(CAFC Summary) Taltech Ltd. v. Esquel Enters. Ltd. - Exceptional Case Under 35 U.S.C. § 285 Due to Inequitable Conduct and Litigation Misconduct

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Taltech Ltd. v. Esquel Enters. Ltd., ___ F.3d ___, No. 2009-1344 (Fed. Cir. May 12, 2010):(Exceptional Case Under 35 U.S.C. § 285 Due to Inequitable Conduct and Litigation Misconduct) – [District court properly inferred deceptive intent from the disclosure of a reference which the applicant described as “wholly inadequate for dress shirts” and failure to disclose another reference that was more similar to dress shirt seams and included the specific adhesive material adjudicated to be the withheld best mode.]

Issues: (1) Three independent bases to support the district court’s finding of an exceptional case under 35 U.S.C. § 285—(a) inequitable conduct for failure to disclose a reference, (b) inequitable conduct for making a misrepresentation to the PTO, and (c) abusive litigation tactics. (2) Calculation of post-judgment interest.

Briefer’s Comment: The majority opinion is presented as a fairly straightforward application of the facts to the law of inequitable conduct and the requirements for finding a case exceptional pursuant to 35 U.S.C. § 285. Judge Gajarsa filed a lengthy dissent in this case, concerned that the majority opinion was departing from the Federal Circuit’s current inequitable conduct precedent. He noted the importance of requiring an elevated standard of proof in inequitable conduct cases because of the severity of the penalty. Judge Gajarsa did not believe that the district court's finding of deceptive intent was supported by clear and convincing evidence. He stated that “[t]his case exemplifies the ongoing pandemic of baseless inequitable conduct charges that pervade our patent system.”

Technology: Pucker-free garment seams and the method of manufacturing them.

Summary: The Federal Circuit (Mayer and Friedman) (Gajarsa dissented) affirmed the Western District of Washington’s (Zilly) award of attorney fees and costs under 35 U.S.C. § 285 and reversed the post-judgment interest rate.  The Federal Circuit stated:

    Following a bench trial, the district court concluded that Taltech inventor John Wong engaged in inequitable conduct during prosecution of the ’779 patent before the United States Patent and Trademark Office (“PTO”) when he did not disclose a raincoat seam that included heat-fusible adhesive tape (undisclosed raincoat seam, “URS”), and when he misrepresented a raincoat seam previously made and sold by TAL (“double top-stitch seam”). Based on these inequitable conduct findings, and a finding of litigation misconduct, the court declared the case exceptional under 35 U.S.C. § 285. The July 13, 2007, final judgment awarded Esquel attorney fees and costs based on the exceptional case finding. TAL appealed.

    This court vacated the inequitable conduct determination. The attorney fees and costs were also vacated because the exceptional case finding was based, at least in part, on TAL’s inequitable conduct in failing to disclose the URS. The case was remanded for the district court to determine if the URS was cumulative to German Patent No. 1 104 802 (“Robers”).

    On remand, the district court set out its previously presented reasons as three separate and independent bases to support its finding of exceptional case: (1) inequitable conduct in failing to disclose the URS; (2) inequitable conduct in misrepresenting the double top-stitch seam; and (3) abusive litigation tactics. On these bases, the court entered a supplemental final judgment which also imposed interest from the date of the earlier July 13, 2007, judgment.  TAL moved under Rule 60(a) of the Federal Rules of Civil Procedure that the judgment specify an interest rate under 28 U.S.C. § 1961 from the date of the new judgment. The motion was denied. TAL appeals both the exceptional case finding and the judgment interest rate. This court has jurisdiction under 28 U.S.C. § 1295(a).

    District courts may award reasonable attorney fees to a prevailing party “in exceptional cases.”  35 U.S.C. § 285. “‘[T]he types of conduct which can form a basis for finding a case exceptional [include] . . . inequitable conduct before the P.T.O., [and] misconduct during litigation.’” To establish inequitable conduct the accused infringer must prove by clear and convincing evidence that the patentee withheld material information with intent to deceive the PTO. Materiality and intent are questions of fact that we review for clear error. If the materiality and intent requirements are met, the court must then determine whether the cited conduct amounts to inequitable conduct by balancing the levels of materiality and intent; a greater showing of one allows a lesser showing of the other. “Thus, even if a threshold level of both materiality and intent to deceive are proven by clear and convincing evidence, the court may still decline to render the patent unenforceable.” 

    We review the district court’s ultimate determination of inequitable conduct for an abuse of discretion. “An abuse of discretion occurs ‘when [the district court’s] decision is based on clearly erroneous findings of fact, is based on erroneous interpretations of the law, or is clearly unreasonable, arbitrary, or fanciful.’”

    We review a finding that a case is exceptional within the meaning of 35 U.S.C. § 285 for clear error. “Once a case is determined to be exceptional, we review a district court’s decision to award attorney fees under an abuse of discretion standard.” “The trial judge's discretion in the award of attorney fees permits the judge to weigh intangible as well as tangible factors: the degree of culpability of the infringer, the closeness of the question, litigation behavior, and any other factors whereby fee shifting may serve as an instrument of justice.” “Litigation misconduct and unprofessional behavior are relevant to the award of attorney fees, and may suffice to make a case exceptional.”

    The district court’s first independent ground for finding the case exceptional is TAL’s inequitable conduct in not disclosing the URS. The court concluded that the URS met “the most stringent of the materiality standards,” and also found that the patentee’s “culpability . . . is high.”

    The district court also did not err in concluding that TAL acted with the requisite deceptive intent in failing to disclose the URS. Proving intent does not require direct evidence; it can be inferred from indirect and circumstantial evidence. TAL chose to disclose the double top-stitch seam, presented as “wholly inadequate for dress shirts” in a 1996 amendment, instead of the URS that more closely approximated a high-priced dress shirt seam; and its failure to disclose the URS, which included Vilene SL33, is consistent with its non-disclosure of the Vilene SL33 best mode. “[T]he involved conduct, viewed in light of all the evidence, including evidence indicative of good faith . . . indicate[s] sufficient culpability to require a finding of intent to deceive.” On these bases, the district court could properly infer that TAL acted with deceptive intent. The dissent insists that Robers was before the examiner and the URS was therefore cumulative, but, again, the district court deemed to the contrary because of the faulty translation.

    Moreover, there is no evidence of good faith to counter the evidence of intent. The dissent relies on Wong’s voluntary disclosure of the URS, citing Rothman v. Target. But in Rothman this court found no substantial evidence that the patentee had the requisite intent to deceive based on the patentee submitting letters to the PTO discussing the alleged prior art; the holder of the alleged prior art previously participating in negotiations to license rights to the patent prior to issue; the patentee having no sample, photograph, drawing, or description of the alleged prior art to submit to the PTO; the patentee’s attorney having a good faith belief that the alleged prior art was not prior art; and the patentee submitting all the information it did have to the PTO with its petition to make special. The dissent also cites Pfizer, Inc. v. Teva Pharmaceuticals USA, Inc., but there, the district court credited the testimony of a named inventor that the reference was significantly different from the invention, noted the PTO’s recognition of the differences, and relied on Pfizer’s “highly consistent pattern of disclosing references.” In stark contrast, Wong disclosed the prior art during a deposition, after the patent issued, despite having sufficient knowledge and ability to disclose it during prosecution; was deemed not credible by the court; and offers no consistent pattern of disclosing references. This is not good faith.

    Seeing no clear error in the materiality or deceptive intent analyses of TAL’s failure to disclose the URS, we conclude that the district court did not abuse its discretion in finding inequitable conduct.

Judge Gajarsa dissented:

This case exemplifies the ongoing pandemic of baseless inequitable conduct charges that pervade our patent system. For the reasons stated below, I respectfully dissent from the majority opinion. [¶] Defendants’ inequitable conduct claim rests on a handmade drawing that the inventor, John Wong, sketched on a piece of paper during his deposition.  Defendants’ counsel requested that Wong draw the prior art that “inspired” him to experiment in making pucker-free seams in dress shirts.

The district court also improperly inferred intent to deceive from the materiality of the non-disclosed reference and several statements Wong made to the PTO.  In both instances, the district court drew an inference of bad faith despite an equally plausible, and likely more reasonable, inference of good faith.  Such an analysis has been rejected by this court and is legally erroneous.

[T]he majority’s opinion affirms a district court judgment that contains no supportable finding of intent, limited materiality findings, and wholly ignores evidence of good faith.  In doing so, the majority reverses the road upon which this court’s inequitable conduct precedent is presently travelling.  As we recently explained, “[t]he need to strictly enforce . . . [an] elevated standard of proof . . . is paramount because the penalty for inequitable conduct is so severe, the loss of the entire patent . . . . This penalty was originally applied only in cases of fraud on the Patent Office.”  The district court’s finding of deceptive intent is not supported by clear and convincing evidence and the inequitable conduct finding should be reversed.

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