Print PDF

Prior Lawsuits and Communications with Customers Determine Declaratory-Judgment Jurisdiction

September 09, 2002

Decision icon Decision

Last Month at the Federal Circuit - October 2002

Judges: Linn (author), Newman, and Clevenger

In Vanguard Research, Inc. v. Peat, Inc., No. 01- 1373 (Fed. Cir. Sept. 9, 2002), the Federal Circuit reversed-in-part, vacated-in-part, and remanded the district court’s judgment regarding dismissal of Vanguard Research, Inc.’s (“Vanguard”) DJ action with prejudice and its order that Vanguard pay costs and attorneys’ fees to Peat, Inc. (“Peat”).

In the early 1990s, Vanguard entered into a series of contracts with Peat’s predecessor and parent corporation enabling Vanguard to license and market a thermal destruction and recovery waste processing system (“TDR technology”). Peat’s predecessor had filed a U.S. patent application on TDR technology in 1994 that issued to Peat as U.S. Patent No. 5,534,659 (“the ‘659 patent”).

On December 10, 1997, Vanguard and Peat entered into a two-year marketing and licensing agreement (“Agreement”) to market and license the TDR technology. In late 1997, Vanguard entered into a contract with a third party for a TDR technology system referred to as the “Phase I system,” which Vanguard subcontracted Peat to construct. In June 1998, Vanguard was named a subcontractor for a variation of the TDR technology referred to as the “Phase II system.” The Agreement expired under its own terms on December 10, 1999.

On September 23, 1999, prior to the expiration of the Agreement, Peat filed a suit in the U.S. District Court for the Northern District of Alabama asserting, among other things, breach of contract related to Phase I and Phase II contracts, unfair competition, trade-secret misappropriation, breach of nondisclosure agreement, breach of fiduciary duty, and breach of the duty of good faith and fair dealing (Peat had earlier filed and voluntarily dismissed a similar suit). Two days prior, on September 21, 1999, Vanguard filed a DJ action in the U.S. District Court for the Eastern District of Virginia (“Vanguard’s first Virginia action”) seeking a declaration that claims asserted in an arbitration demand filed in Peat’s dismissed suit were subject to arbitration. Peat moved to have Vanguard’s first Virginia action transferred to the Northern District of Alabama, but that motion was denied. On February 7, 2002, the Eastern District of Virginia court transferred Vanguard’s first Virginia suit to the U.S. District Court for the District of Columbia.

On February 15, 2000, after the Agreement had expired, Peat wrote Vanguard asserting that Vanguard no longer had the right to market TDR technology or use Peat’s intellectual property for the development of future contracts. Vanguard alleged that Peat also contacted Vanguard’s clients implying that the Phase II system uses Peat’s technology without a license.

On March 7, 2000, the judge presiding over Peat’s Alabama action entered an Order concluding that the Phase II system claims were not subject to arbitration and, thus, retained jurisdiction of those claims. Further, the judge ordered Peat to amend its complaint to omit claims related to the Phase I system based on the first-to-file rule and Vanguard’s pending litigation in the District of Columbia. This order was later upheld by the U.S. Court of Appeals for the Eleventh Circuit.

On March 13, 2000, Vanguard filed an action in the U.S. District Court for the Eastern District of Virginia (“Vanguard’s second Virginia action”) for a DJ that the ‘659 patent is invalid and unenforceable, and that the Phase II system did not infringe the ‘659 patent. Peat moved to dismiss Vanguard’s second Virginia action, alleging that Vanguard did not have a reasonable apprehension of suit and that Vanguard’s claims were compulsory counterclaims in Peat’s Alabama action.

The judge residing over Vanguard’s second Virginia action ruled that this action should be dismissed, but granted leave for Vanguard to file a motion to transfer to Alabama. Vanguard moved to transfer Vanguard’s second Virginia action to the District of Columbia. The residing judge dismissed the suit, holding that, under Fourth Circuit law, the patent claims were not compulsory counterclaims and that the Virginia court had subject-matter jurisdiction over Vanguard’s second Virginia action based on an actual controversy.

Accordingly, on January 29, 2001, Vanguard filed a DJ action in the U.S. District Court for the Northern District of Alabama (“Vanguard’s Alabama action”) that was essentially the same as Vanguard’s second Virginia action. On February 15, 2001, Peat moved to dismiss Vanguard’s Alabama action, arguing that the court lacked jurisdiction because there was no actual controversy between Peat and Vanguard with respect to the ‘659 patent, and that Vanguard’s claims were compulsory counterclaims. In response, Vanguard argued that Peat was collaterally estopped from raising jurisdictional and compulsory counterclaim defenses based on the decision in Vanguard’s second Virginia action. Alternatively, Vanguard argued that the Alabama court had jurisdiction because Vanguard had a reasonable apprehension of Peat filing a patent suit and that its noninfringement and invalidity claims were not compulsory counterclaims.

The Alabama district court dismissed the Vanguard’s Alabama complaint with prejudice, ordered Vanguard to pay costs, and awarded Peat its attorneys’ fees, concluding that it lacked jurisdiction under the Declaratory Judgment Act because there was no objectively reasonable apprehension that Peat would bring a suit of infringement of the ‘659 patent against Vanguard. Vanguard appealed to the Federal Circuit seeking review of the finding of a lack of subject-matter jurisdiction, the dismissal with prejudice, the award of costs, and the award of attorneys’ fees.

On the issue of subject-matter jurisdiction, the Federal Circuit ruled that the district court had clearly erred in finding no case or controversy. The Court reasoned that Vanguard’s reasonable apprehension that Peat would sue for patent infringement controlled whether a case or controversy existed, not Peat’s present intentions. The Court stated that by filing lawsuits and communicating with Vanguard’s clients about Vanguard using Peat’s technology, Peat had shown a willingness to protect that technology, and reasoned thatVanguard had a reasonable apprehension of suit from these actions. Thus, the Federal Circuit held that the district court did have jurisdiction over Vanguard’s Alabama action and reversed the district court’s judgment of dismissal with prejudice. The Court chose not to rule on Vanguard’s assertion that Peat was collaterally estopped from challenging the Alabama court’s jurisdiction based on the decision in Vanguard’s second Virginia action. The Court also vacated the award of costs and attorney’s fees.

Therefore, the Federal Circuit remanded the case to the district court to determine whether to exercise its jurisdiction over the case by considering the evidentiary and legal issues involved in Vanguard’s Alabama action and Peat’s Alabama action. The Federal Circuit also instructed the district court to consider the representation made by Vanguard’s counsel to the Federal Circuit at oral argument that upon remand, it would file a motion to consolidate its Alabama action with Peat’s Alabama action.