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Pleading Precedent

The problem is well known. Academics, attorneys and businesses involved in patent infringement suits have complained about it for decades. Even the courts have acknowledged the gravity of the situation.

The problem, as the Federal Circuit wrote in the 1988 case Burlington Industries v. Dayco Corp., is "the habit of charging inequitable conduct in almost every major patent case." The court went on to describe this problem as an "absolute plague." And the plague has not abated since the court penned those words 21 years ago.

Inequitable conduct remains a powerful legal weapon for accused infringers. If a defendant can prove the plaintiff obtained its patent by intentionally misleading the patent office, the entire patent becomes unenforceable.

"It's the nuclear option. That's why everybody [accused of infringement] pleads it. It's always in their best interest to plead it," says Kevin Noonan, a patent attorney at McDonnell Boehnen Hulbert & Berghoff.

Those pleadings, however, are clogging up the courts and making patent infringement suits significantly more costly and time-consuming. A case can remain in limbo for years while the parties fight over a defendant's attempts to discover information about a plaintiff's possible inequitable conduct.

The Federal Circuit recently struck back. Its ruling in Exergen Corp. v. Wal-Mart Stores Inc. toughened the standards for pleading inequitable conduct.

"It will be much more difficult to craft an allegation of inequitable conduct that will withstand scrutiny under this new standard," says Peter Midgley, a member of Zarian Midgley & Johnson who represents one of the defendants in Exergen.

The ruling will alter significantly the conduct of patent infringement litigation, according to many experts. But the long-term results of Exergen may surprise the courts.

Unexpected Decision

When it began, the Exergen case didn't seem like a groundbreaker. A small private firm, based in Watertown, Mass., Exergen owned several patents on infrared thermometers that measure human body temperature. The company sued in 2001, alleging these patents were infringed by thermometers sold at Wal-Mart and manufactured by S.A.A.T. Systems Application of Advanced Technology (SAAT), an Israel-based firm. Wal-Mart settled, but SAAT decided to fight.

In 2002, SAAT moved to amend its pleading in order to allege that Exergen obtained the patents at issue through inequitable conduct. The federal district court in Massachusetts denied this request, saying the allegations of inequitable conduct were too vague.

A jury subsequently found SAAT guilty of willful infringement and determined it should pay more than $2.5 million in damages. Exergen appealed, seeking greater damages and prejudgment interest. SAAT appealed, too, asserting that it had not infringed Exergen's patents and that the lower court had acted incorrectly when it refused to allow SAAT to amend its claims with allegations of inequitable conduct.

The Federal Circuit's decision gave something to both parties. A three-judge panel ruled in August that SAAT's thermometers did not infringe Exergen's patents--a big victory for SAAT. Then the panel protected Exergen from SAAT's inequitable conduct claims, imposing tough pleading standards for inequitable conduct claims and finding that SAAT's amended pleading failed to meet these standards.

"The Federal Circuit was perhaps looking for an opportunity to make law in this area," Midgley says. "The ruling [on inequitable conduct] ... was more thorough and detailed than either party had asked for."

Playing by the Rule

For years, defendants pleaded inequitable conduct in general terms. That will no longer suffice.

Exergen states that a defendant cannot allege merely that the plaintiff obtained its patent because it or one of its agents intentionally made a material misrepresentation to the patent office. Such a vague allegation violates Federal Rule of Civil Procedure Rule 9(b), which requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."

Exergen holds that in order to satisfy Rule 9(b), a pleading of inequitable conduct must detail "the specific who, what, when, where and how of the material misrepresentation or omission" made to the patent office. The pleading also must allege facts showing that a specified individual knowingly withheld or misrepresented material information "with a specific intent to deceive" the patent office.

"The Exergen case requires parties to conduct significant upfront investigation and analysis of all inequitable conduct allegations," says Frank DiGiovanni, an IP litigator at Connolly Bove Lodge & Hutz. "Attorneys must drill down several layers before even alleging inequitable conduct. They not only must identify the specific claims and the limitations of those claims affected by the inequitable conduct, but they also must provide a pinpoint description of the withheld information and a detailed description of how this information is material."

In order to hunt for all this detailed information, accused infringers will seek discovery early in litigation. "[They] will accelerate discovery plans--depose inventors and patent prosecuting attorneys sooner than in the past," Midgley says. "This will have the effect of accelerating costs earlier in proceedings. ... Right off the bat, you are racking up
significant legal bills."

Costly Scenario

These higher upfront costs may make it harder to settle infringement suits. "The more quickly parties rack up significant litigation fees, the less likely they are to settle, because the parties' positions for settlement get farther and farther apart," Midgley says.

Exergen also weakens defendants' negotiating position. It deprives defendants of the powerful threat of inequitable conduct claims--at least in the early stages of lawsuits.

Exergen's tough pleading requirements are expected to cut down on the number of inequitable conduct claims. "Rather than throwing up inequitable conduct claims in every single case, almost as a knee-jerk reaction, defendants will have to assert it only in cases that merit it," says David Nelson, a patent litigator at Quinn Emanuel Urquhart Oliver & Hedges. "[This] is a reminder from the Federal Circuit that inequitable conduct should be limited to pretty unusual facts."

Other experts, however, think Exergen will do relatively little to stop the plague of inequitable conduct claims. "We'll see a fall in inequitable conduct allegations, but likely not a sharp fall," DiGiovanni says. "[The new standard is] more likely to simply defer the allegations from the beginning of a case to the later stages of a case, after discovery has occurred."

In the end, Exergen may have little effect on the time and expense of patent litigation, according to many experts. "There's not much you can do to make patent litigation cheaper because there's so much at stake," Noonan says. "The defendant will be motivated to find all invalidating prior art and evidence for inequitable conduct--that's the jackpot."

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