United States District Court, E.D. Kentucky, Central Division, Lexington
OPINION AND ORDER
KAREN K. CALDWELL, Chief District Judge.
This matter is before the Court on the defendants' motion to stay (DE 35) this case pending an ongoing reexamination by the U.S. Patent and Trademark Office of two patents that are at issue in this action.
The plaintiffs assert that defendant JM Farms breached a license agreement by ceasing to pay monthly royalty payments as required. The parties entered into the agreement in October 2008. With it, Natural Alternatives granted JM Farms exclusive rights to five U.S. patents, three U.S. trademarks, one Canadian patent, four Canadian patent applications and one Canadian trademark.
The patents and trademarks all involve a process by which de-sugared beet juice is used to prevent ice from forming on roads. According to Natural Alternatives, JM Farms initially agreed to pay it a monthly royalty payment of $25, 000. The parties later amended the agreement to reduce the monthly royalty payment to $12, 500. (DE 38, Mem. at 3-4, DE 38-1, Agreement, DE 38-6, Amendment.) There is no dispute that JM Farms ceased paying this amount in June 2012.
But JM Farms argues that it has a valid reason for no longer paying the monthly royalty payment. It alleges that, by June 2012, the U.S. Patent and Trademark Office entered a final rejection of all the claims of one of the patents - the 330 patent - and also later rejected all of the claims of another patent - the 684 patent. The reexamination proceedings commenced on January 23, 2009 after one of Natural Alternative's competitors filed requests for reexamination of both patents with the USPTO. (DE 38, Mem. at 3.) On May 30, 2014, the Patent Trial and Appeal Board affirmed the rejection of the 330 patent claims. It is unclear whether Natural Alternatives has requested a reconsideration of that decision. The reexamination proceedings for the 684 patent continue. (De 38, Mem. at 5-6.)
JM Farms raises two affirmative defenses that are related to the USPTO's actions. First, it argues that JM Farms properly terminated the agreement in July 2012 pursuant to a provision of the agreement that provides for termination "immediately upon written notice from LICENSEES... in the event that an injunction or other legal proceeding materially inhibits or prohibits the exercise of the license rights granted in this Agreement...." (DE 9, Affirmative Defenses, ¶ 3; Counterclaim, ¶ 8; DE 41, Reply at 3.) Second, JM Farms asserts that its continued performance of the agreement is excused because the purpose of the license agreement has been frustrated by the USPTO's actions. (DE 9, Affirmative Defenses, ¶ 4.)
JM Farms now moves the Court to stay this action pending the USPTO's reexamination of the 330 and 684 patents.
"Courts have inherent power to manage their dockets and stay proceedings, including the authority to order a stay pending conclusion of a [USPTO] reexamination." Ethicon, Inc. v. Quigg, 849 F.2d 1422, 1426-27 (Fed.Cir.1988) (citation omitted). "However, a district court may allow a case to move forward while reexaminations are underway since the functions of the courts and the Patent Office are very different." TouchTunes Music Corp. v. Rowe Int'l Corp., 676 F.Supp.2d 169, 176 (S.D.N.Y.2009) (internal quotation marks and citations omitted). "There are three factors a court should take into consideration when deciding whether to stay litigation pending a patent reexamination: (1) whether a stay will simplify the issues in question and trial of the case; (2) the stage of the proceedings; and (3) whether a stay will unduly prejudice the nonmoving party." Rosco, Inc. v. Mirror Lite Co., No. cv-96-5658, 2007 WL 2296827, at *2 (E.D.N.Y. Aug. 6, 2007) (citing Telemac Corp. v. Teledigital, Inc., 450 F.Supp.2d 1107, 1111 (N.D.Cal.2006)).
As to whether a stay will simplify the issues here, it will not do so with regard to Natural Alternatives' claim. Again, Natural Alternatives asserts only a claim for breach of the license agreement. Patent invalidity is generally a defense to such a claim. See Lear, Inc. v. Adkins, 395 U.S. 653, 674 (1969); PPG Industries, Inc. v. Westwood Chemical, Inc., 530 F.2d 700, 708 (6th Cir. 1976). And in cases where that defense is asserted, it often makes sense to await the results of the USPTO's reexamination. While not binding on the Court, the USPTO's decision is "evidence the court must consider in determining whether the party asserting invalidity has met its statutory burden by clear and convincing evidence." Fromson v. Advance Offset Plate, Inc., 755 F.2d 1549, 1555 (Fed. Cir. 1985). Further, the USPTO has "acknowledged expertise in evaluating prior art and assessing patent validity." Old Reliable Wholesale, Inc. v. Cornell Corp., 635 F.3d 539, 548 (Fed. Cir. 2011).
But JM Farms does not assert patent invalidity as an affirmative defense to Natural Alternative's breach claim. (DE 9, Answer, Affirmative Defenses.) Instead, it asserts frustration of purpose as an affirmative defense. The license agreement involves 10 patents and only two of them are being reexamined. JM Farms asserts that the purpose of the license agreement has been frustrated by the actions that the USPTO has already undertaken with regard to the two patents because they are "the heart of the license agreement". (DE 9, Affirmative Defenses, ¶ 4; Counterclaim, ¶ 16.)
JM Farms does not argue that the invalidity of the two patents frustrates the purpose of the agreement but that "the reexamination proceedings by themselves frustrate the purpose of the license agreement...." (DE 24, Response at 9.) It argues, "the reexaminations have weakened the market's perception of how strong the Plaintiffs' patent rights are, especially in view of the final rejection and pending appeal, making it now likely that Plaintiffs' ability to exclude others has been reduced to near zero leverage, and that the value of the license granted to Defendants has been diminished to the point of being worthless." (DE 24, Response at 9.) The USPTO's ultimate determination regarding the patents would not simplify the issues involved in this defense.
Thus, a stay of these proceedings would not help resolve Natural Alternatives' claims or JM ...