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The Due Process Inquiry Focuses on Contact with the Forum State Beyond Cease and Desist Letters and Licensing Attempts

April 07, 2006

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Last Month at the Federal Circuit - May 2006

Judges: Michel (author), Friedman, Linn

In Breckenridge Pharmaceutical, Inc. v. Metabolite Laboratories, Inc., Nos. 05-1221, -1428 (Fed. Cir. Apr. 7, 2006), the Federal Circuit reversed the dismissal of plaintiff’s claims of tortious interference, unfair competition, and DJ of noninfringement against defendant-patentee for lack of personal jurisdiction. The Court also vacated the grant of SJ on all claims to defendant-licensee and remanded the case for further proceedings. Metabolite Laboratories, Inc. (“Metabolite”), whose principal business involves licensing its patents to pharmaceutical manufacturing companies, is the holder of patents concerning a method of controlling hyperhomocysteinemia (an emerging risk factor for heart and vascular disease).

Metabolite exclusively licensed those patents to PamLab, L.L.C. (“PamLab”), a codefendant who manufactures FOLTX, a prescriptiononly vitamin product. Breckenridge Pharmaceutical, Inc. (“Breckenridge”), a generic manufacturer, manufactures and markets a product called “Folbee,” which it sells as a substitute for FOLTX.

In December 2003, Metabolite and PamLab filed suit in the U.S. District Court for the District of Colorado for infringement of the Metabolite patents by Breckenridge for the offering and sale of Folbee as a generic equivalent to PamLab’s FOLTX. Plaintiffs Metabolite and PamLab, however, voluntarily dismissed the Colorado suit when the district court denied their motion for a temporary restraining order.

Several weeks later, Metabolite, with PamLab’s cooperation, sent letters to vitamin distributors and retailers, including customers of Breckenridge in Florida, informing them of Metabolite’s patents and PamLab’s exclusive license. About eight days after learning of the letters sent to its customers, Breckenridge filed suit in the U.S. District Court for the District of Florida for DJ of noninfringement and alleging state law claims of tortious interference and unfair competition against Metabolite and PamLab. Metabolite moved to dismiss the complaint for lack of personal jurisdiction, and the district court granted the motion. Based on the dismissal of Metabolite, an indispensable party, the district court subsequently granted SJ to PamLab on all claims. Breckenridge appealed.

On appeal, the Federal Circuit reviewed whether the cause of action “arises out of” or “relates to” Metabolite’s in-state activity, such that the district court has specific jurisdiction over Metabolite. In making this determination, the district court must find that (1) the state long-arm statute permits service of process on the defendant, and (2) the exercise of personal jurisdiction satisfies due process.

The Federal Circuit agreed with the district court’s holding that Metabolite’s contacts in Florida satisfied the Florida long-arm statutebecause the letters Metabolite sent could be solicitations and Breckenridge alleges that the letters caused injury in Florida.

With respect to due process, the Federal Circuit determined that the district court correctly applied Federal Circuit law because the question of infringement is a critical factor in determining liability under the claims of tortious interference and unfair competition. The Court noted that, under Florida law, Breckenridge must show, among other things, an unjustified interference (tortious interference) in the business relationship between Breckenridge and the recipients of the cease and desist letters, and that Metabolite’s actions were unfair (unfair competition). The Federal Circuit reasoned that, if the implication of infringement contained in the Metabolite letters were true, the letters would neither be unjustifiable nor unfair; thus, the nonpatent issues are “intimately linked to patent law,” and the Federal Circuit due process law should apply.

The Federal Circuit employs a three-prong test to determine whether the exercise of personal jurisdiction satisfies the requirements of due process. In particular, it must be determined whether “(1) the defendant purposefully directed its activities at residents of the forum, (2) the claim arises out of or relates to those activities, and (3) assertion of personal jurisdiction is reasonable and fair.” Slip op. at 8 (citing Akro Corp. v. Luker, 45 F.3d 1541, 1545-46 (Fed. Cir. 1995)).

With respect to the first two prongs of the Akro test, the Federal Circuit held that although the district court was correct in stating that personal jurisdiction may not be exercised constitutionally when defendant’s contact with the forum state is limited to only cease and desist letters, it erred in determining that Metabolite’s letters were the full extent of its contacts with Florida. After reviewing the relevant case law, the Court explained that “the crux of the due process inquiry should focus first on whether the defendant has had contact with parties in the forum state beyond the sending of cease and desist letters or mere attempts to license the patent at issue there.” Slip op. at 15. In particular, the inquiry should allow for “close examination” of the license agreement between the defendant-licensor and a licensee headquartered or doing business in the forum state.

In this case, the Federal Circuit found that the absentee defendant Metabolite had purposefully availed itself of the privilege of conducting activities within Florida. In particular, the Court noted that in addition to sending the cease and desist letters into Florida, Metabolite had an exclusive license with PamLab, a company doing business in Florida. The license agreement contemplated cooperation between Metabolite and PamLab as to patent infringement litigation and patent prosecution. The Court also found that Metabolite and PamLab actually did collaborate in sending the cease and desist letters and in litigating the Metabolite patents, and were often represented jointly by counsel. Accordingly, the Federal Circuit found that the first two prongs of the Akro test were satisfied.

Under the third prong of the Akro test, the Federal Circuit explained, a defendant can avoid the exercise of personal jurisdiction over it by showing that it would offend principles of fair play and substantial justice. The Court reviewed the district court’s weighing of the relevant factors and held that Metabolite failed to present a “compelling case” that the exercise of personal jurisdiction would be unfair.

Therefore, the Federal Circuit held that the district court may exercise personal jurisdiction over Metabolite in accordance with due process and that the district court’sdismissal of Metabolite for lack of personal jurisdiction was improper. Additionally, because the grant of SJ to PamLab was based on the district court’s erroneous determination that it lacked personal jurisdiction over Metabolite, the Federal Circuit vacated the grant of SJ to PamLab and remanded for further proceedings.