United States: After PTO’s Cancellation Of Claim, No Legal Basis Remains To Enjoin Conduct Based On The Rights Previously Conferred By That Claim As Those Rights Cease To Exist

In ePlus, Inc. v. Lawson Software, Inc., Nos. 13-1506, -1587 (Fed. Cir. July 25, 2014), the Federal Circuit vacated an injunction and contempt order because both were based on a claim that had been cancelled by the PTO during reexamination. 

ePlus, Inc. ("ePlus"), assignee of U.S. Patent Nos. 6,023,683 ("the '683 patent") and 6,505,172 pertaining to methods and systems for electronic sourcing, instituted an infringement action against Lawson Software, Inc. ("Lawson").  The district court found two asserted system claims and three asserted method claims were valid, and the jury determined that Lawson infringed the asserted claims.  The district court entered a permanent injunction against Lawson in light of the jury's verdicts.  On appeal, the Federal Circuit reversed-in-part—finding the system claims invalid and that two of the method claims were not infringed—affirmed only the infringement verdict as to method claim 26 of the '683 patent, and remanded so that the district court could modify the injunction. 

On remand, the district court requested that the parties provide statements of position discussing the effect of the Federal Circuit's decision on the injunction.  Particularly, Lawson challenged the bar against the sales of particular software products, which were originally supported by the jury's findings of infringement of the system claims, but those findings were later vacated by the Federal Circuit.  Lawson argued that infringement of method claim 26 of the '683 patent did not support the district court's injunction against product sales and that, because the jury's findings had been narrowed, the software products subject to the injunction were capable of significant noninfringing uses.  Lawson subsequently filed a Rule 60(b) motion seeking modification of the injunction.  The district court disagreed with Lawson's arguments and modified the injunction in only one respect.  The district court further found Lawson in civil contempt for violation of that same injunction because Lawson's redesigned products "were no more than colorably different and infringed," and required Lawson to pay a compensatory fine and coercive daily fines until it showed compliance with the injunction.  Slip op. at 8.  Lawson appealed the injunction and the contempt order, which was presently before the Court.  While these appeals were pending, the PTO completed reexamination of the '683 patent and determined that claim 26 of the '683 patent was invalid, which the Federal Circuit affirmed in a separate appeal.

On appeal, first addressing whether an injunction can continue after the PTO has cancelled the only claim upon which the injunction was based, the Federal Circuit found that the injunction was no longer supported.  Relying on long-standing precedent, the Federal Circuit explained that—once the PTO invalidated claim 26, the Federal Circuit affirmed that decision, the mandate issued, and the PTO cancelled the claim—"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."  Id. at 11.  Indeed, the Court noted that ePlus admitted as much during oral argument.  Thus, the Federal Circuit found that the injunction should be vacated.

The Federal Circuit then turned to the second issue on appeal:  whether civil contempt remedies based on the violation of an injunction should be set aside when the injunction has been overturned on direct appeal.  Distinguishing between criminal and civil contempt, the Federal Circuit explained that "[c]ivil contempt sanctions must be set aside when the resolution of the case requires overturning the injunction on which those sanctions are based."  Id. at 13.  The Court further explained that the present case was not distinguishable based on the injunction being set aside due to a PTO proceeding rather than a court judgment.  The Court found this case analogous to Fresenius USA, Inc. v. Baxter International, Inc., 721 F.3d 1330 (Fed. Cir. 2013) ("Fresenius II"), where the Court previously 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."  Slip op. at 15 (citing 721 F.3d at 1344, 1347). 

The Court further noted that the present appeal did not require it to decide whether civil sanctions would survive if the injunction had been final at the time civil contempt sanctions had been imposed by the district court.  To be sure, the Court indicated, "[t]here is no question here that the district court's modified injunction was not final when the PTO cancelled claim 26."  Id. at 17.  Addressing ePlus's argument that Lawson viewed the injunction as final because it filed a Rule 60(b) motion to modify or dissolve the modified injunction, the Court found the filing of the motion under those circumstances not to be unusual.  Thus, the Court concluded that the compensatory damages award had to be set aside due to the cancellation of claim 26 of the '683 patent.

Accordingly, the Court vacated both the district court's injunction and contempt orders, and remanded the case with instructions to dismiss.

While Judge O'Malley agreed that, upon affirming the PTO's cancellation of claim 26 of the '683 patent, the injunction could no longer stand, she dissented to address the "more difficult question" as to whether Lawson should be relieved of all penalties for violation of the injunction for the four years that it was in place prior to the Court's affirmance of the PTO's cancellation of claim 26.  O'Malley Dissent at 1-2.  Judge O'Malley dissented from the portion of the Court's opinion where it stated that it did not need to decide whether civil contempt sanctions would survive if the injunction had been final at the time the district court imposed civil contempt sanctions.  She was of the opinion that Fresenius II was distinguishable from the present appeal and also wrote separately "to note that, if we are bound by Fresenius II on these facts, I find Fresenius II even more troubling than I initially believed."  Id. at 2.  First, Judge O'Malley found "crucial differences between these facts and the facts in Fresenius II."  Id. at 7.  Second, she reiterated the concerns from her dissent in Fresenius II that "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 USA, Inc. v. Baxter International, Inc., 582 F.3d 1288, 1293 (Fed. Cir. 2009)].  These arguments apply with even greater force and urgency here."  O'Malley Dissent at 12.  Accordingly, Judge O'Malley would consider the merits of Lawson's appeal from the trial court's civil contempt findings.

Judges: Prost, Dyk (author), O'Malley (dissenting)

[Appealed from E.D. Va., Senior Judge Payne]

This article previously appeared in Last Month at the Federal Circuit, August, 2014.

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