Neutralizing Actual Controversy: How Patent Holders Can Reduce the Risk of Declaratory Judgment in Patent Disputes

• Citation: Vol. 6 No. 2
• Publication year: 2010

Washington Journal of Law, Technology and Arts Volume 6, Issue 2 Autumn 2010

Neutralizing Actual Controversy: How Patent Holders Can Reduce the Risk of Declaratory Judgment in Patent Disputes

Homer Yang-hsien Hsu (fn*)

Abstract

Alleged patent infringers may bring declaratory judgment actions against patentees when actual controversies exist over infringement or validity. Such declaratory judgment actions are important strategic tools because they allow alleged infringers to take initiative and bring actions, thereby eliminating the risk of doing business without knowing whether continued product use would constitute infringement. Declaratory judgment actions also provide alleged infringers an opportunity to choose the forum in which to bring their suits. In order to bring such an action, however, there must be an actual controversy between the parties to establish standing. The United States Supreme Court's 2007 decision in Medlmmune v. Genentech made it easier for alleged infringers to obtain declaratory judgments without actually terminating or breaching license agreements. The Court held that all circumstances should be considered when determining whether an actual controversy exists. The United States Court of Appeals for the Federal Circuit, relying on Medlmmune, has since considered what communication between parties is sufficient to establish the existence of such a controversy. This Article analyzes those decisions, discusses possible implications, and describes how the Federal Circuit has finally embraced the "all circumstances" test for determining whether a sufficient controversy exists to sustain a declaratory judgment action.

Table of Contents

Introduction......................................................................................94

I. Declaratory Judgment Actions in Patent Disputes...................95

II. From Two-Part to "All Circumstances": History of Declaratory Judgment Actions and Supreme Court's Decision in Medlmmune.................................................................................97

III. After Medlmmune: Confusion Caused by Continuous Use of Elements in the Improper Two-part Test................................100

A. Adherence to the "All Circumstances" Test....................100

B. Federal Circuit Still Considers Factors of the Improper Two-Part Test.....................................................................103

IV. Hewlett-Packard and the Federal Circuit's Return to Medlmmune ......................................................................................105

V. Implication of Hewlett-Packard-"All Circumstances" Test Confirmed and Patent Holding Entities Beware......................107

Conclusion......................................................................................108

Practice Pointers..............................................................................109

Introduction

Declaratory judgment actions are important tools for alleged infringers in patent litigation because they resolve uncertainty and prevent monetary damages from continuing to accrue for infringement. In addition, declaratory judgment actions give alleged infringers strategic advantages by acting as plaintiff, including the ability to choose a favorable forum and to enjoy the benefits of primacy and memorability at trial.(fn1) The issue, however, is whether there is an actual controversy such that an infringer will have standing to bring an action for a declaratory judgment.

In 2007, the United States Supreme Court in Medlmmune, Inc. v. Genentech, Inc. abandoned the two-part test traditionally applied when determining if a party has standing to bring a declaratory judgment action-showing (1) a reasonable basis for believing the infringer will be sued and (2) meaningful preparation to infringe.(fn2) Instead the Court adopted a new "all circumstances" test that eliminated the first prong and made it easier to obtain declaratory relief in patent cases. However, confusion resulted when the Federal Circuit failed to consistently apply the new test and instead considered certain elements of the two-part test from time to time.

Two years after Medlmmune, in Hewlett-Packard Co. v. Acceleron LLC,(fn3) the Federal Circuit eliminated some of that confusion when it followed the "all circumstances" test to determine whether an alleged infringer had standing to bring a declaratory judgment action. The Hewlett-Packard case is important not only because it confirms that the Federal Circuit follows the "all circumstances" test set out in Medlmmune, but also because it sheds light on the trend that the Federal Circuit treats patent-holding companies differently from patentees who actually use their patents.

I. Declaratory Judgment Actions in Patent Disputes

The Declaratory Judgment Act(fn4) authorized federal courts to provide legal remedies to interested parties who have an "actual controversy" within the meaning of Article III of the U.S. Constitution.(fn5) Congress intended declaratory relief as an alternative to injunction in cases where injunctive relief is unavailable.(fn6) The objectives of the Declaratory Judgment Act are (1) to avoid accrual of avoidable damages to those who are not certain of their rights, (2) to afford early adjudication without waiting until the adversary decides to bring a patent infringement lawsuit, and (3) to clarify legal relationships before they have been disturbed or a party's rights have been violated.(fn7)

Courts do not have jurisdiction to deliver advisory opinions on questions that are abstract or hypothetical in nature, so only interested parties who have an actual controversy are eligible to bring a suit.(fn8) The term "actual" is one of emphasis rather than of definition, which means that the controversy should be real in the constitutional sense.(fn9)In other words, the Declaratory Judgment Act requires that actions for declaratory judgment meet the same test for "case or controversy" as required for conventional suits under Article III federal jurisdiction.(fn10)Determining whether there is an actual controversy is essential to deciding whether a party has standing to sue.(fn11)

Declaratory judgment actions are frequently used in patent infringement suits as both shields and swords. Employed as a shield, a defendant can bring counterclaims for a declaration of invalidity, unenforceability, and non-infringement. In contrast, when used as a sword, the declaratory judgment action allows the alleged infringer to file suit before the patentee brings an infringement action. This can prevent damages from continuing to accrue and can help businesses make risk assessments.

The advantages of declaratory judgments for alleged patent infringers are many. For example, declaratory judgment actions allow alleged infringers to eliminate uncertainty regarding potential patent infringements. In addition, bringing a declaratory judgment action gives an alleged infringer the opportunity to choose a favorable place to sue and to control aspects pertaining to litigation such as forum convenience, potential jury pools, local court rules, trial speed, and court sophistication regarding patent cases. Finally, declaratory judgment actions allow alleged infringers to better control business risks.

The declaratory judgment action is an equitable remedy. This means that the court has discretion to decline the declaratory judgment action jurisdiction if it deems appropriate, even if a justiciable controversy exists.(fn12)

II. From Two-Part to "All Circumstances": History of Declaratory Judgment Actions and Supreme Court's Decision in MedImmune

The Supreme Court first established the meaning of "actual controversy" under the Declaratory Judgment Act in Aetna Life Insurance Co. v. Haworth.(fn13) In Aetna, the Court defined the limitation of "actual controversy" to mean controversies appropriate for judicial determination by a court described in Article III of the Constitution.(fn14)The Court stated that "the controversy must be definite and concrete, touching the legal relations of parties having adverse legal interests."(fn15)Later, in Maryland Casualty Co. v. Pacific Coal and Oil Co., the Supreme Court stated that the presence of an "actual controversy" within the meaning of the statute depends on "whether 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."(fn16)

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