ABS Global, Inc. v. Inguran, LLC

This case is about the birds and the bees-in particular, about human efforts to control the reproductive outcomes otherwise determined by Mother Nature. Our specific interest is the cattle industry. People have been raising cattle since the early Neolithic Age, some 10,000 years ago, when members of the Bovidae family were first domesticated. See Mario Melletti, Cattle Domestication: from Aurochs to Cow , CAMBRIDGE UNIVERSITY PRESS : FIF

*1060TEENEIGHTYFOUR (Feb. 18, 2018), http://www.cambridgeblog.org/2016/02/cattle-domestication-from-aurochs-to-cow/. Not surprisingly, production techniques have evolved over the millennia. The innovation at the heart of the present controversy is the development of sperm-sorting technology. This process enables cattle breeders to determine the sex of calves by separating a sample of bull semen into X-chromosome bearing and Y-chromosome bearing sperm cells. The resulting product-"sexed semen"-is then used to inseminate cows artificially. With this technology, dairy farmers can be sure they will breed only milk-producing cows.

Until recently, Inguran, LLC, which does business as Sexing Technologies ("Sexing Tech"), held a monopoly on the market for sexed cattle semen in the United States. ABS Global, Inc., which runs a large bull-stud operation, hoped to change that. Believing that its efforts had been thwarted in ways that violated the antitrust laws, ABS sued Sexing Tech in the Western District of Wisconsin in 2014. It alleged, among other things, that Sexing Tech had unlawfully monopolized the domestic sexed-semen market in violation of section 2 of the Sherman Act by using its market power to impose coercive contract terms. ABS sought a declaratory judgment proclaiming those contracts invalid, hoping to clear the way for its own entry into that market. Sexing Tech, along with its subsidiary, XY, LLC, (we use "Sexing Tech" to describe them collectively unless the distinction matters) counterclaimed that ABS infringed its patents and breached the contract between them by misappropriating trade secrets in developing ABS's competing technology. Both sides also added state-law theories to the mix.

In the end, only three claims went to trial: ABS's antitrust claim and Sexing Tech's patent infringement and breach of contract counterclaims. After a nearly two-week trial, the jury returned a mixed-and somewhat puzzling-verdict, which the court ratified in post-trial rulings. We conclude, as did the district court, that ABS violated a confidentiality agreement it had with Sexing Tech, and that Sexing Tech's patent was not invalid on obviousness grounds. The jury's assessments of two of the three patent claims still at issue, however, cannot be reconciled under the rules governing dependent claims and enablement, and so a new trial is necessary on them.

I. The '987 Patent

The basic processes at issue in this case are not hard to describe. They rely on cell sorters, which are devices that sort cells to select either for a desired characteristic or to weed out an undesirable characteristic. These sorters date back to the mid-1960s, but it was not until the early 1990s that the first person developed a device designed to sort sperm cells. Lawrence Johnson, then a scientist with the U.S. Department of Agriculture, was the inventor. His technique is best explained with the help of a diagram:

*1061This technique is a variation on a standard cell sorting technique called flow cytometric sorting. Johnson's process begins with a sample of stained sperm cells suspended in liquid. The stain allows the sorter to distinguish X-bearing cells from Y-bearing cells based on differences in their DNA content. The stained fluid is forced through a stream, spacing out the cells and orienting them single-file. Next, a laser identifies each cell as bearing either an X or Y chromosome. By this time, each sperm cell is contained in an individual droplet, and a different charge is applied to each droplet depending on whether it contains an X- or Y-bearing sperm cell. The individually charged cells are then passed through charged plates, which redirect the cells into three batches: X-bearing cells, Y-bearing cells, and waste. Because the cells are sorted while they are suspended in individual water droplets, this device is called a "droplet sorter." Johnson first patented this technology in 1992 and wrote an article discussing improvements to the technique in 1999.

Sexing Tech holds a patent- U.S. Patent Number 8,206,987 ("the '987 patent") -over an alternative technique, developed by Gary Durack, for sorting sperm cells. The Durack patent issued in 2012, with an effective filing date relating back to a provisional application filed on March 28, 2003. Although the full text of the patent runs nearly 250 pages, the critical part for our purposes is the final section, where the claims covered by the patent are set out. Three of those claims are at issue in this case: Claims 1, 2, and 7. Claim 1 is an independent claim, meaning (as we explain more fully below) that it stands on its own, while Claims 2 and 7 are dependent claims. Each of the dependent claims begins by specifying "a method of sorting a mixture of stained sperm cells according to claim 1." Each dependent claim then goes on to specify a limitation on the subject matter covered by Claim 1, as required by 35 U.S.C. § 112(d). We set forth the full text of the disputed claims in the Appendix to this opinion.

The invention described in Claim 1 follows the same basic structure as the Johnson invention, but it substitutes a different method for sorting the cells at the final step. The Johnson method uses magnets to *1062redirect droplets depending on the cell they contain, while the '987 patent describes a photo-damage sorting method. Photo-damage sorting is straightforward: a "kill laser" destroys undesired cells identified by the detection laser, leaving only the desired cells alive. The end product of the two methods is thus different: the Johnson patent yields three separate outputs (characteristic A, characteristic B, and waste); the Durak patent (illustrated below) produces only one output, which is composed of living cells with the desired characteristic (A or B) and dead waste cells. Under ideal conditions, photo-damage sorters work faster than droplet sorters because their speed is not limited by the size of droplets.

Dependent Claims 2 and 7 impose additional limitations on Claim 1 of the '987 patent. Claim 7 specifies that in the final step of Claim 1, "Characteristic A" must be "a live X-chromosome bearing sperm cell" and "Characteristic B" must be "something other than a live X-chromosome bearing sperm cell." This means that a photo-damage sorter that sorts sperm cells for a characteristic other than sex (perhaps a set of genes on a different chromosome) would infringe Claim 1 of the patent, but not Claim 7. It also means that every violation of Claim 7 would necessarily violate the broader Claim 1.

Claim 2 restricts Claim 1 in a different way. Claim 2 covers a process "wherein the step of selecting stained sperm cells in the flow path to photo-damage further comprises the step of photo-damaging sperm cells based upon a sort strategy." Thus, the only difference between Claim 1 and Claim 2 is whether the "selection" of stained sperm cells that occurs at the selection point (step (e) of Claim 1), is based solely on their classification as having characteristic A or B (Claim 1) or based both on their classification as A or B and a sort strategy (Claim 2) that would further narrow the results obtained. A photo-damage sorter that sorts sperm without an additional sort strategy would infringe Claim 1 of the patent, but not Claim 2, while all sorters that followed all of the Claim 1 steps and then implemented a sort strategy would violate both Claim 2 and Claim 1.

Although Sexing Tech holds a patent for photo-damage sorting of sperm cells, it had not commercialized the technology before this suit began-its commercial sorters all used the droplet sorting technique pioneered by Johnson. ABS says that it created its own commercially usable photo-damage sorter but found itself blocked by Sexing Tech's patents, bringing us to the present litigation.

II. The Issues on Appeal

As we noted earlier, the jury reached a mixed verdict. It found that Sexing Tech had violated section 2 of the Sherman Act, but that ABS suffered no antitrust injury from that violation and thus was entitled only to injunctive relief. On the other hand, the jury found ABS liable for infringing the '987 patent and a second patent held by Sexing Tech,1 and it concluded that ABS had breached its confidentiality contract with Sexing Tech. It accordingly awarded damages to Sexing Tech on those claims. With respect to the '987 patent, ABS argued only invalidity; it did not contest infringement. The jury found that independent Claim 1 and dependent Claim 7 of the '987 patent were valid, but that dependent Claim 2 was invalid. After trial, both parties moved for judgment as a matter of law, and ABS also moved for a new *1063trial and for a permanent injunction. The district court granted those motions in part and denied them in part, and it entered a permanent injunction barring Sexing Tech from enforcing certain contractual provisions as a remedy for its antitrust violation. ABS appealed. (Sexing Tech initially filed a cross-appeal, which it later voluntarily dismissed.)

Three issues are now before us: two relate to patent law and one to contract interpretation. First, ABS argues that all three claims in the '987 patent are invalid on the ground of obviousness. See 35 U.S.C. § 103. Second, ABS contends that the jury's decisions to uphold independent Claim 1 and dependent Claim 7, but to find dependent Claim 2 invalid, are irreconcilably inconsistent under the rules for enablement and thus a new trial is necessary. Finally, ABS asserts that the district court erred by finding a breach of the confidentiality agreement. It admits that it hired a former employee of Sexing Tech's subsidiary XY, and that this employee brought purloined trade secrets with her to ABS. Indeed, ABS stipulated to trade-secret liability for this wrongdoing, but Sexing Tech wanted and got more: the court held that ABS was separately liable for breach of a confidentiality agreement between the companies. ABS contends that information passed along by a disloyal former employee was not covered by the agreement and thus that it was entitled to judgment on this point.

III. Appellate Jurisdiction

Because it is rare for our court to see a patent case, we take a moment to examine our appellate jurisdiction. The Federal Circuit has exclusive jurisdiction over any "appeal from a final decision of a district court of the United States ... [1] in any civil action arising under, or [2] in any civil action in which a party has asserted a compulsory counterclaim arising under" the Patent Act ("the Act"). 28 U.S.C. § 1295(a)(1) ; FED. R. CIV. P. 13(a). We lack appellate jurisdiction if either basis for the Federal Circuit's exclusive jurisdiction was present in the district court, regardless of the claims brought on appeal. See Kennedy v. Wright , 851 F.2d 963, 965 (7th Cir. 1988).

Our first inquiry is whether, applying the well-pleaded complaint rule, this case arose under the patent laws. Christianson v. Colt Indus. Operating Corp. , 486 U.S. 800, 809, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988). Following long-established law, the Supreme Court held in Christianson that the complaint had to establish "either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law." Id. at 808, 108 S.Ct. 2166 (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983) ). For patent cases, the well-pleaded complaint must "establish[ ] either that federal patent law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded claims." Id. at 809, 108 S.Ct. 2166. In our case, ABS's complaint had nothing to do with patent law: it invoked only federal antitrust law and state law. Thus, under Christianson this is not a case that arises under the patent laws, and the first potential source of the Federal Circuit's jurisdiction does not apply.

The second possibility-jurisdiction through a compulsory counterclaim-requires more attention. Patent issues entered this case when Sexing Tech filed a counterclaim asserting patent infringement. If that counterclaim was compulsory, this appeal belongs in the Federal Circuit; if it was permissive, it is properly in *1064this court. Section 1295(a) incorporates the standard of Federal Rule of Civil Procedure 13(a) for determining whether a counterclaim is compulsory. In re Rearden LLC , 841 F.3d 1327, 1332 (Fed. Cir. 2016). In applying Rule 13(a), the Federal Circuit examines "(1) whether the legal and factual issues raised by the claim and counterclaim are largely the same; (2) whether substantially the same evidence supports or refutes both the claim and the counterclaim; and (3) whether there is a logical relationship between the claim and the counterclaim." Id. Our test adds a few additional points: we require "that the claim (1) exist at the time of pleading, (2) arise out of the same transaction or occurrence as the opposing party's claim, and (3) not require for adjudication parties over whom the court may not acquire jurisdiction." Burlington N. Ry. Co. v. Strong , 907 F.2d 707, 710-11 (7th Cir. 1990).

The difference between these standards is immaterial for this case. Sexing Tech's claim existed at the time of pleading, and it does not require any additional parties, and so we need to assess only the "transaction or occurrence" requirement. To determine whether a claim arises from "the same transaction or occurrence," this circuit uses the "logical relationship" test, which requires us to examine the factual allegations underlying each claim. Id. at 711. The patent and antitrust claims in this case are quite different. ABS's antitrust claims hinge on Sexing Tech's competitive practices, such as the use of evergreen clauses in its contracts and other allegedly coercive applications of market power. ABS did contend that Sexing Tech pooled patents for anticompetitive reasons, but the pooling of patents is distinct from questions of infringement and validity. Any relation between the patent and antitrust claims is minor. In fact, patent counterclaims are frequently permissive in antitrust cases. To hold otherwise "would be to hold that the holder of a patent, which is presumptively and facially valid ... must immediately counterclaim with any and every and even, perhaps, every potential claim of infringement against that plaintiff or else lose such claims forever." Xerox Corp. v. SCM Corp. , 576 F.2d 1057, 1061 (3d Cir. 1978) (citation omitted). The patent counterclaims in this case were permissive, and thus the appeal falls outside of the Federal Circuit's exclusive jurisdiction and is properly in this court.

IV. Obviousness

The patent system is built on a trade-off. On one side of the ledger, the prospect of exclusivity gives inventors an incentive both to innovate and to disclose their inventions, to the benefit of society as a whole. Without the prospect of a patent, inventors may choose other pursuits or hide their innovations from the public. See Kewanee Oil Co. v. Bicron Corp. , 416 U.S. 470, 480-82, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974) (noting the tradeoff between patent protection and trade-secret protection). On the other hand, a patent comes at a social cost: the exclusivity given to the inventor prevents competition with respect to the subject matter of the patent for 20 years, see 35 U.S.C. § 154(a)(2), increasing prices for users and preventing future innovators from building on or improving the invention without a license. The patent system may not calibrate those opposing incentives perfectly, see generally Stephen Yelderman, The Value of Accuracy in the Patent System , 84 U. CHI. L. REV. 1217 (2017), but we are not in the habit of demanding perfection from legislation.

Nonetheless, the Patent Act includes a number of doctrines that are designed in the aggregate to come as close as possible to the socially optimal balance. Prime among them is the bar against the patentability *1065of obvious inventions, which the Supreme Court recognized as a constitutional "absolute prerequisite to patentability" even before Congress codified the requirement in 1952. Dann v. Johnston , 425 U.S. 219, 225-26, 96 S.Ct. 1393, 47 L.Ed.2d 692 (1976) ; see also Great Atl. & Pac. Tea Co. v. Supermarket Equip. Corp. , 340 U.S. 147, 155, 71 S.Ct. 127, 95 L.Ed. 162 (1950) (Douglas, J., concurring) ("The standard of patentability is a constitutional standard...."). Extending patent protection to obvious inventions would "withdraw[ ] what already is known into the field of its monopoly and diminish[ ] the resources available to skillful men." KSR Int'l Co. v. Teleflex Inc. , 550 U.S. 398, 416, 127 S.Ct. 1727, 167 L.Ed.2d 705 (2007) (quoting Great Atl. & Pac. Tea Co. , 340 U.S. at 152-53, 71 S.Ct. 127 ). As the Act now provides, an invention cannot be patented if it "would have been obvious ... to a person having ordinary skill in the art to which the claimed invention pertains." 35 U.S.C. § 103.

The Supreme Court has held that "[t]he ultimate judgment of obviousness is a legal determination." KSR , 550 U.S. at 427, 127 S.Ct. 1727. In making that determination, courts should adopt the perspective of a skilled artisan not only of "ordinary skill" but also of "ordinary creativity," who would follow "known options within his or her technical grasp" to solve known problems. Id. at 421, 127 S.Ct. 1727. ABS says that the '987 patent would have been obvious at the time of its invention to a skilled artisan because it merely replaced the traditional droplet method for sorting sperm cells with the photo-damage method, which had been successfully used to sort other types of cells. Sexing Tech responds that there were many factors that would have made photo-damage sorting unlikely to work with sperm cells and thus experimenters would have been discouraged from trying to combine the methods. The jury in the present case found that ABS had infringed Sexing Tech's '987 patent ; it thus had to have found that the innovation was not obvious. ABS contends that this was error and that all three of the claims at issue are invalid for obviousness. Before resolving this dispute, we say a word about the applicable standard of review.

A. Standard of Review

In Graham v. John Deere Co. of Kansas City , 383 U.S. 1, 17, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966), the Supreme Court held that obviousness is a question of law. See also KSR , 550 U.S. at 427, 127 S.Ct. 1727. This flows from the Court's acknowledgement that the standard for patentability is "basically constitutional." Anderson's-Black Rock, Inc. v. Pavement Salvage Co. , 396 U.S. 57, 62-63, 90 S.Ct. 305, 24 L.Ed.2d 258 (1969). It also reflects the Court's judgment that the question whether an invention meets the criteria of Article I, section 8, clause 8 of the Constitution requires the application of one of those broad legal standards that calls for de novo review by appellate courts. See U.S. Bank Nat'l Assn. v. Village at Lakeridge, LLC , --- U.S. ----, 138 S.Ct. 960, 966-67, 200 L.Ed.2d 218 (2018) ; Ornelas v. United States, 517 U.S. 690, 697-98, 116 S.Ct. 1657, 134 L.Ed.2d 911 (1996). Nevertheless, like many legal questions, the obviousness question "lends itself to several basic factual inquiries." Graham, 383 U.S. at 17, 86 S.Ct. 684. We review those basic or historical facts only for clear error. U.S. Bank, 138 S.Ct. at 966.

As with any appeal from a motion for judgment as a matter of law, we must review all of the evidence in the record in the light most favorable to the nonmoving party, drawing all reasonable inferences in that party's favor. Reeves v. Sanderson Plumbing Prods., Inc. , 530 U.S. 133, 150-51, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000).

*1066As applied here, this means that we must assume that the jury settled the underlying facts relevant to obviousness in Sexing Tech's favor. And we note that Sexing Tech has already prevailed on this issue in a different context: after the U.S. Patent and Trademark Office granted the '987 patent, ABS unsuccessfully challenged it in an inter partes review proceeding, under which ABS had only the burden of showing a reasonable likelihood of prevailing. See 35 U.S.C. §§ 311, 314(a).

In Graham , the Supreme Court highlighted three core features that are pertinent to obviousness: (1) "the scope and con-tent of the prior art," (2) "differences between the prior art and the claims at issue," and (3) "the level of ordinary skill in the pertinent art." 383 U.S. at 17, 86 S.Ct. 684. "Secondary considerations" such as "commercial success, long felt but unsolved needs, [and] failure of others," are also potentially relevant. Id. at 17-18, 86 S.Ct. 684. These are all underlying facts-a point that becomes clear when we recall that in a bench trial on obviousness, " 'subsidiary determinations of the District Court' [are] subject to Rule 52(a)'s clear error standard." Teva Pharm. USA, Inc. v. Sandoz, Inc. , --- U.S. ----, 135 S.Ct. 831, 838-39, --- L.Ed.2d ---- (2015) (quoting Dennison Mfg. Co. v. Panduit Corp. , 475 U.S. 809, 811, 106 S.Ct. 1578, 89 L.Ed.2d 817 (1986) (per curiam ) ).

B. The Jury's Verdict

ABS argues that "for the most part the relevant facts were not disputed." Sexing Tech takes the opposite position, contending that factual disputes abounded. It asserts that whether an artisan would have been "motivated to combine" the prior art is itself a factual question. Sexing Tech asserts that the jury implicitly concluded that the prior art "teaches away" from the '987 patent 's use of a photo-damage method. But that is hard to say, especially in a case such as this one, where the jury rendered only a general verdict. Special verdicts are the only reliable way to nail down such findings. See FED. R. CIV. P. 49(a) ; Roberts v. Sears, Roebuck & Co. , 723 F.2d 1324, 1341-42 (7th Cir. 1983) (en banc ).

The mystery question concerns what the jury might have thought about the motivation to combine Johnson's droplet sorter with a photo-damage method. In the Federal Circuit, motivation to combine is always a factual question that is "[s]ubsumed within the Graham factors." Pfizer, Inc. v. Apotex, Inc. , 480 F.3d 1348, 1361 (Fed. Cir. 2007) ; see also Wyers v. Master Lock Co. , 616 F.3d 1231, 1238-39 (Fed. Cir. 2010). That court asks "whether there is a known reason a skilled artisan would have been motivated to combine elements to arrive at a claimed combination." Arctic Cat Inc. v. Bombardier Recreational Prods. Inc. , 876 F.3d 1350, 1359 (Fed. Cir. 2017). Here, to the extent that there are disputes about the existence of something that would give an artisan a "known reason" to combine prior art elements, the jury's verdict indicates that it resolved those factual questions in favor of Sexing Tech.

Nevertheless, it does not follow, as Sexing Tech contends, that the existence of factual disputes by itself makes judgment as a matter of law inappropriate. Sexing Tech's position overstates the importance of a motivation to combine or "teaching away" after KSR . KSR recognizes that "expert testimony ... may resolve or keep open certain questions of fact," but "[t]hat is not the end of the issue." 550 U.S. at 427, 127 S.Ct. 1727. Some factors might point away from obviousness and other factors might point toward it, yet judgment as a matter of law might be appropriate. That is because the jury does not have the last word on obviousness; as we *1067noted earlier, it is the court that must resolve the ultimate legal issue.

C. Nonobviousness of '987 Patent

Out of all the evidence that was presented, only a small portion bears on the question whether the '987 patent was invalid for obviousness. See 35 U.S.C. § 103. There were three pieces of documentary evidence: (1) Johnson's 1999 article describing his droplet method of sperm sorting; (2) a book chapter written by Jan Keij describing other applications of photo-damage sorting; and (3) the '987 patent itself. In addition, three witnesses opined on the relation among the three devices: Durack, the inventor of the '987 patent ; J. Paul Robinson, ABS's expert; and John Nolan, Sexing Tech's expert.

We already ha