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Notice Letters Insufficient to Subject Company to Personal Jurisdiction in DJ Action

07-1553
December 16, 2008
Ferrill, Elizabeth D.

Decision icon Decision

Last Month at the Federal Circuit - January 2009

Judges: Newman (dissenting), Schall, Linn (author)

[Appealed from: N.D. Ala., Judge Smith]

In Avocent Huntsville Corp. v. ATEN International Co., No. 07-1553 (Fed. Cir. Dec. 16, 2008), the Federal Circuit affirmed the district court’s dismissal of all of Avocent Huntsville Corp.’s and Avocent Redmond Corp.’s (collectively “Avocent”) claims for lack of personal jurisdiction, finding that Avocent had failed to allege that ATEN International Co., Ltd. (“ATEN”) purposefully directed any activities beyond merely sending notice letters to residents of the forum and that the DJ action arose out of or related to those activities.

Avocent is a subsidiary of Avocent Corporation, a Delaware corporation located in Huntsville, Alabama. Avocent develops and markets computer keyboard-video-mouse (“KVM”) switches. ATEN, a Taiwanese corporation, is the assignee of U.S. Patent Nos. 6,957,287 (“the ’287 patent”) and 7,035,112 (“the ’112 patent”), both of which relate to KVM switches. ATEN attempted to enforce its patent rights in three letters. In the first letter, one of ATEN’s U.S. subsidiaries attached a copy of a published patent application that led to the ’112 patent and suggested that Avocent Corporation review the pending claims. Two years later, in a second letter, another company affiliated with ATEN sent a letter to Amazon.com (“Amazon”) encouraging Amazon to discontinue selling various products allegedly infringing the ’112 patent, including one Avocent product. Finally, one year later, at a time when ATEN and Avocent Redmond Corp. were litigating a separate infringement suit in the Western District of Washington, counsel for ATEN sent counsel for Avocent Redmond Corp. a letter asserting that the ’287 and ’112 patents were infringed by Avocent’s KVM switch products.

Shortly after the third letter, Avocent sued ATEN in the U.S. District Court for the Northern District of Alabama requesting a DJ of noninfringement and invalidity of the ’287 and ’112 patents. ATEN moved to dismiss for lack of personal jurisdiction, or in the alternative, to transfer the case to the Western District of Washington, where ATEN and Avocent Redmond Corp. had a pending action. Neither party disputed that some of ATEN’s products were available for sale within Alabama. Avocent alleged that ATEN purposefully directed these products to the forum both by injecting them into the stream of commerce through the Internet and through direct sales activities at, for example, retail stores. The district court granted ATEN’s motion, holding that it could not exercise specific jurisdiction over ATEN based on the three letters and that it could not exercise general jurisdiction based on the availability of ATEN’s products in Alabama. Avocent appealed.

On appeal, the Federal Circuit first reviewed the two-step legal framework to determine whether personal jurisdiction exists over a nonresident defendant. As Alabama’s long-arm statute permits service of process to the extent allowed under the Due Process Clause of the U.S. Constitution, the Federal Circuit focused its analysis on those minimum contacts of ATEN within Alabama, whereby ATEN purposefully availed itself of the benefits and protections of the forum state’s laws. The Federal Circuit noted that to establish specific jurisdiction, a plaintiff must demonstrate that the defendant has “purposefully directed” his activities at residents of the forum and the litigation results from alleged injuries that “arise out of or relate to” those activities. Slip op. at 8. Moreover, the Federal Circuit explained that a defendant must purposefully establish minimum contacts within the forum state and these contacts may be considered in light of other factors to determine whether the assertion of personal jurisdiction would comport with fair play and substantial justice.

The Federal Circuit noted that in the context of patent infringement litigation, it employs a three-prong test for specific jurisdiction to determine whether (1) the defendant purposefully directed its activities at residents of the forum; (2) the claim arises out of or relates to those activities, constituting the “minimum contacts” analysis; and (3) assertion of personal jurisdiction is reasonable and fair, constituting the “fair play and substantial justice” requirement. Id. at 11-12. In the context of an action for DJ of noninfringement, invalidity, and/or unenforceability, the Federal Circuit explained that the claim asserted by the plaintiff relates to the wrongful restraint by the defendant-patentee on the free exploitation of noninfringing goods, such as the threat of an infringement suit. Such a claim neither directly arises out of nor relates to the making, using, offering to sell, selling, or importing of arguablypatented products in the forum, but instead arises out of or relates to the activities of the defendant-patentee in enforcing the patent or patents-in-suit. Thus, the Federal Circuit noted that for specific personal jurisdiction purposes, the inquiry turns on to what extent has the defendant-patentee purposefully directed its enforcement activities at residents of the forum and the extent to which the DJ claim arises out of or relates to those activities.

The Court noted that in the past, it has held that letters threatening suit for patent infringement sent to the alleged infringer alone did not suffice to create personal jurisdiction because exercising jurisdiction in such a situation would not comport with fair play and substantial justice. Rather, the Court has found that there must be “other activities” directed at the forum and related to the cause of action besides the letters. The Court noted that “other activities” should relate to the enforcement or the defense of the validity of the relevant patents, such as initiating judicial or extrajudicial patent enforcement within the forum or entering into an exclusive license agreement that imposes enforcement obligations with a party residing or regularly doing business in the forum. On the other hand, the defendant patentee’s own commercialization activity and mere evidence of sales within the forum of products covered by the relevant patents are not included in “other activities” that would confer specific personal jurisdiction over the patentee in the context of a DJ claim for noninfringement, invalidity, and/or unenforceability.

Applying these principles, the Federal Circuit concluded that the district court did not have personal jurisdiction over ATEN and that it correctly dismissed Avocent’s claims. Avocent asserted that ATEN should be subject to personal jurisdiction in Alabama, arguing that the availability of ATEN’s products for sale in the forum state demonstrated a nationwide distribution network, making ATEN susceptible to jurisdiction in Alabama. Conversely, ATEN argued that, while its products may be purchased in Alabama, there is no evidence that ATEN controlled the distribution of its products, acted in concert with distributors or others, or had any knowledge that the likely destination of its products was Alabama, because any sales activity in the United States was attributable to its subsidiary. ATEN contended that a corporate subsidiary’s contacts in the forum state cannot be imputed to the parent corporation absent clear and convincing evidence that the parent controls the subsidiary’s activities.

After examining the roles of ATEN and its U.S. subsidiaries, the Federal Circuit determined that Avocent’s complaint was fatally deficient since it did not explicitly identify the U.S. subsidiaries or explain the relationship between these corporate entities. Because the mere sale of defendant’s products—whether covered by the patents-in-suit or not—is not sufficient to establish specific personal jurisdiction in a DJ suit, the Federal Circuit found that Avocent had failed to allege sufficient activities related to the claim of patent noninfringement and invalidity to support the assertion of specific personal jurisdiction. The Federal Circuit also noted that a district court’s refusal to exercise personal jurisdiction over a foreign patentee in a particular state does not foreclose the availability of a domestic forum, because by statute, every foreign patentee is subject to jurisdiction in at least one state or in the District of Columbia. For these reasons, the Court concluded that the district court properly dismissed Avocent’s claims against ATEN for lack of personal jurisdiction.

Judge Newman dissented. She stated that the entirety of the contacts with the forum adequately supported the exercise of personal jurisdiction in the forum, comporting with the principles of personal jurisdiction as elaborated by the Supreme Court. In addition to the notice letters, Judge Newman noted that ATEN conducted regular retail sales in the forum in direct competition with Avocent’s products and that ATEN threatened suit in the forum. Further, given the pendant state law claims, Judge Newman stated there was no other forum in which all of the counts of the complaint could be resolved as of right and that the majority should have considered the availability of alternative fora in deciding whether the defendant’s contacts with the forum were sufficient for the exercise of personal jurisdiction.

Judge Newman identified seven general factors that contributed to the relationship between the parties and involved the Alabama forum: (1) ATEN’s infringement letter was sent to Avocent in Alabama; (2) ATEN’s contacts with Alabama included sale of ATEN’s products through distributors and retail outlets in Alabama; (3) ATEN’s contacts with Avocent’s customers were the focus of commercial tort claims under Alabama law; (4) Avocent’s manufacture of the accused infringing products was conducted in Alabama; (5) ATEN had brought infringement suits in other U.S. tribunals on the same patent that was the subject of the first letter; (6) no clear alternative forum for this complaint; and (7) due process and fairness. According to Judge Newman, the majority erred in its analysis because it evaluated each factor that contributed to jurisdiction in isolation rather than considering the totality of the factors in combination. She concluded that she would hold that personal jurisdiction lies in the Alabama forum.