United States: Mind The "Gap": Laches No Defense To Claims For Patent Damages

Yesterday the Supreme Court held in a 7-1 decision that the equitable defense of laches is no defense to the legal remedy of patent damages where the infringement occurred during the statutory period of 35 U.S.C. § 286. SCA Hygiene Prods. AB v. First Quality Baby Prods., LLC, 580 U.S. ___, slip op. at *16 (Mar. 21, 2017) (No. 15-927).

SCA and First Quality are competitors in the field of adult incontinence products. Both companies have been innovators and hold patents for their products. In 2003, SCA sent a letter to First Quality alleging patent infringement of U.S. Patent No. 6,375,646 B1 (the "'646 Patent"). First Quality responded to the allegations by pointing to its own patent as invalidating prior art of the '646 Patent. The following year, SCA requested an ex parte reexamination of the '646 Patent in the USPTO based on First Quality's patent. Three years later, in 2007, the USPTO affirmed the validity of the '646 Patent over First Quality's patent. In 2010, seven years after the first letter and without any further intervening communication, SCA filed suit against First Quality for patent infringement of the '646 Patent.

Given the long delay by SCA, First Quality sought the benefit of the equitable defenses of laches and equitable estoppel against SCA's damages claim. Section 286 provides for a six year statute of limitations in patent cases concerning the remedy of damages. § 286 ("Except as otherwise provided by law, no recovery shall be had for any infringement committed more than six years prior to the filing of the complaint or counterclaim for infringement in the action."). This issue came to a head in the lower court at summary judgment, and the district court ruled in favor of First Quality. The district court also granted summary judgment to First Quality for the defense of equitable estoppel (more on this defense in the Practice Note section, infra).

SCA appealed to the Federal Circuit, which affirmed the lower court's judgment on laches, but reversed on equitable estoppel finding that there were material issues of fact outstanding for this defense. The panel's decision on laches was based on its 20-plus year old en banc precedential opinion in A.C. Aukerman Co. v. R.L. Chaides Constr. Co. 960 F.2d 1020 (Fed. Cir. 1992) (en banc) (ruling that laches and equitable estoppel are not limited by "simple or hard and fast rules" in claims of patent infringement). However, before the appellate panel issued its opinion following Aukerman, the Supreme Court issued its opinion in Petrella v. Metro-Goldwyn-Mayer, Inc.; a copyright case that presented virtually the same issue of the propriety of applying the equitable defense of laches to the legal remedy of damages where Congress had included a statute of limitations in the underlying statutory scheme. In Petrella, the Supreme Court held that laches could not be applied to a copyright damages claim within the Copyright Act's three year statute of limitations. 572 U.S. ___, slip op. at *13 (May 19, 2014). In light of the contrary Petrella opinion, the Federal Circuit vacated the panel decision and reheard the appeal before the entire court. In the ensuing 6-5 en banc decision, the Federal Circuit boldly stuck to its guns and reaffirmed Aukerman and the availability of laches within the six year period of § 286. 807 F.3d 1311 (2015). SCA appealed to the Supreme Court.

The Supreme Court began with a general overview of laches defense. Laches protects a defendant who has been harmed by an "unreasonable, prejudicial delay in commencing suit" against it by a complaining party. A claim of damages, the Court said, is the "quintessential legal remedy." Laches, on the other hand, was "a defense developed by courts of equity" without statutory basis. The parties argued over whether laches had in fact been used as a defense against damages prior to and after the Patent Act of 1952 was promulgated by Congress, which included cases at both law and equity. Key to the Supreme Court's decision in the instant SCA Hygiene case was the law and equity divide, long since merged in federal courts (in 1938, prior to the enactment in 1952 of the Patent Act and the first version of the § 286 statute of limitations). The same issue was prominent in Petrella.

Ultimately, the Supreme Court ruled that the six year statute of limitations period of § 286 was Congress's spoken word on a defense against untimely patent infringement claims. Laches, which likewise provides a defense to untimely claims, was created by equity courts where no statute of limitations existed as a "gap filling" defense. Because Congress had explicitly set forth a six year period in § 286, there was no "gap" for a laches defense to fill, at least as far as the legal remedy of damages was concerned. By extension, the Court ruled that the Federal Circuit's rule in Aukerman and its progeny effectively (and improperly) provided judges with a "legislation-overriding" tool that circumvented Congress's judgment of a "hard and fast rule" on the timeliness of a claim for patent damages.

The Supreme Court also dissected the Federal Circuit opinion below. The Federal Circuit majority rationalized the Aukerman rule on the phrase "[e]xcept as otherwise provided by law" in § 286, finding that this codified laches as a defense in view of § 282. Section 282 provides that certain defenses shall be pleaded, including "unenforceability." In not so subtle terms, the Supreme Court took the Federal Circuit to task for its rationale in the lower SCA Hygiene decision ("The en banc majority below never identified which word or phrase in §282 codifies laches as a defense."). Even if § 282 does codify laches to some degree, the Court was incredulous that such treatment would have any effect on a legal remedy given the great weight of authority on laches not being applicable to damages claims ("Indeed, it would be exceedingly unusual, if not unprecedented, if Congress chose to include in the Patent Act both a statute of limitations for damages and a laches provision applicable to a damages claim."). The Supreme Court likewise picked apart the numerous cases cited by the Federal Circuit it said demonstrated a well-settled consensus in support of the rule of Aukerman. The Court concluded that only a mere handful of cases that directly applied laches to a claim of damages (in a federal equity court pre-merger) could not "establish a settled, national consensus" that could possibly overcome a strong presumption that Congress would not legislate silently against general common law principles.

Justice Breyer, who also wrote the dissent in Petrella, penned the lonely dissent of the Court. His dissent focused on the policy and judicial history of laches that was dispatched rather summarily by the Court's majority. As to policy, Justice Breyer found that a "gap" does in fact exist in which laches has and should continue to protect accused infringers. This gap "permits a patentee to sue at any time after an infringement takes place" by essentially allowing the patentee to sit on a claim while the infringer expends valuable resources to develop and market a product. Thus, the infringer could be "locked-in" to a patent infringing product or process that cannot be easily or readily changed, all while the patentee waited for the damages to pile high. Justice Breyer also would find the long history of laches as a defense in law and equity against patent damages to be compelling, citing to commentaries by the principal drafter of the Patent Act of 1952 as stating that Congressional intent was to codify laches and other equitable defenses in § 282. In conclusion, Justice Breyer states that both SCA Hygiene and Petrella were wrongly decided, despite the confessed consistency in the two opinions.

Practice Note:

The SCA Hygiene decision is yet another high profile rejection of Federal Circuit-promulgated law in the past decade. The Federal Circuit's long standing precedent of Aukerman is now unquestionably dead, at least as to laches. The absence of the "gap filling" defense of laches to claims of damages presents a real threat to the status quo, but the Supreme Court made no flinch in striking down Aukerman.

Justice Breyer's fear that a patentee can lie in wait for a potential defendant to accrue substantial damages should not be ignored by practitioners. The SCA Hygiene decision could very well awake a thousand sleeping giants. A company may have thought (even forgotten) that a claim has long been stale, but such claim nevertheless may still rise to be a serious threat to a product line, so long as some alleged act of infringement has occurred in the past six years.

It is important to note that the Supreme Court did not address or disturb the propriety of applying the equitable defense of equitable estoppel against a damages claim (also a rule in Aukerman) or the use of laches as a defense against injunctive relief. As to the latter, the plain wording of the holding would support a continued practice of applying laches to injunctive relief claims. Where an accused infringer is "locked-in" for a particular infringing product or process, a threat of injunction (and the availability of a strong defense to it) can significantly affect the settlement leverage of the parties. Practitioners should continue to investigate and evaluate laches defenses, as this will be useful in counteracting any threats of preliminary or permanent injunction during/following litigation.

As to the former, equitable estoppel provides a far stronger defense as "all relief on a claim may be barred." Generally, a defendant must show (1) a misleading communication to the defendant by the patentee (words, conduct, or silence may suffice), (2) reliance by the defendant, and (3) the defendant would be harmed materially if the patentee is later permitted to assert a claim inconsistent with the earlier relied upon conduct. Furthermore, equitable estoppel does not require an "unreasonable" amount of time to pass for it to attach to a patentee's claim, but such delay may be evidence of the patentee's misleading "conduct." However, a defendant must necessarily be aware of the allegations and the patentee's conduct for equitable estoppel to attach. Whereas laches has no requirement for awareness of a potential claim, equitable estoppel will be little or no help in a case where a patentee "lies in wait" without providing any notice or other communication to an accused infringer. For any damages theories that will require indirect infringement under either §§ 271(b) or (c), both of which include an element of knowledge of the patent at suit, lying in wait will not always be an effective strategy for a patentee. Nevertheless, some circumstances may exist where this can be a real threat. For example, where mere direct infringement under § 271(a) is required, such as for an apparatus, device, composition, or the like, patentees may be able to spring from nowhere to assert a claim of patent damages for up to six years of infringing acts with no recourse to the defense of laches or equitable estoppel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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