What are the Limits of Enjoining Non-Parties?

May 9, 2017

“Having your day in court” is a well-known concept that suggests, absent exceptional circumstances such as a Temporary Restraining Order, a Court should not issue an injunction curtailing the activities of a company when that company has not had the opportunity to be heard. This concept has a unique impact in determining the scope of a permissible injunction on non-parties. For example, where a plaintiff successfully shows a distributor is selling a product which infringes a valid patent, in many instances (especially involving competitors), the Court may enter an injunction prohibiting future sales of the infringing product by the defendant. This injunction will often extend beyond the defendant and apply to agents, servants, employees, attorneys, and others who are in active concert or participation with the defendant. The questions arises, how far can the injunction go to prohibit activities by the infringing product’s manufacturer, a non-party who did not yet “have its day in court.” Can the injunction reach the product’s manufacturer, and if so, can it enjoin the manufacturer from selling the infringing products to parties other than the defendant?

In a recent Federal Circuit decision, Asetek Danmark A/S v. CMI USA Inc., Cooler Master Co, Ltd., 852 F.3d 1352(Fed. Cir. April 3, 2017), the Federal Circuit explored the limits of enjoining actions by such non-party product manufacturers. In Asetek, the Federal Circuit was confronted with an injunction broadly written to enjoin all potentially infringing actions of a non-party, without regard to the actions of the defendant. While an action against a manufacturer resulting in an injunction is often effective in stopping infringement by distributors downstream, the issue presented in Asetek is the reverse: whether an action against a distributor resulting in an injunction can be effective in stopping actions of the manufacturer unrelated to the specific enjoined distributor.

The Plaintiff Asetek Danmark A/S (“Asetek”) sued both CMI USA Inc. (“CMI”) and Cooler Master Co., Ltd. (“Cooler Master”) for patent infringement of two patents related to the cooling of central processing units of computer systems. Cooler Master, a Taiwanese manufacturer, made the accused products, which CMI imported into the United States for sale. Prior to trial, Asetek stipulated to the dismissal with prejudice of Cooler Master based upon deposition testimony of both CMI and Cooler Master that CMI was the exclusive United States distributor of the accused products.

After the jury found the patents valid and infringed by CMI, awarding slightly over $400,000 in damages, the Court entered an injunction against any further infringement by CMI. However, the Court also explicitly enjoined Cooler Master, a non-party at this point, “from making, using, offering for sale or selling in the United States, or importing into the United States, or causing to be made, used, offered for sale, or sold in the United States, or imported into the United States, the Infringing Products.”
While Cooler Master did not take issue with an injunction barring it from abetting future infringement by CMI, as Cooler Master was no longer a party to the litigation, it appealed the portion of the injunction that prohibits Cooler Master from taking actions independent of CMI. On December 6, 2016, the Federal Circuit initially remanded the case back to the district court to reconsider this portion of the injunction. However, after granting a petition for panel rehearing, the Federal Circuit, on April 3, 2017, vacated this portion of the injunction and still remanded the case back to the district court to reconsider the proper scope of the injunction.

According to Federal Rule of Civil Procedure 65(d), it is well settled that an injunction can bind more than just the parties, and “the parties’ officers, agents, servants, employees, and attorneys.” An injunction can also bind “other persons who are in active concert or participation” with them “who receive actual notice of [the injunction] by personal service or otherwise.” Thus, the question is the bounds of the phrase “active concert or participation.” This phrase is usually construed to require privity, abetting behavior, or being “legally identified” with the party being enjoined. This “legally identified” criteria is usually a fact-intensive inquiry, which courts are told to approach cautiously, less they enjoin a party who did not “have his own day in court.” However, facts that indicate a non-party sufficiently controlled the litigation, may be sufficient to find them “legally identified” with the defendant, such that it may then be said that they had their day in court.

The district court justified enjoining Cooler Master based on it being legally identified with CMI due to 1) CMI being the exclusive United States distributor of the Cooler Master products and 2) CMI’s and Cooler Master’s joint development of the infringing products. In vacating and remanding this portion of the injunction, the Federal Circuit wanted the factual record developed further to determine whether Cooler Master can be “legally identified” with CMI. For example, would CMI need to cooperate with Cooler Master to modify the exclusivity relationship to allow Cooler Master to engage in US focused activity outside of CMI? In providing a roadmap for this further discovery, the Federal Circuit provided a non-exhaustive list of relevant factual information in determining if Cooler Master can be “legally identified” with CMI:

1. The nature of the exclusivity relationship between CMI and Cooler Master, including the scope of the exclusivity and the terminability of the exclusivity;
2. The trademarks and trademark agreements between CMI and Cooler Master;
3. The origins of CMI (formerly known as Cooler Master USA, Inc.) and its relationship with Cooler Master;
4. The details of and intent behind changes in the companies’ relations and if those changes are related to the finding of liability against CMI; and
5. The companies’ relationship in the conduct of the litigation both before and after Cooler Master was dismissed.

As the Federal Circuit again recognized the caution needed in enjoining non-parties, it made numerous statements limiting the potential scope of its decision. First, the Federal Circuit identified other potential challenges to this type of injunction that were not presently before it, including: (a) whether a district court has personal jurisdiction over the non-party; (b) whether the non-party lacked notice or an opportunity to be heard on the issues related to the injunction; (c) whether the injunction was an appropriate remedy in light of eBay Inc. v. MercExchange, L.L.C., 457 U.S. 388 (206); and (d) whether the non-party sufficiently threatens to engage in the enjoined conduct. Second, the Federal Circuit suggested to Asetek the whole issue on remand could become moot if Asetek were to file a new injunctive infringement action against Cooler Master, seeking a preliminary injunction based on the judgment reached in the CMI case.

While still a possibility, it appears that Asetek has decided against a separate infringement action. Factual discovery is now proceeding, with supplemental briefing set for July and August 2017 and a hearing currently set for September 2017. While the Federal Circuit’s Asetek decision failed to identify the exact limits to enjoining the actions of non-parties, it did provide a number of signposts suggesting the outer limits. The district court’s order on remand, and a potential additional Federal Circuit appeal may further help clarify the true bounds of enjoining a non-party.

Jason J. Keener HeadshotThis article was written by Jason J. Keener who is the Chair of the Intellectual Property Group at Fox Swibel Levin & Carroll LLP. He can be reached at jkeener@foxswibel.com.

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