In a much anticipated en banc decision, a split Federal Circuit redefined the decadesold inequitable conduct doctrine. Discarding the “sliding scale” that weighed materiality against intent, the court now requires a “but for” showing of materiality and, separately, clear and convincing evidence of a “specific intent to deceive the PTO” by the applicant. Describing the inequitable conduct doctrine as a “plague not only [on] the courts but also the entire patent system,” the majority explicitly described their holding as an effort to “redirect a doctrine that has been overused to the detriment of the public.” While the dissent criticized the majority for breaking with precedent and discouraging full disclosure to the PTO, the majority defended the doctrinal shift as a return to the underlying principles from which the doctrine emerged as well as a corrective to an out-ofcontrol system of unnecessary disclosures. Therasense v. Becton Dickinson, 2008- 1511, -1512, -1513, -1514, -1595 (Fed. Cir. May 25, 2011) (en banc).
Dismantling the “Atomic Bomb” of Patent Infringement Defenses
Called the “atomic bomb” of patent infringement defenses, the inequitable conduct defense differs from other defenses for alleged infringers in that, if upheld, it bars enforcement of the patent in its entirety regardless of which claims the plaintiff patentee asserts at trial. In fact, a finding of inequitable conduct often has a cascading effect, rendering unenforceable other related patents and applications in the same technology family. While the potency of the defense made it a popular litigation option for defendants in patent infringement actions, the severity of an adverse holding combined with a vague materiality standard over the years resulted in a “tidal wave of disclosures mak[ing] identifying the most relevant art more difficult” for the PTO. While the PTO issued its own guidelines on materiality in its 1977 amendment to Rule 56 (the “reasonable examiner” standard), the “sliding scale” approach taken by the courts meant that, in practice, a finding of low materiality could still result in the invalidation of an entire patent if a strong enough showing of intent were found, and vice versa. The majority in Therasense announced that the court was now “tighten[ing] the standards for finding both intent and materiality” in an effort to reduce litigation costs and complexity, unburden courts and the PTO, and enhance the overall quality of patents.
The underlying dispute concerned a patent infringement action brought by plaintiff Therasense, Inc. against defendant Becton, Dickinson and Co. for the alleged infringement of plaintiff’s U.S. Patent No. 5,820,551 (“the ‘551 patent”). The defendant alleged inequitable conduct based on conflicting positions taken by the applicant before the PTO on the one hand, and by a subsidiary of the patentee before the EPO on the other with regard to the same prior art reference. The inconsistency concerned whether one skilled in the art would understand the phrase “[o]ptionally, but preferably” in a prior art reference to mean that a protective membrane was required for a disposable blood glucose test strip for diabetes management. The question went directly to the novelty of the ‘551 patent, which claimed a disposable blood glucose test strip specifically without a protective membrane. Before the PTO, attorneys for the applicant argued that one skilled in the art would understand that the prior art reference did require a protective membrane. Before the EPO, the patentee’s subsidiary argued to the contrary. The District Court for the Northern District of California found that Therasense’s patent attorney and expert knew of the previous EPO arguments but withheld this information when applying for the ‘551 patent before the PTO. 565 F. Supp. 2d 1088 (N.D. Cal. 2008). Accordingly, the court held that the ‘551 patent was both unenforceable by reason of inequitable conduct and also invalid as obvious in view of the prior art reference at the heart of the inequitable conduct defense.
Writing for the eleven-member majority, Judge Rader provided an historical overview of the inequitable conduct doctrine from its origin to the present day. Grounded in the equitable doctrine of “unclean hands,” the doctrine emerged from a trio of cases involving “particularly egregious misconduct, including perjury, the manufacture of false evidence, and the suppression of evidence.” Keystone Driller Co. v. General Excavator Co., 290 U.S. 240 (1933), Hazel- Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944), overruled on other grounds by Stan-dard Oil Co. v. United States, 429 U.S. 17 (1976), and Precision Instruments Manufacturing Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806 (1945). “Moreover,” noted Judge Rader, “they all involved ‘deliberately planned and carefully executed scheme[s] to defraud’ not only the PTO but also the courts.” The doctrine then evolved to encompass “not only egregious affirmative acts of misconduct” but also “the mere nondisclosure of information to the PTO.” Under this expanded interpretation of the doctrine, the element of materiality was added. This in turn led to the “sliding scale” approach under which even mere negligence on the part of the applicant could mean the invalidation of a patent in its entirety. “In effect,” the majority argued, “this change conflated, and diluted, the standard for both intent and materiality.” To address both the uncertainty of the “fluctuat[ing]” standards and the “unintended consequences” that beset the courts and PTO alike, the majority in Therasense redefined the thresholds for both the intent and materiality prongs.
New Standards for Materiality and Intent
First, Therasense raised the threshold for the materiality prong to a “but for” standard, i.e., that information is material if the PTO would not have allowed a claim had it been aware of the undisclosed information. The court rejected the “reasonable examiner” standard set by PTO Rule 56 as a contributor to “the very problems this court sought to address by taking this case en banc.” (Responding to the dissent that the new standard broke with “principles of materiality that courts have applied in other contexts,” the majority disagreed, arguing that “the most analogous area of law is copyright” – which also requires “but-for proof” for invalidation.) Citing Corona Cord Tire Co. v. Dovan Chemical Corp., 276 U.S. 358, 48 S.C.t. 38, 72 L.Ed. 610 (1928), the court rejected the application of inequitable conduct where “a misrepresentation to the PTO [does] not affect the issuance of the patent.” The court recognized an exception to the “but for” materiality standard, however, where the applicant engaged in “affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit.” The court retained the requirement that materiality been proven by clean and convincing evidence.
With respect to intent, the court reaffirmed the rule that intent and materiality are separate requirements. However, the court rejected the use a “sliding scale,” where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa. Moreover, the court held that a district court may not infer intent solely from materiality. Instead, a district court must weigh the evidence of intent to deceive independent of its analysis of materiality. Proving that the applicant knew of a reference, should have known of its materiality, and decided not to submit it to the PTO does not prove specific intent to deceive. The court also reaffirmed the rule that because direct evidence of deceptive intent is rare, a district court may infer intent from indirect and circumstantial evidence. However, the court tightened this rule by holding that to meet the clear and convincing evidence standard the specific intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Indeed, the evidence “must be sufficient to require a finding of deceitful intent in the light of all the circumstances.” Hence, when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found.
Finally, because the party alleging inequitable conduct bears the burden of proof, the court held that the “patentee need not offer any good faith explanation unless the accused infringer first. . . prove[s] a threshold level of intent to deceive by clear and convincing evidence.” The absence of good faith explanation for withholding a material reference does not, by itself, prove intent to deceive.
Coast Clear, or Another Ticking Time Bomb?
Judge O’Malley filed an opinion concurringin- part and dissenting-in-part. She agreed with the majority’s holdings that intent to deceive and materiality must be found separately, and that district courts may not employ a “sliding scale” and may not infer intent from materiality alone. Further, she agreed that intent can be inferred from indirect and circumstantial evidence, but only where it is “the single most reasonable inference able to be drawn from the evidence.” Judge O’Malley disagreed, however, with the majority’s materiality standard, which in her view does not allow district courts sufficient flexibility to find inequitable conduct in “extraordinary” cases that might not satisfy the literal terms of the majority’s standard. Emphasizing the equitable principles underlying the doctrine, Judge O’Malley called the inequitable conduct doctrine “imprecise by design.” On this basis, she criticized the majority for stripping district courts of the flexibility needed to identify inequitable conduct where they find it on a case-by-case basis. Thus, while agreeing with the majority on the deficiencies of the old doctrine, Judge O’Malley proposed heading in the opposite direction – that is, away from hard and fast standards, giving courts the freedom to fashion a “reasonable remedy” that is “commensurate with the violation.”
Writing for the dissent and joined by Judges Gajarsa, Dyk, and Prost, Judge Bryson opened by conceding the wide consensus united against the inequitable conduct doctrine as it was. Yet, while the parties to the case and amici alike could agree on a “specific intent” standard and the rejection of the “sliding scale” approach, disagreement was found with regard to the proper standard for materiality. Likewise, the dissent rejected the “but for” standard for materiality set by the majority in favor of affirming the PTO’s own standards as laid out in Rule 56. Arguing that the PTO “is in the best position to know what information examiners need,” Judge Bryson further lamented that the heightened “but for” standard would disincentivize applicants from “comply[ing] with the disclosure requirements the PTO places upon them.” Since “the sanction of inequitable conduct will apply only if the claims that issue are invalid anyway,” the new standard set by Therasense leaves “no inducement for the applicant to be forthcoming.” Besides such practical considerations, the dissent chastised the majority decision as “contrary to the Supreme Court decisions that gave rise to the doctrine of inequitable conduct [and] to a long line of our own precedent.”
Waiting for the Fallout
While, as the dissent observed, the PTO had taken a position against the “but for” standard adopted by the majority, the PTO has not yet indicated how it will respond to Therasense. In a Press Release dated May 26, 2011, the PTO announced that “it is carefully studying” the decision and it will “soon issue guidance to applicants related to the prior art information they must disclose” in view of Therasense. (www.uspto.gov/news/pr/2011/11-36.jsp) In the meantime, legal commentators have noted already that Therasense leaves several open questions. Most notably, notwithstanding the heightened “but for” materiality standard, the “affirmative egregious misconduct” exception left by the majority leaves considerable room for interpretation. While not a “sliding scale” per se, this exception could provide alternative grounds for pleading inequitable conduct where materiality is ultimately found to be lacking. Likewise, the potential impact of the “specific intent” standard is blunted by the court’s acknowledgement that the district courts may infer intent from circumstantial evidence.
Already, the district courts have begun the task of applying the Therasense-standards. In fact, the very day after Therasense’s release, the U.S. District Court for the Eastern District of Texas applied the new standard in Ameranth, Inc. v. Menusoft Systems Corp. 2011 WL 2080248 (E.D. Tex. 2011) (finding “but for” materiality but lack of sufficient intent on the part of the applicant). Time will tell what impact Therasense will have on the courts and patent system alike, and whether ultimately the cure is better or worse than the “plague” that inspired it.