A Patent Owner May Be Sued in a State Where Patent Demand Letters Were Sent and Where an Ongoing Licensing Relationship With Continuing Obligations Exists

Abstract

A Louisiana court exercised personal jurisdiction over an out-of-state defendant who sent patent-based cease-and-deist letters to a Louisiana company related to a project that would start in Louisiana. The court also relied on the parties’ prior license agreement which created an ongoing relationship where the Louisiana company would seek approval for every project and the defendant would have to notify the Louisiana company of the approval or denial in the Louisiana company’s offices.

Background of the Case

In November 2015, C-Innovation entered into a joint venture with an oil platform operator to remediate subsea flow lines in the Gulf of Mexico (the “2015 Project”). The 2015 Project used a specific remediation method.      

In August 2016, C-Innovation formed a coalition with Trendsetter and others to engage in activity related to subsea oil and gas wells. Between October 2016 to December 2016, representatives from the companies met several times in Louisiana to plan projects, with C‑Innovation alleging they agreed to use the process from the 2015 Project.

In November of 2016, Trendsetter filed a patent for a method to remediate subsea flow lines. After Trendsetter’s patent issued, C-Innovation approached a prospective client about a remediation project using method from the 2015 Project. Trendsetter notified C-Innovation of its patent and sent a copy to the prospective client. Both the prospective client and C-Innovation viewed Trendsetter’s communication as an express threat of litigation if they used the method from the 2015 Project. After negotiations, C-Innovation agreed to a non-exclusive patent license from Trendsetter and executed the agreement from its office in Louisiana. The license had to be renewed on a project-by-project basis.

C-Innovation then terminated the agreement and sued Trendsetter in Louisiana, where C‑Innovation was headquartered.  Specifically, C-Innovation sought a declaratory judgment of invalidity, unenforceability, and noninfringement of Trendsetter’s patent.  Trendsetter, located in Texas, then offered a covenant-not-to-sue C‑Innovation and filed a motion to dismiss the case, arguing that the Louisiana court lacked personal jurisdiction over Trendsetter and that C‑Innovation failed to present a valid case or controversy. The court disagreed.

The Court Decision

Motion to Dismiss for Lack of Personal Jurisdiction

A federal court may exercise personal jurisdiction over a non-resident if (1) the state’s long-arm statute confers personal jurisdiction over the non-resident and (2) exercise of personal jurisdiction comports with due process under the Constitution.  Here, the court explained that Louisiana’s long-arm statute collapses the two inquiries into one:  whether or not exercising personal jurisdiction over Texas-based Trendsetter in Louisiana conformed with due process.

Personal jurisdiction can be general or specific.  For general jurisdiction, the defendant’s contacts with the state where the action is pending must be continuous and systematic to render the defendant “at home” in that state. For specific jurisdiction, courts apply a three-prong test to determine whether (1) the defendant purposefully directed its activities at residents of the state, (2) the claim arises out of or related to those activities, and (3) assertion of personal jurisdiction is reasonable and fair.

Here, Trendsetter’s actions with C-Innovation in Louisiana were sufficient to satisfy the first two prongs. The court explained that patent demand letters, also known as cease-and-desist letters, are relevant to establishing specific personal jurisdiction. Even though the complaint did not allege the Trendsetter notices were directed to Louisiana, the court viewed the notices in the context of Trendsetter’s overall objective: license its patent to C‑Innovation (a Louisiana company) to influence a Louisiana project. The negotiations resulted in a license agreement, which the parties executed in Louisiana. While license agreements alone are not enough to establish minimum contacts, here the agreement forged an ongoing relationship between the parties, requiring C‑Innovation to request approval before moving forward with each prospective project. And Trendsetter would notify C-Innovation at its Louisiana office whether the renewal was allowed or denied. The court concluded that these actions demonstrate Trendsetter’s purposeful direction of its activities in Louisiana, and that C‑Innovation’s claims arose out of those activities.

The court then turned to the third prong of the specific jurisdiction test, shifting the burden to Trendsetter. To assess whether personal jurisdiction over Trendsetter was fair and reasonable, the court examined five factors: (1) the burden on the defendant, (2) the interests of the state, (3) the plaintiff’s interest in obtaining relief, (4) the interstate judicial system’s interest in obtaining the most efficient resolution of the controversy, and (5) the shared interest among the several states in furthering fundamental substantive social policies.

The court found all the factors weighed in favor of exercising jurisdiction over Trendsetter. The burden on Trendsetter was not extraordinary because it regularly conducted business internationally and domestically, including in Louisiana. The state of Louisiana regularly hears patent disputes related to oil-and-gas projects, so it has an interest in hearing the dispute. C-Innovation, as a Louisiana company, has an interest in obtaining relief in Louisiana, and the project was to launch from Louisiana. The court reasoned that it could efficiently resolve the patent dispute in either a Texas federal court (where Trendsetter claimed was the proper jurisdiction) or a Louisiana federal court, and Texas and Louisiana share the same interest in furthering the policies behind federal patent law at issue in this case.

Motion to Dismiss for Lack of Case or Controversy

Having established personal jurisdiction over Trendsetter, the court considered Trendsetter’s motion to dismiss for lack of case or controversy. To survive the motion to dismiss, the complaint must have sufficient factual allegations, which if accepted as true, state a plausible claim for relief.  Here, C-Innovation and its clients received letters from Trendsetter threatening suit.  As a result, C-Innovation was coerced into taking a license. Having terminated the license, C-Innovation’s projects will be subject to the same threats of litigation.

Trendsetter argued the covenant not to sue removed any threat of infringement. But the court disagreed. The court explained that whether a covenant not to sue removes any threat of infringement depends on the scope of the covenant. Here, Trendsetter’s covenant not to sue was limited to the method employed in the 2015 Project. Given Trendsetter’s history of seeking to enforce its own patented method, the court noted C‑Innovation had a reasonable fear of Trendsetter enforcing its patent if C-Innovation wanted to use different remediation methods in the future. Trendsetter’s covenant not to sue should have promised to protect C-Innovation from threat of past or future enforcement.  Because it did not, the court denied Trendsetter’s motion to dismiss.

Strategy and Conclusion

 To avoid being sued in unfavorable jurisdictions, exercise caution when engaging in activity in such jurisdictions or sending communications, such as cease and desist letters, in such jurisdictions.

Further Information

The C-Innovation decision can be found here.