IP Law Daily Patentee committed inequitable conduct by failing to disclose uses triggering on-sale bar
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Friday, May 4, 2018

Patentee committed inequitable conduct by failing to disclose uses triggering on-sale bar

By Peter Reap, J.D., LL.M.

A determination by the federal district court in Fargo, North Dakota, that an inventor of a patent for a device for heating water in hydraulic fracturing operations committed inequitable conduct by failing to disclose 61 prior commercial sales and public uses of the patent’s technology during prosecution before the USPTO was affirmed because its findings were not clearly erroneous and the court did not abuse its discretion, the U.S. Court of Appeals for the Federal Circuit has held. Additionally, the district court’s findings of tortious interference and denial of remedies under two North Dakota statutes were affirmed. However, the lower court’s denial of attorney fees under Section 285 of the Patent Act was vacated due to the court’s lack of an articulated basis for the denial (Energy Heating, LLC v. Heat On-The-Fly, LLC, May 4, 2018, Stoll, K.).

U.S. Patent No. 8,171,993 relates to a "method and apparatus for the continuous preparation of heated water flow for use in hydraulic fracturing," also known as "fracing." The sole named inventor is Mr. Hefley, the founder of Heat On-The-Fly. Heat On-The-Fly is the patent owner and Super Heaters is a current licensee (together, HOTF). HOTF also refers to the heating performed by the patented technology as heating water "on-the-fly."

Hefley filed the earliest provisional application on September 18, 2009. Thus, the critical date for analyzing the on-sale and public-use bars under 35 U.S.C. § 1023 is September 18, 2008, one year before the priority date. Before the critical date, Hefley and his companies performed on-the-fly heating of water on at least 61 frac jobs using the system described in the ’993 patent application. In total, Mr. Hefley’s companies collected over $1.8 million for those heat-on-the-fly services. Hefley did not disclose any of the 61 frac jobs to the USPTO during prosecution as potential on-sale or public uses of the invention that might have triggered an on-sale bar. Ultimately, the patent issued on May 8, 2012.

Energy Heating, LLC and Rocky Mountain Oilfield Services, LLC (together, Energy) competes with HOTF in providing water-heating services during fracing. Energy began using its accused process of heating water on frac jobs in 2012. Energy alleged that HOTF tortiously interfered with its prospective business relationship with Triangle Oil by calling Triangle and alleging that Energy’s water heaters infringed a valid and enforceable patent, raising the possibility of a patent infringement lawsuit. Energy ultimately lost the work with Triangle.

This case commenced in 2013 when Energy sought declaratory judgment that the ’993 patent was unenforceable for inequitable conduct, invalid as obvious, and not infringed. HOTF filed counterclaims and a third-party complaint against Marathon Oil Company and Marathon Oil Corporation (together, Marathon), an oil company that contracted with Energy for on-demand water-heating services, alleging claims for induced infringement and contributory infringement. HOTF later added a direct infringement claim against Marathon. Energy then filed a second amended complaint, seeking declaratory judgment for tortious interference. Energy did not plead any cause of action arising under North Dakota’s Unlawful Sales or Advertising Practices Act in its complaint, the court noted.

The district court held before trial that all claims of the ’993 patent would have been obvious under 35 U.S.C. § 103. Then, in addition to other rulings, the jury found that HOTF unlawfully interfered with Energy’s contractual rights and prospective business relationship. The district court then held a bench trial on inequitable conduct and granted declaratory judgment against the patent owner on the issue of inequitable conduct. Next, the district court denied Energy and Marathon’s motions for a finding of exceptionality and an award of attorney fees and costs under § 285. Eight months after the district court’s inequitable conduct judgment, while this appeal was pending, the USPTO issued a continuation patent related to the same invention after all 61 frac jobs were disclosed. HOTF, Energy, and Marathon all filed appeals.

Inequitable conduct. To prevail on inequitable conduct, the accused infringer must prove by clear and convincing evidence that the applicant knew of the reference or prior commercial sale, knew that it was material, and made a deliberate decision to withhold it. Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1290 (Fed. Cir. 2011) (en banc).

The district court did not clearly err in finding that Hefley’s 61 prior commercial sales and public uses were not experimental, as contended by HOTF, the appellate court ruled. A use may be experimental only if it is designed to (1) test claimed features of the invention or (2) determine whether an invention will work for its intended purpose—itself a requirement of patentability.

Hefley’s invention disclosure form, which was submitted to his employer, stated that he conceived the invention in January 2006 and experimented through October 2006, the court observed. The disclosure form also identified the "[f]irst date of service on [a] paying job" as November 3, 2006—almost two years before the critical date. The 61 prior on-sale uses of the invention were not done in secret; there was no attempt to enter into confidentiality agreements or hide the system HOTF used to heat water; and Hefley "kept no notebooks, drawings, plans or explanations of the outcomes." Based on this and other record evidence, there was no clear error in the district court’s finding that the primary reason for the 61 prior uses of the heat-on-the-fly process was to provide income to Hefley and his companies, the appellate court reasoned.

The appellate court also found that the district court did not abuse its discretion in not considering the USPTO’s issuance of the continuation patent because (1) the continuation patent was issued after the district court’s judgment; and (2) the claims of the continuation patent materially differ from the ’993 patent claims.

Nor did the district court abuse its discretion in finding that there was clear and convincing evidence that the inventor knew that the prior frac jobs were material and specifically intended to deceive the USPTO by not disclosing these jobs to it. HOTF argued that the evidence showed that, objectively and subjectively, Hefley could not have clearly and convincingly known that the 61 pre-critical-date jobs were material. To the contrary, the district court had sufficient evidence to disbelieve Mr. Hefley’s testimony and to find instead that "[t]he single most reasonable inference to be drawn from the evidence requires a finding of deceitful intent in light of all of the circumstances" and that "[i]ntent to deceive was proven by clear and convincing evidence," the Federal Circuit determined.

Thus, because the district court’s findings on materiality and intent were not clearly erroneous, the district court did not abuse its discretion in determining that HOTF procured the ’993 patent through inequitable conduct, rendering the patent unenforceable. It followed that the appellate court did not need to reach the issues of obviousness, claim construction, and divided infringement.

Tortious interference. The jury found that HOTF tortiously interfered with Energy’s business. The district court denied HOTF’s post-trial motion for judgment as a matter of law of no tortious interference and entered judgment in accordance with the jury’s finding.

First, HOTF argued that Energy’s claim rested on improperly admitted hearsay. However, the jury’s verdict did not rest on improperly admitted hearsay because HOTF did not object to Gerald Lind’s testimony as hearsay, the Federal Circuit concluded.

Next, HOTF argued that this state tort claim was preempted by federal patent laws. State tort claims based on enforcing a patent, including for tortious interference, are preempted by federal patent laws, unless the claimant can show that the patent holder acted in bad faith. Here, the jury found that HOTF made representations to Triangle that it had a valid patent, and that those representations were made in bad faith. Energy presented sufficient evidence to allow a reasonable fact finder to conclude that HOTF, the patent holder, acted in bad faith, and therefore its claim for tortious interference fell within the bad-faith exception to preemption. Thus, the Federal Circuit affirmed.

North Dakota statutes. The district court’s finding that it did not have authority to award treble damages and attorney fees under North Dakota’s Unlawful Sales or Advertising Practices Act because Energy did not plead that cause of action was affirmed. In addition, the appellate court held that it was not tried by consent. HOTF did not impliedly consent to trial on this issue and indeed actively objected to adjudication of this particular issue.

Attorney fees. District courts have often awarded attorney fees under § 285 following a finding of inequitable conduct, and the Federal Circuit has frequently upheld such awards. Many of the cases predated Therasense, where the Federal Circuit heightened the standard for inequitable conduct. As explained in Therasense, inequitable conduct requires specific intent to deceive, and "to meet the clear and convincing evidence standard, the specific intent to deceive must be ‘the single most reasonable inference able to be drawn from the evidence.’" See Therasense, 649 F.3d at 1290. The Federal Circuit reaffirmed that district courts may award attorney fees after finding inequitable conduct, but are not required to do so.

However, given the strict standard in Therasense, a district court must articulate a basis for denying attorney fees following a finding of inequitable conduct. Just as it is incumbent on a trial court to articulate a basis for finding a case exceptional, it is equally necessary to explain why a case is not exceptional in the face of an express finding of inequitable conduct. Here, the appellate court could not determine whether the district court abused its discretion in denying attorney fees.

The district court found: "HOTF reasonably disputed facts with its own evidence and provided a meritorious argument against a finding of inequitable conduct." The court’s finding contradicted Therasense, which holds that "when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found." Therasense, 649 F.3d at 1290–91. Accordingly, the appellate court was unable to affirm the district court’s exercise of discretion, absent further explanation or reconciliation of the court’s reasoning with regard to its finding of inequitable conduct. The denial of attorney fees on the basis that this is not an exceptional case under § 285 was vacated, and the case remanded to the district court for reconsideration.

This case is Nos. 2016-1559, 2016-1893 and 2016-1894.

Attorneys: F. Ross Boundy (Davis Wright Tremaine LLP) for Energy Heating, LLC and Rocky Mountain Oilfield Services, LLC. Shane P. Coleman (Holland & Hart LLP) for Heat On-The-Fly, LLC and Super Heaters of North Dakota, LLC.

Companies: Energy Heating, LLC; Rocky Mountain Oilfield Services, LLC; Heat On-The-Fly, LLC; Super Heaters of North Dakota, LLC

MainStory: TopStory Patent FedCirNews

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