Center for Advanced Study & Research on Innovation Policy


CASRIP Newsletter - Spring 1996, Volume 3, Issue 1

The Federal Circuit at the University of Washington School of Law

On Wednesday, November 1, 1995, a panel of the Court of Appeals for the Federal Circuit sat for oral arguments in two actual cases at the University of Washington School of Law. The panel was in Seattle to hear arguments in some of the pending appeals before the Federal Circuit, and at the suggestion of Judge Plager, the panel held one of its sessions at the University of Washington School of Law.

The visiting Federal Circuit panel consisted of Chief Judge Archer, Judge Rader and Judge Plager. In a room filled to capacity with students, faculty and visitors, the panel heard arguments in two cases: Lockheed Corp. v. The U.S. Air Force, and Stairmaster Sports/Medical Products, Inc. v. Pacific Fitness Corp. The hearing began at 2:30 pm and lasted until about 3:45 pm.

1. Lockheed Corp. v. The U.S. Air Force, No. 95-1025. This case is on appeal from the Armed Services Board of Contract Appeals. In the late '70s, Lockheed had some research & development contracts with the Air Force under which the Air Force was to reimburse Lockheed for all costs allocable to the work under the contract and allowable under applicable regulations. In 1982, due to some adjustments in its tax returns, Lockheed had to pay the State of California some back taxes plus interests. Lockheed requested reimbursements from the Air Force for part of the taxes and interests allocable to work under Air Force contracts. The Contract Officer denied the claim, and Lockheed appealed to the Armed Services Board of Contract Appeals. The Board held that the interest was not allowable under Defense Acquisition Regulation (DAR) 15-205.17. That provision disallows interests and other financial costs from "borrowings".

At the oral argument, the attorney for Lockheed argued that the term "borrowings" as used in DAR 15-205.17 does not cover inadvertent underpayment of taxes on the basis of good faith and reasonable compliance with tax laws. He pointed out that the purpose for disallowing interests from borrowing is to equalize the positions between contractors who borrow to finance performance and contractors who finance performance with their own funds. He compared inadvertent underpayment of taxes to inadvertently leaving the light on after work (and thereby increasing the utility bill). The Air Force attorney argued that the term "borrowings" in that provision should be construed as broadly as possible. In particular, he points to an exception in DAR 15-205.17 that allows for interests on state and local taxes under particular conditions. Although those conditions do not apply to Lockheed's case, the Air Force argues that the exception proves the rule that underpayment of taxes should be broadly construed as a form of borrowing and interests from back taxes should be disallowed.

2. Stairmaster Products v. Pacific Fitness Corp., No. 95-1213, -1255. This case is on appeal from the U.S. District Court, Western District of Washington.

Stairmaster is an Oklahoma corporation headquartered in Kirkland, Washington. Pacific Fitness is a California corporation which, like Stairmaster, is in the exercise equipment business. In late 1993, Pacific Fitness sent a "cease and desist" letter to Stairmaster requesting Stairmaster to stop selling a product that allegedly infringed a patent owned by Pacific Fitness. The letter threatened legal action if Stairmaster did not stop the alleged infringement. Pacific Fitness has not sold any product embodying the patent at issue in Washington or anywhere else.

Stairmaster filed a declaratory judgment suit in the Western District of Washington seeking to have Pacific Fitness' patent declared invalid. Pacific Fitness then filed an infringement action against Stairmaster in the Central District of California. The District Court, Western District of Washington, dismissed Stairmaster's declaratory judgment action on the ground that Pacific Fitness lacked sufficient contacts with Washington to support an exercise of personal jurisdiction.

At the oral argument, the attorney for Stairmaster argued that although Pacific Fitness does not have enough contacts with Washington to support an exercise of general jurisdiction, specific jurisdiction is justified in this case for three reasons: the threatening letter is sufficient to give rise to a declaratory judgment suit and so should be sufficient contact for specific jurisdiction in this case; since a patentee can now sue an alleged infringer almost anywhere the infringing products can be found, parity suggests that an alleged infringer should be able to bring a declaratory judgment suit against the patentee on the basis of a "cease and desist" letter; and finally the case Akro Corp. v. Luker, 45 F.3d 1541 (Fed. Cir. 1995), in which the Federal Circuit held there was personal jurisdiction on the basis of "cease and desist" letters and the fact that the patentee had a licensee in that forum.

The attorney for Pacific Fitness argued that under the test set out in Burger King v. Rudzewicz, 471 U.S. 462 (1985), the "cease and desist" letter falls far short of the requisite level of contacts required for personal jurisdiction in this case. He also argued that to base personal jurisdiction on the basis of a "cease and desist" letter would dissuade patentees from sending warning letters and encourage them to simply file infringement suits first.

The three judges on the panel interjected frequently in the attorneys' arguments with their own questions, probing and testing the parties' positions. Overall the hearing was a vigorous and engaging give-and-take between the court and the attorneys arguing the two cases. But despite the serious nature of the proceeding, there were also some light-hearted moments. During oral arguments in the Stairmaster case, for example, Judge Plager was asking Ronald Regan, the attorney for Pacific Fitness, about some of his arguments when the lights over the judges' bench went out. Judge Plager said, "Well, Mr. Regan, I'm afraid your arguments have left the court in the dark." The whole room erupted with laughter.

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