Federal Circuit Says Indemnity Agreement with Customer Satisfies Article III Standing

Yesterday, the U.S. Court of Appeals for the Federal Circuit issued a precedential decision in CQV Co., Ltd. v. Merck Patent GmbH, vacating the Patent Trial and Appeal Board’s (PTAB) determination that CQV failed to show the unpatentability of Merck patent claims to pearlescent automotive coatings in post-grant review (PGR) proceedings. Although the Federal Circuit’s vacatur was based on substantial evidence review of the PTAB’s ruling, most of the appellate court’s opinion dealt with issues surrounding CQV’s Article III standing to appeal the PTAB’s adverse decision without itself facing patent infringement allegations.

Merck Contacts CQV Customers Over Potential Infringement Liability

CQV’s petition for PGR proceedings at the PTAB challenged claims of Merck’s U.S. Patent No. 10647861, a-Alumina Flakes, which claims alpha-aluminum flake formulations useful in various industrial inks, paints and coatings. The transparent alumina flakes of the ‘861 patent exhibit enhanced optical qualities, including pearlescent luster and multicolor effect, while retaining higher chemical stability when compared to existing formulations.

The specification of the ‘861 patent notes that pearlescent pigments based on flakes containing the same alpha-alumina composition are well-known and commercially available through the patentee under the Xirallic trademark for automotive coatings. During PGR proceedings, CQV and Merck disputed the date at which various commercially available lots of Xirallic became publicly available for purposes of determining prior art status. In its final decision, the PTAB ruled that CQV had not proven that a particular sample lot of Xirallic qualifies as prior art under both effective filing dates for the ‘861 patent argued by either CQV or Merck.

Before considering the merits of CQV’s appeal, the Federal Circuit was first required to consider whether CQV suffered an injury-in-fact through the PTAB’s adverse ruling sufficient to confer Article III status. Such an injury-in-fact in this context is typically found if the appellant is engaging in behavior that would likely give rise to the liability of an infringement suit, the Federal Circuit noted, citing to its 2020 ruling in Grit Energy Solutions v. Oren Technologies.

To establish Article III standing on appeal, CQV’s appellant’s brief relied upon a declaration from a lab chief that CQV’s Adamas line of pearlescent pigment products competes with Merck’s Xirallic. The Federal Circuit ordered supplemental briefing on the standing issue to which CQV responded with additional details, including communications between Merck and CQV customers regarding potential infringement liability over the ‘861 patent. One of those customers required CQV to enter an indemnity agreement that would make CQV protect the customer against infringement allegations before they would continue purchasing Adamas.

Standing for Declaratory Judgment Actions Establishes Standard for PTAB Appeals

The Federal Circuit has previously found that such agreements to indemnify customers against patent infringement liability suffices to establish Article III standing for actions seeking declaratory judgment, citing to its 2011 decision in Arris Group v. British Telecommunications. “Because the standard for establishing standing under the Declaratory Judgment Act is the same as the standard for establishing Article III standing… CQV has shown that it has standing to pursue this appeal,” the Federal Circuit found. Although Merck said that its communications with CQV’s customers were simply identifying the general coverage of Merck’s rights, the appellate court noted that specific threats of infringement by patentees are not required under the Article III standard.

Reviewing the PTAB’s findings as to the prior art status of the Xirallic sample lot at issue, the Federal Circuit concluded that it was impossible to discern whether the Board properly evaluated the relevant evidence. CQV’s appeal challenged the Board’s decisions to discount several pieces of evidence including general statements about Xirallic’s availability, CQV’s purchase of the Xirallic sample lot prior to any proposed effective date for the ‘861 patent, and evidence that Merck manufactured a Xirallic batch in 2007 that it was incentivized to sell due to short shelf life.

The Federal Circuit found that it did not need to address any single CQV challenge because the PTAB’s ruling did not consider the record as a whole. In particular, the appellate court was bemused by the PTAB’s failure to address evidence that the Xirallic sample lot would have been made available to the public within weeks of being placed in quality control. Although Merck noted that the Board may have had reasons to discredit quality control evidence, the PTAB’s failure to discuss CQV’s evidence left the appellate court unable to reasonably discern whether the Board’s path was proper.

As a result, the Federal Circuit vacated the PTAB’s patentability determinations related to claims 1 through 17 and claim 21 of the ‘861 patent. On remand, the Federal Circuit warned the PTAB to be “careful not to overstate the required degree of certainty,” noting that CQV only had to prove by a preponderance of the evidence that the contested Xirallic sample lot was commercially available before the effective filing date.