Magic Words

Submitted by patentadmin on Fri, 03/11/2011 - 12:08

As the reader should be aware by now, the MedImmune decision has drastically altered the landscape with respect to declaratory judgment actions. A specific threat of litigation by a patentee is no longer required to establish jurisdiction, and a declaratory judgment action can no longer be defeated by the simple stratagem of avoiding “magic words,” such as “litigation” and “infringement” in correspondence. Nevertheless, in order to invoke federal question jurisdiction, the case must be one “relating to patents.” So, does an action which turns on the meaning of certain terms in a patent license satisfy the requirements for federal question jurisdiction? ABB Inc. et al. v. Cooper Industries, LLC et al.

Cooper is the owner of several patents directed to dielectric fluid which is used to electrically insulate and thermally protect equipment such as transformers. ABB took a license under these patents, which provided that it would have the right, inter alia, to “have made” the patented fluid. However, the license also specified that it did not include the right of any third party to make the fluid. The reader may discern an inconsistency here; apparently the parties did not.

Be that as it may, after executing the license, ABB outsourced the manufacture of the fluid to Dow Chemicals, which it agreed to indemnify for any claims of patent infringement by Cooper. Upon discovering this, Cooper wrote to both ABB and Dow, asserting that ABB’s rights to “have made” “do not include the right of third parties such as Dow to manufacture” the licensed fluid, that “any attempt by ABB to outsource the manufacture [of the fluid] to any entity other than an ABB Related Company … would be a material breach” of the license agreement, and that “Cooper will vigorously defend its rights should Dow attempt to make products covered by one or more of Cooper’s patents.” Note the absence of any “magic words.”

ABB reacted to this letter by filing an action, in federal court, seeking a declaration that its activities were authorized under the license. Shortly thereafter, Cooper filed an action, in state court, seeking a declaration that the license did not include the right to have Dow manufacture the patented fluid and that ABB’s actions were outside the scope of the agreement.

Cooper moved to dismiss ABB’s declaratory judgment claim on the grounds that the federal court lacked subject matter jurisdiction because there was no actual controversy involving patent infringement and that ABB’s complaint raised only a state law defense to such a claim. The federal district court agreed, holding that “the issues raised by ABB’s complaint sound entirely in contract and hinge exclusively on the interpretation and construction of the terms of the [license] – matters governed entirely by state law.” Case dismissed. ABB appealed.

The C.A.F.C. reversed, noting that “a specific threat of infringement litigation by the patentee is not required to establish jurisdiction.” Cooper’s statements that it would “act vigorously to protect its rights” and that it would “vigorously defend its rights” were “of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. To obtain an injunction or damages remedy, Cooper would have to sue ABB for induced infringement or Dow for direct infringement (which would have obligated ABB to indemnify Dow). In determining whether there is federal subject matter jurisdiction for declaratory judgment actions: ‘it is the character of the threatened action, and not of the defense, which will determine whether there is federal-question jurisdiction in the District Court’.”

So, in case there was any doubt, federal courts DO have jurisdiction over a declaratory judgment action where there is a federal cause of action, but only a state law defense. The Supreme Court had recognized this was an “open question.” Well, no more!

THE LESSONS TO BE LEARNED: (1) Mere avoidance of “magic words” may not prevent a declaratory judgment action; and (2) be careful when drafting a license.

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