U.S. Federal Circuit holds that direct buyers have standing for Walker Process claims

On 20 November, 2012 the U.S. Court of Appeals for the Federal Circuit ruled (Ritz Camera & Image, LLC v SanDisk Corp) case that direct purchasers of a product which is covered by a patent have standing to bring Walker Process antitrust claims.

In June 2010 Ritz Camera filed a lawsuit against SanDisk alleging that they violated Section 2 of the Sherman Act as they monopolized the market for NAND flash memory products by fraudulently obtaining patents. NAND flash memories are a type of flash memories used in many consumer electronics products, e.g. USB drives, smartphones, digital cameras and computers. SanDisk holds at least two patents for the manufacture of NAND flash memory products.

According to Ritz Camera, a retailer, SanDisk fraudulently obtained these patents as it intentionally failed to disclose invalidating prior art and made affirmative misrepresentations to the U.S. Patent and Trademark Office. Additionally, SanDisk enforced these patents through infringement suits against its competitors and by threatening customers of its competitors. This resulted in higher prices to direct purchasers, such as the plaintiff.

In bringing this lawsuit Ritz Camera relied on the ruling by the U.S. Supreme Court in Walker Process Equipment, Inc v. Food Machinery & Chemical Corp, where it held that “the enforcement of a patent procured by fraud on the Patent Office may violate Section 2 of the Sherman Act provided the other elements necessary to Section 2 monopolization charge are proved.” SanDisk wanted the case to be dismissed, partly because direct purchasers like the plaintiff lacked standing to file for Walker Process claims. The District Court held that Walker Process did not limit the class of plaintiffs eligible for standing and denied SanDisk’s motion.

The single issue on appeal to the Federal Circuit was:

“Whether direct purchasers who cannot challenge a patent’s validity or enforceability through a declaratory judgment action (and have not been sued for infringement, and so cannot assert invalidity or unenforceability as a defence in the infringement action) may nevertheless bring a Walker Process antitrust claim that includes as one of its elements the need to show that the patent was procured through fraud.”

In its ruling the Federal Circuit first outlined the conditions for a Walker Process claim:

(1) The defendant procured the patent by knowing and wilful fraud on the Patent and Trademark Office.

(2) All elements necessary to establish a § 2 Sherman Act monopolization claim are established.

Secondly, the court held that nothing in the Supreme Court’s ruling in the Walker Process supported the defendant’s argument that the rules on standing to bring patent validity challenges should be imported into Walker Process claims.

Thirdly, the court dismissed SanDisk’s argument that by allowing direct purchaser suits an end-run around patent laws would be created. A Walker Process claim is a separate action from a patent declaratory judgment action as it is governed by antitrust principles and does not directly seek the invalidity of a patent, even if that is the likely effect.

Finally, the court also rejected SanDisk’s argument that granting direct purchasers standing would lead to a flood of litigation.

This decision by the Federal Circuit expands the possibility of parties to bring Walker Process antitrust claims which creates potentially significant implications for consumers, accused infringers and patent owners. A direct purchaser is able to bring a Walker Process claim even if there is no justiciable patent infringement dispute. Furthermore, whenever there is an adverse ruling in a case challenging a patent it seems inevitable that follow-on class actions by direct purchasers will follow. However, the high bar in proving fraud before the Patent and Trademark Office may temper the long-term impact of this ruling. [Nicole Daniel]