Inherent Power Sanction of Summary Judgment for Declining to Pay Attorney’s Fees Ordered as a Prerequisite to the Party’s Supplementing Its Claims (a Requirement of a Local Rule of Court) Reversed — Bad Faith Violation of Local Rule Essential

Anticancer, Inc. v. Pfizer, Inc., 2014 U.S. App. LEXIS 20059 (Fed. Cir. Oct. 20, 2014):

This litigation concerns patents owned by AntiCancer, Inc. on technology related to the imaging of gene expression using a green fluorescent protein linked to a gene promoter. The fluorescent protein is derived from a species of green-glowing jellyfish named Aequorea victoria. The patented inventions are described as useful for drug discovery and evaluation in cancer control and treatment.

Appeal is from the district court's summary judgment of noninfringement entered not on the substantive merits of any issue raised [*2]  in the complaint, but on a procedural aspect at the threshold of the litigation arising from application of the Patent Local Rules of the Southern District of California. The district court imposed a fee-shifting sanction as a condition of permitting AntiCancer to supplement the Preliminary Infringement Contentions that the district court found defective under Patent Local Rule 3.1. The court ordered that AntiCancer may supplement its Contentions, provided that it concurrently pay the attorney fees and costs incurred by the defendants in connection with their motion for summary judgment related to the Contentions. AntiCancer objected to this condition, and the district court entered summary judgment of noninfringement and duly dismissed the complaint with prejudice. For the reasons we shall discuss, we conclude that the fee-shifting condition was improperly imposed; the judgment based thereon is vacated.

Background

On January 19, 2011, AntiCancer filed a complaint against Pfizer, Inc. in the United States District Court for the Southern District of California, with counts for breach of license agreement, breach of the duty of good faith and fair dealing, and unjust enrichment. The complaint recited [*3]  that AntiCancer, in a contractual arrangement initially with Wyeth Pharmaceuticals, later acquired by Pfizer, disclosed technology relating to fluorescent proteins and their DNA linkage and imaging in mammals, and the technology's use in cancer drug evaluation and treatment.

After the complaint was filed, AntiCancer came upon several publications authored by scientists at Pfizer and Crown Bioscience, Inc. AntiCancer stated that these publications show the use of AntiCancer's technology and infringement of AntiCancer's patents, and requested permission to amend the complaint by adding counts for patent infringement and adding Crown Bioscience as a defendant. The district court granted the motion on November 8, 2011.

On September 21, 2011, the district court held a case management conference, and on that same date the court issued a "Case Management Conference Order Regulating Discovery and Other Pretrial Proceedings," AntiCancer, Inc. v. Pfizer Inc., No. 11CV107 (S.D. Cal. Sept. 21, 2011), ECF No. 13. The Order provided that: "On or before November 14, 2011, Plaintiff shall serve on all parties a 'Disclosure of Asserted Claims and Preliminary Infringement Contentions,'" in accordance [*4]  with the Patent Local Rules. Id. at 1-2. The Order also set the discovery schedule, with claim construction discovery to be completed by March 26, 2012, fact discovery to be completed by September 4, 2012, and expert discovery to be completed by October 29, 2012. Id. at 8, 11.

On November 9, 2011, AntiCancer filed a First Amended Complaint adding Crown Bioscience as a defendant and adding patent infringement counts. AntiCancer filed its "Disclosure of Asserted Claims and Preliminary Infringement Contentions" on November 14, 2011, as required by the Case Management Conference Order. This document drew primarily on the scientific publications of Pfizer and Crown Bioscience, and consisted of 22 pages, including 18 pages of patent claim charts. The Contentions stated that AntiCancer "reserves the right to amend or supplement its identification of asserted claims, accused instrumentalities, and priority dates, as well as its claim charts, based on further investigation and discovery." J.A. 83-84. On January 31, 2012, the deadline for completing fact discovery was extended to December 4, 2012, and the deadline for expert discovery was extended to January 29, 2013. Am. Case Mgmt. Conf. Order, AntiCancer (S.D. Cal. [*5]  Jan. 31, 2012), ECF No. 32.

On March 12, 2012, Pfizer filed a motion for summary judgment on the patent infringement counts, stating that the Preliminary Infringement Contentions were defective because the "charts are missing claim limitations for each and every claim of each asserted patent, and/or do not identify specifically how Pfizer allegedly practiced each element of the asserted claims." Pfizer's Notice of Mot. & Mot. Summ. J. at 1, AntiCancer (S.D. Cal. Mar. 12, 2012), ECF No. 38. Crown Bioscience joined this motion. AntiCancer responded that its Preliminary Infringement Contentions complied with the Patent Local Rules and that the presentations in the claim charts associated the claim elements or steps with a designated portion of the scientific publications of Pfizer and Crown Bioscience. AntiCancer also filed with its opposition brief the declaration of Dr. Robert M. Hoffman, the founder and President of AntiCancer, who explained how a person skilled in this field of science would understand the claim terms and their relation to the Pfizer and Crown Bioscience publications.

The district court found the information in the claim charts deficient as to three claim elements, [*6]  and authorized AntiCancer to supplement its Preliminary Infringement Contentions but required that AntiCancer concurrently pay the defendants' attorney fees and costs related to the summary judgment motion.1 The district court gave the defendants fourteen days in which to submit an accounting of their attorney fees and costs and gave AntiCancer fourteen days thereafter in which to file amended Preliminary Infringement Contentions and concurrently pay the defendants' attorney fees and costs, or to "object [to the] conditions for amendment, in which event summary judgment will be granted in Defendants' favor." Dist. Ct. Op. at 15-16. AntiCancer objected to the fees/costs condition,2 and the district court entered summary judgment of noninfringement.3

1   AntiCancer, Inc. v. Pfizer Inc., No. 11CV107 (S.D. Cal. June 1, 2012), ECF No. 63 ("District Court Opinion") (conditional order granting summary judgment of noninfringement).

2   Notice of Objection to Court's Conditions for Amendment, AntiCancer (S.D. Cal. June 29, 2012), ECF No. 73.

3   AntiCancer (S.D. Cal. July 2, 2012), ECF No. 74 (order entering summary judgment on patent infringement claims).

On July 16, 2012, the district court entered a Judgment in a Civil Case, stating "IT IS ORDERED AND ADJUDGED that summary [*7]  judgment is hereby granted in favor of Defendant Crown Bioscience, Inc. on the fourth and fifth claims for relief in AntiCancer's Second Amended Complaint." AntiCancer (S.D. Cal. July 16, 2012), ECF No. 80.4

4   We note that the fourth claim for relief in AntiCancer's Second Amended Complaint is against Pfizer only, and the fifth claim for relief is against Pfizer and Crown Bioscience. Second Am. Compl. 9-10, AntiCancer (S.D. Cal. June 22, 2012), ECF. No. 72.

The parties then settled the contract claims and filed a "Joint Motion and Stipulation of Voluntary Dismissal, with Prejudice." AntiCancer (S.D. Cal. Sept. 26, 2012), ECF No. 85. Upon the parties' joint stipulation, the district court dismissed AntiCancer's Second Amended Complaint with prejudice.5 AntiCancer then filed its Notice of Appeal, wherein AntiCancer stated it was appealing "from the judgment entered in this action on July 16, 2012."6

5   Order Granting Joint Mot. & Stipulation of Voluntary Dismissal, with Prejudice, AntiCancer (S.D. Cal. Sept. 28, 2012), ECF No. 86.

6   Notice of Appeal, AntiCancer (S.D. Cal. Oct. 26, 2012), ECF No. 87.

AntiCancer argues on appeal that the fee-shifting condition and its consequences was a sanction, that [*8]  the sanction was unwarranted, and that the summary judgment based on the condition was improper. AntiCancer states that it provided all information available to it at the time it filed its Contentions, that it complied with the Patent Local Rules, that there was no bad faith or other sanctionable behavior, and that further details of the defendants' practice of the claimed inventions required discovery of the unpublished laboratory procedures of Pfizer and Crown Bioscience. AntiCancer also states that its pleadings met the requirements of the Federal Rules of Civil Procedure and that, even without supplementation, its Preliminary Infringement Contentions complied with the Patent Local Rules. AntiCancer appeals from the requirement for payment of the defendants' attorney fees and costs as a condition for continuing the litigation.

Discussion

Standard of Review

The grant of summary judgment is reviewed without deference. See Flex--Rest, LLC v. Steelcase, Inc., 455 F.3d 1351, 1357 (Fed. Cir. 2006). Summary judgment is appropriate when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).

A district court's application of its local rules is reviewed on the standard of abuse of discretion. See O2 Micro Int'l Ltd. v. Monolithic Power Sys., Inc., 467 F.3d 1355, 1366-67 (Fed. Cir. 2006) [*9] . The district court's exercise of its disciplinary authority is reviewed on the standard of abuse of discretion. Chambers v. NASCO, Inc., 501 U.S. 32, 55, 111 S. Ct. 2123, 115 L. Ed. 2d 27 (1991); see also In re Keegan Mgmt. Co. Sec. Litig., 78 F.3d 431, 436 (9th Cir. 1996). Abuse of discretion may be established when the court commits a clear error of judgment in weighing the relevant facts or exercises its discretion based upon an error of law or clearly erroneous factual findings. See, e.g., Erico Int'l Corp. v. Vutec Corp., 516 F.3d 1350, 1353 (Fed. Cir. 2008); United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009).

In O2 Micro, this court discussed when and whether Federal Circuit law or regional circuit law applies to issues arising under patent local rules, and concluded that it depends on whether the issue is of substantive patent law or of regional procedure. 467 F.3d at 1364 ("There is an important distinction between local rules of general applicability, which by definition are not unique to patent law and where we apply regional circuit law, and local rules that only apply to patent cases." (footnote omitted)).

The question of whether a filing under the Patent Local Rules needs supplementation may involve substantive patent law, but the question of whether fee-shifting is an appropriate condition for such supplementation is primarily a matter of discipline under the court's inherent authority, not substantive patent law. See Baldwin Hardware Corp. v. FrankSu Enter. Corp., 78 F.3d 550, 560-62 (Fed. Cir. 1996); see also Monsanto Co. v. E.I. Du Pont de Nemours & Co., 748 F.3d 1189, 1196 (Fed. Cir. 2014).

The federal courts have the inherent powers that "'are necessary to the exercise of all others.'" Roadway Express, Inc. v. Piper, 447 U.S. 752, 764, 100 S. Ct. 2455, 65 L. Ed. 2d 488 (1980) (quoting United States v. Hudson, 11 U.S. 32, 34, 3 L. Ed. 259 (1812)). The Supreme Court has observed that action "in bad faith, vexatiously, wantonly, or for oppressive reasons" may incur sanctions [*10]  in the form of attorney fees under the court's inherent powers. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258-59, 95 S. Ct. 1612, 44 L. Ed. 2d 141 (1975) (quotation omitted). Invocation of the district court's inherent powers is a matter of regional circuit law, rather than Federal Circuit law. See Monsanto, 748 F.3d at 1196 ("When reviewing the imposition of sanctions under a district court's inherent powers, we apply the law of the regional circuit in which the district court sits . . . .").

Under Ninth Circuit precedent, "[b]efore awarding sanctions under its inherent powers . . . the court must make an explicit finding that counsel's conduct 'constituted or was tantamount to bad faith.'" Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997) (quoting Roadway Express, 447 U.S. at 767); see also Yagman v. Republic Ins., 987 F.2d 622, 628 (9th Cir. 1993) ("Courts may not invoke these [inherent] powers without a 'specific finding of bad faith.'" (quoting United States v. Stoneberger, 805 F.2d 1391, 1393 (9th Cir. 1986))). This rigid imposition that district courts make an explicit finding of bad faith is justified under Ninth Circuit law because of the "very potency [of] inherent powers." Yagman, 987 F.2d at 628.

Here, the district court's conditional fee-shifting sanction appears to be grounded in the court's inherent powers relating to the "general conduct of the litigation," rather than on any specific infraction such as violation of 28 U.S.C. §1927 or Rule 11. Primus Auto., 115 F.3d at 648; see id. ("Although the district court failed to specify the authority for its order, we can [*11]  deduce the source of its power for purposes of our review. . . . [W]e will assume that the court relied on its inherent powers."); see also Jones v. Williams, 68 Fed. App'x 857, 859 (9th Cir. 2003) ("Since the district court did not specify the authority under which sanctions were imposed, we assume that the court was exercising its inherent powers . . . ."); Irwin v. Colletti, No. 98-15019, 1999 U.S. App. LEXIS 3354, 1999 WL 109662, at *1 n.3 (9th Cir. Feb. 26, 1999) ("The district court did not specify the authority for its fee award. . . . [W]e conclude that the district court relied upon its inherent powers in awarding fees . . . .").

Of significance to our review is the Ninth Circuit's requirement of an explicit finding of bad faith before imposing a sanction. We note the Ninth Circuit's recognition of the importance of this requirement, see Primus Auto., 115 F.3d at 649-50, as well as the Supreme Court's observance of the gravity of district courts invoking their inherent authority, see, e.g., Roadway Express, 447 U.S. at 764 ("Because inherent powers are shielded from direct democratic controls, they must be exercised with restraint and discretion.").

We apply this guidance to the "factual and legal prerequisites to the exercise of this [inherent] power," Zambrano v. City of Tustin, 885 F.2d 1473, 1478 (9th Cir. 1989), surrounding Patent Local Rule 3.1 as here applied, including the asserted deficiencies of AntiCancer's submissions.

***

Conclusion

Summary judgment is appropriate when there is no reasonable possibility that the non-movant could prevail upon proper pleadings and a full and fair trial. See Fed. R. Civ. P. 56; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). Here, the district court granted summary judgment based on its finding that AntiCancer's Preliminary Infringement Contentions were deficient and because AntiCancer objected to the fee-shifting sanction imposed as a condition of supplementing the Contentions.

When a complaint meets the standards of the Federal Rules, and there has been no reasonable opportunity for discovery and evidentiary development of the issues, it is rarely appropriate to summarily decide the merits against the complainant. We need not intrude upon the district court's authority to require supplementation of the Preliminary Infringement Contentions when such supplementation may assist the procedures of trial. However, exercise of a court's inherent authority to levy a sanction [*36]  as a condition of supplementing the Contentions requires conduct that "constituted or was tantamount to bad faith." Roadway Express, 447 U.S. at 767. There is no finding, and there is no basis for a finding, of such impropriety here.

We conclude that the district court exceeded its discretion in imposing the condition of payment of the defendants' attorney fees and costs in order to permit AntiCancer to supplement its Preliminary Infringement Contentions. We vacate the condition, and the summary judgment based thereon. The case is remanded for further proceedings.

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