On May 25, 2011, the Federal Circuit issued its long-awaited en banc decision in TheraSense, Inc. v. Becton, Dickinson & Co. By a 6-4-1 vote, the court significantly narrowed the classes of cases where courts may find a patent unenforceable due to inequitable conduct before the Patent and Trademark Office ("PTO"). Most importantly, the majority adopted a new "but-for" test for materiality, requiring an accused infringer to show (by clear and convincing evidence) that the PTO would not have allowed a claim to issue had it known of prior art or other information that the applicant withheld. The majority also held, however, that "but-for" causation is not required in cases of "affirmative egregious misconduct," such as filings of "unmistakably false affidavits." As for intent to deceive, the other prong of the traditional test for inequitable conduct, the court largely reaffirmed existing precedent that required an accused infringer to prove (by clear and convincing evidence) that the applicant knew of a prior art reference, knew that it was material, and made a deliberate decision to withhold it. The court reiterated that although direct evidence of deceptive intent is not required, a specific intent to deceive the PTO must be the single most plausible inference from the evidence. Moreover, district courts must no longer apply a "sliding scale" whereby a stronger showing on materiality may offset a weaker showing on intent. Considering the facts of the case, the Federal Circuit vacated the district court's finding of inequitable conduct and remanded for further consideration under the new legal standard.
Background
TheraSense sued several defendants for infringement of patents related to disposable blood glucose strips. Following a bench trial, the district court held a patent unenforceable due to inequitable conduct because TheraSense had failed to disclose to the PTO arguments it made to the European Patent Office ("EPO") that contradicted statements it made to the PTO during the prosecution of its U.S. patent. On appeal, a divided panel affirmed, but TheraSense successfully sought rehearing en banc. The Federal Circuit vacated the panel opinion and directed the parties and amici to address several broad issues that related to inequitable conduct, including the proper standards for assessing intent to deceive, materiality, and remedies.
The En Banc Decision
The six-member majority (Chief Judge Rader joined by Judges Newman, Lourie, Linn, Moore, and Reyna) surveyed the history of the inequitable conduct doctrine and its development into the "atomic bomb" of patent law. According to the majority, the doctrine has created "numerous unforeseen and unintended consequences," including discouraging settlement, increasing the cost and complexity of patent litigation, and overburdening PTO examiners with a deluge of marginally relevant prior art references. To counter those problems, the court tightened the standards for proving inequitable conduct, which the majority estimated plays a role in up to 80% of patent cases.
The majority first addressed the deceptive intent element of inequitable conduct. It largely reaffirmed existing precedent on this score, requiring intent to deceive to be "the single most reasonable inference able to be drawn from the evidence." In the paradigm case of failure to disclose prior art references, an accused infringer must prove, by clear and convincing evidence, that the applicant knew of a specific prior art reference, knew that the reference was material, and deliberately decided to withhold it from the PTO. A showing that an applicant "should have known" of a reference's materiality is insufficient. Consistent with previous decisions, intent may still be inferred from indirect and circumstantial evidence, but bad intent may not be inferred from materiality alone. Moreover, the court rejected past suggestions that materiality and intent may be judged on a "sliding scale," such that a stronger showing of materiality could offset a weaker showing of intent.
Turning to materiality, the majority abandoned the court's existing tests, which asked whether a "reasonable examiner" would consider the information pertinent and what information the PTO required to be disclosed under Regulation 1.56 (which currently includes both information that may establish a prima facie case of unpatentability and information that refutes or is inconsistent with the position the applicant takes regarding patentability). Instead, the majority adopted a "but-for" causation standard for most cases. As a general rule, the new materiality standard requires an accused infringer to show, by clear and convincing evidence, that the PTO would have refused to allow a claim to issue if it had known of the undisclosed information. In assessing whether the PTO would have issued the patent, district courts are to apply the standards that the PTO would have applied, not the standards used to determine validity at trial; thus, they must judge validity under a "preponderance of the evidence" standard and give claims their "broadest reasonable construction." To align with U.S. Supreme Court precedent, however, the majority recognized an exception: "but-for" materiality will not be required in cases of "affirmative acts of egregious misconduct," such as filing an "unmistakably false affidavit."
On the facts before it, the majority voted to vacate the district court's inequitable conduct finding and remand for further consideration. According to the majority, the district court erred by appearing to apply a "should have known" standard for intent and applying the PTO Rule 56 standard in finding materiality. On remand, the district court was instructed to consider whether the applicants knew of the inconsistent arguments to the EPO, knew of their materiality, and made the conscious decision to withhold them in order to deceive the PTO.
Four judges (Judge Bryson, joined by Judges Gajarsa, Dyk, and Prost) joined a lengthy dissent criticizing the majority's new "but-for" materiality standard and predicting that it will "not merely reform" the inequitable conduct doctrine, but come "close to abolishing" it altogether. The dissenters instead endorsed the current PTO Rule 56 materiality standard, and they would have affirmed the district court's finding of unenforceability.
Judge O'Malley took a middle position, joining the majority's discussion regarding intent to deceive and its decision to remand, but dissenting from its adoption of a "but-for" materiality standard. According to her, both the majority and dissenting opinions sought to establish overly rigid tests for materiality that are improper in the context of an equitable doctrine. Instead, she would have granted district courts more flexibility regarding the remedy for inequitable conduct.
Significance
TheraSense will be welcomed by the patent prosecution bar and patentees, as it significantly raises the bar for accused infringers seeking to prove inequitable conduct. The Federal Circuit has adopted a rigorous "but-for" test for materiality in most circumstances, including the paradigm case of an applicant's failure to disclose prior art references. In many cases it will be difficult for accused infringers to carry their burden of proving that the PTO would have refused to grant a claim had it known of the additional information. Moreover, the Federal Circuit has put an end to the "sliding scale" practice of using a strong showing of materiality to offset a weaker showing as to intent, and vice versa. These heightened substantive and evidentiary standards, along with previous panel decisions imposing detailed pleading requirements, will almost surely reduce the number of inequitable conduct allegations. Whether the decision will significantly affect patent prosecution practice remains to be seen, as applicants still have other incentives to disclose large volumes of art—and may have an even greater incentive to do so if the Supreme Court holds in Microsoft v. i4i that defendants' evidentiary burden of proving invalidity depends on what was disclosed and argued to the PTO.
Of course, the Federal Circuit may not have the last word. The en banc court was sharply divided not only on policy issues, but also on the proper reading of Supreme Court precedent, which is sparse, old, and applies generalized notions of "unclean hands" rather than the modern rubrics of materiality and intent. Furthermore, in adopting a "but-for" causation test, the majority both rejected the recommendation of the PTO (which favored using its own rule as the standard for materiality) and declined to follow the more lenient standard of materiality that the Supreme Court has adopted in securities fraud cases. Petitions for certiorari—either in this case or the many other pending inequitable conduct cases—are likely.
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