The key litigated issue in Allflex USA, Inc. v. Avid Identification Systems, Inc. was whether appellate jurisdiction existed over certain carved-out issues in a settlement agreement, where the damages sought on appeal bore no reasonable relationship to the parties' claims.

In 2006, Allflex filed suit against Avid in the US District Court for the Central District of California seeking a declaratory judgment that several of Avid's patents were unenforceable due to Avid's inequitable conduct, and that Allflex was not liable for patent infringement. Avid counterclaimed, alleging infringement.

In 2010, the district court granted summary judgment in favor of Allflex on the non-infringement claim.

In 2011, the district court granted partial summary judgment in favor of Allflex on the inequitable conduct claim. In its ruling, the court found that Avid's failure to disclose information regarding prior public use of its patents and offers to sell one of its products was material for purposes of Allflex's claim of inequitable conduct. However, the district court refused to grant full summary judgment on Allflex's inequitable conduct claim because it concluded there was a genuine issue of fact about whether Avid's president had the requisite intent to deceive the Patent and Trademark Office (PTO), a necessary element of inequitable conduct.

During the course of the litigation, the district court also ruled that Avid should be sanctioned under Federal Rule of Civil Procedure 37(c) for failure to disclose the existence of reexamination proceedings that were pending in the PTO with respect to the patents at issue. However, the court never actually imposed any sanctions on Avid.

After the court's 2011 partial summary judgment ruling, the parties settled. The settlement provided that Avid would pay Allflex $6.55 million. In addition, the settlement allowed Avid to appeal the district court's:

Under the settlement, if Avid were to successfully overturn any of these three rulings, Allflex would pay Avid back $50,000 (termed an "appeal consideration" by the settlement agreement).

The district court approved the settlement and dismissed the case with prejudice, except for the three issues carved out for potential appeal.

Avid appealed all three rulings. Allflex did not file any opposition.

On January 17, 2013, the US Court of Appeals for the Federal Circuit issued an opinion dismissing Avid's appeal as moot. It held that parties cannot manufacture appellate jurisdiction after settlement by stipulating to an arbitrary amount of damages to be paid to the winner on appeal. Specifically, the court held that:

Moreover, the Federal Circuit held that all three issues on appeal were moot despite the fact that Avid potentially stood to reap $50,000 if it prosecuted a successful appeal. According to the court, for the appeal to survive a mootness challenge, the amount at stake had to be tied to the parties' claims (such as a reasonable amount in liquidated damages or an amount awarded to one party in the district court action). The $50,000 sum at issue here bore no such relationship. It was, in the court's words, a mere "side bet" between the parties designed to manufacture appellate jurisdiction "completely untethered to the value of the issues on appeal." It was therefore insufficient to create a live controversy for any of the three issues Avid sought to appeal to the court.

When carving out issues in a settlement agreement to pursue on appeal, make sure that appellate resolution of those issues will actually affect the rights of the litigants. Otherwise, a court may ultimately dismiss an appeal on mootness grounds. Moreover, Allflex teaches that parties cannot side-step the mootness issue by agreeing that the winner on appeal will receive "appeal consideration," at least where the amount of consideration bears no reasonable relationship to the value of the litigated claims.