Can a company or inventor actively seek to monetize patent rights through licensing activities and avoid declaratory judgment lawsuits? No. In this post, the IP Playbook tackles the outdated notion that a company or inventor can generate licensing revenues and simultaneously evade the risk of litigation. This conventional wisdom ignores the present-day risks companies and inventors confront when seeking to license their patents. Advanced planning and a proactive litigation strategy tailored to each potential infringer and licensing negotiation is essential to mitigate the expansive scope of declaratory judgment jurisdiction. Otherwise, companies and inventors inadvertently may expose themselves to preemptive litigation challenging the validity of their patents in unfriendly and inconvenient venues, considerably reducing their leverage in licensing negotiations. See EMC Corp. v. Norand Corp., 89 F.3d 807, 811 (Fed. Cir. 1996) (“[t]he threat of enforcement … is the entire source of the patentee’s bargaining power.”).
The Federal Circuit’s decision by Judge Lourie on March 26, 2012 in 3M Co. v. Avery Dennison Corp., No. 2011-1339, illustrates the negligible threshold necessary for a plaintiff to establish a justiciable controversy under the Declaratory Judgment Act. According to 3M, its in-house head IP counsel received a call from Avery’s in-house head IP counsel, who told him that a product “may infringe” two of Avery’s patents and “licenses are available.” During a second informal telephone call, 3M rejected this offer and Avery disclosed that it performed an infringement analysis of 3M’s products and it would send claim charts, although it never did. 3M waited a year and then filed a declaratory judgment action. The district court dismissed the action for lack of subject matter jurisdiction. The Federal Circuit panel of Judges Lourie, Rader, and Linn vacated and remanded for factual determinations, explaining that the alleged communications, if credited by the district court, were sufficient to constitute a case or controversy under the Declaratory Judgment Act.
The result in 3M v. Avery reinforces Judge Bryson’s admonition in SanDisk Corp. v. STMicroelectronics, Inc. that the Supreme Court’s rejection of the “reasonable-apprehension-of-suit” test and adoption of an “all circumstances” test for declaratory judgment jurisdiction in MedImmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), created a standard where “virtually any invitation to take a paid license relating to the prospective licensee’s activities would give rise to an Article III case or controversy.” 480 F.3d 1372, 1384 (Fed. Cir. 2007) (J., Bryson, concurring). It is noteworthy that the Federal Circuit found declaratory judgment jurisdiction in SanDisk even though the defendant, in connection with licensing discussions, provided a claim- and product-specific infringement analysis but promised verbally that it had “absolutely no plan whatsoever to sue….”
Where is the line between licensing discussions giving rise to declaratory judgment jurisdiction and those that do not? Some commentators have explained that “[v]irtually any communication by a patentee to a potential infringer about a specific accused product that references infringement or licensing, it appears, will be enough to create jurisdiction.” (Read more.) Here at the IP Playbook, we believe that any credible licensing offer raises the specter of litigation, as illustrated by the minimal discussions between counsel in 3M v. Avery. Based on post-MedImmune decisions, any of the following, alone or in combination, could trigger declaratory judgment jurisdiction:
- Threatening a lawsuit
- Providing claim charts, opinions, or analyses regarding infringement, or just mentioning that claim charts are forthcoming
- Offering to grant a license to patents
- Notifying a party that licenses or royalties are required to continue its actions
- Explaining whether or not the patentee has a plan to bring suit
- Refusing to sign a covenant not to sue
- Past history of enforcing patent rights
- Asserting a right to enjoin sales or collect a royalty
- The lack of a strict deadline in licensing offers is immaterial
Avoiding declaratory judgment jurisdiction in connection with a genuine licensing effort is impracticable. As others have aptly observed, 3M v. Avery suggests there is a narrow gap indeed between the non-case or controversy creating communication … and communications sufficient to establish jurisdiction.” (Read more.)
The only factual scenario approaching a “bright line” rejection of jurisdiction is where a putative declaratory-judgment plaintiff attempts to manufacture jurisdiction unilaterally. (Read more.) For example, in Innovative Therapies, Inc. v. Kinetic Concepts, Inc., the Federal Circuit affirmed dismissal of a declaratory judgment action where the plaintiff’s efforts strongly indicted it had undertaken a “sub rosa” effort to create jurisdiction. 599 F.3f 1377, 1381 (Fed. Cir. 2010).
IP Playbook’s Takeaway
Before MedImmune, offers to license to a potential infringer could be insufficient for declaratory judgment jurisdiction. That is no longer true. This makes strategic planning before seeking any licensing opportunities critical. Depending on the circumstances of the negotiation and parties involved, a patent-holder may choose to file a complaint in a favorable venue before opening licensing discussions; or have a complaint drafted and read to file if licensing discussions reach an impasse. Another option would be to enter into a confidentiality agreement and covenant-not-to-sue, although those types of agreements could be used to establish declaratory judgment jurisdiction if licensing negotiations are unsuccessful.
The proper course of action will depend on the specific scenario, the parties involved, and the patentee’s business objectives. That is why an individualized litigation strategy is an essential component of any licensing program. Otherwise, patentees provide alleged infringers with ample opportunities to take the offensive, bring preemptive litigation in unfriendly and inconvenient venues, and gain crucial leverage in licensing negotiations. (Read more.)