A Patent Owner Cannot Be Sued in a State Merely Because It Licensed Companies Doing Business in That State and Threatened Suit for Patent Infringement in That State

Authored by D. Brian Kacedon, Daniel F. Klodowski, and John C. Paul

Abstract

A nonpracticing entity based in New York had twice licensed its patents to companies doing business in Texas. It sent a cease-and-desist letter to a Texas company, demanding that the company take a license to its patents. The Texas company filed suit in a Texas district court, seeking a declaratory judgment of patent invalidity and noninfringement. The court, however, dismissed the case, holding that the patent owner's letter did not create personal jurisdiction in Texas. In reaching its conclusion, the court also found that the patent owner's other licensing activities, including granting nonexclusive licenses to two other businesses operating in the state, did not give the court personal jurisdiction over the patent owner.

Under the U.S. Constitution, a court cannot hear a case and render a decision binding on a defendant unless it has personal jurisdiction over the defendant. For a district court to exercise personal jurisdiction over an out-of-state party, the party must have purposefully established minimum contacts in the forum state.

In a recent case, Catalyst Medium Four, Inc. v. CardShark, LLC,¹ the U.S. District Court for the Western District of Texas held that the combination of 1) a nonpracticing patent owner's letter to a Texas company demanding that the company take a patent license and 2) the patent owner's nonexclusive licenses with two other companies operating within Texas was insufficient to establish the necessary minimum contacts that would allow the court to assert personal jurisdiction over the patent owner.

Background

Catalyst Medium Four, Inc. (CM4), a Texas corporation, produced cases for personal digital assistants and iPhones. In June 2014, CM4 received a letter from counsel for CardShark, LLC, a New York company, notifying it of CardShark's patent rights to two U.S. patents covering protective cases for personal electronic devices. The letter stated that CardShark previously approached two other case manufacturers—Case-Mate, Inc. and Speculative Product Design, LLC (Speck)—about CardShark's patent rights and noted that each company agreed to take a license before initiation of any infringement lawsuit. Following CM4's receipt of the letter, CM4 and CardShark entered into licensing discussions, but failed to reach an agreement.

CM4 then filed suit against CardShark in the Western District of Texas, seeking a judgment that CardShark's patents were invalid and not infringed. CardShark—which had no businesses outside of New York, owned no property in Texas, had no contacts with entities in Texas (other than the letter it sent to CM4), and never sold any products in Texas—moved to dismiss the case for lack of personal jurisdiction.

The CardShark Decision

CM4 argued that personal jurisdiction over CardShark was proper because CardShark did business in Texas in two ways. First, emphasizing CardShark's status as a nonpracticing entity, CM4 characterized CardShark's business as seeking to "extract money from on-going businesses (like CM4) on patents it does not practice" and argued that CardShark's targeting of CM4 for license negotiations constituted doing business in Texas. Second, CM4 highlighted CardShark's license agreements with Case-Mate and Speck, both of which sell phone cases in physical stores within Texas and over the Internet.

In assessing CM4's arguments, the court looked to precedent set by the Court of Appeals for the Federal Circuit, which framed the relevant inquiry as the extent to which the patent owner engaged in activity to enforce its patents in the forum state. Under Federal Circuit precedent, the court noted, a patent owner does not subject itself to personal jurisdiction in a forum solely by mailing a letter threatening a lawsuit for patent infringement. Rather, other activities by the patent owner are required, such as initiating judicial or extra-judicial patent enforcement within the forum or entering into an exclusive license agreement with a party regularly doing business within the forum.

Under this framework, the court determined that CardShark's letter to CM4, by itself, was insufficient to create personal jurisdiction. Furthermore, according to the court, CardShark's license negotiations with CM4 following the letter were "simply commercialization efforts, which [did] not constitute the sort of 'other activities' needed . . . to support the exercise of personal jurisdiction."

Regarding CardShark's licenses with Case-Mate and Speck, the court noted that neither of those companies was located in Texas; Case-Mate had a principal place of business in Georgia and Speck's place of business was in California. The court also emphasized that the license agreements between CardShark and its two licensees were nonexclusive and that CardShark held no power or control over how Case-Mate or Speck marketed and sold their products.

The court therefore dismissed CM4's declaratory-judgment action, finding that CardShark had not engaged in activities in Texas relating to the enforcement of its patents sufficient to create personal jurisdiction over CardShark.

Strategy and Conclusion

This case shows that a cease-and-desist letter or a letter otherwise threatening suit for patent infringement might not, by itself, create personal jurisdiction over a patent owner in a remote forum. Moreover, the activities of nonexclusive licensees, over which the patent owner does not exert control and to which the patent owner has made no promises of patent enforcement, might also be insufficient to establish personal jurisdiction over a patent owner in a remote forum.

Endnotes

¹ The CardShark decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/CatalystMedium_v_Cardshark.pdf.