Verizon Successfully Moves to Sever and Stay Patent Infringement Action Based on "Customer Suit Exception"

August 31, 2012

Plaintiff Micro Enhanced Technology Inc. ("Micro") filed a patent infringement action against Videx, Inc., accusing Videx of infringing six patents. Micro subsequently amended its complaint to add two defendants, Verizon Wireless ("Verizon") and ITC Holdings Corp. ("ITC"), both of whom are customers of Videx. Verizon filed a motion to dismiss and a motion to sever and stay.

As the district court explained, Fed.R.Civ.P. 21 "gives the Court discretion to sever any claim against any party" and that "[c]onsistent with that rule, courts have recognized that when a patentee sues both the manufacturer and its customers, 'litigation against or brought by the manufacturer of infringing goods takes precedence over a suit by the patent owner against customers of the manufacturer.' Speed Spectrum Screening LLC v. Eastman Kodak Co., 657 F.3d 1349, 1357 (Fed. Cir. 2011)." The district court further explained that this doctrine is referred to as the "customer suit exception" and "is based on the recognition that a manufacturer is presumed to have a 'greater interest in defending its actions against charges of patent infringement [than a customer may]; and to guard against the possibility of abuse.' Kahn v. Gen. Motors Corp., 899 F.2d 1078, 1081 (Fed. Cir. 1989); see also Spread Spectrum Screening, LLC v. Eastman Kodak Co., 2010 WL 3516106, at *2-3 (N.D. Sept. 1, 2010) (severing customer defendants and transferring claims against manufacturer under the notion that the customers were 'peripheral' to the infringement allegations)." The district court also noted that district courts have broad discretion to control their dockets by staying proceedings, as long as the stay is not indefinite or otherwise excessive.

Turning to Verizon's motion, the district court found that Micro's infringement claims against the two customer defendants should be severed and stayed because the claims against Verizon and ITC were peripheral to the claims against Videx and that whatever happens in the suit against Videx will determine the outcome of the suit against Videx's customers, Verizon and ITC. As the district court explained, "[a]ccording to Plaintiff's Second Amended Complaint, Verizon [and ITC] 'purchases and uses Videx's Cyberlock systems' and 'Videx provides Cyberlock systems . . . to end-user customers, such as Verizon Wireless and ITC in the United States who, in turn, install and use the Cyberlock systems.'"

The district court found that these allegations establish that Verizon is a peripheral defendant and that Verizon's potential infringing conduct is entirely dependent on the Court's ruling with respect to Videx. The district court also found significant that no discovery had been conducted and therefore little judicial effort had been expended, both of which favored the stay of the case with respect to the two customer defendants.

Accordingly, the district court found that "[b]ecause Plaintiff's suit is brought primarily against Videx, which has a greater interest in defending against charges of patent infringement, and severance and stay will promote judicial economy by reducing discovery disputes, costs and motions, the Court grants Defendant's motion to sever and stay the claim against Verizon and ITC."

Micro Enhanced Technology Inc. v. Videx, Inc., et al., Case No. 11 C 5506 (N.D. Ill. Aug. 16, 2012)

The authors of www.PatentLawyerBlog.com are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. We represent inventors, patent owners and technology companies in patent licensing and litigation. Whether pursuing patent violations or defending infringement claims, we are aggressive and effective advocates for our clients. For more information contact Stan Gibson at 310.201.3548 or SGibson@jmbm.com.