On May 5, 2014, the Federal Circuit issued an opinion in Microsoft Corporation v. DataTern, Inc.1 that clarified, at least in part, the circumstances under which a supplier may bring a declaratory judgment action based on patent infringement allegations directed to its customers. Specifically, suits against customers do not, without more, give a supplier standing to bring a declaratory judgment action. However, where the patent owner relies on the supplier’s own documentation or instructions to show infringement by the customers, the supplier may have standing.
DataTern concerns the standard for bringing a declaratory judgment action against a patent owner based on that patent owner’s allegations against a third party customer. The Supreme Court previously held that the fundamental question of jurisdiction in this context is whether “there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”2Building on this standard, the Federal Circuit held four years later in Arris Group, Inc. v. British Telecommunications PLC that “where a patent holder accuses customers of direct infringement based on the sale or use of a supplier's equipment, the supplier has standing to commence a declaratory judgment action if (a) the supplier is obligated to indemnify its customers from infringement liability, or (b) there is a controversy between the patentee and the supplier as to the supplier's liability for induced or contributory infringement based on the alleged acts of direct infringement by its customers.”3 To show inducement under the second prong of that test, the patentee must show that the supplier took affirmative steps to encourage infringement, knowing that the actions it encouraged would infringe.4
DataTern sued more than 100 Microsoft and SAP customers, alleging that their use of Microsoft’s ADO.NET and SAP’s BusinessObjects software infringed two patents owned by DataTern: U.S. Patent No. 5,937,402 (the “’402 Patent”) and U.S. Patent No. 6,101,502 (the “’502 Patent”). DataTern’s infringement allegations contained numerous references to the Microsoft and SAP functionality. For example, the claim charts alleging infringement by SAP customers cite to SAP’s user guides and other documentation for every element of the asserted claims in both patents.5 Similarly, the claim charts alleging infringement of the ’502 Patent by Microsoft customers cited to Microsoft documentation for every element. However, the claim charts alleging infringement of the ’402 Patent by Microsoft customers relied only on third-party sources for some key claim limitations.6
Microsoft contacted DataTern to discuss the suits after several customers demanded indemnification. DataTern’s CEO told Microsoft that DataTern was pursuing the customers alone and was not interested in suing, or even entering into licensing discussions with, either Microsoft or SAP.7 Nevertheless, Microsoft and SAP sued DataTern, requesting declaratory judgments of invalidity and noninfringement.8
DataTern moved to dismiss for lack of subject matter jurisdiction, arguing that neither Microsoft nor SAP had an obligation to defend its customers and neither faced a threat of suit itself. The district court denied the motion based in part on the claim charts and the indemnification demands.9 After claim construction, DataTern conceded non-infringement based on the construction of several claim terms, and the district court entered summary judgment.10
The Federal Circuit’s Decision
In the majority opinion by Judge Moore, the Federal Circuit affirmed in part and reversed in part, holding that the district court had jurisdiction over the challenges to the ’502 Patent, and SAP’s challenge to the ’402 Patent, but not Microsoft’s challenge to the ’402 Patent.11 The decision established several guideposts for future litigants.
First, the Federal Circuit held that a mere request for indemnification from a customer does not give standing to a supplier. To have standing, the supplier must actually be legally obligated to indemnify its customer. “In that instance, [the supplier] would stand in the shoes of the customers and would be representing the interests of their customers.”12 In this case, Microsoft and SAP conceded that their customers’ indemnification requests were not valid.13
Second, the Federal Circuit held that the existence of customer suits, without more, does not give standing to a supplier.14 Specifically, a patent owner’s allegation that a customer has directly infringed its patent using a supplier’s product does not create a controversy between the patent owner and the supplier regarding direct infringement.15 Neither does it create a controversy regarding induced infringement, because inducement requires an affirmative act of encouragement from the supplier, with knowledge it is encouraging infringement.16
Finally, though, the Federal Circuit held that where the customer suits rely on the supplier’s own documentation to demonstrate infringement of all claim limitations, the supplier does have standing. “Providing instruction to use a product in an infringing manner is evidence of the required mental state for inducing infringement.”17 Because DataTern had cited to SAP documentation for all limitations in the asserted claims, and to Microsoft documentation for allasserted claims in the ’502 Patent, the Federal Circuit affirmed the district court’s jurisdiction to hear those challenges (and proceeded to consider the merits of the summary judgment motions). However, because DataTern had cited “exclusively to third-party—not Microsoft-provided—documentation for several key claim limitations” in the ’402 Patent, nothing suggested that Microsoft had encouraged any allegedly infringing actions.18 As a result, Microsoft had no standing to challenge the ’402 Patent.
Roadmap to Avoid Declaratory Judgment Jurisdiction
Although he later recused himself from the case, initially Chief Judge Rader dissented, pointing out several implications of the majority’s reasoning.19 As the Chief Judge observed, the majority’s reasoning in DataTern creates a roadmap that allows a patent owner to avoid declaratory judgment jurisdiction. Any patent owner who wishes to pursue a large number of small settlements with a major corporation’s customers — customers that generally cannot afford to defend a major patent lawsuit — can keep the major corporation on the sidelines by ensuring that its infringement contentions as to at least one key claim limitation are supported without reference to the supplier’s documentation. Furthermore, it is unclear what makes a limitation “key” in this context.