Last week saw a sea change in the law of declaratory judgment jurisdiction in patent cases, a change that started with the Supreme Court's MedImmune decision in January. In two decisions, the Federal Circuit announced a new — and largely undefined — standard that lowers the bar for companies to file suit for a declaration of patent invalidity or noninfringement. These decisions require patent owners to rethink the manner in which they approach prospective licensees or possible infringers. They also put a new arrow in the quiver of companies that receive offers of a license from patent owners, letters that often include subtle or veiled threats of a lawsuit but which are carefully worded in an effort to avoid triggering declaratory judgment jurisdiction.

MedImmune Sets The Stage

It had long been the rule in the Federal Circuit that, consistent with the Constitution and the Declaratory Judgment Act, a person could only maintain a declaratory judgment action against a patentee if that person could satisfy a two-part test. That test required: (1) an explicit threat or other action by the patentee that creates a reasonable apprehension that the declaratory judgment plaintiff will be sued, and (2) present activity or concrete steps towards an activity that could constitute infringement. This rule arose from provisions of Article III of the Constitution that limit federal courts to hearing "cases and controversies," and the Declaratory Judgment Act which similarly limits jurisdiction to "case[s] of actual controversy." In January 2007, in MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), the Supreme Court criticized the "reasonable apprehension of suit" requirement in dicta in a footnote, stating that it "conflicts" with Supreme Court precedent.

SanDisk, Teva and the "All the Circumstances" Test

Last week, the Federal Circuit put all doubts to rest on the viability of the reasonable apprehension test. In SanDisk Corp. v. STMicroelectronics, Inc., No. 05-1300, 2007 WL 881008 (Fed. Cir. Mar. 26, 2007), the Federal Circuit noted the Supreme Court's rejection of the reasonable apprehension test, and identified one new circumstance where declaratory judgment jurisdiction would be proper. "[W]here a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise . . . ." SanDisk, slip op. at 15. This significantly broadens the range of conduct that will support an action for declaratory judgment of patent invalidity or noninfringement.

Then, in Teva Pharm. USA Inc. v. Novartis Pharm. Corp.,No. 06-1181, 2007 WL 942201 (Fed. Cir. March 30, 2007), the Federal Circuit made clear that the dicta in MedImmune effectively "overruled" the Federal Circuit's "reasonable apprehension of suit" test. In its place, the court adopted the "all the circumstances" test that the Supreme Court suggested in MedImmune was the proper approach. Under that approach, "all the circumstances" must demonstrate (1) that the party instituting suit has standing and (2) that the issue presented is ripe. Among other things, standing requires that the plaintiff allege an injury-in-fact that is "personal, "concrete and particularized" and "actual or imminent." Teva, slip op. at 7. Ripeness focuses on the defendant's conduct to determine "whether the defendant's actions have harmed, are harming, or are about to harm the plaintiff" and whether the question presented is "fit for judicial review." Id. Thus, "a declaratory judgment plaintiff is only required to satisfy Article III, which includes standing and ripeness, by showing under 'all the circumstances' an actual or imminent injury caused by the defendant that can be redressed by judicial relief and that is of 'sufficient immediacy and reality to warrant the issuance of a declaratory judgment.'" Id. at 9 (quoting MedImmune, 127 S. Ct. at 771).

Uncertain Boundaries

In the wake of SanDisk and Teva, cases that may have been barred under the "reasonable apprehension of suit" test may now be permitted. What remains unclear is just what "circumstances" will, or will not, trigger declaratory judgment jurisdiction. The facts of SanDisk and Teva offer some guidance, but the cases raise more questions than they answer.

In SanDisk, there was extensive evidence that the patentee, ST, had firmly concluded that SanDisk infringed its patents and that ST was prepared to litigate. ST and SanDisk engaged in extensive cross-license negotiations during which ST presented SanDisk with a detailed infringement analysis, including claim charts, and repeatedly referred to SanDisk's products as "infringing." ST also requested that the parties treat their discussions as settlement discussions under Rule 408. After the negotiations broke down, SanDisk filed suit. Applying the MedImmune decision, the court stated that an Article III case or controversy existed because ST presented a "thorough infringement analysis" during license negotiations and SanDisk "maintained that it could proceed in its conduct without the payment of royalties to ST." SanDisk, slip op. at 17. According to the majority in SanDisk, under these facts there is "little basis for the district court's refusal to hear the case." Id. at 19. Moreover, the Federal Circuit made clear that ST's express promise made during licensing negotiations not to sue SanDisk did not alter the outcome. A promise not to sue will not eliminate a justiciable controversy where the patentee "has engaged in a course of conduct that shows a preparedness and willingness to enforce its patent." Id. at 18.

In his concurrence, Judge Bryson offered a note of caution. "[I]t would appear that under the court's standard virtually any invitation to take a paid license relating to the prospective licensee's activities would give rise to an Article III case or controversy if the prospective licensee elects to assert that its conduct does not fall within the scope of the patent." Slip op. at 3 (Bryson, J., concurring). Acknowledging the "sweeping change" in the law, Judge Bryson went on to state "I see no practical stopping point short of allowing declaratory judgment actions in virtually any case in which the recipient of an invitation to take a patent license elects to dispute the need for a license and then to sue the patentee. Although I have reservations about the wisdom of embarking on such a course, I agree with the court that a fair reading of footnote 11 of the Supreme Court's opinion in MedImmune compels that result . . . ." Id. at 5.

In Teva, an ANDA case brought under the Hatch-Waxman Act, Novartis had listed five patents covering its drug Famvir® in the FDA's Orange Book. Teva filed a paragraph IV certification against all five patents, stating that its drug did not infringe or that the patents were invalid. Novartis sued Teva under one patent, the compound patent, but took no action on the four remaining patents covering methods of using the compound. Teva brought a declaratory judgment action on the other four Orange Book listed patents, and Novartis moved to dismiss. The Federal Circuit held that under "all the circumstances," declaratory judgment jurisdiction existed. Teva, slip op. at 12.

In his concurring opinion, Judge Friedman went even further. In his view, because the patents were listed in the Orange Book and Teva certified under paragraph IV against all five patents that its drug did not infringe or that the patents are invalid, an actual controversy already existed before Novartis sued on the compound patent. That Novartis filed suit on one of those patents merely confirmed the existence of the controversy.

New Strategies Required

What is the new legal landscape after SanDisk and Teva? For patent owners with an eye on a potential licensee or infringer, greater care must be taken in approaching that party, lest the patent owner triggers declaratory judgment jurisdiction. There are a number of available options. The parties may enter into a standstill agreement to prevent either side from filing suit while negotiations take place. Alternatively, even before contacting the other party, a cautious patent owner may consider filing suit to preserve its choice of forum while the parties negotiate. Perhaps a higher risk strategy: if the patent owner sends a demand letter overtly threatening litigation by a date certain and the recipient files a declaratory judgment action in an unfavorable forum before that deadline, the patent owner may be able to obtain dismissal of the declaratory suit if the convenience factors, such as the location of witnesses and documents, favor the patent owner's later-filed action.

For companies that receive letters from a patent owner, SanDisk and Teva provide some new options. If the letter clearly identifies a U.S. patent and a specific product that is accused of infringement, the recipient of the letter may file an action in a forum of its choosing, provided that the patent owner is subject to personal jurisdiction there. If the letter is ambiguous, the recipient may use a new tool suggested by Judge Bryson: the "put up or shut up" letter. In other words, the recipient may demand that the patentee expressly state whether it regards the recipient's products as infringing and identify with particularity how those products read on particular claims. If the patent owner responds with a charge of infringement, it will have satisfied the Federal Circuit's test for declaratory judgment jurisdiction.