Customer Suit Exception

The customer suit exception (also called the 'customer exception' or 'manufacturer's exception') is a judicially-created doctrine that allows a court to stay or dismiss a patent infringement lawsuit against a customer (e.g., a retailer or end user) when: (1) the manufacturer of the accused product offers to defend the customer and be bound by the outcome; (2) the same product and the same patents are at issue in a parallel manufacturer case; (3) resolution of the manufacturer case would resolve the customer case. POLICY BASIS: the customer is typically just a passive conduit for the infringing product — the real infringement dispute is between the patent owner and the manufacturer; making the customer litigate a complex patent case when the manufacturer is the real party in interest serves no efficient purpose; forcing customers into expensive litigation also harms patent defendants' distribution channels and supply chains; LEGAL AUTHORITY: the doctrine is grounded in common sense principles of judicial economy and the court's equitable discretion; there is no explicit statutory basis; courts of appeals (including the Federal Circuit) have recognized and applied the doctrine in a series of cases; INTERACTION WITH DECLARATORY JUDGMENT: a manufacturer often files a declaratory judgment action for non-infringement or invalidity in a favorable forum and then uses the customer suit exception to consolidate or stay the customer suits in other venues; the first-filed rule (or most convenient forum rule) applies to determine which case goes forward.

Courts have identified several requirements for applying the customer suit exception: (1) THE MANUFACTURER MUST OFFER TO DEFEND AND BE BOUND: the manufacturer must affirmatively offer to: (a) provide the defense for the customer; (b) be bound by the outcome of the manufacturer case as to both infringement and validity; (c) indemnify the customer against any damages awarded; this requirement prevents the manufacturer from asserting the exception without accepting responsibility; (2) SAME PRODUCT: the customer case must involve the same accused product as the manufacturer case — if the customer has modified the product or uses it in a unique way, the exception may not apply because the customer's specific use is not resolved by the manufacturer case; (3) SAME PATENTS: the patents asserted against the customer must be the same (or a subset of) the patents at issue in the manufacturer case; (4) RESOLUTION: the manufacturer case must be likely to resolve the customer case; if the manufacturer case involves different claims or a different accused product, resolution of the manufacturer case will not definitively resolve the customer case; (5) TIMING: the manufacturer case must be more advanced or filed first (or the manufacturer must consent to accepting the outcome of whatever case the court allows to proceed); courts generally stay the less-advanced case; (6) SAME COURT vs. DIFFERENT COURTS: if the manufacturer and customer cases are in different courts, the stay/dismissal motion is typically filed in the customer case court; the court has discretion to stay the customer case in favor of the manufacturer case.

Manufacturers use the customer suit exception in conjunction with declaratory judgment (DJ) filings to control the litigation forum and consolidate cases: TYPICAL SCENARIO: (1) a patent owner sues a manufacturer's retail customers in one district (e.g., Eastern District of Texas or Delaware); (2) the customers are passive resellers with no technical knowledge of the product's design or manufacture; (3) the manufacturer files a DJ action for non-infringement and invalidity in its preferred forum (often Northern District of California or its home district); (4) the manufacturer moves to stay the customer suits and have the customer cases transferred to the DJ forum; FIRST-FILED RULE INTERACTION: the first-filed rule generally gives priority to the first-filed case; if the customer suits were filed first, the manufacturer's DJ may be second-filed; courts will examine which forum is most appropriate under § 1404(a) transfer analysis even if the customer suits were first filed; PATENT OWNER'S STRATEGY — CUSTOMER SUITS: patent owners sue customers first to: (a) get a faster and more favorable venue (EDTX or WDTX had historically fast schedules); (b) gain leverage by threatening the manufacturer's customers (creates pressure on the manufacturer to settle); (c) avoid the manufacturer's preferred DJ forum; MANUFACTURER'S COUNTER-STRATEGY: file DJ immediately upon learning of the patent owner's litigation plans; offer to defend customers and be bound; move to stay customer suits; intervene in customer suits as defendant-in-interest; DECLARATORY JUDGMENT JURISDICTION: MedImmune v. Genentech (S.Ct. 2007) — a licensor suing for breach of royalty obligations creates DJ jurisdiction; the manufacturer can file DJ as soon as there is a 'definite and concrete' dispute.

The Kessler doctrine is a related but distinct patent law doctrine that protects a manufacturer from repeated harassment by patent suits based on a product that has already been held non-infringing: KESSLER v. ELDRED (S.Ct. 1907): the Supreme Court held that once a manufacturer wins a final judgment of non-infringement (or invalidity) for a product, the manufacturer (and its customers) are protected from subsequent suits on the same patents for the same or substantially similar products, even if new customers are involved; SCOPE: the Kessler doctrine creates a kind of 'in rem' protection for the specific product against the specific patent — it protects the article of commerce; KESSLER vs. CUSTOMER SUIT EXCEPTION: the customer suit exception arises BEFORE a judgment — it stays or dismisses a customer suit while the manufacturer litigates; the Kessler doctrine arises AFTER a final judgment — it protects against new suits for the same product and patent; KESSLER IN PRACTICE: if a manufacturer wins a final judgment of non-infringement, it can provide its customers with a 'Kessler license' — protection against future suits for the same product; the manufacturer can intervene in future customer suits based on the prior judgment; PRECLUSION vs. KESSLER: traditional claim preclusion (res judicata) requires privity between the prior litigant and the new party; the Kessler doctrine provides a specific exception for this manufacturer-customer relationship that goes beyond traditional preclusion doctrine; INTERACTION WITH IPR: if the manufacturer's IPR invalidates the patent, both Kessler protection and the customer suit exception are mooted — there is no valid patent to enforce.

PROACTIVE MONITORING: manufacturers should monitor patent lawsuits filed against their customers; patent watch services and PACER searches for the company's products are essential; EARLY INTERVENTION: as soon as customer suits are filed, the manufacturer should: (1) contact the customers and offer to defend; (2) file a DJ action in the manufacturer's preferred forum; (3) file motions to intervene in the customer cases; (4) move to stay or transfer the customer cases; INDEMNIFICATION AGREEMENTS: many sales contracts include indemnification clauses where the manufacturer agrees to defend customers from IP suits; even without a contractual indemnity, the manufacturer may voluntarily offer to defend to use the customer suit exception; CHOICE OF MANUFACTURER'S FORUM: the manufacturer's preferred DJ forum should be: (1) where the manufacturer is located (home turf advantage); (2) a venue with experienced patent judiciary; (3) a venue likely to grant or respect the customer suit exception stay request; (4) favorable for invalidity defenses (if seeking early SJ on invalidity or § 101); DISTRIBUTOR AGREEMENTS: clearly define IP indemnity obligations in distributor and OEM agreements; specify that the manufacturer controls any IP litigation involving the product; this both enables the customer suit exception and avoids conflicts with customers over litigation strategy; LIMITATIONS: the customer suit exception does not apply if: the customer has materially modified the product; the customer's specific use is the infringement (e.g., process claim infringed by how the customer uses the product, not by the product itself); the manufacturer refuses to be bound.