Retailer Lawsuit May be Severed and Stayed Pending Outcome Against Manufacturer

By Dennis Crouch

In re Toyota Motor Corp (Fed. Cir. 2014)

AVS – an Acacia company – sued Toyota for patent infringement in the Eastern District of Texas. As part of the litigation strategy, AVS included Gulf States Toyota – a large Texas-based dealer/distributor as a co-defendant. The AIA limited joinder of multiple unrelated defendants in a single infringement action. However, here joinder of these defendants appears proper because the manufacturer and distributor are both dealing in the same infringing products – Toyota vehicles.

Although venue is “proper”, Toyota argues that E.D. Texas is an inconvenient forum under 28 U.S.C. §1404(a) and that a better venue is E.D. Michigan, both because of the location of witnesses and because that court has previously adjudged the patent in question. That proposal wouldn’t exactly work because the Michigan court apparently has no personal jurisdiction over Gulf States. Thus, Toyota and Gulf States collectively argued that the case against the franchisee (Gulf States) should be severed and stayed pending outcome of the Toyota case. District Court judge Schneider rejected those proposals – finding that the case would not be moved to Michigan even if Gulf States were not a defendant and that therefore there was no cause to either transfer or sever.

On Mandamus, the Federal Circuit has vacated the district court denial – holding instead that (1) absent Gulf States as a defendant, the case against Toyota should be transferred to Michigan; and (2) therefore the district court should reconsider the request for severance-and-stay on remand.

This decision seemingly serves as the Federal Circuit’s first pass at addressing retailer/customer lawsuit concerns that are at the heart of legislative patent reform initiatives. The proposed legislation would provide a right to stay customer lawsuits while the current law seemingly only provides that such a stay can occur at a district court’s discretion. The provision most on point is likely Fed. R. Civ. Proc. 42(b) that calls for a district court to hold separate trials on various issues or claims “for convenience, to avoid prejudice, or to expedite and economize.”

 

33 thoughts on “Retailer Lawsuit May be Severed and Stayed Pending Outcome Against Manufacturer

  1. anon, I think in the end, the manufacturer will be found in privity with his customer reseller and will be responsible for his damages. This will prevent severability unless the manufacturer agrees to be responsible for the damages of the reseller and the reseller agrees to be bound by the outcome of the manufacturer case.

    1. That may be so.

      That does not change the point of the discussion regarding de facto privity.

      But for argument’s sake, let’s look at de facto privity.

      Does such neuter the AIA (in at least any similar or not so similar seller/buyer sets)? Even if 299(a)(2) is not met?

      1. Does such neuter the AIA (in at least any similar or not so similar seller/buyer sets)? Even if 299(a)(2) is not met?

        “299(a)(2) questions of fact common to all defendants or counterclaim defendants will arise in the action.”

        anon, I don’t know how you can have privity and not have common questions of fact. The whole point is that the exact same products are involved.

        Also, if you read the briefs by the people arguing for severability, they essentially say that the mere retailer will be bound by the result in the first case. What they actually mean to say is that the patent owner will be bound by the result in the first case which is okay for the retailer if the patent owner loses. But it is not clear under the law that the retailer will be bound unless there is privity, and all that is required of the second action against the retailer is an accounting for damages if the manufacturer loses on the merits.

        This works to some extent if the retailer has a notice and an opportunity to be heard in does not wish to participate but will consent to being bound by the outcome of the suit against the manufacturer. However if he wishes to defend himself because his liability is potentially so great, and perhaps because he deals in products of the same type from other manufacturers such that the resolution of the issue by one manufacturer is not sufficient for his purposes, then I don’t understand how the manufacturer can be severed because there are going to be two suits involving the same products. While that might be in the interest of justice for the manufacturer, and certainly is almost a violation of due process with respect to the patent owner to be forced to pursue an action against the same products in two different jurisdictions where there are common issues of law and fact with respect to both.

        1. Ned, what if you have questions of fact NOT in common that are critical to a specific count?

          Sure, there may be some facts in common – but those very well may not be questions of fact. Note how the AIA is written – merely being the exact same product may not be enough.

          And as to any briefs by people arguing for severability, I have not read them, but any time I see you say “What they actually mean to say” alarms go off big time, as your ability to accurately assess what others mean to say is notoriously suspect.

          But it is not clear under the law – hmm, now you seem to be agreeing with my very first post challenging your de facto under the law position….

        2. Anon, I am not following you. There is no question that a retailer of a manufacturer otherwise in privity by contract and by virtue of the same products are properly joined.

          The fact that the acts of infringement may be different — is that enough to sever. I think not.

          1. You mean, you assume not.

            Further, you do not address the real possibility that counts may be different against one versus the other…

          2. Also Ned, I noticed this morning that you have again assumed a finding of privity that already fits one of the conditions of the Taylor case, whereas I am proposing that such ‘by contract’ does not reach.

            As to ‘the same products,’ I again invite you to read the AIA and the present case – merely having the same products is not enough: “To the extent that Appellees argue that they have a right to bring the declaratory judgment action solely because their customers have been sued for direct infringement, they are incorrect.link to patently.wpengine.com at page 7.

  2. Dennis,

    Also consider In re Nintendo, 13-151 and In re Emc, 13-142.

    The former also involved a request to sever retailers from manufacturers in order to transfer:

    “There are also practical reasons why a different order
    of proceedings should have been followed here. In all
    likelihood, the retailers will have very little to offer in the way of evidence regarding the substantive aspects of the infringement case. They can add little to nothing regarding how the technology underlying the accused products works. Indeed, we and other courts have all but said as much in the analogous context of the “customer suit exception,” which endorses staying a case against a customer or retailer in light of the notion that the manufacturer is the “true defendant.” Katz v. Lear Siegler, Inc., 909 F.2d 1459, 1464 (Fed. Cir. 1990); Codex Corp. v. Milgo Elec. Corp., 553 F.2d 735, 737-38 (1st Cir. 1977).”

    Observe also the recent case of Kessler doctrine cited. Kessler protected customers from suits by a patentee after losing against a manufacturer where the same “type” of products were involved in both cases.

    Recent Federal Circuit cases have extended injunctions to distributors who were notified of the injunction even though no parties on the principle of privity and notice.

    Thus a judgment against patentee in the manufacturer suit will protect the retailer, and a judgment against the manufacturer will bind the retailer who has notice.

    Now, the retailers have a right to defend themselves, and they may choose to opt in. But I think that under the prevailing law of privity and notice, they will be bound by a judgment against their supplier/manufacturer if they do not. See, e.g., Taylor v. Sturgell, second category, 128 S.Ct. 2161, at 2172.

    1. Question:

      If a retailer is going to be bound by the outcome of the suit against his manufacturer, but wants to defend itself and not allow the defense to be totally up to the manufacturer such that severing and transferring will result in two different suits over the same products, can the manufacturer suit constitutionally be severed and transferred to a jurisdiction where the retailer could not have been sued?

      It seems to me that severing and transferring depends upon the consent of the retailer from a constitutional point of view.

      1. Ned,

        The gist of your questions seems to highlight the fact that patent infringement comes in more than one flavor.

        To use the metaphor of the stream of commerce, misuse of ‘water’ in the stream may be undertaken by multiple parties with culpability for that misuse combinable or not combinable. When the misuse is necessarily tied to the same act of violation (and this means more than just the same item is involved), then severability appears to be a problem. When the misuse (even of the same item) is tied to different and distinct acts of violation, then non-severability seems to be impacted (absent a prior agreement between the parties as to indemnification, or perhaps the other items in the list from the Taylor case).

        “Making” can be an act of patent infringement.
        “Using” can be a separate act of patent infringement.
        “Selling” and “offering to sell” can be yet another separate act of patent infringement.**

        While one cannot use what has not been made***, one also should not conflate the two acts as necessarily of the same single act of infringement. Two different suits for two different acts of infringement may (or may not) be perfectly in line with the law.

        **This reminds me of the possibly unintended consequence of the Monsanto v. Bowman case, and the fact that Bowman’s infringement of ‘making’ and the lack of the items that Bowman makes being exhausted necessarily means that those items released into the stream of commerce can attach other forms of infringement by other parties – the selling or offering to sell by the graineries who buy the illicitly made (and non-exhausted, multiple-N generations removed) items from Bowman. An item illicitly made does not exhaust the patent holder’s rights – neither in the general case of commerce immediately related to the specific example in this thread or in any other case including the self-replicating cases.

        ***I note that this thought seems to be difficult for you to grasp in other contexts. But we need to continue that conversation here.

        1. anon, also consider that Toyota, being in privity with Gulf States, is or should be responsible for the infringement of Gulf States one way or another. Thus the damages that Toyota should be obligated to pay should include the damages for the separate infringement by Gulf States induced by Toyota.

          1. Privity is definitely one of those things that may make the question of culpability (and severability) an interesting one.

            An analysis of the different alleged infringements should guide. Questions of fact for the possibly separate counts of infringement may not be common to all defendants – see 299(a)(2).

  3. Could someone please educate me on why Gulf States wouldn’t waive personal jurisdiction? The severability question would seem to go against the defendants because of 299(a), and that can only serve as an anchor for a case that (according to this order) is otherwise transferable to EDMI.

    1. APoTU, a better question is why wouldn’t Gulf States simply agree to be bound by the outcome of the case against Toyota. In such a case, severing staying would seem appropriate.

      If, however, Gulf States wanted to actively defend for some reason, severing makes no sense at all.

    2. I don’t have the citation readily available, but there is Fifth circuit case law that forbids waiver of pjxn to facilitate transfer.

      1. Thanks – I was wondering if 299(a)(1) was reached.

        If indeed so, then is not severing problematic? If severing is found to be plausible, does this not speak against reaching the conditions controlled by the new AIA section?

        1. If indeed so, then is not severing problematic?

          “No.”

          If severing is found to be plausible, does this not speak against reaching the conditions controlled by the new AIA section?

          “No, it doesn’t.”

          If you disagree with these answers, explain why. Try doing so using statements backed up by citations to the laws which you are referring to. That way everyone will be able to understand what you are talking about and what your concerns are.

          And try to remember: you brought it up.

          1. If you disagree with these answers, explain why

            Is there any thread that you can make a post without being a t00l, Malcolm?

            1. I’m curious as to whether you are trying to make a genuine point based on something you know, or are you just making stuff up that you’d like to be true and expecting other people to waste their time proving that you’re making it up.

              You have some theory based on 299(a)(1)? Share it with everybody.

            2. are you just making stuff up that you’d like to be true

              … and planting the idea with leading/rhetorical questions to make it seem like there’s a legitimate debate on the subject.

              Sounds like something he’d do.

            3. As opposed to playing Calvinball with face spikes (something that IANAE would do).

              Thanks for chirping in with meaningless nonsense as usual IANAE.

      2. Dennis, I would also think they were in privity under the law by virtue of Toyota selling the infringing cars to Gulf States.

        1. Do you have a cite for this “privity under the law?”

          I think that you have (inadvertently?) expanded the Kessler doctrine and forced privity where it may not exist (noting that indemnification as a related item is not automatic).

          1. Taylor v. Sturgell, 2nd category. Successors in property. Also see Hart Steel. The exact same product was involved in both cases.

            Taylor v. Sturgell, 128 S. Ct. 2161, 553 U.S. 880, 171 L. Ed. 2d 155 (2008).

            Hart Steel Co. v. Railroad Supply Co., 244 U.S. 294, 37 S. Ct. 506, 61 L. Ed. 1148 (1917).

            1. Ned,

              Taylor is not a case that supports your de facto privity position. In fact, Taylor is a case against such a de facto position.

              The case lists specific categories where exceptions regarding privity may be found. “May” is not “must.” The fact that such instances are not universal and are only indicators of privity necessarily implicate that privity is not a de facto condition. Read the first paragraph of the case – your post at 1.1.2 is the exception that swallows the rule. You have referenced the second category – but note the language used to describe that category (the permissive “may”) – note your tendency of seeing something that aligns with your desired endpoint and fixating on that and over-reading the case law to make your desired endpoint an absolute. “May” is not “must.”

              Fostering reliance on judicial action – the basis of the doctrine here** goes to my post at 3.1.1.1: the facts may or may not indicate privity and your de facto view cannot stand.

              The Hart Steel case is not a good case to lean on, as the facts there clearly already fall into one of the situations where privity has already been established. You appear to be doing that “take one example and expand it to all” over-reading thing you tend to do.

              ** – a concept the Court would do well to remember in its current deliberations of the Alice case and the fact that the lower court has slapped the Supreme Court across its collective face and the lower court has thrown up its hands.

            2. I would also point out that none of the six categories in Taylor reflect the fact that indemnification is not an automatic in any contractual relationship – since it is not an automatic, there is no such de facto privity at law that you seem to want to have.

              See my post at 3.1.1: (absent a prior agreement between the parties as to indemnification, or perhaps the other items in the list from the Taylor case).

            3. anon, take a look at a couple of footnotes from Taylor.

              “The Restatement observes that a nonparty may be bound not only by express or implied agreement, but also through conduct inducing reliance by others. See 2 Restatement § 62. See also 18A Wright & Miller § 4453, pp. 425-429. We have never had occasion to consider this ground for nonparty preclusion, and we express no view on it here.

              [8] The substantive legal relationships justifying preclusion are sometimes collectively referred to as “privity.” See, e.g., Richards v. Jefferson County, 517 U.S. 793, 798, 116 S.Ct. 1761, 135 L.Ed.2d 76 (1996); 2 Restatement § 62, Comment a. The term “privity,” however, has also come to be used more broadly, as a way to express the conclusion that nonparty preclusion is appropriate on any ground. See 18A Wright & Miller § 4449, pp. 351-353, and n. 33 (collecting cases). To ward off confusion, we avoid using the term “privity” in this opinion.”

              Note, the Supreme Court specifically reserves the point argued by the Restatement which applies in the case of inducement. But, also consider the UCC which imposes on the seller an obligation to indemnify his customer for patent infringement.

              Finally, the law has required that judgments on particular property flow to successors. Just read the cases cited in Taylor. Hart Steel is also on point.

            4. Interesting, especially about the attempt to ward of confusion. Tell me, are you going in the other direction then with your intended use of the word?

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