PATENT CASE OF THE WEEK
In re: PersonalWeb Technologies LLC, Appeal No. 2019-1918 (Fed. Cir. June 17, 2020)
In this week’s only precedential opinion, the Federal Circuit addresses issues of claim preclusion and the Kessler doctrine as they relate to a series of patent infringement cases involving PersonalWeb Technologies (“PersonalWeb”), Amazon, and several Amazon customers.
As background, PersonalWeb first brought a patent infringement case against Amazon in Texas district court in December 2011, alleging infringement of five related patents, which generally claim a system for identifying unique data items in computer networks using “True Names,” by Amazon’s cloud-based storage service, called “S3.” After the district court issued its claim construction order, PersonalWeb stipulated to dismissal of all claims against Amazon with prejudice, and a final judgment was entered against PersonalWeb.
Years after the Texas litigation was dismissed, beginning in January 2018, PersonalWeb brought dozens of actions for patent infringement in various districts against customers of Amazon, alleging infringement of the same patents at issue in the Texas litigation, but as related to the customers’ use of a different part of Amazon’s S3 service. Amazon indemnified its customers and undertook their defense. Amazon also filed a declaratory judgment action against PersonalWeb, seeking to bar PersonalWeb from bringing its new infringement actions against Amazon and its customers. The customer cases and Amazon’s declaratory judgment action were consolidated into a multi-district litigation proceeding in the Northern District of California. That court elected to proceed with Amazon’s declaratory judgment action first, as well as one representative customer case. PersonalWeb then filed a counterclaim against Amazon in the declaratory judgment action, alleging that Amazon’s S3 system infringed the same five “True Name patents” as were asserted in the earlier Texas litigation. PersonalWeb’s infringement contentions for its counterclaim against Amazon tracked the complaints against Amazon’s customers.
Amazon moved for summary judgment in its declaratory judgment action and for partial summary judgment in the representative infringement action, arguing that, in light of the with-prejudice dismissal of the Texas litigation, PersonalWeb was barred from suing Amazon or its customers for infringement based on Amazon’s S3 system. The district court granted the motion in part. First, it held that claim preclusion barred PersonalWeb’s claims regarding acts of infringement occurring prior to the final judgment in the Texas litigation because (1) the with-prejudice dismissal was a final judgment on the merits; (2) PersonalWeb did not reserve any rights in the stipulated dismissal; (3) Amazon and its customers were in privity; and (4) the cause of action asserted in the Texas litigation and the customer cases were the same, despite their being directed to different features of the same product. Second, the district court held that, based on the Kessler doctrine (explained below), the judgment in the Texas litigation gave rise to a limited trade right for Amazon and its customers to continue producing, using, and selling the S3 product at issue in that case, even when the acts of infringement at issue in the multi-district litigation occurred post-final judgment, and even when it was third parties (Amazon’s customers) who allegedly engaged in those acts of infringement. As such, the district court dismissed the customer cases in which PersonalWeb alleged infringement based solely on their use of Amazon’s S3 system.
PersonalWeb appealed, raising two challenges: first, that claim preclusion is inapplicable to the actions against Amazon’s customers because the Texas litigation allegedly involved a different feature of the S3 system, and therefore a different cause of action, than the feature at issue in the customer cases; and second, that the with-prejudice dismissal of the Texas litigation did not constitute an adjudication of non-infringement and is therefore insufficient to trigger the Kessler doctrine.
The Court first addressed claim preclusion, and analyzed whether the causes of action in the two cases were the same. The Court explained that a cause of action is defined by the transactional facts from which it arises, and as such, it considered the extent of factual overlap between the two alleged claims at issue. In patent cases, one area of factual overlap considered is the overlap of the product or process accused in the instant action with the product or process accused in the prior action; claim preclusion does not apply unless the products or processes are essentially the same in both actions. The Court further explained that accused devices are “essentially the same” where the differences are merely colorable or are unrelated to the limitation in the claim of the patent. Moreover, different arguments or assertions in support of liability do not all constitute separate claims under the well-settled principles of claim preclusion; rather, a party must raise in a single lawsuit all grounds of recovery arising from a particular transaction it wishes to pursue. PersonalWeb’s argument that it accused different parts of Amazon’s S3 system, and therefore accused different “products or processes,” in the Texas litigation and the cases brought against Amazon’s customers was thus rejected by the Court. For one, PersonalWeb did not limit its infringement contentions in the Texas case to only one of the S3 system’s functionalities; rather, the same functionality was accused in both cases. And regardless, the Court explained that it was clear that the complaints in the Texas case and the customer cases related to the same set of transactions because every act of alleged infringement was based on the use of the same Amazon S3 product. Merely alleging different facts in support of a different theory of infringement is not enough to avoid claim preclusion. As such, PersonalWeb was barred from pursuing infringement claims in the customer cases for actions pre-dating the judgment in the Texas case.
The Court next addressed the Kessler doctrine, which arises from a 1907 Supreme Court decision, Kessler v. Eldred, 206 U.S. 285. Kessler “fills the gap” between claim preclusion and issue preclusion, “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 the Kessler doctrine does not apply in this case because Amazon is not an “adjudged non-infringer,” and the Kessler doctrine, which is based on principles of collateral estoppel, cannot be invoked unless the issue of infringement or invalidity was actually litigated in the prior case. Since “no issues” were actually litigated in the Texas case due to PersonalWeb’s dismissal of its claims prior to an adjudication, PersonalWeb argued that the doctrine does not apply.
The Court disagreed. First, the Court discussed its prior decisions analyzing the Kessler doctrine: in Brain Life, LLC v. Elekta Inc., 746 F.3d 1045 (Fed. Cir. 2014), the Court held that the doctrine bars all claims that were brought or “could have been brought” in the prior action; in SpeedTrack, Inc. v. Office Depot, Inc., 791 F.3d 1317 (Fed. Cir. 2015), the Court explained that Kessler prevents patent owners from suing a manufacturer for literal infringement in one action, and if unsuccessful, then filing suit against the manufacturer’s customers under any claim or theory not actually litigated against the manufacturer, so long as it challenged only those acts of infringement that post-dated the judgment in the first action; and in SimpleAir, Inc. v. Google LLC, 884 F.3d 1160 (Fed. Cir. 2018), the Court explained that the Kessler doctrine fills the “temporal gap” left by claim preclusion, even if not filled by issue preclusion. These cases illustrate that the Kessler doctrine is not simply an early version of non-mutual collateral estoppel, but rather, a close relative to claim preclusion but without the temporal limitation.
Next, the Court explained that PersonalWeb cited no cases requiring that issues of non-infringement or invalidity be actually litigated before the Kessler doctrine could be invoked. Nor does the doctrine only apply to instances in which collateral estoppel would apply. Rather, PersonalWeb, by way of its stipulated with-prejudice dismissal, “abandoned its claims against Amazon without reservation, explicit or implicit.” As such, the Court explained that the judgment in the Texas case stands as an adjudication that Amazon was not liable for the acts of infringement alleged by PersonalWeb.
Further, the Court explained that the policy that drove the Supreme Court’s decision in Kessler would be “ill-served” by adopting PersonalWeb’s proposed rule. In Kessler, the court explained that to allow follow-up suits by the patentee against Kessler’s customers would “practically … destroy Kessler’s judgment right.” The same is true here. Kessler thus grants a “limited trade right” that attaches to the product itself, and as such, Amazon’s S3 product was protected from subsequent infringement challenges, even when those challenges were directed at Amazon’s customers rather than at Amazon. PersonalWeb’s narrow reading of the doctrine would leave a patentee free to engage in the same type of harassment the Supreme Court sought to prevent.
Finally, the Court explained that applying Kessler to voluntary dismissals with prejudice in no way contravenes the public interest in the settlement of patent litigation because to the extent a plaintiff wishes to settle an infringement action while preserving its rights to sue the same or other parties in the future, it can do so by framing the dismissal agreement to preserve any such rights the defendant is willing to agree to. In doing so, settling parties remain free to limit the preclusive effect of a dismissal.
The Court thus affirmed the district court’s grant of summary judgment in favor of Amazon and its customers.
The opinion can be found here.
