March 24, 2017

What’s Left Of Laches Post-SCA Hygiene

Law360, New York (March 23, 2017, 2:52 PM EDT) — Sitting en bancin 1992, the Federal Circuit confirmed laches (unreasonable, prejudicial delay in commencing suit) as a defense to prefiling damages in patent litigation, notwithstanding the six-year damages window of 35 U.S.C. § 286. A.C. Aukerman Company v. R.L. Chaides Construction Company, 960 F.2d 1020 (Fed. Cir. 1992)(analyzing laches and equitable estoppel). In 2014, the U.S. Supreme Court held laches could not bar a claim for damages brought within the three years statute of limitations provided by the Copyright Act in 17 U.S.C. § 504. Petrella v. Metro-Goldwyn-Mayer Inc., 572 U.S. __, 134 S.Ct. 1962 (2014)(6-3). The following year, the Federal Circuit again sat en banc to reconsider Aukerman in light of Petrella. By a 6-5 vote, the en banc court reaffirmed Aukerman’s holding that laches can be asserted to defeat a claim for damages incurred within the six-year period set out in the Patent Act. SCA Hygiene Products AB v. First Quality Baby Products LLC, 807 F.3d 1311 (Fed. Cir. 2015)(6-5).

On March 21, 2017, the Supreme Court reversed, holding that based on Petrella’s reasoning, and because of § 286, laches cannot preclude a claim for damages incurred within the six-year damages window. SCA Hygiene Products AB v. First Quality Baby Products, 580 U.S. __ (2017)(7-1)(Bryer, J. dissenting). At the same time, the Supreme Court announced the continued viability of equitable estoppel, as it had done in Petrella. Id., slip op. at 16.

Laches is a defense commonly asserted by accused infringers, often when they believe a patent holder sat on its hands until the accused party’s investments of time and money caused product sales to reach a level creating a risk of significant damages and/or market interruption. While there seems little debate that the laches defense was only infrequently won, it did offer refuge for accused infringers in at least a few circumstances. More importantly, it provided negotiating leverage in settlement discussions, especially in situations involving loss of potentially relevant evidence.

The discussion below begins with the elements of laches and equitable estoppel, turns to how and why the law got to this point, and explores what, if anything, remains of the laches and other equitable defenses in patent litigation.

The Elements of Laches and Equitable Estoppel

Laches has two elements: (1) that the patentee knew or should have known of the infringement and with such knowledge failed for an unreasonable and inexcusable period of time to assert its patent claims against the infringer; and (2) that the accused infringer was materially prejudiced by this delay. Aukerman, 960 F.2d at 1028. The requisite material prejudice could be either litigation prejudice, such as the loss of relevant records or the death of a witness, or business prejudice, such as significant business expansion during the laches period that would not otherwise have been made. Id. at 1033. Even if undue delay and prejudice were established, however, laches was not automatic if circumstances existed that would make it inequitable to apply the defense. Id. at 1036-37. A successful laches defense barred recovery of damages for infringement that occurred prior to the filing of suit, but could not bar prospective relief. Id. at 1041.

In SCA, the en banc Federal Circuit revisited the nature of laches in light of Petrella and eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006). The entire SCA court agreed that laches may in some circumstances apply to bar equitable relief. Moreover, a patentee guilty of laches typically would not surrender its right to future royalties, applying the flexible rules of equitable and district court discretion.

Aukerman clarified that equitable estoppel differed from laches, rather than being a “laches plus” defense. Id. at 1041. In particular, Aukerman articulated a three-element test for equitable estoppel: (1) the patentee must act in a way that will support an inference that the patentee did not intend to press an infringement claim against the accused infringer; (2) reliance on the action by the accused infringer; and (3) material prejudice. Id., 960 F.2d at 1014-43. Equitable estoppel, unlike laches, bars the entire suit.

Equitable Defenses in Patent Litigation

Equitable defenses in patent litigation arose from the historic separation between actions in law and equity and the perceived absence of a true statute of repose.[1] Aukerman held that Congress codified the equitable defense of laches in 35 U.S.C. § 282. Aukerman, 960 F.2d at 1028. While the SCA Federal Circuit majority reaffirmed that holding, the dissent disagreed. Compare SCA, 807 F.3d at 1318, 1321-23, with id at 1334-37. The Supreme Court sided with the dissent’s view. Slip op. at 8-15.

According to the Supreme Court majority, laches is a gap-filling doctrine and where, as in the Copyright and Patent Acts there is a statute of limitations, there is no gap to fill. Id. at 5. “By the logic of Petrella, we infer that this provision [35 U.S.C. § 286] represents a judgment by Congress that a patentee may recover damages for any infringement committed within six years of the filing of the claim.” Id. at 6. In reaching that conclusion, the court rejected First Quality’s argument that Petrella should not apply because § 286 “is not a true statute of limitations.” Id. (emphasis in original.) In Standard Oil Co. v. Nippon Shokubai Kagaku Co., 754 F.2d 345, 348 (Fed. Cir. 1985) the Federal Circuit had opined that “[Section] 286 cannot properly be called a ‘statute of limitations’ in the sense that it defeats the right to bring suit.” However, First Quality wisely avoided that argument because the copyright statute under scrutiny in Petrella does not do so either. Indeed, the plaintiff in Petrella filed a copyright infringement suit in 2009 limiting her claim for relief only for acts occurring within the three prior years, although MGM had released the movie “Raging Bull” in 1980.

While Petrella rejected laches as a bar to legal relief in the face of a statute of limitations enacted by Congress, the court explained that estoppel was “a defense long recognized as available in actions at law.” 134 S.Ct. at 1977. “The gravamen of estoppel … is misleading and consequent loss.” Id. “Delay may be involved, but is not an element of the defense. For laches, timeliness is the essential element.” Id. This was the basis for the court’s observation in SCA that “[w]e note, however, as we did in Petrella, that the doctrine of equitable estoppel provides protection against some of the problems that First Quality highlights, namely, unscrupulous patentees inducing potential targets of infringement suits to invest in the production of arguably infringing products.” SCA, slip op. at 16.

The Remnants of Equitable Defenses in Patent Litigation After SCA

Beginning with the obvious, laches is no longer a defense to a claim for past damages in patent cases. The loss of this defense will be most apparent in situations involving patent lawsuits where the accused conduct began many years ago, with the patent owner limiting damages only to the six years prior to the filing of suit. As often as not, those situations involve at least evidence prejudice, such as lost documents, deceased witnesses, and/or failed memories. Such circumstances will no longer be of use during settlement negotiations, at least for past damages, absent an amendment to Title 35 by Congress.

With that said, at least some penumbra of laches remains available in the context of equitable relief. Based on language in the en banc SCA decision that the Supreme Court did not address, the fact of ongoing royalties are unlikely to be barred by facts supporting laches. However, since “the principles of equity apply” to ongoing royalties, SCA, 807 F.3d at 1332, district courts could consider the nature of the unreasonable delay and the extent of material prejudice as one factor in assessing the amount of ongoing royalties. Turning to injunctive relief, the third eBay factor (the balance of hardships) presents a natural home for facts that previously supported laches. That eBay factor is “considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted.” eBay, 547 U.S. at 391. A set of facts involving long delay and material prejudice to the infringer resulting from on capital investments or business expansion during the delay period and made in reliance on the delay, creates significant hardship to the defendant in the context of a permanent injunction analysis.

The test for equitable estoppel is more exacting than the test for laches, in that misleading conduct and consequent loss are necessary. On the other hand, equitable estoppel, if established, is a complete defense. This equitable defense should, as the Supreme Court surmised in Petrella and SCA, provide some protection against the most egregious hypothesized conduct on the part of patent or copyright owners. Finally, Rule 8(c) of the Federal Rules of Civil Procedure identifies additional equitable defenses (e.g., waiver) that may not be within the “statute of limitations” rationale of SCA. One point to consider in assessing other equitable defenses is whether the defense, if successful, provides complete relief, or just relief for past damages.

Related Team:

Jerry R. Selinger