Cygnus Telecommunications Technology, LLC v. Telesys Communications, LLC (Fed. Cir. 2008)

Patents may be invalidated under 35 U.S.C. §102(b) if the invention was already patented or described in a printed publication anywhere in the world, or was in public use or on sale in the United States, more than one year prior to the date a U.S. patent application was filed. Patent practitioners sometimes joke that the “b” in 102(b) stands for a “bar” to patentability. While 102(b) may likely be the most well known section of the patent statute, the present case serves as a reminder that 102(b) is no joking matter and that patentees and patent owners alike must remain vigilant and keenly aware of how certain actions may impact patent validity or whether a patent application should be filed at all. It is equally important that the legal terminology involved in 102(b) decisions be well understood so that such terminology is not incorrectly used, where something else entirely may be meant, as such misuse could result in unfortunate consequences for patent holders.

Using some of the facts of the present case, creating a few imagined scenarios and posing a few speculative questions, we provide a thumbnail review of some important intertwining legal concepts and terminology and also provide suggestions as to what might have been done to prevent patent validity problems. We note how, in the present case, the validity attack may have been defended against, assuming of course that operative facts existed in support of patent validity. Our created scenarios assume such facts exist.

Patent validity in the present case turned on the issue of whether the invention was “on sale” prior to the critical date of one year from the filing date of the patent applications in question. Subissues concerning reduction to practice were also discussed by the Federal Circuit, including whether the patented invention had been “reduced to practice” and whether the invention was “ready for patenting.” Before delving into the specific facts of Cygnus Telecommunications, we review some of the legal principles involved in the Federal Circuit’s decision. Reduction to practice may legally manifest in one of two forms.

The Concept of Reduction to Practice

Constructive reduction to practice occurs when a patent application is filed. The patent application must meet the legal requirement of teaching one of ordinary skill how to make and use the invention. An actual reduction to practice occurs when the inventor builds the invention and, in the language of the Federal Circuit, “realizes that the invention as later claimed indeed works for its intended purpose.” At that point “further ‘experimentation’ may constitute a barred public use.” (“Public use,” as noted above, is another condition that may bar patentability under the patent statute; however, the issue of whether there was a public use of the invention in Cygnus Telecommunications was touched upon by the Federal Circuit only to note that the lower court had no need to address it.)

The Concept of Experimental Use

A concept intimately related to actual reduction to practice is the “experimental use” doctrine. The Manual of Patent Examining Procedure (MPEP) defines experimental use as “perfecting or completing an invention to the point of determining that it will work for its intended purpose.” Therefore, according to the MPEP, “experimental use ends with an actual reduction to practice.”

Experimental use may handily be invoked to prevent an on-sale bar under 102(b) if, as stated by the MPEP, “the primary purpose of the inventor at the time of sale, as determined from an objective evaluation of the facts surrounding the transaction, was to conduct experimentation.”

The Concept of the “On-Sale” Bar

Whether there was an offer for sale within the meaning of the patent statute involves applying traditional contract law principles of offer, acceptance and consideration. An important Supreme Court case that sets forth the requirements for finding an “on-sale” bar is Pfaff v. Wells Elec., 525 U.S. 55 (1998), which was cited and relied upon by the Federal Circuit in Cygnus Telecommunications.

In Pfaff, the Supreme Court concluded that two conditions must be satisfied before the critical date, in order to find an on-sale bar. “First, the product must be the subject of a commercial offer for sale, … [and] … [second, the invention must be ready for patenting.” Whether an invention is “ready for patenting” may be determined in at least two ways: (1) “by proof of reduction to practice before the critical date”; or (2) “by proof that prior to the critical date the inventor had prepared drawings or other descriptions of the invention that were sufficiently specific to enable a person skilled in the art to practice the invention.” Note that the preparation of drawings and enabling description of the invention is similar to constructive reduction to practice, but without proceeding to file a patent application based on the prepared papers.

For example, in Pfaff, the inventor Wayne Pfaff filed a patent application for a computer chip socket on April 19, 1982. His “critical date” was therefore April 19, 1981, one year prior to the patent application filing date. Prior to March 1981, Pfaff provided drawings (a sketch) of his concept to representatives of a potential manufacturer, and on April 8, 1981 the manufacturer provided Pfaff with a written confirmation of a previous oral purchase order for 30,100 of his chip sockets, along with a total price. The manufacturer proceeded to take several months, until July 1981, to produce the chip sockets due to the tooling it needed to develop. The July 1981 time frame was found to be the time frame of actual reduction to practice. That is, Pfaff’s actual reduction to practice was accomplished less than one year prior to his constructive reduction to practice date of April 19, 1982.

Nevertheless, the Supreme Court found an on-sale bar because the drawings Pfaff provided to the manufacturer were sufficient to enable the manufacturer to make the chip socket. That is, the Supreme Court found a commercial sale, and an enabling description, of the invention. The enabling description is similar to constructive reduction to practice as noted above.

The Cygnus Telecommunications Case

In the present case, Cygnus Telecommunications appealed from the district court’s grant of summary judgment that two of Cygnus’s patents were invalid under the on-sale bar of 35 U.S.C. §102(b). The Federal Circuit affirmed the district court’s holdings.

The technology at issue involved a “black box” system that enabled callers located outside of the United States to take advantage of less expensive U.S. international billing rates. The black box user would first place a call to the United States (actually to the black box located in the United States), but the call would be terminated and the user would receive a callback. The user would then enter the international number to be dialed, and the black box system would make the needed connections based out of the United States, thereby obtaining the lower billing rate. The so-called “black box” had the disadvantage of requiring a dedicated line per user, which was expensive. Therefore, the black box system was replaced by a computer-based system (the “386 system”), which did not require the dedicated line.

The inventor testified that he worked with a computer engineer to develop the software needed for the 386 system and with several individuals overseas who first used the black box system and then used the 386 system. The inventor described two of the overseas individuals as “beta-testers” who assisted him in troubleshooting the 386 system. However, the overseas individuals were also invoiced for the cost of their telephone calls.

During the same time period, the inventor also had discussions with another telecommunications company regarding implementing and marketing the invention on a commercial scale. A commercialization agreement was entered into on April 24, 1991.

On April 24, 1992, the inventor filed a patent application on the computerized callback system and the application matured into U.S. Patent No. 5,883,964 and a successor patent, U.S. Patent No. 6,035,027. Cygnus Telecommunications became the owner of the two patents in question as a successor-in-interest to the company originally founded by the inventor.

The district court held the two patents to be invalid, finding that a sale occurred, due to the payments by the overseas participants for their phone calls, and that the 386 system had been reduced to practice, both actions having occurred more than one year prior to the critical date of April 24, 1992. Although Cygnus argued that the use of the 386 system prior to the critical date was experimental use, the district court rejected this argument, holding that the experimental use exception is not available after the invention has been reduced to practice.

The critical evidence relied on to establish reduction to practice was a 1997 sworn declaration from the inventor in which he stated, “I reduced to practice the invention of the claims before June 27, 1990.” The court also found that Cygnus provided no satisfactory explanation for the inventor’s statement and did not explain why Cygnus believed that it should have been disregarded. Another declaration filed in 1994, and a 2006 deposition, were alleged to be inconsistent with the 1997 declaration statement.

However Cygnus Telecommunications’ appeal suffered from procedural problems in that, while some evidence germane to the issue of whether the inventor’s declaration should be disregarded may have been present in the overall record on appeal, Cygnus did not present that evidence to the district court on the issue of summary judgment and also apparently presented such possible evidence several months after the summary judgment order was issued. To overcome the district court’s summary judgment ruling, Cygnus needed to convince the Federal Circuit that there was some issue of material fact (discernable in the allowable record on appeal) that, without resolution, precluded summary judgment. Cygnus failed to do so because, as stated in the present case, “a genuine issue of fact sufficient to survive summary judgment [cannot be created by a party] simply by contradicting his or her own previous sworn statement … without explaining the contradiction or attempting to resolve the disparity.”

Some Imagined Scenarios and Questions

We therefore speculate here as to what evidence might have saved the day for Cygnus and explained the contradiction or disparity with the inventor’s sworn declaration. Our first question is whether the inventor incorrectly used the terminology “reduced to practice.” More directly, was the inventor accurate in stating that the invention was reduced to practice? After all, the inventor testified that at least two of his overseas participants were “beta-testers” and that they were “troubleshooting” the 386 system. This begs the questions of what aspect the beta-testers were involved with and why such troubleshooting was required by the inventor. If, indeed, some portion of the 386 system was not yet working, this evidence may have been sufficient to show that the purported sale was actually related to continuing experimental use and that therefore actual reduction to practice was not yet completed. That is, if Cygnus could have shown that “the primary purpose of the inventor at the time of sale, as determined from an objective evaluation of the facts surrounding the transaction, was to conduct experimentation,” Cygnus may have framed an argument around the inventor’s usage and understanding of the terminology “reduced to practice” as used in the inventor’s declaration. In other words, the inventor’s apparent intent to experiment, and the reasons experimentation seemed warranted, may have been inconsistent with his sworn declaration statement. Key to this argument would have been to somehow use such inconsistent information to show that the inventor was not clear as to the specific legal meaning of the phrase “reduced to practice.” In other words, the inventor may have meant only that he built a prototype that required experimentation to “perfect or complete” the invention.

There is some further issue in the actual record of the present case, however, because the inventor testified that, prior to June 27, 1990, he “had built a system that the idea would work, but not necessarily commercially,” which the Federal Circuit viewed as a confirmation of his declaration statement. This statement alone, however, still seems questionable as to what was specifically meant by “that the idea would work.” Without reviewing the actual complete testimony, one may imagine that the inventor’s view that the idea would work may still have been subject to experimentation.

Another speculative question related to the inventor’s declaration is whether the inventor was referring to the 386 system or the black box system (despite, of course, the inventor’s “invention of the claims” language). If the inventor was referring to the black box system, then the follow-up question is whether the black box system in reality embodied the claims of the patents and was in fact the “invention of the claims.” The Federal Circuit noted that the question of whether an invention is ready for patenting turns on “whether the system embodied the claims in the two patents at issue.” (The declaration apparently did contain some reference to the 386 system as a functional computerized callback device as of June 1990.)

There are questions regarding the sale also. The MPEP states that, for a sale to exist, a “sale or offer for sale must take place between separate entities … Where the parties to the alleged sale are related, whether there is a statutory bar depends on whether the seller so controls the purchaser that the invention remains out of the public’s hands.” MPEP 2133.03(b) (quoting Ferag AG v. Quipp, Inc., 45 F.3d 1562, 1566 (Fed. Cir. 1995). The MPEP provides an example fact pattern: “Where the seller is a parent company of the buyer company, but the President of the buyer company had ‘essentially unfettered’ management authority over the operations of the buyer company, the sale was a statutory bar.” However, in the present case, the overseas individuals may have been employees of the inventor’s company. Such evidence may have overcome the finding of a sale.

The inventor’s declaration appeared to be the controlling factor in Cygnus Telecommunications in that the holding that reduction to practice had occurred, per the inventor’s own words, prevented arguments regarding experimental use of the purported sold system.

We nonetheless hope our imagined scenarios serve the purpose of providing a view toward awareness of pitfalls that inventors and patent owners may encounter regarding patentability and patent validity issues.

Practice Tip:

Patent owners and inventors should be aware of the meaning of terminology related to 102(b) to prevent inadvertently incorrect statements that could result in patent invalidity. Whether an invention is barred from patentability is a legal question that requires careful gathering and assessment of facts. Vedder Price patent attorneys can assist in making these determinations prior to filing patent applications, and they can provide legal opinions on patent validity and assist in related litigation situations.