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Court Clarifies “Commercial” Offer for Sale

June 15, 2001

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Last Month at the Federal Circuit - July 2001

Judges: Plager (author), Lourie, and Gajarsa

In Group One, Ltd. v. Hallmark Cards, Inc., No. 00-1014 (Fed. Cir. June 15, 2001), the Federal Circuit affirmed a district court’s decision regarding a trade-secret issue, but reversed and remanded for further findings on the issue of an on-sale bar.

Group One, Ltd. (“Group One”) sued Hallmark Cards, Inc. (“Hallmark”) for infringement of two patents: U.S. Patent No. 5,518,492 (“the ‘492 patent”), directed to a machine for producing curled and shredded ribbon, and U.S. Patent No. 5,711,752 (“the ‘752 patent”), directed to a method for producing the curled and shredded ribbon. Additionally, Group One claimed that Hallmark had misappropriated its trade secrets regarding the curling and shredding machine and method. Hallmark counterclaimed that Group One’s ‘492 patent was invalid.

Frederic Goldstein is the managing director and sole beneficial shareholder of Group One. Before filing a PCT application on November 12, 1992, Goldstein commenced a series of communications, beginning on June 24, 1991, with Hallmark (and others) to generate interest in his device. Prior to any meetings, a Confidential Disclosure Agreement (“CDA”) was drafted, but was never signed by Hallmark. On February 14, 1992, before a scheduled meeting, Goldstein spoke on the telephone with a Hallmark engineer and discussed the details of Group One’s machine and method. Goldstein had signed the CDA and had assumed that it was in effect. Hallmark then cancelled the meeting and wrote a letter to Goldstein indicating that they had developed their own machine for curling and shredding ribbon. In the spring of 1995, Hallmark began producing its products, a clump of curled ribbon attached to a card and a giftbag- stuffing product.

The district court had held that while the pre- November 12, 1991, communications did not constitute a formal offer for sale in the contract sense, they did constitute an offer for sale in the context of 35 U.S.C. § 102(b). The district court thus ruled that the ‘492 and ‘752 patents were invalid.

The district court also held that any misappropriation had ended with publication of the PCT application on May 27, 1993, but that Group One could recover for any “head-start” advantage gained by Hallmark because Hallmark had improperly used the confidential information during the period prior to the PCT publication date. Group One subsequently stipulated that it could prove no such damages and the tradesecret counts were dismissed. Group One appealed alleging that the district court had erred in declaring its patents invalid and in limiting its recovery for misappropriation to prepublication “head-start” damages.

The Federal Circuit noted that there is no binding precedent in the circuit that requires the acceptance of something less than an offer to contract as constituting an offer for sale, as that term is construed for purposes of the on-sale bar. The Court rejected the district court’s reliance on RCA Corp. v. Data General Corp., 887 F.2d 1056 (Fed. Cir. 1989), to support a less formal offer criterion, noting that the dicta in RCA concerning something less than a formal commercial offer is too vague and its parameters are too ill defined for any sort of analysis. Instead, the Federal Circuit looked to the Uniform Commercial Code to define whether the series of communications rose to the level of a commercial offer for sale. The Court explained that only an offer that rises to the level of a commercial offer for sale, one that the other party could make into a binding contract by simple acceptance (assuming consideration), constitutes an offer for sale. Finding these criteria missing from the Group One correspondence, the Federal Circuit reversed the district court’s finding of invalidity.

Group One also contended that it was offering only to license the patent to Hallmark. The Federal Circuit noted that there was precedent to the effect that a sale of rights in a patent is not within the scope of the statute and, thus, does not implicate the on-sale bar. Hallmark countered that the correspondence documents demonstrate that Group One was actually offering to license the machine itself and not just the rights in the patent on the machine. However, the Federal Circuit noted that the answer to this issue is unclear and that its holding on the onsale bar issue relieved the Court from having to address this issue. Judge Lourie wrote separately, however, to explain his conclusion that such offers to license would not offend the on-sale bar.

With regard to the trade-secret issue, Group One urged that the harm being remedied is the misappropriation itself and any subsequent publication of a formerly secret material is irrelevant unless the misappropriating party becomes aware of the publication and relies on the publication. Hallmark argued for a stricter interpretation of what constituted a trade secret, i.e., once formerly secret material is published, it ceases to be a secret and, therefore, it cannot be misappropriated. The district court had found that the publication of the PCT application destroyed the trade-secret status and, therefore, Hallmark could not be liable for damages for any activity after that date. The Federal Circuit affirmed.