Mentor Graphics Corp. v. Quickturn Design Systems, Inc.

• Decision Date: 05 August 1998
• Docket Number: No. 97-1564,97-1564
• Citation: 150 F.3d 1374,47 USPQ2d 1683
• Parties: MENTOR GRAPHICS CORPORATION and Meta Systems, Inc., Plaintiffs-Appellants, v. QUICKTURN DESIGN SYSTEMS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1374

150 F.3d 1374

47 U.S.P.Q.2d 1683

MENTOR GRAPHICS CORPORATION and Meta Systems, Inc. Plaintiffs-Appellants, v. QUICKTURN DESIGN SYSTEMS, INC., Defendant-Appellee.

No. 97-1564.

United States Court of Appeals Federal Circuit.

Aug. 5, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied Sept.

28, 1998.

David A. York, Latham & Watkins, Menlo Park, California, argued for plaintiffs-appellants. With him on the brief was Sanjay Bhandari.

James W. Geriak, James C. Brooks, Lyon & Lyon LLP, Costa Mesa, California, argued for defendant-appellee. With him on the brief were Steven D. Hemminger, Lawrence R. LaPorte, and Jonathan T. Losk. Of counsel on the brief was Alan T. McCollom, Marger Johnson McCollom & Stolowitz, P.C., Portland, Oregon.

Before MAYER, Chief Judge, RADER, and BRYSON, Circuit Judges.

RADER, Circuit Judge.

Mentor Graphics Corp. (Mentor) and Meta Systems, Inc. (Meta) sued Quickturn Design Systems, Inc. (Quickturn) for a declaratory judgment of invalidity and non-infringement of U.S. Patent No. 5,036,473 (the '473 patent). In a counterclaim, Quickturn alleged infringement. The United States District Court for the District of Oregon preliminarily enjoined Mentor and Meta from infringing the '473 patent. Because the doctrine of assignor estoppel barred both Mentor and Meta from challenging the validity of the '473 patent, this court affirms.

I

Quickturn, Mentor, and Meta manufacture and sell hardware emulation technology. This technology allows engineers to simulate and test new circuit designs before constructing the actual circuits. On October 5, 1988, Michael R. Butts filed a patent application for a "reconfigurable hardware implementation system." On October 4, 1989, Butts filed a continuation-in-part of his 1988 application, naming Jon A. Batcheller as an additional inventor. Batcheller and Butts assigned their rights to this application, which eventually issued as the '473 patent, to their employer, Mentor. The '473 patent issued on July 30, 1991.

On February 28, 1992, Quickturn purchased some of Mentor's hardware emulation assets, including the '473 patent, six other pending patent applications, and related hardware and software. Quickturn paid Mentor $200,000 cash and gave Mentor a combination of Quickturn stock and warrants for additional Quickturn stock. The sales agreement included the following language:

3.2 Warranty Disclaimer. Except as set forth in Section 7.1, Seller transfers the Technology without any warranty or representation and on an "AS IS, WHERE IS" basis. Both parties acknowledge that Purchaser is an expert and the recognized industry leader in the field of emulation technology. SELLER EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE TECHNOLOGY OR THE OTHER ASSETS ARE OF ANY CERTAIN QUALITY, WILL PERFORM IN ANY PARTICULAR MANNER OR PRODUCE ANY PARTICULAR RESULTS, OR THAT THE TECHNOLOGY OR THE OTHER ASSETS ARE SUITABLE OR ADEQUATE FOR THE PURCHASER'S REQUIREMENTS. Seller also disclaims any warranty as to the validity or enforceability of the patent and patent applications assigned to Purchaser under this Agreement.

Fulfilling this sales agreement, Mentor assigned the '473 patent to Quickturn on March 2, 1992. Under terms of the sale, Batcheller and Butts became Quickturn employees.

The '473 patent was not, however, Quickturn's only patent protecting its hardware emulation technology. In 1988, a group of Quickturn employees had filed their own patent application, claiming technology similar to that developed by Batcheller and Butts. The inventors assigned their application to Quickturn. The '473 patent issued during the prosecution of this application. At that point, the Quickturn inventors filed an affidavit claiming a conception date before the filing date of the '473 patent. The Patent and Trademark Office did not declare an interference proceeding. Quickturn's application issued as U.S. Patent No. 5,109,353 (the '353 patent) on April 28, 1992.

After Mentor assigned the '473 patent to Quickturn, Quickturn set about resolving the apparent priority conflict between the '473 and '353 patents. After an internal evaluation of the evidence, Quickturn dedicated claims 1, 6, 13, 14, 16, and 17 of the '473 patent to the public. Quickturn took this action because it believed that the inventors of the '353 patent first invented the subject matter of these claims.

Meanwhile, Meta, a small French company, had been developing hardware emulation technology independent of either Mentor or Quickturn. By 1993, Meta delivered its initial product to the French Ministry of Defense. In March 1994, Meta introduced the first in a series of commercial products (collectively referred to as the SimExpress systems). Due to its difficulty in acquiring venture capital, Meta decided to sell itself to a more established company to finance its growth. Both Quickturn and Mentor offered to purchase Meta, but the French Government would only approve a sale to Mentor.

On May 19, 1995, Mentor and Meta entered a share purchase agreement whereby Mentor purchased all shares of stock issued by Meta. The sale was completed in May 1996. Meta is now a wholly owned subsidiary of Mentor, with operations in France. Mentor has budgetary control over Meta. Some personnel work for both companies. Mentor markets and distributes Meta's products.

Believing that Meta's products infringe its patents, Quickturn moved to assert its right to exclude. On January 25, 1996, Quickturn asked the International Trade Commission to prevent importation of the SimExpress systems under 19 U.S.C. § 1337. Quickturn's petition remains pending before the Commission.

In October 1995, Mentor sued Quickturn in the United States District Court for the Northern District of California. Mentor sought a declaratory judgment of invalidity and noninfringement of several U.S. patents, including the '473 patent. Mentor later dismissed the California suit in favor of this suit. On March 5, 1996, Mentor filed the present action, which seeks a similar declaration, in the District of Oregon. Quickturn filed a counterclaim accusing several SimExpress products of infringing the U.S. patents at issue. On July 3, 1996, Quickturn moved for partial summary judgment, seeking to prevent Mentor and Meta from challenging the validity of its patents. On December 20, 1996, the district court granted Quickturn's motion with respect to the '473 patent. The court based its ruling on the doctrine of assignor estoppel.

On June 5, 1997, Quickturn moved for a preliminary injunction to prevent Mentor and Meta from making, using, selling, offering to sell, and either importing into or exporting from the United States a variety of the accused products or their components. Quickturn alleges that these products infringe claims 7 and 8 of the '473 patent. The district court granted the injunction. Mentor and Meta now appeal. This court has jurisdiction over the appeal under 28 U.S.C. § 1292(c)(1).

II

A preliminary injunction requires the assessment of four factors: the likelihood of movant's success on the merits, the irreparability of harm to the movant without an injunction, the balance of hardships between the parties, and the demands of the public interest. See Hybritech Inc. v. Abbott Lab., 849 F.2d 1446, 1451, 7 USPQ2d 1191, 1195 (Fed.Cir.1988). This court reviews the grant of a preliminary injunction for abuse of discretion. See id. at 1449. A district court abuses its discretion by making a clear error of judgment in weighing relevant factors or in basing its decision on an error of law or on clearly erroneous factual findings. See A.C. Aukerman Co. v. R.L. Chaides Constr. Co., 960 F.2d 1020, 1039, 22 USPQ2d 1321, 1333 (Fed.Cir.1992).

On appeal, Mentor and Meta argue that the district court abused its discretion by incorrectly determining that Quickturn would likely show infringement of the '473 patent. In particular, they argue that Quickturn did not show a likelihood of success in defending the validity of the '473 patent. The district court found a likelihood of success on validity based on its grant of summary judgment that assignor estoppel barred both Mentor and Meta from challenging the validity of the '473 patent.

Mentor argues that the district court improperly determined that Mentor was estopped from challenging the validity of the '473 patent. In particular, Mentor asserts that the district court overlooked important factors before applying the doctrine of assignor estoppel. Mentor further argues that the warranty disclaimer in its sales agreement with Quickturn reserved the right to challenge the validity of the '473 patent.

Meta argues that, even if the district court correctly applied estoppel to Mentor, Meta escapes any estoppel because it developed the accused devices well before selling itself to Mentor. Although this court has applied assignor estoppel to parties in privity with the assignor, Meta contests the justification for applying assignor estoppel in this case.

III

Assignor estoppel prevents a party who assigns a patent to another from later challenging the validity of the assigned patent. See Diamond Scientific v. Ambico, Inc., 848 F.2d 1220, 1224, 6 USPQ2d 2028, 2030 (Fed.Cir.1988). This doctrine prevents the "unfairness and injustice" of permitting a party "to sell something and later to assert that what was sold is worthless." Id. This court explained that an assignment contains an "implicit representation by the assignor that the patent rights that he is assigning (presumably for value) are not worthless." Id.

In applying assignor estoppel in Diamond Scientific, this court determined that the Supreme Court's reasons for limiting licensee estoppel in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), did not apply to assignor estoppel. In Lear, the Supreme Court permitted a...