Wednesday, May 5, 2021

Federal Circuit Affirms Vacatur of Injunction

The decision, handed down this morning, is Cap Export LLC v. Zinus, Inc., opinion authored by Judge Dyk, joined by Judges Bryson and Hughes.  Plaintiff Cap filed an action for declaratory judgment of noninfringement and invalidity of the U.S. Patent No. 8,931,123 (“the ’123 patent”), which is directed to “[a]n assemblable mattress support” that “can be shipped in a compact state with all of its components compactly packed into the headboard”’ (p.2).  Defendant Zinus, the patent owner, counterclaimed for infringement.  To make a long story short, the court ultimately granted summary judgment of infringement and validity on the counterclaim, awarded damages, and entered a permanent injunction against Cap.  As a result of another infringement action filed by Zinus against another company, however, it subsequently came to Cap's attention that Zinus had purchased from a Malaysian company beds, which the district court later characterized as "functionally identically in design to the claims in the ’123 patent" (p.9), before Zinus's filing date.  Cap Export then filed a motion to vacate the judgment and injunction under Federal Rule of Civil Procedure "60(b)(3), which provides grounds for relief for reason of 'fraud . . . , misrepresentation, or misconduct by an opposing party'” (p.5).  The district court granted the motion, concluding that Zinus president Lawrie's earlier testimony that he was not aware of any such prior art was false. (In his defense, Lawrie states that his earlier testimony was "literally incorrect," but not intentionally so.) 

The Federal Circuit affirms on the ground that the district court did not abuse its discretion in granting the motion.  The appellate court expresses some doubt, however, as to the regional (Ninth) circuit's requirement that a judgment can be vacated under Rule 60(b)(3) only if the conduct could not have been discovered through the exercise of due diligence (a requirement not found in the statutory text) (p.12).  More specifically:

Even though the Ninth Circuit’s requirement for Rule 60(b)(3) that the “fraud” not be discoverable through due diligence seems questionable, we follow it here. . . . The question is what constitutes due diligence in discovering fraud. Ninth Circuit cases applying Rule 60(b)(3) do not elaborate on the due diligence requirement, but Ninth Circuit decisions in other contexts provide guidance.

In other contexts, due diligence in discovering fraud does not require investigation unless there is reason to suspect fraud. . . . 

The issue thus is not whether the conduct of Cap Export’s counsel fell below the standard of care for attorneys practicing patent litigation, but whether a reasonable company in Cap Export’s position . . . should have had reason to suspect the fraud—here, that [Zinus president] Lawrie had testified falsely—and, if so, took reasonable steps to investigate the fraud. . . .

On this record, there has been no showing that there was reason to suspect that Lawrie’s statements were fraudulent. Cap Export deposed Lawrie, as a person claiming knowledge of the relevant facts, “asked him, repeatedly, about his knowledge of disassembled beds shipped in a single box with all components stored in the headboard,” and “Lawrie then repeatedly misrepresented his knowledge of such bed designs.” J.A. 18. Cap Export had no reason to suspect fraud. Cap Export “undertook numerous prior art searches that failed to reveal evidence of the Woody Furniture purchases.” Id. at 26–27. Nor was “[t]he material evidence concealed by Lawrie’s misrepresentation . . . widely available, a matter of public record, or information already in Cap Export’s possession.” Id. at 20. We see no clear error in the district court’s determination that the Ninth Circuit’s due diligence requirement was satisfied (pp. 13-16).

The court further finds no clear error in the district court's conclusion that the misrepresentation was intentional and material.  On materiality, although the defendant "contests whether the Woody Furniture beds 'qualify as invalidating prior art'", the court concludes that it isn't necessary to show whether the evidence would have altered the result, but only that it "prevented Cap Export from fully and fairly presenting its case" (pp. 16-19).

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