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  United States Court of Appeals for the Federal Circuit


                                         06-1169


                              PHG TECHNOLOGIES, LLC,

                                                      Plaintiff-Appellee,

                                            v.


                             ST. JOHN COMPANIES, INC.,

                                                      Defendant-Appellant.




     Lea Hall Speed, Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., of
Memphis, Tennessee, argued for plaintiff-appellee. With her on the brief was W. Edward
Ramage, of Nashville,Tennessee.

       Robert A. Schroeder, Bingham McCutchen LLP, of Los Angeles, California, argued
for defendant-appellant. With him on the brief were Jennifer M. Phelps and Robert C.
Horton.


Appealed from: United States District Court for the Middle District of Tennessee

Judge Robert L. Echols
 United States Court of Appeals for the Federal Circuit

                                          06-1169


                               PHG TECHNOLOGIES, LLC,

                                                         Plaintiff-Appellee,


                                              v.


                              ST. JOHN COMPANIES, INC.,

                                                         Defendant-Appellant.


                            __________________________

                            DECIDED: November 17, 2006
                            __________________________


Before MICHEL, Chief Judge, DYK, and PROST, Circuit Judges.

PROST, Circuit Judge.

       Defendant-Appellant, St. John Companies, Inc. (“St. John”), appeals the decision

of the United States District Court for the Middle District of Tennessee granting a

preliminary injunction in favor of Plaintiff-Appellee, PHG Technologies, L.L.C. (“PHG”).

Because we find that St. John has raised a substantial question of the validity of the two

patents at issue, the district court abused its discretion by granting PHG’s motion for a

preliminary injunction. Therefore, we vacate the preliminary injunction.

                                     I. BACKGROUND

       PHG and its predecessors have been in the business of selling certain medical

patient identification labels as well as identification labeling software in the United States
since 1995. PHG owns the two design patents at issue in this case: United States

Patent Nos. D496,405 (the “’405 patent”) and D503,197 (the “’197 patent”). The ’405

patent claims “[t]he ornamental design for the medical label sheet, as shown.” The ’197

patent claims “[t]he ornamental design for a label pattern for a medical label sheet, as

shown.” Figure 1 from the ’405 patent and figure 1 from the ’197 patent appear below,

respectively:




As can be seen, both designs include eleven rows of labels, with each row containing

three labels. The first nine rows are depicted to contain three labels of equal size, the

size being consistent with a standard medical chart label. The tenth and eleventh row

each contain differently-sized labels which apparently correspond to the size of a

pediatric and adult patient wristband respectively.     The difference between the two

patents is that the border is part of the design claimed in the ’405 patent but not part of



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the design claimed in the ’197 patent. The ’405 and ’197 patents depend from a utility

parent application, No. 09/952,425 (the “’425 utility application”), which is still pending at

the United States Patent and Trademark Office.

       St. John also sells medical patient identification labels in the United States in

competition with PHG.1 On May 13, 2004, before PHG’s design patents issued, PHG

informed St. John by letter that the design of St. John’s medical label sheet infringed the

intellectual property rights of PHG and that PHG anticipated that patents covering the

accused design would be issued in the future. St. John did not respond to the May 13th

letter and continued to sell its medical label sheet. After the two patents issued, PHG

filed suit on August 11, 2005 alleging, inter alia, that St. John’s medical label sheet

infringed the ’405 and ’197 patents.

       On August 26, 2005, two weeks after filing suit, PHG moved for a preliminary

injunction against St. John’s continued sale of its accused medical label sheet. The

district court held an evidentiary hearing on November 22, 2005. St. John argued that

the patented medical label sheets are primarily functional and presented evidence from

the prosecution history of the ’425 utility application and from an affidavit submitted by

Adam Press, St. John’s Chief Executive Officer, in support of its argument.             PHG

presented the testimony of Mr. Moyer, one of the inventors of the patents at issue. Mr.

Moyer testified that he and Mr. Stewart, his co-inventor, experimented with different




       1
              Part of St. John’s business model involves securing a contract with a large
purchasing organization, performing a “label collect” in which every label used by any
hospital within the organization is collected, copying those labels, and offering them at
reduced prices to those hospitals.



06-1169                                       3
configurations of the medical labels and chose the claimed designs because they were

the “most aesthetically pleasing to us.”

       On December 5, 2005, the district court granted PHG’s motion for a preliminary

injunction and made, inter alia, the following findings with respect to the validity of the

patents: (1) the design claimed is not dictated by its function; (2) the different sizes and

arrangement of labels on PHG’s claimed design are primarily ornamental because there

are other ways to arrange different sizes of labels on an 8 1/2O x 11O sheet; (3) the

inventors of the design considered various arrangements and chose the patented

design because it had “the best flow and look”; and (4) the novel features of PHG’s

designs, particularly the placement of the various sizes of labels at the bottom of the

sheet, distinguishes PHG’s designs from the prior art. Additionally, the district court

made the following findings pertaining to infringement of the patents by St. John’s

medical label sheet: (1) when compared, St. John’s medical label sheet and the

patented design are identical and an ordinary observer would be “very hard-pressed” to

identify any differences in the two designs; and (2) St. John’s accused design

appropriates the novelty of PHG’s patented design, which distinguishes it from the prior

art—the different sizes of labels and their placement on the sheet. Finally, the district

court found that PHG is entitled to a rebuttable presumption of irreparable harm and the

evidence confirms that PHG has suffered and will continue to suffer substantial damage

in lost sales, business opportunities, and customer goodwill if St. John is not enjoined

from continuing to market its accused design. See PHG Techs., L.L.C. v. St. John Cos.,

No. 03:05-0630 (M.D. Tenn. Dec. 5, 2005) (“Preliminary Injunction Opinion”). Based on

these findings, the court concluded that PHG demonstrated a reasonable likelihood of




06-1169                                      4
success on the merits, established that it would be irreparably harmed if an injunction

did not issue and showed that the balance of hardships and the public interest weigh in

favor of enjoining St. John from continuing to sell its accused design.

       St. John appeals the district court’s grant of the preliminary injunction against its

accused medical label sheet design.        We have jurisdiction pursuant to 28 U.S.C.

§ 1292(a)(1).

                                    II. DISCUSSION

                                 A. Standard of Review

       This court reviews a district court’s decision granting a motion for preliminary

injunction for an abuse of discretion. Novo Nordisk of N. Am., Inc. v. Genentech, Inc.,

77 F.3d 1364, 1367 (Fed. Cir. 1996). “To overturn the grant of a preliminary injunction,

we must find that the district court made a clear error of judgment in weighing the

relevant factors or based its exercise of discretion on an error of law or on clearly

erroneous factual findings.” Pfizer, Inc. v. Teva Pharms., USA, Inc., 429 F.3d 1364,

1372 (Fed. Cir. 2005). Whether a patented design is functional or ornamental is a

question of fact.

       A decision to grant or deny a preliminary injunction is based on the district court’s

consideration of four factors: “(1) the likelihood of the patentee’s success on the merits;

(2) irreparable harm if the injunction is not granted; (3) the balance of hardships

between the parties; and (4) the public interest.” Oakley, Inc. v. Sunglass Hut Int’l, 316

F.3d 1331, 1338-39 (Fed. Cir. 2003) (citing Amazon.com, Inc. v. Barnesandnoble.com,

Inc., 239 F.3d 1343, 1350 (Fed. Cir. 2001)). “Our case law and logic both require that a

movant cannot be granted a preliminary injunction unless it establishes both of the first




06-1169                                      5
two factors, i.e., likelihood of success on the merits and irreparable harm.”

Amazon.com, 239 F.3d at 1350. In order to establish the first preliminary injunction

factor, PHG must show that it will likely prove that St. John infringes the ’405 and ’197

patents. However, in order to defeat the injunction on grounds of potential invalidity, St.

John, as the party bearing the burden of proof on the issue at trial, must establish a

substantial question of invalidity. See Gonzales v. O Centro Espirita Beneficente Uniao

Do Vegetal, 126 S. Ct. 1211, 1219-20 (2006) (“[T]he burdens at the preliminary

injunction stage track the burdens at trial.”); see also Ashcroft v. Am. Civil Liberties

Union, 542 U.S. 656, 666 (2004).

                                       B. Analysis

       On appeal, St. John challenges the district court’s findings with respect to only

the first preliminary injunction factor—the likelihood of success on the merits. St. John

argues that the district court erred by finding that (1) PHG will likely prove infringement

and (2) St. John’s challenge to the validity of the patents at issue lacks substantial merit

(i.e., does not raise a substantial question concerning the validity of the patents). We

begin with St. John’s challenge to the validity of PHG’s asserted patents.

                            1. Substantial Question of Validity

       St. John asserts that the district court erred in finding that the patented designs

are primarily ornamental rather than merely a byproduct of functional considerations. In

support of its assertion of functionality, St. John points to various statements made by

PHG in the prosecution of the ’425 utility application and to statements made by Mr.

Press in an affidavit submitted to the court. St. John argues that the statements made

during prosecution and those submitted by Mr. Press constitute a clear and convincing




06-1169                                      6
showing of functionality. Further, St. John asserts that because PHG presented no

evidence to rebut St. John’s showing of invalidity, the district court clearly erred in

finding that the patented designs are primarily ornamental.

       PHG responds that the district court correctly determined that St. John failed to

raise a substantial question regarding the functionality of the designs because the

patented designs were not dictated by the use or purpose of the article of

manufacture―a medical label sheet. PHG concedes that the design has functional

features but argues that the arrangement of the different sizes of labels on the sheet is

primarily ornamental because, as found by the district court, “there are a multitude of

ways to arrange different sizes of labels on an 8 1/2O x 11O sheet.” Further, PHG

accuses St. John of focusing solely on the individual features of the claimed designs

rather than analyzing the overall appearance to determine if the designs were dictated

by functional considerations.

       The district court determined that St. John failed to carry its burden of raising a

substantial question of validity of PHG’s design patents to defeat PHG’s motion for

preliminary injunction.   The district court’s sole finding with regard to St. John’s

assertion of invalidity was that the design was not dictated by its function because “[t]he

testimony revealed [that] there are a multitude of ways to arrange different sizes of

labels on an 8 1/2O x 11O sheet.” Preliminary Injunction Opinion, slip op. at 12. In

support, the district court noted that “Brian Moyer testified that PHG considered various

arrangements for medical label sheets and settled on the design ultimately patented

because it had ‘the best flow and look.’” Id. In sum, the district court concluded that

“[t]he different sizes of labels and the arrangement of those labels on PHG’s Medical




06-1169                                     7
Label Sheet are primarily ornamental because there are other ways to arrange different

sizes of labels on an 8 1/2O x 11O sheet.” Id., slip op. at 13-14.

       “Whoever invents any new, original and ornamental design for an article of

manufacture may obtain a patent therefor, subject to the conditions and requirements of

this title.” 35 U.S.C. § 171 (2006). As the statute indicates, a design patent is directed

to the appearance of an article of manufacture. L.A. Gear, Inc. v. Thom McAn Shoe

Co., 988 F.2d 1117, 1123 (Fed. Cir. 1993).            “If the patented design is primarily

functional rather than ornamental, the patent is invalid.”        Power Controls Corp. v.

Hybrinetics, Inc., 806 F.2d 234, 238 (Fed. Cir. 1986). The design of a useful article is

deemed to be functional when “the appearance of the claimed design is ‘dictated by’ the

use or purpose of the article.” L.A. Gear, 998 F.2d at 1123; see also Rosco, Inc. v.

Mirror Lite Co., 304 F.3d 1373, 1378 (Fed. Cir. 2000).

       “[T]he determination of whether the patented design is dictated by the function of

the article of manufacture must ultimately rest on an analysis of its overall appearance.”

Berry Sterling Corp. v. Pescor Plastics, Inc., 122 F.3d 1452, 1455 (Fed. Cir. 1997). Our

cases reveal a “list of . . . considerations for assessing whether the patented design as

a whole—its overall appearance—was dictated by functional considerations,” including:

       whether the protected design represents the best design; whether
       alternative designs would adversely affect the utility of the specified article;
       whether there are any concomitant utility patents; whether the advertising
       touts particular features of the design as having specific utility; and
       whether there are any elements in the design or an overall appearance
       clearly not dictated by function.

Id. at 1456 (emphasis added). In particular, we have noted that “[t]he presence of

alternative designs may or may not assist in determining whether the challenged design

can overcome a functionality challenge. Consideration of alternative designs, if present,



06-1169                                       8
is a useful tool that may allow a court to conclude that a challenged design is not invalid

for functionality.” Id. “When there are several ways to achieve the function of an article

of manufacture, the design of the article is more likely to serve a primarily ornamental

purpose.” Rosco, 304 F.3d at 1378.

       Our case law makes clear that a full inquiry with respect to alleged alternative

designs includes a determination as to whether the alleged “alternative designs would

adversely affect the utility of the specified article,” such that they are not truly

“alternatives” within the meaning of our case law. Id. In this case, while the district

court relied exclusively on its finding that there were a multitude of alternative designs,

the court did not make any findings with respect to whether any of the alternatives

would adversely affect the utility of the medical label sheet. One might presume that the

district court’s findings with respect to alternatives implicitly include the additional finding

that the alternatives did not adversely affect the utility of the medical label sheet. The

difficulty in doing so in this case, however, is that the district court makes no reference

to St. John’s evidence that the overall arrangement of the labels on the medical label

sheet was dictated by the use and purpose of the medical label sheet and that

alternative designs lacking that arrangement would adversely affect the utility of the

sheet. Specifically, St. John presented Mr. Press’s affidavit, in which he stated:

       The labels for use on the wristbands themselves are located on the
       bottom two rows of the sheet as these are usually the first labels used
       when a patient is admitted to a medical facility. The lower right hand
       corner is the easiest location for a right-handed user to remove the label
       as it is flush to an edge and unencumbered by a file or binder clip along
       the top or left hand margins. By placing the labels for the wristbands at
       the bottom of the page, the subsequent removal of additional labels
       adjacent to the removed label is facilitated.

(Press Aff. ¶ 5.d.)



06-1169                                        9
       Mr. Press’s affidavit constitutes evidence that alternative designs, which do not

include the “novel feature” of PHG’s design―the placement of various sizes of medical

labels at the bottom of the sheet―would adversely affect the utility of the medical label

sheet. It articulates a clear functional reason why the use and purpose of the article of

manufacture dictated that the “wristband” labels be located at the bottom of the sheet.

Additionally, PHG’s statements during prosecution of the ’425 utility application indicate

that there were functional reasons for each of the other features of the medical label

sheet, including: for creating one sheet containing labels of different sizes; for the

particular sizes of each differently-sized label; for the size of the sheet itself; and for

including holes along the side and top of the sheet.

       While a district court’s determination as to whether a design is primarily

ornamental is reviewed for clear error, in this case there is no explicit finding by the

court on whether the alleged alternatives are in fact functionally equivalent (i.e., that the

alternatives do not adversely affect the utility of the medical label sheet), or any mention

or finding whatsoever with respect to the evidence presented in Mr. Press’s affidavit.

The evidence presented by St. John, in our view, was sufficient to raise a substantial

question of invalidity. The only evidence presented by PHG and relied upon by the

district court was Mr. Moyer’s testimony that he and his co-inventor chose the patented

designs because they had “the best flow and look.” PHG did not offer testimony refuting

the assertions made in Mr. Press’s affidavit―that functional considerations dictated the

medical label design, specifically the “novel feature” of the differently-sized labels being

placed at the bottom of the sheet. In fact, on cross-examination Mr. Moyer testified that

the original intent in designing a medical label sheet with differently-sized labels was




06-1169                                      10
“functional.” Therefore, this case is clearly distinguishable from L.A. Gear, in which the

patentee introduced evidence indicating that “a myriad of athletic shoe designs” could

achieve the same functions that were achieved by the patented designs and “[i]t was

not disputed that there were other ways of designing athletic shoes to perform the

functions of the elements of the [patented] design.” 988 F.2d at 1123.

       Further, we reject PHG’s assertion that St. John’s analysis focuses solely on the

individual features of the designs rather than their overall appearance. The evidence

presented by St. John not only addresses the individual features of the designs, but also

their overall appearance.2     Mr. Press’s statements directly pertain to the overall

arrangement of the designs as a whole and indicate that the use and purpose of the



      2
                Although our case law recognizes that the relevant inquiry with respect to
a design patent is the overall appearance of the design, this court invariably also
considers whether the elements of the design are themselves dictated by the purpose
or use of the article of manufacture. See Power Controls, 806 F.2d at 240 (“In
determining whether a design is primarily functional, the purposes of the particular
elements of the design necessarily must be considered.”); see also L.A. Gear, 988 F.2d
at 1123 (noting that the record showed “the existence of a myriad of athletic shoe
designs in which each of the functions identified by [the alleged infringer] as performed
by the [patented] design elements was achieved in a way other than by the design of
the . . . patent” (emphasis added)).
         Therefore, St. John’s evidence that the particular elements of PHG’s designs
were dictated by the use or purpose of the medical label sheet “necessarily must be
considered.” St. John’s evidence in this regard includes PHG’s statements during
prosecution of the ’425 utility application indicating that the particular elements of the
designs are dictated by the use or purpose of the medical label sheet. While PHG
argues that a utility application may be drawn to different features of the same product,
a statement with which we whole-heartedly agree, PHG has not done so in this case.
Its statements in prosecution are directed to the same features of the medical label
sheet as the design. For example, the medical label sheet itself is ideally of standard-
size, 8 1/2O x 11O, and the three different label sizes are all standard-sized as well, one
size being standard for medical charts and record books, another for adult patient
wristbands, and a third for pediatric patient wristbands. Therefore, PHG’s statements
during prosecution are relevant to whether the elements of the design are primarily
ornamental, and as discussed infra, are also relevant to whether the designs’ overall
appearance was “dictated by” its use and purpose.


06-1169                                     11
medical label sheet dictate that the wristband-sized labels be located at the bottom of

the sheet. See supra. His statements reasonably indicate that once the location of the

wristband-sized labels has been dictated by the use and purpose of the medical label

sheet, the location of the remaining labels is necessarily dictated as well.          This is

because the remaining labels, as well as the medical label sheet itself, are of standard

size.      Therefore, in order to maximize the efficient use of space on the sheet, the

location and number of the medical chart and record labels is dictated by the placement

of the wristband-sized labels at the bottom of the sheet.         St. John’s evidence thus

directly pertains to, and is sufficient to raise a substantial question with respect to,

whether the overall appearance of the patented designs is “dictated by” the medical

label sheet’s use and purpose. Because St. John has satisfied its burden of raising a

substantial question of invalidity, the district court’s finding that PHG was likely to show

that the patented designs were primarily ornamental is clearly erroneous.

        We also note that, contrary to PHG’s assertion, the facts in this case are

distinguishable from those presented in Rosco. In Rosco, this court reversed the district

court’s finding of invalidity based on functionality because the record indicated that other

mirror designs “that have non-oval shapes also offer that particular field of view . . . and

the record shows that other non-oval shaped mirrors have the same aerodynamic

effect.”     304 F.3d at 1378.   In this case, however, the evidence of record at this

preliminary stage indicates that other medical label designs would adversely affect the

utility of the medical label sheet, and the district court made no findings to the contrary.




06-1169                                      12
                                      2. Infringement

       St. John’s argument on infringement is that the patented designs do not have any

non-functional features to identify in claim construction and therefore there is nothing to

compare in an infringement analysis.           Alternatively, St. John asserts that the

“contrasting grid-like pattern” is ornamental and the “point of novelty” that must be found

in the accused design for infringement to occur.

       In light of our conclusion―that St. John has raised a substantial question of the

design patents’ validity―we need not reach St. John’s arguments with respect to

infringement to conclude that St. John has failed to show that it will likely succeed on

the merits. Therefore, the first preliminary injunction factor weighs in favor of St. John.

                                    III. CONCLUSION

       St. John’s challenge to the district court’s grant of PHG’s motion for a preliminary

injunction was based solely on its assertion that PHG could not establish the first

preliminary injunction factor—the likelihood of success on the merits. St. John has

shown, based on the evidence of record at this preliminary stage, that the district court

clearly erred in concluding that PHG met its burden of proving that it is likely to succeed

on the merits. Because PHG has not established that at least the first preliminary

injunction factor―likelihood of success on the merits―weighs in its favor, see

Amazon.com, 239 F.3d at 1350, the district court abused its discretion in granting

PHG’s motion for a preliminary injunction.

       Accordingly, we vacate the district court’s grant of a preliminary injunction.

                                          COSTS

       Each party shall bear its own costs.

                                        VACATED
