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Order Granting Stay of Claims Not an Appealable Final Judgment or Effectively an Injunction

September 26, 2011

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Last Month at the Federal Circuit - October 2011

Judges: Rader, Lourie, O’Malley (author)

[Appealed from: N.D. Ill., Judge Gettleman]

In Spread Spectrum Screening LLC v. Eastman Kodak Co., No. 11-1019 (Fed. Cir. Sept. 26, 2011), the Federal Circuit held that a district court order staying claims against customers of an accused infringer was not an appealable final judgment under 28 U.S.C. § 1295 and not “effectively an injunction” appealable under 28 U.S.C. § 1292(a)(1).

Spread Spectrum Screening LLC (“S3”) owns U.S. Patent No. 5,689,623 (“the ’623 patent”) drawn to methods and systems for commercial printing technology called “digital half-toning.” The S3 technology involves “a process used in the commercial printing industry to convert a continuous tone image, such as a photograph, into a half-tone image consisting of a pattern of minute dots that, when viewed at a suitable distance, appears to recreate the continuous tone image.” Slip op. at 3 (citation omitted). Half-toning is commonly used in the production of newspapers, magazines, and other print materials.

Eastman Kodak Company (“Kodak”) manufactures, uses, and licenses commercial printing products under the brand name Staccato. Four of Kodak’s customers, Continental Web Press, Inc., Graphic Partners, Inc., Genesis Press, Inc., and Johns-Byrne Company (collectively “the Kodak Customers”) use Kodak’s Staccato software under license to generate half-toned images, and manufacture and sell their own binary reproductions. Id. at 4.

On February 18, 2010, S3 brought suit against Kodak and the Kodak Customers in the Northern District of Illinois alleging infringement of the ’623 patent. Two months into the case, Kodak moved to sever and stay the claims against the Kodak Customers, and to transfer the Kodak claims to the Western District of New York. The district court granted Kodak’s motion in all respects. According to the district court’s order, the Kodak Customers were “merely peripheral” to S3’s claims and would not be “helpful to determine whether Kodak’s Staccato product infringes the ’623 patent.” Id. at 6-7. S3 timely appealed.

On appeal, S3 argued that the district court’s stay order was an appealable “final decision” under § 1295 because it cast S3 “out of court,” is “practically final,” or is “effectively an injunction” under § 1292(a)(1). S3 further argued the district court’s stay order was made in error and should be reversed for abuse of discretion. On the other hand, Kodak and the Kodak Customers countered that the district court’s stay was not a “final decision” under the final judgment rule or any exception thereto, and that the Federal Circuit should dismiss the case for lack of jurisdiction.

The Court agreed with Kodak that the district court’s stay order was not reviewable. As an initial matter, the Court noted that the Federal Circuit reviews matters relating to its jurisdiction “in the first instance” and “apply[ing] Federal Circuit law.” Id. at 7. Under Federal Circuit law, a “final decision” under
§ 1295(a)(1) is one that “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Id. at 8 (citation omitted). Because the district court merely stayed S3’s claims against the Kodak Customers and did not adjudicate them to the end, the district court’s order was clearly not a final decision per se. Id. at 8-9. But the Court acknowledged that under the Supreme Court precedent, a decision can be final or warrant interlocutory review under certain exceptional circumstances. The Court addressed these possible exceptions to the final judgment rule in turn.

First, the Court found that Spread Spectrum was not “effectively out of court” under Moses H. Cone Memorial Hopsital v. Mercury Construction Corp., 460 U.S. 1, 10 (1983). In Moses Cone, the plaintiff’s federal proceedings were stayed pending the outcome of state court proceedings. Because the state proceedings would have had potential res judicata effect on the federal claims, the Supreme Court found that the plaintiff was “effectively out of court” and granted interlocutory review. In distinguishing Moses Cone, the Court noted that any res judicata effect in S3’s case would be predicated on the federal adjudication of S3’s claims in the United States District Court for the Western District of New York. Therefore, S3 was not put effectively out of federal court in the manner described in Moses Cone. Slip op. at 9. The Court also found that any delay in adjudication that would result from the stay would not be “protracted or indefinite” as that concept was discussed in Gould v. Control Laser Corp., 705 F.2d 1340, 1341 (Fed. Cir. 1983). Slip op. at 10. In Gould, it was suggested that a plaintiff could be (but was not) put “effectively out of court” if subjected to a protracted or indefinite delay during a reexamination of a patent. Id. at 11. Like Moses Cone, the Court distinguished S3’s appeal from the situation in Gould by explaining that “[d]elay inherent in the federal court system is not the type of ‘protracted or indefinite’ delay [warranting exceptional interlocutory review]” as may have been available in those cases. Id. at 12 (emphasis added). In other words, while delays resulting from state court or administrative adjudication might put a plaintiff “effectively out of court,” that is not the case when the delay is caused by ordinary federal judicial procedure.

Next, the Court considered S3’s argument that the stay should be considered “practically final” under Gillespie v. U.S. Steel Corp., 379 U.S. 148 (1964). In Gillespie, the Supreme Court described a balancing test for interlocutory review of a stay involving “‘the inconvenience and costs of piecemeal review on the one hand and the danger of denying justice by delay on the other.’” Slip op. at 13 (quoting Gillespie, 379 U.S. at 152-53). In rejecting S3’s argument, the Court explained that Gillespie was “severely limited” in subsequent Supreme Court cases and should be “very rarely used beyond the unique facts of that case.” Id. at 13-14 (citation omitted). The Court echoed the sentiment that “‘[i]f Gillespie were extended beyond the unique facts of that case, § 1291 would be stripped of all significance.’” Id. at 14 (alteration in original) (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 477 n.30 (1978)). Accordingly, the Court declined to extend Gillespie to S3’s case. Id.

In addition, the Court also recognized that jurisdictional issues involving the so-called “customer-suit exception” may independently warrant interlocutory review in certain circumstances. Id. at 14 (citing Kahn v. Gen. Motors Corp., 889 F.2d 1078 (Fed. Cir. 1989)). In Kahn, the Federal Circuit found an exception to the first-filed jurisdiction rule, wherein a litigation brought by or against a manufacturer takes priority over a suit filed against customers of the manufacturer. The Kahn Court stated that a misapplication of this principle will “uniformly receive[] interlocutory review.” Id. at 15 (citing Kahn, 889 F.2d at 1080). Based on this statement, S3 argued that the district court misapplied the exception and thus review is warranted. The Court disagreed, noting that in Kahn the patentee sued the customer and the manufacturer brought a subsequent DJ suit in a different jurisdiction, and, thus, the “procedural posture in Kahn differed from that presented [in S3’s appeal].” Id. at 15-17. Still, even applying the customer-suit exception arguendo, the Court found S3’s argument unpersuasive. According to the Court, Kahn was not the broad “jurisdictional holding” suggested by S3 and instead was driven by prudential considerations including injunctive relief and “irreparable harm” not at issue in S3’s case. Id. at 18-19. For these reasons, the Court found the reviewability language from Kahn inapplicable to S3’s case. Id. at 19.

Lastly, the Court addressed S3’s argument, based on Katz v. Lear Siegler, Inc., 909 F.2d 1459, 1464 (Fed. Cir. 1990), that the district court’s stay order was “effectively an injunction” barring S3 from pursuing its case against the Kodak Customers. In Katz, the district court enjoined a suit in another jurisdiction, a decision which the Federal Circuit held was “appealable as of right” under § 1292. Id. at 19-20. But here the Court found Katz materially distinguishable on the basic grounds that Katz involved a “stay” in a jurisdiction other than that of the ruling court. In S3’s case, the Northern District of Illinois stayed its own proceedings. Id. at 20-21. The Court summarily rejected the notion that all stays, regardless of where applied, are tantamount to an immediately appealable “injunction,” as was the case under the unique circumstances of Katz. Id. at 20. As a result, the Court rejected S3’s analogy to Katz and the suggestion that the district court’s order was “effectively an injunction.” Accordingly, the Court dismissed the appeal.

Summary authored by Phillip K. Decker, Esq.