- Cybersquatting and Domain Name Disputes
- Jurisdiction and Choice of Law
- Navigating the US Government's Export Restrictions on Encryption Technology
- Texas Repeals the Internet Access Tax Law
- PTO Gets APA deference from the Supreme Court
CYBERSQUATTING AND DOMAIN NAME DISPUTES
Robust competition for domain name services will soon be a reality. Network Solutions, Inc. (NSI) had until recently been the only provider of domain name registration services for open generic top-level domains (gTLDs), such as .com, .net and .org. However, the Internet Corporation for Assigned Names and Numbers (ICANN) is now accrediting other registrars. At the same time, ICANN is formulating new rules and procedures for resolving domain name disputes, particularly for disputes that involve cybersquatting.
New Domain Name Registrations
ICANN is a non-profit organization that was created last year under the direction of the U.S. Department of Commerce. A goal of the organization is to facilitate privatization of the technical management of Internet names and addresses, the domain name system (DNS). As part of this privatization effort, ICANN announced on April 21, 1999, the selection of five companies to participate in a two-month test of a new shared registration system.
During the two-month test period, America Online, CORE (Internet Council of Registrars), France Telecom/Oleane, Melbourne IT and register.com joined NSI as registrars for gTLD names. After completion of the testbed program, any company meeting ICANN standards will be able to offer customers competitive domain name registration services in the .com, .net and .org domains. More than forty companies have been accredited to provide registration services after June 24, 1999, the end date for the two-month testbed program.
As of June 14, 1999, only one of the testbed registrars (register.com) had begun its trial service, so there are indications that the testbed period will need to be extended. Furthermore, there remain controversies over other details, such as the ownership of the database of information built by NSI during its tenure as the sole registrar. These data ownership issues will be resolved in the coming months.
In addition to the number of registrars increasing, competition in registration services will become even more robust as the pool of available gTLDs increases. Although there exists controversy about which new gTLDs to add, proposed gTLDs include .firm, .shop, .web, .info, .arts, .rec and .nom. Domain Bank, Inc., for example, offers a service of pre-registering names for such proposed gTLDs at no cost. If a proposed gTLD becomes available, Domain Bank will charge pre-registrants only after securing the domain name.
Domain Name Disputes
In the environment of increased competition in registration services, ICANN is formulating new rules and procedures for resolving domain name disputes. At its May 25-27, 1999, meetings in Berlin, ICANN commended the World Intellectual Property Organization (WIPO) for a recent Final Report (the Report), submitted to ICANN on April 30, 1999, on the relationship between the DNS and intellectual property rights.
In particular, ICANN endorsed a major principle of the Report: uniform dispute resolution policy should be adopted for all registrars of gTLDs. The ICANN Board further requested that by July 31, 1999, the Domain Name Supporting Organization (DNSO) of ICANN submit recommendations on a uniform dispute resolution policy for registrars in open gTLDs. The DNSO is expected to pay particular attention to the recommendations made in the Report concerning elements of a uniform dispute resolution policy in formulating its own recommendations for the ICANN Board.
Though ICANN endorsed the principle that a uniform dispute resolution policy should be adopted for all registrars of gTLDs, ICANN did not formally endorse the entire WIPO report, particularly in the areas that relate to governance of the Internet, which remains a highly political and controversial subject. For example, consumer activist Ralph Nader has recently published a letter to ICANN regarding the way the current interim ICANN board makes policy decisions.
Several factors contribute to the occurrence of domain name disputes. While identical or similar trademarks may co-exist when they are used for different goods or services (or in different geographic locations), domain names are unique globally. In order to foster acceptance of the Internet by businesses and consumers, NSI has registered domain names at a relatively low cost (e.g., $70 for two years) on a first-come-first-served basis and without an exclusion process comparable to the exclusion process of a trademark registration. These two factors, ease of access and no exclusion process, have contributed to the frequency of domain name disputes.
Due to these disputes, the NSI policy on conflicts between domain name registrants and owners of trademarks has changed several times. The current policy (the fifth version) became effective in February 1998 and continuing criticisms may well create further modifications.
Not surprisingly, the Report recommended that ICANN create an exclusion process for famous or well-known marks. The process would enable an owner of a mark to exclude others from obtaining registration of a domain name identical to that mark if "the mark is famous or well-known on a widespread geographical basis and across different classes of goods or services." A registration authority would determine whether a mark is famous or wellknown using a non-exhaustive list of criteria, including "evidence of the mark being the subject of attempts by nonauthorized third parties to register the same or misleadingly similar names as domain names." This last criterion raises the issue of cybersquatting.
It is important to note that the exclusion process would apply to non-U.S. marks, as well as to U.S. marks. Consequently, the holder of a mark judged to be famous in Europe could potentially exclude the registration by a U.S. company of an identical or similar domain name.
Resolving Disputes that Involve Cybersquatting
As a result of the elastic meaning of cybersquatting, the Report addresses the problem of cybersquatting under a different term -- abusive registration of a domain name. The Report considers the registration of a domain name to be "abusive" when all of the following conditions are met: (1) the domain name is identical or misleadingly similar to a trade or service mark in which the complainant has rights; (2) the holder (i.e., the registrant) of the domain name has no rights or legitimate interests with respect to the domain name; and (3) the domain name has been registered and is being used in "bad faith."
For purposes of clarifying the third condition, "bad faith" is evidenced by: (1) an offer to sell the domain name to the owner of the trademark or service mark or to a competitor of the owner; (2) an attempt to attract, for financial gain, Internet users to the domain name holder's Web site by creating confusion with the trade or service mark of the complainant; (3) the registration of the domain name in order to prevent, as a pattern of conduct, the owner of the trademark or service mark from reflecting the mark in a corresponding domain name; or (4) the registration of the domain name in order to disrupt the business of a competitor.While the Report considers such practice to be parasitical and predatory, it does more than simply criticize. The Report recommends a "Policy on Dispute Resolution for Abusive Domain Name Registrations" (the Policy) and recommends that ICANN adopt the Policy. Furthermore, the Report suggests that the Policy be implemented through terms of the domain name registration agreement that would be required of each domain name applicant. The registration agreement would require each eventual holder of a domain name to submit to an administrative dispute resolution proceeding if a third party files a complaint for abusive registration against the holder.
The Report sets out procedural rules for the administrative dispute resolution proceeding. Among the Report's recommendations for procedural rules are the following: that (1) a panel of three decision-makers be appointed, with input from the parties, to conduct the procedure and make the final determinations; (2) provision be made for the secure electronic filing of all pleadings; (3) final determinations on claims be made within 45 days of initiation of the procedure; and (4) remedies be limited to cancellation or transfer of the domain name registration and allocation of the responsibility for payment of the costs of the proceedings (though such costs would not include attorney's fees).
The Report also recommends that clauses in the domain name registration agreement contain a provision for a domain name applicant to submit, on an optional basis, to arbitration with respect to any dispute in relation to the domain name. The Report further recommends that such clauses envisage the arbitration taking place on line. However, the registration agreement would not deny parties to a dispute access to court litigation.
On-line arbitration processes have been proposed before and several organizations have attempted to provide the service. However, to date on-line arbitration processes have been ignored by disputants and the viability of the approach remains questionable. Consequently, court litigation will likely remain a necessity for resolving domain name disputes.
Conclusion
The degree to which the recommendations of the WIPO Final Report become part of the rules ICANN is now formulating for resolving domain name disputes remains unclear. Cybersquatting disputes will probably continue to involve litigation for the foreseeable future. However, because a single registrar will no longer be setting policy on conflicts between domain name registrants and owners of trademarks, and owners of trademarks will increasingly be concerned about the effects on their marks of domain name registration by others, the importance of ICANN policy on resolving domain name disputes will continue to increase.
Organizations interested in protecting their trademarks should pay close attention to the development of the final ICANN rules for resolving domain name disputes and particularly to exclusion process rules that attempt to protect famous or well-known marks from cybersquatting. While both rules and processes for resolving domain name disputes continue to develop, both substantive and procedural law likely will be markedly influenced by the final ICANN rules.
For further information concerning this topic, please contact Mark Gatschet in the Austin office of Akin Gump at (512) 703-1134 or via e-mail at mgatschet@akingump.com. You may also contact Richard Schafer in the Houston office of Akin Gump at (713) 220-8184 or via e-mail at rschafer@akingump.com.
JURISDICTION AND CHOICE OF LAW
One of the most vexing issues of contract law pertains to that of jurisdiction -- what court in which venue will have jurisdiction to resolve disputes that may arise pertaining to the contractual relationship. In many contract negotiations, contracting parties tend to ignore the importance of this question and unaware parties will compromise on the issue of jurisdiction and choice of law in order to obtain other concessions. These parties eventually find themselves having to litigate under adverse conditions -- in a foreign country, subject to unfamiliar laws and in a language they do not know, and having to utilize the services of expensive local legal counsel. Within the context of e-commerce, the issue of jurisdiction has been the focal point of leading case law in recent years. By its sheer definition, the Internet breaks down all of the traditional notions of geographic borders and provides for a seamless, borderless environment. In this context, where does the transaction take place? At the point in which the transacting parties connect to the Internet, the place where the server is located, or the place from or to which the goods are provided? Physical presence also assumes a whole new meaning within the electronic environment of the Internet. Within the context of a single transaction, "presence" may be at different places simultaneously and the courts in each one of those venues would have legitimate claim to impose their jurisdiction on the subject matter transaction.
Much of the Internet-related case law addressing the question of jurisdiction has resorted to the purposeful availment test. According to this test, one who purposefully and knowingly subjects himself/herself to enjoy the privileges of the laws in the legal system of a certain forum should be subject to the jurisdiction of the appropriate courts within that same forum, as long as the basic notions of justice, fair play and due process are not breached. The question usually arises in the context of whether, by the mere operation of a Web site, the Web site owner avails himself/herself to the jurisdiction of a court in the forum of any Internet user who can access that site. Access to the Internet is available from virtually anyplace in the world where a user has access to a computer and some sort of connection to a computer network. As such, a broadly positive answer to the question posed previously would result in a situation wherein Web site owners would be subject to jurisdiction everywhere in the world, a situation that would not allow for commercial activity to take place over the Internet. U.S. courts have refrained from applying their jurisdictional power in such a sweeping manner.
Consequently, courts have typically looked at the level of interactivity available to users when accessing the Web site. The less the level of interactivity allowed the user, the less likely it is that the court will find jurisdiction in the forum of the user. For example, in the case of a purely promotional Web site where there is only a display of promotional and advertising information, but where the consumer has to physically contact the vendor, the court will treat such sites in a manner similar to that of placing an advertisement in a newspaper of general circulation. In the same way that the advertiser is not subject to jurisdiction in every venue where the newspaper may be sold or read, the Web site owner will not be subject to jurisdiction in every locale where the Web site may be accessed. On the other side of the spectrum are the highly-interactive Web sites, where e-commerce can be conducted and the transaction fully consummated. Under such circumstances, the courts are of the opinion that the Web site owner has purposefully availed herself to the benefits of doing business in the locale where the consumer is located and as such is subject to jurisdiction in that forum.
What should the Web site owner do in order to have more control over the jurisdictions in which they may be subject?
- As described above, one step is to limit the level of interactivity that the consumer has with the Web site. Of course, this solution is not always practical for Web site owners who are interested in conducting e-commerce through their Web site.
- It is recommended that in the terms and conditions of the sale there be explicit statements as to the governing law and choice of forum.
- The vendor should not limit himself/herself to just contractual terms, but should implement proactive steps in order to sustain a claim of reasonable diligence. Such steps should include explicit notification to the customers that business is not to be conducted with people located in certain predefined venues and that the moment that the customer notifies the vendor he is from such an undesired geographic area, the transaction should be immediately terminated.
All these steps can be implemented in an interactive, non-intrusive and non-threatening manner which will achieve the desired result. This will place customers in a position, if they are interested in furthering the transaction, of accepting the choice of law elected by the Web site owner or engaging in deception, concealing their true location.
For further information concerning this topic, please contact Jonathan Barsade in the Dallas office of Akin Gump at (214) 969-2710 or via email at jbarsade@akingump.com.
NAVIGATING THE U.S. GOVERNMENT'S EXPORT RESTRICTIONS ON ENCRYPTION TECHNOLOGY
Introduction
Increasingly sophisticated commercial encryption technology has fueled the growth of electronic commerce by protecting the confidentiality and confirming the authenticity of electronically transmitted data. Because of this growing demand for and reliance on encryption for electronic commerce, encryption technology is incorporated into many types of computer hardware and software, such as servers, routers, Internet browsers and communication applications. Reflecting the global nature of electronic commerce, more and more companies seek to export hardware and software containing encryption technology from the United States to conduct electronic commerce with overseas customers, partners and subsidiaries.
Companies that export encryption technology, however, need to be aware that the U. S. Government strictly controls the physical and electronic export of many forms of encryption technology. Because of the ubiquitous nature of encryption technology in the electronic commerce infrastructure, these export controls are potentially a significant issue for any company involved in using the Internet and other means to electronically conduct business and manage information. A company also cannot afford to ignore these export controls because failure to comply with these regulations can result in significant civil and/or criminal fines and penalties. Therefore, any company involved in international electronic commerce should be familiar with the U.S export controls on encryption technology. The following provides a general overview of the export controls on encryption technology and advice on how to comply with them.
Why Encryption Technology Exports Are Regulated
The primary policy reason for export controls on encryption technology is that the U.S. government seeks to prevent the use of encryption by criminals, terrorists and other threats to national security to securely conceal their activities and communication. There is a strong concern in the U.S. justice and intelligence agencies that the uncontrolled availability of encryption technology would significantly damage their ability to gather information on illegal activities. Thus, the focus of the export controls on encryption technology is on those products that use encryption to secure communications and data.
How Encryption Technology Exports Are Regulated
The export controls on commercial encryption technology are contained in the U.S. Export Administration Regulations (EAR). These regulations are administered by the Bureau of Export Administration (BXA) within the U.S. Department of Commerce and govern the export of most kinds of goods, services and technology with commercial or primarily civilian uses. Other regulations that control the export of encryption products are the International Traffic in Arms Regulations (ITAR), which are administered by the State Department. These regulations only apply to encryption products that are specifically designed, developed or modified for military applications and, as a result, usually do not apply to the types of encryption products used for electronic commerce.
The primary purpose of the EAR is to control the export of products, services and technology for national security and foreign policy reasons. If the uncontrolled export of a product or technology to any person or destination could adversely affect U.S. national security or foreign policy interests, then the EAR requires an exporter to obtain a license or other authorization from BXA prior to exporting the particular item or technology from the United States. Generally all exports to countries subject to U.S. trade embargoes and economic sanctions (currently Cuba, Iran, Iraq, Libya, North Korea, Serbia, Sudan and Syria) are prohibited by the EAR. In addition to controlling the export of an item or technology from the United States, the EAR also regulate subsequent transfers or re-exports of the item or technology and the transfer of technology to a foreign entity or person located within the United States.
Certain Encryption Technology Exempted from Export Controls
Computer hardware and software in which encryption is used solely for access control or identity authentication and cannot be used to encrypt any communications or information are exempt from the export licensing requirement of the EAR. These applications include: (1) the use of encryption for security purposes in "smart cards"; (2) decryption functions in copy-protected software; (3) access-control equipment that uses a personal identification number or password to limit access to a facility; (4) data authentication equipment for authenticating users or ensuring that text has not been altered; and (5) cryptographic equipment limited for use in automatic teller machines, selfservice statement printers or point-of-sale terminals. A company that is uncertain whether a certain product containing encryption falls within one of these exceptions can request BXA to review the function and capabilities of the encryption technology, along with the associated hardware or software, and issue a binding classification determination indicating whether prior export authorization is required.
How to Obtain an Export License for Encryption Technology
If the encryption technology to be exported does not fall within one of the above exempt categories, then the exporter must obtain a license or other authorization from BXA before exporting the encryption technology. The obligation to obtain authorization before export applies regardless of the "strength" of the encryption technology (i.e., whether the encryption uses a key-length of 40-bit, 56- bit, 128-bit or higher) and regardless of whether the encryption technology is generally available on the Internet or from other sources. A license or other authorization is also required for electronically sending encryption software outside of the United States via e-mail or the Internet.
An export license is obtained by submitting an application, cover letter and supporting documentation to BXA. The required information includes a description of the function and encryption capabilities of the hardware or software to be exported, information about the person overseas that will receive the encryption technology and the destination of the export. The application is primarily reviewed by BXA, although BXA often forwards license applications concerning encryption to the Departments of Justice, State, and Defense and the National Security Agency for their review and approval. The review process usually requires two months to complete. If a company plans to engage in numerous exports of a particular piece of hardware or software containing encryption technology, it can apply for an Encryption Licensing Arrangement (ELA) from BXA, which authorizes multiple exports to various destinations.
Export License Exceptions for Encryption Technology
BXA recognizes that a lesser degree of control is required to protect national security and foreign policy interests for encryption products that are limited in keylength, end-use or destination. For example, a foreign bank or financial institution that uses encryption to secure financial transactions is often required by its country's banking laws to provide the underlying data in unencrypted form in response to a lawful governmental request. Accordingly, the use of "strong" encryption by the foreign bank or financial institution will not hinder law enforcement. BXA, as a result, has created a number of license exceptions that allow the export of hardware or software with limited encryption capabilities, specified uses and/or restricted endusers without a license after BXA conducts a one-time review of the item. This one-time review is obtained by submitting a classification request to BXA, which is similar in form to a license application. Although these license exceptions apply to different types of encryption products, end-users and destinations, they are all designated by BXA as "License Exception ENC."
Exception for 56-Bit or Lower Encryption
Probably the most utilized license exception applies to software that contains 56-bit or lower encryption with symmetric algorithms, such as DES, RC2, RC4, RC5 and CAST. Once a software vendor obtains this license exception for its software, any person can export the software to all destinations, other than the designated sanctioned countries. Any subsequent bundling, updates or releases of the software are also covered by this license exception as long as the functional encryption capacity of the software has not been modified or enhanced. This exception is often obtained by software vendors for "international" versions of software that contain lower encryption strength than "domestic" versions of the software sold in the United States. A company can confirm that a vendor has obtained this license exception by requesting from the vendor a copy of BXA's determination granting the exception.
Exception for U.S. Subsidiaries
Under another useful license exception, encryption technology of any key-length may be exported to overseas subsidiaries of U.S. companies in any destination other than the sanctioned countries. The encryption software or hardware can only be exported for internal company proprietary use, which includes securing communications between the U.S. company and its overseas subsidiaries and use in the development of new products. A beneficial aspect of this license exception is that if the vendor of the encryption software or hardware has already been granted an export license or an ELA by BXA, then a company purchasing the item may export it without first having to submit it to BXA for a one-time review.
Exception for Banks/Financial Institutions, Health/Medical End-Users and On-Line Merchants
The EAR also provide a license exception for exports of general purpose encryption products to specific types of end-users. Under this license exception, encryption hardware or software of any key-length may be exported without a license for use by banks and financial institutions (including insurance companies), health and medical endusers and on-line merchants. The EAR, however, impose significant limitations on this license exception.
First, the EAR strictly define which types of companies qualify as banks and financial institutions, health and medical end-users and on-line merchants. The exception is further restricted to only exports of encryption software and hardware used to secure communications within each group of end-users or between the end-users and their customers. The encryption software and hardware cannot be used to enable secure customer-to-customer communications. Finally, this exception only allows exports of encryption technology to such end-users located in 46 specified countries. As in the case of the license exception for U.S. subsidiaries, the requirement under this exception for a one-time review by BXA is automatically met if an export license or ELA has already been issued for the encryption software or hardware and the software or hardware is exported to a bank, financial institution, or health or medical end-user. A previous export license or ELA does not fulfill the one-time review requirement for exports to on-line merchants.
Exception for Financial-Specific Encryption
The remaining extensively used license exception is limited to banks and financial institutions. This exception allows the export of "financial-specific" encryption hardware and software to any destination other than the designated sanctioned countries. To be covered by this exception, "financial-specific" encryption hardware and software must be specifically designed and limited to processing electronic financial transactions and may only encrypt text or data entered into specifically delineated fields, such as customer name, customer address and payment amount. Unlike the previous two license exceptions, the prior granting of an export license or ELA does not fulfill the requirement for a one-time review by BXA of the financial-specific hardware or software.
Complying With the Encryption Export Controls
As these numerous types of licenses and license exceptions show, complying with the U.S. Government's export controls on encryption technology and selecting the best type of authorization to export a given piece of encryption hardware or software can be complex. Adding to the difficulty of the situation is the frequent failure of many information technology personnel to be aware that encryption technology is subject to export controls. The controls on encryption often do not make common sense to technology personnel because some of the encryption technology that is covered by the controls is weak in strength and generally internationally available from the Internet. The compliance of technology personnel with the EAR restrictions is often further undermined by the ease with which encryption technology can be electronically transmitted to almost anywhere in the world and by the significant amount of misinformation, mostly circulated on the Internet, concerning the application of export controls to encryption products.
The combination of the complexity of the export controls on encryption technology and a potential lack of knowledge or concern for these controls by the personnel responsible for exporting encryption software and hardware makes compliance with the EAR restrictions on encryption technology particularly challenging. Nonetheless, the export of encryption technology is an important issue for the U.S. Government, and BXA vigorously enforces these controls. Any company that sells or uses encryption technology internationally, therefore, should implement a compliance program to ensure its conformity with the EAR.
An effective compliance program should begin with a comprehensive inventory of the encryption hardware and software that the company produces or uses and that could be exported. Based on a review of the capabilities and intended uses of these products, the applicable license requirements and/or license exceptions can be determined, followed by the submission to BXA of the required license or classification applications. Most importantly, an effective compliance program requires a thorough education of the personnel involved in the development, use and export of encryption technology to make them aware of the applicable export controls and the importance of complying with these controls. The program must also establish procedures for determining whether and how an encryption item may be exported. Personnel should be provided a single contact responsible for resolving export issues involving encryption technology, obtaining any required authorization from BXA and ensuring that the company's compliance program is implemented.
Conclusion
The EAR presents a complex web of export controls on encryption technology in which a company can be easily caught. Because of the ubiquitous presence of encryption in the hardware and software that makes electronic commerce possible, any company involved with electronic commerce cannot avoid these regulations through an effective export compliance program, however, a company can safely navigate the web of encryption export controls.
For further information concerning this topic, please contact Ed Rubinoff in the Washington, D.C., office at (202) 887-4026 or via e-mail at erubinoff@akingump.com. You may also contact Steve Claeys at (202) 887-4334 or via e-mail at sclaeys@akingump.com.
TEXAS REPEALS INTERNET ACCESS TAX LAW
In an effort to increase the growth and development of e-commerce and other on-line opportunities, legislation has been signed by Governor George W. Bush that will prevent Internet access service in the state of Texas from being subject to sales tax. Once recognized as a leader in taxing services surrounding the Internet, Texas has reversed its position and joined the growing number of states which do not tax Internet access.
Akin Gump attorneys Demetrius McDaniel, Brandon Janes and Mark Vane represented clients in the legislative process. The final legislation moves Texas in line with the 42 other states that do not tax access to the Internet. The tax measure is expected to provide $20 million in savings to Texas consumers each year. Only Internet Service Providers (ISPs) located in Texas assess the sales tax on its customers.
Because of the technology involved, an ISP may provide service to a national coverage area from any single geographic location. The costs to ISP customers associated with the sales tax may cause ISPs to locate in states that do not tax Internet access. Most ISPs currently charge approximately $20 per month for unlimited access to the Internet. The legislation limits the sales tax exemption to monthly access charges of $25 or less, meaning that commercial users will still pay sales taxes on amounts above $25 to maintain large band-width sites and conduct commercial transactions.
Not only will consumers receive a yearly $25 maximum in savings based on the new provision, but Texas-based ISPs will be better positioned to compete with those located in states that do not tax access to the Internet.
"Internet access service" is defined as a service enabling people to access proprietary content, information, electronic mail or other services offered over the Internet.
The exemption will not include telecommunications services or any other form of data processing or information service unless that service was provided in conjunction with and merely incidental to accessing the Internet.
This exemption will apply without regard to the billing period used by the service provider or whether the service was bundled with another taxable service. Therefore, "chat room," access to databases and other proprietary services provided by the ISPs will be exempt from sales taxes as well, if the monthly fee is less than $25.
This new legislation reverses the policy established by the former state Comptroller of Public Accounts, who had determined that access to the Internet was taxable under state law. This decision earned Texas national attention for being the most aggressive state in recognizing the Internet as a major new source of tax revenue.
For further information concerning this topic, please contact Demetrius McDaniel in the Austin office at (512) 499-6200 or via e-mail at dmcdaniel@akingump.com. You may also contact Mark Vane at (512) 499-6200 or via e-mail at mvane@akingump.com.
PTO GETS APA DEFERENCE FROM THE SUPREME COURT
The "if it ain't broke, don't fix it" philosophy lost out to the uniformity approach to judicial review of administrative action in a recent Supreme Court decision, Dickinson v. Zurko, ___S. Ct. ___ (No. 98-377, June 10, 1999). The Court had before it the question of whether the Court of Appeals for the Federal Circuit in reviewing decisions from the Patent and Trademark Office (PTO) should use the clearly erroneous standard of review that it employs when reviewing district court judgments or the standard of review mandated by the Administrative Procedure Act (APA).
In the 6-3 decision, the Court appears to have gone out of its way to apply the APA to the Federal Circuit's review of agency action by the Patent and Trademark Office. While the parties agreed that the PTO was an "agency" subject to APA constraints, that the PTO's findings at issue were facts and that the findings were "agency action," the Federal Circuit took the position that its review under the clearly erroneous standard was a statutory exception to the review standard mandated by the APA.
The two standards of review are fairly well established at the present time. The "clearly erroneous" standard which is referred to as "court/court review" – allows the appellate court to reverse a lower court's judgment (or an agency action when applicable) where the contrary position carries thorough conviction that a mistake has been made; the "APA standard" only allows agency holdings to be set aside if they constitute an abuse of discretion or are found to be arbitrary, capricious or unsupported by substantial evidence (referred to as court/agency review).
In Zurko, the PTO examiner and PTO Board of Patent Appeals and Interferences had both refused to grant the applicant a patent on a method for increasing computer security because they felt the method was obvious in view of prior art. On appeal, the Federal Circuit held that the Patent Office's view was reversible error based on a "clearly erroneous" standard of review. The court then sat en banc to conclude that its clearly erroneous standard, which it used in reviewing PTO actions, was the proper standard. The Solicitor General on behalf of the Commissioner of Patents sought certiorari and the Supreme Court granted the writ.
While the Supreme Court recognized that the APA exception section did "not limit or repeal additional requirements . . . recognized by law," it was unconvinced that the exception applied to the Federal Circuit's review of PTO findings of fact. The Court did not agree that the Federal Circuit's predecessor court, the Court of Custom and Patent Appeals (CCPA), had uniformly applied a court/court clearly erroneous standard before the APA was enacted in 1946. It dissected some 89 pre-APA cases of the CCPA to demonstrate that that court had not used the words of art "clearly erroneous," but rather a lot of other terms to describe the scope of its review and that other courts had sometimes used "clearly erroneous" to describe the court/agency review standard. It refused to find terms such as "manifest error" and "clearly wrong" to signal a court/court review standard. The Court also refused to be bothered by the anomalous fact that not all PTO fact finding comes directly to the Federal Circuit, since some appeals come to the Federal Circuit from Federal district courts where the court/court review standard is used.
Even though it told the Federal Circuit that it should quit applying the court/court review standard to agency action appeals originating in the PTO, the Supreme Court conceded that the difference between the court/court and court/agency review standards is a "subtle one." In fact, the Court admitted that it had "failed to uncover a single instance in which a reviewing court conceded that use of one standard rather than the other would in fact have produced a different outcome." As the Court pointed out, one appellate judge in the District of Columbia had made the point that he had been unable to find the case -- dreamed of by law professors -- where an agency's findings, though "clearly erroneous," were "nevertheless" supported by "substantial evidence"!
The dissent, though lacking the necessary majority to affirm the Federal Circuit's use of the court/court review standard in evaluating agency action from the PTO, seemed on firmer ground in believing the clearly erroneous standard should continue to be the correct standard, not the APA standard. The dissent pointed to the fact that until the majority changed the standard, both the patent bench and patent bar had believed the "clearly erroneous" standard was an additional requirement that foreclosed application of the APA court/agency review standard. It also noted that the purpose of the APA was to bring uniformity to agency review by raising the minimum standards of review, not by lowering the standards that existed at the time the APA became law. It was clear to the dissenters that the Court should not defer to the review standard applied to agencies in general, but to the unanimous view of the Federal Circuit, which was charged with review of patent appeals. Since the Federal Circuit and the patent bar both agreed that the "clearly erroneous" standard was the correct one to apply -- and the PTO had never argued otherwise until 1995 -- the dissent felt it was the "sensible and plausible" way to resolve the issue.
One can speculate as to why the majority in Dickinson needed to convert the exception language "otherwise recognized by law" into "clearly or expressly recognized by law" to eliminate the exception applicable to agency review of the PTO. Some have suggested that it may imply that the Federal Circuit/Supreme Court honeymoon -- which has found the Supreme Court deferring to the Federal Circuit on most occasions -- is a thing of the past. If this is one of the unarticulated messages of Dickinson v. Zurko, it is unfortunate that the majority picked such an anomalous vehicle to declare its independence. The Federal Circuit has overruled established principles of law in a number of cases without raising the hackles of the Supreme Court, so one wonders why the Court took a case that was hard to defend to make its position perfectly clear. While it is an old "saw" in the legal community that hard cases make bad law, the instant case proves that you do not need a hard case to make bad law.
For further information concerning this topic, please contact Jim Gambrell in the Austin office at (512) 499-6200 or via e-mail at jgambrell@akingump.com.