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Federal Circuit: Prior Dismissal Bars Customer Lawsuits

Publications / Jun 21, 2020

Article by Clyde Shuman

The U.S. Court of Appeals for the Federal Circuit, in a precedential opinion, has ruled that dismissal with prejudice of a patent infringement lawsuit against a manufacturer or supplier can bar subsequent infringement suits against the manufacturer/supplier’s customers. In In re: PersonalWeb Techs., LLC, No. 2019-1918, the Court affirmed a district court ruling that eight infringement lawsuits brought by PersonalWeb Technologies LLC against customers of, Inc., and Amazon Web Services, Inc., (collectively “Amazon”) were barred as a result of a prior lawsuit brought by PersonalWeb against Amazon, which was dismissed with prejudice.

By way of background, PersonalWeb was the owner by assignment of five patents directed to methods and systems for identifying data and naming files in computer systems.

PersonalWeb originally sued Amazon and one customer for patent infringement in the Eastern District of Texas, based on Amazon’s manufacture, sale, use, importation and/or offer for sale of the Amazon Simple Storage Service (S3). Briefly, Amazon S3 provides web-based storage to certain customers, typically companies with websites. The customers can use S3 to store static content, such as images, for their websites. Information is stored in the form of “objects” organized into customer-created containers called “buckets.” Once an object is stored in S3, it can be made available over the entire Internet. S3 automatically generates an “ETag” for every object stored in S3. ETags provide useful identifying information about an object.

Where a user requests a file for a second time, S3 compares the ETag for the file stored in the user’s cache to the file stored on S3. If the ETags are identical, S3 responds with a status code indicating that the user’s computer already has a copy of the file, and further download is not needed. If S3 does not contain a file with the same ETag, that indicates that the contents of the file have been changed. In that event, S3 sends the user’s browser the file containing the updated version of the file. This is referred to as a “conditional get request” and helps avoid unnecessary downloads, saving time and network bandwidth.

In the Texas action, PersonalWeb’s infringement contentions specifically referenced S3’s use of conditional get requests. PersonalWeb also represented in discovery that S3’s use of ETags to perform conditional operations infringed the asserted patents.

Following the district court’s claim construction order, PersonalWeb stipulated to the dismissal of all its claims against Amazon with prejudice. The district court subsequently issued an order dismissing all claims against Amazon with prejudice and entered final judgment against PersonalWeb.

Beginning almost four years later, PersonalWeb filed dozens of new lawsuits in various districts against website operators, many of which were Amazon’s customers. PersonalWeb alleged that by using S3, Amazon’s customers had infringed the above-referenced patents. Amazon intervened in the customer suits. Amazon also filed a declaratory judgment complaint against PersonalWeb, seeking an order barring PersonalWeb’s infringement actions against Amazon and its customers in light of the prior action against Amazon in the Eastern District of Texas. The customer cases and Amazon’s declaratory judgment action were consolidated in a multi-district proceeding  and assigned to the Northern District of California for pretrial proceedings. The district court there began with Amazon’s declaratory judgment action and selected a representative customer case to proceed along with it, staying the other cases.

In its counterclaim against Amazon in the declaratory judgment action, PersonalWeb alleged that S3 infringed the asserted patents by using ETags to perform conditional operations. PersonalWeb made similar allegations against Amazon’s customers.

Amazon moved for summary judgment in its declaratory judgment action and partial summary judgment in the customer suit. Amazon argued that dismissal with prejudice of PersonalWeb’s action against Amazon in Texas barred further suits against Amazon or its customers for infringement based on Amazon’s S3 system.

The district court granted Amazon’s motion in part, holding that claim preclusion barred PersonalWeb’s claims regarding acts of infringement occurring prior to the final judgment in the Texas action, and that the Supreme Court’s Kessler doctrine [Kessler v. Eldred, 206 U.S. 285 (1907)], barred PersonalWeb’s claims relating to S3 after the final judgment.

On claim preclusion, the district court determined that: (i) the with-prejudice dismissal in the Texas action was a final judgment on the merits, and that PersonalWeb did not reserve any rights in the stipulated dismissal; (ii) Amazon’s customers were in privity with Amazon; and (iii) the causes of action in the Texas case and in the customer cases were the same.

As to the Kessler doctrine, the district court held that the judgment in the Texas case gave rise to a limited trade right to continue producing, using, and selling the product at issue in that case “even when the acts of infringement occurred post-final judgment and even when it was third parties who allegedly engaged in those acts of infringement.” The court rejected PersonalWeb’s argument that the Kessler doctrine is does not apply because the judgment in the Texas case did not specifically adjudicate the issue of non-infringement.

Finally, the district court determined that its summary judgment ruling also disposed of the eight customer lawsuits in which PersonalWeb alleged infringement based solely on the customer’s use of Amazon’s S3 system. The court dismissed those cases.

On appeal, the Federal Circuit rejected PersonalWeb’s two primary challenges to the district court’s decision, viz., that claim preclusion was inapplicable to the customer actions because the Texas case involved a different feature of Amazon’s S3 system, and therefore a different cause of action, and that the with-prejudice dismissal of the action against Amazon did not constitute an adjudication of non-infringement and thus did not trigger the Kessler doctrine.

On claim preclusion, the Court rejected PersonalWeb’s sole argument, that the Texas action against Amazon and the customer suits involved different causes of action. The Court found that PersonalWeb’s infringement contentions in Texas specifically referenced “conditional operations.”

The Court said, “In any event, regardless of the breadth of the specific infringement theories PersonalWeb pursued in the Texas case, it is clear that the complaints in the customer cases and the complaint in the Texas case relate to the same set of transactions… Every alleged act of infringement in the eight customer cases before us is likewise based on the use of the same Amazon S3 product.”

With respect to the Kessler doctrine, the Court rejected PersonalWeb’s contention that the doctrine did not apply here because Amazon was not an “adjudged non-infringer.” Citing its own precedent, the Court held that nothing limits application of the Kessler doctrine to cases where issues of noninfringement or invalidity were “actually litigated.” The Court held that PersonalWeb abandoned its claims against Amazon in Texas “without reservation, explicit or implicit. The judgment in that case therefore stands as an adjudication that Amazon was not liable for the acts of infringement alleged by PersonalWeb.”

The Court noted that it had previously characterized the Kessler doctrine as granting a “limited trade right” that attaches to the product itself. “The scope of that right is not limited to cases involving a finding of non-infringement that was necessary to the resolution of an earlier lawsuit, but extends to protect any products as to which the manufacturer established a right not to be sued for infringement.” Per the Court, for that reason, “the judgment in the Texas case, pursuant to a with-prejudice dismissal, protected Amazon’s S3 product from subsequent infringement challenges, even when those challenges were directed at Amazon’s customers rather than at Amazon itself.”

The Court expressly rejected PersonalWeb’s narrower construction of the Kessler doctrine, under which a final, adverse disposition of a patentee’s claims against the manufacturer of a particular product would not give the manufacturer protection from infringement actions against its customers for the use of the same product, unless the adverse decision was accompanied by a specific, contested adjudication of non-infringement. Per the Court, “[s]uch a proposition would leave the patentee free to engage in the same type of harassment that the Supreme Court sought to prevent in Kessler, a result that would be inconsistent both with Kessler itself and with this court’s cases interpreting Kessler.”

The Court also rejected PersonalWeb’s contention that applying Kessler to voluntary dismissals with prejudice would contravene the public interest in the settlement of patent litigation. The Court said, “To the extent that a plaintiff wishes to settle an infringement action while preserving its rights to sue the same or other parties in the future, it can do so by framing the dismissal agreement to preserve any such rights that the defendant is willing to agree to.”