Threatening Letters to Infringer's Clients Are Not Actionable Unless "Objectively Baseless" (Although They Will Create DJ Jurisdiction)

GP Industries v. Eran (Fed. Cir. 2007)

Eran makes “leakproof” rain gutter covers. Several Eran employees were fired during the summer of 2005.  Those individuals reorganized as GPI — a potential competitor to Eran. As a preemptive strike, Eran mailed letters to its distributors and contractors noting that GPI’s planned to sell a competitive product that infringed Eran’s patent.

After GPI filed for declaratory judgment, the district court (Nebraska) granted GPI’s motion for a preliminary injunction — stopping Eran from “(1) seeking to prevent GPI from making and selling its gutter products during the pendency of this litigation and (2) making vague and unspecified allegations of infringement against GPI in the marketplace.”

On appeal, the CAFC reversed — finding that the preliminary injunction had been improperly granted.

The party seeking a preliminary injunction has the burden of showing: “(1) a reasonable likelihood of success on the merits; (2) irreparable harm; (3) a balance of hardships in its favor; and (4) public interest in favor of the injunction.” Once granted, a preliminary injunction will only be vacated for clear error.

Injunction against Communications: Based on First Amendment rights and 35 U.S.C. § 287 (notice), injunctions relating to communications must pass a higher hurdle. In particular, “bad faith” is required in order to bar communications.

“One has a right to inform others of his or her patent rights. See 35 U.S.C. § 287. Thus, an injunction against communication is strong medicine that must be used with care and only in exceptional circumstances.”

In Globetrotter Software, the CAFC held that “bad faith” communications require “objectively baseless claims.”  Notably, these determinations are based on federal law that preempt any state laws that may be less strict.

Here, the CAFC found that Eran’s statements could not be “objectively baseless” since the lower court had noted the real potential that Eran would eventually succeed on the merits of the case.

Preliminary Injunction Reversed

Notes:

• Hovey Williams of Kansas City, Missouri represented the patentee, Eran.
• Kirton & McConkie of Salt Lake City, Utah represented the accused infringer.

V-Chip Declaratory Judgment Patent Case Reinstated by CAFC

Sony Electronics v. Guardian Media (Fed. Cir. 2007).

Guardian holds several patents for blocking naughty TV shows based on program classification codes. In 1999, Guardian sent a “notice of patent infringement” to Sony asserting that its V-Chip products “infringe the claims,” and later followed-up with a claim chart. Four years later, Guardian sent another letter offering to license its patents. After unsuccessful negotiations, Sony filed a declaratory judgment action in the Southern District of California — alleging non-infringement, invalidity, and unenforceability.

On motion, the district court dismissed the suit for lack of declaratory judgment jurisdiction — finding no actual controversy as required by the Constitution. In particular, the court noted that Guardian had not threatened to sue and the circumstances did not imply a threat of immediate suit. The court then went on to hold that even if jurisdiction existed it would use its discretion to decline hearing the case because (1) the question of jurisdiction is “close” and (2) it appears that the DJ plaintiffs are using the case as a negotiation tool rather than as a means to settle the dispute.

Particular Adverse Positions => DJ Jurisdiction: On appeal, the CAFC determined that an actual controversy certainly existed between Sony and Guardian at the time of the complaint. The parties had taken particular adverse positions regarding infringement and validity (associating particular claims with particular products; requesting a particular amount of money; arguing whether particular prior art references demonstrated particular claim elements). The facts of this dispute make it “manifestly susceptible of judicial determination.” (quoting 300 US 227 (1939)).

In short, because Guardian asserts that it is owed royalties based on specific past and ongoing activities by Sony, and because Sony contends that it has a right to engage in those activities without a license, there is an actual controversy between the parties within the meaning of the Declaratory Judgment Act.

Discretionary Dismissal: The Declaratory Judgment Act allows a court “substantial discretion” not to hear cases even when there exists an actual controversy. However, here, the CAFC found that the lower court’s two reasons for declining to hear the case were arbitrary and thus insufficient. Specifically, the question of jurisdiction is not a close call as the lower court had determined — rather it was only close because of an error of law. Additionally, the CAFC could not discern any “affirmative evidence” of plaintiffs’ nefarious reasons for filing suit.

Vacated and remanded to determine whether there may be other reasons for discretionary dismissal.

Notes:

• Four other DJ plaintiffs had similar experiences and are discussed in the decision.

Declaratory Judgment Jurisdiction Denied in Biotech Research Patent Case

Benitec Australia v. Nucleonics (Fed. Cir. 2007)

Benitec’s infringement suit against Nucleonics was derailed by several factors. Perhaps most critically, the Supreme Court’s Merck v. Integra decision expanding the research exemption of 271(e)(1) left Benitec with no viable infringement claim. Benitec voluntarily dismissed its claims against the defendant Nucleonics and also issued a covenant not to sue for Nucleonics current activities. (Covenant submitted within its appeal opposition brief).

In the meantime, Nucleonics had filed declaratory judgment counterclaims — asserting invalidity and unenforceability.  Nucleonics wants the patent invalidated to remove any investor concerns regarding future products.  On appeal, the CAFC determined whether DJ jurisdiction still exists in this case.

The Supreme Court’s jurisdiction requires “a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune.

DJ jurisdiction clearly existed at the time of filing. However, when the controversy disappears, so does jurisdiction. Here, the CAFC found that the controversy was gone and that Nucleonics “future work” was too speculative and might not be infringing anyway.

We also recognize that Nucleonics wishes to receive the benefit of a ruling on the validity and scope of Benitec’s patent now, while Nucleonics undertakes any nascent animal work. There is currently, however, no “substantial controversy, between [Benitec and Nucleonics], of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” MedImmune, 127 S. Ct. at 771. And there may never be. Although Nucleonics lost the appeal, it certainly won a major victory by forcing Benitec to issue a covenant not to sue.

Dismissal affirmed.

In Dissent, Judge Dyk would have allowed the DJ case to continue:

Supreme Court precedent requires that, if a patentee files an infringement lawsuit and the particular claim of infringement is mooted, a counterclaim for invalidity should not be dismissed unless the patentee demonstrates that there is no possibility of a future controversy with respect to invalidity. See Cardinal Chem. Co. v. Morton Int’l, Inc., 508 U.S. 83, 98 (1993). In my view, Benitec made no such showing.

Notes:  

• Sitting by designation, Judge Whyte penned the opinion. This is only the second CAFC opinion where a judge sitting by designation cast the deciding vote, and is the only CAFC case where a judge sitting by designation penned an opinion and another judge dissented.  The N.D. California IP Bar has often called for Judge Whyte’s appointment to the CAFC. This opinion my provide some guidance as to his potential jurisprudential conduct.
• Although formally a loser, Nucleonics’ appeal forced Benitec into issuing a covenant not to sue — a major litigation victory.

Supreme Court: Licensee in Good Standing May File Declaratory Judgment

MedImmune v. Genentech (Supreme Court 2007).

Declaratory judgment (DJ) actions are often used by potential defendants to obtain a declaration that a patent is invalid, unenforceable, or not infringed.  Under Federal Circuit law, a licensee cannot challenge a patent without first breaching the license.  The CAFC's reasoning was that a licensee in good standing feels no apprehension of suit since the license is essentially a settlement between the parties. Without an apprehension of suit, the DJ action would not rise to an actual controversy as required by the Constitution.

In a broadly worded opinion, the Supreme Court has scrapped the Federal Circuit's "reasonable-apprehension" test on declaratory judgment standing in favor of a rule that allows licensee's in good-standing to file DJ actions.

We hold that petitioner was not required, insofar as Article III is concerned, to break or terminate its 1997 license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed.

There are several things to note immediately:

Not Limited to Patents: This case at least extends to all licensing issues and likely to most contracts -- whether or not they involve patents or intellectual property.

Suggested Contractual Work-Around: Reading between the lines, the opinion may indicate that a contractual "prohibition against challenging the validity of the patents." may serve to block challenges by licensee's in good standing. Without the clause, however, the Court found no such prohibition:

To begin with, it is not clear where the prohibition against challenging the validity of the patents is to be found. It can hardly be implied from the mere promise to pay royalties on patents

Regarding apprehension of suit, the Opinion's footnote 11 is a complete divergence from common practice -- finding that a licensee who pays royalties either in fear of an injunctions or for fear of treble damages is being coerced in a way that creates an Article III case or controversy.

Links:

• Download MedImmune.pdf
• Briefs filed in MedImmune v. Genentech;
• CAFC Decision in MedImmune v. Genentech;
• CAFC Decision in MedImmune v. Centocor;
• MedImmune Petition Granted;
• Lear v. Adkins;
• Professor Miller’s comments;
• Supreme Court on the March;
• Supreme Court docket sheet.