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Energy Heating, LLC v. Heat On-The-Fly, LLC

United States Court of Appeals, Federal Circuit

May 4, 2018

ENERGY HEATING, LLC, AN IDAHO LIMITED LIABILITY COMPANY, ROCKY MOUNTAIN OILFIELD SERVICES, LLC, AN IDAHO LIMITED LIABILITY COMPANY, Plaintiffs-Cross-Appellants
v.
HEAT ON-THE-FLY, LLC, A LOUISIANA LIMITED LIABILITY COMPANY, SUPER HEATERS NORTH DAKOTA, LLC, A NORTH DAKOTA LIMITED LIABILITY COMPANY, Defendants-Appellants MARATHON OIL CORPORATION, MARATHON OIL COMPANY, Third-Party Defendants-Cross-Appellants

         Appeals from the United States District Court for the District of North Dakota in No. 4:13-cv-00010-RRE-ARS, Chief Judge Ralph R. Erickson.

          F. Ross Boundy, Davis Wright Tremaine LLP, Seattle, WA, argued for plaintiffs-cross-appellants. Also represented by Benjamin J. Byer, Stuart Russell Dunwoody; Steven Van Gibbons, Gibbons & Associates, P.S., Seattle, WA.

          Shane P. Coleman, Holland & Hart LLP, Billings, MT, argued for third-party defendants-cross-appellants.

          Scott A. Brister, Andrews Kurth Kenyon LLP, Austin, TX, argued for defendants-appellants. Also represented by Lloyd Lee Davis, III, Gregory Lawrence Porter, Houston, TX.

          Before Moore, Hughes, and Stoll, Circuit Judges.

          Stoll, Circuit Judge.

         Appellants Heat On-The-Fly, LLC and Super Heaters North Dakota, LLC (together, "HOTF")[1] appeal the district court's judgment of inequitable conduct, summary judgment of obviousness, denial of judgment as a matter of law of no tortious interference, construction of disputed claim terms, and dismissal of HOTF's counterclaim of direct infringement. Cross-Appellants Energy Heating, LLC and Rocky Mountain Oilfield Services, LLC (together, "Energy"); and Marathon Oil Company and Marathon Oil Corporation (together, "Marathon") appeal the district court's denial of attorneys' fees under 35 U.S.C. § 285.

         We affirm the district court's declaratory judgment that U.S. Patent No. 8, 171, 993 is unenforceable due to inequitable conduct, and therefore do not reach the district court's summary judgment of obviousness, claim construction order, or summary judgment of no direct infringement. We also affirm the district court's judgment of tortious interference and denial of remedies under the North Dakota Unlawful Sales or Advertising Practices Act. Finally, we vacate the district court's denial of attorneys' fees under § 285 and remand on that issue alone.

         Background

         The '993 patent, which is at the heart of the disputes on appeal, is titled "Water Heating Apparatus for Continuous Heated Water Flow and Method for Use in Hydraulic Fracturing." '993 patent col. 1 ll. 1-5. It relates to a "method and apparatus for the continuous preparation of heated water flow for use in hydraulic fracturing, " also known as "fracing."[2] Id. at col. 1 ll. 28-30, 36-37. More specifically, the invention relates to heating water on demand or inline during the fracing process, instead of using preheated water in large standing tanks. See id. HOTF also refers to this as heating water "on-the-fly." The sole named inventor is Mr. Hefley, the founder of Heat On-The-Fly. He filed the earliest provisional application, Patent App. No. 61/276, 950, on September 18, 2009. Thus, the critical date for analyzing the on-sale and public-use bars under 35 U.S.C. § 102[3] is September 18, 2008, one year before the priority date.

         Claim 1 of the '993 patent reads as follows:

1. A method of fracturing a formation producing at least one of oil and gas, comprising the steps of:
a) providing a transportable heating apparatus for heating water to a temperature of at least about 40 degrees F. (4.4 degrees C.);
b) transmitting a water stream of cool or cold water to a mixer, the cool or cold water stream being at a temperature of less than a predetermined target temperature;
c) the mixer having a first inlet that receives cool or cold water from the stream of step "b" and a first outlet that enables discharge of a substantially continuous stream which is a mix of cool or cold and heated water;
d) the mixer having a second inlet that enables heated water to enter the mixer;
e) adding heated water from the transportable heating apparatus of step "a" to the mixer via the second inlet;
f) wherein the volume of cool or cold water of step "b" is much greater than the volume of heated water of step "e";
g) adding a selected proppant to the mix of cool or cold and heated water discharged from the mixer after step "f"; and
h) transmitting the mix of cool or cold and heated water and the proppant into a formation producing at least one of oil and gas, wherein water flows substantially continuously from the first inlet to the first outlet during the fracturing process.

'993 patent claim 1.

         Before the critical date, Mr. Hefley and his companies performed on-the-fly heating of water on at least 61 frac jobs using the system described in the '993 patent application. In total, Mr. Hefley's companies collected over $1.8 million for those heat-on-the-fly services. Furthermore, Mr. Hefley knew that the patent process required that he file his application within one year of the first offer for sale or public use. It is undisputed that Mr. Hefley's business partner had discussed the on-sale bar requirement with him. Nevertheless, Mr. Hefley did not disclose any of the 61 frac jobs to the Patent and Trademark Office ("PTO") during prosecution as potential on-sale or public uses of the invention that might have triggered an on-sale bar. Ultimately, the patent issued on May 8, 2012.

         Energy competes with HOTF in providing water-heating services during fracing. Energy began using its accused process of heating water on frac jobs in 2012. Energy initially obtained all jobs through Wind River, a water supplier working for Triangle Oil ("Triangle"). After Energy stopped receiving payment from Wind River, it directly solicited work from Triangle. Energy alleges that HOTF tortiously interfered with its prospective business relationship with Triangle by calling Triangle and alleging that Energy's water heaters infringed a valid and enforceable patent, raising the possibility of a patent infringement lawsuit. Energy ultimately lost the work with Triangle. Instead, Triangle hired HOTF for its water-heating needs in early December 2012.

         This case commenced a month later, in January 2013, when Energy sought declaratory judgment that the '993 patent was unenforceable for inequitable conduct, invalid as obvious, and not infringed. In response, HOTF filed counterclaims of infringement, inducement to infringe, and contributory infringement against Energy. HOTF also filed a third-party complaint against Marathon-an oil company that contracted with Energy for on-demand water-heating services-alleging claims for induced infringement and contributory infringement. In response, Marathon filed counterclaims of its own, seeking declaratory judgments of invalidity, non-infringement, and unenforceability due to inequitable conduct. HOTF later added a direct infringement claim against Marathon. Energy then filed a second amended complaint, seeking declaratory judgment for tortious interference with existing or prospective business relationships and for tortious interference with contracts under state law. Energy did not plead any cause of action arising under North Dakota's Unlawful Sales or Advertising Practices Act in its complaint.

         Before trial, the district court granted summary judgment in Energy and Marathon's favor, (1) dismissing HOTF's claims of direct infringement of method claims 1, 13, and 63; and (2) finding all claims of the '993 patent would have been obvious under 35 U.S.C. § 103. In late 2015, the district court held a jury trial, where the jury found:

(1) HOTF represented in bad faith that it possessed a valid patent.
(2) HOTF knowingly engaged in unlawful sales or advertising ...

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