Alerts and Updates
In Sweeping Change, Federal Circuit Lowers Threshold for Declaratory Judgment Jurisdiction in Patent Actions
March 28, 2007
SanDisk Corp. v. STMicroelectronics, Inc, et al., No. 05-1300
On March 26, 2007, the Federal Circuit significantly lowered the bar for determining when a prospective patent licensee can initiate a declaratory judgment action. In response to the Supreme Court's rejection of the Federal Circuit's "reasonable apprehension of suit" test for determining declaratory judgment jurisdiction in MedImmune Inc. v. Genentech, Inc., et al., 127 S. Ct. 764 (January 9, 2007), the Federal Circuit set forth a new rule and held that in the context of pre-litigation licensing negotiations "where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party," declaratory judgment jurisdiction will arise.
SanDisk Corp. ("SanDisk") is a market leader in flash memory storage and owns several patents related to flash memory storage products. STMicroelectronics ("ST"), known for semiconductor integrated circuits, recently entered the flash memory market and has a sizable portfolio of patents related to flash memory storage products. ST contacted SanDisk to request a meeting to discuss a cross-license agreement. At the meeting, ST requested that the parties' discussions be treated as settlement discussions under Federal Rule of Evidence 408 and proceeded to provide SanDisk a detailed explanation of how specific claims of fourteen different patents were allegedly infringed by SanDisk products. As part of the presentation, ST provided SanDisk a copy of each of ST's fourteen patents under discussion, reverse engineering reports for certain of SanDisk's products and diagrams showing a detailed infringement analysis of SanDisk's products. At the end of meeting, ST told SanDisk that "ST has absolutely no plan whatsoever to sue SanDisk."
After additional discussions, SanDisk filed suit in the U.S. District Court for the Northern District of California, alleging infringement of one SanDisk patent and seeking a declaratory judgment of noninfringement and invalidity of the fourteen ST patents. ST filed a motion to dismiss SanDisk's declaratory judgment claims for lack of subject matter jurisdiction. In a decision rendered before the Supreme Court's recent decision in MedImmune, the District Court found that no actual controversy existed because SanDisk did not have an "objectively reasonable apprehension of suit," particularly since ST stated that it did not intend to sue SanDisk. Hence the Court granted ST's motion to dismiss. As recognized in Circuit Judge Bryson's concurring opinion in the Federal Circuit, "ST was simply availing itself of the safe haven [prior Federal Circuit] cases had created for patentees to offer licenses without opening themselves up to expensive litigation."
On appeal, the Federal Circuit found that the MedImmune decision, which addressed the "actual controversy" requirement of the Declaratory Judgment Act and Article III of the Constitution in the context of a signed patent license, represented "a rejection of our reasonable apprehension of suit test." In the context of conduct prior to the existence of a license, the Federal Circuit noted that declaratory judgment jurisdiction requires some affirmative act by the patentee, but declined to define the outer boundaries. Rather, the Federal Circuit held that "where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license," declaratory judgment jurisdiction will arise.
Upon finding 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," the Federal Circuit found an actual controversy sufficient for declaratory judgment jurisdiction. In so finding, the Federal Circuit concluded that ST's communication to SanDisk of its detailed infringement analysis belied ST's statement that it did not intend to sue. The Federal Circuit described ST's conduct as "'extra-judicial patent enforcement with scare-the-customer-and-run tactics' that the Declaratory Judgment Act was intended to obviate."
In a footnote, the Federal Circuit suggested ST could have avoided the risk of a declaratory judgment action if ST and SanDisk had entered into a "suitable confidentiality agreement." However, the Federal Circuit did not elaborate on the necessary terms for such a confidentiality agreement, except to indicate that conducting license negotiations under Federal Rule of Evidence 408 would not suffice to avoid a declaratory judgment action.
In a concurring opinion, Circuit Judge Bryson noted the potential far-reaching implications of the majority decision, stating that under this new rule "virtually any invitation to take a paid license relating to the prospective licensee's activities" would give rise to a declaratory judgment action. Judge Bryson predicted the decision will effect "a sweeping change in our law regarding declaratory judgment jurisdiction." Although Judge Bryson expressed reservations about this outcome, he agreed that the MedImmune decision compelled such a result.
For the full SanDisk opinion see: http://www.fedcir.gov/opinions/05-1300.pdf
For the full MedImmune opinion see: http://www.supremecourtus.gov/opinions/06pdf/05-608.pdf
For Further Information
For more information, please contact any lawyer in our Intellectual Property Practice Group or any lawyer in our Intellectual Property Litigation Practice Group or the lawyer in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.