United States: IP Newsletter - April 2015

FEDERAL CIRCUIT AFFIRMS PTO IN FIRST APPEAL OF AN INTER PARTES REVIEW DECISION

By Matthew I. Kreeger and Jason D. Hall

In a split decision, the Federal Circuit issued its first opinion reviewing a final decision of the Patent Trial and Appeal Board ("Board") of the Patent and Trademark Office ("PTO") in an inter partes review case. The court affirmed the PTO's decision finding three claims invalid and denying the patent owner's motion to amend claims. Along the way, the Court made two significant rulings: (1) the Court lacks jurisdiction to review the Board's decision to institute an IPR; and (2) the Board correctly used the "broadest reasonable interpretation" standard to construe claims. Judge Newman dissented because, in her view, "several of the panel majority's rulings are contrary to the legislative purpose of the Leahy- Smith America Invents Act."

This decision provides a first look at how the Federal Circuit will review Board decisions in inter partes review cases. The opinion confirms the Board's authority, making the Board's decisions to institute trial unreviewable on appeal, and approving the Board's "broadest reasonable interpretation" standard that can make it easier to invalidate patents. The decision thus confirms the Board's approach in conducting these increasingly important patent review proceedings.

BACKGROUND

Cuozzo is the assignee of U.S. Patent No. 6,778,074 (the '074 patent), which is directed to an interface for displaying both a vehicle's current speed and the speed limit. Garmin filed a petition for inter partes review, requesting the Board to cancel three claims of the '074 patent on various grounds, including anticipation and obviousness. The Board instituted the IPR, based on obviousness grounds that differed in some ways from the grounds in the petition.

In a final written decision, the Board construed the claims under the PTO's customary "broadest reasonable interpretation" standard and found the claims invalid as obvious. The Board denied Cuozzo's motion to amend the claims, finding that the amended claims lacked written support under 35 U.S.C. § 112 and improperly enlarged the scope of the claims. Cuozzo appealed the Board's final written decision, as well as its decision to institute IPR. The PTO responded to the appeal, but Garmin had settled the case and did not participate.

THE FEDERAL CIRCUIT LACKS JURISDICTION TO REVIEW THE BOARD'S DECISION TO INSTITUTE IPR

The Court's majority opinion—authored by Judge Dyk and joined by Judge Clevenger—held that under 35 U.S.C. § 314(d), a decision to institute IPR may not be appealed at any stage of the proceeding. In a prior decision, the Court held that § 314(d) precludes interlocutory review of decisions whether to institute IPR. St. Jude Med., Cardiology Div., Inc. v. Volcano Corp., 749 F.3d 1373, 1375-76 (Fed. Cir. 2014). Here, the Court sounds the death knell to all efforts to appeal decisions to institute IPR, now holding that the Court cannot on appeal review decisions to institute IPR, even after a final decision.

The Court suggested that a writ of mandamus might be available (after a final decision) to challenge a Board's decision "in situations where the PTO has clearly and indisputably exceeded its authority." The Court declined, however, to rule "whether mandamus to review institution of IPR after a final decision is available." Instead, the Court held that even if it were available, Cuozzo failed to satisfy the requirements for mandamus.

THE PTO'S BROADEST REASONABLE INTERPRETATION STANDARD IS APPROPRIATE

The Court upheld the PTO's use of the "broadest reasonable interpretation" standard for construing claims during IPR. First, the Court found that Congress implicitly adopted this standard by enacting the AIA. "[T]he broadest reasonable interpretation standard has been applied by the PTO and its predecessor for more than 100 years in various types of PTO proceedings." And the Court has approved of this standard in numerous proceedings, including initial examinations, interferences, and post-grant proceedings. Thus, Congress was aware and adopted this prevailing rule through its enactment of the AIA.

Second, the Court held that the PTO properly used its rulemaking power under the AIA to adopt the broadest reasonable interpretation standard. The AIA conveys rulemaking authority to the PTO under 35 U.S.C. § 316(a)(2), which provides that the PTO shall establish regulations "setting forth the standards for the showing of sufficient grounds to institute a review . . . ." Under this authority, the PTO set the broadest reasonable interpretation standard under 37 C.F.R. § 42.100(b). "There is no indication that the AIA was designed to change the claim construction standard that the PTO has applied for more than 100 years." The Court analyzed the validity of the PTO's regulation defining its claim construction standard under the Chevron framework and determined that, because of the AIA's silence and the PTO's century-long use of the standard, the regulation was proper.

JUDGE NEWMAN'S DISSENT

Judge Newman dissented and argued that the majority's decisions are inconsistent with the AIA. On the claim construction standard, Judge Newman contended that the PTO needs to "apply the same legal and evidentiary standards as would apply in the district court." Because the express purpose of IPRs is "providing quick and cost effective alternatives to litigation," IPRs are better classified as a "surrogate for district court litigation." Judge Newman also offered the view that appeals of decisions to institute IPR are necessary to ensure that the PTO does not overstep its authority.

EU COPYRIGHT: NO RESALE OF DIGITAL CONTENT EXCEPT FOR SOFTWARE? HOW DOES THE EUROPEAN COURT OF JUSTICE DECISION ON EXHAUSTION OF THE DISTRIBUTION RIGHT UPON FIRST SALE IMPACT THE RESALE OF DIGITAL COPIES?

By Alistair Maughan and Kristina Ehle

The European Court of Justice (ECJ) has decided that the rule of exhaustion of the distribution right upon first sale (in the U.S. known as the "first sale" doctrine) does not apply to post first-sale alterations to the physical medium embodying the work if such alterations constitute a new reproduction of the work (here: the transfer of a painting from paper poster onto a canvas). Consequently, such subsequent alterations require the consent of the owner of the reproduction right to the work.

In this decision, the ECJ expressly states that exhaustion of the distribution right upon first sale under the EU Copyright Directive applies to the tangible object into which a protected work is incorporated. Thus, the first sale of intangible digital copies of works subject to the EU Copyright Directive will likely not exhaust the distribution right to such copies. This means that the resale of digital music, film, and e-book files duly purchased by way of download from the Internet will likely be considered as copyright infringement if not authorized by the copyright holders. As regards software, the ECJ ruled the opposite in its UsedSoft judgment in 2012 by deciding that also the first sale of an intangible digital copy of a computer program by way of download from the Internet with the copyright holder's consent exhausts the distribution right to such copy. As a consequence, the buyer of such intangible software copy can resell such copy to third parties without the copyright holder's consent. However, this judgment was based on the interpretation of the EU Directive on Protection of Computer Programs and not on the EU Copyright Directive.

This rather formalistic differentiation between works that are ultimately all protected by copyright may, in particular, lead to practical difficulties for industries with multimedia offerings, like digital games, that comprise software and artistic elements (drawings, music, etc.).

WHAT DOES EXHAUSTION OF THE DISTRIBUTION RIGHT MEAN?

When buying a video on a DVD, a hardcover book, or an art painting in the EU that was first sold in the EU with the consent of the copyright holder of such work, one can resell such DVD, book, or painting to any other person in the EU later on. The reseller does not need the copyright holder's consent for such resale. This is possible because Art. 4 (2) of the EU Copyright Directive sets forth that the first sale in the EU of a copy, or of the original, of a copyrighted work by the copyright holder or with his/her consent causes exhaustion of the distribution right of the copyright holder. The copyright holder can neither prohibit such resale nor ask the reseller or purchaser to pay additional compensation.

THE CASE

In the case, Allposters, a Dutch company, bought art posters depicting copyrighted paintings of famous artists that were sold in the EU with the consent of the respective copyright holders. Allposters transferred the image of the painting from the purchased paper poster onto a canvas by a chemical process so that the image no longer appeared on the paper poster but only on the canvas. Thus, there was still only one reproduction of the painting – only that it was on a canvas medium instead of on the original paper poster. The image of the painting itself was not altered. The canvases looked much better and bore a much closer resemblance to the original painting than the paper posters did, and Allposters offered such canvases for sale on its websites. Allposters argued that (i) alterations made to a sold copy after the distribution right to such copy was exhausted had no impact on the previous exhaustion and (ii) the transfer of the image from paper to canvas did not constitute a reproduction of the work, as the image was not duplicated.

THE JUDGMENT

In its decision of January 22, 2015, the EJC states that the exhaustion of the distribution right applies to the physical medium in which the work is embodied (here: the paper poster) and that alterations of the physical medium which result in a new object (here: the replacement of a paper poster by a canvas) constitutes a new reproduction of the work - which requires the authorization of the holder of the reproduction right. The ECJ therefore decided that "the rule of exhaustion of the distribution right... does not apply in a situation where a reproduction of a protected work, after having been marketed in the European Union with the copyright holder's consent, has undergone an alteration of its medium, such as the transfer of that reproduction from a paper poster onto a canvas, and is placed on the market again in its new form."

EFFECT ON THE RESALE OF DOWNLOADED COPIES?

The, perhaps, even more interesting aspect of this ECJ judgment is its likely impact on the resale of digital copies of copyrighted works purchased by way of download from the Internet:

In the UsedSoft judgment of July 3, 2012, the ECJ decided that "... the distribution right under Art.4 (2) of Directive 2009/24 concerns both tangible and intangible copies of a computer program, and hence also copies of computer programs which, on the occasion of their first sale, have been downloaded from the Internet onto the first acquirer's computer."

As a consequence, the buyer of such intangible copy can resell such copy to third parties without the copyright holder's consent. However, this judgment was based on the interpretation of the EU Directive on the protection of computer programs (Directive 2009/24/EC) that the ECJ considers a lex specialis to the EU Copyright Directive.

In the Allposters decision, the ECJ clearly states that "exhaustion of the distribution right applies to the tangible object into which a protected work or its copy is incorporated." For this purpose, it explicitly relies on (i) the wording of recital 28 of the EU Copyright Directive, according to which copyright "protection under this Directive includes the exclusive right to control distribution of the work incorporated in a tangible article" and (ii) the agreed statement concerning Articles 6 and 7 of the WIPO Copyright Treaty (1996), according to which "the expressions 'copies' and 'original and copies' being subject to the right of distribution ... refer exclusively to fixed copies that can be put into circulation as tangible objects."

In the Allposters case, the ECJ applies precisely those arguments that it had previously rejected as not being applicable in the UsedSoft case. Considering this argumentation, it would appear to be difficult for the ECJ in future cases to turn around and decide that exhaustion of the distribution right under the EU Copyright Directive also applies to the first sale of intangible digital copies.

Therefore, the underlying arguments of the ECJ in the Allposters case are a strong indication that with regard to copyrighted works other than software (e.g., music, literature, film, art), the ECJ will likely not apply the rule of exhaustion of the distribution right to the first sale of intangible digital copies of such works by way of download from the Internet (e.g., music, film, and e-book files). This would mean that, except for the resale of downloaded software copies, the resale of downloaded copies of such works will continue to require the consent of the copyright holder in each case.

WHAT ABOUT ALTERATIONS THAT ARE NOT NEW REPRODUCTIONS?

The ECJ did not rule on the impact of subsequent alterations of sold physical copies of a work which did not qualify as new reproductions of that work. As regards alterations of a copyrighted work itself, one has to look at the applicable national copyright law of the EU countries, because the exclusive right of authors to authorize adaptations, arrangements and other alterations of their works is not granted by the EU Copyright Directive, but by Article 12 of the Berne Convention as implemented into national law of those countries which are party to this multilateral copyright treaty (including all EU Member States).

This alteration right to the work is not impacted by the exhaustion of the distribution right upon first sale. This means that subsequent alterations of the sold work itself require the copyright holder's consent (e.g., changing a painting of an artist after purchase). However, depending on the national copyright law of the respective country, the mere alteration of the sold physical medium embodying the work can also be qualified as an alteration of the work itself, if such alteration puts the work into a different context, e.g., if the purchaser of a painting changes its frame to a very different frame containing patterns or images that modify the context of the work (so decided by the German Federal Supreme Court in 2002, I ZR 304/99).

To read the full article please click here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved