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Fifteen Patents Held Unenforceable for Inequitable Conduct for Failure to Disclose Relationship of Affiant, Improperly Paying Small Entity Fees, Misclaiming Priorities, and Failure to Disclose Existence of Litigation and Material Prior Art

06-1550
October 10, 2007

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Last Month at the Federal Circuit - November 2007

Judges: Mayer, Lourie (author), Linares (District Judge sitting by designation)

[Appealed from: N.D. Ill., Judge Darrah]

In Nilssen v. Osram Sylvania, Inc., No. 06-1550 (Fed. Cir. Oct. 10, 2007), the Federal Circuit affirmed the district court’s holding that fifteen patents issued to Ole K. Nilssen and exclusively licensed to Geo Foundation, Ltd. (“Geo”) were unenforceable due to inequitable conduct.

Nilssen is the inventor on a large number of patents related to electrical lighting products. Nilssen established Geo as a not-forprofit charitable organization in 1998, and since June 2000, Geo has been the exclusive licensee of Nilssen’s patents. Nilssen and Geo sued Osram Sylvania, Inc. and Osram Sylvania Products, Inc. (collectively “Osram”), alleging that Osram had infringed fifteen of Nilssen’s patents. The district court entered judgment in favor of Osram, holding all fifteen patents unenforceable due to inequitable conduct. Nilssen and Geo appealed.

On appeal, the Federal Circuit held initially that the district court did not abuse its discretion in finding that four of Nilssen’s patents were unenforceable, even though they had been withdrawn before trial and were no longer asserted against Osram. The Court noted that with respect to two of the four patents, the district court found that Nilssen had engaged in inequitable conduct by submitting affidavits by Dale Fiene in support of patentability, but failing to inform the examiner of Fiene’s relationship to Nilssen. The Federal Circuit explained that “[e]ven though the examiner did not raise a question concerning any such relationship, it is material to an examiner’s evaluation of the credibility and content of affidavits to know of any significant relationship between an affiant and an applicant” and that “failure to disclose that relationship violated Nilssen’s duty of disclosure.” Slip op. at 8 (citation omitted). With respect to the other two patents, the Court noted that Nilssen and Geo did not contest the materiality of the prior art references that the district court found were intentionally withheld during prosecution. In addition, the Federal Circuit rejected Nilssen and Geo’s argument that the district court should have first considered whether there was a sufficiently close relationship between the patents-in-suit and the four patents no longer in suit before considering whether the patents no longer in suit were unenforceable. The Court reasoned that “[t]rial judges are entitled to arrange the priority of issues in a manner that they consider efficient” and that the four patents were withdrawn from suit only shortly before trial. Id. Accordingly, the Federal Circuit concluded that the district court did not abuse its discretion in finding unenforceable the four patents no longer in suit.

The Federal Circuit next addressed the issue of whether the district court abused its discretion in finding that Nilssen’s improper payment of small entity maintenance fees for the patents-in-suit constituted inequitable conduct. It observed that certain entities, including “independent inventors,” are entitled to pay reduced patent maintenance fees and that the relevant PTO regulation defines “independent inventors” as “any inventor who (1) has not . . . licensed, and (2) is under no obligation under contract or law to . . . license, . . . .” Id. at 9 (citing 35 U.S.C. § 41(h)(1); 37 C.F.R. § 1.9(c) (July 1, 2000)). The district court found that Nilssen had entered into a Compact Fluorescent Lamp Agreement (“CFLA”) with Philips Electronics North America Corp. (“Philips”), effective December 7, 1995, and into a Patent License Agreement (“PLA”) with Philips, effective January 1, 1996. Because the district court found that these agreements created a license or an obligation to license all of the patents-in-suit, and Philips had more than 500 employees at all relevant times, it concluded that Nilssen was obligated to pay large entity maintenance fees on all the patents-in-suit after December 7, 1995, the date of the CFLA, and that Nilssen’s failure to pay large entity fees constituted inequitable conduct.

The Federal Circuit concluded that the district court did not abuse its discretion in holding that the CFLA precluded Nilssen from being eligible to pay small entity fees on the patents covered by that agreement. It observed that “[t]he clear import of the PTO regulation benefiting small entities is to ensure that inventors currently receiving a revenue stream from or reasonably expected to receive a revenue stream from an entity that is not itself entitled to pay small entity fees should not be able to claim that right.” Id. at 10. The Court noted that the district court had not erred when it interpreted the CFLA to mean that Nilssen had in effect licensed Philips on December 7, 1995, and that the PLA, which unequivocally was a license, was executed less than one month after the CFLA, covering most of the same patents as the CFLA. It explained that “[w]hile a misrepresentation of small entity status is not strictly speaking inequitable conduct in the prosecution of a patent, as the patent has already issued if maintenance fees are payable . . . , it is not beyond the authority of a district court to hold a patent unenforceable for inequitable conduct in misrepresenting one’s status as justifying small entity maintenance payments.” Id. at 11. The Federal Circuit noted that the district court found clear and convincing evidence of Nilssen’s obvious intent to mislead and, thus, affirmed the district court’s holding that the patents covered by the CFLA were unenforceable.

Similarly, the Federal Circuit concluded that the district court did not abuse its discretion in finding all of the patents-in-suit unenforceable because Nilssen claimed small entity status after the date Geo licensed the patents-in-suit. Because the PTO regulations explicitly excluded an inventor who had licensed his patents to a large company from the definition of an “independent inventor” eligible to pay small entity fees, but did not explicitly state the  same exclusion for a nonprofit organization, Nilssen testified that he believed that a nonprofit organization that licensed patents to a large company was still eligible to pay small entity fees. Nilssen and Geo argued that the fact that the PTO changed the regulation for nonprofits in 2000, specifically noting the confusion created by the prior inconsistent definitions, to explicitly exclude nonprofits licensing to large companies, demonstrated the prior ambiguity of the regulation.

In rejecting Nilssen and Geo’s argument, the Federal Circuit observed that the PTO relies on applicants to accurately represent their fee status, and it is for a fact-finder to evaluate whether any intentional misrepresentations occurred in doing so. It noted that the district court did not credit Nilssen’s testimony that he was aware of the pre-2000 fee regulations, but yet not aware of the clarification of the relevant regulation in 2000. The Court observed that while the PTO’s own admission of ambiguity in the regulation prior to 2000 may have resulted in a reasonable belief that nonprofits were subject to different treatment than independent inventors, it saw no error in the district court’s finding that it was not believable that Nilssen was aware of a specific alleged ambiguity in his favor but ignorant of a change that eliminated the alleged ambiguity shortly thereafter. Accordingly, the Federal Circuit affirmed the district court’s decision finding all of the patents-in-suit unenforceable due to inequitable conduct in improperly claiming small entity status.

The Federal Circuit next turned to the issue of whether the district court abused its discretion in holding that priority claims in certain of Nilssen’s patents constituted inequitable conduct. Nilssen and Geo argued that an improper claim to an earlier priority date was only material to patentability if the applicant asserts that earlier date to overcome or exclude prior art. In rejecting this argument, the Federal Circuit noted that “[i]t is not necessary for a holding of inequitable conduct that an examiner rely on a claim for priority or that entitlement to an earlier priority be expressly argued in order to overcome prior art.” Id. at 14. It added that a claim for priority is inherently material to patentability because a priority date may determine validity, whether an issue arises in prosecution or later in court challenges to validity. It explained that “[w]hile an active misrepresentation made during prosecution in order to avoid prior art is no doubt ‘highly material,’ . . . a  misrepresentation that would not have immediately affected patentability is still material, . . . .” Id. at 15 (citations omitted). The Federal Circuit noted that it could not say that the district court’s finding—that Nilssen’s disclosures that his patents were derived from earlier ones were intentional misrepresentations—was clearly erroneous given that the district court had made credibility determinations. It therefore affirmed the district court’s conclusion that those patents were unenforceable for inequitable conduct in misclaiming priority.

The Federal Circuit next addressed the issue of whether the district court abused its discretion in holding eight patents unenforceable for inequitable conduct based upon Nilssen’s failure to disclose Nilssen’s litigation with Motorola, which involved different Nilssen patents. Nilssen and Geo argued that the district court failed to conduct an adequate comparison of the subject matter of the patents in the Motorola litigation with the subject matter of the patents-in-suit to determine whether Nilssen violated M.P.E.P. § 2001.06(c) in failing to bring the litigation to the attention of the examiner. M.P.E.P. § 2001.06(c) states that “[w]here the subject matter for which a patent is being sought is, or has been involved in litigation, the existence of such litigation and any other material information arising there from must be brought to the attention of the [PTO], . . . .” Id. at 15-16 n.2. The Federal Circuit noted that it is clear from the language of M.P.E.P. § 2001.06(c) that the existence of the litigation itself is material information because it signals to the examiner that other material information relevant to patentability may become available through the litigation proceedings. It noted further that the PTO obviously considers such information material and there was no basis for it to conclude otherwise. It therefore affirmed the district court’s holding that eight Nilssen patents were unenforceable for inequitable conduct in failing to disclose the Motorola litigation.

Finally, the Federal Circuit considered the issue of whether the district court correctly concluded that certain Nilssen patents were unenforceable for inequitable conduct because Nilssen withheld material prior art references during prosecution. In affirming the district court on this basis, the Federal Circuit noted that the district court’s findings regarding the withheld references were not clearly erroneous. It explained that “[i]nformation is material if there is a substantial likelihood that a reasonable examiner would have considered the information important in deciding whether to allow the application to issue as a patent.” Id. at 18 (citation omitted). It noted that the fact that Nilssen had repeatedly cited or had cited to him the prior art references in question made it highly likely that a reasonable examiner would have wanted to consider the information in the withheld patents in determining patentability. Given that these material references were repeatedly before Nilssen, and his failure to offer any good-faith explanation for withholding them other than mere oversight, the Court noted that an inference that Nilssen intended to deceive the PTO was not unreasonable.

In closing, the Federal Circuit noted that each of the issues on which the district court found inequitable conduct generated defenses by Nilssen that were not per se unreasonable. However, noted the Court, “this case present[ed] a collection of . . . problems, which the district court evaluated thoroughly and . . . concluded that the record and testimony indicated repeated attempts to avoid playing fair and square with the patent system.” Id. at 18-19. The Court added that “[m]istakes do happen, but inadvertence can carry an applicant only so far.” Id. at 19. As a result, the Federal Circuit concluded that it could not find that the district court’s holding of unenforceability was an abuse of discretion.