Allflex USA, Inc. v. Avid Identification Systems, Inc.

United States Court of Appeals
for the Federal Circuit
__________________________
ALLFLEX USA, INC.,
Plaintiff,
v.
AVID IDENTIFICATION SYSTEMS, INC.,
Defendant-Appellant.
__________________________
2011-1621
__________________________
Appeal from the United States District Court for the
Central District of California in Case No. 06-CV-1109,
Senior Judge Mariana R. Pfaelzer.
___________________________
Decided: January 17, 2013
___________________________
CHRISTIAN CHADD TAYLOR, Kirkland & Ellis LLP, of
Palo Alto, California, argued for defendant-appellant.
With him on the brief was R. ROY WANG. Of counsel on
the brief was WILLIAM H. BURGESS, of Washington, DC.
__________________________
Before LOURIE, CLEVENGER, and BRYSON *, Circuit Judges.
* Judge Bryson assumed senior status on Janu-
ary 7, 2013.
ALLFLEX USA v. AVID IDENTIFICATION 2
BRYSON, Circuit Judge.
In this appeal only one side has appeared and submit-
ted a brief. The defendant-appellant, Avid Identification
Systems, Inc., seeks to overturn the district court’s judg-
ment in several respects and has filed a brief in support of
its appeal. The plaintiff and would-be appellee, Allflex
U.S.A., Inc., has declined to file a brief defending the
judgment in its favor. The reason for the plaintiff’s lack
of interest in the appeal is clear: The parties have settled
their dispute in this case with a payment from Avid to
Allflex. Their settlement agreement provided that Avid
would pay Allflex a lump sum, but that Avid would be
permitted to appeal from several aspects of the judgment
and that, if it were to succeed on any of the appealed
issues, Avid’s settlement payment to Allflex would be
reduced by $50,000. While acknowledging that the case
would be moot if it were not for the $50,000 contingency
payment, Avid argues that the payment (termed an
“appeal consideration” by the settlement agreement)
ensures that there is a real controversy between the
parties sufficient to rescue the appeal from being dis-
missed as moot. For the reasons set forth below, we are
not persuaded, and we therefore dismiss the appeal on
grounds of mootness.
I
This case began on October 6, 2006, when Allflex sued
Avid in the United States District Court for the Central
District of California. Among other claims, Allflex sought
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.
Avid counterclaimed, alleging infringement. Only two of
3 ALLFLEX USA v. AVID IDENTIFICATION
the original six patents are still at issue. 1 They relate to
Radio Frequency Identification (“RFID”) technology used
in tags attached to animals or objects to locate them if
they are lost. Allflex and Avid compete in the RFID tag
market for pets.
On October 30, 2009, while the case was still pending,
the district court (Judge Larson) ruled that Avid and its
former counsel “should be sanctioned” under Fed. R. Civ.
P. 37(c) because they had failed to disclose the existence
of reexamination proceedings that were pending with
respect to the patents in suit. The court, however, did not
impose any monetary or other sanction on either Avid or
its former counsel, because it decided that the amount of
any sanction that might be imposed could not be deter-
mined until the conclusion of the reexamination proceed-
ings. 2
After construing the relevant claims, the district court
granted summary judgment of non-infringement as to
both patents on July 28, 2010. In a February 11, 2011,
order, the court granted partial summary judgment in
favor of Allflex on its inequitable conduct claim. The
court held that Avid’s failure to disclose information
about prior public use and offers to sell one of its products
was material for purposes of Allflex’s claim of inequitable
conduct. However, the court also denied summary judg-
ment on the inequitable conduct claim as a whole because
1 Those patents are U.S. Patent Nos. 5,214,409
(“the ’409 patent”) and 5,499,017 (“the ’017 patent”).
2 Three days after issuing the order relating to
sanctions, Judge Larson resigned from the bench. The
case was then transferred to Judge Pfaelzer. She has
taken no further action in connection with the sanctions
issue.
ALLFLEX USA v. AVID IDENTIFICATION 4
it concluded that there was a genuine issue of fact as to
whether Avid’s president, Dr. Hannis Stoddard, had the
requisite intent to deceive the Patent and Trademark
Office (“PTO”), a necessary element of Allflex’s claim.
At that point in the litigation, the parties entered into
a settlement agreement. By its terms, the agreement
resolved all claims and issues between the parties other
than those raised in this appeal. As part of the settle-
ment agreement, Avid agreed to pay $6.55 million to
Allflex. The parties further agreed that Avid would be
free to appeal the three issues referred to above—the
summary judgment of non-infringement, the finding of
materiality as to the undisclosed information about prior
public use and offers for sale, and the court’s ruling that
Avid and its counsel “should be sanctioned.” Avid also
reserved the right to appeal the district court’s claim
constructions and any other “underlying orders, objec-
tions, opinions, and rulings.” For its part, Allflex retained
the right to contest any appeal on the merits, but the
settlement explicitly barred Allflex from disputing the
existence of a live case or controversy. The agreement
further provided that, “[i]n the event AVID is successful
in overturning any of such findings,” Allflex would pay
Avid $50,000, i.e., the settlement amount to be paid to
Avid would be reduced from $6.55 million to $6.5 million.
The district court accepted the settlement agreement
and entered what the court styled a “Stipulated Order of
Final Judgment.” In that order, the court stated that the
action was dismissed with prejudice “with the exception of
the following findings, which are final and ripe for appel-
late review.” The court listed those findings as being the
grant of summary judgment of non-infringement, the
grant of summary judgment of materiality regarding the
inequitable conduct claim, and the order sanctioning Avid
5 ALLFLEX USA v. AVID IDENTIFICATION
and its former counsel. The order stated that Avid could
also appeal “all underlying orders, objections, opinions,
and rulings including the Court’s claim construction
rulings.”
Avid then appealed those three issues to this court.
In its brief, Avid also contests the district court’s con-
struction of claim 13 of the ’017 patent, which it admits
was not necessary to the district court’s infringement
rulings. Allflex did not file a brief in response.
II
This case presents several procedural problems for us.
The first question is whether the order entered by the
district court is a “final decision” over which this court
may exercise jurisdiction. 28 U.S.C. § 1295(a)(1). At first
blush, the court’s stipulated judgment appears to be non-
final, because two of the issues raised on appeal involve
claims that were not finally disposed of by the district
court. Although the grant of summary judgment of non-
infringement finally disposed of the infringement claims,
the inequitable conduct claim and the sanctions against
Avid and its counsel stand differently.
As to the inequitable conduct claim, the district court
ruled that the information Avid failed to disclose to the
PTO was material. However, the court denied summary
judgment with respect to the other element of inequitable
conduct—whether the nondisclosure was done with the
intent to mislead the PTO. That issue, and the inequita-
ble conduct claim in general, were left unresolved, at least
until the settlement agreement.
As to the sanctions issue, Judge Larson stated that
Avid and its previous counsel “should be sanctioned”
ALLFLEX USA v. AVID IDENTIFICATION 6
under Fed. R. Civ. P. 37(c) for failing to disclose the
pendency of reexamination proceedings, but he did not
impose any monetary or other sanction on either Avid or
its counsel. Instead, he left the matter of the amount of
sanctions for later determination, following the transfer of
the case to Judge Pfaelzer. No such later determination
was made, and no monetary or other sanction has been
imposed.
The posture of the sanctions issue is that while Judge
Larson criticized Avid and its former counsel, nothing
further has been done with regard to sanctions, and it
appears likely that nothing more will be done. While
Avid may be unhappy about having its conduct criticized
by a federal district judge, criticism in the absence of a
monetary or similarly formal sanction does not constitute
an order over which this court has appellate jurisdiction.
See Orenshteyn v. Citrix Sys., Inc., 691 F.3d 1356, 1358
(Fed. Cir. 2012) (notwithstanding that the decision on the
merits is a final decision, “the district court’s decision
granting sanctions is a separate order which is not final
and appealable until the district court has decided the
amount of sanctions”); Nisus Corp. v. Perma-Chink Sys.,
Inc., 497 F.3d 1316, 1320-21 (Fed. Cir. 2007); Precision
Specialty Metals, Inc. v. United States, 315 F.3d 1346,
1353 (Fed. Cir. 2003); View Eng’g, Inc. v. Robotic Vision
Sys., Inc., 115 F.3d 962, 964 (Fed. Cir. 1997); 5A Charles
Alan Wright & Arthur R. Miller, Federal Practice &
Procedure § 1337.4 (3d ed.) (2004). We therefore lack
jurisdiction over the sanctions issue because there has
been no final sanctions order for this court to review. 3
3 Avid’s former attorneys have not appealed from
Judge Larson’s order regarding sanctions. For purposes
of this appeal, Judge Larson’s order therefore cannot
constitute an attorney reprimand that would be appeala-
7 ALLFLEX USA v. AVID IDENTIFICATION
Under normal circumstances, the inequitable conduct
claim would also be considered non-final, and the conse-
quence of the non-finality of the inequitable conduct claim
would be that the entire appeal would have to be dis-
missed. See Enzo Biochem, Inc. v. Gen-Probe, Inc., 414
F.3d 1376, 1379 (Fed. Cir. 2005) (unresolved inequitable
conduct counterclaim “renders the district court’s judg-
ment nonfinal for purposes of appeal”); Pause Tech., LLC
v. TiVo, Inc., 401 F.3d 1290, 1295 (Fed. Cir. 2005); Nys-
trom v. Trex Co., Inc., 339 F.3d 1347 (Fed. Cir. 2003). 4
The manner in which the final judgment is framed, how-
ever, makes this case different. The district court dis-
missed all aspects of the case except for the precise issues
that Avid sought to preserve for appeal. As to those
issues, the district court’s judgment and the settlement
agreement made clear it was not contemplated that there
would be any further proceedings in the district court
either before or after any appellate action in the case.
In effect, the district court’s final judgment disposed
of the inequitable conduct claim in Avid’s favor, because it
dismissed that claim without granting relief to Allflex and
without contemplating any further proceedings on that
issue in the district court. That disposition avoids the
problem of the non-finality of the inequitable conduct
ble as a final order. See Precision Specialty Metals, 315
F.3d at 1352-53.
4 The non-finality of the sanctions issue would not
render the entire appeal non-final. See Jackson v. Cintas
Corp., 425 F.3d 1313, 1316 (11th Cir. 2005); In re Dyer,
322 F.3d 1178, 1186 (9th Cir. 2003); Brown v. Francis, 75
F.3d 860, 864 n.3 (3d Cir. 1996); Triland Holdings & Co.
v. Sunbelt Serv. Corp., 884 F.2d 205, 208 (5th Cir. 1989);
Cleveland v. Berkson, 878 F.2d 1034, 1036 (7th Cir. 1989);
see generally Budinich v. Becton Dickinson & Co., 486
U.S. 196, 202-03 (1988).
ALLFLEX USA v. AVID IDENTIFICATION 8
claim, but it creates other jurisdictional problems, as we
discuss below.
III
The main procedural problem created by the posture
of this case is mootness. Avid asserts that it has a con-
tinuing interest in the issues it wishes to present on
appeal, but there is a real question whether Allflex has a
legally cognizable interest in any of those issues in the
context of this case, and thus whether there is a live case
or controversy for this court to resolve.
First, with respect to the sanctions issue, there has
been no sanction entered against Avid, and thus an
appeal on that issue would have no effect on either party’s
legal rights even if this court had jurisdiction to review
the district court’s findings and agreed with Avid. Sec-
ond, with respect to the materiality issue in the inequita-
ble conduct claim, Avid has not suffered an adverse
judgment on Allflex’s inequitable conduct claim because
the district court dismissed this case without finding
Avid’s patents unenforceable. Regardless of whether this
court reverses the materiality ruling, Avid’s patents will
remain in force because neither the district court nor the
parties contemplate further proceedings on the issue of
intent, which would be necessary before the court could
enter a judgment on inequitable conduct. Under those
circumstances, Avid’s disagreement with the court’s
ruling on the materiality issue does not give it a right to
appeal. “A party may not appeal from a judgment or
decree in his favor, for the purpose of obtaining a review
of findings he deems erroneous which are not necessary to
support the decree.” Elec. Fittings Corp. v. Thomas &
Betts Co., 307 U.S. 241, 242 (1939); see also N.Y. Tel. Co.
v. Maltbie, 291 U.S. 645 (1934).
9 ALLFLEX USA v. AVID IDENTIFICATION
In contending that the issues it has put before this
court are not moot, Avid relies entirely on the $50,000
contingent payment that will be payable to Avid if it
prevails in this court on any one or all of the three identi-
fied issues—sanctions, materiality, or non-infringement. 5
In the context of this case, we hold that the $50,000
contingency payment is not sufficient to avoid a conclu-
sion that the issues Avid seeks to raise on appeal are
moot. Under the settlement agreement, Allflex has
obtained a payment of $6.5 million that is not at risk in
the appeal, and Avid’s infringement counterclaims have
been dismissed with an agreement not to bring a similar
action against Allflex for seven years. Although Allflex is
entitled under the terms of the settlement agreement to
litigate the merits of this appeal, the $50,000 remaining
at issue is apparently insufficient to induce it to file a
brief or otherwise participate.
If there were no money at stake, the appeal would
undoubtedly be moot. The fact that Avid is unhappy with
the district court’s decision in this case is not enough to
breathe life into the case in the absence of a continuing
controversy between the parties. This court’s decision in
Aqua Marine Supply Co. v. AIM Machining, Inc., 247 F.3d
1216 (Fed. Cir. 2001), makes that clear. In that case,
Aqua Marine sued for infringement of its patent, and the
defendant counterclaimed, alleging invalidity. The dis-
trict court granted the defendant summary judgment and
held Aqua Marine’s patent invalid, after which the parties
settled the infringement issues in the case. Aqua Marine
sought to appeal to obtain reversal of the invalidity
5 Avid has not suggested that the $50,000 contin-
gent payment would apply to its argument regarding the
construction of claim 13 of the ’017 patent, and we con-
clude that there is no independent basis for exercising
jurisdiction over that issue.
ALLFLEX USA v. AVID IDENTIFICATION 10
ruling, an issue in which the defendants had no interest
in light of the settlement of the infringement dispute.
Because the parties were “no longer adversaries” with
respect to that issue, and because the appellant had been
responsible for the appellee’s loss of interest in the appeal
by entering into the settlement of the dispute, this court
held that the case was moot and dismissed the appeal,
leaving the district court’s decision intact. The court
explained that where “the alleged infringer has settled
the infringement issue, and no longer professes any
interest in defending its declaratory judgment of invalidi-
ty, the case has become moot as a result of the voluntary
act of the patentee.” 247 F.3d at 1220.
Avid contends that this case differs from Aqua Marine
because the outcome of the appeal has monetary conse-
quences for the parties—to wit, Allflex will have to return
$50,000 of the settlement funds that Avid paid if Avid is
successful on any of the issues it seeks to raise on appeal.
In arguing about the significance of the monetary conse-
quences of the appeal, Avid relies on this court’s opinion
in another case it prosecuted, Avid Identification Systems,
Inc. v. Crystal Import Corp., 603 F.3d 967 (Fed. Cir.
2010), and on the Supreme Court’s decisions in Nixon v.
Fitzgerald, 457 U.S. 731 (1982), and Havens Realty Corp.
v. Coleman, 455 U.S. 363 (1982).
In both of the Supreme Court cases, the parties
agreed to a sum of liquidated damages that would be paid
or not paid depending on the outcome of the case in the
Supreme Court. In Nixon, the plaintiff agreed to accept
liquidated damages of $28,000 if it succeeded in the
Supreme Court, and in Havens, the parties agreed that
each of the class members would receive $400 in damages
if the class prevailed. Because the Court found that the
parties were still adverse and because there was no
11 ALLFLEX USA v. AVID IDENTIFICATION
indication that the amount of the liquidated damages in
each case reflected anything but a reasonable attempt to
quantify the damages that would flow from the outcome
in the Supreme Court, the Court held that the cases were
not moot simply because the parties had fixed the amount
of damages that would turn on the Court’s decision.
In the Crystal Import case, Avid, the patentee, pre-
vailed in a jury trial on infringement and obtained a
verdict of $26,981 in damages, plus a verdict of $6 million
in damages for unfair competition. The district court then
held the patent unenforceable for inequitable conduct.
Following that ruling, the parties entered into a settle-
ment agreement in which they agreed to reduce the unfair
competition damages to $3 million, to obtain dismissal of
all claims other than those relating to the patent that was
the subject of the infringement and inequitable conduct
claims, and to allow Avid to appeal from the inequitable
conduct ruling. The parties agreed that if Avid prevailed
on appeal, it would recover the $26,981 in damages that
the jury had awarded it.
Allflex, which appeared in that case as amicus curiae,
argued that the settlement agreement rendered the case
moot. This court disagreed. The court pointed out that
the agreement had provided that the defendant,
Datamars, was entitled to contest the merits of the ap-
peal, although it declined to do so, and that the $26,981
that would be affected by the appeal “is not a token or
arbitrary sum introduced for the purpose of manufactur-
ing a controversy,” but “represents the entirety of the jury
award for patent infringement, which Datamars would
have been legally obligated to pay to Avid if the ’326
patent were not held unenforceable.” 603 F.3d at 972.
For that reason, the court held that the settlement
agreement did not render the case moot.
ALLFLEX USA v. AVID IDENTIFICATION 12
Even in the absence of an agreement in Crystal Im-
port, if Avid had chosen to appeal the inequitable conduct
issue, the amount in dispute would have been exactly the
amount that the parties actually agreed upon in their
settlement agreement. That amount was therefore not a
form of liquidated damages, but was the actual amount of
damages at stake. It was not a contrivance invented for
the purpose of avoiding a mootness determination, but
rather was the jury’s legally binding assessment of the
damages caused by the trespass against Avid’s rights—a
trespass that, in Avid’s mind, was worth remedying in
court.
This case is quite different from the three cases on
which Avid relies. Under the settlement agreement in
this case, the $50,000 rebate from the $6.55 million
settlement sum will be paid if Avid prevails on any or all
of the three issues that it undertook to appeal. Counsel
for Avid has made no effort to suggest that $50,000 is a
reasonable estimate of the value of any of the issues on
appeal, rather than simply a number that Avid hopes will
be large enough to persuade this court that it is not a
“token or arbitrary sum introduced for the purpose of
manufacturing a controversy.” Crystal Import, 603 F.3d
at 972.
The $50,000 contingent payment does not reflect an
actual damages award, as in Crystal Import, and it does
not represent a liquidated damages award, as in Nixon
and Havens. With respect to the materiality issue in the
inequitable conduct claim, Avid is not and never was at
risk of having to pay a monetary judgment on that claim,
as inequitable conduct is a defense or an equitable reme-
dy, not a claim for damages, even when it is pleaded as an
affirmative claim in a declaratory judgment action.
Accordingly, the $50,000 cannot be fairly characterized as
13 ALLFLEX USA v. AVID IDENTIFICATION
a reasonable estimate of a prospective damages award
that would take the place of an adjudicated damages
award following the appeal. See Gator.com Corp. v. L.L.
Bean, Inc., 398 F.3d 1125, 1131 (9th Cir. 2005) (en banc)
(distinguishing Havens and Nixon on the ground that
those cases involved “plaintiffs who were seeking mone-
tary damages and who agreed to accept a liquidated
payment if they prevailed on appeal”).
Even with respect to the non-infringement issue, we
are not satisfied that the $50,000 contingent payment is a
reasonable proxy for a damages award on that issue.
And, given the way the contingent payment is structured,
how could it be? If $50,000 is a reasonable estimate of the
value of a reversal on the inequitable conduct issue, for
example, then the other issues on appeal presumably
have no value. Yet under the settlement agreement, each
of those issues has been valued at $50,000, with the
proviso that success on more than one of those issues will
not increase the amount of Avid’s rebate above $50,000.
The $50,000 is thus completely untethered to the value of
any of the issues on appeal.
At oral argument, counsel for Avid declined to defend
the proposition that a $10,000 payment would be suffi-
cient to rescue this case from mootness, no doubt perceiv-
ing that if he asserted that it was, the question would
soon follow whether $10 would be sufficient. Instead,
counsel’s answer to the court’s inquiry was to assert that
the $50,000 was sufficient because it was almost twice the
amount at issue in the Crystal Import case. But the
absolute amount at stake is insufficient by itself to estab-
lish a relation to the value of the issues on appeal in this
case, especially where the $50,000 represents less than
one percent of the payment included as consideration for
the partial settlement. We hold that where, as here, the
ALLFLEX USA v. AVID IDENTIFICATION 14
appellant has identified no relationship between the
valuation placed on the appeal and the issues the appel-
lant wishes to challenge, the parties have simply placed a
“side bet” on the outcome of the appeal, which is not
enough to avoid a ruling of mootness.
As this court explained in Aqua Marine, dismissal of
appeals mooted by settlement is necessary to preserve the
rule, announced in U.S. Bancorp Mortgage Co. v. Bonner
Mall Partnership, 513 U.S. 18, 29 (1994), that “mootness
by reason of settlement does not justify vacatur of a
judgment under review.” If appeals such as this one were
permitted, “evasion of the Supreme Court’s limitations on
vacatur . . . could be easily accomplished by simply set-
tling” certain issues for a large sum “and allowing the
patentee to continue to litigate . . . unencumbered by an
opposing party.” Aqua Marine, 247 F.3d at 1220. The
only appropriate response to such tactics is to declare this
appeal moot and leave the district court’s rulings undis-
turbed.
While counsel emphasized the advantages to parties
of being able to take appeals after settling their dis-
putes—usually in an attempt to upset rulings that they
fear may have adverse downstream consequences for the
would-be appellant—the consequences for the judicial
system are sufficiently detrimental that we believe it is
important to avoid creating incentives for one-sided
appeals such as this one. When one party wishes to
maximize its prospects of prevailing on an issue that has
been the subject of a settlement agreement similar to the
one in this case, it would no doubt be tempting to set the
contingency payment at a level that would be sufficient to
avoid the mootness rule of Aqua Marine, yet low enough
to avoid encouraging the adverse party to participate in
the appeal. As this case demonstrates, that results in the
15 ALLFLEX USA v. AVID IDENTIFICATION
highly unsatisfactory situation in which the court finds
itself with a one-party appeal, where there is no adversar-
ial presentation and the court consequently has reduced
confidence in any ruling it might enter. In some instanc-
es, as we pointed out in Crystal Import, one-party appeals
are unavoidable. But where, as in this case, the appellant
has failed to satisfy us that the arrangement leading to
the one-party appeal reflects the existence of a legitimate,
continuing case or controversy, we decline to be a party to
the exercise. We therefore dismiss the case as moot and
do not disturb the judgment of the district court.
DISMISSED