What Is Inequitable Conduct?

Inequitable conduct is a plea defense for infringement lawsuits. The defendant claims the patent holder intentionally misinformed, misled, or withheld important information from the U.S. Patent and Trademark Office (USPTO) to get a bad patent. If the court rules in favor of this defense, it can void the patent in question.

How Does the Inequitable Conduct Defense Work?

Patents are supposed to encourage people to innovate and invent. They are public information, and in exchange for showing how an invention works, the inventor gets monopoly power for several years. However, many people try to abuse the patent system by getting patents that are too vague or describe inventions that already exist. They can then try to use these patents to get money from people who aren't infringing on anything. That's why USPTO rules demand candor, good faith, and full disclosure from every inventor and lawyer involved in an application.

When a defendant gives an inequitable conduct plea, they are saying the patent they allegedly violated is fraudulent. It's a fake that only got through the USPTO because the patent holder lied. It doesn't have to be the defendant's only defense, but it is one of the most dangerous to the plaintiff. Along with losing the case and the patent, the plaintiff could face a civil fraud case afterwards.

"Inequitable conduct" comes from an old legal rule called "unclean hands." If you lied and deceived to get something like a patent or a copyright, you don't deserve to make money from it. Thus, the court can strip it away. "Inequitable" means the plaintiff doesn't get to have compensation equal to the harm of infringement because of bad conduct.

The inequitable conduct defense came out of three Supreme Court cases from the 1930s and '40s. The idea was to keep big businesses from using bad patents to crush the competition, but the Court left the definition of "inequitable conduct" up to lower courts. By the 1980s, the Federal Circuit Court had created loose standards that were less strict than those for fraud. This led to defendants using inequitable conduct throughout the decade.

The standards have gone up and down since then, and while they're strong now, that might not last.

How Can the Defense Prove Inequitable Conduct?

The latest case that defined the requirements of inequitable conduct is the Federal Circuit's Therasense, Inc. v. Becton, Dickinson and Co. This is a serious accusation, so the defendant has to prove with clear and convincing evidence that the plaintiff lied on the patent application and did so to fool the USPTO. An intentional lie can be the only possible way to explain the evidence, and if there's any other reasonable explanation, such as an overlooked patent, it's not good enough for this defense.

Therasense also says the defendant has to prove "but-for materiality," which means the USPTO wouldn't have issued the patent if they had known about the missing, withheld, or fake information. If the plaintiff made an honest mistake, the court may still void the patent, but the inequitable conduct defense won't apply. This has made the defense harder to pull off.

The Federal Circuit upheld this standard in 2014's American Calcar v. American Honda but said that using it to invalidate a patent can only happen if it meets the "clear and convincing evidence" standard. Calcar's founder and patent inventor, Michael Obradovich, had clearly researched an Acura vehicle's navigation system complete with photos and a system guide, but he didn't give any of this research to the USPTO in his patent application.

The Acura system was on his list of "prior art," but this research would have made it clear he was copying it on his patent and deceiving the USPTO. Therefore, they would have rejected his patent if they had the information. The Federal Circuit later affirmed the decision.

Another recent case, Exergen Corp. v. Wal-Mart, added a need for particularity to inequitable conduct pleas. This means the defendant has to answer who, what, where, when, why, and how the inequitable conduct happened before they can enter the plea.

The biggest issue with patent applications is that the applicants have to send along all known prior art, all the patents and inventions that might relate to the invention in the application. This is to make life easier for the examiner, since there are millions of U.S. patents and even more prior art that never got a patent in the first place. Holding back some known prior art can make an invention look more unique and help it get a patent it doesn't deserve.

Of course, the hard part is to prove an intentional fraud. With so much material to research, an applicant might honestly miss something. "Clear and convincing evidence" is the strictest standard in civil law, which means having to prove that the plaintiff acted in bad faith is the most reasonable explanation.

Another factor is the patent lawyer. Every lawyer must practice good faith before the court, but good faith, candor, and full disclosure are especially important for patent lawyers. This is for the sake of protecting the client's patents, but it's also because patent lawyers can be at fault for inequitable conduct or patent fraud since they are "substantially involved" in patent applications.

What's the Deal With Inequitable Conduct?

Inequitable conduct is a controversial defense, in part because some defendants use it too often. On average, 20 to 40 percent of infringement cases use the inequitable conduct defense. The threat of it can scare small and inexperienced plaintiffs and push them into bad settlements. This defense also adds a lot more time and money to the pre-trial discovery period, which is also bad news for small plaintiffs. The Federal Circuit judges called the inequitable conduct defense "a plague" in their Therasense ruling, and some legal experts argue the defense should go away completely. This is because:

  • The threat of an inequitable conduct defense causes many patent applicants to add extra prior art that doesn't apply to their application. This is to keep themselves safe, but it makes life harder for the examiners and adds extra time and costs to getting a patent.
  • Inequitable conduct can add thousands of documents and weeks to the discovery period and make the trial last days longer.
  • All this extra time adds to the backlog of patent applications and patent lawsuits.
  • Inequitable conduct is a poor fit for a defense and should be a part of a different kind of trial. The only reason it's a defense is because of a Supreme Court ruling.
  • Patent protections normally favor the plaintiff: A defendant that didn't know about a patent and had no intent to infringe can still be liable for damages.
  • A patent voided by inequitable conduct can have a domino effect on related patents and the inventions that rely on them.
  • An invalidity defense is easier to prove, works as well for the defendant, and invalidates part of a patent instead of the whole thing.
  • An inequitable conduct charge can cast a bad light on the plaintiff and influence the jury. It also harms the reputation of the patent holder's patent attorney.
  • The current fixes aren't enough. People still use the inequitable conduct defense because the goal isn't to succeed, it's to add extra costs and time to a case. Exergen only helps so far, and making the standards stricter won't stop people from abusing the defense. The extra test added by the America Invents Act of 2011 doesn't help with this issue, either.
  • Today's strict standards could become loose again.

To help deal with the problem of prior art and new references, in 2012 the USPTO started letting patent holders ask for supplemental examinations so they could add more references and protect their patents from inequitable conduct and other patent challenges. However, this also gives the patent office more work to do and can lead to a reexamination if the new reference is too similar to the patent.

The biggest supporters of inequitable conduct are generic drug manufacturers. They use it to defend themselves from Big Pharma giants and protect their FDA exclusivity agreements. But aside from that, most defendants who use inequitable conduct don't do so because they think the plaintiff lied to the USPTO. Also, other punishments can work better, like a different court case or government fines.

Still, having said all that, there are times when the inequitable conduct defense comes in handy. The Therasense case centered around Dr. Sherman, who acted very suspiciously under oath and had clear and convincing evidence that he discovered prior art and kept it from the USPTO examiner. A later case, iLife Technologies Inc. v. AliphCom, discovered iLife's inventor and patent lawyer had known about European patents that would have disqualified his U.S. patent application if they had told the USPTO about it.

During the case of Worldwide Home Products, Inc. v. Time Inc., it came out that the patent lawyer of the plaintiff had given the examiner poor-quality photos of prior art despite having physical examples and high-resolution photos at the time. And in Intellect Wireless, Inc. v. HTC Corp., the inventor appealed a patent rejection by saying he had built a prototype even though he hadn't.

It's clear that inequitable conduct pleas have a purpose, but the question is whether it's worth the headaches when there are other ways to fight bad patents. A few success stories might not be worth the extra costs to the system.

Whether you're going to file or face an inequitable conduct plea, you'll need expert legal advice on what to do. That's why UpCounsel only accepts the top 5 percent of lawyers and attorneys from across the nation. The experts you'll find with us have an average of 14 years of experience, and many of them are graduates from Yale and Harvard Law. Post your legal need on UpCounsel's marketplace for advice you can count on.