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Standards for Inequitable Conduct Apply to Payments of Maintenance Fees

December 05, 2003

Decision icon Decision

Last Month at the Federal Circuit - January 2004

Judges: Dyk (author), Prost, and Newman (concurring-in-part and dissenting-inpart)

In ULead Systems, Inc. v. Lex Computer & Management Corp., No. 01-1320 (Fed. Cir. Dec. 9, 2003), the Federal Circuit reversed the district court’s SJ that U.S. Patent No. 4,538,188 (“the ‘188 patent”) was unenforceable, because there was a genuine issue of material fact regarding intent to deceive and because 37 C.F.R. § 1.28(c) does not authorize or require inquiry into good faith when a patent holder seeks to correct an error in the payment of a maintenance fee.

Lex Computer and Management Corporation (“Lex”) owns the ‘188 patent. ULead Systems, Inc. (“ULead”) sued Lex, seeking a DJ of noninfringement, invalidity, and unenforceability of the ‘188 patent. Lex counterclaimed for infringement. ULead moved for SJ, alleging that the ‘188 patent was (1) unenforceable and/or invalid because Lex misrepresented its small-entity status by paying the small-entity maintenance fee, and (2) expired because Lex failed to pay the correct maintenance fee and did not pay the incorrect small-entity fee in good faith.

Certain facts were not disputed by either party. Lex never had more than twenty employees and, thus, qualified as a small entity under 37 C.F.R. § 1.9(f) (1993). After the ‘188 patent issued, however, Lex granted a nonexclusive license to Adobe Systems Incorporated (“Adobe”) and two other companies, none of which qualified as a small entity. After granting these licenses, Lex paid the small-entity maintenance fee two more times. In the first instance, Lex submitted a verified statement claiming small-entity status along with a petition to accept late payment of the fee. In the second instance, Lex again submitted a petition to accept late payment of the fee and stated in the petition that the small-entity status was maintained. After ULead sued, Lex filed a petition with the PTO to correct its status and pay the correct maintenance fee. The PTO allowed the petition.

The Federal Circuit ruled that the standards for inequitable conduct laid down by the Federal Circuit govern the procedures for paying maintenance fees and declaring smallentity status. The Court found unpersuasive Lex’s argument that the misrepresentations were not material because they were not the basis for the issuance of the patent. According to the Court, the misrepresentations were material because they fostered the survival of the patent.

As to intent, Lex’s representatives had testified that they either did not know of the licenses or those that did know were not aware that a nonexclusive license to a large entity would result in loss of the licensor’s small-entity status. Drawing all reasonable inferences in Lex’s favor, the Federal Circuit concluded that Lex’s actions were more telling of negligence than intentionally deceptive.

The district court also held that the ‘188 patent had expired for failure to pay maintenance fees. While Lex had filed a petition to correct the mistake, and while the PTO had allowed the petition and accepted the balance due for the maintenance fees, the district court held that Lex’s payment was made in bad faith, and 37 C.F.R. § 1.28(c), which allows for corrections of erroneous smallentity fee payments, requires good faith. The Federal Circuit reversed the SJ holding because, although 37 C.F.R. § 1.28(c) does require “good faith,” it does not authorize an inquiry into the patentee’s good faith. According to the Court, because the PTO is not required to inquire into the patentee’s good faith in deciding whether to accept a late payment, neither is a district court. Rather, the intent issue is considered under the inequitable-conduct analysis. Accordingly, the Federal Circuit vacated and remanded the case for trial.

Judge Newman concurred-in-part and dissented-in-part. Judge Newman, relying on the language of 37 C.F.R. § 1.28(d), which describes the legal status of a fraudulent claim to small-entity status as a “fraud practiced upon the Office,” would have applied the more rigorous proof of fraud in establishing a false claim of entitlement to reduced fees. In her opinion, the majority sought to rewrite agency regulation and, in doing so, exceeded its authority.