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RMT Inc. v. Bhat Industries Inc.

U.S. Court of Appeals, Federal Circuit


April 05, 1999

RMT, INC., PLAINTIFF-APPELLEE,
v.
BHAT INDUSTRIES, INC., GREEN EARTH TECHNOLOGIES CORPORATION AND VASANTH KUMAR BHAT, DEFENDANTS-APPELLANTS.

Before Mayer, Chief Judge, Rich and Plager, Circuit Judges.

The opinion of the court was delivered by: Plager, Circuit Judge.

Bhat Industries, Inc., Green Earth Technologies Corp., and Vasanth Kumar Bhat (collectively "Bhat") appeal from a district court decision and order, No. IP 95-0799-C M/S (S.D. Ind. Mar. 6, 1998), holding that Bhat violated a final consent judgment and sanctioning Bhat by enjoining Bhat from sale of all existing products at issue. We affirm the district court's Conclusion that Bhat violated the final consent judgment. However, because the sanction imposed in paragraph two of the civil contempt order is punitive rather than coercive, we vacate that paragraph of the court order and remand the case for the district court to recast the terms of the permanent injunction.

DISCUSSION

The dispute in this case centers around a final consent judgment issued by the district court in 1996 after the parties settled a patent infringement suit. Under the terms of the consent judgment, Bhat was permanently enjoined from directly or indirectly selling the "Product" as defined in paragraph three of the judgment, but was licensed to sell the defined "Royalty Product" for three years in exchange for royalty payments to RMT. See RMT, Inc. v. Bhat Indus., Inc., No. IP 95-799-C-M/S ¶¶ 5-6 (S.D. Ind. Sept. 18, 1996) [hereinafter Final Consent Judgment]. The consent judgment also contained a royalty auditing requirement.

The present controversy stems from Bhat's refusal to approve of the auditor chosen by RMT to audit Bhat's books and records for royalty purposes, and Bhat's sales of some alleged "New Products," as defined in paragraph thirteen of the consent judgment. In response, RMT filed a motion for contempt against Bhat, alleging that Bhat had violated the consent judgment provisions relating to full disclosure of New Products and the royalty payment auditing process. The district court found that Bhat had unreasonably withheld approval of RMT's chosen auditor, and that Bhat had deliberately sold "illegal products (e.g., Ecosol 3, Ecosol 5, Alkasol 2, Alkasol 5, Foundrytreat 70, etc.) without first providing a `full disclosure'" to RMT both in violation of the final consent judgment. As one of the sanctions for civil contempt, the court permanently enjoined Bhat during the term of the '479 patent from the sale of all existing products regardless of disclosure. This appeal followed.

We have jurisdiction to hear this appeal under 28 U.S.C. § 1295(a)(3) (1994). With regard to procedural matters that are not uniquely of concern to us, as a matter of courtesy we apply the law of the regional circuit. That would include the standard of review of a district court's contempt actions. See Atari, Inc. v. JS & A Group, Inc., 747 F.2d 1422, 1438-40 (Fed. Cir. 1984) (en banc). The Seventh Circuit uses an abuse of discretion standard. See Badger Meter, Inc. v. Grinnell Corp., 13 F.3d 1145, 1154-55 (7th Cir. 1994). The district court's Conclusions of law are reviewed without deference. See id. at 1155.

On appeal, Bhat contends that the district court erred in adopting RMT's proposed findings of fact and Conclusions of law and in construing the terms of the consent judgment. We note that the Seventh Circuit has specifically declined to criticize the practice of a district court's adoption of a party's proposed findings of fact and Conclusions of law. See Abbot Labs. v. Mead Johnson & Co., 971 F.2d 6, 23 (7th Cir. 1992). Thus, we find no abuse of discretion here, particularly because Bhat could have submitted its own proposed findings of fact and Conclusions of law or objected to RMT's proposals, but did not.

Similarly, we conclude that the district court properly interpreted the consent judgment to include the products at issue as "New Products" subject to the disclosure requirement. The parties specifically defined "New Product" in the consent judgment to mean "any product for the treatment of materials containing heavy metals . . . which differs in any respect from the Royalty Product." See Final Consent Judgment ¶ 13; see also Freedman v. Air Line Stewards & Stewardesses Ass'n, 730 F.2d 509, 515 (7th Cir. 1984) (construing a consent order like a contract to determine whether a party has complied). This definition encompasses Alkasol 2 and 4, Ecosol 3 and 5, and Foundrytreat 70, even if they are old products in a temporal sense. Furthermore, we note that the same Judge presided over the present contempt proceeding as well as the original patent infringement trial which concluded with the consent judgment. Upon review, we cannot say that the district court's interpretation of "New Product" in the consent judgment to include products previously sold for other purposes is inconsistent with the rest of the agreement.

Bhat also argues that the district court erred in holding that Bhat violated the terms of the consent judgment. Even if Bhat were correct in its assertion that it did not violate the "New Product" disclosure requirements in paragraph thirteen of the consent judgment, it clearly violated paragraph fifteen of the consent judgment by unreasonably withholding approval from RMT's chosen auditor. The district court did not clearly err in finding that Bhat's refusal to accept the auditor was unreasonable because public accountants are independent and because the accounting firm had agreed to maintain confidentiality as required by the consent judgment. See generally United States v. Arthur Young & Co., 465 U.S. 805, 817-18 (1984) (finding that the accountant-client relationship is unlike the attorney-client relationship because the certified public accountant's role of disinterested analyst charged with public obligations demands total independence from the client).

Although we conclude that the district court properly held Bhat in contempt for violating the consent judgment, we agree with Bhat that paragraph two of the permanent injunction sanction is improper. The purpose of a civil contempt sanction is to coerce compliance with the court order or to compensate the other party for the noncompliance. See Commodity Futures Trading Comm'n v. Premex, Inc., 655 F.2d 779, 785 (7th Cir. 1981). In this case, in paragraph two of the civil contempt order, the court permanently enjoined Bhat during the term of the '479 patent from:

"[T]he sale of all existing products including without limitation Ecosol, Ecosol 3, Ecosol 5, Alkasol 2, Alkasol 4 and Foundrytreat 70, and products substantially similar thereto, for the treatment of materials containing heavy metals which differ in any respect from the Royalty Product, with such permanent injunction continuing irrespective of BHAT's subsequent "full disclosures", if any . . . ."

Because the scope of paragraph two of the permanent injunction is too broad in that it continues despite Bhat's subsequent compliance with the disclosure terms of the consent judgment, that paragraph of the order is not coercive but punitive in nature. See Commodity Futures, 655 F.2d at 785 (stating that relief for civil contempt is remedial rather than punitive in nature). Consequently, we vacate paragraph two of the district court's order and remand the case for the court to reformulate the terms of the permanent injunction.

19990405


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