Perfect Co. v. Adaptics Ltd.
| Decision Date | 19 March 2019 |
| Docket Number | CASE NO. 3:14-cv-05976-RBL |
| Citation | 374 F.Supp.3d 1039 |
| Parties | PERFECT COMPANY, Plaintiff, v. ADAPTICS LIMITED, Defendant. |
| Court | U.S. District Court — Western District of Washington |
Kurt Marcus Rylander, Mark E. Beatty, Rylander & Associates PC, Vancouver, WA, Richard D. McLeod, McLeod Law LLC, Woodland, WA, for Plaintiff.
Amy K. Liang, Pro Hac Vice, Brian Jacobsmeyer, Pro Hac Vice, Jeremy J. Taylor, Pro Hac Vice, Joe Craig, Pro Hac Vice, Baker Botts LLP, Palo Alto, CA, Hannah Jo Jackowski, Neil Armstrong Dial, Eisenhower & Carlson, Tacoma, WA, Mark Oda, Pro Hac Vice, Reilly T. Stoler, Pro Hac Vice, Wayne O. Stacy, Pro Hac Vice, Baker Botts LLP, Anthony J. Patek, Pro Hac Vice, Todd Kennedy, Pro Hac Vice, Gutride Safier LLP, San Francisco, CA, Lauren J. Dreyer, Pro Hac Vice, Baker Botts, Washington, DC, for Defendant.
ORDER DENYING DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT
DKT. ## 317 & 321
THIS MATTER is before the Court on Defendant Adaptics Limited's Motion for Partial Summary Judgment. Dkt. ## 317, 321. The underlying patent dispute in this case concerns two products that enable a user to make food and mix drinks using weight-based measurements. Both products achieve this via an electronic scale that communicates with an app.
Perfect Company initially sued Adaptics on December 12, 2014, alleging that Adaptics' Drop Kitchen Connected Scale and Drop Kitchen Recipe App infringed its Patent No. 8,829,365. Three months later, Perfect joined Apple as a co-defendant. Perfect alleged that Apple infringed its patent by selling Adaptics' iOS-configured products via the App Store and at its brick-and-mortar locations. Perfect also alleged that Apple induced its customers to infringe Perfect's patent by selling Adaptics' products. Perfect later sued under its patent no. 9,772,217, which claims priority to the '365 patent, resulting in the two cases being consolidated. Dkt. # 232.
On September 25, 2015, Perfect settled with Apple and agreed not sue Apple or any of its customers, affiliate, suppliers, and others for infringement of the '365 patent or others claiming priority to it. See Dkt. # 322, at §§ 1.1-1.2, 2.1-2.2. The settlement covers all products sold by Apple, past and future. Id. at §§ 1.1, 2.1-2.2. However, the settlement contains a "carve out" that specifically excludes infringement claims against Adaptics and any other entity that designs or manufactures products or services that infringe Perfect's patents. Id. at § 2.7. The covenant not to sue references the carve out section, thus excluding Adaptics from the broad covenant and release of Apple's affiliates and suppliers. Id. at § 2.1.
Adaptics argues that this settlement functions as an authorization for Apple to sell any and all Adaptics products utilizing the iOS system. Applying the doctrine of patent exhaustion, Adaptics contends that Perfect extinguished its right to sue Adaptics or any other party for infringement with respect to the products it authorized Apple to sell. Under Adaptics' conception of patent exhaustion, as soon as a patentee authorizes the sale of a particular type of product, that product passes outside the patent monopoly and cannot be the object of a lawsuit. Adaptics argues that, if Perfect's patent rights were not exhausted by the Apple authorization, Perfect would be able to collect twice on the value of its patent.
Perfect vigorously resists this characterization of patent exhaustion. According to Perfect, patent exhaustion only applies to subsequent, downstream purchasers after an initial authorized sale. Consequently, because Apple is not the initial manufacturer and seller, the settlement did not trigger patent exhaustion. Perfect also argues that "[t]he Settlement Agreement agreed to dismiss Apple as a defendant, but did not actually immunize Apples [sic] activities to the extent they relate to Adaptics' infringing conduct." Dkt. # 331, at 10. Perfect goes on to assert that the Supreme Court has held that settling with one defendant does not immunize another and that such a settlement does not provide a double recovery. Finally, as a side note, Perfect also points out that Adaptics failed to plead patent exhaustion as an affirmative defense.
Summary judgment is proper "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). In determining whether an issue of fact exists, the Court must view all evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in that party's favor. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis added); Bagdadi v. Nazar , 84 F.3d 1194, 1197 (9th Cir. 1996). A genuine issue of material fact exists where there is sufficient evidence for a reasonable factfinder to find for the nonmoving party. Anderson , 477 U.S. at 248, 106 S.Ct. 2505. The inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Id. at 251-52, 106 S.Ct. 2505. The moving party bears the initial burden of showing that there is no evidence which supports an element essential to the nonmovant's claim. Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the movant has met this burden, the nonmoving party then must show that there is a genuine issue for trial. Anderson , 477 U.S. at 250, 106 S.Ct. 2505. If the nonmoving party fails to establish the existence of a genuine issue of material fact, "the moving party is entitled to judgment as a matter of law." Celotex , 477 U.S. at 323-24, 106 S.Ct. 2548.
There is no requirement that the moving party negate elements of the non-movant's case. Lujan v. National Wildlife Federation , 497 U.S. 871, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990). Once the moving party has met its burden, the non-movant must then produce concrete evidence, without merely relying on allegations in the pleadings, that there remain genuine factual issues. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The parties focus much of their attention on the extent to which the settlement authorizes Apple to sell the same products that Perfect is also suing Adaptics over. However, the success or failure of Adaptics' Motion hinges on one legal issue: whether an authorized sale of a product exhausts all patent rights in that type of product against both downstream and upstream parties in the chain of commerce. Adaptics largely takes for granted that it does, but the case law suggests otherwise.
The Supreme Court recently provided a refresher on the patent exhaustion doctrine in Impression Products, Inc. v. Lexmark International, Inc. , ––– U.S. ––––, 137 S.Ct. 1523, 1532-33, 198 L.Ed.2d 1 (2017). The Court began with a brief history lesson characterizing the doctrine as "the point where patent rights yield to the common law principle against restraints on alienation." 137 S.Ct. at 1531. "Because ‘the purpose of the patent law is fulfilled ... when the patentee has received his reward for the use of his invention,’ that law furnishes ‘no basis for restraining the use and enjoyment of the thing sold.’ " Id. at 1532 (quoting United States v. Univis Lens Co. , 316 U.S. 241, 251, 62 S.Ct. 1088, 86 L.Ed. 1408 (1942) ). Consequently, "[t]he patent laws do not include the right to ‘restrain [ ] ... further alienation’ after an initial sale." Id. (quoting Straus v. Victor Talking Machine Co. , 243 U.S. 490, 501, 37 S.Ct. 412, 61 L.Ed. 866 (1917) ).
The Court then discussed several cases in which patentees granted licenses to retailers to sell their products under limited terms. Id. at 1533 (). Although these patentees could limit the scope of their authorizations, they could not restrict the use of their products after they had moved "outside the scope of the patent monopoly." Id. In keeping with that principle, the Court held that the patentee in the case at hand could not use patent law to enforce its "single use/no-resale provision" after it had sold its product to the defendant. Id.
Although it is a common scenario, patent exhaustion does not only apply when a patentee sells their own product. In TransCore, LP v. Electronic Transaction Consultants Corp. , for example, a patentee settled a dispute with an alleged infringer, then years later tried to sue a consulting company that agreed to set up and test a product purchased from the previous infringer. 563 F.3d 1271, 1273-74 (Fed. Cir. 2009). The court held that the settlement, in which the patentee agreed not to sue for infringement, acted as an authorization to sell the product. Id. at 1276. This is because "a patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee." Id. at 1275. Consequently, the patentee's rights against the consulting company as a subsequent purchaser were exhausted. Id. at 1277.
Here, Adaptics is likely correct that Perfect's settlement with Apple functions as an authorization for Apple and its customers to sell Adaptics' iOS products as they wish. The settlement with Apple is largely indistinguishable from the settlement in TransCore insofar as both include a covenant that the patentee will not sue the defendant for infringement of...
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