As a general rule, federal government contractors can expect that they will not have liability for infringement of U.S. patents for things done in performance of their contract obligations to the U.S. government.  This immunity arises under Section 1498 of Title 28 of the U.S. Code, which serves to shift the burden of liability for infringement of patents occurring in the course of performance under government contracts to the U.S. government.  The pertinent statutory language is:

Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture.

Since it was initially filed in 1996, the case of Zoltek Corp. v United States has cast doubt on the efficacy of this statute to shield contractors from claims for infringement of U.S. patents, if the infringing activity occurs outside the United States.  This issue has remained in play through multiple decisions by the Court of Federal Claims and the Court of Appeals for the Federal Circuit, the latest of which was handed down on March 14, 2012.  In this decision the Federal Circuit overruled earlier decisions by it and the Court of Federal Claims to the effect that 28 U.S.C. 1498 does not make the government responsible for patent infringement liability arising from actions of federal contractors outside the U.S., and that the contractors can be sued for infringement arising from those actions.  In doing so the Federal Circuit resolved a seeming conflict between various statutory provisions to rule that the statutory language quoted above amounts to a waiver of sovereign immunity by the government for patent infringement by federal contractors performing within the scope of their contracts, even if some of the infringing activities occur outside of the United States.  It will not be surprising if this latest Federal Circuit decision in the Zoltek case is appealed to the Supreme Court; but, at least for now, this Federal Circuit ruling has improved the situation for federal contractors. –Robert E. Smartschan

What constitutes patentable subject matter has been a question of keen interest to the courts in recent years.  The most recent chapter came on March 20, 2012 with the Supreme Court’s unanimous decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc.  

Two well established principles of patent law are that: (1) patent law cannot be used to claim laws of nature, natural phenomena and abstract ideas; and (2) patent law can be used to claim inventive ways of applying laws of nature.  Mayo examines the uneasy intersection of these two principles in the setting of a diagnostic method for determining the proper dosage of thiopurine drugs for treating autoimmune diseases.

Physicians found it difficult to determine proper dosages of drugs like thiopurine because different patients metabolized medicines at different rates.  As a result, the same dosage in different people could be ineffective in one but cause side effects in another.   Prometheus was the exclusive licensee of a patented method for determining the proper dosage of the drug by measuring the levels of metabolites in patients’ blood.   It was known that the level of metabolites in blood affected the ability to metabolize a drug and thus the effectiveness of drugs.  Prometheus’ patent taught a method for measuring metabolite levels and, based on refined measurements of the correlation, set thresholds where dosages would be either too high or too low.  Mayo used a similar method and Prometheus sued.  The district court held that the patent claimed an unpatentable law of nature, but the Federal Circuit reversed.

The Supreme Court agreed with the district court in deciding that the patent claimed a law of nature and nothing more, or at least not enough more.   It concluded that the relationship between the concentration of metabolites in blood and a drug’s effectiveness was a law of nature, and indeed one that was known.  While the patent did set forth an application of the law of nature, a method for determining proper dosages based on measurements of metabolites, the method “consist[ed] of well-understood, routine, conventional activity already engaged in by the scientific community; and these steps . . . are not sufficient to transform unpatentable natural correlations into patentable applications of those regularities.”

The method for applying the law of nature consisted of measuring levels of metabolite, refining the measurement of the correlation and applying the results to determine when a dosage is too high or low, and adjusting the dosage accordingly.  This application of the principle, it concluded, was no more than routine scientific analysis and thus was not inventive enough to be a patentable application. 

The case has prompted numerous amicus briefs on both sides of the issue, focusing mostly on whether limits on the patentability of methods for applying natural laws either foreclosed the free use of natural laws by everyone or properly encouraged the more detailed understanding and application of those laws.   The Court’s comments on those arguments may be helpful to future applicants.  First, while courts properly consider whether a method of application is “transformative”, transformation is only one indicator of patentability.  Second, it reasoned that something is no less a law of nature because it, like the correlation between metabolites and dosage effect, is relatively “narrow.”  Even if applying a narrowly-defined natural law may not foreclose much from the public domain, the courts are not in a good position to distinguish the importance or reach of different natural laws.  It also rejected the government’s argument that any method with additional steps necessarily transforms and therefore should be patentable, countering that such an expansive view would negate the broad principle that natural phenomena are in the public domain. 

Chris Mugel practices intellectual property law from the Richmond, Virginia office of Kaufman & Canoles.  –Christopher J. Mugel

Over the last few months, as either an advisor or trustee, I have been reviewing various existing and proposed life insurance policies, both conventional and universal life. In each case, my starting point has been to think about the purpose of the policy, the risk tolerance of the client or trust and the assumptions on which the income projections of the policy are based. Often this process involves having the insurance agent run new projections for a policy.

The current environment with low interest rates is by necessity changing the way that all of us need to evaluate the performance of insurance policies. In fact, one of the local companies recently put out a “Due Care Bulletin” that discussed the impact of low interest rates on life insurance products. The long and short is that, as a trustee or an advisor, we need to recognize that future performance, at least for some period of time, is going to be affected by this change in the marketplace.

The other interesting point is that there are a number of products on the marketplace which can help policyholders to deal with the volatility of market returns. I will discuss a couple of these below.

The starting point is to analyze the purpose of the policy. For example, what amount of the proceeds is “mission critical” and what amount is “icing on the cake.” Then it is important to understand the math of a life insurance policy, particularly how much is charged monthly, quarterly or annually against the premium or cash value to pay for the life insurance component. For example, in analyzing a universal life policy, you will see that there is a stated charge for the life insurance portion of the policy. The insurance company deducts this charge annually before funds are available to increase cash value or otherwise benefit the policy.

Next, we should look at what net annual rate of return is really needed for the policy to perform at the level that our client needs or wants, which are two distinct concepts, and what is the risk tolerance of our client.

Once you have a target range for an average annual return, the next step is to look at what tools may be available from the life insurance company to increase the likelihood of obtaining that performance objective. For example, one insurance company product that we recently looked at offers an S&P type of index fund with a 1% floor and an 11% cap. The effect of this collar is that the portion of the account invested in this fund can never have a negative return. Since there is always is a fixed charge for life insurance policies, avoiding a negative return can have a meaningful positive impact. For example, if the timing of the periodic charge is such that it occurs on a down day in the market, there can be a significant negative impact on returns.

Another tool that same insurance company offered was a bond fund with a floor currently at 2 1/2%. The price for the floor was the loss of liquidity on funds invested in the bond fund in that those funds were locked into the fund for a long period of time with a 10% per annun withdrawal right. However, since the policy holder is already making a long term investment with a commitment of at least some portion of the portfolio to bonds, this loss of liquidity was almost like a ‘freebie’ in the sense that from an investment point of view you would intend to keep a position covered in bonds anyway. In all cases, all funds are freed up immediately for policy termination or death benefit.

The point of all of this discussion is not to promote any particular insurance policy but rather to emphasize that, as a trustee, it is our job to look at all the options and constantly to explore new ways of analyzing the effective and proper way to see that the policies are managed. This is an effort between the attorneys, the accountants and insurance agents who make up the team advising clients in these matters. –Rob Goodman

In previous posts, we have explained that violating the dilution provisions of the Federal Trademark laws is difficult and only available to the uber-famous.  As living proof of this point, the Federal Circuit recently denied such protection to the iconic Coach® brand.  Without a doubt, Coach® is one of the most famous American high fashion, handbag manufacturers, ubiquitously present in nearly all high fashion magazines and annually selling billions of dollars of Coach® branded products.  Yet, even with this type of fame, the company could not avail itself of the anti-dilution provisions of the Trademark Dilution Revision Act of 2006 (“TDRA”), 15 U.S.C. § 1125(c), to block the registration of the mark “coach” by Triumph Learning who made and marketed test preparation materials under that name. 

Dilution claims are the stepchildren of the trademark world because, by their very nature, the claims do not involve products that compete.  Rather, the claims are based on a claim that a noncompeting use intrinsically devalues the strength of the brand.  As such, courts have struggled to limit its use.   In Coach Servs., Inc. v. Triumph Learning LLC, No. 2011-1129, 2012 WL 540069 (Fed. Cir. Feb. 21, 2012), the Federal Circuit held that to take advantage of the TDRA, the mark had to not only be famous but, since it’s mark was based on a common word with other ordinary uses, the mark holder had to establish that the ordinary “uses of the mark are now eclipsed by the owner’s use of the mark . . .  in almost any context” and that the mark has become “a household name.”   Despite its extensive sales and ubiquity, a multitude of registered trademarks, extensive survey evidence, and even two Second Circuit decisions finding the mark famous, the Federal Circuit held that Coach had not shown that its use of the Coach mark had become a household name that eclipsed the other, ordinary uses of “coach.”   In the end, the Court may be signaling just how careful it will be with extending trademark protection beyond the confines of competition. 

Stephen E. Noona is the head of Kaufman & Canoles’ Trial Section and Co-chair of its Intellectual Property Law and Franchising Practice Group.  In his 24 years of practice, he has been counsel in hundreds of intellectual property cases in federal courts across the nation, including over ninety (90) patent cases in the Eastern District and is Fellow in the American College of Trial Lawyers. He regularly appears before the judges in all four Divisions of the Eastern District on intellectual property matters.  –Stephen E. Noona

Recent articles and scholarly studies point to a significant increase in trade secret litigation.  Most notably, two studies by attorneys at the law firm O’Melveny & Meyers, published in the Gonzaga Law Review in 2009 and 2010, analyzed trends in trade secret litigation in federal and state courts.  The studies found that the frequency of trade secret litigation has been “growing exponentially” in federal courts and more modestly in state courts, but in both venues at rates greater than those for litigation generally.  According to a February 1, 2012 Business Week article, four of the ten largest intellectual property verdicts in 2011 were trade secret cases.  These included a $2.3 billion verdict (subsequently reduced to slightly under $1 billion) in an action brought by St. Jude Medical, Inc. against an ex-employee and a Chinese company he founded.  Admittedly, the verdict may be more of a message than a remedy:  since the defendants are overseas, the judgment may not be collectable.

The Business Week article speculates that the growth in litigation is being fueled by a number of trends: hard economic times and the employee mobility that accompanies them; the growing reliance on trade secrets to protect innovation; and the increasing ease of misappropriation brought by technology and economic arrangements such as outsourcing.

The Gonzaga Law Review studies came to some noteworthy conclusions about the characteristics of trade secret litigation, including the following: 

• The bulk of cases involve claims against ex-employees or business partners – those known to the plaintiff.
• Despite the proliferation of trade secret litigation, defendants prevail at trial more often than plaintiffs, and they also succeed more often than plaintiffs on appeal.
• Statistically, at least, it is somewhat more difficult to prevail on a trade secret claim in state court than in federal courts.

Chris Mugel practices intellectual property law from the Richmond, Virginia office of Kaufman & Canoles.  –Christopher J. Mugel

These days it is very common for estate planning clients to create revocable trusts for probate avoidance and ease of estate administration, even if the clients do not face estate tax liability under the current system. As we are well aware, those clients fail to achieve the probate avoidance benefits of their trusts if they fail to fund their trusts during their lifetimes. Attorneys and other advisors should (and often do) work with clients to ensure that most of their assets, and certainly all the large assets, are in their trusts. We draw deeds to transfer real estate to the trusts. We re-title their brokerage accounts, their stock, their CDs and their money market accounts. Sometimes, we even have clients transfer their regular checking accounts, their vehicles and their tangible personal property into their trusts.

Nevertheless, for most clients, at least something is forgotten. It could be a checking account that hasn’t been used in years, a vehicle, a fractional interest in real estate, or assets purchased or inherited by the decedent after the trust already was in place. In the past, if the value of the forgotten assets was in excess of $15,000, the decedent’s executor had to go through the full probate process. As the result of an update to the law in 2010, this threshold has now increased to $50,000, a much more realistic figure.

Under these circumstances, a small estate affidavit can be used to collect and distribute assets in the decedent’s name as long as the value of the entire probate estate is less than $50,000. Use of a small estate affidavit does not require an executor or administrator to qualify on the estate and does not require any reporting to the Commissioner of Accounts.

In order to use a small estate affidavit, certain criteria must be satisfied, all of which are listed in Virginia Code Section 64.1-132.2. As previously mentioned, the decedent’s entire personal probate estate must not exceed a value of $50,000. Additionally, at least sixty days must have passed since the decedent’s death, no one must have qualified as executor or administrator, and the decedent’s will (if any) must have been probated (meaning, put to record in the Clerk’s Office). The affidavit must name the person or persons entitled to payment of the decedent’s assets. If there is more than one person entitled to the assets, then one of them may be designated by the group to collect and distribute the assets.

If a decedent dies with a pour over will and $30,000 worth of assets which were not transferred to his trust during his lifetime, one option would be for the trustee of the trust to use the small estate affidavit to transfer the probate assets to the trust. However, if it makes more sense for these assets to be distributed directly to a surviving spouse, the surviving spouse could first file claims for family allowance ($18,000) and exempt property ($15,000), which are given priority over any other claims against the estate. Then, the surviving spouse will be the person entitled to be paid the assets of the probate estate, up to her claim amount of $33,000.

The small estate affidavit is another tool which when used properly can make the probate process easier and more cost effective for clients. –Sarah Messersmith