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Nuclimate Air Quality Systems, Inc. v. M&I Heat Transfer Products

July 24, 2008


The opinion of the court was delivered by: Neal P. McCurn, Senior District Judge


I. Introduction

Presently before the court is a motion by defendant and counter-plaintiff, M&I Heat Transfer Products, Ltd. ("M&I") for a preliminary injunction pursuant to Fed. R. Civ. P. 65, enjoining plaintiffs and counter-defendants, NuClimate Air Quality Systems, Inc. ("NuClimate") and James Miller ("Miller") (collectively, "Plaintiffs") from infringing U.S. Patent No. 6,623,353 ("the '353 patent"). Plaintiffs oppose, and M&I replies. Oral argument was heard regarding the pending motion on July 10, 2008 in Syracuse, New York. Decision was reserved.

II. Background

The subject matter of the '353 patent is an "air handling system that provides heated or cooled air to an enclosed space, for example, a school classroom . . . that includes four induction units that use the Venturi effect to provide a mixture of primary air and return air to an enclosed space." Decl. of Muammer Yazici, May 14, 2008, ¶ 1, Dkt. No. 13-3. See also Ex. A to Am Compl. (the '353 patent). The '353 patent was issued on September 23, 2003 to inventors Salman Akhtar ("Akhtar") and Gerhard Granek ("Granek") and assignee, Air Handling Engineering, Ltd. M&I is the current owner of the '353 patent. See Yazici Decl., ¶ 1. M&I contends that NuClimate unlawfully sells two air handling systems that infringe the '353 patent: the Q-4 air terminal and the Q-360 air terminal.

Plaintiff Miller, Vice President and twenty-five percent owner of NuClimate, alleges that he "initially conceived, and brought to M&I, the idea of a four-way induction unit." Decl. of James Miller, June 23, 2008, ¶ 18, Dkt. No. 26 ("Miller Decl."). "Sometime between 1999 through 2001" Miller, who was working as a consultant on the Diven school project in Elmira, New York, came into contact with William Shultes ("Shultes") who worked for R.L. Kistler, a manufacturer's representative that was supplying equipment for the project. Decl. of William R. Shultes, June 20, 2008, ¶ 4, Dkt. No. 23 ("Shultes Decl."). See also Miller Decl., at ¶ 5. Shultes introduced Miller to M&I, "because [he] knew that it designed and manufactured induction units, and [he] thought M&I would be able to help [Miller] refine and test his concept." Shultes Decl. ¶ 5. According to Shultes, "[Miller] conceived of the idea of an induction assembly with a square configuration utilizing four induction units". . . and communicated the idea to Shultes "before [Shultes] put [Miller] in touch with M&I." Id. ¶ 4.

Miller contends that he spoke with the then president of M&I, Dippti Datta ("Datta") and "told him about the idea of having a four-way induction unit." Miller Decl. ¶ 6. Datta suggested Miller speak with Akhtar, who was employed by M&I at that time. See id. Miller contends he also "described his concept of having a four-way induction unit to [] Akhtar, and asked him to implement it." Id. However, Miller contends "[r]ather than develop an integrated unit, . . . M&I simply arranged four of their pre-existing single induction units together as four sides of a square[,] [which] did not accomplish my goals of having a single air and water connection with induced room air directly entering the unit from the room." Id. Nonetheless, Miller states that he continued to work with Akhtar "to try to improve the M&I product . . . [and] [a]fter several months, we decided to install the prototype in a room at M&I's offices in Canada to see how it performed." Id. at ¶ 7. According to Miller, "M&I set up a test area to demonstrate its unit so that the attendees could see the air flow patterns and effectiveness of the ventilation system." Miller Decl. ¶ 7.

At oral argument, Plaintiffs submitted to the court a copy of a facsimile cover sheet and attached diagrams which are dated February 23, 2001, and are addressed to the attention of Akhtar at M&I from Miller. See Tr. of Oral Argument at 8:18-9:5, 15:18-16:15. Dkt. No. ___ ("Tr."). The message states, in relevant part, "[e]nclosed is our interpretation of what the small quad unit will look like. This drawing is taken from the drawings being prepared for the Diven project. These units will be made up of MLD-48 units ... [.]" Attached is one diagram labeled, "Test Room" and another labeled "Quad Model." Another diagram labeled "Floor Plan" was submitted by M&I and is purported to be "a drawing showing the layout of the M&I facility displaying the patented invention ... [which] specifically identifies the locations of the patented invention." Yazici Decl. ¶ 10, Ex. F. The diagram is dated July 25, 2001. See id.

By electronic mail to Akhtar, Datta and Shultes on July 6, 2001, Miller confirmed "our trip to M&I on ... July 31, 2001." Miller further stated that "[] Datta (president of M&I) and [] Akhtar (engineering manager) will host us and be able to answer any questions pertaining to the induction units. I will answer any questions about the total systems being designed for them at Diven and Hendy. We will also be able to demonstrate the air flow patterns and effectiveness of the ventilation system through the use of smoke bombs." Ex. 1 to Miller Decl.

Miller claims "[t]he demonstration showed that M&I's design did not achieve my goals for the system[,]" and that M&I's design was "inefficient" and "drew unfiltered air from above the ceiling, potentially introducing dirt, mold and other particles ... into the occupied spaces." Miller Decl. ¶ 8. See also Shultes Decl ¶ 8. Consequently, according to Miller, "[Shultes] and I ... decided to take control of designing and building a prototype unit[,]" and "purchased four induction units from M&I to integrate into our design." Id. See also Shultes Decl.¶ 6.

By letter dated August 6, 2001, Miller told Datta that "the total impact [of the presentation] on everyone involved was a very positive image" and "[t]he results that we have gotten at your demonstration room were as predicted." Ex. 2 to Miller Decl. Miller also stated that "[t]he air handler design that [Akhtar] has come up with incorporating the heat recovery system with it, makes the system easier to install for renovation projects." Id. However, Miller also noted that he and Shultes have had further conversations since the demonstration "about developing some further refinements on the appearance and packaging of our Quad Systems. We want to make them easier to install and more flexible to apply. Since M&I is not equipped with sheetmetal shops and pipe fitters to assist in packaging, we have decided to purchase four induction units from you and continue to do some further refinements on the packaging of these systems under our direct supervision here locally." Id. Datta replied to Miller thanking him for organizing the trip and "making every effort to demonstrate the ceiling mounted induction unit as being the possible, if not the best solution, for the upcoming school market." Ex. 7 to Miller Decl. Datta went on to state that "[t]he full credit goes to your commitment to augment the existing systems, which other consultants have left for someone in the future to address. The only distinction I make, is that you had the foresight and conviction to face stiff opposition in and around you, and despite that fact you decided to forge ahead because you knew this industry needs a heavy dose of infusion knowledge based solution. We, at M&I, played a very small role in giving fruition." Id. Datta also told Miller that "you can convey to your clients that we would be participating in the commissioning of the systems under your guidance and make sure that the systems will perform in compliance with your specification." Id.

After Miller and Shultes purchased the induction units from M&I, they continued working on a design in Syracuse, New York. See Miller Decl. ¶ 9; Shultes Decl. ¶ 6. According to Shultes, "[a]fter our design was finalized and the prototype tested, I sent drawings of our design, as well as our performance metrics, to M&I." Shultes Decl. ¶ 7. By facsimile dated November 27, 2001, Shultes sent a design drawing to Muammer Yazici,*fn1 labeled "M&I Air Wedge" with the following written introduction, "[t]he final diffuser design is shown on enclosed. We have tested, tested & tested and balanced and the enclosed performance is enclosed. The copper sweat coil connection will be on unit side per [] Miller's request. Will keep you informed." Ex. 9 to Miller Decl.; Ex. B to Shultes Decl. Shultes explained that he "created the sketches and drawings contained in [the facsimile], which were intended to show M&I our design. At that time, we had planned that M&I would be responsible for manufacturing the unit and that Kistler would be the manufacturers' representative for the product. [The facsimile] therefore refers to the design as an M&I product, although it was designed by me and [] Miller. In fact, because I did not know what to name the product at the time, I referred to it [] as the 'M&I Air Wedge,' which was the name of an existing M&I product with two induction units." Shultes Decl. ¶ 7. See also Miller Decl. ¶ 17. Miller explains, "[a]lthough I believed that the product [Shultes] and I designed would be the best induction unit for [the Diven] project, it would have been a conflict of interest for me to recommend a product I designed and with which I was involved in the manufacture. At that time, therefore, M&I was going to sell the product I conceived. (M&I eventually decided, however, not to manufacture or sell our design.)" Miller Decl. ¶ 16.

On January 25, 2002, a meeting apparently took place between Datta, Yazici, Shultes and Miller regarding the "Development, Assembly, Engineering and Marketing of Induction Units," as evidenced by minutes which were prepared by Miller, and submitted to the court by both parties. See Miller Decl. ¶ 8; Yazici Decl. ¶ E. The minutes reflect that the attendees "discussed construction of induction units, regarding coil and air leakage. Leakage to be addressed by M&I." Id. The minutes also reflect that "[t]hree equal partners are M&I, [] Shultes and [] Miller" and that "[] Akhtar, [] Miller and [] Granek are on patent application." Id.

Eventually, Miller's and Shultes's design was embodied in a patent application they filed April 25, 2002, which matured into U.S. Patent No. 6,569,010, issued on May 27, 2003 ("the '010 patent"). See Shultes Decl. ¶ 6; Miller Decl. ¶ 9. "Around this time, [Miller] was made aware that M&I was filing its own patent application on its embodiment of an induction assembly with four induction units ... ." Miller Decl. ¶ 10. On March 11, 2002, Miller wrote to Yazici*fn2 noting his receipt of a Power of Attorney and Assignment of Patent Application, but stating, "I cannot sign these papers." Ex. 4 to Miller Decl.; Ex. D to Yazici Decl. Miller went on to explain that he has not seen the patent application and "cannot in good conscience sign a Declaration claiming to be an inventor of an invention described in a patent application I have not seen nor read." Id. Miller also stated, "I am unaware of any invention [Akhtar], [Granek] and I have worked on that would qualify us as co-inventors" and "I am also disappointed that you expected me to sign away all rights for my system to a business unknown to me and from which I can expect no benefits." Id. Yazici replied to Miller by letter, to which a copy of the '353 patent application was ostensibly attached, suggesting that Miller and Shultes form an LLP so that the LLP can endorse a contract with M&I, in order that "some financial benefits would accrue to the participants when these 'quad induction units' are sold to the school market." Ex. 5 to Miller Decl. Yazici also stated, "[a]s far as M&I is concerned you, [] Akhtar and [] Granek were all involved in the development of this product and will be named as inventors." Id. In an electronic message sent April 3, 2002 Miller told Yazici, "I don't think we have much to talk about until we get the order for the D[]iven job. The patent application does a good job of describing your induction units, but other than showing them in a square configuration it does not have anything to do with my design and you don't need to have my name on that application." Ex. 6 to Miller Decl.; Ex. B to Granek Decl. Miller explains that he "did not believe [M&I's] patent application described [his] invention or that the design therein functioned in an efficient manner." Miller Decl. ¶ 13. Significantly, Miller admits he did not show his April 3, 2002 electronic message to his patent attorney "to investigate what effect it would have on [his] pending patent application." Id.

Yazici claims he was initially "under the impression that [] Miller was involved in the development of the invention sent forth in the '353 patent[,]" and therefore "had his name put on the inventor's declaration and power of attorney that was to accompany the M&I patent application ... ." Yazici Decl. ¶ 6. Yazici further states that "Miller informed me on April 3, 2002 that he was not an inventor of the subject matter of the M&I patent application ..." and relying on same, he removed Miller's name from said application. Id. Granek, one of the two named inventors listed on the '353 patent, states that he "worked with [] Akhtar in developing the invention set forth in the '353 patent[,] [but does] not have any recollection of [] Miller making any contribution ... [and therefore has] no reason to dispute [] Miller's assertion ... that 'you don't need to have my name on that application.'" Decl. of Gerhard Granek, April 25, 2008, ¶¶ 3, 4, Dkt. No. 13. Granek further notes that "[his] memory of the events regarding development of the invention set forth in the '353 patent has faded as these events occurred a number of years ago." Id. ¶ 5.

A patent application was submitted, with only Akhtar and Granek listed as inventors, on May 7, 2002. The'353 patent was awarded on September 23, 2003, just shy of four months after Shultes and Miller were awarded the '010 patent. On March 12, 2008, M&I issued a cease and desist letter to NuClimate, demanding it "immediately cease and desist in the manufacture, use, sale and/or offer for sale of the Model Q-4 air terminal." Ex. A to Am. Compl., Dkt. No. 5.

One week later, Plaintiffs commenced this lawsuit pursuant to 35 U.S.C. §§ 256 and 283 seeking declaratory and injunctive relief only. Plaintiffs request an order declaring that (1) M&I is without right to sue Plaintiffs for infringement of the '353 patent; (2) the '353 patent is invalid; (3) the '353 patent is not infringed by NuClimate; and (4) NuClimate has the right to continue to do business without interference from M&I arising from their ownership of the '353 patent. Plaintiffs also seek an injunction enjoining M&I from prosecuting any action against NuClimate's buyers, sellers or users based on alleged infringement of the '353 patent and enjoining M&I from charging that NuClimate's Model Q-4 air terminal infringes the '353 patent. Plaintiffs request in the alternative that the court order the correction of the named inventors of the '353 patent to include Miller. M&I countersues Plaintiffs for infringement of the '353 patent, seeking an injunction enjoining Plaintiffs from further infringement as well as damages.

By the present motion, M&I contends that NuClimate unlawfully sells two air handling systems that infringe the '353 patent: the Q-4 air terminal and the Q-360 air terminal. M&I further contends it is suffering and will continue to suffer irreparable harm due to Plaintiffs' infringement of the '353 patent. M&I alleges that it has lost jobs in the U.S. market because NuClimate has underbid M&I using M&I's patented technology. M&I further contends that Plaintiffs do not have the financial resources to satisfy a money judgment in this case.

Plaintiffs argue that M&I has known about the Q-4 since 2004, and their delay in bringing suit negates a finding of irreparable harm. Plaintiffs also contend that they have ceased selling or manufacturing the Q-4 pending the outcome of this litigation and therefore, an injunction is unnecessary. See Decl. of John A. DiMillo, June 20, 2008, ¶ 7, Dkt. No. 25 ("Dimillo Decl."). Plaintiffs further argue that the Q-360 does not infringe the '353 patent; the '353 patent is invalid because the invention disclosed therein is obvious; and Miller is not estopped from asserting that he invented the four unit induction system. Plaintiffs contend that M&I cannot establish irreparable harm regarding the Q-360 because the damages alleged - - price erosion and loss of market share - - are compensable by monetary damages, and it has failed to demonstrate what a likely judgment might be and why Plaintiffs are unable to satisfy such a judgment.

For the reasons that follow, M&I's motion for a preliminary injunction is granted as to Plaintiffs' Q-4 model, but is denied as to the Q-360 model.

III. Discussion

Initially, it is important to note that it is the law of the Court of Appeals for the Federal Circuit which governs preliminary injunctions in patent cases. See Hybritech Inc. v. Abbot Labs., 849 F.2d 1446, 1451 n.12 (Fed. Cir. 1988). Accordingly, this court is bound by Federal Circuit, not Second Circuit, precedent in deciding the present motion.

A. Standard of Review

Injunctive relief in patent cases is authorized by statute. Pursuant to 28 U.S.C. § 283, "courts . . . may grant injunctions in accordance with the principles of equity to prevent the violations of any right secured by patent, on such terms as the court deems reasonable." The party seeking a preliminary injunction, here M&I, has the burden to show entitlement to same. See Reebok Int'l Ltd. v. J. Baker, Inc., 32 F.3d 1552, 1555 (1994). In deciding whether to grant a preliminary injunction, the court must consider the following four factors: (1) the movant's reasonable likelihood of success on the merits; (2) the irreparable harm the movant will suffer if preliminary relief is not granted; (3) the balance of hardships tipping in its favor; and (4) the adverse impact on the public interest. See id. Although all four factors must be considered when deciding to grant a preliminary injunction, the Federal Circuit has "specifically decline[d] ... to require a district court to articulate findings on the third and fourth factors when the court denies a preliminary injunction because a party fails to establish either of the two critical factors." Id., at 1556 (emphasis in original).

In order to establish a reasonable likelihood of success, M&I must establish that the '353 patent is valid, and that Plaintiffs have infringed same. See Reebok, 32 F.3d at 1555. However, a patent is "presumed valid[,]" and "[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity." 35 U.S.C. § 282. Thus, in order to avoid a showing of likelihood of success here, Plaintiffs "must show a substantial question of invalidity" of the '353 patent. Erico Int'l Corp. v. Vutec Corp., 516 F.3d 1350, 1354 (Fed. Cir. 2008).

Next, in order to prevail on its motion, M&I must also at the very least establish that it will suffer irreparable harm if the preliminary injunction is not granted. See id. However, should M&I establish "[a] strong showing of likelihood of success on the merits coupled with continuing infringement" a presumption of irreparable harm is raised. Id., at 1556. The presumption is rebuttable, though, as the burden would then shift to Plaintiffs, who carry the "ultimate burden of production on the question of irreparable harm." Id.

B. The Q-4

1. Irreparable Harm

Plaintiffs make clear that for purposes of the present motion, they do not contest infringement of the '353 patent by the Q-4. See Tr., at 9:25-10:1; 23:5-7. However, Plaintiffs do argue that M&I has not established that it will be irreparably harmed absent a preliminary injunction. Plaintiffs argue that M&I cannot show irreparable harm because 1) it has been aware of the Q-4's existence since 2004, and 2) NuClimate has ceased manufacturing or selling the Q-4 pending resolution of this litigation. See Decl. of John A. DiMillo, June 20, 2008, ¶ ¶ 7, 8, Dkt. No. 25 ("DiMillo Decl.").

Plaintiffs' first argument carries little weight. According to Plaintiffs, in 2004, M&I's current CEO, Wais Jalai ("Jalai"), viewed a Power Point presentation that included information regarding the Q-4, which was exhibited by NuClimate Vice President John DiMillo. However, Jalai declares that he did not purchase M&I until "August or September of 2007." Decl. of Wais Jalai, June 30, 2008, ¶ 2, Dkt. No. 27-6 ("Jalai Decl."). Prior to that time, he was not an employee, owner or officer of either M&I or any of its parent or subsidiary companies, and did not have any knowledge of the '353 patent, which is owned by M&I. See id. ¶¶ 2, 5. Therefore, in 2004, not only would Jalai have had no reason to suspect that the Q-4 was relevant to any M&I patent, he was not in any position to enforce such a patent. See id. ¶ 5. Accordingly, Plaintiff's argument in that respect does not support its overall contention of lack of irreparable harm.

Plaintiff's second argument, however, warrants some discussion. John A. DiMillo, Vice President of Sales and Marketing for NuClimate, states that NuClimate ceased manufacture of the Q-4 immediately after receiving the first communication from M&I of an infringement complaint. See DiMillo Decl. ¶ 7. Plaintiffs argue that because the Q-4 is no longer in production, M&I cannot establish irreparable harm in the absence of a preliminary injunction. M&I counters that NuClimate's cessation of production of the Q-4 does not negate a finding of irreparable harm, citing W.L. Gore & Associates, Inc. v. Garlock, Inc., 842 F.2d 1275, 1281 -1282 (Fed. Cir. 1988). There, the court held, "[t]he fact that the defendant has stopped infringing is generally not a reason for denying an injunction against future infringement unless the evidence is very persuasive that further infringement will not take place." Id. In that case, the defendant stopped production and sale of alleged infringing material at the time of trial without any explanation. See id. at 1282. Because no other evidence existed to support a conclusion that the defendant no longer had the capacity to make or sell the material, including the equipment necessary to do so, or that he had no intention to resume production, the court reversed the district court's order refusing to issue an injunction. See id. Here, however, an officer of NuClimate has stated that upon receipt of the first communication from M&I complaining of infringement, all sales and production of the Q-4 were ceased, all literature and information regarding the Q-4 was removed from NuClimate's website, and NuClimate will not offer the Q-4 for sale until a final ruling is made in this case. See Dimillo Decl. at ¶ 7.

At oral argument, M&I notes that here, as in W.L. Gore & Associates, Inc., DiMillo does not state that NuClimate no longer has the capacity to manufacture and sell the Q-4. See Tr., at 20:6-13. W.L. Gore & Associates, Inc., 842 F.2d at 1282. Accordingly, M&I argues, it has no way to protect its interests if the court denies its motion for a preliminary injunction, as there would be no legal basis upon which to prevent NuClimate from continuing its alleged infringement. M&I further argues that NuClimate, on the other hand, stands to lose nothing by an injunction here, if in fact they have stopped production and sale of the Q-4. M&I also points out that as of the date this litigation was commenced, Plaintiffs alleged, for jurisdictional purposes, that NuClimate "has been and is at present manufacturing and selling its Model Q-4 air terminal in the United States." Compl. ¶ 11. See Tr., at 19:20-6. M&I further notes that Plaintiffs re-asserted the same allegation when they filed their Amended Complaint on April 28, 2008. See Am. Compl. ¶ 12. These allegations, M&I argues, shed doubt on DiMillo's contention that Plaintiffs have ceased production and sale of the Q-4.

Plaintiffs counter that DiMillo's declaration was signed after the Amended Complaint was filed and reiterate through counsel that they have no intention of bringing the Q-4 back on the market until this litigation is resolved. See Tr., at 22:8-17.

The court deems DiMillo's Declaration to be persuasive evidence that Plaintiffs have, in fact, ceased manufacture and production of the Q-4. Nonetheless, as M&I correctly points out, here, as in W.L. Gore & Associates, Inc., there is no evidence before the court which would support a conclusion that Plaintiffs no longer have the capacity to resume production and sale of the Q-4 if they so chose. Accordingly, M&I's argument that they would be irreparably harmed without an injunction has merit.

Nonetheless, M&I must still establish a likelihood of success on the merits of its infringement claim in order to prevail on its motion for a preliminary injunction. While it is true that Plaintiffs do not contest a likelihood of success on the merits of this claim insofar as it relates to the Q-4 for purposes of the pending motion, they do, however attack the validity of the '353 patent, which forms the basis for M&I's claims as to both the Q-4 and Q-360. Plaintiffs argue that (1) the '353 patent is invalid because it is obvious pursuant to 35 U.S.C. § 103, (2) the named inventors on the '353 patent should be amended to include Miller, or (3) a question of priority of invention is raised under 35 U.S.C. § 102(g). Because a finding in ...

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