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IP Alert: Federal Circuit Finds Claim Preclusion Prevents Second Bite at the Apple with Customer Suits

June 19, 2020

On June 17, the Federal Circuit held in In re PersonalWeb Technologies LLC that PersonalWeb’s attempt to bring eight new cases against Amazon’s customers was barred as a result of a previous suit brought by PersonalWeb against Amazon that was later dismissed with prejudice. The court’s opinion explicated the rule of claim preclusion as applied to customer suits and included a discussion of the relatively uncommon Kessler doctrine.

In an earlier lawsuit, PersonalWeb sued Amazon and one of its customers alleging infringement of five patents directed to a “True Name” system that created a unique identifier for data items. PersonalWeb alleged that Amazon’s “S3” system and its customer’s use of the S3 system infringed each of the patents. However, after claim construction, PersonalWeb stipulated to dismissal with prejudice of its claims against Amazon, and the court entered a final judgment against PersonalWeb.

Almost four years later, PersonalWeb initiated a series of new lawsuits across the country, these lawsuits naming many of Amazon’s customers that use the S3 system as defendants. Amazon intervened and also filed a declaratory judgment complaint against PersonalWeb seeking an order barring the actions in light of the earlier dismissal with prejudice and judgment. After consolidation of the various lawsuits into a multidistrict litigation, the district court granted a motion for summary judgment brought by Amazon, finding that both claim preclusion and the Kessler doctrine barred PersonalWeb’s customer lawsuits.

On appeal, the Federal Circuit affirmed. First, the Federal Circuit found that the customer claims could have been brought in the earlier lawsuit and did not involve different causes of action merely because PersonalWeb contended that a different feature of S3 was at issue in the second lawsuit. The court reaffirmed the well-settled claim preclusion principle that different legal theories, including infringement theories, do not create multiple transactions and thus multiple claims that may be separately brought. Instead, the complaints in both lawsuits related to the same set of transactions and the customer suits were precluded.

More notably, the Federal Circuit also affirmed the district court’s reliance on the less frequently invoked Kessler doctrine, which derives from a 1907 Supreme Court case, Kessler v. Eldred. The Kessler doctrine “fills the gap” left by the doctrines of claim and issue preclusion by “allowing an adjudged non-infringer to avoid repeated harassment for continuing its business as usual post-final judgment in a patent action where circumstances justify that result.” PersonalWeb argued that because it stipulated to a dismissal with prejudice against Amazon, Amazon did not qualify as an “adjudged non-infringer” under the doctrine.

The Federal Circuit rejected this argument, finding there is no requirement that an issue such as non-infringement be “actually litigated.” Instead, the doctrine operates to protect any products to which the manufacturer established a right not to be sued for infringement. When PersonalWeb stipulated to a dismissal without any reservation of its rights, the resulting judgment was an adjudication that Amazon was not liable for infringement as PersonalWeb alleged. This action was operative to grant Amazon a limited trade right to continue producing, using, and selling its S3 system without future suits from PersonalWeb against both Amazon and its customers using the S3 system.

Parties that are considering settling their infringement claims with voluntary stipulations of dismissal should take note of this decision. If the patentee wants to be able to sue other parties, such as customers, in the future, such rights must be explicitly preserved in the dismissal order to limit its preclusive effect. Similarly, settling defendants should be aware of the implications of any attempt by a patent owner to reserve such rights.

For more information on this case, please contact Fitch Even partner Nikki Little, author of this alert.

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