Mary Siceloff

The California Supreme Court in the 2008 case, Edwards v. Arthur Andersen LLP, ruled that a provision in an employment agreement that prevented an employee from competing with his former employer following the termination of his employment was an invalid restraint on trade in violation of section 16600 of the California Business and Professions Code.  The Court held that subject to certain statutory exceptions, i.e., to protect the value of goodwill in connection with the sale of one’s business interest, section 16600 invalidated all contractual provisions that constituted a restraint on an employee’s ability to practice his or her trade or profession.  What the Court has not addressed since that 2008 decision was whether provisions that acted as a restraint on trade in business contracts (i.e. exclusive distribution agreements, franchise agreements, etc.) would suffer a similar fate.    On August 3, 2020, the California Supreme Court issued its decision in Ixchel Pharma, LLC v. Biogen, Inc., and ruled that non-compete provisions in business to business contracts were not per se invalid, but rather subject to a rule of reasonableness.

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Imagine litigating an infringement case for two years, and after a nine day jury trial, obtaining a jury’s verdict that says you’ve established infringement and awards your client $5,000,000.  Then you realize that the jury has awarded your client $0 in actual damages, and the entire $5,000,000 sum is for punitive damages.  The Ninth Circuit in an unpublished opinion in Monster Energy Company v. Integrated Supply Network, LLC (July 22, 2020), reiterated that a party is not entitled to punitive damages without a finding of actual damages.

Monster Energy Company is a well-known energy drink giant that does a lot of sponsorship in the motorsports area with its distinctive green M logo.  In 2017, it sued Integrated Supply Network for infringement of its Monster marks.  Integrated Supply is a Florida automotive-supply company that sold various Monster Mobile and ISN Monster lines of goods that Monster Energy Company claimed infringed on its marks.

In November 2018, after a nine day jury trial, Monster Energy Company received a favorable jury verdict that found that ISN had infringed on some of its marks and trade dress, that the infringement was not willful and awarded Monster Energy Company $0 in actual damages. The jury found, however, that Monster Energy Company was entitled to $5,000,000 in punitive damages.  After post-trial motions, the trial court, perhaps in an attempt to fix this defect, awarded Monster Energy Company $1 in nominal damages in addition to the $5 Million in punitive damages.

Both sides appealed various rulings by the trial court to the Ninth Circuit.  This article will focus only on the issue of the interplay between actual damages and punitive damages.

Monster Energy Company appealed the denial of its motion for new trial on actual damages by claiming that the jury’s verdict awarding $0 in actual damages was not supported by the evidence.  The Ninth Circuit rejected this argument and concluded that the “verdict reflects the jury’s determination that [Monster Energy Company] failed to carry its burden of proving the amount of damages if any.”  The Ninth Circuit continued by further rejecting an argument that the award of $5,000,000 in punitive damages showed that the jury must have made a mistake with regard to its finding of $0 in actual damages.  The Ninth Circuit reasoned, “[a]ny tension between the jury’s punitive and actual damages awards does not lead to the conclusion that the actual damages verdict had no reasonable basis.”  Thus, the Ninth Circuit affirmed the lower court’s denial of Monster Energy Company’s motion for a new trial on the issue of actual damages.

The Ninth Circuit later turned its attention to Integrated Supply’s appeal of its motion to vacate the punitive damages award, which was denied by the trial court.  The Ninth Circuit held that the jury’s findings of $0 in actual damages precluded an award of punitive damages to Monster Energy Company: “Because ‘actual damages are an absolute predicate for an award of exemplary or punitive damages’ in California and the jury awarded $0 in actual damages, the punitive damages award should have been vacated.”

The Ninth Circuit continued by recognizing that the trial court’s attempt to fix the issue by awarding $1 in nominal damages to Monster Energy Company was not proper.  The Ninth Circuit concluded, “Moreover, although an award of nominal damages may be mandatory in a 42 U.S.C. §1983 in some circumstances [i.e. civil rights actions], the district court erred in overriding the jury’s $0 damages verdict and awarding $1 in nominal damages in this case.”  The Ninth Circuit ordered that the award of nominal and punitive damages be vacated.  However, given that the Ninth Circuit was remanding the case for the trial court to address other issues raised by Monster Energy Company, specifically its unfair competition law claim and its Lanham Act disgorgement claim, there could be a later basis for an award of punitive damages.  Nevertheless, that would be up to the trial court to determine after further litigation between the parties.

The result in the Monster Energy Company case is a reminder that plaintiffs in infringement actions must focus on establishing actual damages if they have any hope of holding on to an award of punitive damages.  Otherwise, the time and expense incurred in litigating for a number of years could all be for naught.

An unpublished decision from the Northern District of California emphasizes how important it is for attorneys to follow patent local rules.

Patent local rules are rules that many federal district courts have for patent infringement cases. These rules supplement the regular local rules for that court and the Federal Rules of Civil Procedure, and allow the courts that have a lot of patent infringement cases to more efficiently manage those cases. Patent local rules are also helpful to the parties and their counsel, as they provide a standard structure and some certainty to the litigation process.

Patent local rules usually include due dates for the plaintiff to disclose its infringement contentions and the defendant to disclose its invalidity contentions; whether a Markman hearing needs to be held, and if so, what terms need to be construed, the due date for the parties to propose claim terms and to exchange claim constructions, and the date of the Markman hearing; and whether the court or the parties will have technical experts testifying at the Markman hearing. The Northern District of California has long had patent local rules that address all of these issues and more. In most courts, the patent local rules provide that the parties may modify the rules with approval of the district court judge.

If a party fails to follow the patent local rules, the rules may provide that the district court may sanction the party, including by striking the contentions, or, in more serious cases, striking claims. That is exactly what happened in Xiaohua Huang v. MediaTek USA, Inc., 2020 U.S. App. LEXIS 17482. It’s hard to believe that such a case would make it all the way to the Federal Circuit, but it did.

In MediaTek, a patent owner in pro per filed a suit in the Northern District of California for patent infringement against defendant MediaTek. The patents-in-suit were two patents for memory technology used in semiconductor chips. The patent owner served infringement contentions before the case management conference was held. At the case management conference, MediaTek told the court that the contentions were premature and improper. The court informed the patent owner that he would have to follow the patent local rules or risk the case being dismissed.

Twice more, the patent owner served the same infringement contentions on the defendant, despite MediaTek offering to allow the patent owner time to amend. After the third set of deficient infringement contentions, MediaTek moved to strike the contentions as not compliant with the patent local rules and to dismiss the action with prejudice.

The district court granted MediaTek’s motion, but provided the patent owner leave to amend the infringement contentions, and again warned the patent owner that non-complaint contentions would likely result in a dismissal of the case with prejudice. The patent owner served a fourth set of infringement contentions, containing the same defects as the prior sets. The district court again found the contentions insufficient, and, this time, dismissed the case with prejudice.

On appeal, the Federal Circuit Court of Appeals affirmed the district court’s decision. The court explained that the patent owner’s infringement contentions were defective because thr claim chart did not tie the claim limitations to the features of the accused products, but instead tied the claim limitations to the drawings in the patent itself. The patent owner also failed to set forth the contentions with the required specification. Thus, the contentions were not proper and did not comply with the patent local rules.

The court explained that it “gives broad deference” to the district court’s patent local rules whose purpose was to help the district court manage its cases. The court held that the district court had not abused its discretion in striking the infringement contentions after the patent owner had repeatedly failed to correct the deficiencies in the contentions. The appellate court further held that the district court had not abused its discretion in dismissing the case.