Federal Circuit Rules on Case or Controversy Requirement in Patent DJ Actions

March 26, 2007. The U.S. Court of Appeals (FedCir) issued its opinion [26 pages in PDF] in SanDisk v. STMicroelectronics, a patent infringement case involving flash memory storage products. The Court of Appeals vacated the judgment of the District Court, which had dismissed SanDisk's claims relating to declaratory judgment of noninfringement and invalidity for failure to present an actual controversy. The declaratory judgment claims will proceed in the District Court.

Overview. The Supreme Court of the United States (SCUS) recently addressed the case or controversy requirement in the context of an existing patent license. It held in its January 9, 2007, opinion [30 pages in PDF] that the Article III case or controversy requirement, and the Declaratory Judgment Act, which is codified at 28 U.S.C. § 2201, do not require a patent licensee to terminate, or be in breach of, its license agreement before it can seek a declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed. See also, story titled "Supreme Court Rules on Case or Controversy Requirement in Patent Litigation" in TLJ Daily E-Mail Alert No. 1,516, January 9, 2007.

However, there are no patent licenses in the present case. Patent holder STMicroelectronics (ST) approached SanDisk and presented detailed analyses that SanDisk was infringing its patents. ST sought money from SanDisk through licensing. However, when SanDisk sought a declaratory judgment (DJ) of noninfringement from the District Court, ST asserted there is no Article III case or controversy.

ST wants to be able to assert infringement, demand licensing and royalties, but prevent SanDisk from litigating the merits of these infringement assertions.

The Court of Appeals ruled, in effect, that ST could not have it both ways. Its actions gave rise to a justiciable case or controversy. Patent holders that engage in scare and run demands for royalties cannot hide behind Article III. The Court of Appeals vacated the judgment of the District Court. SanDisk can now proceed with its DJ claims.

Background. SanDisk and ST both make and hold patents related to flash memory storage products. The two companies, at ST's requests, engaged in series of lengthy written and in person discussions regarding technologies, patents, and licensing.

ST brought in its litigation experts. ST made statements that SanDisk engaged in "unlicensed activities" and infringed ST's patents, and backed this up with detailed analyses. ST stated repeatedly that SanDisk must license its patents.

SanDisk denied infringement, refused to pay royalties to ST, and declined to participate in further negotiations.

ST also requested that the discussions be treated as "settlement discussions" under Federal Rule of Evidence 408. ST filed no patent infringement action against SanDisk. ST stated to SanDisk that it would not bring an infringement action.

District Court. SanDisk filed a complaint in U.S. District Court (NDCal) against ST alleging infringement of one of its patents. It also sought a DJ of noninfringement and invalidity of fourteen ST patents. ST moved to dismiss the DJ claims.

The District Court dismissed all of SanDisk's DJ claims. The Court of Appeals summarized the District Court's holding: "no actual controversy existed for purposes of the Declaratory Judgment Act because SanDisk did not have an objectively reasonable apprehension of suit, even though it may have subjectively believed that ST would bring an infringement suit."

Holding of the Court of Appeals. SanDisk brought the present appeal. The Court of Appeals vacated and remanded.

Article III of the Constitution, which defines the judicial power, provides that "The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States ..." and "to Controversies to which the United States shall be a party ..." Article III lists other types of "Cases" and other types of "Controversies". Thus, "the judicial Power" extends only to certain "Cases" and "Controversies". The Constitution does not define these two terms.

The Court of Appeals distinguished the Supreme Court's holding in MedImmune. v. Genentech. It wrote that "The Supreme Court in MedImmune addressed declaratory judgment jurisdiction in the context of a signed license."

The Court of Appeals held that "In the context of conduct prior to the existence of a license, declaratory judgment jurisdiction generally will not arise merely on the basis that a party learns of the existence of a patent owned by another or even perceives such a patent to pose a risk of infringement, without some affirmative act by the patentee. But Article III jurisdiction may be met where the patentee takes a position that puts the declaratory judgment plaintiff in the position of either pursuing arguably illegal behavior or abandoning that which he claims a right to do."

The Court of Appeals continued that "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. We hold only 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 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."

The Court of Appeals then applied this principle to the facts of the present case and concluded that there is an Article III case of controversy. "ST sought a right to a royalty under its patents based on specific, identified activity by SanDisk." Moreover, it gave SanDisk "a thorough infringement analysis presented by seasoned litigation experts ... which identified, on an element-by-element basis, the manner in which ST believed each of SanDisk's products infringed the specific claims of each of ST’s patents".

The Court of Appeals also held that ST's statement to SanDisk that it would not file a complaint did not remove the case or controversy "because ST has engaged in a course of conduct that shows a preparedness and willingness to enforce its patent rights despite" ST's statement.

And finally, the Court of Appeals ruled that the District Court could not, in its discretion, decline to exercise jurisdiction.

This case is SanDisk Corporation v. STMicroelectronics, Inc. and STMicroelectronics, NV, U.S. Court of Appeals for the Federal Circuit, App. Ct. No. 06-1300, an appeal from the U.S. District Court for the Northern District of California, D.C. No. 04-CV-04379, Judge Jeremy Fogel presiding.