Alert April 01, 2007

Offer for License or Offer for Litigation?

The Good Old Days (for Patent Holders)

For decades a patent owner has been free to correspond with potential licensees without the fear of a declaratory judgment action. A patent holder could contact a potential licensee and detail an infringement case, and despite these acts – provided the patent holder did not overtly threaten litigation – a potential licensee would not be able to acquire declaratory judgment jurisdiction. Thus, in the event the patent holder wanted to initiate litigation, it could select the timing of such litigation as well as the jurisdiction at its leisure. This is no longer the case.

The Supreme Court Ends the Party

In MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), the U.S. Supreme Court considered “whether Article III’s limitation of federal courts jurisdiction to ‘Cases’ and ‘Controversies,’ requires a patent licensee to terminate or breach a license agreement before it can seek a declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed.” The MedImmune Court held that the “actual controversy” requirement does not require a patent licensee to expose itself to liability by breaching its licensing agreement in order to bring a declaratory judgment. Prior to MedImmune, the U.S. Court of Appeals for the Federal Circuit utilized a two-part test to decide whether a declaratory judgment action satisfied the ‘actual controversy’ requirement. The first part of this test examines whether the patentee’s conduct creates a reasonable apprehension on the part of the declaratory judgment plaintiff that it will face an infringement suit, while the second part examines whether the declaratory judgment plaintiff’s conduct constitutes infringing activity. Footnote 11 of the MedImmune opinion criticized the Federal Circuit’s “reasonable apprehension of suit” test for declaratory judgment jurisdiction as conflicting with Supreme Court precedent. The MedImmune Court stated that “the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”

The Federal Circuit Tries Again

Following the MedImmune decision, the Federal Circuit in SanDisk v. STMicroelectronics, Inc., et al., No. 05-1300, (Fed. Cir., March 26, 2007) overturned its long-standing precedent and held that the apprehension of “imminent litigation” is no longer required for a prospective licensee to initiate a declaratory judgment action. Instead, “all of the circumstances” must be examined to determine whether a case and controversy exists under Article III of the Constitution. And “where a patentee asserts rights under a patent based on certain identified or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license,” the accused party may bring a declaratory judgment action.

This significantly lowered the standard required for a declaratory injunction action and injected uncertainty into even the most innocuous license discussions for patent holders.

The Facts

In SanDisk, STMicroelectronics sent a letter to SanDisk requesting a meeting to discuss a possible “cross-license agreement” and identifying numerous patents that “may be of interest” to SanDisk. At the requested meeting, STMicroelectronics first asked that the discussions be treated as “settlement discussions” under Federal Rule of Civil Procedure 408. STMicroelectronics then provided detailed infringement analysis regarding the manner in which it believed SanDisk’s products infringed its patents. At the conclusion of the meeting, a representative for STMicroelectronics stated that STMicroelectronics “has absolutely no plans whatsoever to sue SanDisk.” After further negotiations, through which the parties were unable to reach an agreement, SanDisk filed a declaratory judgment action seeking to have each of the patents STMicroelectronics presented declared invalid and not infringed.

At the district court, STMicroelectronics moved to have the declaratory judgment action dismissed for failure to provide a case or controversy under Article III of the Constitution. The district court determined that a case or controversy did not exist because SanDisk did not have a reasonable apprehension of litigation. Under the then-existing Federal Circuit standard, merely telling a prospective licensee that his or her products were covered by one’s patents would not give rise to reasonable apprehension of suit; some additional action on the part of the patentee indicating intent to sue was necessary. The district court reasoned that STMicroelectronics told SanDisk that it did not intend to initiate any litigation and that SanDisk “presented no evidence that STMicroelectronics threatened [SanDisk] with litigation at any time during the parties’ negotiations, nor has SanDisk shown that other conduct by ST rising to a level sufficient to indicate an intent on the part of ST to initiate an infringement action.” In light of this, the district court found that the totality of the circumstances did not evidence an actual controversy.

SanDisk appealed the ruling of the district court.

The Federal Circuit Results and Reasoning

The Federal Circuit first rejected its reasonable apprehension of suit standard based on the Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc., 127 S.Ct. 764 (2007). The Federal Circuit noted that the U.S. Supreme Court in MedImmune “specifically addressed and rejected [the] reasonable apprehension of suit test.” After rejecting the reasonable apprehension of suit test, the Federal Circuit adopted a new standard consistent with the Supreme Court’s holding in MedImmune. Under this new standard a case or controversy for declaratory judgment purposes exists “where a patentee asserts rights under a patent based on certain identified or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license.”

After articulating the new standard, the Federal Circuit analyzed whether STMicroelectronics had asserted the right under a patent based on identified activity of SanDisk. The Court noted that STMicroelectronics had presented a “thorough infringement analysis . . . detailing that one or more claims of its patents read on one or more of SanDisk’s identified products.” The Court further noted that during its presentation to SanDisk, STMicroelectronics employed seasoned experts, who liberally referred to SanDisk’s infringement and need for a license. The Federal Circuit rejected STMicroelectronics’ arguments that its unequivocal statement that it did not intend to sue eliminated any actual controversy. It found by making “a studied and continued determination of infringement” and communicating such determination to SanDisk, STMicroelectronics’ statement that it does not intend to sue does not moot the actual controversy created by these acts.”

In light of all the circumstances, the Federal Circuit found that “ST communicated to SanDisk that it had made a studied and determined infringement determination and asserted the right to a royalty based on this determination. SanDisk, on the other hand, maintained that it could proceed in its conduct without the payment of royalties to ST.” Thus, under the new standard, the Federal Circuit determined that the district court had declaratory judgment jurisdiction over SanDisk’s complaint because “a substantial controversy, between parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment” existed.

The concurring opinion of Judge William Bryson noted that the new standard adopted by the Court “will effect a sweeping change in our law regarding declaratory judgment jurisdiction.” The opinion suggested that STMicroelectronics “was simply availing itself of the safe haven our cases had created for patentees to offer licensees without opening themselves up to expensive litigation.” Justice Bryson further opined that despite the references to the particular facts of the case the majority’s opinion will allow for declaratory judgment jurisdiction “in virtually any case in which the recipient of an invitation to take a patent license elects to dispute the need for a license and then to sue the patentee.”

Shoot First and Ask Questions Later

The Federal Circuit’s decision in SanDisk v. STMicroelectronics, Inc. injects uncertainty into licensee negotiations and patent owners must be careful to avoid potential litigations. The majority opinion, in a footnote, indicated that STMicroelectronics could have avoided the risk of a declaratory judgment proceeding by entering into a suitable confidentiality agreement. Such confidentiality agreement should not only contain standard clauses regarding the confidentiality of any presentations or information provided, it should also affirmatively state that any information provided under such agreement may not be used for purposes of obtaining declaratory judgment jurisdiction.

The concurring opinion correctly noted that a potential licensee could simply refuse to enter into a confidentiality agreement. In such event, the patent owner would be forced into a Hobson’s choice of either ending licensing discussions or continuing such discussions but exposing itself to a possible declaratory judgment action. Upon the potential licensee’s refusal to enter into a suitable confidentiality agreement, the patent holder who wants to keep control of the selection of jurisdiction to litigate, may institute an action by filing (but not serving) a complaint in the jurisdiction of their choosing thereby giving the potential licensee 120 days to enter into an agreement before the complaint needs to be served or re-filed. Thus, the practical result of SanDisk is likely to be an increase in anticipatory litigation due to the uncertainty that has been injected into licensing negotiations.