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2 DELAWARE LAWYER WINTER 2008/2009

EDITORS' NOTE 4

CONTRIBUTORS 6

FEATURES 8 INTELLECTUALLY BANKRUPT?Five potential pitfalls whenintellectual property interests meetbankruptcy proceedings.

Gregory W. Werkheiser

14 INFINITE COMBINATIONSConflicts of interest can take many formsin patent litigation.

David Hricik

18 HONESTY IS THE BEST POLICYBut even honest mistakes can be "fraud H

when it comes to trademark applications.

Christina M. HillsonJennifer Fraser

24 IP MEDIATION AT THE FEDERAL CIRCUITThe court's fledgling program has provento be surprisingly successful.

Kevin R. Casey

WINTER 2008/2009 DELAWARE LAWYER 3

EDITORS' NOTE_ .....;.'_-'-" _:'" ._c",-~........_·_>~~_. _.;, __ .~ "_ c.-•. -4'- •.~

Karen L. Pascale

~.ri

Karen 1. Pascale

rather than the three judges we actually have as ofearly 2009!In short, it is clear that Delaware remains "An Ideal Venuefor Patent Litigators." See DELAWARE LAWYER, Vol. 18, No.4(Winter 2000/2001) (available at delawarebarfoundation.org/delawyer).

Although it has been eight years since we've focusedan issue on Intellectual Property, I think it was worth thewait. Greg Werkheiser navigates us through the dangerousintersection of intellectual property and bankruptcy law.Professor David Hricik's thought-provoking article remindsus that there are few "bright lines" when it comes to the manyforms of potential conflicts of interest in patent litigation.Christina Hillson and Jennifer Fraser offer an excellentanalysis of a hot-button issue: the prospect of trademarkowners losing valuable registration rights based upon honestmistakes in their applications. And finally, Kevin Caseyexplores the successes and challenges of the Federal Circuit'sfledgling IP mediation program. Many thanks to these finecontributors for offering us such a varied and informativeslate of articles.

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Harnessing the economic power of creativity - isn't thatwhat intellectual property law is really about? There aresignificant financial rewards to be reaped from the exclusivityenjoyed by the holders of patents, trademarks, trade secrets,and copyrights. All of the statutes, regulations, PTO actions,jury verdicts, and court rulings that we think of as "intellectual property law"- aren't they just a reflection ofour society'seffort to ensure that those rewards are not gained unfairly orat the cost of stifling innovation and competition?

But the rules of the IP game are imperfect and alwaysshifting. Powerful industries and interest groups are alwayslobbying vigorously for the rules that could tilt the playingfield in their favor. Thus, one must cast an especially criticaleye on the ongoing debates about intellectual propertylaw (including the fate of copyrighted material in the ageof digital media, and the many proposals being discussedunder the umbrella of "patent reform").

While we wait to see what the next Congress might ormight not accomplish on the "patent reform" front, andwho President Obama will tap to head the PTO, Delawarehums along as a strong locus for IP litigation. Accordingto Dr. Peter T. Dalleo, Clerk of the United States DistrictCourt for the Distr-ict of Delaware, this district has thehighest number of patent cases per authorized judgeship inthe country - and that is based on four authorized judges,

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CONTRIBUTORS

(Spring 2005); Trouble Waiting toHappen: Malpractice and EthicalIssues in Patent Prosecution, 31 AM.INTELL. PROP. L. Q.J. 387 (2003); andWrong About Everything: Applicationby the District Courts of Federal Ruleof Civil Procedure 9(b) to InequitableConduct, 86 MARQUETTE L. REV. 895(2003).

Gregory W. Werkheiseris a partner with the Business Reorganization and RestructuringGroup at Morris, Nichols, Arsht &Tunnel, LLP. He has substantialexperience representing debtors andcreditors in bankruptcy cases andout-of-court restructurings. Hispractice focuses on Chapter 11business restructuring, advising fiduciaries and managers for distressedenterprises, bankruptcy acquisitionsand transactions, committee representations, debtor-in-possession (DIP)financing, representation of securedand unsecured lenders to bankrupt ordistressed companies and bankruptcyrelated litigation. Mr. Werkheiser hasappeared on behalf of clients in federalcourts throughout the United Stateson a range bankruptcy issues.

Jennifer Fraseris an Intellectual Property attorneyat Connolly Bove Lodge & HutzLLP. She is a co-chair of the firm'sTrademark and Copyrights section.Her practice focuses primarily on theselection, use and enforcement oftrademarks including prosecutingU.S. and foreign applications,litigating rights before the courtsand the Trademark Trial and AppealBoard, and resolving domain namedisputes. She is a former ExaminingAttorney with the United States Patentand Trademark Office and a memberof the following organizations: American Bar Association - IntellectualProperty Section, American Intellectual Property Law Association,Intellectual Property Owners Association, Trademark Office PracticeCommittee and the InternationalTrademark Association.

adjunct professor at Temple UniversityBeasley School of Law since 1995.Mr. Casey is ranked as one of theleading IP attorneys in Pennsylvaniaby "America's Leading Lawyers forBusiness, The Client's Guide," and wasrecommended as a leader in intellectualproperty in Pennsylvania in the 2008and 2009 editions of Chambers USA:AmericaJsLeading LawyersforBusiness.In addition, he has been consistentlynamed a Pennsylvania Super Lawyer<roby a vote of his peers, and was includedin the 2009, 2008 and 2007 editionsof The Best Lawyers in America.

Christina M. Hillson

David Hricikis a Professor of Law at MercerUniversity School of Law in Macon,Georgia. He is a past chair of theEthics & Professionalism Committeeof the American Intellectual PropertyLaw Association, and teaches bothpatent law and legal ethics. In privatepractice for 14 years with the Houstonlaw firms of Baker Botts LLP, Slusser& Frost LLP and Yetter & WardenLLP, he focused on complex civillitigation, patent litigation, malpracticedefense and ethics consulting. Afrequent speaker on issues relatedto legal ethics, professionalism andintellectual property, Professor Hricikalso has written numerous booksand articles, including Ethical Issuesin Patent Practice and Ethical Ismesin Patent Litigation (both OxfordUniversity Press 2008); The EthicalResponsibilities and Liability RisksArising From Representing a SingleClient in Multiple Patent-RelatedRepresentations: How Things Snowball, 18 GEO. J. LEGAL ETHICS 421

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Kevin R. Caseyis a partner in Stradley Ronon Stevens& Young LLP and chair of the firm'sIntellectual Property (IP) PracticeGroup. Mr. Casey has counseledclients for more than 20 years in allaspects of the intellectual propertyfield, encompassing patent, trademark,copyright, trade secret and relatedmatters. He has acted as lead litigationcounsel and participated as assistantcounsel in more than 50 IP cases.Mr. Casey also has an active appellatepractice before the U.S. Court ofAppeals for the Federal Circuit, applying his experience as a judicial clerkto the Hon. Helen W. Nies, formerChief Judge on the Federal Circuit.He has supported patent procurement, including U.S. and internationalpatent application preparation andprosecution. Mr. Casey has provided IPlegal opinions, and also has extensiveexperience negotiating and completingIP licenses. He has authored numerouspapers on IP issues, and has been an

is an Intellectual Property attorney atConnolly Bove Lodge & Hutz LLP.She represents clients in the areasof computer software, technologyand science, retail, consumer products and service industries withcopyright, trademark, and copyrightand trademark litigation. She is amember of the Intellectual Property

------------------, Owners Association, Trademark LawCommittee.


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If you spend any amount of time with a group of bankruptcy lawyers,

not only might you develop a somewhat skewed perspective of the world,

but sooner or later someone will announce that bankruptcy lawyers

are among the last "true generalists" in private practice. By this state

ment, they mean that bankruptcy lawyers, especially those that routinely

represent companies in bankruptcy reorganization cases, need to know a

lot about bankruptcy law and at least something about numerous other

areas of the law.

bankruptcy overlay may affect their clients' rights and obligations.

Ask pretty much any bankruptcylawyer, and she is apt to launch into anaccount about how her corporate litigation, tax, insurance or [insert practicearea name] colleagues got themselvesinto a boatload of trouble that couldhave been avoided had they just pickedup the telephone and sought her adviceat the first hint that the client or theother party might be experiencing somefinancial distress.

Perhaps nowhere does this scenario

~n short, a bankruptcy lawyer needsto know enough about areas outside

: her chosen field to appreciate when. to pick up the telephone and call

one of her colleagues for assistance on aparticular matter within a larger bankruptcy case.

The converse proposition, however,also holds true. Those that practice inother areas of the law, even ones seemingly remote from the bankruptcyworld, need to know enough about whatsome might perceive as the arcane fieldof bankruptcy law to appreciate how the

FEATUREGregory W. Werkheiser

Five pitfallsto avoid whenit comes tothe treatmentof intellectualproperty interestsin bankruptcyproceedings.

play out more prominently than in thetroublesome region where intellectualproperty law and bankruptcy law intersect. Pitfalls abound in the BankruptcyCode for the unwary. The bulletproofintellectual property license that youthought you had negotiated is vitiatedby the operation of certain provisionsof the Bankruptcy Code after your licensee files for bankruptcy - or is it?The "bet the company" patent infringement litigation that was about to go totrial against the defendant which justfiled for bankruptcy and its non-debtorsubsidiary is enjoined by the automaticstay - or is it? Your right to continueusing the trademark you licensed fromyour franchisor that just filed for bankruptcy is protected by the BankruptcyCode - or is it?

These are but a few occasions of interactions between intellectual propertylaw and the Bankruptcy Code that tendto produce results that one might not beable to intuit without developing someeye for how the Bankruptcy Code treatsintellectual property interests.

The starting point for understanding the interplay between intellectualproperty and bankruptcy law is to realize that these two fields attempt tofurther some very different and oftenconflicting interests. For instance, oneof the principal goals of patent law is topromote invention by recognizing andprotecting property interests in technological developments, which is accomplished, in part, by allowing patenteesto exclude others from making use oftheir proprietary technology.

The principal goals of the Bankruptcy Code include promoting reorganization and maximizing value for creditors,which are accomplished, in part, by removing restrictions that impede the freetransferability of property. It is largelyas a result of the Bankruptcy Code'sattempts to reconcile these potentiallyconflicting policy goals that many ofthe pitfalls involving the treatment ofintellectual property in a bankruptcysetting arise.

While a comprehensive cataloguing

of every possible interaction betweenfields of intellectual property and bankruptcy law is beyond the scope of thismodest article, I will attempt to identifysome of those issues that have proventime and again to be the most irksome.

Pitfall #1: Not understanding the

rather peculiar way the Bankruptcy Code

determines which intellectual property

licenses can and cannot be assumed) or

assumed and assigned) by a debtor or

trustee.Consistent with the Bankruptcy

Code's overall policy goals of promoting reorganizations and maximizingvalue, it generally favors the free assignability of prepetition contracts, and section 365 of the Bankruptcy Code givesa trustee or debtor the authority to assume, or assume and assign, most executory contracts.

The Bankruptcy Code, however, alsoattempts to do as little violence as possible to applicable non-bankruptcy lawby recognizing that in several areas theassignment of contracts should be prohibited or restricted. The result of theseefforts is reflected in sections 365(c) and365(f) of the Bankruptcy Code, twoseemingly contradictory provisions thathave befuddled and continue to befuddle litigants and courts. See 11 U.S.C. §365(c) & (f).

The application ofthese provisions tointellectual property licenses has provenparticularly challenging. The thresholdinquiry is whether the agreement reallyis an executory contract (i.e.) a contracton which performance remains due tosome extent on both sides), or something else, such as a sale.

Frequently, although not always,courts make this distinction on the basisof whether the license is non-exclusive(i.e.) merely grants the licensee permission to use certain intellectual property)or exclusive (i.e.) transfers to the licensee(and divests the licensor of) some significant portion of the ownership rights associated with the intellectual property).

Ifthe license agreement is determinedto be executory, then the question under section 365(c) is whether "applica-

ble law" would excuse the non-debtorparty from accepting performance fromor rendering performance to a partyother than the debtor. The term "applicable law" in the context of intellectualproperty licenses generally refers to patent law, copyright law or trademark law.As a general proposition, patent law andcopyright law have been held to makenon-exclusive licenses nonassignablewithout the consent of the licensor.

In contrast, the rights ofa trademarkholder to control the use of its markmay be more limited, which createsmore uncertainty about whether section365(c) would necessarily excuse a trademark holder from accepting performance from or rendering performanceto a party other than the debtor per thelicense's terms.

Another peculiar aspect of the waythe Bankruptcy Code treats licenses ofintellectual property to debtors is in themanner in which sections 365(c) and365(f) are applied to affect the ability ofa debtor in possession (i.e.) a debtor in achapter 11 reorganization case in whichno separate trustee has been appointed)to assume a license even when assignment is not contemplated (i.e., wherethe debtor seeks only to exit bankruptcywith the rights and obligations under thelicense intact, but not to transfer it to athird party). In this situation, whetheror not the debtor will be stripped of theopportunity to assume a license withoutthe non-debtor party's consent may depend on the venue in which the debtor'sbankruptcy case was commenced.

Several circuits, including the ThirdCircuit, follow the so-called "hypothetical" approach, which they conclude ismandated by the specific language ofsection 365, and do not permit a debtor'sassumption of a license if "applicablelaw" would not allow its assignment toa third party. Other circuits follow theso-called "actual" approach (or variantsthereof), pursuant to which they rejectthe notion that the debtor in possessionshould be presumed to be an entity distinct from the pre-petition debtor andtypically allow assumption to occur,


FEATURE


even when applicable law would restrictassignment to a third party.

Thus, although all courts are interpreting the same language, there is nobroad consensus among federal courtsabout the manner in which these provisions are to be applied.

Furthermore, even the few broadgeneralizations that can be made aboutthe treatment of intellectual propertylicensed to a debtor can break downwhen applied to the facts of a given case.In most instances, it will be necessaryto examine the nature of the intellectualproperty rights at issue and the terms ofthe license before any reliable conclusion can be reached about the license'stransferability without the express consent of the licensor.

As a practical matter, this means thatcare must be taken by intellectual property holders long befort; the advent ofthe bankruptcy to structure a license insuch a way to maximize the likelihoodthat its restrictions on assignability willbe enforced within a bankruptcy proceeding.

Pitfall #2: Being unfamiliar withthe reach ofthe automatic stay that comes

into effect when a debtorfiles a bankrupt

cy petition.Pursuant to section 362(a), upon the

filing of a bankruptcy petition, an injunction automatically comes into effectagainst certain actions, including

(1) the commencement or continuation ... of [an] action or proceedingagainst the debtor that was or couldhave been commenced before thecommencement of the [bankruptcy]case ... , or to recover a claim againstthe debtor that arose before the commencement of the [bankruptcy] case... ; (2) the enforcement, against thedebtor or property of the estate, of ajudgment obtained before the commencement of the [bankruptcy] case. . . ; (3) any act to obtain possessionof property of the estate or of property from the estate or to exercisecontrol over property of the estate;[and] (6) any act to collect, assess,or recover a claim against the debtor

that arose before the commencementof the [bankruptcy] case ....

11 U.S.C. § 362(a).Exactly what this language means

for participants in intellectual propertylitigation is not always clear. The stakes,however, if one is wrong about whetherthe automatic stay applies may be significant, because actions taken in violationof the automatic stay may be deemedvoid or voidable and, if done willfully,may result in the imposition of actualand punitive damages. See 11 U.s.C. §362(h).

Even in a simple, bilateral patent infringement suit the question ofwhetherthe automatic stay applies is not alwaysclear. For instance, it is not unusual foran accused infringer to file a preemptive suit seeking a declaration of noninfringement and for the defendant insuch a suit to counterclaim for damagesand injunctive relief. When the plaintiff/counterclaim-defendant in such anaction then files for bankruptcy, it cancreate doubt as to whether and to whatextent the automatic stay applies.

Certainly, in such a situation the infringement count brought by the defendant/counterclaim-plaintiff would bestayed, but the impact of the automaticstay on the plaintiff/counterclaim-defendant's request for a declaration ofnon-infringement is less certain. Generally, actions by a debtor are not affected by the automatic stay, but whenthe nature of that action is essentially arequest to determine the nonexistenceof a claim against the debtor, there isgreater likelihood that the action wouldnot be permitted to proceed, either as adirect application of the automatic stayor for prudential reasons.

The impact of the automatic stay alsocan be uncertain in situations where elements of the action relate to events thathave occurred after the debtor filed abankruptcy petition. For instance, whena patent has issued after a debtor soughtbankruptcy petition, it has been heldthat an action for damages and injunctive relief may be prosecuted against adebtor without first obtaining relief

from the automatic stay; however, theexecution or attachment of a judgmentobtained against a debtor through suchan action would be barred, absent relieffrom the automatic stay.

Further, it has been suggested (onthe theory that each act of infringementis an independent tort) that an actionmay be pursued against a debtor basedupon its postpetition infringement eventhough the infringing acts commencedon a date prior to the bankruptcy filing;however, such an action also could beviewed as one that "could have beencommenced before the commencement of the [bankruptcy] case ..." and,therefore, violative of the stay.

Even more uncertainty creeps inwhen the question is presented of whateffect a debtor-defendant's bankruptcyfiling should have on the continuationof infringement litigation against parties who have not themselves soughtbankruptcy protection, especially whenthose parties are closely connected withthe debtor. As a general rule, litigation should proceed against non-debtorparties, but courts have found that theautomatic stay can be extended to nondebtor defendants (or have otherwisegranted injunctive relief) in situationswhere there exists a substantial identity of interests between the debtor andnon-debtor parties, such that a judgment of infringement against the nonfiling defendant might operate (eithertechnically or practically) as a judgmentagainst the debtor.

This is but a sampling of the typesof issues that arise in the litigationcontext when an automatic stay comesinto effect. There are numerous otherpermutations on these themes. The lesson to take away from this abbreviateddiscussion is to stop and fully considerall of the potential implications of theautomatic stay when a bankruptcy filingoccurs or is contemplated.

Pitfall #3: Not appreciating the lim

ited and incomplete nature of the Bankruptcy Code protections available to a

debtor)s licensees and sublicensees ofintellectual property.

!

II:,.

r

FEATURE

When originally enacted, section365 of the Bankruptcy Code allowed adebtor licensor to reject (i.e., breach andcease performing under) an intellectualproperty license without regard to thepotentially disastrous effects of such action on the viability of the business ofitsnon-debtor licensee. Because of the perceived inequity of this result, in 1988,Congress added subsection 365(n) ofthe Bankruptcy Code in an attemptto provide special protections for nondebtor licensees.

Subsection (n) attempts to mitigatethe effects of a debtor licensor's rejection of an intellectual propertylicense by giving the non-debtor licensee the option to either (a) treatthe license as terminated or (b) retainits rights to the licensed intellectualproperty under the license, otherthan the right to specific performance of any license provision (savefor any exclusivity requirement). Ifthe licensee opts to retain the rightto use the intellectual property itmust make all royalty payments under the license and may not assertagainst the debtor any setoff rightsor administrative claims arising under the license.

Despite this legislative attemptto improve the lot of non-debtor licensees, it would be a mistake to assume that section 365(n) fully insulatesthem from the adverse consequencesof a debtor's rejection. Section 365(n)has significant limitations that make itsprotections incomplete and may lessenthe utility of those protections whenavailable.

A notable limitation is that trademarks fall outside of the BankruptcyCode's definition of "intellectual property," thereby placing trademark licenses beyond the reach of section 365(n).Thus, for example, the non-debtor franchisee of a debtor franchisor may finditself with no protection against thedebtor franchisor's decision to reject itsfranchise agreement and thereby deny itthe right to continue to use the tradename and trade dress.

Another limitation of section 365(n)is its potential inapplicability to sublicensees (as distinguished from licensees).Although there is no definitive guidanceavailable concerning whether section365(n)'s protections reach sublicenseesof intellectual property, an analogousprovision that allows a non-debtor tenant to remain in possession of premisesafter the debtor lessor has rejected itslease has been held not to extend sucha right to a sublessee when the debtoris the tenant on a prime lease which isrejected. See 11 U.S.C. § 365(h).

An interested party

must file an objection

by a stated deadline

or forever forego theopportunity of

challenging what the

debtor proposes.

This result suggests that the rightsof a sublicensee against the ultimatelicensor may be governed exclusivelyby applicable non-bankruptcy law evenwhen the bankruptcy act of the debtorsublicensor's rejection of the sublicenseis the triggering event. If (as is often thecase) under applicable non-bankruptcylaw the total breach of the prime licensewould extinguish the sublicensee's rightto use the technology, section 365(n)may be of no help to a sublicensee. Totake a real world example, sublicensees of a software distributor that filesfor bankruptcy may well be withoutany protection under section 365(n) ifthat software distributor rejects its distribution agreement with the originallicensor.

Finally, even when section 365(n) isavailable, its conditions may not be economically or otherwise viable for nondebtor licensees. Aside from the right toenforce the exclusivity provisions of thelicense agreement, all that the licenseeretains is the bare right to practice thelicensed technology subject to the termsof the license. Significantly, there is noability to obtain specific performance ofthe licensor's other obligations underthe license agreement, such as thoserelated to training and support of thelicensed technology. Furthermore, any

rights under the license that the licensee might otherwise have had toalterations and improvements to thetechnology will be no longer recognized.

In short, section 365(n) provideslittle more than a basic safety netagainst catastrophic business failureresulting directly from the loss ofability to practice a licensed technology.

Pitfall #4: Forgetting that bank

ruptcy cases often operate under thecrscream or die» principle.

The phrase "scream or die" harkens back at least 165 years, as indicated by this early usage in American literature:

But anything was better than thisagony! Anything was more tolerable than this derision! I couldbear those hypocritical smiles nolonger! I felt that I must screamor die - and now - again - hark!louder! louder! louder! LOUDER!- Edgar Allan Poe, The Tell-Tale

Heart (1843) (emphasis added).

In reality, the term "scream or die"as used in the bankruptcy context probably owes less to great literature than itdoes to the bankruptcy bar's penchantfor developing its own colorful lexicon.This phrase describes the concept thatan interested party must file an objection by a stated deadline or foreverforego the opportunity of challengingwhat the debtor or trustee proposes toaccomplish by the noticed transaction.Thus, a holder of intellectual property

1

12 DELAWARE LAWYER WINTER 2008/2009IJ

that fails to timely object to a bankruptcy transaction involving its propertymay be precluded from later challengingthe transaction by any other means.

Failure to heed the "scream or die"rule can be particularly problematic forintellectual property holders. As a licensor of intellectual property to a debtor,you may be secure in the notion thatthe license agreement you drafted is immune from being treated as anythingother than the personal, non-exclusiveand nontransferable license that yourclient intended it to be.

Likewise, as a patent or copyright licensee of a debtor, you may be equallyconfident that your basic rights to continue using the licensed technology areprotected pursuant to section 365(n) ofthe Bankruptcy Code even if the debtorattempts to reject your license.

If, however, in either case your assuredness about your p'osition caused

you to fail to object to a debtor's attempt to sell the intellectual propertyfree and clear of interests pursuant tosection 363(f) of the Bankruptcy Code,you may find that your rights have beenadversely affected.

Section 363(f) authorizes the sale ofproperty "free and clear of any interestin such property ofan entity other thanthe estate" in various situations, including when "such entity consents" or"such interest is in bona fide dispute."11 U.s.C. §§ 363(f)(2) & (4). Pursuantto these provisions, a party that claimsan interest in intellectual property possibly even when the claimed interest is the ownership of the intellectualproperty - may be at risk ofhaving thatinterest severed from the intellectualproperty if the party is put on notice ofthe debtor or trustee's adverse claim ofownership and intent to sell the intellectual property, but "consents" by failingto interpose a timely objection.

This is particularly so, where thedebtor or trustee has made a record thatownership of such intellectual propertyis in bona fide dispute, such as the existence of unresolved litigation over thenature or extent of the asserted interest

in the intellectual property. A timely objection to a transaction involving one's

intellectual property should resolve anyquestion of "deemed consent" and may

go some distance to creating an opportunity for an intellectual property holderto protect its rights, even where ownership of intellectual property is contestedby a debtor or trustee.

As for section 365(n)'s protections oflicensees from a debtor, while the rightto continue using intellectual propertypursuant to the terms of the licensemight seem guaranteed by the expresslanguage of the statute, bankruptcy caselaw has cast doubt on this assumption.At least one Court of Appeals has held,in interpreting an analogous provisionof the Bankruptcy Code, that the rightsincluded for contract parties in that provision are not meaningfully differentthan any other "interest" that a debtoror trustee may sell free and clear of.

Once again, however, a timely objectionmay be the predicate act that prevents alicensee from being stripped ofits rightswithout receiving anything ofvalue.

Pitfall #5: Assuming that you willhave more than a nanosecond to respond

to protectyour intellectualproperty inter

ests in a bankruptcy case.

Bankruptcy, by its nature, often requires quick action to monetize assetsthat are deteriorating in value. Businesses in many industries, especiallytechnology driven firms that are dependent upon human capital, often do notfare well in bankruptcy. Key employeesleave. Customer relationships sour.

This "melting ice cube" phenomenonmeans that a company may file for bankruptcy and immediately move for theauthority to sell substantially all ofits assets through an auction and sale processthat could be completed on less than 30to 45 days notice to creditors and otheraffected parties. The notice period provided to contract parties, such as thosewho may have licensed intellectual property to the debtor, is often significantlymore compressed. The winning bidderfor a debtor's assets may not be identified until after the conclusion of an auc-

tion that occurs only well into the saleprocess. That winning bidder then mayhave the opportunity to designate whichcontracts and which assets it wants totake as part of the transaction.

By the time formal notice is given (ifit is given) of the intent to transfer certain assets and contracts to the winningbidder, holders of intellectual propertyinterests may be left with no more thana few days to evaluate the bona fides ofthe potential acquirer and the terms ofthe proposed transaction, and to act onthat information to protect their rights.

While in some cases scenarios like theone above may be contrived to diminish the ability of contract parties to takeaction to block or increase the cost of atransaction, often it is the unavoidableconsequence of attempting to monetizeassets in a distressed environment. There

is not much for intellectual propertyholders to do, except to heed warningslike this one to be vigilant about whathappens in bankruptcy cases and to beproactive about asserting their rights.

Holders of intellectual property interests need to be aware of the ways theBankruptcy Code protects - and sometimes fails to protect - their rights. Aninherent level of uncertainty necessarilyarises from the Bankruptcy Code's imperfect attempt to harmonize the sometimes conflicting goals of intellectualproperty and bankruptcy law.

Careful planning for the advent ofa bankruptcy and vigilance concerningwhat may transpire in a bankruptcy caseare the twin keys to mitigating suchrisks and to maximizing the likelihoodthat intellectual property interests willbe recognized and respected in a bankruptcy scenario. ~

FOOTNOTE

1. The author would like to thank his coparticipants on the "Intersection of Bankruptcy and Intellectual Property" panel cosponsored by the United States BankruptcyCourt for the District of Delaware and theDelaware Chapter of the Federal Bar Association on September 11, 2008, to whomthe author is gratefully indebted for theirinsightful comments that helped inspire thisarticle.


;,,-, "c -, ';-, _' ,_.~:~~~!~J.~~-,\C~';:C':::_~~_"David Hricik

InfiniteThe many formsof conft ictsof interest inpatent litigation.1

Courts generally hold that, absent unusual circumstances, a lawyer may not

be adverse to a current client even in an unrelated matter. Generally, too,

this obligation is imputed to all lawyers associated with a firm: if one lawyer

is representing a company in a matter, no lawyer may be adverse to that cli

ent, even in a matter completely unrelated to the representation ofthe client.

~'.•..'_-.'Il atent litigation presents a variety of'!J ways for clients to be harmed, even

, when they are not parties to a suit.

, For example, suppose a firm rep-

resents a patentee against a non-client,

but another client of the firm is likely to

be sued later for infringing that same

patent. While the other client will not

be bound by claim preclusion doctrines

from contesting any findings made in

the first suit, and so as a legal matter

is not bound by any findings such as

those as to claims scope, for example, as

a practical matter one court's interpre

tation ofa patent may have some impact

on a later court's views. Is that adverse

"enough" to be "adverse?"

This article addresses adversity inthe context of current clients and pat

ent litigation. Obviously, representing a

patentee against a current client in an

infringement suit constitutes an adverse

representation. Beyond that, there are

less obvious actions that have been

held to constitute unethical behavior.

Indeed, if the cases are any indication,

there are few bright lines and instead

infinite combinations of circumstances

may lead to a conclusion that a law firm

is acting adversely to his current client.

This article addresses circumstances,

beyond the obvious "across the v" suit,

in which representing a patentee can be

an adverse representation. We will see


I

that even suits in which a firm repre

sents a patentee against a non-clientcan be "adverse" to a non-party client

of the firm.

Helping Out Behind the ScenesA firm that cannot represent a party

opposing a current client in litigationalso cannot help some other firm to dothe same thing, trying to avoid adversity solely by not making an appearancein court.2 Put the other way, if a firmwould be disqualified if it appeared incourt, it can't avoid disqualification by

simply acting only out of court. Insome ways, a firm that tries to help

out "behind the scenes" can be portrayed in even a harsher light than afirm that appears in court, since the

failure to appear can be characterized as a strategic, cynical decisiondesigned to "hide" the conflict.

In patent litigation, clearly this

case means that if a firm is pre

cluded from acting openly in court

- because, for example, the oppos

ing party is a current client of thefirm - then the firm cannot avoidthe conflict by simply not formallyappearing in court. The problem, aswe will see, is that adversity can exist even if the opposing party is nota current client of the firm, as next

shown.

Parallel Patent Litigation

Suppose, as happens, a firm is ap

proached by a patentee with a list ofpossible infringers. The firm deter

mines that out of the, say, five possibletargets, one is a client of the firm. Asshown above, the firm cannot representthe patentee against its client. Nor canit help some other firm in that suit.

Suppose the patentee-client retains

the firm, but only to sue the non-clientdefendants. It retains another firm to

act separately and file suit against thefirst firm's client. Is the first firm, nonetheless, disqualified from representing

the patentee against non-clients?

Two district courts have addressedthis issue in the context of patent litiga-

tion. Naturally, they split on their an

swer to the question. In the first case,

Enzo Biochem, Inc. v. Applera Corp., 3

the court found no adversity; a month

later the second court, in Rembrandt

Technologies, LP v. Comcast Corp.,4 did

find adversity. The cases are fact in

tensive. The Rembrandt court distin

guished Enzo and ordered disqualifica

tion, as follows:

In Enzo, the Hunton firm represent

ed a client in a patent case against

one defendant. The same plaintiff,

Afirm that cannotrepresent a party

opposing a currentclient in litigation also

cannot help someother firm to dothe same thing.

represented by the Greenberg firm,sued a different defendant. Some of

the same patents were asserted inboth cases. A client of the Hunton

firm, GE, later acquired the defendant being sued in the second case.

The Hunton lawyers representingthe plaintiff in the first case aided,to a certain extent, the Greenberglawyers representing the plaintiff

in the second case. GE contendedthat the Hunton firm's concurrentrepresentation of Enzo in the first

case and the GE subsidiary sued byEnzo in the second case amountedto an impermissible conflict of interest. GE intervened in the first case

and moved to disqualify the Huntonfirm. The court evaluated the evi-

dence and concluded that GE hadnot demonstrated a sufficient show

ing of direct adversity. The court

stated that "while the constructionof [the plaintiffs] patents applicable

to the infringement claims brought

against two separate accused infringers ... implicates pretrial Markman

overlap, the trials of how thoseconstructions apply to the respective accused products or conductare wholly separate." Enzo, 2007

WL 30338 at *7 (emphasis added).As a result, the court refused to dis

qualify the Hunton firm from repre

senting the plaintiff in the first case.The court agrees with Enzo that

the mere possibility of overlappingMarkman proceedings is insufficient

to show direct adversity, particularlywhen the trials of how the constructions apply to accused products or

conduct varies from defendant todefendant.

Here, in contrast to Enzo, F &

R is not simply advocating claimconstruction positions that might,

at some later date, adversely impactTime Warner. F & R advocates thatthe Comcast defendants infringethe patents because the defendantscomply with industry standards. Inparticular, F & R advocates in this

case that Comcast infringes becauseit adheres to the ATSC standard for

United States Patent No. 5,43,627("the '627 patent") and DOCSIS forUnited States Patent Nos.5,852,631,

4,937,819, and 5,719,858 ("the'631, '819, and '858 patents"). Thepractical significance ofRembrandt'sinfringement theory is to indict forpatent infringement all major cable

companies that follow the industrystandards. A finding of infringementand an injunction issued by this court

against a cable company for compliance with industry standards wouldhave a significant practical effect onTime Warner.

There are additional distinctionsbetween this case and the Enzo deci-


FEATURE

sion that lead the court to find the

requisite direct adversity. Rembrandtfiled its cases in the same district. Its

case against Time Warner is pendingbefore the same judge at roughly thesame time as this case, 'but this case

was filed first. Although it is true thatthe claim construction rulings in this

case would not be binding on Time

Warner, there is a likelihood that thepositions taken by F & R in this case

could, as a practical matter, prejudice

Time Warner in subsequent proceedings. As a result, on these

facts, this court reaches a differ-ent conclusion from the one inEnzo. F & R's representation ofRembrandt in this case is directlyadverse to Time Warner.

Thus, a firm may have a con

flict of interest even where it is not

adverse to a current client, and evenif it is not helping a firm to sue a

current client, if there is "enough"practical impact to establish directadversity. In Enzo, there was not

enough, but in Rembrandt, thefact that the patent covered a standard, the litigation was pending before the same judge, and the otherfacts tipped the scales in favor ofadversity.

Increasing a Client's Risk ofLiability Even WithoutParallel Litigation

Suppose a law firm is representinga client adverse to a non-client, butin the course of that representation,

the firm uncovers evidence that mightlead someone else to sue a client. Is thatadverse?

Maybe.

Even without parallel litigation, butsomewhat similarly, there are circum

stances "in which a lawyer's pursuitof a client's lawsuit or defense may beat odds with or detrimental to the in

terests of a person or entity that hasnot been joined in the litigation but

is being represented by the lawyer ina different litigation or transactional

matter." 5 Identifying precisely when

this sort of indirect adverse representation becomes an ethical violation is"difficult."6

As we'll see below, "difficult" maybe a severe understatement, at least in

the middle of the infinite spectrum ofcircumstances that can arise. On one

end of the spectrum, there are somerelatively easy cases. For example, rep

resenting a plaintiff against a defendant

who impleads a third party defendantwho is a client is adverse: if the non-

The mere fact that oneclient's victory willallow that client to

compete economicallyagainst another

cl ient is not enoughto establish an

adverse interest.

client is liable to the plaintiff, then theimpleaded client is liable to the defen

dant.' Similarly, adversity can ariseshort of actual impleading of the clientsuch as when a lawyer in a case againsta non-client will give the non-client

the ability to seek indemnity against

a client. S

On the other end of the spectrum,the mere fact that victory by a lawyer

for one client will allow that client tocompete economically against another client does not mean the lawyer isrepresenting an adverse interest. As ageneral matter, most states recognizethat "adversity" cannot be stretched sofar as to include mere economic com

petition.

In the middle are those "difficult"

cases. Two somewhat famous non

patent cases illustrate the fact-intensive,difficult, and arguably subjective nature

of this inquiry.

In the first, National MedicalEnterprises, Inc. v. Godbey,9 Baker Bottswas representing a client against a nonclient. A former client, Cronen, al

leged that while representing its client,Baker Botts might uncover evidencethat might lead to criminal chargesbeing brought against him. The TexasSupreme Court found that Baker Botts

was acting adversely to Cronen eventhough Cronen was not a party tothe suit, and there was no litigationplanned by anyone against him:

Even if Baker & Botts is correctthat resolution of the pendingcase will leave Cronen unscathed,Cronen's anxiety that his former

law firm is now vigorously advancing the same allegations thathave swirled around him for solong is certainly understandable.The chances of being struck bylightning are slight, but not slightenough, given the consequences,to risk standing under a tree in athunderstorm. Cronen is not likely to be struck by lightning in thepending case, even though he is

in the midst of a severe thunder-storm, but he is entitled to objectto being forced by his formerlawyer to stand under a tree whilethe storm rages on.

Id., 924 S.w.2d at 133.

The second, the well-l~nown case of

Fund ofFunds, Ltd. v. Arthur Andersen& CO.,IO illustrates this point. In Fund

of Funds, Morgan Lewis representedClient A. With Meister as co-counsel,it then represented Client B in a suitagainst King. At the time the King suitwas filed, Morgan Lewis knew that Client A intended to sue Client B. At thistime, Morgan Lewis repeatedly advisedMeister that it could not "make thecase" against Client B and said Morgan

Lewis lawyers would not participate inany consideration of wrong-doing by


Reliable Real Estate Service Since 1969

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Philip BergerOffice: 302-478-3800Res: 302-427-2251Cell: 302-547-6883

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third-party defendants to defend against athird-party complaint by alleging that thedefendant had no liability to the plaintiff);Pressman-Gutman Co., Inc. P. First UnionNat'l Bank, 459 F.3d 383 (E.D. Pa. 2004),on reconsideration, Pressman-Gutman Co.,Inc. P. First Union Nat'l Bank, 2004 U.S.Dist. LEXIS 23991 (E.D. Pa. Nov. 30,2004), mandamus denied, Pressman-Gutman Co., Inc. P. First Nat'l. Bank, 459 F.3d383 (3d Cir. 2006).

8. See Snapping Shoals Etec. MembershipCorp. P. RLI Ins. Corp., 2006 WL 1877078(N.D. Ga. July 5, 2006) (firm disqualifiedfrom asserting claim against non-client thatwould result in a client owing the non-clientindemnity). See NHBA Eth. Comm. Formal Op. 1989-90/17 (Aug. 25, 1990). Inthat opinion, the committee concluded thata firm could not represent a general contractor in pursuing a claim against a lenderwhere doing so would expose its other client, a developer, to a claim by the lender.(Although the opinion is couched in termsof material limitations, the issue could alsobe viewed as one of adversity.) "Directlyadverse" representations can arise in a variety of ways, apart from the circumstanceof taking action that will result in liabilityagainst a client. For example, current clientshave argued that their firms may not arguea "position" that affects their rights. See FlyingJ Inc. P. TA Operating Corp., 2008 WL648545 (D. Utah March 10, 2008) (denying motion to disqualify, though findinga conflict of interest, where firm could becreating arguments, facts, and positions inlitigation against a non-client that "couldbe applied" by "third parties" to the clientin litigation in which the firm would not beinvolved).

9. 924 S.w.2d 123, (Tex. 1996).

10. 567 F.2d 225 (2d Cir. 1977) (trialcounsel disqualified for receiving assistancefrom law firm which breached its duty ofundivided loyalty).

FOOTNOTES

punches in the suit against the non-cli

ent in order to avoid creating a record

that could harm your client," would

be the gist of such an allegation. Fee

forfeiture and other remedies may be

available to the patentee if the firm, for

example, failed to obtain a broad Markman construction in order to avoid in

fringement by its other client.

The ultimate lesson may be that firms

should monitor for conflicts in patent

litigation closely. The nature of patent

litigation, with sometimes common

multiple defendants, Markman rulings,

and indemnity obligations, means that

care and attention may be the only way

to spot the issues.•

I. The title comes from the song "InfiniteCombinations" by John Wesley Harding.Most of my articles have in their title a songby Wes. It's a long story.

2. B.F. Hutton & CO. P. Brown, 305 F.Supp. 371, 378-79 (S.D. Tex. 1969) (NewYork firm that had represented employeewas disqualified from assisting Houstonfirm in litigating against him in substantially related matter).

3. 468 F.Supp.2d 359 (D. Conn. 2007).

4. 2007 WL 470631 (E.D. Tex. Feb. 8,2007).

5. ABA/BNA Lawyer's Manual on Professional Conduct 51:111 (2001).

6. Id.

7. Richmond Am. Homes of N. Cal., Inc.P. Air Design, Inc., 2002 Cal. App. Unpub.LEXIS 6948 (Cal. App. July 25,2002) (finding adversity because procedural rules allow

The consequences may not be as

clear, however.

Whenever a firm knows that its pat

entee-client contemplates parallellitiga

tion, the firm should analyze whether

that litigation could result in either

adversity under the facts and circum

stances or the need to communicate

and coordinate with a firm representing

the patentee to a degree prohibited by

the principle that "helping out behind

the scenes" is improper. Either circum

stance could be deemed to be unethical

and warrant disqualification.

Second, firms ought to consider an

issue not litigated in any of these cases:

the risk that the patentee-client may lat

er claim that the firm's ability to repre

sent its interests was materially limited

by the firm's representation of the party

accused of infringement in the paral

lel case, the impleader action, or the

possible later claim. "You pulled your

its Client B. Nonetheless, the court

held that Morgan Lewis was disquali

fied because it had violated its duty of

loyalty to Client B because the firm had

examined documents which touched on

Client B's liability to Client A and had

otherwise investigated and assisted in

the prosecution of a claim against a cur

rent client.

In light of these cases, adversity can

arise even where the firm is doing its

best to avoid "making the case" against

its client, and even where no impleader

has taken place, and may not even be

contemplated.

Implications andRecommendations

Two principles emerge. First, adver

sity does not depend upon appearing in

court against a client; it can arise even

when a firm does not actually appear in

a case, and even if the case'is not filed

against its own client. Second, disquali

fication often turns, not on the normal

bright line that accompanies the proto

typical "across the v" conflict, but in

stead on the facts and circumstances of

each case.


FEATUREChristina M. HillsonJennifer Fraser

!/:.

t·····.:·····•... ~.;c,;,",' <:::. ,

False or MiSleading?>Honesty isthe best policy,but in trademarkapplications anhonest mistakemay be fraud.

Could this happen to you? A client calls, very excited, because he's just

launched a new business. He wants you to file a trademark application for

him. You explain what information is required and what constitutes "use in

commerce" in the trademark world, and ask him for which products he is

using the mark. He explains that he is using the mark on clothing. You get

the date ofhis first sale in commerce, a specimen ofthe mark being used on

a clothing hang tag, and file the application. Along with the application is a

declaration signed by the client confirming the accuracy of the application

information, including the use on the goods.

FOur months later you receive an Of

fice Action from the United States

Patent and Trademark Office ( the

"PTO") requiring more specificity

regarding "clothing." The Examining

Attorney helpfully suggests: clothes,

namely women's, men's, and children's

shirts. You forward this Office Action

to the client along with a letter explain

ing the Examining Attorney's require

ments and recommendation.

The client, extremely busy at this

point with his new business, is only too

glad to accept the recommendation

and obtain his trademark registration.

Unfortunately, the client has sold only

women's and men's shirts under the

mark, not children's shirts. The regis

tration that issues will be vulnerable to

cancellation for fraud.

After the Trademark Trial and Ap

peal Board's (the "Board") decisions

in Medinol Ltd. v. Neuro Vasx Inc.! and

Standard Knitting, Ltd. Po Toyota ]i-


dosha Kabushiki Kaisha,2 such a seem

ingly innocent misstatement could have

just such serious consequences.

The Board in Medinol found that

including both "neurological stents

and catheters" in the Statement of Usewhen the mark was used only for cath

eters constituted fraud thereby resulting in cancellation of the entire registra

tion. Medinol, 67 U.S.P.Q.2d at 1210.

The Board stated that "knowledge that

[respondent's] mark was not in use onstents - or its reckless disregard for the

truth - is all that is required to estab

lish intent to commit fraud in theprocurement of a registration." Id.

Registrant's subjective intent is not

relevant in assessing fraud but the

objective manifestation of that intentis relevant and must be inferred from

the circumstances. Id. at 1209.Trademark practitioners won

dered whether Medinol was an aber

ration and whether other mistakes

would have such severe consequenc

es. On January 10, 2006, the Board

issued another precedential decision

on the issue, once again confirmingthat mistakes in claiming use willresult in cancellation of the registra

tion based on fraud.In Standard Knitting, the Board

reiterated this strict standard andfound Standard Knitting committed

fraud because offalse statements in con

nection with claiming use on children'sclothing, when the marks were used for

other clothing. Standard Knitting, 77U.S.P.Q.2d at 1928. The Board noted

that it was not reasonable for the individual who signed the applications tobelieve that making the goods, or using

the goods in the past, supported a state

ment of current use. Id. at 1927.Generally in Trademark law, fraud

arises when the applicant makes materialrepresentations of fact in its declaration

which it knows or should know to be

false or misleading while procuring orrenewing a registration. Torres v. Cantine Torresella S.r.l., 808 F.2d 46, 48-49(Fed. Cir. 1986). Medinol and its prog-

eny might have altered the landscape, at

least with regard to claims of use.

As the concept of "use" might be

confusing to many trademark appli

cants, could a misunderstanding regarding use in commerce or use of broad

or perhaps awkwardly crafted wording

result in fraud and cancellation of theentire registration? After Medinol and

Standard Knitting, the answer is quite

simply "yes."

Many registrations currently foundon the Principal Register could be vul

nerable, judging by the extensive and

Is the mark in actualuse in commerce for

all the goods listed? Ifnot, whether the error is

deliberate or innocent,the registration could

be cancelled.

varied listings of goods and services. If

the mark was not in actual use in commerce for all the goods listed, it might

not necessarily be the result ofa deliber

ate misrepresentation, but after Medinolthe consequences could be the same.

Many trademark practitioners recall

conversations with clients who haveasked for an explanation of"use in com

merce" and, in the process ofprovidingan explanation, have clarified that mere

incorporation, registering a domain

name, or sending artwork to the ad

agency, for example, does not constituteuse in commerce.

Additionally, many practitioners havereviewed Web sites, advertising, and/orlabels and have questioned whether theidentification of goods and services is

entirely accurate. After all, the identifi

cation is often the result of an Examin

ing Attorney's requirement and is fre

quently defined prior to use. We must

also wonder whether our careful expla

nations of use in commerce are relayedto the appropriate business units within

a large organization.

Attorneys filing trademark applications should now think differently

when filing a use-based application, a

Statement of Use, or an Amendment to

Allege Use. When a foreign client sends

a letter requesting that a Statement of

Use be filed, we must be certain that

the client understands "use in com

merce," that legitimate use has beenmade for all the goods and services,

and that the identification of goodsand services accurately describes the

goods or services in use.

Perhaps there is now a need tofollow up with clients on this is

sue, ask for more specimens than

are required, and repeatedly explain

the meaning of "use." Many of us

already provide explanations of useand provide clients with checklistswhen forwarding the Notice of Allowance, but are we certain theseexplanations are understood and re

layed to the appropriate people?

Unfortunately, the Board hasopined on these issues in only a hand

ful of cases. Those cases do not provideclear guidance for many of the day-to

day scenarios encountered by trademark

attorneys and do not offer clear solutionsin the event a mistake is uncovered. The

Board has left open the possibility thatthere are "circumstances" where a misstatement does not constitute fraud.

In a 2006 decision, Maids to OrderojOhio, Inc. v. Maid-to-Order, Inc. ,3 the

Board rejected a claim of fraud where

a "layperson" was uncertain about themeaning of "use in commerce" and, inthat case, a potentially mistaken belief

was sufficient to negate the inferenceof fraud. The Maids to Order decisionmight provide guidance as to scenariosthat do not amount to fraud. This de-


FEATURE

cision cited the testimony of the company president, specifically referredto the president as a "layperson," andprovided excerpted testimony regarding

her understanding of the .legal concept"use in commerce."4 Maids to Order, 78U.S.P.Q.2d at 1906-7.

In contrast to Medin 01, Standard

Knitting, and other cases involving aclaim of use made for particular goods,which a layperson can or should know,Maids to Order might provide insightinto .situations where an ambiguous

claim of use does not rise to the level offraud. This concept might have beenforeshadowed in Medinol, whereinthe Board noted "[n]either the identification of goods nor the statementof use itself were lengthy, highlytechnical, or otherwise confusing,and the President/CEO who signedthe document was clearly in a position to know (or to inquire) as tothe truth of the statements therein."Medinol, 67 u.S.P.Q.2d at 1210.Although such language might suggest a demarcation in what constitutes fraud, it does not provide certainty for the practitioner.

The Board is still refining itsposition on fraud and two very recent opinions give some additionalguidance. In University Games Corp.

v. 20Qnet Inc.,s the Board denied aMotion for Summary Judgment basedon fraud. The application was use-basedand claimed use for "board games, teeshirts, and supporting promotionalmaterials including videos and paperproducts."

During prosecution and in responseto an Office Action, the applicantamended its goods to "a board gamefor correctly identifYing well-knownpersons, places, things and years using

game cards and board pieces," deletingthe other claimed goods.

According to the Board, such anamendment during prosecution "constitutes a rebuttable presumption thatopposer lacked the willful intent to deceive the Office." University Games, 87

U.S.P.Q.2d at 1468 (emphasis added).In this case, the Board confirmed its dicta in Hurley International LLC v. Volta,

6 that indicated an amendment prior to

publication which corrects a misstatement as to goods or services "does notrise to the level of fraud...." Hurley

International, 82 U.S.P.Q.2d at n. 5.Judge Walsh, in his concurrence

in-part/dissent-in-part in UniversityGames, went further and opined thatthe amendment, prior to any challengeto the application, "should preclude

a fraud claim." University Games, 87

AIPLA wants a rule"that will appropriately

sanction trulyfraudulent acts without

stripping trademarkowners of their rights

due to innocentmistakes,/I

U.S.P.Q.2d at 1469 (emphasis added).Interestingly, Judge Walsh then

penned one of the most recent Boardopinions on the subject offraud, Grand

Canyon West Ranch, LLC v. HualapaiTribe,? and apparently relied on hisown concurrence/dissent in UniversityGames to support a conclusion that anattempted amendment to the goods orservices after a challenge has been filedis not enough to preclude a claim offraud. Grand Canyon West Ranch, 2008

WL 2600669 at *21. This appears tosuggest that an amendment before achallenge might be enough to precludefraud; however, this is far from clear.

So far, the Federal Circuit has notweighed in, although a very recentfraud case will be considered on appeal:

Bose Corp. v. Hexawave, Inc. sTrademark

practitioners will be paying close attention. In this case, Bose's federal trademark registration for the mark WAVEfor "radios, clock radios, audio' tape recorders and players, portable radio andcassette recorder combinations, com

pact stereo systems and portable compact disc players" came under attack inan Opposition proceeding.

The applicant, or defendant in theOpposition proceeding, asserted acounterclaim of fraud against the registration claiming that, at the time of re-

newal, a false declaration of use hadbeen filed with the PTO.

Bose's in-house counsel arguedthat, in signing the declaration ofuse, he had made a good-faith legalconclusion that the shipment of"audio tape recorders and players" bearing the mark to and from customersfor repair constituted use. "Use incommerce" under Trademark law

is, after all, the sale or transport ofmarked goods in commerce. However, this argument was deemed unreasonable and therefore fraudulentby the Board, and it cancelled theentire registration due to fraud inthe renewal.

The Bose case is currently beingbriefed, and the American Intellec

tual Property Law Association ("AIPLA"), clearly interested in the Medinol

line of cases, has filed an amicus curiaebrief in support of Bose's appeal.9

In its brief, AIPLA "urges the Courtto adopt a fair and uniform approachthat will appropriately sanction trulyfraudulent acts without stripping trademark owners of their rights due to innocent mistakes." The organization'sposition is that "mistakes made withoutany intent to deceive or not having a

material effect on the scope of the registration do not amount to fraud."

AIPLA also urges the Court to recognize that an erroneous conclusionof law should not necessarily support afinding of fraud. And, indeed, the "intent" of Bose's counsel in coming to his


legal conclusion, while no doubt pushing the envelope of the definition ofuse,

would not appear to rise to this level.This could be compared with FederalRule of Civil Procedure 11 's standardfor sanctioning attorneys' erroneousassertions of law that states that legalcontentions are acceptable if "warranted by existing law or by a nonfrivolousargument for extending, modifYing, orreversing existing law or for establishingnew law."

AIPLA also contends that theBoard's view on the "materiality" of a

mistake in determining fraud is circular. The Board's reasoning is that any

"wrongly recited goods or services arematerial because the registration wouldnot have issued in thatform without theerroneous statement."

AIPLA "suggests that materiality instead should be judged ba~ed on howrelated the non-used goods are to othergoods properly included in the registration, and whether the inclusion of thosenon-used goods had any significant impact on the public."

This element of materiality is closelyrelated to the element of injury, andAIPLA argues to the Court that the"public may not suffer any real injurywhen a registration properly coveringvarious goods inadvertently includes another highly related product on whichthe registrant was not using the mark atthe time."

This conclusion is illustrated by oneof the most recent fraud decisions by theBoard, Sierra Sunrise Vineyards v. Mon

telvini S.P.A.lO In this case, the Boardcancelled a federal trademark registration for "wines, spirits and liqueurs"based on the fact that the foreign ownerhad not imported "liqueur" under themark. Realistically speaking, it is doubtful that the over-inclusion of the related"liqueur" in a description of "wine andspirits" would likely have a significant

impact on the public.So, for the time being, it is not

known whether the Federal Circuit willagree with the Board's analysis of fraud

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FEATURE

under the Medinolline of cases. It will

be interesting to see whether district

courts, which are on the front lines of

fact-finding, will encounter circumstances establishing fraud "to the hilt."And whether there will be a proliferation of successful claims under Section38 of the Lanham Act, which providesa civil remedy for fraudulent registration. 35 U.S.C. § 1120 ("Civil liability

for false or fraudulent registration: Anyperson who shall procure registration inthe Patent and Trademark Office of amark by a false or fraudulent declarationor representation, oral or in writing,or by any false means, shall be liablein a civil action by any person injuredthereby for any damages sustainedin consequence thereof.") It is onething to lose your federal trademark

registration to allegati.ons of fraud,and quite another to be civilly liable

to your opposing party.At this time, practitioners are not

entirely certain as to how to dealwith Medinol and its progeny. One

thing is certain: Until the Boardand the Federal Circuit have furtherdelineated what circumstances constitute fraud, the Board can expectto see increased allegations of fraudin opposition and cancellation proceedings. Clients and practitionerscan also expect to defend such al

legations.Some practical tips to remember

include the fact that trademark rightsstill exist with regard to the goods orservices that have been offered in connection with the mark even if a client'sfederal registration is vulnerable or voidunder MedinoFs fraud standard. Thesecommon law rights can, and should,be defended despite a potentially faultyregistration.

Of course, if a client is consideringusing its federal registrations as a sword,rather than a shield, trademark practitioners are well advised to perform theirdue diligence carefully and to thoroughly consider whether the registrations to be asserted are vulnerable to

cancellation.

If a client's federal registration is

vulnerable or void, one immediatecourse of action is to file new applica

tions covering just goods or servicesactually being offered. When filing these"bullet-proof' applications, consider

filing only the goods or services in oneclass per application, or perhaps evenmore narrowly.

This alternative, although perhapscostly, will force the client to focus onthe actual goods or services being offered and, if a problem should arise withone registration, will leave the client

It is one thing tolose your federal

trademark registrationto allegations

of fraud, and quiteanother to

be civilly liable.

with others on which to fall back.Another problem area is with Affi

davits of Continued Use under Section8. Particular attention should be paidto these affidavits, especially in situations involving U.S. registrations basedon foreign registrations. Many timesthose descriptions ofgoods and serviceswill need to be narrowed significantly.Candid discussions with the client as toexact use of the mark in commerce areimperative in these situations.

In fact, it is prudent to explain to alltrademark clients, in writing, that a misstatement to the Trademark Office regarding the goods or services offered inconnection with a mark can result in thecancellation of the entire registration.

Always keep in mind that the Trade-

mark Office requires sworn declarationsof use in which the trademark ownerconfirms that the mark is being used in

commerce on all of the goods or services listed in the application or registration.

After Medinol, there is little room forerror and a wary practitioner can helpclients avoid a problem under the current fraud standard and protect theirfederal trademark registrations.•

FOOTNOTES

1. 67 U.S.P.Q.2d 1205 (T.TA.B.2003).

2. 77 u.S.P.Q.2d 1917 (T.TA.B. 2006).

3.78 U.S.P.Q.2d 1899 (T.TA.B. 2006).

4. In this case, the federal registrationfor the mark at issue was for use in connection with "cleaning of domesticand business premises." The owner ofthe mark was an Illinois company thatconducted its cleaning business almostexclusively in Illinois. The evidence introduced regarding use in interstatecommerce included two actual instancesof providing services in another state inthe 1970s and invoices and checks toand from corporate clients whose headquarters were located outside ofthe state,although the cleaning services were performed in Illinois at corporate apartments. The Board specifically stated thatwhile the evidence was not "conclusiveon the question of whether [registrant]has in fact used the mark MAID TOORDER in interstate commerce" it was

sufficient to negate an inference of fraud.Maids to Order, 78 U.S.P.Q.2d at 1906-7.

5. 87 U.S.P.Q.2d 1465 (T.T.A.B. 2008).

6. 82 U.S.P.Q.2d 1339 (TT.A.B. 2007).

7. 2008 WL 2600669, (Trademark Tr.& App. Bd.), June 30, 2008, OppositionNo. 91162008 to Application Serial No.76484111 filed on 1/23/2003.

8. Docket No. 2008-1448, U.S. Court ofAppeals for the Federal Circuit, Appeal fromthe TTA.B. of Opposition No. 91157315[not precedential].

9. Brief of Amicus Curiae American Intellectual Property Law Association In Support of Bose Corporation and Reversal,Bose Corp. v. Hexawave, Inc., September 10,2008, Docket No. 2008-1448 ("Brief').

10. Cancellation No. 92048154 to Registration No. 2,293,853 (September 10,2008) [not precedential].


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FEATUREKevin R. Casey

The court'sftedgling programhas provento be surprisinglysuccessful.

The u.s. Court of Appeals for the Federal Circuit hears appeals from the

U.S. Patent and Trademark Office in patent and trademark matters, and

from all of the district courts countrywide in patent infringement cases.

Along with other subject matter such as copyrights and trade secrets, pat

ents and trademarks fall within the category of "intellectual property" or

IP. IP cases are among the most complex and costly to litigate, and among

the most difficult to resolve via mediation. Perhaps for these reasons, many

people have thought a lot about, and have addressed with great passion, the

topic of mediation at the Federal Circuit.

This article addresses the topic in fivesections. The article briefly outlines what the process ofmediationentails, explains existing appellate

mediation at the federal level, providesa history of mediation at the FederalCircuit, summarizes the relatively newFederal Circuit mediation program,and concludes with a look at the futureof mediation at the Federal Circuit.

I. What is Mediation?There is no shortage of literature on

the topic ofmediation. See, e.g., B. Picker,

"Mediation Practice Guide" (AmericanBar Association Section of DisputeResolution, 2d ed., 2003). Mediationis a non-binding process designed toresult in a settlement agreement thatis an enforceable contract. The partiesare free to define the parameters of theprocess; it is both flexible and informal.The Federal Rules of Evidence andFederal Rules of Civil Procedure areinapplicable.

The mediator does not imposeany judgment on the parties. Rather,

- ,24 DELAWA~E LAWYE~ WINTER 2008/2009

the mediator changes the dynamicsof settlement negotiations througha structured process designed toencourage compromise. When mediation occurs before trial, some haveexpressed concern that they will educatethe opposition via candor that mightultimately hurt their case. Especiallyat the appellate level, however, whereall issues should have been vettedat trial, mediation is substantiallyrisk-free.

In addition to mediation, a numberofother "alternative dispute resolution"or ADR tools, alternatives to litigation,are available. Among these alternativesare settlement negotiations, arbitration,early neutral evaluation, summary jurytrials, mini-trials, private judging, factfinding, and hybrid processes (e.g.,mediation-arbitration or "Med-Arb").

Each alternative has its place inthe toolkit of those tl"lfing to resolvea particular dispute at a particulartime. Few of the other alternatives arebetter suited for implementation at theappellate level than mediation.

II. Background:Appellate Mediation

The Federal Circuit became thethirteenth federal court of appealin 1982. The jurisdiction of the 12regional U.S. courts of appeal islimited by geography. In contrast, thejurisdiction of the Federal Circuit isdefined by subject matter. Interestingly,all ofthe other 12 regional circuit courtshad existing mediation programs wellbefore 2005, with the first implementedin 1974. The Federal Circuit was thelast holdout. For more informationon the various appellate mediationprograms, see R. Niemic, "Mediation& Conference Programs in the FederalCourts of Appeals" (Federal JudicialCenter, 2006).

A. Key Factors for SuccessWhat have these existing programs

taught us? There are a number of keyfactors that affect the likelihood ofsuccess for a mediation. See K. Casey,"Mediating IP Disputes: Seven Keysto Success," 9 Intellectual PropertyLaw Newsletter 1 (Pennsylvania Bar

Association Intellectual Property LawSection, Spring 2005). Four of themore important factors are mediatorqualifications, case selection, themediation structure, and practiceculture.

First, selection of the mediator iscritical to the success of the processand perhaps the most importantfactor. The mediator must manage theprocess, control and direct the parties,offer creative solutions, break impasse,establish credibility, and more. Manymediations fail through mismatchbetween mediator and case.

Second, some cases are more suitedto mediation than others and, therefore,case selection is also important to thesuccess of a mediation program.

The structure of the mediationprocess is also critical. When mediationoccurs affects the likelihood of success. If the process begins too early,the parties may not have enough information to resolve their dispute. Iftoo late, the advantageous cost andtime savings which often drive partiesto mediation dissipate.

Other practical factors - such aswhich party representatives attend,whether the mediation is done in personor by telephone or even online, andmany more - also affect success.

Finally, certain industries are already comfortable with ADR andhave incorporated it into their culture.Consider many employment disputesor baseball arbitration. Unfortunately,IP is not yet one of those fields. Butmany in the field are working towardthat goal.

B. AssessmentsWhat have been the assessments of

existing appellate mediation programs?The mediation settlement rates ofexisting appellate programs range fromabout 25% to 75% across all circuits incivil cases, depending on the factorsidentified above. In terms ofsaving time,about halfofthe appellate mediations areconcluded faster than the appeal wouldhave taken; the other halfare concludedin about the same time frame.

Although cost savings may be

achieved, they should not be expectedduring the appeal. The data reportinsignificant savings. Consider thesavings, however, if further proceedingsare avoided by settlement.

Perhaps the most important assessment is how the participants ultimatelyview their mediated outcome. Mostevaluate appellate mediation positively.A positive evaluation is not surprising,as a compromise settlement is often"better" than an appellate judgment.This is especially true because it avoidsthe suggestion for panel rehearing andpetition for en bane proceedings (filedin over 90% of Federal Circuit cases),petitions for certiorari, and remandsto the trial tribunal. Some cases havebounced between the district court andFederal Circuit multiple times.

III. History of Mediation atthe Federal Circuit

The Federal Circuit rules expresslyrequire the parties to discuss settlement.See Fed. Cir. R. 33 (appeal conferences).Although the parties' own, unfacilitatedefforts to settle cases on appeal areoften ineffective, the Federal Circuit'sadoption of its mediation program in2005 was accomplished in the face ofsignificant controversy. An hour-longintroductory program at the secondannual Bench and Bar Conferencesponsored by the Federal Circuit BarAssociation (FCBA) in 2000 touted theadvantages of mediation. Discussionwith several court personnel followingthe presentation revealed an appreciation for the process but disinterest inapplying it to Federal Circuit appeals.

At least six reasons were expressedto justify the court's initial reluctanceto adopt a mediation program: (1) incentives to settle are reduced on appeal;(2) opportunities to discuss settlementare reduced on appeal; (3) complexpatent cases are ill-suited for mediation(how ironic that patent cases comprisethe bulk of those now settled by theFederal Circuit's mediation program);(4) when the government is a party,settlement approvals are problematic;(5) there is only a small group ofmediators available; and (6) timing


FEATURE

concerns in that the court lacked abacklog and did not want mediationdelays to affect the favorable status quo.

Nevertheless, the FCBA formed aDispute Resolution Committee (DRC).The court's clients or' customers members of the FCBA - flocked inlarge numbers, initially more than 50,to join that committee. The committeecontinues to generate great interest.DRC representatives worked withthe Federal Circuit Advisory Councilin recommending mediation to theFederal Circuit, and then worked withthe judges of the court to help developa pilot program. Chief Judge Paul R.Michel has been a terrific supporter ofthe court's mediation program.

IV. The Federal CircuitMediation Program

On October 3, 2005, the FederalCircuit initiated its Appellate MediationProgram. The program is authorized byan en bane order, revised on September18, 2006, and is operated in accordance

with a set of Guidelines, last revisedon May 1, 2008. Relevant materialsare available on the court's Web site:www.cafc.ttscourts.gov. A three-judgepanel monitors the program; the courtwants to see the program work. Theexpressly stated purpose of the programis perhaps self-evident, i.e., to help theparties settle.

The program was entirely voluntaryat the outset; counsel could jointly askto participate. Although court resourcescontinue to be available for voluntaryrequests, subsequent amendmentsnow make mediation "mandatory" forselected cases. Thus, parties enter theprogram either upon selection by thecourt staff, or by filing a confidentialjoint request to enter the mediationprogram.

Ofcourse, the mediation ceases onceit appears that mediation will not befruitful, so "mandatory" is a relativeword. But the court does not hesitate toorder the parties to a mediation session

even if one or both parties do not wantto try mediation. Curiously, the courtreports a slightly higher settlement ratefor those cases where one party camereluctantly than when both parties wereinitially willing to try mediation.

A Chief Circuit Mediator has beenappointed to administer the program.His name is Jim Amend and he isassisted by a Circuit Mediation Officer,Wendy Dean. Together, they select casesand mediators "as early as possible." Todo so, they review the record and theparties' own assessment provided in aninitial Docketing Statement that, amongother items, asks whether the case maybe amenable to mediation. They alsoconduct a telephone assessment.

The FCBA was asked to compile alist of mediators who, preferably, arenot in active practice. The requirementsto qualify as a mediator are somewhatflexible. The mediators receive nocompensation, but for minor expenses.The mediator list is available on the

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court's Web site. For those who mediate, an application form is also availableon the court's Web site.

Based on its order and the authorityprovided in FRAP 33, the court haspublished guidelines for the program.The mediation process is confidential.Certain cases are excluded fromselection for the program; namely, prose cases. The appeal proceeds in parallel- sensitive to the court's desire to keepcurrent on its case load - but the courtgrants consent motions for extensionsof time to allow mediation as needed.

V. FutureThe trend is toward settlement

of civil cases. A recent study by theAmerican Bar Association showed that98.2% of civil cases settled after thecomplaint was filed. This statistic augerswell for the Federal Circuit's mediationprogram.

Despite the finality of .the judgmentbeing appealed, each party has asignificant risk that it will still lose on

appeal. Statistics show a reversal ratesomewhere between 35% and 50% onthe issue of patent claim construction.This statistic, too, bodes well for thesuccess of the mediation program.

And the court's fledgling mediationprogram has proven successful. Thecourt has consistently helped the partiesto resolve their patent appeals throughmediation in over 40% of the patentcases selected for the program. Inremarks presented at the Annual Benchand Bar Conference of the FCBA heldJune 25-28, 2008 ("the Conference"),ChiefJudge Michel noted the followingstatistics: 65% ofpatent cases are decidedby the court, 12% are settled by theparties, 9% are dismissed by the court,and 8% are resolved by the court'smediation program.

Chief Judge Michel supports theprogram as a way to give the courtdocket relief, case management assistance, and enhanced service to litigants.His support appears warranted. Helped

by its mediation program, the court hasbeen able to issue opinions within threemonths after oral argument in about80% of its cases.

Clearly, the program will requiremonitoring and shaping. Many issuesmust be resolved. For example, partiesoften neglect to complete and file aDocketing Statement (available on thecourt's Web site). In those instances,the court sends a reminder letter.

More substantively, when the partiessettle during the appeal process, perhapsliterally on the steps of the FederalCircuit courthouse on Lafayette Squarein Washington, D.C., will the courtvacate the decision being appealed?

In efforts to enhance the success thatthe mediation program of the FederalCircuit has already enjoyed in its shortexistence, Chief Circuit MediatorAmend identified at the Conferenceeight impediments to settlement ofpatent cases on appeal. The impedimentsare: (1) the case involves a "troll" (which

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FEATURE

3021837-1600 • continuing·[email protected] • www.pcs.udel.edulparalegall

BIBLIOGRAPHY

become familiar with the FederalCircuit's mediation program and,in your next patent case, be ready toparticipate. And the odds that you justmight settle the case through mediationare good.•

Niemic, Robert J., Mediation & ConferencePrograms in the Federal Courts of Appeals,www.fjc.gov (2006).

Casey, Kevin R., Mediating IP Disputes:Seven Keys to Success, 9 Intellectual PropertyLaw Newsletter I (Pennsylvania Bar Association Intellectual Property Law Section,Spring 2005).

Wissler, Roselle L., The Effectiveness ofCourt Connected Dispute Resolution in CivilCases, Conflict Resolution Quarterly, vol.22, no. 1 2, (Fall-Winter 2004).

Lande, John, Commentary: Focusing onProgram Design lsstles in Futtlre Researchon Court Connected Mediation, ConflictResolution Quarterly, vol. 22, no. 1-2, (FallWinter 2004).Newman, Schultz Sandra and Friedman,Scott E., Appellate Mediation in Pennsylvania: Looking Back at the History and Forwardto the Futtlre, Pennsylvania Bar AssociationQuarterly (July 2004).

Picker, Bennett G., Mediation PracticeGuide (American Bar Association Section ofDispute Resolution, 2d ed., 2003).Scanlon, Kathleen A., A Case for JudicialAccountability: When Courts Add a Settlement Detour to the Traditional Appellate«Path," 17 Ohio State Journal on DisputeResolution 379 (2002).

Bernard, Claudia L. and Caulfield, BarbaraA., Alternative Dispute Resolution at the Appellate Level, Federal Circuit Bar AssociationSecond Bench & Bar Conference (June 18,2000).Goelz, Christopher A. and Watts, MeredithJ., Federal Ninth Circuit Civil AppellatePractice, Chapters 1-7, Rutter Group Practice Guide (2000).

Kinnard, Stephen 0., Mediating the DecidedCase: What to expect ifyou're looking to settleat the appellate level, Dispute ResolutionMagazine, Volume 5, Number 4 (Summer1999).Niemic, Robert J., On Appeal: Mediationbecoming more appealing in federal and statecourts, Dispute Resolution Magazine, Volume 5, Number 4 (Summer 1999).

Lynch, Daniel P., Third Circuit Appellate Mediation Program has a new director,Pennsylvania Bar News (April 13, 1998).

Duffy, Shannon P., Mediation ProgramComes to 3rd Circuit, Arbitration and Mediation - A Special Supplement (November1995).

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millions (the "lottery" case); and (8) aparty believes it is entitled to attorneyfees or enhanced damages. The court isin the process of refining the selectioncriteria for, and the techniques usedin, its mediation program to take theseimpediments into account and improvethe program.

Ultimately, however, the success ofthe program depends on the partiesusing it. The court likely would, as itshould, cancel the program at somepoint if they do not. Attorneys doa disservice to their clients withoutplacing the appropriate case in themediation program. In addition, it isperhaps a breach of ethical duty not toat least advise clients of the existenceand availability of the court's mediationprogram.

In summary, the belief that IP casescannot be mediated with sufficientsuccess rates to justify an appellatemediation program has been dispelled.The consequence is that you should

might be defined as a non-inventiveentity with no commercial product thatacquires and asserts overbroad patents inan attempt to extort a toll from others)and the defendant company wishesto avoid a "bulls-eye" inviting furtherlitigation; (2) party representatives withsettlement authority are not presentfor the mediation session; (3) the partyhaving lost the judgment appealed isreluctant to mediate (this is perhapscounterintuitive, since the winning partymight be viewed as more reluctant, butthe cost of rolling the die on appeal canappear small relative to the cost alreadysunk into the case); (4) the patent washeld invalid (one solution might beto ask the district court to vacate itsinvalidity holding as part ofa settlementaward); (5) counsel is representing theappellant on a contingent fee basis; (6)an emotional, entrepreneurpatent ownerappeals a loss and seeks "justice"; (7) asummaryjudgmentofnon-infringementis appealed and the plaintiff seeks

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