Oregon State Bar Bulletin — NOVEMBER 2007
Legal Practice Tips
Can’t We Talk Anymore?
Why Talking to a User of Your Patented Art
May End Up Getting You Sued

By Michael M. Ratoza

To lightly paraphrase Bob Dylan, the times are a changing — particularly concerning the rules of patent enforcement. A patent holder’s (patentee’s) approach to protecting its valuable patents from real or suspected infringement must be reevaluated following a recent Supreme Court decision. A patentee must be very cautious in approaching a party suspected of misusing patented art, for fear of being blindsided by a declaratory judgment action filed in a far-off jurisdiction.

In the case of MedImmune, Inc. v. Genentech, Inc., 549 U.S. ___, 127 S. Ct. 764, 166 L. Ed. 2d 604 (2007), Justice Scalia wrote that a patent-licensee could sue its patentee-licensor in a declaratory judgment action. The Supreme Court held that the licensee could challenge the validity of the patent, and the application of the license terms to the licensee’s product, even though the license was fully paid up and not in default. Under this holding, it is not necessary for a patent-licensee to repudiate or breach the license terms as applied to the licensee’s product. Rather, the licensee can fully perform under the license and still bring a lawsuit declaring the patent to be invalid or the licensee’s product to be noninfringing or outside the scope of the license.

Straightforward enough. Now the mischief begins. Buried in footnote 11 of the MedImmune opinion, Justice Scalia criticized the rule of the U.S. Court of Appeals for the Federal Circuit pertaining to the long-standing criteria for the institution of a declaratory judgment action by a suspected infringer of patented art. The criticized rule required the existence of two elements before a targeted infringer could sue a patentee: 1) the targeted infringer had to possess an objectively reasonable apprehension that it would be sued by the patentee; and 2) the conduct of the targeted infringer had to amount to potentially infringing activity or lead to potentially infringing activity. If these elements were present, a targeted infringer could be said to have a "reasonable apprehension of imminent suit." Then, the suspected infringer could, itself, initiate a federal court lawsuit seeking a declaration that its conduct did not invade the patented art, or the patent was not valid or enforceable.

Common to the usual experience of protecting a patent, a patentee would likely contact a suspected infringer of the patented art seeking a dialogue as to whether the suspect’s conduct was covered by the patent. If the suspect’s conduct were infringing, then the patentee would perhaps offer a license or another resolution. Inherent in this practice was a recognition by the patentee that it should be cautious about threatening litigation. The common approach by the patentee was to assure the suspect that the patentee was not interested in suing if everything could be worked out. This was so because if the patentee assured the suspect that litigation was not immediately in the offing, then there could not be an objectively reasonable apprehension of an imminent lawsuit. As such, the patentee could entertain a dialogue with the suspected infringer without worrying too much about being blindsided with a declaratory judgment lawsuit filed against it in some far-off federal courthouse.

This all changed with the Federal Circuit’s response to footnote 11 of MedImmune. On March 26, 2007, the Federal Circuit issued its first opinion relying on footnote 11 in SanDisk Corporation v. STMicroelectronics, Inc., 480 F. 3d 1372 (Fed. Cir. 2007). On March 30, the Federal Circuit issued its second opinion affected by MedImmune in Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceuticals Corp., 482 F. 3d 1330 (Fed. Cir. 2007). There will be more opinions as the Federal Circuit spreads the gospel of footnote 11 throughout the patent field.

In the SanDisk case, the Federal Circuit ruled that a suspected user of patented art could bring a declaratory judgment action against a patentee even though the patentee gave assurances that it would not file a lawsuit for infringement. In particular, STMicroelectronics ("ST") contacted SanDisk initially in April 2004, requesting an opportunity to talk about a cross-licensing agreement centered in part on ST’s patents. Eventually, at an August 2004 licensing meeting, ST made a presentation as to why it believed that SanDisk’s product was covered by ST’s patents. At the end of the meeting, ST told SanDisk that "ST has absolutely no plan whatsoever to sue SanDisk." 480 F. 3d at 1376. In reply, SanDisk stated that it was "not going to sue you on Monday," and the parties contemplated another meeting. Id. In fact, SanDisk indicated that it was "time to let our businesspeople talk and see if a peaceful resolution is possible." Id. Back and forth communication occurred attempting to set up another meeting, but SanDisk refused to meet further. Without any threat of litigation from ST, or a cease-and-desist letter or a take-it-or-leave-it offer of any sort, SanDisk sued ST in October 2004, seeking a declaration that SanDisk’s product was not infringing of ST’s patent and that, in any case, ST’s patent was invalid and unenforceable. ST’s worldwide headquarters is in Geneva with its U.S. headquarters in Texas. SanDisk brought its case in California.

The trial court dismissed SanDisk’s lawsuit, reasoning that SanDisk did not have an objectively reasonable apprehension of an imminent lawsuit, since ST gave its assurance that it would not sue, although subjectively it believed it would be sued. Id. On March 26, 2007, the Federal Circuit reversed the dismissal and re-instated SanDisk’s lawsuit, holding that the "objectively reasonable apprehension of an imminent lawsuit" is no longer the applicable test to define a case or controversy following MedImmune. SanDisk can be said to stand for the proposition that a suspected infringer’s right to bring a declaratory judgment action is not limited merely to those situations where a patentee sends a cease-and-desist letter or threatens judicial enforcement.

The Federal Circuit’s new rule is this: if the patentee asserts its rights under its patents based on a suspected infringer’s present or future anticipated activity, and if the suspected infringer maintains that its activity is not covered by the patentee’s patent, then the suspected infringer can bring a declaratory judgment action. Providing an assurance by the patentee that it will not sue the suspected infringer is not good enough. If a substantial, real and present controversy exists by virtue of the parties’ adverse positions, then the suspected infringer has standing to sue the patentee for a declaratory judgment.

The Federal Circuit extended and applied this new rule in the context of pharmaceutical patents in the Teva case on March 30, 2007. 482 F. 3d at 1330. There, the court held that a generic drug firm can bring a declaratory judgment action on patent issues during the federal drug review process, even before marketing its generic equivalent. Additional cases are certain to follow as the Federal Circuit applies the new declaratory judgment rule to various patent genres.

The Federal Circuit explained that its new SanDisk rule might be limited. It might not apply when a suspected infringer becomes aware of a patent covering the suspect’s conduct and the suspect assumes that there might be some risk of infringement. At a minimum, the Federal Circuit suggests that "some contact" must be made by the patentee with the suspected infringer. In short, the Federal Circuit has junked its "objectively reasonable apprehension of imminent litigation" test and replaced it with a requirement for "some contact" by a patent owner. As in San- Disk, an invitation to talk coupled with an assurance not to sue could be the "some contact" that gets the patentee sued.

The implications to patent owners of SanDisk’s new open-litigation rule are enormous. 480 F. 3d at 1383 (concurring opinion). All patent owners are justifiably interested in protecting their patents. An inventor proceeds down a questionable path when it invests resources procuring a patent only to watch others profit from the patented invention without objection. The new SanDisk rule, however, substantially increases the risk of litigation against a patentee if it seeks to open a dialogue with a suspected infringer of the invention.

As observed in Judge Bryson’s concurring opinion in SanDisk, almost all invitations by a patentee to negotiate a patent license with a suspected user of the invention will expose the patentee to a risk of litigation. Indeed, this may be the new negotiation approach by the suspected infringer in response to an invitation from a patentee to talk. The suspected infringer might certainly be placed in a stronger bargaining position if it sues the patentee first in an impractically located federal district. Alternatively, the patentee may decide to sue the suspected infringer first, but not serve process immediately, and then seek to open negotiations. It would be of interest to determine if negotiations in these circumstances proceed as openly and smoothly as they might otherwise exist outside of the litigation environment.

Further, and as noted by the concurring opinion in SanDisk, the new rule expanding a suspected infringer’s litigation rights will undoubtedly place the patent holder in an unenviable position of choosing between enforcing its patent or being sued. That is, there is no reason to believe that a suspected infringer cannot turn the new SanDisk rule to its advantage by asking a patentee if it believes that the patent covers the suspect’s conduct. Once this question is asked, the patentee is between a rock and a hard place. If the patentee answers no, then this response is an admission against its own interest that can be used against it by the suspected infringer if the patentee ever elects to sue in the future. If the patentee answers yes, then the suspect’s right to sue immediately is likely triggered.

As such, SanDisk effectively invites any potential infringer of a patented invention to pick a fight with the patentee. If the patentee is a large, wealthy entity, and if the patent is seasoned and has more than nominal value to the patentee, the suspected infringer may not wish to invite that sort of fight. On the other hand, many patents are owned by small entities or individual inventors who may not have the resources or ability to resist a fight by the junkyard dog. In these cases, a larger bully can use the new rule of SanDisk to compel a patentee to do something it would otherwise not freely want to do: grant a sweetheart license or get sued.

Although MedImmune applies to patent licenses and SanDisk to patent infringements, there is no reason to believe that the new declaratory judgment rule of the Federal Circuit won’t migrate throughout the regional circuits and become applied in other IP and non-IP cases.

The times, they are a changing.

Michael M. Ratoza is an attorney in the Portland law office of Bullivant Houser Bailey, where his practice emphasizes intellectual property. He is also an adjunct law professor at the University of Oregon School of Law. He can be reached at (503) 228-6351 and at michael.ratoza@bullivant.com.

© 2007 Michael M. Ratoza

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