Alert 03.14.24
Alert
Alert
04.25.24
Earlier this month, in a precedential opinion, the Federal Circuit addressed the unclean hands defense (among other issues), affirming the district court’s ruling that the patentee’s litigation conduct precluded the patentee’s infringement claims. The conduct at issue included (1) failing to disclose relevant patent applications, waiting until well after the close of discovery and dispositive motions to disclose the information, and (2) attempting to block discovery on the inventor’s prior art searches conducted during prosecution. Luv N’ Care, Ltd. v. Laurain, __ F. 4th __, No. 2022-1905, slip op. at 12 (Fed. Cir. Apr. 12, 2024). As discussed below, practitioners who follow suit and use unclean hands to seek a remedy for discovery misconduct should do so with caution if the underlying claim is a claim of law, rather than of equity.
Background
The litigation was initiated in the Western District of Louisiana in June 2016 by Luv N’ Care, Ltd., seeking a declaratory judgment that U.S. Design Patent D745,327 (’327 patent) was invalid, unenforceable, and not infringed. Luv N’ Care also brought claims against Lindsey Laurain and Eazy-PZ, LLC (EZPZ) under the Lanham Act and Louisiana’s Unfair Trade Practices and Consumer Protection Act.
After the complaint was filed, U.S. Patent No. 9,462,903 (’903 patent) issued. Laurain is the sole identified inventor on the patent, and she assigned the patent to EZPZ. Thereafter, Luv N’ Care amended its complaint, adding another request for declaratory judgment, seeking a finding that the ’903 patent was invalid, unenforceable and not infringed. Thereafter, EZPZ filed counterclaims against Luv N’ Care, claiming infringement of the ’327 and ’903 patents, along with claims of copyright, trademark, and trade dress infringement, violation of Louisiana’s Unfair Trade Practices and Consumer Protection Act, and unjust enrichment. Relevant to this article:
the district court determined that unclean hands barred EZPZ from obtaining relief on its then-remaining counterclaims. In particular, the court found that EZPZ engaged in litigation misconduct, including by failing to disclose certain patent applications during discovery, attempting repeatedly to block LNC from obtaining Ms. Laurain’s prior art searches, stringing LNC along during settlement negotiations, and providing evasive and misleading testimony.
EZPZ moved for an amendment of the court’s unclean hands ruling. The district court amended its opinion, and “for the first time, expressly addressed the issue of the necessary and immediate connection between EZPZ’s unclean hands and the relief EZPZ was seeking from the court. Based on its revised analysis, the court continued to find that unclean hands barred EZPZ from obtaining relief on its counterclaims.” EZPZ and Luv N’ Care appealed multiple findings of the district court, including an appeal of the unclean hands ruling.
The Federal Circuit reviewed the unclean hands ruling under the abuse of discretion standard. The Federal Circuit affirmed the holding, finding no clear error and noted that the court’s finding was supported by the record. The evidence supported a finding that EZPZ “‘by deceit and reprehensible conduct attempted to gain an unfair advantage’ in seeking the relief it requested in the litigation.” EZPZ’s actions were “‘offensive to the integrity of the [c]ourt,’ resulting in the district court’s ‘loss of confidence in [EZPZ’s] candor.’” Additionally, the Court found that the misconduct had an immediate and necessary connection to EZPZ’s claims of infringement of the ’903 patent, depriving Luv N’ Care and the district court the opportunity to understand the U.S. Patent and Trademark Office’s construction of claim terms that were important to the litigation and limiting Luv N’ Care’s ability to challenge validity and enforceability of the ’903 patent. The false and evasive testimony during both depositions and at trial “deprived [Luv N’ Care] of material information for consideration by its experts, for use in connection with dispositive motion practice, and as part of both its declaratory judgment claim and its defense against EZPZ’s counterclaims.” Moreover, the Court affirmed the district court’s finding that the misconduct bore a necessary and immediate connection to the ’327 patent and the trade dress claims, citing the district court’s explanation:
EZPZ’s design patent and trade dress infringement claims were pled at the outset, the subject of LNC’s written discovery, addressed at depositions and the subject of motion practice. After five years of litigation, EZPZ’s conduct with respect to its pursuit of the ’903 Patent infringement claim cannot be cordoned off from its conduct with respect to its pursuit of its other claims. For example, the Court’s finding that EZPZ knowingly deprived it of important information during claims construction cuts across all claims. The Court’s loss of confidence in a party’s candor cannot be overcome with respect to other theories of recovery.
Discussion
An important procedural issue that the Federal Circuit did not address is whether unclean hands should have been available as an infringement defense in the first instance and whether its availability was dependent on the remedy sought in the complaint, e.g., legal or equitable relief. EZPZ did not raise this question in its briefing to the court, and thus it was not addressed.
The genesis of unclean hands as applied to patent cases is in Keystone Driller Co. v. General Excavator Co., 290 U.S. 240 (1933). There, the Supreme Court affirmed a finding of unclean hands based on conduct designed to conceal a potential prior public use, which occurred in a prior litigation with a resulting determination that the patent was valid. Having succeeded in the earlier case where the prior use was concealed, the plaintiff filed the lawsuit at issue asserting the same patent again—but its concealment was exposed. The Supreme Court characterized the ill-gotten earlier victory as being used “in support, if not indeed as the basis” for the later case it was deciding and confirmed that such conduct constituted unclean hands.
Importantly, however, the Keystone case before the Supreme Court was brought as a bill in equity, and the Supreme Court relied on equity jurisprudence as the basis for affirming the unclean hands defense. Specifically, the Court stated:
As authoritatively expounded, the words and the reasons upon which it rests extend to the party seeking relief in equity. “It is one of the fundamental principles upon which equity jurisprudence is founded, that before a complainant can have a standing in court he must first show that not only has he a good and meritorious cause of action, but he must come into court with clean hands. He must be frank and fair with the court, nothing about the case under consideration should be guarded, but everything that tends to a full and fair determination of the matters in controversy should be placed before the court.’ Story’s Equity Jurisprudence, 14th ed., § 98
Although the distinction between legal and equitable issues was not readily apparent from the Supreme Court’s opinion, the plaintiff did not lose its rights to a remedy at law. Specifically, the Keystone Driller Supreme Court affirmed the Sixth Circuit’s decision that denied the plaintiff’s claim for equitable relief, but also remanded the case “with instructions to dismiss the bills of complaint without prejudice to the prosecution of suits at law, or, indeed, to subsequent actions in equity upon the other patents in suit.” General Excavator Co. v. Keystone Driller Co., 62 F.2d 48, 51 (6th Cir. 1932) (emphasis added). In other words, the outcome affirmed was that Keystone lost only its right to equitable relief (i.e., an injunction), but not its right to legal relief (i.e., plaintiff’s lost profits and/or a reasonable royalty). And the plaintiff only lost its rights to equitable relief for that particular case, not later cases. In fact, the same patent was asserted a third time, and the Supreme Court did not bar its enforcement based on unclean hands. Keystone Driller Co. v. Northwest Engineering Corp., 294 U.S. 42, 44 at n.2 (1935).
In SCA Hygiene, the Supreme Court relied in part on a similar law versus equity distinction to hold that the equitable defense of laches is not available for patent causes of action brought within the six-year statute of limitation and seeking damages as a legal remedy. SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, 580 U.S. 328, 333-36, 346 (2017) (“Before the separate systems of law and equity were merged in 1938, the ordinary rule was that laches was available only in equity courts. ... This case turns on the application of the defense to a claim for damages, a quintessential legal remedy. We discussed this subject at length in Petrella.” (internal citation and footnote omitted)); see also Petrella v. Metro-Goldwyn-Mayer, Inc., 572 U.S. 663, 686 (2014).
It is not entirely unrealistic for a similar argument to be advanced against the unclean hands defense in some future case. There, of course, is a strong textual counterargument is that 35 U.S.C. §282 expressly includes “unenforceability” as a defense to infringement and unclean hands is a form of unenforceability. See, e.g., J.P. Stevens & Co. v. Lex Tex Ltd., Inc., 747 F.2d 1553, 1561-62 (Fed. Cir. 1984) (quoting P.J. Federico, Commentary On The New Act to confirm that §282 includes “equitable defenses such as laches, estoppel and unclean hands”), overruled on other grounds. However, because the Rules of Civil Procedure and the court’s inherent authority provide various legal remedies to address litigation misconduct, there is a question of whether an equitable remedy should remain available in view of the existence of adequate legal remedies. Similarly, the issue of whether the remedy for unclean hands includes preclusion of just equitable relief (as happened in Keystone Driller) versus both legal and equitable relief (as happened in Luv N’ Care) was also not raised, so the Federal Circuit had no need to address that issue. However, it is better to be safe than sorry, and there is no reason to not seek relief for litigation misconduct under all available remedies.
Thus, practitioners considering unclean hands as a potential defense should also consider other available options as a hedge against an argument that unclean hands does not apply to bar a claim for legal relief (e.g., a case brought solely for money damages). For example, in a case with serious discovery misconduct, like the Luv N’ Care case, sanctions are also available under the Federal Rules of Civil Procedure and may be advanced alongside an unclean hands theory, providing an alternative basis for the same relief.
Likewise, practitioners that have traditionally looked to the discovery rules for sanctions to remedy discovery misconduct should consider advancing an unclean hands theory as well. In Luv N’ Care the conduct at issue was purely discovery misconduct, including unreasonably withholding the production of a related application relevant to claim construction until after the close of discovery, thwarting discovery into prior art searches conducted by the inventor, and offering deposition testimony contradicted by contemporaneous evidence. That misconduct was not just sufficient to preclude enforcement of the ’903 utility patent, but the Federal Circuit affirmed the district judge’s decision to bar enforcement of the separate design patent and trade dress rights. That is an extremely broad remedy—essentially case dispositive for the patentee in Luv N’ Care. The standard applied was the traditional equitable one: “[a] court may find unclean hands when the misconduct of a party seeking relief ‘has immediate and necessary relation to the equity that he seeks in respect of the matter in litigation ... for such violations of conscience as in some measure affect the equitable relations between the parties in respect of something brought before the court for adjudication.’” Notably, the issue was not resolved using Federal Rules of Civil Procedure, which tend to use dismissal of a cause of action as a “last resort” for discovery misconduct. Moore’s Federal Practice – Civil §37.50[2][a]. Moreover, the remedy in Luv N’ Care was broad (indeed devastating), as it reached all the asserted intellectual property rights. Therefore, an unclean hands defense may offer an alternative basis for dismissing a claim based on discovery misconduct above and beyond the mechanisms available under the civil procedure rules.