Civil Contempt Only Applies if Party Violates Explicit Terms of Order

by McDermott Will & Emery
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Energy Recovery, Inc. v. Hauge

Addressing a civil contempt order under an abuse of discretion standard, the U.S. Court of Appeals for the Federal Circuit found in that a former employee was not in contempt because he did not violate any specific terms within the four-corners of a consent decree.  Energy Recovery, Inc. v. Hauge, Case No. 13-1515 (Fed. Cir., Mar. 20, 2014) (Wallach, J.).

Leif Hauge and his former employer, ERI, entered into a consent decree (the 2001 Order) resolving an intellectual property ownership dispute.  The 2001 Order provided that ERI would be the sole owner of certain patents relating to “pressure exchangers” used in reverse osmosis.  In addition, the 2001 Order obligated Hauge to transfer ownership of all other intellectual property and other rights relating to pressure exchanger technology to ERI; it also contained a non-compete clause prohibiting Hauge from making or selling energy recovery devices for two years from the date of the 2001 Order.  Notably, the 2001 Order was silent regarding infringement of the intellectual property rights.

After the non-compete clause expired, Hauge began selling pressure exchangers through his new company, Isobaric.  ERI filed a motion to show cause, alleging that Hauge was violating the 2001 Order by using ERI’s proprietary technology.  The district court agreed that Hauge was in violation of the 2001 Order, issued a contempt order and enjoined him and Isobaric from manufacturing and selling pressure exchangers.  Hauge appealed.

Applying an abuse of discretion standard, the Federal Circuit reversed the contempt order.  While civil contempt requires satisfaction of a four-element test by clear and convincing evidence, the Court focused on “whether Mr. Hauge by his conduct violated any terms of the district court’s 2001 Order.”  Specifically, the Court considered whether Hauge had violated his promise to assign all his rights to the intellectual property and other rights relating to pressure exchanger technology predating the 2001 Order.

The Court noted that the 2001 Order did not specifically preclude Hauge from using any manufacturing process but merely required Hauge to transfer ownership of the pressure exchanger intellectual property prior to the 2001 Order.  Indeed, Hauge was not claiming ownership of the intellectual property.  He merely began using the technology after the expiration of the non-compete clause.  While the Court suggested that Hauge may be in violation of the patent laws or state trade secret laws, he was not in violation of any “unequivocal command” in the 2001 Order.  Since the 2001 Order did not address infringement and ERI never pursued such a claim, Hauge’s use of the technology did not violate the 2001 Order.

The Court also rejected the district court’s finding that Hauge had violated the “letter and spirit” of the 2001 Order, noting that the Supreme Court has explained that a consent decree must be discerned within its four corners.  Because Hauge did not violate any specific provision of the 2001 Order, the Court held that the district court abused its discretion in holding Hauge in contempt.  Accordingly the Court reversed the decision below.

Practice Note:  Consent decrees resolving disputes between a former employer and employee should preclude subsequent infringement of intellectual property by the former employee.  Additionally, if a former employee makes use of patented technology after entering a consent decree precluding such use, the former employer should assert a claim for patent infringement in addition to a claim for civil contempt.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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