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Evidence Not Cited in Connection with SJ Motion Also Not Considered on Appeal

August 19, 2008

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Last Month at the Federal Circuit - September 2008

Judges: Newman, Bryson (author), Pogue (International Trade Judge sitting by designation)

[Appealed from: N.D. Cal., Judge Whyte]

In In re Cygnus Telecommunications Technology, LLC, Nos. 07-1328, -1329, -1330, -1331, -1332, -1333, -1354, -1361 (Fed. Cir. Aug. 19, 2008), the Federal Circuit affirmed a grant of SJ of invalidity under the on-sale bar of 35 U.S.C. § 102(b), in favor of Telesys Communications, LLC and seven other defendants (collectively “the Telesys defendants”), as well as AT&T Corp. (“AT&T”). The Federal Circuit also affirmed the dismissal of trade secret misappropriation claims against AT&T.

U.S. Patent Nos. 5,883,964 (“the ’964 patent”) and 6,035,027 (“the ’027 patent”) are directed to computerized “callback systems” that allow telephone users in foreign countries to originate phone calls in the United States to take advantage of lower U.S. billing rates. The inventor, Mr. Alleman of Paragon Services International, Inc. (“Paragon”), began developing systems to take advantage of the cost differential between U.S. and foreign phone billing in the late 1980s, first employing a system requiring a dedicated line for each foreign user. Soon afterward, Mr. Alleman created a prototype computerized system on a 386 computer (“the 386 system”) that avoided the need for each user to have a dedicated line. Several individuals overseas worked with Mr. Alleman as “beta testers” to help troubleshoot the 386 system, and were regularly invoiced for the cost of their telephone calls. In 1992, Mr. Alleman filed a patent application for the computerized system, which led to the issuance of the ’964 and ’027 patents.

Cygnus Telecommunications Technology, LLC (“Cygnus”), Paragon’s successor-in-interest, sued the Telesys defendants and AT&T for infringement of the ’964 and ’027 patents. Further, Cygnus alleged trade secret misappropriation against AT&T. After consolidation of the various actions into a single multidistrict proceeding, AT&T moved to dismiss the trade secret misappropriation claim under Fed. R. Civ. P. 12, as barred by the statute of limitations. In addition, AT&T filed a motion on behalf of all defendants for SJ of invalidity based on prior public use and commercial sales of the subject matter of the patents. Several defendants also filed motions for SJ of noninfringement. The district court granted the invalidity and noninfringement SJ motions and AT&T’s motion to dismiss the trade secret claims. Cygnus filed two appeals from the judgments in the multidistrict litigation proceeding: the first regarding the judgment in favor of the Telesys defendants, and the second from the judgment in favor of AT&T.

On appeal, the defendants first argued that Cygnus was collaterally estopped from challenging the invalidity of the ’964 and ’027 patents under § 102(b) because Cygnus omitted one defendant from the appeal. The defendants contended that the district court’s invalidity ruling for the omitted defendant should serve as a “first case” that would preclude Cygnus from bringing the subsequent appeal against the remaining defendants. In rejecting this argument, the Court noted that “once an issue is actually and necessarily determined . . . , that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation,” but that the appeal in this case was not a “subsequent suit based on a different cause of action.” Slip op. at 5 (citing Montana v. United States, 440 U.S. 147, 153 (1979)). In addition, the Court noted that this appeal involved a multidistrict litigation, which should be viewed as a single, multidefendant lawsuit. The Court relied on its previous ruling in Innovad Inc. v. Microsoft Corp., 260 F.3d 1326 (Fed. Cir. 2001), which held that a decision regarding a defendant omitted from appeal did not qualify as “prior litigation” for collateral estoppel purposes. The Court concluded that the defendants’ proposed rule would require appellants to prosecute appeals against every defendant in a multidefendant case and would preclude the opportunity of settlement with any party before appeal. Accordingly, the Court declined to apply collateral estoppel.

Turning to the grant of SJ of invalidity of the ’964 and ’027 patents, the Court first addressed that, on appeal, Cygnus cited portions of the record that it had not presented to the district court as part of its briefing on the § 102(b) SJ motion. In particular, some of the documents cited in Cygnus’s appellate briefs were submitted to the district court two months after the district court had issued its § 102(b) ruling. Cygnus argued that in challenging the SJ ruling, it could rely on any materials that were submitted to the district court for any purpose at any time during the course of the litigation. The Court disagreed, however, and drew the distinction between documents that were part of the “record on appeal,” which included the later-submitted documents, and “what part of the record on appeal was specifically presented to the district court in connection with a particular legal issue.” Slip op. at 9.

For guidance, the Court looked to the law of the regional circuit in which the case was tried. In Carmen v. San Francisco Unified School District, 237 F.3d 1026 (9th Cir. 2001), the Ninth Circuit rejected the same argument that Cygnus presented in its appeal and reaffirmed that a district court need not consider an affidavit on file unless it is brought to the district court’s attention in SJ briefing. Relying on Carmen, the Federal Circuit emphasized that a judge should not be expected to search the entire record looking for genuine issues of fact, when counsel had the opportunity to present the evidence in its opposition to a SJ motion. Accordingly, the Court declined to consider any part of the record that had not been presented to or cited to the district judge in connection with the motion.

Analyzing invalidity under the § 102(b) on-sale bar, the Court rejected Cygnus’s argument that the invention was not “ready for patenting” prior to the critical date. In granting SJ of invalidity, the district court relied on Mr. Alleman’s sworn declaration in the PTO that the invention was reduced to practice, and thus ready for patenting, before the critical date. On appeal, Cygnus contended that the PTO did not ultimately rely on the declaration and that the declaration suffered from “internal inconsistencies.” Cygnus, however, had not submitted to the district court many of the documents used to support its arguments. And the Federal Circuit found that the documents that were before the district court did not call into question Mr. Alleman’s statements and did not create a disputed issue of material fact. Based on Cygnus’s failure to present sufficient evidence to undermine Mr. Alleman’s declaration, the Court agreed with the district court that the invention had been reduced to practice before the critical date.

Cygnus also argued that the 386 system was not ready for patenting because it would not work on a commercial scale. The Court found that the 386 system embodied the claims and sales relating to it constituted potentially invalidating sales, regardless of the state of development of a larger system. The Court also rejected Cygnus’s argument that the users of the 386 system were “beta testers” rather than paying customers. The Court found that Mr. Alleman’s testimony that he charged users on a per-minute basis and that he billed them each month supported a finding of a sale and that the district court did not draw any improper inferences in the defendants’ favor. The Court also concluded that use of the 386 system before the critical date did not fall within the “experimental use” exception to the public use or on-sale bar of § 102(b), based on the Court’s prior decisions that the exception does not apply after an invention has been reduced to practice. Because the Court found that the ’964 and ’027 patents were indeed invalid under the § 1(b) on-sale bar, it did not reach the issues of public use or noninfringement raised by the defendants.

With regard to the trade secret misappropriation claims specific to AT&T, the Court affirmed the district court’s dismissal of Cygnus’s complaint as barred under the three-year statute of limitations in Minnesota. Under Minnesota law, the statute of limitations starts to run once a lawsuit could survive a motion to dismiss for failure to state a claim. The Court found that Cygnus had enough information as of 1996 to file a trade secret misappropriation suit and that its claims were time-barred. The Court refused to consider Cygnus’s argument that AT&T should be liable for breach of promise to pay commission because Cygnus raised the issue for the first time on appeal.

Finally, during the appeal, Cygnus moved to assess costs for being forced to include improper materials in the appendix, and AT&T moved to strike portions of the joint appendix and Cygnus’s reply brief. The Court denied both parties’ motions.