Judges: Gajarsa, Moore, Jordan (author, sitting by designation)

[Appealed from M.D.N.C., Judge Tilley, Jr.]

In Walter Kidde Portable Equipment, Inc. v. Universal Security Instruments, Inc., No. 06-1420 (Fed. Cir. Mar. 2, 2007), the Federal Circuit affirmed the district court’s dismissal of the complaint without prejudice and without conditions.

Walter Kidde Portable Equipment, Inc. (“Kidde”) filed two infringement suits against Universal Security Instruments, Inc. (“USI”), amidst questions regarding Kidde’s standing to sue. On June 11, 2003, Kidde filed the first infringement action (“Kidde I”) in the United States District Court for the Middle District of North Carolina, alleging infringement of U.S. Patent No. 4,972,181 (“the ’181 patent”). In its answer and counterclaims, USI asserted noninfringement, invalidity, unenforceability for inequitable conduct, unenforceability for fraud on the PTO, a violation of Section 2 of the Sherman Act, and unfair competition in violation of the Lanham Act and North Carolina statutory and common law.

USI filed a motion to dismiss for improper venue, or alternatively, to transfer the case. In its reply brief, USI also asserted that Kidde did not have standing to bring suit because another company, Management Investment & Technology Company, Ltd. (“MITCL”), not Kidde, owned the ’181 patent. In response, Kidde submitted a Confirmatory Assignment of the ’181 patent executed by MITCL on October 8, 2003, which purported to confirm a transfer of rights in the ’181 patent to Kidde pursuant to a purchase agreement dated January 24, 1997. The district court dismissed USI’s venue motion and did not address the standing issue.

Prior to trial, the district court granted USI’s motion in limine excluding Kidde’s expert reports served on May 1, 2005, from use at trial. According to Kidde, the parties mutually agreed to extend the deadline for the exchange of expert reports to May 1, 2005. USI, however, filed a motion to exclude the reports from being introduced at trial, claiming that the reports were untimely served. The district court granted USI’s motion, finding that the parties had no authority without court approval to alter the April 15, 2005, discovery deadline, and admission of the untimely expert reports would have necessitated either moving the trial date (to grant USI more time to submit rebuttal expert reports) or forcing the district court to face dispositive motions on the eve of trial, neither of which the district court was willing to do.

USI later filed a motion in limine to exclude evidence and testimony as to the ownership and chain of title of the ’181 patent. Concerned that Kidde did not have legal title to the ’181 patent, the district court asked the parties to fully brief and further develop the record regarding ownership of the ’181 patent. In an attempt to eliminate questions about its standing, Kidde filed a motion for voluntary dismissal without prejudice. On the same day, Kidde filed a new action in the same court (“Kidde II”) with the belief that the Confirmatory Assignment of the ’181 patent executed before the new suit was filed would confer standing. USI submitted a cross motion to dismiss with prejudice, or in the alternative, to dismiss without prejudice but with conditions. The Court granted Kidde’s motion to dismiss without comment and without prejudice or conditions. This appeal followed.

On appeal, the Federal Circuit first analyzed whether the district court’s order was a final appealable judgment. The Court held that the district court’s statement in the order dismissing the “action” terminated not only the complaint but also USI’s counterclaims; therefore, the Court had jurisdiction over the appeal.

Turning to the dismissal, the Federal Circuit applied the law of the regional circuit because voluntary dismissal pursuant to Fed. R. Civ. P. 41(a)(2) is not unique to patent cases. Applying Fourth Circuit precedent, the Federal Circuit held that the district court did not abuse its discretion in dismissing Kidde’s claims without prejudice and without conditions. In so deciding, the Federal Circuit considered USI’s allegations of prejudice and found them to be conclusory or without merit. The Court found that USI was not prejudiced by the expenditure of resources and effort because USI can use the discovery and work product obtained in Kidde I in Kidde II. The Court also was not swayed by USI’s argument that the dismissal nullifies the favorable in limine rulings it received in Kidde I with regard to Kidde’s expert reports. The in limine rulings had nothing to do with substantive rights or even with the quality of the evidence but, rather, were expressly founded on a scheduling concern. Additionally, USI remains free to argue that the in limine rulings should also apply in Kidde II.

The Federal Circuit found that the district court’s dismissal of USI’s counterclaims was harmless legal error. The Court explained that the district court had erred in dismissing USI’s antitrust and unfair competition counterclaims because the counterclaims were pleaded prior to Kidde’s motion to dismiss. Moreover, the district court apparently had subject matter jurisdiction over the claims, as neither party had contended otherwise, and in fact, USI objected to their dismissal. Kidde could have properly defended itself against those counterclaims without owning the ’181 patent.

While the Federal Circuit declined to decide whether the district court’s dismissal of the patent counterclaims was legal error because the district court never resolved whether Kidde owned the ’181 patent, the Court held that the dismissal of USI’s counterclaims was harmless legal error because it did not affect USI’s substantial rights. The Court explained that USI’s substantial rights were not affected by the dismissal because USI appeared free to assert all of its counterclaims in Kidde II. Rather than explain how USI’s substantial rights might be adversely affected by the dismissal, USI instead contended, citing precedent, that the “mere fact that it is conceivable that there may be some legal significance to the timing of the counterclaims is enough to warrant reversal.” Slip op. at 18. The Federal Circuit countered that precedent did not hold that “a defendant need not articulate the ramifications of a district court’s dismissal of counterclaims, . . . .” Id. Separately, USI also contended that the dismissal was unfair because USI would lose the benefit of the favorable in limine ruling in Kidde I. As explained supra, this argument did not persuade the Court because the ruling was made apparently out of procedural necessity at the time, without examination of the expert reports’ merits. Additionally, USI is also free to argue in Kidde II that the same restrictions on expert evidence set by the in limine ruling in Kidde I should apply in Kidde II.

The Federal Circuit also held that the district court had erred in deciding the dismissal motion before resolving the standing issues; however, the Court held that this error was also harmless. The Court explained that because the parties would find themselves in the same position as they are now if the case were remanded and subject matter determined, the interest of judicial economy dictates that the district court’s order should be upheld.