Avid Identification Systems v. Crystal Import Co.: President May Have Rule 56 Duty to Disclose

The Federal Circuit has held that the founder and president of a company that has submitted a patent application may owe a duty to disclose to the USPTO under Rule 56(c)(3), even if he was not the inventor or preparing attorney or agent. In Avid Identification Systems Inc. v. The Crystal Import Corporation, 603 F.3d 967 (Fed. Cir. 2010), the Court upheld a district court ruling that a company president who was more involved in the sales of company products than their technical development nevertheless owed a duty of candor to the USPTO under 37 CFR section 1.56, which the company president breached. The Court affirmed the lower court’s factual analysis resulting in its finding that the company president was “substantively involved in the preparation or prosecution of the patent application.”

BACKGROUND

Avid Identification Systems Inc. is the seller and developer of biocompatible microchips used to identify lost pets. Initially the company sold relabeled chips from an independent supplier, but company founder Dr. Hannis Stoddard changed the business model in 1985 such that Avid would develop a chip reader that could read both Avid’s own chips as well as other commercially available unencrypted chips.

In order to achieve this goal, Stoddard – not an engineer himself—testified that he “hired” three engineers to develop the product.  In August 1991, Avid filed for patent number 5,235,326 (the ‘326 patent) for a chip and reader system, identifying the three engineers as the inventors, and one of those three as the prosecuting attorney. A few days before filing, the inventors assigned their rights in the patent to Avid. Stoddard signed the small entity status affidavit filed with the patent to obtain lower fees. Avid was also pursuing European patents rights for the same invention.

The ‘326 patent issued in August 1993 and Avid sued other corporations for infringement. Most settled, but one manufacturer, Datamars, fought all the way to trial, where Avid won.

Following the trial, Datamars filed a motion to hold the ‘326 patent unenforceable due to Avid’s inequitable conduct. Specifically, the district court pointed to a livestock trade show in April 1990, where Stoddard demonstrated some of Avid’s technology, though not the patented technology. The district court found that Stoddard’s trade show demonstration was material prior art under 35 U.S.C. section 102(b) and that information regarding that demonstrative was withheld from the USPTO with deceptive intent. The district court specifically determined that Stoddard owed a duty of candor to the USPTO. Avid appealed.

Prior Art may be material even if it does not invalidate the patent

A party may prove inequitable conduct that renders a patent unenforceable by producing clear and convincing evidence of: 1) material prior art; 2) knowledge chargeable to the patent applicant of prior art and its materiality, and 3) the applicant’s failure to disclose the prior art to the PTO with intent to mislead. FMC Corp. v. Manitowoc Co., 835 Fl2d 1411, 1415 (Fed. Cir. 1987). Avid focused its appeal on two issues: materiality of the trade show demonstration and whether Stoddard had a duty to disclose to the USPTO.

Avid argued that the trade show demonstration was not material for two reasons: 1) the demonstration related to a precursor product that did not include all of the elements of the ‘326 product; 2) the jury received evidence about the trade show and obviously did not find that it was section 102(b) prior art because the jury found the ‘326 patent valid.

But the Federal Circuit Court upheld the district court ruling, noting that “material” prior art was not necessarily the same thing as “invalidating” prior art. To assess materiality, the Court applied the definition in Rule 56: “Information is material where a reasonable examiner would find it important to a determination of patentability.” Avid Identification Systems Inc. v. The Crystal Import Corporation, 603 F.3d 967, 972 (Fed. Cir. 2010) “We have often held that a reasonable examiner may find a particular piece of information important to a determination of patentability, even if that piece of information does not actually invalidate the patent.” Id. at 973.  As far as Avid’s contention that the demonstration product differed from the patented invention, the Court held that it still “reflected the closest prior art” and thus was material to patentability. Id.

Stoddard was bound by a duty of candor under Rule 56

The Federal Circuit Court focused on the question of whether Stoddard owed a duty of candor to the USPTO at all, since only individuals owing such a duty could have committed inequitable conduct.

PTO Rule 56, codified at 37 CFR section 1.56, states that all “individuals associated with the filing and prosecution of a patent application” owe a duty of candor and good faith when dealing with the Patent and Trademark Office during the patent prosecution period. 37 CFR section 1.56 (a). That duty includes the duty to disclose to the PTO all information the individual knows that is “material” to the question of patentability, including prior sale or public use of the invention one year or more before the filing date of the application.  Id. at 1.56(b). Individuals who fall in this category include: (1) each named inventor, (2) each attorney or agent that prepares or prosecutes the application, and (3) every other person who is substantively involved in the preparation or prosecution of the application and who is associated with the inventor or assignee.” Id. at 1.56(c).

It was undisputed that Stoddard was neither an inventor nor prosecuting attorney, so the question for the court was whether Stoddard was “substantially involved in the preparation or prosecution of the application and associated with the inventor or assignee.” If so, and if he failed to comply with his duty of candor, then his inequitable conduct may be charged to the patent applicant, thus rendering the patent unenforceable. Molins PLC v. Textron, Inc., 48 F.3d 1172, 1178 (Fed. Cir. 1995). The Federal Circuit Court had not previously interpreted and defined what conduct constitutes “substantive involvement” for these purposes.

The majority of the Federal Circuit determined that “substantively involved” means “that the involvement relates to the content of the application or decisions related thereto, and that the involvement is not wholly administrative or secretarial in nature.” 603 F.3d at 974. The Court acknowledged and agreed with USPTO policy that “typists, clerks, and similar personnel who assist with an application” are not bound by the duty of candor.

In determining that Stoddard was “substantively involved,” the Federal Circuit reviewed with approval the factual analysis and findings rendered by the district court. The lower court had determined that Stoddard was in fact “substantively involved” in Avid’s patent application and prosecution, largely by imputing the general knowledge of Avid to Stoddard due to his active role in the closely held company. The district court had found that Stoddard was “involved in all aspects of the company’s operation, from marketing and sales to research and development,” leading to “a reasonable inference that he was also involved in the preparation of the patent application relating to that research.” Id. at 974.

The Court additionally pointed to email correspondence between Stoddard and an inventor relating to the European patent application, as well as the fact that he signed the affidavit for submission to the USPTO as a “small entity.” The Federal Circuit court noted that the lower court simply did not find credible Stoddard’s testimony regarding his lack of involvement in or understanding of the claimed invention. Id. at 975.

Judge Linn says the majority goes too far

In his dissent, Judge Linn says the majority imposes the duty of candor on an inappropriately broad group of individuals. Specifically, Linn argues that the duty to disclose material information should only be applied to individuals who can appreciate whether or not the information is actually “material,” i.e., those individuals who have “knowledge of the technical details or legal merits of an application.” Id. at 978.

“The majority’s interpretation places on persons who are not in a position to assess materiality an obligation to disclose information the relevance of which they have no way of determining. The effect is either to encourage the filing of information regardless of its materiality, just to be on the safe side, or to widen the net of inequitable conduct that may be cast by accused infringers after the fact in litigation.” Id. at 979.

The majority disputes Linn’s view, essentially holding that a finding of inequitable conduct requires multi-faceted factual analysis. The “threshold inquiry” is asking whether the individual involved in the alleged misconduct owed a duty of candor to the USPTO. But if that individual is unable to assess the materiality of the information, by definition, they “would lack the deceptive intent required” for an ultimate finding of inequitable conduct. Id. at 977.

CONCLUSION

Avid warns that companies filing and prosecuting patent applications must carefully document all individuals who do – as well as those who do not – have any involvement in the filing and prosecution of a patent application. The knowledge and involvement of every relevant corporate officer or agent should be recorded in order to clearly delineate who within the company owes a duty of candor and who may not. Especially in a close corporation, where company knowledge may be imputed to those in charge, it may be prudent to err on the side of inclusion if there is any doubt as to who owes the duty of candor.

Connect on Linkedin®

Olivier A. Taillieu

Jeffrey J. Zuber

Also See:

Mayo v. Prometheus: The Supreme Court Reverses the Federal Circuit, Finding Prometheus' Patents Cover Laws of Nature and Therefore Ineligible Subject Matter

Celsis In Vitro, Inc. v. Cellzdirect, Inc.: Federal Circuit Disagrees on Obviousness Analysis Post-KSR

In re Ricoh Co., Ltd.: Federal Circuit Clarifies § 1920 Allowances for Prevailing Party to Charge Costs

Bosch v. Pylon: Federal Circuit Confirms Elimination of the Presumption of Irreparable Harm in Permanent Injunction Analysis

Therasense v. Becton: Federal Circuit Narrows Scope of Inequitable Conduct