United States: Reasonable Reliance On Pretrial Party Admissions Cannot Lead To A Subsequent Finding That A Litigation Is Exceptional Under 35 U.S.C. § 285

In Checkpoint Systems, Inc. v. All-Tag Security S.A., No. 12-1085 (Fed. Cir. Mar. 25, 2013), the Federal Circuit reversed the district court’s exceptional case finding and award of attorneys’ fees with costs and interest to the defendants under 35 U.S.C. § 285. 

Plaintiff Checkpoint Systems, Inc. (“Checkpoint”) manufactures “resonance tags,” electronic antishoplifting devices placed on goods.  Checkpoint sued Belgian corporation All-Tag Security S.A., All-Tag Security Americas, Inc. (its American affiliate), and Sensormatic Electronics Corporation (an All-Tag customer) (collectively “All-Tag”) for infringement of U.S. Patent No. 4,876,555 (“the ’555 patent”).  At issue between the parties was whether All-Tag’s resonance tags contained a claimed “throughhole,” defined in the ’555 patent abstract as a “continuous hole” in a dielectric layer sandwiched between two conducting layers.  During discovery, Checkpoint asked All-Tag to admit that the accused products contained such a throughhole.  All-Tag responded only that its tags were made “generally in accordance with” its U.S. Patent No. 5,187,466 and a pending patent application that later issued as U.S. Patent No. 7,023,343 (collectively “the All-Tag patents”).

Checkpoint’s expert witness tested a roll of All-Tag resonance tags acquired from an All-Tag customer, and testified that tags produced in accordance with the All-Tag patents would have contained a throughhole and would have infringed the ’555 patent.  All-Tag moved to exclude the expert’s testimony, arguing that his infringement opinion was fatally flawed because the tags he examined were made by All-Tag Security A.G. in Switzerland, and were not the current accused tags made by All-Tag Security S.A. in Belgium.  Although All-Tag had moved its manufacturing operations from Switzerland to Belgium in 1994, the Belgian company resumed making resonance tags on the exact same factory equipment within approximately a week of the move.  Accordingly, the district court denied All-Tag’s motion and permitted the expert to testify, and further denied JMOL motions by All-Tag on the issue at the end of both sides’ evidentiary presentations.

After trial, the jury returned a verdict in favor of All-Tag, finding that the ’555 patent was not infringed, invalid, and unenforceable.  All-Tag then moved for attorneys’ fees under 35 U.S.C. § 285, arguing that the case qualified as “exceptional” under the statute because Checkpoint and its expert allegedly never examined the actual accused products.  The district court agreed and awarded All-Tag attorneys’ fees plus costs and interest totaling approximately $6.6 million.  Since the ’555 patent term had expired by the time of appeal, Checkpoint appealed only the award of attorneys’ fees.

“All-Tag’s admission that its products are made ‘generally in accordance’ with its patents could reasonably have been relied on by Checkpoint and its expert Dr. Zahn.  Such reliance was not ‘objectively baseless.’”  Slip op. at 12.

Turning to the first requirement to make an “exceptional” showing, “subjective bad faith,” the Court disagreed with the district court’s finding that because Checkpoint “only examin[ed] tags from All-Tag A.G. of Switzerland, not the Actual Accused Product manufactured by All-Tag S.A. of Belgium,” the claim was brought in bad faith.  Slip op. at 9.  The Court noted that All-Tag presented no evidence showing that the Swiss and Belgian-made tags were materially different in any respect, and further pointed out that All-Tag had stipulated that the Belgian entity used the Swiss entity’s machines to make the same tags.

Focusing on the second requirement, objective baselessness, the Court discussed the testimony of Checkpoint’s expert, Dr. Zahn, who referred in his testimony to the All-Tag patents because All-Tag had stated in discovery that its manufacturing process was “generally in accordance with” those patents.  Id.  at 5.  The Court rejected All-Tag’s argument that Dr. Zahn’s reliance on the discovery statement was unreasonable because of the qualifier “generally,” stating that under Fed. R. Civ. P. 36(b), “a party may rely on an admission as ‘conclusively established’ unless the admission is recanted.”  Id. at 11 (citing Ajinomoto Co. v. Archer-Daniels-Midland Co., 228 F.3d 1338, 1351 (Fed. Cir. 2000)).  The Court found that All-Tag had provided no such evidence or argument to indicate that its pretrial admission was incorrect; in fact, All-Tag’s own expert conceded at trial that a product made by the processes of the All-Tag patents would infringe the ’555 patent if the product’s “physical reality” matched the patents’ disclosures.  Id.

The Court also disagreed with All-Tag’s arguments citing L & W, Inc. v. Shertech, Inc., 471 F.3d 1311 (Fed. Cir. 2006).  All-Tag contended that in L & W, the Court had rejected liability based on a similar statement that a product was “covered” by a patent, because there were multiple embodiments described and it was unclear whether a critical infringing feature was disclosed.  The Court rejected the argument, distinguishing the facts of the case from L & W by finding that “the All-Tag patents describe no embodiments without the hole, which is the critical feature of Checkpoint’s ’555 patent.”  Slip op. at 12.  Consequently, “All-Tag’s admission that its products are made ‘generally in accordance’ with its patents could reasonably have been relied on by Checkpoint and its expert Dr. Zahn.  Such reliance was not ‘objectively baseless.’”  Id.  Accordingly, the Court found that Checkpoint’s charges of infringement against All-Tag were not shown to have been made in bad faith or objectively baseless, and reversed the district court’s finding of an exceptional case under 35 U.S.C. § 285 and the award of attorneys’ fees.

This article previously appeared in Last Month at the Federal Circuit, April, 2013