by Dennis Crouch
Automated Merchandising Systems (AMS) v. Crane Co. (Fed. Cir. 2009)(nonprecedential)
We are approaching the point that most patents being litigated are also undergoing a parallel reexamination at the patent office. Defendants file reexamination requests as both (a) a way to invalidated claims and (b) a litigation strategy. One aspect of the litigation strategy is the notion that a district court may completely stay proceedings until the outcome of the reexamination (typically a multi-year delay). This case also suggests that a pending reexamination may help a defendant defeat a preliminary injunction. Finally, this case is important because it holds that a patentee has no presumption of irreparable harm based on proof of infringement.
AMS & Crane compete in the market for vending machines. AMS asserted patents cover the “use of optical technology to determine whether a [purchased product] has actually been delivered.” In the infringement litigation, the West Virginia federal district court took the unusual approach of simultaneously (1) granting the patentee’s motion for a preliminary injunction and (2) granting the defendant’s motion to stay proceedings until the outcome of the copending reexamination.
The Federal Circuit has interlocutory jurisdiction over appeals from orders granting or denying preliminary relief. 28 U.S.C. § 1292(a)(1). Using that jurisdictional hook – the court also considered the stay. (The court also held that the right to appeal attaches once the PI motion is decided – regardless of whether a PI bond is posted.).
The Federal Circuit has previously held that a “district court ordinarily should not grant both a preliminary injunction and a stay.” Procter & Gamble, 549 F.3d at 849 (Fed. Cir. 2008). On appeal, the Federal Circuit reversed the preliminary injunction, but affirmed the stay.
Preliminary Relief: The equitable remedy of a preliminary injunction is governed by a four-factor test much like those outlined in the Supreme Court’s case of eBay v. MercExchange. These four factors include: (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. In the factors for permanent injunctive relief is that preliminary relief considers the likelihood of success on the merits. That factor is not relevant to permanent relief because that injunction question is only asked after the patent has been held valid and infringed. The first two factors must each be established before preliminary relief may be granted. Thus, although identified as factors, they are more properly seen as required elements.
On appeal, the Federal Circuit found that the district court had abused its discretion in finding that the patentee had established a likelihood of success and irreparable harm.
Irreparable Harm: In a definitive statement, the appellate panel held that there is no presumption of irreparable harm “based just on proof of infringement.” Although prior cases have found a presumption, those cases were overturned by eBay.
[T]he district court relied on . . . the old presumption that harm from patent infringement was irreparable, [and consequently that] the burden was on the defendant to demonstrate that the potential harm from not granting a preliminary injunction was finite, calculable, and compensable. This is no longer the law, as these cases all pre-dated the Supreme Court’s decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392-94 (2006), in which the presumption of irreparable harm, based just on proof of infringement, was discarded. The burden is now on the patentee to demonstrate that its potential losses cannot be compensated by monetary damages.
In looking at the patentee’s evidence of irreparable harm, the Federal Circuit held that its evidence of lost sales and arguments of lost market share were insufficient. “[L]ost sales standing alone are insufficient to prove irreparable harm” because they are presumed to be compensable through damages. Lost market share and price erosion could lead to a conclusion of irreparable harm. However, those must be proven or “at least substantiated with some evidence” and shown to be caused by ongoing infringement.
More Than de Minimis: The patentee did provide evidence of one lost contract (Mountain Coin Machines) due to the ongoing infringement. However, the Federal Circuit rejected that “loss of one distributor” as sufficient to show irreprable harm. “We cannot agree that, under the circumstances of this case, the defection of a single distributor from the patentee’s camp to the accused infringer’s camp is sufficient to demonstrate irreparable harm.”
Likelihood of Success: The patentee must show that it is “reasonably likely to succeed in the case-proper in order to win a preliminary injunction. In other cases, the Federal Circuit has held that a “substantial question” of patent validity is sufficient to derail a preliminary injunction. On appeal here, the Federal Circuit found such a substantial question based on the prior-art presented by the defendants. Most of the court’s analysis, however, is directed at the district court’s analysis that was “too quick to dismiss Crane’s invalidity argument.”
Reexamination and Likelihood of Success: Although dicta, the court suggests that the PTO’s decision to reexamine the pending reexamination also impacts the likelihood of success because reexamination is premised on a decision that the patent faces a “substantial question of patentability.”
Because it logically seems that there cannot simultaneously be a substantial issue of patentability and no substantial issue of patentability, stays pending reexamination are typically inappropriate in cases in which preliminary injunctions are appropriate.
The Federal Circuit’s suggestion is off-base for many reasons – most notably that the PTO grants reexamination requests in almost every case. Interestingly, the one reexamination request from this case that I pulled-up (90/009,231) was denied by the PTO because the submitted reference was not prior art.
Based on the adjudged “weaknesses” of the patentee’s proof of likelihood of success and irreparable harm, the Federal Circuit reversed the lower court’s grant of preliminary relief.
Stay Pending Reexamination: A court’s discretion in managing its docket appears broader than its discretion in granting or denying injunctive relief. Here, the Federal Circuit gave the challenge to the stay only cursory review.
AMS’s claims against Crane are still in their very early stages: Crane requested the stay only two months after the complaint was filed, and the district court entered the stay order before any discovery was conducted. Because the stay was granted pending the outcome of patent reexamination proceedings, it may simplify the issues for trial. It might even render a trial unnecessary. Given these facts, and given the wide discretion the district court generally has to manage its docket, this seems to be a case in which the stay could have been correctly granted or denied. We cannot say that the district court abused its discretion here by granting the stay.
Notes: PAIR Docket Information