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License Negotiations Created Case or Controversy for DJ Action Despite Promises Not to Sue

05-1300
March 26, 2007

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Last Month at the Federal Circuit - April 2007

Judges: Bryson (concurring), Linn (author), Dyk

[Appealed from: N.D. Cal., Judge Fogel]

In SanDisk Corp. v. STMicroelectronics, Inc., No. 05-1300 (Fed. Cir. Mar. 26, 2007), the Federal Circuit vacated the district court’s dismissal of SanDisk’s DJ claims for lack of subject matter jurisdiction and remanded the case.

SanDisk Corporation (“SanDisk”) and STMicroelectronics, Inc. (“ST”) are competitors in the flash memory storage market, and each has patent portfolios related to flash memory storage products.

Beginning with an April 2004 letter from ST to SanDisk requesting a meeting with representatives of SanDisk to discuss a cross-licensing agreement based on a number of ST’s patents, ST and SanDisk exchanged letters for several months concerning the scheduling and agenda for the meeting. The exchange of letters resulted in a licensing meeting between ST and SanDisk held on

During the licensing meeting, ST presented a slide show, which listed SanDisk’s various “unlicensed activities.” The ST slide show was followed by a four- to five-hour presentation by ST’s technical experts, during which they identified and discussed specific claims of each ST patent and alleged that they were infringed by SanDisk’s products. In particular, the presentation included an element-by-element analysis of how SanDisk’s products purportedly infringed claims of the fourteen ST patents. Thereafter, SanDisk made a presentation describing several of SanDisk’s patents and analyzing how a semiconductor chip product sold by ST purportedly infringed the SanDisk patents. At the end of the licensing meeting, ST’s vice president of IP and licensing handed SanDisk’s counsel a packet of materials containing, for each of ST’s fourteen patents presented, a copy of the patent, reverse engineering reports for SanDisk’s products, and diagrams showing how elements of ST’s patent claims covered SanDisk’s products. According to SanDisk’s counsel, ST’s counsel indicated that

I know that this is material that would allow SanDisk to DJ [ST] on. We have had some internal discussions on whether I should be giving you a copy of these materials in light of that fact. But I have decided that I will go ahead and give you these materials.

Slip op. at 5. ST’s counsel further told SanDisk’s counsel that “ST has absolutely no plan whatsoever to sue SanDisk,” to which SanDisk’s counsel replied, “SanDisk is not going to sue you on Monday.” Id. Following the licensing meeting, ST and SanDisk exchanged copies of the materials presented during the meeting, and on September 15, 2004, SanDisk sent ST a confidential cross-licensing offer, indicating that the offer would expire if not accepted by September 27, 2004. Thereafter, despite ST’s repeated requests for a nonconfidential version of the offer, SanDisk refused to send ST a nonconfidential version of the offer. On September 27, 2004, SanDisk indicated to ST that SanDisk did not need any additional information about ST’s patents because SanDisk was “quite comfortable with its position” and that it was “time to let our business people talk and see if a peaceful resolution is possible.” Id. at 6.

After several failed attempts by business representatives to schedule another meeting, SanDisk filed a lawsuit on October 15, 2004, alleging infringement of one of SanDisk’s patents and seeking a DJ of noninfringement and invalidity of the fourteen ST patents. The district court granted ST’s motion to dismiss SanDisk’s DJ claims for lack of subject matter jurisdiction on the basis that there was no actual controversy at the time SanDisk filed its complaint. In particular, the district court reasoned that under the Federal Circuit’s existing two-part test for determining whether an actual controversy exists to support DJ jurisdiction under the DJ Act, 28 U.S.C. § 2201(a), ST’s conduct did not create in SanDisk a reasonable apprehension of suit by ST. The district court noted that “SanDisk has presented no evidence that ST threatened it with litigation at any time during the parties’ negotiations, nor has SanDisk shown other conduct by ST rising to a level sufficient to indicate an intent on the part of ST to initiate an infringement action.” Id. at 7. The district court further found that the infringement analysis, which ST provided to SanDisk, did not constitute the required “express charges [of infringement] carrying with them the threat of enforcement.” Id. SanDisk appealed.

On appeal, the Federal Circuit vacated the district court’s dismissal of SanDisk’s request for a DJ of noninfringement and invalidity of the fourteen ST patents and remanded the case. Referring to footnote 11 in the Supreme Court’s recent opinion in MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), the Federal Circuit repudiated its own two-part test to determine whether an actual controversy exists, and held “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.” Slip op. at 15. In particular, the Federal Circuit found that in footnote 11, the Supreme Court “specifically addressed and rejected our reasonable apprehension test.” Id. at 14.

Applying the facts of ST and SanDisk’s licensing negotiations under the new rule, the Federal Circuit held that SanDisk had demonstrated the existence of an Article III controversy giving rise to DJ jurisdiction. In support, the Federal Circuit cited ST’s detailed infringement analysis, including a presentation given by seasoned litigation experts detailing how ST’s patent claims purportedly read on one or more of SanDisk’s products based on its element-by-element analysis, ST’s liberal reference to SanDisk’s activities as “ongoing infringement” of ST’s patents and the need for SanDisk to obtain a license to those patents, and ST’s provision of materials to SanDisk containing, for each of ST’s fourteen patents, copies of each of the patents, reverse engineering reports for SanDisk’s products, and diagrams showing a detailed infringement analysis of SanDisk’s products.

The Federal Circuit further noted that SanDisk maintained that it could continue its conduct without payment of license royalties to ST, thereby establishing a legal controversy. The Federal Circuit quoted Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941), and concluded 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.” Slip op. at 17. The Federal Circuit further explained its rationale, commenting that “SanDisk need not ‘bet the farm’ . . . and risk a suit for infringement by cutting off licensing discussions and continuing in the identified activity before seeking a declaration of its legal rights.” Id. at 17-18.

Concerning ST’s explicit promise not to sue SanDisk, the Federal Circuit concluded that ST’s promise did not eliminate a justiciable controversy because ST’s conduct showed a preparedness to and willingness to enforce its patent rights despite the promise. Calling ST’s conduct “extra-judicial patent enforcement with scare-the-customer-and-run tactics,” the Federal Circuit found such tactics to be the type of conduct that the DJ Act was intended to obviate. Id. at 18. Referring to the district court’s alternative indication that it would exercise its discretion and decline to hear the DJ case, the Federal Circuit noted that such discretion has limits, and further, that the district court’s decision was made in the context of the Federal Circuit’s now repudiated “reasonable apprehension” test. As a result, the Federal Circuit indicated that there would be little basis for the district court to exercise such discretion in the absence of additional facts in this case.

In a concurring opinion, Judge Bryson agreed with the Federal Circuit’s opinion in light of footnote 11 in the Supreme Court’s MedImmune decision, but noted that “it would appear that under the [Federal Circuit]’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.” Bryson Concurring Op. at 3. In short, Judge Bryson sees no practical basis for preventing grant of a DJ action in virtually any case in which the recipient of an offer to take a patent license decides to dispute the need for a license and bring a DJ action.