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Article: June 2017: Equitable Defenses in Patent Cases After SCA Hygiene

June 01, 2017
Business Litigation Reports

On March 21, 2017, the U.S. Supreme Court issued its highly anticipated opinion in SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 580 U.S. , No. 15-927, slip op. (Mar. 21, 2017), eliminating the equitable defense of laches to a claim of damages for patent infringement. In doing so, the Court clarified the framework of equitable defenses available to an accused infringer. Equitable estoppel, often pled and proven alongside laches, will likely continue to be an available defense where the parties had a preexisting relationship that can give rise to an inference of the patentee’s authorization by a patentee of an accused infringer’s conduct.

Laches Is No Longer Available as a Defense to Patent Damages
The Court’s decision in SCA Hygiene eliminated laches as a defense in patent cases. The Court held that laches is not available as a defense against a claim for patent damages brought within the six-year damages capture period prescribed by 35 U.S.C. § 286. SCA Hygiene, slip op. at 16. In reaching this decision, the Court followed the reasoning in Petrella v. Metro-Goldwin- Mayer, Inc., 572 U.S. , 134 S. Ct. 1962 (2014), in which the Court held that laches cannot preclude a claim for copyright damages. The Court reasoned in Petrella that the Copyright Act’s three-year limitation period “necessarily reflects a congressional decision that the timeliness of covered claims is better judged on the basis of a generally hard and fast rule” rather than a case-specific laches determination. SCA Hygiene, slip op. at 4 (citing Petrella, slip op. at 14). Applying laches in such cases “would give judges a ‘legislation- overriding’ role that is beyond the Judiciary’s power.” Id. Applying the same reasoning, the Court in SCA Hygiene found that the Patent Act’s provision that “‘no recovery shall be had for any infringement committed more than six years prior to filing of the complaint or counterclaim,’” represented a “judgment by Congress that a patentee may recover damages for any infringement committed within six years of filing of the claim.” Id. at 6. Therefore, the Court held that laches cannot be used as a defense in a patent case against a claim for damages within the six-year period of Section 286. Id. at 4, 16.

The Doctrine of Equitable Estoppel
Although laches is no longer available, equitable estoppel is a potential defense to claims of patent infringement and is closely related to laches. The Court in SCA Hygiene expressly notes that equitable estoppel, unlike laches, remains a defense that also protects against the problem of patentees inducing accused infringers to invest in arguably infringing products. SCA Hygiene, slip op. at 16. Although delay is often a part of equitable estoppel, the focus is on misleading conduct and reliance by the accused infringer on such conduct.

Equitable estoppel has often been asserted hand-in-hand with the laches defense, but the elements and the effects of the two defenses differ. Prior to SCA Hygiene, the laches defense in patent cases required only an unreasonable and inexcusable delay by patentee in bringing suit and material prejudice to the accused infringer from the delay. A.C. Aukerman Co. v. R.L. Chaides Const. Co., 960 F.2d 1020, 1028 (Fed. Cir. 1992). Laches bars only pre-suit damages. Id.

In contrast, equitable estoppel requires more than delay and prejudice. It requires that: (a) a patentee through misleading conduct (or silence) leads the alleged infringer to reasonably infer that the patentee does not intend to enforce its patent; (b) reliance by the alleged infringer on the patentee’s conduct; and (c) materially prejudice if the patentee is allowed to proceed with its claim. Id. Thus, unlike laches, equitable estoppel requires some conduct on the part of the patentee. If established, equitable estoppel bars all relief on the claim, not just pre-suit damages. Id. at 1028, 1041.

Equitable Estoppel in Practice
Because the focus of equitable estoppel is not timeliness, but rather whether the conduct of the patentee suggests that the patentee would not enforce its patent, the focus of the inquiry is often the relationship between the patentee and accused infringer.

An overt threat of enforcement of a patent followed by a long period of silence may raise equitable estoppel. For example, if a patentee provides notice of alleged infringement of multiple patents but only follows up on a subset of those patents, it may be reasonable for the accused infringer to infer that the patentee does not intend to pursue the omitted patents. In Aspex Eyewear Inc. v. Clariti Eyewear, Inc., 605 F.3d 1305 (Fed. Cir. 2010), the patentee sent a letter to the accused infringer asserting that “some” of accused infringer’s products “may” be covered by four of patentee’s patents. Id. at 1308. Within days, Aspex sent a similar letter identifying a fifth patent, also without any specificity as to which products it contended may infringe which claims. Id. at 1309. The accused infringer responded with a request for more information, including the claims patentee contended applied and the products, by model number, the patentee accused. Patentee then identified claims from only two of the five patents identified in the original correspondence, which the accused infringer addressed in subsequent correspondence. Id. There was no further contact for more than three years, at which point patentee raised alleged infringement of only one of the three previously unaddressed patents from three years before. Id. The court found that this sequence of events could be viewed as a tacit withdrawal of the patent from which it was reasonable for the accused infringer to infer that patentee would not enforce the patent. Id. at 1311. In Radio Systems v. Lalor, 709 F.3d 1124 (Fed. Cir. 2013), the court affirmed a finding of equitable estoppel where a patentee was silent for over four and a half years after the accused infringer responded to an initial demand letter. 709 F.3d at 1125, 1130.

A patentee’s course of conduct in connection with an ongoing relationship with the accused infringer also can support a finding of equitable estoppel. In High Point Sarl v. Sprint Nextel Corp., 817 F.3d 1325 (Fed. Cir. 2016), the court affirmed summary judgment of equitable estoppel where a patentee’s predecessors in interest in the patents worked with Sprint to developed the accused CDMA network without ever raising infringement concerns on its patents. Defendant Sprint entered licenses and supply agreements with Lucent, the prior owner of the patents, concerning developing with other vendors interoperability standards for Sprint’s CDMA network. Over a decade, the Sprint network grew and used unlicensed equipment supplied by multiple vendors without challenge by the patent owners. Indeed, patent holders were “not only silent as to infringement concerns, they were actively involved in licensing arrangements involving the patents, discussing interoperability with other potentially infringing vendors, and continuing business relationships.” 817 F.3d at 1331. This silence with respect to the patents while at the same time actively helping to build, and profiting from the creation of, the Sprint network was misleading conduct sufficient to support a finding of equitable estoppel.

Similarly, in Mass Engineered Design, Inc. v. Ergotron, 633 F. Supp. 2d 361, 386 (E.D. Tex. 2009), the court found a six-year course of dealing between the patentee and the accused infringer concerning an accused product There, the patentee sold accused infringer’s products for six years without mentioning or asserting its patent, and even encouraged the accused infringer to sell the accused products through others. Id. at 386. Patentee’s encouragement of sales of the accused products was sufficient affirmative conduct to lead the accused infringer to believe that patentee would not assert its patent rights. Id.

One interesting approach for an accused infringer in litigation is to present the patentee with a sample product during negotiations, and to inform the patentee that the new product would be considered non-infringing unless the patentee advised them otherwise. See Scholle Corp. v. Blackhawk Molding Co., Inc., 133 F.3d 1468 (Fed. Cir 1998). In Scholle, after litigation commenced about a predecessor product, the accused infringer presented samples of its new design to patentee, along with the assertion that, absent disagreement from the patentee, the new design would be considered non-infringing. Id. at 1470. Patentee did not respond to the statements concerning the new product, while the parties continued to have contact about other matters, including concerning the ongoing litigation about the predecessor product. The Court found that this cooperative behavior, particularly in light of previous threats, created a reasonable inference that the patentee would not sue based on the design-around product. Id. at 1470-71; see also John Bean Techs. Corp. v. Morris & Assoc., 2016 WL 7974654 (E.D. Ark. Dec. 14, 2016) (granting summary judgment to accused infringer who proactively sent a letter to patentee who was writing to accused infringer’s customers threatening suit, explaining why it believed the claims were not valid; patentee never responded but sued nearly twelve years later).

The reasonable inference that a patentee will not pursue a particular patent or patent claims alone is not enough to establish equitable estoppel. An accused infringer must also show that it relied on patentee’s misleading conduct. Facts supporting reliance may include expanded promotion of the accused products, expanded sales of the accused products, expanded product lines using the accused technology, and/or increased expenditures such as building plants or hiring employees to produce, promote and sell the accused products, provided that these activities were undertaken, at least in part, based on the understanding that patentee would not sue. As with the misleading conduct element, the parties course of conduct may be persuasive with respect to reliance. For example, in the Aspex case discussed above, the same patentee had previously sued on other patents, and the accused infringer responded by agreeing to an injunction and withdrawing those products from the market. The accused infringer testified that it likely would have withdrawn its products if patentee had filed suit, rather than remaining silent for three years after the initial letter concerning alleged infringement. Aspex, 605 F.3d at 1312.

Finally, a company that has acquired an existing product line that is later accused of infringement should explore the course of dealings between its predecessor and the patentee. Equitable estoppel applies to successors-in-interest where privity has been established. See Radio Sys.Corp. v. Lalor, 709 F.3d 1124, 1131 (Fed. Cir. 2013). Accordingly, a patentee cannot defeat an otherwise valid defense of equitable estoppel by arguing that the successor company did not know of the demand letter and did not rely on silence after the demand letter. Id. at 1130-31.

Although laches does not require a showing of affirmative conduct by the patentee and merely requires unexcused delay, in practice, unless there was a substantial delay the additional evidence to prove equitable estoppel is often important to prevailing on laches. Thus, although laches is no longer a viable defense to a claim for patent damages, the impact on discovery for these equitable defenses will not likely change. The same facts that one would develop prior to SCA Hygiene to support a laches defense will likely continue to be the focus of discovery for equitable estoppel.

The Patentee’s Perspective
During the course of business dealings and while policing the market for potential infringement, patentees should carefully consider whether their conduct can be construed as creating a false sense that the patentee does not intend to assert its patent rights against a particular entity. If the patentee receives a response asserting non-infringement or invalidity, the patentee should respond or commence suit.

For example, even if, despite having initiated contact with a demand letter, the patentee determines it does not want to pursue litigation at that time, it should consider a simple follow up, at least stating that it disagrees with the accused infringer’s response and reserving all rights to pursue infringement in the future. If an accused infringer responds by asserting that its sales are de minimis and not worth pursuing, the patentee may choose to expressly respond that it is refraining from suit based on that representation but that it reserves all rights if circumstances change. It is also worth noting that, even if a patentee does not further respond to an assertion of de minimis sales, an infringer might not ultimately be able to reasonably rely on the ensuing silence as any indication with respect to future conduct if circumstances change.

A patent holder might also choose to be proactive in warning a potential competitor in advance, where, for instance, a competitor that is not yet in the market is thought to be bidding on a project that would employ infringing technology. Indeed, continued warnings of potential infringement are “precisely the opposite of the sort of conduct needed to give rise to equitable estoppel.” See Vanderlande Indus. Nederland BV v. ITC, 366 F.3d 1311, 1325 (Fed. Cir. 2004).

One important consideration for patentees is whether and how to raise patent rights and potential infringement during the course of a profitable business relationship with the potential infringer. To the extent that a patentee wants to retain the ability to assert patent rights in the future, it cannot appear to acquiesce to or encourage continued known infringement. In Sprint Communications Co. v. Time Warner Cable, Inc., 2017 WL 978107 (D. Kan., March 14, 2017), the court found that the extended course of dealings between the patentee and accused infringer would not mislead the accused infringer because the contracts between the parties “expressly provided that no intellectual property rights were being given to” the accused infringer and the court also found no evidence that patentee indicated to the accused infringer that it would never enforce the patents. Id. at *4. Similarly, in Robertson Transformer Co. v. General Electric Co., 191 F. Supp. 3d 826 (N.D. Ill. 2016), the court denied summary judgment and found no equitable estoppel because “every communication of record” between patentee and accused infringer concerning the parties’ joint project “explicitly mentioned a royalty arrangement between the parties.” Id. at 834. It is also possible for the parties to acknowledge the potential infringement dispute and agree to toll the limitations period to preserve the right to damages as a compromise.

It is worth noting that a patentee who has acquired existing patents must explore any past relationship between prior owners and the potential infringer. The effect of equitable estoppel is a license to use the invention that extends throughout the life of the patent. See High Point Sarl, 817 F.3d at 1331 Accordingly, a subsequent purchaser of the patent rights may be equitably estopped from recovering from an accused infringer that reasonably relied on a predecessor owner’s misleading conduct to its detriment.

Lesson: Always Follow Up
As a practical matter, for both patentees and accused infringers, the focus is on the relationship and communications between the parties to identify any conduct or facts that support (or refute) an inference that a patentee is not going to enforce its patent. As a result, it is important to investigate and develop facts such as:

The relationship between the parties for the technology that is the general subject matter of the patents. Should the patentee be in a position to know about potential infringement and to comment on it to the accused infringer?

What interactions may have taken place involving predecessors in ownership of the patent or the accused product line?

The specific communications between the patentee and the accused infringer regarding the patent. Has the patentee identified the patent, specific claims, specific assertions against an accused product to suggest that the patentee is aware of the alleged infringement?

The overt communication from the accused infringer responding to notice of infringement. What has the accused infringer told the patentee about the assertions?

How has the patentee responded to the accused infringer? Has there been silence with respect to the allegations as opposed to other business that the two parties may have with each other?

What actions has the accused infringer taken during the time since the patentee last communicated with the accused infringer about the allegations? This evidence should be cataloged carefully to support not only actual reliance but also the extent of the reliance to help demonstrate prejudice.

Equitable estoppel is a fact specific defense that does not fit into any precise formula. It will be important for both accused infringers and patentees to thoroughly marshal the facts relating to the conduct of all patent owners and how that conduct is perceived by the accused infringer and its privities, how the accused infringer relied on such conduct to its detriment and quantifying the extent of prejudice, both economic and evidentiary. Often, the facts will depend on who last responded and what was the length of silence or inaction with respect to the specific allegations. In many cases, it will be a question of who spoke last on the issue of potential infringement.