Kimberly-Clark Worldwide, Inc. et al v. First Quality Baby Products, LLC et al

Filing 128

DECISION AND ORDER signed by Chief Judge William C Griesbach on 4/9/2015 granting 65 Motion to Stay; denying in part 70 Motion to Dismiss; granting 84 Motion for Summary Judgment; granting 107 Motion for Leave to File. See Order for full detail. (cc: all counsel) (Griesbach, William)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN

KIMBERLY-CLARK WORLDWIDE INC. et al.,
Plaintiffs,
v.

Case No. 14-CV-1466

FIRST QUALITY BABY PRODUCTS LLC et al.,
Defendants.
_____________________________________________________________________________
FIRST QUALITY BABY PRODUCTS LLC et al.,
Counterclaim-Plaintiffs,
v.
KIMBERLY-CLARK WORLDWIDE INC. et al.,
Counterclaim-Defendants.

DECISION AND ORDER GRANTING [65] MOTION TO STAY AND SEPARATE,
DENYING IN PART [70] MOTION TO DISMISS AND STRIKE AND GRANTING [84]
MOTION FOR SUMMARY JUDGMENT

Kimberly-Clark Worldwide Inc. et al. (collectively “K-C”) and First Quality Baby Products
LLC et al. (FQ) are competitors in the disposable training pants market. K-C brought this, its most
recent action against FQ, for infringement of U.S. Patent No. 8,747,379 (“the ‘379 patent”), which
is a continuation of an earlier KC patent that this court found invalid in a previous case between the
parties. FQ counterclaimed alleging, among other things, violations of Section 2 of the Sherman
Antitrust Act, 15 U.S.C. § 2, the Wisconsin Antitrust Act, Wis. Stat. § 133.01 et seq. and unfair
trade practices under Wis. Stat. § 120.10 (hereinafter “the antitrust counterclaims”). Before the

court are K-C’s motion to dismiss or, alternatively, to stay and separate FQ’s antitrust counterclaims,
and FQ’s motion for summary judgment on K-C’s res judicata affirmative defense. For the reasons
below, the motion to dismiss will be denied in part, the motion to stay and separate will be granted
and the motion for summary judgment will be denied.

BACKGROUND
K-C is a global manufacturer of consumer products including its Huggies® Pull-Ups® brand
disposable training pants for toilet-training children. FQ is part of an independent group of familyowned companies that manufactures products sold by retailers as “private label” brands under their
own store names. Since 2009, these parties have been engaged in litigation related to a number of
patents held by K-C. In February 2009, FQ filed a declaratory judgment action against K-C in the
Middle District of Pennsylvania seeking a ruling that FQ’s baby diaper products did not infringe on
K-C’s patents. Shortly thereafter, K-C filed an action in Texas alleging FQ was infringing on its
diaper and adult incontinence patents. After the declaratory judgment suit was dismissed, the Texas
suit was transferred to the district court in Pennsylvania. In July 2010, FQ asserted several
counterclaims in the Pennsylvania action, including that K-C was maintaining a monopoly in the
disposable training pant market in violation of Section 2 of the Sherman Act. (ECF No. 71-59,
¶¶ 109–14.) FQ alleged K-C had unlawfully acquired and maintained a monopoly in the market by
inter alia, “[t]hreatening to sue and suing private label manufacturers such as First Quality on patents
that K-C knows are invalid, unenforceable, not infringed and/or procured by fraud on the Patent
Office[.]” (Id. ¶ 112(a).)

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On September 21, 2009, while the Pennsylvania litigation was still pending, K-C filed an
action in this court alleging infringement of a number of patents K-C holds on disposable training
pant products and the processes it uses to manufacture them. After that suit was filed, FQ redesigned several of its products and processes to avoid the asserted patents, and as K-C learned of
FQ’s new designs and processes, K-C filed additional actions against FQ. These actions were either
consolidated with the first suit filed in this court or voluntarily dismissed by K-C. The consolidated
action culminated in a number of summary judgment motions, some granted and some denied. One
such summary judgment ruling was that K-C’s U.S. Patent No. 6,847,067 (the ‘067 patent), which
described a disposable training pant with refastenable side seams, was invalid for obviousness. See
Kimberly-Clark Worldwide, Inc. v. First Quality Baby Products, LLC, 900 F. Supp. 2d 903 (E.D.
Wis. 2012). This court concluded that claims 8–10 of the ‘067 patent, claiming the refastenable sideseams, described an obvious combination of K-C’s own non-refastenable Pull-Ups® training pant
and a refastenable feature taught in the prior art. On May 31, 2013, the parties settled the remaining
issues and agreed to entry of final judgment. K-C then appealed the court’s adverse ruling on the
‘067 patent.
While that appeal was pending, on June 10, 2014, the PTO issued the ‘379 patent, and on
July 11, 2014, K-C filed this action for infringement of that patent in the Western District of
Wisconsin. The ‘379 patent is a continuation of several patents including the ‘067 patent (which
itself was a continuation of a patent filed originally filed in 1999). Like the ‘067 patent, the ‘379
patent describes a disposable training pant with refastenable side seams. (ECF No. 1-1.) The ‘379
patent and the ‘067 patent share the same inventors, specification and drawings. According to K-C,
the ‘379 patent is significantly different than the ‘067 patent because the former contains additional
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substantive limitations, such as “containment flaps,” a “surge layer” and other features. (ECF No.
71 at 17.) FQ, on the other hand, alleges that K-C used samples of FQ’s training pants to draft
claims for ‘379 patent in an attempt to cover FQ’s product so that it could then sue FQ for
infringement if and when its continuation patent was granted.
Meanwhile, in the Pennsylvania case, the district court entered an order on June 5, 2014
indicating the parties had reached a settlement. The parties executed a settlement agreement on
August 21, 2014 wherein the parties acknowledged the June 5 order and agreed that within seven
days of execution of the agreement, “the Parties agree to file an Agreed Order dismissing with
prejudice all claims and counterclaims, and waiving all appeals, in the Pennsylvania Suit[.]” (Pls.’
Ex. 54, ECF No. 103-2, § 6.4.) On August 26, 2014, the Pennsylvania court entered the dismissal
order the parties had agreed to. It provided that pursuant to a settlement agreement, the parties
jointly intended that the case be dismissed “with prejudice” and the court accordingly ordered that
“[a]ll claims and counterclaims in the above-captioned action are hereby dismissed with prejudice.”
(Pls.’ Ex. 13, ECF No. 71-15.)
The settlement agreement also contains a mutual release. The agreement provides that the
parties “irrevocably, comprehensively and mutually release, acquit and forever discharge each other”
from:
(1) all claims and counterclaims that have been asserted or could have been asserted
by one Party against the other, which claim or counterclaim pertains to the PatentsIn-Suit and (2) all claims and counterclaims for past damages that have been asserted
or could have been asserted by one Party against the other, which claim or
counterclaim pertains to the following products if manufactured sold, imported,
exported, offered for sale or otherwise transferred on or before the Effective Date:
all protective underwear, belted undergarments, pant liners, bladder control pads,
male guards, briefs, under pads, liners, baby diapers, youth pants, youth briefs and
Accused Products (the foregoing list of products shall not be construed to include
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infant or toddler training pants).
(ECF No. 103-2, § 5.1.) The parties also agreed to other terms relating to the patents and products
at issue, including that K-C would not sue FQ on the patents-in-suit alleging infringement by certain
redesigned products and that K-C granted FQ immunity from suit for its future use of the accused
products. (Id. §§ 3.1, 4.1.)
Back in this case, FQ filed its answer on August 11, 2014. It asserted affirmative defenses
based on invalidity and the doctrine of unclean hands and asserted counterclaims for declaratory
judgment of non-infringement and invalidity. (ECF No. 19.) On September 2, 2014, FQ filed an
amended answer adding the defense of prosecution laches. On October 10, 2014, the Federal Circuit
affirmed this court’s 2012 judgment of invalidity of the ‘067 patent without opinion in a per curiam
judgment. (ECF No. 43-1.) Counsel for FQ then sent a letter to K-C’s counsel stating the Federal
Circuit’s decision “leaves no doubt that the ‘379 Patent is also invalid . . . .” (See 2d Am. Answer
and Countercls. ¶ 84, ECF No. 62.) FQ requested that K-C voluntarily dismiss the suit, but K-C did
not respond.
On November 20, 2014, FQ’s motion to transfer the case to this court from the Western
District was granted. (ECF No. 50.) In an unopposed motion filed the next day, FQ requested leave
to file an amended answer and counterclaim. This court granted the motion November 23, 2014.
FQ’s new pleading added its fifth affirmative defense asserting K-C’s claim on the ‘379 patent is
barred by collateral estoppel, as well as the antitrust counterclaims. FQ alleges K-C’s suit on the
‘379 suit is objectively baseless because the ‘379 patent is invalid and unenforceable. (ECF No. 62,
¶ 87.) In addition to the alleged “sham” suit on the ‘379 patent, FQ also alleges K-C has engaged
in a pattern of litigation without regard for the merits of its claims but with the purpose of excluding
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competition from private label companies like FQ, driving up costs for FQ and interfering with its
business. (Id. ¶¶ 88–89.)
On December 16, 2014, K-C filed a motion to separate and stay the antitrust counterclaims
and a motion for a protective order staying discovery related to the antitrust counterclaims until the
disposition of the motion to separate and stay. The court granted the latter request. On December
23, 2014, K-C moved to dismiss the antitrust counterclaims and strike FQ’s fifth affirmative defense
of collateral estoppel.

On January 16, 2015, FQ responded to the motion to dismiss and

simultaneously moved for summary judgment in its favor as to the first ground for dismissal offered
by K-C, which was that the antitrust counterclaims are precluded under the Pennsylvania court’s
dismissal of the prior antitrust counterclaims “with prejudice.” These motions are now fully briefed.

ANALYSIS
A.

Res Judicata
K-C first argues that FQ’s anti-trust claims are barred under the doctrine of res judicata by

the final judgment entered in the Pennsylvania litigation. Res judicata, also called claim preclusion,
is an affirmative defense. Fed.R.Civ.P. 8(c)(1). A pleading generally need not anticipate and avoid
affirmative defenses. Levin v. Miller, 763 F.3d 667, 671 (7th Cir. 2014). Nevertheless, a suit may
be dismissed if a valid affirmative defense is sufficiently obvious “from the face of the complaint [or
counterclaim.]” Walker v. Thompson, 288 F.3d 1005, 1009–10 (7th Cir. 2002). Matters outside
the pleadings may be considered on a motion to dismiss without converting it to one for summary
judgment if the matters are properly subject to judicial notice. Henson v. CSC Credit Servs., 29 F.3d
280, 284 (7th Cir. 1994).
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Seventh Circuit law applies to the claim preclusion issues in this case. Dana v. E.S. Original,
Inc., 342 F.3d 1320, 1323 (Fed. Cir. 2003). According to the Seventh Circuit:
The doctrine of claim preclusion is premised on the idea that, when a claim has been
fully litigated and come to judgment on the merits, finality trumps. Claim preclusion
under federal law has three ingredients: a final decision in the first suit; a dispute
arising from the same transaction (identified by its “operative facts”); and the same
litigants (directly or through privity of interest).
Czarniecki v. City of Chicago, 633 F.3d 545, 548 (7th Cir. 2011) (alteration in original) (citations
omitted). “Res judicata also bars litigation of claims that ‘could have been raised’ in the previous
litigation, but were not.” Maher v. F.D.I.C., 441 F.3d 522, 526 (7th Cir. 2006) (citation omitted).
K-C argues that FQ’s antitrust counterclaims are precluded here because (1) all three
“ingredients” above are present and (2) FQ could have raised all the requisite facts (including K-C’s
filing of this suit on the ‘379 patent in July 2014) prior to the August 2014 dismissal of the earlier
antitrust counterclaims. K-C notes that a stipulated dismissal with prejudice was entered in the
Pennsylvania litigation and that such a dismissal is a final judgment on the merits for claim preclusion
purposes. (ECF No. 71 at 12) (citing Lawler v. Nat’l Screen Serv. Corp., 349 U.S. 322, 327 (1995);
Golden v. Barenborg, 53 F.3d 866, 867 (7th Cir. 1995). K-C also notes that FQ’s antitrust claims
arise out of the same operative facts that were, or could have been alleged in the Pennsylvania
litigation, and that the parties in this case are either the same as, or in privity with, the parties in the
Pennsylvania litigation. (ECF No. 71 at 12–14.) It therefore follows, K-C argues, that FQ’s
antitrust claims are barred.
FQ argues in response, however, that the judgment of dismissal of the Pennsylvania litigation
was based on a written Settlement Agreement of the parties. As FQ notes, the Settlement Agreement
is crucial. In determining the res judicata effect of an order of dismissal based upon a settlement
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agreement, courts strive to give effect to the intent of the parties. Norfolk Southern Corp. v.
Chevron, U.S.A., Inc., 371 F.3d 1285, 1289 (11th Cir. 2004). “The best evidence of that intent is,
of course, the settlement agreement itself.” Id. Thus, the scope of the preclusive effect of a prior
judgment of dismissal is determined not by the claims specified in the original complaint, but instead
by the terms of the settlement agreement, as interpreted according to traditional principles of contract
law. Id.; see also Arrow Gear Co. v. Downers Grove Sanitary Dist., 629 F.3d 633, 638 (7th Cir.
2010); Pactiv Corp. v. Dow Chem. Co., 449 F.3d 1227, 1230–1232 (Fed. Cir. 2006). FQ argues
that the terms of the Settlement Agreement demonstrate that K-C’s argument for dismissal of its
antitrust counterclaims on grounds of res judicata is without merit. Even more, FQ argues that it is
clear from the terms of the Settlement Agreement that the antitrust claims it has asserted here are
preserved. FQ therefore has therefore moved for summary judgment in its own favor on K-C’s res
judicata defense and asks that it be struck.
As noted above, under the terms of the Settlement Agreement, the parties released each other
from all claims and counterclaims that pertain to the patents-in-suit in the Pennsylvania action and
all claims and counterclaims for past damages that pertain to certain enumerated products, the list
of which excludes infant or toddler training pants. (ECF No. 103-2, § 5.1.) The ‘379 patent was not
one of the patents-in-suit in the Pennsylvania action, and it pertains to training pants, the product
expressly excluded from the release. Thus, by its plain terms, the Settlement Agreement would
appear to except from the release the counterclaims FQ has asserted here.
K-C argues that FQ has omitted other language from the Settlement Agreement that makes
clear the parties’ intent to dismiss all claims and counterclaims in the Pennsylvania action with
prejudice. Specifically, § 6.4 of the Settlement Agreement states: “Within seven (7) calendar days
8

of execution of this Settlement Agreement, the Parties agree to file an Agreed Order dismissing with
prejudice all claims and counterclaims, and waiving all appeals, in the Pennsylvania Suit, in the form
attached as Exhibit G.” (ECF No. 103-2.) K-C argues this language demonstrates that the final
judgment in the Pennsylvania action was intended to resolve all disputes in that action, including the
antitrust claims. (ECF No. 102-1 at 2.) K-C also accuses FQ of conflating two separate defenses
– release and res judicata – by relying exclusively on the language of the release portion of the
Settlement Agreement. K-C notes that it is not relying on the release or the Settlement Agreement
as a bar to FQ’s antitrust claims, but instead on the final order of dismissal with prejudice. Finally,
K-C contends that in order to avoid the preclusive effect of a judgment through an agreement, the
parties must do so by including an express reservation and waiver. K-C contends that the Settlement
Agreement contains no such reservation or waiver. (Id. 2-3.)
K-C’s arguments are not persuasive. The release on which FQ relies is part of the Settlement
Agreement and sets forth the parties’ specific understanding and intention as to effect of their
Agreement. A limited release in a settlement agreement narrows the preclusive effect of a final
judgment to those claims that are not expressly reserved. Arrow Gear, 629 F.3d at 638. The release
here expressly excepts from its terms claims and counterclaims pertaining to other patents and infant
or toddler training pants. This language controls over the more general statement of future intent
quoted by K-C. Moreover, it makes no sense to create such an exception to the release unless the
parties intended to avoid the preclusive effect of the dismissal of the Pennsylvania action on such
claims. K-C apparently wanted to preserve its right to pursue its claim against FQ for infringement
of the ‘067 patent in the event its appeal was successful. In doing so, K-C likewise preserved FQ’s
antitrust claim against K-C pertaining to the same product. It follows that FQ’s claim is not barred.
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FQ’s motion for summary judgment on K-C’s affirmative defense of res judicata will therefore be
granted.
B.

Noerr-Pennington Immunity and the Sham Litigation Exception
Aside from res judicata, K-C argues the antitrust counterclaims must be dismissed because

it is entitled to immunity for its patent litigation under Eastern Railroad Presidents Conference v.
Noerr Motor Freight, Inc., 365 U.S. 127 (1961) and United Mine Workers of America v.
Pennington, 381 U.S. 657 (1965). So-called Noerr-Pennington immunity is premised on the notion
that “[t]hose who petition the government for redress are generally immune from antitrust liability.”
Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 56
(1993) (hereinafter “PRE”). The rule is particularly apt in patent cases since a patent, by definition,
carves out an exception to the applicability of antitrust laws. “[A] patent is an exception to the
general rule against monopolies and to the right to access to a free and open market.” Precision
Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 816 (1945). It only
stands to reason that a patent holder should not be subject to suit for taking advantage of the
monopoly that the law expressly allows it.
There are exceptions to Noerr-Pennington immunity, however. Under Walker Process
Equipment, Inc. v. Food Machinery Corp, for example, a patent holder who brings an infringement
suit may be subject to antitrust liability for the anti-competitive effects of that suit if the asserted
patent was obtained through knowing and willful fraud. 382 U.S. 172, 177 (1965). There is no such
allegation here. FQ has not accused K-C of having obtained the ‘379 patent by willful fraud. Instead,
FQ contends that the “sham” litigation exception to Noerr immunity applies.

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In PRE, the Supreme Court held that Noerr immunity does not apply to allegedly
anticompetitive “sham” litigation. The reason for this exception is that “application of the Sherman
Act would be justified when petitioning activity, ostensibly directed toward influencing government
action, is a mere sham to cover . . . an attempt to interfere directly with the business relationships of
a competitor.” Id. at 56 (quotations omitted). This exception applies in the patent context as well.
A patent holder is not entitled to Noerr-Pennington immunity when a suit for patent infringement is
a mere sham to cover an illegal attempt to eliminate or suppress competition. Kaiser Foundation
Health Plan, Inc. v. Abbott Laboratories, Inc., 552 F.3d 1033, 1045 (9th Cir. 2009).
There are two elements to sham litigation: “First, the lawsuit must be objectively baseless in
the sense that no reasonable litigant could realistically expect success on the merits.” Id. at 60. This
standard is akin to the standard for probable cause. Id. at 62. Second, the baseless suit must
“conceal[] an attempt to interfere directly with the business relationships of a competitor . . . through
use [of] the government process—as opposed to the outcome of that process—as an anticompetitive
weapon[.]” Id. at 60–61 (citations omitted and emphases in original). Put another way, a “sham” suit
is not a “genuine” suit in either sense of the word because the asserted claim must be objectively
baseless and the complainant must subjectively know it. Id. at 61.
In patent cases in which the sole or primary defense is a challenge to the validity of the patent,
Noerr-Pennngton immunity will generally prevail. See Tyco Healthcare Group LP v. Mutual
Pharmaceutical Co., Inc., 762 F.3d 1338, 1345 (Fed. Cir. 2014) (“Given the presumption of patent
validity and the burden on the patent challenger to prove invalidity by clear and convincing evidence,
it will be a rare case in which a patentee's assertion of its patent in the face of a claim of invalidity will
be so unreasonable as to support a claim that the patentee has engaged in sham litigation.”). But
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implicit in the Federal Circuit’s statement that a finding of sham litigation will be rare in such
circumstances is the acknowledgment that it is possible. In other words, the Federal Circuit has not
ruled out the possibility that an action to enforce a facially valid patent in the face of a claim of
invalidity can constitute sham litigation. FQ argues that this is such a rare case.
FQ notes that at the time K-C filed this action seeking to enforce its ‘379 patent, this court
had already entered a judgment declaring the ‘067 patent, the parent of the ‘379 patent, invalid as
obvious. The PTO had reached the same conclusion in an inter partes re-examination of the ‘067
patent on October 9, 2013, and rejected each and every claim of the patent as obvious. (ECF No 62,
¶¶ 67, 68.) In addition, the Federal Circuit summarily affirmed this court’s determination that the
‘067 patent was invalid on October 10, 2014, three months after K-C filed its suit to enforce the ‘379
patent. FQ alleges that the ‘379 patent is “virtually identical” to the ‘067 patent except for the
addition of several features well known in the prior art. Despite this fact and the Federal Circuit’s
decision summarily affirming this court’s obviousness determination of the ‘067 patent, K-C has
refused FQ’s request that it voluntarily dismiss the current action.
It is not only this action, however, that FQ cites in support of its antitrust claims against K-C.
Relying on California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 513 (1972), FQ
alleges that K-C has filed “a pattern of baseless, repetitive claims” against FQ sufficient to support
a finding that K-C has abused the administrative and judicial processes in an effort to interfere with
FQ’s lawful efforts to compete in the disposable training pant market. In support of this allegation,
FQ recites in its counterclaim the history of K-C’s three previous lawsuits against FQ in this court
in which K-C sued FQ for infringement of twelve separate patents relating to disposable training
pants or their manufacture. In 2009 K-C sued FQ for infringement of two of its patents on the
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training pant product, including the ‘067 patent, and sought an injunction enjoining FQ from
manufacturing and selling its training pant product. After the court denied K-C’s motion for a
preliminary injunction, K-C filed an amended complaint in which it accused FQ of infringing several
other K-C patents covering its manufacturing process for disposable training pants. K-C again
sought a preliminary injunction to enjoin FQ from manufacturing its training pants product in
violation of K-C’s patents. Although this court granted K-C’s motion as to four of its process
patents, the Federal Circuit reversed as to three on the ground that FQ had raised substantial
questions as to their validity. In the meantime, FQ had redesigned its manufacturing process so as
not to infringe K-C’s patents. K-C then filed a third motion for preliminary injunction, which the
court ultimately denied as moot.
While its previous action was still pending, K-C filed two additional lawsuits in this court
against FQ for infringement of two other process patents. In one, the court found the patent invalid.
In the other, K-C voluntarily dismissed the action after FQ brought to its attention prior art not
considered by the PTO. As summarized by FQ, of the twelve patents K-C asserted against it, four
were invalidated, two were found not infringed, five (including three with substantial questions of
validity) were designed around, and one was voluntarily dismissed. (ECF No. 62, ¶¶61-74.) The
amount of and lack of success in its previous litigation in this court, FQ contends, supports an
“inference of a pattern of predatory litigation under California Motor Transport” by K-C. (ECF No.
80 at 19.)
FQ further contends that K-C manipulated the patent process in order “to manufacture still
more sham litigation with First Quality on the ‘379 Patent.” (Id. at 20.) In support of this allegation,
FQ notes that shortly after being sued by K-C for infringement of the 067 patent, and prior to the
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court’s determination that it was invalid, it redesigned its training pant product in an effort to resolve
the dispute between the parties. FQ states that it provided K-C samples of its redesigned product to
K-C and asked K-C to confirm that it no longer infringed. FQ alleges that instead of confirming the
fact that its modified design no longer infringed K-C’s ‘067 patent, K-C drafted new claims for the
‘379 patent to cover FQ’s new design. FQ alleges that this is reflective of how K-C has exploited
the patent process so as to maintain its dominant share of the disposable training pant market:
After first applying for a patent relating to refastenable training pants in 1998, K-C
has repeatedly filed “continuation” applications with the Patent Office for the purpose
of broadening claims and even adding new claims altogether. Through careful
maneuvering in the Patent Office, K-C has ensured that for the past fifteen years, it
has always had at least one patent application pending relating to refastenable training
pants. This has allowed K-C to add or amend claims relating to training pants
whenever doing so tactically suited its interests. In this way, K-C has exploited
“continuation” practice by, for example, introducing minor, trivial differences over the
prior art into patent claims when K-C was threatened with a validity challenge.
(ECF No. 62 ¶ 77.) FQ further alleges that “the Patent Office twice rejected as obvious every claim
of the application that would become the ‘379 Patent,” explaining “how each element of the claims
was either taught in the prior art or involved obvious modifications in view of the prior art.” (Id.
¶ 79.) Despite K-C’s failure to adequately address the issues raised in the prior rejections, FQ alleges
that the PTO “finally relented under the procedural onslaught from K-C and, without any explanation,
finally allowed the claims and the patent to issue.” (Id.)
FQ also alleges that the claims of the ‘379 patent are unenforceable under the doctrine of
prosecution laches. According to FQ, K-C waited more than a decade before adding the claims it
alleges FQ infringed to its continuation patent, and only after observing FQ’s product. FQ alleges
that if the ‘379 patent is enforceable, K-C’s delay will have inflicted substantial harm upon FQ in the
form of reliance costs. FQ alleges that it “has invested in manufacturing materials and equipment
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designed to make training pants with non-elasticized and non-stretched front side panels and has sold
those products for years under the reasonable understanding that such products avoided the claims
of the patents in the ‘067 Patent family.” (Id. at ¶ 81.) Given this delay, FQ alleges that K-C knew
or should have known that the claims of the ‘379 patent are unenforceable and for this reason as well
its lawsuit constitutes sham litigation.
Finally, FQ alleges that the training pant market is particularly conducive to this sort of
anticompetitive sham litigation because K-C, with some 75% of the training pant market, has much
lower “per-unit” litigation costs than competitors like FQ with much smaller market shares. (Id.
¶¶ 53–55.) In such a market, FQ contends, the prospect of earning monopoly profits from the
exclusion of a competitor makes sham litigation more profitable and likely. (ECF No. 80 at 15.)
Based on these allegations, FQ contends that it has set forth a plausible account of antitrust claims
from which K-C is not immune as a matter of law.
K-C argues these allegations are insufficient under PRE to strip a litigant of NoerrPennington immunity. K-C relies heavily on the presumption that duly issued patents are valid and
that a patentee who exercises the right to assert a facially valid patent against a competitor, absent
an allegation that it was obtained by fraud, does so in good faith and is immune from liability on
antitrust claims. K-C’s position is not without merit. As noted above, a patent holder should not be
subject to antitrust liability for attempting to take advantage of the very rights that the patent affords
him or her. Moreover, given the presumption of validity that attends a lawfully granted patent, it is
difficult to see how attempting to enforce it against the manufacturer of an infringing product can be
considered “objectively baseless.” The PTO is an independent governmental body that is mandated
to issue only patents for inventions that are novel and not obvious. 35 U.S.C. §§ 102, 103; see also
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Structural Rubber Prods. Co. v. Park Rubber Co., 749 F.2d 707, 714 (Fed.Cir.1984) (explaining that
the statutory presumption of patent validity carries with it, inter alia, a presumption of
nonobviousness). The very fact that the ‘379 patent was issued would therefore seem to preclude
a finding that K-C’s action to enforce it against an infringing product is baseless.
FQ emphasizes the fact that this court found the ‘067 patent invalid and its decision was
summarily affirmed by the Federal Circuit. In FQ’s view, the ‘379 patent is virtually the same as the
‘067 patent, and thus K-C’s refusal to dismiss its suit after the Federal Circuit affirmed this court’s
invalidity determination is a clear indication its claim is baseless. But as K-C points out, the ‘379
patent is a different patent; it has different claims. Moreover, the patent examiner who granted the
application for the ‘379 patent had before him this court’s decision invalidating the ‘067 patent and
all of the prior art on which the court relied. This fact makes the presumption of validity even
stronger. See Tokai Corp. v. Easton Enterprises, Inc., 632 F.3d 1358, 1367 (Fed. Cir. 2011) (noting
that “a party challenging validity shoulders an enhanced burden if the invalidity argument relies on
the same prior art considered during examination by the U.S. Patent and Trademark Office”).
K-C also challenges FQ’s characterization of its prior litigation in this court as evidence of
a pattern of predatory litigation within the meaning of California Motor Transport. K-C first notes
that California Motor Transport, which the Ninth Circuit reaffirmed in USS-POSCO Industries v.
Contra Costa County Bldg. & Const. Trades Council, AFL-CIO, 31 F.3d 800 (9th Cir. 1994), has
not been adopted by either the Federal Circuit or the Seventh Circuit. Thus, the suggestion in those
cases that the number of lawsuits brought by a party can amount to sham litigation, even if all or
some have merit, has no application here. Even if California Motor Transport did apply, K-C argues
that its history of litigation in this court to enforce its patents was in good faith and does not meet
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that standard.
I agree that K-C is immune from liability for its previous lawsuits against FQ. K-C sought
to enforce against FQ twelve separate patents that it expended substantial time, money and effort to
obtain with varying degrees of success. This was not a series of unsuccessful lawsuits that were
brought with no hope of success, but in essence one primary case with two small branches. The fact
that K-C has adopted a business model of obtaining patents for its products and the processes it has
developed to manufacture them, and then seeks to enforce them to the full extent permitted by law,
is not a reason to subject it to the penalties allowed for antitrust violations:
Neither the bringing of an unsuccessful suit to enforce patent rights, nor the effort to
enforce a patent that falls to invalidity, subjects the suitor to antitrust liability. Cf.
Concrete Unltd. Inc. v. Cementcraft, Inc., 776 F.2d 1537, 1539, 227 USPQ 784, 785
(Fed.Cir. 1985) (no liability for unfair competition based on suit to enforce an invalid
patent). Since a principal purpose of the patent system is to provide innovators with
a property right upon which investment and other commercial commitments can be
made, absent the PRE criteria the patentee must have the right of enforcement of a
duly granted patent, unencumbered by punitive consequences should the patent's
validity or infringement not survive litigation. See id. The law recognizes a
presumption that the assertion of a duly granted patent is made in good faith, see
Virtue v. Creamery Package Mfg. Co., 227 U.S. 8, 37–38 (1913); this presumption
is overcome only by affirmative evidence of bad faith. See PRE, supra.
C.R. Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1369 (Fed. Cir. 1998).
In essence, FQ’s argument is that the patents K-C attempted to enforce in the previous
lawsuit should never have been issued. But absent an allegation of fraud or inequitable conduct on
the part of K-C in obtaining its patents, this is a complaint against the PTO more than K-C. K-C
invested substantial time and money to design a refastenable disposable training pant product and the
machines needed to mass produce that product. It also invested substantial resources in creating a
market for it. K-C then expended much time and money to apply for and obtain patents on its

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product and manufacturing processes in order to protect its investment. K-C should not be punished
because the PTO issues “bad” patents. See Microsoft Corp. v. i4i Ltd. Partnership, 131 S.Ct. 2238,
2251-52 (2011). FQ’s argument is for reform of the PTO, not for imposing antitrust liability on K-C.
At least at this point, however, I will deny K-C’s motion as to the current litigation. The fact
that K-C commenced this action, even though the parent to the ‘379 patent was found invalid by the
court, and has continued the action even after the Federal Circuit affirmed that determination seems
to distinguish this case from others in which Noerr-Pennington immunity has been applied. FQ cites
several district court cases in which Rule 12(b)(6) motions have been denied under such
circumstances. See, e.g., In re Skelaxin Metaxalone Antitrust Litig., 2013 U.S. Dist. LEXIS 70968,
at **63–64 (E.D. Tenn. May 20, 2013) (allegations that infringement claims on continuation patent
were sham under PRE were made plausible by the defendant’s knowledge of the invalidity of the
parent); Teva Pharmaceutical Indus., Ltd. v. Apotex, Inc., 2008 WL 3413862, at **6–7 (D.N.J. Aug.
8, 2008) (allegations that infringement claims on a continuation patent were a sham under PRE were
made plausible by allegations that defendant knew the parent patent would have been unenforceable).
While it is true that the fact that the parent patent is invalid does not necessarily doom a descendent,
FQ alleges that the claims K-C added in the ‘379 pertain to features well known in the prior art. FQ
also alleges that the PTO twice rejected those claims but finally “relented” in allowing the claims
without providing any explanation and even though K-C failed to adequately address the issues the
examiner had raised. (ECF No. 62 ¶ 79.)
Also pertinent is FQ’s allegation that K-C adopted a practice of filing continuation patents
so that it could broaden claims and add new claims to protect its monopoly. More specifically, FQ
alleges that in this case K-C misused the patent process by amending the claims of the ‘379 patent
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to cover FQ’s redesigned training pant product after FQ requested K-C to confirm that it did not
infringe the ‘067 patent. As K-C observes, the Federal Circuit has explicitly approved the practice
of expanding claims in order to obtain a right to exclude a competitor’s product that a patentee
observes in the marketplace. Kingsdown Medical Consultants, Ltd. v. Hollister Inc., 863 F.2d 867,
874 (Fed. Cir. 1988). Here, however, FQ alleges that K-C was shown FQ’s design in the course of
litigation in an effort to resolve the case and that K-C delayed expanding its claims while FQ invested
in manufacturing materials and equipment with the understanding that its product did not infringe KC’s patents. It is not clear that Kingsdown applies under these circumstances.

See Rambus v.

Infineon Techs. AG, 330 F. Supp.2d 679 (E.D. Va. 2004); Kothmann Enterprises, Inc. v. Trinity
Industries, Inc., 455 F.Supp.2d 608, 640 (S.D. Tex. 2006)..
Based on these allegations, I cannot say that this is not one of those rare cases in which the
PTO’s issuance of the patent is insufficient to overcome a claim that the patentee has engaged in
sham litigation. Moreover, unlike the patents asserted in the earlier lawsuits, this court has not yet
ruled on the validity of the ‘379 patent. FQ has filed a motion for summary judgment on that issue,
and it seems prudent to address the merits of FQ’s invalidity defense before deciding whether K-C’s
lawsuit to enforce it constitutes “sham” litigation. Accordingly, K-C’s motion will be denied pending
the court’s decision of FQ’s motion for summary judgment on validity of the ‘379 patent. The court
will reconsider the motion upon deciding that motion.
C.

Compulsory Counterclaims
K-C also moves to dismiss the antitrust counterclaims under Rule 13(a), which requires “[a]

pleading must state as a counterclaims any claim that—at the time of its service—the pleader has
against an opposing party if the claim . . . arises out of the transaction or occurrence that is the
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subject matter of the opposing party’s claim[] and . . . does not require adding another party over
whom the court cannot acquire jurisdiction.” Fed.R.Civ.P. 13(a)(1) (emphasis added). K-C contends
that FQ “had every opportunity” and knowledge all requisite facts to raise these claims in its initial
answer, which was filed on August 11, 2014. (Pls.’ Br. 28–29, ECF No. 71.)
But failure to raise a counterclaim covered by Rule 13(a) generally prevents a party from
raising that counterclaim in a subsequent action, not necessarily later in the same action. See 6
CHARLES ALAN WRIGHT ET AL., FED . PRAC . & PROC . § 1417 (3d ed. 2010) (“A failure to plead a
compulsory counterclaim bars a party from bringing a later independent action on that claim.”). A
defendant can, as FQ did here, fail to raise a counterclaim in the answer and nonetheless seek to
amend and add counterclaims. E.g., United Central Bank v. Maple Court LLC, No. 10-CV-464,
2010 WL 5345570, at *1 (E.D. Wis. Dec. 21, 2010) (“[D]efendants moved for leave to add
counterclaims. Plaintiff opposes the motion. It argues that defendants waived their counterclaims,
apparently believing that compulsory counterclaims under Fed.R.Civ.P. 13(a) must be exclusively
pled in the original answer or be forever barred. This is incorrect. Defendants may request leave to
amend their answer just as plaintiffs may request leave to amend their complaint.”). Indeed, the fact
that a counterclaim is “compulsory” is a reason for granting leave to amend, since if amendment is
not allowed the counterclaim will be barred in subsequent actions. See, e.g., Jupiter Aluminum Corp.
v. The Home Ins. Co., 181 F.R.D. 605, 609 (N.D. Ill. 1998) (“The argument for amendment is
especially compelling where the claim is compulsory.”).
K-C changes its tune slightly in its reply brief and argues FQ “has not and cannot show good
cause” to amend its pleading, which was filed after the deadline for amended pleadings. (Reply at
30, ECF No. 102-1) (citing Rule 16(b)). But this argument is not only untimely in a reply brief, it
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should have been presented when FQ filed its motion for leave to amend its pleading several months
ago. Instead, FQ filed a motion to amend and a brief in support, which K-C did not oppose, and the
court granted the motion. I decline to revisit that decision, particularly given that K-C does not
appear to be prejudiced by the delay. I also note that according to K-C, the antitrust counterclaims
here are the same as those pending in the Pennsylvania action when FQ answered on August 11,
2014, and therefore the present counterclaims would appear to be expressly excepted from the
mandate of Rule 13(a). See Fed.R.Civ.P. 13(a)(2) (“The pleader need not state the claim if: (A)
when the action was commenced, the claim was the subject of another pending action[.]”). For all
of these reasons, I will not dismiss the antitrust counterclaims on the ground that FQ waived them
in its initial answer.
D.

FQ’s Fifth Affirmative Defense
K-C has also moved under Rule 12(f) to strike FQ’s fifth affirmative defense that this suit is

barred “in whole or in part” by collateral estoppel under the Federal Circuit’s decision. K-C argues
that the judgment on the ‘067 patent does not preclude it from litigating the ‘379 claim.
Rule 12(f) permits the court to “strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.” Courts generally apply the Twombly-Iqbal
standard for determining whether an affirmative defense is sufficiently pled. E.g., S.E.C. v. Sachdeva,
No. 10-C-747, 2011 WL 933967, at *1 (E.D. Wis. Mar. 16, 2011). Collateral estoppel, also known
as issue preclusion, “protects a party from having to litigate issues that have been fully and fairly tried
in a previous action and adversely resolved against a party-opponent.” Ohio Willow Wood Co. v.
Alps South, LLC, 735 F.3d 1333, 1342 (Fed. Cir. 2013).

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K-C’s motion is based on the notion that FQ’s collateral estoppel defense “makes no sense”
given that the ‘067 and ‘379 patents are different patents. It is possible that collateral estoppel
applies to different patents, however. See, e.g., Ohio Willow, 735 F.3d at 1342 (“If the differences
between the unadjudicated patent claims and adjudicated patent claims do not materially alter the
question of invalidity, collateral estoppel applies.”). Thus, given the similarity in the patents, I do not
find that FQ’s fifth affirmative defense was insufficiently pled. K-C’s argument really goes to the
merits (or lack thereof, in K-C’s view) of FQ’s defense, which the court will take up in resolving the
coming summary judgment motion. Because the defense is plausible on its face, K-C’s motion to
strike will be denied.
E.

Motion to Separate and Stay
K-C also moved, in the event its motion to dismiss is denied, to separate and stay the antitrust

counterclaims until disposition of the underlying patent dispute. Rule 42(b) of the Federal Rules of
Civil Procedure provides:
For convenience, to avoid prejudice, or to expedite and economize, the court may
order a separate trial of one or more separate issues, claims, crossclaims,
counterclaims, or third-party claims. . . .
Additionally, the court may sequence discovery “for the parties’ and witnesses’ convenience and in
the interests of justice[.]” Fed.R.Civ.P. 26(d)(2).
Given the interests at play in the context of antitrust counterclaims in a patent suit, K-C
argues bifurcation has become the “standard practice.” In re Innotron Diagnostics, 800 F.2d 1077,
1084 (Fed. Cir. 1986) (“The district court noted cases reflecting the now-standard practice of
separating for trial patent issues and those raised in an antitrust counterclaim. Abbot has cited
twenty-three of those cases from eight regional circuits.”). Conversely, FQ urges the court to follow
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the “commonsense principle” that claims with overlapping issues should be litigated together. Both
sides have a point. Ultimately, while the burden is on the party seeking bifurcation, it is a decision
committed to the discretion of the court. Krocka v. City of Chicago, 203 F.3d 507, 516 (7th Cir.
2000). It is also a case-specific determination that does not lend itself to general rules.
K-C argues the “standard practice” should be followed here because doing so would serve
judicial economy, considering that the validity of the ‘379 patent is a logical predicate to the antitrust
counterclaims. K-C argues a stay would also ensure that the notoriously costly antitrust discovery
that would be required to litigate the antitrust counterclaims would be necessary, and a stay would
permit the trier of fact to determine the several issues in this case in a sensible, ordered manner.
Noting that it has pled a pattern of predatory litigation on training pant patents, FQ
downplays the significance of the validity of the ‘379 patent for the antitrust counterclaims. The issue
regarding the pattern, FQ says, is whether the suits are brought without regard for their merit and
instead for the purpose of injuring a market rival. Also, according to FQ, the antitrust issues would
not be meaningfully narrowed even if K-C won on the ‘379 claim. I am not persuaded. First, FQ did
not even assert the antitrust counterclaims until the Federal Circuit affirmed my ruling on the
obviousness of the ‘067 patent. That alone indicates the validity of the patent-in-suit here, the
continuation of the ‘067 patent, is a critical logical predicate to FQ’s antitrust theory. More
importantly, the court has already rejected FQ’s pattern of litigation claim under based on its previous
Wisconsin litigation. The entire focus for FQ’s antitrust claims therefore must rest on the validity of
the ‘379 patent.
FQ also argues that the issues raised by the ‘379 claim and FQ’s defenses, including
obviousness, unclean hands and unreasonable delay, are inextricably linked with the issues raised by
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the antitrust counterclaims. This was not the case, FQ contends, with many of the cases K-C cites
as demonstrating the “standard practice.” FQ also argues the standard practice pertains to bifurcation
of trials, not the whole case, including discovery. FQ asserts that here, discovery will overlap—for
example, “the admissions of K-C’s executive Robert Thibault before this Court in support of K-C’s
motion for a preliminary injunction on the invalid ‘067 patent as evidence of lost profits from First
Quality’s alleged infringement are also evidence of K-C’s monopoly power and the consumer harm
from K-C's sham litigation[.]” (Opp. at 14, ECF No. 72) (emphasis in original). FQ promises these
overlapping issues will breed discovery disputes about the scope of allowed discovery versus stayed
discovery.
These are legitimate concerns. Nonetheless, for two reasons, I believe expediency and judicial
economy favor bifurcation: First, it is axiomatic that antitrust claims add significant discovery costs.
Therefore, to the extent that the validity of the patent-in-suit is a logical predicate to the antitrust
counterclaims, the patent suit should be resolved first. Second, although there is undoubtedly some
overlap between the antitrust issues and issues in the patent suit, the patent case is still a relatively
simple one. The patent issues (which are necessarily the common ones) will be decided in fairly short
order—FQ’s summary judgment as to invalidity is pending; the December trial date is set.
Additionally, as the Pennsylvania district court reasoned in bifurcating the previous case, “resolution
of the patent disputes would become the law of the case, and thus eliminate or reduce some of the
proof that would be necessary at trial on the counterclaims.” (ECF No. 78-2 at 3.)
FQ also asserts that a stay will prejudice it and consumers by prolonging K-C’s allegedly
unlawful monopoly. The argument presumes FQ’s antitrust counterclaims are meritorious, of course,
and to the extent they are and delay causes harm to FQ, the injury would appear to be accounted for
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in its recovery in the antitrust case. Moreover, quick resolution of the infringement action will
alleviate any further harm FQ will suffer.

ORDER
K-C’s motion to dismiss and strike (ECF No. 70) is denied in part. K-C’s motion to separate
and stay the antitrust counterclaims (ECF No. 65) is granted. FQ’s motion for summary judgment
(ECF No. 84) is granted. FQ’s motion for leave to file (ECF No. 107) is also granted and the Clerk
is directed to file the memorandum attached to the motion.
SO ORDERED this 9th

day of April, 2015.
s/ William C. Griesbach
William C. Griesbach, Chief Judge
United States District Court

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