United States: The Federal Circuit Is Not the Place For Side Bets

Addressing an appeal on non-infringement, inequitable conduct and sanctions after the parties had reached a settlement, the U.S. Court of Appeals for the Federal Circuit dismissed a patent holder's appeal as moot, finding the settlement's $50,000 "bet" to go to the winner of the appeal did not make it a live case and controversy. Allflex USA, Inc. v. Avid Identification Systems, Inc., Case No. 11-1621 (Fed. Cir. Jan. 17, 2013) (Bryson, J.).

Avid Identification Systems appealed the district court's judgment in favor of Allflex. Allflex and Avid are both in the business of technology used in tags attached to animals or objects to locate them if they are lost. Allflex sued Avid for a declaratory judgment that six of Avid's patents were unenforceable due to inequitable conduct and that Allflex was not liable for infringement of any of the patents.

During the proceedings, the district court found that Avid and its former counsel "should be sanctioned" for their failure to disclose the existence of reexamination proceedings that were pending with respect to the patents in suit. After construing the claims, the district court granted summary judgment of non-infringement. Regarding inequitable conduct, the district court found that Avid's failure to disclose information about prior public use and offers to sell one of its products was material. However, the district court denied summary judgment on the inequitable conduct claim because it concluded there was a genuine issue of fact regarding intent to deceive.

The parties then entered into a settlement agreement. Under the terms of the agreement, Avid agreed to pay Allflex $6,550,000. The agreement also allowed Avid to appeal three rulings: the summary judgment of non-infringement, the finding of materiality on inequitable conduct and the court's ruling that Avid and its counsel should be sanctioned. The agreement also provided that if Avid succeeded in overturning any of those three issues, Allflex would return to Avid $50,000 of the settlement payment.

The district court accepted the terms of the settlement agreement, and entered a "Stipulated Order of Final Judgment." Avid appealed, and Allflex did not oppose.

The Federal Circuit addressed whether the district court's order was a "final decision" over which it had jurisdiction. Although the grant of summary judgment of non-infringement finally disposed of the infringement claims, the Federal Circuit scrutinized the inequitable conduct and sanctions issues. The Court found that the sanctions issue was not final, as it was never a final order, but instead was just a recommendation that the party and counsel "should be sanctioned." As a result, the Federal Circuit did not have jurisdiction over the sanctions issue. The Court found the inequitable conduct issue, however, to be final as a result of the specific posture of the

case. The district court had dismissed all aspects of the case, except for the specific issues preserved for appeal. Both the district court's judgment, as well as the parties' settlement agreement made clear there would be no further proceedings in the district court, including on the inequitable conduct issue.

The Federal Circuit also addressed the question of whether the case was still a live case and controversy, or whether it was moot. In contending that the case is not moot, Avid relied entirely on the $50,000 contingent payment. In doing so, Avid relied on a prior case in which it was involved, as well as two prior Supreme Court decisions. The Federal Circuit distinguished the Supreme Court cases because in those cases the parties agreed to a liquidated damages sum depending on the outcome of the case. Likewise, in the prior case involving Avid, the parties had agreed to a specific damages award that was the same amount the jury had awarded if Avid prevailed on the inequitable conduct appeal in that case.

Here, however, the $50,000 contingent payment was neither representative of either an actual damages award or a liquidated damages award. The Federal Circuit explained that the absolute amount at stake is insufficient by itself to establish a relation to the value of the issues on appeal, especially where as in this case the amount was less than 1 percent of the partial settlement payment. After noting that Allflex had $50,000 at stake based on the outcome of the appeal, the Court concluded this amount insufficient to even justify the filing of a brief.

The Federal Circuit concluded that the appellant identified no relationship between the valuation placed on the appeal and the issues that were challenged. Rather, it viewed the $50,000 as simply a "side bet" on the outcome of the appeal and determined that the contingency payment was not sufficient to avoid the conclusion that the issues raised in the appeal were moot.

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