Chief Judge Rodney Gilstrap of the Eastern District of Texas issued a decision addressing motions to stay a patent infringement case under the “customer-suit exception” to the general first-to-file rule. Judge Gilstrap largely focused the opinion on his conclusion that granting a stay would have been inequitable under the circumstances, and thus would have contravened the fundamental purposes underlying the customer-suit exception. In particular, he found that the defendant’s decision to pursue parallel inter partes review (IPR) proceedings “violates the express policy and purpose of the customer-suit exception,” namely, to relieve the customer of the burdens of litigation. But he also reasoned that, regardless of the movant’s decision to pursue parallel IPR proceedings, the defendant was not entitled to a stay under the exception, or under the general factors courts normally consider when deciding stay motions.

Factual Background and Relevant Legal Standards

On January 24, 2019, Rembrandt Wireless Technologies, LP sued Apple Inc. for infringing two patents related to systems and methods of wireless data communication. The Accused Products that Rembrandt has targeted with its infringement claims are Apple devices that incorporate certain Bluetooth chipsets to deliver the accused communication functionality. Although Apple purchases many of the chipsets from third-party manufacturers—specifically, Broadcom and Qualcomm—Apple itself also manufactures some of the chipsets. Apple additionally developed the software that is necessary for integrating and using the chipsets in the Accused Products.

Apple filed a motion to stay the lawsuit because on April 15, 2019, Rembrandt sued Broadcom and Qualcomm in the Central District of California for infringing on the same two patents. Apple argued in its motion that the court should grant a stay pursuant to the customer-suit exception, on the ground that Apple is merely a reseller of the chipsets, rather than the manufacturer.

The customer-suit rule is an exception to the normal first-to-file rule, under which a court will generally choose to stay, transfer, or dismiss a duplicative later-filed action. The exception allows a court to stay an earlier-filed case against a customer, so that a later-filed case against the manufacturer may proceed first. In determining whether the exception applies, courts consider three factors, including: (1) whether the customer in the first-filed action is a mere reseller of products manufactured by the defendant in the second-filed action; (2) whether the customer has agreed to be bound by any decision in the second-filed action; and (3) whether the defendant in the second-filed action is the only source of the allegedly infringing product. But as Judge Gilstrap stressed in his Order, “the guiding principles in the customer suit exception cases are efficiency and judicial economy.”

As Judge Gilstrap further explained, there are also three factors that courts generally consider in deciding motions to stay. Those factors include (1) whether a stay will unduly prejudice, or present a clear tactical disadvantage to the nonmoving party; (2) whether a stay will simplify the issues in question and the trial of the case; and (3) whether discovery is complete and a trial date has been set.

Judge Gilstrap’s Analysis

In deciding not to grant Apple’s stay motion, Judge Gilstrap conducted a three-part analysis. First, he held that, because Apple had filed three IPR petitions against the Asserted Patents after filing the motion, a stay would have been inconsistent with the customer-suit exception’s “guiding principles” and therefore was not warranted, regardless of whether Apple could satisfy the three factors of the customer-suit test. Judge Gilstrap reasoned that if he stayed the action, he would not be relieving Apple of the burdens of litigation (and thereby promoting judicial economy) since Apple had actively embraced those burdens by bringing additional litigation in another setting. Instead, a stay would merely deprive Rembrandt of the ability to seek redress in the forum, and under the procedural rules, of its choosing. Judge Gilstrap therefore concluded that granting a stay under the guise of efficiency and judicial economy would be inequitable where Apple continued to pursue litigation elsewhere.

Second, Judge Gilstrap explained that, even setting aside Apple’s inequitable conduct, the customer-suit factors still did not warrant a stay. For the Accused Products containing Apple-manufactured chipsets, the customer-suit exception did not apply because Apple was the manufacturer rather than the customer. Therefore, these products did not satisfy the first and third customer-suit factors, as Apple was the manufacturer and served as an additional source for the allegedly infringing products.

The outcome was the same for Accused Products containing Broadcom and Qualcomm chipsets. The patents-in-suit recited communication devices “configured to” or “capable of” performing certain functions. So, the question of whether Apple’s source code that integrates the chipsets enabled the accused functionality was directly relevant to infringement. As such, Apple’s role in integrating the chipsets prevented it from being a “mere reseller,” and its contribution to the development of the Accused Products showed that Broadcom and Qualcomm were not the sole source of those products.

Judge Gilstrap also found that the second factor did not support a stay, even though Apple agreed to be bound by the decision in the California litigation. With respect to the Apple-made chipsets, Judge Gilstrap explained that Apple’s agreement to be bound was both impractical and unreasonable, since Apple’s chipsets were not identical to the ones at issue in the later-filed action, and Rembrandt had not agreed to be bound by a decision in the California litigation. As for the Broadcom and Qualcomm chipsets, Judge Gilstrap found Apple’s stipulation sufficient, but that the overall balance of the factors still weighed against a stay.

Finally, Judge Gilstrap concluded that none of the three general stay factors supported a grant of Apple’s motion either. Regarding the first factor, he observed that granting a stay “would present a tactical disadvantage to Rembrandt in view of the recently filed IPR proceedings initiated by Apple.” On the second factor, he explained that a stay of a customer-suit generally will not simplify the issues where the customer is sued for direct infringement, while the manufacturer is sued for indirect infringement—especially where, as here, the allegedly infringing devices in the two cases are not identical. Turning to the third factor, Judge Gilstrap stressed that discovery was almost complete, the claim construction hearing was only a week away, and trial was scheduled to begin in only six months. Judge Gilstrap thus concluded that the general stay factors also weighed against granting Apple’s motion.

Rembrandt Wireless Technologies, LP v. Apple Inc., 19-CV-00025 (E.D. Tex. November 27, 2019) (Gilstrap, C.J.)

Practice Tip: Defendants looking to stay an earlier-filed patent infringement case under the customer-suit exception should be aware of its grounding in equity, and in the principles of efficiency and judicial economy, such that a court may shut down attempts to use the exception merely to gain a tactical advantage. More specific to the facts of this case, “customer” defendants should carefully weigh the value of filing an IPR petition against the value of obtaining a stay. Although there were multiple bases for the Court’s decision, Judge Gilstrap’s rationale suggests that merely filing an IPR Petition may be sufficient grounds to deny a stay under the customer-suit exception.

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.