Energy Recovery, Inc. v. Hauge

Sanction of Civil Contempt Reversed Where Defendant Did Not Violate Any Unequivocal Command in the Court’s Order


March 20, 2014

Menzie, Shaton C.


Last Month at the Federal Circuit - April 2014

Judges: Rader, Reyna, Wallach (author)

[Appealed from: E.D. Va., Judge Jackson]

In Energy Recovery, Inc. v. Hauge, No. 13-1515 (Fed. Cir. Mar. 20, 2014), the Federal Circuit reversed the district court’s contempt finding against Mr. Leif J. Hauge and vacated the corresponding injunction.

Mr. Hauge, a former employee of Energy Recovery, Inc. (“ERI”), was involved in a legal dispute with ERI involving intellectual property rights related to pressure exchangers, a type of energy recovery device used in reverse osmosis. Mr. Hauge and ERI entered into an agreement in 2001 to resolve the pending litigation (“the Agreement”), and the district court issued an order adopting the Agreement (“the 2001 Order”). The 2001 Order obligated Mr. Hauge to transfer ownership of certain patents and all other intellectual property and rights relating to pressure exchanger technology predating the Agreement and 2001 Order. The Agreement stated that the transfer of rights was not to include inventions made by Mr. Hauge after the Agreement. The Agreement also contained a noncompete clause that prohibited Mr. Hauge from making or selling energy recovery devices for use in reverse osmosis for two years.

Mr. Hauge subsequently obtained U.S. Patent No. 7,306,437 (“the ’437 patent”), which claimed priority to a provisional patent application that he filed in 2004, after the noncompete clause had expired. Mr. Hauge began selling a pressure exchanger based on the ’437 patent, and contracted with two ERI employees for consulting services. ERI filed a motion for an order to show cause, alleging that Mr. Hauge was using ERI’s proprietary pressure exchanger technology in violation of the 2001 Order. The district court entered judgment that Mr. Hauge was in violation of the 2001 Order, found him in contempt, and further enjoined him from manufacturing and selling pressure exchangers and replacement parts for ERI’s pressure exchangers. Mr. Hauge appealed.

On appeal, the Court held that none of Mr. Hauge’s challenged conduct violated the 2001 Order. The Court reasoned that the Agreement only required Mr. Hauge to transfer ownership of the pre-Agreement pressure exchanger intellectual property, cooperate fully in executing all documents necessary to do so, refrain from competing for two years, and announce in a press release that ERI was the sole source for pressure exchangers built pursuant to such patents, patent applications, and technology. The Court explained that “[n]othing in the 2001 Order expressly precludes Mr. Hauge from using any manufacturing process.” Slip op. at 8. The Court noted that “[c]ivil contempt is an appropriate sanction only if the district court can point to an order of the court which ‘sets forth in specific detail an unequivocal command which a party has violated,’” and that “ERI cannot point to such a command.” Id. at 8-9 (quoting In re Gen. Motors Corp., 61 F.3d 256, 258 (4th Cir. 1995)).

The Court found unpersuasive ERI’s arguments that Mr. Hauge violated the 2001 Agreement by necessarily employing the proprietary technology he agreed to transfer. The Court stated that “if in fact Mr. Hauge is using ERI’s manufacturing processes, he may be in violation of the patent laws or state trade secret laws, but he is not in violation of any ‘unequivocal command’ in the 2001 Order.” Id. at 9 (citation omitted). The Court further noted that to the extent the Agreement put an affirmative duty on Mr. Hauge to not create pressure exchangers pursuant to ERI’s intellectual property, an infringement analysis would be necessary, and the contempt proceeding did not implicate patent infringement. The Court also stated that while Mr. Hauge’s hiring of ERI employees may constitute trade secret misappropriation, it would not justify a finding of contempt in this case.

Finally, addressing the district court’s finding that Mr. Hauge violated the letter and spirit of the Agreement, the Federal Circuit cited Supreme Court precedent requiring that a consent decree be discerned within its four corners. The Court concluded that “[b]ecause Mr. Hauge did not violate any provision of the 2001 Order, the district court abused its discretion in holding Mr. Hauge in contempt.” Id. at 12. Because the reversal of the contempt finding eliminated the need for a remedy, the Court vacated the corresponding injunction.

Summary authored by Shaton C. Menzie, Esq.