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Zenith Electronics Corporation, and Elo Touchsystems, Inc. v. Exzec, Inc.
Citations: 182 F.3d 1340; 1999 WL 455864Docket: 98-1288
Court: Court of Appeals for the Federal Circuit; July 12, 1999; Federal Appellate Court
The case involves Zenith Electronics Corporation and Elo Touchsystems, Inc. (plaintiffs) against Exzec, Inc. (defendant) concerning allegations of unfair competition and patent infringement. Exzec claimed that Elo Touch made misleading statements to potential customers regarding Exzec's product, suggesting it infringed Elo Touch's patents and could not be made non-infringing. Exzec alleged violations of the federal Lanham Act and state unfair competition laws based on these statements. Elo Touch sought dismissal of the claims, arguing that federal patent and antitrust laws preempted the Lanham Act and state laws in this context. The U.S. District Court for the Northern District of Illinois denied the dismissal and certified the order for immediate appeal. The Federal Circuit concluded that Exzec's claims are not completely barred by patent or antitrust laws, noting that a patentee's protections could be lost if actions are taken in bad faith. The determination of whether Elo Touch acted in bad faith is left for the trial court. Consequently, the Federal Circuit affirmed the district court's judgment denying the motion to dismiss. The background involves patent infringement allegations against Exzec's "SureTouch" system, with Zenith as the patent assignee and Elo Touch as the exclusive licensee. Exzec filed two counterclaims against Elo Touch for unfair competition under the Lanham Act, 15 U.S.C. § 1125(a), and Illinois common law. Exzec contends that Elo Touch knowingly misrepresented that Exzec’s SureTouch system infringes the Zenith patents, which are limited to touch panels using surface acoustic wave (SAW) technology, while Exzec's technology employs shear technology and does not infringe. Exzec alleges that Elo Touch made false statements to potential customers, claiming that Exzec could not produce a non-infringing acoustic touch panel system. In its claims, Exzec specifically asserts that Elo Touch's false representations of infringement and threats of legal action were intended to confuse potential customers, thereby diverting them from Exzec. This conduct is characterized as unfair competition in Illinois. Elo Touch responded by arguing that mere allegations of patent infringement do not constitute unfair competition under Section 43(a), citing several district court cases that distinguish between false representations of infringement and claims asserting exclusive sourcing due to a patent. These cases clarify that while claims of infringement alone may not be actionable, claims that a competitor cannot design around a patent are actionable under the Lanham Act. False patent claims do not constitute unfair competitive activity under the Lanham Act, as established in Chromium Industries, Inc. v. Mirror Polishing, Plating Co. Inc. However, a seller can be liable under § 43(a) if they falsely create the impression of being the exclusive source of a product by exaggerating patent scope. The distinction is made between claims of infringement and claims that a competitor cannot design around a patent, with the latter being more harmful to competition. The district court found that Exzec's pleading included viable § 43(a) claims based on allegations that Elo Touch falsely informed potential customers that Exzec could not produce a non-infringing device. Regarding Exzec's state common law unfair competition claim, Elo Touch argued it was essentially tortious interference with prospective economic advantage, claiming "the privilege of competition" as a defense. The court agreed that Exzec sufficiently pleaded the elements of this tort, noting that the "privilege" defense does not apply if bad faith is present, which Exzec alleged against Elo Touch. After the denial of its motion to dismiss, Elo Touch sought reconsideration, claiming that the § 43(a) and state unfair competition claims were preempted by federal patent and antitrust law, referencing decisions such as Pro-Mold and Tool Co. v. Great Lakes Plastics, Inc. The district court denied this motion, distinguishing Exzec's allegations from those in the cited cases and emphasizing Elo Touch's false representations about Exzec's capabilities. Elo Touch's argument that Exzec's counterclaims were preempted due to a lack of bad faith was also rejected, with the court highlighting that Exzec's allegations indicated Elo Touch acted in bad faith. The district court denied Elo Touch's motion for reconsideration but granted its alternative motion to certify the order for immediate appeal under 28 U.S.C. § 1292(b), finding that the "preemption" issue constitutes a controlling question of law with substantial grounds for differing opinions. The court expressed concern that Exzec's unfair competition claims might be preempted by federal patent or antitrust laws, referencing the Pro-Mold and Schreiber decisions, which suggest that unfair competition claims tied to an invalid patent may be preempted since federal law provides adequate remedies. Exzec's counterclaims assert that Elo Touch falsely misrepresented its ability to design around Zenith's patent, indicating potential antitrust remedies could apply. Following this, Elo Touch petitioned for permission to appeal, which was granted. The primary issue for appeal is whether Exzec's anticompetitive counterclaims are preempted by federal patent or antitrust laws, particularly when a patentee informs customers about potential infringement by a competitor. The court also noted that while Elo Touch raised additional issues, these will not be considered in the interlocutory appeal, and it clarified its jurisdiction, noting that the original patent claims are no longer at issue due to a stipulation that dismissed them with prejudice prior to the motion regarding Exzec's counterclaims. The court has determined it has jurisdiction over the interlocutory appeal based on 28 U.S.C. 1292(c)(1) and 1295(a)(1), asserting that its exclusive jurisdiction over patent law matters is unaffected by the dismissal of patent claims with prejudice. The jurisdiction of the district court, which arose from patent infringement claims under 28 U.S.C. 1338(a), dictates the path of appeal, affirming that it lies exclusively with this court, as supported by Abbott Lab. v. Brennan. The distinction is made with Gronholz v. Sears, Roebuck and Co., where a dismissal without prejudice was deemed an amendment rather than a merits adjudication. In contrast, the current case involves a merits adjudication due to the dismissal of claims with prejudice, thus maintaining the district court's jurisdiction. Regarding the Lanham Act 43(a) claim, the district court's concern about potential preemption by patent or antitrust laws is noted, but the issue is framed as one of conflict between federal statutes rather than state versus federal law. The court's task is to identify and resolve any conflicts between applicable federal laws, adhering to principles of statutory construction that aim to give effect to both statutes wherever possible, unless Congress specifies otherwise. The excerpt addresses the potential conflict between a 43(a) claim under the Lanham Act and existing patent or antitrust laws, emphasizing the need to resolve such conflicts to maintain the integrity of both legal frameworks. It cites relevant case law, specifically Midwest Industries, Inc. v. Karavan Trailers, Inc., to assert that Federal Circuit law governs these issues. The district court recognized Exzec's 43(a) claim concerning allegations that Elo Touch made false statements to potential customers regarding Exzec's product's infringement of Zenith patents and its ability to design around them. Exzec claims Elo Touch misrepresented both the nature of the patent infringement and Exzec's capability to create a non-infringing product. The pertinent section of 43(a) outlines the liability for false or misleading representations in commerce, which form the basis for claims such as false advertising and product disparagement. Substantial agreement exists among various circuit courts regarding the elements required to establish claims under Section 43(a) of the Lanham Act, despite variations in wording. A plaintiff, such as Exzec in this case, must demonstrate: (1) the defendant, Elo Touch, made a false or misleading statement of fact in commercial advertising regarding the plaintiff's goods or services; (2) this statement deceives or is likely to deceive a significant portion of the intended audience; (3) the deception is material and likely influences purchasing decisions; (4) the defendant caused the statement to enter interstate commerce; and (5) the statement results in actual or probable injury to the plaintiff. In this interlocutory appeal, it is assumed that Exzec has adequately pled the necessary elements for a Section 43(a) claim. The district court's concerns stem from earlier cases, particularly the Pro-Mold decision, which involved a patent infringement suit where the counterclaim for unfair competition was based on the assertion of inequitable conduct in obtaining a patent. The court found that inequitable conduct does not provide a legal basis for a Section 43(a) claim, emphasizing that a specific statutory violation must be cited to support a federal unfair competition claim. The existing remedy for inequitable conduct is the patent's unenforceability, and if warranted, attorney fees can be awarded. Additionally, the Supreme Court has recognized that enforcing a patent obtained through fraud on the Patent Office may violate the Sherman Act, but federal unfair competition law is not an appropriate remedy for inequitable conduct. Pro-Mold establishes that while a patent obtained through inequitable conduct is not invalidated, courts will not enforce it based on equitable principles. Defendants in infringement suits can seek to have such patents declared unenforceable or, in some cases, hold the patent holder liable for antitrust violations. However, a lawsuit for unfair trade practices under the Lanham Act is not an appropriate remedy for patents acquired through inequitable conduct. In this context, Exzec's counterclaim against Elo Touch is focused on alleged false statements made to potential customers regarding Exzec's product infringement, rather than on a defense based on the patent's unenforceability. The Schreiber opinion, which was referenced in this case, similarly dismissed a Lanham Act claim based on a patentee's correspondence accusing a party of infringement, asserting that such conduct is akin to initiating a patent infringement suit. The Schreiber court noted that infringement notices often precede lawsuits and can limit recoverable damages if not issued. It argued against the notion that bad faith infringement suits do not violate the Lanham Act while bad faith notices do. However, it differentiated that while a lawsuit is not covered by Section 43(a), communication to customers might be, a nuance the Schreiber court did not fully appreciate. The Pro-Mold statement regarding adequate remedies under patent law does not imply that a Section 43(a) claim for marketplace misconduct is barred by patent or antitrust laws. It merely indicates that the claimant was not without a remedy under patent law. The existence of conduct actionable under multiple federal laws does not inherently create a conflict, and the principle for addressing potential conflicts is to allow each law to operate effectively. Exzec's 43(a) claim is not precluded by the court's ruling in Concrete Unlimited, which involved Cementcraft counterclaiming for unfair competition against Concrete Unlimited, alleging the enforcement of a fraudulently obtained patent. The district court had ruled in favor of Cementcraft, but this court reversed that decision, emphasizing that Concrete Unlimited had the right to enforce its patent rights, which were presumed valid until declared otherwise. It clarified that enforcing patent rights, including threats of lawsuits, does not constitute unfair competition. The court noted that Concrete Unlimited's situation, similar to Pro-Mold, involved direct threats and actual infringement suits rather than marketplace assertions of infringement. Furthermore, the applicability of 43(a) was not addressed in Concrete Unlimited, leaving Exzec's claim intact. The ruling is consistent with recent cases, Dow Chemical Co. v. Exxon Corp. and Hunter Douglas, Inc. v. Harmonic Design, Inc., which explored conflicts between patent laws and unfair competition claims but focused on state law preemption rather than direct conflicts among federal laws. Therefore, neither Pro-Mold nor Concrete Unlimited bars Exzec's 43(a) claim based on patent or antitrust regulations. State law claims related to unfair competition and tortious interference with contractual relations are not preempted by patent laws, even when based on allegations of inequitable conduct in patent procurement, as established in Dow Chemical. The court ruled that such claims do not conflict with patent law objectives and incorporate additional elements beyond those found in patent remedies. This decision distinguished previous case law, specifically Concrete Unlimited, by highlighting that the latter concerned good faith patent enforcement, while Dow Chemical involved allegations of bad faith misconduct by the patentee. Furthermore, the analysis of whether a Section 43(a) claim could conflict with federal antitrust laws reveals no such irreconcilable conflict. The district court noted that antitrust claims could offer remedies similar to those provided under patent law, and emphasized that both the Lanham Act and antitrust laws aim to promote fair competition. Therefore, allowing the 43(a) claim does not undermine the purpose of antitrust laws, as they share a common goal of fostering competition. The elements of a federal antitrust claim under the Sherman Act differ significantly from those of a Lanham Act § 43(a) claim. A Sherman Act § 2 claim requires identifying the relevant market and demonstrating monopoly power within that market, which comprises two elements: (1) possession of monopoly power and (2) willful acquisition or maintenance of that power, as opposed to growth from superior products or business acumen. Recognizing a § 43(a) claim will not undermine the intent of antitrust laws. The document also addresses whether Exzec's § 43(a) claim could be obstructed by patent laws, noting the compatibility of patent and antitrust laws in promoting innovation and competition. Conflicts arise when a patent infringer attempts to use antitrust law to challenge a patentee's right to enforce their patent. Courts have sought to balance these interests by establishing thresholds for antitrust suits against patentees enforcing their patents. For instance, in Handgards, the Ninth Circuit demanded clear and convincing evidence of bad faith for antitrust claims arising from a patentee's infringement lawsuits. Additionally, recent rulings indicate that a patentee may lose antitrust immunity if it can be shown that the patent was obtained through fraud or if the infringement suit is deemed a sham. Although the distinctions between the Lanham Act and patent laws are not as pronounced as those between patent and antitrust laws, a tension exists, particularly regarding the conditional privilege of a patentee's statements about patent rights, which are actionable only if made in bad faith. Federal patent law protects patentholders from liability for publicizing their patents in the marketplace unless the plaintiff demonstrates that the patentholder acted in bad faith. Courts have affirmed the right of patent owners to enforce their patents, including threatening potential infringers with litigation, as long as they hold a good faith belief in the accuracy of their claims. Communications regarding patent rights are considered proper when the patentholder is acting in good faith. This principle is supported by various precedents, which emphasize that notifying potential infringers of their rights is essential for the enforcement of patents and is not inherently illegal. The legal framework for this practice is found in 35 U.S.C. § 287, which allows patentholders to inform the public of their patents through marking and requires specific notice to infringers for damage recovery. To hold a patentholder liable under the Lanham Act (specifically section 43(a)), a showing of bad faith in their marketplace activities is necessary. This requirement is an additional element beyond what the Lanham Act typically stipulates, aligning with the notion that bad faith must be established to avoid preemption by patent law. The addition of this bad faith requirement enhances the balance between the rights of patentees and the objectives of the Lanham Act, ensuring that there is no conflict between the two statutes while allowing patentholders to comply with both. Patent law is not undermined by bad faith marketplace statements regarding patents, as such actions do not advance the law's objectives. Infringement actions executed in bad faith do not support the goals of patent or antitrust law, which include incentivizing invention, promoting full disclosure, and protecting public domain ideas. Recognizing a Lanham Act § 43(a) claim for these actions would not negatively impact patent law objectives. Instead, it would align with the Lanham Act's aim to prevent deception and unfair competition. The document addresses two allegedly false statements: that Exzec's product infringes Zenith's patents and that Exzec cannot create a non-infringing product. It argues against drawing a distinction between these statements for liability under § 43(a), as both can harm competition if made in bad faith. Defining what constitutes bad faith will depend on the specifics of each case, with clear indicators being a patentee's knowledge of a patent's invalidity or the inability to design around it. Statements claiming a competitor cannot design around a patent are particularly suspect, as they are difficult to verify and imply bad faith more readily. Thus, either statement, if proven to be made in bad faith, can be actionable under § 43(a) without conflicting with patent or antitrust laws. Exzec's state-law tortious interference claim is examined for potential preemption by patent and antitrust laws. Previous rulings in Dow Chemical and Hunter Douglas clarify that state tortious interference claims are not preempted by patent laws if bad faith is alleged and proven. In Dow Chemical, it was established that claims could arise from a patent holder's bad faith actions, such as knowingly asserting an unenforceable patent. Hunter Douglas reinforced that publicizing a patent in bad faith allows for state tort claims to proceed without preemption. Thus, bad faith is a necessary element for Exzec's claim to avoid preemption by patent law. Regarding federal antitrust law, the analysis indicates that Exzec's state tort claim is not preempted. The court observes that preemption can occur through explicit, field, or conflict means, but finds no evidence of such preemption in this case. The court references California v. Arc Am. Corp., which supports the notion that traditional state-regulated business practices, like unfair competition, are not preempted by federal antitrust laws. Elo Touch did not provide a convincing argument for preemption. In summary, the court concludes that Exzec's state unfair competition claims are not barred by patent or antitrust laws, but emphasizes the necessity of alleging and proving bad faith in such claims. The district court found that Exzec had sufficiently alleged bad faith. The district court's decision to deny the motion to dismiss is affirmed, and the case is remanded for further proceedings consistent with this opinion. Each party is responsible for its own costs. For this appeal, Elo Touch is recognized as the patent holder, as there is no contention regarding its status as an exclusive licensee. The district court's main concern involved potential conflicts with federal antitrust laws, alongside issues related to patent laws, which is a significant argument in Elo Touch's appeal. It is noted that neither party nor the district court has thoroughly analyzed the relevant provisions of 43(a) or the necessary elements for a claim based on it in relation to Exzec's allegations. However, recent district court cases have acknowledged specific 43(a) claims related to marketplace representations of patent infringement. The determination of whether Exzec's allegations meet the requirements of a 43(a) claim is left for the parties and the district court to explore further.