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Full Compensation for Direct Infringement Precludes Separate Trial on Indirect Infringement for the

April 11, 2006

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Last Month at the Federal Circuit - May 2006

Judges: Newman (dissenting), Bryson, Prost (author)

In Glenayre Electronics, Inc. v. Jackson, No. 04-1568 (Fed. Cir. Apr. 11, 2006), the Federal Circuit affirmed the district court’s denial of patentee’s motion for a second trial on indirect infringement counterclaims after the patentee obtained a judgment and accepted damages for direct infringement based on the same infringing products.

Phillip Jackson and PMJ Family Limited Partnership (collectively “Jackson”) sued a number of Glenayre Electronics, Inc.’s (“Glenayre”) customers alleging direct infringement of U.S. Patent No. 4,596,900 (“the ’900 patent”). The ’900 patent claims a device that produces control signals upon receiving predetermined tone signals from remotely located telephones. Glenayre sold infringing voice-mail server systems to customers who, in turn, included the systems in their networks for further sales and services. In response to Jackson’s suit, Glenayre filed a separate DJ action of noninfringement, and the district court, in turn, stayed Jackson’s original suit against Glenayre’s customers pending resolution of the DJ action. With his original suit stayed, Jackson filed counterclaims accusing Glenayre of indirect infringement and again accusing its customers of direct infringement. The district court stayed Jackson’s counterclaims against both Glenayre and its customers, reasoning that a determination of Glenayre’s indirect infringement must come after a determination of liability against a direct infringer. The district court also reasoned that because it stayed the original suit and counterclaims against Glenayre’s customers for direct infringement, the issue of damages for Glenayre’s indirect infringement did not present itself at the time. Jackson, as a result, filed a counterclaim for direct infringement against Glenayre.

At trial, a jury ruled in favor of Jackson, finding Glenayre directly infringed the ’900 patent and awarded Jackson damages of $12 million. During the trial, Jackson presented evidence of benefits gained by Glenayre’s customers as a result of the infringement. In view of the significant damages awarded, Glenayre moved to have the reward remitted. In opposing the motion, Jackson once again relied on benefits received by Glenayre’s customers as a result of the infringement. Nevertheless, the district court granted Glenayre’s motion, reducing the award to $2.65 million. Jackson did not challenge the award, and Glenayre, not Jackson, appealed the district court’s decision to the Federal Circuit. The Federal Circuit affirmed without opinion. Subsequently, Jackson dismissed his counterclaims against Glenayre’s customers without prejudice and accepted payment of the remitted damages award.

In Jackson’s view, his counterclaims on the issue of Glenayre’s indirect infringement stillwarranted adjudication, so he moved to set trial on the stayed counterclaims. The district court denied the motion, reasoning that the damages awarded fully compensated Jackson for the infringement. Jackson appealed.

The Federal Circuit reviewed the denial of Jackson’s motion to set trial under the same standard it applies for the dismissal of counterclaims for failure to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6), namely, de novo. In taking a fresh legal view of the denial, the Federal Circuit addressed two issues making up the bulk of Jackson’s argument. Jackson argued (1) that staying his indirect infringement counterclaims automatically granted him a second trial as a matter of right, and (2) the damages award did not fully compensate him for the entirety of the infringement.

Addressing Jackson’s first argument, the Federal Circuit held that the fact that the district court stayed his indirect infringement counterclaims does not entitle him, as a matter of right, to present the same evidence to a new jury. Such a stay does not, in and of itself, automatically grant a party the absolute right to a second trial.

The Federal Circuit went on to hold that not only is Jackson not entitled to a new trial as a matter of right, but none of the district court’s actions or statements constitute a promise of a second trial. The district court neither expressly nor impliedly promised Jackson a second trial. In addressing Jackson’s second argument that the remitted damages award failed to fully compensate him, the Federal Circuit rejected Jackson’s argument on three grounds. Specifically, Jackson’s argument fails because (1) Jackson’s indirect infringement contention stems from the same conduct, namely, Glenayre’s sales, for which Jackson received an award for direct infringement; (2) Jackson already introduced evidence at trial on the benefits Glenayre’s customers received from the infringement; and (3) Jackson accepted the remitted award, which precludes him from challenging it on appeal.

In addition, the Federal Circuit addressed three Supreme Court cases incorrectly relied on by Jackson to further support the Federal Circuit’s decision. According to the Federal Circuit, because Jackson received actual damages for direct infringement, neither Birdsell v. Shaliol, 112 U.S. 485 (1984), nor Union Tool Co. v. Wilson, 259 U.S. 107 (1922), apply. Moreover, Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476 (1964), does not apply because, unlike the factual situation in Aro, Glenayre did not sell parts used to perpetuate an infringing use when assembled by end users. Rather, Glenayre’s devices constituted the actual infringing product, and Glenayre’s customers simply used the infringing product. Based on this reasoning, the Federal Circuit held that none of these cases supported Jackson’s right to a new trial.

Judge Newman dissented, noting that both the district court and the majority erred in denying Jackson a trial on the severed indirect infringement counterclaims because, absent such trial, one cannot determine if Jackson received full compensation for the entirety of the infringement. In addition, in Judge Newman’s view, the holding sets a precedent that a direct infringer can never be liable for indirect infringement, which, according to Judge Newman, contradicts the law. Judge Newman reasoned that Jackson’s appeal does not amount to a collateral attack on the jurytrial damages award for Glenayre’s direct infringement. Rather, Jackson’s appeal deals only with the stayed counterclaims of indirect infringement based on direct infringement by Glenayre’s customers, which were never litigated. Therefore, Jackson did not waive his right to a separate trial on his indirect infringement counterclaims by accepting the remitted damages award for direct infringement. The true issue on appeal, according to Judge Newman, is whether Jackson received adequate compensation for the entirety of the infringement, and the district court did not decide this issue because the counterclaim for indirect infringement went unlitigated. Therefore, in order to determine if Jackson received adequate compensation, the district court should have held a trial on the severed indirect infringement counterclaims.