The Federal Circuit Court of Appeals (”Federal Circuit”) reversed the trial court’s decision that the process – a computer method claim – was not statutory subject matter under 35 U.S.C. § 101. Ultramercial, LLC v. Hulu, LLC, Case No. 2010-1544 (Fed. Cir. Sept. 15, 2011) (available here). The 11 step computer program method patent claim was held to be a machine under the “machine or transformation” (MOT) test. Earlier, the District Court had dismissed the patent owner’s case without formally construing the 11 elements in the method patent claim and this failure to properly construe the claim elements in a Markman ruling was a factor in the reversal.

“This court has never set forth a bright line rule requiring district courts to construe claims before determining subject matter eligibility. Indeed, because eligibility is a ‘coarse’ gauge of the suitability of broad subject matter categories for patent protection, Research Corp. Techs., Inc. v. Microsoft Corp., 627 F.3d 859, 869 (Fed. Cir. 2010), claim construction may not always be necessary for a § 101 analysis. See, e.g., Bilski v. Kappos, 130 S. Ct. 3218, 3231 (2010) (finding subject matter ineligible for patent protection without claim construction).” Slip opn. p. 5.

The § 101 subject matter eligibility analysis is merely a threshold check. Claim patentability ultimately depends on “the statutory conditions the patent statute such as novelty, nonobviousness, and adequate disclosure.” See Ultramercial, p. 6; Classen Immunotherapies, Inc. v. Biogen IDEC, Nos. 2006-1634, 2006-1649, 2011 WL 3835409, at *6 (Fed. Cir. Aug. 31, 2011) (pointing out the difference between “the threshold inquiry of patent-eligibility, and the substantive conditions of patentability”).

Per the Federal Circuit, the claimed invention in this case was a method for monetizing and distributing copyrighted products over the Internet. “As a method, it satisfies § 100’s definition of ‘process’ and thus falls within a § 101 category of patent-eligible subject matter. Thus, this court focuses its inquiry on the abstractness of the subject matter claimed by the ’545 patent.” p. 9.

“‘[I]nventions with specific applications or improvements to technologies in the marketplace are not likely to be so abstract that they override the statutory language and framework of the Patent Act.’ Research Corp., 627 F.3d at 869. The ’545 patent [in suit] seeks to remedy problems with prior art banner advertising, such as declining clickthrough rates, by introducing a method of product distribution that forces consumers to view and possibly even interact with advertisements before permitting access to the desired media product. By its terms, the claimed invention purports to improve existing technology in the marketplace. By its terms, the claimed invention invokes computers and applications of computer technology.” P. 9-10 (emphasis added).

The ’545 patent claims a particular method for monetizing copyrighted products, consisting of the following steps: (1) receiving media products from a copyright holder, (2) selecting an advertisement to be associated with each media product, (3) providing said media products for sale on an Internet website, (4) restricting general public access to the media products, (5) offering free access to said media products on the condition that the consumer view the advertising, (6) receiving a request from a consumer to view the advertising, (7) facilitating the display of advertising and any required interaction with the advertising, (8) allowing the consumer access to the associated media product after such display and interaction, if any, (9) recording this transaction in an activity log, and (10) receiving payment from the advertiser. ’545 patent col.8 ll.5-48. Many of these steps are likely to require intricate and complex computer programming. In addition, certain of these steps clearly require specific application to the Internet and a cyber-market environment.

In conclusion, the many claim elements, which constitute the claimed process restrictions of: viewing, restricting, limiting access, displaying and processing payments, satisfy the “machine” portion of the “machine or transformation” (MOT) test.

The Court of Appeals for the Federal Circuit (”Federal Circuit”) has held that a computer aided method of managing a credit application, by receiving data, sending credit data and forwarding funding decision (with certain alternative steps of selectively sending portions data) is not patent eligible subject matter under 35 U.S.C. § 101. Dealertrack, Inc. v. Huber, Case No. 2009-1566 (Fed. Cir. Jan. 20, 2012) (available here).

One view of this case involves the problem associated with the use of alternative “OR” claim language to define inventive claim elements D1, D2, D3 or D4. See the claim set forth below. The truncated “nominal” claim defining the invention with bracketed elements A, B, C. D and D1 is reproduced below.

 ”A computer aided method of managing a credit application, the method comprising the steps of: [A] receiving credit application data from a remote application entry and display device; [B] selectively forwarding the credit application data to remote funding source terminal devices; [C] forwarding funding decision data from at least one of the remote funding source terminal devices to the remote application entry and display device; [D] wherein the selectively forwarding the credit application data step further comprises: [D1] sending at least a portion of a credit application to more than one of said remote funding sources substantially at the same time.”

Dealertrack’s claimed inventive process in its simplest form includes three steps: receiving data from one source (step A), selectively forwarding the data (step B, performed more specifically in step D1), and forwarding reply data to the first source (step C). “The claim ‘explain[s] the basic concept’ of processing information through a clearinghouse, just as claim 1 in Bilski II ‘explain[ed] the basic concept of hedging.’ The steps that constitute the method here do not ‘impose meaningful limits on the claim’s scope.’ Neither Dealertrack nor any other entity is entitled to wholly preempt the clearinghouse concept.” Slip Opn. p. 35 (quoting In re Bilski, 545 F.3d 943, 961-62 (Fed. Cir. 2008) (en banc) (”Bilski I”); Bilski v. Kappos, 130 S. Ct. 3218, 3231 (2010) (Bilski II”); Gottschalk v. Benson, 409 U.S. 63, 71-72 (1972)). “The claims were silent as to how a computer aids the method, the extent to which a computer aids the method, or the significance of a computer to the performance of the method.” p. 35.

“The notion of using a clearinghouse generally and using a clearinghouse specifically to apply for car loans, like the relationship between hedging and hedging in the energy market in Bilski II, is of no consequence without more. See Diehr, 450 U.S. at 191 (noting that the principle that a mathematical formula ‘is not accorded the protection of our patent laws . . . cannot be circumvented by attempting to limit the use of the formula to a particular technological environment’ (emphasis added)).” p. 37 (citing Diamond v. Diehr, 450 U.S. 175, 191 (1981).

In conclusion, receiving data, sending credit application data and forwarding funding decision data and simultaneously sending the credit data to several funding sources is too abstract and not a “machine” under the “machine or transformation” (MOT) test. Also, no transformation of data was present. Compare this case to Ultramercial LLC v. Hulu LLC, Case No. 2010-1544 (Fed. Cir. Sept. 15, 2011) wherein the selective access, and sometimes free access, ad display, tracking transactions and making payment was found to be patent eligible subject matter.

The Supreme Court extended the prohibition that laws of nature, combined with “well-understand, routine [and] conventional” method steps are not patent eligible subject matter under 35 U.S.C. Sec. 101. Mayo Collaborative Serv. v. Prometheus Labs., Inc., Case No. 10-1150 (U.S., March 20, 2012) (available here). The Patent Statute provides: “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U. S. C. §101.

The Supreme Court has held that this provision contains an important implicit exceptions on patentable subject matter. “[L]aws of nature, natural phenomena, and abstract ideas” are not patentable. Prometheus Opn. 1; citing Diamond v. Diehr, 450 U. S. 175, 185 (1981); see also Bilski v. Kappos, 561 U. S. ___, ___ (2010) (slip op., at 5); Diamond v. Chakrabarty, 447 U. S. 303, 309 (1980); Le Roy v. Tatham, 14 How. 156, 175 (1853); O’Reilly v. Morse, 15 How. 62, 112–120 (1854).

“Phenomena of nature, though just discovered, mental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work.” p. 2; Gottschalk v. Benson, 409 U. S. 63, 67 (1972). The exclusion of laws of nature was extended in Parker v. Flook, 437 U.S. 584, 590 (1978) (adjusting alarm limits in catalytic conversion of hydro carbons not patentable subject mater) and Gottschalk v. Benson, 409 U.S. 63, 67 (1972) (mathematical process for converting binary-coded decimal numerals into pure binary numbers). In Bilski, the Court considered claims covering a process for hedging risks of price changes by, for example, contracting to purchase commodities from sellers at a fixed price, reflecting the desire of sellers to hedge against a drop in prices, while selling commodities to consumers at a fixed price, reflecting the desire of consumers to hedge against a price increase. p. 5; Bilski v. Kappos, 561 U.S. – (2010). This hedging risk method was also not patentable subject matter.

Is “Inventive Concept” a New Requirement For Process Patents?

The Court in Prometheus stated that Flook and Benson “insist[ed] that a process that focuses upon the use of a natural law also contain other elements or a combination of elements, sometimes referred to as an ‘inventive concept,’ sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the natural law itself.” p. 3, citing O’Reilly v. Morse, 15 How. 62, 112-120 (1854)(Morse’s telegraph case).

“In particular, the steps in the claimed processes (apart from the natural laws themselves) involve well-understood, routine, conventional activity previously engaged in by researchers in the field.” P. 4. “Claim 1, for example, states that if the levels of 6–TG in the blood (of a patient who has taken a dose of a thiopurine drug) exceed about 400 pmol per 8×108 red blood cells, then the administered dose is likely to produce toxic side effects.” P. 8.

Laws of Nature: Process Plus What

“If a law of nature is not patentable, then neither is a process reciting a law of nature, unless that process has additional features that provide practical assurance that the process is more than a drafting effort designed to monopolize the law of nature itself. A patent, for example, could not simply recite a law of nature and then add the instruction ‘apply the law.’ P. 8-9.

In the Promotheus case, first, the “administering” step refered to the relevant audience, namely doctors who treat patients with certain diseases with thiopurine drugs. Second, the “wherein” clauses “simply” tell a doctor about the relevant natural laws, at most adding a suggestion that he should take those laws into account when treating his patient. Third, the “determining” step tells the doctor to determine the level of the relevant metabolites in the blood, through whatever process the doctor or the laboratory wishes to use. Fourth, to consider the three steps as an ordered combination “adds nothing” to the laws of nature that is not already present when the steps are considered separately.

“Thus, this step tells doctors to engage in well-understood, routine, conventional activity previously engaged in by scientists who work in the field. Purely ‘conventional or obvious’ ‘[pre]-solution activity’ is normally not sufficient to transform an unpatentable law of nature into a patent-eligible application of such a law.” P. 10.

Like Flook, the instructions “add nothing specific to the laws of nature other than what is well-understood, routine, conventional activity, previously engaged in by those in the field. And since they are steps that must be taken in order to apply the laws in question, the effect is simply to tell doctors to apply the law somehow when treating their patients.” “The ‘determining’ step too is set forth in highly general language covering all processes that make use of the correlations after measuring metabolites, including later discovered processes that measure metabolite levels in new ways.” P. 18.

In a cautionary statement, the Court stated “We need not, and do not, now decide whether were the steps at issue here less conventional, these features of the claims would prove sufficient to invalidate them. For here, as we have said, the steps add nothing of significance to the natural laws themselves.” P. 18.

The Supreme Court confirmed that the Bilski, machine or transformation (MOT) test for patentable subject matter, is a useful clue, but stated the MOT test does not trump the law of nature exclusion. P. 19. Also, the Court indicated that the law of nature exclusion under § 101 is independent of the novelty requirements of § 102, non-obvious requirements of § 103 and the requirement to clearly and exactly describe the invention under § 112.

The Claim

A method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder, comprising: (a) administering a drug providing 6-thioguanine to a subject having said immune-mediated gastrointestinal disorder; and (b) determining the level of 6-thioguanine in said subject having said immune-mediated gastrointestinal disorder, wherein the level of 6-thioguanine less than about 230 pmol per 8×108 red blood cells indicates a need tincrease the amount of said drug subsequently administered to said subject and wherein the level of 6-thioguanine greater than about 400 pmol per 8×108 red blood cells indicates a need to decrease the amount of said drug subsequently administered to said subject. See U.S.P.N. 6,355,623.

In conclusion, with respect to method or process claims, the transformation of blood chemistry coupled with only a “determining” step, is not patentable statutory subject matter under § 101. Such “chemical transformation” with a “determining step” is now held to fall within the “conventional post solution” category as does issuing an alarm (Flook) or printing or displaying a result. These are “well understood, routine, conventional activity, previously engaged in by those in the field.” P. 13. Further, the sequence of the steps was not unique.

The Supreme Court expanded the appeal rights of a patent applicant whose patent has been rejected by the U.S. Patent and Trademark Office. In Kappos v. Hyatt, Case No. 10-1219 (Apr. 18, 2012)(available here), the questions before the Court were: (i) whether there are any limitations on the applicant’s ability to introduce new evidence before the district court when the applicant appeals the the district court from a USPTO final rejection and (ii) what standard of review should the district court apply when considering new evidence. The Court held that (i) there are no evidentiary restrictions beyond those already imposed by the Federal Rules of Evidence and the Federal Rules of Civil Procedure and (ii) the district court must make a de novo finding when new evidence is presented on a disputed question of fact but the trial court may consider what weight to afford that evidence when the applicant had an opportunity to present the evidence to the PTO.

“The Patent Act of 1952, 35 U. S. C. §100 et seq., grants a patent applicant whose claims are denied by the Patent and Trademark Office (PTO) the opportunity to challenge the PTO’s decision by filing a civil action against the Director of the PTO in federal district court. In such a proceeding, the applicant may present evidence to the district court that he did not present to the PTO.” Slip opn. P. 1.

As for the “new evidence” issue, an applicant for patent may either (a) appeal a final USPTO agency decision to the court of Appeals for the Federal Circuit on the evidence presented to the PTO or (b) file a civil action against the Director of the PTO in the United States District Court for the District of Columbia pursuant to 35 U.S.C. §145 (under the newly enacted AIA, the Northern District of Virginia). The District Court action is a trial de novo which also includes the PTO administrative record.

In Dickinson v. Zurko, 527 U. S. 150 (1999), the Court addressed the standard that governs the Federal Circuit’s review of the PTO’s factual findings. “We held that the Administrative Procedure Act (APA), 5 U.S.C. §701 et seq., applies to §141 proceedings and that the Federal Circuit therefore should set aside the PTO’s factual findings only if they are ‘unsupported by substantial evidence.’ 527 U. S., at 152 (quoting 5 U. S. C. §706).” P. 2-3. Therefore, a rejected applicant, when appealing to the Federal Circuit, must show that the PTO’s decision is ‘unsupported by substantial evidence’ or contrary to law.

In the Hyatt case, the District Court applied the APA’s deferential “substantial evidence” standard when it reviewed the PTO’s factual findings and ruled against inventor Hyatt. Hyatt appealed to the Federal Circuit which reversed the lower court’s dismissal and ruled that when new, conflicting evidence is introduced in a §145 proceeding, the district court must make de novo findings to take such evidence into account. The Supreme Court affirmed the Federal Circuit.

The Supreme Court also held that the heightened standard of review for factual findings of an agency in §145 District court proceedings should not be applied. P. 7.

“We also agree with the Federal Circuit’s longstanding view that, ‘where new evidence is presented to the district court on a disputed fact question, a de novo finding will be necessary to take such evidence into account together with the evidence before the board.’ Fregeau v. Mossinghoff, 776 F. 2d 1034, 1038 (1985). As we noted in Zurko, the district court acts as a factfinder when new evidence is introduced in a §145 proceeding. 527 U. S., at 164. The district court must assess the credibility of new witnesses and other evidence, determine how the new evidence comports with the existing administrative record, and decide what weight the new evidence deserves.” P. 13.

In conclusion, since some patent applicants are disappointed by Patent Office rejections of their patent claims, an appeal to the District Court may provide a better opportunity to obtain patent protection rather than an appeal to the Federal Circuit where the APA’s deferential “substantial evidence” standard applies to PTO decisions.

The Second Circuit Court of Appeals in New York has ruled that Internet service providers cannot turn a blind eye (be willfully blind) to users who post copyrighted content on the provider’s website. This appellate court decision diminishes the service provider’s immunity under the DMCA, the Digital Millennium Copyright Act, 17 U.S.C. § 512. Viacom Int’l, Inc. V. YouTube, Inc., Case no. 10-3270 (2^nd Cir. Apr. 5, 2012)(available here). If the web hosting service provider is found to engage in “conscious avoidance” amounting to knowledge that the provider “was aware of a high probability of the fact in dispute and consciously avoided confirming that fact,” the provider’s immunity from liability under the DMCA safe harbor provisions may be compromised. The “fact” being an unauthorized reproduction and display of copyrighted material owned by someone other than the user posting material on the provider’s website.

The DMCA limits the liability of online service providers (like YouTube) for copyright infringement that occurs “by reason of the storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider.” 17 U.S.C. § 512(c). The Second Circuit reversed and remanded the lower court’s summary judgment applying DMCA immunity to YouTube’s actions. The lower court had found that YouTube was not liable for direct and secondary copyright infringement because YouTube was immunized by the safe harbor protection provisions of the DMCA § 512. Per the Second Circuit, “we vacate the [district court] order granting summary judgment because a reasonable jury could find that YouTube had actual knowledge or awareness of specific infringing activity on its website.” Viacom slip opn. p. 2.

The DMCA creates a series of four “safeharbors” that allow qualifying service providers to limit their liability for claims of copyright infringement based on (a) “transitory digital network communications,” (b) “system caching,” (c) “information residing on systems or networks at [the] direction of users,” and (d) “information location tools.” 17 U.S.C. §§ 512(a)–(d). To qualify for protection under any of the safe harbors, a party must meet a set of threshold criteria. First, the party must in fact be a “service provider,” defined, in pertinent part, as “a provider of online services or network access, or the operator of facilities therefor.” 17 U.S.C. §512(k)(1)(B). A party that qualifies as a service provider must also satisfy certain “conditions of eligibility,” including the adoption and reasonable implementation of a “repeat infringer” policy that “provides for the termination in appropriate circumstances of subscribers and account holders of the service provider’s system or network.” Id. § 512(i)(1)(A). In addition, a qualifying service provider must accommodate “standard technical measures” that are “used by copyright owners to identify or protect copyrighted works.” §§ 512(i)(1)(B), (i)(2). See Viacom, p. 10.

In addition, the safe harbor applies only if the service provider:

“(A) (i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing; (ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; or (iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material;

(B) does not receive a financial benefit directly attributable to the infringing activity, in a case in which the service provider has the right and ability to control such activity; and

(C) upon notification of claimed infringement as described in paragraph (3), responds expeditiously to remove, or disable access to, the material that is claimed to be infringing or to be the subject of infringing activity.” DMCA §§ 512(c)(1)(A)–(C).

The service provider must have a notification scheme with a designated agent to receive notices of claimed infringement. Customarily, these notices are called DMCA takedown notices and the website service provider must, in its Terms of Service (TOS) or Terms of Use (TOU), identify an agent and a clear communications channel and path to the agent for dealing with DMCA takedown notices.

Viacom sued YouTube for direct and secondary copyright infringement “based on the public performance, display, and reproduction of approximately 79,000 audiovisual “clips” that appeared on the YouTube website between 2005 and 2008.” p. 8. YouTube permits users to upload and view video clips free of charge. Only registered users can upload material. The Terms of Use (sometimes called Terms of Service or “TOS”) prohibited users from violating the Copyright Act. YouTube, upon notification of a specific violation, did take down offending video clips. The District Court had earlier held that YouTube could only be liable if it had “knowledge of specific and identifiable infringements” or “item-specific knowledge.” The Court of Appeals held that liability may be based upon knowledge other than item-specific knowledge.

The Court reasoned that since the DMCA refers to “facts or circumstances,” the DMCA was not limited to “actual knowledge” (YouTube’s position) but included both actual knowledge and “red flag knowledge.” P. 17. “In other words, the actual knowledge provision turns on whether the provider actually or ‘subjectively’ knew of specific infringement, while the red flag provision turns on whether the provider was subjectively aware of facts that would have made the specific infringement ‘objectively’ obvious to a reasonable person.” p. 17. See also, Capitol Records, Inc. v. MP3tunes, LLC, __ F. Supp. 2d __, 2011 WL 5104616, at *14 (S.D.N.Y. Oct. 25, 2011) (”Undoubtedly, MP3tunes is aware that some level of infringement occurs. But, there is no genuine dispute that MP3tunes did not have specific ‘red flag’ knowledge with respect to any particular link . . . .”); UMG Recordings, Inc. v. Veoh Networks, Inc., 665 F. Supp. 2d 1099, 1108 (C.D. Cal. 2009) (”UMG II”) (”[I]f investigation of ‘facts and circumstances’ is required to identify material as infringing, then those facts and circumstances are not ‘red flags.’”).

To show a red flag or facts that would have made the specific infringement objectively obvious to a reasonable person, Viacom pointed to a Credit Suisse valuation report that indicated that more than 60% of YouTube’s content was premium copyrighted content owned by others but only 10% of that content was authorized. The Court held that the Credit Suisse survey was not enough for a triable fact on the issue of willful blindness. However, YouTube personnel targeted and sought out football (soccer) video footage for “valuing” usage for an acquisition but then continued to show the football footage after it abandoned the acquisition. Also, internal memos by YouTube’s founder identified unauthorized content and noted its benefit to the company, as well as preemptive steps that could be taken to remove such content. The Court said this was enough to present the willful blindness theory for secondary liability to the jury. P. 21.

“‘The principle that willful blindness is tantamount to knowledge is hardly novel.’ Tiffany (NJ) Inc. v eBay, Inc., 600 F.3d 93, 110 n.16 (2d Cir. 2010) (collecting cases); see In re Aimster Copyright Litig., 334 F.3d 643, 650 (7th Cir. 2003) (‘Willful blindness is knowledge, in copyright law . . . as it is in the law generally.’). A person is ‘willfully blind’ or engages in ‘conscious avoidance’ amounting to knowledge where the person ‘was aware of a high probability of the fact in dispute and consciously avoided confirming that fact.’ United States v. Aina-Marshall, 336 F.3d 167, 170 (2d Cir. 2003) (quoting United States v. Rodriguez, 983 F.2d 455, 458 (2d Cir. 1993)); cf. Global-Tech Appliances, Inc. v. SEB S.A., __ U.S. __, 131 S. Ct. 2060, 2070–71 (2011) (applying the willful blindness doctrine in a patent infringement case). Writing in the trademark infringement context, we have held that ‘[a] service provider is not . . . permitted willful blindness. When it has reason to suspect that users of its service are infringing a protected mark, it may not shield itself from learning of the particular infringing transactions by looking the other way.’ Tiffany, 600 F.3d at 109.” p. 23.

Although willful blindness can be applied to the DMCA safe harbor “facts or circumstances,” the DMCA explicitly does not require affirmative monitoring of content provided by others. DMCA sec. 512(m).

The Court also discussed control and benefit under DMCA sec. 512(c). The Court rejected theories of vicarious liability given the explicit provisions of the DMCA. The Court said the service provider must engage in “something more” to be liable. The Court also addressed several software functions relative to controlling content uploads.

In conclusion, the safe harbor immunity provision of the DMCA has been tempered by the theory of willful blindness. Website service providers cannot be willfully blind to copyright infringement. However, the blindness may be limited to item-specific content which the service provider has otherwise identified on its site. The Court’s finding that “a reasonable jury could find that YouTube had actual knowledge or awareness of specific infringing activity on its website” should be heeded by all service providers.

Florida’s Third District Court of Appeals (3^rd DCA) ruled that the federal Communications Decency Act, 47 U.S.C. § 230 (”CDA”), provides absolute immunity to Rip Off Report, a computer service provider who maintains an interactive website permitting others to post comments or blogs. Giordano v. Romeo, Case no. 3D11-707 (3^rd DCA, Dec. 28, 2011) (available here). Giordano sued Romeo and the website service provider Xcentric Ventures, LLC who maintains a blog posting service website at www.ripoffreport.com. Xcentric maintains the infamous RipOff Report website permitting its users to post critical comments about businesses.

Romeo, a disgruntled recipient of G&S’ services, went online and posted false and defamatory claims about Giordano and G&S, identifying Giordano as a convicted felon and claiming, among other things, that the employees of G&S illegally disbursed medications and that the facility itself was dangerous. Giordano sued Romero and Xcentric for defamation and won at trial. The trial court found that a least a portion of the blog postings were defamatory per se. Co-defendant Romero “begged” co-defendant Xcentric to remove the offensive material but, even after trial and entry of an injunction, Xcentric refused to remove the defamatory material.

Xcentric moved to dismiss the complaint against it on the basis of its immunity from suit under the CDA which specifies that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” 47 U.S.C. § 230(c)(1). The CDA further provides that “[n]o cause of action may be brought and no liability may be imposed under any State or local law that is inconsistent with this section.” 47 U.S.C. § 230(e)(3). The trial court agreed with Xcentric.

“The Florida Supreme Court has held that the CDA provides absolute immunity to interactive computer services like Xcentric. In Doe v. America Online, Inc., 783 So. 2d 1010 (Fla. 2001), an internet service provider that had allowed third parties to publish allegedly illegal postings on the internet was deemed immune from suit. Relying on the Fourth Circuit decision in Zeran v. America Online, Inc., 129 F.3d 327 (4^th Cir. 1997), the Florida Supreme Court held that ‘section 230 expressly bars ‘any actions’ and we are compelled to give the language of this preemptive law its plain meaning. Doe 783 So. 2d at 1018. Further, the Court adopted the reasoning of Zeran unambiguously, stating that it was accepting Zeran’s account of the scope and purpose of the CDA as a basis for our reading of section 230. Doe, 783 So. 2d at 1015. That account included the statement that ‘Section 230 was enacted, in part, to maintain the robust nature of Internet communication and, accordingly, to keep government interference in the medium to a minimum.’ Zeran, 129 F.3d at 330. Consequently, under Florida law, section 230 of the CDA creates a federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service.’ Id..” Giordano, Slip opn. 3-4.

 The 3^rd DCA called Xcentric’s business practices appalling because it “creat[ed] a forum for defamation,” with no checks or balances to assure the posting of reliable information and no protocol to determine “whether its users are availing themselves of its services for the purpose of tortious or illegal conduct.” Xcentric’s policy is “never to remove a post.” Giordano at p. 4.

Notwithstanding this sharp language by the 3^rd DCA, it found “Xcentric enjoys complete immunity from any action brought against it as a result of the posting of third party users of its website.” Giordano, pg. 5.

The 11^th Circuit Court of Appeals has held that a criminal defendant is not required to reveal passwords which would decrypt (effectively unlock) data on his computer’s hard drive. To compel defendant John Doe to reveal his decryption password would violate his Fifth Amendment privilege against self incrimination. In re Grand Jury Subpoena, Case no. 11-12268 (11^th Cir. Feb. 23, 2012) (available here) (herein “Doe’s Case”).

 In Doe’s Case, a child pornography investigation was initiated after videos of underage girls were found on YouTube associated with Internet IP addresses ultimately linked to Doe. The officers thought Doe was sharing the pornography. Officers seized multiple external hard drives from Doe and determined that parts of them were encrypted using TrueCrypt, a free encryption program from the Internet. See www.TrueCrypt.org. A grand jury subpoena was issued to require production of an unencrypted copy, and Doe refused to comply and was held in civil contempt by the U.S. District Court.

In summary, the 11^th Circuit Court of Appeals decided that compelling Doe to reveal, by testimony, the encryption passwords would be testimonial rather than “turning over a physical key” to unlock a physical lock. The Court said the issue is not whether the contents of the hard drive were testimonial content but whether the announcement of the passwords were testimonial in nature.

Two Supreme Court cases were critical. In Fisher v. United States, 425 U.S. 391, 410, 96 S. Ct. 1569, 1581, 48 L. Ed. 2d 39 (1976), a taxpayer’s production of the subpoenaed documents was held to be “not testimonial” because the Government knew of the existence of the documents, knew that the taxpayer possessed the documents, and could show their authenticity not through the use of the taxpayer’s mind, but rather through testimony from others. In United States v. Hubbell, 530 U.S. 27, 38, 120 S. Ct. 2037, 2044, 147 L. Ed. 2d 24 (2000) (the famous Whitewater case), the Court found that the Government could not show that it had knowledge of the contents of the subpoened documents from a source independent of the documents themselves, and dismissed the indictment. The Court held that Hubbell’s act of production was sufficiently testimonial to trigger Fifth Amendment protection, as knowledge of the implicit testimonial facts associated with his act of production was not a foregone conclusion.

In the Doe Case, “the Fifth Amendment privilege is not triggered where the Government merely compels some physical act, i.e. where the individual is not called upon to make use of the contents of his or her mind. The most famous example is the key to the lock of a strongbox containing documents,” where the defendant was compelled to produce the key. Slip Opn 20-21, citing Hubbell, 530 U.S. at 43, 120 S. Ct. at 2047.

“We hold that the act of Doe’s decryption and production of the contents of the hard drives would sufficiently implicate the Fifth Amendment privilege. We reach this holding by concluding that (1) Doe’s decryption and production of the contents of the drives would be testimonial, not merely a physical act; and (2) the explicit and implicit factual communications associated with the decryption and production are not foregone conclusions.” Opn. 21-22.

“First, the decryption and production of the hard drives would require the use of the contents of Doe’s mind and could not be fairly characterized as a physical act that would be nontestimonial in nature. We conclude that the decryption and production would be tantamount to testimony by Doe of his knowledge of the existence and location of potentially incriminating files; of his possession, control, and access to the encrypted portions of the drives; and of his capability to decrypt the files.” Opn. 22.

“We are unpersuaded by the Government’s derivation of the key/combination analogy in arguing that Doe’s production of the unencrypted files would be nothing more than a physical nontestimonial transfer. The Government attempts to avoid the analogy by arguing that it does not seek the combination or the key, but rather the contents. This argument badly misses the mark. In Fisher, where the analogy was born, and again in Hubbell, the Government never sought the “key” or the “combination” to the safe for its own sake; rather, the Government sought the files being withheld, just as the Government does here. Hubbell, 530 U.S. at 38, 120 S. Ct. at 2044 (trying to compel production of documents); Fisher v. United States, 425 U.S. at 394–95, 96 S. Ct. at 1572–73 (seeking to access contents possessed by attorneys).” Opn. 22-23.

“Requiring Doe to use a decryption password is most certainly more akin to requiring the production of a combination because both demand the use of the contents of the mind, and the production is accompanied by the implied factual statements noted above that could prove to be incriminatory. See Hubbell, 530 U.S. at 43, 120 S. Ct. at 2047. Hence, we conclude that what the Government seeks to compel in this case, the decryption and production of the contents of the hard drives, is testimonial in character.” Opn. 23.

“Moving to the second point, the question becomes whether the purported testimony was a ‘foregone conclusion.’ We think not. Nothing in the record before us reveals that the Government knew whether any files exist or the location of those files on the hard drives; what’s more, nothing in the record illustrates that the Government knew with reasonable particularity that Doe was even capable of accessing the encrypted portions of the drives…” Opn. 23.

“To be fair, the Government has shown that the combined storage space of the drives could contain files that number well into the millions. And the Government has also shown that the drives are encrypted. The Government has not shown, however, that the drives actually contain any files, nor has it shown which of the estimated twenty million files the drives are capable of holding may prove useful. The Government has emphasized at every stage of the proceedings in this case that the forensic analysis showed random characters. But random characters are not files; because the TrueCrypt program displays random characters if there are files and if there is empty space, we simply do not know what, if anything, was hidden based on the facts before us. It is not enough for the Government to argue that the encrypted drives are capable of storing vast amounts of data, some of which may be incriminating. In short, the Government physically possesses the media devices, but it does not know what, if anything, is held on the encrypted drives. Along the same lines, we are not persuaded by the suggestion that simply because the devices were encrypted necessarily means that Doe was trying to hide something. Just as a vault is capable of storing mountains of incriminating documents, that alone does not mean that it contains incriminating documents, or anything at all.” Opn. 24-25.

It seems in the Doe Case, the applicability of the Fifth Amendment turns on the question of what the government knew and how it knew it, that is, what is the contents of the Doe’s hard drive. Federal prosecutors admitted at trial that while the amount of storage encrypted exceeded 5TB, there was no way to determine what data was on the hard drive and whether there was any information at all on the hard drives. The government was forced to admit that there was no way to differentiate what might be legal or illegal material.

In closing, the Doe Case represents the first appellate court decision upholding a defendant’s right not to reveal a decryption password. Other lower court decisions were split on this issue.

As background, the Fifth Amendment provides: “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” U.S. Const. Amend. V.

The Court of Appeals for the Federal Circuit affirmed an award of nearly $24M for patent infringement of an in-store radial saw guard against Home Depot.  Powell v. The Home Depot U.S.A., Inc., Case No. 2010-1409 (Fed. Cir. Nov. 14, 2011) (available here).  Patentee Powell, prior to securing a patent, had offered to sell the saw guard to Home Depot for $2,000 per unit (one per store).  Home Depot bought a handful of Powell’s guards, used them in several stores, then invited another company, Industriaplex, to copy the Powell guard.  Industriaplex sold Home Depot the guards for about $1,300 per unit.  After widespread installation of the Industriaplex guards, Home Depot’s saw related employee accident losses dropped nearly $1M per year.  Powell obtained the patent, sued Home Depot, and the jury awarded Powell $15M in compensatory damages, the trial court enhanced the award by $3M and awarded Powell $2.8M for his attorneys fees.  The enhancement and attorneys fees award was based upon a finding of bad faith litigation.

This case presents an issue regarding a use-based reasonable royalty. “As sent to the jury, the question it was required to answer was what amount would [Mr. Powell] have received from [Home Depot] for the right to use his patented invention in the United States.  The jury awarded $15 million, or approximately $7,736 per unit, in damages as a reasonable royalty that Mr. Powell would have received from Home Depot for the right to use his invention in the United States for the duration of the ’039 patent.”  Slip opn. P. 23.

“First, we address Home Depot’s argument that a reasonable royalty cannot exceed lost profits. On this point, we note that Mr. Powell’s citation to Golight, Inc. v. Wal- Mart Stores, Inc. for the proposition that [t]here is no rule that a royalty be no higher than the infringer’s net profit margin is not controlling. 355 F.3d 1327, 1338 (Fed. Cir. 2004). Here, the point made by Home Depot is not that its net profit margin should set the upper bound of the reasonable royalty calculation. That argument is foreclosed by Golight. Rather, its argument is that Mr. Powell cannot recover more than his expected profits from selling saw guard units to Home Depot as a reasonable
royalty. We disagree with Home Depot for two reasons.”  P. 23.

It is settled law that an infringer’s net profit margin is not the ceiling by which a reasonable royalty is capped. P. 24; see also  Golight, 355 F.3d at 1338; State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1580 (Fed. Cir. 1989).

The court found it equally appropriate to impose the “no rule for expected net profit” concept here.  Home Depot argued that the patentee’s profit expectation must be a cap on the reasonable royalty that the patentee may receive. “While either the infringer’s or the patentee’s profit expectation may be considered in the overall reasonable royalty analysis, Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), neither is an absolute limit to the amount of the reasonable royalty that may be awarded upon a reasoned hypothetical negotiation analysis under the Georgia-Pacific factors.” P. 25, see also Stickle v. Heublein, Inc., 716 F.2d 1550, 1563 (Fed. Cir. 1983).

Home Depot argued that the “reasonable royalty” would be 3-5% of Industriaplex’s sales price ($38-65 per unit).  Further, Home Depot argued that a 50% royalty rate ($1,295 per unit), resulting in a potential award of $1.3M in compensatory damages, was grossly high.  P. 26.  Patentee Powell’s expert opined that a reasonable royalty rate range was $2,180 to $8,500 per unit.  The jury awarded $7,736 per unit.  Key factors supporting the experts’ lump sum royalty calculation included (1) Home Depot’s competitive advantage over Lowes’ due to Depot’s “cut your lumber to your needs” program (Loew’s had removed saws due to excessive employee injuries); (2) the sudden drop in radial saw injuries when Industriaplex guards were installed; and (3) Home Depot’s follow-on purchases of nails, hinges etc. when its customers bought custom-cut lumber.  Classic Georgia-Pacific Corp. v. U.S. Plywood Corp., factors were applied by Powell’s expert.

“Reliance upon estimated cost savings from use of the infringing product is a well settled
method of determining a reasonable royalty.” P. 28, see also Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1080–81 (Fed. Cir. 1983).

The Court was not persuaded by Home Depot’s argument that the jury’s award of $7,736 per unit was unreasonably high in light of the concession by Powell’s expert that a reasonable royalty would be some amount less than $7,000 per unit.  The “expert testified that the scope of possible reasonable royalties was bounded by a range from $2,180 per unit up to approximately $8,500 per unit. He also testified that a $7,000 per unit royalty amounted to roughly $1 per store, per day for Home Depot’s use of Mr. Powell’s invention over the life of the patent. The jury was entitled to choose a damages award within the amounts advocated by the opposing parties.” P. 29-30, citing Spectralytics, Inc. v. Cordis Corp., 649 F.3d 1336, 1347 (Fed. Cir. 2011); (Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368, 1378 (Fed. Cir. 2005) ([T]he jury is not bound to accept a rate proffered by one party’s expert but rather may choose an intermediate royalty rate.)  “Its award is not so outrageously high . . . as to be unsupportable as an estimation of a reasonable royalty, Rite–Hite, 56 F.3d at 1554, and is within the range encompassed by the record as a whole.” P. 29-30, citing Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d 512, 519 (Fed. Cir. 1995).

As a trial note, practitioners should be keenly aware of the opposer’s damages calculation and not ignore cost savings due to non-use of a patented product.  Apparently the jury considered and awarded Powell damages because (a) Home Depot saved $1.00 per store per day for the life of the patent and (b) the employee accident loss prevention due to use of the patented saw guard saved Home Depot $1M per year.  The $15M in compensatory damages was deemed reasonable.

The Florida Bar and William Harrell, Esq. of Jacksonville, Florida, crossed swords in the Eleventh Circuit Court of Appeals over the Bar’s Advertising Rules and Harrell’s constitutional right of free speech. The result was a partial win for both sides. Harrell v. The Florida Bar, Case No. 09-11910 (11^th Cir. June 17, 2010) (available here). The lower court ruled on summary judgment dismissing Harrell’s constitutional first amendment, free speech challenge to a number of advertising rules. The 11^th Circuit reversed in part, remanded in part and affirmed in part the lower court. Harrell’s core challenge centered on the use of his slogan — “Don’t settle for less than you deserve”– that he included in his advertisements for years.

However, while the motion to dismiss was pending in the trial court, Harrell received a letter from the Bar informing him that the Bar’s Board of Governors reversed sua sponte the Standing Committee’s earlier judgment that the slogan “Don’t settle for less than you deserve” characterized the quality of Harrell’s services and violated Rule 4-7.2(c)(2). The Board of Governors relented on the slogan after months of federal court litigation.

Harrell objected to the following rules: (a) Rule 4-7.1, a general prefatory rule, the comment to which limits permissible advertising content to “useful, factual information presented in a nonsensational manner”; (b) The comment to Rule 4-7.2(c)(1), which bans statements that, “[s]tanding by [themselves,] … impl[y] falsely that the lawyer possesses a qualification not common to virtually all lawyers practicing in Florida”; (c) Rule 4-7.2(c)(1)(D) which prohibits statements that are “unsubstantiated in fact”; (d) Rule 4-72(c)(1)(G), which prohibits statements that “promise[] results”; (e) Rule 4-7.2(c)(1)(I), which forbids lawyers to “compar[e] [their] services with other lawyers’ services, unless the comparison can be factually substantiated”; (f) Rule 4-7.2(c)(2), which bans “statements describing or characterizing the quality of the lawyer’s services”: (g) Rule 4-7.2(c)(3), which prohibits the use of “visual or verbal descriptions, depictions, illustrations, or portrayals of persons, things, or events” that are “manipulative, or likely to confuse the viewer”; (h) Rule 4-7.5(b)(1)(A), which similarly prohibits any television or radio advertisement that is “deceptive, misleading, manipulative, or that is likely to confuse the viewer”; and (i) Rule 4-7.5(b)(1)(C), which prohibits “any background sound other than instrumental music.”

In September 2008, the parties filed cross-motions for summary judgment. In a lengthy opinion, the district court granted summary judgment in the Bar’s favor, holding that Harrell’s challenge to the rejection of (a) his slogan was moot, (b) that he lacked standing to challenge the application of the nine aforementioned rules, and (c) that such a challenge in any event was not ripe. Further, while his attack on the Bar’s 20 day pre-filing rule was justiciable, on the merits that requirement did not violate the First Amendment because it did not constitute an illegal prior-restraint on speech. On this last point (the 20 day rule), the 11^th Circuit agreed with the Bar and the lower court.

Although the rejection of his slogan (”Don’t settle for less than you deserve”) may have spurred Harrell to file this lawsuit, the heart of his case was a broad challenge to nine provisions of the Bar’s advertising rules on First and Fourteenth Amendment grounds. Harrell asserted, under the 14^th Amendment, that the Bar’s Advertising Rules were void due to vagueness. Harrell claimed that all nine rules were “invalid in toto[,] and therefore incapable of any valid application.” Steffel v. Thompson, 415 U.S. 452, 474 (1974). Harrell claimed that the rules specify “no standard of conduct … at all … [and] simply ha[ve] no core.” Vill. of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 495 n.7 (1982).

The 11^th Circuit reversed the trial court on some issues and held that Harrell had standing to facially challenge Rules 4-7.1, 4-7.2(c)(1)(G), 4-7.2(c)(2), 4-7.2(c)(3), and 4-7.5(b)(1)(A) on vagueness grounds. For these five rules, Harrell’s claims satisfied the causation and redressability components of the standing inquiry. Harrell’s stated a “cognizable self-censorship injury, … arguably caused by the challenged rules’ alleged vagueness. As for the redressability prong, if the challenged rules are stricken as unconstitutional, Harrell simply need not contend with them any longer.” Harrell v. The Florida Bar, slip opn. 28.

 ”As for the remaining four rules, however, Harrell has not shown an injury-in-fact, and he therefore lacks standing to challenge them. Specifically, he has not explained, either textually or by example, how there is any arguable vagueness in the rule prohibiting statements that are ‘unsubstantiated in fact,’ Rule 4-7.2(c)(1)(D); in the rule prohibiting any communication that ‘compares the lawyer’s services with other lawyers’ services, unless the comparison can be factually substantiated,’ Rule 4-7.2(c)(1)(I); in the rule prohibiting ‘any background sound other than instrumental music,’ Rule 4-7.5(b)(1)(C); or in the rule against misleading advertisements, to the extent it prohibits a statement that, ‘[s]tanding by itself[,] … implies falsely that the lawyer possesses a qualification not common to virtually all lawyers practicing in Florida,’ Rule 4-7.2(c)(1), cmt.” Id.

 The 11^th Circuit did not express an opinion as to the merits of the claims– only that Harrell made a sufficiently credible showing that the rules are unconstitutionally vague on their face. The district court will not hear these claims on the five challenged rules (useful, factual information; no promised results; describing quality; confusion).

The 40 year old EVA’S BRIDAL store trademark, used for generations at multiple Chicago locations, could not be used as leverage to collect trademark royalties from another related EVA’S BRIDAL store due to an absence of any reasonable control over the nature and quality of the goods and services provided by the former licensee-defendant, that is, the trademark owner abandoned the trademark by naked licencing of the mark. Eva’s Bridal Ltd. v. Halanick Enter. Inc., Case No. 10-2863 (7^th Cir. May 10, 2011) (available here).

In 1996, the Sweis family opened EVA’S BRIDAL in Chicago (see www.evasbridalsofchicago.com). The founding parents permitted their children to open other EVA’S BRIDAL stores. The licensing of the mark to stores owned and operated by family relatives continued as the family grew and expanded. One store was sold to an in-law with a $75,000 per year trademark license fee payable to a senior relative. The license expired in 2002. Demands were made and suit was brought for violation of the unregistered trademark and for false association and designation, 15 U.S.C. § 1125(a) (Lanham Act § 43(a)).

The district court trial judge dismissed the suit on the ground that plaintiffs abandoned the “Eva’s Bridal” mark by engaging in naked licensing — that is, by allowing others to use the mark without exercising “reasonable control over the nature and quality of the goods, services, or business on which the [mark] is used by the licensee”. Restatement (Third) of Unfair Competition §33 (1995); see also id. §30 (discussing abandonment); TMT North America, Inc. v. Magic Touch GmbH, 124 F.3d 876, 885–87 (7th Cir. 1997). The written agreement for the $75K per year license did not require licensee to operate the store in any particular way. It did not give the licensor any power of supervision over how the business was conducted. Licensor never tried to control any aspect of how defendants’ shop operated or how the mark was used. The district judge therefore concluded that the mark had been abandoned and that defendants may use it without payment. P. 2-3.

Licensor testified that (a) they never doubted the high standards of the licensee’s store; (b) they had no reason to supervise; (c) licensee sold dresses from the same designers as licensor; and (d) there was no need for any form of regulation. The court noted that consumers do care about the quality of service, the cleanliness pf dressing rooms, the helpfulness of staff and whether alterations were timely made by licensee. Apparently, no evidence was presented on these topics. Plaintiffs left defendants to their own devices without control.

The trial court found, and the Court of Appeals agreed, that the owner of the EVA’S BRIDAL mark abandoned the trademark by failing to exercise any reasonable control over the use of the trademark by the former licensee-defendant. The trademark owner engaged in naked trademark licensing.

“The sort of supervision required for a trademark license is the sort that produces consistent quality. ‘Trademarks [are] indications of consistent and predictable quality assured through the trademark owner’s control over the use of the designation’. Restatement §33 comment b. See also William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 166–68, 184–86 (2003).” Pg. 4.

“How much control is enough? The licensor’s self-interest largely determines the answer. Courts are apt to ask whether ‘the control retained by the licensor [is] sufficient under the circumstances to insure that the licensee’s goods or services would meet the expectations created by the presence of the trademark.’ Restatement §33 comment a (summarizing doctrine); see also id. at Reporter’s Note comment c (collecting authority, which we need not set out). It isn’t necessary to be more specific here, because plaintiffs did not retain any control—not via the license agreement, not via course of performance.” Pg. 5.

As a practice pointer, all trademark licenses should identify some type of control to avoid naked licensing.