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Intellectual Property Bulletin - Summer 2018


 

US Taxation of IP After Tax Reform

By Larissa B. Neumann and Julia Ushakova-Stein

Introduction

U.S. taxation of intellectual property has become astoundingly more complex after the Tax Cuts and Jobs Act. The new rules are so complex that the IRS and Treasury are still figuring out the details of how they operate. Some important clarifying guidance has been issued recently, but more guidance and regulations are needed. The IRS has until June 2019 — 18 months after the act went into effect in December 22, 2017 — to issue regulations for them to be retroactive. This is a tight deadline considering the voluminous guidance that is needed.

A number of the new rules under the act specifically target the taxation of IP. Significant changes related to IP taxation include a new tax on certain global income earned by foreign subsidiaries and a new tax incentive for certain foreign-derived income earned by U.S. corporations. The law also reduced the corporate tax rate to 21 percent, compared with the previous top corporate tax rate of 35 percent. This generally makes the United States a more competitive location in which to operate and own IP than in the past.

The U.S. has historically had a worldwide system of taxation, where income earned by a U.S. taxpayer is subject to U.S. tax regardless of whether it is earned inside or outside the U.S. Most countries do not tax worldwide income, but rather have a territorial system that only taxes residents on the income earned in the country.

Although it was originally suggested that the act would move the U.S. to a territorial system to be in line with international taxation norms, and to make the country a more attractive place for multinational businesses to operate, the reality is that the U.S. still taxes worldwide income, unlike all other major countries.

Some of the Important Changes in Taxation of IP

Foreign-Derived Intangible Income Tax Incentive
The act created a new tax rule intended to encourage companies to have “foreign derived intangible income” earned in the U.S. Under the new rules, the tax rate on FDII, which is income arising from U.S. taxpayers selling or licensing property, including IP, or providing services to foreigners, can be reduced from the standard corporate tax rate of 21 percent to a favorable corporate tax rate of 13.125 percent. Specifically, FDII is defined as certain income derived in connection with (1) property that is sold, leased, licensed or otherwise exchanged or disposed by the U.S. taxpayer to a non-U.S. person for a foreign use, or (2) services provided by the U.S. taxpayer to a person located outside the United States.

If a U.S. corporation sells or licenses goods (including IP) to a foreign related party, the income should generally qualify as FDII if the property is ultimately sold to an unrelated foreign person, used to make property sold to an unrelated foreign person or used in providing services to an unrelated foreign person outside of the U.S. However, if, for example, a U.S. corporation sells IP to an unrelated party for further development within the U.S., the IP is not treated as sold for a foreign use even if the IP subsequently has a foreign use.

Even though FDII is labeled as a “foreign derived intangible income” tax provision, the new category of income is actually much broader. FDII generally applies to income from exports of goods and services, not just income from IP. FDII is not like a patent box tax incentive, which typically requires IP ownership and development in the country to qualify for the reduced tax rate.

New Global Intangible Low-Tax Income Tax
The act also added a unique U.S. tax on worldwide income of foreign subsidiaries called “global intangible low-taxed income.” GILTI results in the immediate U.S. taxation of certain foreign income earned through controlled foreign corporations — known as CFCs, which are entities that are more than 50 percent owned by 10 percent U.S. shareholders. The GILTI rule is also broadly drafted and is not limited to intangibles, despite what the name “global intangible low-taxed income” indicates. The GILTI tax is a significant revenue raiser that helped pay for other tax changes in the act, including the decrease in the corporate tax rate.

The purpose of GILTI is to subject U.S. shareholders of CFCs to a minimum U.S. tax if the CFC’s foreign income is taxed at a rate below 13.125 percent. GILTI generally results in a 10.5 percent minimum U.S. tax, in addition to any foreign taxes paid, on all foreign income after giving effect to a routine return on tangible property. Under the GILTI tax rules, the U.S. continues to use a worldwide system of taxation.

The new GILTI tax also reduces the benefit of using IP holding company CFCs to defer U.S. tax on global income. As a result, GILTI has the biggest impact on industries with low tangible property ownership when compared to revenues, such as the technology sector and the pharmaceutical industry, where companies rely heavily on IP in manufacturing and selling their products or delivering their services.

Taxation of Moving IP Offshore
The act also made certain changes that make it more costly to transfer IP outside the United States. Previously, certain otherwise tax-free transfers of patents, know-how, copyrights, trademarks, franchises, licenses and other similar IP created a taxable deemed royalty in the U.S., resulting in a tax cost in the U.S. to transferring IP offshore. The act added goodwill, going concern value and workforce in place to the list of IP that is subject to the deemed royalty, creating an additional tax cost to moving IP offshore.

This change, coupled with the provisions discussed above, serve as a disincentive to transferring U.S.-owned IP abroad.

Should IP be Brought Back to the US?

Even with the act’s changes to international tax rules, multinational corporations generally do not benefit from bringing any offshore IP back to the U.S. The U.S. tax rate on income from IP owned abroad under GILTI is approximately 10.5 percent, while IP owned in the U.S. is taxed at a higher 13.125 percent tax rate under FDII.

In addition, FDII is unlikely to be a provision that a company can rely on in its long-term planning. A shift in political leadership in the U.S. could easily result in a higher FDII rate. In order to balance the budget to get the act passed, Congress has already opted to increase the FDII rate in 2026 to 16.4 percent. It is also uncertain how long the FDII incentive will remain. FDII might be deemed an impermissible export subsidy by the World Trade Organization, and the U.S. could decide to remove the FDII benefit at any time. It generally would be inadvisable to restructure your IP ownership or operations based on an expected FDII benefit.

Furthermore, the act of bringing IP back into the U.S. through a related party sale would likely trigger additional foreign income that could be subject to GILTI taxation. For example, sale of IP that has dramatically increased in value by a holding company in a low-tax jurisdiction could result in additional income that is GILTI. Foreign taxes could also apply to this IP transfer, which could significantly add to the cost of onshoring the IP. Additionally, as discussed above, once the IP is in the U.S. it could be very costly to offshore it in the future.

Conclusion

The act has drastically changed the landscape of U.S. IP taxation. Although streamlining of taxation and simplicity of the U.S. tax code were promoted as the reasons the act was necessary, in reality the law increased the complexity of the U.S. tax rules significantly. As a result, any past IP tax planning should be carefully re-evaluated.


 

PTAB Trials Evolving Toward the Litigation Alternative Congress Envisioned

By Jennifer R. Bush

The recent decision in SAS Institute v. Iancu — in combination with the proposed shift from a broadest reasonable interpretation (BRI) standard to the Phillips standard for claim construction used in district court — moves trials at the U.S. Patent Trial and Appeal Board toward being the most likely forum for deciding claim construction and patent validity. It also signals that PTAB trials are becoming a truer “alternative” to litigation, as Congress envisioned under the America Invents Act.

A New Trial is Born

Under the AIA, Congress created PTAB trials as a cost-effective alternative to district court litigation. See 35 U.S.C. §§ 316(b), 326(b) (2012). However, in the first five years since the trials went into effect, the result has been an increase in PTAB trials running concurrently with district court litigation pertaining to the same patent. The AIA did not expressly prohibit such redundancy; instead, it relied upon the district courts to decide whether to stay the concurrent litigation. Indeed, since the inception of PTAB trials, a majority of cases have had co-pending litigation.

For concurrent litigation and PTAB trials, the historic grant rate for contested stays has hovered around 60 percent. This percentage likely reflects the fact that many judges have considered PTAB trials as “simplifying the issues” for the litigation, which has been a key factor in district courts’ decisions whether or not to grant such a stay. This is the case even in the context of inter partes review, in which the issues up for consideration by the PTAB are limited to challenges under §§ 102 and 103 based on printed publications.

Recent Patent Law Developments

Two recent legal developments are poised to have a profound impact on the interplay between PTAB trials and district court litigation: the U.S. Supreme Court decision in SAS and the new rules set forth by the USPTO Director Andrei Iancu in the Notice of Proposed Rulemaking dated May 9, 2018, which proposed a change to the Phillips claim construction standard for PTAB trials.

In the SAS decision, the majority held that instituting an IPR is an all-or-nothing decision, such that the PTAB must either institute for all challenged claims or deny institution entirely. The Court’s ruling was based on the rationale that the AIA statutes entitle a petitioner to a final written decision addressing all challenged claims. Following SAS, the threshold for institution is whether the petitioner has presented a “reasonable likelihood” of prevailing on at least one challenged claim. If so, a trial is instituted on all challenged claims. In the USPTO Guidance issued following SAS, this position was taken a step further than the express holding of SAS, stating that “the PTAB will institute on all challenges,” seemingly confirming that it will also institute as to all grounds included in the petition, not just all claims (emphasis added). As a practical matter, all claims and grounds now will be addressed in a final written decision, which will be appealable to the Federal Circuit.

The second recent legal development likely to impact the effect of PTAB trials on district court litigation is a set of new rules proposed by Iancu for a change to the claim construction standard. Responding to arguments that the overlap between patents that are considered at the PTAB and those that are the subject of litigation favors using a consistent claim construction standard, Iancu has proposed changing from use of the BRI standard in PTAB trials to the same Phillips standard used by courts.

Commentators have disagreed about how much of a disparity, if any, there is between the BRI and Phillips claim construction standards. Even judges have disagreed on this matter, with U.S. Court of Appeals for the Federal Circuit Judge Kimberly A. Moore having stated in PPC Broadband v. Corning Optical Communications RF that the broadest reasonable interpretation consistent with the specification is “not necessarily the correct construction under the framework laid out in Phillips.” On the other hand, CAFC Chief Judge Paul Michel has stated that “[t]he putative claim construction standard between courts and the Patent Office is the same — with the one minor difference being that courts may apply disclaimers made by a patent owner during prosecution.” Regardless of whether there is a true difference in the standards, what the rule change will mean is that when a patent is challenged both in court and at the PTAB, the PTAB is likely to become the first forum to construe a patent’s claims under Phillips, due to the expedited timeline of PTAB trials.

As detailed below, the decision in SAS and the proposed change to Phillips-style claim construction may well increase the overall institution rate of PTAB trials and increase the stay rate in concurrent district court cases.

If the petitioner needs only show a reasonable likelihood of prevailing on one challenged claim, then under the SAS decision the bar is arguably lower for institution than it was previously, when each claim and ground was considered individually. Some have argued that SAS will not result in an increased institution rate, believing the PTAB will exercise its discretion in institution decisions to deny entire cases more often, for example if the evidence is weak for most claims. This outcome seems unlikely, for several reasons.

First, the PTAB’s discretion has been largely criticized, when applied outside of contexts such as overly numerous unsupported grounds (e.g., Liberty Mutual Insurance Company v. Progressive Casualty Insurance Company and Zetec v. Westinghouse Electric Company) or 35 U.S.C. § 325(d) issues where the petition puts forth the same or substantially the same prior art or arguments, whether in the reexamination setting or for follow-on petitions. Some have even argued that SAS reduced the PTAB’s discretion authority substantially. Rather, rules such as word count are likely to continue to provide a gating issue as to how many claims and grounds adequately can be addressed in a petition, with General Plastic Industrial v. Canon Kabushiki Kaisha clarifying the circumstances in which follow-on petitions are most likely to be allowed. Indeed, it’s possible that petitioners worried about outright denial may decide to split up claims and issues between multiple petitions.

Second, it would be incorrect to argue that the SAS decision means more work for the PTAB at the institution stage. Rather, the PTAB can stop its analysis at a single independent claim under a single ground if it believes institution is warranted on that basis. The increase in work that is likely to occur, if any, would be in the PTAB’s analysis in the final written decision, not at the institution stage.

Third, some commentators have argued that the SAS decision will lead to a decrease in patent owner preliminary responses, in view of the patent owner needing to show why the petitioner is wrong on every claim to avoid institution. If this argument ends up being correct, then the institution rate could very well increase in view of the petition being uncontested. Finally, it also seems unlikely that the PTAB would opt to increase its institution denial rate substantially based solely on SAS, in view of the post-institution stage providing a large portion of the fees for PTAB trials. Thus, each of these factors point to the change in the overall institution rate of PTAB trials resulting from SAS, if any, being an increase.

Another likely effect of the SAS decision, and one for which the impact likely would be increased by changing to a Phillips-style claim construction at the PTAB, is an increase of the stay rate in concurrent district court cases. For covered business methods, the factors that “shall” be considered in determining whether to stay concurrent litigation are governed by statute, at Section 18(b) of the AIA: “(A) whether a stay, or the denial thereof, will simplify the issues in question and streamline the trial; (B) whether discovery is complete and whether a trial date has been set; (C) whether a stay, or the denial thereof, would unduly prejudice the nonmoving party or present a clear tactical advantage for the moving party and (D) whether a stay, or the denial thereof, will reduce the burden of litigation on the parties and on the court.”

In practice, district courts are not required by statute to consider these factors for other PTAB trial types, but they typically consider at least condition (A) — whether a stay “will simplify the issues in question” — in conjunction with consideration of the totality of the circumstances. Post-SAS, since all claims will be instituted if any are, the likelihood that the PTAB trial will in fact “simplify the issues in question” goes up dramatically. If a Phillips-style claim construction is used, then the issues for litigation are simplified even further by the PTAB trial.

Another factor that courts typically look to is the timing of the PTAB petition vis-a-vis the status of the district court case. Because PTAB trials proceed on an expedited timeline, institution early in the litigation timeline can be particularly advantageous for a petitioner looking to stay the district court litigation. Indeed, the PTAB may weigh in on claim construction under Phillips as early as six months after the filing of the PTAB petition, via the institution decision, which is likely to be well ahead of the typical timeline for a Markman hearing in the concurrent litigation. This timeline seems like yet another reason for courts to stay cases pending that construction.

Takeaways

These recent and proposed changes in patent law appear to be moving PTAB trials toward being the “alternative” to litigation that Congress envisioned. If all claims are instituted in a PTAB trial and a Phillips claim construction applied at the institution decision stage, litigation stays become much more likely, and ultimately, the PTAB will become the most likely forum for deciding claim construction and patent validity.


 

Quick Updates

All the World’s a Stage, and Some Players Are De Minimis Under Copyright Law

By Mitchell Zimmerman

The out-of-doors world abounds with copyrighted works, and visual authorship is everywhere on display: giant visuals on buses, designs on T-shirts, public sculpture, caps with artsy graphics, advertising posters — and graffiti. In a world abristle with potential copyright claims, what is a filmmaker to do when she ventures into the streets? Must she seek rights clearance for every work upon which her camera alights — or eschew everything but her own subjects?

No, holds a recent decision in Gayle v. Home Box Office, 2018 WL 2059657 (S.D.N.Y. May 1, 2018), appeal docketed, No. 18-1536 (2d Cir. May 21, 2018). According to that ruling, when a scarcely legible graffiti (or other copyrighted content) appears fleetingly in the background and is not the focus of a scene, either visually or substantively, the use may be deemed de minimis and hence non-infringing.

Gayle comes 21 years after a decision by the U.S. Court of Appeals for the Second Circuit that went the other way but set the stage for de minimis holdings on the incidental use of visual works in movies or television. In Ringgold v. Black Entertainment Television, a poster of artist Faith Ringgold’s “Church Picnic” was displayed as set decoration in nine segments aggregating 27 seconds. The Second Circuit rejected the studio’s de minimis and fair use defenses. In copyright law, Ringgold explains, de minimis usually means “copying [that] has occurred to such a trivial extent as to fall below the quantitative threshold of substantial similarity, which is always a required element of actionable copying.”

The quantitative element plays a role in fair use analysis: §107 of the Copyright Act requires consideration of “the amount and substantiality” of the copying. But, Ringgold counsels, the de minimis “concept is an inappropriate one to be enlisted in fair use analysis . . . If the allegedly infringing work makes such a quantitatively insubstantial use of the copyrighted work as to fall below the threshold required for actionable copying, it makes more sense to reject the claim on that basis and find no infringement.”

For reasons we needn’t go into here, the Ringgold court faulted the district court’s fair use analysis and remanded. But because Ringgold’s progeny, including Gayle, concentrate on the de minimis defense, we focus on that issue.

The Ringgold court held the public display of the “Church Picnic” poster was not de minimis in light of the relative clarity with which the poster could be seen, with “sufficient observable detail for the ‘average lay observer’ to discern African-Americans in Ringgold's colorful, virtually two-dimensional style.”

“Observability” is thus the key.

In Sandoval v. New Line Cinema, the defendant used 10 of Sandoval’s photographs. Though visible for up to six seconds, and at least partly for a total of 36 seconds, “Sandoval's photographs [were] not displayed with sufficient detail for the average lay observer to identify even the subject matter of the photographs, much less the style used in creating them,” the court ruled. The photos were shown in poor lighting, at great distance, were out of focus and were “virtually unidentifiable.” The copying was held de minimis.

Likewise in Gottlieb Development v. Paramount Pictures. In that case, the copyrighted designs on the plaintiff’s “Silver Slugger” pinball machine were allegedly infringed because the machine appeared in a three-and-a-half-minute scene in a film. Notwithstanding that the pinball machine was selected for its thematic relevance, the display was de minimis because the “Silver Slugger” appeared only briefly, in the background, and the copyrighted designs were out of focus, obscured and never fully visible.

Gayle confirms that minor, incidental use may be de minimis. In an episode of HBO’s series Vinyl, a woman is shown walking down a New York City street and passing a dumpster. Graffiti on the dumpster bearing the text “Art We All” briefly appears. The creator alleged this constituted copyright infringement, but the court granted HBO’s motion to dismiss.

Observability is “paramount” to the de minimis issue, Gayle holds, and “turns on ‘the length of time the copyrighted work is observable as well as factors such as focus, lighting, camera angles, and prominence.’”

Gayle’s claim was “premised on a fleeting shot of barely visible graffiti” that “appears on screen for no more than two to three seconds,” is never pictured by itself or in a close-up and plays no role in the plot. This graffiti “is ‘never fully visible,’ let alone legible.”

Gayle sought to bolster his claim by asserting the use was deliberate and consequential. The court dismissed these considerations, reiterating Gottlieb‘s holding that motive is irrelevant: “[W]here the use is de minimis’… ‘the copying will not be actionable, even where the work was chosen to be in the background for some thematic relevance.”

Lesson for filmmakers: We cannot quite say that chances of a challenge are de minimis . But when third-party visual works can be seen in your videos, Gayle and its predecessors suggest you will have substantial defenses so long as the earlier works appear only incidentally and briefly, remain in the background, are not significant to the plot and are presented in such a manner that their expressive character is not readily discernable.


Non-Marking Sole? Lessons from adidas v. Skechers

By Crystal Nwaneri

California trademark attorneys have been waiting five years to get clarification on the requirements for injunctive relief and hoped that a new case between adidas and Skechers would provide that guidance. The U.S. Court of Appeals for the Ninth Circuit has now spoken, and while some aspects remain uncertain, the situation is clearer than it was under the court’s 2013 Herb Reed Enterprises v. Florida Entertainment Management decision.

In Herb Reed, the Ninth Circuit held that the district court abused its discretion in finding that the plaintiff suffered irreparable harm where it relied on “conclusory statements” rather than evidence about the loss of control over business reputation and damage to goodwill. Instead of allowing a presumption of irreparable harm, Herb Reed held that “[t]hose seeking injunctive relief must proffer evidence sufficient to establish a likelihood of irreparable harm.”

In adidas America v. Skechers USA, the Ninth Circuit clarified that “concrete evidence” is needed, and, while not defining that term, provided examples of what is and what is not such evidence. The court held that the district court did not abuse its discretion in issuing a preliminary injunction on sales of Skechers’ Onix sneakers for infringement of adidas’ Stan Smith shoe, after finding that adidas presented sufficient evidence of likelihood of success on the merits and irreparable harm.


Figure 1: adidas Stan Smith shoe,
via
adidas America v. Skechers USA decision

 

Figure 2: Skechers Onix shoe,
via
adidas America v. Skechers USA decision

 


For success on the merits, the court found it to be significant that Skechers placed metatags on its website that directed consumers who searched for the Stan Smith shoe to its Onix shoe. It agreed with the district court that the only reason such a term would be useful would be to associate the term with adidas’s distinctive shoe. To prove irreparable harm, adidas provided evidence of the company’s targeted advertising strategy, the shoe’s unsolicited media attention and consumer surveys showing that 20 percent of those surveyed believed Skechers’ Onix was made by or affiliated with adidas.

But the Ninth Circuit held that the district court was clearly erroneous in issuing an injunction over Skechers’ infringement of adidas’ registered three-stripe mark in its Cross Court shoe.


Figure 3: adidas Three Stripes,
via Adidas.com

 

Figure 4: Skechers Relaxed Fit Cross Court TR,
via
adidas America v. Skechers USA decision

 


Although the court held that the district court did not err in finding a likelihood of success on the merits for adidas’s trademark infringement or dilution claims, it found that there was no evidence in the record that supported a finding of irreparable harm based on a loss of control theory. Specifically, the court found that testimony from adidas’s employees was insufficient to show that consumers believed Skechers made lower quality products, and there was no evidence that post-sale confusion about the Cross Court’s maker would cause adidas irreparable harm.

As the court repeated, now the only sufficient evidence for injunctive relief is “concrete evidence.” While what constitutes concrete evidence has not been outlined, the case does provide clues. Rather than relying on statements from employees, companies seeking injunctive relief in a trademark dispute should conduct a consumer survey or gather any other external evidence of public recognition of the good or customer confusion. The court refused to assume irreparable harm when the plaintiff failed to provide evidence that consumers would be confused even if the court believed they would be. adidas may not have provided the clear answers sought by some, but it does provide more guidance on the Ninth Circuit’s evidentiary standard for injunctive relief in a trademark dispute.


How Do I Avoid Indefiniteness with No Intrinsic Record Support?

By Dargaye Churnet

In Kaneka Corporation v. Zhejiang Medicine, the U.S. District Court for the Central District of California held that expert testimony alone was sufficient to avoid summary judgment of indefiniteness under 35 U.S.C. § 112 ¶ 2, even though both parties’ experts agreed there were several ways to perform the claimed step and even though the intrinsic record did not identify any particular method for performing the claimed step. No. CV 11-02389 SJO (SHSx), slip op. (Apr. 5, 2018 C.D. Cal.) The court’s analysis hinged on the U.S. Supreme Court’s Nautilus v. Biosig Instruments decision that a patent is invalid for indefiniteness “if its claims, read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.” According to the court, the experts agreed that those of ordinary skill would have known of the several ways to perform the claimed step, and because the movant had not shown that selection of any of those methods would be “outcome-determinative” in performing the claimed step, summary judgment should be denied.

The disputed claim step required measurement of “70 mole %” in coenzymes Q10. The parties agreed that the measurement of the 70 mole percent involved: (1) collecting a sample, (2) handling (e.g., storing) the sample, and (3) testing the sample. The parties agreed that the testing step was disclosed in the specification, but defendants contended that the first two steps — collecting and handling the sample — were not adequately disclosed in the specification, and the claim was therefore indefinite.

The court agreed that the “intrinsic evidence [does not] reveal … how a sample should be collected or handled prior to testing the sample.” But, the parties’ experts agreed that several methods could be used to perform the claimed step, including freezing, refrigeration and adding acid or solvents. The court held that any of these methods would suffice to meet the required collecting and handling of the sample, but that a genuine dispute existed as to which of the methods to use and how long the sample should be stored prior to testing.

Although the defendants provided evidence showing that applying the different methods for different durations can lead to different mole percent measurements, the court denied summary judgment, holding that the defendants failed to show that selecting one of the several known methods would be outcome-determinative in performing the claimed step.

Patent litigators should be cognizant of Kaneka and the increased importance of expert testimony in indefiniteness analysis. Even where a claim limitation finds no support in the intrinsic record, expert opinions can provide adequate support to withstand an indefiniteness challenge. Litigators should perform a thorough indefiniteness analysis prior to expert discovery to make certain that their expert does not provide opinions that would undermine any indefiniteness grounds. Further, when moving for summary judgment under indefiniteness, litigators should be prepared to identify why the intrinsic record’s lacking disclosure is outcome-determinative in performing the claimed step.


Federal Circuit Panel Holds Trade Secret Disgorgement of Profits Must Be Awarded by Judge, Not Jury

By Matthew B. Becker

In Texas Advanced Optoelectronic Solutions v. Renesas Electronics America, the Federal Circuit held that there is no right to a jury for determining disgorgement of profits for trade secret misappropriation under Texas common law.

Texas Advanced Optoelectronic Solutions sued Renesas Electronics America (formerly Intersil) in the Eastern District of Texas for both trade secret misappropriation and patent infringement of ambient light sensor technology used in cellphones and other devices. A jury found for TAOS on its trade secret claims and awarded disgorgement of Renesas’ profits, and Renesas subsequently appealed to the Federal Circuit, arguing in part that no Seventh Amendment right existed to have a jury determine disgorgement of profits in a trade secret matter.

As is standard for determining if a jury right exists, the court analyzed whether disgorgement of profits for a trade secret claim would have been addressed in a court of law or a court of equity back in 1791 (the year when the Seventh Amendment to the U.S. Constitution established a right to jury trials for suits in law, but not for suits in equity).

Before wading into that question, the court first looked at whether the disgorgement might have served as a proxy for more traditionally legal damages, such as evidence of the plaintiff’s losses or of a reasonable royalty rate. The court determined it did not serve as a proxy, noting that TAOS previously dropped its claim for lost profits, explicitly distinguished its request for a reasonable royalty from its request for disgorgement of profits and failed to prove that the disgorgement correlated with its losses.

The court then turned to the core question of whether disgorgement for trade secret misappropriation was available in courts of law or in courts of equity in 1791. According to the U.S. Supreme Court, disgorgement can serve as either a legal remedy or as an equitable remedy, depending on whether the underlying claim itself is legal or equitable. The Federal Circuit panel noted that when trade secret misappropriation claims first appeared in the early 1800s, they were brought in courts of equity. And although trade secret claims sound in tort, which is generally equitable, trade secret claims are a distinct form of tort for which the legal quasi-contract restitutionary remedy did not include awarding disgorgement (analogizing to similar determinations in patent, trademark and copyright law). With no disgorgement remedy available at law for other forms of intellectual property in 1791, the court concluded, there was no such remedy at law for trade secrets, either, and therefore it was not an issue that a jury should determine under the Seventh Amendment.

Although the historical basis is broadly worded, the Federal Circuit decision applies specifically to trade secret misappropriation under Texas common law. Nonetheless, it has the potential to extend to other sources of trade secret protection (including the Texas Uniform Trade Secrets Act and other state implementations of the Uniform Trade Secrets Act, as well as the federal Defend Trade Secrets Act). Regardless, a plaintiff seeking disgorgement for trade secret misappropriation under Texas common law might still be able to put the issue before a jury, so long as the plaintiff can convince the court that such disgorgement is an appropriate proxy for traditional legal damages such as a reasonable royalty rate.

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