United States: Inequitable Conduct Does Not Exist Where Standard PTO Form Was Used

Network Signatures, Inc. v. State Farm Mut. Auto. Ins. Co.

The U.S. Court of Appeals for the Federal Circuit reversed a summary judgment holding of the district court on the issue of whether payment of late issue fees, using standard Patent Trademark Office (PTO) procedures, without stating the reasons for the late payment amounts to inequitable conduct. Network Signatures, Inc. v. State Farm Mut. Auto. Ins. Co., Case Nos. 12-1492 (Fed. Cir., Sept. 24, 2013) (Newman, J.) (Clevenger, J., dissenting).

The patent in issue was owned and maintained by the Naval Research Laboratory (NRL). Accordingly to NRL internal procedures, the patent was permitted to lapse, by nonpayment of maintenance fees, because there was no commercial interest in it.

Two weeks after the lapse became effective, the NRL received an inquiry from the predecessor to Network Signatures about licensing the patent. The predecessor indicated that he had tried to reach NRL several times to inquire about the license before the lapse of the patent, but did not succeed.

The NRL then petitioned the Patent and Trademark Office (PTO) to accept delayed payment of the fee using standard PTO procedures and the standard form for late payment of issue fees. The PTO granted the petition. The patent was then duly licensed and Network Signatures sued State Farm Mutual Automobile Insurance Company for infringement of the patent.

As a defense, State Farm asserted that the patent was permanently unenforceable on the ground that the NRL patent attorney had engaged in inequitable conduct by "falsely representing" to the PTO that the NRL's non-payment of the maintenance fee was "unintentional."

The Federal Circuit, applying the two-prong test for inequitable conduct, which requires both a showing of withholding material facts and an intent to deceive, found that the NRL attorney did not commit inequitable conduct when he used the standard PTO form to submit late payment of issue fees (i.e., a form that stated the non-payment of the issue fee was "unintentional"). The Court found that the NRL attorney's failure to state the exact reasons why the issue fee was not initially paid did not amount to inequitable conduct because the PTO form did not require any explanation of the reasons for non-payment. The Court focused on the fact that the acceptance of late fees is within the discretion of the director of the PTO and that the acceptance of the late fees without requiring further explanation is within the bounds of that discretion.

The Court further highlighted the fact that the non-payment of fees in this case was a mistake of fact, because had facts that were not known at the time of the lapse been known (here the third-party interest in a license) the lapse would not have occurred.

In the end, the Court found that matters unrelated to "substantive criteria of patentability" should be left to the discretion of the PTO, and where the PTO does not require specific showing of facts in these matters, failure to disclose such facts does not amount to inequitable conduct.

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