Richard Epstein versus the Federal Circuit on Contempt of Court

Suppose that Patent Owner sues Defendant and wins, and that the court grants an injunction prohibiting Defendant from making, using, or selling Defendant's ABCD Device.  Defendant designs around and makes, uses, or sells an ABCD* Device.  Patent Owner then goes back to court and moves for the entry of an order holding Defendant in contempt.  In TiVo Inc. v. EchoStar Corp., 646 F.3d 869 (Fed. Cir. 2011) (en banc), the Federal Circuit held that when this happens the patent owner has the burden of proving, by clear and convincing evidence, that the "newly accused product is not more than colorably different from the product found to infringe and that the newly accused product actually infringes."  If it succeeds, then the patent owner must also prove, by clear and convincing evidence, that the design-around infringes.  More specifically: 

. . . the contempt analysis must focus initially on the differences between the features relied upon to establish infringement and the modified features of the newly accused products.

The primary question on contempt should be whether the newly accused product is so different from the product previously found to infringe that it raises “a fair ground of doubt as to the wrongfulness of the defendant's conduct.” Cal. Artificial Stone Paving Co., 113 U.S. at 618, 5 S.Ct. 618. The analysis must focus not on differences between randomly chosen features of the product found to infringe in the earlier infringement trial and the newly accused product, Additive Controls, 154 F.3d at 1350, but on those aspects of the accused product that were previously alleged to be, and were a basis for, the prior finding of infringement, and the modified features of the newly accused product. Specifically, one should focus on those elements of the adjudged infringing products that the patentee previously contended, and proved, satisfy specific limitations of the asserted claims. Where one or more of those elements previously found to infringe has been modified, or removed, the court must make an inquiry into whether that modification is significant. If those differences between the old and new elements are significant, the newly accused product as a whole shall be deemed more than colorably different from the adjudged infringing one, and the inquiry into whether the newly accused product actually infringes is irrelevant. Contempt is then inappropriate. Arbek Mfg., Inc. v. Moazzam, 55 F.3d 1567, 1570 (Fed.Cir.1995) (“[T]he modifying party generally deserves the opportunity to litigate the infringement questions at a new trial.”).

The significance of the differences between the two products is much dependent on the nature of the products at issue. The court must also look to the relevant prior art, if any is available, to determine if the modification merely employs or combines elements already known in the prior art in a manner that would have been obvious to a person of ordinary skill in the art at the time the modification was made.  A nonobvious modification may well result in a finding of more than a colorable difference. Where useful, a district court may seek expert testimony in making the determination. See Abbott Labs., 503 F.3d at 1380 (allowing the use of expert testimony on the colorable differences question). The analysis may also take account of the policy that legitimate design-around efforts should always be encouraged as a path to spur further innovation. State Indus. Inc. v. A.O. Smith Corp., 751 F.2d 1226, 1236 (Fed.Cir.1985) (“One of the benefits of a patent system is the so-called ‘negative incentive’ to ‘design around’ a competitor's products”). But an assertion that one has permissibly designed around a patent should not be used to mask continued infringement. Determining the requisite level of difference is a question of fact.

Conversely, when a court concludes that there are no more than colorable differences between the adjudged infringing product and modified product, a finding that the newly accused product continues to infringe the relevant claims is additionally essential for a violation of an injunction against infringement. KSM, 776 F.2d at 1528. Thus, the court is required to evaluate the modified elements of the newly accused product against the asserted claim, on a limitation by limitation basis, to ensure that each limitation continues to be met. In making this infringement evaluation, out of fairness, the district court is bound by any prior claim construction that it had performed in the case. The patentee bears the burden of proving violation of the injunction by clear and convincing evidence, a burden that applies to both infringement and colorable differences. As with other factual determinations, both findings are reviewed for clear error. Where the court finds a violation and awards sanctions, such a sanctions award is reviewable for an abuse of discretion.

The Federal Circuit recently applied these principles in NCube Corp. v. SeaChange Int'l Inc. (The opinion was handed down on October 10, with errata on October 17; unless I am mistaken, the second change in the errata is itself an erratum, but we'll see.)  According to the Federal Circuit, the district court properly held that the defendant’s design change constituted a significant change, and therefore that a contempt finding was not warranted.  (The infringing system used an identifier known as Client ID, which contains among other things a 6-byte MAC address, to update a Connection Table.  The change involved using an identifier known as Session ID, which also contains among other things the same 6-byte MAC address, to update a Connection Table, and placing Client ID elsewhere in the system.)  The court held that the change was significant, because Client ID "still performs the same relevant functions in both systems, but does so in a way that all parties admit puts the ClientID outside the claim"; and because at trial the patent owner never relied on the MAC address alone as the infringing aspect of the claim element at issue.  "As the separation of the colorable-differences and infringement components in TiVo indicates, the colorable-differences standard focuses on how the patentee in fact proved infringement, not what the claims require." As a result, the Federal Circuit "need not reach the question of actual infringement by the modified ITV system."  Dennis Crouch had a nice write-up about the case last week, here.  Bloomberg BNA's discussion is here.

Shyam Balganesh's recently published edited volume Intellectual Property and the Common Law (which I blogged about here) includes an article by Professor Richard Epstein titled Sequential Injunctions in Patent Litigation: The Gratuitous Novelty of TiVo v. EchoStar.  According to Epstein:

nothing justifies the creation of a remedial rule that allows the defendant to profit, perhaps repeatedly, from its own wrong. The sensible approach, therefore, is to use an initial determination of resemblance to determine whether to expedite the hearing on whether the second device infringes the original patent. The argument here is that, because the chances that the new device infringes on the old patent are better than they were the first time round, it becomes proper to make some adjustments in the trial procedures to take account of that fact.

Epstein argues that the pre-TiVo standard, under which a plaintiff merely had to prove by a preponderance of the evidence that there were "colorable differences" to initiate contempt proceedings, and then prove by clear and convincing evidence that the design around infringed, got it right.  Under TiVo:

the prior finding of substantial similarity between the original and modified device must be proved by the same high standard of proof. If there is failure on the first part of the test, the finding of infringement on the second part of the test is not sufficient to carry the day. 
 
What is so striking about this reformulation of the original test is how it works at cross-purposes with the fundamental objective of error minimization in sequential injunction cases. The two-part test of KSM makes a real shot at this task by stressing the ultimate fact of infringement after a preliminary finding of similarity. The newer test goes the opposite way. It never explains why a finding of infringement, by clear and convincing evidence, should be rejected solely because the level of proof was insufficient at the earlier stage – which had the sole purpose of seeing whether the contempt proceeding was warranted in the first place. In putting forward the revised test, the Federal Circuit achieves an unfortunate double blunder by endorsing a process that invokes more expensive procedures to produce less reliable results.  

Although Epstein completed his essay before the district court's decision on the contempt motion in nCube, he talks about (what was then the pending) proceeding at the end of his essay.  Epstein seems to think that the design around in that case would easily have been found to violate the injunction, under the pre-TiVoi standard.