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Discussions Between Patentee and Alleged Infringer Regarding Infringement and Validity During Licensing Negotiations May Create the “Actual Controversy” Required Under the DJ Act

August 03, 2007

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Last Month at the Federal Circuit - September 2007

Judges: Newman, Friedman, Prost (author)

[Appealed from: S.D. Cal., Judge Brewster]

In Sony Electronics, Inc. v. Guardian Media Technologies, Ltd., No. 06-1363 (Fed. Cir. Aug. 3, 2007), the Federal Circuit vacated the district court’s dismissals of several DJ actions and remanded for the district court to determine in its discretion whether to entertain them.

In 1999, an attorney acting on behalf of an inventor, Peter S. Vogel, sent Sony Electronics, Inc. (“Sony”), Matsushita Electric Industrial Co., Ltd. (“Matsushita”), Victor Company of Japan, Ltd. (“JVC”), and Mitsubishi Digital Electronics America, Inc. (“Mitsubishi”) a substantially similar letter entitled, “Notice of Patent Infringement,” stating that their products infringed Vogel’s U.S. Patent Nos. 4,930,158 (“the ’158 patent”) and 4,930,160 (“the ’160 patent”). The ’158 and ’160 patents describe a system in which users can selectively block the viewing or playing of programs that have particular program classification codes. Such a system can be used, for example, by parents wishing to prevent their children from viewing television programs designated unsuitable for children. Sony,Matsushita, and Mitsubishi responded, claiming that the asserted patents were not infringed, invalid, or both. Vogel never responded.

In 2003, the ’158 and ’160 patents were assigned to Guardian Media Technologies, Ltd. (“Guardian”) and in 2004, nearly five years after the initial letters from Vogel, Guardian sent letters to Sony, Matsushita, JVC, and Mitsubishi offering licenses to the ’158 and ’160 patents. An exchange of letters between each company and Guardian followed. At some point during the exchange of correspondence, each company asserted that the ’158 and ’160 patents were not infringed, invalid, or both. Then, on September 14, 2005, Sony and Mitsubishi filed separate DJ complaints alleging that the asserted patents were not infringed, invalid, and unenforceable due to laches and equitable estoppel. Two days later, Matsushita and JVC filed a DJ complaint with the same allegations.

After filing their complaints, Sony, Mitsubishi, JVC, Matsushita, and Thomson, Inc. (“Thomson”), which had also filed a DJ action against Guardian, filed requests for ex parte reexamination of both patents. The PTO granted the requests in late 2005. Subsequently, the district court, on its own motion, consolidated all the suits for purposes of pretrial proceedings. Shortly thereafter, Guardian filed a motion to dismiss the complaints for lack of subject matter jurisdiction and the plaintiffs filed a joint motion to stay the cases pending the reexamination of the ’158 and ’160 patents.

The district court granted Guardian’s motion to dismiss, holding that there was no “actual controversy” between Guardian and any of the plaintiffs. The district court found that Guardian had not expressly threatened to sue any of the plaintiffs and that none of Guardian’s actions amounted to an “implicit threat of immediate litigation.” Slip op. at 17. The district court further stated that even if it did have jurisdiction, it would exercise its discretion not to hear the cases because the jurisdictional question was “close” and because “the facts as a whole create[d] an appearance that Plaintiffs filed these lawsuits as an intimidation tactic to gain leverage in the licensing negotiations.” Id. (alteration in original). The district court also denied the plaintiffs’ motions to stay as moot. Sony, Mitsubishi, Matsushita, and JVC appealed.

On appeal, the Federal Circuit noted that the DJ Act provides that, “[i]n a case of actual controversy within its jurisdiction . . . any court of the United States, upon filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” Id. at 20 (alteration in original) (quoting 28 U.S.C. § 2201(a)). The Court noted that the Supreme Court has not articulated a bright-line test for distinguishing those cases that satisfy the actual controversy requirement from those that do not. Instead of fashioning a precise test, observed the Court, the Supreme Court has required only that the dispute be “‘definite and concrete, touching the legal relations of parties having adverse legal interests’; and that it be ‘real and substantial’ and ‘admi[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.’” Id. at 20-21 (alteration in original) (quoting MedImmune v. Genentech, Inc., 127 S. Ct. 764, 771 (2007)). The Court stated that “[b]asically, the question in each case is whether the facts alleged, under all circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a [DJ].” Id. at 21 (citation omitted).

The Court explained that prior to the Supreme Court’s decision in MedImmune, it applied a two-part test to determine whether there was an actual controversy in suits requesting a declaration of patent noninfringement, invalidity, or unenforceability. One prong of the test examined whether the DJ plaintiff actually produced or was prepared to produce an allegedly infringing product, whereas the other prong looked to see whether conduct by the patentee had created on the part of the DJ plaintiff a reasonable apprehension that the patentee would file suit if the allegedly infringing activity continued. The Court noted that in MedImmune, however, the Supreme Court abrogated this “reasonable apprehension of suit” test because it conflicted with Supreme Court precedent. As a result, observed the Court, its post-MedImmune decisions, “while not attempting to define the outer boundaries of [DJ] jurisdiction, have made clear that a [DJ] plaintiff does not need to establish a reasonable apprehension of a lawsuit in order to establish that there is an actual controversy between the parties.” Id. at 22. The Court added that it has recognized that “jurisdiction may be met where the patentee takes a position that puts the [DJ] plaintiffinthe position of either pursuing arguably illegal behavior or abandoning that which he claims a right to do.” Id. at 23 (citation omitted).

Applying these principles to the current cases, the Court held that “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 [DJ] Act.” Id. at 26. In so holding, the Court rejected Guardian’s suggestion that there can be no jurisdiction in the courts because it was at all times willing to negotiate a “business resolution” to the dispute. The Court explained that Sony was within its rights to terminate the “negotiations” when it determined further negotiations would be unproductive. This analysis, according to the Court, applied equally to facts presented for the other appellants, Mitsubishi, Matsushita, and JVC. Thus, the Court concluded that it was error for the district court to dismiss the complaints for lack of subject matter jurisdiction.

The Court added that even though it holds that there are actual controversies between Guardian and each of the appellants within the meaning of the DJ Act, the DJ Act states that courts “may” grant relief; it does not require courts to grant relief. It noted that the Supreme Court has held that the DJ Act confers on federal courts “unique and substantial discretion in deciding whether to declare the rights of litigants.” Id. at 29 (citation omitted). The Court observed that in this case, the district court had exercised that discretion and decided to decline jurisdiction, articulating “two  primary reasons.” The Court, however, did not agree with either reason. It noted that the district court’s first reason—its belief that this is a “close case”—was based on an erroneous conclusion of law in that it was based on the “reasonable apprehension of suit” test. The district court’s second reason underlying the district court’s decision to decline jurisdiction—its belief that “the facts as a whole create[d] an appearance that Plaintiffs filed these lawsuits as an intimidation tactic to gain leverage in the licensing negotiations”—also “troubled” the Court. Id. at 31. It observed that based on the record before it, it did not think that “a nefarious motive on the part of the appellants [could] be so easily inferred.” Id. The Court noted that even if the suits have had the effect of placing appellants in a more favorable negotiating position, that effect is not a sufficient reason to decline to hear the suit. Nonetheless, given the circumstances of the case, the Court remanded for the district court to reconsider whether to exercise its discretion to dismiss the cases or stay them pending the outcome of the reexamination proceedings.