Sup. Ct. Rules Burden of Proof Remains with Patent Owner

In 2006, the parties entered into an agreement that modified the procedure for resolving disputes. Under the modified agreement, after receiving written notice that a Medtronic product infringed, Medtronic could bring a declaratory judgment action and accumulate the disputed royalties in an escrow account. The prevailing party of the declaratory judgment action would receive the accrued royalties. In 2007, MFV notified Medtronic that it believed that seven new Medtronic products infringed claims contained in two of its patents. Medtronic brought a declaratory judgment action and paid the relevant royalties into an escrow account.

The district court acknowledged that MFV was the defendant in the action, but believed that MFV, “'[a]s the part[y] asserting infringement,' bore the burden of proving infringement.” Id. at 847 (quoting Medtronic Inc. v. Boston Scientific Corp., 777 F. Supp. 2d 750, 766 (D. Del. 2011). After a bench trial, the district court found that MFV had not proved infringement, either directly or under the doctrine of equivalents.

On appeal, the Federal Circuit reached the opposite conclusion and held that Medtronic, as the declaratory judgment plaintiff, bore the burden of proving non-infringement. The Federal Circuit found that this rule should apply where a declaratory judgment defendant, like MFV, “is 'foreclosed' from asserting an 'infringement counterclaim' by the 'continued existence of a license.'” Id. (quoting Medtronic, Inc. v. Mirowski Family Ventures, LLC, 695 F.3d 1266, 1274 (Fed. Cir. 2012)).

Medtronic filed a petition for certiorari, which was granted.

Federal Circuit Had'Subject Matter'Jurisdiction

As an initial matter, the Supreme Court rejected Amicus Tessera Technologies, Inc.'s claim that the Federal Circuit lacked subject matter jurisdiction over the patent infringement action. Tessera argued that in determining whether the court had subject matter jurisdiction, it was necessary to look at the action that MFV could have brought in the absence of a declaratory action, namely a breach of contract action and not a patent infringement action. The Supreme Court disagreed because the patent licensing agreement specified that “if Medtronic stop[ped] paying royalties, [MFV could] terminate the contract and bring an ordinary patent infringement action. Such an action would arise under federal patent law because 'federal patent law creates the cause of action.'” Id. at 848 (citations omitted). The Supreme Court stated that the likelihood of a patent infringement action is not relevant, rather it is “the nature of the threated action in the absence of the declaratory judgment suit” that is of relevance. Id . As a result, the Supreme Court found that subject matter jurisdiction was present.

Supreme Court Ruling

The Supreme Court also found that “simple legal logic” and “settled case law” supported its decision that the burden of proof on infringement remains with the patent owner in a declaratory judgment proceeding. First, the Supreme Court noted that “it is well established that the burden of proving infringement generally rests upon the patentee.” Id. at 849. Second, the Supreme Court noted that they “have long considered 'the operation of the Declaratory Judgment Act' to be only 'procedural,' leaving 'substantive rights unchanged[.]'” Id. (internal citations omitted). Third, the Supreme Court noted that they have held that the burden of proof is substantive. Relying on these three legal propositions, the Supreme Court concluded that “in a licensee's declaratory judgment action, the burden of proving infringement should remain with the patentee.” Id.

The Supreme Court noted that its conclusion also is supported by practical considerations. First, shifting the burden based on the form of the action could create “postlitigation uncertainty about the scope of the patent.” Id. The Supreme Court reasoned that issue preclusion may not apply in a suit brought after a plaintiff failed to meet its burden of proving non-infringement. In such a suit, the burden would be shifted to the patent owner. If the patent owner failed to prove infringement, the infringement question would remain unanswered, “creating uncertainty among the parties and others who seek to know just what products and processes they are free to use.” Id. at 850. Second, the Supreme Court reasoned that the patent owner is in a better position to “point out, just where, how, and why a product (or process) infringes a claim” especially in the case where a patent has many pages of claims. Id. Finally, the Supreme Court found that shifting the burden to the plaintiff in a declaratory judgment action is difficult to reconcile with the basic purpose of the Declaratory Judgment Act: eliminating the dilemma of one who challenges a patent's scope of choosing between abandoning his rights or risking a lawsuit. The Supreme Court noted that shifting the burden makes the declaratory judgment procedure disadvantageous as compared to just refusing to pay royalties, thereby creating an obstacle to using the Declaratory Judgment Act.

In reaching its decision, the Supreme Court rejected the Federal Circuit's reliance on Schaffer v. Weast, 546 U.S. 49 (2005), which referred to the default rule as placing the burden of the risk of failing to prove a claim on the plaintiff. Id. at 851. The Supreme Court distinguished Schaffer by noting that it did not involve a declaratory judgment proceeding.

The Supreme Court also rejected the Federal Circuit's claim that Schaffer “applied only in 'the limited circumstance when an infringement counterclaim by a patentee is foreclosed by the continued existence of a license.'” Id. (citations omitted). The Supreme Court found that the limited circumstance “is often present when a patent licensee faces an ordinary but disputed claim of infringement.” Id. Finally, the Supreme Court rejected Amicus Intellectual Property Owners Association's assertion that patent owner's will be forced into “full-blown patent-infringement litigation,” noting that “litigation can occur only in the presence of a genuine dispute, 'of sufficient immediacy and reality,' about the patent's validity or its application.” Id. (citations omitted).

Conclusion

Going forward, a patent owner will be expected to prove infringement in a declaratory judgment proceeding regardless of whether the threat arises from an existing license or a notice letter. This may cause licensees to threaten a declaratory judgment action in an effort to force the patent owner to negotiate license terms. Potential licensees may also seek running royalties rather than a lump-sum payment in order to preserve their right to challenge the scope of the patent in a declaratory judgment action. In any event, a patent owner should be prepared to meet the burden of proof on infringement whenever he alleges that an item or process is covered by his patents.

Angie M. Hankins is an Intellectual Property Partner in the New York office of Stroock & Stroock & Lavan LLP. The views expressed herein are her own and not necessarily those of Stroock or any of its clients .

The Supreme Court began 2014 by reversing the Court of Appeals for the Federal Circuit's decision in Medtronic, Inc. v. Mirowski Family Ventures, LLC, 134 S. Ct. 843 (Jan. 22, 2014). The Supreme Court held that the burden of proof on infringement remains with the patent owner even when a licensee files a declaratory judgment suit seeking a judgment of no infringement. Id. at 846. The Supreme Court reached this conclusion based on three legal propositions:

• The burden of proving infringement generally rests with the patent owner;
• The operation of the Declaratory Judgment Act is only procedural; and
• The burden of proof is substantive.

On the practical side, the Supreme Court found that:

• Shifting the burden depending on the form of the proceeding would result in uncertainty as to the scope of the patent;
• The patent owner is in a better position to identify infringement; and
• Shifting the burden would make bringing a declaratory judgment proceeding “disadvantageous” as compared with just refusing to pay royalties.

Thus, the Supreme Court concluded that the burden of proof on infringement remains with the patent owner in a declaratory judgment proceeding for non-infringement.

The Underlying Facts

In 1991, Mirowski Family Ventures, LLC (MFV) entered into a patent license agreement with Eli Lilly & Co., which then sublicensed the subject patents to Medtronic, Inc. (Medtronic). Under the agreement, if MFV notified Medtronic that a new Medtronic product infringed, Medtronic could: 1) cure the non-payment of royalties; or 2) cure the non-payment of royalties and challenge the assertion of infringement by bringing a declaratory judgment action. Medtronic also could choose not to challenge the asserted infringement but, contrary to the terms of the agreement, not pay royalties. In that case, MFV could terminate the license and bring an infringement action.

In 2006, the parties entered into an agreement that modified the procedure for resolving disputes. Under the modified agreement, after receiving written notice that a Medtronic product infringed, Medtronic could bring a declaratory judgment action and accumulate the disputed royalties in an escrow account. The prevailing party of the declaratory judgment action would receive the accrued royalties. In 2007, MFV notified Medtronic that it believed that seven new Medtronic products infringed claims contained in two of its patents. Medtronic brought a declaratory judgment action and paid the relevant royalties into an escrow account.

The district court acknowledged that MFV was the defendant in the action, but believed that MFV, “'[a]s the part[y] asserting infringement,' bore the burden of proving infringement.” Id. at 847 (quoting Medtronic Inc. v. Boston Scientific Corp., 777 F. Supp. 2d 750, 766 (D. Del. 2011). After a bench trial, the district court found that MFV had not proved infringement, either directly or under the doctrine of equivalents.

On appeal, the Federal Circuit reached the opposite conclusion and held that Medtronic, as the declaratory judgment plaintiff, bore the burden of proving non-infringement. The Federal Circuit found that this rule should apply where a declaratory judgment defendant, like MFV, “is 'foreclosed' from asserting an 'infringement counterclaim' by the 'continued existence of a license.'” Id. (quoting Medtronic, Inc. v. Mirowski Family Ventures, LLC, 695 F.3d 1266, 1274 (Fed. Cir. 2012)).

Medtronic filed a petition for certiorari, which was granted.

Federal Circuit Had'Subject Matter'Jurisdiction

As an initial matter, the Supreme Court rejected Amicus Tessera Technologies, Inc.'s claim that the Federal Circuit lacked subject matter jurisdiction over the patent infringement action. Tessera argued that in determining whether the court had subject matter jurisdiction, it was necessary to look at the action that MFV could have brought in the absence of a declaratory action, namely a breach of contract action and not a patent infringement action. The Supreme Court disagreed because the patent licensing agreement specified that “if Medtronic stop[ped] paying royalties, [MFV could] terminate the contract and bring an ordinary patent infringement action. Such an action would arise under federal patent law because 'federal patent law creates the cause of action.'” Id. at 848 (citations omitted). The Supreme Court stated that the likelihood of a patent infringement action is not relevant, rather it is “the nature of the threated action in the absence of the declaratory judgment suit” that is of relevance. Id . As a result, the Supreme Court found that subject matter jurisdiction was present.

Supreme Court Ruling

The Supreme Court also found that “simple legal logic” and “settled case law” supported its decision that the burden of proof on infringement remains with the patent owner in a declaratory judgment proceeding. First, the Supreme Court noted that “it is well established that the burden of proving infringement generally rests upon the patentee.” Id. at 849. Second, the Supreme Court noted that they “have long considered 'the operation of the Declaratory Judgment Act' to be only 'procedural,' leaving 'substantive rights unchanged[.]'” Id. (internal citations omitted). Third, the Supreme Court noted that they have held that the burden of proof is substantive. Relying on these three legal propositions, the Supreme Court concluded that “in a licensee's declaratory judgment action, the burden of proving infringement should remain with the patentee.” Id.

The Supreme Court noted that its conclusion also is supported by practical considerations. First, shifting the burden based on the form of the action could create “postlitigation uncertainty about the scope of the patent.” Id. The Supreme Court reasoned that issue preclusion may not apply in a suit brought after a plaintiff failed to meet its burden of proving non-infringement. In such a suit, the burden would be shifted to the patent owner. If the patent owner failed to prove infringement, the infringement question would remain unanswered, “creating uncertainty among the parties and others who seek to know just what products and processes they are free to use.” Id. at 850. Second, the Supreme Court reasoned that the patent owner is in a better position to “point out, just where, how, and why a product (or process) infringes a claim” especially in the case where a patent has many pages of claims. Id. Finally, the Supreme Court found that shifting the burden to the plaintiff in a declaratory judgment action is difficult to reconcile with the basic purpose of the Declaratory Judgment Act: eliminating the dilemma of one who challenges a patent's scope of choosing between abandoning his rights or risking a lawsuit. The Supreme Court noted that shifting the burden makes the declaratory judgment procedure disadvantageous as compared to just refusing to pay royalties, thereby creating an obstacle to using the Declaratory Judgment Act.

In reaching its decision, the Supreme Court rejected the Federal Circuit's reliance on Schaffer v. Weast, 546 U.S. 49 (2005), which referred to the default rule as placing the burden of the risk of failing to prove a claim on the plaintiff. Id. at 851. The Supreme Court distinguished Schaffer by noting that it did not involve a declaratory judgment proceeding.

The Supreme Court also rejected the Federal Circuit's claim that Schaffer “applied only in 'the limited circumstance when an infringement counterclaim by a patentee is foreclosed by the continued existence of a license.'” Id. (citations omitted). The Supreme Court found that the limited circumstance “is often present when a patent licensee faces an ordinary but disputed claim of infringement.” Id. Finally, the Supreme Court rejected Amicus Intellectual Property Owners Association's assertion that patent owner's will be forced into “full-blown patent-infringement litigation,” noting that “litigation can occur only in the presence of a genuine dispute, 'of sufficient immediacy and reality,' about the patent's validity or its application.” Id. (citations omitted).

Conclusion

Going forward, a patent owner will be expected to prove infringement in a declaratory judgment proceeding regardless of whether the threat arises from an existing license or a notice letter. This may cause licensees to threaten a declaratory judgment action in an effort to force the patent owner to negotiate license terms. Potential licensees may also seek running royalties rather than a lump-sum payment in order to preserve their right to challenge the scope of the patent in a declaratory judgment action. In any event, a patent owner should be prepared to meet the burden of proof on infringement whenever he alleges that an item or process is covered by his patents.

Angie M. Hankins is an Intellectual Property Partner in the New York office of Stroock & Stroock & Lavan LLP. The views expressed herein are her own and not necessarily those of Stroock or any of its clients .