Glasgow Contributes to Intellectual Property Magazine; Pleading Edge

Glasgow Contributes to Intellectual Property Magazine; Pleading Edge

This article appeared in Intellectual Property Magazine (Dec.2012/Jan. 2013), Focus on Engineering and Architecture. 

Pleading Edge

The implications of allowing ‘bare-bones’ pleading for direct infringement mean US patent defendants face a tough choice, says Wright, Lindsey & Jennings’ Richard Blakely Glasgow. According to a biennial survey of patent litigators and in-house counsel in the US, the median cost through the discovery phase of a patent infringement case having less than $1m at stake has grown from $250,000 to $350,000 in the last decade.1 Spurred by similar concerns in other types of litigation, the US Supreme Court held in Bell Atlantic Corp v Twombly2 and Ashcroft v. Iqbal3 that complaints must contain detailed factual allegations to move beyond the pleading stage. Nevertheless, ‘bare-bones’ pleading is still alive and well in the US, at least in patent infringement cases. The US Court of Appeals for the Federal Circuit’s recent opinion in In re Bill of Lading Transmission and Processing System Patent Litigation4 held that Twombly and Iqbal have no application to the pleading of direct patent infringement claims, ensuring that even threadbare-complaints will survive beyond the pleading stage.

With the high cost of patent litigation and the Federal Circuit’s opinion in Bill of Lading, corporate defendants more now than ever face a difficult decision: should they settle early to avoid expensive litigation, or should they defend against marginal patent infringement claims even if it costs more to win outright?

Pleading in ‘all civil actions’ Rule 8 of the Federal Rules of Civil Procedure requires only that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to relief”. In Twombly and Iqbal, however, the US Supreme Court interpreted the rule to require much more than is suggested by its plain language.

In those cases, the Court held that a complaint must contain sufficient factual matter to state a claim for relief that is plausible on its face. Facial plausibility exists when the plaintiff pleads facts that, if taken as true, allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. While the plausibility standard is not a probability standard, the Court noted that this pleading standard requires more than a possibility the defendant has acted unlawfully. The Court made clear in Twombly and Iqbal that the mere recital of elements of a cause of action supported only by conclusory statements will not suffice. While courts must still take factual allegations in a complaint as being true at the motion to dismiss stage, they are not bound to accept as true legal conclusions couched as factual allegations. The Court expressly held that this new pleading standard applied for “all civil actions”.

Shortly after the Twombly decision, the US Court of Appeals for the Federal Circuit reviewed a trial court’s dismissal of a patent infringement claim of a pro se plaintiff in McZeal v Sprint NexTel Corp.5 Citing the rule that a reviewing court may give a pro se litigant leeway on procedural matters such as pleading requirements, the McZeal court stated that the plaintiff “met the low bar for pro se litigants to avoid dismissal” by pleading at least the elements contained in Form 18 of the Appendix of Forms of the Federal Rules of Civil Procedure. Form 18 is a sample complaint for patent infringement and requires only:

• An allegation of jurisdiction; 

• A statement that the plaintiff owns the patent;

• A statement that the defendant has been infringing the patent by making, selling, and using the patented device;

• A statement that the plaintiff has given the defendant notice of the infringement; and

• A demand for an injunction and damages.

While the McZeal court’s divergence from Twombly at the time appeared to be predicated on the relaxed pleading requirements applied to a pro se plaintiff, the Federal Circuit ruled in Bill of Lading that the heightened plausibility pleading standard of Twombly and Iqbal does not apply to all civil actions, notably a direct patent infringement action.

Background

R+L Carriers, Inc (“R+L”) alleged that a number of defendants directly and indirectly infringed its patented method of processing and sorting freight in the less-than-a-load freight industry. This method enables shipping documents to be sent from the truck driver to a terminal so billing and load planning can occur while the driver is en route with the freight.

The defendants filed a joint motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. The district court dismissed R+L’s claims against the defendants as failing to state a claim for direct infringement because the purported inferences from the facts pled in the complaints were not “reasonable”. The district court also dismissed R+L’s induced infringement claim because R+L failed to plausibly plead that the defendants had a specific intent to induce infringement of the patent and dismissed R+L’s contributory infringement claim because R+L failed to plausibly plead that the accused products were not capable of substantial non-infringing uses.

‘Bare-bones’ Sufficient

Like in McZeal, the Court in Bill of Lading held the ‘bare-bones’ allegations contained in Form 18 of the Federal Rules of Civil Procedure are sufficient to meet the pleading requirements for direct infringement. The Court’s ruling was based on Federal Rule of Civil Procedure 84, which states the forms “suffice under these rules and illustrate the simplicity and brevity that these rules contemplate”.

The Court said, “[w]hile there may be criticism of the text of Form 18, it is not within our power to rewrite it.” Because the Federal Rules may only be amended by Congress and not by judicial interpretation, the Court stated that even if there is conflict between the Form and Twombly and its progeny, the Form controls.

In holding that Form 18 governs the specificity required to state a claim for direct patent infringement, the Court made clear that a patent infringement complaint need not identify the claims alleged to be infringed or explain how each element of the infringed claims is practiced by the alleged infringer.

‘Bare-bones’ Not Sufficient

The Court held that Form 18 must be strictly construed as measuring only the sufficiency of allegations of direct infringement and thus the principles of Twombly and Iqbal govern pleading requirements for indirect infringement. As such, a plaintiff must plead enough factual content to allow the court to draw the reasonable inference that the defendant is liable for indirect infringement.

Contributory Infringement

Contributory infringement is a form of indirect infringement that occurs when a defendant sells a product for use in practicing a patented process and that product: (i) is material to practicing the process, (ii) has no substantial non-infringing uses, and (iii) is known by the defendant to be especially made or adapted for use in infringement of the patent.7 Thus, among other things, the Court stated that R+L was required to plead facts that allow an inference that the product sold has no substantial non-infringing uses. A “substantial non-infringing use” is any use that is “not unusual, far-fetched, illusory, impractical, occasional, aberrant, or experimental”.

The Court stated that “[w]here the product is equally capable of, and interchangeably capable of both infringing and substantial non-infringing uses, a claim for contributory infringement does not lie.” Because R+L attached materials to its complaints that contained descriptions of non-infringing uses of the alleged infringing products, the Court held that the defendants’ products had substantial non-infringing uses and R+L thus did not state a claim for contributory infringement.

Induced Infringement

Induced infringement is a form of indirect infringement that requires that the defendant knowingly induced infringement8 and possessed specific intent to encourage another’s infringement.8 The Court stated that R+L’s complaints must state facts plausibly showing that the defendants specifically intended their customers to infringe the patent and knew that their customer’s acts constituted infringement.

R+L alleged that each of the defendants had sold and offered for sale an in-cab scanning product and encouraged its use in conjunction with other products in a manner that infringes the patented process. Specifically, R+L cited the defendants’ advertising materials that described their in-cab scanners and touted their ability to be used with existing mobile computing products to transmit information to increase efficiency in processing and sorting freight.

The Court stated that in assessing whether it is reasonable to infer intent from these statements, it must assess the facts in the context in which they occurred and from the standpoint of the speakers and listeners within that context. Because “[c]ommon sense dictates that advertising that your product can be used in conjunction with dispatch software… to provide operational efficiency to the less-than-a-load shipping/trucking industry gives rise to a reasonable inference that you intend to induce your customers to accomplish those benefits through utilization of the patent method,” the Court held that R+L had stated a claim for induced infringement under the Twombly and Iqbal standard.

Clarity Yet Uncertainty

The Bill of Lading decision offers clarity on several points for US patent litigators:

• Use Form 18 as a foundation when drafting a complaint for direct infringement. However, unless there is a strategic reason not to do so, it is best to include additional factual allegations that satisfy the heightened standard of Twombly and Iqbal.

• Provide factual allegations that support an inference that the infringing product has no substantial non-infringing uses for contributory infringement claims.

• Avoid attaching materials to your complaint unless absolutely necessary because it may undercut your claim.

• Quote specific portions of advertising materials or instruction manuals to support the “specific intent” requirement for induced infringement.

Whether the Federal Circuit’s view on the pleading requirements for direct patent infringement claims is widely adopted remains to be seen. Since the Appendix of Forms of the Federal Rules of Civil Procedure contains sample forms for several other causes of action, other circuits may resolve the tension between the Forms and the precedent from the US Supreme Court differently. While other courts often give considerable weight to the Federal Circuit on patent issues, such deference is unlikely on this procedural issue.

Unless the Supreme Court weighs in, it may be that other circuit courts of appeal will require a claim for direct patent infringement to meet the heightened pleading requirements of Twombly and Iqbal.

Tough Decisions Ahead

While the hurdle to state a claim for direct patent infringement has never been particularly high, after Bill of Lading, it is now practically impossible to dispose of a direct infringement case at the motion to dismiss stage. Given substantial discovery costs, corporate defendants now face the tough decision of whether to settle marginal direct patent infringement claims before discovery or wait and attempt to dispose of those claims at the summary judgment stage, all the while incurring costs around every corner.

Given the money and resources often saved by settling early, unless there are other business reasons to fight, such as when patent litigation is anticipated in the future on the same product, purely financial reasons may force corporate defendants to consider early settlement as the preferable option.

Footnotes

1. Am. Intell. Prop. Law Ass’n, AIPLA Report on the Economic Survey 2001 (2001); Am. Intell. Prop. Law Ass’n, AIPLA Report on the Economic Survey 2011 (2011). 2. 550 U.S. 544 (2007). 3. 556 U.S. 662 (2009). 4. 681 F.3d 1323 (Fed. Cir. 2012). 5. 501 F.3d 1254 (Fed. Cir. 2007) 6. See U.S. Patent No. 6,401,078. 7. 35 U.S.C. §271(c). 8. 35 U.S.C. §271(b).

Author: Richard Blakely Glasgow is a patent attorney at Wright, Lindsey & Jennings in Little Rock, Arkansas. His practice focuses on patent litigation and prosecution, primarily in the technology areas of chemicals, biotechnology and medical devices.