The Inequitable Conduct Defense in Patent Infringement Cases: After Therasense
By: GRANT D. FAIRBAIRN
July 2011
Part one of this series looked at the inequitable conduct defense and suggested that that the Federal Circuit was about to significantly change the doctrine. The Federal Circuit delivered with Therasense, Inc. v. Becton Dickinson & Co., 2011 U.S. App. LEXIS 10590 (Fed. Cir. May 25, 2011) and made it more difficult for accused infringers to assert the defense.
The Problem
Chief Judge Randall Rader wrote the decision for the majority in Therasense. After tracing the origins of the inequitable conduct doctrine, Judge Rader explained that the defense has evolved to require a finding of both intent to deceive and materiality:
To prevail on the defense of inequitable conduct, the accused infringer must prove that the applicant misrepresented or omitted material information with the specific intent to deceive the Patent and Trademark Office (PTO). The accused infringer must prove both elements–intent and materiality–by clear and convincing evidence.
Id. at *24.
While the two-part test is well-established, the standards for intent and materiality have “fluctuated over time.” Id. at *25. In particular, Judge Rader noted that the Federal Circuit’s earlier creation of a “sliding scale,” whereby a reduced showing of intent could be offset by a strong showing of materiality, had managed to dilute the standards for both elements. Id. at *26. While these changes were intended to foster full disclosure by applicants to the PTO, they had “numerous unforeseen and unintended consequences.” Id.
First, claims of inequitable conduct have become ubiquitous in patent litigation, increasing the “complexity, duration and cost” of such cases. Id. at *27. Judge Rader called the defense the “atomic bomb” of patent law, as it is capable of rendering an otherwise valid and infringed patent unenforceable. Id. Given the power of the defense, it is not surprising that it is overused. Id. at *29 (estimating that eighty percent of patent infringement cases include allegations of inequitable conduct).
Second, the “plague” of inequitable conduct claims has affected more than just litigation. Judge Rader used several colorful phrases to describe the plight of patent prosecutors. Id. at *30-31. For example, he stated that patent practitioners “constantly confront the specter of inequitable conduct charges,” and the shadow of the “hangman’s noose” has led patent prosecutors to bury the PTO with prior art references during prosecution. Id. This culture of fear, fostered by overzealous litigation, has led to a “tidal wave” of disclosure that makes the PTO’s job unmanageable. Id.
The Therasense Court blamed the low standards for intent and materiality for this outbreak in inequitable conduct claims. Specifically, Judge Rader noted that fluctuating standards “have inadvertently led to many unintended consequences, among them, increased adjudication cost and complexity, reduced likelihood of settlement, burdened courts, strained PTO resources, increased PTO backlog, and impaired patent quality.” Id. at *31-32. The majority decided that the answer is to tighten the standards for finding both intent and materiality “in order to redirect a doctrine that has been overused to the detriment of the public.” Id. at *32.
The Fix
Starting with the intent element, the majority decided that an accused infringer must prove that the patentee acted with the specific intent to deceive the PTO. Under the new test, the accused infringer must prove by clear and convincing evidence that (1) the applicant knew of the reference, (2) knew it was material, and (3) made a deliberate decision to withhold it. Id. at *32. Gross negligence or proving that the applicant “should have known” that the reference was material are not enough. Id. at *32.
In addition, the Court scrapped the “sliding scale” described above. Id. at *33. Rather, the specific intent to deceive must be the “single most reasonable inference able to be drawn from the evidence” and the evidence “must be sufficient to require a finding of deceitful intent in the light of all the circumstances.” Id. at *34 (emphasis in original). Where there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found. Id.
Turning to the materiality element, the Court determined that “as a general matter, the materiality required to establish inequitable conduct is but-for materiality.” Id. at *37 (emphasis added). In other words, when an applicant fails to disclose prior art to the PTO, that prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. Id. at *37-39 (“After all, the patentee obtains no advantage from misconduct if the patent would have issued anyway.”). Thus, district courts must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed reference. Id.
The Loophole?
After describing these heightened standards for intent and materiality, the majority recognized an exception to the “but-for” test for “cases of affirmative egregious conduct.” Id. at *39-41. Specifically, the Court cited prior cases dealing with “deliberately planned and carefully executed schemes to defraud the PTO and the courts.” Id. (“When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.”). As examples of “affirmative acts of egregious misconduct,” the Court cited cases involving false affidavits, manufacturing of false evidence, perjury, suppression of evidence, and bribery. See id. at *40-42
The Court created this exception to strike a “necessary balance between encouraging honesty before the PTO and preventing unfounded accusations of inequitable conduct.” Id. at *40-41. Of course, by creating an exception that does not require a showing of but-for materiality, the Court may have encouraged litigators to frame their allegations as “affirmative acts of egregious misconduct” to keep the defense alive. Time will tell whether the Therasense Court created an exception large enough to swallow the rule.
Takeaway
The new inequitable conduct test is undeniably more difficult to meet. As a result, the decision should significantly reduce the number of inequitable conduct claims asserted at the beginning of lawsuits. In light of Therasense and Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312 (Fed. Cir. 2009), which raised the standards for pleading inequitable conduct, accused infringers will likely have to take some discovery and find “smoking gun” evidence before asserting inequitable conduct claims, or risk dismissal of such claims by district courts. The Federal Circuit’s recent decisions empower district courts to act as “gatekeepers” for inequitable conduct claims. Given the Court’s increased scrutiny of the defense, this may be exactly what the Federal Circuit intended.