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IP Alert: Federal Circuit Vacates Injunction, Sets Aside $18M Contempt Fine After USPTO Invalidates Patent Claim

July 31, 2014

On July 25, 2014, after previously affirming the decision of the U.S. Patent and Trademark Office (USPTO) in a related reexamination proceeding that certain patent claims are invalid, the Federal Circuit in ePlus, Inc. v. Lawson Software, Inc., followed the longstanding doctrine that once the legal basis underlying an injunction has been set aside, the injunction must cease to exist. The court further held that civil contempt sanctions for violating the defunct injunction are not enforceable if the underlying injunction is not final.

ePlus owns two patents related to methods and systems directed to using electronic databases to search for product information and ordering selected products from third-party vendors: U.S. Patent Nos. 6,023,683 (“the '683 patent”) and 6,505,172 (“the '172 patent”). ePlus sued Lawson, a computer software company that sells to institutional customers, in the Eastern District of Virginia, alleging patent infringement. Lawson’s products can be divided into five distinct configurations of software modules (“Configurations 1–5”). At trial, the jury found that the three of the five accused configurations (“Configurations 2, 3, and 5”) infringed multiple claims. Pursuant to the jury verdict, the district court entered an injunction permanently enjoining Lawson from selling any of the Infringing Products or Services, defined to include Configurations 2, 3, and 5.

On the first appeal, the Federal Circuit determined that several of the claims were either invalid or not infringed and affirmed only infringement with respect to one method claim: claim 26 of the '683 patent. Only Configurations 3 and 5 were found to infringe claim 26. As a result of the appeal, Configuration 2 no longer infringed. The Federal Circuit remanded “for the district court to consider what changes are required to the terms of the injunction, consistent with this opinion.”

On remand, the district court ordered the parties to file statements of position regarding the effect of the Federal Circuit’s decision on the injunction. Lawson challenged the injunction regarding the bar against sales of particular software products and asserted that infringement of a single method claim “could not support the injunction against product sales (and hence, contempt sanctions based on such sales).” ePlus argued that the only modification required was “the removal of Configuration 2 from the list of enjoined products.” The district court agreed with ePlus and ordered that the injunction be “modified by deleting from its scope the product … colloquially known as ‘Configuration 2’” and “remain in effect in all other respects.” The district court also instituted contempt proceedings regarding Lawson’s attempt to design around the ‘683 patent. ePlus asserted that the redesign did not make the software “more than colorably different from Configurations 3 and 5” and that the redesign software still infringed claim 26. The district court agreed and held Lawson in civil contempt for violating the injunction and ordered the company to pay a compensatory fine of more than $18 million, as well as daily fines until demonstrating compliance with the injunction. Lawson then appealed again, challenging the modified injunction and the civil contempt order.

While Lawson’s second appeal was pending, the USPTO completed a reexamination of the ‘683 patent and determined that claim 26 was invalid. In a separate appeal, the Federal Circuit affirmed the USPTO’s invalidity determination, and the USPTO then cancelled claim 26.

Lawson’s second appeal raises two issues: (1) whether an injunction can continue after the USPTO has cancelled the only claim on which the injunction was based, and (2) whether civil contempt remedies based on the violation of an injunction are appropriate when the injunction has been overturned.

Regarding the first issue, relying on Supreme Court precedent, the Federal Circuit noted that it is “well established that an injunction must be set aside when the legal basis for it has ceased to exist.” The Federal Circuit noted that because “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.”

As to the second issue, the Supreme Court has applied the rule 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.” In deciding this issue, the Federal Circuit relied on its own precedent. In Fresenius USA, Inc. v. Baxter International, Inc., the Federal Circuit held that “the cancellation of a patent requires non-final judgments be set aside because the ‘cancelled claims [a]re void ab initio.’” The Federal Circuit noted that it did not have to decide whether civil contempt sanctions would survive if the injunction had been final because, given the present facts, the injunction was not final. “With respect to the determination of finality . . . where the scope of relief remains to be determined, there is no final judgment binding the parties (or the court).” Given that the Lawson’s first appeal did not result in an affirmation of the injunction but rather a remand to the district court requiring it “to consider what changes are required to the terms of the injunction, consistent with this opinion,” the majority held that there is no question that the injunction was not final. The majority wrote that because the first appeal necessitated changes to the injunction, the district court had to consider the scope of relief to which ePlus was entitled, “which necessarily impacted what activities Lawson could undertake.” The majority concluded that because the injunction was not final, the sanctions for civil contempt must be set aside in light of the cancellation of claim 26.

In her dissent, Judge O’Malley agrees with the majority regarding the first issue, but takes issue with the second. She disagrees that the facts of Fresenius are analogous to the present facts and believes its holding should not control the outcome of the present case. Judge O’Malley asserts that the injunction in Lawson’s first appeal was final because “[o]ur remand instruction merely recognized the district court’s inherent continuing equitable powers over the scope of its injunction. Importantly, neither our opinion nor our remand instruction vacated the injunction. The judgment that claim 26 was valid and infringed—one of the judgments upon which the injunction was predicated—remained intact, as did the injunction.” Judge O’Malley concludes in her dissent that because there was no final decision, the court should “proceed to consider the merits of Lawson’s appeal from the trial court’s civil contempt findings.”

This case provides insight to litigation practitioners regarding injunctions and how the scope and finality of them may be affected on appeal. As evidenced by this case, there are reasons why parties may want to finalize injunctions, especially when related proceedings such as reexaminations are pending.
If you have any questions regarding this decision, please contact Fitch Even partner Eric L. Broxterman, author of this alert.

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