Originally published in Managing Intellectual Property, September 1, 2007 Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

The Rulings in MedImmune and SanDisk May Also Force Trade Mark Owners to Re-think Their Enforcement Strategies

The Supreme Court and the Federal Circuit have recently issued two decisions in patent-licensing cases that may ultimately affect how trade mark practitioners conduct future enforcement efforts. In its recent decision in MedImmune v Genentech, the Supreme Court redefined the case-and-controversy requirement for declaratory judgment actions in the context of patent licensing disputes to make it easier for patent licensees to bring suit rather than negotiating a license at a disadvantaged position (MedImmune, Inc v Genentech, Inc, 127 S Ct 764 (2007)). Just two months later, the Federal Circuit followed the Supreme Court's guidance and, in Sandisk v STMicroelectronics, applied the more permissive MedImmune declaratory-judgment standard and reversed a lower court's dismissal of a declaratory-judgment action (SanDisk Corp v STMicroelectronics, Inc, 480 F 3d 1372 (Fed Cir 2007)). Although the facts of each case relate to patent-licensing disputes, they may signal a liberalizing trend in allowing declaratory-judgment plaintiffs to gain access to federal courts to resolve disputes over IP rights.

The Declaratory Judgment Act provides that:

[i]n a case of actual controversy within its jurisdiction ... any court of the United States, upon the filing of an appropriate proceeding, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought (28 USC § 2201(a)).

The "actual controversy" requirement of the Act is rooted in Article III of the Constitution, which provides for federal jurisdiction over "cases and controversies". The issue, of course, is what set of facts is needed for an Article III "actual controversy" to arise in the IP context.

The purpose of federal declaratory judgment in trade mark cases is almost identical to that in patent cases, where declaratory-judgment litigation is common. The Act offers a remedy to a potential defendant who is uncertain of his rights and wants to obtain an early adjudication without waiting for a potential adversary to bring suit, and being left to act at his peril in the interim.

The Windsurfing Test

Since the Federal Circuit's decision in Windsurfing in 1987, the standard for determining whether a case or controversy exists in a trade mark declaratory-judgment suit has been twofold: "(1) the declaratory plaintiff must have a 'real and reasonable apprehension' of litigation; and (2) the declaratory plaintiff must have engaged in a course of conduct that brought it into 'adversarial conflict' with the declaratory defendant" (Windsurfing Int'l, Inc v AMF, Inc, 828 F 2d 755 (Fed Cir 1987)). While the second prong is typically satisfied because most trade mark enforcement efforts are initiated as a result of some kind of adversarial conflict, satisfaction of the first prong has been debated and litigated for many years. On the trade mark side, courts have found the presence of an "actual controversy" where the trade mark owner's actions consist of a threat of trade mark infringement litigation; where the trade mark owner requests that an infringer or its customers not use the owner's trade mark; where the trade mark owner files its trade mark with the United States Customs Service to prevent the infringer's importation; and where the trade mark owner files multiple lawsuits against an infringer's competitors or customers. An actual controversy can also be found to exist, even in the absence of a direct claim of trade mark infringement, where a party could be perceived to run a real risk of potential liability were it to move forward in exercising what it believes are its legal rights in the marketplace (such as releasing not-yet-issued product into the marketplace).

Generally, the threat or actual filing of an opposition or cancellation proceeding with the USPTO is not, per se, regarded as sufficient to create an "actual controversy" (see Neilmed Prods v Med-Systems, 472 F Supp 2d 1178 (ND Cal 2007) holding that the filing of an opposition with the PTO alleging intentional trade mark infringement and dilution is sufficient to establish an actual controversy or reasonable apprehension of litigation)). The underlying rationale is simply that issues of registration, rather than use, should be reserved for the administrative agency charged with greatest expertise in this area – namely, the PTO. Where infringement is not alleged – and actual use is not at issue – the federal courts are perceived to lack jurisdiction to enter a declaratory judgment

Experienced trade mark practitioners recognize that the more direct the allegation of infringement in a demand letter, the greater the risk that it could provide the basis for a declaratory judgment suit. As a result, trade mark practitioners often tailor the ever-popular cease-and-desist letter to convey as much information as needed about the priority of trade mark rights while carefully couching the tone of the letter and the nature of any demands to lessen the relative declaratory judgment risk. Should the federal courts extend the Supreme Court decision in MedImmune to trade marks to liberalize the declaratory judgment standard, trade mark practitioners may need to rethink their enforcement approach.

The Impact of MedImmune and Sandisk

In MedImmune, the Supreme Court addressed whether a patent licensee must breach its licensing contract to generate the "actual controversy" needed to establish subject-matter jurisdiction for a declaratory judgment suit on the validity or enforceability of a patent or the presence or absence of infringement thereof. In response to assertions by Genentech that MedImmune's profitable Synagis respiratory drug was covered by a patent and a still-pending Genentech patent application, MedImmune entered a patent licensing agreement relating to the issued patent. After Genentech's pending patent application issued as a patent, Genentech wrote to MedImmune seeking additional royalties for the newest patent. Reluctant to risk treble damages, attorney fees and a possible injunction, MedImmune agreed to pay the requested royalties, under protest, and later filed an action seeking a declaratory judgment regarding the Genentech patents and their scope. The district court, later affirmed by the Federal Circuit, dismissed the action on a licensee-estoppel theory, contending that a patent licensee in good standing could not meet the "actual controversy" requirement for declaratory judgment relief.

In reversing the Federal Circuit's dismissal, the Supreme Court held that a licensee's actions as a result of threatened coercive enforcement action will not bar subject-matter jurisdiction on the basis that there does not exist a case or actual controversy. In rejecting the Federal Circuit's "reasonable apprehension" test, the Supreme Court articulated a new standard for declaratory judgment jurisdiction, namely "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". The Court also noted that past decisions required the dispute be "definite and concrete, touching the legal relations of the parties having adverse legal interests, and that it be real and substantial and admit of specific relief through decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts". Implying that these factors are still relevant, the Court sought to clarify the determination of a case and controversy in the relatively unique context of the patent licensor-licensee relationship that includes a coercive aspect during negotiations.

The dispute between MedImmune and Genentech highlights the somewhat unique relationship between a patent licensor and licensee, and the underlying patent-enforcement strategy often used by a patent owner seeking to enforce its rights against potential patent infringers. The MedImmune decision recognizes that Article III's "actual controversy" requirement can be satisfied for declaratory-judgment jurisdictional purposes even where the threat of litigation is couched as an offer to enter into a licence. The decision allows a licensee to bring a declaratory-judgment action against the licensor and patent holder without having to breach a licence agreement or reject an offer for a licence agreement and fear patent litigation in a patentee-favourable forum.

In Sandisk v STMicroelectronics, the Federal Circuit built on the new standard set by the Supreme Court in MedImmune in reversing the district court's dismissal of a declaratory-judgment suit by Sandisk against STMicroelectronics. Following the stalling of lengthy cross-licensing negotiations in which ST asserted its rights to royalties based on detailed infringement analyses prepared by multiple patent experts, Sandisk filed suit seeking a declaratory judgment of non-infringement and invalidity of various ST patents raised in the parties' licensing discussions. In its motion to dismiss the DJ action, ST relied on express statements of a representative during licensing negotiations that ST had no intention to sue Sandisk for infringement. The court found that this statement was inconsistent with ST's entire "course of conduct" during the parties' negotiations, which showed "a preparedness and willingness to enforce its patent rights". Noting that ST's actions placed Sandisk in the unenviable position of either pursuing arguably illegal behavior or abandoning Sandisk's claims to the allegedly infringed technology, and recognizing that Sandisk waited to file suit until the parties' negotiations had stalled, the Federal Circuit determined that all the circumstances created "a substantial controversy, between parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment". Accordingly, the court held that subject-matter jurisdiction under the case-and-controversy requirement was satisfied.

In his concurrence, Judge Bryson suggested the new declaratory judgment test would appear to make declaratory judgments available to all parties who are approached by patentees seeking to license their patents. But the Federal Circuit seems to have gone out of its way to make clear that the standard is not, in fact, so lenient. Rather, the Federal Circuit made clear 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" (emphasis added). The court also suggested that although there is a new standard, past decisions using the old "reasonable apprehension of suit" standard would likely yield a similar, if not identical, result.

Impact on Trade Mark Demand Letters

While the facts of both the MedImmune and Sandisk cases are specific to patent licensor-licensee interactions, these opinions do represent a potentially important shift in the standard for declaratory judgment about which trade mark practitioners should be aware. Trade mark demand letters have always danced the line between threatening litigation, demanding total cessation and capitulation, and encouraging settlement dialogue for some intermediate resolution (such as redesign of a logo to eliminate objectionable elements; use but not registration). In evaluating the extension of this new precedent to the trade mark arena, however, we must be cognizant of significant factual differences between patent-licence negotiations and the standard trade mark demand letters. As was shown in the facts of both MedImmune and SanDisk, patent licence negotiations generally involve an enormous amount of preparation, due diligence, research and devotion of resources including a thorough review of the licensor and licensee's patent portfolios, utilization of patent experts and royalty-value assessments. It is these efforts and, in particular, the in-depth infringement analysis presented during these types of negotiations that shows both a preparedness and willingness to file an enforcement suit and, orrespondingly, that supports the conclusion of a "substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment" as specified in MedImmune. This level of preparation and dedication of resources is not typical, however, on the trade mark side. Although trade mark demand letters are assuredly carefully drafted, they typically do not require the same level of analysis and pre-litigation dedication of resources typical to patent licence negotiations. Trade mark demand letters do not generally include detailed legal analysis or expert opinions, such as survey analysis. Accordingly, demand letters that invite dialogue between the parties, express a willingness to settle the dispute amicably and refrain from express threats of litigation arguably continue to offer some deterrent to the risk of a declaratory judgment action, even under the new Supreme Court and Federal Circuit precedent. In the wake of the MedImmune and SanDisk decisions, however, trade mark practitioners would be well advised to take these new decisions into consideration in crafting their enforcement approach.