On Thursday, the U.S. Court of Appeals for the Federal Circuit issued an important ruling that will have significant repercussions for foreign companies that choose to ignore injunctions issued in the U.S. that forbid them from infringing, misappropriating or misusing the intellectual property of U.S. companies.   In Merial Ltd. v. Cipla, Ltd., 2012 U.S. App. LEXIS 10982 (Fed. Cir., May 31, 2012), the Federal Circuit upheld a Georgia district court’s finding of contempt against an India-based company that had actual notice of the underlying case but elected not to appear.  Given the increasingly international nature of many trade secret disputes and the importance of injunctions in many trade secret cases, this ruling will force a foreign party to contest jurisdiction sooner rather than later or face the consequences of ignoring a U.S. injunction — namely, a finding of contempt.

The facts and procedural history are fairly involved, so I will do my best to summarize them briefly.  Merial is the exclusive licensee of patented compositions for protecting dogs and cats from flea and tick infestation and marketed under the brand name Frontline and Frontline Plus.  In 2007, Merial sued Cipla, an India-based company headquartered in Mumbai, for infringing its patent when it sold infringing formulations under the brand “Cipla Protektor” and “Cipla Protektor Plus” in the U.S.  When Cipla did not appear in the case, Merial secured a default judgment in 2008 which included a permanent injunction forbidding Cipla from selling infringing products.  Shortly after the default judgment, Cipla filed an “informal” communication referencing the default and seeking dismissal of the action, which the district court rejected.

In 2011, Merial initiated contempt proceedings against Cipla and a company called Velcera, a competitor formed by former Merial employees.  Cipla and Velcera had entered into agreements to sell “PetArmor Plus,” a flea and tick remedy that contained the same compositions as Merial’s Frontline Plus.  The Georgia district court found Cipla had been subject to its jurisdiction in 2008 when it issued the injunction, found the PetArmor Plus product was not colorably different from Cipla’s previously infringing product, and found Cipla and Velcera had acted in concert to knowingly violate the 2008 permanent injunction.  As a result the court issued an injunction forbidding the sale of any competing products in the U.S. with the assistance or participation of Cipla.

The Federal Circuit’s Opinion:  To put it bluntly, the Federal Circuit had no sympathy for Cipla and its partner Velcera.  Judge Alan Lourie, writing for the majority, rejected Cipla’s arguments that it had not been served, that the court lacked personal jurisdiction over it, and that it should have been given another opportunity to battle over these and other issues.  Notably, the Federal Circuit found “it is beyond dispute that Cipla had actual notice of the suit and chose to risk a default judgment, based on its subjective assessment of the complaint.”  

In particular, the Federal Circuit took Cipla for task for belatedly arguing that it was essentially entitled to a mulligan if it consented to another federal district court under Federal Rule of Civil Procedure 4(k)(2) (Cipla argued that had it been sued in Illinois in 2007, it would have consented to service and jurisdiction there).  Judge Lourie reasoned that “the incentives for gamesmanship” would be “particularly acute because the defaulting party could use a simple, unilateral statement of consent not only to achieve transfer into a forum it considers more convenient (or less convenient for its opponent) but also undo an adverse final judgment for the chance to litigate from a clean slate.”

Judge Lourie also rejected Cipla’s claim that the district court overextended U.S. law to penalize Cipla for conduct that occurred entirely overseas.  He held that “where a foreign party, with the requisite knowledge and intent, employs extraterritorial means to actively induce acts of direct infringement that occur within the United States, such conduct is not categorically exempt from redress under [35 U.S.C.]  § 271(b).”   He noted that the record supported the district court’s finding that Cipla induced infringement of the patent at issue through the PetArmor Plus product with Velcera.

Finally, the Federal Circuit rejected Velcera’s arguments that it should not have been found in contempt of the 2008 order because it had not been a party to that case.  Judge Lourie emphasized the fact that Velcera was fully aware of the previous default and understood that acting in concert with Cipla to market an infringing product would violate the injunction.

The Takeaway?  Foreign defendants accused of misappropriating trade secrets or infringing U.S. patents will have to think long and hard about ignoring complaints filed, and court orders issued, in the U.S.  If a foreign party truly feels that service of process is defective or that the court lacks personal jurisdiction over it, that company is now incentivized to respond and take those issues head on, rather than wait for a later opportunity to try to contest them in another proceeding or in a contempt proceeding.  The ruling also serves as a powerful lesson to other companies who may want to do business with a defaulting foreign company, as they may find themselves bound by the same injunction for having acted in concert with that foreign party.

June 5, 2012 Update:  At the time I wrote this post over the weekend, I could not access and post the Federal Circuit’s opinion.  For those that would like to review the opinion firsthand, a link to it can now be found in this article in The National Law Journal that appeared earlier today (shameless plug:  I was interviewed for my take, which appears at the end of the article).  For those who do not subscribe to that publication, the opinion can be found in the PDF below.