Fifth Circuit Denies Attorney Fees Where Attorneys Created Claim for Purpose of Generating Excessive Fee Request

The Fifth Circuit has affirmed a denial of all attorney fees under the Fair Debt Collection Practices Act based on the “outrageous facts” and the conduct of the plaintiff’s attorneys.

Crystal Davis alleged that Credit Bureau of the South violated Texas and Federal Debt Collection Practices Acts by using the words “credit bureau” in its name when attempting to collect a water bill of $107.29.  Davis also alleged that the defendant misrepresented itself in a phone call she recorded.  No actual damages were claimed.  The district court granted summary judgment and awarded her $1,000 in statutory damages under the federal act.  Davis then filed a motion seeking $130,410 in attorney fees under 15 U.S.C. § 1692k(a)(3), which provides that a person who violates the Act is liable for actual and statutory damages and a reasonable attorney’s fee as determined by the court.

The attorney-fee motion was referred to the magistrate judge, who refused to award any fees finding that the case involved “special circumstances” that would render an award of fees unjust.  He found that the claim “was created by counsel for the purpose of generating, in counsel’s own words, an ‘incredibly high’ fee request.”  Davis, who lived in Louisiana, was also found to have created a false claim under Texas law.  While employed at her lawyer’s law firm, she requested Defendant to mail her water bill to her parents’ address in Texas.  Davis’ recorded phone call with the Defendant was made using the law firm’s recorder and in the presence of her attorney.  The magistrate judge found that Plaintiff’s counsel believed that  prevailing  on a simple claim  under  the  FDCPA  “gives rise to a  blank  check for attorney’s  fees” and had treated the fee request as an opening bid.  The magistrate judge was “stunned” by the request for $130,000 in fees for a simple case governed by a Fifth Circuit opinion directly on point.  He found substantial duplicative and excessive fees by multiple counsel, and that the requested hourly rate of $450 was “excessive by orders of magnitude” for such a straightforward matter.  The district judge overruled objections to the magistrate’s ruling and Davis appealed.

The Fifth Circuit acknowledged that attorney fees in a successful FDCPA action are mandatory and that no Fifth Circuit opinion had allowed zero fees where the Plaintiff recovered actual or statutory damages.  However, it cited numerous cases that deny fees in similar contexts.  The Fifth Circuit has found that “special circumstances” can justify not awarding fees in civil rights cases.  Romain  v.  Walters, 856 F.3d 402, 407 (5th Cir. 2017) (quoting Hensley v. Eckerhart, 461 U.S. 424, 429 (1983)).  The Third and Fourth Circuits permit outright denial of fees under the FDCPA in “unusual circumstances.”  Graziano v. Harrison, 950 F.2d 107, 113 (3d Cir. 1991); Carroll v. Wolpoff & Abramson, 53 F.3d 626, 628 (4th Cir. 1995).  The First Circuit has upheld the denial of fees under the Truth in Lending Act under “the most unusual of  circumstances” such as bad faith, obdurate conduct, unjust hardship, or other special circumstances.   de  Jesus  v.  Banco  Popular  de  Puerto  Rico,  918  F.2d  232,  234  &  n.4 (1st  Cir. 1990).  The concurring opinion in a D.C. Circuit case suggests that even though a  reasonable fee is required under FDCPA, “the statutory text does not preclude a court from deciding — consistent with its inherent authority  to protect the integrity of its proceedings, Chambers v. NASCO, Inc., 501 U.S. 32, 42–51 (1991)—that a ‘reasonable’ fee in response to an exorbitant request is a nominal  amount  approaching zero.”  Baylor  v.  Mitchell  Rubenstein  &  Assocs.,  P.C. ,  857  F.3d  939,  958  (D.C.  Cir.  2017)  (Henderson,  J.,  concurring).

The Fifth Circuit concurred with the magistrate judge’s findings.  It criticized the requested hourly rate noting that the pleadings and brief on appeal  were replete  with  grammatical errors, formatting issues, and  improper citations.   It agreed that no incentive for bringing claims under the FDCPA was needed in this case since the plaintiff’s counsel “essentially created her claim.”  It disapproved of  “utilizing technical violations  of  the  FDCPA  solely as a means for generating attorney’s fees” and concluded: “This simply cannot be tolerated.   Bottom-line:   the   FDCPA   does   not support avaricious efforts of attorneys seeking a windfall.”  It held that the district court did not abuse its discretion in determining that Davis was not entitled to attorney’s fees, or that the reasonable attorney’s fee was $0.

Davis v. Credit Bureau of the South, No. 17-41136 (Fifth Cir. Nov. 16, 2018).

Texas Supreme Court Finds No Cause of Action for Intentional Interference with Inheritance

The Texas Supreme Court resolved a longstanding debate and an unusual split in lower courts by declaring that there is no cause of action for intentional interference with inheritance.

One issue for those victimized by persons taking undue advantage of the elderly is what remedies are available when an inheritance is interfered with.  Last year the Texas Supreme Court held that neither the Legislature nor the Supreme Court had recognized a tort for interference with an inheritance but left open whether the court might do so in the future.  Kinsel v. Lindsay, 526 S.W.3d 411, 423 (Tex. 2017).

Subsequent to Kinsel the two Houston Courts of Appeal entered opposite holdings.  The First District held that a cause of action for intentional interference with an inheritance exists.  Yost v. Fails, 534 S.W.3d 517, 529-30 (Tex. App.—Houston [1st Dist.] 2017, no pet.).  Within weeks, the Fourteenth District rejected Yost and declined to recognize such a cause of action.  Rice v. Rice, 533 S.W.3d 58, 62-63 (Tex. App.—Houston [14th Dist.] 2017, no pet.).  Both Houston courts have appellate jurisdiction over the same ten-county districts.  Cases are randomly assigned between them, meaning that parties and judges in those counties were subject to simultaneous and opposing rules.

Jack Archer executed a will in 1991 that left the bulk of his estate to his brother Richard and his children (the Archers) and the rest to charities.  In 1998, Jack suffered a stroke and became delusional and sometimes disoriented.  Jack’s friend, Ted Anderson, hired a lawyer and had Jack sign new wills and trust documents leaving his entire estate to the charities.  While Jack was still alive, the Archers sued seeking a declaration that Jack lacked mental capacity to execute the new wills and trusts.  The charities agreed not to probate the new wills in exchange for the Archers’ agreement to give them Jack’s coin collection worth $588,000 and pay their attorney fees.

After Jack died, his 1991 will was probated and the Archers received their bequests.  They sued Anderson’s estate for intentional interference with their inheritance.  Unlike many elder abuse cases, Anderson never personally profited from his actions and the Archers received their inheritance under Jack’s prior will.  But they alleged damages consisting of the $588,000 they had to give the charities in settlement plus $2.8 million in attorney fees incurred in avoiding Jack’s post-1991 wills and trusts.

In a 5-4 decision the Supreme Court rejected the claim.  “Because existing law affords adequate remedies for the wrongs the tort would redress, and because the tort would conflict with Texas probate law, we hold that there is no cause of action in Texas for intentional interference with inheritance.”  The court reasoned that probate law protects a donor’s right to freely dispose of his property as he chooses, while a prospective beneficiary has no right to a future inheritance only an expectation that is dependent on the donor.  Recognizing a tort of intentional interference with inheritance would give a beneficiary a right he or she does not otherwise have and one that might conflict with the interests and private motives of the donor.  The court agreed with commentators that tort law “is ill-suited to posthumous reconstruction of the true intent of a decedent.”  John C.P. Goldberg & Robert H. Sitkoff, Torts and Estates: Remedying Wrongful Interference with Inheritance, 65 Stan. L. Rev. 335 (2013).  Probate doctrines like undue influence and duress distinguish between legitimate persuasion and overbearing influence on a testator.  If these remedies are inadequate, establishing new remedies is better suited to the legislature than through “judicial adventurism.”

The dissenters agreed with the majority that the Archers had adequate remedies without a claim for intentional interference with inheritance.  But they argued forcefully that it was too soon to reject such a tort for all time, citing statistics on elder abuse including abuse within guardianships.  The dissenters argued that the Court could not state that current law affords adequate remedies for all situations where elderly persons are wrongfully relieved of assets intended for others.  They would have withheld a decision about whether to recognize or reject the tort until the full effects of Kinsel could be seen and evaluated.

Archer v. Anderson, No. 16-0256 (Tex. June 22, 2018)

The Texas Supreme Court’s Docket, Part 3

There’s a perception in some appellate circles that if the court of appeals has issued a “memorandum opinion,” the chances of getting review by the Supreme Court of Texas are minuscule.   A look at the supreme court’s statistics might change a few minds.

To give some perspective, first consider what it means to have a “memorandum opinion.”  The Texas rules of appellate procedure allow intermediate courts of appeals to designate written opinions as an “opinion” or a “memorandum opinion.”  In general, if the issues decided by the court are settled under existing law, the court should use the “memorandum opinion” designation.  But the “opinion” label should be used when the court (1) establishes a new rule, alters an existing rule, or applies an existing rule to a novel set of facts; (2) addresses issues of constitutional law or other legal issues important to the jurisprudence of the state; (3) criticizes existing law; or (4) resolves an apparent conflict of authorities.   Faithful application of this test to each appeal results in a sorting of cases into those that are mundane because they don’t plow new ground (memorandum opinions) and those that are significant because of the nature of the issues resolved (opinions).  The Texas Supreme Court accepts only cases that are important to the state’s jurisprudence, so one would expect to see a strong bias in favor of the “opinions” over “memorandum opinions.”

The breakdown of granted petitions for the 4-year period from 2014 through 2017 shows that approximately 1/3 of the petitions granted involved memorandum opinions.   In 2016, the percentage was approximately 40% of the total petitions granted.  Those percentages are strikingly high if memorandum opinions are supposed to be reserved for mundane settled legal questions.   The percentages may give practitioners hope that an opinion labelled as a “memorandum opinion” is not the end of the appellate road.

 

The Texas Supreme Court’s Docket, Part 2

Each calendar year, the Supreme Court of Texas agrees to hear and decide somewhere around 80 petitions for review.   This is only a fraction of the petitions for review that come knocking on the court’s door.   When the court grants a petition for review the odds are very strong that the court is going to reverse the court of appeals judgment.  Overall reversal rates range between 75% to 85% for the years 2014 through 2017, with the average reversal rate for all four years being 82.2%.

But reversal rates vary depending upon which intermediate court of appeals issued the opinion being reviewed.  Excluding courts of appeals with a statistically insignificant number of cases reviewed, the reversal rates vary from a low of 54% (Austin) to a high of 94.7% (El Paso).  The chart below shows the percentage reversals by court of appeals:

Statistically, the odds of an affirmance are better than the average if the intermediate court of appeals that issued the opinion under review is the Houston First Court of Appeals, the Austin Court of Appeals, the Amarillo Court of Appeals, or the Corpus Christi Court of Appeals.

In part 1 of this series, I pointed out that the Texas Supreme Court was granting more petitions than would be expected by random selection for the 3rd (Austin), 4th (San Antonio), 8th (El Paso), 13th (Corpus Christi), and 14th (Houston) courts of appeals, and I raised the question of whether the numbers might be higher because these courts were committing more errors than the other intermediate appellate courts.  The reversal rates in the chart above do not seem to support that theory.  The reversal rates for the Austin Court of Appeals and the Corpus Christi Court of Appeals are well below the average.  The reversal rates for the San Antonio and Houston Fourteenth Courts of Appeals is about average.  Only the El Paso Court of Appeals has a higher than average reversal rate.   Thus, it would appear that there is something more than mere error that explains why the Texas Supreme Court accepts more petitions to review opinions from some courts of appeals than others.

 

 

 

 

The Texas Supreme Court’s Docket, Part 1

For well over a decade, the Supreme Court of Texas has been presented with more than 1000 different matters each fiscal year.  These matters consist of petitions for review, petitions for writs of mandamus, certified questions, petitions for habeas corpus, direct appeals, and a handful of other miscellaneous items.  The bulk of the court’s docket consists of petitions for review, which are either denied or granted.

Understanding the make-up of the court’s docket may be enlightening.  Where do these petitions for review come from and why?  In the coming weeks, I will be presenting a number of blog posts that focus upon the make-up of the court’s docket.  It is my hope to bring a greater understanding of the court’s docket by this analysis.

In this first blog entry, I focus on the immediate source of the petitions for review–the 14 intermediate courts of appeals.  More particularly, I wanted to see what intermediate court of appeals the granted petitions for review came from.   Assuming all things being equal, one might conclude that the distributions across the 14 intermediate courts would be roughly equal.  But you have to consider that the 14 courts of appeals have different numbers of justices on them, ranging from 3 to 13.  There are a total of 80 intermediate appellate court justices statewide, and thanks to the Texas Supreme Court’s efforts to equalize the workload, the distribution of cases among the 80 justices is roughly equal.   With this in mind, based upon the total petitions granted, I was able to calculate the distribution of those granted petitions across the 14 intermediate courts that would be expected if all things were equal (random), keeping in mind the number of justices serving on each court.  I then compared the expected distribution of granted petitions with the actual distribution of granted petitions.  I performed these calculations for the calendar years ranging from 2014 to 2017.  Here’s the result:

As this graph demonstrates, the Texas Supreme Court grants more petitions than would be expected from a random selection process for the 3rd (Austin), 4th (San Antonio), 8th (El Paso), 13th (Corpus Christi), and 14th (Houston) courts of appeals.  The Texas Supreme Court grants fewer petitions than would be expected from a random selection for the 2nd (Fort Worth), 5th (Dallas), 6th (Texarkana), 9th (Beaumont), 10th (Waco), and 11th (Eastland) courts of appeals.

What explains these differences?  Could it be that the 3rd, 4th, 8th, 13th, and 14th courts of appeals are making more errors?  Could it be that these courts are deciding issues that are more important to the state’s jurisprudence–which was one of the key factors (and now the only factor) the Texas Supreme Court uses for exercising its discretion over which petitions to accept for review?  Could it be that the other courts are making fewer errors, or deciding less important issues?  The reader can draw his or her own conclusions, but the data does not in itself give any definitive answer.

Could it be that more petitions are filed from the 3rd, 4th, 8th, 13th and 14th courts of appeals?  Stay tuned to find out…

Does Texas follow the “sham affidavit” doctrine?

A “sham affidavit” has been described as referring to an affidavit in which an affiant offers sworn testimony that contradicts the affiant’s prior, sworn testimony on a material point and the affiant gives no explanation in the affidavit for the change in the testimony.  The scenario of the “sham affidavit” arises with great frequency in Texas summary judgment practice.   Because many district courts and intermediate appellate courts refuse to give credence to such an affidavit, many motions for summary judgment have been granted and upheld.

The Supreme Court of Texas has never formally adopted or recognized the “sham affidavit” doctrine.  On February 6, 2018, the Texas Supreme Court will hear oral argument in Lujon v. Navistar, Inc., No. 16-0588.   Mr. Lujon argues that the application of the “sham affidavit” doctrine violates Texas Supreme Court holdings in Gaines v. Hamman, 358 S.W.2d 557, 562 (Tex. 1962), and in Randall v. Dallas Power & Light, Co., 752 S.W.2d 4, 5 (Tex. 1988), in which the court held that a deposition does not have controlling effect over an affidavit.  The briefs of the parties in the Lujon case may be found here.

The majority opinion in the court of appeals recognized and applied the sham affidavit doctrine, while a vigorous dissent argued that the sham affidavit doctrine should not be recognized.

Practitioners should watch for the Texas Supreme Court opinion in Lujon as it may resolve a conflict between the intermediate appellate courts over whether Texas follows the sham affidavit doctrine.

 

 

“Virtual” Business Operations Don’t Establish Venue for Patent Cases

The Federal Circuit has held that “virtual” business operations are insufficient to establish patent venue.  And it rejected the widely discussed four-factor approach to patent venue adopted by the Eastern District of Texas, which until recently was the nation’s busiest patent venue.

For almost 30 years, venue of patent cases utilized the general federal venue statute, 28 U.S.C. § 1391(c), which allows a corporation to be sued “in any judicial district in which such defendant is subject to the court’s personal jurisdiction.”  VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1578 (Fed. Cir. 1990).  That approach allowed almost any national firm to be sued in the Eastern District of Texas, the favorite venue for patent plaintiffs, leading to as much as 40% of all patent cases in the nation being filed there.

All that changed earlier this year.  In TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 197 L. Ed. 2d 816 (2017), the Supreme Court held that 28 U.S.C. § 1400(b) was the sole and exclusive venue statute for patent infringement actions.  Section 1400(b) provides that suits for patent infringement may be brought only “in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”

Following TC Heartland, many patent defendants in the Eastern District of Texas sought a change of venue.  The new venue fights focused attention on the meaning of “a regular and established place of business,” a little used phrase for which the case law was sparse and divergent.

In Raytheon Co. v. Cray, Inc., No. 2:15-cv-01554-JRG, 2017 WL 2813896 (E.D. Tex. June 29, 2017), the Eastern District court denied a motion to transfer venue.  The evidence showed that Cray did not rent or own an office or property in the Eastern District, but it allowed a sales executive to work remotely from his home in the district.  He provided price quotations to customers and identified his home telephone number as his office number with an Eastern District area code.  However he did not maintain Cray products or product literature at his home, and Cray did not pay the employee for the use of his home or publicly advertised his home as a Cray place of business.  The district court held that a fixed physical location in the district was not a prerequisite to proper venue, and that Cray was subject to venue under the holdings of In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985).

After announcing its opinion, the court identified, for the benefit of future litigants, four factors for inquiries into what constitutes a regular and established places of business “in the modern era.”  The four factors included physical presence, a defendant’s representations, benefits received, and targeted interactions with the district.  Raytheon Co. v. Cray, supra at *11–14.  Cray sought mandamus from the Federal Circuit, arguing that its limited contacts in the Eastern District did not constitute a “regular and established place of business.”

The Federal Circuit agreed with Cray.  It started with the observation that “the world has changed since 1985 when the Cordis decision issued.”  It noted that not all companies have brick-and-mortar locations, business can be conducted virtually, employees can telecommute, and products may not be warehoused given the just-in-time delivery paradigm.  But despite these changes, under TC Heartland the focus must be on “the full and unchanged language of the statute” in ways not explored in Cordis.

Without saying so expressly, the Court applied an “original intent” approach to interpreting Section 1400(b).  It reviewed the history of patent venue leading up to the enactment of Section 1400(b)’s predecessor in 1897, and admonished courts to “be mindful of this history in applying the statute.”   It considered the plain meaning of each word as it was understood at the time of enactment, citing sources like the first edition of Black’s Law Dictionary (1891).

Using those sources, the Court interpreted a “place of business” under Section 1400(b) to mean “a physical, geographical location in the district from which the business of the defendant is carried out.”  A place of business does not refer to “a virtual space or to electronic communications from one person to another.”

A “regular” place of business means a steady, uniform, orderly, and methodical manner.  Sporadic activity is insufficient.  A “regular and established” business is not transient.  It must be settled certainly, or fixed permanently.  A business can move its location but must for a meaningful time period be stable and established.  If an employee can move their home out of the district without approval of the defendant, that fact would cut against the employee’s home being a place of business of the defendant.

Finally, the regular and established place of business must be “the place of the defendant” not solely a place of the defendant’s employee.  A defendant must establish or ratify the place of business not the employee on their own.  It is not sufficient that a defendant advertises a place of business or sets up an office in the district.  It must actually engage in business from that location. “In the final analysis, the court must identify a physical place, of business, of the defendant.”

The Court held that the district court erred in denying Cray’s motion to transfer venue, and that its four-factor test was not “sufficiently tethered to the statutory language” and thus failed to inform future litigants of the necessary requirements.

Venue of the suit against Cray was not proper in the Eastern District of Texas because Cray did not have a regular and established place of business there that was the place of the defendant.  The only showing was that there was within the district “a physical location where an employee of the defendant carries on certain work for his employer.”

The Court vacated the district court’s order denying Cray’s Rule 12(b)(3) motion and ordered the district court to grant the motion to transfer under Section 1406(a) to an appropriate venue to be determined by the district court.

In re: Cray Inc., No 2017-129 (Fed. Cir. Sept. 21, 2017)

How soon must an attorney notify his client of a court filing?

The answer to this question may depend upon the circumstances.  As reflected in one recent Dallas Court of Appeals opinion, minutes mattered in order for the lawyer to ensure compliance with her obligation not to engage in conduct that might disrupt pending appellate proceedings.  This opinion could serve as a good law school exam question.

Under the facts of the case, the Dallas County Child Protective Services Unit (CPS) filed suit to terminate parental rights of a child.  The child’s foster parents had had possession of the child for 16 months and expressed an interest in adopting the child.  However, CPS sought to place the child with a maternal aunt and uncle in Florida.

In some unusual circumstances, just prior to trial, the biological mother asked the trial court to strike the intervention of the foster parents, which the court did.  Minutes later a trial was held outside of the foster parents’ presence, which lasted all of 9 minutes.  At the conclusion of the trial, the court appointed the Florida aunt and uncle joint managing conservators.

Immediately following the trial, the parties made arrangements for CPS to take the child from the foster parents.  The foster parents advised the CPS attorney’s supervisor that they were filing a petition for writ of mandamus and were seeking an emergency stay order.  Before the filing, CPS removed the child from the foster parents’ home.  The foster parents then filed their petition for writ of mandamus and motion for emergency stay and all counsel were notified of the filings.  Thirty minutes after CPS’s counsel was notified of the filings, CPS released the child to the Florida aunt and uncle, who immediately left with the child to return to Florida.  Fifty-five minutes later, the Dallas Court of Appeals issued an order staying all orders of the trial court.

Although the court of appeals concluded that mandamus relief was not appropriate because the foster parents had an adequate remedy by appeal, the court nonetheless wrote to express its concern over the fact that neither the CPS case worker’s supervisor nor CPS’s attorney attempted to contact the Florida aunt and uncle after learning of the stay order.  The appellate court acknowledged that the child had been handed over to the Florida aunt and uncle before the stay order had issued, but the court questioned the decision to remove the child with such haste within 4 hours of the trial court’s rulings and in the face of the emergency filings.

After noting that the speed of the transfer violated CPS’s own internal guidelines and showed a lack concern for the child’s best interest, the court observed that the failure of the State to notify CPS of the appellate filings potentially violated ethical obligations to keep a client reasonably informed and not to engage in conduct intended to disrupt court proceedings.  The court of appeals concluded by cautioning the State to treat future emergency proceedings as serious matters deserving of review and respect, and warning that the failure to do so may warrant referral to the grievance process.

In re Schklair, No. 05-17-00610-CV (Tex. App.–Dallas June 23, 2017, orig. proceeding)

Supreme Court Limits Class-Action Tolling

The Supreme Court has held that class action tolling under American Pipe does not toll the time within which a suit must be filed under a statute of repose.

In American Pipe the Court held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class.”  American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 554 (1974).  The open question was whether class tolling would also apply to statutes of repose.

In California Public Employees’ Retirement System v. ANZ Securities, No. 16–373 (June 26, 2017), a putative class action was filed under Section 11 of the Securities Act of 1933 concerning securities offerings of Lehman Brothers Holdings.  Section 13 of the Securities Act contains a three-year statute of repose.  More than three years after the securities were offered, the petitioner filed an individual action alleging identical violations.  After a proposed settlement was reached in the putative class action, the petitioner opted out of the class.  The respondents moved to dismiss the individual suit as untimely but the petitioner argued that American Pipe tolled limitations during the pendency of the putative class action.

The Supreme Court disagreed.  It reasoned that American Pipe was based on “the judicial power to promote equity, rather than to interpret and enforce statutory provisions.”  Whereas the statute at issue in American Pipe was a traditional statute of limitations, Section 13 of the Securities Act was held to be a true statute of repose whose purpose is to “create ‘an absolute bar on a defendant’s temporal liability.’”  In light of their purpose, the court held that statutes of repose “override customary tolling rules arising from the equitable powers of courts” and are not subject to tolling without legislative direction.

The court therefore affirmed the dismissal of the individual suit over the vigorous opposition of a four-justice dissent, which would have held that American Pipe tolling applies to statutes of repose.  Justice Gorsuch participated in the opinion and was in the majority.

California Public Employees’ Retirement System v. ANZ Securities, No. 16–373 (June 26, 2017)

Patent Exhaustion: A Win for Printer-Ink Refillers and Another Rebuke to the Federal Circuit

Just a week after reversing the Federal Circuit’s longstanding interpretation of patent venue in TC Heartland LLC v. Kraft Foods Group, No. 16-341 (May 22, 2017), the Supreme Court again reversed the Federal Circuit, this time with respect to patent exhaustion.

U.S. patent laws entitle a patent holder to prevent others from making, selling, or importing the patented invention “without authority” from the patentee.  35 U. S. C. §§ 154(a), 271(a).  However, patent rights end or exhaust once a patented product is sold.  A purchaser may freely reuse or resell the product without infringing on the patent.  The Supreme Court has now held that a patentee cannot retain patent controls after a sale by prohibiting buyers from reusing or reselling the patented items.  It also held that products sold overseas exhaust patent rights and preclude a patentee from claiming infringement when the products are later imported and resold in the U.S. without the patentee’s authority.

Lexmark sells patented toner cartridges for laser printers.  Remanufacturers like Impression Products buy empty Lexmark cartridges in the U.S. and overseas, refill them, and sell them at lower prices than Lexmark charges.  Lexmark tried to prevent customers from selling used cartridges through a Return Program in which it sold cartridges at a discount in exchange for an agreement that the buyer would not reuse or resell the cartridges.  Lexmark sued Impression Products and others claiming that they were infringing Lexmark’s patents by refilling Return Program cartridges, and by importing and filling overseas-sold cartridges.

Lexmark argued that its patent rights had not exhausted because it had not authorized reuse and resale of Return Program cartridges, nor given authority to import cartridges sold overseas at lower prices because they did not carry patent protection until they were brought into the U.S.  Impression Products argued that all patent rights as to cartridges that had once been sold were exhausted.

The Federal Circuit, sitting en banc, held for Lexmark as to both issues.  Lexmark Intn’l, Inc. v. Impression Products, Inc., 816 F. 2d 721 (Fed. Cir. 2016).  It held that, unlike an ordinary sale, Lexmark’s Return Program sales were restricted and thus resales were “without authority.”  As to cartridges sold abroad, the circuit held that patent exhaustion did not arise because the sales were made where American patent laws do not apply.  It reasoned that the patentee did not receive the rewards allowed by the patent laws from selling in an American market.

The Supreme Court disagreed.  It held that once an item is sold, the patentee has “enjoyed all the rights secured” by the patent law and has no further right to restrain the use of the product through that law.  The Court traced the doctrine to the common-law rule against restraints on alienation, citing Lord Coke’s writings from the 17th century.  The Court disagreed with the Federal Circuit’s belief that the exhaustion doctrine was merely an interpretation of the patent law’s prohibition on selling a patented product “without authority.”  Instead, exhaustion is a limit on the scope of the patentee’s own rights under the patent laws.  Thus, even if Lexmark’s contracts with its customers were enforceable under contract law, they did not allow Lexmark to retain patent rights items it had sold.

The Court further held that sales outside the United States exhaust all rights under the patent laws, analogizing to the “first sale doctrine” from copyright law.  That doctrine provides that once a copyright owner sells a copy of its work, it loses the power to restrict resales even if the first sale was made abroad.  Applying patent exhaustion to foreign sales was just as straightforward because nothing in the Patent Act indicates that the “borderless common law principle” of exhaustion should be limited to domestic sales.

The decision was 7-1 with Justice Gorsuch not participating.  Justice Ginsburg concurred as to the domestic sales but dissented as to international exhaustion.

Impression Products, Inc. vs. Lexmark International, Inc., No. 15-1189 (May 30, 2017)

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