Tuesday, March 27, 2007

Unleashed: CAFC Finds DJ Jurisdiction From Patentee's Conduct Prior to Suit

SanDisk Corp. v. STMicroelectronics (05-1300) March 26, 2007

SanDisk is in the flash memory storage market. ST has a sizable portfolio of patent related to flash memory storage products. In 2004, ST sent a letter to SanDisk, listing 8 patents that "may be of interest." SanDisk did not respond substantively. ST sent another letter to SanDisk, listing 4 additional patents that "may also be of interest."

After an initial exchange of letters, a licensing meeting was held, where technical experts from ST gave a demonstration (and a 300 page report) which illustrated how SanDisk's products infringed on ST's patents. Discussions on a cross-license continued, where, at one point, ST stated that "ST has absolutely no plan whatsoever to sue SanDisk."

When licensing negotiations stalled a few months later, SanDisk filed a declaratory judgment action in the N.D. Cal., alleging that ST's patents were invalid and not infringed. The district court dismissed the action, stating that SanDisk did not have an objectively reasonable apprehension of suit, even though it may have subjectively believed that ST would bring an infringement suit.

The CAFC reversed the district court under Medimmune, finding that the circumstances surrounding the licensing negotiations provided a sufficient risk of suit:

We hold ... 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, an Article III case or controversy will arise and the party need not risk a suit for infringement by engaging in the identified activity before seeking a declaration of its legal rights.
Borrowing from the vernacular of Scalia, the court found that SanDisk did not have to "bet the farm" and risk a suit for infringement by formally terminating licensing negotiations:
These facts evince that the conditions of creating "a substantial controversy, between parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment" were fulfilled ... SanDisk need not "bet the farm," so to speak, and risk a suit for infringement by cutting off licensing discussions.
Although the district court found that licensing negotiations had not been terminated, the CAFC noted that SanDisk had declined to participate in further negotiations, effectively bringing them to an end. Also, the court discounted ST's assurances that they would not bring suit, since ST's actions clearly indicated that a lawsuit was contemplated.

Rules of Evidence Note: During the licensing meeting, the parties agreed to treat the discussions as "settlement discussions" under Federal Rules of Evidence 408. The rule relates to evidence of efforts toward compromising a claim in litigation. However, the CAFC found that ST’s presentation was made outside the context of litigation, and there was nothing on the record to indicate that it could be properly considered an "offer" to settle a claim which was then in dispute. Thus, SanDisk could rely on the licensing discussions and infringement study to support its claim for declaratory judgment.

According to the CAFC, "[t]o avoid the risk of a declaratory judgment action, ST could have sought SanDisk’s agreement to the terms of a suitable confidentiality agreement. The record before us reflects that the parties did not enter into such an agreement."

Concurring Opinion: Judge Bryson sums up the practical consequences of this case:

In practical application, the new test will not be confined to cases with facts similar to this one. If a patentee offers a license for a fee, the offer typically will be accompanied by a suggestion that the other party’s conduct is within the scope of the patentee’s patent rights, or it will be apparent that the patentee believes that to be the case. Offers to license a patent are not requests for gratuitous contributions to the patentee; the rationale underlying a license offer is the patentee’s express or implied suggestion that the other party’s current or planned conduct falls within the scope of the patent.

Therefore, it would appear that under the court’s standard 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 if the prospective licensee elects to assert that its conduct does not fall within the scope of the patent. Indeed, as the court makes clear, even a representation by the patentee that it does not propose to file suit against the prospective licensee will not suffice to avoid the risk that the patentee will face a declaratory judgment action.

And if there is any uncertainty on that score, all the prospective licensee has to do in order to dispel any doubt is to inquire of the patentee whether the patentee believes its activities are within the scope of the patent. If the patentee says "no," it will have made a damaging admission that will make it very hard ever to litigate the issue, and thus will effectively end its licensing efforts. If it says "yes" or equivocates, it will have satisfied the court’s test and will have set itself up for a declaratory judgment lawsuit.


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