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Intent to Deceive May Be Inferred from a Declaration Containing a Disingenuous Statement

06-1385
March 20, 2007
Yin, Qingyu

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Last Month at the Federal Circuit - April 2007

Judges: Linn, Dyk, Moore (author)

[Appealed from: D. Del., Judge Jordan]

In eSpeed, Inc. v. BrokerTec USA, L.L.C., No. 06-1385 (Fed. Cir. Mar. 20, 2007), the Federal Circuit affirmed the district court’s decision that U.S. Patent No. 6,560,580 (“the ’580 patent”), asserted by plaintiffs eSpeed, Inc., Cantor Fitzgerald, L.P., CFPH, L.L.C., and eSpeed Government Securities, Inc. (collectively “Cantor”), was unenforceable due to inequitable conduct.

Traders in the secondary market for fixed income securities generally do not want to reveal the full volume that they are willing to trade at a given price because this information might be used against them by other market participants. To foster liquidity in the market, exclusive workup rights are given to customers who initiate the trade to allow such customers to incrementally increase purchase volume. Under the traditional “old rules,” when the first buyer or seller has completed his transaction, new buyers or sellers are sequentially given the exclusive workup rights. A problem was that a few participants could tie up the market for long periods of time.

Between 1987 and 1992, Cantor employees developed software code known internally as the “Super System.” The Super System included code that allowed brokers to use either the old rules or some new rules. The new rules limited the exclusivity of the workup rights. The code for the new rules was accessible to brokers using the Super System, but was not commercially implemented when the Super System was used in 1993 to conduct trades because of its slow speed. Improvements were later made to the Super System.

The ’580 patent describes new rules that limit the exclusive workup rights to the initial traders. In particular, after the initial traders finish their transactions, orders that were placed while the initial traders had exclusivity would then be rapidly executed in time-priority order. The new rules preserve incentive for traders to initiate trades while at the same time avoiding a long queue of traders waiting for their chance to trade.

The ’580 patent issued from U.S. Patent Application No. 09/294,526 (“the ’526 application”), which claimed priority to U.S. Patent Application No. 08/766,733 (“the ’733 application”). The ’733 application was filed on December 13, 1996, and issued as U.S. Patent No. 5,905,974 (“the ’974 patent”) on May 18, 1999. Neither the Super System nor any improvement to that system was disclosed to the PTO during the prosecution of the ’733 application.

Shortly after the ’974 patent issued, Cantor asserted the ’974 patent in a lawsuit, but later dismissed after Cantor’s counsel learned that the Super System had not been disclosed to the PTO. Then, in an effort to purge the possible inequitable conduct with regard to the ’974 patent and avoid a similar problem with any patent that might issue based on the ’526 application, each of the three inventors of the ’526 application submitted a declaration stating that they were not aware of the duty to disclose the Super System during the prosecution of the ’733 application. One such declaration stated that “[t]he Super System . . . did not include new rules” and that “[t]he Super System code was based on ‘old rules.’” The declarations were accompanied by exhibits of over 1000 pages, which included portions of the Super System source code. The ’526 application later issued as the ’580 patent.

Cantor filed suit against BrokerTec USA, L.L.C., Garban, L.L.C., OM Technology US, Inc., and OM Technology AB (collectively “BrokerTec”) in the U.S. District Court for the District of Delaware on June 30, 2003. Cantor asserted that BrokerTec infringed claims 20-23 of the ’580 patent.

The district court ruled, among other things, that the ’580 patent was unenforceable because of inequitable conduct on two separate grounds. First, the failure to disclose the Super System constituted inequitable conduct during the prosecution of the ’733 application, which infected the ’526 application. Inventor declarations in the ’526 application failed to cure the inequitable conduct. Secondly, the three inventor declarations themselves included material misrepresentations. Specifically, the declarations included statements “that the Super System did not contain any code for the ‘new rules’ of trading,” which the district court found to be not true. In addition, the district court inferred intent to deceive, partly because the declarations were worded in a way to make the examiner believe that there were no “new rules” in the Super System. Cantor appealed.

The Federal Circuit’s opinion addressed only the second ground for the finding of inequitable conduct. On the issue of materiality of the misrepresentations in the declarations, the Court concluded that the false statements in the declarations were material under the “reasonable examiner” standard. The Court noted that “[f]alse statements are more likely material when embodied in declarations or affidavits submitted to the PTO.” Slip op. at 11 (citations omitted). Here, the statement that “the Super System did not contain any code for the ‘new rules’ of trading” was found to be false, and would have been important to a reasonable examiner in deciding whether to allow the ’526 application. By the statement in the declaration, the examiner was “left . . . with the impression that the examiner did not need to conduct any further . . . investigation.” Id. at 14 (citation omitted).

Next, the Court noted that “[a]n inference of intent may arise where material false statements are proffered in a declaration or other sworn statement submitted to the PTO.” Id. at 15. Cantor argued that the applicants acted in good faith by submitting portions of the source code with their declarations. However, instead of explaining the relevance of the new rules code buried in the exhibit of over 1000 pages, applicants made outright false statements in the declarations that the Super System did not contain any code for the new rules. These declarations may be considered “the chosen instrument of an intentional scheme to deceive the PTO,” because “[t]he affirmative act of submitting an affidavit must be construed as being intended to be relied upon.” Id. at 16 (citations omitted).

Accordingly, the Court concluded that the district court did not abuse its discretion in finding inequitable conduct.