On December 6, 2024, the U.S. Court of Appeals for the Federal Circuit issued a precedential opinion in PS Products Inc. v. Panther Trading Co. Inc. that appears to allow a district court to sanction under its inherent authority when the sanctionable conduct is arguably covered by a specific rule. The facts of the case are not helpful for the sanctioned parties, PSP, and likely led to this outcome.

In brief summary, PSP sued Panther for infringing U.S. Design Patent No. D680,188 on May 23, 2022. On June 24, 2022, Panther sent a Rule 11 letter and draft motion arguing that the (1) the case was frivolous as the patented design and accused product were plainly dissimilar and (2) venue was statutorily improper. On that same day, Panther also filed a motion to dismiss. PSP did not respond to either the Rule 11 letter or the Motion to dismiss. Instead, on July 11, 2022, PSP voluntarily moved to dismiss the case with prejudice. The district court granted the motion on August 1, 2022. Panther then moved for sanctions under Section 285 and the district court’s inherent authority. The district court granted both motions and sanctioned PSP in the amount of $25,000.00 under its inherent authority as a deterrence sanction. PSP appealed only the deterrence sanction.

Inherent Authority

The Opinion affirmed the inherent authority deterrence sanction against the parties for filing a meritless lawsuit and for using the wrong venue statute for a patent case. However, the filing of a paper is covered by Rule 11, as the Federal Circuit appears to note in its Opinion, where it specifically referenced that a Rule 11 sanction would have been available but the case was dismissed before a Rule 11 Motion could be filed. The Federal Circuit’s acknowledgement appears to conflict with what the Supreme Court has said about inherent authority, namely, that it “is not a broad reservoir of power, ready at an imperial hand, but a limited source; an implied power squeezed from the need to make the court function.”

The Opinion based its affirmance on the district court’s finding of bad faith litigation conduct from PSP’s history of filing meritless lawsuits. However, that history of meritless lawsuits was based on the district court’s inference, without actually analyzing any of the other 25 lawsuits, that many of the other 25 lawsuits were similarly meritless.  The Federal Circuit approved of the district court’s inference based on the district court’s findings that:

1. the incorrect venue statute for a patent case was admittedly used in all 25 lawsuits and venue was at least incorrect in this case;
2. PSP had dismissed 13 of the 25 other lawsuits suits before, or soon after, answers were filed;
3. PSP voluntarily dismissed three of the 25 other lawsuits suits after motions to dismiss were filed by defendants but before the district court ruled on the motions; and,
4. In two instances where the district court adjudicated the motions to dismiss, PSP’s claims were either dismissed for failure to state a claim or lack of personal jurisdiction.

However, in ClearValue, Inc. v. Pearl River Polymers, Inc. the Fifth Circuit, in an analogous fact scenario, has limited the imposition of inherent authority sanctions when a district court had recast what was solely a discovery violation into “a pattern of willful deception perpetrated on the district court throughout the litigation.” In ClearValue, the Fifth Circuit found the district court sanctioned because of a discovery violation and not on the broad conduct of the litigation. The Fifth Circuit held “[a] district court should only use its inherent powers when neither the statute nor the Rules are up to the task. In this case, the court did not indicate it was sanctioning broad litigation conduct of the parties. Rather, it specified it was sanctioning a discovery violation, properly addressed under Rule 37.”

The Fifth Circuit went on to provide that:

“Discovery violations are appropriately addressed through the application of Rule 37. As articulated in Chambers, ‘when there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power.’ 501 U.S. at 50, 111 S.Ct. 2123. A district court should only use its inherent powers when ‘neither the statute nor the Rules are up to the task.’ Id. In this case, the court did not indicate it was sanctioning broad litigation conduct of the parties. Rather, it specified it was sanctioning a discovery violation, properly addressed under Rule 37.”

While the Federal Circuit was analyzing this case under Eighth Circuit law, both the Federal Circuit and the Fifth Circuit cite the same Supreme Court case for each’s outcome, Chambers. Here, the filing of a lawsuit, a document, would be covered by Rule 11, which provides its own safety net, an opportunity to withdraw the filing and avoid sanction, which is what happened. The Opinion approves a Rule 11 like sanction under an inherent authority sanction, which appears to directly conflict with Chambers. While the district court and the Federal Circuit do cite to the other 25 lawsuits, there is no analysis of the other 25 lawsuits. Thus, such consideration would seem to violate PSP’s due process rights as it is being sanctioned for conduct unrelated to the conduct in this case without an opportunity to address the conduct in the other 25 lawsuits. Perhaps more disturbing is the fact that the district court did not actually analyze the other 25 lawsuits and based the sanction on an inferences that many of the other lawsuits were meritless.

Bad Facts, Bad Law

Hopefully PSP will seek en banc review or at least a panel rehearing.The facts of the case are not helpful for PSP and the author is reminded that bad facts often make bad law. However, as a precedential opinion, defendants will cite this case to support sanctions against all plaintiffs who file multiple lawsuits and dismiss many of them. One bright portion of the Opinion is that it would appear that an actual finding that the infringement allegations were meritless would need to be found to support this type of inherent authority sanction. Although, it would be best if this Opinion is challenged all the way to the Supreme Court, if necessary.

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Author: Wavebreakmedia
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