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February 07, 2017 Articles

Patent Law’s Goldilocks Rule: Anticipatory Suit Exception to the First-to-File Rule

Accused infringers must show that the controversy is sufficiently immediate but was not filed in anticipation of imminent litigation

By Aaron Frankel and Nobumasa Hiroi

"First come, first served" is the rule of Black Friday, lining people up every year after (or on) Thanksgiving without fail. While you do need money to buy your desired products, in theory as long as you are the first in line, you have the priority to pick anything on the floor. Now, at the cashier, if you were required to prove that you did not intend to beat others in the race to the store in order to enjoy the benefit of being the first, what would you do? In a way, that is what an accused infringer may need to prove when filing a declaratory judgment (DJ) action in a patent case.

Generally, a patent owner is free to sue an infringer in any forum that satisfies the applicable jurisdictional and venue requirements, and will typically sue in the most favorable available venue. Rather than wait to be sued, an accused infringer may file a DJ action to "clear the cloud" of looming infringement allegations. If both parties file suits, the courts undertake an analysis under the "first-to-file rule" to determine which case should go forward, with a preference given to the first case filed. The courts dismiss, stay, or transfer the other suit to avoid redundant and possibly inconsistent litigation.

Even if a patent DJ action is chronologically filed first, it does not necessarily get priority. Courts routinely find exceptions to the first-to-file rule. One such exception that is particularly relevant to DJ actions is the "anticipatory suit doctrine." Under this doctrine, a first-filed DJ action can be dismissed in favor of a later-filed patent infringement action if the court finds that the DJ action was filed to preempt an imminent litigation.

This anticipatory suit doctrine as an exception to the first-to-file rule is somewhat at odds with the "actual controversy" requirement to file a DJ action, which requires a DJ plaintiff to show that there is "a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality." MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007). In other words, just as Goldilocks searched for porridge that was neither too hot nor too cold, to meet the actual controversy requirement and survive a motion to dismiss under the anticipatory suit doctrine, accused infringers must show that the controversy is sufficiently immediate but was not filed in anticipation of imminent litigation.

This article addresses this oddity and its potential strategic implications for both patent owners and accused infringers.

The Actual Controversy Requirement for a DJ Action

To institute a DJ action, there must be an "actual controversy" between the parties. The Declaratory Judgment Act provides: "In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration . . . ." 28 U.S.C. § 2201(a). Without this actual controversy, DJ actions will be dismissed for lack of subject matter jurisdiction.

Because of the actual controversy requirement, it is often advised that when a patent owner sends a letter proposing licensing negotiations to an infringer, the correspondence should be "toothless" to avoid giving the accused infringer an opportunity to file a DJ action. For example, in one of a very few cases after MedImmune where no actual controversy was found despite the patent owner sending a cease and desist letter, the patent owner stated:

We are sending this letter to inform certain parties that there could be patent infringement on [the patent owners'] designs/parts.

Companies who market, quote, manufacture, fabricate, contract for, approve or install would be infringing if these designs/parts are copied. [The patent owner] intends to enforce/defend its patent rights and sue any and all parties that infringe.

Please cease and desist any infringement on our patent.

Kingspan Insulated Panels, Inc. v. Centria, Inc., No. 1:15-CV-1023, 2016 WL 4136526, at *2 (W.D. Mich. Aug. 4, 2016). The U.S. District Court for the Western District of Michigan held that this letter did not establish DJ jurisdiction because it was "essentially a general notice informing the recipients that [the patent owner] intends to enforce its patents but does not suggest in the slightest that [the patent owner] believed or had concluded that any party, including [the recipient], was actually infringing its patents." Id. at *5; see also Baker Hughes Oilfield Operations, Inc. v. ReedHycalog UK, Ltd., No. 2:05-CV-931 TS, 2008 WL 345849, at *3 (D. Utah Feb. 6, 2008) (finding no actual controversy based on a notice letter notifying only of certain patents owned by the patent owner and recounting claim language from these patents).

That said, reevaluation of this advice may be due in light of the new trend in case law that has made it much easier to establish an actual controversy. Indeed, there are only a few examples where a patent owner's act of sending a letter did not give rise to any actual controversy. This trend began when the Supreme Court delineated a new totality of circumstances test for finding "actual controversy" in MedImmune. Under the MedImmune test, an actual controversy exists if "the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." 549 U.S. at 127 (internal quotation marks omitted). The Federal Circuit Court of Appeals explained that, under this new MedImmune test, "some affirmative act by the patentee" such as "conduct that can be reasonably inferred as demonstrating intent to enforce a patent" is all that is necessary to create subject matter jurisdiction for a DJ action. See Asia Vital Components Co. v. Asetek Danmark A/S, 837 F.3d 1249, 1253 (Fed. Cir. 2016) (quoting Hewlett-Packard Co. v. Acceleron LLC, 587 F.3d 1358, 1363 (Fed. Cir. 2009)). Therefore, sending a relatively innocuous letter could be considered by some district courts as enough of an "affirmative act . . . demonstrating intent to enforce a patent" to allow a DJ action to go forward.

As a recent example highlighting this trend, in Hewlett-Packard, patent owner Acceleron, a nonpracticing entity focused on licensing its patents, sent Hewlett-Packard (HP) the following relatively innocuous letter asserting a patent as "relevant" to a specific HP product line and imposing a "short deadline" for a response:

I am writing to call your attention to the referenced patent. . . . This patent was recently acquired by Acceleron, and relates to Blade Servers.

We would like an opportunity to discuss this patent with you. In order to provide a productive atmosphere in which we can do so, we ask that you agree that all information exchanged between the parties will not be used for any litigation purposes whatsoever, including but not limited to any claim that Acceleron has asserted any rights against any of your ongoing or planned activities, or otherwise created any actual case or controversy regarding the enclosed patent.

Should you wish to engage in discussions regarding this patent with us, please return an executed copy of this letter to me in the enclosed stamped, self-addressed envelope. When we receive your acknowledgement, we will send you a package of information relating to this patent. I will look for your response by September 28, 2007, and if I do not hear from you by that time, I will assume you have no interest in discussing this patent.

Hewlett-Packard, 587 F.3d at 1360, 1364. The Federal Circuit held that, even though the letter did not actually allege infringement and only claimed that the referenced patent is "relevant" to HP's products, "it was not unreasonable for HP to interpret Acceleron's letters as implicitly asserting its rights under [its] patent," and supported HP filing a DJ action. Id. at 1363–64.

The Federal Circuit also found that an actual controversy existed when a patent owner sent a cease and desist letter accusing similar but distinct products as infringing the patent owner's patents. Asia Vital, 837 F.3d at 1253. The Federal Circuit concluded that, notwithstanding the error in the letter of accusing the wrong products, the patent owner demonstrated intent to enforce its patent in view of the surrounding facts, including follow-up emails stating that the patent owner had enforced its patents against the accused infringer's competitors.

Accordingly, the "actual controversy" requirement has become easier to satisfy, and even a generic and nonthreatening cease and desist or licensing letter may subject a patent owner to a DJ action.

The Anticipatory Suit Doctrine Can Militate Dismissal of a First-Filed DJ Action

Generally, a federal district court has discretion to dismiss, stay, or transfer a case to another district court under the first-to-file rule. See Futurewei Techs., Inc. v. Acacia Research Corp., 737 F.3d 704, 708 (Fed. Cir. 2013). The first-to-file rule is a doctrine of federal comity permitting a district court to decline jurisdiction over an action. The issue of the first-to-file rule within the context of patent litigation falls within the Federal Circuit's exclusive subject matter jurisdiction and is not governed by regional circuits' rules. Serco Servs. Co. v. Kelley Co., 51 F.3d 1037, 1038 (Fed. Cir. 1995).

The first-to-file analysis, as its name suggests, generally favors the first-filed action to cover the parties' dispute. Courts caution, however, not to apply this equitable rule rigidly or mechanically. See Futurewei, 737 F.3d at 708 (admonishing that "the rule is not absolute; exceptions may be made if justified"). First-filed complaints are routinely dismissed under exceptions to the rule, such as upon a finding that a first-filed complaint was filed in bad faith, in anticipation of litigation, or to forum shop (for example, to evade a patent owner's choice of forum). Out of these exceptions, the anticipatory suit doctrine is most relevant to patent DJ actions because, as explained above, DJ actions already require "substantial controversies" with "immediacy and reality."

For example, in In re Foundations Worldwide, Inc., the Federal Circuit affirmed a district court's decision to dismiss a first-filed DJ action under the anticipatory suit doctrine. 542 F. App'x 998, 999 (Fed. Cir. 2013). The patent owner sent a cease and desist letter to an alleged infringer, stating that if the accused infringer did not respond by a certain date, the patent owner would sue for patent infringement. Id. at 998. One day before the deadline, the accused infringer filed a DJ action in the Northern District of Ohio, and the patent owner filed suit shortly thereafter in the Central District of California. Finding that the DJ action was filed in anticipation of litigation, the Northern District of Ohio dismissed the first-filed DJ action as anticipatory and the Central District of California declined to transfer the case to Ohio. Id. at 999.

A look at the statistics confirms the importance of the anticipatory suit exception to the first-to-file analysis for DJ actions. We identified 55 first-to-file motions resolved since 2007, the year MedImmune was decided, where the anticipatory suit exception was addressed. In well over half of the cases (30), the first-filed DJ action was dismissed or transferred (or the court declined to dismiss or transfer a second-filed infringement action) based on a finding that the DJ plaintiff filed suit in anticipation of an infringement action. In 14 cases, the first-filed DJ actions survived a motion to dismiss, transfer, or stay after the court found it had not been filed in anticipation of an infringement action (in two additional cases, the district court transferred a later-filed infringement action after finding that the earlier DJ action was not anticipatory). In other words, the anticipatory nature of the DJ action was the key determining factor for 46 out of 55 (84 percent) first-to-file motions.

It should be noted, however, that a finding that a DJ suit was filed for anticipatory reasons does not always lead to dismissal of a DJ action. For example, in Electronics for Imaging, Inc. v. Coyle, the Federal Circuit found that a district court abused its discretion in dismissing a case based solely on the anticipatory nature of the suit. 394 F.3d 1341, 1347 (Fed. Cir. 2005). The Federal Circuit listed other considerations relevant to deciding whether to dismiss a DJ action, including: (1) the convenience and availability of witnesses, (2) absence of jurisdiction over all necessary or desirable parties, (3) the possibility of consolidation with related litigation, and (4) considerations relating to the real party in interest. Id. at 1347–48. This analysis overlaps with the factors considered in a venue transfer analysis.

Thus, a party in a first-to-file dispute should be ready to address the anticipatory nature of the action, the convenience of the competing venues, and the other above listed factors.

Conclusion and Strategic Implications

For patent owners looking to avoid being deprived of their choice of venue by a DJ action, it may now be safer to send a letter specifically alleging infringement and threatening litigation at a specific point in time, rather than a vague invitation to begin licensing discussions. Doing so can create a strong basis to dismiss a DJ action under the anticipatory suit doctrine. Accused infringers in receipt of correspondence from a patent owner should consider if the threat of litigation is sufficient to support a DJ suit, and focus on filing in a convenient forum before discussions with the patent owner proceed to the point when there is an imminent threat of litigation. Given the potential ambiguity of when there is enough but not too much threat of litigation, both parties may be able to avoid a race to the courthouse and the associated expense of litigating the first-to-file rule by entering into a litigation standstill agreement.

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