In SanDisk Corporation v. STMicroelectronics, Inc. (05-1300), the Court of Appeals for the Federal Circuit interpreted a highly critical footnote in the Supreme Court's MedImmune v. Genentech decision as “a rejection of our reasonable apprehension of suit test” for the existence of declaratory judgment jurisdiction in the context of pre-license and pre-lawsuit 'discussions'. The Court filled the void created by the MedImmune rejection of that test with a new test that looks for a dual assertion of rights - an assertion of patent rights and a responsive contention of the right to engage in the accused activity without a license. While the Court was careful to avoid an overly broad holding, Judge Bryson, who wrote separately to express concurrence in the result, noted a broad practical effect: “the rule adopted by the court in this case will effect a sweeping change in our law regarding declaratory judgment jurisdiction.” (emphasis added). The Court also noted that isolated statements regarding “no plans to sue” will not neutralize a course of conduct that otherwise creates a justiciable case or controversy under the new rule. Interestingly, the Court largely left the MedImmune reminder regarding district court discretion to dismiss declaratory judgment actions for another day.

Licensing negotiations and declaratory judgment jurisdiction – Federal Circuit interprets MedImmune footnote as “a rejection of our reasonable apprehension of suit test”

The Federal Circuit, clearly feeling compelled to do so, interpreted a footnote from the Supreme Court's decision in MedImmune v. Genentech as rejecting the “reasonable apprehension of suit” prong of its two-part Arrowhead test for declaratory judgment jurisdiction despite that opinion's relatively narrow holding that focuses on signed license agreements. The Court flatly stated the effect of MedImmune: “The Supreme Court's opinion in MedImmune represents a rejection of our reasonable apprehension of suit test.”

It's easy to understand the Court's feeling of compulsion. The now infamous footnote characterizes the “reasonable apprehension of suit test” as contradicting one Supreme Court opinion, conflicting with two others, and “in tension with” yet another.

The MedImmune footnote reads as follows:

“[e]ven if Altvater could be distinguished as an “injunction” case, it would still contradict the Federal Circuit’s “reasonable apprehension of suit” test (or, in its evolved form, the “reasonable apprehension of imminent suit” test, Teva Pharm. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1333 (2005)). A licensee who pays royalties under compulsion of an injunction has no more apprehension of imminent harm than a licensee who pays royalties for fear of treble damages and an injunction fatal to his business. The reasonable-apprehension-of-suit test also conflicts with our decisions in Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941), where jurisdiction obtained even though the collision-victim defendant could not have sued the declaratory-judgment plaintiff-insurer without first obtaining a judgment against the insured; and Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239 (1937), where jurisdiction obtained even though the very reason the insurer sought declaratory relief was that the insured had given no indication that he would file suit. It is also in tension with Cardinal Chemical Co. v. Morton Int’l, Inc., 508 U.S. 83, 98 (1993), which held that appellate affirmance of a judgment of noninfringement, eliminating any apprehension of suit, does not moot a declaratory judgment counterclaim of patent invalidity.”

MedImmune, 127 S. Ct. at 774 n.11.

Licensing negotiations and declaratory judgment jurisdiction – Federal Circuit fills the MedImmune void with a new test that looks for a dual assertion of rights

The Court's holding sets forth the following new test for the existence of declaratory judgment jurisdiction based on preliminary exchanges:

“where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise and the party need not risk a suit for infringement by engaging in the identified activity before seeking a declaration of its legal rights.” (emphasis added).

Thus, the new test looks for:

1) an assertion of patent rights

2) based on identified ongoing or planned activity; and

3) a contention of the right to engage in the accused activity without a license.

It's important to note that the Court uses language of sufficiency in stating the test, not language of necessity.

Licensing negotiations and declaratory judgment jurisdiction – Judge Bryson explains the “practical effect” of the new test as he concurs in the result

While the Court was careful to avoid an overly broad holding (“We need not define the outer boundaries of declaratory judgment jurisdiction, which will depend on the application of the principles of declaratory judgment jurisdiction to the facts and circumstances of each case), Judge Bryson, who wrote separately to express concurrence in the result, noted the practical effect of the new test effected by this “narrow” holding:

“In practical application, the new test will not be confined to cases with facts similar to this one. If a patentee offers a license for a fee, the offer typically will be accompanied by a suggestion that the other party’s conduct is within the scope of the patentee’s patent rights, or it will be apparent that the patentee believes that to be the case. Offers to license a patent are not requests for gratuitous contributions to the patentee; the rationale underlying a license offer is the patentee’s express or implied suggestion that the other party’s current or planned conduct falls within the scope of the patent. Therefore, it would appear that under the court’s standard virtually any invitation to take a paid license relating to the prospective licensee’s activities would give rise to an Article III case or controversy if the prospective licensee elects to assert that its conduct does not fall within the scope of the patent.” (emphasis added).

Licensing negotiations and declaratory judgment jurisdiction – factors considered relevant in Court's first application of its new test

Applying its newly minted test, the Court recited the following factors as supportive of its conclusion that “[u]nder the facts alleged in this case, SanDisk has established an Article III case or controversy that gives rise to declaratory judgment jurisdiction”:

“ST sought a right to a royalty under its patents based on specific, identified activity by SanDisk.” (emphasis added)

“ST presented SanDisk with a detailed presentation which identified, on an element-by-element basis, the manner in which ST believed each of SanDisks's products infringed the specific claims of each of ST's patents.” (emphasis added).

“[ST] liberally referred to SanDisk's present, ongoing infringement of ST's patents and the need for SanDisk to license those patents.”

“ST also gave SanDisk a packet of materials...showing a detailed infringement analysis of SanDisks's products.”

“ST communicated to SanDisk that it had made a studied and determined infringement determination and asserted the right to a royalty based on this determination.”

“SanDisk, on the other hand, maintained that it could proceed in its conduct without the payment of royalties to ST.”

Licensing negotiations and declaratory judgment jurisdiction – no requirement to “bet the farm”

Playing on the Supreme Court's language in MedImmune, the Court noted that “SanDisk need not bet the farm...and risk a suit for infringment by cutting off licensing discussions and continuing in the identified activity before seeking a declaration of its legal rights.” (internal quotation omitted) (citing MedImmune, 127 S. Ct. at 774, n. 11; other citation omitted).

Licensing negotiations and declaratory judgment jurisdiction – 'promise not to sue' does not eliminate an otherwise justiciable 'case or controversy'

During the licensing discussions, the Defendant-Appellee's Vice President of Intellectual Property represented to the Plaintiff-Appellant that it “has absolutely no plan whatsoever to sue SanDisk.” On appeal, the Defendant-Appellee argued that, when considered under a totality of the circumstances approach, this statement had a neutralizing effect.

The Federal Circuit rejected this position, explicitly declining to hold that the statement eliminates the justiciable controversy created by the Defendant-Appellee's actions. Importantly, the Court's holding on this issue is tied directly to the course of conduct established by the Defendant-Appellee separate from the isolated statement:

“We decline to hold that Jorgenson’s statement that ST would not sue SanDisk eliminates the justiciable controversy created by ST’s actions, because ST has engaged in a course of conduct that shows a preparedness and willingness to enforce its patent rights despite Jorgenson’s statement.”

The lesson for patentees is clear – isolated statements expressing a lack of “plans to sue” will not neutralize a course of conduct that shows a preparedness and willingness to enforce patent rights.

Interestingly, the Court explained that these “scare-the-customer-and-run tactics” are precisely the “extra-judicial patent enforcement” actions that the Declaratory Judgment Act was intended to obviate.

Licensing negotiations and declaratory judgment jurisdiction – discretionary dismissal

In its dismissal of the declaratory judgment action, the district court noted that “even if it had subject matter jurisdiction over the...claims, it would exercise its discretion and decline to decide them.” (citation omitted).

Falling short of characterizing the discretionary dismissal as error, the Federal Circuit noted that the district court's decision was “made in the context of our reasonable apprehension precedent without the benefit of the Supreme Court's views in MedImmune” and indicated that it “expect[s] that in the absence of additional facts, the case will be entertained on the merits on remand.”

The Supreme Court's MedImmune reminder regarding the discretionary authority of district courts to dismiss declaratory judgment actions, therefore, remains to be developed in Federal Circuit law.

Standard of review – Article III “case or controversy” jurisdiction

Citing Arrowhead Indus. Water, Inc. v. Ecolochem, Inc. (846 F.2d 731, 735 (Fed. Cir. 1988), the holding of which the Court interpreted as being rejected by the Supreme Court's decision in MedImmune v. Genentech, the Court noted that it “reviews a dismissal of a patent claim for lack of an actual controversy...as a question of law subject to plenary appellate review.