Friday 19 September 2014

Cautionary Tale: CAFC Rules That Delay Resulting From Reexamination Can Trigger Litigation Laches

Defendants accused of patent infringement sometimes raise the equitable doctrines of laches and estoppel as affirmative defenses. Although the defenses often appear to be linked, they are actually quite separate. As the Supreme Court explained last term, laches arises from an unreasonable delay in commencing suit that resulted in prejudice to the defendant, while equitable estoppel requires some action by the patentee, combined with reasonable reliance on that action by the defendant. See Petrella v. Metro-Goldwyn-Mayer, Inc., ___ U.S. ___, 134 S. Ct. 1962 (2014)

This week, the U.S. Court of Appeals for the Federal Circuit applied laches to bar a patentee’s infringement suit. SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, No. 2013-1564 (Fed. Cir. Sept. 17, 2014). The patentee, SCA Hygiene Products, owns a patent for adult incontinence products. On October 31, 2003, it notified First Quality Baby Products, LLC that First Quality appeared to be infringing the patent. SCA and First Quality exchanged letters for eight months. Then SCA requested ex parte reexamination of the patent based on a reference identified by First Quality. SCA did not notify First Quality of the reexamination proceedings. The U.S. Patent and Trademark Office issued a reexam certificate confirming the original claims and adding additional claims on March 27, 2007. SCA immediately began preparing to sue, but did not actually file suit until August 2, 2010 – six years and nine months after SCA’s first letter. During the pendency of the reexam, First Quality made substantial investments relating to the accused products, including purchasing a division from another diaper manufacturer and spending $10 million to expand production.

First Quality raised both laches and estoppel as defenses to SCA’s action. The Federal Circuit reviewed the elements of laches, as laid out in A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020 (Fed. Cir. 1992) (en banc):
Laches is an equitable defense to patent infringement that may arise only when an accused infringer proves by a preponderance of evidence that a patentee (1) unreasonably and inexcusably delayed filing an infringement suit (2) to the material prejudice of the accused infringer. If these prerequisite elements are present, a court must then balance “all pertinent facts and equities,” including “the length of delay, the seriousness of prejudice, the reasonableness of excuses, and the defendant’s conduct or culpability” before granting relief. . . Delays exceeding six years give rise to a presumption that the delay is unreasonable, inexcusable, and prejudicial. Under this presumption, the burden of evidentiary production shifts from the accused infringer to the patentee. Both of these presumptions disappear if the patentee can identify evidence sufficient for a reasonable jury to conclude either that the delay was excusable or not unreasonable, or that it was not materially prejudicial. If the patentee meets this burden of production, the accused infringer must prove both elements of laches by a preponderance of evidence.
SCA, Slip op. at 5-6 (citations omitted).  

Since SCA’s delay in filing suit was more than six years, the delay was presumed to be unreasonable, inexcusable, and prejudicial. SCA attempted to rebut the presumption by pointing out that three years of the delay was due to the reexam, which was a public proceeding. The Federal Circuit was not impressed. First, it rejected SCA’s argument that the time spent in reexam should not count toward the six year presumption trigger. Second, it ruled that SCA’s overall conduct , including its delay in filing suit after the reexam, could not rebut the presumption:
Under such circumstances, SCA was not required to provide notice of the reexamination to First Quality. But even though SCA’s delay may have been excusable when viewed in isolation, we must examine whether SCA’s delay, viewed as a whole, was excusable. The district court found that “SCA admitted that it has continuously tracked First Quality’s activity since 2003 and has an entire department dedicated solely to competitive intelligence.” SCA then continued to evaluate First Quality’s products during the reexamination period. SCA was also represented by U.S. patent counsel when it sent letters to First Quality in 2003 and 2004 and during the reexamination proceedings between 2004 and 2007. No evidence suggests that SCA was unable to find counsel or reinitiate contact with First Quality shortly after the reexamination ended. Moreover, “personal lack of familiarity with the patent system . . . does not excuse . . . failure to file suit.” Given the circumstances, SCA should have been prepared to reassert its rights against First Quality shortly after the ’646 patent emerged from reexamination. [Cites] But SCA remained silent for more than three years after the patent came out of reexamination. Accordingly, SCA has failed to raise a genuine issue of material fact regarding the reasonability of its delay. Viewing all of the facts in the light most favorable to SCA, no reasonable fact-finder could conclude that SCA’s delay, viewed as a whole, was reasonable. 
Slip op. at 11-12. Since First Quality was able to establish prejudice due to the delay, laches barred SCA’s claim. 

One fascinating aspect of the SCA decision is the Federal Circuit’s treatment of SCA’s argument that the entire laches defense, as well as the Aukerman case on which it rests, was severely undermined by the Supreme Court last term in Petrella, a copyright case. In Petrella, the Supreme Court ruled 9-0 that although laches sometimes is adopted as a “gap filling” doctrine when a federal statute omits any limitations period, it has a limited role when Congress provides a statutory limitation period. “[L]aches is a defense developed by courts of equity; its principal application was, and remains, to claims of an equitable cast for which the Legislature has provided no fixed time limitation.” 134 S. Ct. at 1973. The Court noted that laches’s role is “gap-filling, not legislation-overriding,” and the Court has “never applied laches to bar in their entirety claims for discrete wrongs occurring within a federally prescribed limitations period.” Id. at 1774-75. This view of laches is squarely contrary to the Federal Circuit’s reasoning in Aukerman. Since SCA's claim was timely under the Patent Act's limitations provision, 35 U.S.C. § 286, laches would appear to be unavailable as a defense.

Nonetheless, the Federal Circuit in SCA considered itself bound by Aukerman, wounded though it may be:
But Petrella notably left Aukerman intact. See 134 S. Ct. at 1974 n.15 (“We have not had occasion to review the Federal Circuit’s position.”). Because Aukerman may only be overruled by the Supreme Court or an en banc panel of this court, Aukerman remains controlling precedent.
Slip op. at 8. 

The Federal Circuit reversed the district court’s ruling that SCA’s conduct also created an estoppel, since there was no affirmative act, or failure to act, that First Quality could reasonably have relied upon.  The full decision is available HERE.

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