TLO® INSIGHT: Patents Can Now Be Held Unenforceable for the Actions of Management Not Directly Involved in the Patent Process

In the usual case, claims of inequitable conduct revolve around inventors or patent attorneys who fail to disclose material prior art as they prosecute a patent application. However, the Federal Circuit has now held that where a company has submitted a patent application, the president of that company may owe a duty to disclose prior art to the Patent Office, even if he was not the inventor or preparing attorney or agent. In Avid Identification System Inc. v. The Crystal Import Corporation, 603 F.3d 967 (Fed. Cir. 2010), the Court upheld a district court ruling that a company president who was primarily involved in the commercial aspects of the company’s products (as opposed to technical development) nevertheless owed a duty to disclose prior art. This case marks the first instance that the Federal Circuit determined that persons other than inventors and attorneys, owe a duty to disclose prior art to the USPTO.

Background

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 period of examination of a patent prosecution. This duty of condor includes a duty to disclose to the USPTO all information known to each such individual that is material to the issue of patentability. Failure to comply with Rule 56 can results in a patent being held unenforceable.

For purposes of identifying who owes this duty Rule 56(c) defines “individuals associated wit the filing or prosecution of a patent application” as (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 or prosecution of the application and who is associated with the inventor, with the assignee or with anyone to whom there is an obligation to assign the application.”

The Failure to Disclose a Demonstration of the Invention at a Trade Show Caused the Patent to be Unenforceable

Avid identification System Inc. is a company that designs and markets microchips that are implanted in pets to locate them if lost. The company founder and president, Dr. Hannis Stoddard, wanted Avid to develop a particular type of chip reader. Because Dr. Stoddard was not an engineer himself, he hired three engineers to develop the product. In August 1991, Avid filed for U.S. Patent No. 5,235,326 (the ‘326 patent) for a chip and reader system, and the patent issued in August 1993. Subsequently Avid sued other corporations for infringement. One manufacture, Datamars, filed a motion to hold the ‘326 patent unenforceable for inequitable conduct, and the district court granted Detamar’s motion.

Specifically, the district court found that Dr. Stoddard’s April 1990 trade show demonstration of some of Avid’s technology was material prior art under 35 U.S.C. §102(b) and that information regarding that demonstration was withheld from the USPTO with deceptive intent. The district court further determined that Stoddard owed a duty of candor to the USPTO, and his failure to disclose the demonstration breached that duty. Thus, the district court held the ‘326 patent unenforceable for inequitable conduct. Avid appealed.

Regarding the question of duty, it was undisputed that Dr. Stoddard was neither an inventor nor prosecuting attorney, so the question before the Federal Circuit was whether Stoddard was “substantially involved in the preparation or prosecution of the application and associated with the inventor or assignee.” The Federal Circuit Court had not previously interpreted and defined what conduct constitutes “substantive involvement.”

The majority decision interpreted “substantively involved” to mean “that the involvement related to the content of the application or decisions related thereto, and that the involvement is not wholly administrative or secretarial in nature.” In reaching this definition, the Court cited with approval to the USPTO’s Manual of Patent Examining Procedure Section 2001.01, which notes that “the duty does not extend to typists, clerks, and similar personnel who assist with an application.”

Applying this rule, the Court held that dr. Stoddard was “substantively involved” in the prosecution of the Avid application. Dr. Stoddard was “involved in all aspects of the company’s operation, from marketing and sales to research and development,” contributing to “a reasonable inference that he was also involved in the preparation of the patent application relating to that research.” The court also cited evidence of e-mail correspondence between Dr. Stoddard and one of the inventors relating to a corresponding European patent application, and the fact that he signed an affidavit for submission to the USPOT confirming Avid’s status as a “small entity.” Finally, the court noted that the district court did not find Dr. Stoddard’s testimony to be credible regarding his lack of involvement in, and understanding of, the claimed invention.

Judge Linn dissented on the definition of persons who are “substantively involved.” Judge Linn criticized the majority, stating that “the majority goes even further to extend the duty generally to ‘those on the commercial side of patented product development’ …. With all due respect, I find no basis in the rule or in any policy for such an expansive regarding of Rule 56(c)(3).” Thus, Judge Linn explained that the definition should exclude clerks who prepare the paten as well as “corporate officers, managers, employees, and all other individuals who are neither aware of the technical details or legal merits of the application nor engaged in the preparation or prosecution thereof…. Simply having a general interest or even a financial interest in the invention or a general awareness of the application is not enough.” Judge Linn’s dissenting opinion is probably the better rule, but it is not the law.

Conclusion

Avid demonstrates that the duty of candor is not restricted to inventors, attorneys, or even individuals with technical knowledge of the invention. Indeed, where an individual may merely be an involved in a predominantly commercial role, a duty may still attached if facts exists that may tie the individual to prosecution generally, including corresponding with the inventors regarding the general subject-matter of the patent. As made clear by the Avid court, assessing and understanding the materiality of the prior art is not required. Thus, Avid warns that companies filing and prosecuting patent applications must carefully determine who within the company owes a duty of candor and who may not. Decision-makers would be well-advised to err on the side of inclusion where there is any doubt about whether an officer or employees is subject to the duty of candor.