In a recent decision, Avid Identification Systems, Inc. v. The Crystal Import Corp., 2009-1216 (Apr. 27, 2010), the Federal Circuit affirmed an Eastern District of Texas court’s finding that the asserted patent was unenforceable due to inequitable conduct..  

Plaintiff Avid Identification Systems Inc. (Avid) brought suit against defendants Datamars SA and its subsidiary The Crystal Import Corporation (collectively Datamars) alleging infringement of Avid’s U.S. Patent No. 5,235,326 (the ’326 patent) directed to a multimode radio-frequency identification system for reading encoded biocompatible chips. The jury found that Avid’s patent was valid in view of the prior art and infringed by Datamars. However, the jury also held Avid’s ’326 patent to be unenforceable for inequitable conduct.  

In the appeal, the Federal Circuit addressed the Eastern District of Texas court’s finding of inequitable conduct. Specifically, the Federal Circuit addressed which individuals are “substantively involved” in the preparation or prosecution of a patent application and thus owe a duty of candor and good faith to the U.S. Patent and Trademark Office (USPTO) during prosecution of a patent application.  

In the district court, Datamars argued (1) that Avid’s founder and president, Dr. Stoddard, withheld material information from the USPTO during prosecution of the application that issued as the ’326 patent; (2) that Dr. Stoddard had a duty of candor to disclose that information; and (3) that Dr. Stoddard withheld that information with the intent to mislead the USPTO. The district court granted the motion, finding that the ’326 patent was unenforceable because Dr. Stoddard withheld material prior art and that Dr. Stoddard owed a duty of candor to the USPTO.  

On appeal, Avid challenged the district court’s finding that Dr. Stoddard (1) withheld material prior art and (2) owed a duty of candor to the USPTO. On the first issue (the materiality issue), Avid argued that the withheld prior art was not material because it did not contain all of the elements of the ’326 patent. The Federal Circuit concluded that Avid was confusing the concepts of “material” and “invalidating” and noted that it has “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.” Thus, on the first issue, the Federal Circuit held that the court’s analysis of “materiality” was not clearly erroneous and affirmed the finding that the prior art was material.

Next, the Federal Circuit turned to the “duty of candor” issue. U.S. Patent Rule 56 imposes on all individuals associated with the filing and prosecution of a patent application a duty of candor and good faith in dealing with the USPTO during the examination of a patent application. See 37 C.F.R. § 1.56. Rule 56 imposes a duty of candor on (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 of the application and who is associated with the inventor or assignee. 37 C.F.R. § 1.56(c) (emphasis added).  

The Federal Circuit had not previously addressed exactly what constitutes “substantive involvement” in the preparation of the application. Based on section 2001.01 of the Manual of Patent Examining Procedure (MPEP), the Federal Circuit concluded that “substantively involved” in the prosecution of the patent application means “involvement related to the content of the application” or decisions related to the application that are not “wholly administrative or secretarial in nature.”  

The district court found that Dr. Stoddard was “substantively involved” with the preparation or prosecution of the application that issued the ’326 patent. For example, the district court found that Dr. Stoddard was “involved in all aspects of the company’s operation, from marketing and sales to research and development.” Further, his involvement in “all aspects” contributed to a reasonable inference that he was involved in the preparation of the patent application related to the company’s research. Moreover, Dr. Stoddard was copied on communications related to the corresponding European patent application covering the invention of the ’326 patent, which further contributed to the inference that Dr. Stoddard was “substantively involved.” In addition, the district court found Dr. Stoddard’s testimony at trial was not credible, citing that “his memory of facts was suspiciously selective, and he refused to acknowledge certain incontrovertible events.” The Federal Circuit held that the district court’s “duty of candor” analysis was not clearly erroneous and affirmed.  

The Avid decision is an important reminder for prosecution counsel and litigants on two fronts. First, prosecution counsel must conduct an investigation to ensure that potentially material information from all individuals involved with the patented invention is disclosed to the USPTO. While the Federal Circuit noted that this decision does not automatically extend a duty of candor to all individuals in contact with the inventor, it does hold that the courts may consider a variety of factors, such as “an individual’s position within the company, role in developing or marketing the patented idea, contact with the inventors or prosecutors, and representation to the PTO in deciding whether that individual is ‘substantively involved.’” Second, defendants in patent litigation should carefully consider their exposure to inequitable conduct allegations and carefully consider all individuals who may have had access to potentially material information during prosecution of the patent application. Failure to do so may result in inequitable conduct defenses being overlooked.  

A copy of the opinion can be found at http://www.cafc.uscourts.gov/opinions/09-1216.pdf.