IP Law Daily, PATENT—Fed. Cir.: Nonparty to license agreement not entitled to fee award under indemnification provision, (Jul 2, 2015)

By Thomas Long, J.D.

A prevailing defendant in a patent infringement suit was not entitled to recover attorney fees against the plaintiff under an indemnification provision in a patent licensing agreement between the plaintiff and a co-defendant because it was neither a party to the agreement nor a third-party beneficiary, the U.S. Court of Appeals for the Federal Circuit has held. Nor was the defendant entitled to fees under the district court’s inherent power to issue sanctions for bad-faith litigation misconduct (Buckhorn, Inc. v. Orbis Corp., July 2, 2015, Dyk, T.).

Background and procedural history. Plaintiff Buckhorn, Inc., filed suit against Orbis Corp. and Orbis Material Handling, Inc. (collectively, “Orbis”), alleging infringement of U.S. Patent No. 5,199,592, which related to improved hinges on transportation containers. Buckhorn did not own the ’592 patent; the patent was owned by co-plaintiff Schoeller Arca Systems, Inc. (SAS), and Buckhorn purportedly was its co-exclusive licensee under a patent licensing agreement (PLA). The license was described by the PLA as co-exclusive because SAS retained the right to practice the patent. The PLA contained an indemnity clause, under which Buckhorn would be obligated to pay all costs and expenses if Buckhorn required cooperation by SAS in maintaining an infringement action.

Orbis moved to dismiss Buckhorn’s complaint on standing grounds, and SAS joined the suit to avoid dismissal. SAS had previously granted Orbis a license to use the ’592 patent. Buckhorn apparently was unaware of this license when it filed suit against Orbis. The license was granted pursuant to a 1992 settlement and license agreement (“the RX agreement”), which contained a fee provision clause. Buckhorn was not a party to the RX agreement. The district court granted summary judgment of noninfringement in favor of Orbis on the basis of the license agreement.

Orbis subsequently sought an award of fees against SAS and Buckhorn. The district court declined to award fees under 35 U.S.C. §285 because the case was not “exceptional.” With respect to the RX agreement, the district court ruled that the fee agreement did not apply because the litigation did not arise out of the license. On appeal, the Federal Circuit agreed that Buckhorn had no liability under the RX agreement but held that SAS was liable to pay Orbis’ fees under the agreement because its language was broad enough to cover infringement suits arising out of the licensed patents.

On remand, Buckhorn moved to be dismissed from the case because the remand proceedings related only to the amount of SAS’ liability under the RX agreement. Orbis argued—for the first time in the litigation—that Buckhorn was liable under the PLA. The district court refused to dismiss Buckhorn, reasoning that it was liable under the PLA to pay costs incurred by SAS. The district court awarded over $2.7 million in fees. Buckhorn then moved for clarification that it was not liable to Orbis under the RX agreement, which it argued was the only basis for the fee award. The district court stated that Buckhorn was not liable for fees under the RX agreement, but it was liable to Orbis under the PLA, even though Orbis was not a party to the PLA. Buckhorn appealed.

RX agreement. The Federal Circuit reiterated that Orbis could not recover fees from Buckhorn under the RX agreement. Orbis had disclaimed this theory in the prior appeal. SAS was the only plaintiff with obligations to pay fees under the RX agreement.

PLA. It was improper to award fees against Buckhorn under the PLA. New York law governed the PLA, and New York law provided that, to sue under such a contract, a plaintiff must be a party to the contract or an intended third-party beneficiary. Orbis was not a party to the PLA. The PLA was an agreement between SAS and Buckhorn. Nor was Orbis an intended third-party beneficiary, the Federal Circuit said. The PLA expressly stated that it did not confer rights or remedies to any third parties

Inherent powers. Orbis argued that the district court had broad discretion in fashioning joint and several liability. However, the district court did not purport to award fees under its inherent powers. The fee award was based on the PLA, not any inherent power to impose sanctions for bad faith litigation. Moreover, in the court’s view, this case did not present the kind of bad faith conduct that would warrant the exercise of a court’s sanctioning power to depart from the general “American rule” providing that parties were responsible for their own attorney fees in most instances. Accordingly, the district court’s award of attorney fees against Buckhorn was reversed.

The case is No. 2014-1711.

Attorneys: Judy L. Woods (Benesch, Friedlander, Coplan & Aronoff LLP) for Buckhorn, Inc. Gaspare Joseph Bono (McKenna Long & Aldridge, LLP) for Orbis Corp.

Companies: Buckhorn, Inc.; Schoeller Arca Systems, Inc.; Orbis Corp.; Orbis Material Handling Inc.

Cases: Patent FedCirNews