United States: Customer-Suit Exception Extends To Joinder Of Customers And Manufacturers In The Same Suit

On January 30, 2023, the United States District Court for the Western District of Texas confirmed the customer-suit exception applies even to matters in which a manufacturer and its customer are sued in the same action.

Plaintiff Dali Wireless Inc. originally brought a single suit against defendants Cellco Partnership dba Verizon Wireless, Verizon Corporate Services Group Inc., and Verizon Online LLC (collectively, "Verizon") and two of its vendors for in-building wireless solutions, including defendants Ericsson Inc. and Telefonaktiebolaget LM Ericsson (collectively, "Ericsson"). The court granted the defendants' motion to sever and stay the proceedings against Verizon pursuant to the customer-suit exception, pending the resolution of the plaintiff's claims against Ericsson. Dali Wireless, Inc. v. Ericsson Inc., No. 22-CV-01313, 2023 WL 1423990 (W.D. Tex. Jan. 30, 2023).

In its complaint, Dali alleges that Ericsson and Verizon infringe Dali's patents through Verizon's use of the Ericsson Radio Dot System. The court held that, even where a single suit is brought against a manufacturer, i.e., Ericsson, and its customer, i.e., Verizon, the action against the customer "should be stayed pending resolution of the case against the manufacturer to promote judicial economy." Dali Wireless, Inc., 2023 WL 1423990, at *1 (citing In re Nintendo of Am., Inc., 756 F.3d 1363, 1365–66 (Fed. Cir. 2014)).

Although the court agreed with Dali that "the circumstances of this case do not align with the traditional application of the customer-suit exception," it nevertheless found that "In re Nintendo, a leading Federal Circuit case on the customer-suit exception" likewise "involved allegations made against manufacturer and customer defendants in the same action" and "the same general principles govern" both scenarios. Id. at 3. Those general principles have been distilled to three factors:

1. Whether the customer-defendant in the earlier-filed case is merely a reseller;
2. Whether the customer-defendant agrees to be bound by any decision in the later-filed case that is in favor of the patent owners; and
3. Whether the manufacturer is the only source of the infringing product.

Id. at *2 (quoting CyWee Grp. Ltd. v. Huawei Device Co., No. 17-CV-495, 2018 WL 4002776, at *5 (E.D. Tex. Aug. 22, 2018)). But in all cases, the guiding principle in customer-suit exception cases "are efficiency and judicial economy." Id. (quoting Spread Spectrum Screening LLC v. Eastman Kodak Co., 657 F.3d 1349, 1357 (Fed. Cir. 2011)).

In regards to the first factor, while the court found Verizon to be more than a mere reseller, it concluded that this factor favored a stay because Dali's "infringement contentions against Ericsson and Verizon are identical," "Dali does not allege that any of the claim limitations are met by an act or component from Verizon" and thus, "Dali's infringement case against Ericsson is identical to Dali's infringement case against Verizon. Id. at *3. The second factor similarly weighed in favor of staying the case against Verizon because it agreed to be bound by the court's determination of infringement and invalidity. Id. at *4. The final factor similarly weighed in favor of a stay because "Dali does not allege in its complaint or in the infringement allegations that Verizon infringes the asserted patents independently of Ericsson's Radio Dot [S]ystem" and thus, "Verizon's liability in this case is dependent on whether Ericsson's Radio Dot [S]ystem infringes." Id.

The court gave "great weight to the three factors considered under the customer-suit exception" but "for the sake of completeness" also considered the traditional stay factors, which also supported staying the case against Verizon. Id.

Overall, this decision underscores the guiding principles in the customer-suit exception—"efficiency and judicial economy" (Spread Spectrum, 657 F.3d at 1357)—apply irrespective of whether there are multiple actions or a single action involving both a customer and its vendor. Defendants, specifically customers, should thus be aware that the customer-suit exception not only can be a tool to allow customers to stay an earlier-filed litigation while a later-filed case involving the manufacturer proceeds in another forum, but also when both the manufacturer and customer are brought within the same suit and in the same forum.

For More Information

If you have any questions about this Alert, please contact Thomas J. Kowalski, Deborah L. Lu, Ph.D., Irfan Malani, Brandon A. Chan, Ph.D., any of the attorneys in our Intellectual Property Practice Group or the attorney