Federal Circuit Bursts Defendant's Balloon, Affirms Preliminary Injunction

Yesterday the Federal Circuit handed down an opinion in Tinnus Enterprises, LLC v. Telebrands Corp., available here, affirming the grant of a preliminary injunction barring sales of an allegedly infringing product called "Balloon Bonanza."  The opinion (authored by Judge Stoll, joined by Judges Moore and Wallach) raises a couple of interesting issues relating to remedies.

The patent in suit (U.S. Patent No. 9,051,066) "relates to a system and method for simultaneously filling multiple containers with fluid" (p.3), and is embodied in the plaintiff's product (called "Bunch O Balloons") for filling multiple water balloons through a set of hollow tubes.  Plaintiff sued defendant for patent infringement and moved for a preliminary injunction, while the defendant petitioned for a post-grant review of the '066 Patent before the PTAB.  Under U.S. law, when deciding whether to grant a preliminary injunction, the court considers whether the plaintiff has shown “[1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.”  Titan Tire Corp. v. Case New Holland, Inc., 566 F.3d 1372, 1375-76 (Fed. Cir. 2009) (quoting Winter v. Nat. Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008)).  Moreover, because U.S. patents are entitled to a presumption of validity, "if a patentee moves for a preliminary injunction and the alleged infringer does not challenge validity, the very existence of the patent with its concomitant presumption of validity satisfies the patentee’s burden of showing a likelihood of success on the validity issue.”  Titan Tire, 566 F.3d at 1377.  If the defendant comes forward with evidence of invalidity, however, the patentee has the burden of responding.  See id.  The trial court must then “weigh the evidence both for and against validity,” and if it “concludes there is a ‘substantial question’ concerning the validity of the patent . . . the patentee has not succeeded in showing it is likely to succeed at trial on the merits of the validity issue.”  Id. at 1379.  “Thus, when analyzing the likelihood of success factor, the trial court, after considering all the evidence available at this early stage of the litigation, must determine whether it is more likely than not the challenger will be able to prove at trial, by clear and convincing evidence, that the patent is invalid.”  Id.  

Applying these standards, the Magistrate Judge issued a Report and Recommendation (R&R) in favor of granting the preliminary injunction, rejecting among things the defendant's arguments (which I needn't go into here) that there was a substantial question of validity on both indefiniteness and obviousness grounds.  The defendant filed its objections to the R&R with the district court, but in the Federal Circuit's view it did not provide a specific objection to the Magistrate Judge's conclusions on indefiniteness and obviousness:

Telebrands timely filed its objections to the Magistrate Judge’s R&R, alleging that it erred (1) by failing to  provide a claim construction for the “attached,” “connecting force,” “elastic fastener,” and “shaking” limitations; (2) by improperly shifting the burden of proof to Telebrands on infringement and invalidity; and (3) by relying on insufficient evidence to support findings of commercial success and copying. . . . Notably, Telebrands did not object to the Magistrate Judge’s indefiniteness ruling or its rejection of Telebrands’ obviousness arguments. The district court overruled each of the objections . .  . (pp. 11-12).

Unfortunately for the defendant, the failure specifically to object to the rulings on validity meant that the applicable standard of review on appeal was the highly deferential "plain error" standard, and the Court of Appeals didn't think these rulings amounted to plain error. (The defendant argued that its objection to the Magistrate Judge's claim construction put the court on notice that it was also challenging the definiteness of the term "substantially filled," see p.20, but the Federal Circuit didn't agree.)  One interesting side issue, though, is that while the district court proceedings were pending the PTAB instituted the defendant's requested post-grant review, and in December 2016 it concluded that the claims were invalid on indefiniteness grounds (see pp. 12-13).  Nonetheless, as the Federal Circuit sees it, this doesn't affect the appeal:

We are aware that the PTAB issued a Final Written Decision on December 30, 2016, concluding that the claims of the ’066 patent are indefinite. The PTAB’s decision is not binding on this court, and based on the record before us and the applicable standard of review, it does not persuade us that the district court abused its discretion in granting the preliminary injunction. The parties are, of course, free to ask the district court to reconsider its preliminary injunction in light of the PTAB’s Decision (p.13 n.7).

I'm glad to know I'm not alone in thinking it's a bit odd that the Federal Circuit wouldn't take the PTAB matter into consideration in deciding there was a substantial question concerning the validity of the patent--see Dennis Crouch's post today on Patently-O, where he writes that "A seemingly reasonable approach here would be to say – “If the PTO concludes that claims are likely invalid, then those claims are probably vulnerable to being found invalid.”  Here, the court does not follow that approach . . . ."

On the issue of irreparable harm, the court similarly deferred to the district court, based on evidence of consumer confusion and price erosion:

. . . Telebrands alleges that it was clear error for the Magistrate Judge to rely on evidence pre-dating the ’066 patent’s issuance in support of its finding of irreparable harm. Citing GAF Building Materials Corp. v. Elk Corp. of Dallas, 90 F.3d 479 (Fed. Cir. 1996), Telebrands asserts that irreparable harm must be measured from the date the patent issues because that is the date on which the right to exclude others arises. The GAF case is inapposite, however, because it addresses the dismissal for lack of jurisdiction of an action for declaratory judgment of invalidity and noninfringement of a design patent that had not yet issued. Id. at 481–83. And Telebrands cites no case prohibiting reliance on evidence of irreparable harm pre-dating the patent’s issuance.

Evidence of consumer confusion, harm to reputation, and loss of goodwill pre-dating the patent is, at the very possibility of identical harms once the patent issues. Neither party has suggested that the issuance of a patent would somehow mitigate or otherwise eliminate those harms. Similarly, the pre-issuance price erosion evidence may be relevant to show what would happen if Balloon Bonanza was no longer on the market. For example, it might support an argument that, absent competition, Tinnus could raise its price back to the original price point, but would not be able to do so as long as competition from Balloon Bonanza remains.

Nonetheless, the irreparable harm analysis does not depend solely on evidence pre-dating the patent. The record contains additional evidence of harm after the ’066 patent’s issuance that is sufficient to support a finding of irreparable harm. For example, a review for Tinnus’s Bunch O Balloons product on Amazon—dated a few weeks after the patent issued—states that the customer liked the “off brand” Bunch O Balloons product better than the “name brand” Balloon Bonanza. J.A. 1436. This establishes persisting harm to Tinnus’s reputation and tarnishes its status as the innovator in this market. See Celsis In Vitro, Inc. v. CellzDirect, Inc., 664 F.3d 922, 930 (Fed. Cir. 2012) (“Price erosion, loss of goodwill, damage to reputation, and loss of business opportunities are all valid grounds for finding irreparable harm.”). Although the post-issuance evidence is thinner, we are unable to find any clear error in the district court’s conclusion that Tinnus had demonstrated irreparable harm (pp. 23-24).

The question I have about this analysis is why the alleged injury resulting from price erosion would be "irreparable," since one would think that it could be quantified and repaired through money damages.  Maybe the argument is that once consumers have come to expect paying only $9.99 for the plaintiff's product, they'll be reluctant to pay $17 (the price at which "Bunch O Balloons" sold in August 2014, see p.10).  But I don't see that specific argument discussed in the appellate opinion.  Of course, if there is evidence of consumer confusion or loss of goodwill, those harms could be irreparable--though I wonder to what extent the evidence (including a phone call, a product review, some emails, and the  fact that "Bunch O Ballons" got better ratings on Amazon.com and Toys-R-Us, see p.11) substantiate any material harm to the plaintiff's goodwill or reputation.