Powertech is a licensee of various patents (including the '106 patent) issued to Tessera and directed to semiconductor chip manufacturing. More specifically, the claimed process goes to a protective barrier that protects terminals of the chip from coming in contact with the encapsulant.

Tessera sued various defendants in the ITC and in Texas for infringement of Tessera's patents that are the subject of the Powertech/Tessera license. As it turns out, the defendants in Tessera's lawsuit had purchased the chips in question (the so-called wBGA and µBGA chips) from Powertech and other Tesseara licensees. Tessera asserted that the chips purchased from Powertech infringed the '106 patent. The ITC ALJ ruled that the '106 patent was not invalid and not infringed by the wBGA and µBGA chips. The ALJ also determined that Tessera's patent rights were exhausted with respect to products purchased from Tessera licensees including Powertech.

While the ITC proceeding was underway, Powertech continued to make its royalty payments "under protest" because it believed that its wBGA did not infringe the '106 patent and that the '106 patent was invalid. Powertech then filed a declaratory action asserting that its wBGA products did not infringe the '106 patent and that the '106 patent was invalid. Powertech v. Tessera (N.D. Cal. Mar. 5, 2010).

In response, Tessera filed a motion to dismiss claiming that the actions in the ITC and in Texas against Powertech's customers could not create a case or controversy so long as Powertech remained a licensee in good standing. Raising an interesting jurisdictional question based on contract interpretation, Tessera also argued that Powertech's royalty obligation did not turn on the validity or infringement of the '106 patent but rather on the definition of licensed products under the Powertech/Tessera license, which included both the wBGA and µBGA chips (this latter chip not being at issue vis-à-vis non-infringement).

The Northern District of California court granted Tessera's motion on various grounds including because it concluded that Powertech was required to pay royalties whether or not the '106 patent is valid or infringed. Powertech appealed. Powertech Tech. Inc. v. Tessera, Inc., Case No. 2010-1489 (Fed. Cir. September 30, 2011).

Dispensing with Tessera's argument that Powertech must be in breach to create a case or controversy, the CAFC cited MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) stating "Under the Court's new standard, an Article III case or controversy exists when '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.'" Under MedImmune, Powertech need not be in breach of its license to challenge the validity or infringement of the '106 patent.

As a side note, the CAFC also rejected Tessera's argument at the ITC that the exhaustion doctrine would not apply to licensed products if a licensee failed to make royalty payments, stating:

That some licensees subsequently renege or fall behind on their royalty payments does not convert a once authorized sale into a non-authorized sale. . . . That absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion--to prohibit postsale restrictions on the use of a patented article. Slip. Op. at 12-13 (citation omitted).  

Finally, the CAFC dealt with Tessera's argument that there could be no case or controversy because Powertech's license was not tied to the '106 patent but broadly covered licensed products. Again the CAFC relied on MedImmune to dispel the notion that Powertech must first breach its license to create a case or controversy. Slip Op. at 14. In an interesting issue for California practitioners, Powertech and Tessera argued contract interpretation under California law and specifically whether "legal necessity compels an interpretation that royalty payments be tied to patent coverage or patent validity." Slip Op. at 15; see also Cal. Civ. Code § 1655-56 (stating that, under California contract law, any conditions that make a contract reasonable, conform it to industry usage, or are necessary to carry it into effect, are deemed implied unless the contract manifests a contrary intention).

In reversing and remanding, the CAFC did not interpret the Powertech/Tessera license but instead "simply [held] that the dispute between [Powertech] and Tessera--as to whether the license agreement requires royalty payments to be tied to valid patent coverage--is sufficient to support declaratory judgment jurisdiction. We leave the merits based arguments to the district court to consider on remand." Slip Op. at 17. This opinion may prove significant in cases where a license broadly covers a licensed product as opposed to specific patents.