Federal Circuit Vacates Decision to Waive Bond Requirement for Preliminary Injunction

The case is Otsuka Am. Pharm., Inc. v. Hetero Labs Ltd., opinion by Judge Bryson.  Judge Stoll joins the opinion in its entirety.  Judge Dyk dissents on the principal issue in the case—whether the district court, in granting the preliminary injunction, properly construed the claim at issue—but he joins the majority on the bond issue.

The patent in suit—which is due to expire on August 13, 2026—is for a method for treating emotional lability in patients with (e.g.) certain neurodegenerative diseases, and involves the administration of two drugs, dextromethorphan and quinidine.  The FDA approved the defendant’s ANDA for a generic version of Otsuka’s drug, after which Otsuka filed suit and moved for a temporary restraining order (later converted to a preliminary injunction).  The principal issue on appeal, as noted above, is whether the district court properly construed the claim in suit. (The claim requires a weight-to-weight ratio of dextromethorphan to quinidine of 1:0.5 or less, and the question is whether a product in which the weight ratio of the salt forms of these drugs is less than 1:0.5, but the weight ratio of the free bases is greater than 1:05, falls within the scope of the claim.  The majority holds that it does.)  The majority concludes that the answer is yes, which apparently points to a likelihood of success on the merits, and there is no discussion of any of the other issues relevant to granting a preliminary injunction in the appellate opinion.  The issue that does come up is whether the district court should have waived the bond requirement.  From the opinion:

According to Federal Rule of Civil Procedure 65(c), a court “may issue a preliminary injunction . . . only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained.” The Third Circuit has recognized limited exceptions to the Rule 65(c) bond requirement, but has noted that waiver is “so rare that the requirement is almost mandatory.” Frank’s GMC Truck Ctr., Inc. v. Gen. Motors Corp., 847 F.2d 100, 103 (3d Cir. 1988).

 

The Third Circuit has held that the bond requirement may be waived if “there is no risk of monetary loss to the defendant.” Id. (citing Sys. Operations, Inc. v. Sci. Games Dev. Corp., 555 F.2d 1131, 1145–46 (3d Cir. 1977)). The court has also held that the bond requirement may be waived under circumstances such as those described in Temple University v. White, 941 F.2d 201, 219–20 (3d Cir. 1991). That case explained that a court may excuse compliance with the bond requirement “at least in non-commercial cases . . . [upon] consider[ing] the possible loss to the enjoined party together with the hardship that a bond requirement would impose on the applicant.” Id. at 219 (quoting Crowley v. Local No. 82, Furniture & Piano Moving, 679 F.2d 978, 1000 (1st Cir. 1982), rev’d on other grounds, 467 U.S. 526 (1984)). An exception to the bond requirement may also apply in “suits to enforce important federal rights or public interests, arising out of comprehensive federal health and welfare statutes.” Id. at 220 (quoting Crowley, 679 F.2d at 1000) (citation modified).

 

Applying the first Temple exception, the district court found the risk to financial harm to Hetero “speculative at best” and expressed concern regarding “a chilling effect on access to justice” if a multi-million-dollar bond were required in this case. J.A. 31 (citation omitted). Thus, the court waived the requirement for Otsuka to post security under Rule 65(c). J.A. 32. We are bound to follow the Third Circuit’s narrow exceptions to Rule 65(c). And the Third Circuit has “never excused a [d]istrict [c]ourt from requiring a bond where an injunction prevents commercial, money-making activities.” Zambelli, 592 F.3d at 426. Hetero’s attempt to enter the market with its generic pharmaceutical product is clearly a commercial, money-making activity. Accordingly, we vacate the Rule 65(c) bond waiver and remand the bond issue to the district court for reconsideration.

 

On remand, the district court may exercise its discretion in determining an appropriate amount to require as a security in light of the limited time remaining before the ’282 patent expires. With regard to the district court’s concern about imposing a large expense for a bond on the plaintiffs, we note that under the Local Rules for the United States District Court for the District of Delaware, the “reasonable premiums or expenses paid on bonds or security stipulations shall be allowed” as taxable costs when those amounts are “furnished by requirements of the law or rule of Court . . . or where required to enable a party to receive or preserve some right accorded the party in an action or proceeding.” D. Del. R. 54.1(b)(10) (pp. 18-20).

This seems right to me.  As I discuss in chapter 4 of my new book Wrongful Patent Enforcement:  A Comparative Law and Economics Analysis, I think it is important to ensure that the defendant who is temporarily excluded from the market on the basis of a patent that turns out, ex post, to have been either invalid or not infringed (or otherwise unenforceable), is compensated for the interim losses it suffers.  (Indeed, arguments are sometimes made that even compensatory damages may be insufficient from a policy standpoint, because the temporary exclusion may leave a monopolist plaintiff better off than it otherwise would have been, even if it has to compensate the defendant for the loss of the latter’s duopoly profit.  Nevertheless, I wouldn’t advocate requiring  the plaintiff to disgorge its profit, for reasons I discuss in the book.)  In some countries, moreover, the wrongly-excluded defendant is presumptively entitled to full compensation, in whatever amount is ultimately proven, though in the U.S. compensation is almost always limited to the amount of the bond; and concerns are sometimes voiced that.the amount of the bond as set by the court sometimes turns out to be less than fully compensatory.  (For that reason, I think courts should be permitted to award proven damages in excess of the bond.)  That said, I agree that there may be some exceptional situations where the balance of equities weighs in favor of dispensing with a bond or any form of compensation; but the Federal Circuit’s application of the law to the facts of this case seems correct to me.  One thing that puzzles me, however, is the district court’s implication, as stated in the Federal Circuit opinion, that the defendant’s harm was speculative and that, absent a waiver, the plaintiff might have to post a multimillion dollar bond.  At first blush, these two concerns seem to point in opposite directions--if the defendant’s expected harm is low, then you would think that the amount of the bond should be low too--though perhaps on the facts of this case, the defendant faces a low probability of harm, while at the same time the amount of the harm, should it come to pass, would be substantial, thus inclining the court to require the posting of a multimillion dollar bond just in case; I don’t know. 

Recent Publications by WIPO and the EPO on FRAND Determinations and Assessments

Both the World Intellectual Property Organization (WIPO) and the European Patent Office have recently published reports on FRAND determinations.  WIPO’s, titled FRAND Economics: Valuation Methods in Licensing Standard Essential Patents, is available here, and the EPO’s, titled Methodologies for FRAND determination:  evidence from global case law, is available here.  I think it is fair to generalize that the WIPO report emphasizes economic issues pertaining to FRAND, with some discussion of case law, and that the EPO report provides a more detailed discussion of the relevant judicial decisions, to date, from around the world (but also includes good discussion of the relevant economic issues--and a few citations to some of my sole and co-authored work).  Both reports should prove useful to policymakers, practitioners, and academics.  

U.S. Supreme Court Overrules Humphrey's Executor

The case is Trump v. Slaughter; for previous discussion on this blog, see here.  Essentially, it means that the president can fire federal officers exercising executive powers--such as, here, commissioners of the Federal Trade Commission, which as readers may be aware is, along with the Antitrust Division of the Justice Department, one of the two federal antitrust enforcement agencies--at will.  The result is unfortunate, in my opinion, but not unexpected.  In a separate case, however, Trump v. Cook, the Court upheld the requirement that Federal Reserve governors can only be fired for cause, reasoning that the central bank's independence from political manipulation is consistent with eighteenth and early nineteenth century practice. 

The UPC Court of Appeal’s Long-Arm Jurisdiction Principles, Part 2

Last week I published the first half of a post on those portions of the UPC Court of Appeal’s decision in Kodak GmbH v. Fujifilm Corp. in which the Court expresses its understanding of when it is appropriate for the UPC to exercise jurisdiction over a claim for the infringement of the portion of a European Patent that pertains to a non-UPC, non-EU, non-Lugano Convention country (such as the U.K.).  Here are the remaining headnotes on this topic (corresponding to decision paragraphs 301-23), followed by a brief discussion:

Exercising international jurisdiction

 

11. A court which has jurisdiction to hear an alleged infringement of a patent validated outside of its own territory, is not only required to apply the law applicable to that patent, but must also apply international law principles such as comity.

 

12. In situations where the Court has jurisdiction to decide on the alleged infringement and remedies requested by the patentee based on a non-UPC designation of a European patent (EP), and where the defendant has – as a defence – asserted that the EP relied on is invalid, then:

 

- where designations in the territories of Members States of the European Union (EU) and Signatories to the Lugano Convention (LC) are concerned (‘EU/LC EPs’), it follows from Art 24(4) Br I bis and Art. 22(4) LC that the Court shall not consider the validity of such patents, but as decided in BSH v Electrolux the Court does not lose jurisdiction to decide the infringement action based on such patents;

 

- where designations in territories of non-EU and non-LC States are concerned (‘non-EU/LC EPs’), it follows from BSH v Electrolux that the Court can consider the validity of such patents in inter partes proceedings and the Court may on that basis decide the infringement action based on such patents.

 

13. The Court of Appeal considers the following approach regarding actions based on EU/LC European patents and/or non-EU/LC European patents to be in line with BSH v Electrolux and international principles of law, including comity, for the following situations (I, II and III respectively):

 

I. when a revocation action is lodged with the Court with respect to (a) EU/LC EP(s) and/or non-EU/LC EP(s)

 

14. The Court shall declare that it lacks jurisdiction to decide the action.

 

II. in an infringement action which is also based on (a) EU/LC EP(s) and/or non-EU/LC EP(s), and the patent in force in the UPC territory is considered invalid, but the attacked embodiment or process would infringe if it were valid

 

15. It will be appropriate for the Court to first offer the patentee the opportunity to withdraw the infringement action insofar as based on (a) EU/LC EP(s) and/or non-EU/LC EP(s) within an appropriate period of time.

 

16. Where it concerns EU/LC EPs:

 

a. if the patentee does not wish to withdraw the infringement action, and insofar a revocation action is not already pending with the relevant competent national court(s), it is appropriate to give the defendant the opportunity to file a revocation action with the relevant competent national court(s) within an appropriate period of time.

 

b. if and to the extent that (a) revocation action(s) is pending, or the defendant has lodged such action(s), it is generally appropriate for the Court to use its discretion and/or case management powers (cf R. 295(l) and (m) RoP) to stay the infringement proceedings insofar as based on that EU/LC EP(s) until a final decision has been rendered in the revocation action(s) by the competent national court(s).

 

c. if and to the extent that the defendant does not lodge such action(s) within the given time period, the Court must assume that the patent(s) is/are valid and shall decide the infringement action on that basis.

 

17. Where it concerns non-EU/LC EPs:

 

a. if the patentee does not wish to withdraw the infringement action, the infringement action shall be dismissed, unless there are specific reasons not to do so (e.g. because the claim(s) of an extra-territorial part is different and may be considered valid – in such a situation the next paragraph applies)

 

III. in an infringement action which is also based on (a) EU/LC EP(s) and/or non-EU/LC EP(s), and the patent in force in the UPC territory is considered valid and infringed in the UPC territory

 

18. Where it concerns either EU/LC EPs (in view of Art. 24(4) Br I bis and 22(4) LC) or non-EU/LC EPs (in view of comity):

 

a. the Court may – where appropriate and in order to avoid undue delay – consider there is a reasonable, non-negligible possibility that the patent will be held valid by the competent national court and issue a decision including its orders under the condition subsequent that the patent is not held to be wholly or partially invalid to the extent the infringement is based thereon in first instance or appeal proceedings before the national court competent to hear the revocation case in relation to such an EP (R. 118.2 RoP and Solvay v Honeywell (C-616/10) mutatis mutandis).

 

b. if such a competent national court holds the patent to be valid, then the decision including its orders stays in place with the condition subsequent; if the decision is final, the injunction becomes permanent.

 

c. if such a competent national court at first instance or on appeal holds the patent to be wholly or partially invalid to the extent the infringement is based thereon then the condition under which the decision, including its orders, was issued is not fulfilled and it falls away.

 

d. In the case under c. the patentee may request the Court for orders consequential on such a decision within two months of the decision of such a competent national court (R. 118.4 RoP), including a request for a stay of the proceedings until a final decision is rendered by the competent national court. 

I’m not going to try to summarize everything, but here is my understanding of four major points. First, the UPC has jurisdiction to consider claims for the alleged infringement of European Patents (meaning patents validated in a member of, and in accordance, with the European Patent Convention), as well as E.U. Supplemental Protection Certificates, but not non-European Patents.  So there would be no basis for the UPC to consider an infringement claim concerning, e.g., a U.S. patent or a Japanese patent.  (Domestic courts within the E.U. might do so, under BSH, but any decision such a court would render on validity would be applicable only inter partes.)  Second, the UPC has jurisdiction to entertain claims for the revocation of European Patents validated in UPC territory, but not non-European Patents and not European Patents validated outside UPC territory.  Third, it follows from the above that the UPC has jurisdiction to entertain infringement claims involving European Patents that were validated in a member state of the Brussels I bis Regulation (meaning all current members of the E.U.) or the Lugano Convention (E.U. member states plus Iceland, Norway, and Switzerland); but the court may not reconsider the validity of such a patent even by way of defense or counterclaim.  It may, however, stay the infringement litigation pending a revocation action filed in an appropriate forum.  Fourth, the UPC has jurisdiction to entertain claims involving European Patents that were not validated in a member state of the Brussels I bis Regulation or the Lugano Convention (such as the U.K.), and it may consider validity by way of defense or counterclaim, but its decision would be binding only inter partes.