Today, in In Re Nintendo involving an infringement complaint against Nintendo and eleven retailer’s of the Nintendo DS video game device, the Federal Circuit (Newman, Rader and Hughes) granted mandamus and ordered Judge Gilstrap of E.D. Texas to (1) sever the claims against Nintendo the manufacturer from the claims against the video game retailers; (2) stay the claims against the retailers and (2) transfer the claims against manufacturer Nintendo to W. D. Wash. where Nintendo’s relevant U.S. operations are based.  The court did so notwithstanding the patent owner’s argument that this may lead to collecting a low royalty rate from Nintendo that would then bar collecting a higher royalty against the retailers on those same devices (the retailers charge higher prices and do some bundling).

This case may tip the scales more toward granting “customer stays” in patent cases, which previously had about 50-50 chance of success.  This ruling was made in the wake of recent patent reform legislation that seeks to codify customer-stays in order to provide more predictability to its application.

Background.  In this case, patent owner Secure Axcess sued Nintendo and eleven retailers of the Nintendo DS video game systems alleging patent infringement by those game systems.  The defendants moved to sever and stay the actions against the retailers and transfer the action against Nintendo to W.D. Wash. where the bulk of documents and witnesses concerning the design of Nintendo’s DS video game system were located.  The retailers “stipulated that they would be bound by any judgment rendered by the transferee court in the Nintendo litigation.”

Judge Gilstrap denied the motion, noting that the patent owner “could obtain a higher royalty against the Retailers in light of ‘higher retail prices and the retailers’ practice of bundling the accused systems with video games and other accessories.’”  Thus, the patent owner should be allowed to pursue claims for damages against both Nintendo and the retailers at the same time “even though it may only collect once.”

Federal Circuit.  The Federal Circuit decision, written by Judge Newman, started by explaining the “customer-suit” exception to the “first-to-file” rule where a suit by a manufacturer “generally takes precedence” over a first suit filed by a patent owner against the manufacturer’s customers “for it is the manufacturer who is generally the ‘true defendant’ in the dispute.”  Although the manufacturer (Nintendo) and customers (retailers) were sued in the same single complaint, the customer-suit exception rationale still applies and “Nintendo is the true defendant.”  In this case, “the issues of infringement and validity are common to Nintendo and the Retailer Defendants” and “collect[ing] royalties from Nintendo … would preclude suit against the Retailers.”

The Federal Circuit rejected patent owner’s argument that the case should proceed against the retailers so that the patent owner can “have its choice of … the highest royalty rate among the defendants,” stating:

Secure Axcess [the patent owner] contends that severance should be denied so that it may pursue, and have its choice of, the highest royalty rate among the defendants.  This argument is outweighed, as in Katz, where we held that “[a]lthough there may be additional issues involving the defendants in [the customer] action, their prosecution will be advanced if [the plaintiff] is successful on the major premises being litigated in [the manufacturer litigation], and may well be mooted if [the plaintiff] is unsuccessful.”  This reasoning is similarly applicable here, for Secure Axcess has no claim against the Retailers unless the infringement claims against Nintendo are resolved in favor of Secure Axcess. … Since Nintendo’s liability is predicate to recovery from any of the defendants, the case against Nintendo must proceed first, in any forum.