Thursday, July 14, 2016

Standard competitive bluster can be used as evidence of bad faith

Hillman Group, Inc. v. Minute Key Inc., 2016 WL 3654437,  No.13-cv-00707 (S.D. Ohio Jul. 8, 2016)

Hillman makes duplicate keys, sold in at mass merchants, home centers, automotive parts retailers, franchise and independent hardware stores, grocery/drug chains, parcel shipping outlets, etc.  Key duplication has traditionally been manual; a human identifies the proper blank key that fits the one the customer hands over, then cuts the duplicate.  Hillman has 60% of that market.

Self-service, automatic key duplication is a new trend. Kiosks allow retailers to devote fewer employees, less inventory, and less floor space to the process. Minute Key patented such a kiosk and sought to displace Hillman and its FastKey kiosk.  Minute Key placed 19 kiosks in Walmart stores across the country, then in 2012 signed a Walmart contract for a national rollout of 1000-1600 kiosks.  The rollout was delayed, and Minute Key found that it would have to compete against Hillman in a 100-store head to head pilot.  Minute Key believed that Hillman’s “very good relationship” with Walmart’s Tire Lube Express (TLE) team was at the root of the decision to extend the pilot and, in turn, delay Minute Key’s national rollout, which “practically put minuteKEY out of business.”

A Minute Key board member and investor, as part of discussions about the Walmart pilot, asked if its patent applications could be used to create “some FUD” about Hillman with Walmart.  In late 2012, Hillman won the pilot, with 900 stores going to Hillman and 300 to Minute Key.  A Minute Key principal responded, “in every retailer where we have gone head to head with fastkey @ Lowes, Menards, Meijer, Orchard Supply Hardware; our machine has won in every category; revenue, reliability, customer experience and accuracy. Is there anything we can do here to improve our position?”  (Etc.)  Discussions with Walmart revealed that Hillman succeeded in stores that also used Hillman’s transponder key program in their auto departments.  Another Minute Key person questioned whether it was time for Minute Key to consider “how/whether to use our patents to play offense.” There was further discussion of the patents, the threat they might pose to Hillman, and when the “patent card” should be played.

And there were some of the usual insider comments, which are almost inevitable; generally just bluster; and yet can be made to look bad.  E.g., “Fuck Hillman, they don’t know they are messing with a pirate.”/ “ it. Always need a competitor and we will whack them in time,” to which another responded, “Need to whack them now!”

The Walmart employee responsible for the Walmart decision then took a job at Hillman; his replacement looked at the trial and concluded that, based on revenue per square foot, downtime, returns, and customer experience, Minute Key, rather than Hillman, should have won:

In terms of profit per square foot, [Minute Key] was 25 percent more per machine per store. The customer experience was a little over a minute compared to between a little over three minutes. The downtime was a fracture [sic] of what the Hillman machine was. And the returns was [sic] significantly less, which all factor into customer experience.

Based on this, he started talking with Minute Key about rolling out at 1000 more stores, though Walmart had a three-year commitment to Hillman. 

In September 2013, Minute Key emailed Walmart that it would be sending Hillman a patent infringement notice when its patent was issued.  The email continued:

Our investment is only protected by our intellectual property, and thus we have no choice but to enforce our intellectual property against anyone who attempts to misappropriate it, such as by infringing our patent rights. The patent to be issued next Tuesday is only the tip of the iceberg of our intellectual property, and there are many more on the way.… It is flattering to be imitated by others, but it also is evidence of the significance of the contribution that MinuteKey’s technology has made to the industry, and our technology must be protected.

Walmart responded by deciding to give all kiosks at new stores/stores that requested kiosks to Minute Key, while Hillman would continue to install in its approved locations.  Walmart also requested a claim chart indicating which claims Minute Key alleged Hillman to be infringing.

Hillman sued for a declaration of noninfringement; Minute Key then provided Hillman with a covenant not to sue and argued that no case or controversy existed.  Hillman then sought to amend its complaint to add federal and state false advertising claims.

Courts have decided that, in cases involving statements about patent infringement, Lanham Act plaintiffs have to show bad faith in order to “give effect both to the rights of patentees as protected by the patent laws under ordinary circumstances, and to the salutary purposes of the Lanham Act to promote fair competition in the marketplace.”   The court found genuine issues of material fact precluding summary judgment.

First, Minute Key argued that its statements were opinion, not fact. In context, they were claims of fact, clearly declaring that Hillman was a patent infringer, and a jury could readily conclude that Walmart understood these as statements of fact.  Walmart’s counsel responded by asking Minute Key for a claim chart and Hillman to acknowledge its indemnification obligation; then Walmart suspended the deployment of key kiosks based on the patent claim.

Were the statements “commercial advertising or promotion”?  The relevant customer base as the market for self-service kiosks, not key duplication equipment generally. Hillman argued that Minute Key only seriously tried to get Walmart’s business (though why this should matter is unclear, since the key is distribution in the market, whatever that is, not how many entities in that market the defendant targeted).  Whether the market at issue was limited to Walmart was a factual question for the jury.

Bad faith: Minute Key argued that there could only be bad faith if its patent infringement claim was “objectively baseless.”  But Minute Key’s representation in marketing that its machine was fully automatic, while Hillman’s was not, could be taken into account in determining this, as well as the board member’s speculation about using patents to create “FUD” and “quips from its CEO such as ‘Fuck Hillman, they don’t know they are messing with a pirate’ and ‘Need to whack them now!’ and ‘Thinking about raising the patent card.’”

There were also questions of fact about damage to Hillman; though Hillman wasn’t guaranteed any extra stores, Walmart decided to use Minute Key for new stores/requests the day after Minute Key confirmed that it would be issuing a patent infringement notice to Hillman; before that, Hillman was the vendor of choice.  There was a dispute about whether Walmart offered, as a custom though not a contractual obligation, a “right of first refusal” to existing vendors for future business.  There was also a factual question about whether a delay in the already-promised kiosk rollout was due to the infringement claims, or whether the Hillman kiosks were still in production and then blocked by Walmart’s blackout period from mid-October to mid-January during which no vendor is allowed to place any kiosk.

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