Counseling Clients on Equity Financing Transactions

Business counselors need to have a full understanding of the basic principles of corporate equity financing as well as the procedures that generally apply whenever the corporation raises capital in a private placement. Investment capital can come from a variety of sources. In many cases, the founders and managers may have relatives, friends, neighbors or business acquaintances that can serve as capital providers and/or provide leads to other prospective investors.  Alternatively, the company may look to various types of outside investors including business partners; management-oriented investors; institutional investors and venture capitalists.

A variety of outside investment sources may be tapped by a company depending on the type and size of business and the projected growth of the company over the period that the investors are expected to hold the securities purchased in the offering.  In each case, the transaction, generally referred to as a “private placement”, is defined by the issuance of equity securities (e.g., common or preferred shares) or, in some cases, debt securities convertible into common shares, which results in the investor group holding a significant ownership interest in the company.  The private placement market is not unregulated. For example, offerings in the private placement market are distinguished by the fact that the market efforts associated with the solicitation of potential investors must be strictly limited. As such, the securities may not be offered or sold by any form of general solicitation or advertising, including any advertisement or article published in a newspaper, magazine or similar media, or by any seminar or meeting in which the participants have been generally solicited.

Management should investigate the financing strategies of other companies involved in similar lines of business. Many investors tend to specialize in a particular industry or product line and management may be able to put together a list of persons and entities that might be willing to review the business plan. Trade groups are another way to network with potential investors and many industry associations are now sponsoring regular financing forums that allow companies to make presentations to investors. Service providers, such as attorneys, accountants, and commercial bankers, can also provide assistance with introductions to investors. Alternatively, the company may turn to a finder or broker to provide assistance in locating suitable investors.

Completion of an equity financing for a corporation generally raises the same types of issues that exist whenever a corporation decides to issue new shares. The situation may be complicated by the need to amend the charter documents to reflect the terms of the security being issued to the investors. Counsel should be sure to comply with state statutory requirements governing the conditions for valid authorization and issuance of securities. In addition, as part of that process, it is likely that formal action will be required by both the board of directors and by the shareholders of the corporation.  Federal and state securities laws apply only to the offers and sales of “securities.” It is fairly clear that shares, both common and preferred, are considered to be “securities” for purposes of the securities laws.

This month’s update to Business Transactions Solution on WESTLAW includes new tools for helping business counselors advise their clients on equity financing transactions:

  • Slide Deck presentation: Equity Financing (§154:414)
  • Business Counselor’s Training Materials: Equity Financing (§154:415)

A large library of additional materials is available in the chapter on Corporate Equity Financing (§§ 154:1 et seq.), which covers capital-raising activities by a corporation in the form of sales of equity securities to outside investors in transactions that are intended to be exempt from the registration requirements of the federal securities law. The materials include Master Forms for a subscription agreement, an investment agreement, a warrant to purchase common shares, an investors’ rights agreement, a legal opinion from company counsel, and instructions to investors for completing all the documentation in a subscription book for a private placement. The transaction memorandum discusses the basic principles of corporate equity financing, including various types of equity securities, and the procedures for completing an investment financing transaction. The Specialty Forms library includes complete forms of investment agreements for equity financings; materials for use in the due diligence investigation; certificates of preferences for various types of preferred stock; registration rights agreements; management rights letters; warrants; rights offering documents; board and shareholder resolutions; forms of officers’ certificates, and legal opinions.

Value and Uses of Intellectual Property Rights

As with any form of property right, the value of a firm’s intellectual property (“IP”) rights will generally depend upon a number of different factors. For example, the value of a patent as a device for excluding others from practicing a specified process or invention will depend upon the breadth of its claims. Also, the strength, and attendant value, of a trademark varies with the type of mark and the perceptions regarding the product or service to which the mark is related that are created in the minds of consumers. Moreover, as with other property rights, there may be “clouds” on the firm’s title to a specific IP right, particularly in those cases where the underlying invention or work was created by more than one person.

Intellectual property rights can be put to a variety of uses. The rights can be sold or assigned to a third party in return for cash or other consideration or can be used as a capital contribution to a new business venture which might be formed to exploit the rights. Intellectual property rights can be pledged as security for the obligations of the owner, such as when a loan is needed to finance the machinery necessary for the owner of a patent to manufacture the products that are covered by the patent rights.  Finally, and perhaps most importantly, an intellectual property right can be loaned, or “licensed” to one or more third parties, thereby, giving the third party a limited right to use the “property” for purposes determined by the owner of the rights.  The potential business uses of intellectual property rights can be illustrated by the following examples:

  • The owner of a patent can grant licenses to others which allow them to make, use, or sell the patented invention in specified markets. The patent owner will receive compensation, in the form of “royalties”, based on the efforts of the licensees in using the rights embodied in the patent.
  • The owner of patents and trade secrets covering the products of basic research can use the intellectual property rights as an inducement to secure funding from third parties to permit further research on the basic technology in order to develop commercial products. The owner may then license the products to the funding party in return for royalties.
  • Intellectual property rights can be licensed to third parties for use in the manufacture of products that can then be sold by the licensor. This strategy can be very effective when the licensee is able to produce the products at costs which are significantly lower than those that would be incurred by the licensor.
  • A manufacturer can license third-party distributors in various markets to facilitate the sale of the products through the licensee’s established marketing channels. This strategy allows the manufacturer to penetrate new markets without the expense of building its own direct sales and marketing functions.
  • IP rights can be assigned, sold, or licensed to a joint venture or other separate business entity for use in building a multifunctional firm that is capable of developing, producing, and distributing products embodying the technology that is covered by the rights.

In order to harvest the most value from the company’s intellectual property rights, steps must be taken to develop an overall intellectual property rights strategy and establish a compliance program that ensures that valuable technology and the associated intellectual property rights are identified, protected, maintained and enforced.  Key principles that need to be understood in putting together intellectual property rights strategies and compliance programs include the following:

  • Establish the “tone at the top” by having the board of directors and members of the executive team prepare, discuss and approve an overall technology and intellectual property rights strategy for the company.
  • Identify the role that intellectual property rights are expected to play in the company’s overall business strategies and ensure that the priorities of the intellectual property rights strategy are aligned with that role. For example, a business strategy based on excluding competitors will generally need to be supported by a robust portfolio of patents covering the company’s products.
  • Establish an intellectual property compliance committee to oversee the company’s intellectual property compliance program, make day-to-day decisions about intellectual property issues, implement the company’s intellectual property rights strategy and provide guidance to managers and employees throughout the organization.
  • Identify the intellectual property that the company develops or otherwise uses in order to create and market its products and services and carefully analyze each step of the product development and commercialization process for intellectual property issues: submission and consideration of ideas, basic research and development, potential influences of technology and products owned by competitors, manufacturing processes and sales and marketing activities.
  • Consider technological trends in the industries and markets in which the company competes and the intellectual property portfolios of the company’s current and projected competitors. Market and competitive factors, including product life cycles and existing intellectual property rights of competitors, will determine the investment that the company will need to make in perfecting and protecting its intellectual property rights and can also be a predictor of the likelihood of protracted and expensive intellectual property litigation.
  • Conduct an intellectual property rights audit to understand how the company is already protecting its intellectual property rights and areas where there are significant shortcomings in the company’s compliance activities. Key areas include employee agreements, nondisclosure agreements with third parties, procedures for identifying and analyzing potential intellectual property rights and security procedures.
  • Determine how the company intends to use its intellectual property rights to compete effectively in the marketplace. Possibilities include excluding others from the market in order to secure market share, generating a steady stream of royalty revenues from licensing arrangements and licensing, entering new markets in foreign countries and building the value of the company to attract investors or potential buyers.
  • Build awareness throughout the company of the benefits of intellectual property and the dangers of not paying attention to the steps that should be taken to protect those rights. It is important to have the active support of everyone in the company for the program and this means integrating training and education into the program, beginning with the board of directors and senior executives and then going beyond to include everyone whose assistance will be needed.
  • Create an intellectual property management structure, including a compliance committee overseen by a person designated as the chief compliance official, that ensures that all existing intellectual property rights are identified, all potential intellectual property rights are brought to the attention of the legal department and others in order to make decisions about how best to protect them and audits of the effectiveness of the compliance program are performed regularly.
  • Set aside resources to proactively enforce their rights in the event a third party is engaged in activities that are infringing on the company’s statutory intellectual property rights (i.e., patents, copyrights or trademarks) or which involve misappropriation of the company’s trade secrets. Enforcement, which often involves litigation, can be a costly activity and procedures should be put in place to carefully weigh the benefits and costs.
  • Recognize that the intellectual property compliance program is as important part of the company’s overall risk management system. One very important risk to consider is avoiding intentional or inadvertent infringement of the intellectual property rights of third parties and the program should incorporate procedures such as monitoring patent activities of competitors; carefully analyzing the elements of proposed products before substantial time is spent on development and marketing to determine if any infringement issues are likely to be encountered; and conducting a similar search for potential trademark and copyright issues before launching marketing and advertising campaigns.
  • Extend the principles implemented in the intellectual property compliance program to proposed acquisitions in order to assess of the value of the intellectual property rights of the target and the risks that the target’s products or services infringe the rights of third parties (a potential liability that the company would succeed to if the transaction is completed).

Helpful tools to assist you in advising clients on IP matters and protection of IP rights have been included in this month’s update to Business Transactions Solution on WESTLAW:

  • Executive summary for clients regarding intellectual property rights (§ 206:43)
  • Executive summary for clients regarding intellectual property audits (§ 206:44)

Intellectual Property Audits

For technology-based companies the most significant asset is generally their intellectual property rights—patents, copyrights, trade secrets, and trademarks—and there is a real and substantial risk to those companies if they fail to take the necessary steps to preserve the value of these assets. In order to analyze the legal risks in this area, and take appropriate steps to minimize and manage those risks, companies should conduct regular audits that focus upon the creation of the assets and ownership rights therein; the procedures used to perfect and maintain all legal rights in the asset; and the risk that the use of the assets might infringe upon the valid legal claims or the contractual rights of others.  In order to assist you in preparing your clients for an intellectual property audit, this month’s update to Business Transactions Solution on WESTLAW includes an executive summary for clients regarding intellectual property audits (§202:71).

As part of the audit process, the company should provide a list, along with copies, of all agreements to which it may be a party relating to the ownership and use of intellectual property assets which may be material to the conduct of the company’s business. The scope of the inquiry extends beyond intellectual property rights which are owned by the company to include any technology or legal rights which may have licensed from a third party. Examples of some of the technology rights agreements which may be uncovered in the investigation include:

  • Licensing agreements to which the company is a party, either as a licensor or as a licensee. As to licenses given by the company, attention should be given to “cross-referencing” the subject matter to the description of statutory rights and trade secrets provided by the company.
  • Agreements purporting to assign any intellectual property rights to the company, which must be reviewed to ensure that all requirements for a valid transfer have been satisfied.
  • Joint venture and development agreements which involve the use and/or development of technology.
  • Research agreements with government agencies which call for government funding of the company’s research activities. The terms of the grant should be reviewed to see whether or not the government, or some agency thereof, has maintained some form of ownership interest in the products of the funded research activities.

When reviewing the various technology agreements special consideration should be certain provisions and issues.  For example, it is almost certain that some of the agreements will have arbitration clauses or other procedures for alternative dispute resolution (“ADR”) techniques.  While such provisions are commonly used, there is no universal consensus on the desirability of binding arbitration clauses in technology agreements, nor is their agreement on how to conduct ADR short of binding arbitration.  One of the outcomes of the intellectual property rights investigation should be gaining an understanding of the potential impact of ADR on the company’s technology rights portfolio and creating guidelines for future agreements that set out the company’s preferred negotiating position.

Another common topic for technology agreements is the provisions relating to identification and protection of confidential information, an important element of preserving trade secret status.  Not surprisingly, this is a subject that often consumes a good deal of negotiation time and resources, and the company may want to consider something more than just the traditional assortment of forms, such as a somewhat loose form for receiving confidential information; a rather restrictive form for giving out confidential information; and a more reasonable form for exchanges between parties with relatively equal bargaining positions. Some companies have moved away from this approach to the establishment of a single form that is designed to protect minimum interests. These companies maintain that such forms avoid considerable discussion and negotiation. The main thrust in terms of the intellectual property investigation and forms is that, while the company is collecting all the forms in use, it should evaluate whether the forms and the assortment of procedures for their use are optimal.

When the review turns to licensing agreements, consideration must be given to antitrust issues that may be raised regardless of the intellectual property rights that are the primary subject of the agreement.  For purposes of the investigation, senior management of the company certainly needs to be made aware of any provisions in a license that may run afoul of the guidelines for the licensing of intellectual property promulgated by the federal Department of Justice (“DOJ”) and/or the guidelines of the states’ attorneys general or private plaintiffs (or the courts hearing cases brought by them).  Distribution agreements may also raise antitrust issues and should be reviewed to determine how they impact the company’s trademark rights and whether they constitute a “franchise” that will be subject to federal and state regulation.

Counseling the Finance Function


Financing is an essential element for establishing a new business, launching a new product or service, or expanding an existing business through internal growth or acquisition.  For example, cash is necessary in order for a company to continue operations while awaiting payment from customers and anticipated increases in sales; expand the volume of sales of existing products through increased advertising and promotion; develop or acquire new technical skills and assets, including acquisitions of other firms; enter specified new markets, including new facilities and recruitment of personnel; create new products that address a specified market need, including research and development; replace or upgrade ageing or obsolete facilities or equipment; or comply with regulatory requirements, such as health standards or environmental laws.

It is likely that entrepreneurs and managers will, regardless of the size of their businesses, need to venture into the world of finance several times over the life cycle of the enterprise.  In that world they will encounter a wide range of participants, including banks, venture capitalists, investment bankers, government agencies, and business advisors, each of which will provide unique resources and experience.  Capital suppliers have become increasingly innovative in devising financing techniques that are tailored to their needs and the goals and objectives of the businesses they serve.  However, before managers can begin the onerous process of securing funding, they must develop a careful plan for identifying the financial requirements of the business, the terms upon which the company hopes to secure the necessary funds, and the potential sources for the funding.  Of course, this assumes that management has already developed a “plan” for the business, product, concept or service, and has developed an outline of all of the requirements for successfully completing the plan (i.e., capital resources, human resources, other assets, marketing strategies and tactics).

As a business counselor, one of the most important things that you will be doing is providing advice and transactional support to your clients on their financing activities.  Chapter 250 of Business Transactions Solution (§§ 250:1 et seq.) on WESTLAW provides a general overview of business financing activities which should be reviewed along with the specific types of financing transactions listed below. The materials include a Master Form of a questionnaire for use in assisting management in developing information on financial aspects of the business which can be used in presentations to prospective investors. The chapter discusses some of the steps to be taken to determine the financing requirements of a business, as well as various sources of capital. The chapter also analyzes the relationship between the company’s stage of development and financing alternatives and lists various considerations that the company should always take into account in selecting among financing proposals. Also, the role of legal counsel in the company’s financing strategy is covered.

This month we are adding several new training and practice tools to help you become better counselors to the finance function:

  • Slide Deck presentation: Counseling the Finance Function (§150:104)
  • Business Counselor’s Training Materials: Basic Elements of the Capital Structure (§150:105)
  • Business Counselor’s Training Materials: Counseling the Finance Function (§150:106)
  • Business Counselor’s Training Materials: Organization and Management of the Finance Function (§150:107)

Related issues are covered in the transactions on Corporate Equity Financing (§§ 154:1 et seq.), Corporate Debt Financing (§§ 155:1 et seq.), Venture Capital Financing (§§ 156:1 et seq.), Registered Public Offerings (§§ 288:1 et seq.), and Commercial Debt Financing (§§ 157:1 et seq.). Other transactions cover Offering and Disclosure Documents (§§ 152:1 et seq.), Finders’ Arrangements (§§ 153:1 et seq.), Underwriting and Distribution Arrangements (§§ 289:1 et seq.), Issuance of Corporate Securities (§§ 37:1 et seq.), Business Valuation (§§ 293:1 et seq.), Securities Law Compliance (§§ 151:1 et seq.), and Noncorporate Investment Financings (§§ 56:1 et seq.).

False Advertising

Any company that publishes an advertisement containing false claims about its own products or the products of a competitor is in violation of the trademark law, and any company that believes it is damaged by that false statement can bring a private suit for damages.  The following elements are necessary to state a cause of action foe false advertising under the Lanham Act, the federal law regulating trademarks:

  • In its advertisements, defendant made false statements of fact about the products or services of itself, plaintiff or another;
  • These advertisements actually deceived or have the tendency to deceive a substantial segment of their audience;
  • Such deception is material in that it is likely to influence the purchasing decision;
  • Defendant caused its false advertisements to enter interstate commerce; and
  • Plaintiff has been or is likely to be injured as the result of the foregoing either by changes in sales or goodwill regarding the products or services at issue.

The Lanham Act prohibits the use of false statements made in the context of “advertising or promotion.” Neither the Lanham Act nor its legislative history define “advertising or promotion,” but courts generally consider certain criteria for determining whether a representation is considered “advertising or promotion” under the Lanham Act. Generally, the plaintiff company must show that there was

  • Commercial speech;
  • By a company that is competing with the plaintiff company;
  • For the purpose of influencing customers to buy the defendant company’s goods or services;
  • By representations that are sufficiently disseminated to the relevant purchasing public to constitute “advertising” or “promotion” within that industry.

When a company’s advertisements are literally or explicitly false, as evidenced by expert testimony or survey evidence, the court may grant relief with a presumption that consumers were deceived by the false advertisements. However, in a situation involving misleading statements and subjective determinations regarding whether the message in an advertisement is deceptive, proof is required that consumers were misled or likely to be misled by the false advertising.

Courts are particularly sensitive to claims that imply surveys or studies to bolster their claims, such as “[s]urveys indicate that doctors prefer our brand ten to one.”  The advertising tactic known as puffing—general, laudatory statements about the superiority of one’s own product—is usually not considered actionable as false advertising under the Lanham Act. The theory is that consumers are accustomed to this type of talk and will not take it literally, and will, therefore, not be harmed by any false or misleading statements.

Another action related to false advertising is called “false designation of origin.” The key element in a false designation of origin action is the creation of a likelihood of confusion by the public as to the source of goods. The issue may arise in cases where the seller implies endorsement or sponsorship of its product by another company or in cases where the seller “copies” another product’s characteristics, and then uses the name of the copied product in its advertising. False designation of origin cases may also involve a false designation of geographic origin.  In a comparative advertisement where one company uses the other company’s trade name in its advertisement, the distinction between a false designation of origin claim and a trademark infringement claim is not always clear. While the likelihood of confusion is the key element in a trademark infringement case, that element may or may not be present in a comparative advertising case.

A company that proves a violation of the Lanham Act is entitled to an injunction prohibiting the offensive conduct in the future. Generally, a plaintiff seeking injunctive relief in a false advertising case under § 43(a) must establish a “reasonable likelihood of success” on the five elements of false advertising and a risk of irreparable harm. In the comparative advertisement context, most courts presume irreparable harm in determining whether to grant injunctive relief. The court may also award lost profits, damages caused to the plaintiff’s goodwill by the false advertising, and corrective advertising.  If the false advertisement, false statement of origin, or trademark infringement has occurred during telemarketing calls, plaintiff also has a civil cause of action pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act, codified at 15 U.S.C.A. §§ 6101 to 6108. See Medline Industries, Inc. v. Strategic Commercial Solutions, Inc., 553 F. Supp. 2d 979, 88 U.S.P.Q.2d 1839 (N.D. Ill. 2008).

Consideration should also be given to vicarious liability for false advertising.  Vicarious liability for tortious actions is a well-established common-law doctrine based on the concept of respondent superior. See, e.g., Dobbs’ Law of Torts § 425. Vicarious liability for false advertising extends beyond an employer’s liability for the actions of an employee taken within the scope of the employee’s employment duties to include vicarious liability for defendants when the defendant and the infringer have an actual or apparent partnership, have authority to bind one another in transactions, or exercise joint ownership or control over the infringing product.  Grubbs v. Sheakley Group, Inc., 807 F.3d 785, 117 U.S.P.Q.2d 1209, R.I.C.O. Bus. Disp. Guide (CCH) P 12673, 2015-2 Trade Cas. (CCH) ¶ 79380 (6th Cir. 2015).

In addition, the Eleventh Circuit has recognized the existence of a Lanham Act claim for contributory false advertising. In 2015 it held that a plaintiff who wished to state a claim for contributory false advertising (per the Lanham Act) would need to allege both that (i) a third party in fact directly engaged in false advertising that injured the plaintiff, and (ii) the defendant contributed to that conduct either by knowingly inducing or causing the conduct, or by materially participating in it. To contribute to the conduct found to be false advertising, the defendant would be required to have the requisite state of mind either by intending to participate in that conduct or actually knowing about the false advertising. “Contributing” also requires that the defendant actively and materially further the unlawful conduct—either by inducing it, causing it, or in some other way working to bring it about. See Duty Free Americas, Inc. v. Estee Lauder Companies, Inc., 797 F.3d 1248, 1277–78, 2015-2 Trade Cas. (CCH) ¶ 79257 (11th Cir. 2015).

For further discussion, see Trademarks (§§198.1 et seq.) in Business Transactions Solution on WESTLAW.

Damages for Willful Patent Infringement

If a patentee prevails in a suit for infringement, he or she will be entitled to damages in an amount that is deemed adequate to compensate him or her for the infringement but in no event less than a reasonable royalty for the use of the invention by the infringer, together with interest and costs as fixed by the court. 35 U.S.C.A. § 284.  It should be noted, however, that monetary damages for infringement cannot be recovered unless and until the infringer has been put on notice about the infringement and notice may be provided by actually notifying the infringer, filing an action for infringement, or marking the product (or its packaging where marking the product is impractical) with the word “patent” or the abbreviation “pat.,” together with the patent number. 35 U.S.C.A. § 287(a). The concept of “marking” does not apply to methods since there is generally nothing that can be marked. American Medical Systems, Inc. v. Medical Engineering Corp., 6 F.3d 1523, 1538, 28 U.S.P.Q.2d 1321 (Fed. Cir. 1993) (note that products can often be claimed as methods).  Software can be marked in the software code and accompanying documentation, and websites are “tangible items” that also can, and therefore must, be marked to provide the notice required by the marking statute.  Soverain Software LLC v., Inc., 383 F. Supp. 2d 904, 79 U.S.P.Q.2d 1208 (E.D. Tex. 2005). Any person is allowed to assert an action for “false marking,” including falsely marking or indicating in advertising in connection with any article that a patent application is pending; however, a finding of liability requires a purpose of deceiving the public. A fine of not more than $500 is provided for “every such offense.” 35 U.S.C.A. § 292.

The measure of damages in an infringement action will be determined with reference to the lost profits of the patentee. Lost profits in an infringement action may take three different forms: lost profits from potential sales which were lost to actual sales made by the infringer; lost profits from price reductions which the patentee was forced to make in response to competition from the infringer; and lost profits from any projected lost sales, including the inability of the patentee to raise its prices due to competition from the infringer and a reduction in the rate of the patentee’s sales growth after the initial infringement. Lam Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1065-68 (Fed. Cir. 1983). An award of projected lost profits is proper and not speculative in a two-supplier market if the patent owner can show its sales growth rate decreased during the infringement period and that it had a higher growth rate before and after the infringement period. Lam Inc. v. Johns-Manville, 718 F.2d at 1067.

Additionally, a finding of “willful infringement” allows award of both reasonable attorney’s fees and enhanced damages to the plaintiff. See e.g., Minks v. Polaris Industries, Inc., 546 F.3d 1364, 89 U.S.P.Q.2d 1102 (Fed. Cir. 2008). Actual damages may be assessed either by judge or jury. In either case, if infringement was willful, the judge may enhance the damages award to an amount up to three times the actual damages. See 35 U.S.C.A. § 284; Minks v. Polaris Industries, Inc., 546 F.3d 1364, 89 U.S.P.Q.2d 1102 (Fed. Cir. 2008).

In Liquid Dynamics Corp. v. Vaughan Co., Inc., 449 F.3d 1209, 79 U.S.P.Q.2d 1094, 70 Fed. R. Evid. Serv. 315 (Fed. Cir. 2006), the court set out the standard for determining willful patent infringement as follows:

“A finding of willful infringement is made after considering the totality of the circumstances … Courts consider several factors when determining whether an infringer has acted in bad faith and whether damages should be increased. They include: “(1) whether the infringer deliberately copies the ideas or designs of another; (2) whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; … (3) the infringer’s behavior as a party to the litigation”; (4) “defendant’s size and financial condition”; (5) “closeness of the case”; (6) “duration of defendant’s misconduct”; (7) “remedial action by the defendant”; (8) “defendant’s motivation for harm”; (9) “whether defendant attempted to conceal its misconduct.” … Good faith may normally be shown by obtaining the advice of legal counsel as to infringement or patent validity. … If counsel’s opinion is found to be incompetent, however, a fact finder may discount its usefulness in determining a party’s good faith. [Citations omitted by author.]”

On August 20, 2007, in a unanimous en banc opinion In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007), the Court of Appeals for the Federal Circuit overruled its 1983 decision in Underwater Devices Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380, 219 U.S.P.Q. 569 (Fed. Cir. 1983) (overruled by, In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007)) and established a new standard of proof for demonstrating willful patent infringement. In reaching its decision, the Federal Circuit reviewed the “affirmative duty of due care” standard established in Underwater that required that once a party had notice of a patentee’s rights the party had an affirmative duty of care to avoid infringing the patent. In order to comply with this duty many companies sought and obtained an opinion of counsel that the patent was either invalid or not infringed. In the Seagate case, however, the Federal Circuit adopted a new rule that calls for a showing of “objective recklessness” in order to prove willful infringement. Specifically, the Federal Circuit stated that “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and that “the patentee must also demonstrate that the objectively-defined risk was either known or so obvious that it should have been known to the accused infringer.”

At the same time, the Federal Circuit held that when an accused infringer offers an opinion of counsel as part of a defense against a claim of infringement, there would be a waiver of the attorney-client privilege and work product protection as to the counsel rendering the opinion but not as to the trial counsel of the accused counsel so long as trial counsel is different. Interestingly, the Federal Circuit noted that since it was abandoning the “affirmative duty of due care” an accused infringer no longer had an affirmative obligation to obtain an opinion of counsel regarding the infringement issue.

The U.S. Supreme Court disapproved the Federal Circuit’s teaching regarding enhanced damages awards for willful infringement in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 118 U.S.P.Q.2d 1761 (2016). The Court explained that pursuant to In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007) (abrogated by, Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 118 U.S.P.Q.2d 1761 (2016)) (en banc), “a patent owner must first show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent…. Second, the patentee must demonstrate, again by clear and convincing evidence, that the risk of infringement was either known or so obvious that it should have been known to the accused infringer.” Halo, 2016 WL 3221515. The Court explained that the Federal Circuit’s structured formula imposed a rigidity Congress had not chosen. Additionally, the statute did not specify the requirement of proof by clear and convincing evidence. Therefore, the Federal Circuit’s formula prevented trial courts from enhancing damages in some of the most egregious cases. The U.S. Supreme Court instructed that enhanced damages were to be granted on facts shown by a preponderance of the evidence pursuant to the trial courts’ discretion. Trial courts must explain their reasoning, but that was to be reviewed for an abuse of discretion.

For further discussion, see Patents (§§196.1 et seq.) in Business Transactions Solution on WESTLAW.

Reexamination of Issued Patents

After a patent has been issued, any person, including the patentee, may request reexamination of the patent by the Patent and Trademark Office in order to verify its validity. In addition, reexamination can be ordered by the Patent Office itself. Reexamination can be a valuable procedure when one wants to test the validity of a patent prior to bringing an action for infringement, or before taking some action (e.g., commencing use of a similar process or machine) which might precipitate an infringement action by the patentee. However, post-grant review has often proven to be quite complex and controversial and a number of attempts have previously been made to make the process more efficient, including multiple efforts to reform the reexamination process which often proved to be quite costly and time-consuming given that the initial decision of patent examiners was almost invariably appealed to the Patent Board.

Recognizing these problems, the America Invents Act, which came into effect in September of 2011, amended ex parte and inter partes reexamination.  Under the amended ex parte reexamination procedures, the Director is allowed to institute a reexamination on the Director’s own initiative if a substantial new question of patentability is raised by patents or publications.  The America Invents Act also converts inter partes reexamination from an examinational to an adjudicative proceeding and renamed the proceeding “inter partes review.”  The Act raised the standard a petitioner must meet before the Director institutes inter partes review.  Specifically, the petitioner must show “that there is reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged.” The Director’s refusal to institute a review is unappealable.  A petition may attack a patent only on the basis of a defect under 35 U.S.C.A. §§ 102 and 103; the defect must be supported by “prior art consisting of patents or printed publications.” 35 U.S.C.A. § 311.  The U.S. Supreme Court considered the inter partes review procedure in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131, 119 U.S.P.Q.2d 1065 (2016) and supported the right of Patent Office to set legal standards for use in constructing patents within review proceedings.

The America Invents Act also created a new post-grant opposition procedure that can be utilized during the first nine months after the grant of a patent or issue of a reissue patent. Unlike reexamination proceedings, which provide only a limited basis on which to consider whether a patent should have issued, the post-grant review proceeding permits a challenge on any ground related to invalidity under section 282 of Title 35; however, the petition must include detailed explanation and support and the petition must be made available to the public promptly after filing.  The patent-holder has the right to file a preliminary response stating why a reexamination proceeding is unwarranted. The Director may only institute a reexamination proceeding if one of two standards is met. First, the information in the petition (if not rebutted) “would demonstrate that it is more likely than not that at least 1 of the claims challenged in the petition is unpatentable.” Second, “the petition raises a novel or unsettled legal question that is important to other patents or patent applications.” 35 U.S.C.A. § 324. The Director’s decision not to institute such a proceeding is not appealable.  The intent of the post-grant review process is to enable early challenges to patents, while still protecting the rights of inventors and patent owners against new patent challenges unbounded in time and scope. In utilizing the post-grant review process, petitioners, real parties in interest, and their privies are precluded from improperly mounting multiple challenges to a patent, or initiating challenges after filing a civil action challenging the validity a claim in the patent. Further, a final decision in a post-grant review process will prevent the petitioner, a real party in interest, or its privy from challenging any patent claim on a ground that was raised in the post-grant review process. The post-grant review procedure is not intended, however, to inhibit patent owners from pursuing the various avenues of enforcement of their rights under a patent, and the amendment makes clear that the filing or institution of a post-grant review proceeding does not limit a patent owner from commencing such actions. Given the short time period available for initiating post-grant opposition procedures, it is incumbent for companies to carefully monitor the patent activities of competitors and the record of patent grants.

The America Invents Act also made several other anticipated improvements to “inter parties” review. For example, prior to the enactment of the America Invents Act, if the new references were found to be more relevant than the references previously cited by the examiner and presented “a significant new question of patentability,” a reexamination proceeding was conducted in the Patent Office similar to the original examination. However, the America Invents Act raised the threshold for initiating such a review from “a substantial new question of patentability” to “a reasonable likelihood that the requestor would prevail” with respect to at least one of the challenged claims.

During the reexamination proceeding, the patent owner has the right to file a statement arguing the new question of patentability and to amend the claims to further distinguish them from the new references. The reexamination procedure enables a patent infringer or any other interested party to contest the validity of a patent without litigation. Within the request for reexamination the infringer or other third party may present arguments of why the claims of the patent are invalid or unpatentable over the new references and may reply to the patent owner’s statement. However, after the reexamination proceeding begins, the third party cannot participate further, such as by responding to amendments or attending interviews with the examiner. However, the third party is sent copies of all office actions and amendments.

The America Invents Act expanded the category of documents that may be cited in a reexamination proceeding to include written statements of the patent owner that have been filed in a proceeding before a federal court or the Patent Office regarding the scope of claims. This addition counteracts the ability of patent owners to offer differing interpretations of prior art in different proceedings. These written statements, which include documents, pleadings or evidence from proceedings that address the patent owner’s statements, cannot be considered for any purpose other than to determine the proper meaning of the claims that are the subject of the request in a proceeding.

The America Invents Act included provisions estopping a party from raising, in a subsequent Patent Office proceeding, any issue that it raised or reasonably could have raised in the inter partes review. In addition, the America Invents Act imposed on petitioners the burden of proving that a patent is invalid by a preponderance of the evidence in inter partes review and also imposed time limits on litigation and permits limited discovery. Under the America Invents Act, inter partes review must be completed within one year of when the proceeding is instituted, except that the Patent Office can extend this deadline by six months for good cause. The results of any reexamination will be set out by the Patent Office in a certificate, which describes the new content of the patent.  For further discussion, see Patents (§§196.1 et seq.) in Business Transactions Solution on WESTLAW.