Today, Thu., May 31, 2012, in Merial v. Cipla, No. 2011-1471, the Federal Circuit (Lourie, Schall (dissent) and Reyna) affirmed entry of contempt for violating an injunction that had been entered as part of a default judgment against a foreign defendant that had not contested the original action because that defendant believed personal jurisdiction was not properly pled or met. This complex case provides insight into important procedural nuances of personal jurisdiction, default judgments, injunctions, intervention, contempt proceedings and risks thereof. A quick summary of the case is provided below, which will be followed later by a more thorough analysis with explanatory diagrams.
Original Action. The patent owner Merial originally filed suit against the foreign defendant Cipla alleging personal jurisdiction under the state long-arm statute. The foreign defendant determined that the court lacked jurisdiction and made no appearance. The court entered a default judgment that the accused products infringed valid claims and enjoined further infringement or “causing or inducing” infringement.
New Product. The foreign defendant entered complex agreements with other entities (many related) to produce abroad and import into the U.S. a new product to compete at a lower price with the patent owner’s product. Defendant used an expedited registration filing in the EPA to allow importation where they stated that their product was “identical or substantially similar” to the patent owner’s product.
Declaratory Judgment. Velcera, an entity involved with the new product, filed a declaratory judgment action against the patent owner in another district.
Contempt Proceedings. The patent owner then brought contempt proceedings against the original foreign defendant. Defendant Velcera voluntarily intervened. The court found both the original defendant and intervening defendant (who “acted in concert” with the original defendant) in contempt of the original injunction and enjoined their new product. The declaratory judgment action was dismissed because the contempt ruling eliminated any existing controversy as to unenjoined products.
Appeal:. The defendants raised several complex procedural issues on appeal, some of which are reviewed below.
1. Personal Jurisdiction. Defendants argued that the default judgment was invalid because the district court had no personal jurisdiction over the original foreign defendant. The Federal Circuit Majority ruled that personal jurisdiction existed under Rule 4(k)(2) where a foreign entity has sufficient contacts with the U.S. as a whole though not sufficient contacts with any individual state. The Majority ruled that the original defendant’s decision not to appear in the original case to avoid default judgment had assumed the risk that personal jurisdiction existed under Rule 4(k)(2) even though it had not been pled as a basis for jurisdiction.
2. First-To-File Rule. The Majority ruled that first-to-file rule had not required staying the contempt proceeding in lieu of the earlier filed declaratory judgment action, because the contempt proceeding was based on the original complaint filed before the declaratory judgment action.
3. Unsolicited Intervener. The Majority ruled that “[p]atent validity and infringement by an originally accused product are generally not open to challenge in contempt proceedings” and the intervening defendant – “as an unsolicited intervenor” – had “joined subject to all prior determinations of fact and law that preceded the intervention.” Thus the intervener could not contest whether the original product infringed a valid claim.
4. TiVo Contempt Standard. The Majority ruled that the first TiVo contempt requirement of whether the new product was “colorably different” from the originally enjoined product was met based on a direct comparison of the products even though the original judgment did not include any detailed factual findings about the original product that would provide a more precision to the analysis. Further, the second TiVo requirement of whether patent was infringed was met even though the district court compared the new accused product to the patent owner’s commercial product (that practiced the invention), rather than to the patent claims. But the evidence also included testimony from the intervening defendant’s CEO that the patent would be infringed if held valid.
5. Extraterritorial Inducement. The Majority ruled that the contempt injunction did not improperly extend to activities outside the U.S. because induced infringement under 271(b) only requires that the underlying direct infringement occur in the U.S. – the inducing activity itself may occur outside the U.S.
6. Injunction. The Majority ruled that the contempt injunction was proper, notwithstanding the disparity in size between the parties, because (1) one who builds a business on an infringing product cannot be heard to complain if enjoined and (2) defendants plan to sell a cheaper product may cause irreparable harm to the patent owner in the form of lost market share and price erosion.
7. Dissent. Judge Schall dissented based on the personal jurisdiction ruling.