Troll Repellent: The Customer Suit Exception Today

Normally, the plaintiff in a patent infringement case gets to choose where to file their lawsuit. However, when a plaintiff sues a customer for using an allegedly infringing product, the customer suit exception may apply. Under this exception, courts will stay the patent holder’s action against the customers, pending the result of litigation between the patent holder and manufacturer. If the patent holder has not yet sued the manufacturer, the manufacturer can seek a declaratory judgment of invalidity or non-infringement and select its preferred forum. If the patent holder has already sued the manufacturer, the court may likewise transfer the case to the manufacturer’s preferred forum.

For example, in In re Nintendo of Am., Inc., 756 F.3d 1363, 1364 (Fed. Cir. 2014), Secure Axcess LLC sued Nintendo and eleven retailers of Nintendo products, alleging that the twelve defendants were infringing its patents. Nintendo and the retailers moved “to sever and stay the claims against the [r]etailers.” Id. The district court denied the motion. The Federal Circuit, however, ruled that the customer suit exception applied. Id. at 1365-66. Accordingly, it granted a writ of mandamus directing the district court to stay and sever the claims and retailers. Id. at 1366. Moreover, the Federal Circuit transferred the case to Nintendo’s preferred forum, the United States District Court for the Western District of Washington. Id.

A number of commentators have celebrated this doctrine as a way to stop patent trolls from bringing blackmail litigation against customers, who have an incentive to quickly settle suits against them. These commentators vigorously advocate for the expansion of the customer suit exception.

This blog post reviews the Federal Circuit precedent in this area, provides an overview of the exception’s policy justification, and investigates empirically the district court decisions on the customer suit exception from the past two years. Surprisingly, evidence suggests that the district courts have granted nearly every motion to stay brought under this exception.

Federal Circuit Precedent on the Exception

Under the “customer suit exception,” a patent infringement action against a customer can be stayed pending resolution of a suit by or against the manufacturer of the infringing product. “The general rule . . . is that ‘as a principle of sound judicial administration, the first suit should have priority,’ absent special circumstances.” Kahn v. Gen. Motors Corp., 889 F.2d 1078, 1081 (Fed. Cir. 1989). However, there are some situations that “may justify a departure from the first-filed rule of priority.” Id. at 1081. One “is the ‘customer action,’ where the first suit is filed against a customer who is simply a reseller of the accused goods, while the second suit is a declaratory action brought by the manufacturer of the accused goods.” Id. This “customer suit exception is based on the manufacturer’s presumed greater interest in defending its actions against charges of patent infringement; and to guard against possibility of abuse.” Id.

But the customer suit exception can be used to stay (and even sever) customer suits outside this traditional context. For example, in In re Nintendo of America, Inc., the patent holder sued both a manufacturer and its customers in the same case. The Federal Circuit severed and stayed the suit against the customers while allowing the suit against the manufacturers to move forward. Nintendo, 756 F.3d at 1366.

This exception is no bright-line rule: “The way to avoid wasted resources is not through . . . a ‘mechanical solution’ or ‘precise rule.’” In re Google, Inc., 588 Fed.Appx. 988, 991 (Fed. Cir. 2014) (citations omitted). Instead, the courts employ “a flexible approach, including staying proceedings if the other suit is so closely related that substantial savings of litigation resources can be expected.” Id. In other words, “the manufacturer’s case need only have the potential to resolve the ‘major issues’ concerning the claims against the customer—not every issue—in order to justify a stay of the customer suits.” Spread Spectrum Screening LLC v. Eastman Kodak Co., 657 F.3d 1349, 1358 (Fed. Cir. 2011).

While preserving the district courts’ considerable discretion, the Federal Circuit has identified three factors that are relevant in determining whether to stay a suit based on the customer suit exception. First, the Federal Circuit has considered whether the customer is a “mere reseller of the products.” Kahn, 889 F.2d at 1082; see also Tegic Comms. Corp. v. Bd. of Regents of the Univ. of Tex. Sys., 458 F.3d 1335, 1343 (Fed. Cir. 2006) (similar). Second, the Federal Circuit has considered whether “the customer consented to . . . be bound by the manufacturer’s action.” Kahn, 889 F.2d at 1082; see also Tegic, 458 F.3d at 1343 (similar); Katz v. Lear Siegler, Inc., 909 F.2d 1459, 1464 (Fed. Cir. 1990) (similar). Third, the Federal Circuit has considered whether the manufacturer “is not the only source of the [infringing products]” used by the customer. Tegic, 458 F.3d at 1343.

The Exception’s Policy Justification

The Federal Circuit has also identified two policy rationales for the “customer suit exception.” First, the exception promotes “efficiency and judicial economy.” Tegic 458 F.3d at 1343. Second, “[a]t the root of the preference for a manufacturer’s declaratory judgment action is the recognition that, in reality, the manufacturer is the true defendant in the customer suit . . . .” Katz, 909 F.2d at 1464 (quoting Codex Corp. v. Milgo Elecs. Corp., 553 F.2d 735 (1st Cir. 1977)).

However, one influential article offered several reasons why the customer suit exception can also mitigate the effects of frivolous litigation by patent trolls. First, because customers bear the full cost of proving non-infringement or invalidity of the troll’s patents but only reap a small fraction of the benefits, manufacturers are more motivated to fight patent trolls’ suits. Brian J. Love & James C. Yoon, Expanding Patent Law’s Customer Suit Exception, 93 B.U. L. Rev. 1605, 1621-26 (2013). Second, the manufacturer’s expert knowledge of its own products helps it raise more effective defenses to the suit. Id. at 1626-31. Third, the manufacturer’s expertise also helps it argue for a low damages award. Id. at 1631-35.

In light of these potential benefits, a number of commentators, in addition to Love and Yoon, have argued for the expansion of the customer suit exception. See, e.g., Colleen Chien & Edward Reines, Why Technology Customers Are Being Sued En Masse for Patent Infringement and What Can Be Done, 49 Wake Forest L. Rev. 235, 239 (2014); Gaia Bernstein, The Rise of the End User in Patent Litigation, 55 B.C. L. Rev. 1443, 1449 (2014); Paul R. Gugliuzza, Patent Litigation Reform: The Courts, Congress, and the Federal Rules of Civil Procedure, 95 B.U. L. Rev. 279, 296-97 (2015); Michael Hopkins, Note, Starving the Troll: Using the Customer Suit Exception to Deter Abusive Patent Litigation, 10 Brook. J. Corp. Fin. & Com. L. 249, 275 (2015); Michael J. Meurer, Allocating Patent Litigation Risk Across the Supply Chain, 25 Tex. Intell. Prop. L.J. 251, 274-75 (2018).

Recent District Court Decisions Applying the Exception

Recently, the district courts have taken a fairly permissive view of the customer suit exception. A Westlaw search for district court cases mentioning a “customer suit exception,” “customer suit doctrine,” or “consumer suit exception” decided between October 22, 2017 and October 22, 2019 yields thirteen cases which directly ruled on the applicability of the customer suit exception when a motion to stay was filed in a patent case. [1] Of these thirteen motions to stay, only one was denied on the merits. [2] One other was denied as being premature. [3] The other eleven were granted. [4] Of these eleven, ten were granted under the auspices of the customer suit exception. In the remaining case, although the court held the exception inapplicable, the court still used its discretion to stay the case based on some of the same factors considered under the customer suit exception. [5]

This data should be taken with a grain of salt. Because the district courts almost never report their decisions, getting a complete picture of trends in decisions is difficult. Moreover, because the district courts decide cases in this area only infrequently, empirical inquiries into the customer suit exception have to contend with small sample sizes.

Nevertheless, this is tentative evidence that district courts regularly grant these motions to stay. It’s possible that, rather than reflecting a judicial receptivity to these motions, these decisions reflect a trend by the defense bar only to make motions under the customer suit exception when they’re already very likely to succeed. However, given the large potential benefits of being able to stay a case pending resolution of a manufacturer suit and the comparatively small cost of motion practice, the more probable explanation is that the district courts are in fact fairly open-minded towards these motions to stay.

This result has two potential consequences. First, defendants facing a patent infringement lawsuit for use of a product they bought from someone else should seriously consider moving to stay the suit under the customer suit exception because they have a high likelihood of success. Second, scholars advocating reform of the patent system to prevent abuse by patent trolls should note district courts’ receptivity to these motions.

Footnotes

[1] Since these cases are not reported, they were selected by Westlaw’s editors. This introduces the possibility of selection bias in the sample. Nevertheless, because Westlaw strives to select the most important unreported cases for publication, this selection bias is probably small.

[2] Covves, LLC v. Dillard’s, Inc., Case No. 2:18-cv-08518-RGK-AFM, 2019 WL 2022227 (C.D. Cal. Jan. 18, 2019).

[3] Wapp Tech Ltd. P’ship v. Bank of Am. Corp., Civ. A. No. 4:18-CV-00519, 2019 WL 3890171 (E.D. Tex. Aug. 19, 2019).

[4] Strategic Ops., Inc. v. Giannini, Case No. 18-CV-189 JLS (WVG), 2019 WL 2009129 (S.D. Cal. May 7, 2019); Berkeley*IEOR v. Teradata Ops., Inc., 17 C 7472, 2019 WL 1077124 (N.D. Ill. Mar. 7, 2019); RPost Holdings, Inc. v. DocuSign, Inc., Civ. A. No. 2:12-CV-00683-JRG, 2019 WL 1982531 (E.D. Tex. May 3, 2019); Zebra Techs. Corp. v. Typenex Med., LLC, No. 18 C 4711, 2018 WL 6567076 (N.D. Ill. Dec. 13, 2018); Mantissa Corp. v. Old Second Bancorp, Inc., No. 17 C 9175, 2018 WL 3059604 (N.D. Ill. June 20, 2018); Upaid Sys., Ltd. v. CleanDan, Case No. SA CV 18-00619-AB (SSx), 2018 WL 5279567 (C.D. Cal. July 25, 2018); CyWee Grp. Ltd. v. Huawei Device Co., Ltd., Case No. 2:17-CV-495-WCB, 2018 WL 4002776 (E.D. Tex. Aug. 22, 2018); Tile Tech, Inc. v. Appian Way Sales, Inc., Case No. C17-1660JLR, 2018 WL 2113958 (W.D. Wash. May 8, 2018); Linksmart Wireless Tech. v. Gogo Inc., SACV 18-00654 AG (JDEx), 2018 WL 8367609 (C.D. Cal. Sept. 18, 2018); Huang v. Open-Silicon, Inc., Case No. 18-cv-00707-JSW (LB), 2018 WL 5099275 (N.D. Cal. Aug. 27, 2018); Grecia v. Target Corp., Case No. 17-cv-00323-YGR, 2018 WL 4283358 (N.D. Cal. Sept. 7, 2018).

[5] See RPost Holdings, Inc. v. DocuSign, Inc., Civ. A. No. 2:12-CV-00683-JRG, 2019 WL 1982531 at *2 (E.D. Tex. May 3, 2019).

Comments are closed.