Case Stays in Court Where It Was First Filed Despite Assertion of Rights Under a License with a Forum-Selection Clause Specifying Another Court

Authored by D. Brian Kacedon, John C. Paul, and Jonathan R.K. Stroud

The first-to-file rule is one factor U.S. courts consider when deciding which of two actions should proceed when each side has filed suit in separate courts on the same dispute. In a recent appeal to the U.S. Court of Appeals for the Federal Circuit, the rule trumped arguments made by the party filing the second of two cases. That party, Huawei Device USA, was first sued by a patent owner, SmartPhone, in the Eastern District of Texas and responded the next day by suing SmartPhone and related companies in the Central District of California, seeking a declaratory judgment (DJ) from the court that it was not liable for patent infringement and that it had rights under an asserted license. After the district court dismissed Huawei's complaint, it appealed. The Federal Circuit affirmed the dismissal.¹

Background

Access Co., a software merchant, owns five patents related to smart phone and tablet technologies. In 2009, it exclusively licensed the patents to Acadia Patent Acquisition LLC (APAC), including rights to sublicense, enforce, and collect judgments on the patents. The license disclaimed any third-party-beneficiary rights. It prohibited, however, enforcement against Access's customers or end-users and contained a forum-selection clause exclusively electing the Central District of California to resolve any disputes relating to the agreement. Later in 2009, APAC assigned the license to its wholly owned subsidiary, SmartPhone Technologies. 

In 2012, SmartPhone sued mobile-device maker Huawei for infringement of the patents in the Eastern District of Texas. The next day, Huawei filed a DJ case in the Central District of California, alleging among other things that Huawei had been an Access customer for more than a decade and thus was protected from the patents under the license from Access to APAC. The complaint also sought a declaration that Acacia Research—the parent of APAC—and SmartPhone were acting as corporate alter egos. The California district court dismissed Huawei's complaint and Huawei appealed only the dismissal of its request for protection under the Access-APAC license and the dismissal of its request to define the relationship of Acacia Research and SmartPhone.

The Federal Circuit's Decision

A doctrine grounded in comity and efficiency, the first-to-file rule grants judges the discretion to manage their docket of cases. It suggests—but does not compel—dismissing a later-filed action in favor of one filed earlier on the same patents and substantially the same issues. Although not mandatory, the rule often controls when courts choose which of two competing suits should proceed. Here, the Federal Circuit affirmed the dismissal of both issues before it by relying on the first-to-file rule, even though the district court had relied on different grounds.

Regarding Huawei's rights as a third-party beneficiary of the Access-APAC license, the Federal Circuit concluded that the issue was best addressed in the Texas action. As the court noted, the status Huawei sought did nothing on its own. Rather, it would give Huawei the right to enforce the agreement's provisions. Since Huawei faced patent infringement in the Texas action, it was entirely appropriate for it to proceed with a theory of rights under the Access-APAC agreement as a defense to patent infringement. Because Huawei did not appeal the dismissal of its substantive claims of noninfringement and invalidity, it guaranteed that those would remain in the Texas case.

Another possible benefit to Huawei as a third-party beneficiary came from the agreement's forum-selection clause. Here, the Federal Circuit noted that the Texas magistrate had already denied Huawei's motion to transfer but that reconsideration or review could change that result. It also noted that Huawei would not be precluded from arguing for benefit under the agreement in the Texas case as a result of the California case. Further, the Federal Circuit remarked that Huawei might not need to have the legal status of third-party beneficiary and cited the pending Atlantic Marine Construction case that we reported last week (the U.S. Supreme Court's decision came out the same day as the Federal Circuit's decision in this case). Thus Huawei might have a renewed argument for transfer to the California court under the forum-selection clause in the Access-APAC agreement.

The Federal Circuit next addressed Huawei's request to declare that SmartPhone acted as Acacia Research's alter ego. The court viewed that request as directly related to Huawei's affirmative defense to patent infringement, asserting that Huawei was licensed under the Access-APAC agreement. Because the substantive claim would be litigated in Texas, the Federal Circuit held that the defense should also be litigated in the same case. On this procedural issue, the Federal Circuit looked to Ninth Circuit law, which applies a "logical-relationship test." In the court's view, the two issues must stay together because of the logical connection between the defense and the substantive assertion against which it was raised.

Strategy and Conclusion

Although the Supreme Court's decision in Atlantic Marine Construction may still affect Huawei's claims in this case, the case shows how important the first-to-file rule can be and how choices about issues for appeal may interact. In this case, the Federal Circuit viewed it as significant that the substantive claims regarding infringement and invalidity remained only in the Texas court, which was therefore the natural place for the arguments that Huawei raised on appeal.

Endnotes

¹ The Federal Circuit opinion is available at http://www.finnegan.com/files/Publication/ba6c6d93-f954-4439-a3e3-00bd6fcc40af/Presentation/PublicationAttachment/48ba6494-767d-46ac-a8b9-01da6d1a649b/13-1090%2012-03-13.pdf.

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