October 15, 2012
LES Insights
By John C. Paul; D. Brian Kacedon; Mindy L. Ehrenfried
Authored by Mindy L. Ehrenfried, D. Brian Kacedon, and John C. Paul
The Declaratory Judgment Act authorizes federal courts to declare the rights and legal relations of any interested party if a justiciable controversy—one that is sufficiently real, immediate, and substantial—exists between parties with adverse legal interests. Thus, in certain circumstances, a party concerned about possibly infringing a patent need not wait for the patent holder to assert its rights in court; rather, the putative infringer can initiate its own lawsuit seeking a court ruling of noninfringement and/or invalidity. To establish jurisdiction, the challenger must show a controversy of "adverse legal interests." This threshold requires more than just having economic interests at stake—it requires actual legal risk due to an unresolved dispute. If the challenger does not present a justiciable controversy, the court will dismiss the lawsuit for lack of jurisdiction. The Supreme Court has held that courts must evaluate all of the circumstances to determine if a justiciable controversy exists.
In General Electric Co. v. NeuroGrafix,1 No. 2:12-cv-04586-MRP-RZ (C.D. Cal. Aug. 16, 2012), the court denied the (patentee) defendant's motion to dismiss for lack of declaratory-judgment jurisdiction. The court found that all of the circumstances—which included the patent holder's threatening statements, aggressive patent-enforcement history, the accused infringer's continuing liability risk, and an inadequate covenant not to sue—created a substantial controversy to support declaratory-judgment jurisdiction. Even after the patentee clarified the scope of its covenant not to sue and filed a motion for reconsideration, the court maintained its holding.
NeuroGrafix, a medical-technology company, holds an exclusive license to a patent directed to techniques of generating nerve images using MRI equipment. General Electric Co. manufactures MRI machines and accompanying software, which it sells to hospitals and universities. GE enters into indemnification agreements with its customers to insulate them from patent-infringement liability. NeuroGrafix approached GE to discuss licensing options, but the companies could not reach an agreement. After the licensing discussions with GE broke down, NeuroGrafix released a public statement, referencing an ongoing litigation with a different company, announcing NeuroGrafix's continuing intention to enforce its patent rights, and identifying GE as an unlicensed company. GE subsequently filed a declaratory-judgment action against NeuroGrafix, seeking declarations of invalidity and noninfringement of NeuroGrafix's patent. NeuroGrafix moved to dismiss the lawsuit for lack of jurisdiction, arguing no justiciable controversy existed. NeuroGrafix also granted GE a covenant not to sue under the patent-in-suit claiming that the covenant deprived the court of jurisdiction.
Applying the Supreme Court's "all circumstances" test, the court found four factors that, taken together, created a substantial controversy. First, the court pointed to NeuroGrafix's threatening public statements, which announced NeuroGrafix's intention to pursue its patent rights and specifically identified GE as an unlicensed, possibly infringing company.
Second, the court found compelling NeuroGrafix's history of aggressive patent enforcement. Before GE filed its declaratory-judgment suit, NeuroGrafix had already sued two other companies, both ending in settlement—a fact that NeuroGrafix posted on its website. In the two months after GE filed its suit, NeuroGrafix filed eight more infringement lawsuits. The court described NeuroGrafix's behavior as a "sue-settle-warn-repeat cycle."
Third, the court emphasized GE's continuing liability for indemnification and indirect infringement through NeuroGrafix's lawsuits against GE's customers. The court noted that indemnification and indirect infringement liability are "important considerations" under the Supreme Court's "all circumstances" test. And with every lawsuit against a GE customer, GE remained under the real, immediate, and substantial threat of liability for contractual indemnification and indirect infringement. The real threat of indemnification also served to cement the requirement of adverse legal interests by transforming GE's interests from merely economic to real legal risk.
Finally, the court found inadequate NeuroGrafix's covenant not to sue. The court recognized that a covenant not to sue has the potential to extinguish a controversy and thereby extinguish the court's jurisdiction over the controversy. In this case, however, NeuroGrafix's covenant not to sue was inadequate because it did not extend to GE's customers and it was also ambiguous because it may leave GE vulnerable to suit for future sales of products made in the past. Further, the court found that under all the circumstances, NeuroGrafix's threatening and aggressively litigious conduct "canceled out" its proffered inadequate and ambiguous covenant not to sue. Even after NeuroGrafix filed a motion for reconsideration and unambiguously stated that its covenant extended to future sales, therefore precluding any action against GE, the court maintained its decision because NeuroGrafix had not addressed GE's liability for indemnification and had not overcome the other factors considered by the court. The court summarized and relied on both Supreme Court and Federal Circuit case law holding that a potential action by the patentee against the declaratory-judgment plaintiff was only one possible way to support jurisdiction.
Courts consider many factors when determining whether a controversy sufficiently supports declaratory-judgment jurisdiction. In this case, the court cited the patent holder's threatening public statements and history of aggressive patent enforcement as factors supporting jurisdiction. And although a covenant not to sue can sometimes defeat jurisdiction, the covenant in this case was insufficient to do so because it did not eliminate all avenues of liability for the challenger.
Perhaps most important from a business perspective is the court's reliance on the alleged infringer's indemnification liability. A patent holder enforcing its patents should consider not only the possibility of a declaratory-judgment action from its enforcement targets but also the possibility of one from the suppliers of those enforcement targets. On the other hand, a supplier with indemnification agreements may not necessarily find its hands tied when its customers are facing threats of infringement suits.
Endnotes
1 The GE decision is not currently publicly available.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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