Cygnus Telecommunications Technology v. Telesys Communications and ... AT&T... and other dimestore international telecom companies, rolled into one big litigation (CAFC 2007-1328, -1329, -1330, -1331, -1332, -1333, -1354, -1361)

The lowdown on phone call arbitrage -

In the late 1980s, placing a telephone call from the United States to a foreign country was typically less expensive than placing the same call from the foreign country to the United States. In 1988, James Alleman founded Paragon Services International, Inc., and began to develop systems designed to take advantage of that cost differential. Mr. Alleman first attempted to do so through what he called the "black box" system. That system allowed a user in a foreign country to purchase a dedicated line that was attached to a "black box" in the United States. The foreign user would place a call on the dedicated line and then promptly terminate the call. The black box would then call the user back using the less expensive U.S. billing rate. The user would then dial the desired destination number, and the black box would place that call and bridge the two lines together. The effect was to allow a person overseas to initiate a call to the United States, but for the call to originate in the United States for billing purposes so as to take advantage of the lower U.S. billing rates. The problem with that system was that it was expensive to maintain, since it required a dedicated line for each foreign user.

Mr. Alleman subsequently developed a system to carry out the same process by using a computer rather than the black box. He created a prototype of the new system on a 386 computer ("the 386 system"). Instead of having a dedicated line for each user, the 386 system identified users by reference to the international telephone numbers from which they made their initial calls. Part of the user's telephone number would be passed along to the 386 system by the telephone company's local exchange carrier. The 386 system would use that information to search its database and identify the foreign user. The system would then terminate the call from the user and promptly call the user back. The user could subsequently enter the number of its desired destination call, and the 386 system would place that call from within the United States and bridge the two calls together.

Mr. Alleman asserts that in order to develop the software necessary for the 386 system, he worked with a computer engineer named Jim Gunther. Throughout the development process, Mr. Alleman also worked with several individuals overseas who first used the black box system and then used the 386 system. Mr. Alleman described two of those individuals, Theo Brenner and Fadi Ghandour, as "beta-testers" who helped him troubleshoot the 386 system. Those individuals were also regularly invoiced for the cost of their telephone calls. During that period, Mr. Alleman had discussions with another telecommunications company, Call Interactive, as to how they could implement and market his invention on a commercial scale.

On the shooting match -

Paragon's successor-in-interest, Cygnus, later brought infringement suits against the defendants-appellees alleging infringement of both patents. The various actions were ultimately transferred and consolidated into a single multidistrict proceeding before the United States District Court for the Northern District of California.

On October 27, 2006, AT&T filed a motion on behalf of all defendants for summary judgment of invalidity based on prior public use and commercial sales of the subject matter of the patents... The district court granted the invalidity and noninfringement motions and entered a final judgment on March 30, 2007.

On on-sale bar -

A patent is invalid under the section 102(b) on-sale bar if, prior to the critical date, the invention was ready for patenting and was the subject of a commercial sale or offer for sale. Pfaff v. Wells Elec., Inc., 525 U.S. 55, 67 (1998). "An invention can be found to be 'ready for patenting' in at least the following ways: by proof that it was reduced to practice, or by proof that the inventor had prepared drawings or other descriptions of the invention that were sufficiently specific to enable a person skilled in the art to practice the invention." Cargill, Inc. v. Canbra Foods, Ltd., 476 F.3d 1359, 1368 (Fed. Cir. 2007).

On the self-admission of on-sale bar -

The district court ruled, on summary judgment, that the '964 and '027 patents are invalid under the on-sale bar of 35 U.S.C. § 102(b). The district court's ruling was based on Mr. Alleman's sale of the 386 system to paying users and the commercialization agreement that Paragon and Call Interactive entered into before the critical date for both patents, April 24, 1991. The district court determined that the 386 system had been reduced to practice based on Mr. Alleman's sworn declaration to the Patent and Trademark Office ("PTO") in which he stated, "I reduced to practice the invention of the claims before June 27, 1990."

No "experimental use" exception after reduction to practice.

The district court also rejected Cygnus's argument that the use of the 386 system prior to the critical date fell within the "experimental use" exception to the public use or on-sale bar of section 102(b). In so ruling, the court relied on this court's decisions holding that the experimental use exception is not available after an invention has been reduced to practice.

Affirmed.

Finally, the district court concluded that because Mr. Alleman had charged users of the 386 system for the calls they made using that system, he engaged in a "sale" of the service within the meaning of section 102(b) even if he did not make a profit on the transactions. For the reasons below, we affirm the district court's holding with respect to the 386 system.

As an aside, on appeal, the defendants wanted Cygnus "collaterally estopped from challenging the invalidity of the '964 and '027 patents under section 102(b) because it failed to appeal the district court's entry of final judgment against one defendant in the multidistrict litigation." The CAFC didn't bite on that.