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Today's lesson for litigators: make sure you present all your arguments to the district court
August 21, 2008

In a decision Tuesday, the Federal Circuit affirmed a district court's holding that two patents were invalid under the on-sale bar of 35 U.S.C. § 102(b). The inventor filed a declaration during prosecution that the invention was reduced to practice before the critical date of the patents, and thereafter sold the claimed method, also before the critical date. The post-reduction to practice sales could not be considered experimental use, as once an invention is reduced to practice, experimental use is no longer possible. Further, there was insuffucient evidence to call the inventor's declaration into question. On this point, the plaintiff attempted to rely upon additional evidence not presented to the district court in opposition to the defendants' summary judgment motion. The Federal Circuit rebuffed this attempt, limiting the plaintiff on appeal to the evidence presented to the district court in opposition to the summary judgment motion. As a result, the court affirmed the finding of invalidity.

The Federal Circuit further affirmed the district court's dismissal of the plaintiff's trade secret claims as barred under the statute of limitations. The court held the plaintiff had sufficient information to allege trade secret misappropriation at least as early as 1996, but did not file suit until 2005, well outside the applicable 3-year limitations period. Accordingly, dismissal of the trade secret claims was proper.

More concerning In re Cygnus Telecomms. Tech., LLC, Patent Litig. after the jump.

In 1988, James Alleman founded Paragon Services International, Inc. and began to develop what he termed as a "black box" system to take advantage of the less expensive cost of a telephone call from the U.S. to a foreign country in comparison to placement of a call from a foreign country to the U.S. At the time of the invention, existing systems allowed a user in a foreign country to purchase a dedicated line attached to a "black box" in the U.S. whereby the foreign user would place a call on the dedicated line, promptly terminate the call, then the black box would call back the user using the less expensive U.S. billing rate. Mr. Alleman subsequently developed a less expensive system that used a computer rather than the black box and created a prototype on a 386 computer ("the 386 system"). Mr. Alleman worked with several individuals to implement the 386 system and further had discussions with another telecommunications company, Call Interactive, as to how they could implement and market his invention on a commercial scale.

Mr. Alleman filed a patent application on the computerized callback system on April 24, 1992 which eventually led to the issuance of two patents. Paragon's successor-in-interest, Cygnus, later brought infringement suites against the multiple defendants, and the case was consolidated into a multidistrict litigation. The court granted defendant AT&T's motion to dismiss Cygnus's trade secret misappropriation claim on the basis it was barred by the statute of limitations. Specifically, the district court noted the allegations in Cygnus's second amended complaint demonstrated that Cygnus was in possession of sufficient facts to state a claim for trade secret misappropriation as of August 30, 1996, relying upon the complaint's allegations that AT&T publicly announced its plan to launch a callback service on that date, and that AT&T had acknowledged receipt of Cygnus's callback patent applications in 1995, providing Cygnus with notice that AT&T had potentially used its trade secrets. Cygnus argued that the statute of limitations should not have started running until 2005 when AT&T's counsel allegedly admitted during an in-court argument that AT&T used Cygnus's technology in its 1996 callback services, stating that it had no reason to suspect misappropriation by AT&T before that time, nor did it have means of knowing whether AT&T was using its precise callback technology, but the court rejected these arguments.

On October 27, 2006, AT&T filed a motion on behalf of all the defendants for summary judgment of invalidity based on prior public use and commercial sales of the subject matter of the patents, while several of the defendants also filed motions for summary judgment on noninfringement. The district court granted the defendants' motions and entered a final judgment. The district court's ruling was based on Mr. Alleman's sale of the 386 system to paying users and the commercialization agreement that Paragon and Call Interactive entered into before the critical date for both patents, April 24, 1991. The district court determined that the 386 system had been reduced to practice based on Mr. Alleman's sworn declaration to the PTO in which he stated that he had reduced the invention to practice before June 27, 1990, and Mr. Alleman's failure to provide a satisfactory explanation as to why the statement should be disregarded. The district court also rejected Cygnus's argument that the use of the 386 system prior to the critical date fell within the "experimental use" exception to the § 102(b) bar, noting that the exception does not apply after an invention has been reduced to practice. Finally the district court concluded that Mr. Alleman engaged in the "sale" of the 386 system since he had charged users for the calls they made using the system.

On appeal, the defendants first asserted that Cygnus was collaterally estopped from challenging the decision of invalidity of the patents under § 102(b) because it failed to appeal the court's entry of final judgment against one defendant, Heritage Communications Corp., which was granted summary judgment but was not included in Cygnus's appeal. The defendants' basic argument was that if a court enters a judgment of patent invalidity against a patentee in a multi-defendant action and the patentee appeals that judgment against fewer than all of the defendants, the appellees can invoke collateral estoppel based on the final judgment in favor of the defendant as to whom the patentee did not appeal. The court held that its prior decision in Innovad Inc. v. Microsoft Corp. controlled, which held in an analogous setting that when plaintiff Innovad filed an appeal against all but one of the defendants in a patent infringement case, the judgment that was awarded to the defendant as to which no appeal was taken did not constitute the "first case" for collateral estoppel purposes. Accordingly, the court held, the decision as to that defendant did not qualify as "prior litigation" entitling the other defendants to deprive Innovad of the right to appeal. The court accordingly declined to apply collateral estoppel against Cygnus, while acknowledging that the result would have been different if the various actions had not been consolidated in an MDL proceeding and one of the actions had gone to judgment before the others, resulting in a judgment adverse to the plaintiff. Since the consolidated MDL proceeding was treated as a single multi-defendant action with respect to the common issues, the court held it proper to treat it as a single action for purposes of collateral estoppel.

Turning to the on-sale bar of § 102(b), Cygnus attempted to submit arguments relating to the § 102(b) issues not previously presented to the district court. The court refused to consider this additional evidence, noting that evidence not presented to the district court in opposition to a summary judgment motion may not be raised on appeal as grounds to reverse the summary judgment. The court further held that the remaining evidence did not successfully contradict Mr. Alleman's statement that the invention was reduced to practice in June 1990. The court therefore agreed with the district court that Cygnus was bound by the statements that Mr. Alleman made in his declaration to the PTO, regardless of whether the declaration was necessary for the issuance of the patent. More particularly, the court noted that a party cannot create a genuine issue of fact to survive summary judgment simply by contradicting his or her own previous sworn statement without explaining the contradiction or attempting to resolve the disparity. The court also affirmed the lower court's ruling that the experimental use doctrine did not apply after June 27, 1990 as the invention had already been reduced to practice.

With regard to Cygnus's trade secret misappropriation claims, the Federal Circuit agreed with the district court's analysis concluding that the allegations showed Cygnus's claim accrued in 1996, well outside the 3-year statute of limitations. While Cygnus argued the statute should be tolled because of alleged fraudulent concealment by AT&T, the court was unpersuaded because Cygnus had sufficient information to bring a claim in 1996, making any subsequent concealment immaterial for purposes of the statute of limitations.

To read the full decision in In re Cygnus Telecomms. Tech., LLC, Patent Litig., click here.

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