Federal Circuit Ruling Tightens Standard For Inequitable Conduct

In patent litigation, a finding of inequitable conduct renders a patent unenforceable, exposes the patentee to an assessment of attorney’s fees, and has other significant consequences. The Federal Circuit has characterized the remedies from inequitable conduct as the “atomic bomb” of patent litigation. Therasense, Inc. v. Becton, Dickinson & Co., ___ F.3d ___, slip op. at 21 (Fed. Cir. May 25, 2011) (en banc). Yesterday, the Federal Circuit, sitting en banc, sought to limit the use of that weapon by tightening the standards for finding inequitable conduct. Under the new standard, to prevail on a claim for inequitable conduct, the alleged infringer must show “but-for” materiality and, by clear and convincing evidence, specific intent to deceive the United States Patent and Trademark Office (“PTO”).

The majority opinion was written by Chief Judge Rader and joined in full by Judges Newman, Lourie, Bryson, Linn, Moore, and Reyna; an opinion concurring in part and dissenting in part was rendered by Judge O’Malley; and a dissenting opinion was written by Judge Bryson and joined by Judges Gajarsa, Dyk, and Prost.

To establish intent to deceive for a failure to disclose a reference, “the accused infringer must prove by clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” Slip op. at 24. Mere negligence, showing that the patentee “should have known” of the reference, is insufficient. Id. In most circumstances, where direct evidence if intent to deceive is lacking, “a district court may infer intent from indirect and circumstantial evidence.” The Federal Circuit clarified that materiality and intent are separate requirements and abandoned the “sliding scale” approach. Id. at 24–25. A court may not infer intent solely from materiality. Id. at 25. While the Court did not hold that materiality was irrelevant to intent, specific intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Id.

The Court adopted a new standard for materiality required to establish inequitable conduct, “but-for materiality.” Slip op. at 27 (emphasis added). When prior art is withheld from the PTO, the prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. In other words, prior art that invalidates a claim and was withheld from the PTO is material. This is substantially narrower that the past practice of deciding whether the reference had to be disclosed under PTO Rule 56, which had previously been the standard.

The new materiality test does not mean the claims will necessarily be invalidated based upon the undisclosed prior art. A district court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed prior art. Slip Op. at 28. Unlike the clear and convincing standard required to invalidate a claim in litigation, to determine whether the PTO would have allowed the claim had it been aware of the undisclosed prior art, the district court “should apply the preponderance of the evidence standard and give claims their broadest reasonable construction.” Id. Accordingly, there may be situations where the undisclosed prior art is insufficient to invalidate a claim during litigation, but it is otherwise “material” for purposes of inequitable conduct.

In addition to announcing a new standard for materiality, the Federal Circuit carved out an exception to the but-for materiality test. “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Slip op. at 29.

The Federal Circuit expressly declined to adopt the definition of materiality set forth by the PTO in Rule 56. Slip op. at 32; but see Dissenting Op. at 3 (adopting Rule 56 definition of materiality). The Federal Circuit criticizes Rule 56 as too broad because inequitable conduct may be based on information that becomes irrelevant in view on subsequent arguments by the applicant to the PTO. Id. Nonetheless, as a practical matter, practitioners will continue to comply with the requirements of Rule 56 during prosecution.

The ruling will make it more difficult for an accused infringer to plead inequitable conduct with specificity as required by the Federal Rule of Civil Procedure 9(b). An accused infringer should now need to plead with specificity factual averments to show that the PTO would not have allowed a claim but-for non-disclosure of the prior art reference and that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.

The facts and history of the case are summarized in an earlier alert which you can review at this link: Federal Circuit Agrees To Review Standard For Inequitable Conduct.