Wednesday, January 27, 2010

Thinking About Fraud (cont.): Why Look to Patent Law for the Trademark Fraud Standard?

In its fraud analysis in In re Bose Corporation, 91 USPQ2d 1938 (Fed. Cir. 2009), the CAFC relied on various precedents involving inequitable conduct in the patent arena. As Joe Dreitler has pointed out (for example, here), trademark fraud and patent inequitable conduct are completely different beasts, and they should be treated differently. But the CAFC, relying on its patent rulings, has now completely knocked the props out from under the TTAB's fraud jurisprudence, and it may take some time to build it up again.

Generally speaking, a patent is a government grant of an exclusive right, for a limited time, to make, use, and sell a particular invention. If a patent is held unenforceable due to inequitable conduct, the patentee is left with nothing. Therefore the CAFC maintains a very high standard of proof for inequitable conduct:

The need to strictly enforce the burden of proof and elevated standard of proof in the inequitable conduct context is paramount because the penalty for inequitable conduct is so severe, the loss of the entire patent even where every claim clearly meets every requirement of patentability. Star Scientific, Inc. v R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1366 (Fed. Cir. 2008).

The patent doctrine of inequitable conduct requires clear and convincing proof of both the materiality of the misrepresentation and the intent to deceive the USPTO. "Information is material when a reasonable examiner would consider it important in deciding whether to allow the application to issue as a patent." Id. at 1367. Information concealed from the UPSTO may be material even if it does not invalidate the patent. Ibid.

Determining materiality in the patent context is not easy: Should some piece of information have been disclosed to the PTO? Is a certain prior art reference merely cumulative? What exactly does it disclose? Would it affect examination of the application? This determination is hardly a black-and-white decision, and there is much room for disagreement.

In short, the CAFC requires clear and convincing proof of inequitable conduct in patent cases because of the severity of the penalty and the uncertainty surrounding the materiality issue.

This contrasts sharply with the trademark side of the coin. In the typical trademark fraud case, there is no issue of materiality because a false statement regarding use is clearly material to the examination of the application or Section 8 Declaration: the application would not be approved for publication, or the declaration accepted, if the PTO knew the truth. Moreover, it is usually a simple question with a black or white answer: either the mark was in use for a particular good or service, or it wasn't.

Furthermore, as Mr. Dreitler points out, the consequence of a finding of trademark fraud is not nearly as severe as in the patent context. A trademark applicant or registrant found to have committed fraud will lose its application or registration (and the appurtenant priority thereof), but its common law rights will remain intact. Unlike the patentee, it hasn't lost everything.

Given the lesser severity of the punishment for trademark fraud and the relatively simple and straightforward determination of materiality, why should such a high standard of proof for fraud be imported from the patent context? Yet that's what the CAFC did in Bose, relying on Star Scientific at the core of its ruling.

In my blog posting on Monday (here), I discussed the possibility that "reckless disregard for the truth" might satisfy the intent requirement for fraud in the trademark context. The TTAB recently suggested the same in DaimlerChrysler Corporation and Chrysler, LLC v. American Motors Corporation, Cancellation No. 92045099 (January 14, 2010). The CAFC in Bose specifically declined to rule on that question (footnote 2), but it also gave an indication that reckless disregard might not be enough:

We [have] even held that “a finding that particular conduct amounts to ‘gross negligence’ does not of itself justify an inference of intent to deceive.” Kingsdown Med. Consultants, Ltd. v. Hollister Inc., 863 F.2d 867, 867 (Fed. Cir. 1988) (en banc). The principle that the standard for finding intent to deceive is stricter than the standard for negligence or gross negligence, even though announced in patent inequitable conduct cases, applies with equal force to trademark fraud cases. After all, an allegation of fraud in a trademark case, as in any other case, should not be taken lightly. San Juan Prods., 849 F.2d at 474 (quoting Anheuser-Busch, Inc. v. Bavarian Brewing Co., 264 F.2d 88, 92 (6th Cir. 1959)). Thus, we hold that a trademark is obtained fraudulently under the Lanham Act only if the applicant or registrant knowingly makes a false, material representation with the intent to deceive the PTO.

There is no dispute that an allegation of trademark fraud "should not be taken lightly." But does that preclude a lesser standard of proof for fraud in trademark cases, where the consequences are less severe than in a patent case and where the materiality is unquestionable? The verification of an application or a declaration of use is not to be taken lightly either.

In its criticism of Medinol Ltd. v. Neuro Vasx, Inc., 67 USPQ2d 1205 (TTAB 2003), the CAFC stated that the TTAB had "lowered the fraud standard to a simple negligence standard." Has the CAFC left the door open for "reckless disregard" as a basis for trademark fraud? Is the TTAB ready to take a step through that door? We shall see.

TTABlog afterthought: Can you think of a reason why the patent operation and the trademark operation are in the same agency, other than due to historical accident? I've been a registered patent attorney since 1975, and have practiced patent law and trademark law throughout my career, and I can't think of one. If patents and trademarks were each handled by separate agencies, would the CAFC so readily apply patent fraud principles to a trademark case? I doubt it.

Text Copyright John L. Welch 2010.


At 10:02 AM, Anonymous Orrin A. Falby said...

I believe the CAFC's reliance on the patent cases is justfied. The materiality hurdle in a trademark case is not a high hurdle to clear and fraud by its definition requires that the deceipt be "intentional". You seem to suggest that the standard should be lowered or that the definition of fraud some how should change because the consequence of the lost to the party committing the fraud in patent case as oppose to a trademark case is different. I disagree. Fraud is fraud is fraud. It is the intent component of proof that is at issue in Medinol and Bose.

At 7:56 PM, Anonymous Paul Reidl said...

In my opinion, the Federal Circuit decision is ridiculous. The USPTO administers both the patent statute and the Lanham Act. They are two different statutes with two different objectives. I don't have to prove that my client's trademark applications are useful, novel and non-obvious over the prior art so why in the heck should "fraud" be defined by the patent standard? I think that what happened here is that the patent bar filed a strong amicus brief, the trademark bar took a powder, and the Federal Circuit adopted the patent bar standard without much thought. That is very unfortunate because the two factual scenarios are so different (as you argue) that applying the same standard makes little sense to me.

At 3:08 PM, Anonymous Chili Palmer said...

That even makes sense to me, and I'm borderline idiot. There are attorneys and there are bag men, and this bag man appreciates having things explained by a bona fide attorney at the the top of the heap. Thanks, John.


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