07/28/14

ePlus v. Lawson Software: Contempt Order for Violation of Injunction Vacated in view of Reexam Claim Invalidation


Category: Injunctions 
 
 
 
 By: Jesus Hernandez, Blog Editor/Contributor
 
TitleePlus, Inc. v. Lawson Software, Inc., No. 2013-1506, -1587 (July 25, 2014).
IssuesThis case raises two issues. [1: Injunction] The first is whether an injunction can continue after the PTO has cancelled the only claim on which the injunction was based. [2: Civil Contempt Remedies] The second is whether civil contempt remedies based on the violation of an injunction are appropriate when the injunction has been overturned on direct appeal.
ePlus, Inc. at *3.
Holdings
[1: Injunction] Under these authorities, there is no longer any legal basis to enjoin Lawson’s conduct based on rights that claim 26 of the ’683 patent previously conferred as those rights have ceased to exist. The PTO found claim 26 invalid, we affirmed that decision, our mandate issued, and the PTO cancelled the claim. Claim 26 no longer confers any rights that support an injunction against infringement.
Id. at *11.
[2: Civil Contempt Remedies] We conclude that the compensatory award for the violation of the injunction must be set aside in light of the cancellation of claim 26 [because the modified injunction was not final].
Id. at *18 (text added).
 
 

Procedural HistoryePlus, Inc. (“ePlus”), the assignee of U.S. Patent Nos. 6,023,683 (the “’683 patent”) and 6,505,172 (the “’172 patent”), sued Lawson Software, Inc. (“Lawson”) for infringement. The district court found two of the asserted system claims and three of the asserted method claims not invalid, and a jury found that Lawson infringed those claims. In an earlier appeal, we reversed in part on the ground that the system claims were invalid and that two of the asserted method claims were not infringed. We affirmed only the infringement verdict as to one method claim—claim 26—of the ’683 patent. We remanded to the district court to make necessary modifications to the injunction. On remand, the district court modified the injunction in one respect and found Lawson in civil contempt for violating the injunction. Lawson appealed both the injunction and contempt order. During the pendency of Lawson’s appeals, the United States Patent and Trade- mark Office (“PTO”) completed a reexamination of the ’683 patent and determined that claim 26 was invalid. In a separate appeal, we affirmed the PTO’s invalidity determination, and the PTO cancelled claim 26.
ePlus, Inc. at *2.

 

Legal Reasoning (Dyk, Prost)
Background
Basis for First CAFC AppealGiven the modular nature of Lawson’s products, ePlus asserted different patent claims against five distinct configurations of software modules (“Configurations 1–5”). […] Configurations 3 and 5 were found to infringe two system claims (claim 1 of the ’172 patent and claim 3 of the ’683 patent) and three method claims (claims 26, 28, and 29 of the ’683 patent). […] [T]he district court permanently enjoined Lawson […] The court defined the “Infringing Products and Services” to include the three software configurations (Configurations 2, 3, and 5) adjudged infringing by the jury. […] Lawson appealed. […] We affirmed only the infringement finding as to method claim 26. Only Configurations 3 and 5 were found to infringe that claim. […] We remanded “for the district court to consider what changes are required to the terms of the injunction, consistent with this opinion.” ePlus I, 700 F.3d at 523.
ePlus, Inc. at *4-5.
Basis for Second CAFC Appeal (and Initiation of Contempt Proceedings)The district court […] ordered that the injunction be “modified by deleting from its scope the product . . . colloquially known as ‘Configuration 2,’” and “remain in effect in all other respects.” J.A. 1. On remand, in addition to reconsidering the injunction, the district court also instituted contempt proceedings [as Lawson had redesigned its software]. […] The court held Lawson in contempt for violating the injunction, finding that the redesigned products were no more than colorably different and in- fringed. The court ordered Lawson to pay a compensatory fine of $18,167,950 and coercive daily fines of $62,362 until it could show compliance with the injunction. […]
Id. at *7-8 (text added).
Co-Pending ReexaminationWhile Lawson’s appeals were pending, in another case, we affirmed the PTO’s reexamination decision invalidating claim 26 of the ’683 patent. In re ePlus, Inc., 540 Fed App’x 998 (Fed. Cir. 2013) (per curiam). Our mandate issued, and the PTO cancelled claim 26 in April 2014.
Id. at *8.
[1: Injunction] An injunction cannot continue after the PTO has cancelled the only claim on which the injunction was based.
Wheeling & Belmont Bridge Co. Precedent
[In Wheeling & Belmont Bridge Co.] [t]he [Supreme] Court held that an injunction “is executory, a continuing decree . . . . If, in the mean[]time, since the decree, this right has been modified by the competent authority . . . it is quite plain the decree of the court cannot be enforced.” Id. at 431–32.
ePlus, Inc. at *9.
[Cases adopting the Wheeling Bridge reasoning reflect] “[a] continuing decree of injunction directed to events to come is subject always to adaptation as events may shape the need. . . . [A] court does not abdicate its power to revoke or modify its mandate, if satisfied that what it has been doing has been turned through changing circumstances into an instrument of wrong.” United States v. Swift & Co., 286 U.S. 106, 114–15 (1932); […]
Id. at *9-10 (some citations omitted, text added).
Our court has applied these principles to an injunction barring infringement of patents later found to be invalid. Mendenhall v. Barber-Greene Co., 26 F.3d 1573, 1584 (Fed. Cir. 1994). In Mendenhall, we reviewed injunctions based on findings of patent infringement. Id. at 1576. While those injunctions were pending on appeal, the same patents were held invalid in another case in our court. Id. at 1576–77. We held that the injunctions had to be reversed following the final judgment of patent invalidity. Id. at 1584.
Id. at *11.
No Rationale for InjunctionUnder these authorities, there is no longer any legal basis to enjoin Lawson’s conduct based on rights that claim 26 of the ’683 patent previously conferred as those rights have ceased to exist. The PTO found claim 26 invalid, we affirmed that decision, our mandate issued, and the PTO cancelled the claim. Claim 26 no longer confers any rights that support an injunction against infringement. During oral argument, ePlus even admitted that there could be no injunction moving forward. The PTO’s cancellation of claim 26 requires that we now vacate the injunction.
Id. at *11.
[2: Civil Contempt Remedies] Civil contempt remedies based on the violation of an injunction are not appropriate when the injunction has been overturned on direct appeal.
Distinguishing Civl and Criminal ContemptIf Lawson had been found guilty of criminal contempt, that order and any resulting penalties would not be set aside simply because claim 26 had been cancelled. However, the district court found Lawson in civil, not criminal, contempt. […] The Supreme Court distinguished civil from criminal con- tempt, explaining that: It does not follow, of course, that simply because a defendant may be punished for criminal contempt for disobedience of an order later set aside on appeal, that the plaintiff in the action may profit by way of a fine imposed in a simultaneous proceeding for civil contempt based upon a violation of the same order. […] The Court explained that if the injunction had been overturned, “the conviction for civil contempt would be reversed in its entirety.” […]
ePlus, Inc. at *11-12 (internal citations omitted).
Worden PrecedentUnder Worden, compensatory civil contempt remedies must be set aside when the injunction on which they are based is set aside because the patent is determined to be invalid. [...] Other circuits have similarly held that civil contempt sanctions must be set aside if the underlying injunction is reversed on appeal.
Id. at *14.
Fresenius Precedent
This case is not distinguishable on the ground that the injunction has been set aside as the result of the PTO proceeding rather than a court judgment. In Fresenius USA, Inc. v. Baxter International, Inc., we held that a non-final money judgment of damages for infringement must be set aside where the judgment rested on a patent claim that the PTO later cancelled. 721 F.3d 1330, 1344, 1347 (Fed. Cir. 2013). [...] We held that the cancellation of a patent requires that non-final judgments be set aside because the “cancelled claims [a]re void ab initio,” id. at 1346,
Id. at *14.
This case does not require us to decide whether civil contempt sanctions would survive if the injunction had been final at the time the district court imposed civil contempt sanctions. [...] The injunction here was not final even though claim 26 had been held infringed. We held in Fresenius that even if this court has rejected an invalidity defense to infringement, an “intervening decision invalidating the patents unquestionably applies” as long as “the judgment in [the present] litigation is not final.” […] With respect to the determination of finality, we explained that “where the scope of relief remains to be determined, there is no final judgment binding the parties (or the court).” […] This rule follows from the Supreme Court’s holding that “a final decree [is] one that finally adjudicates upon the entire merits, leaving nothing further to be done except the execution of it.’” […] There is no question here that the district court’s modified injunction was not final when the PTO cancelled claim 26. Our previous appeal did not affirm the injunction, rather it remanded the case to the district court, requiring it “to consider what changes are required to the terms of the injunction, consistent with this opinion.”
Id. at *15-17 (internal citations omitted).
Conclusion
For the foregoing reasons, the district court’s injunction and contempt orders are vacated. The case is remanded with instructions to dismiss.
ePlus, Inc. at *19.

 

 

O’MALLEY, Circuit Judge, dissenting. ePlus, Inc., O’Malley Op., at *1.
Basis for Dissent, generallyOn [the] second question, the majority concludes that “[t]his case does not require us to decide whether civil contempt sanctions would survive if the injunction had been final at the time the district court imposed civil contempt sanctions,” Maj. Op. at 15-16, because, under Fresenius USA, Inc. v. Baxter International, Inc., 721 F.3d 1330 (Fed. Cir. 2013) (“Fresenius II”), cancellation of claims by the Patent and Trademark Office (“PTO”) “requires that non-final judgments be set aside.” Maj. Op. at 15. Because it finds the judgment in this case non- final, the majority—on the strength of Fresenius II— renders all aspects of the earlier judgment against Lawson, including the injunction premised thereon, a nullity. I respectfully dissent from that aspect of the majority’s opinion because Fresenius II is distinguishable from, and I do not believe governs, the present appeal.
ePlus, Inc., O’Malley Op., at *2.
There are crucial differences between these facts and the facts in Fresenius
First, Fresenius failed to appeal the pre-verdict damages judgment from the district court, but did appeal the validity of all relevant claims-at-issue. As the PTO’s reexamination determination involved the validity of some of the claims-at-issue, Fresenius at least continued to press the validity of the patents in its first appeal. Further, while Fresenius did not directly appeal the pre-verdict damages award in Fresenius I, it did move for a new trial on damages on remand premised on the “further proceedings” language in our remand instruction, which it then appealed in Fresenius II. […] While the PTO did find claim 26 of the ’683 patent to be invalid through ex parte reexamination proceedings, and we affirmed that decision in In re ePlus, Inc., 540 F. App’x 998 (Fed. Cir. 2013), the validity of claim 26 of the ’683 patent as between ePlus and Lawson with regards to the continuing injunction (at least until the decision in In re ePlus mandated) was final well before that point in time. […]
Id. at *7-8 (some internal citations omitted).
Second, the remand instructions in ePlus I and Fresenius I were different in important, material respects. In Fresenius I, we vacated the injunction and the post-verdict royalty awards, instructed the district court to “revise or reconsider” the injunction, and remanded “for further proceedings consistent with this opinion.” Fresenius I, 582 F.3d at 1304. By vacating the injunction, we required the district court to analyze the injunction anew. […] Here, we did not vacate the injunction, which was the only form of remedy available to ePlus. By not vacating the injunction, the injunction remained in force and any on-going infringing activity by Lawson would be potential contemptible conduct.
Id. at *8-9.
Issue with Fresenius
If the majority is correct that Fresenius II requires us to vacate the compensatory contempt award, even though Lawson failed to appeal the judgment finding claim 26 of the ’683 patent valid and even though we did not vacate the injunction or remand for open-ended proceedings, then Fresenius II is even more concerning than I first believed. I continue to believe that we wrongly decided Fresenius II. As detailed in my dissent to the denial of the petition for rehearing en banc, Fresenius II, 733 F.3d at 1373-81 (O’Malley, J., dissenting from denial of petition for rehearing en banc), the majority in Fresenius II erroneously analyzed both the finality of the issues on appeal and the scope of our appellate remand instruction in Fresenius I.) 
Id. at *12.
The majority’s approach to finality will further displace the critical role of district courts in patent infringement suits. According to the majority, a decision of the PTO, an administrative agency under a coordinate branch of government, can displace a judgment of an Article III court. Validity of claim 26 became final when Lawson failed to appeal the issue in ePlus I and our disposition did not reopen the judgment for any further proceedings regarding the validity of any of the claims-at-issue, nor did it leave the remedy open in the sense Fresenius II said Fresenius I did. By extending Fresenius II to these materially different circumstances, the majority assumes that any determination made during an infringement case, even if that specific issue is never appealed, can be nullified by the action of an administrative agency as long as anything—even a fully discretionary “consideration” of an intact remedy—remains available.
Id. at *13.

 

Image Attribution Statement: Verrill, A. Hyatt, “Short splice,” available as a public domain image in the U.S. due to copyright expiration for work published before Jan. 1, 1923, http://commons.wikimedia.org/wiki/File:Short_splice.PNG (last visited July 28, 2014) (image edited). 

 

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