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The Exclusion of Evidence Is an Appropriate Sanction for Failure to Comply with a Scheduling Order, Even When It Results in Effective Dismissal of a Claim

November 15, 2006

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Last Month at the Federal Circuit - December 2006

Judges: Michel, Dyk (author), Prost

[Appealed from: N.D. Ca., Judge Wilken]

In 02 Micro International Ltd. v. Monolithic Power Systems, Inc., No. 06-1064 (Fed. Cir. Nov. 15, 2006), the Federal Circuit affirmed the district court’s grant of SJ of noninfringement in favor of Monolithic Power Systems, Inc. (“MPS”).

U.S. Patent No. 6,259,615 (“the ’615 patent”), which is owned by 02 Micro International Limited and
02 Micro, Inc. (collectively “02 Micro”), discloses a circuit for converting direct current (“DC”) to alternating current (“AC”). The principal use of the patented technology is to convert the current supplied by laptop batteries to provide the monitor lighting. The patented circuit uses feedback signals and pulse signals to control two pairs of switches, thereby regulating the amount of power delivered. Claims 1 and 18 contain a limitation referred to as the “only if” limitation, which requires that the second set of switches be controlled only if the feedback signal is above a certain threshold.

02 Micro filed suit against MPS, alleging infringement of its ’615 patent. MPS counterclaimed for DJ that the patent was invalid, unenforceable, and not infringed. MPS also claimed that 02 Micro infringed MPS’s U.S. Patent No. 6,316,881, which is no longer at issue.

In accordance with the scheduling order, 02 Micro filed preliminary infringement contentions as to the ’615 patent on April 19, 2002, and relied exclusively on its “Isense” theory. Under this theory, 02 Micro contended that a feedback control loop runs between the lamp and Isense pin, which measures the current supplied, in the accused device and meets the claimed “only if” limitation because the second set of switches is not controlled unless the voltage measured at the Isense pin is greater than a predetermined threshold determined by another pin called the Bright pin. About two months later, MPS filed its preliminary validity contentions, and then the district court held the claim construction hearing and issued a ruling in December 2002. Within the allotted thirty days, 02 Micro served its final infringement contentions, still relying solely on its Isense theory, and then MPS submitted its final invalidity contentions.

During this same period, 02 Micro deposed an MPS engineer, which led to the development of 02 Micro’s “open lamp” theory. Under this theory, the feedback control loop runs between the lamp and open lamp pin, and the accused device meets the “only if” limitation because the second set of switches is only controlled when the open lamp pin value is above a certain threshold. The parties attempted to negotiate a stipulation agreeing to amend their contentions at the close of discovery, but were unsuccessful. Regardless, 02 Micro sent MPS its proposed supplemental infringement contentions concerning the ’615 patent. Although MPS objected to the supplementation, 02 Micro submitted its opening expert report addressing only the open lamp theory. Therefore, 02 Micro moved to amend its infringement contentions, claiming good cause because the theory was developed based on new evidence obtained in discovery. The magistrate judge denied 02 Micro’s motion, finding that 02 Micro’s delay in serving the proposed contentions showed lack of diligence and would be prejudicial to MPS.

02 Micro filed an objection with the district court and moved to amend the scheduling order to allow MPS an opportunity to respond to its new contentions. The district court overruled 02 Micro’s objection and denied its motions to extend the schedule. At the same time, MPS moved for SJ of noninfringement. 02 Micro responded to the motion, relying on another new theory, the “Vsense” theory, and including declarations describing the theory from an expert and the inventor. The district court rejected the declarations as untimely. Limiting the record to the original Isense theory, and finding no evidence of record supporting the theory, the district court granted SJ of noninfringement and dismissed the DJ counterclaim.

On appeal, the Federal Circuit noted that this case presents questions concerning the Northern District of California’s local rules for patent cases. These local rules require permission of the district court to amend or modify the final infringement contentions upon a showing of good cause, which the district court has understood to require a showing of diligence. The district court may impose any “just” sanctions on a party for failure to obey the scheduling order. Because the local rules at issue “are likely to directly affect the substantive patent law theories that may be presented at trial,” the Federal Circuit applied its own law rather than that of the regional circuit. Slip op. at 17.

The Federal Circuit agreed with the district court’s determination that “good cause” requires a showing of diligence. The Court noted that the local rules are designed to “balance the right to develop new information in discovery with the need for certainty as to the legal theories” by requiring early notice of infringement and validity contentions and proceeding with diligence in amending those contentions. Id. at 20. Contrary to 02 Micro’s implications, the Court explained that nothing in the Federal Rules is inconsistent with the local rules requirement of early disclosure and diligence in amending. Without requiring prompt amendment, the early disclosure provision would be meaningless.

The Federal Circuit also held that the district court was correct in finding that 02 Micro did not act diligently in amending its contentions. The Court noted that 02 Micro had reason to know of its new open lamp theory as early as March 2002 from documents, but even accepting that 02 Micro did not possess the evidence until the February 2003 deposition of MPS’s engineer, 02 Micro waited three months to serve its proposed amended contentions and another two weeks to move to amend. The Court held that the negotiations over a possible stipulation was insufficient to excuse the delay because no agreement was ever reached, and 02 Micro did not provide evidence supporting its contention that the delay was necessary to “digest” the new evidence. The Federal Circuit also affirmed the district court’s denial of 02 Micro’s attempts to supplement its expert reports. The Court concluded that 02 Micro never adequately explained why its original Isense theory was not included in the original expert report, and 02 Micro’s assertion that it was acting in reliance on an agreement to amend the contentions was not adequate. Likewise, the Court held that the declarations submitted with 02 Micro’s response to the SJ motion were untimely as 02 Micro failed to show diligence.

Additionally, the Federal Circuit reasoned that “exclusion of evidence is often an appropriate sanction for the failure to comply with . . . deadlines,” and rejected 02 Micro’s argument that the district court abused its discretion effectively dismissing its case through the combination of its decisions denying amendment and refusing to allow supplementation of expert reports. Id. at 26.

Finally, the Federal Circuit affirmed the district court’s grant of SJ of noninfringement. The Court noted that, because 02 Micro’s contentions were limited to the Isense theory and it failed to timely provide evidence in support of that theory, SJ was appropriate.