By Jason Rantanen
Checkpoint Systems, Inc. v. All-Tag Security S.A. (Fed. Cir. 2013)
Panel: Newman (author), Lourie, Schall
It's a general rule of commercial litigation in the United States that parties must bear their own legal costs. One exception to this general rule arises when litigation is baseless. Under 35 U.S.C. § 285, courts may award the prevailing party its legal costs "based on the baseless of the suit." (There are other grounds for awarding legal fees, but those weren't at issue in this case). Over the past few years, the Federal Circuit has made clear that there are two criteria that must be met for sanctions to be imposed based on the baselessness of the suit: "(1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.” Highmark, Inc. v. Allcare Health Mgmt. Sys., Inc., 687 F.3d 1300, 1309-10 n.1 (Fed. Cir. 2012). In Highmark, the Federal Circuit also held that it reviews the "objectively baseless" component de novo. This mechanism effectively results in the Federal Circuit becoming the final arbiter of whether sanctions may be imposed under the baselessness approach.
Checkpoint v. Alltag illustrates how this mechanism works in practice and offers some notable holdings when it comes to attempts to wriggle out of an admission. Checkpoint is the owner of Patent No. 4,876,555, which relates to an anti-shoplifting device consisting of three layers. Checkpoint's advance was to place a hole in the middle layer, which allowed the tag to be deactivated "at a lower current and with greater reliability." It sued All-Tag Security S.A. for infringing its patent, and at trial relied on two relevant pieces of evidence to demonstrate that All-Tag's accused tags infringed the '555 patent. First, it offered testimony from its expert, who found holes in All-Tag tags made by All-Tag Security A.G. (a predecessor company) and whose manufacturing equipment was subsequently moved from Switzerland to Belgium to make the accused tags. Second, it relied on two of All-Tag's patents and All-Tag's admission that the process it used in Belgium to produce the accused tags was "generally in accordance" with its patents. Both of All-Tag's patents describe products having a hole in the middle layer and Checkpoint's expert testified that those products would infringe the '555 patent.
At trial, the court denied All-Tag's motion for judgment as a matter of law on infringement but the jury returned a verdict in favor of All-Tag on infringement (and invalidity and unenforceability). The district court subsequently granted All-Tag's motion for attorney's fees under Section 285, explaining that the case was exceptional "because Checkpoint through its expert witness did not inspect the tags it accused of infringement, despite having ample opportunity to do so." Slip Op. at 7.
On appeal, the Federal Circuit reversed on the ground that the suit was not objectively baseless. In reaching this conclusion, the CAFC discussed the Switzerland-to-Belgium transition (including the fact that production was restarted in Belgium within a week using the same equipment), but the interesting part of the court's opinion is its analysis of the reasonableness of Checkpoint's reliance on All-Tech's patents. The CAFC first rejected the argument that Checkpont's reliance on its expert's testimony was unreasonable because All-Tag had used the qualifier "generally" in its pre-trial admission that its manufacturing process generally practiced the All-Tag patents. "[A] party may rely on an admission as “conclusively established” unless the admission is recanted....All-Tag provided no evidence and presented no argument that its pre-trial admission was incorrect." Slip Op. at 11. In other words, All-Tag could not escape its admission simply because it had tried to be ambiguous in its wording.
The Federal Circuit also rejected All-Tag's argument that the admission as to its patents was insufficient for purposes of relying on those patents as evidence of infringement:
All-Tag cites L & W, Inc. v. Shertech, Inc., 471 F.3d 1311 (Fed. Cir. 2006), where this court rejected the assessment of liability based solely on the alleged infringer’s statements that the accused products are “covered” by its own patent, because the patent included multiple embodiments and it was unclear whether the patent disclosed the critical infringing feature. In contrast, All-Tag’s ’466 and ’343 patents are specific to resonance tags having a hole in the dielectric; the All-Tag patents describe no embodiments without the hole, which is the critical feature of Checkpoint’s ’555 patent.
Slip Op. at 12. The result was that "All-Tag’s admission that its products are made “generally in accordance” with its patents could reasonably have been relied on by Checkpoint and its expert Dr. Zahn," id., and this reliance was not "objectively baseless."