IP UPDATE

Promises, Promises: Covenant Not to Sue for Patent Infringement Includes Downstream Users

by Karen Gover | Oct 31, 2024 | Patents

The US Court of Appeals for the Tenth Circuit affirmed that a district court did not err in applying ordinary rules of contract construction to a covenant not to sue and properly found that under the patent exhaustion doctrine, the covenant encompassed downstream users. Fuel Automation Station, LLC v. Energera Inc., Case Nos. 23-1123; -1358 (10th Cir. Oct. 21, 2024) (Carson, Rossman, Federico, JJ.)

Fuel Automation Station (FAS) and Energera compete in the manufacture of automated fuel delivery equipment and related services. Energera holds patents related to its fuel delivery equipment. In 2016 and 2018, Energera sued FAS, alleging that it infringed two of its patents. The parties resolved the suits with a single settlement agreement in 2019. The agreement described the scope of the patent rights at issue and provided mutual covenants not to sue.

Less than a year later, FAS contracted with a Canadian corporation to operate its fuel automation equipment. Energera sued the Canadian corporation for infringement of one of its patents. FAS intervened, then separately sued Energera seeking a declaration that the covenant not to sue authorized FAS to sell or lease its own equipment and, therefore, the patent exhaustion doctrine prohibited Energera from suing downstream users, such as the Canadian corporation. FAS also brought two breach of contract claims asserting that Energera violated the settlement agreement and its included covenant since it was prohibited from suing the Canadian corporation for downstream use or from suing or “otherwise engag[ing]” FAS in legal proceedings.

FAS moved for summary judgment on its declaratory judgment count, which the district court granted. However, the court denied both parties’ later motions for summary judgment on the issue of whether the settlement agreement covered the asserted patent, finding that an ambiguity in the agreement created genuine issues of material fact. A jury subsequently found that the agreement did cover the asserted patent and that Energera breached the covenant. Energera appealed.

After first determining that the district court’s summary judgment ruling was an appealable legal ruling on the issue of the scope of the covenant, the Tenth Circuit found that the district court correctly interpreted the covenant to include downstream users. In the covenant, Energera promised “not to sue [FAS] or otherwise engage [FAS] in any domestic or foreign legal or administrative proceeding” related to the Patent Rights. Citing dictionary definitions of “engage” in its analysis, the Tenth Circuit found that the term “otherwise engage” reasonably could show the parties’ intent to prohibit Energera from suing FAS’s downstream users. The Court then invoked the patent exhaustion doctrine, which it called “the brooding omnipresence in the sky of patent law.” The Court explained that if a patent holder promises not to sue an entity for patent infringement when the entity sells or leases an item, “the doctrine recognizes an inherent promise not to sue downstream users of those items.” Otherwise, the Court pointed out, no reasonable customer would want to buy or lease a patented item from an authorized seller.

As to whether the [...]

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Bill Proposes to Shed Light on Third-Party Litigation Interests via Mandatory Disclosures

by Anisa Noorassa | Oct 31, 2024 | Uncategorized

On October 4, 2024, US Representatives Darrell Issa (R-CA) and Scott Fitzgerald (R-WI) introduced HR 9922, the Litigation Transparency Act of 2024. If enacted, the act would require the disclosure of third parties receiving payment in civil lawsuits. The bill is intended to shed light on civil litigation funded by undisclosed third-party interests.

In a press release on his website, Representative Issa stated that the legislation is intended to increase transparency and target “serious and continuing abuses in our litigation system.” The National Association of Mutual Insurance Companies, The U.S. Chamber of Commerce, and the American Property Casualty Insurance Association, among other organizations, submitted statements of support for the bill. However, opponents of similar measures have argued that third-party money for litigation expenses can promote access to justice and level the playing field.

The text of the legislation can be found here. If enacted, the bill would require that each party disclose in writing to the court the names of any persons having a “right to receive any payment or thing of value that is contingent on the outcome of the civil action,” as well as any agreement creating such a right. The bill includes an exception where the right to receive payment is due to the repayment of a loan.

The bill has been referred to the US House of Representatives Judiciary Committee.

Practice Note: Significant legislative action on the bill during the short remainder of the current Congress is unlikely. IP Update will track the progress of the bill if it is introduced in the next Congress.

Final Rule on DMCA Grants Circumvention Exemptions

by Paul Devinsky | Oct 31, 2024 | Copyrights

On October 25, 2024, the Librarian of Congress Carla Hayden adopted a final rule granting exemptions to a Digital Millennium Copyright Act (DMCA) provision that prohibits circumvention of technological measures that control access to copyrighted works. The new final rule went into effect October 28, 2024.

In 1998, as part of the DMCA, Congress added § 1201 to the Copyright Laws (Title 17) to provide greater legal protection for copyright owners in the then-emerging digital environment. Section 1201 generally made it unlawful to “circumvent a technological measure that effectively controls access to” a copyrighted work. Since then, every three years, the Librarian of Congress (US Copyright Office), upon the recommendation of the Register of Copyrights, has been authorized to adopt temporary exemptions specific to classes of copyrighted works that will be in effect for the ensuing three‐year period.

Now, pursuant to § 1201 and based upon recommendation of the Register, the Copyright Office has renewed all but one of the existing exemptions, adopted a new exemption to vehicle operational data for computer programs, and expanded the existing exemptions to text and data mining of audiovisual and literary works and exemptions regarding computer programs for repair of commercial industrial equipment.

The Copyright Office recommended adopting or expanding exemptions for the following classes:

[For] Classes 3(a) and 3(b) [exemptions]: Expansion of the exemption for audiovisual and literary works, for the purpose of text and data mining for scholarly research and teaching by allowing researchers affiliated with other nonprofit institutions of higher education to access corpora for independent research and by modifying the provisions concerning security measures and viewing the contents of copyrighted works within a corpus.
[For] Class 5 [exemptions]: New exemption for computer programs that control retail-level commercial food preparation equipment for purposes of diagnosis, maintenance, and repair.
[For] Class 7 [exemptions]: New exemption for computer programs, for purposes of accessing, storing, and sharing operational data, including diagnostic and telematics data, of motorized land vehicles, marine vessels, and commercial and agricultural vehicles or vessels.

Regarding the Classes 3(a) and 3(b) exemptions, the final rule explains that institutions can “provide outside researchers with credentials for security and authentication to use a corpus that is hosted on its servers but cannot disseminate a copy of a corpus (or copyrighted works included therein) to outside researchers or give outside researchers the ability to download, make copies of, or distribute any copyrighted works.”

Regarding the Class 5 exemptions, the Register agreed that “proponents sufficiently showed . . . adverse effects on . . . proposed noninfringing uses” of computer programs “related to retail-level commercial food preparation” but otherwise declined to extend the exemption to software-enabled industrial devices.

Regarding the Class 7 exemption, the Register determined that “the prohibition on circumvention adversely affects the ability of lawful owners and lessees, or those acting on their behalf, to access, store, and share operational and telematics data, which are likely to be noninfringing.”

The Copyright Office declined to add “an exemption for the [...]

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Pre-Markman Claim Construction Is OK, Within Limits

by Sydney E. McDermott | Oct 31, 2024 | Patents

In an appeal stemming from the denial of a preliminary injunction and dismissal of the complaint, the US Court of Appeals for the Federal Circuit clarified its precedent and explained that a district court may construe claims at the motion to dismiss Rule 12(b)(6) stage, but only to the extent necessary to decide the motion. UTTO Inc. v. Metrotech Corp., Case No. 23-1435 (Fed. Cir. Oct. 18, 2024) (Prost, Taranto, Hughes, JJ.)

UTTO sued Metrotech in the US District Court for the Northern District of California for patent infringement and tortious interference with prospective economic advantage under California law. UTTO also moved for a preliminary injunction. The asserted patent describes and claims methods for detecting and identifying “buried assets,” which refers to underground utility lines. The district court denied the preliminary injunction because of UTTO’s failure to show a likelihood of success on the merits for infringement based on the district court’s construction. The district court adopted a construction of the term “group” as requiring at least two data points per buried asset. The district court then dismissed the original complaint for failure to state a claim on which relief could be granted but allowed UTTO to amend, explaining that infringement of the claims as construed at the preliminary injunction stage was not pled.

UTTO then filed an amended complaint, which the district court also dismissed, noting that UTTO failed to plead facts supporting infringement of other limitations under the claim construction issued at the preliminary injunction stage. The district court again granted UTTO leave to amend, which UTTO did. But the district court dismissed that third complaint as well, this time with prejudice, citing the claim construction in its order at the preliminary injunction stage.

On appeal, UTTO (citing 2018 Federal Circuit precedent Nalco v. Chem-Mod) challenged the district court’s claim construction and its reliance on a claim construction in an order denying summary judgment to dismiss a complaint. The Federal Circuit explained that claim construction by a district court “to resolve . . . particular claim construction issues in [a] case” may be necessary and is not categorically barred at the Rule 12(b)(6) stage. The Court explained that there is a “logical relationship of claim construction” between “infringement and the normal function of courts deciding whether to grant a Rule 12(b)(6) motion.” An infringement analysis first requires an analysis of the scope and meaning of the claims asserted and then the “properly construed claims” are compared to the accused device or method. Often, claims are construed based on intrinsic evidence alone, which the Federal Circuit concluded “is not different in kind from the interpretation of other legal standards, which is proper and routine in ruling on a motion under Rule 12(b)(6).” As an example, the Court cited its routine dismissals under Rule 12(b)(6) in connection with motions under 35 U.S.C. § 101.

The Federal Circuit cautioned that not all claim construction issues need to be construed at the Rule 12(b)(6) stage, but only those issues necessary to decide a [...]

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IRS Issues Final Rules on Intangible Property Repatriations

by Brian Moore | Oct 31, 2024 | Uncategorized

With the allure of tax incentives for foreign derived intangible income and an increase in foreign audits scrutinizing transfer pricing, bringing intellectual property (IP) back to the United States is increasingly attractive. Newly issued final IP repatriation regulations make the tax consequences of repatriating previously offshored IP more predictable and eliminate the risk of potential double taxation.

On October 10, 2024, the US Department of the Treasury and the Internal Revenue Service (IRS) released final regulations under § 367(d) regarding the tax consequences of certain IP repatriations. The final regulations largely follow the proposed regulations issued in May 2023, with minor modifications. These regulations apply to IP repatriations that occur on or after October 10, 2024.

Background on § 367(d)

Section 367(d) and the corresponding regulations were designed to prevent US companies from avoiding US tax by transferring valuable IP to foreign affiliates. Generally, when a US person transfers IP to a foreign corporation in a nonrecognition transaction, the transfer is treated as a sale in exchange for payments contingent on the productivity, use, or disposition of the IP. This means that the US transferor is deemed to receive annual royalty payments over the useful life of the IP, reflecting the income that would have been generated by the IP.

Prior to the release of the latest regulations, the § 367(d) regime provided “subsequent transfer” rules that could result in an immediate income inclusion of the remaining deemed royalty amount if the US transferor transferred the stock of the transferee foreign corporation, or the transferee foreign corporation transferred the IP. However, the prior regulations did not clearly address the tax implications when the IP was repatriated back to the US, leading to uncertainty and potential double taxation. The final regulations clarify the treatment of repatriated IP under § 367(d). The regulations are generally taxpayer friendly and are expected to reduce the tax burden on US companies repatriating IP.

Key Provisions of the Final Regulations

Termination of Annual Royalty Inclusions

The final regulations terminate the deemed royalty inclusions when the IP is repatriated and certain conditions are met. The US transferor is no longer required to include deemed royalty payments in its income if the transferee foreign corporation transfers the IP to a qualified domestic person (QDP), which could be the original US transferor, a successor US transferor, or a related US person, provided the person is subject to US tax. To benefit from the termination of deemed royalty inclusions, the US transferor also must comply with specific reporting requirements, including providing detailed information about the repatriation transaction to the IRS.

Gain Recognized by the US Transferor

The US transferor must recognize gain equal to the fair market value of the IP at the time of repatriation. The amount of gain recognized by the US transferor depends on whether the IP is “transferred basis property.” If the IP is transferred basis property, the gain recognized is the amount the foreign corporation would have recognized if its adjusted basis [...]

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