Ulead Systems v. Lex Computer & Management

• Decision Date: 09 December 2003
• Docket Number: No. 01-1402.,No. 01-1448.,No. 01-1320.,01-1320.,01-1402.,01-1448.
• Citation: 351 F.3d 1139
• Parties: ULEAD SYSTEMS, INC. (a California Corporation), Plaintiff-Cross Appellant, and Ulead Systems, Inc. (a Taiwan Corporation), Cross Defendant-Cross Appellant, v. LEX COMPUTER & MANAGEMENT CORP., Defendant/Cross Claimant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1139

351 F.3d 1139

ULEAD SYSTEMS, INC. (a California Corporation), Plaintiff-Cross Appellant, and Ulead Systems, Inc. (a Taiwan Corporation), Cross Defendant-Cross Appellant, v. LEX COMPUTER & MANAGEMENT CORP., Defendant/Cross Claimant-Appellant.

No. 01-1320.

No. 01-1402.

No. 01-1448.

United States Court of Appeals, Federal Circuit.

Decided December 9, 2003.

COPYRIGHT MATERIAL OMITTED

Kenneth L. Wilton, Small Larkin, LLP, of Los Angeles, California, argued for plaintiff-cross appellant and cross defendant-cross appellant. With him on the brief were Jon E. Hokanson and Jill S. Schwartz.

William J. Brutocao, Sheldon & Mak, of Pasadena, California, argued for defendant/cross claimant-appellant. With him on the brief was Jeffrey G. Sheldon.

Before NEWMAN, DYK and PROST, Circuit Judges.

Opinion for the court filed by Circuit Judge DYK. Concurring in part and dissenting in part opinion filed by Judge NEWMAN.

DYK, Circuit Judge.

Lex Computer & Management Corp. ("Lex") appeals the decision of the United States District Court for the Central District of California, granting summary judgment that United States Patent No. 4,538,188 ("the '188 patent") is unenforceable and expired because Lex falsely claimed status (and paid maintenance fees) as a small entity. Lex also appeals the district court's award of attorneys' fees under 35 U.S.C. § 285 to Ulead Systems, Inc., a California corporation, ("Ulead-California") and Ulead Systems, Inc., a Taiwan corporation ("Ulead-Taiwan"). Ulead-California and Ulead-Taiwan cross-appeal claiming that they should have been awarded additional attorneys' and expert witness fees.

We conclude that summary judgment of inequitable conduct was improper because a genuine dispute of material fact remains as to Lex's intent to deceive. We also hold that the erroneous payment of small entity fees may be excused under 37 C.F.R. § 1.28(c), so long as the patentee is not guilty of inequitable conduct relating to its inaccurate assertion of small entity status. Consequently, we vacate the decision of the district court, including the award of attorneys' fees, and remand for trial. On the cross appeal we affirm the district court's refusal to impose sanctions based on Lex's alleged failure to conduct a pre-filing investigation and dismiss as moot the cross-appeal in other respects.

BACKGROUND

In 1980, Congress amended the patent laws to require for the first time the payment of periodic maintenance fees to maintain the life of a patent. Act of December 12, 1980, Pub. L. No. 96-517, § 2, 1980 U.S.C.C.A.N. (94 Stat.) 3015, 3017-18 (codified as amended at 35 U.S.C. § 41 (2000)). Further amendments in 1982 imposed substantial increases in filing, processing, maintenance and issue fees. Concerned that this new legislation would be overly burdensome to individuals, nonprofit organizations and smaller businesses, Congress provided a discount for small entities. Act of August 27, 1982, Pub. L. No. 97-247, § 1, 1982 U.S.C.C.A.N. (96 Stat.) 317, 317. This discount for small entities was eventually made permanent. Act of Nov. 6, 1986, Pub. L. No. 99-607, § 1(b)(2), 1986 U.S.C.C.A.N. (100 Stat.) 3470, 3470 (codified as amended at 35 U.S.C. § 41(h) (2000)). Pursuant to its rulemaking authority under 35 U.S.C. § 41, the Patent and Trademark Office ("the PTO") adopted rules governing claims to small entity status. 47 Fed.Reg. 40,134, 40,139-40 (Sept. 10, 1982) (codified as amended at 37 C.F.R. §§ 1.27, 1.28 (1983)).

The PTO rules define a "small entity" as a small business concern, independent inventor, or non-profit organization. 37 C.F.R. § 1.9(f) (1993).¹ "Small business concern" is defined in accordance with the definition established by the Small Business Administration ("SBA"). Id. at § 1.9(d). The applicable SBA regulation states as follows:

a small business concern for purposes of paying reduced fees ... to the Patent and Trademark Office means any business concern (1) whose number of employees, including those of its affiliates, does not exceed 500 persons and (2) which has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey or license, any rights in the invention to any person who could not be classified as an independent inventor if that person had made the invention, or to any concern which would not qualify as a small business concern or a nonprofit organization under this section.

37 C.F.R. § 1.9(d) (quoting 13 C.F.R. § 121.12(a)) (emphases added).

In the present case, it is undisputed that Lex has never had more than twenty employees and qualified as a small entity when it acquired the '188 patent by assignment on May 21, 1986. Lex properly paid the first maintenance fee on the '188 patent at the reduced rate in 1988. However, on February 15, 1993, Lex granted a nonexclusive license to Adobe Systems Incorporated ("Adobe"), a company with more than 500 employees, and later granted non-exclusive licenses to at least two more large entities.

It is undisputed that the grant of the Adobe license and the other licenses to large entities disqualified Lex from claiming small entity status and paying reduced fees. It is also undisputed that on November 1, 1993, Lex submitted the second maintenance fee for the '188 patent to the PTO along with a petition to accept delayed payment and a verified statement claiming small entity status. The verified statement stated: "no rights to the invention are held by any person ... who could not qualify as a small business concern under 37 CFR 1.9(d)." (App. at 523.) The PTO granted the petition and reinstated the patent on November 15, 1993. On September 28, 1998, Lex submitted a petition to accept delayed payment of its third maintenance fee. That petition stated that "small entity status for this patent has been checked and is still in effect." (App. at 525.) The PTO granted the petition and again reinstated the '188 patent on April 26, 1999. Lex admits that it paid both the second and third maintenance fees and claimed the reduced rate for small entities even though it was not entitled to claim small entity status.

On July 21, 1998, Ulead-California filed this action seeking declaratory judgment of non-infringement, invalidity, and unenforceability of the '188 patent. Lex counterclaimed for infringement of the '188 patent. Ulead Sys., Inc. v. Lex Computer & Mgmt. Corp., 130 F.Supp.2d 1137, 1141 (C.D.Cal.2001) ("Ulead I"). Lex later joined Ulead-Taiwan and filed a cross-claim for infringement of the '188 patent. Id. On December 26 and 28 of 2000, Ulead-California and Ulead-Taiwan respectively moved for summary judgment that the '188 patent is unenforceable, invalid and/or expired.² Id. Ulead set forth two grounds in these motions: (1) that the '188 patent is unenforceable and/or invalid because of Lex's misrepresentations of small entity status to the PTO and (2) that the '188 patent had expired because Lex failed to pay the correct maintenance fees and did not pay the incorrect small entity fee in "good faith" as required by the PTO regulation. See Id. at 1142. Immediately thereafter, Lex acted to correct the error in fee payment by submitting the balance of the deficiency to the PTO, in accordance with the procedures for correcting erroneous underpayment set forth in 37 C.F.R. § 1.28(c). The PTO accepted payment, and on January 5, 2001, announced by letter that "[a]fter meeting with the Office of Petitions it was determined that [Lex's] request to change status to large entity under patent number 4,538,188 will be approved." (App. at 1650.)

Lex opposed summary judgment on the ground that it did not intend to mislead the PTO to believe it was entitled to small entity status. Lex also argued that the '188 patent was not expired because the PTO had properly excused its erroneous claim to small entity status (and underpayment of fees) under § 1.28(c). On January 23, 2001, the district court granted summary judgment for Ulead on both of the asserted grounds. The court held that the patent was unenforceable because Lex had committed inequitable conduct and there was no genuine issue of fact relating to either the materiality of Lex's misrepresentation of small entity status or its intent to deceive. Id. at 1143-46. The court also held that the patent had expired due to failure to pay the full maintenance fees and that Lex could not correct this error under § 1.28(c) because its claim to small entity status had been in bad faith. Id. at 1147.

Based upon its conclusion that Ulead had proven, by clear and convincing evidence, that Lex was guilty of inequitable conduct and bad faith, the district court held this to be exceptional case under 35 U.S.C. § 285. Ulead Sys., Inc. v. Lex Computer & Mgmt. Corp., 151 F.Supp.2d 1192, 1205 (C.D.Cal.2001) ("Ulead II"). Ulead was awarded attorneys' fees and costs in the amount of $470,084.37. Id. at 1215. However, the court refused to award attorneys' fees incurred for a related litigation that Lex had filed against Ulead in New York. Id. at 1211. Ulead was also denied deposition-related expert witness fees, id. at 1213, and attorneys' fees that it spent to prepare additional summary judgment motions of invalidity and non-infringement that were not considered by the district court, id. at 1211. Furthermore, the court declined to impose sanctions for Lex's alleged vexatious litigation and failure to conduct a pre-filing investigation. Id. at 1213-14.

Lex timely appealed. Ulead timely cross-appealed. We have jurisdiction under 28 U.S.C. § 1295(a)(1).

DISCUSSION

"Summary judgment is proper in a case where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." DH Tech., Inc. v. Synergystex Int'l, Inc., 154 F.3d 1333, 1339 (Fed.Cir.1998). We review a district court's grant of summary judgment without deference. Dayco Prods., Inc. v. Total Containment, Inc., 329 F.3d 1358, 1362 (Fed.Cir.2003...