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Covenant Not to Sue for Past Infringement Did Not Divest District Court of Jurisdiction of Declaratory Counterclaims Applicable to Future Infringement

08-1050
February 13, 2009
Bhushan, Anita

Decision icon Decision

Last Month at the Federal Circuit - March 2009

Judges: Newman (author), Schall, Moore

[Appealed from: C.D. Cal., Judge Gutierrez]

In Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., No. 08-1050 (Fed. Cir. Feb. 13, 2009), the Federal Circuit reversed and remanded the district court’s dismissal of an accused infringer’s counterclaims of invalidity and unenforceability for lack of jurisdiction under Fed. R. Civ. P. 12(b)(1) and for lack of an actual case or controversy.

Revolution Eyewear, Inc. (“Revolution”) owns U.S. Patent No. 6,550,913 (“the ’913 patent”), directed to magnetically attached auxiliary eyeglasses. In 2003, Revolution sued Aspex Eyewear, Inc. (“Aspex”) for infringement of the ’913 patent. Aspex stopped selling the allegedly infringing eyewear after the suit was filed, and filed counterclaims for noninfringement, invalidity, and unenforceability of the ’913 patent in responding to the complaint.

During pretrial proceedings, the district court granted Aspex’s motion for SJ on the invalidity counterclaim, dismissed the other counterclaims as moot, and entered final judgment of invalidity. Revolution appealed, and the Federal Circuit vacated the judgment of invalidity and remanded in light of claim construction issues. Shortly thereafter, the district court awarded attorneys’ fees to Aspex under 35 U.S.C. § 285. Revolution appealed, but the Federal Circuit dismissed for lack of final judgment based on the previous remand. On remand, the district court set a trial date for invalidity and unenforceability.

Just before trial, Revolution unconditionally covenanted not to sue Aspex for infringement of the ’913 patent “based upon any activities and/or products made, used, or sold on or before the dismissal of this action.” Slip op. at 3. Revolution filed this covenant, along with a motion to dismiss its infringement suit under Fed. R. Civ. P. 41(a)(2) and a motion to dismiss Aspex’s counterclaims for lack of jurisdiction under Fed. R. Civ. P. 12(b)(1), and for absence of the constitutionally required case or controversy. Aspex objected to the motion to dismiss its counterclaims, arguing that an actual controversy continued to exist because Revolution’s covenant applied only to past infringement.

The district court dismissed the claims and counterclaims because, as Revolution covenanted not to sue in the future for products made, used, or sold in the past and the present, any actual controversy in the present had been removed from the case. Accordingly, the district court held that it no longed had subject matter jurisdiction over the counterclaims. Aspex appealed the dismissal of its counterclaims.

On appeal, the Federal Circuit agreed with Aspex that the undisputed fact that the covenant not to sue would not protect Aspex from suit if Aspex engaged in future marketing of the accused eyewear constituted a critical distinction from the Court’s earlier decision in Super Sack Manufacturing Corp. v. Chase Packaging Corp., 57 F.3d 1054 (Fed. Cir. 1995). There, the Federal Circuit held that, where a covenant not to sue only applied to products as they existed at the time of the suit even if made and sold in the future, whether any unknown future products of changed structure would be sufficiently at risk of infringement was too speculative an issue to warrant present prosecution of declaratory charges of invalidity. In contrast, the Court reasoned that in this case, Aspex stated that it did not intend to change its design of the accused product, and the covenant did not extend to future sales of the same structure.

The Federal Circuit next turned to MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). In MedImmune, the Supreme Court held that a DJ action is available when the facts as alleged “under all the circumstances, show that there is a substantial controversy, between the parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Slip op. at 5 (quoting MedImmune, 549 U.S. at 127). The Federal Circuit agreed with the district court that MedImmune did not change the well-established rule, as enunciated in Super Sack, that an actual controversy must exist at all stages of judicial review, not merely when a complaint is filed. The Court, however, acknowledged that MedImmune imposed a totality-of-the-circumstances test.

The Federal Circuit also surveyed its own case law. The Court began by noting that “[w]hether a covenant not to sue will divest the trial court of jurisdiction depends on what is covered by the covenant.” Id. at 6. The Court first considered SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007), where it explained that DJ jurisdiction is met when the patentee “puts the declaratory judgment plaintiff in the position of either pursuing arguably illegal behavior or abandoning that which he claims a right to do.” Slip op. at 6 (quoting SanDisk, 480 F.3d at 1381). The Court in SanDisk held that when a party’s proposed activity resulted in an assertion of legal rights by the patentee, the party needs to actually infringe before seeking a declaration of rights.

The Federal Circuit next considered Benitec Australia, Ltd. v. Nucleonics, Inc., 495 F.3d 1340 (Fed. Cir. 2007), a post-MedImmune case in which DJ jurisdiction was found not to exist. In Benitec, the patentee filed a covenant not to sue a competitor for infringement based on the competitor’s development of a drug product that federal approval had not yet been applied for. The competitor wished to continue to challenge the patent, but the district court found no actual controversy existed because the competitor was exempt from liability for infringement due to the Hatch-Waxman Act. The Federal Circuit held that, based on the entirety of the circumstances, there was no actual controversy because the possibility of a future infringement suit based on future acts was too speculative.

The Federal Circuit distinguished Revolution’s covenant from the one in Benitec, noting that there, as in Super Sack, the continuing activities of the would-be infringer were not subject to an infringement suit, either because of a statutory exemption or because of a covenant that extended to future production and sale of the same products that were the subjects of the infringement suit. Accordingly, there was no reasonable apprehension of suit in either Benitec or Super Sack. By contrast, Revolution’s covenant did not extend to future sales of the same products that had been sold before.

The Federal Circuit further reasoned that MedImmune made clear that “[t]he rule that a plaintiff must destroy a large building, bet the farm, or (as here) risk treble damages and the loss of 80 percent of its business, before seeking a declaration of its actively contested legal rights finds no support in Article III.” Slip op. at 8 (quoting MedImmune, 549 U.S. at 134). The Court noted that Revolution was proposing that, for a justiciable controversy to exist, Aspex would have to manufacture and sell the accused eyewear before challenging the ’913 patent and risk being held a willful infringer subject to treble damages. Thus, the Federal Circuit concluded that MedImmune counseled a thoughtful review of the entirety of the circumstances in this case.

Turning to the present appeal, the Court found that the MedImmune requirements for DJ jurisdiction were satisfied. The Court first noted that Aspex maintained that it had the right to make the products at issue because the ’913 patent was invalid and unenforceable. Moreover, Aspex’s planned activity was not speculative—Aspex appeared to have the accused product in storage and wished to sell it again. Finally, the Court noted that Revolution stated in oral argument that it would return to court if Aspex reentered the market with the accused products. Thus, applying the MedImmune factors, the Federal Circuit concluded that the dispute was definite and concrete because it pertained to the ’913 patent as applied to the product Aspex previously produced and sold and wished to produce and sell again. The dispute was real and substantial, as evinced by the lengthy litigation and the limited covenant. The issue “touch[ed] the legal relations of parties having adverse legal interest” because it affected whether Aspex could return to the market without risking treble damages. Slip op. at 9. Finally, the Court reasoned that the dispute was amenable to “specific relief through a decree of a conclusive character” because the resolution of the counterclaims for invalidity and unenforceability of the ’913 patent would conclusively determine the issue. Id.

The Court rejected Revolution’s suggestion that the case presented a request for an advisory judicial opinion. The Federal Circuit reasoned that the parties had already been in infringement litigation initiated by the patentee, the case had been pending since 2003, the case already produced an SJ of invalidity, and the covenant was filed in 2007 after four years of litigation and just before the trial on enforceability. Moreover, throughout this period, Aspex removed the accused eyewear from the market, yet Aspex would not be shielded by the covenant if it now returned the product to the market. Under these circumstances, the Court concluded that Aspex’s declaratory action met MedImmune’s requirement of “sufficient immediacy and reality.” Id.

Finally, the Court concluded that the district court cases Revolution cited supported the conclusion that DJ jurisdiction for Aspex’s counterclaims existed. The Court noted that in all of the cases, no continuing case or controversy was found because the covenants covered the current products whether they were sold before or after the covenant. In contrast, Revolution did not offer a covenant on the current products in this case, opting to retain the right to sue for future infringement. The Court noted that by retaining this right, Revolution preserved the controversy to a level of “sufficient immediacy and reality” to allow Aspex to pursue its DJ counterclaims. Accordingly, the Court held that there was an actual controversy within the meaning of the DJ Act and reversed the district court’s dismissal, remanding the case for further proceedings.