Res Judicata and Kessler – The Impact of Dismissals with Prejudice on Later Suits Against Customers

August 5, 2020

In In re PersonalWeb Techs. LLC, 2020 WL 3261168 (Fed. Cir. June 17, 2020), the Federal Circuit addresses an issue that we all studied in law school, but that remains tricky when we encounter it in practice:  the preclusive effect of a dismissal with prejudice.  In particular, PersonalWeb discusses both the familiar doctrine of claim preclusion (or, res judicata), and the less familiar Kessler doctrine (which is unique to patent law).  Patent litigators should keep these doctrines in mind whenever they resolve cases.

The facts in PersonalWeb were not complicated:    

First Lawsuit:  In December 2011, PersonalWeb sued Amazon for patent infringement in the Eastern District of Texas.  PersonalWeb accused Amazon’s Simple Storage Service (S3) of infringing five of its patents.  S3 provides web-based storage to customers, typically customers with websites.  The customers can use S3 to store static content, such as images, for their websites. 

The district court issued a claim construction that favored Amazon.  As a result, PersonalWeb stipulated to a dismissal with prejudice of all its claims against Amazon.  In June 2014, the court issued an order dismissing the claims with prejudice and subsequently entered final judgment against PersonalWeb. 

Second Lawsuit:  Starting in January 2018, PersonalWeb began filing “dozens of new lawsuits” against Amazon customers in various district courts.  In these actions, PersonalWeb alleged that by using S3, Amazon’s customers infringed the same set of patents.  Amazon intervened in these suits and undertook the defense of its customers.  Amazon also filed a declaratory judgment action against PersonalWeb in which Amazon sought an order barring the cases.  Amazon’s request for declaratory relief was based on the preclusive effect of the dismissal with prejudice in the First Lawsuit. 

The Judicial Panel on Multidistrict Litigation consolidated all the customer cases and the Amazon declaratory judgment action into one multi-district proceeding.  The MDL panel assigned the consolidated cases to the Northern District of California for pretrial proceedings.  The California district court decided to proceed first with Amazon’s declaratory judgment action and one representative customer suit.  The court stayed all the other customer cases. 

Amazon moved for summary judgment.  Amazon argued that, in light of the dismissal in the First Lawsuit, PersonalWeb was barred from suing Amazon or its customers for infringement based on the S3 system.  The district court granted Amazon’s motion.  It held that claim preclusion barred PersonalWeb’s claims for any acts of infringement that occurred prior to the final judgment in the First Lawsuit, and that the “Kessler doctrine” (based on Kessler v. Eldred, 206 U.S. 285 (1907)) barred PersonalWeb’s claims relating to the S3 after that final judgment. 

PersonalWeb appealed and attacked both aspects of the district court’s decision.  The Federal Circuit affirmed. 

Claim Preclusion:  “Under the doctrine of claim preclusion, ‘a judgment on the merits in a prior suit bars a second suit involving the same parties or their privies based on the same cause of action.’”  (Opinion at 15 (citation omitted).)  “Claim preclusion bars both those claims that were brought as well as those that could have been brought in the earlier lawsuit.”  (Id.)  PersonalWeb conceded that the “with-prejudice judgment” from the First Lawsuit was a final judgment on the merits, and that Amazon and its customers were in privity. 

But PersonalWeb argued that claim preclusion was nevertheless inapplicable because the Second Lawsuit (against Amazon’s customers) supposedly involved a different feature of the S3 system than was at issue in the First Lawsuit.  According to PersonalWeb, the actions therefore involved different causes of action.  The Federal Circuit resolved this question by looking to the Restatement (Second) of Judgments. 

“Following the approach taken in the Restatement, we define a cause of action by the transactional facts from which it arises, and we consider the extent of the factual overlap between the two alleged claims at issue.”  (Id. at 16.)  In patent cases, one of the key areas of potential overlap is whether “the product or process accused” in the earlier and later actions are “essentially the same.”  (Id. at 17.)  In addition, “under well-settled principles of claim preclusion, different arguments or assertions in support of liability do not all constitute separate claims….  Regardless of the number of substantive theories available to a party and regardless of the differences in the evidence needed to support each of those theories, a party may not split a single claim into separate grounds of recovery and raise those separate grounds in successive lawsuits.”  (Id.)  Given this framing of the issues, the Federal Circuit concluded with ease that claim preclusion applied and that PersonalWeb could not sue Amazon’s customers for their activities that pre-dated the judgment in the First Lawsuit. 

The court first rejected PersonalWeb’s assertion that the activity it accused in the Second Lawsuit was not “essentially the same” as the activity it had accused in the First Lawsuit.  Although PersonalWeb accused the S3 system of infringement in both actions, PersonalWeb argued that it had accused different S3 features and functionalities in the two litigations.  PersonalWeb contended that its focus on “entirely different feature[s] of Amazon’s S3” rendered claim preclusion inapplicable.  The problem for PersonalWeb was that its infringement contentions in the First Lawsuit expressly cited the same software commands and operations that it admitted were squarely at issue in the Second Lawsuit.  (Id. at 18-19.)  And the Federal Circuit did not rest on this overlap alone.

“[R]egardless of the breadth of the specific infringement theories PersonalWeb pursued” in its cases, “it is clear that the complaints in the customer cases and the complaint in the [first] case relate to the same set of transactions.”  (Id. at 19.)  In both the First Lawsuit and the Second Lawsuit, all of the acts of alleged infringement were “based on the … same Amazon S3 product.”  (Id.)  “At most, PersonalWeb has shown that it emphasized different facts in support of a different theory of infringement in [its two cases.]  But that is not enough to avoid claim preclusion.”  (Id.) 

The “Kessler” Doctrine:  The Federal Circuit’s ruling in Amazon’s favor with regard to claim preclusion only impacted liability for customer actions through the date of the judgment in the First Lawsuit (i.e., mid-2014).  The question remained as to whether PersonalWeb could still establish liability for later activities.  Because the district court did not actually decide any issues in the First Lawsuit, collateral estoppel (issue preclusion) would not apply.  But there is another doctrine in patent law that can give rise to preclusion. 

“In addition to the two traditional pillars of preclusion law — claim and issue preclusion — there is a separate and less frequently invoked doctrine that derives from the Supreme Court’s decision in Kessler v. Eldred.”  (Op. at 19.)  “The Kessler doctrine … ‘fills the gap’ left by claim and issue preclusion, by ‘allowing an adjudged non-infringer to avoid repeated harassment for continuing its business as usual post-final judgment in a patent action where circumstances justify that result.’”  (Id. at 20 (citation omitted).) 

PersonalWeb argued that Kessler did not apply because Amazon was not an “adjudged non-infringer,” i.e., PersonalWeb had dismissed its claims in the First Lawsuit before the district court decided any issues.  The Federal Circuit rejected that argument for a couple of reasons.  First, none of the Court of Appeals’ prior cases “require[d] that issues of noninfringement or invalidity be actually litigated before the Kessler doctrine can be invoked.”  (Id. at 21.)  Furthermore, “[t]he policy that drove the Supreme Court’s decision in Kessler would be ill-served by adopting the rule proposed by PersonalWeb.  The Court in Kessler recognized that even if a manufacturer [accused of infringement] were to prevail in a patent infringement suit, the manufacturer could be deprived of the benefits of its victory if the patentee were free to sue the manufacturer’s customers.”  (Id. at 23.)    

The Federal Circuit also emphasized another way to see the flaw in PersonalWeb’s contention.  In several prior cases, the court had previously “characterized the Kessler doctrine as granting a ‘limited trade right’ that attaches to the product itself.”  (Id. at 24 (citations omitted).)  “The scope of that right is not limited to cases involving a finding of non-infringement that was necessary to the resolution of an earlier lawsuit, but extends to protect any products as to which the manufacturer established a right not to be sued for infringement.”  (Id.)  The Kessler “trade right,” in other words, travels with the original defendant’s product. 

Because there was an unqualified judgment and dismissal with prejudice in the First Lawsuit, that judgment “protected Amazon’s S3 product from subsequent infringement challenges, even when those challenges were directed at Amazon’s customers rather than at Amazon itself.”  (Id.)  To allow PersonalWeb to sue Amazon’s customers “would leave the patentee free to engage in the same type of harassment that the Supreme Court sought to prevent in Kessler[.]”  (Id.)  The Court of Appeals therefore also held that PersonalWeb’s claims were barred for activities that occurred after the judgment in the First Lawsuit. 

Takeaways:  The Federal Circuit offered some advice for patentees who want to resolve one infringement dispute without prejudicing their ability to later sue downstream customers of the defendant.  To preserve those rights, patentees need to carefully draft their settlement agreements and dismissals.  The Federal Circuit stated:   

To the extent that a plaintiff wishes to settle an infringement action while preserving its rights to sue the same or other parties in the future, it can do so by framing the dismissal agreement to preserve any such rights that the defendant is willing to agree to.  Settling parties will remain free to limit the preclusive effect of a dismissal; they simply have to fashion their agreement in a way that makes clear any limitations to which they wish to agree as to the downstream effect of the dismissal. 

(Id. at 25.)

Author: Marc J. Pernick