Originally Published: February 24, 2023
Patent litigation is usually a federal affair, but liability for some patent-related claims can also arise under state law when such claims are made in bad faith. The bad-faith distinction is significant from a constitutional standpoint: Federal law only preempts the states from regulating infringement claims made in good faith, allowing states to target bad faith claims under certain circumstances. This distinction has arisen on multiple occasions in district court decisions denying challenges against state laws targeting bad-faith patent assertion. While those rulings have primarily turned on the preemption issue, they have also rejected arguments from frustrated plaintiffs invoking First Amendment speech protections for litigation activity ultimately found to be in bad faith. Now, the Federal Circuit has addressed the bad faith standard in a related context—this time, siding with the plaintiff. In its precedential Lite-Netics v. Nu Tsai Capital decision, the Federal Circuit held that a district judge was wrong to enjoin a plaintiff from communicating with a defendant's customers about its alleged infringement, ruling that the court erred by concluding that these claims were made in objectively bad faith.
The litigation below involved a dispute between two sellers of holiday string lights with magnetized bases. Lite-Netics holds two patents describing a light fixture with a magnetized base, one (7,549,779) incorporating a single, full-disk magnet with a "pull strength of at least five pounds" and another (8,128,264) with an embedded magnet that does not protrude from the base. The company's customer-turned-competitor Nu Tsai Capital (d/b/a Holiday Bright Lights, or "HBL") also holds a patent for such a light fixture (11,333,309) that distinguishes itself from prior art (including the '779 patent) by incorporating at least two magnets that include a moisture drainage channel as well as drainage holes to avoid corrosion and short circuits.
In June 2017 and April 2022, Lite-Netics sent HBL demand letters accusing it of infringing the '779 and '264 patents through the provision of certain products practicing HBL's '309 patent: a magnetic string light fixture utilizing two magnets called the Magnetic Cord, and a single-magnet Magnetic Clip product that adds magnetic adhesion capabilities to existing light strips. After the April letter, the parties exchanged letters debating infringement—including whether the '779 patent requires each individual magnet to have a pull strength at least five pounds (HBL's position) or the magnets' combined strength was sufficient (LiteNetic's), and whether the '264 patent's non-protrusion requirement only precludes protrusion from the perimeter of the base (Lite-Netics's) or also precluded protrusion below the base (HBL's). In August 2022, Lite-Netics sued HBL for infringement of its two patents in the District of Nebraska (8:22-cv-00314).
However, Lite-Netics also sent two communications to its customers, some of which were also HBL's, about the infringement: one in May 2022 that identified the patents and their alleged infringement but did not name HBL; and a second that September, shortly after the filing of the Nebraska complaint, stating that other companies were "copying" its patented products, that it had sued HBL to stop it from "making and selling infringing products", and that Lite-Netics was "also considering including any known company using or reselling the HBL products as co-defendants in this lawsuit".
As a result, HBL asserted several state law counterclaims in its September 30 answer, including unfair competition deceptive trade practices, tortious interference with business relations and prospective business relations, and defamation under Nebraska law; and bad-faith patent infringement communications under Colorado law. That same day, HBL moved for a temporary restraining order (TRO) and preliminary injunction in light of its tortious-interference and defamation claims, seeking to enjoin Lite-Netics from accusing HBL of copying Lite-Netics's products and from suggesting to HBL's customers that they could also be subject to infringement litigation.
District Judge Brian C. Buescher granted the TRO a week later, extending it for another 14 days. Later that month, prior to the expiration of the TRO, he granted HBL's request for a preliminary injunction (PI), barring Lite-Netics from making the aforementioned statements and from otherwise "suggesting that HBL is a patent infringer". Judge Buescher reached that conclusion primarily based on his determination that HBL was likely to succeed on the merits, the first step of the required four-part test. He "recognized that state-law tort claims based on the communication of patent rights, such as HBL's tortious-interference and defamation claims, 'are preempted by federal patent laws, unless the claimant can show that the patent holder acted in bad faith'" (as quoted by Federal Circuit with internal citation to district court opinion; citations omitted). Here, the court decided "that HBL's state-law tort claims were not preempted here, centrally because it held that Lite-Netics's infringement allegations were so clearly meritless that their assertion was in bad faith". Judge Buescher also ruled that the three remaining requirements for a PI—the likelihood of "irreparable harm" to HBL without the injunction, the balance of equities, and the public interest—favored granting that relief. Lite-Netics appealed in November (2023-1146).
The Federal Circuit, ruling on appeal on February 17, began by reaffirming the good/bad-faith dividing line for preemption as noted above. Under the Federal Circuit's 2004 Globetrotter Software v. Elan Computer Group decision, it held, "federal patent law preempts state-law tort liability for a patentholder's good faith conduct in communications asserting infringement of its patent and warning about potential litigation" (citation to Globetrotter and other cases omitted). "HBL's state-law claims here thus 'can survive federal preemption only to the extent that those claims are based on a showing of 'bad faith' action in asserting infringement'", the court continued.
In this context, held the Federal Circuit, such a showing "rests partly on First Amendment principles", which are especially important when a court considers enjoining speech. While noting that bad faith here involves both objective and subjective elements, the Federal Circuit emphasized that objective bad faith is a "threshold requirement" for finding a claim baseless (citation omitted). "A patent-infringement allegation is objectively baseless", the court ruled, "only if 'no reasonable litigant could realistically expect success on the merits'" (citing its 2007 decision in GP Industries v. Eran Industries).
Turning next to the injunction at issue, the Federal Circuit then declined to accept HBL's argument that "if the preliminary injunction at issue here is proper in its application to any speech, then it must be upheld in full"—rejecting this position as lacking in precedent and contrary to the more demanding standard established by First Amendment caselaw, under which any injunction of speech must be narrowly tailored. Moreover, characterizing HBL's position as "all-or-nothing", the Federal Circuit determined that it would overturn the injunction altogether if it found an abuse of discretion.
Indeed, the Federal Circuit did find that the district court had abused its discretion in determining that Lite-Netic's claims of infringement related to the '779 patent had been objectively baseless. "An incorrect allegation of patent infringement is not necessarily objectively baseless", the court explained. A plaintiff acting under a good-faith understanding of the "nature and scope" of its patent rights "is fully permitted to press those rights 'even though he may misconceive what those rights are'", it held (citations omitted).
The Federal Circuit took issue with each of the three legal conclusions underpinning the district court's objective baselessness determination. First, it disagreed with the lower court's rationale as to literal infringement through the Magnetic Cord (the accused standalone magnetic light strip): that the '779 patent's "claimed 'magnet' is limited to a single magnet with a unitary structure", as it had concluded with respect to infringement theories against both accused products. Rather, the Federal Circuit found that Lite-Netics' contrary position, that references to "a magnet" in the specification and the claims themselves could describe two magnets that together had a combined pull strength of five pounds, is "at least reasonable". In particular, the appellate court found "no basis" for determining on the record that it would be objectively unreasonable for a skilled artisan to understand the claims to require a single magnet, "whether as a matter of claim construction or as a matter of application". Separately, the Federal Circuit noted that under "patent parlance", the "use of 'a' or 'an' before a noun naming an object is understood to mean to 'one or more' unless the context sufficiently indicates otherwise". As a result, it concluded that this portion of the district court's objective baselessness ruling depended on "incorrect legal principles and cannot stand".
"[A]lso flawed", per the Federal Circuit, was Judge Buescher's ruling for that same product with respect to the doctrine of equivalents. Rather than determining whether the Magnetic Cord's two magnets "perform[ed] substantially the same overall function or work, in substantially the same way, to produce substantially the same overall result" (citations omitted), the court instead "extended its finding that there was a clear intention to limit 'a magnet' to one singular magnet to be a surrendering and foreclosure of claim scope". This meant that allowing two magnets would amount to an impermissible recapture of surrendered claim scope under the lower court's reading. The Federal Circuit again ruled that this was based on a legal error, instead finding "nothing unreasonable about the allegation that HBL's two half-disk magnets satisfy the function-way-result formulation for equivalence" under the circumstances.
Finally, the Federal Circuit determined that the district court was wrong to find objective baselessness for Lite-Netics's claims of indirect infringement as to the Magnetic Clip, a "dual-clip unit" that customers must use with existing lights. Since the Magnetic Clip contains a single magnet, the issue turned on whether placing the product on the bottom of a light socket "forms the base within the claim requirement of a magnet-containing base attached to the light socket". According to the Federal Circuit, Judge Buscher erred in determining that the answer to this question was negative based on the fact that the clip does not "attach" to the base but instead "pockets" the bottom of the socket. Even if a claim construction analysis were to ultimately justify that initial conclusion, the appellate court explained, enough of the Federal Circuit's caselaw supports the plaintiff's construction of "attach" as "broad enough to cover connecting without fastening" that its position was not objectively baseless. Judge Buescher further erred, per the appellate court, by concluding that Lite-Netics had disclaimed "clips" and "external 'clips' that attach to the electrical cord" in the patent's specification—countering once again that it is, "at the least", reasonable to take the opposite position.
The Federal Circuit then concluded by vacating the preliminary injunction and remanding for further proceedings. It did not address claims related to the infringement of the '264 patent because a claim construction dispute existed as to the protrusion requirement discussed above. The court also declined to reach claims stemming from Lite-Netics's statement to HBL's customers, citing caselaw requiring the adjudication of infringement-related claims against manufacturers before those involving its customers.
For more on preemption and the role of the bad-faith standard, see here and here.
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