CAFC: Bad Actor Makes Bad Inequitable Conduct Law

In a decision handed down earlier today in Avid Identification Systems v. The Crystal Import Corporation, a bad acting President of a closely-held company managed to create potentially bad inequitable conduct law for the rest of us. Intent to deceive was admitted, if you can believe that, but as it turns out the prior art withheld, a prior sale, was not invalidating and would not have lead to an appropriate rejection by the Patent Office. Nevertheless, the prior sale of an earlier version of the invention in question was the closest prior art and the Federal Circuit, per Judge Prost, explained that materiality does not require that the the withheld prior art lead to a good rejection. So Judge Prost applied the Patent Office law relative to materiality as it existed prior to the 1992 revision of 37 CFR 1.56. In a feat of mental gymnastics, however, Judge Prost quoted the current Rule 56 to support her decision, muddying the waters even further in the area of inequitable conduct. Who would have thought muddying the inequitable conduct waters was even possible!

Avid challenged the district court’s finding that the trade show demonstration was material and that Dr. Stoddard had a duty of candor to disclose this information. Avid did not dispute on appeal that Dr. Stoddard withheld the information with specific intent to deceive the PTO for the purposes of obtaining a patent, so it is admittedly hard to feel sorry for him or Avid, yet this case is one that patent practitioners and litigators need to know about and deal with since the President of the company, who was not the inventor, was deemed to be substantively involved in patent prosecution such that he had a duty to disclose material prior art he know of, which he did not fulfill.

On appeal, Avid argued that the district court’s finding of materiality was clearly erroneous because Dr. Stoddard’s trade show demonstration related to a precursor product that did not contain all of the elements of the ’326 patent claims. Avid’s arguments against materiality focused on the fact that a jury was presented with the trade show information and still found the patent not invalid. Avid argued that the jury must have found that the trade show demonstrations were not § 102(b) prior art. Judge Prost, however, was not convinced, explaining that Avid was confusing the concepts of “material” and “invalidating.” She wrote that the CAFC 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.” Those familiar with patent prosecution will recall that the reasonable examiner standard was written out of Rule 56 by the Patent Office nearly 20 years ago. Recently, over the last several years an increasing number of Federal Circuit panels have retreated to the reasonable examiner standard as if it were the law.

In one tremendous bit of irony, recall that it was Judge Prost who sided with the Patent Office in the claims and continuations challenge and found that the USPTO should be given deference with respect to implementation of procedural rules. See Tafas v. Doll (now vacated).  Judge Prost even cited to Rule 56 and explained that the Patent Office authority to promulgate the rule has been addressed and upheld by the Federal Circuit. So pardon me for noticing the intellectual dishonesty involved here. If the USPTO deserves deference and the USPTO has expressly written out the reasonable examiner standard from the duty of candor set forth in Rule 56, exactly who is Judge Prost and those other members of the Federal Circuit to ignore the express desire of the USPTO and refuse to give the USPTO the deference it deserves? Why do members of the Federal Circuit ignore the obligations set forth in Rule 56 and instead apply its own precedent? Can’t we all agree that is not an appropriate showing of deference to the USPTO? That much should be unanimously agreed to if you ask me.

In any event, returning to the case at hand, the district court found that sales demonstrations would be important to a determination of patentability under § 102(b) despite the fact that a valid rejection could not be made based on the prior device. The district court found that the precursor product, while not invalidating, reflected the closest prior art, and thus was highly material to patentability, despite the fact that the current Rule 56 would specifically disagree with this interpretation. Nevertheless, the panel of the Federal Circuit, with Judge Linn dissenting in part, held that the district court’s analysis of materiality is not clearly erroneous.

Now, we all know how this case will be used in some trial proceedings, and we all know how it will be stretched and pulled by some panels of the Federal Circuit. But before we overstate the ridiculousness and intellectual dishonesty of the ruling, lets be clear. The district court determined that Dr. Stoddard’s testimony at trial was not credible, his memory of facts was suspiciously selective, and he refused to acknowledge certain incontrovertible events. All of those are bad facts no doubt, but inequitable conduct is a sliding scale test, although the en banc rehearing of Therasence, Inc. v. Becton Dickinson and Co. may change that. See Federal Circuit to Consider Inequitable Conduct En Banc. But when there is no materiality there should be no inequitable conduct, and based on the current Rule 56 which no longer adheres to the reasonable examiner standard there could not be any materiality, despite what Judge Prost thinks or wrote.

In conclusion, allow me to notice another bit of irony. The Federal Circuit reverses district courts with great frequency when the issue relates to claim construction, showing no deference whatsoever, despite Chief Judge Michel being on the record in multiple places saying that he thinks the Federal Circuit got it wrong when it decided not to give any deference whatsoever to claim construction decisions. But in the realm of inequitable conduct whenever the district court finds inequitable conduct it seems that extreme deference is provided. At the same time there is no deference given to the USPTO’s current Rule 56 which did away with the reasonable examiner standard.

The one overwhelmingly important issue for patent reform was the establishment of a uniform set of inequitable conduct standards that even the Federal Circuit had to accept. As we seemingly march toward patent reform and the culmination of over 5 years of legislative efforts there is no inequitable conduct reform or standards in the current bill. That is a terrible missed opportunity. Let’s hope that Congress doesn’t put patents aside now for another decade, which they might do. It could become a lost decade where inequitable conduct once again becomes the scourge of patent litigation.