Automated Merchandising Systems, Inc. v. Crane, Co. , 357 F. App'x 297 ( 2009 )

NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2009-1158, -1164
AUTOMATED MERCHANDISING SYSTEMS, INC.,
Plaintiff-Cross Appellant,
v.
CRANE CO.,
Defendant-Appellant,
and
SEAGA MANUFACTURING, INC.,
Defendant-Appellee.
James D. Berquist, Davidson Berquist Jackson & Gowdey, LLP, of Arlington,
Virginia, argued for plaintiff-cross appellant. With him on the brief was Donald L.
Jackson.
Jamil N. Alibhai, Munck Carter, LLP, of Dallas, Texas, argued for defendant-
appellant. With him on the brief was William A. Munck. Of counsel were Ryan C.
Hudson and Laura A. Russell.
William A. Rinehart, II, Reinhart Boerner Van Dueren s.c., of Milwaukee,
Wisconsin, argued for defendant-appellee. On the brief was David G. Hanson.
Appealed from: United States District Court for the Northern District of West Virginia
Chief Judge John Preston Bailey
NOTE: This disposition is nonprecedential.
United States Court of Appeals for the Federal Circuit
2009-1158, -1164
AUTOMATED MERCHANDISING SYSTEMS, INC.,
Plaintiff-Cross Appellant,
v.
CRANE CO.,
Defendant-Appellant,
and
SEAGA MANUFACTURING, INC.,
Defendant-Appellee.
Appeals from the United States District Court for the Northern District of West Virginia in
case no. 3:08-CV-97, Chief Judge John Preston Bailey.
__________________________
DECIDED: December 16, 2009
__________________________
Before MICHEL, Chief Judge, CLEVENGER, and DYK, Circuit Judges.
MICHEL, Chief Judge.
In this patent infringement case, the district court entered a preliminary injunction
against sales of the allegedly infringing products. The district court simultaneously
stayed all infringement and other claims pending the outcome of ongoing reexamination
proceedings in the United States Patent and Trademark Office (USPTO). The parties
have brought dueling interlocutory appeals, arguing that the district court should not
have entered these simultaneous orders, although the parties disagree about which
order was correct. Because we find that the district court erred by granting the
preliminary injunction but not by staying the case, we affirm in part, vacate in part, and
remand.
I. BACKGROUND
Automated Manufacturing Systems, Inc. (AMS), Crane Co. (Crane), and Seaga
Manufacturing, Inc. (Seaga) all make and sell glass-front automatic vending machines.
AMS holds several patents relating to systems that use optical technology to detect
whether a product that the user of the machine has purchased has actually been
delivered by the machine.
During 2003 and 2004, AMS and Crane filed four separate patent-related
lawsuits against one another in the Northern District of West Virginia. These four earlier
cases are all stayed pending reexamination of the relevant patents. In June 2008, AMS
filed the present case against Crane, alleging that Crane infringed two other, later-
issued AMS patents and that Crane tortiously interfered with AMS’s contractual and
business relationships. AMS also sued Seaga for infringement of several AMS patents.
During the early stages of the litigation, Crane asked the USPTO to reexamine the
patents it was alleged to have infringed, and Crane subsequently asked the court to
consolidate this case with the four earlier stayed cases and thereby also stay this
litigation pending the outcome of the reexamination proceeding.
At about the same time, AMS moved for a preliminary injunction, arguing
essentially that Crane’s sales of infringing products were costing AMS so much market
share that, were Crane not enjoined from making infringing sales, AMS was likely to go
out of business before the litigation could conclude. In December 2008, the court
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granted AMS’s motion for a preliminary injunction, and, in the same order, the court
simultaneously granted Crane’s motion to consolidate the case with the earlier cases
and to stay the litigation pending reexamination of the asserted patents. Both AMS and
Crane appealed the portions of this order that were adverse to them. Seaga did not
appeal.
After the original notices of appeal were filed, the district court decided on the
amount of a preliminary injunction bond. AMS amended its notice of appeal to include
this decision, because AMS contends the district court set the injunction bond amount
without considering AMS’s ability to pay. In its papers seeking reconsideration of the
bond amount order, AMS stated that it did not intend to pay the bond unless the court
reduced the amount of the bond AMS would be required to post. After setting the bond
amount, the district court stayed entry of the preliminary injunction pending the outcome
of this appeal. The district court also clarified that the bond would not have to be posted
until the injunction became effective, thereby apparently causing AMS to reconsider its
decision not to pay without a reduction.
II. DISCUSSION
We review grants of preliminary injunctions for abuse of discretion. Procter &
Gamble Co. v. Kraft Foods Global, Inc., 549 F.3d 842, 845 (Fed. Cir. 2008). Under this
standard, we ask whether the district court “made a clear error of judgment in weighing
relevant factors or exercised its discretion based upon an error of law or clearly
erroneous factual findings.” Novo Nordisk of N. Am. Inc. v. Genentech, Inc., 77 F.3d
1364, 1367 (Fed. Cir. 1996). Similarly, because district courts “have the inherent power
to manage their dockets and stay proceedings,” we also review district court decisions
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staying litigation for abuse of discretion. Procter & Gamble, 549 F.3d at 848-49;
Ethicon, Inc. v. Quigg, 849 F.2d 1422, 1426-27 (Fed. Cir. 1988).
Before deciding the merits of this case, we must first ensure that we have
jurisdiction to hear these appeals. AMS argues that we have jurisdiction over the
interlocutory appeal from the district court’s grant of the preliminary injunction. We
agree. 28 U.S.C. § 1292(a)(1) provides this court with jurisdiction over “appeals from
. . . interlocutory orders . . . granting . . . injunctions.” AMS and Crane both have
appealed from the district court’s entry of the original order granting a preliminary
injunction against sales of Crane’s allegedly infringing products, so there is an
interlocutory appeal from an order granting a preliminary injunction. We hold we have
jurisdiction under § 1292(a)(1). Strangely, although it is the appellant here, Crane
argues that jurisdiction under § 1292(a)(1) does not exist, because AMS never posted
the required injunction bond, rendering the order granting the injunction a nullity. We
disagree. While the posting of a bond may be necessary before the preliminary
injunction can go into force, the failure to post such a bond does not mean that no order
was ever entered granting the injunction. Entry of such an order is all that is required
by § 1292(a)(1). It is exceedingly odd that Crane, the appellant here, argues that there
is no appellate jurisdiction, but Crane’s argument is even stranger than this. In the
same motion 1 in which Crane argues that we lack jurisdiction to hear challenges to the
preliminary injunction order at issue in this case, Crane argues that we should vacate
the preliminary injunction order at issue in this case. It should go without saying that we
1
Crane raised its jurisdictional argument in its brief but only developed the
argument fully in its earlier motion to dismiss the appeal. That motion was denied
without prejudice to Crane’s raising the issue in its merits brief.
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cannot vacate the preliminary injunction, as Crane asks us to do, unless we have the
jurisdiction that Crane claims we lack. We conclude, however, that we do have
jurisdiction for the reasons discussed above.
Turning to the merits, we first consider whether the district court abused its
discretion by granting a preliminary injunction. “A decision to grant or deny a
preliminary injunction is within the sound discretion of the district court, based upon its
assessment of four factors: (1) the likelihood of the patentee’s success on the merits;
(2) irreparable harm if the injunction is not granted; (3) the balance of hardships
between the parties; and (4) the public interest.” Oakley, Inc. v. Sunglass Hut Int’l, 316
F.3d 1331, 1338-39 (Fed. Cir. 2003) (citing Amazon.com, Inc. v. Barnesandnoble.com,
Inc., 239 F.3d 1343, 1350 (Fed. Cir. 2001)). “[A] movant cannot be granted a
preliminary injunction unless it establishes both of the first two factors, i.e., likelihood of
success on the merits and irreparable harm.” Amazon.com, 239 F.3d at 1350 (citing
Vehicular Techs. Corp. v. Titan Wheel Int’l, Inc., 141 F.3d 1084, 1088 (Fed. Cir. 1998);
Reebok Int’l Ltd. v. J. Baker, Inc., 32 F.3d 1552, 1555 (Fed. Cir. 1994)). Here, the
district court abused its discretion by finding that AMS established these two factors
when that finding was clearly erroneous on this record.
To show irreparable harm, AMS argued below (and argues here) that, in the
absence of a preliminary injunction, Crane’s continued alleged infringement will cause
various types of harm to AMS that cannot be compensated via monetary damages.
These harms include loss of revenue, loss of market share, and price erosion. We do
not agree with the district court that AMS established irreparable injury by introducing
evidence supporting these harms. First, lost sales standing alone are insufficient to
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prove irreparable harm; if they were, irreparable harm would be found in every case
involving a “manufacturer/patentee, regardless of circumstances.” Abbott Labs. v.
Andrx Pharms., Inc., 452 F.3d 1331, 1348 (Fed. Cir. 2006). Lost sales (without more)
are presumed to be compensable through damages, so they do not require injunctive
relief. Thus, we find that, no matter how much evidence of lost revenue AMS
presented, this evidence by itself could not support a finding of irreparable injury.
Second, lost market share must be proven (or at least substantiated with some
evidence) in order for it to support entry of a preliminary injunction, because granting
preliminary injunctions on the basis of speculative loss of market share would result in
granting preliminary injunctions “in every patent case where the patentee practices the
invention.” Nutrition 21 v. United States, 930 F.2d 867, 871 (Fed. Cir. 1991). In finding
AMS’s evidence of lost revenue and market share sufficient here, the district court relied
on several cases that suggested that, because of the old presumption that harm from
patent infringement was irreparable, the burden was on the defendant to demonstrate
that the potential harm from not granting a preliminary injunction was finite, calculable,
and compensable. This is no longer the law, as these cases all pre-dated the Supreme
Court’s decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392-94 (2006), in
which the presumption of irreparable harm, based just on proof of infringement, was
discarded. The burden is now on the patentee to demonstrate that its potential losses
cannot be compensated by monetary damages. The proof of lost market share and lost
sales cited by the district court here was insufficient to meet this standard. The district
court cited an affidavit from Sharon Shull, AMS’s president, which stated that Crane’s
acquisition of a distribution company (Automatic Products) placed Crane’s allegedly
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infringing machines in many of the same showrooms as AMS’s machines; that one of
AMS’s dealers (Mountain Coin Machines) asked AMS to no longer list it as a distributor
soon after Crane introduced its allegedly infringing products; and that AMS’s production
levels and employment depended on the sales of AMS machines that competed with
Crane’s allegedly infringing machines. To the extent that these harms stem from
Crane’s alleged patent infringement, we cannot conclude that they have been shown to
be non-compensable by monetary damages. The only one that might reasonably be
considered non-compensable is AMS’s loss of one distributor, Mountain Coin Machines.
We cannot agree that, under the circumstances of this case, the defection of a single
distributor from the patentee’s camp to the accused infringer’s camp is sufficient to
demonstrate irreparable harm. The district court’s contrary finding is legally and
factually unsound.
Third, AMS suggests that allowing Crane to keep producing and selling allegedly
infringing machines will lead to price erosion. To the extent that failing to grant a
preliminary injunction would permit Crane to drop its prices in order to drive AMS out of
the market entirely, this might support a finding of irreparable harm sufficient to warrant
a preliminary injunction. But the district court cited no evidence (and neither party
points to any evidence here) that this would be likely to occur; the only support for this
theory of harm is the district court’s conclusory statement that price erosion is possible.
Given the lack of evidence supporting any type of harm that would not be compensable
through monetary damages, we hold that the district court clearly erred by finding that
AMS demonstrated irreparable harm.
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Moreover, we hold that the district court clearly erred in finding that AMS
demonstrated a reasonable likelihood of success on the merits. The district court’s
finding of likelihood of success was based on Crane’s failure to demonstrate that its
invalidity argument was likely to succeed in invalidating the asserted claims of AMS’s
patents. Given this failure by Crane to demonstrate that AMS’s patents were likely to be
proven invalid, the district court found that AMS had shown a reasonable likelihood of
succeeding on the merits of its infringement claim. But this improperly shifts the burden
to Crane to demonstrate that AMS is unlikely to succeed on the merits in order for
Crane to avoid a preliminary injunction. This is not the law. Instead, AMS must
demonstrate that it is reasonably likely to succeed on the merits. Given that Crane will
have the burden at trial of proving invalidity by clear and convincing evidence, we
understand that it may be difficult to determine precisely how much of an invalidity case
Crane needs to present at this preliminary stage. Even so, the district court’s analysis
of the likely outcome of the invalidity question here was so abbreviated that we cannot
uphold the district court’s finding that AMS was reasonably likely to succeed on the
merits. Crane pointed to a selection of prior art references that together disclose all the
limitations of claim 28 of the ‘220 patent. The district court did not examine the invalidity
arguments Crane presented; instead, the court merely determined that, because two of
the prior art references had already been examined by the PTO, they were incapable of
raising any substantial question of patentability. This was improper, not least because
the Supreme Court decision in KSR International Co. v. Teleflex Inc., 550 U.S. 398
(2007), which changed the state of obviousness law, was issued after the patents were
examined in the PTO but before the district court issued the decision under review here.
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The district court then found that, because the other two prior art references Crane
presented related only to “transparent-front vending machine[s] having helical coils to
dispense products,” they also could not raise a substantial question of patentability. We
do not find that these references, which certainly relate to vending machines, are in a
field so different from the vending-machine-related patent at issue that they could not
conceivably support an obviousness argument. Thus, we hold that the district court was
too quick to dismiss Crane’s invalidity argument. Under a proper analysis, it may well
prove that AMS is likely to prevail on the merits in this case. We express no opinion on
that issue. But, given the facts in this case and the analysis conducted by the district
court, we do not agree with the district court’s conclusion that Crane failed to raise a
substantial question of patentability.
Given the weaknesses in AMS’s demonstrations of likelihood of success on the
merits and irreparable harm, we hold that the district court reversibly erred by granting
AMS’s motion for a preliminary injunction. We therefore vacate the injunction and
remand for further proceedings. Because we vacate the preliminary injunction, we need
not reach the question of whether it was error for the district court to set the amount of
the injunction bond without considering AMS’s ability to pay.
This leaves only the issues regarding the district court’s stay of all of AMS’s
infringement and related claims (against both Crane and Seaga) pending the outcome
of the reexamination of the patents-in-suit by the United States Patent and Trademark
Office. There are two separate issues: the stay of AMS’s claims against Crane and the
stay of AMS’s claims against Seaga.
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Both Crane and AMS agree that it was error for the district court to both grant a
preliminary injunction against Crane and stay AMS’s claims against Crane pending
reexamination of the patents-in-suit. But the parties do not agree on the proper remedy.
Crane would maintain the stay but vacate the preliminary injunction, while AMS would
vacate the stay and maintain the injunction. The parties are correct that on this record
the district court necessarily erred either by granting the preliminary injunction or by
staying the case. “[T]he district court ordinarily should not grant both a preliminary
injunction and a stay.” Procter & Gamble, 549 F.3d at 849. This is because a stay
pending reexamination is appropriate only if there is a substantial issue of patentability
raised in the reexamination proceeding, while the injunction against the accused
infringer is appropriate only if there is no substantial issue of patentability. Id. (citing
Amazon.com, 239 F.3d at 1350-51). Because it logically seems that there cannot
simultaneously be a substantial issue of patentability and no substantial issue of
patentability, stays pending reexamination are typically inappropriate in cases in which
preliminary injunctions are appropriate. As discussed above, though, because Crane
did not fail to raise a substantial question of patentability, the entry of the preliminary
injunction here was in error, and we vacate the injunction. Given this, there is no longer
any problem with staying AMS’s claims against Crane pending the outcome of the
reexamination process. Moreover, AMS’s claims against Crane are still in their very
early stages: Crane requested the stay only two months after the complaint was filed,
and the district court entered the stay order before any discovery was conducted.
Because the stay was granted pending the outcome of patent reexamination
proceedings, it may simplify the issues for trial. It might even render a trial
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unnecessary. Given these facts, and given the wide discretion the district court
generally has to manage its docket, this seems to be a case in which the stay could
have been correctly granted or denied. We cannot say that the district court abused its
discretion here by granting the stay. Therefore, we affirm the district court’s stay of
AMS’s claims against Crane.
For the same reasons, we affirm the district court’s stay of AMS’s claims against
Seaga. As with the claims against Crane, the claims against Seaga were stayed before
the start of discovery, and the reexamination of the patents-in-suit may simplify the
issues for trial. Trial may even prove unnecessary. Given that the district court properly
stayed the claims against Crane, and given that, by filing the claims against the two
defendants in the same action, AMS suggested that the claims against Seaga should be
tried together with the claims against Crane, we do not think the district court abused its
discretion by also staying the claims against Seaga. We also do not think that the
district court erred in staying the state-law claims, which are intertwined with the patent
claims. Thus, we affirm the district court’s stay of these claims.
CONCLUSION
For the reasons stated above, we affirm in part, reverse in part, and remand the
district court’s decision.
COSTS
No costs.
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