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Nonparty Acting in Concert with Enjoined Party May Be Held in Contempt of Injunction

May 31, 2012

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Last Month at the Federal Circuit - June 2012

Judges: Lourie (author), Schall (dissenting), Reyna

[Appealed from: M.D. Ga., Judge Land]

In Merial Ltd. v. Cipla Ltd., Nos. 11-1471, -1472 (Fed. Cir. May 31, 2012), the Federal Circuit affirmed the district court’s judgment holding Cipla Ltd. (“Cipla”) and other defendants in contempt of an earlier injunction.

Merial Ltd. (“Merial”) is the owner of U.S. Patent No. 6,096,329 (“the ’329 patent”), directed to dual-acting pest control compositions for dogs and cats, comprising fipronil. Merial was also the exclusive licensee of expired U.S. Patent No. 5,232,940 (“the ’940 patent”), which claimed fipronil. Merial sells and markets Frontline, a fipronil-containing pest control composition, and Frontline Plus, a dual-acting composition containing fipronil and methoprene.

In 2007, Merial sued Cipla in the Middle District of Georgia for infringement of the ’940 and ’329 patents, based on the sale and marketing of pest-control formulations known as Cipla Protektor and Cipla Protektor Plus. Cipla did not respond to Merial’s complaint or enter an appearance. The district court granted Merial a default judgment, finding that the ’940 and ’329 patents were infringed and not invalid, and entering a permanent injunction against Cipla.

Earlier, in 2004, former Merial executives led the formation of Velcera, Inc. (“Velcera”) in order to develop veterinary products for companion animals, such as dogs and cats. Through a British intermediary, Omnipharm Ltd. (“Omnipharm”), Velcera engaged Cipla to develop and manufacture dual-acting pest control compositions known as PetArmor Plus and Velcera Fipronil Plus (collectively “PetArmor Plus”) to compete with Merial’s Frontline products. In March 2011, the first shipments of PetArmor Plus arrived in the United States.

Having become aware of Cipla’s role in the impending commercial launch of PetArmor Plus, Merial filed a motion for contempt of the 2008 permanent injunction against Cipla. Velcera moved to intercede in the contempt proceedings. The district court joined Velcera as a defendant and ordered it to show why it should not be held in contempt for acting in concert with Cipla. Meanwhile, Velcera had filed a DJ action against Merial in the District of Delaware, alleging noninfringement and invalidity of the ’329 patent.

In the contempt proceedings, Cipla contended that the district court lacked personal jurisdiction when it issued the 2008 default judgment. Cipla and Velcera also alleged that their production and sale of PetArmor Plus did not violate the 2008 injunction. In addition, Velcera argued that it was not subject to the 2008 injunction and had not acted in concert with Cipla, and that the contempt proceedings should be stayed pending the outcome of the Delaware action.

The district court found that Cipla was subject to its jurisdiction in 2008 under Fed. R. Civ. P. 4(k)(2), that PetArmor Plus was not more than colorably different from Cipla’s Protektor Plus product, and that Cipla and Velcera knowingly acted in concert to violate the 2008 injunction. Cipla and Velcera (collectively “Appellants”) timely appealed the contempt order.

First, Appellants alleged that the district court lacked personal jurisdiction over Cipla in 2008. The Federal Circuit disagreed and held that Rule 4(k)(2) supported jurisdiction. The Federal Circuit found that Cipla’s ex post facto consent to suit in Illinois did not preclude the district court from applying
Rule 4(k)(2). The Federal Circuit held that “a defendant . . . challenging a prior default judgment may not do so by naming another forum that would not have had an independent basis for jurisdiction at the time of the original complaint.” Slip op. at 17.

The Federal Circuit next dismissed Appellants’ assertion that Merial’s service of Cipla in Mumbai in 2007 was insufficient, finding that Cipla waived the argument by raising it for the first time on appeal. The Court also dismissed Appellants’ argument that Merial’s allegation of jurisdiction was insufficient, because Cipla had actual notice of the suit, chose to risk a default judgment, and had a full opportunity to litigate personal jurisdiction during the contempt proceedings.

The Federal Circuit then turned to Appellants’ argument that the contempt proceedings should be stayed pending resolution of the Delaware action under the “first-to-file” rule. The Court found that the contempt proceedings elaborated Merial’s 2007 action and thus predated the DJ action. The Court further found that the district court was within its discretion to conclude that principles of comity did not support a stay because the issues in the two proceedings differed and Cipla was not a party to the Delaware action.

The Federal Circuit also addressed Appellants’ argument that Cipla’s activities were outside the United States and thus could not violate 35 U.S.C. § 271. The Federal Circuit recognized that direct infringement requires domestic infringing acts, but found that induced infringement does not contain such a territorial restriction. The Court further held that the district court’s factual findings bore directly on the question of inducement, and were not clearly erroneous. Specifically, the district court found that (1) PetArmor Plus infringes the ’329 patent; (2) Velcera sold PetArmor Plus in the United States; (3) Cipla and Velcera were aware of the ’329 patent and the 2008 injunction; (4) Cipla played fundamental roles in manufacturing, packaging, and assisting in the development of PetArmor Plus for Velcera to sell in the United States; (5) Cipla knew that PetArmor Plus was to be sold in the United States; and (6) Cipla knew and intended that such sales would infringe the ’329 patent.

Turning to Velcera’s argument that it could not be held in contempt because it was not a party to the original action, the Federal Circuit held that, although a court may not enjoin a nonparty, an injunction may reach nonparties who (1) are legally identified with an enjoined party and named in the injunction, or (2) act in concert with an enjoined party to violate the injunction. Velcera pointed to its “arms length” business relationships with intermediaries that insulated it from Cipla’s independent actions. The Federal Circuit found that the district court did not clearly err in finding that the relationships between Velcera and Cipla were “designed primarily to obfuscate illicit and intentional concerted action rather than as bona fide, constructive business arrangements.” Id. at 38.

Finally, the Federal Circuit addressed Appellants’ argument that the district court improperly balanced the hardships in granting a permanent injunction. Specifically, Velcera argued that while an injunction would have a crippling effect, its sales would not seriously threaten Merial because of its small size relative to Merial. The Federal Circuit disagreed and affirmed the grant of an injunction, stating that “[o]ne who elects to build a business on a product found to infringe cannot be heard to complain if an injunction against continuing infringement destroys the business so elected.” Id. at 39 (alteration in original) (quoting Broadcom Corp. v. Qualcomm Inc., 543 F.3d 683, 704 (Fed. Cir. 2008)).

Judge Schall dissented, stating that the district court erred in not allowing Cipla to designate Illinois as a substitute forum because it had failed to do so in 2007. Judge Schall also indicated that the district court erred in requiring a determination that the 2007 action could have been brought in Illinois in the first place.

Summary authored by Daniel A. Lev, Ph.D., Esq.