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State Law Tortious Interference Claim Was Preempted by Federal Patent Laws Because the Claimant Could Not Show That the Patentee Acted in Bad Faith in Enforcing Its Patents

07-1272
August 29, 2008

Decision icon Decision

Last Month at the Federal Circuit - September 2008

Judges: Gajarsa, Plager (author), Dyk (concurring)

[Appealed from: M.D. Fla., Chief Judge Fawsett]

In 800 Adept, Inc. v. Murex Securities, Ltd., Nos. 07-1272, -1356 (Fed. Cir. Aug. 29, 2008), the Federal Circuit reversed the district court’s judgment of infringement with respect to certain patents, vacated its infringement damages award and permanent injunction, and vacated its judgment with respect to willfulness and attorneys’ fees. At the same time, the Court reversed the district court’s judgment of invalidity with respect to unasserted claims of certain patents, vacated the district court’s judgment that certain claims were invalid and remanded for a new trial on the validity of those claims, and affirmed the district court’s invalidity judgment with respect to certain claims. The Court also reversed the district court’s judgment on a tortious interference claim, finding that it was preempted by federal patent laws, and vacated the accompanying award of compensatory and punitive damages.

The patents at issue relate to technology for routing telephone calls made to 800 numbers. Typically, when a caller dials an 800 number, the long distance carrier (“LDC”) handling the call must identify the ten-digit number, known as a “Plain Old Telephone System” (“POTS”) number, to which to route the call. 800 Adept, Inc. (“Adept”) owns two patents (“the Adept patents”) that disclose a method for directly routing an 800 call to the appropriate service location based on the caller’s ten-digit telephone number. The invention involves the construction of a database that assigns a service location POTS number to every potential caller according to geographic criteria provided by the owner of the 800 number. This database can be provided to the LDC, which then routes calls made to the 800 number according to the routing instructions in the database.

Adept sued Targus Information Corporation, its affiliated companies Murex Securities, Ltd. and Murex Licensing Corporation, and its customer West Corporation (collectively “Targus”), alleging that services sold by Targus infringed the Adept patents. Adept further alleged that Targus had tortiously interfered with Adept’s business relationships by asserting Targus’s patents against Adept’s customers. Targus filed counterclaims alleging that Adept’s call-routing services infringed various claims of several of its patents (“the Targus patents”).

After a twenty-four-day jury trial, the jury found for Adept on essentially all issues. It found that Targus willfully infringed the asserted claims of the Adept patents and that Adept did not infringe the asserted claims of the Targus patents. It found that all the asserted claims of the Targus patents were invalid and further found that the unasserted claims of two of the Targus patents were invalid as well. It also found Targus liable under state law for tortious interference with Adept’s business relationships. It awarded Adept $18 million for patent infringement and $7 million on the tortious interference claim. The district court entered judgment on the jury verdict, issued a permanent injunction, and awarded enhanced damages of $24 million on the patent infringement claim. The district court also determined that the case was exceptional and that Adept was entitled to attorneys’ fees under 35 U.S.C. § 285. Targus filed motions for JMOL and a new trial. The district court denied those motions. Targus appealed.

On appeal, the Federal Circuit addressed first the issues that Targus raised with respect to the Adept patents. Targus argued that the district court erred in construing the “assigning” limitation recited in the claims of the Adept patents and that under the correct construction, its services did not infringe the Adept patents. The relevant claim language recites “assigning to the physical location of said potential first parties a telephone number of a service location of a second party that will receive calls.” The district court construed this “assigning” limitation to mean “a designation made prior to the telephone call of the first parties” and indicated that it did not exclude calculations made during the telephone call. Targus argued that the district court erred in concluding that the “assigning” limitation did not exclude calculations made during the telephone call. The Federal Circuit agreed.

The Court observed that the plain language of the claims made clear that the “assigning” limitation required that a “telephone number of a service location” be assigned to each potential caller. It noted further that nothing in the claims suggested that storing an algorithm that would be used to determine the telephone number of the correct service location during a telephone call constituted an assignment of a service location telephone number to a potential caller before a telephone call is placed. It explained that the written description confirmed this view and that the prosecution history also reinforced the conclusion that any calculations necessary for assigning service location telephone numbers to callers must be performed before any calls are placed. As a result, the Court concluded that under the correct claim construction, assignment of service location telephone numbers to potential callers must occur prior to any calls, and thus any calculations necessary for completing that assignment must be performed before any telephone calls are placed.

Turning to the issue of infringement, the Federal Circuit found that the accused Targus services did not assign service location telephone numbers to potential callers before calls are placed. To the contrary, the Court noted that all calculations necessary to complete the assignment are performed in real time while the caller is on the line. As a result, the Court concluded that the Targus services did not satisfy the “assigning” limitations in the Adept patents and that under the correct claim construction, no reasonable jury could find that Targus infringed the asserted claims of the Adept patents. Accordingly, the Court reversed the district court’s denial of Targus’s motion for JMOL of noninfringement, vacated the infringement damages award and the permanent injunction, and vacated the district court’s judgment with respect to willfulness and attorneys’ fees.

The Federal Circuit turned next to the Targus patents. The jury found that all claims of two of the Targus patents were invalid, and the district court entered judgment accordingly. Targus argued that the district court erred because only one claim from each patent was asserted and at issue. The Federal Circuit agreed with Targus that the unasserted claims were not at issue, and thus the district court erred. The Court found that the scope of Adept’s complaint was less than clear and that in any event, a reference in the complaint is not sufficient to support a judgment that particular claims are invalid. It explained that the specific validity of the claims must have been at issue during the trial and actually litigated by the parties.

In addition, the Court noted that the parties’ Joint Final Pretrial Statement demonstrated that only one claim from each patent was asserted and at issue, and that there were no references whatsoever to the unasserted claims. The Court also noted that at trial, neither party presented evidence with respect to the unasserted claims and that under the patent statute, the validity of each claim must be considered separately. Accordingly, it concluded that it was clear from the parties’ pretrial statement and from the trial proceedings that the unasserted claims were neither litigated nor placed in issue during the trial, and therefore reversed the district court’s judgment of invalidity with respect to the unasserted claims.

The jury also found all twelve of the asserted claims from the other Targus patents to be invalid. Targus appealed the district court’s denial of its motion for a new trial on the validity of these claims. Targus argued on appeal that the jury’s invalidity findings were “tainted” by the erroneous characterization of the Adept patents by Adept’s expert, Dr. Brody. The Federal Circuit agreed, but only in part. The Court agreed that Dr. Brody’s characterization of the scope of the disclosure of the Adept patents was mistaken, but that this characterization applied to only two of the twelve asserted claims. Under these circumstances, the Court reasoned that the district court should have granted the motion for a new trial with regard to these two claims because the great weight of the evidence in the record was against the jury’s verdict. It concluded that the failure to have granted Targus’s motion was an abuse of discretion and vacated the district court’s judgment with respect to those two claims. The Court, however, affirmed the district court’s judgment that the remaining asserted claims were invalid.

Finally, the Federal Circuit turned to the jury’s verdict for Adept on the tortious interference claim. Adept argued that, because Targus had asserted certain of its patent claims against some of Adept’s customers, Targus had tortiously interfered with Adept’s business relationships with those customers. Targus responded that the state-law remedy was preempted by the federal patent laws. The Federal Circuit noted that “[s]tate tort claims against a patent holder, including tortious interference claims, based on enforcing a patent in the marketplace, are ‘preempted’ by federal patent laws, unless the claimant can show that the patent holder acted in ‘bad faith’ in the publication or enforcement of its patent.” Slip op. at 26. The Court noted that the issue here was whether Adept presented to the jury sufficient facts that a reasonable jury could find for Adept on the issue of Targus’s bad faith. The Court explained that this “bad-faith” standard has objective and subjective components. The objective component requires a showing that the infringement allegations are “objectively baseless.” The subjective component relates to a showing that the patentee, in enforcing the patent, demonstrated subjective bad faith. The Court noted that absent a showing that the infringement allegations are objectively baseless, it is unnecessary to reach the question of the patentee’s intent.

Targus argued that there was no clear and convincing evidence on which a reasonable jury could conclude that its actions were objectively baseless. The Federal Circuit explained that to prove at trial that Targus’s actions were objectively baseless, Adept was required to offer clear and convincing evidence that Targus had no reasonable basis to believe that its patent claims were valid or that they were infringed by Adept’s customers. With respect to validity, the Court reviewed the record and concluded that no reasonable jury could have found that Targus’s belief that its patents were valid had no reasonable basis. Similarly, with respect to infringement, the Court reviewed the record and concluded that no reasonable jury could find by clear and convincing evidence that Targus had no reasonable basis for believing that Adept’s customers were infringing its patents. Accordingly, the Court concluded that there was no clear and convincing evidence on which a reasonably jury could find that Targus acted in bad faith, that Adept’s state-law tortious interference claim was preempted by federal patent law, and that the district court erred in denying Targus’s motion for JMOL on this claim.

Judge Dyk concurred in the result, but did not file a separate opinion.