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Natural Alternatives, LLC v. JM Farms

United States District Court, Eastern District of Kentucky, Central Division, Lexington

April 28, 2015




This matter is before the Court on the defendants’ motion (DE 44) asking the Court reconsider a prior opinion denying their motion to stay this case. For the following reasons, the motion is GRANTED in part and DENIED in part.

The facts are set forth in more detail in the opinion under reconsideration (DE 42). The plaintiff Natural Alternatives make a relatively straightforward claim against the defendant JM Farms. It asserts that it owns the rights under certain patents and trademarks and that it granted JM Farms a license to use those rights. In exchange, JM Farms must pay Natural Alternatives a monthly royalty payment of $12, 500. There is no dispute that JM Farms ceased making the royalty payment in June 2012. Natural Alternatives sues JM Farms for breach of the license agreement.

JM Farms’ defense has been somewhat less clear. When a licensee like JM Farms is sued for failing to pay royalty payments due under a license agreement, it can assert as an affirmative defense that the licensed patents are invalid. See Lear, Inc. v. Adkins, 395 U.S. 653, 674 (1969). As the Court stated in its prior opinion, however, JM Farms did not appear to assert patent invalidity as a defense but instead asserted that the purpose of the license agreement had been frustrated by the United States Patent and Trademark Office’s reexamination of two of the patents governed by the license agreement. In arguing that there is a current controversy between the parties, JM Farms itself explained its defense as follows:

Defendants submit that 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 Plaintiff’s 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. Thus, . . . the reexamination proceedings by themselves frustrate the purpose of the license agreement. . .

(DE 24, Response at 9) (emphasis added).

Because JM Farms had asserted that the reexamination proceedings themselves had already rendered the two patents worthless, in its prior opinion, the Court concluded that this matter need not be stayed. That defense did not depend upon the ultimate outcome of the reexamination.

In its motion to reconsider, however, JM Farms clarifies that it actually does assert that the purpose of the license agreement has been frustrated because the two patents are invalid. Thus, it argues, staying this matter until the USPTO finally decides whether the patents are indeed invalid would help to clarify and simplify the issues in this case.

JM Farms explains that it cannot assert a simple patent-invalidity defense in this case because the license agreement grants it rights to use multiple patents and trademarks but only two are being reexamined by the USPTO. Thus, JM Farms explains, it must assert that the invalidity of just two of the patents governed by the license agreement has frustrated the purpose of the whole agreement. In other words, patent invalidity is relevant “as part of a broader frustration of purpose defense. . . .” (DE 44-1, Mem. at 5.) JM Farms explains that the “basis of the frustration of purpose defense is that the patents are invalid and competitive entities are acting accordingly. . . In other words, it is not the re-exam itself that frustrates the purpose of the license agreement, it is the finding that those patents are invalid that frustrates the purpose of the license agreement.” (DE 47, Reply at 1.)

Accordingly, the Court understands that JM Farms asserts as a defense to the breach of contract claim that it is excused from making royalty payments under the license agreement because the ‘330 and ‘684 patents are not valid, which has frustrated the purpose of the license agreement.

“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)).

Staying this matter would simply some of the issues in this case. As JM Farms concedes, its frustration-of-purpose defense fails if the USPTO should determine that either of the patents is valid. (DE 47, Reply at 2.) Likewise, if the USPTO should determine that either patent is invalid, while that determination is not binding on the Court, it would certainly assist the Court in its own validity determination given the recognized expertise of the USPTO. Fromson v. Advance Offset Plate, Inc., 755 F.2d 1549, 1555 (Fed. Cir. 1985); Old Reliable Wholesale, Inc. v. Cornell Corp., 635 F.3d 539, 548 (Fed. Cir. 2011). See also Pass & Seymour, Inc. v. Hubbell Inc., 532 F.Supp.2d 418, 436 (N.D. N.Y. 2007) (recommending a stay because “the parties and the court could benefit immensely from the expertise of the PTO” and because the USPTO’s “determination could potentially avoid the necessity of this case going forward, or at a minimum materially reshape the issues presented.”)

This case, however, presents issues beyond the validity of the patents. Natural Alternatives argue that JM Farms is obligated to pay royalty fees under the terms of the license agreement even if the ‘330 and ‘684 patents are invalid. It argues that, under the terms of the license agreement, JM Farms must pay the royalty fees until “all of the patents have expired.” (DE 46, Response at 4.) The reexamination proceedings will shed no light on that issue. Similarly, the reexamination proceedings will not help the Court in determining whether the purpose of the agreement has been frustrated by the invalidity of only two of the patents at issue.

As to the stage of the respective proceedings, this action has not yet proceeded into discovery. The USPTO process, on the other hand, began in 2009 (DE 38, Response at 3) – years before this litigation – and, even with appeals, should be nearly complete. (DE 44-1, Mem. at 2.) See Affinity Labs of Texas v. Apple Inc., 09–04436 CW, 2010 WL 1753206, at *2 (N.D.Cal. Apr. 29, 2010 (stating that the average length of an inter partes reexamination is 36.2 months and 36 additional months if either party appeals the determination); TPK Touch Solutions, Inc. v. Wintek Electro-Optics Corporation, No. ...

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