Sanction Of Civil Contempt Reversed Where Defendant Did Not Violate Any Unequivocal Command In The Court’s Order

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.

"[I]f 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." Slip op. at 9 (citation omitted).

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...