March 24, 2022
LES Insights
By John C. Paul; Anthony D. Del Monaco; Courtney A. Bolin
A forum selection clause in an agreement specified that the parties agreed that disputes arising under the agreement would be decided in a court in the state of Delaware. However, that forum selection clause was determined to apply only to contract disputes arising under the agreement and not to patent infringement disputes between the parties. As a result, a company that was accused of infringement but resided outside Delaware could not be sued for patent infringement in Delaware courts because those courts did not have personal jurisdiction over that company and that company did not agree in the forum selection clause to be sued for patent infringement in Delaware despite the fact that the company had a subsidiary that resided in Delaware.
Finjan sued Trustwave and Trustwave’s parent company, Singtel, for patent infringement in Delaware Federal Court. In response, Singtel claimed the court did not have the power to hear the case because Singtel was not a resident of Delaware and therefore the court lacked personal jurisdiction over Singtel. So Singtel asked the court to dismiss the case on that basis.
Finjan then filed an amended complaint to add a claim against Singtel for breach of contract. Singtel subsequently renewed its motion to dismiss the case for lack of personal jurisdiction. The Delaware Federal Court heard argument on the motion to dismiss and, at the conclusion of the hearing, granted Finjan’s request for discovery on the issue of personal jurisdiction.
During discovery, Singtel produced the merger agreement between itself and Trustwave from when it acquired Trustwave in 2015. The 2015 merger agreement referred to a 2012 agreement between Trustwave and Finjan that amended and restated a patent licensing agreement between Finjan and M86 Security, Inc. (later acquired by Trustwave) to extend certain patent license rights from M86 to Trustwave.[1]
The 2012 Finjan-Trustwave agreement provided a forum selection clause naming Delaware as the exclusive jurisdiction for any dispute that arises from or relates to the 2012 Finjan‑Trustwave agreement. Singtel also produced a letter that was associated with its 2015 acquisition of Trustwave that stated that the 2012 Finjan-Trustwave agreement that amended and reinstated certain patent licenses was a “Material Contract” to the merger.
In 2018, nearly two years before Finjan filed its patent infringement suit in the Delaware Federal Court, Finjan filed a suit against Trustwave in a different court, the Delaware State Court, for breach of the 2012 license agreement. In that suit, Finjan argued that Singtel’s acquisition of Trustwave triggered a four percent royalty on certain products, and that Trustwave failed to pay those royalties.
The Delaware State Court held that Trustwave did not owe royalties and noted that Singtel may owe royalties under the 2012 Finjan-Trustwave agreement. Finjan then filed suit in Delaware Federal Court, asserting Trustwave and Singtel infringe one of Finjan’s patents. Finjan later amended its complaint to add a breach of contract claim following Singtel’s motion to dismiss for lack of personal jurisdiction.
A party may move to dismiss a case by asserting that a court lacks personal jurisdiction over it. Federal Rule of Civil Procedure 12(b)(2). The courts typically use a two-part test for determining whether exercising personal jurisdiction over a nonresident defendant.
Where a defendant moves to dismiss a lawsuit for lack of personal jurisdiction, the plaintiff bears the burden of showing the basis for jurisdiction. Generally, plaintiffs are only required to make a prima facie showing. Here, however, because the parties conducted some discovery, the burden of proof required was unclear. Ultimately, the court determined that Finjan was required to do more than merely make a prima facie showing of jurisdiction.
Finjan presented four arguments supporting its position that it had personal jurisdiction over Singtel.
First, Finjan argued that Singtel expressly consented to jurisdiction in Delaware when it acquired Trustwave, since the 2012 Finjan-Trustwave agreement contained a forum selection clause designating Delaware as the forum choice.
Second, Finjan contended that Singtel’s marketing and offering for sale of the accused products in Delaware and the United States gives rise to personal jurisdiction.
Third, Finjan asserted that there is both general and specific personal jurisdiction over Singtel based on Singtel’s relationship with Trustwave and Singtel’s other wholly owned subsidiaries.
Finally, Finjan argued, in the alternative, that if Singtel is not subject to jurisdiction in any district in the United States, then it has sufficient contacts with the United States as a whole to support exercising jurisdiction pursuant to Federal Rule of Civil Proceeding 4(k)(2).
Regarding Finjan’s first argument, the forum selection clause argument, the Delaware Federal Court found that the forum selection clause of the 2012 Finjan-Trustwave agreement bound Singtel and that the Delaware Federal Court may exercise personal jurisdiction over Singtel regarding Finjan’s breach of contract claim but not its patent infringement claim. It explained that, unlike subject matter jurisdiction, personal jurisdiction can be waived be a party’s express or implied consent to jurisdiction and, where express consent is given, the traditional two-step analysis is not required. The court continued to explain that execution of an agreement with a forum selection clause can constitute express consent to the jurisdiction of the forum state.
Finjan argued that, by acquiring Trustwave, Singtel consented to the jurisdiction of Delaware based on the forum selection clause of the 2012 Finjan-Trustwave agreement.
In response, Singtel argued that the forum selection clause did not bind acquirors or apply to it since it was not a party to the agreement.
Ultimately, the court sided with Finjan. The court explained that Delaware applies a three-part test to determine whether to apply a forum selection clause to a non-signatory. Under that test, the court asks: (1) if the forum selection clause is valid, (2) if the non-signatory is a third-party beneficiary or closely related to the contract, and (3) if the claim arises from the agreement.
Singtel did not dispute the first or third requirements but argued that it was not “closely related” to the contract.
The court explained that Singtel was closely related to the 2012 Finjan-Trustwave agreement because it could have foreseen that it would have been bound by the agreement based on Singtel’s actual notice of the agreement during due diligence and its reference to the agreement as a “Material Contract.”
The court also found that Singtel directly benefited from the agreement because it acquired Trustwave’s cybersecurity assets and access to the United States cyber security market.
The court then turned to the patent infringement claim asserted by Finjan. The forum selection clause of the 2012 Finjan-Trustwave agreement provides that it only applies to “dispute[s] arising out of or relating to” the agreement.
Finjan argued that the forum selection clause should bind Singtel to Delaware because the breach of contract and patent infringement claims were, in Finjan’s view, so closely related.
The court disagreed. Instead, the court found that its denial of Finjan’s motion to dismiss Trustwave’s action does not make Finjan’s infringement claim against Singtel a claim that arises from or relates to the 2012 Finjan-Trustwave agreement.
After determining that it had personal jurisdiction over Singtel with respect to Finjan’s breach of contract claim, the court turned to Singtel’s motion to stay. The court explained that generally simultaneous litigations in state and federal courts may proceed until one court comes to a judgment. At that point, the judgment may create a res judicata or collateral estoppel effect on the other action.
However, in Colorado River, the Supreme Court recognized extremely limited circumstances where a federal court may defer to a pending state court proceeding. For Colorado River abstention to be appropriate, the parallel state and federal litigations must be truly duplicative. The court explained that the threshold issue that must be decided when determining if abstention is appropriate is if the state and federal actions are “parallel.”
Litigations are generally considered to be parallel where they involve the same parties and substantially identical claims, and where the plaintiff is seeking the same remedies. If a court finds that the proceedings are parallel, it then applies a six-factor balancing test, that is weighted in favor of exercising jurisdiction, to determine if abstention is warranted. This six-factor test includes considering which court first assumed jurisdiction over the property (in an in rem case), the convenience of the federal forum, the desirability of avoiding piecemeal litigation, the order in which jurisdiction was obtained, whether state or federal law controls, and whether the state court will adequately protect the interests of the parties.
Applying the Colorado River factors, the court determined that the requested stay was justified and granted it. Finjan argued that the proceedings were not parallel because Singtel was not a party in the Delaware State Court case. In response, Singtel argued that Finjan’s amended complaint treated Singtel’s liability as coextensive with Trustwave’s liability. The court sided with Singtel and added that both cases involved the same contract, same alleged conduct, and the same disputed royalties. Further, the court explained that the Delaware Superior Court will ultimately determine whether royalties are owed. Thus, the court found that the proceedings were parallel.
Next, the court applied the six-factor Colorado River balancing test and found that none of the factors weighted against abstention. The court noted that the third factor—the desirability of avoiding piecemeal litigation—weighed heavily in favor of abstention, and that the fourth and fifth factors—the order in which jurisdiction was obtained and whether state or federal law controls—weighed in favor of abstention. Thus, the court found that Singtel met its burden of proof and that abstention was appropriate, and it granted the motion to stay.
A forum selection clause relating to disputes under an agreement may not apply to all disputes between the parties even if a dispute relates in some way to the subject matter of the agreement. The forum section clause can result in a party being sued on contract claims in a state where it could otherwise not be sued because, by agreeing to the forum selection clause, it waived personal jurisdiction to contract claims arising under the agreement. But unless the forum selection clause also applied to patent infringement claims, that party may not be sued in that state for such patent infringement claims because it did not waive personal jurisdiction in that state relating to such patent infringement claims.
The Finjan decision can be found here.
[1]Notable here, asserted U.S. Patent No. 8,141,154 (“the ’154 patent”), which relates to protecting computers from malicious code, was not among the patents that were licensed to the M86 before the company was acquired by Trustwave.
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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