Energy Recovery, Inc. v. Hauge

United States Court of Appeals
for the Federal Circuit
______________________
ENERGY RECOVERY, INC.,
Plaintiff-Appellee,
v.
LEIF J. HAUGE,
Defendant-Appellant,
AND
ENERGY RECOVERY INTERNATIONAL, INC.,
Defendant.
______________________
2013-1515
______________________
Appeal from the United States District Court for the
Eastern District of Virginia in No. 00-CV-0431, Judge
Raymond Alvin Jackson.
______________________
Decided: March 20, 2014
______________________
STEPHEN E. NOONA, Kaufman & Canoles, P.C., of
Norfolk, Virginia, argued for plaintiff-appellee.
RICHARD A. STERBA, Fish & Richardson P.C., of
Washington, DC, argued for defendant-appellant. With
him on the brief was AHMED J. DAVIS.
ENERGY RECOVERY, INC. v. HAUGE 2
______________________
Before RADER, Chief Judge, REYNA, and WALLACH, Circuit
Judges.
WALLACH, Circuit Judge.
Leif J. Hauge appeals the district court’s decision
finding him in contempt of that court’s March 19, 2001,
Order (the “2001 Order”), which adopted Mr. Hauge and
Energy Recovery, Inc.’s (“ERI”) March 16, 2001,
Settlement Agreement (the “Agreement”). For the
reasons set forth below, this court reverses the contempt
finding and vacates the injunction.
BACKGROUND
The dispute between Mr. Hauge and his former
employer, ERI, began more than thirteen years ago over
ownership of intellectual property rights related to
“pressure exchangers,” a type of energy recovery device
used in reverse osmosis. On March 16, 2001, the parties
entered into the Agreement resolving the litigation.
Three days later, the district court adopted the
Agreement and issued the 2001 Order, stating that ERI
was to be the sole owner of three U.S. patents and one
pending U.S. patent application: U.S. Patent Nos.
4,887,942, 5,338,158, and 5,988,993, and U.S. Patent
Application No. 09/508,694, which later issued as U.S.
Patent No. 6,659,731. 1
The Agreement and subsequent Order obligated Mr.
Hauge to transfer ownership not only of the patents, but
1 The Agreement required Mr. Hauge to “cooperate
fully in executing any and all documents necessary to
prosecute, assign, record, perfect, and/or maintain the
Patents and/or Patent Applications in Energy Recovery’s
name or for Energy Recovery’s benefit in the United
States and throughout the world.” J.A. 17.
ENERGY RECOVERY, INC. v. HAUGE 3
also “all other intellectual property and other rights
relating to pressure exchanger technology” pre-dating the
Agreement and 2001 Order. J.A. 10, 16. The Agreement
states: “[t]his assignment and transfer of rights is not
intended to extend to inventions by Hauge . . . made after
the date of this Agreement.” J.A. 16. The Agreement also
contains a non-compete clause, prohibiting Mr. Hauge
from making or selling energy recovery devices for use in
reverse osmosis salt water desalination for two years from
the date of the Agreement. J.A. 18.
After the expiration of the non-compete clause, on
August 10, 2004, Mr. Hauge filed a provisional patent
application, titled “Pressure Exchanger,” and filed a
utility application one year later. U.S. Patent No.
7,306,437 (the “’437 patent”) issued on December 11,
2007. Its abstract describes “[a] pressure exchanger for
transferring pressure energy from a high-pressure fluid
stream to low-pressure fluid stream.” ’437 patent, at
[57]. 2
In 2009, Mr. Hauge arranged a meeting with ERI on
behalf of his new company, Isobaric Strategies, Inc.
(“Isobarix”). In subsequent correspondence, Mr. Hauge
wrote “the main topic under consideration was the
possibility of uniting all pressure exchanger technology
and [intellectual property] rights under the umbrella of
[ERI] and the potential benefits to those concerned.” J.A.
85. ERI ultimately declined to “get involved in [Mr.
Hauge’s] project” and wished him “success with current
and future endeavors.” J.A. 84. After ERI’s rejection of
Mr. Hauge’s proposal, Mr. Hauge, through Isobarix,
began selling a pressure exchanger based on the ’437
patent, called “XPR.” In 2010, Mr. Hauge created a
consulting agreement for two ERI employees, Tristan
2 The district court refers to this patent as both
“patent ’734” and “patent ’437.”
ENERGY RECOVERY, INC. v. HAUGE 4
Nillo and James Coyle, regarding services they could
provide to Isobarix; they ultimately contracted with
Isobarix.
On September 11, 2012, ERI filed a Motion for Order
to Show Cause, alleging Mr. Hauge was using ERI’s
proprietary technology in the manufacture of the XPR
pressure exchanger, in violation of the district court’s
2001 Order. ERI submitted the declaration of an expert
who testified that Mr. “Hauge and Isobarix are using
‘pressure exchanger technology’ from pre-March 19,
2001[,] in both the design and manufacture of the Isobarix
pressure exchanger,” which the expert opined is “virtually
identical to the ERI pressure exchanger” in terms of
operation. J.A. 237. At the hearing, Mr. Hauge’s counsel
argued that ERI had failed to show that the allegedly
proprietary technology was protectable as a trade secret,
and argued that Mr. Hauge was not prohibited from using
the technology because the Agreement related only to
transfer of ownership of the patents and proprietary
technology pre-dating the Agreement.
After holding a Show Cause Hearing on June 24,
2013, the court entered an order (the “Contempt Order”)
finding that allowing Mr. Hauge “to . . . develop new
products using the very technology he assigned to ERI
solely because those new inventions post-date the
Agreement would render the Settlement Agreement and
its assignment of ownership rights useless.” J.A. 4. The
court entered judgment that Mr. Hauge was in violation
of the 2001 Order, found him in contempt, and further
enjoined him and Isobarix “from manufacturing and
selling pressure exchangers and replacement parts for
ERI’s pressure exchangers.” J.A. 9. The court also
awarded ERI attorneys’ fees and ordered it to file a
request for damages and reasonable attorneys’ fees within
thirty days.
ENERGY RECOVERY, INC. v. HAUGE 5
In September 2013, Mr. Hauge filed a Motion for
Order to Stay the Permanent Injunction, which this court
granted, stating “[t]he district court’s June 25, 2013[,]
[O]rder, including the provision enjoining Hauge and
Isobarix from manufacturing and selling pressure
exchangers and replacement parts for [ERI]’s pressure
exchangers, is stayed pending appeal.” Ct. Order at 2,
Energy Recovery Inc. v. Hauge, No. 2013-1515 (Fed. Cir.
Sept. 13, 2013), (ECF No. 19) (order granting motion to
stay).
DISCUSSION
I. Jurisdiction
This court has jurisdiction over interlocutory orders
modifying an injunction. See 28 U.S.C. § 1292(c)(1)
(2012).
Even though no final disposition has been made
regarding the amount of contempt damages and
attorneys’ fees, the district court’s Contempt Order is
appealable under § 1292(c)(1) because it modified the
scope of the 2001 Order. In relevant part, the 2001 Order
declared ERI the sole owner of all “intellectual property
and other rights relating to pressure exchanger
technology predating this Order.” J.A. 5. In contrast, the
Contempt Order for the first time prohibits Mr. Hauge
from engaging in certain acts, and therefore modifies the
2001 Order. Specifically, the Contempt Order enjoins Mr.
Hauge “from manufacturing and selling pressure
exchangers and replacement parts for ERI’s pressure
exchangers.” J.A. 9. Accordingly, because it modifies the
substance of the 2001 Order, the Contempt Order is
appealable.
II. Standard of Review
“Regional circuit law governs contempt proceedings
that do not raise issues unique to patent law.” Schaefer
Fan Co., Inc. v. J & D Mfg., 265 F.3d 1282, 1289 (Fed. Cir.
ENERGY RECOVERY, INC. v. HAUGE 6
2001). In the Fourth Circuit, a district court’s grant or
denial of a civil contempt motion is reviewed for an abuse
of discretion. Ashcraft v. Conoco, Inc., 218 F.3d 288, 301
(4th Cir. 2000). “When a district court’s decision is based
on an interpretation of its own order, our review is even
more deferential because district courts are in the best
position to interpret their own orders.” JTH Tax, Inc. v.
H & R Block E. Tax Servs. Inc., 359 F.3d 699, 705 (4th
Cir. 2004) (citing Vaughns v. Bd. of Educ., 758 F.2d 983,
989 (4th Cir. 1985)). However, “[c]ontempt is a weighty
penalty and should not be casually imposed.” In re
Wilson, 199 F.3d 1329, 1999 WL 976491, at *2 (4th Cir.
1999); see also TiVo Inc. v. EchoStar Corp., 646 F.3d 869,
881–82 (Fed. Cir. 2011) (en banc) (Contempt “is a severe
remedy, and should not be resorted to where there is a
fair ground of doubt as to the wrongfulness of the
defendant’s conduct.”) (internal quotation marks and
citation omitted).
An abuse of discretion may be found when the district
court’s decision is “‘guided by erroneous legal principles’
or ‘rests upon a clearly erroneous factual finding.’” Brown
v. Nucor Corp., 576 F.3d 149, 161 (4th Cir. 2009) (quoting
Westberry v. Gislaved Gummi AB, 178 F.3d 257, 261 (4th
Cir. 1999)).
III. The Contempt Finding
To establish civil contempt, clear and convincing
evidence must support each of the following elements:
(1) the existence of a valid decree of which the
alleged contemnor had actual or constructive
knowledge; (2) that the decree was in the
movant’s favor; (3) that the alleged contemnor by
its conduct violated the terms of the decree, and
had knowledge (at least constructive knowledge)
of such violations; and (4) that the movant
suffered harm as a result.
ENERGY RECOVERY, INC. v. HAUGE 7
Ashcraft, 218 F.3d at 301 (citation omitted). At issue in
this case is element (3): whether Mr. Hauge by his
conduct violated any terms of the district court’s 2001
Order.
Mr. Hauge argues he did not violate any provision of
the 2001 Order. He contends that in reaching the
Agreement the parties were both aware of the possibility
that he would eventually compete with ERI by selling
devices in the pressure exchanger industry. As support,
he claims (1) the Agreement only required transfer of his
ownership rights to the intellectual property pre-dating
the Agreement; (2) the non-compete clause had a limited
two-year duration; and (3) the Agreement explicitly
provided that the transfer of ownership rights did not
extend to inventions after the date of the Agreement. ERI
responds that Mr. Hauge is free to develop and
commercialize new technology relating to the energy
recovery field; he is not, however, able “to appropriate the
very pressure exchanger technology” that he explicitly
transferred to ERI in 2001. Appellee’s Br. 21.
ERI further emphasizes the “tremendous effort and
money” spent developing the allegedly proprietary
technology pre-dating the Agreement. Appellee’s Br. 8.
To ERI, Mr. Hauge is necessarily employing the same
proprietary technology he agreed to transfer. It relies on
evidence that Mr. Hauge hired two of ERI’s employees
who set up Isobarix’s facility, similar to that of ERI’s pre-
2001 facility, and that the Isobarix pressure exchanger is
made “out of essentially the same ceramic material” as
ERI’s, the manipulation of which requires special
techniques not known outside of ERI. Appellee’s Br. 18.
None of Mr. Hauge’s challenged conduct violates any
provision of the 2001 Order. Paragraph One of the
Agreement begins with the heading “ABSOLUTE
TRANSFER OF ALL RIGHTS IN PATENTS, PATENT
APPLICATIONS AND ALL RELATED INTELLECTUAL
ENERGY RECOVERY, INC. v. HAUGE 8
PROPERTY, TO ENERGY RECOVERY.” J.A. 16. The
remainder of the paragraph details that Mr. Hauge
“irrevocably and absolutely assign[s]” to ERI “all right,
title and interest along with any and all patent rights,”
J.A. 16, which Mr. Hauge had in “(i) the patents and
patent applications . . . ; (ii) any and all patent rights . . . ,
intellectual property rights, property rights . . . ; and (iv)
all other intellectual property and other rights relating to
pressure exchanger technology predating this Order.”
J.A. 10. Only clause (iv) is at issue. See J.A. 57 (ERI’s
counsel explained to the district court that “[t]he [issue]
that is in question . . . for this hearing, it’s not patents, it’s
not the applications for patents, but it is No. 4 in the
[O]rder, ‘[a]ll other intellectual property and other rights
relating to pressure exchanger technology predating this
[O]rder.’”).
The Agreement only required Mr. Hauge to transfer
ownership of the pre-Agreement pressure exchanger
intellectual property; “cooperate fully in executing any
and all documents necessary” to do so; refrain from
competing for two years; and announce in a press release
that ERI was the “sole source for Pressure Exchangers
built pursuant to such patents, patent applications, and
technology.” J.A. 17, 32. Nothing in the 2001 Order
expressly precludes Mr. Hauge from using any
manufacturing process.
Mr. Hauge’s manufacture of the XPR pressure
exchanger is not inconsistent with the 2001 Order’s
requirement that Mr. Hauge transfer all “intellectual
property and other rights relating to pressure exchanger
technology pre-dating this Agreement.” J.A. 16 (emphasis
added). Civil contempt is an appropriate sanction only if
the district court can point to an order of the court which
“sets forth in specific detail an unequivocal command
which a party has violated.” In re Gen. Motors Corp., 61
F.3d 256, 258 (4th Cir. 1995) (internal quotation marks
ENERGY RECOVERY, INC. v. HAUGE 9
and citation omitted). ERI cannot point to such a
command. Mr. Hauge is not claiming ownership of ERI’s
intellectual property. Nor did Mr. Hauge start selling
pressure exchanger products before the expiration of the
Agreement’s non-compete clause. Finally, if in fact Mr.
Hauge is using ERI’s manufacturing processes, he may be
in violation of the patent laws or state trade secret laws,
but he is not in violation of any “unequivocal command” in
the 2001 Order. See id. (civil contempt requires violation
of “an unequivocal command” in the underlying court
order).
To the extent the “sole source” language in the
Agreement puts an affirmative duty on Mr. Hauge not to
create pressure exchangers pursuant to ERI’s intellectual
property, an infringement analysis would be necessary to
determine whether such a violation occurred. As
recognized by the district court and conceded by both
parties, the instant contempt proceeding does not
implicate patent infringement. ERI’s counsel stated
“[n]ow, I don’t want to be quoted later as saying that [the
’437 patent] doesn’t violate our patents . . . . [T]here’s an
argument . . . that practicing the new patent violates an
earlier patent, but that’s for another day.” J.A. 59. Mr.
Hauge’s counsel agreed, responding, “Mr. Noona is correct
that if there is a patent infringement lawsuit, we can deal
with those issues on another day.” J.A. 64. The district
court explicitly declined to address infringement,
determining that a formal finding of infringement was
unnecessary because it was Mr. Hauge’s use of ERI’s
allegedly proprietary manufacturing processes that was
problematic, not the patented pressure exchanger
technology. The district court stated: “[A]lthough the
[c]ourt expresses no judgment as to the separate issue of
whether Defendant is actually infringing ERI’s patents,
[Mr. Hauge] does little to dispel any doubt that he is in
fact using ERI’s technology.” J.A. 7. Because ERI
ENERGY RECOVERY, INC. v. HAUGE 10
explicitly stated during the contempt hearing that it was
not alleging contempt on the basis that Mr. Hauge’s new
pressure exchanger, as described in the ’437 patent,
infringes any of ERI’s patents, see J.A. at 59, the district
court was not required to address patent infringement. 3
The district court was also concerned by Mr. Hauge’s
conduct in hiring two (then current) employees of ERI.
Mr. Hauge admitted hiring the ERI employees, explaining
they were “skilled trade persons . . . and of course no one
would hire at this cost and expect no benefit from past
work experience.” J.A. 7. Mr. Hauge’s professed
motivation for the hires was that when he was the
president of ERI, “we basically went through the complete
setup of commercial production. And what we were about
to do was pretty much all over again doing what I did in
[19]98.” J.A. 7. This conduct does not violate any
3 Additionally, because the 2001 Order contains no
injunction against infringement, Mr. Hauge is incorrect to
argue that the district court should have applied the
“colorable differences” test. See, e.g., Panduit Corp. v.
HellermannTyton Corp., 451 F.3d 819, 827 (Fed. Cir.
2006). Under this test, “[t]he primary question on
contempt should be whether the newly accused product is
so different from the product previously found to infringe
that it raises a fair ground of doubt as to the wrongfulness
of the defendant’s conduct.” TiVo, 646 F.3d at 882
(internal quotation marks and citation omitted). Because
Mr. Hauge was never found to have infringed any of ERI’s
patents in the underlying action, there is no adjudicated
infringing product to compare to Mr. Hauge’s new
pressure exchanger to determine whether their
differences are more than “colorable.” Accordingly, even if
ERI had argued during the contempt proceedings that Mr.
Hauge’s conduct constituted patent infringement, the
district court was not required to address the “colorable
differences” test to find contempt.
ENERGY RECOVERY, INC. v. HAUGE 11
provision of the 2001 Order, however. While it may
constitute trade secret misappropriation, that would not
justify a finding of contempt in this case. Notably, ERI’s
trade secret claim in California state court based on the
same conduct resulted in a unanimous jury verdict in
favor of Mr. Hauge. Appellant’s Notice of Supplemental
Authority at 1, Energy Recovery Inc. v. Hauge, No. 2013-
1515 (ECF No. 33) (Dec. 19, 2013) (quoting Attach. 1:
Special Verdict Format 8 (“26. Did Leif Hauge
misappropriate any trade secrets of Energy Recovery,
Inc.? NO.”)).
The district court found that Mr. Hauge had “violated
the letter and spirit of the [] Agreement.” J.A. 8.
However, the Supreme Court has explained that a
consent decree must be discerned within its four corners:
Consent decrees are entered into by parties to a
case after careful negotiation has produced
agreement on their precise terms. The parties
waive their right to litigate the issues involved in
the case and thus save themselves the time,
expense, and inevitable risk of litigation.
Naturally, the agreement reached normally
embodies a compromise; in exchange for the
saving of cost and elimination of risk, the parties
each give up something they might have won had
they proceeded with the litigation. Thus the
decree itself cannot be said to have a purpose;
rather the parties have purposes, generally
opposed to each other, and the resultant decree
embodies as much of those opposing purposes as
the respective parties have the bargaining power
and skill to achieve. For these reasons, the scope
of a consent decree must be discerned within its
four corners, and not by reference to what might
satisfy the purposes of one of the parties to it.
ENERGY RECOVERY, INC. v. HAUGE 12
United States v. Armour & Co., 402 U.S. 673, 681–82
(1971) (footnote omitted) (emphases added); see also
Firefighters Local Union No. 1784 v. Stotts, 467 U.S. 561,
574 (1984). Because Mr. Hauge did not violate any
provision of the 2001 Order, the district court abused its
discretion in holding Mr. Hauge in contempt. That
finding is accordingly reversed.
IV. The Injunction
A district court may fashion a remedy for civil
contempt to the extent it is necessary to enforce
compliance with its orders. See McComb v. Jacksonville
Paper Co., 336 U.S. 187, 193 (1949) (explaining “[w]e are
dealing here with the power of a court to grant the relief
that is necessary to effect compliance with its decree. The
measure of the court’s power in civil contempt proceedings
is determined by the requirements of full remedial
relief.”) Because the finding of contempt is reversed,
there is no remedy necessary; the injunction is therefore
vacated. 4
CONCLUSION
For the foregoing reasons, the district court’s finding
of civil contempt is reversed and its grant of the
injunction is vacated.
4 In any case, the injunction is also overbroad. “A
federal district court may not use its power of enforcing
consent decrees to enlarge or diminish the duties on
which the parties have agreed and which the court has
approved.” Johnson v. Robinson, 987 F.2d 1043, 1046
(4th Cir. 1993). The injunction prohibits Mr. Hauge from
selling any pressure exchanger, which is inconsistent with
the language in the Agreement that explicitly allows him
to compete with ERI after two years. It improperly
expands the scope of the consent decree, subjecting it to
vacation.
ENERGY RECOVERY, INC. v. HAUGE 13
REVERSED AND VACATED