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Court Orders New Trial as Sanction for Litigation Fraud

March 22, 2005

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Last Month at the Federal Circuit - April 2005

Judges: Dyk (author), Archer, and Rader

In Schreiber Foods, Inc. v. Beatrice Cheese, Inc., No. 04-1279 (Fed. Cir. Mar. 22, 2005), the Federal Circuit affirmed a district court’s order vacating an earlier judgment of infringement in favor of Schreiber Foods, Inc. (“Schreiber”), reversed a judgment of dismissal under Fed. R. Civ. P. 60(b), and remanded for a new trial.

In January 1997, Schreiber brought suit against Beatrice Cheese, Inc. (“Beatrice”), Kustner Industries, S.A. (“Kustner”), and others for infringement of U.S. Patent No. 5,440,860 (“the ‘860 patent”). Two months after filing suit, Schreiber assigned all rights and causes of action under the ‘860 patent to its subsidiary, Schreiber Technologies, Inc. (“Schreiber Technologies”). In turn, Schreiber Technologies gave Schreiber a nonexclusive license to the ‘860 patent. The assignment was purportedly part of a plan to avoid state income taxes.

In response to discovery requests for documents concerning assignments, Schreiber stated that it was not aware of any such document. Moreover, after U.S. Patent No. 5,701,724 (“the ‘724 patent”) issued to Schreiber, Schreiber amended its complaint to allege that Kustner infringed the ‘724 patent. The ‘724 patent includes a terminal disclaimer that requires it to be co-owned with the ‘860 patent to be enforceable. Despite this requirement, Schreiber’s amended complaint asserted that Schreiber owned and had standing to sue for infringement of the ‘860 patent. Schreiber also notified the PTO of its assignment of the ‘860 patent to Schreiber Technologies; however, it did not inform the district court or the parties of the assignment. And, during trial, a Schreiber director, who had been present when Schreiber’s board approved the assignment, falsely testified that Schreiber owned the ‘860 patent.

While Kustner’s motion for JMOL was pending, Schreiber’s counsel learned of the assignment of the ‘860 patent. Schreiber’s counsel concluded that there was no legal or ethical obligation to disclose the assignment to the court or the parties. Instead, on the advice of counsel, Schreiber reacquired all rights and causes of action under the ‘860 patent from Schreiber Technologies. After Schreiber reacquired the ‘860 patent, the district court entered judgment in Schreiber’s favor. Kustner was ordered to pay approximately $15 million in damages, plus costs and postjudgment interest. Kustner then moved to vacate judgment under Fed. R. Civ. P. 60(b) after it learned of the ‘860 patent’s earlier assignment to Schreiber Technologies, and the district court granted Kustner’s motion.

On appeal, Schreiber sought reinstatement of the district court’s earlier judgment to the extent that the ‘860 patent is valid, enforceable, and infringed, but waived its claim for monetary damages and waived its claim for infringement of the ‘724 patent. Schreiber argued that the earlier judgment should stand because Schreiber had removed any tangible prejudice to Kustner caused by the failure to disclose the assignment of the ‘860 patent.

The Federal Circuit affirmed the district court’s decision to vacate the entire judgment, finding that the district court had acted within itsdiscretion in finding that Schreiber and its counsel had committed fraud, misrepresentation, and other misconduct. The Federal Circuit recognized that Schreiber had a duty to promptly correct the record once it became aware that highly material false statements were made in Schreiber’s amended complaint, discovery responses, and witness testimony. The Federal Circuit also upheld the district court’s finding that Kustner was prejudiced by Schreiber’s and its counsel’s misconduct because the assignment would have provided Kustner withstrong arguments that the ‘724 patent was unenforceable and that damages should have been reduced.

The Federal Circuit held that the district court abused its discretion, however, in dismissing the case as being void for lack of standing. The Court recognized that Schreiber’s loss of standing to sue over the ‘860 patent during the litigation was only temporary. Because Schreiber reacquired the ‘860 patent before the district court entered judgment, the Court found that Schreiber had cured this jurisdictional defect. The Court also rejected Schreiber’s argument that its selective waiver of monetary damages removed any tangible prejudice to Kustner, because Schreiber should not be entitled to benefit from the inability to accurately appraise the extent to which the jury relied on the false testimony of Schreiber’s witness. Accordingly, the Federal Circuit held that a new trial on all issues, rather than outright dismissal, was an appropriate sanction for Schreiber’s litigation misconduct.