, Dickinson & Co., 2011 U.S. App. LEXIS 10590 (Fed. Cir. May 25, 2011), Chief Judge Randall Ray Rader lamented that the inequitable conduct doctrine had been overused to the detriment of the courts and “the entire patent system,” and that the harsh consequences of a finding of inequitable conduct ' unenforceability of the entire patent or patent family ' warrant a more sparing application of the doctrine. The Therasense court then held: 1) “as a general matter, the materiality required to establish inequitable conduct is but-for materiality” where “prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art”; 2) an exception to the general rule exits “in cases of affirmative egregious misconduct,” such as filing an unmistakably false affidavit; 3) “the accused infringer must prove that the patentee acted with the specific intent to deceive the PTO,” that is, “prove by clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it”; and 4) a “district court should not use a 'sliding scale,' where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa.”

Background of the Case

Inequitable conduct is an equitable defense to patent infringement that, if proved, bars enforcement of a patent. To prevail on the defense of inequitable conduct, the accused infringer must prove that: 1) the applicant misrepresented or omitted material information with, 2) the intent to deceive the PTO, 3) and, weighing the equities, the applicant's conduct warrants a finding of unenforceability. At issue in Therasense were representations the patentee made to the PTO about the meaning of a statement in one of its prior art patents that were seemingly inconsistent with arguments made to the European Patent Office (“EPO”) about the same statement.

The patent-in-suit involves test strips with electrochemical sensors to measure the level of glucose in a blood sample. It claims a test strip for testing whole blood without a membrane over an electrode on the strip. During prosecution, the PTO repeatedly rejected the claims for anticipation and obviousness based on a prior art patent (also owned by the patentee) which disclosed a similar test strip, but referred to the use of a protective membrane “optionally, but preferably when being used on live blood.” In an attempt to distinguish its invention, the patentee told the PTO, in both a declaration and amendment, that a person of ordinary skill in the art would understand the statement in the prior art as requiring a membrane for use with whole blood. Prior to this representation to the PTO, when prosecuting the European counterpart of the prior art patent, the patentee had argued that the same statement was “unequivocally clear” that the membrane is optional, and merely preferred, for live blood.

Following a bench trial, the district court held the patent unenforceable for inequitable conduct because the patentee did not disclose to the PTO the previous statements it had made to the EPO. A divided Federal Circuit panel affirmed the finding of unenforceability, which was then vacated for rehearing en banc.

Tightened Standard for Establishing Materiality and Intent

A six-judge majority of the en banc court adopted a “but-for” standard of materiality. Four judges dissented, and one judge concurred in the result but adopted a more flexible materiality standard.

Materiality

A significant aspect of the Therasense decision is the court's adoption of the heightened “but-for” standard for establishing materiality. Under this standard, prior art that an applicant fails to disclose to the PTO is only considered material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. Notably, the “but-for” standard is an even higher bar for establishing materiality than the PTO's own regulations in 37 C.F.R. ' 1.56 (“Rule 56″). In explicitly declining to adopt the Rule 56 standard, the majority reasoned that because Rule 56 sets a low bar for materiality, adopting it as the standard would inevitably result in patent prosecutors continuing to disclose too much prior art of marginal relevance and patent litigators continuing to charge inequitable conduct in nearly every case as a litigation strategy. A district court applying the “but-for” standard must nonetheless evaluate patentability as the PTO would have: under a preponderance of the evidence standard, giving claim terms their broadest reasonable interpretation.

The court did carve out an exception to this heightened “but-for” standard: “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Its rationale, in part, for accommodating this exception is that an applicant would not likely go to great lengths to deceive the PTO unless it believed it would affect issuance. Clarifying the exception, the opinion notes that neither “mere nondisclosure of prior art references to the PTO nor failure to mention prior art references in an affidavit” constitutes “affirmative egregious misconduct.” Thus, such omissions will require proof of but-for materiality.

Intent

Stating that it also was tightening the intent standard, the en banc opinion removed a potential lack of clarity from panel opinions about what was needed to establish intent to deceive. Specific intent to deceive is required in a case involving nondisclosure of information. “In other words ' that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” And while acknowledging that it may be necessary to infer specific intent from indirect and circumstantial evidence, the Federal Circuit emphasized that an intent to deceive the PTO must be the only reasonable inference that can be drawn from the totality of available evidence. That is, if there are multiple reasonable inferences that may be drawn, only one of which constitutes a specific intent to deceive, this will not satisfy the intent requirement for inequitable conduct.

No Sliding Scale

Lastly, the court affirmatively rejected the use of a “sliding scale” approach to the materiality and intent requirements for establishing inequitable conduct. Under this previously applied approach, a particularly strong showing of materiality might be enough to make up for a weak showing of intent to deceive ' and vice versa. Emphasizing that these are two separate and unrelated requirements, the Federal Circuit also reiterated that no matter how strong the evidence of materiality may be, a district court may not infer intent solely from materiality.

Implications

In litigation, the tightened standards raise questions of what tactics and proof parties will marshal when litigating inequitable conduct, and how district courts will apply Therasense. For patentees fending off inequitable conduct allegations, one issue to watch is how Therasense will be applied at the pleading stage. One approach the Federal Circuit had adopted pre-Therasense to weed out some inequitable conduct allegations was a rigorous pleading standard emphasizing the factual underpinnings of the elements of the defense. Under that pleading standard, what will district courts require to plead “but-for-materiality,” and in particular, will patentees be able to successfully challenge, at the pleading stage, a substantively questionable “but-for-materiality” case?

Therasense requires that “the court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed reference.” A district court's analysis under this test may require a substantive analysis of the patent-in-suit, its prosecution context, and an understanding of the teachings of the prior art information at issue (as pled). Busy courts may not welcome the effort required to become confident that a materiality allegation is so lacking in possible merit as to warrant dismissing a claim of inequitable conduct at the pleading stage. At the merits stage, another issue to watch is the role expert opinion will play in determining what the PTO would have done with the undisclosed information.

For those seeking to establish “but-for-materiality,” whether re-examination can provide helpful proof may be another issue to evolve. Given the respective timelines of district court litigation and PTO re-examination, a party asserting inequitable conduct in litigation could simultaneously seek re-examination based on the omitted information and, if a claim were rejected, argue that this should establish materiality for purposes of the litigation, even if the re-examination has not yet concluded.

Another issue likely to arise under Therasense is what conduct will qualify as “affirmative acts of egregious misconduct” under the Federal Circuit's exception to the but-for materiality requirement. The majority provided only one example of the type of act that might fall under this exception ' the filing of an unmistakably false affidavit ' but otherwise provided no guidance other than to note that it was incorporating elements of early Supreme Court unclean hands cases, which dealt with “deliberately planned and carefully executed scheme[s]” to defraud the PTO and the courts. Given the complexities of prosecution, and the history of circumstances where inequitable conduct has been found, one can readily envision fact patterns where it will be disputed whether the challenged conduct is within the exception; and, presumably, those advancing the defense will pursue available theories with the exception in mind.

What impact will Therasense have on prosecution practice before the PTO? One of the articulated concerns of the Therasense court was to reduce the cautionary incentive of prosecutors to “over disclose” information to the PTO, often without context or explication of its possible relevance. With an eye to achieving this, information which might have been disclosed in recent years as a matter of course may no longer qualify as material. Those prosecuting patent applications and managing portfolios should review their guidelines and practices on disclosing information. In doing so, one may now need to consider what role compliance with PTO Rule 56 and the PTO's “Aids to Compliance With Duty of Disclosure” in the Manual of Patent Examining Procedure will play in normal practice when the information in question is not “but-for-material.” One issue to look for is whether the PTO provides any new guidance to applicants in light of Therasense on this point. As a practical matter, because the cost to analyze a complex reference to determine if it is “but-for material” may exceed the cost to disclose it, and the common desire to have patents issue over a broad background of prior art having been considered by the PTO, some likely will continue to “err on the safe side.” Paradoxically, while Therasense may not create a disincentive for applicants to disclosure “harmless” information, it may allow applicants greater latitude to make good faith determinations that information considered to be potentially the most relevant to an examiner nonetheless need not be disclosed because it is not “but-for material,” leaving it to the examiner to find the closest prior art. Certainly, prudent practitioners will continue to show full candor before the PTO and disclose information the examiner should consider, and for them Therasense likely will reduce the chances of unfounded allegations of inequitable conduct.

Another consideration for those revisiting prosecution guidelines is to review prosecution at or near the time of closing for compliance with the duty of disclosure. As claims evolve, the examiner's and applicant's views on patentability are articulated, and as additional prior art becomes part of the record, information which at an earlier stage in prosecution was deemed not “but-for-material” may be viewed differently. Additionally, the Federal Circuit's exception of certain affirmative acts from the heightened “but-for” standard will continue to warrant close review of declarations under 37 C.F.R. ” 1.131 and 1.132 (Rules 131 and 132) arguing for patentability for compliance with the duty of candor. Since the determination of which type of acts fall under this different standard will likely be hard fought between litigants, it will also be an important issue for prosecutors to monitor as it evolves in the courts.

The full impact of the Therasense decision will be played out in the coming years, and the division of the Federal Circuit judges on this decision may increase the chances for Supreme Court review. Nevertheless, although these judges may disagree about the best means for doing so, for the most part their varying opinions seek to achieve the same end goals: reducing the number of inequitable conduct claims brought by litigants and easing the administrative strain on the already-burdened PTO.

Darren Donnelly is a partner in Fenwick & West LLP's litigation group specializing in patent litigation and counseling. Betsy White is an associate in Fenwick & West's litigation group. Her practice focuses on commercial and intellectual property litigation, with a particular emphasis on representing technology companies in patent infringement, unfair competition, and trade secret misappropriation disputes.

Responding to views from the U.S. Patent and Trademark Office (“PTO”) and elsewhere about the unintended consequences of the current inequitable conduct doctrine, a divided en banc Federal Circuit decision issued on May 25, 2011 adjusted the standard of the materiality element to make this defense harder to establish. Writing for the majority in Therasense, Inc. v. Becton, Dickinson & Co., 2011 U.S. App. LEXIS 10590 (Fed. Cir. May 25, 2011), Chief Judge Randall Ray Rader lamented that the inequitable conduct doctrine had been overused to the detriment of the courts and “the entire patent system,” and that the harsh consequences of a finding of inequitable conduct ' unenforceability of the entire patent or patent family ' warrant a more sparing application of the doctrine. The Therasense court then held: 1) “as a general matter, the materiality required to establish inequitable conduct is but-for materiality” where “prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art”; 2) an exception to the general rule exits “in cases of affirmative egregious misconduct,” such as filing an unmistakably false affidavit; 3) “the accused infringer must prove that the patentee acted with the specific intent to deceive the PTO,” that is, “prove by clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it”; and 4) a “district court should not use a 'sliding scale,' where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa.”

Background of the Case

Inequitable conduct is an equitable defense to patent infringement that, if proved, bars enforcement of a patent. To prevail on the defense of inequitable conduct, the accused infringer must prove that: 1) the applicant misrepresented or omitted material information with, 2) the intent to deceive the PTO, 3) and, weighing the equities, the applicant's conduct warrants a finding of unenforceability. At issue in Therasense were representations the patentee made to the PTO about the meaning of a statement in one of its prior art patents that were seemingly inconsistent with arguments made to the European Patent Office (“EPO”) about the same statement.

The patent-in-suit involves test strips with electrochemical sensors to measure the level of glucose in a blood sample. It claims a test strip for testing whole blood without a membrane over an electrode on the strip. During prosecution, the PTO repeatedly rejected the claims for anticipation and obviousness based on a prior art patent (also owned by the patentee) which disclosed a similar test strip, but referred to the use of a protective membrane “optionally, but preferably when being used on live blood.” In an attempt to distinguish its invention, the patentee told the PTO, in both a declaration and amendment, that a person of ordinary skill in the art would understand the statement in the prior art as requiring a membrane for use with whole blood. Prior to this representation to the PTO, when prosecuting the European counterpart of the prior art patent, the patentee had argued that the same statement was “unequivocally clear” that the membrane is optional, and merely preferred, for live blood.

Following a bench trial, the district court held the patent unenforceable for inequitable conduct because the patentee did not disclose to the PTO the previous statements it had made to the EPO. A divided Federal Circuit panel affirmed the finding of unenforceability, which was then vacated for rehearing en banc.

Tightened Standard for Establishing Materiality and Intent

A six-judge majority of the en banc court adopted a “but-for” standard of materiality. Four judges dissented, and one judge concurred in the result but adopted a more flexible materiality standard.

Materiality

A significant aspect of the Therasense decision is the court's adoption of the heightened “but-for” standard for establishing materiality. Under this standard, prior art that an applicant fails to disclose to the PTO is only considered material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. Notably, the “but-for” standard is an even higher bar for establishing materiality than the PTO's own regulations in 37 C.F.R. ' 1.56 (“Rule 56″). In explicitly declining to adopt the Rule 56 standard, the majority reasoned that because Rule 56 sets a low bar for materiality, adopting it as the standard would inevitably result in patent prosecutors continuing to disclose too much prior art of marginal relevance and patent litigators continuing to charge inequitable conduct in nearly every case as a litigation strategy. A district court applying the “but-for” standard must nonetheless evaluate patentability as the PTO would have: under a preponderance of the evidence standard, giving claim terms their broadest reasonable interpretation.

The court did carve out an exception to this heightened “but-for” standard: “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Its rationale, in part, for accommodating this exception is that an applicant would not likely go to great lengths to deceive the PTO unless it believed it would affect issuance. Clarifying the exception, the opinion notes that neither “mere nondisclosure of prior art references to the PTO nor failure to mention prior art references in an affidavit” constitutes “affirmative egregious misconduct.” Thus, such omissions will require proof of but-for materiality.

Intent

Stating that it also was tightening the intent standard, the en banc opinion removed a potential lack of clarity from panel opinions about what was needed to establish intent to deceive. Specific intent to deceive is required in a case involving nondisclosure of information. “In other words ' that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” And while acknowledging that it may be necessary to infer specific intent from indirect and circumstantial evidence, the Federal Circuit emphasized that an intent to deceive the PTO must be the only reasonable inference that can be drawn from the totality of available evidence. That is, if there are multiple reasonable inferences that may be drawn, only one of which constitutes a specific intent to deceive, this will not satisfy the intent requirement for inequitable conduct.

No Sliding Scale

Lastly, the court affirmatively rejected the use of a “sliding scale” approach to the materiality and intent requirements for establishing inequitable conduct. Under this previously applied approach, a particularly strong showing of materiality might be enough to make up for a weak showing of intent to deceive ' and vice versa. Emphasizing that these are two separate and unrelated requirements, the Federal Circuit also reiterated that no matter how strong the evidence of materiality may be, a district court may not infer intent solely from materiality.

Implications

In litigation, the tightened standards raise questions of what tactics and proof parties will marshal when litigating inequitable conduct, and how district courts will apply Therasense. For patentees fending off inequitable conduct allegations, one issue to watch is how Therasense will be applied at the pleading stage. One approach the Federal Circuit had adopted pre-Therasense to weed out some inequitable conduct allegations was a rigorous pleading standard emphasizing the factual underpinnings of the elements of the defense. Under that pleading standard, what will district courts require to plead “but-for-materiality,” and in particular, will patentees be able to successfully challenge, at the pleading stage, a substantively questionable “but-for-materiality” case?

Therasense requires that “the court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed reference.” A district court's analysis under this test may require a substantive analysis of the patent-in-suit, its prosecution context, and an understanding of the teachings of the prior art information at issue (as pled). Busy courts may not welcome the effort required to become confident that a materiality allegation is so lacking in possible merit as to warrant dismissing a claim of inequitable conduct at the pleading stage. At the merits stage, another issue to watch is the role expert opinion will play in determining what the PTO would have done with the undisclosed information.

For those seeking to establish “but-for-materiality,” whether re-examination can provide helpful proof may be another issue to evolve. Given the respective timelines of district court litigation and PTO re-examination, a party asserting inequitable conduct in litigation could simultaneously seek re-examination based on the omitted information and, if a claim were rejected, argue that this should establish materiality for purposes of the litigation, even if the re-examination has not yet concluded.

Another issue likely to arise under Therasense is what conduct will qualify as “affirmative acts of egregious misconduct” under the Federal Circuit's exception to the but-for materiality requirement. The majority provided only one example of the type of act that might fall under this exception ' the filing of an unmistakably false affidavit ' but otherwise provided no guidance other than to note that it was incorporating elements of early Supreme Court unclean hands cases, which dealt with “deliberately planned and carefully executed scheme[s]” to defraud the PTO and the courts. Given the complexities of prosecution, and the history of circumstances where inequitable conduct has been found, one can readily envision fact patterns where it will be disputed whether the challenged conduct is within the exception; and, presumably, those advancing the defense will pursue available theories with the exception in mind.

What impact will Therasense have on prosecution practice before the PTO? One of the articulated concerns of the Therasense court was to reduce the cautionary incentive of prosecutors to “over disclose” information to the PTO, often without context or explication of its possible relevance. With an eye to achieving this, information which might have been disclosed in recent years as a matter of course may no longer qualify as material. Those prosecuting patent applications and managing portfolios should review their guidelines and practices on disclosing information. In doing so, one may now need to consider what role compliance with PTO Rule 56 and the PTO's “Aids to Compliance With Duty of Disclosure” in the Manual of Patent Examining Procedure will play in normal practice when the information in question is not “but-for-material.” One issue to look for is whether the PTO provides any new guidance to applicants in light of Therasense on this point. As a practical matter, because the cost to analyze a complex reference to determine if it is “but-for material” may exceed the cost to disclose it, and the common desire to have patents issue over a broad background of prior art having been considered by the PTO, some likely will continue to “err on the safe side.” Paradoxically, while Therasense may not create a disincentive for applicants to disclosure “harmless” information, it may allow applicants greater latitude to make good faith determinations that information considered to be potentially the most relevant to an examiner nonetheless need not be disclosed because it is not “but-for material,” leaving it to the examiner to find the closest prior art. Certainly, prudent practitioners will continue to show full candor before the PTO and disclose information the examiner should consider, and for them Therasense likely will reduce the chances of unfounded allegations of inequitable conduct.

Another consideration for those revisiting prosecution guidelines is to review prosecution at or near the time of closing for compliance with the duty of disclosure. As claims evolve, the examiner's and applicant's views on patentability are articulated, and as additional prior art becomes part of the record, information which at an earlier stage in prosecution was deemed not “but-for-material” may be viewed differently. Additionally, the Federal Circuit's exception of certain affirmative acts from the heightened “but-for” standard will continue to warrant close review of declarations under 37 C.F.R. ” 1.131 and 1.132 (Rules 131 and 132) arguing for patentability for compliance with the duty of candor. Since the determination of which type of acts fall under this different standard will likely be hard fought between litigants, it will also be an important issue for prosecutors to monitor as it evolves in the courts.

The full impact of the Therasense decision will be played out in the coming years, and the division of the Federal Circuit judges on this decision may increase the chances for Supreme Court review. Nevertheless, although these judges may disagree about the best means for doing so, for the most part their varying opinions seek to achieve the same end goals: reducing the number of inequitable conduct claims brought by litigants and easing the administrative strain on the already-burdened PTO.

Darren Donnelly is a partner in Fenwick & West LLP's litigation group specializing in patent litigation and counseling. Betsy White is an associate in Fenwick & West's litigation group. Her practice focuses on commercial and intellectual property litigation, with a particular emphasis on representing technology companies in patent infringement, unfair competition, and trade secret misappropriation disputes.