Be careful sending that letter: appellate court confirms that demand letters can justify personal jurisdiction in declaratory judgment actions
Declaratory Judgment Actions and Personal Jurisdiction
Companies often send cease-and-desist letters to competitors they believe are infringing their patents and demand the competitor stop the infringement, pay some amount of monetary damages, or both. If the competitor tells the company to pound sand, the company has the option to file a patent infringement suit in federal court. Although few companies enjoy being in this position, a company about to file suit against an infringer has the litigation advantage of being the first party to file the lawsuit. Think of this as a first-mover advantage. The party who files suit can do so in its home district (cutting down on travel and other logistical costs and driving up costs for the competitor) or in a district that is well-known for being friendly to patent-holders over accused infringers. (Thinking about where to file a lawsuit is something every company in this situation should make sure its attorney is thinking about.)
Those on the receiving end of these letters are very aware of the first-mover advantage, too. That’s why, when faced with accusations of infringement, they may consider filing what’s called a declaratory judgment action. This is a lawsuit where the accused infringer (who is typically the defendant) is the plaintiff, and the patent-holder (who is typically the plaintiff) is the defendant. The accused infringer files the suit asking for a declaration of non-infringement and/or a declaration that the company’s patents are invalid. Why would an accused infringer rush to court? Shouldn’t it want to avoid any lawsuit? If the accused infringer thinks a lawsuit is inevitable, it may want to file first to take advantage of being the first-mover.
But a given court doesn’t just hear any and all declaratory judgment actions; the court must still have personal jurisdiction over the patent-holder. Personal jurisdiction is the concept that prevents someone from suing you in a state in which you have no presence. Generally, for a court to have personal jurisdiction over you, (1) you must have purposefully directed your activities at residents of the state, (2) the claim must arise out of or relate to the your activities within the state, and (3) the exercise of personal jurisdiction must otherwise be fair and reasonable. The first two factors are often grouped together and called “minimum contacts.”
The Apple v. Zipit Wireless Case
On April 18, 2022, in Apple Inc. v. Zipit Wireless, Inc. the Court of Appeals for the Federal Circuit (which is the appellate court that hears all patent appeals nationwide), reiterated that patent demand letters can form the basis of personal jurisdiction in a declaratory judgment action.
As background, Zipit is a Delaware corporation with its principal place of business in South Carolina. It first reached out to Apple in 2013. Over the next three years, the parties exchange letters and met in-person in Apple’s Cupertino headquarters regarding a potential sale or license of Zipit’s patent portfolio, Apple’s potential patent infringement, and third-party challenges against Zipit’s patents (administrative proceedings called “IPRs” or inter partes reviews). Discussions escalated to the point that the parties exchanged draft license agreements, but they ultimately failed to reach any agreement.
In a July 2015 email regarding “Apple’s Ongoing Infringement,” Zipit asked Apple for a “definitive response” and attached Zipit’s brief in the ongoing IPRs. Apple held firm: it said it didn’t believe it needed a license because it wasn’t infringing and the patent claims were invalid. In a responsive letter, Zipit emphasized that it believed Apple was willfully infringing Zipit’s patents, and in a follow-up letter, Zipit updated Apple on the fact that the validity of its claims was upheld in the IPRs.
Over four years after the back-and-forth ended, Zipit filed a patent infringement suit against Apple in the Northern District of Georgia, but voluntarily dismissed it without prejudice two weeks later. Nine days after that, Apple filed a declaratory judgment suit against Zipit in the Northern District of California, seeking declaration of non-infringement of Zipit’s patents. Zipit moved to dismiss Apple’s complaint, claiming that the California court didn’t have personal jurisdiction over Zipit.
The district court held that Zipit’s contacts with California were enough for the court to exercise personal jurisdiction over it, and that the exercise of jurisdiction over Zipit in California wouldn’t be unreasonable. However, the court nonetheless dismiss Apple’s complaint because of an exception created by the Federal Circuit: when a party’s contacts were only for the purpose of warning against infringement or negotiating license agreements, no personal jurisdiction existed. Apple appealed to the Federal Circuit.
The Federal Circuit agreed with the district court that Zipit had sufficient contacts with California: it sent multiple letters to a company headquartered there and it traveled there to discuss its accusations of infringement with Apple. In relying on previous cases with similar facts, the Federal Circuit held there was “no question” that the required minimum contacts with California were met.
Zipit argued that there were no minimum contacts by relying on Autogenomics, Inc. v. Oxford Gene Technology Ltd. The facts in that case were similar: the defendant-patentee, like Zipit, sent a notice letter to the declaratory-judgment plaintiff, the plaintiff expressed interest in taking a license, and the patentee flew to California to meet with the plaintiff. But the Autogenomics court concluded that the plaintiff failed to allege sufficient minimum contacts. Zipit argued that Autogenomics created a bright-line rule that cease-and-desist letters and related in-person discussions can never support minimum contacts for personal jurisdiction.
But the Federal Circuit disagreed. First, it found that Autogenomics’ facts were distinguishable: unlike in that case, here Zipit kept Apple apprised of the status of ongoing IPRs and escalated its allegations of infringement, “going so far as twice describing Apple’s infringement as willful.” Second, it identified cases decided both before and after Autogenomics that concluded cease-and-desist letters were enough to support personal jurisdiction.
Having agreed with the district court that there existed sufficient minimum contacts , the Federal Circuit then turned to whether the exercise of personal jurisdiction was otherwise fair and reasonable. Zipit argued that forcing it to litigate in California would go against good policy: a patent-holder should be allowed to send a notice letter to a company in a different state and try to settle a dispute without being forced into court in that state. This would encourage the patent-holder to settle disputes instead of filing suit immediately.
The Federal Circuit didn’t agree; it held that the settlement policy should be only one of many factors—such as the burden on the defendant and the forum state’s interest in adjudicating the dispute—that the district court should consider when determining whether the exercise of personal jurisdiction is fair and reasonable. Thus, reversing the district court, the Federal Circuit held that there is no bright-line rule that cease-and-desist letters trump all other factors. After reviewing the various factors, the Federal Circuit found that Zipit could not make a compelling case that would render jurisdiction unreasonable.
Takeaways
The Federal Circuit had a tough time distinguishing the Autogenomics case on either the facts or the law. The facts of the Autogenomics case were remarkably similar, the only differences being, here, Zipit levelled claims of willful infringement a few times and attached updates on publicly accessible proceedings (the IPRs). On the law, the Federal Circuit merely said that other cases said the opposite of Autogenomics without grappling with the tension between the two.
In any case, we have clarity now. Patent-holders who are thinking about sending cease-and-desist letters should be careful to limit the content of their letters. Being too aggressive, or sharing too much information, may subject a patent-holder to personal jurisdiction in the target’s home state. Avoiding the specific acts called out by the Zipit court—such as repeated allegations of willfulness and updates on related litigations or administrative proceedings—should go a long way in preserving a patent-holder’s ability to file suit in its preferred location. On the other hand, an accused infringer now has greater leeway to file a declaratory judgment suit in its preferred state, but it should be aware that patent-holders may now be more incentivized to file suits earlier than they would otherwise.
If you think that someone is infringing your patents, or you received a demand letter accusing you of infringement, contact us for a free consultation on next steps.
This article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader; we do not recommend or endorse the contents of the third-party sites.