Avid Identification Sys. v. Crystal Import Corp.

United States Court of Appeals for the Federal Circuit
2009-1216, -1254

AVID IDENTIFICATION SYSTEMS, INC.,

Plaintiff-Appellant,

v.

THE CRYSTAL IMPORT CORPORATION,
DATAMARS SA and DATAMARS, INC.,

Defendants.

John W. Thornburgh, Fish & Richardson P.C., of San Diego, California, for
plaintiff-appellant. With him on the brief were Juanita R. Brooks, Roger A. Denning, and
Michael A. Amon.

K.T. Cherian, Howrey LLP, of San Francisco, California, for amicus curiae Allflex
USA, Inc. With him on the brief were Ronald S. Wynn; and Richard L. Stanley, of
Houston, Texas.

Appealed from: United States District Court for the Eastern District of Texas

Judge T. John Ward
 United States Court of Appeals for the Federal Circuit
2009-1216, -1254

AVID IDENTIFICATION SYSTEMS, INC.,

Plaintiff-Appellant,

v.

THE CRYSTAL IMPORT CORPORATION,
DATAMARS SA and DATAMARS, INC.,

Defendants.

Appeals from the United States District Court for the Eastern District of Texas in case
no. 2:04-CV-183, Judge T. John Ward.

__________________________

DECIDED: April 27, 2010
__________________________

Before MAYER, LINN, and PROST, Circuit Judges.

Opinion for the court filed by Circuit Judge PROST. Opinion concurring-in-part and
dissenting-in-part filed by Circuit Judge LINN.

PROST, Circuit Judge.

Avid Identification Systems Inc. (“Avid”) brought suit against Datamars SA and its

subsidiary Crystal Import Corporation (collectively “Datamars”) alleging infringement of

Avid’s U.S. Patent No. 5,235,326 (“the ’326 patent”) directed to a multi-mode radio-

frequency identification system for reading encoded biocompatible chips. The patent

was found valid and infringed, but held to be unenforceable for inequitable conduct.

This appeal challenges the district court’s finding of inequitable conduct. In reviewing

the district court’s finding, we address which individuals are “substantively involved” in

the preparation or prosecution of a patent application and thus owe a duty of candor
and good faith to the Patent and Trademark Office under 37 C.F.R. § 1.56. We affirm

the finding of the district court.

BACKGROUND

Avid is a small, closely held company that designs and markets biocompatible

radio frequency identification chips for implantation in animals. Avid markets its chips to

pet owners as a way of increasing the chances that an estranged companion animal will

be identified and reunited with its family. Avid markets devices for reading its chips to

animal hospitals and shelters.

Avid’s founder and president, veterinarian Dr. Hannis Stoddard, testified that he

decided to form the Avid corporation after visiting an animal shelter to reclaim his own

lost dog. He explained that most animals at the shelter were clearly lost pets, but there

was no way to find their homes. Dr. Stoddard made it his mission to implement a better

system of dealing with the identification and processing of recovered animals. He and a

colleague, Peter Troesch, formed Avid for the purpose of carrying out Dr. Stoddard’s

mission.

When the company first started, Avid purchased unencrypted identification chips

from a supplier, relabeled them, and sold them as a marketer and distributor. The

company discontinued its resale business model in around 1985 because Dr. Stoddard

wanted Avid to develop its own technology. Specifically, Stoddard wanted Avid to

develop a chip and reader system, where the reader could read both the unencrypted

chips currently on the market as well as encrypted chips that Avid produced. Stoddard

hired at least three engineers, Dr. Polish, Dr. Malm, and Mr. Beigel, to carry out this

objective. By about 1990, these engineers developed an encrypted identification chip

2009-1216, -1254 2
that could be read by a reader programmed with Avid’s decryption code. They also

developed a “multi-mode” reader that could read both Avid’s encrypted chip and

traditional unencrypted chips.

Dr. Stoddard demonstrated some of Avid’s technology at a U.S. Livestock

Committee trade show in around April of 1990. In August of 1991, Avid filed for the ’326

patent on a multi-mode encrypted chip and reader system, where the reader can read

both unencrypted chips and Avid’s encrypted chips. The inventors named on the

application were Polish, Malm, and Beigel. Dr. Malm was also listed as the prosecuting

attorney. A few days before the patent application was filed, the inventors assigned

their rights to Avid. Dr. Stoddard signed the small entity status affidavit filed with the

patent. Avid was also pursuing European patent rights for its encrypted chip and reader

system during this time. The ’326 patent issued in August of 1993.

Datamars is a competitor of Avid in the companion animal identification chip

market. Avid brought suit against Datamars and several other competitors in 2004

alleging infringement of its ’326 patent, as well as unfair competition and false

advertising claims. The other defendants settled their claims with Avid. The case

against Datamars proceeded to trial and a verdict.

The jury found the ’326 patent willfully infringed and not invalid, and found in

favor of Avid on the unfair competition and false advertising claims. The jury awarded

Avid $26,981 on the patent infringement claim and $6 million on the unfair competition

claim. Following the trial, Datamars filed a motion to hold the patent unenforceable for

inequitable conduct. The district court granted the motion, without trial, finding that Dr.

Stoddard’s trade show demonstration was material prior art under 35 U.S.C. § 102(b)

2009-1216, -1254 3
and that information regarding the demonstration was withheld from the U.S. Patent and

Trademark Office (“PTO”) with deceptive intent. Specifically, the district court found that

Dr. Stoddard owed a duty of candor to the PTO.

After this ruling on inequitable conduct, the parties entered into a settlement

agreement. Pursuant to the terms of the agreement, the parties stipulated to a

dismissal of all claims other than those related to the ’326 patent, the payment for unfair

competition was reduced to $3 million, Avid filed an unopposed motion for

reconsideration of the district court’s inequitable conduct decision, and Datamars

agreed not to contest the standing, jurisdiction, mootness, or case and controversy of

the inequitable conduct decision on appeal to this court. In the event that Avid prevailed

on reversing the inequitable conduct determination on motion for reconsideration or on

appeal to this court, Datamars agreed to pay the $26,981 previously awarded by the

jury for infringement of the ’326 patent.

The district court dismissed the unopposed motion for reconsideration of the

inequitable conduct decision, finding that there was no case or controversy between the

parties. The district court explained that the terms of the settlement agreement explicitly

precluded Datamars from opposing the motion for reconsideration in any way, thus

eliminating any adversity between the parties on all matters before the district court.

The district court noted in its opinion that Avid argued, for the first time on

reconsideration, that Dr. Stoddard did not have a duty of candor before the PTO.

Avid timely appealed the district court’s determination of inequitable conduct to

this court. Datamars did not file a brief in response.

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 DISCUSSION

There are two issues before this court on appeal: first, whether the court has

jurisdiction to decide the issue of inequitable conduct, and second, if we do have

jurisdiction, whether the district court abused its discretion in holding the ’326 patent

unenforceable for inequitable conduct. We discuss each in turn.

I. Case and Controversy

As a preliminary matter, we must determine whether the issue of inequitable

conduct is properly before this court. The mere fact that Datamars agreed with Avid not

to dispute standing, jurisdiction, mootness, and case or controversy in this appeal does

not thereby give Avid standing or this court jurisdiction. Similarly, it does not create a

case or controversy where one would not otherwise exist. This court must always

determine for itself whether it has jurisdiction to hear the case before it, even when the

parties do not raise or contest the issue. Special Devices, Inc. v. OEA, Inc., 269 F.3d

1340, 1342 (Fed. Cir. 2001); View Eng’g, Inc. v. Robotic Vision Sys., Inc., 115 F.3d 962,

963 (Fed. Cir. 1997).

Amicus Allflex argues that Avid’s appeal is mooted by the settlement agreement

between Avid and Datamars. Allflex argues that the provision of the settlement carving

out the ’326 patent and making the $26,981 payment contingent on the outcome of this

appeal is not enough to preserve a controversy between the parties. Allflex argues that

Datamars has no further interest in the disposition of this case, and that the $26,981

“side bet” is a nominal gesture in light of the $3 million in consideration to Datamars for

agreeing not to oppose reconsideration below or the procedural appropriateness of the

appeal.

2009-1216, -1254 5
 For the reasons stated in the district court’s opinion dismissing Avid’s motion for

reconsideration, we agree with the district court that the terms of Avid’s settlement

agreement with Datamars eliminated any case or controversy before the district court

regarding the motion for reconsideration. The settlement agreement’s limitations on

Datamars’s ability to oppose Avid’s efforts on appeal, however, are different from the

agreement’s limitations on Datamars’s ability oppose Avid’s motion for reconsideration.

As a result of these differences, there is still a live controversy between the parties on

appeal.

A live controversy still exists because Datamars remained free under the

settlement agreement to oppose this appeal on the merits. See, e.g., Kimberly-Clark

Corp. v. Proctor & Gamble Distributing Co., 973 F.2d 911, 913-14 (Fed. Cir. 1992).

That it chose not to submit a brief does not deprive this court of jurisdiction over the

issues on appeal. Similarly, Datamars’s agreement not to contest the procedural

appropriateness of the appeal does not release this court from its legal obligation to

determine procedural appropriateness sua sponte. See Johannsen v. Pay Less Drug

Stores N.W., Inc., 918 F.2d 160, 161 (Fed. Cir. 1990). Both the merits and procedure

are therefore issues before the court on appeal.

Although the $26,981 riding on the outcome of the appeal may be dwarfed by the

other monetary provisions of the settlement agreement, this amount is not a token or

arbitrary sum introduced for the purpose of manufacturing a controversy. It represents

the entirety of the jury award for patent infringement, which Datamars would have been

legally obligated to pay to Avid if the ’326 patent were not held unenforceable.

2009-1216, -1254 6
 For these reasons, we conclude that there remains a live controversy between

the parties on the issue of unenforceability of the ’326 patent, and that this court has

jurisdiction to decide the case under 28 U.S.C. § 1295(a)(1). We now turn to the merits

of the issues presented.

II. Inequitable Conduct

A party may show inequitable conduct by producing clear and convincing

evidence of (1) material prior art, (2) knowledge chargeable to the patent applicant of

prior art and its materiality, and (3) the applicant’s failure to disclose the prior art to the

PTO with intent to mislead. FMC Corp. v. Manitowoc Co., 835 F.2d 1411, 1415 (Fed.

Cir. 1987). Information is material if there is a “substantial likelihood that a reasonable

examiner would consider it important in deciding whether to allow the application to

issue as a patent.” J.P. Stevens & Co. v. Lex Tex Ltd., 747 F.2d 1553, 1559 (Fed. Cir.

1984).

This court reviews the ultimate determination of inequitable conduct under an

abuse of discretion standard. Kingsdown Med. Consultants Ltd. v. Hollister Inc., 863

F.2d 867, 876 (Fed. Cir. 1988) (en banc in relevant part). The underlying findings on

materiality and intent are reviewed for clear error and will not be disturbed on appeal in

the absence of a “definite and firm conviction” that a mistake has been made. Id. at

872.

In the present appeal, Avid challenges the district court’s finding that the trade

show demonstration was material and that Dr. Stoddard had a duty of candor to

disclose this information. Avid does not dispute on appeal that Dr. Stoddard withheld

2009-1216, -1254 7
the information with specific intent to deceive the PTO for the purposes of obtaining a

patent. We thus turn to the issues of materiality and duty of candor.

A. Materiality

In evaluating materiality, this court typically refers to the definition provided in 37

C.F.R. § 1.56, by which the PTO promulgated the duty of disclosure. See Astrazeneca

Pharm. LP v. Teva Pharm. USA, 583 F.3d 766, 773 (Fed. Cir. 2009). Information is

material where a reasonable examiner would find it important to a determination of

patentability. Id.

On appeal, Avid argues that the district court’s finding of materiality was clearly

erroneous because Dr. Stoddard’s trade show demonstration related to a precursor

product that did not contain all of the elements of the ’326 patent claims. Avid’s

arguments against materiality focus on the fact that a jury was presented with the trade

show information and still found the patent not invalid. Avid concludes that the jury

must have found that the trade show demonstrations were not § 102(b) prior art. Such

arguments, however, confuse the concepts of “material” and “invalidating.” We have

often held that a reasonable examiner may find a particular piece of information

important to a determination of patentability, even if that piece of information does not

actually invalidate the patent. See Praxair, Inc. v. ATMI, Inc., 543 F.3d 1306, 1314-15

(Fed. Cir. 2008) (holding that similar prior art that did not meet all of the patent’s claim

limitations was nonetheless material); Upjohn Co. v. Mova Pharm. Corp., 225 F.3d

1306, 1312 (Fed. Cir. 2000); Molins PLC v. Textron, Inc. 48 F.3d 1172, 1179-80 (Fed.

Cir. 1995).

2009-1216, -1254 8
 The district court found that sales demonstrations would be important to a

determination of patentability under § 102(b). See 35 U.S.C. § 102(b) (“the invention

was patented or described in a printed publication in this or a foreign country or in public

use or on sale in this country, more than one year prior to the date of the application for

patent in the United States”). The district court found that the precursor product, while

not invalidating, reflected the closest prior art, and thus was highly material to

patentability. We hold that the district court’s analysis of materiality is not clearly

erroneous.

B. Duty of Candor

PTO Rule 56, codified at 37 C.F.R. § 1.56, imposes on all individuals associated

with the filing and prosecution of a patent application a duty of candor and good faith in

dealing with the PTO during the period of examination of a patent application. 37

C.F.R. § 1.56(a). The duty of candor includes a duty to disclose to the PTO all

information known to each individual that is material to the issue of patentability. Id.

This information includes prior sale or public use of the invention one year or more

before the filing date of the application. See 37 C.F.R. § 1.56(b). Thus, to have a duty

to disclose information to the PTO, an individual must (1) be associated with the filing

and prosecution of a patent application such that he owes a duty of candor to the PTO,

and (2) know that the information is question is material. Id. § 1.56(a).

For purposes of identifying who owes a duty of candor to the PTO, Rule 56

defines “individual[s] associated with the filing or prosecution of a patent application” as

(1) each named inventor, (2) each attorney or agent that prepares or prosecutes the

application, and (3) every other person who is substantively involved in the preparation

2009-1216, -1254 9
or prosecution of the application and who is associated with the inventor or assignee.

37 C.F.R. § 1.56(c). Individuals other than the attorney, agent, or inventor, who are

“substantively involved in the preparation or prosecution of the application,” may comply

with their duty of candor by disclosing known material information to one of the attorney,

agent, or inventor. 37 C.F.R. § 1.56(d).

If an individual who is substantively involved in the preparation or prosecution of

an application fails to comply with his duty of candor, then that individual’s misconduct is

chargeable to the applicant for the patent, and the applicant’s patent is held

unenforceable. Molins, 48 F.3d at 1178; FMC Corp., 835 F.2d at 1415 n.8. In this

case, it is undisputed that Dr. Stoddard is not an inventor of the ’326 patent, or an

attorney or agent who prepared the ’326 patent application. Thus, whether Dr.

Stoddard owed a duty of candor to the PTO, such that his misconduct would be

chargeable to Avid (the applicant for the ’326 patent), depends on whether he was an

individual who was “substantively involved in the preparation or prosecution of the

application” and “associated with the inventor or assignee.” 37 C.F.R. § 1.56(c)(3).

What constitutes “substantive[] involve[ment] in the preparation or prosecution of

the application,” the issue on which this case turns, has not previously been addressed

by this court. We read “substantively involved” to mean that the involvement relates to

the content of the application or decisions related thereto, and that the involvement is

not wholly administrative or secretarial in nature. See Manual of Patent Examining

Procedures § 2001.01 (8th ed., rev. 2, May 2004).

In this case, the district court made the following findings of fact with respect to

inequitable conduct:

2009-1216, -1254 10
 1) that Avid was aware of the consequences of selling or offering to sell its
reader and tag before filing the ’326 patent application, 2) that Avid
attempted to file the ’326 patent application in advance of the 102(b) date,
i.e. within one year after its first sales, but failed, and 3) that Avid
intentionally withheld evidence of such sales from the PTO in an effort to
deceive the PTO and secure allowance of the ’326 patent. 1

Inequitable Conduct Order at 7. Based on these findings, the court concluded that Avid

acted with deceptive intent during prosecution of the ’326 patent. Id. at 8.

In support of its inequitable conduct finding, the district court also made several

findings related specifically to Dr. Stoddard. Id. Based on these findings, the district

court concluded that Dr. Stoddard was “substantively involved” within the meaning of 37

C.F.R. § 1.56(c)(3), such that he owed a duty of candor to the PTO.

The district court’s fact findings related to Dr. Stoddard include: the nature of his

position as president and founder of Avid, that Avid is a closely held company, and that

Stoddard hired the inventors to reduce his encrypted chip concept to practice. Id.

These facts establish that Dr. Stoddard was associated with the inventors of the ’326

patent and with the assignee, Avid, in accordance with the latter requirement of

§ 1.56(c)(3).

1
The district court’s use of “Avid” in these findings is not entirely clear
because only individuals, rather than corporations such as Avid, owe a duty of candor to
the PTO. Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312, 1328 (Fed. Cir.
2009); Manual of Patent Examining Procedures § 2001.01 (explaining that “the duty
applies only to individuals, not to organizations”). Accordingly, only individuals can
breach that duty and give rise to a finding of inequitable conduct. Id. Although the
district court opinion mentions a few different individuals, it appears that all of its
inequitable conduct conclusions with respect to “Avid” refer to the conduct of Dr.
Stoddard that is imputed to Avid. See Avid Identification Sys. Inc. v. Crystal Import
Corp., No. 2:04-CV-183, slip op. at 8 (E.D. Tex. Sept. 28, 2007) (“Inequitable Conduct
Order”).

2009-1216, -1254 11
 With respect to the first requirement of § 1.56(c)(3), requiring that the individual

be substantively involved in the preparation or prosecution of the application, the district

court found that Dr. Stoddard was “involved in all aspects of the company’s operation,

from marketing and sales to research and development.” Inequitable Conduct Order at

8. Dr. Stoddard’s involvement in “all aspects” of Avid, including its research and

development, contributes to a reasonable inference that he was also involved in the

preparation of the patent application relating to that research. That this fact would

contribute to such an inference is especially reasonable here, since the ’326 patent was

directed to the system that fulfilled Dr. Stoddard’s personal mission and the purpose for

which his company was created.

The district court also cited two communications related to Dr. Stoddard’s

substantive involvement in patent matters. See Def. Trial Ex. #27 and Def. Trial Ex.

#251. One communication was from an inventor named in the ’326 patent and

contained content for a European patent application. Dr. Stoddard was one of two

recipients of this communication, the other being the European prosecuting attorney.

The European patent application was the international phase of the ’326 patent

application. The other communication was a note from the same inventor to Dr.

Stoddard advising him to check with Avid’s European patent attorney before

demonstrating any of Avid’s technology, as it might affect Avid’s patent rights in Europe.

The district court discussed these documents and found that they also

contributed to an inference that Dr. Stoddard was substantively involved in patent

matters related to the identification chip system. The documents related to the

European filing refer to the same subject matter as the ’326 patent, and preparations for

2009-1216, -1254 12
both patent applications were underway at roughly the same time. Given the nature

and content of these communications, and the district court’s findings with respect to Dr.

Stoddard’s role in the company, the inference that Dr. Stoddard was similarly involved in

the ’326 patent application is reasonable and the finding of substantive involvement is

not clearly erroneous.

Additionally, the district court determined that Dr. Stoddard’s testimony at trial

was not credible, his memory of facts was suspiciously selective, and he refused to

acknowledge certain incontrovertible events. 2 See Inequitable Conduct Order at 4. The

district court’s findings with respect to Dr. Stoddard’s lack of credibility as a witness cast

doubt on Dr. Stoddard’s assertion that he did not understand the claimed technology

and was not involved in the preparation of the ’326 patent application.

Our conclusion that the district court’s duty of candor analysis was not clearly

erroneous is reinforced by our own review of the entire record and relevant case law,

which reveals sufficient reason to uphold the district court’s judgment. Cf. Bruno Indep.

Living Aids, Inc. v. Acorn Mobility Servs. Ltd., 394 F.3d 1348, 1354 (Fed. Cir. 2005)

(“While the district court indeed provided little explicit support for its finding of intent, it is

well established that, as an appellate tribunal, we review judgments, not opinions. We

therefore focus our review on whether there is sufficient evidence in the record to

sustain the judgment of intent to deceive the PTO.” (citing Black v. Cutter Labs., 351

U.S. 292, 297 (1956); Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d 1530, 1540 (Fed. Cir.

1983); Consol. Aluminum Corp. v. Foseco Int’l Ltd., 910 F.2d 804, 814 (Fed. Cir. 1990)

2
For example, Dr. Stoddard was Avid’s main fact witness on the issue of
patent validity, and the district court explicitly discredited the portions of his testimony
relevant to the validity of the ’326 patent under § 102(b).

2009-1216, -1254 13
(“An appellate court need not close its eyes to the record where . . . there is a way

clearly open to affirm the district court’s action.”))).

Dr. Stoddard was personally responsible for the disputed prior art

demonstrations. He was in contact with at least one of the inventors during the

preparation of the ’326 patent application regarding patent-related matters. He was also

advised by that inventor to check with a patent attorney before disclosing information

about Avid’s technology to the public. He signed the small entity status affidavit shortly

before the application was filed. These facts lend further support to the inference that

Dr. Stoddard was substantively involved in preparations for filing the application, and

demonstrate that Dr. Stoddard spoke for Avid in representations to the PTO.

Although Dr. Stoddard did not contribute enough to the patentable features of the

claims to be considered an inventor, the functionality of the system described in the ’326

patent was his idea. The inventors he hired were specifically instructed to reduce his

idea to practice. Dr. Stoddard’s inclusion on substantive communications related to the

preparation of the European counterpart to the ’326 patent application further support

the more general conclusion that he was substantively involved in preparation of the

patent application covering the system he conceived.

Under the terms of Rule 56, the PTO does not assign a duty of candor to persons

not associated with a patent application, or to those involved only in a ministerial

capacity. Such persons would not be in a position to appreciate that their conduct or

knowledge might be relevant to the PTO. 3 The district court did not clearly err in

3
Our holding does not automatically extend the duty of candor to all
individuals who contact one of the inventors or sign the small entity affidavit. Nor does
our holding extend the duty generally to all individuals on the commercial side of product

2009-1216, -1254 14
determining that Dr. Stoddard was not such an exempt person. Indeed, to accept Avid’s

argument that a person such as Dr. Stoddard owes no duty of candor would allow

intentional deception by the types of people most likely to have knowledge of § 102(b)

prior art, i.e., those on the commercial side of patented product development.

The dissent errs by conflating Rule 56’s requirements of substantive involvement

and knowledge that the undisclosed information is material. According to the dissent,

the “substantively involved” has a knowledge requirement; the person must be “able to

assess the materiality of any information [that person] may know or discover.” Dissent

at 4. The dissent’s proposed definition fails, however, because that is not what Rule 56

says. Involvement and knowledge are separate inquiries under Rule 56, located in

separate sections (subsections (c) and (a), respectively) and serving different purposes.

Under § 1.56(c), we ask whether a person is substantively involved with the preparation

or prosecution of a patent application in order to determine whether that person is

associated with the filing and prosecution of a patent application, and thus owes a duty

of candor to the PTO under § 1.56(a). Nothing in § 1.56(c)(3) requires, as the dissent

suggests, the individual be “able to assess the materiality of any information [he] may

know or discover” in order to be substantively involved. Dissent at 4. Rather, what a

person knew or should have known only matters after he is found to be “associated with

the filing and prosecution of a patent application,” such as by being substantively

involved. Id. § 1.56(a).

development. We simply hold that the district court may properly consider a variety of
factors, such as an individual’s position within the company, role in developing or
marketing the patented idea, contact with the inventors or prosecutors, and
representations to the PTO in deciding whether that individual is “substantively involved”
within the meaning of § 1.56(c)(3) and thus owes a duty of candor to the PTO.

2009-1216, -1254 15
 In other words, a finding that an individual was “substantively involved in the

preparation or prosecution” of a patent application only determines that the individual

owed a duty of candor to the PTO. Whether the individual involved in the alleged

misconduct owed a duty of candor to the PTO is merely a threshold inquiry in the

inequitable conduct analysis. Once a court finds that the individual had a duty of

candor, the court must proceed to the dual prongs of materiality and deceptive intent, to

determine whether that duty was violated. This subsequent analysis, in particular the

deceptive intent inquiry, encompasses the concerns raised by the dissent. If an

individual is unable to assess the materiality of the information at issue, then he would

lack the deceptive intent required to find that he committed inequitable conduct. 4

Therefore, the dissent’s main objection to our “substantive involvement” test is

misplaced.

Based on the district court’s findings and on the entirety of the evidence of

record, we hold that the district court did not abuse its discretion in rejecting Avid’s

argument that Dr. Stoddard owed no duty of candor to the PTO. Dr. Stoddard withheld

material information regarding his sales demonstrations of products that reflected the

closest prior art to the claims of the ’326 patent. Dr. Stoddard acted with deceptive

intent. Dr. Stoddard’s actions are imputed to Avid, the patent holder. We therefore

affirm the district court’s judgment that Avid’s ’326 patent is unenforceable due to

inequitable conduct.

AFFIRMED

2009-1216, -1254 16
 COSTS

Each party shall bear its own costs.

4
As occurred here, the district court may find the same evidence probative
of whether a person was “substantively involved” and whether that person acted with
deceptive intent. The inquiries, however, are distinct.

2009-1216, -1254 17
 United States Court of Appeals for the Federal Circuit

2009-1216, -1254

AVID IDENTIFICATION SYSTEMS, INC.,

Plaintiff-Appellant,

v.

THE CRYSTAL IMPORT CORPORATION,
DATAMARS SA and DATAMARS, INC.,

Defendants.

Appeal from the United States District Court for the Eastern District of Texas in case
no. 2:04-CV-183, Judge T. John Ward.

LINN, Circuit Judge, concurring-in-part and dissenting-in-part.

I am pleased to join Parts I and IIA of the majority opinion concluding that there

remains a live controversy between the parties on the issue of unenforceability of U.S.

Patent No. 5,235,326 (“the ’326 patent”) and affirming the district court’s materiality

ruling. I respectfully dissent, however, from Part IIB affirming the district court’s ruling

that the duty of candor required by 37 C.F.R. § 1.56(c)(3) applies to Dr. Stoddard.

This case involves the application of 37 C.F.R. § 1.56 (“Rule 56”), a rule adopted

by the United States Patent and Trademark Office (“PTO”) that places on defined

individuals a duty of candor and good faith, including a duty of disclosure, in dealing

with the PTO during the period of examination of a patent application. 37 C.F.R. §

1.56(a). These individuals include: (1) each named inventor; (2) each attorney or agent

who prepares or prosecutes the application; and (3) “[e]very other person who is
substantively involved in the preparation or prosecution of the application and who is

associated with the inventor, with the assignee or with anyone to whom there is an

obligation to assign the application.” 37 C.F.R. § 1.56(c). Since Dr. Stoddard is not a

named inventor or an attorney or agent associated with the filing of the ’326 patent, the

question presented in this case turns on the application of Rule 56(c)(3), which, as the

majority recognizes, has never been explicitly addressed by this Court.

Rule 56(c)(3) lists two criteria that must be met before imposing a duty of

disclosure on an individual. First, the individual must be “substantively involved in the

preparation or prosecution of the application.” 37 C.F.R. § 1.56(c)(3). Second, the

individual must be “associated with the inventor, with the assignee or with anyone to

whom there is an obligation to assign the application.” Id. I agree with the majority that

Dr. Stoddard was associated with the inventors of the ’326 patent and that the second

prong of Rule 56(c)(3) is met in this case. Where I part company with the majority is the

conclusion that Dr. Stoddard was “substantively involved in the preparation or

prosecution of the [’326 patent] application” as required by the first prong of

Rule 56(c)(3).

We review a district court’s determination of inequitable conduct under an abuse

of discretion standard. Kingsdown Med. Consultants Ltd. v. Hollister Inc., 863 F.2d 867,

876 (Fed. Cir. 1988) (en banc). “We will not substitute our judgment for that of the trial

court in relation to the discretionary ruling of inequitable conduct unless the appellant

establishes that the ruling is based upon clearly erroneous findings of fact or a

misapplication or misinterpretation of applicable law or that the ruling evidences a clear

error of judgment on the part of the district court.” Brasseler, U.S.A. I, L.P. v. Stryker

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Sales Corp., 267 F.3d 1370, 1379 (Fed. Cir. 2001). In my view, the district court both

misapplied Rule 56(c)(3) and clearly erred in finding that Dr. Stoddard was

“substantively involved in the preparation or prosecution of the application.”

Accordingly, I would reverse the determination that the ’326 patent is unenforceable due

to inequitable conduct.

I. Who Owes the Duty of Candor

The majority correctly recognizes that the duty of candor is codified at 37 C.F.R.

§ 1.56 and includes the duty to disclose to the PTO all information that is material to the

issue of patentability known to certain individuals. 37 C.F.R. § 1.56(a). As the majority

further notes, the question in this case is to whom does the duty of candor extend under

the language “every other person who is substantively involved” in Rule 56(c)(3)?

The majority holds that a district court may consider an “individual’s position

within the company, role in developing or marketing the patented idea, contact with the

inventors or prosecutors, and representations to the PTO” when deciding whether an

individual is “substantively involved,” regardless of whether those factors relate to the

person’s awareness of the merits of the application in question or engagement in any

specific activity relating to that application. Majority Op. at 12,14, 15 n.4. The majority

goes even further to extend the duty generally to “those on the commercial side of

patented product development,” because they are “the types of people most likely to

have knowledge of § 102(b) prior art.” Majority Op. at 15. With all due respect, I find no

basis in the rule or in any policy for such an expansive reading of Rule 56(c)(3).

The obligation imposed by the duty of candor is to disclose to the PTO

information “material to patentability.” 37 C.F.R. § 1.56(a). Because one cannot assess

2009-1216, -1254 3
whether information is “material to patentability” without knowledge of the technical

details or legal merits of an application, it should be self-evident that when Rule 56(c)(3)

talks about persons who are “substantively involved” it is referring to those persons who

are both (1) engaged in the preparation or prosecution of an application and (2)

sufficiently apprised of the technical details or legal merits of the application as to be

able to assess the materiality of any information they may know or discover as the

application is prepared or prosecuted. This naturally excludes not only the “typists,

clerks, and similar personnel who assist with the application” in a non-substantive way

as described in the Manual of Patent Examining Procedure (“MPEP”) § 2001.01, but

also corporate officers, managers, employees, and all other individuals who are neither

aware of the technical details or legal merits of the application nor engaged in the

preparation or prosecution thereof. Simply having a general interest or even a financial

interest in the invention or a general awareness of the application is not enough.

This interpretation does not improperly import into Rule 56(c)(3) the knowledge

component from materiality, as suggested by the majority. Majority Op. at 15. Instead,

it recognizes that Rule 56(c)(3) uses the phrase “substantively involved.” The use of the

word “substantive[]” limits the set of individuals who have a duty to disclose to those

who possess a specific understanding of the substance of the application. This has

nothing to do with the question of whether any particular piece of information is material,

but relates to the separate question of whether a person is substantively involved; i.e.,

sufficiently apprised of the details of the application as to be in a position to make that

assessment. Reading the separate parts of Rule 56 in harmony is not improperly

conflating them, as the majority suggests.

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 The majority reads “substantive[]” to mean that the involvement “relates to the

content of the application or decision related thereto, and that the involvement is not

wholly administrative or secretarial in nature.” Majority Op. at 10 (citing MPEP §

2001.01 (8th ed., rev.2, May 2004)). Such an expansive interpretation is nowhere

suggested in the cited section of the MPEP or anywhere in Rule 56. The PTO could

easily have written a rule as broad as that set forth by the majority. However, the PTO

purposefully limited the duty of disclosure to material information in order to limit the

submission of irrelevant and cumulative information that could overwhelm the PTO and

obscure potentially important disclosures. See Duty of Disclosure, 42 Fed. Reg. 5589

(Jan. 28, 1977) (“‘Relevant’ is replaced by ‘material’ because the latter term connotes

something more than a trivial relationship.”); MPEP § 2001 (8th ed., rev.2, May 2004)

(“There is no duty to submit information which is not material to the patentability of any

existing claim.”). By extension, the PTO also limited the duty to those individuals in a

position to determine what disclosures are material─those substantively involved in the

preparation or prosecution of the application.

While I do not quibble about the majority’s characterization of this as a threshold

inquiry, calling it such does not justify writing “substantively” out of the rule and lowering

the threshold to extend the duty to disclose to everyone having some relationship to the

invention or application no matter how peripheral or tangential it may be to the

substance of the application. The majority’s interpretation places on persons who are

not in a position to assess materiality an obligation to disclose information the relevance

of which they have no way of determining. The effect is either to encourage the filing of

information regardless of its materiality, just to be on the safe side, or to widen the net of

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inequitable conduct that may be cast by accused infringers after the fact in litigation.

Neither result is desired or warranted and cannot be justified on the rationalization that

Rule 56(c)(3) is simply an innocuous threshold inquiry. Indeed, this court has held that

the identity of the individual accused of inequitable conduct is essential to the

determination of whether the patent can be found unenforceable. See Exergen Corp. v.

Wal-Mart Stores, Inc., 575 F.3d 1312, 1330 (Fed. Cir. 2009) (“The pleading, however,

provides no factual basis to infer that any specific individual, who owed a duty of

disclosure in prosecuting the ′685 patent, knew of the specific information in the [prior

art] patents that is alleged to be material to the claims of the ’685 patent.”).

Finally, the majority suggests that intent should solve the concern I have

expressed. Majority Op. at 16. With all due respect, that suggestion is premised on

circular reasoning that ignores Rule 56(c)(3) entirely. If intent was all that mattered,

there would be no need to be concerned at all about who had the duty to disclose.

II. Dr. Stoddard’s Involvement

In this case, there is no evidence that Dr. Stoddard was substantively involved in

the preparation or prosecution of the application for the ’326 patent. Specifically, there

is no evidence to even suggest that Dr. Stoddard had any knowledge of the technical

details or legal merits of the application for the ’326 patent while it was being prepared

or prosecuted. I find it significant that no document or testimony shows that Dr.

Stoddard participated in any inventor meeting with patent counsel, received a draft of

the application prior to filing, or received any draft response of an office action to the

PTO during prosecution or was otherwise apprised of the technical details or legal merit

of the application. In fact, Robert Malm, the prosecuting attorney of the ’326 patent,

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testified that Dr. Stoddard was not substantively involved in the preparation or

prosecution of the patent. J.A. 14100, 14104 (Malm’s testimony stating that he did not

have any conversations with Dr. Stoddard about patent prosecution matters and that no

individual at Avid reviewed responses before they were filed with the PTO).

The majority cites two communications as evidence sufficient to support the

district court’s inference that Dr. Stoddard was substantively involved in the ’326

application. Majority Op. at 12-13. Neither of these documents actually related to the

’326 application. The first memo, addressed to Dr. Stoddard from a named inventor of

the ’326 patent, mentioned only the possible effect of Avid sales on a European patent

application. The second memo, which indicated that Dr. Stoddard was provided a copy,

was addressed to a patent attorney who was never involved in the ’326 patent

application and included new material for an unspecified patent application. This memo

did not give any indication that it was in any way related to the ’326 patent application.

These documents do not support the conclusion that Dr. Stoddard had any awareness

of the details or merits of the ’326 application.

The majority incorrectly points to Dr. Stoddard’s involvement in Avid’s research

and development as a factor indicating that he was substantively involved in the

preparation of the patent application relating to that research. Majority Op. at 12. Dr.

Stoddard’s research activities are simply evidence that Dr. Stoddard was “associated

with the inventor, with the assignee or with anyone to whom there is an obligation to

assign the application.” 37 C.F.R. § 1.56(c)(3). Because it is the actual substance of

the application that defines what constitutes “material” information that the individual

must disclose to the PTO, Rule 56 requires more than just this association. See 37

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C.F.R. § 1.56(b)(1), (c)(3).

The majority also ascribes significance to the fact that Dr. Stoddard was

personally responsible for certain prior art demonstrations. Majority Op. at 14.

However, this fact does not contribute to a finding that Dr. Stoddard was substantively

involved in the patent application. While employees who perform product

demonstrations may well be the individuals most likely to have knowledge of prior art,

that knowledge, in itself, does not give rise to a duty of disclosure to the PTO. See

Kemin foods, L.C. v. Pigmentos Vegetales Del Centro S.A. de C.V., 464 F.3d 1339,

1346 (Fed. Cir. 2006) (affirming district court’s refusal to find inequitable conduct based

on the failure of an employee scientist—not a named inventor—to disclose a prior art

reference noting that he was “only tangentially involved in prosecution” of the patent).

Unless such an individual also has knowledge of the technical details or legal merits of

the patent application and is engaged in the preparation or prosecution thereof, he is

not bound by Rule 56. Moreover, while the district court found Dr. Stoddard’s testimony

on the issue of prior art demonstrations was less than candid, that neither shows that he

was involved in the ’326 patent application nor demonstrates that whatever involvement

he may have had was substantive in any way.

Finally, Dr. Stoddard’s signature on the small entity status affidavit, declaring that

Avid is a small business concern eligible for reduced patent application fees, provides

no evidence that he had any knowledge of the substantive details contained in the

patent application. The small entity status document relates only to information about

the corporation and not to anything material to patentability.

The majority states that Dr. Stoddard is substantively involved in the application

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for the ’326 patent based on the entirety of the evidence in the record. However, as

noted above, none of the individual pieces of evidence the majority cites as the basis for

this finding—Dr. Stoddard’s role in the company, the two memos regarding patent

prosecution, the small entity status affidavit, Dr. Stoddard’s involvement in the product

demonstrations, or Dr. Stoddard’s lack of credibility at trial—show that Dr. Stoddard was

even peripherally involved with the actual application at issue. Simply combining the

evidence does not change the fact that there is nothing in the record showing that Dr.

Stoddard had anything at all to do with the application for the ’326 patent.

For the foregoing reasons, it is my view that the evidence does not support a

finding that Dr. Stoddard was substantively involved in the preparation or prosecution of

the ’326 patent. He was neither engaged in the preparation or prosecution of the ’326

patent application nor sufficiently apprised of its technical details or legal merits to allow

him to assess what information would be considered material to its patentability.

Because the district court misapplied Rule 56(c)(3) and clearly erred in extending the

duty of disclosure to Dr. Stoddard, I would reverse the finding that the ’326 patent is

unenforceable due to inequitable conduct.

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