On September 8, 2015, the Federal Circuit heard oral arguments in an appeal from an ITC enforcement proceeding that imposed a civil penalty of $6.2 million against DeLorme Publishing Company, Inc. and DeLorme inReach LLC (collectively, “DeLorme”) for violating a consent order.  The appeal, heard by a panel consisting of Judges Moore, Reyna and Taranto, raises a number of novel issues, including the effect of a subsequent district court judgment in a co-pending case that invalidated the patent claims at issue in the enforcement proceeding.

Background

In Certain Two-Way Global Satellite Communication Devices, System and Components Thereof, Inv. No. 337-TA-854, complainant BriarTek IP, Inc. accused its competitor DeLorme of violating Section 337 by infringing BriarTek’s U.S. Patent No. 7,991,380 (the “’380 patent”).  The asserted claims were directed to a two-way global satellite emergency monitoring and reporting system comprised of two major components:  a user unit and a monitoring system.  BriarTek alleged that DeLorme’s inReach messaging devices – the user unit – infringed the ’380 patent when used with other components of the patented system.  DeLorme decided to move its manufacturing operations from Taiwan to Maine, and therefore sought to resolve the ITC investigation through a consent order in which DeLorme agreed not to import or sell after importation “any two-way global satellite communication devices, system, and components thereof, that infringe claims 1, 2, 5, 10-12, and 34 of the ’380 patent after April 1, 2013, until the expiration, invalidation, and/or unenforceability of the ’380 patent.”

Immediately following entry of the consent order and termination of the investigation, BriarTek filed an enforcement complaint on April 10, 2013.  The enforcement proceeding challenged DeLorme’s domestic assembly of its inReach devices using various imported components.  One model was assembled almost entirely from imported parts:  an Iridium modem and antenna, a keypad, battery and the plastic housing; a second model used only two imported components — the plastic housing and a clip to hold the device on a user’s belt.  Following discovery, an evidentiary hearing and an Initial Determination by Judge Lord, the Commission issued an opinion and order on June 9, 2014.  The Commission found that DeLorme violated the consent order and induced infringement by selling the domestically assembled devices with imported components to end users with instructions to use the entire system in an infringing manner.  The Commission rejected DeLorme’s arguments that it did not violate the consent order because the imported plastic housing and belt clip did not, by themselves infringe, finding them to be “components” whose importation and sale were barred by the consent order.  The Commission found 227 days of violation, and imposed a civil penalty of $27,500 per day, for a total of $6,242,500.

In the meantime, in May 2013, DeLorme filed a declaratory judgment action in the Eastern District of Virginia, seeking to invalidate BriarTek’s ’380 patent.  Following motions for summary judgment, the district court entered judgment on November 19, 2014, finding the asserted claims of the ’380 patent invalid.  BriarTek’s appeal of the invalidity judgment was heard on the same day as DeLorme’s appeal of the ITC penalty.

The Oral Argument

Although DeLorme offered arguments that clearly non-infringing components such as a belt clip cannot be the basis of a finding of violation, and that its good faith belief in the invalidity of the ‘380 patent precluded the finding of induced infringement, the oral argument focused almost exclusively on the effect of the district court’s judgment of invalidity.

DeLorme argued that it cannot be found to violate Section 337 based on alleged infringement of an invalid patent.  DeLorme distinguished the Supreme Court’s ruling in Commil that “belief regarding validity cannot negate the scienter required under § 271(b)”[1] by relying on  Section 337(a)(1)(B), which expressly prohibits infringement of “a valid and enforceable” patent. 19 U.S.C. § 1337(a)(1)(B).

The Court focused on the fact that the district court judgment was rendered several months after the ITC’s finding of a consent order violation.  Judge Moore asked, assuming the Commission was otherwise correct in its decision, if the violation could “disappear” based on a later district court decision.  DeLorme argued that since civil penalties for violation of orders under Section 337(f) derive their authority from Section 337(a), the adjudicated invalidity of the ‘380 patent required reversal of the consent order violation finding and the $6.2 million penalty.  Judge Taranto questioned that analysis, pointing out that DeLorme had, as all ITC consent orders require, given up its right to challenge validity at the ITC.  Judge Taranto noted that DeLorme’s Section 337(f) argument would mean that validity could be litigated in an enforcement action, and that “cannot be.”

Judge Moore also noted that the consent order expressly stated it would not apply with respect to any claim that had been adjudicated invalid provided the adjudication was “final and non-reviewable.”  She questioned how the district court’s decision could terminate the ITC’s consent order prohibitions while that decision was on appeal.

DeLorme and the Court appeared to agree that the consent order was ambiguous regarding the retrospective vs. prospective effect of a subsequent judgment of invalidity, although DeLorme argued that the jurisdictional limit of the Commission to reach a decision about unfair acts (e.g. infringement of a valid patent)meant that the invalidation must apply retrospectively.

DeLorme argued that the Federal Circuit’s opinion in ePlus, Inc. v. Lawson Software, Inc., 789 F.3d 1349 (Fed. Cir. 2015), supported the conclusion that the ITC penalty could not stand.  In ePlus, the Federal Circuit vacated an injunction and contempt order because both were based on a claim that had been cancelled by the PTO during reexamination.  Judge Moore questioned the applicability of ePlus, noting that the case involved civil contempt.  She noted that while a civil fine of a compensatory nature could be vacated on the basis of subsequent events, as in ePlus, a punitive fine should not be reversed.  Recognizing that the ITC order was termed a “civil penalty,” Judge Moore nevertheless pressed counsel for the parties to show whether the penalty in this case was compensatory or punitive.  The fine, if paid, would go to the ITC, not to BriarTek, but DeLorme relied on the “civil” label.  Counsel for the ITC could not say whether the fine was punitive, and suggested that the case should be remanded so the ITC could consider in the first instance what effect, if any, the subsequent district court judgment should have.  Counsel for the ITC stated that the consent order could not be viewed as a judicial decree or injunction because there had been no underlying finding or admission of wrongdoing.  Rather, he argued the consent order should essentially be viewed as a contract.

The Court questioned the ITC’s request for remand rather than affirmance inasmuch as the interpretation of the consent order was a question of law.  Counsel for the ITC could not say whether the Commission would conclude that the district court judgment had retrospective or prospective effect because the Commission would have to consider input from the parties and deliberate before taking a position.  When Judge Moore noted that the consent order states it applies “until” the patent is invalidated, counsel for the ITC responded that while that is what the order appears to say, he could not state what the final position of the Commission would be.  He noted that the “until” language in the consent order was not standard, and asserted that was a further reason for remand so the Commission could consider its effect.  DeLorme concluded the hearing by arguing that remand was not necessary and reiterating its position that the consent order cannot be interpreted so as to exceed the Commission’s authority to find violations based on infringement of valid patents.

The Court took the case under submission.