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Dismissal Without Prejudice Not an Abuse of Discretion

January 11, 2002

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Last Month at the Federal Circuit - February 2002

Judges: Bryson (author), Newman, and Dyk

In H.R. Technologies, Inc. v. Astechnologies, Inc., No. 01-1121 (Fed. Cir. Jan. 11, 2002), the Federal Circuit held that a district court’s dismissal of a patent infringement action without prejudice (rather than with prejudice) was not an abuse of discretion. However, the Federal Circuit did find legal error in the district court’s dismissal of certain counterclaims.

H.R. Technologies, Inc. (“HRT”) filed suit against Astechnologies, Inc. (“Astechnologies”) for infringement of U.S. Patent No. 5,665,185 (“the ‘185 patent”), which claims a process for preparing a glass fiber containing a polymer sheet. In response, Astechnologies filed a counterclaim seeking a DJ of noninfringement; a federal counterclaim of unfair competition in violation of the Lanham Act, 15 U.S.C. § 1125; a state law counterclaim of tortious interference with potential business relations; and attorney fees.

HRT asserted ownership of the ‘185 patent pursuant to an assignment from ESFI Acquisition (“ESFI”). During discovery, however, the parties learned that HRT did not own the ‘185 patent because ESFI did not own the patent at the time of the purported assignment. Subsequently, Astechnologies moved to dismiss the complaint with prejudice on the ground that HRT lacked standing. HRT in turn moved to dismiss the action without prejudice.

The district court dismissed the action without prejudice. HRT corrected the assignment error and refiled its complaint against Astechnologies in a second action. Astechnologies filed a motion for reconsideration of the dismissal order. The district court denied the motion for reconsideration and clarified that it was not only dismissing HRT’s complaint without prejudice, but also was dismissing Astechnologies’ counterclaims. Astechnologies refiled the same counterclaims in response to HRT’s complaint in the second action, appealed the without-prejudice aspect of the district court’s order, and appealed the dismissal of its counterclaims in the first action.

On appeal, Astechnologies argued that the district court should have dismissed HRT’s complaint with prejudice to bar the second action. Astechnologies argued that the dismissal of a patent infringement action should always be with prejudice when a party without standing brings it. In addition, Astechnologies argued that dismissal with prejudice of the first action was required because of alleged misconduct by HRT during the discovery process.

The Federal Circuit first ruled that it had jurisdiction to hear Astechnologies’ appeal of the withoutprejudice aspect of the dismissal, since dismissal without prejudice of a party’s claims over that party’s objection is a final, appealable order. The Court explained that even though the dismissal order was partially favorable to Astechnologies, it could still appeal the without-prejudice aspect of the dismissal. In its analysis, the Court noted several distinctions from Parr v. United States, 351 U.S. 513 (1956), a Supreme Court case that held that a criminal defendant could not appeal a voluntary, without-prejudice dismissal of an indictment after a new indictment was filed in another district. The Federal Circuit reasoned that the rationale of Parr— that an appeal from the first dismissal should not be permitted because the issue can be preserved in the second phase of the case—was inapplicable in a civil setting. Therefore, the Court held that the district court’s order dismissing both the Plaintiff’s complaint and the Defendant’s counterclaims was an appealable, final order, even though it was without prejudice.

Under Sixth Circuit law, the Federal Circuit then ruled on whether the dismissal should have been with or without prejudice. The Court explained that because lack of standing does not go to the merits of the underlying patent issues, a dismissal for lack of standing would not normally be expected to be made with prejudice. Accordingly, the Court agreed that the district court was within its discretion to allow HRT to cure its standing defect and refile its complaint. In addition, the Court agreed that the district court was within its discretion not to dismiss with prejudice, since HRT was unaware that its filing was premature. Accordingly, the Court held that the district court did not abuse its discretion by dismissing HRT’s complaint without prejudice.

However, the Court found that the district court had erred in dismissing certain counterclaims asserted by Astechnologies. In particular, the Court found that, regardless of patent ownership, the counterclaims of unfair competition, tortious interference, the state law counterclaim, and attorney fees against HRT were still within the district court’s jurisdiction and did not have to be dismissed, even though the original complaint was dismissed. Therefore, the Court vacated the district court’s order to the extent that it dismissed these counterclaims.