Monetizing Your Patents – The Dangers of Declaratory Judgment Jurisdiction

Now you have your shiny, new issued patent, and you want to go forth and profit from it.  To do that, you need to let all of those “infringers” (okay, “potential licensees”) know that you have a patent and that they should pay up.

Not so fast.  Are you prepared to be sued by the infringer? If you are not careful in your communications about your patent, you could end up being the defendant in a “declaratory judgment lawsuit.”  In a declaratory judgment lawsuit, the accused infringer is the plaintiff, and the patent holder is the defendant.  The accused infringer asks the court to issue a declaration that its products do not infringe certain of the patent holder’s patents and/or that the patents are invalid or unenforceable.

Declaratory judgment lawsuits are provided for by the Declaratory Judgment Act which states that “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 legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201(a).  One of the reasons that the Declaratory Judgment Act is important is that it gives an accused infringer a way of resolving an infringement dispute without waiting to be sued by the patent owner, and thus, provides a vehicle for eliminating the uncertainty and business disruption that a patent holder’s threats can cause.

For purposes of patent holders trying to monetize their patents, the key is communicating with accused infringers (potential licensees) without creating an “actual controversy.”  Prior to 2007, the standard for triggering declaratory judgment jurisdiction was stricter, and a patent holder had to create a “reasonable apprehension of suit.”  However, the U.S. Supreme Court rejected that standard in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 S. Ct. 764, 166 L. Ed. 2d 604 (2007).  Following MedImmune, the Federal Circuit held that “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 a 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 rights.”   San Disk Corp. v. STMicroelecronics, Inc., 480 F.3d 1372, 1381 (Fed. Cir. 2007).  

Unfortunately, there is no “bright line” test for determining whether a given interaction between a patent holder and a potential licensee will trigger declaratory judgment jurisdiction.  Nevertheless, avoiding threats of litigation and specific allegations of infringement (e.g., identifying which claims are infringed by which products) will reduce the likelihood that a court will find it has jurisdiction.  Also, if you can get the potential licensee to agree to sign a confidentiality agreement that prohibits the use of any communications or exchanged materials for any purpose in litigation (including to establish declaratory judgment jurisdiction), you may be able to provide more specific infringement explanations and allegations and have more candid licensing discussions without running the risk of ending up a declaratory judgment defendant.

Notably, in San Disk the Federal Circuit held that it is not sufficient to subject licensing communications or Rule 408 of the Federal Rules of Evidence as a means of avoiding declaratory judgment jurisdiction.  Rule 408 bars the use of evidence or efforts toward compromising or attempting to compromise a claim, but the Court held that the rule does not bar a potential licensee from relying on licensing discussions to establish jurisdiction.

The courts will also look at a patent holder’s litigation history in determining whether declaratory judgment exists. Those patent holders with a track record of enforcing their patents need to be particularly careful about dealing with potential licensees because their propensity for litigation may be used against them.  A history of enforcement without some sort of specific communication directed to a particular party will typically be insufficient for declaratory judgment jurisdiction.  However, the enforcement history will weigh in favor of finding jurisdiction.

Also, if you truly have no intention of suing on a patent, you can agree to sign a “covenant not to sue.”  While not dispositive, such covenants make it less likely for a court to find declaratory judgment jurisdiction.  Of course, signing such a covenant reduces your bargaining leverage.

Under the currently operative case law, a standard cease and desist letter in which the patent holder demands that the recipient refrain from allegedly infringing activity seems very likely to trigger jurisdiction, whereas a non-specific offer to enter into licensing talks seems unlikely to do so.  In the end, you should consult with patent counsel about the specifics of your situation so that you can communicate licensing offers effectively while minimizing the threat of being sued.