United States: Recent Decisions In The United States

Originally published in Les Nouvelles, September 2006

Historically, it has been presumed that when a defendant has been found to infringe a patent, the patent owner would be entitled to a permanent injunction preventing the defendant from further infringement. This was in contrast to the traditional test for injunctions in other types of general civil litigation, which requires a case-by-case analysis of four factors to determine whether this equitable remedy should be awarded. Earlier this year, in eBay Inc. v. MercExchange, LLC, No. 05-130 (2006), the U.S. Supreme Court rejected the long-held belief that a patentee is always entitled to a permanent injunction and ruled that the traditional test for injunctions applicable to other cases should also be applied in patent infringement cases. In one of the first district court opinions issued since that ruling, the district court for the Eastern District of Texas in z4 Technologies, Inc. v. Microsoft Corp., No. 6:06- CV-142 (June 14, 2006) denied a patent owner's motion for a permanent injunction after analyzing the four factors in the traditional test for injunctions for other cases in general civil litigation.

This case involved patents owned by z4 Technologies ("z4") related to methods for limiting the unauthorized use of computer software. z4 sued Microsoft Corp. alleging that its Windows software infringed its patents. The case was tried to a jury, and the jury found that Microsoft willfully infringed z4's patents and awarded $115 million in damages. Following the verdict, z4 moved for a permanent injunction to bar Microsoft from selling infringing Windows software.

Pursuant to the Supreme Court's decision in eBay, the district court applied the traditional four factor test for injunctions in ruling on this issue. The four factors require that the plaintiff demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and the defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

The district court first determined that z4 had not suffered an irreparable injury based on Microsoft's infringement. z4 argued that it was entitled to a presumption of irreparable harm based on the finding of infringement. The Court rejected this argument as contrary to the Supreme Court's decision in eBay. The Court also held that Microsoft's past and current infringement did not dissuade anyone from purchasing or licensing z4's software because Microsoft does not sell any stand-alone software activation software that would directly compete with z4. Moreover, the infringing software was only a small component of Microsoft's software and likely did not drive consumer demand. Therefore, the Court found that because z4 had not shown any potential for lost profits, loss of brand name recognition, or loss of market share, z4 did not demonstrate irreparable harm.

The district court next determined that monetary damages were sufficient to compensate z4 for Microsoft's infringement. Again, the Court found that Microsoft's infringement did not impact the selling or licensing of z4's software; therefore, z4 had not suffered any injury that could not be compensated for by the payment of a royalty going forward. Therefore, z4 had not satisfied this factor.

Next, the district court held that the balance of hardships weighed in favor of Microsoft. The Court noted that causing Microsoft to turn off its activation software would create largescale software piracy of Microsoft products. Moreover, the amount of time it would take to redesign Microsoft's software and release a new version might be substantial. On the other hand, z4 would not suffer any significant hardship by allowing Microsoft to continue to sell its software in exchange for paying a royalty. Therefore, the Court held that the potential hardships to Microsoft if an injunction was granted outweighed any limited and reparable harm that z4 would suffer in the absence of an injunction.

Finally, the district court held that the potential negative effects on the public of granting an injunction also weighed against granting z4's motion. The Court noted that Microsoft's software is ubiquitous and removing it from the marketplace could prejudice consumers. Moreover, the potential for widespread piracy could also harm consumers. Therefore, since the Court found that all four factors weighed against an injunction, it denied z4's motion and refused to enter an injunction against Microsoft's infringement.

After a case is decided by a court, the parties to that litigation are generally barred from bringing a second case on the same claims with the same parties. This general rule principle is known as "res judicata." "Res judicata" can also apply when parties to a litigation agree to settle a suit and dismiss that suit "with prejudice." The parties can, however, draft their settlement agreement to preserve the parties' rights to bring those claims again. In Pactiv Corp. v. Dow Chemical Co., No. 05-1260 (June 5, 2006), the Federal Circuit held that a defendant in a settlement agreement who failed to expressly reserve a right to bring a later suit was precluded from later filing a declaratory judgment action to invalidate the patents at issue in the earlier litigation.

In 1995, Dow Chemical Co. sued Pactiv Corp. for infringement of two patents. That case was dismissed with prejudice after the parties entered into a settlement agreement. Under the settlement agreement, Pactiv agreed to pay royalties to Dow under the two patents. Several years later, however, Pactiv ceased payments under the agreement on the grounds that the patents were invalid. Shortly thereafter, Pactiv filed a declaratory judgment action alleging noninfringement, invalidity, and unenforceability of the patents.

Dow moved to dismiss the declaratory judgment action on the grounds that the suit was barred by the doctrine of res judicata. The district court reviewed the parties' settlement agreement and determined that Pactiv had not reserved a right to bring this later challenge. Therefore, the district court dismissed the case, and Pactiv appealed.

On appeal, Pactiv did not dispute then under the general principles of "res judicata," it would be barred from asserting the claim at issue. Pactiv argued, however, that an exception to this doctrine applied because it reserved a right to challenge the patents in the settlement agreement. The Court of Appeals for the Federal Circuit agreed that such an exception exists, but that any reservation of the right to bring suit again must be express.

Pactiv pointed to two provisions of the settlement agreement as providing this reservation. The first stated in pertinent part:

The second stated in pertinent part:

Pactiv argued the second provision provides that anyone, including Pactiv, can challenge the validity of the patents and that the first provision preserved this right.

The Federal Circuit disagreed with Pactiv and found that there was no provision in the agreement reserving the right to challenge the patents at issue. The Court found that the second provision provides only that Pactiv's royalty obligation ceases if the patents are found invalid. The Court noted that the fact that the clause did not use the term "third party" did not mean that it reserved a right for Pactiv to later sue to invalidate the patents. Therefore, the Federal Circuit held that the settlement agreement failed to reserve a right to challenge the patents.

Occasionally, parties will settle a litigation with an agreement by a defendant to no longer make a particular product or type of product. The language used to describe those products can be crucial to determining what products that party can make in the future. In Panduit Corp. v. HellermannTyton Corp., No. 05-1337 (June 12, 2006), the Court of Appeals for the Federal Circuit held that where a settlement agreement prohibited the defendant from making only a particular model, the agreement would not be expanded to cover different products that were only colorably different.

This case involved a patent for a power box owned by Panduit Corp. In 2001, Panduit sued HellermannTyton Corp. for infringement of this patent. The parties later entered into a settlement agreement to end that litigation. Under that agreement, HellermannTyton agreed not to make or sell "Subject Products." Subject Products were defined as one particular model of a HellermannTyton power box and any other products that infringed the patent.

Several years later Panduit sued HellermannTyton for infringement based on a redesigned version of HellermannTyton's power box. Panduit asserted that the redesigned product was a "Subject Product" and, therefore, HellermannTyton was in breach of the agreement. The district court found that the redesigned product was not a "Subject Product," and Panduit appealed.

On appeal, Panduit argued that, under Federal Circuit precedent, "Subject Products" should include not just the specific model it identified in the agreement, but those with only colorable differences. In Panduit's view, the redesigned product was only colorably different from the model identified in the agreement and, therefore, should be included as a Subject Product. The Federal Circuit found that in this case, unlike those relied on by Panduit, however, the parties entered into an agreement that expressly identified a specific product. The Court found that the agreement was unambiguous and by its express terms did not include "colorable changes." Therefore, the redesigned product could only be a "subject product" if it infringed the patent under that agreement.

The Federal Circuit next analyzed whether the product infringed the claims of the patent. The Court agreed with the district court that the redesigned product did not infringe the claims of the patent either literally or under the doctrine of equivalents. Therefore, the Court found that HellermannTyton did not breach the license agreement by selling the redesigned product.

Under the Foreign Sovereign Immunities Act ("FSIA"), a foreign state is presumptively immune from the jurisdiction of U.S. courts, unless a specified exception applies. One such exception is when an action is based on a commercial activity carried on in the United States by the foreign state. In Intel Corp v. Commonwealth Scientific and Industrial Research Organisation, No. 06-1032 (July 14, 2006), the Court of Appeals for the Federal Circuit held that the Commonwealth Scientific and Industrial Research Organisation ("CSIRO"), Australia's national science agency, was not immune from a suit seeking to invalidate several of its patents due to its commercial activities relating to those patents.

This case involved a patent directed to wireless local area networks owned by CSIRO. CSIRO asserted that its patents covered a particular standard relating to high speed data transfer. From 2003 to 2005, CSIRO initiated license negotiations with many companies including Dell, Intel, HP, Netgear, and Microsoft. During those negotiations, CSIRO offered certain proposed terms that would expire after a specified period of time. CSIRO indicated that after expiration of its offer, it would consider litigation to enforce its patents. After those offers expired, two separate declaratory judgment actions were filed against CSIRO seeking to invalidate the patent, one by Dell and Intel; the other by HP, Microsoft, and Netgear. CSIRO moved to dismiss both suits under the FSIA. The district court denied both motions, and CSIRO appealed.

The Federal Circuit first noted that the appeal revolved around the interpretation of what constituted "commercial activity" sufficient to subject a foreign government entity to the jurisdiction of a U.S. court. CSIRO argued that only negotiations that result in a binding contract would qualify as "commercial activity." The plaintiffs argue that CSIRO's activities in obtaining a patent and offering it for license were "commercial activity."

The Federal Circuit began by noting that the statutory definition of "commercial activity" was "either a regular course of commercial conduct or a particular commercial transaction or act." The Court further noted, however, that the Courts had found that this definition was not particularly instructive. The legislative history of the statute provided some further guidance stating that:

U.S. Supreme Court precedent had further clarified that the commercial activity exception applies when the foreign state "do[es] not exercise powers peculiar to sovereigns; rather it exercis[es] only those powers that can also be exercised by private citizens."

Against this background, the Federal Circuit held that CSIRO's acts of "(1) obtaining a U.S. patent and then (2) enforcing its patent so it could reap profits thereof-whether by threatening litigation or proffering licenses to putative infringers" met the definition of commercial activity. Moreover, the Court also held that it did not believe a contract had to be fully consummated in order to qualify as commercial activity. The Federal Circuit held that the legislative history indicating that "a single contract" could constitute commercial activity did not set a contract as a lower bound, but rather just provided an example.

The Federal Circuit next analyzed whether the declaratory judgment actions were based on this commercial activity. The Supreme Court had previously held that in this context, "based on" meant that the commercial activity forms those elements of a claim that, if proven, would entitle the plaintiff to relief under its theory of the case. While it is not required that every element of a claim be commercial activity, there must be something more than a mere connection with the commercial acts. The Federal Circuit held that the declaratory judgment actions were based on CSIRO’s commercial acts of obtaining and asserting a U.S. patent. In order to prevail, the plaintiffs would have to prove that CSIRO attempted to enforce its patent against them. Therefore, the Federal Circuit affirmed the decisions of the district court.

Generally, the unconditional sale of a patented product by the patent owner or someone authorized by the patent owner will "exhaust" the patentee’s right to sue for infringement for the use or resale of that product. In order to determine whether one’s patent rights have been exhausted, it is therefore important to determine whether a sale was "conditional" or not, namely whether the sale included conditions that limited what the purchaser could do with the product. In LG Electronics, Inc. v. Bizcom Electronics, Inc. et al., No. 05-1261 (July 7, 2006), the Court of Appeals for the Federal Circuit held that a notification to a customer accompanying a sale that the customer was not licensed under particular patents was sufficient to make a sale "conditional" and therefore not exhaust the patent rights.

This case involves several patents relating to personal computers owned by LG Electronics Inc. ("LGE"). Under an agreement with LGE, Intel was authorized to sell microprocessors and chipsets under LGE's patents; however, Intel was required to notify its customers that they were not authorized under the LGE-Intel agreement to combine the products with non-Intel products. The defendants all purchased microprocessors and chipsets from Intel and received the notice required under the LGE-Intel agreement. LGE sued the defendants asserting that the combination of the Intel microprocessors with other computer components infringed its patents.

In the district court action, the defendants asserted that the LGE-Intel license granted defendants an implied license under the patents and that the sale of the microprocessors by Intel exhausted LGE’s patent rights. The district court found that no implied license existed, but found that Intel’s authorized sale of microprocessors exhausted LGE’s patent rights. LGE appealed these rulings.

On appeal, the Federal Circuit first analyzed whether an implied license had been granted. In order to establish an implied license, the defendants were required to prove that the products they purchased from Intel had no noninfringing uses and that the circumstances plainly indicated that the grant of a license should he inferred. The Federal Circuit held that no implied license existed because Intel expressly informed the defendants that their agreement with LGE did not extend to the defendants. Therefore, regardless of whether any noninfringing uses existed, the circumstances could not indicate that a grant of a license should he inferred.

The Federal Circuit next analyzed whether Intel's sale of the microprocessors exhausted LGE's patent rights. The Court first noted that in order to exhaust patent rights, a sale must be unconditional. If a sale is conditional, however, it is assumed that the parties negotiated a price that reflects only the value of the use rights conferred by the patentee.

The Federal Circuit indicated that there were two sales at issue. The first was the grant by LGE to Intel of a license covering its entire patent portfolio. The second was Intel’s sale of its microprocessors to the defendant. The Court first noted the LGE-Intel license agreement, while granting a license from LGE-Intel, expressly disclaimed granting a license to computer system manufacturers and required Intel to notify the defendants of the limited scope of its license, which it did. Thus, although Intel was free to sell the components, those sales were conditional, and its customers were expressly prohibited from infringing LGE’s patents. Therefore, since the sale was conditional, the Federal Circuit held the that LGE’s patent rights were not exhausted.

The Federal Circuit also briefly addressed the issue of whether the sale of a device could exhaust the method claims of a patent. The Court affirmed that such a sale does not exhaust method claims, but noted that even if it did, based on the above reasoning, the sale was conditional and could not exhaust the patent rights.

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