USCO S.p.A. v. ValuePart, Inc. et al
Filing
98
ORDER granting 89 Motion to Stay. Signed by Judge Jon Phipps McCalla on 7/29/2015. (McCalla, Jon)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION
USCO S.P.A.,
Plaintiff,
v.
VALUEPART, INC., ACE TRACK
CO., LTD., and REONE TRACK
CO., LTD.,
Defendants.
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No. 2:14-cv-02590-JPM-tmp
ORDER GRANTING DEFENDANT VALUEPART, INC.’S MOTION TO STAY THE
CASE
Before the Court is Defendant ValuePart, Inc.’s Motion to
Stay the Case, filed June 18, 2015.
(ECF No. 89.)
Plaintiff
filed a response in opposition to the motion on July 2, 2015.
(ECF No. 95.)
Defendant ValuePart, Inc. replied to Plaintiff’s
response on July 8, 2015.
(ECF No. 96.)
For the reasons that follow, the motion to stay the instant
case is GRANTED.
I.
BACKGROUND
This case concerns allegations of infringement of U.S.
Patent No. 6,412,267 (the “’267 patent”) asserted by Plaintiff
USCO S.p.A. (“USCO”) against Defendants ValuePart, Inc. (“VPI”),
ACE Track Co., Ltd. (“ACE Track”), and REONE Track Co., Ltd.
(“REONE Track”) (collectively “the named Defendants”).
A.
Factual Background
“Plaintiff USCO is a joint stock company established under
the laws of Italy with its principal place of business in
Modena, Italy.”
(Compl. ¶ 5, ECF No. 1.)
USCO sells and uses
split master links and lubricated track assemblies that
incorporate split master links, and is the owner of the ’267
patent.
(Id. ¶¶ 2, 5.)
The ’267 patent protects a “method of manufacturing an
openable link of a track.”
PageID 44.)
(’267 patent at 1, ECF No. 1-3 at
USCO alleges that Defendant VPI has infringed and
continues to infringe the ’267 patent by “import[ing],
offer[ing] to sell, sell[ing], or us[ing] products which are
made by the claimed methods of the ’267 Patent within the United
States, the State of Tennessee, and this district, thereby
causing USCO to continue to suffer severe and irreparable harm.”
(Compl. ¶ 21.)
Relevant to the instant Motion, ACE Track filed a Chapter
15 petition for recognition of a foreign proceeding in the
Bankruptcy Court for the Northern District of Illinois (“the
Bankruptcy Court”).
(See ECF No. 82-1.)
The Bankruptcy Court
preliminarily enjoined the instant case on May 7, 2015.
3.)
(Id. ¶
On June 4, 2015, the Bankruptcy Court formally recognized
ACE Track’s Korean bankruptcy proceeding as a “foreign main
proceeding under chapter 15 of the United States Bankruptcy
2
Code.”
(ECF No. 86-1 ¶ 1.)
Additionally, the Bankruptcy Court
terminated the preliminary injunction staying proceedings in the
instant case.
(Id. ¶ 4.)
An automatic stay of proceedings as
to ACE Track, however, remained in effect.
See 11 U.S.C.
§ 362(a)(1).
B.
Procedural Background
On July 30, 2014, Plaintiff USCO filed a Complaint against
the named Defendants for patent infringement.
No. 1.)
(Compl., ECF
On October 1, 2014, Defendant VPI filed its Answer,
Affirmative Defenses, Counterclaims, Cross-Claims and Jury
Demand to USCO S.p.A.’s Complaint.
(ECF No. 19.)
USCO filed an
Answer to Defendant ValuePart, Inc.’s Counterclaims on October
27, 2015.
(ECF No. 30.)
On January 27, 2015, VPI filed an
Answer, Amended Affirmative Defenses, Counterclaims, CrossClaims and Jury Demand to USCO S.p.A.’s Complaint.
(ECF No.
49.)
On October 1, 2014, VPI filed a Motion to Transfer Venue.
(ECF No. 21.)
USCO responded in opposition to VPI’s Motion on
October 20, 2014.
(ECF No. 28.)
Response on October 28, 2014.
VPI filed a Reply to USCO’s
(ECF No. 33.)
On November 14,
2014, the Court denied VPI’s Motion to Transfer Venue.
(ECF No.
41.)
On March 16, 2015, USCO filed a Motion to Exclude the
Declaration of Roger Kern Regarding Claim Construction for U.S.
3
Patent No. 6,412,267.
(ECF No. 56.)
On March 18, 2015, USCO
filed a Notice of Clarification revising certain assertions made
in the Motion to Exclude.
(ECF No. 59.)
On March 18, 2015,
USCO also filed a Consent Motion for Expedited Briefing Schedule
(ECF No. 60), which the Court granted on March 19, 2015 (ECF No.
61).
On March 20, 2015, VPI filed a Response in Opposition to
USCO’s Motion to Exclude.
(ECF No. 62.)
VPI’s response on March 26, 2015.
USCO filed a reply to
(ECF No. 67.)
The Court
granted USCO’s motion to exclude the declaration of Roger Kern
on April 27, 2015.
(ECF No. 78.)
Pursuant to the Court’s
order, the Court subsequently entered a revised declaration of
Roger Kern on May 6, 2015.
(ECF No. 79.)
On June 18, 2015, VPI filed the instant motion to stay
proceedings.
(ECF No. 89.)
USCO filed a response in opposition
to the motion on July 2, 2015.
(ECF No. 95.)
USCO’s response on July 8, 2015.
II.
VPI replied to
(ECF No. 96.)
LEGAL STANDARD
“The decision whether to grant a stay of a particular
action is within the inherent power of the Court and is
discretionary.”
Ellis v. Merck & Co., Inc., No. 06–1005–T/AN,
2006 WL 448694, at *1 (W.D. Tenn. Feb. 19, 2006) (citation
omitted).
“[T]he power to stay proceedings is incidental to the
power inherent in every court to control the disposition of the
causes on its docket with economy of time and effort for itself,
4
for counsel, and for litigants.”
Gray v. Bush, 628 F.3d 779,
785 (6th Cir. 2010) (alteration in original) (quoting Landis v.
North American Co., 299 U.S. 248, 254 (1936)) (internal
quotation marks omitted).
A.
Stay Pending Patent Reexamination
“Courts have inherent power to manage their dockets and
stay proceedings, including the authority to order a stay
pending conclusion of a PTO reexamination.”
Ethicon Inc. v.
Quigg, 849 F.2d 1422, 1426–27 (Fed. Cir. 1988) (citation
omitted).
In determining whether to stay litigation pending
patent reexamination by the United States Patent and Trademark
Office (“PTO”), courts generally consider the following three
factors:
“‘(1) whether a stay would unduly prejudice or present
a clear tactical disadvantage to the non-moving party; (2)
whether a stay will simplify the issues in question and trial of
the case; and (3) whether discovery is complete and whether a
trial date has been set.’”
Procter & Gamble Co. v. Team Techs.,
Inc., No. 1:12-cv-552, 2013 WL 4830950, at *2 (S.D. Ohio Sept.
10, 2013) (quoting Tdata Inc. v. Aircraft Technical Publishers,
Nos. 2:03–cv–264, 2:04–cv–1072 (S.D. Ohio Jan. 4, 2008)).
B.
Stay Pending Bankruptcy Proceedings
Pursuant to 11 U.S.C. § 362(a)(1), the filing of a petition
for protection in Bankruptcy Court operates as an automatic stay
as to the bankruptcy petitioner for “the commencement or
5
continuation, including the issuance or employment of process,
of a judicial, administrative, or other action or proceeding
against the debtor that was or could have been commenced before
the commencement of the case under this title, or to recover a
claim against the debtor that arose before the commencement of
the case under this title.”
See also In re Delta Air Lines, 310
F.3d 953, 956 (6th Cir. 2002).
The automatic stay “facially
stays proceedings ‘against the debtor’ and fails to intimate,
even tangentially, that the stay could be interpreted as
including any defendant other than the debtor . . . .”
Lynch v.
Johns-Manville Sales Corp., 710 F.2d 1194, 1196 (6th Cir. 1983).
The automatic stay under 11 U.S.C. § 362(a)(1) may,
however, be extended to solvent codefendants in “‘unusual
circumstances.’”
Parry v. Mohawk Motors of Michigan, Inc., 236
F.3d 299, 314 (6th Cir. 2000) (quoting In re Eagle-Picher
Indus., Inc., 963 F.2d 855, 861 (6th Cir. 1992)); see also In re
Delta Air Lines, 310 F.3d at 956 (“In the absence of unusual
circumstances, the automatic stay does not halt proceedings
against solvent codefendants.”).
In order to extend the
automatic stay to solvent defendants, the movant must show
“[s]omething more than the mere fact that one of the parties to
the lawsuit has filed a Chapter 11 bankruptcy . . . .”
A.H.
Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)
(internal quotation marks and citations omitted).
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“[U]nusual
circumstances have been found (1) when an indemnification or
contribution relationship creates an identity of interests
between the debtor and the non-debtor defendant; (2) when the
proceeding imposes a substantial burden of discovery on the
debtor; or (3) when the proceeding would have a potential
preclusive effect that forces the debtor to participate in the
proceeding as if the debtor were a party.”
In re Jefferson
Cnty., Ala., 491 B.R. 277, 284 (Bankr. N.D. Ala. 2013) (citing
A.H. Robins, 788 F.2d at 999; Queenie, Ltd., 321 F.3d at 287;
Johns–Manville Corp. v. Asbestos Litig. Grp. (In re Johns–
Manville Corp.) (Johns–Manville I), 40 B.R. 219, 223–26
(S.D.N.Y. 1984); Lesser v. A–Z Assocs. (In re Lion Capital
Grp.), 44 B.R. 690, 702–04 (Bankr.S.D.N.Y.1984)).
Courts have
issued a stay of proceedings under these circumstances
in a variety of procedural ways. Some courts have
simply determined the 11 U.S.C. § 362(a) stay applies
to non-debtors based on the considerations outlined
above, see, e.g., In re QA3 Fin. Corp., No. BK1 1–
80297–TJM, 2011 WL 2678591 (Bankr. D. Neb. July 7,
2011); Maaco Enters., Inc. v. Corrao, No. 91–3325,
1991 WL 255132 (E.D. Pa. Nov. 25, 1991), while other
courts have extended the § 362 stay using 11 U.S.C.
§ 105, which allows a bankruptcy court “to issue any
order, process, or judgment that is necessary or
appropriate to carry out the provisions of [the
Code].” See, e.g., Sudbury, Inc. v. Escott (In re
Sudbury, Inc.), 140 B.R. 461, 464 (Bankr. N.D. Ohio
1992); Johns–Manville I, 40 B.R. at 226. Still other
courts have held that a movant seeking relief pursuant
to § 105 must do so through an adversary proceeding.
See, e.g., In re Cincom iOutsource, Inc., 398 B.R.
223, 227 (Bankr. S.D. Ohio 2008).
7
In re Jefferson Cnty., Ala., 491 B.R. at 284 n.1.
III. ANALYSIS
A.
Stay of Proceedings Pending Reexamination of the ’267
Patent
1.
Prejudice
USCO argues that it will suffer prejudice as a result of a
stay of proceedings “because the average pendency of an ex parte
reexamination would leave little or no life of the ’267 Patent
for injunctive relief.”
(ECF No. 95 at 5.)
USCO asserts that
the average time for this type of reexamination ranges from
19.70 months to 27.8 months with a median of 20.1 months.
Id. at 6.)
(See
USCO further asserts that the ’267 patent is set to
expire “no later than February 11, 2018 . . . .”
(Id.)
USCO
contends that it is seeking a permanent injunction in the
instant case, which would also expire with the expiration of the
’267 patent.
(Id. at 8.)
As a result, USCO argues, a stay of
proceedings “would likely exhaust the life of the ‘267 Patent
and leave USCO without this valuable and expressly requested
remedy.”
(Id.)
USCO also argues that it will be put at a tactical
disadvantage if these proceedings are stayed because “ACE is
presently going through a bankruptcy proceeding in the Republic
of Korea with no guarantee of survival.”
(Id.)
“Should ACE not
survive bankruptcy or lose employees and/or executives during
8
the pendency of the ex parte reexamination, evidence from ACE
concerning shipments of accused instrumentalities to the United
States and its manufacturing process(es) could be lost or
difficult to obtain.”
(Id. at 8-9.)
USCO asserts that “the
Bankruptcy Code provides a mechanism for obtaining discovery
from a debtor subject to the Bankruptcy Court’s jurisdiction.”
(Id. at 9 (citing 11 U.S.C. § 1521(4); Rule 2004(a) of the
Federal Bankruptcy Rules of Procedure).)
VPI argues that USCO will not be prejudiced by entry of a
stay pending reexamination of the ’267 patent.
VPI asserts that
both parties would, instead, be prejudiced by “expend[ing]
resources to litigate claims that, statistically, are likely to
be invalidated or narrowed during reexamination.”
at 3.)
(ECF No. 89-1
VPI contends that failure to stay proceedings at this
juncture would likely result in duplicative “fact and expert
discovery efforts” and “pre-trial and trial practice.”
(Id.)
VPI further asserts that the instant case would not be
unduly delayed.
VPI states that the average time required for
reexamination, including appeals to the PTAB and the Federal
Circuit, is 20 months.
(ECF No. 96 at PageID 2873-74.)
VPI
avers that “any delays in the prosecution of the reexamination
(i.e., requests for extensions of time) are solely in USCO’s
control,” because patent reexamination is an ex parte proceeding
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in which the petitioner is not allowed to participate.
(Id. at
2874.)
VPI further argues that USCO would not be prejudiced
because monetary damages would adequately compensate USCO for
any harm suffered.
(ECF No. 89-1 at 4-5.)
VPI avers that the
fact that “USCO did not seek preliminary injunctive relief [is]
a tacit admission that it does not face irreparable
harm . . . .”
(Id. at 5 (citing Insituform Techs., Inc. v.
Liqui-Force Servs. (USA), 2009 U.S. Dist. LEXIS 44116, at *7
(E.D. Mich. May 26, 2009); SKF Condition Monitoring, Inc. v. SAT
Corp., 88 USPQ 2d 1038, 2008 U.S. Dist. LEXIS 24310, at *19
(S.D. Cal. Feb. 26, 2008)).)
With regard to the availability of discovery through the
Bankruptcy Court, VPI argues that “to obtain such discovery
could take time and cause further delays.”
PageID 2877.)
(ECF No. 96 at
VPI contends that discovery pursuant to 11 U.S.C.
§ 1521(a)(4) is only available upon request of the “foreign
representative” of the debtor, and neither VPI nor USCO are ACE
Track’s foreign representative.
(ECF No. 96 at PageID 2877.)
Additionally, VPI asserts, Rule 2004(a) is not an avenue for
“discovery against a debtor in litigation outside of the
bankruptcy proceeding.”
(ECF No. 96 at PageID 2877 (citing In
re Washington Mut., Inc., 408 B.R. 45, 50 (Bankr. D. Del.
2009)).)
10
Although USCO will suffer some prejudice as a result of the
imposition of a stay of proceedings, that prejudice is not
“undue” in relation to the potential for substantial expenditure
on duplicative procedures subsequent to the conclusion of the
reexamination and appeals process.
USCO’s primary argument is
that the delay would be significant given current cycle times
for patent reexamination and appeals, but delay alone is
insufficient to establish undue prejudice as a result of a stay
pending reexamination.
Allied Erecting & Dismantling Co. v.
Genesis Equip. & Mfg., Inc., No. 4:08CV589, 2010 WL 3239001, at
*2 (N.D. Ohio Aug. 16, 2010); see AngleFix, Tech, LLC. v. Smith
& Nephew, Inc., No. 2:13-cv-02281-JPM-tmp (W.D. Tenn. filed May
6, 2013), ECF No. 53 at 4.
Of significant concern to the Court is the expenditure of
resources on duplicative proceedings should the Court not impose
a stay in the instant case.
In Gould v. Control Laser
Corporation, the Court of Appeals explained,
Early versions of what became the reexamination
statute, 35 U.S.C. §§ 301–307 (Supp. V 1981),
expressly provided for a stay of court proceedings
during reexamination. S. 1679, 96th Cong., 1st Sess. §
310 (1979); H.R. 5075, 96th Cong., 1st Sess. § 310
(1979); S. 2446, 96th Cong., 2d Sess. § 310 (1980). An
express provision was deemed unnecessary, however, as
explained in the House report:
The bill does not provide for a stay of court
proceedings. It is believed by the committee that
stay provisions are unnecessary in that such
power already resides with the Court to prevent
11
costly pretrial maneuvering which attempts to
circumvent the reexamination procedure. It is
anticipated that these measures provide a useful
and necessary alternative for challengers and for
patent owners to test the validity of United
States patents in an efficient and relatively
inexpensive manner. (emphasis added).
705 F.2d 1340, 1342 (Fed. Cir. 1983).
The potential for “costly
pretrial maneuvering” and significant expenditure of resources
on duplicative proceedings exists in the instant case.
Should
the PTO amend any of the ’267 patent’s claims that are asserted
in the present case, the Court would likely be compelled to
reopen claim construction and allow the parties to relitigate
invalidity, noninfringement, and possibly the scope of damages
as to the amended claims.
Moreover, the expenditure of
resources on litigation with regard to any cancelled claims
would be completely squandered.
With regard to ACE Track’s bankruptcy proceedings, USCO’s
concern that ACE Track may not survive bankruptcy is unsupported
by the record.
Approval of a debtor’s reorganization plan may
serve as evidence that a successful reorganization is likely.
See In re Baldwin-United Corp., 57 B.R. 759, 768 (S.D. Ohio
1985) (finding that the bankruptcy court’s approval of the
debtor’s reorganization plan provided “ample support for [the]
conclusion that there was a substantial likelihood of a
successful reorganization and that it could be effected in the
near future”
(internal quotation marks omitted)).
12
In the
instant case, ACE Track’s rehabilitation plan was approved by
the Korean Bankruptcy Court on June 1, 2015.
(ECF No. 96-2.)
Moreover, there is no indication that a bona fide reorganization
is unfeasible in this case.
See In re Landmark Air Fund II, 19
B.R. 556, 560 (Bankr. N.D. Ohio 1982) (denying a stay of
proceedings because “[f]rom the evidence adduced thus far, it is
apparent to this Court that no bona fide reorganization is
intended or feasible in this case. The only business of the
partnership is the leasing of the Cessna aircraft, its only
major asset.”).
Additionally, the mechanisms for obtaining discovery from
ACE Track suggested by USCO do not apply to the instant
litigation.
VPI correctly points out that discovery pursuant to
11 U.S.C. § 1521(a)(4) can only be obtained in the bankruptcy
proceedings by request of the debtor’s foreign representative.
Similarly, discovery pursuant to Rule 2004(a) is only available
in the bankruptcy proceeding and cannot be used “where the party
requesting the Rule 2004 examination could benefit their pending
litigation outside of the bankruptcy court against the proposed
Rule 2004 examinee.”
In re Washington Mut., Inc., 408 B.R. 45,
50 (Bankr. D. Del. 2009).
Given the automatic stay that exists
as to ACE Track in the instant case, USCO has not adequately
explained how it could obtain discovery from ACE Track in these
proceedings should the Court rule in its favor.
13
Although a delay of 20-27 months in the instant proceedings
is not insignificant, the delay is not overly burdensome when
compared to the potential for substantial expenditure on
duplicative proceedings absent a stay of proceedings.
Accordingly, the Court finds that this factor does not weigh in
favor of a denial of a stay of proceedings.
2.
Simplification of the Issues
VPI argues that reexamination of the ’267 patent will
result in simplification of the issues in the instant case.
VPI
asserts that 78% of ex parte reexaminations at the PTO have
resulted in the cancellation or modification of patent claims.
(ECF No. 89-1 at 6 (citing ECF No. 89-6 at PageID 2667).)
VPI
further asserts that “the USPTO cited six prior art references
that, alone or in combination with another reference, raised a
substantial new question of patentability” as to multiple claims
of the ’267 patent.
(Id. at 7.)
USCO argues that the reexamination may complicate, rather
than simplify, the issues in this case.
USCO asserts that the
likelihood that the reexamined patent claims will be modified or
cancelled should be analyzed on a case-by-case basis.
(ECF No.
95 at 9 (citing Parallel Networks, LLC v. Microsoft Corp., No.
2:09-CV-172, 2010 U.S. Dist. LEXIS 145954, at *7-*8 (E.D. Tex.
May 10, 2010)).)
In support of its argument, USCO contends that
“ex parte reexamination does not create the estoppel of inter
14
partes proceedings, which means that VPI or other defendants can
re-litigate any and all prior art combinations, even if they
failed in the USPTO.”
(Id. at 9-10 (citing United Pet Group,
Inc. v. MiracleCorp Prods., No. 4:12CV00440AGF, 2012 U.S. Dist.
LEXIS 88926, at *6-*7 (E.D. Mo. June 27, 2012)).)
USCO’s argument is unavailing and runs counter to the
weight of authority on the issue.
Given that reexamination is
granted as to multiple claims, the potential for simplification
is substantial.
See Allied Erecting & Dismantling Co. v.
Genesis Equip. & Mfg., Inc., No. 4:08CV589, 2010 WL 3239001, at
*3 (N.D. Ohio Aug. 16, 2010) (“As courts in the Sixth Circuit
have noted, it is statistically unlikely that, where multiple
claims are involved, all of the claims presented will survive
reexamination unchanged.”).
In the instant case, the PTO
instituted reexamination of claims 1-7, 9-10, 12-13, and 15 of
the ’267 patent.
(ECF No. 89-2 at PageID 2624.)
Amendment of
of these claims could impact the litigation presently before the
Court, and a “majority of patents which have been reexamined
have either had all claims canceled or changes made to the
claims.”
DSW Inc. v. Shoe Show, Inc., No. 1:11 CV 1797, 2012 WL
2994193, at *2 (N.D. Ohio July 20, 2012).
In contrast, the complexities that could arise should the
Court not issue a stay of these proceedings are significant.
The Federal Circuit has previously “held that a non-final money
15
judgment of damages for infringement must be set aside where the
judgment rested on a patent claim that the PTO later cancelled.”
ePlus, Inc. v. Lawson Software, Inc., No. 2013-1506, 2015 WL
3772472, at *7 (Fed. Cir. June 18, 2015) (citing Fresenius USA,
Inc. v. Baxter International, Inc., 721 F.3d 1330, 1344, 1347
(Fed.Cir.2013)).
The Court of Appeals explained in ePlus that
cancellation of a patent claim necessitates setting aside all
non-final judgments because “‘cancelled claims [a]re void ab
initio’ . . . .”
Id.
Moreover, even though a district court’s
judgment may be “final” for the purposes of appeal, it is “not
sufficiently final to preclude application of [an] intervening
judgment that le[ads] to the cancellation of the [asserted]
patent.”
Id. (internal quotation marks omitted).
Instead, “‘a
final decree [is] one that finally adjudicates upon the entire
merits, leaving nothing further to be done except the execution
of it.’”
Id. (quoting John Simmons Co. v. Grier Bros. Co., 258
U.S. 82, 88, 42 S.Ct. 196, 66 L.Ed. 475 (1922)).
Applying these principles to the instant case, the Court
could fully adjudicate the claims against VPI and enter a
judgment on the substantive claims, damages, and injunctive
relief, only to have that judgment set aside by the issuance of
a reexamination determination in which one of the claims of the
’267 patent are cancelled.
Additionally, in the case of a
16
modified claim, it is likely that the related infringement
claims would have to be relitigated in their entirety.
Furthermore, the fact that the defendants in the instant
case could raise issues and arguments already addressed by the
PTO in its reexamination of the ’267 patent, highlights the need
for a stay of proceedings.
Because the PTO applies a different
standard for determining validity of a patent’s claim than that
applied by the district court, the potential for inconsistent
validity determinations is significant.
See Ethicon, 849 F.2d
at 1428-29 (“[I]f the district court determines a patent is not
invalid, the PTO should continue its reexamination because, of
course, the two forums have different standards of proof for
determining invalidity.”).
USCO does not dispute that if the
PTO cancels or modifies claims of the ’267 patent and those
changes are affirmed by the PTAB and the Federal Circuit, the
Court would be bound to consider the ’267 patent claims as
amended.
(See ECF No. 95 at 9-10.)
Given this fact, the fact
that the PTO granted reexamination based on six separate prior
art references, and the high probability that at least one of
the claims will be modified or cancelled, the Court finds that a
stay of proceedings pending reexamination of the ’267 patent
will simplify the issues in the instant case.
17
3.
Stage of Litigation
VPI argues that this case is in its early stages because
1) “USCO and VPI are still exchanging document discovery;”
2) “[d]iscovery and briefing on claim construction issues has
only just begun and no Markman hearing has occurred;”
3) “[n]either party has completed its claim construction
briefing;” 4) “each side has yet to conduct depositions on each
side’s claim construction expert;” 5) “no discovery has yet been
obtained from ACE Track nor has it participated in the claim
construction process;” and 6) “[n]o dispositive motions have
been filed by any party.”
(ECF No. 89-1 at 8.)
USCO argues that
[t]he current trial date of June 1, 2016 (only eleven
months from now) is far closer than the average
duration of an ex parte reexamination of 20+ months,
and completion of the trial would allow the parties to
move forward with any post-trial motions and/or
appeals before the ex parte reexamination is likely to
be concluded.
(ECF No. 95 at 10.)
USCO further asserts that “the instant case
is statistically just as close to disposition as filing, and
only ten weeks from the Markman hearing.”
(Id. at 11.)
The Court agrees with VPI that the current stage of
litigation is not so advanced that a stay would be harmful.
Similar to the present case, the Court has previously granted
stays in cases in which claim construction briefs had already
been submitted.
See, e.g., One StockDuq Holdings, LLC v.
18
Becton, Dickinson & Co., No. 2:12-CV-03037-JPM-tmp (W.D. Tenn.
Nov. 12, 2013), ECF No. 85.
Although the parties have submitted
opening claim construction briefs and a trial date was set prior
to the Bankruptcy Court’s order for a stay of proceedings, the
claim construction hearing and close of discovery are still
months out.
(See ECF Nos. 80, 89.)
USCO even concedes that the
June 1, 2016 trial date “was based on an earlier Markman hearing
setting,” which was reset due to the Bankruptcy Court’s
provisional stay of proceedings.
(See ECF No. 95 at 11.)
Due
to the delay caused by the provisional stay of proceedings, the
trial date will have to be reset.
Accordingly, this case is in
its early stages, and this factor weighs in favor of a stay of
proceedings.
4.
Balance of the Factors
Having considered the relevant factors, the Court finds
that they weigh in favor of a stay of proceedings in the instant
case pending reexamination of the ’267 patent.
B.
Extension of ACE Track’s Automatic Stay to Include VPI
In addition to a stay of proceedings pending reexamination
of the ’267 patent, VPI also requests the Court to extend ACE
Track’s automatic stay under 11 U.S.C. §362(a)(1) to include VPI
in the instant case.
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1.
Identity of Interests Between ACE Track and VPI
VPI argues that extension of the automatic stay is
appropriate in the instant case because “VPI has asserted
indemnification cross-claims against ACE Track.”
at 11.)
(ECF No. 89-1
VPI asserts that “pendency of these indemnification
claims ‘create[s] an immediate adverse economic consequence for
the debtor regardless of whether they are ultimately
successful.’”
(Id. (quoting In re Jefferson County, 491 B.R. at
296).)
VPI also argues that ACE Track is the real party in
interest because “[i]t is ACE Track’s manufacturing process that
is accused of infringing the ‘267 Patent, and VPI’s liability
will hinge on whether ACE Track’s process infringes.”
10.)
(Id. at
VPI asserts that similar to the claims against the debtor
and solvent defendant in In re Jefferson County, USCO’s claims
against VPI and ACE Track are “‘inextricably interwoven.’”
(ECF
No. 89-1 at 11 (quoting In re Jefferson County, 491 B.R. at 28687).)
USCO contends that VPI’s cross-claim against ACE Track for
indemnity is based on the terms of the Exclusive Dealership
Agreement.
(ECF No. 95 at 12-13.)
USCO asserts that the
“agreement requires mandatory arbitration for all such claims.”
(Id. at 13.)
USCO states, “It is USCO’s understanding that
issue was in fact being arbitrated by ACE and VPI and that prior
20
to Recognition of ACE’s Korean bankruptcy proceeding, the
arbitration judge issued a memorandum decision and order on
February 9, 2015 that dismissed VPI’s claim for indemnity from
ACE for patent infringement.”
(Id.)
USCO asserts that VPI has
not disclosed the arbitration order “based on a claim of
privilege and work product,” but “[i]f USCO’s understanding on
this point is incorrect it can certainly be addressed by VPI in
its response and the actual arbitration decision can be provided
to the Court by VPI.”
(Id.)
With regard to VPI’s claim that ACE Track is the real party
in interest, USCO argues that VPI “is a real party defendant by
statute under 35 U.S.C. § 271(g).”
(ECF No. 95 at 3.)
USCO
avers that “VPI’s liability stems from direct infringement of
importing, offering to sell, and selling the accused products,
not performing the patented methods of the ‘267 Patent.”
at 15 (citing § 271(g)).)
(Id.
In support of this averment, USCO
cites to Ajinomoto Co. v. ADM Co., 228 F.3d 1338, 1347 (Fed.
Cir. 2000) and argues that ACE Track cannot be the real party in
interest because patent holders are “not required under section
271(g) to pursue legal action against the party actually
practicing the patented method abroad.”
(See ECF No. 95 at 16.)
The Court of Appeals in A.H. Robins explained that an
identity of interests sufficient to warrant extension of an
automatic stay to a solvent codefendant exists where the solvent
21
codefendant “is entitled to absolute indemnity by the debtor on
account of any judgment that might result against them in the
case.”
788 F.2d at 999; see also In re Dow Corning Corp., 86
F.3d 482, 493 (6th Cir. 1996), as amended on denial of reh’g and
reh’g en banc (June 3, 1996); In re Eagle-Picher Indus., Inc.,
963 F.2d 855, 861 (6th Cir. 1992).
A sufficient identity of
interests between the debtor and solvent codefendant is also
created when “codefendant liability is ‘directly attributable to
the debtor.’”
In re Dow Corning, 86 F.3d at 493 (quoting A.H.
Robins, 788 F.2d at 1004).
As to the question of whether an identity of interests
exists between VPI and ACE Track sufficient to warrant extension
of the automatic stay based on ACE Track’s indemnity of VPI, the
Court can find no basis to sustain VPI’s position.
The Court
agrees with USCO that the Exclusive Dealership Agreement
requires mandatory arbitration to determine whether VPI is
indemnified by ACE Track for patent infringement.
Dealership Agreement § 11, ECF No. 1-1.)
(Exclusive
Moreover, VPI fails to
point to an express provision of the Exclusive Dealership
Agreement that would establish ACE Track’s indemnity for patent
infringement.
Significantly, VPI does not dispute USCO’s
assertion that the issue of indemnity for patent infringement
was resolved against VPI during arbitration proceedings.
22
(See
ECF No. 96.)
Accordingly, VPI has not established the existence
of “absolute indemnity” by ACE Track for patent infringement.
The question of whether VPI’s liability is “directly
attributable” to ACE Track is a closer issue.
On one hand,
VPI’s liability for importing, offering to sell, selling, or
using the allegedly infringing products is dependent on VPI’s
conduct.
(See § 271(g).)
On the other hand, to establish VPI’s
liability, USCO must first prove that ACE Track’s manufacturing
process is covered by the ’267 patent.
See Ajinomoto, 228 F.3d
at 1348.
The Court agrees with USCO that VPI is a real party in
interest based on the alleged infringement pursuant to § 271(g).
That VPI is a real party defendant does not, by itself, resolve
the issue presently before the Court.
In In re Jefferson
County, the court found that a sufficient identity of interests
between the debtor and solvent defendant existed based in part
on the plaintiff’s claim against the solvent defendant for
aiding and abetting the debtor’s fraud.
491 B.R. at 286-87.
Similar to the instant case, to succeed on the merits, the
plaintiff in In re Jefferson County was required to prove both
the solvent defendant’s conduct in aiding and abetting and the
debtor’s fraud.
(Id.)
Despite the fact that the plaintiff did
not pursue a claim for fraud against the debtor in In re
Jefferson County, the court found an identity of interests
23
existed between the debtor and the solvent defendant.
(Id.)
Although the facts in In re Jefferson County differ from those
in the present case in that the solvent defendant was
indemnified by the debtor, the Court finds the discussion of the
underlying fraud violation to be relevant to and instructive of
the instant analysis.
USCO simply cannot escape the fact that
in order to prevail against VPI, it must prove that ACE Track’s
manufacturing process is covered by the ’267 patent’s claims.
This requirement under § 271(g) is tantamount to proving that
ACE Track’s manufacturing process infringes the ’267 patent if
it were performed within the patent’s regional scope.
These
circumstances are sufficiently analogous to those in In re
Jefferson County to support a finding that VPI’s liability is
“directly attributable” to ACE Track.
Accordingly, the Court finds that an identity of interests
exists between VPI and ACE Track.
The Court further finds that
an extension of the automatic stay to include VPI in the instant
proceedings is appropriate based on these grounds.
2.
Substantial Burden of Discovery on ACE Track
VPI argues that failure to extend the automatic stay will
create a substantial burden on ACE Track because “[b]oth USCO
and VPI will need extensive discovery about ACE Track’s
manufacturing process.”
(See ECF no. 89-1 at 12.)
VPI asserts
that “[t]he discovery will likely include production of
24
documents and electronically-stored information as well as
depositions of corporate representatives and employees.”
(Id.)
VPI further asserts that the scope of discovery with regard to
ACE Track goes beyond merely establishing ACE Track’s
manufacturing process, and includes
many related issues, such as when the process began,
what alternatives were considered or exist, what the
“state of the art” was when ACE Track began the
process, what alternatives were known in the industry,
whether there is consumer demand for the process used,
what benefits the process offers over the
alternatives, whether ACE Track knew about USCO’s
patent, and what ACE Track reassured VPI about ACE
Track’s process.
(Id.)
USCO does not argue that proceeding with the instant action
against VPI would not burden ACE Track with discovery
obligations.
Instead, USCO argues that “the facts of this case
indicate that issuance of a stay will unnecessarily prolong this
litigation and prejudice USCO.”
(ECF No. 95 at 12.)
USCO
asserts that some discovery from ACE Track will be necessary,
but that the required discovery is appropriate given the
Bankruptcy Court’s determination to lift the stay of proceedings
as to VPI and the existence of discovery mechanisms through the
Bankruptcy Court.
(See id.)
USCO avers that “[t]here is no
reason to believe that the Bankruptcy Court will not allow
discovery that may be necessary in conjunction with this case.”
(Id.)
25
USCO further contends that it will be put at a tactical
disadvantage if a stay is granted because the Bankruptcy Court
has already authorized ACE Track’s participation in discovery in
the arbitration proceedings.
(Id. at 13.)
Because VPI has
access to discovery of ACE Track in the arbitration proceedings
and USCO does not, USCO argues that a stay of the instant
proceedings would “clos[e] the door to discovery by USCO, while
VPI will be able to continue its claims against and take
discovery from ACE.”
(Id. at 13-14.)
“[T]he overall purpose of the bankruptcy code [is] to
permit the debtor a breathing space during which time he can
take stock and formulate a plan without the distraction of other
actions.”
In re Baldwin-United, 57 B.R. 759, 767 (S.D. Ohio
1985); see also In re Penn-Dixie Indus., Inc., 6 B.R. 832, 836
(Bankr. S.D.N.Y. 1980) (“‘The automatic stay is one of the
fundamental debtor protections provided by the bankruptcy laws.
It gives the debtor a breathing spell from his creditors.’”
(quoting House Report No. 95-595, 95th Cong., 1st Sess. (1977)
340; Senate Report No. 95-989, 95th Cong., 2d Sess. (1978) 54,
U.S. Code Cong. & Admin. News 1978 at 5840)).
Consequently,
courts may extend the automatic stay to include solvent
defendants in circumstances where proceeding against the solvent
defendant would substantially burden the debtor.
See In re
Jefferson County, 491 B.R. at 284; In re Lion Capital, 44 B.R.
26
at 703; In re Penn-Dixie Industries, 6 B.R. at 836 (finding
inter alia that production of customer lists “would result in a
not insubstantial expenditure from the Debtor’s estate of energy
and money away from the Chapter 11 reorganization effort”).
Although the potential prejudice to USCO is appreciable
given the Bankruptcy Court’s approval of discovery in the
arbitration proceedings, the issue at hand is whether allowing
additional discovery in the instant would impose a substantial
burden on ACE Track.
It is undisputed that one of the main
issues in the instant case, if not the ultimate issue, is
whether ACE Track’s manufacturing process falls within the scope
of the claims of the ’267 patent.
Discovery of ACE Track’s
manufacturing process alone would likely impose a substantial
burden on ACE Track sufficient to extend the automatic stay.
Moreover, the Court agrees with VPI that discovery would likely
cover many issues beyond the step-by-step process by which ACE
Track manufactures its products.
Accordingly, the Court finds
that requiring ACE Track to take part in full discovery at this
stage would impose a substantial burden on ACE Track.
Additionally, USCO has failed to establish a viable
mechanism for proceeding on discovery as to ACE Track.
supra Part III.A.1.
See
Without a clear discovery mechanism in
place as to ACE Track, it is difficult to see how this case
could proceed on the merits.
27
Accordingly, the Court finds extension of the automatic
stay to be appropriate based on these grounds.
3.
Preclusive Effect on ACE Track
VPI argues that if the instant proceedings are not stayed,
they could have a preclusive effect on ACE Track such that ACE
Track would feel compelled to defend against an adverse
judgment.
(ECF No. 89-1 at 13.)
VPI avers that a finding that
ACE Track’s manufacturing process infringes the ’267 patent
would have a preclusive effect on ACE Track.
(Id.)
In support
of this argument VPI cites to the cases In re W.R. GrACE & Co.,
115 F. App’x 565, 570 (3d Cir. 2004) and In re Jefferson County,
491 B.R. at 294-95 and asserts that “[t]he potential preclusive
effect need not rise to the level of collateral estoppel.”
(ECF
No. 89-1 at 13.)
USCO does not directly address the issue of what, if any,
preclusive effect a finding that ACE Track’s manufacturing
process is covered by the ’267 patent would have given the
imposition of the automatic stay as to ACE Track.
Bearing in mind that the overall purpose of § 362(a) is to
protect the debtor from being overburdened by litigation
external to the bankruptcy proceedings, the potential for
preclusion of the debtor on a claim or issue in a case is
substantial grounds for granting a stay of proceedings.
See In
re Jefferson Cnty., Ala., 491 B.R. at 293 (citing In re Lomas
28
Fin. Corp., 117 B.R. 64, 67 (S.D.N.Y. 1990); In re Lion Capital,
44 B.R. at 702–04).
“To the extent that a case turns on general
principles of claim preclusion, as opposed to a rule of law
having special application to patent cases, [the Court of
Appeals for the Federal Circuit] applies the law of the regional
circuit in which the district court sits . . . .”
Acumed LLC v.
Stryker Corp., 525 F.3d 1319, 1323 (Fed. Cir. 2008).
Regional
circuit law is also applied “to the general procedural question
of whether issue preclusion applies.”
Soverain Software LLC v.
Victoria’s Secret Direct Brand Mgmt., LLC, 778 F.3d 1311, 1314
(Fed. Cir. 2015).
“Under res judicata, a final judgment on the merits of an
action precludes the parties or their privies from relitigating
issues that were or could have been raised in that action.”
Allen v. McCurry, 449 U.S. 90, 94
(1980).
The elements for res
judicata are as follows:
(1) a final decision on the merits by a court of
competent jurisdiction; (2) a subsequent action
between the same parties or their privies; (3) an
issue in the subsequent action which was litigated or
which should have been litigated in the prior action;
and (4) an identity of the causes of action.
In re Alfes, 709 F.3d 631, 638 (6th Cir. 2013) (internal
quotation marks omitted).
Similarly, under Sixth Circuit
precedent, there are four elements to establish a claim for
issue preclusion:
29
(1) the precise issue raised in the present case must
have been raised and actually litigated in the prior
proceeding; (2) determination of the issue must have
been necessary to the outcome of the prior proceeding;
(3) the prior proceeding must have resulted in a final
judgment on the merits; and (4) the party against whom
estoppel is sought must have had a full and fair
opportunity to litigate the issue in the prior
proceeding.
Schreiber v. Philips Display Components Co., 580 F.3d 355, 367
(6th Cir. 2009) (internal quotation marks omitted).
Under traditional theories, for preclusion to be effective,
the party seeking preclusion must establish either 1) the
existence of “a subsequent action between the same parties or
their privies” (claim preclusion), In re Alfes, 709 F.3d at 638;
or 2) that “the party against whom estoppel is sought must have
had a full and fair opportunity to litigate the issue in the
prior proceeding” (issue preclusion), Schreiber, 580 F.3d at
367.
Neither of these elements can be established with regard
to ACE Track for the simple reason that these proceedings are
stayed as to ACE Track.
A final judgment could not be entered
against ACE Track until the automatic stay is lifted and the
claims against ACE Track are fully adjudicated.
Moreover, a
judgment as to USCO’s claims against VPI would not be binding on
ACE Track because ACE Track would not have had an opportunity to
fully litigate the issues raised in those claims.
Accordingly,
the traditional preclusion theories do not provide a basis for
extending the automatic stay in the instant case.
30
4.
Customer Suit Exception
VPI argues that the automatic stay should be extended
because the customer suit exception applies to this case.
ECF No. 89-1 at 14-16.)
(See
VPI contends that USCO’s claims for
infringement against ACE Track should take precedent over the
claims against VPI.
(Id. at 14-15.)
VPI asserts that “[i]t is
[ACE Track’s] manufacturing process that is accused of
infringing the ‘267 Patent,” and “VPI has ‘little to nothing’ to
offer about the manufacturing process, yet it might be forced
into the position of having to show that ACE Track’s process
does not infringe.”
(Id. at 15.)
USCO argues that the customer suit exception does not apply
in the instant case.
USCO asserts that the customer suit
exception applies to multiple actions filed in more than one
federal court and “does not apply in a case where the
manufacturer party and downstream party are both named parties
in the same action.”
(ECF No. 95 at 15.)
The Court agrees with USCO that strictly applied, the
customer suit exception does not apply to the circumstances in
this case, where a single cause of action has been asserted.
See In re Nintendo of Am., Inc., 756 F.3d 1363, 1365-66 (Fed.
Cir. 2014) (explaining the applicable circumstances as follows:
“When a patent owner files an infringement suit against a
manufacturer’s customer and the manufacturer then files an
31
action of noninfringement or patent invalidity, the suit by the
manufacturer generally take[s] precedence.”); Tegic Commc’ns
Corp. v. Bd. of Regents of Univ. of Texas Sys., 458 F.3d 1335,
1343 (Fed. Cir. 2006) (“The customer suit exception is an
exception to the general rule that favors the forum of the
first-filed action, . . . but does not override the immunity
provided by the Eleventh Amendment.”).
The Federal Circuit has,
however, found it appropriate to apply the principles of the
customer suit exception in analogous circumstances.
In In re
Nintendo of America, the Court of Appeals explained that the
“customer-suit exception to the first-to-file rule exists to
avoid, if possible, imposing the burdens of trial on the
customer, for it is the manufacturer who is generally the true
defendant in the dispute.”
marks omitted).
756 F.3d at 1365 (internal quotation
The Court of Appeals has further opined that
“the guiding principles in the customer suit exception cases are
efficiency and judicial economy.”
Tegic Communications, 458
F.3d at 1343.
In In re Nintendo of America, the Court of Appeals found
that “[w]hile the circumstances of this case differ from those
of the customer-suit exception, we agree with the district court
that the same general principles govern in that Nintendo is the
true defendant.”
756 F.3d at 1365.
The Court of Appeals then
applied those general principles in determining that severance
32
and transfer of that case would resolve the claims “more
efficiently and conveniently.”
Id. at 1366.
The same concerns of efficiency and judicial economy
predominate in the instant case precisely because ACE Track will
not be bound by the results of the instant proceedings as to
VPI.
Once the automatic stay is lifted, ACE Track will have the
opportunity to assert claim construction arguments,
noninfringement and invalidity contentions, and other factual
assertions relevant to its defense.
Moreover, there is an
appreciable risk of inconsistent judgments should the Court
enter a final judgment as to VPI without the benefit of ACE
Track’s involvement in the case.
Similar to the circumstances
in In re Nintendo of America, ACE Track is the “true defendant”
in this case because VPI is ACE Track’s customer and VPI’s
infringement can only be established if ACE Track’s
manufacturing process is found to be covered by the ’267 patent.
The potential expenditure that USCO and ACE Track would be
subject to by relitigating issues that were already litigated as
to VPI is substantial.
Accordingly, the principles of the customer suit exception
favor a stay of proceedings in the instant case pending
conclusion of ACE Track’s bankruptcy proceedings.
33
IV.
CONCLUSION
For the foregoing reasons, Defendant ValuePart, Inc.’s
Motion to Stay the Case (ECF No. 89) is GRANTED.
It is hereby
ORDERED that all proceedings in this case are stayed until the
latter of 1) a final determination of the reexamination of the
’267 patent; or 2) lifting of the automatic stay of proceedings
as to ACE Track.
IT IS SO ORDERED, this 29th day of July, 2015.
/s/ Jon P. McCalla
JON P. McCALLA
U.S. DISTRICT COURT JUDGE
34
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