Leviton Manufacturing Company, Inc. v. Universal Security Instruments, Inc., No. 2009-1421 (Fed. Cir. 5/28/2010)

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LEVITON MANUFACTURING COMPANY, INC., Plaintiff, v. UNIVERSAL SECURITY INSTRUMENTS, INC., AND USI ELECTRIC, INC., Defendants.

SHANGHAI MEIHAO ELECTRIC INC., Plaintiff-Appellee, v. LEVITON MANUFACTURING COMPANY, INC., Defendant-Appellant.

No. 2009-1421.

United States Court of Appeals, Federal Circuit.

Decided: May 28, 2010.

Appeal from the United States District Court for the District of Maryland in consolidated case no. 05-CV-889, Judge Andre M. Davis.

SUSAN B. MANNING, Bingham McCutchen LLP, of Washington, DC, argued for plaintiff-appellee. Of counsel on the brief was GARY M. HNATH, Mayer Brown LLP, of Washington, DC.

J. MICHAEL JAKES, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, of Washington, DC, argued for defendant-appellant. With him on the brief were EDWARD J. NAIDICH; and BETH Z. SHAW, of Reston, Virginia. Of counsel on the brief was JAMES T. HOSMER, Nixon & Vanderhye, P.C., of Arlington, Virginia.

Before MICHEL, Chief Judge, PROST and MOORE, Circuit Judges.

Opinion for the court filed by Chief Judge MICHEL.

Dissenting opinion filed by Circuit Judge PROST.

MICHEL, Chief Judge.

Defendant-Appellant Leviton Manufacturing Company, Inc. ("Leviton") appeals the district court's award of attorney fees and costs to Plaintiff-Appellee Shanghai Meihao, Inc. ("Meihao") based on inequitable conduct and vexatious litigation. We vacate and remand for the reasons below.

I. BACKGROUND

On October 22, 2003, Leviton filed U.S. Patent Application No. 10/690,776 ("Germain application"), which claims priority to a February 3, 2003 provisional application. Greenberg Traurig attorneys Paul Sutton, Barry Magidoff, and Claude Narcisse filed and prosecuted the Germain application. It lists Franz Germain and five others as co-inventors. Each of these inventors submitted to the U.S. Patent and Trademark Office ("PTO") a sworn declaration that he was an original inventor of the subject matter which was claimed.

Six months later, on April 19, 2004, Leviton filed U.S. Patent Application No. 10/827,093, which later issued as U.S. Patent No. 6,864,766 ("the '766 patent"). The '766 is a third-generation continuation of U.S. Patent No. 6,246,558 ("the '558 patent"). The application for the '558 patent was filed on August 20, 1999, and Leviton has claimed that the '766 patent is entitled to this priority date. Nicholas DiSalvo and William Ziegler are named as the inventors of the '766 patent. Both of these inventors also submitted to the PTO a sworn declaration that he was an original inventor of the subject matter which was claimed.

The '766 patent and the Germain application have no common inventors, and neither claims priority to the other. The '766 patent's claimed 1999 priority date is three and a half years before Germain's claimed 2003 priority date. The '766 patent and Germain have many claims that are nearly identical. For example, the only difference between claim 1 of the '766 patent and claim 31 of the Germain application is that claim 1 recites "at least one moveable bridge" whereas claim 31 recites "a movable bridge." And dependent claims 3, 4, 13 and 14 of the '766 patent are identical to Germain claims 32, 31, 43 and 44.

Meihao and Leviton offer different explanations as to the similarity of the claims. Meihao contends that Narcisse "copied" the claims from the Germain application into the application that matured into the '766 patent. Leviton explains the similarity by stating that several months after Narcisse filed the Germain application, he met with several Leviton engineers, including William Ziegler, one of the inventors of the '558 patent. At that meeting, Narcisse learned that the broad reverse-wiring protection concept he claimed in the Germain application had actually been described in the '558 patent over three years earlier, having already been invented by Ziegler and DiSalvo. Afterwards, Narcisse prepared a continuation of the '558 patent with claims directed to that feature.

During the prosecution of the '766 patent, Leviton did not disclose the Germain application or the fact that certain claims had been copied from Germain into the application for the '766 patent. Moreover, Leviton did not inform the PTO that it had previously submitted a sworn declaration in which other individuals (the Germain inventors) claimed to be inventors of subject matter very similar to that which was now recited in the application for the '766 patent.

In June 3, 2005, two months after the '766 patent issued, Leviton disclosed the '766 patent, the '558 patent, and thirty other references during the prosecution of the Germain application. In September 2005, having learned of the substantively identical claims, the PTO issued a double-patenting rejection of the Germain application in light of the '766 patent. Leviton cancelled the similar claims.

A reexamination of the '766 patent was requested on June 6, 2005. Leviton did not disclose the Germain application or the related litigation to the PTO during the seven months in which the examiner reconsidered the patentability of the '766 patent. On February 17, 2006, the examiner confirmed all claims of the '766 patent, and the reexamination requestor appealed. Leviton filed its appeal brief on June 16, 2006, but did not disclose the Germain application or related litigations to the PTO, though it had been aware of inequitable conduct allegations for over a year.

Narcisse first referenced the Germain application and asserted that it was not material information in a memorandum to the PTO dated August 7, 2007. Although Narcisse titled his memorandum "Information Disclosure Statement" ("IDS"), it is not formally an IDS because it does not meet any of the requirements for an IDS. Narcisse also submitted several standard PTO forms titled "Information Disclosure Statement by Applicant" that comply with PTO rules, but these IDS forms did not list the Germain application.

During the district court case, Meihao sought discovery of the facts related to the inequitable conduct defense. Meihao argued that Leviton's counsel unreasonably and self-servingly tried to avoid discovery of Leviton's own misconduct. When Meihao issued subpoenas to Sutton, Magidoff, and Narcisse, the witnesses did not object, did not produce documents, and did not appear for their scheduled depositions. Leviton belatedly moved to quash primarily on the ground that the witnesses were acting as Leviton's litigation counsel. In March 2007, Greenberg Traurig withdrew and was replaced by Nixon Vanderhye.

Narcisse and Magidoff subsequently appeared for depositions, and Leviton's new counsel made numerous privileged advice and work product objections and repeatedly instructed the witnesses not to answer. During Narcisse's deposition, counsel made 96 privileged advice and work product objections, and over a third of the time explicitly instructed Narcisse not to answer. Many of these questions were about the relationship between the Germain application and claim 1 of the '766 patent, or Narcisse's rationale for failing to disclose the Germain application to the PTO. For example, Narcisse declined to answer the following questions claiming the work-product exception:

• Can you tell me with respect to Claim 1 where you got the language for Claim 1?

• So isn't it a fact that Claim 1 of the '766 application was copied from Claim 31 of the Germain application?

• Can you tell me where you got the phrase, "moveable bridge"?

• Did you consider disclosing the Germain application to the PTO?

• How do you explain the similarity in claim language?

Magidoff refused to answer similar questions, also on advice and objection by counsel. The district court found that these objections were baseless.

Another round of briefing ensued, with Meihao seeking an order compelling Narcisse and Magidoff to appear for further deposition and to fully answer Meihao's questions, and also compelling Sutton to appear for deposition. The matter was argued and submitted to Magistrate Judge Gauvey on September 17, 2007. Meihao's motions to compel were still pending when Leviton moved to dismiss the case in November 2007, but the magistrate judge noted that he was about to grant them.

On November 28, 2007, Leviton moved to dismiss the case. Leviton asserts that it dismissed the case because it succeeded in forcing Meihao to stop selling older-model, allegedly infringing products. Meihao alleges the real reason Leviton moved to dismiss its case was that it wanted to avoid a finding that the '766 patent is unenforceable. Leviton has more than 30 different issued patents and patent applications that relate to the '766 patent, and Leviton's counsel of record on the '766 patent was also counsel of record in the PTO on several hundred Leviton patents. The district court dismissed the case with prejudice on December 17, 2007 and gave Meihao leave to file a motion for fees and costs.

The magistrate judge held a hearing on the motion for fees and costs on September 3, 2008 and issued a 128 page Memorandum Opinion on December 23, 2008 in which she found that Leviton had committed inequitable conduct, had engaged in a strategy of vexatious litigation, and that an award of fees to Meihao was proper. District Judge Andre M. Davis issued an opinion on May 12, 2009 accepting Magistrate Judge Gauvey's report and recommendations. The district court entered two money judgments in favor of Meihao together totaling $1,046,353.10 in costs and reasonable attorney fees.

II. DISCUSSION

A. Attorney Fees

The Patent Act provides, "The court in exceptional cases may award reasonable attorney fees to the prevailing party." 35 U.S.C. § 285. "The prevailing party may prove the existence of an exceptional case by showing: inequitable conduct before the PTO; litigation misconduct; vexatious, unjustified, and otherwise bad faith litigation; a frivolous suit or willful infringement." Epcon Gas Sys., Inc. v. Bauer Compressors, Inc., 279 F.3d 1022, 1034 (Fed....