Energy Recovery, Inc. v. Hauge (Fed. Cir. 2014) 13-1515.Opinion.3-18-2014.1
Panel: Rader, Reyna, and Wallach (author)
At the heart of this case lies the question of “what is intellectual property?” Here, the answer has more than philosophical implications: a finding of contempt hinges on it.
Leif Hauge was a former president of Energy Recovery, Inc. (“ERI”), a company specializing in “pressure exchangers,” which are used in reverse osmosis. Mr. Hague and ERI apparently had a falling out, and in 2001 they entered into a settlement agreement, adopted by the district court, that included a section entitled “ABSOLUTE TRANSFER OF ALL RIGHTS IN PATENTS, PATENT APPLICATIONS AND ALL RELATED INTELLECTUAL PROPERTY, TO ENERGY RECOVERY.” That paragraph specified that Mr. Hauge:
“irrevocably and absolutely assign[s]” to ERI “all right, title and interest along with any and all patent rights,” , which Mr. Hauge had in “(i) the patents and patent applications . . . ; (ii) any and all patent rights . . . , intellectual property rights, property rights . . . ; and (iv) all other intellectual property and other rights relating to pressure exchanger technology predating this Order.”
Slip Op. at 8 (citations to Joint Appendix omitted). He also agreed to a non-compete clause that prohibited him from making or selling energy recovery devices for use in RO salt water desalination for two years. Id. at 3.
After the non-compete clause expired, Mr. Hauge obtained a new patent on pressure exchanger technology and formed a company, Isobarix, that began selling its own pressure exchanger. In 2013, the District Court (acting on ERI’s Motion for Order to Show Cause) entered an order finding that allowing Mr. Hauge “to . . . develop new products using the very technology he assigned to ERI solely because those new inventions post-date the Agreement would render the Settlement Agreement and its assignment of ownership rights useless,” finding him in contempt of the 2001 Order, and enjoining him and Isobarix “from manufacturing and selling pressure exchangers and replacement parts for ERI’s pressure exchangers.” Slip Op. at 4.
On appeal, the analysis focused on whether Mr. Hauge had violated clause (iv) of the agreement, which required him to “irrevocably and absolutely assign”…”all right,
title and interest along with any and all patent rights,” which he had in “(iv) all other intellectual property and other rights relating to pressure exchanger technology predating this Order.”
Here is where the split over the meaning of “intellectual property” comes into play. ERI argued that Mr. Hauge was not, under the settlement agreement, able “to appropriate the very pressure exchanger technology” that he explicitly transferred to ERI in 2001. This was a view that the district court apparently agreed with when it concluded that Mr. Hauge should not be allowed to “develop new products using the very technology he assigned to ERI.” Id. at 4. Both approaches treat “intellectual property” as meaning “technology.” In other words, what mattered was that Mr. Hauge was allegedly using ERI’s own technology, including technical knowledge that he acquired while its president.
The Federal Circuit, on the other hand, agreed with Mr. Hauge’s view: that he had complied with the settlement agreement by “transfer[ring] ownership of the pre-Agreement pressure exchanger intellectual property.” Slip Op. at 8. He was “not claiming ownership of ERI’s intellectual property,” id. at 9, and “[n]othing in the 2001 Order expressly precludes Mr. Hauge from using any manufacturing process.” Id. at 8. Under the Federal Circuit’s approach, “intellectual property” is not treated as the technology itself, but the rights over that technology, rights that Mr. Hauge properly assigned to ERI. (To spark yet another debate: This is, in my view, the only correct way to view the term. Using “intellectual property” to refer to the underlying technology, as opposed to the legal regimes surrounding that technology, leads to chaos, confusion, and erroneous views about the law).
What about the argument that Mr. Hauge maintained ownership of ERI’s trade secrets, which operate a much grayer area of intellectual property law? The Federal Circuit declined to treat these as “intellectual property and other rights,” at least for purposes of a civil contempt finding. “Civil contempt is an appropriate sanction only if the district court can point to an order of the court which ‘sets forth in specific detail an unequivocal command which a party has violated.’” Id. Here, there was no such command.