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Chicago IP Litigation Tracking Northern District of Illinois IP Cases

Monthly Archives: May 2011

Court Dismisses Case and Considers Unenforceability With Exceptional Case Motion

By R. David Donoghue on Posted in Damages

Gordon-Darby Sys., Inc. v. Applus Techs., Inc., No. 10 C 1863, Slip Op. (N.D. Ill. Dec. 23, 2010) (Zagel, J.).

Judge Zagel granted plaintiff’s motion to dismiss its patent infringement claims regarding vehicle emissions testing with prejudice and to dismiss defendants’ noninfringement, invalidity and unenforceability claims without prejudice. After the parties engaged in some discovery, plaintiff determined that it no longer wanted to pursue its claims and gave defendants a covenant not to sue. Based upon that covenant, the parties agreed that all of their claims should be dismissed, except for defendants’ inequitable conduct claims. Defendants argued that those claims were related to its 35 U.S.C. Section § 285 claim to make the case exceptional and award defendants their attorney’s fees. Citing the Federal Circuit’s decision in Monsanto Co. v. Bayer Bioscience N.V., 514 F.3d 1229 (Fed. Cir. 2008), the Court held that, although the Federal Circuit had not squarely decided the issue, the precedent was clear that the covenant divested the Court of subject matter jurisdiction over the inequitable conduct declamatory judgment claim.

The Court, however, retained independent jurisdiction over defendants’ Section § 285 claim to make the case exceptional and award defendants their attorney’s fees. And the Court acknowledged that it could consider unenforceability as part of the exceptional case analysis, which could trigger a holding that the patents in suit were unenforceable due to inequitable conduct.

N.D. Illinois Judicial Panel: Judge Zagel

By R. David Donoghue on Posted in Legal News

The Federal Bar Association – an excellent group that is worth joining (disclosure: I am a member) – recently held a panel of Northern District judges. Here are my notes regarding Judge Zagel’s comments:

  • The most valuable cost control tool Judge Zagel has found is an early deposition, often of a 30(b)(6) designee, allowing for a second deposition later in the case. The early deposition tends to narrow discovery and case issues.
  • Clerks write first drafts of Judge Zagel’s opinions, with one clerk taking even cases and the other taking odd numbered cases. Clerks can write first drafts because a majority of cases are inadequately prosecuted or defended and, therefore, do not result in motions that are difficult, close calls.
  • Judge Zagel writes 10-15% of his own opinions.
  • Judge Zagel does voir dire by himself. Counsel do not ask questions.

Federal Circuit Heightens Inequitable Conduct Standards, But Does it Increase Unethical Behavior?

By R. David Donoghue on Posted in Legal News

Yesterday, the Federal Circuit handed down its anticipated en banc decision in Therasense, Inc. v. Becton, Dickinson & Co., increasing the standards for inequitable conduct.  The 6-5 majority held that: 

  1. an omitted reference is material only if the claim or patent would not have issued, but for omission of the reference;
  2. specific intent to deceive must be shown by clear and convincing evidence;
  3. courts can no longer employ a "sliding scale" of intent and materiality, both must be showng by clear and convincing evidence; and
  4. courts should apply equity to ensure that the remedy is not based upon conduct "immaterial to the issuance of the patent." 

Patent Docs has an excellent explanation of the opinion and the case background.  And there is plenty of commentary about the opinion (see links below).  My initial reaction was that the heightened standards will not actually reduce the number of inequitable conduct claims that are filed, although it may reduce the number of inequitable conduct findings. 

So, while the overall outcomes may change, the general cost and complexity of patent litigation will likely remain the same.  But when I said as much on Twitter (@rdd), I got an interesting reaction from what appears to be an anonymous patent lawyer.  This anonymous person suggested that the heightened standard would actually embolden inventors and patent prosecutors to omit references and hide information from the Patent Office because they are now less likely to be charged with inequitable conduct.  My inclination is to dismiss this theory based upon my operating presumption that most patent prosecutors, and most inventors, are, or at least intend to, zealously advocate for their clients, or themselves, within the Patent Office’s rules and the relevant ethics standards.  Of course, I have seen exceptions, and they can be severe.  But my experience is that those are the exceptions, not the rule.  I am curious to hear what others think about this.  Am I wrong?

Here is a round up of some of the blog posts about the decision:

Patent Assignor Estoppel is Limited to the Assignee

By R. David Donoghue on Posted in Pleading Requirements

Schultz v. iGPS Co. LLC, No. 10 C 71, Slip. Op. (N.D. Ill. Jan. 3, 2011) (Hibbler, Sen. J.)

Judge Hibbler granted in part defendant’s Fed. R. Civ. P. 15 motion to amend its affirmative defenses. The doctrine of assignor estoppel did not ban defendant’s invalidity and inequitable conduct defenses. An assignor is estopped from challenging the validity and enforceability of its assigned patent, but that estoppel is personal to the assignee. Because plaintiff was not the assignee, he had no right to assert estoppel. Furthermore, to determine whether defendants were in privity with the assignor would require facts beyond the complaint and was, therefore, not resolvable in a motion to dismiss.

The Court, however, did not accept defendants’ inequitable conduct defenses because they failed to plead the necessary intent with particularity. Defendants only alleged that patentee failed to pay its maintenance fees and then improperly revived the patents, without more. Defendants were granted leave to replead those defenses, if possible, with sufficient facts.

Defendant Waived Personal Jurisdiction by Its Actions, If Not Its Filings

By R. David Donoghue on Posted in Jurisdiction

Salud Natural Entrepreneur, Inc. v. Nutricento Internacional, Inc., No. 09 C 4417, Slip Op. (N.D. Ill. Jan. 27, 2011) (Zagel, J.).

Judge Zagel denied defendant Azteca Products’ ("Azteca") Fed. R. Civ. P. 12(b)(2) motion to dismiss for lack of personal jurisdiction in this Lanham Act case. Azteca’s officer, a non-lawyer, purported to file an answer on Azteca’s behalf. Azteca then hired counsel who participated in Rule 26 scheduling conferences. Azteca’s officer then filed a Rule 12(b)(2) motion to dismiss without counsel, which the Court struck because it was not filed by counsel, and a corporate entity cannot act pro se. The Court then entered a default judgment and an injunction against Azteca. Azteca hired counsel and asked through counsel that the default be vacated. The Court vacated the judgment and agreed to consider whether Azteca’s personal jurisdiction arguments had been waived. Noting the "bizarre posture of the case, the Court held that Azteca had not preserved its jurisdiction arguments.

The answer did not waive Azteca’s arguments because as a pro se filing it was treated as never having been filed. But counsel did participate in Rule 26(f) conferences, although he filed no notice of appearance, and offered no suggestion that Azteca would challenge jurisdiction during that time. Furthermore, jurisdiction was challenged for the first time more than thirty days after the other defendants settled based upon discussions that Azteca did not participate in. Regardless of the legal impact of Azteca’s filings, by the time Azteca challenge jurisdiction, plaintiff had developed a "reasonable expectation" that Azteca would defend itself in Illinois.

N.D. Illinois Judicial Panel: Judge Pallmeyer

By R. David Donoghue on Posted in Legal News

The Federal Bar Association – an excellent group that is worth joining (disclosure: I am a member) – recently held a panel of Northern District judges. Here are my notes regarding Judge Pallmeyer’s comments:

  • Judge Pallmeyer does not like hearings by phone, but will allow them in appropriate circumstances.
  • She reads briefs as they come in, but has clerks write some opinions. She also avoids unnecessary opinions.
  • When possible and appropriate, Judge Pallmeyer encourages live argument and immediate decision. So, show up for hearings prepared to argue.
  • Judge Pallmeyer uses a two-page questionnaire tailored to each case for voir dire. She then asks follow up and gives counsel brief opportunities to follow up, followed by preemptory challenges.

Congress Considers Changes to Rule 11 Sanctions

By R. David Donoghue on Posted in Federal Rules

Congress is currently considering revision Rule 11 sanctions, including:

  1. Removing the existing 21 day "safe harbor" provision which requires that you send your motion to the opposing party and give them 21 days to remedy the alleged Rule 11 violation before filing the motion with the Court; and
  2. Making an award of fees and costs related to a winning Rule 11 motion automatic, instead of discretionary.

The Federal Bar Association (of which I am a member) has published a call for comment that sets out both sides of the issue well.  It follows below.  I can understand the inclination to make fees and costs automatic, but the 21 day "safe harbor" serves a valuable gatekeeping role.  It avoid clogging the federal courts with Rule 11 motions that could be fixed with notice of the alleged deficiency.

Proposed Amendments in H.R. 966

The H.R. 966 bill would repeal amendments that the Judicial Conference of the United States proposed for adoption effective in 1993, thereby in part reinstating an earlier version of Rule 11 that had been in force between 1983 and 1993. It would also add a new provision for punitive monetary sanctions to be paid into court.

Under the bill, there would no longer be a “safe harbor” provision that allows an adverse party to withdraw or modify a challenged pleading or other paper before a sanctions motion can be filed or otherwise presented to the court. See Fed. R. Civ. P. 11(c)(2). That safe harbor clause was adopted effective in 1993.

The bill would also provide that sanctions awards would once again be mandatory, rather than discretionary, in cases where a court has found that a pleading or other paper was signed without adequate factual or legal grounds. Sanctions had been mandatory from 1983 to 1993. The bill would specify that, in addition to any other sanctions the court might impose, “the sanction shall consist of an order to pay to the party or parties the amount of the reasonable expenses incurred as a direct result of the violation, including reasonable attorneys’ fees and costs.”

In doing so, the bill would repeal the current provision in Rule 11(c)(2) that that fees and costs “may” be awarded “if warranted.” In place of that provision, the bill would further authorize punitive monetary awards, to be paid into the court, “if warranted for effective deterrence.”

Testimony Supporting and Opposing the H.R. 966 Bill

According to testimony on behalf of the National Federation of Independent Business and the U.S. Chamber Institute for Legal Reform, the changes are necessary because frivolous lawsuits and staggering litigation costs are creating a climate of fear for America’s small businesses. In their view, the current “safe harbor” means that preparing a motion for sanctions may serve only to increase the costs for the moving party – which is, generally, the defendant. And even if a plaintiff does not withdraw his or her claims for relief, and even if the court finds them to be frivolous, the discretionary nature of the current sanctions provision means that the court may choose not to impose any sanction other than dismissing the case. These trade associations also believe that the current version of Rule 11 discourages judges from imposing sanctions for the purpose of compensating defendants for their attorney’s fees and costs.

In opposition to the H.R. 966 bill, a professor at the University of Houston Law Center has testified that the 1993 amendments of Rule 11 were adopted in the face of studies suggesting that the 1983 version of Rule 11 was deterring the filing of meritorious cases. Additionally, in practice, civil rights and employment discrimination plaintiffs were impacted the most severely under the earlier version of Rule 11 as adopted in 1983. Studies also showed that plaintiffs had been the targets of sanctions far more often than defendants, even though the terms of Rule 11 apply to all pleadings and other papers – including a defendant’s answer containing denials and affirmative defenses. Scholars and practitioners had noted that the 1983 version actually increased costs and delays by encouraging “the Rambo-like use of Rule 11 by too many lawyers,” and that the resulting increase in sanctions-oriented motions practice had led to a breakdown of civility and professionalism. This professor cited a 1991 study by the Federal Judicial Center, which revealed that few judges polled thought the then-current 1983 version of the rule was “very effective” in deterring groundless pleadings. In a 2005 survey of 278 district judges polled by the Federal Judicial Center, more than 80% of the judges said that “Rule 11 is needed and it is just right as it stands now.”

Call for Comment and Proposals from the Federal Litigation Bar

The Committee on Federal Rules of Civil Procedure and Trial Practice seeks your comments. Comments may be submitted concerning any of the proposed revisions contained in the H.R. 966 bill; or concerning any other proposals to modify Rule 11; or concerning whether to retain the text of Rule 11 as currently in force. We also welcome any other proposals that are germane to the application or purposes of Rule 11. Upon request, we will handle any comment as confidential. Anonymous comments will also be accepted.

Rob Kohn and John McCarthy are co-chairs of the Committee on Federal Rules of Civil Procedure and Trial Practice. Kohn is also the Secretary and Treasurer of the Federal Litigation Section; and McCarthy is Chapter President of the Southern District of New York chapter of the FBA. Kohn may be reached at rkohn@kohnlawgroup.com. McCarthy may be reached at jmccarthy@sgrlaw.com.

N.D. Illinois Judicial Panel: Judge Dow

By R. David Donoghue on Posted in Legal News

The Federal Bar Association – an excellent group that is worth joining (disclosure: I am a member) – recently held a panel of Northern District judges discussing their chambers and tips for counsel. Here are my notes regarding Judge Dow’s comments:

  • Judge Dow allows counsel to appear by phone; sometimes even encourages it for remote counsel and less complex hearings and status conferences.
  • He started out writing all of his own opinions, but now writes some and has clerks draft some, with interaction as clerks have questions.
  • For voir dire, Judge Dow uses a brief questionnaire tailored to the case, followed by follow- up questions from the Court and the counsel.

Patent Damages 25% Rule is Dead

By R. David Donoghue on Posted in Damages

The following is an article I wrote with my Holland & Knight colleague Ben Stern outlining the Federal Circuit’s Uniloc decision striking down the 25% rule for patent damages.

On January 4, 2011, the U.S. Court of Appeals for the Federal Circuit found that the so-called “25 percent rule of thumb” analysis long used by damages experts in patent cases to calculate a “reasonable royalty” is “fundamentally flawed.” Uniloc v. Microsoft (Fed. Cir. 2011). The Federal Circuit held that because the 25 percent rule merely applies a general theory that is untethered to the facts of a case, “[e]vidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence.” Slip op. at 41. The full decision can be found online.

Striking down the 25 percent rule has important implications for patent damages in both existing and future patent litigation. As a result, the Uniloc decision is critical for every company that faces any current or potential risk of patent litigation.

Background

The 25 percent rule of thumb has long been a “starting point” of a reasonable royalty analysis. The rule – which the Federal Circuit observed has “met its share of criticism” – is based on the idea that, in a hypothetical negotiation, a licensee generally agrees to pay the patentee a royalty rate equivalent to 25 percent of the licensees’ expected profits on products that incorporate the intellectual property at issue in the case.

In this case, the plaintiff, Uniloc, sued Microsoft, alleging that a certain feature of Microsoft’s Word XP, Word 2003 and Windows XP infringed Uniloc’s patent. The jury agreed and awarded Uniloc $388 million in damages (which was less than the approximately $564 million that Uniloc’s expert opined it was due, based upon the 25 percent rule). These damages represented a “reasonable royalty” that Uniloc and Microsoft would have hypothetically agreed upon at the time the infringement began. Following the jury verdict, the district court granted Microsoft’s motion for a judgment as a matter of law of noninfringement, thereby effectively nullifying the jury’s damage award.

The Appeal

On appeal, the Federal Circuit first observed that the “admissibility of the 25 percent rule has never been squarely presented to this court” but acknowledged that it has “passively tolerated” the rule’s use over the years. After first reviewing the standards for the admissibility of expert opinions, the Federal Circuit concluded that U.S. Supreme Court precedent requires experts to “justify the application of a general theory to the facts of the case.” Slip op. at 43. If an expert cannot do so, then the proffered theory is inadmissible. Id. Given that the 25 percent rule, according to the Federal Circuit, is based on generalized empirical evidence about licenses, the Court concluded that the rule is nothing more than “an abstract and theoretical construct that … does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry or party.” Slip op. at 45. Furthermore, it “is of no moment” that the 25 percent rule is merely a “starting point” for a reasonable royalty analysis; damages experts used the rule as a baseline and then applied other case-specific factors to adjust the rate up or down. According to the Court, “[b]eginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the case nevertheless results in a fundamentally flawed conclusion.” Slip op. at 46. Because Uniloc’s expert’s damages opinion (which was based on the 25 percent rule) was unrelated to the facts of the case, it was “arbitrary, unreliable, and irrelevant.” Slip op. at 47.

Thus, the Federal Circuit held that Microsoft is entitled to a new trial on damages. Because the Federal Circuit also reversed the district court’s post-trial finding of noninfringement, ordering a new trial on damages means that Uniloc may yet obtain a damage award in the case.

Implications of the Decision

The implications of the Uniloc decision on damages analysis for patent cases are tremendous. Because most patentees seek “reasonable royalties” (rather than lost profits, the other general mode of analysis), damages opinions, up until now, often began with the 25 percent rule of thumb and then “adjusted” the royalty rate up or down in light of the facts of the case.

Now that the 25 percent rule has been repudiated, the future promises to bring new and creative modes of analysis to arrive at a “reasonable royalty” in patent cases, which will likely result in new disputes about the admissibility of damages opinions.

Similar Products Sold by Unrelated Defendants Not Warrant Joinder in Patent Cases

By R. David Donoghue on Posted in Jurisdiction

Rude d/b/a ABT Sys., LLC v. Lux Prods. Corp., No. 09 C 6957, Slip Op. (N.D. Ill. Jan. 12, 2011) (Norgle, J.).

Judge Norgle granted defendant Emerson Climate Technologies’ ("ECT") motion to sever plaintiffs’ claims against ECT for improper joinder, and granted ECT’s motion to transfer the case to the Eastern District of Missouri in this patent dispute regarding an air distribution fan recycling control. ECT sought dismissal because each defendant’s accused system, generally a thermostat, was a different product and, therefore, there was no common transaction or occurrence as required for Fed. R. Civ. P. 20 joinder. The Court agreed, holding that sales of similar products by unrelated defendants did not meet Rule 20(a)’s common transaction or occurrence requirement, noting agreement from several other judges in the Northern District. Furthermore, allegations that unrelated defendants design and sell similar products does not satisfy Rule 20(a). Similarly, the fact that the defendants’ defenses and counterclaims were "nearly identical" was irrelevant to the joinder analysis. Having held that ECT was misjoined, the Court declined to consolidate the two cases for pretrial proceedings pursuant to Fed. R. Civ. P. 42(a). And the Court severed ECT’s case pursuant to Fed. R. Civ. P. 21.

The Court then transferred the severed case to the Eastern District of Missouri, where ECT was located. Plaintiffs’ choice of forum was given less than normal deference because plaintiffs were not Illinois residents. The situs of material events was irrelevant, as in many patent cases.

The ease of access to the proofs weighed strongly in favor of transfer. ECT’s relevant entities were headquartered in St. Louis, within the Eastern District of Missouri. ECT identified at least five key party witnesses within the Eastern District of Missouri. And that district could more easily compel non-party witnesses also likely to be resident in St. Louis. Additionally, while ECT would gain significant convenience from transfer, plaintiffs would be inconvenienced either way, as they were not residents of either contemplated district. So, relative convenience of the parties weighed in favor of transfer. And the speed of the districts to trial slightly favored transfer.

New N.D. Illinois Judges Panel: Judge Coleman

By R. David Donoghue on Posted in Legal News

In late January, the Northern District’s six newest judges attended a Federal Bar Association* panel to offer insights into their practices and chambers. The recurring theme of the discussion was a call for civility: Civility in court. Civility in briefs. Civility in emails. Over the next several weeks, I will provide summaries of each judge’s comments and insights. This post (the sixth in the series) focuses upon Judge Coleman:

  • "Come prepared"
  • Do not argue when the Court is not expecting argument
  • Civility
  • Consent to magistrates
  • Often does not require argument of motions, but gives a ruling date
  • For arguments, she will often identify issues to be addressed
  • Arguments are 15-30 minutes, "tops."

Unrelated Companies’ Sales of Similar Products Do Not Warrant Joinder in Patent Cases

By R. David Donoghue on Posted in Pleading Requirements

ThermaPure, Inc. v. Temp-Air, Inc., No. 10 C 4724, Slip Op. (N.D. Ill. Dec. 22, 2010) (Lefkow, J.).

Judge Lefkow granted defendants’ RxHeat and Cambridge Engineering’s (collectively "Cambridge") motion to dismiss or sever and Temp-Air’s motion to sever and transfer in this patent litigation involving the use of heat to remediate structures removing mold, bacteria, insects or rodents, among other things. Neither Cambridge nor Temp-Air were related to any of the other defendants. As such, their sales of different products could not satisfy the Fed. R. Civ. P. 20(a) joinder requirement that the claims arise out of the same transaction or occurrence. It was not enough that plaintiff accused that each defendant infringed the same patent. Furthermore, plaintiff never identified which specific products it accused of infringement, even during briefing of the instant motion. So, there was no way for the Court to determine how similar the accused products actually were. The Court, therefore severed Cambridge’s and Temp-Air’s cases.

The Court then transferred Temp-Air’s case. ThermaPure’s choice of forum was given little deference because it was neither party’s home district. The situs of material events was Minnesota, where ThermaPure is headquartered and conducts most of its business. The fact that ThermaPure sold accused products to Illinois customers was unavailing. Additionally, most of the documents were located in Minnesota. Temp-Air only identified party witnesses, which are given less consideration, that were located in Minnesota. But ThermaPure did not identify any Illinois witnesses.

Neither party argued that either district would resolve the claims faster, and ThermaPure’s citation to the Northern District’s Local Patent Rules for reducing costs and expenses of the litigation was not relevant. The Court, therefore, transferred Temp-Air’s case to Minnesota. And having transferred the case as to Temp-Air, the Court stayed ThermaPure’s case against Temp-Air’s alleged Illinois customer Gierstsen Illinois. That case could be reopened, as necessary, in the Northern District after Temp-Air’s case was resolved, as it should significantly narrow, if not resolve, the claims against Gierstsen Illinois.

Court Analogizes Inequitable Conduct Pleading to False Marking Pleading

By R. David Donoghue on Posted in Pleading Requirements

Patent Compliance Group, Inc. v. Brunswick Corp., No. 10 C 4645, Slip Op. (N.D. Ill. Jan. 14, 2010) (Der-Yeghiayan, J.).

Judge Der-Yeghiyan denied defendant Brunswick’s Fed. R. Civ. P. 12(b)(6) motion to dismiss plaintiff Patent Compliance Group’s ("PCG") false patent marking claims regarding Brunswick’s exercise equipment. First, the Court held that Rule 9(b) heightened pleadings applied to the intent to deceive requirement of false patent marking, and anologized to the Federal Circuit’s inequitable conduct pleading requirements. While PCG’s first complaint alleging that Brunswick was a sophisticated company, PCG’s amended complaint attaching Patent Office documents identifying the expiration dates of the allegedly expired patents and identifying Brunswick’s in-house patent counsel was sufficient.