Attacking the Customer: Coercing Patent Infringers While Avoiding Exposure to DJ Actions

To avoid declaratory judgment actions, patent holders may opt to sue or threaten the purchasers of an allegedly infringing product, without threatening suit against the manufacturer. In effect, the patent holder coerces the manufacturing company to give up the right to manufacture or distribute the accused product by scaring off its customers. The Federal Circuit frowns on this type of activity, but certain decisions have left loopholes patent holders may exploit. At what point does this activity create grounds for a declaratory judgment action by the manufacturer?

Jurisdiction of DJ Actions

A declaratory judgment action may only be brought to resolve an “actual controversy” between “interested” parties. 28 USC '2201(a). For patent litigation, the Federal Circuit initially developed a two-part test to define “actual controversy.” The test required, first, that the patentee had made an explicit threat or action, creating a reasonable apprehension that the party seeking declaratory judgment would be sued, and second, that this party be currently taking action which could constitute infringement, or have taken concrete steps toward such action. BP Chemicals Ltd. v. Union Carbide Corp., 4 F.3d 975, 978 (Fed. Cir. 1993).

Recently, the Federal Circuit relaxed the standard for determining when actions by a patentee will expose them to a declaratory judgment action. In Sandisk Corp. v. ST Microelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007), the Federal Circuit overruled the “reasonable apprehension” test described above, and replaced it with a new test, requiring only a showing that the patentee has asserted its rights against a party ' either the manufacturer or a customer ' and that the party seeking the declaratory judgment contends it has the right to engage in the activity without a license. Id. at 1381.

Four days after Sandisk, the Federal Circuit relaxed the standard even further in Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceuticals Corp., 482 F.3d 1330 (Fed. Cir. 2007). Under this holding, an “actual controversy,” is established when the party seeking declaratory judgment shows an actual or imminent injury caused by the patentee that can be sufficiently redressed by judicial relief. Id. at 1338.

The Federal Circuit applied similar standards to find an “actual controversy” in an anti-trust lawsuit alleging enforcement by a patentee of a patent known to have been obtained by fraud. See Hydril Co. v. Grant Prideco LP, 474 F.3d 1344, 1350 (Fed. Cir. 2007).

Although Sandisk and Teva both cite the Supreme Court case Medimmune, Inc v. Genentech, Inc., 127 S.Ct. 764 (2007), as their authority, there is a difference between the two tests. Both tests focus on the conduct of the patent holder, but Sandisk additionally requires a showing that the party seeking declaratory judgment has been asked to give up some right. Because the new standards are more lenient than the old “reasonable apprehension” test, any set of facts which met the old test likely meets the new standard.

Recommendations to the Patentee

A patentee wishing to force a manufacturer to stop making or distributing a product without generating grounds for a declaratory judgment action by the manufacturer may threaten the manufacturer's customers to scare them away from use of that product. However, because the current standards to initiate a declaratory judgment action are more relaxed, when targeting a customer of an infringer, there are several questions the patentee must ask.

First, is the manufacturer a direct competitor of the patentee? If so, suing the manufacturer's customers will probably expose the patentee to a declaratory judgment action. Courts take a dim view of direct competitors suing each other's customers in this manner. Although it is not dispositive, this aspect weighs heavily against the patentee. The patentee should take care to sue customers only when the manufacturer is not a direct competitor. See Arrowhead Industrial Water, Inc. v. Ecolochem, Inc., 846 F.2d 731, 735 (Fed. Cir. 1988), and WS Packaging Group, Inc. v. Global Commerce Group, LLC, 505 F. Supp. 2d 561, 566 (E.D. Wis. 2007).

Second, how often does the patentee sue or threaten to sue others for patent infringement? The Teva test requires that the party seeking declaratory judgment show an “imminent injury” from the patentee. “Imminent injury” may be more easily shown where the patentee has a history of suing or threatening to sue others for infringement. Unfortunately, there is no hard and fast rule for how often a patentee can sue or threaten to sue before that history satisfies the standard. See Arrowhead, 846 F.2d at 736-737 and Microchip Technology, Inc. v. Chamberlain Group, 441 F.3d 936, 941 (Fed. Cir. 2006). In addition, statements made by company executives in trade journals or other media outlets about enforcement tactics have been held to meet the Teva test. See WS Packaging, 505 F. Supp. 2d at 566-567. Thus, such statements should be carefully crafted and made only after fully considering their potential to give rise to a declaratory judgment action.

Third, does the accused product infringe the patent by itself, or only in combination with other items not provided by the manufacturer? If the infringement requires that the customer combine the accused product with other items, the requirements of Teva and Sandisk may not be satisfied, and the factor weighs in the patentee's favor. See Microchip, 441 F.3d at 930-939. For example, in a case involving a product alleged to infringe only after combination by the customer with other items, “economic harm” to the manufacturer resulting from suits against the customer was held not to be sufficient to support a declaratory judgment action. Id. at 943.

Fourth, is the manufacturer being asked to give up a right? For example, in Delphi Corp. v. Automotive Technologies Int'l. Inc., 2008 U.S. Dist LEXIS 56463 (E.D. Mich. 2008), a dispute arose after the defendant sued seven major automakers for infringement based on the sale and use of a Delphi product. Delphi argued that a suit brought by ATI in Texas made Delphi uncertain of its legal rights regarding the product, and that Delphi would be placed in the position of either pursuing arguably illegal behavior or abandoning its product. Id. at *4. The District Court refused to dismiss Delphi's declaratory judgment action, applying the teachings of Sandisk. Id. at *10. However, in a similar case, Fujitsu Limited v. Nanya Tech. Corp., 2008 U.S. Dist LEXIS 63830 (N.D. Cal. 2008), the District Court dismissed a declaratory judgment action where Nanya used a KLA product in a manufacturing process, and Fujitsu alleged that this use of KLA's product infringed its method patent. Nanya filed a third-party complaint against KLA for indemnification, and KLA responded by filing a declaratory judgment action against Fujitsu. In dismissing KLA's action, the court applied the Sandisk test, concluding that Futitsu had not asked KLA to give up the right to manufacture or distribute its product, but asked only that Nanya not use the product in a particular way. Id. at *9-10.

Recommendations to Parties Seeking DJ

While recent Federal Circuit decisions have made it easier to establish grounds for declaratory judgment actions, steps must be taken to prevent the patentee from exploiting the exceptions noted above. There are several questions to consider when a customer has been threatened with suit.

First, is there an indemnification agreement in place? Suit against a customer whom a manufacturer has agreed to indemnify against patent infringement meets the “imminent injury” standard of Teva. Arrowhead, 846 F.2d at 736. While this alone may not be reason enough to enter into this type of agreement, it may be worthwhile to consider this benefit when considering entering into an indemnification agreement.

As described above, suits or threats against customers of direct competitors will almost always meet the Sandisk and Teva standards. See Arrowhead and WS Packaging.

Furthermore, the manufacturer/distributor may want to keep records of public statements by competitors concerning their enforcement strategies and the history of their suits and threats of suit, so that the threats of action from these competitors may be more easily established should the need arise.

Finally, where possible, a manufacturer/distributor may consider intervening in a suit against a customer (e.g., where grounds for a declaratory judgment action are less certain).

In short, the standards for declaratory judgment actions have been greatly relaxed, and care should be exercised when considering threats or suits against users of an accused product.

This article originally appeared in Patent Strategy & Management, a sister publication of this newsletter.

Patrick Fay is a partner at the New York Intellectual Property law firm of Fay Kaplun & Marcin, LLP. He specializes in patent prosecution and analysis in the mechanical, electrical, and biomedical fields. Fay can be reached at [email protected]. Aaron Marx is currently a law student at Brooklyn Law School and a Legal Intern at the firm.

To avoid declaratory judgment actions, patent holders may opt to sue or threaten the purchasers of an allegedly infringing product, without threatening suit against the manufacturer. In effect, the patent holder coerces the manufacturing company to give up the right to manufacture or distribute the accused product by scaring off its customers. The Federal Circuit frowns on this type of activity, but certain decisions have left loopholes patent holders may exploit. At what point does this activity create grounds for a declaratory judgment action by the manufacturer?

Jurisdiction of DJ Actions

A declaratory judgment action may only be brought to resolve an “actual controversy” between “interested” parties. 28 USC '2201(a). For patent litigation, the Federal Circuit initially developed a two-part test to define “actual controversy.” The test required, first, that the patentee had made an explicit threat or action, creating a reasonable apprehension that the party seeking declaratory judgment would be sued, and second, that this party be currently taking action which could constitute infringement, or have taken concrete steps toward such action. BP Chemicals Ltd. v. Union Carbide Corp. , 4 F.3d 975, 978 (Fed. Cir. 1993).

Recently, the Federal Circuit relaxed the standard for determining when actions by a patentee will expose them to a declaratory judgment action. In Sandisk Corp. v. ST Microelectronics, Inc. , 480 F.3d 1372 (Fed. Cir. 2007), the Federal Circuit overruled the “reasonable apprehension” test described above, and replaced it with a new test, requiring only a showing that the patentee has asserted its rights against a party ' either the manufacturer or a customer ' and that the party seeking the declaratory judgment contends it has the right to engage in the activity without a license. Id. at 1381.

Four days after Sandisk , the Federal Circuit relaxed the standard even further in Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceuticals Corp. , 482 F.3d 1330 (Fed. Cir. 2007). Under this holding, an “actual controversy,” is established when the party seeking declaratory judgment shows an actual or imminent injury caused by the patentee that can be sufficiently redressed by judicial relief. Id. at 1338.

The Federal Circuit applied similar standards to find an “actual controversy” in an anti-trust lawsuit alleging enforcement by a patentee of a patent known to have been obtained by fraud. See Hydril Co. v. Grant Prideco LP , 474 F.3d 1344, 1350 (Fed. Cir. 2007).

Although Sandisk and Teva both cite the Supreme Court case Medimmune, Inc v. Genentech, Inc. , 127 S.Ct. 764 (2007), as their authority, there is a difference between the two tests. Both tests focus on the conduct of the patent holder, but Sandisk additionally requires a showing that the party seeking declaratory judgment has been asked to give up some right. Because the new standards are more lenient than the old “reasonable apprehension” test, any set of facts which met the old test likely meets the new standard.

Recommendations to the Patentee

A patentee wishing to force a manufacturer to stop making or distributing a product without generating grounds for a declaratory judgment action by the manufacturer may threaten the manufacturer's customers to scare them away from use of that product. However, because the current standards to initiate a declaratory judgment action are more relaxed, when targeting a customer of an infringer, there are several questions the patentee must ask.

First, is the manufacturer a direct competitor of the patentee? If so, suing the manufacturer's customers will probably expose the patentee to a declaratory judgment action. Courts take a dim view of direct competitors suing each other's customers in this manner. Although it is not dispositive, this aspect weighs heavily against the patentee. The patentee should take care to sue customers only when the manufacturer is not a direct competitor. See Arrowhead Industrial Water, Inc. v. Ecolochem, Inc. , 846 F.2d 731, 735 (Fed. Cir. 1988), and WS Packaging Group, Inc. v. Global Commerce Group, LLC , 505 F. Supp. 2d 561, 566 (E.D. Wis. 2007).

Second, how often does the patentee sue or threaten to sue others for patent infringement? The Teva test requires that the party seeking declaratory judgment show an “imminent injury” from the patentee. “Imminent injury” may be more easily shown where the patentee has a history of suing or threatening to sue others for infringement. Unfortunately, there is no hard and fast rule for how often a patentee can sue or threaten to sue before that history satisfies the standard. See Arrowhead , 846 F.2d at 736-737 and Microchip Technology, Inc. v. Chamberlain Group , 441 F.3d 936, 941 (Fed. Cir. 2006). In addition, statements made by company executives in trade journals or other media outlets about enforcement tactics have been held to meet the Teva test. See WS Packaging, 505 F. Supp. 2d at 566-567. Thus, such statements should be carefully crafted and made only after fully considering their potential to give rise to a declaratory judgment action.

Third, does the accused product infringe the patent by itself, or only in combination with other items not provided by the manufacturer? If the infringement requires that the customer combine the accused product with other items, the requirements of Teva and Sandisk may not be satisfied, and the factor weighs in the patentee's favor. See Microchip, 441 F.3d at 930-939. For example, in a case involving a product alleged to infringe only after combination by the customer with other items, “economic harm” to the manufacturer resulting from suits against the customer was held not to be sufficient to support a declaratory judgment action. Id. at 943.

Fourth, is the manufacturer being asked to give up a right? For example, in Delphi Corp. v. Automotive Technologies Int'l. Inc., 2008 U.S. Dist LEXIS 56463 (E.D. Mich. 2008), a dispute arose after the defendant sued seven major automakers for infringement based on the sale and use of a Delphi product. Delphi argued that a suit brought by ATI in Texas made Delphi uncertain of its legal rights regarding the product, and that Delphi would be placed in the position of either pursuing arguably illegal behavior or abandoning its product. Id. at *4. The District Court refused to dismiss Delphi's declaratory judgment action, applying the teachings of Sandisk. Id. at *10. However, in a similar case, Fujitsu Limited v. Nanya Tech. Corp., 2008 U.S. Dist LEXIS 63830 (N.D. Cal. 2008), the District Court dismissed a declaratory judgment action where Nanya used a KLA product in a manufacturing process, and Fujitsu alleged that this use of KLA's product infringed its method patent. Nanya filed a third-party complaint against KLA for indemnification, and KLA responded by filing a declaratory judgment action against Fujitsu. In dismissing KLA's action, the court applied the Sandisk test, concluding that Futitsu had not asked KLA to give up the right to manufacture or distribute its product, but asked only that Nanya not use the product in a particular way. Id. at *9-10.

Recommendations to Parties Seeking DJ

While recent Federal Circuit decisions have made it easier to establish grounds for declaratory judgment actions, steps must be taken to prevent the patentee from exploiting the exceptions noted above. There are several questions to consider when a customer has been threatened with suit.

First, is there an indemnification agreement in place? Suit against a customer whom a manufacturer has agreed to indemnify against patent infringement meets the “imminent injury” standard of Teva. Arrowhead, 846 F.2d at 736. While this alone may not be reason enough to enter into this type of agreement, it may be worthwhile to consider this benefit when considering entering into an indemnification agreement.

As described above, suits or threats against customers of direct competitors will almost always meet the Sandisk and Teva standards. See Arrowhead and WS Packaging.

Furthermore, the manufacturer/distributor may want to keep records of public statements by competitors concerning their enforcement strategies and the history of their suits and threats of suit, so that the threats of action from these competitors may be more easily established should the need arise.

Finally, where possible, a manufacturer/distributor may consider intervening in a suit against a customer (e.g., where grounds for a declaratory judgment action are less certain).

In short, the standards for declaratory judgment actions have been greatly relaxed, and care should be exercised when considering threats or suits against users of an accused product.

This article originally appeared in Patent Strategy & Management, a sister publication of this newsletter.

Patrick Fay is a partner at the New York Intellectual Property law firm of Fay Kaplun & Marcin, LLP. He specializes in patent prosecution and analysis in the mechanical, electrical, and biomedical fields. Fay can be reached at [email protected]. Aaron Marx is currently a law student at Brooklyn Law School and a Legal Intern at the firm.