Judges: Gajarsa (author), Clevenger, Dyk [Appealed from W.D. Pa., Judge Schwab]

In University of Pittsburgh v. Varian Medical Systems, Inc., Nos. 08-1441, -1454 (Fed. Cir. June 9, 2009), the Federal Circuit held that the district court erred in dismissing with prejudice a suit brought by the University of Pittsburgh (“Pitt”) against Varian Medical Systems, Inc. (“Varian”) for lack of standing. The Court vacated the dismissal and remanded with instructions to designate the dismissal as without prejudice.

Pitt is the assignee of U.S. Patent Nos. 5,727,554 (“the ‘554 patent”) and 5,784,431 (“the ‘431 patent”), which are directed to inventions arising from a collaboration between scientists at Pitt and Carnegie Mellon University (“Carnegie Mellon”) to develop an improved apparatus for administering radiation therapy to lung cancer patients. Pitt sued Varian for infringement of the ‘554 and ‘431 patents, and Varian moved for SJ, alleging that Carnegie Mellon is a co-owner of these patents; thus, Pitt alone lacked standing to sue for infringement. Pitt moved to join Carnegie Mellon pursuant to Fed. R. Civ. P. 19, but the district court denied the motion without explanation. The district court then dismissed the case with prejudice on the grounds that (1) Pitt should have joined Carnegie Mellon when it first brought suit, and (2) Pitt’s attempt to join Carnegie Mellon was untimely and unfair to Varian.

On appeal, the Federal Circuit rejected as an abuse of discretion under Third Circuit law both of the district court’s reasons for dismissing the case with prejudice. Addressing first the district court’s conclusion that Pitt should have joined Carnegie Mellon at the lawsuit’s inception, the Court held that, although all patent owners must be joined to maintain an infringement action, a dismissal for failure to join a necessary party or, more generally, for lack of standing is not an adjudication on the merits and thus should not have preclusive effect. Specifically, the Court held that although the district court had the discretion to dismiss the case under Rule 12(b)(7) for failure to join a patent co-owner under Rule 19, it lacked the discretion to do so with prejudice. And, more generally, as the Third Circuit and other regional circuits universally recognize, a dismissal for lack of standing is jurisdictional and thus should generally be without prejudice, particularly when the defect is curable. Therefore, the Court concluded, the district court should have dismissed the case without prejudice and permitted Pitt to file a second suit curing the standing defect either by joining the proper parties or by assignment of the necessary patent rights.

In so holding, the Federal Circuit distinguished two cases cited by Varian. In Sicom Systems, Ltd. v. Agilent Technologies, Inc., 427 F.3d 971 (Fed. Cir. 2005), the Court affirmed the dismissal of a second suit with prejudice after the plaintiff had been given a chance to cure a standing defect and failed. In Textile Productions, Inc. v. Mead Corp., 134 F.3d 1481 (Fed. Cir. 1998), the standing defect was likely incurable, and the parties did not contest the “with prejudice” nature of the dismissal. Here, in contrast, Pitt did not file a previous action that was dismissed for lack of standing. Pitt attempted to cure the defect by filing a motion to join Carnegie Mellon, and Pitt’s lack of standing can, in fact, be cured. Accordingly, the Court found Sicom and Textile Productions consistent with the general rule that a dismissal for lack of standing should usually be without prejudice, and it found no reason to deviate from this general rule.

The Federal Circuit next addressed the district court’s second justification for dismissing the action with prejudice—that Pitt’s attempt to join Carnegie Mellon was untimely and unfair to Varian. To determine whether dismissal with prejudice was an appropriate sanction, the Court again applied Third Circuit law, which holds that dismissal with prejudice is rarely a proper sanction. Indeed, the Third Circuit has stated that “dismissal [with prejudice] is a drastic sanction and should be reserved for those cases where there is a clear record of delay or contumacious conduct by the plaintiff.” Slip op. at 9-10 (alteration in original) (quoting Donnelly v. Johns-Manville Sales Corp., 677 F.2d 339, 342 (3d Cir. 1982)).

The Third Circuit instructs courts to analyze four nonexclusive factors to determine whether dismissal with prejudice is appropriate: “(1) the degree of the plaintiff’s personal responsibility for the delay; (2) prejudice to the defendant occasioned by the delay; (3) any history that the plaintiff proceeded in a dilatory manner; and (4) [a consideration of] the effectiveness of sanctions other than dismissal.” Id. at 10 (quoting Madesky v. Campbell, 705 F.2d 703, 704 (3d Cir. 1983)). The Third Circuit interprets the fourth factor to require that the district court indicate on the record that it has considered sanctions less severe than dismissal.

Here, the Federal Circuit found that the district court failed to discuss or provide support for any of the relevant factors. Rather, the district court stated only that it found dismissal to be more appropriate than joining Carnegie Mellon and that Pitt knew of Carnegie Mellon’s rights in the ‘554 and ‘431 patents but chose not to join Carnegie Mellon for tactical reasons. The Court noted that, although these statements relate to the first three factors, the district court provided no explanation or citation to the record in support. Likewise, the district court provided no explanation when it initially denied Pitt’s motion to join Carnegie Mellon.

Noting that the Court may on occasion affirm a district court’s judgment in the absence of a recitation of its reasons, the Court concluded that the complexity of the standing issue made this not such an occasion. The Court therefore concluded that because dismissal with prejudice is a harsh sanction that is disfavored under Third Circuit law and was not justified on the record, the district court improperly dismissed the case with prejudice. Accordingly, the Court vacated the dismissal and remanded with instructions to designate the dismissal as without prejudice to Pitt’s ability to establish standing through joinder of Carnegie Mellon or assignment of whatever rights Carnegie Mellon may have in the ‘554 and ‘431 patents. The Court declined to consider whether Carnegie Mellon is a necessary party to the action or whether dismissal would be the proper consequence if Pitt failed to join a necessary party.