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Contingency Payment of $50K Pending Successful Appeal Did Not Defeat Mootness

Wednesday, January 23, 2013

A $50,000 contingency payment, to be paid by an alleged infringer if the appellant is able to overturn certain adverse rulings that preceded a comprehensive settlement between the parties, means that there is no continuing case or controversy over which a federal appeals court can exercise jurisdiction, the U.S. Court of Appeals for the Federal Circuit ruled Jan. 17 (Allflex USA Inc. v. Avid Identification Systems Inc., Fed. Cir., No. 2011-1621, 1/17/13).

The settlement agreement, which was approved by a federal district court, required the appellant to make a lump sum payment of $6.55 million. However, the agreement stated the award would be reduced by $50,000 if the appellant were able to overturn any of three adverse rulings on appeal. Those rulings, relating to a finding of non-infringement, a finding of materiality regarding an inequitable conduct claim, and an order stating that the appellant and its former counsel should be sanctioned, bore no apparent relationship to the amount identified in the contingency award, the court noted. Accordingly, the amount did not seem to be a “reasonable estimate” of what the appellant may be entitled to if it were to prevail on any of those issue on appeal, and therefore the court said that the case was moot.

Dispute Over Pet-Tracking Technology

Avid Identification Systems Inc. designs biocompatible radio frequency identification chips that can be implanted in an animal so that it can be identified if it is lost by its owner and found by someone else with a chip reader. Avid markets these chips to pet owners as a way of finding lost pets. Avid also sells devices for reading the chips and markets them to animal hospitals and animals shelters, which can use the devices to help identify the owners of lost animals.

Allflex USA Inc. also markets animal identification devices. In 2006, Allflex filed an action in the Central District of California seeking a declaratory judgment that six Avid patents relating to RFID technology were unenforceable due to inequitable conduct, and that Allflex was not liable for infringement. Avid then counterclaimed alleging infringement.

In 2009, while the case was pending, the district court ruled that Avid and its former counsel “should be sanctioned” for failing to disclosure that some of the patents at issue in the case were undergoing re-examination at the Patent and Trademark Office. The court, however, declined at that time to determine the amount of sanctions to impose.

The district court in 2010 granted summary judgment of non-infringement as to the only two patents still at issue (U.S. Patent Nos. 5,214,409 and 5,499, 017). In 2011, the court granted partial summary judgment with respect to the inequitable conduct claim. After that order, the parties entered into a settlement agreement whereby Avid agreed to make a lump sum payment to Allflex in the amount of $6.55 million. The agreement also gave Avid the right to appeal the three adverse district court rulings, and it further prohibited Allflex from arguing on appeal that the case was now moot. Finally, the agreement stated that if Avid was successful on any of its three arguments on appeal then the settlement amount would be reduced by $50,000.

The district court accepted the settlement agreement and it dismissed with prejudice the entire action, save for the three issues that Avid intended to appeal. Avid then appealed those issues to the Federal Circuit.

No Jurisdiction Over Sanctions Order

The court first determined that it had no jurisdiction over Avid's challenge to the district court's sanctions order.

The sanctions order was issued by Judge Stephen G. Larson who had in fact retired from the bench three days after issuing that order. The case was then transferred to Judge Mariana Pfaelzer who did not re-examine the sanctions order. Thus, although Larson had expressed an intention to sanction Avid and its former counsel at a later date, “nothing further has been done with regard to sanctions, and it appears likely that nothing more will be done,” Judge William C. Bryson noted.

“While Avid may be unhappy about having its conduct criticized by a federal district judge, criticism in the absence of a monetary or similarly formal sanction does not constitute an order over which this court has appellate jurisdiction,” the court said.

The court thus determined that it lacked jurisdiction over the sanctions order because in fact there were no final sanctions to review.

Inequitable Conduct Order Reviewable, Moot

The court next turned to the district court's inequitable conduct order, which was the second issue on appeal.

“Under normal circumstances, the inequitable conduct claim would also be considered non-final, and the consequence of the non-finality of the inequitable conduct claim would be that the entire appeal would have to be dismissed,” the court said.

However, it noted that settlement agreement was constructed in a way that it effectively disposed of the claim in Avid's favor “because it dismissed that claim without granting relief to Allflex and without contemplating any further proceedings on the issue in the district court.”

The court said that although the inequitable conduct ruling is technically reviewable, it is nevertheless moot. The court said:  

[W]ith respect to the materiality issue in the inequitable conduct claim, Avid has not suffered an adverse judgment on Allflex's inequitable conduct claim because the district court dismissed this case without finding Avid's patents unenforceable. Regardless of whether this court reverses the materiality ruling, Avid's patents will remain in force because neither the district court nor the parties contemplate further proceedings on the issue of intent, which would be necessary before the court could enter a judgment on inequitable conduct. Under those circumstances, Avid's disagreement with the court's ruling on the materiality issue does not give it a right to appeal.  

 

 

 

Contingency Payment Does Not Alter Mootness

Avid argued that the fact that it would pay $50,000 less to Allflex if it were to prevail on any of the three identified issues meant that there existed a continuing case or controversy over which the court could exercise jurisdiction under Article III of the U.S. Constitution. The court rejected this argument, and determined that the cases upon which the argument was based was easily distinguished from the facts of this case.

First, looking to Aqua Marine Supply v. Aim Machining Inc., 247 F.3d 1216, 58 U.S.P.Q.2d 1536 (Fed. Cir. 2001), for support, the court said, “If there were no money at stake, the appeal would undoubtedly be moot.”

Avid though pointed to two Supreme Court decision and to one Federal Court decision that Avid itself prosecuted that it said stood for the proposition that a “monetary consequence” of an appeal represents a continuing case or controversy.

The court here distinguished the Supreme Court cases,Nixon v. Fitzgerald, 457 U.S. 731 (1982), and Havens Realty Corp. v. Coleman, 455 U.S. 363 (1982), by noting that in both cases the parties had agreed on a liquidated damages sum that would either be paid or withheld depending on the outcome of the litigation. In each instance, the Supreme Court determined that the stipulated sum represented a reasonable attempt to ascertain damages that would be due if the court ultimately ruled in the plaintiffs' favor. The cases were not moot simply because the parties had agreed beforehand what those damages would be, the high court held.

In this case, the court noted that the $50,000 contingency fee does not appear to be linked to a reasonable calculation of a stipulated damage award.

Similarly, the court found unpersuasive the other case in which Avid was a party. In Avid Information Systems Inc. v. Crystal Import Corp., 603 F.3d 967, 94 U.S.P.Q.2d 1845 (Fed. Cir. 2010) (82 PTD, 4/30/10), Avid had prevailed in a jury trial on infringement and obtained a damages award of $27,000. Avid was also awarded $6 million on its claim for unfair competition. However, the district court then ruled that the patent was uneforceable for inequitable conduct. The parties then settled for $3 million on the unfair competition claim. The settlement agreement, however, allowed Avid to appeal from the inequitable conduct ruling and if Avid was successful on appeal then the settlement agreement stated that the company would recoup the $27,000 damage award for infringement.

The Federal Circuit determined that the issue was not moot. Indeed, after noting that disposition of the $27,000 award depended on the fate of Avid's appeal, the court found that the amount was “not a token or arbitrary sum introduced for the purpose of manufacturing a controversy.”

But while the amount in Crystal Import was tied to the original infringement award, the $50,000 contingency fee in this case was “completely untethered to the value of any of the issues on appeal,” the court noted. The court said:  

The $50,000 contingent payment does not reflect an actual damages award, as in Crystal Import, and it does not represent a liquidated damages award, as in Nixon and Havens. … Accordingly, the $50,000 cannot be fairly characterized as a reasonable estimate of a prospective damages award that would take the place of an adjudicated damages award following the appeal.  

 

 

 

The court said that there was no case or controversy and thus it dismissed the appeal for mootness. Before dismissing the case, however, the court said that one-sided appeals were “highly unsatisfactory situation[s]” due to the lack of adversarial presentation. In some situations the one-sided appeals cannot be avoided, the court said. “But where, as in this case, the appellant has failed to satisfy us that the arrangement leading to the one-party appeal reflects the existence of a legitimate, continuing case or controversy, we decline to be a party to the exercise.”

The opinion was joined by Judge Alan D. Lourie and Judge Raymond C. Clevenger III.

Avid was represented by Christian Chadd Taylor of Kirkland & Ellis, Palo Alto, Calif.

By Tamlin H. Bason  


Opinion at http://pub.bna.com/ptcj/Allflex2013Jan17.pdf

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