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Judgment Day

It was a battle STMicroelectronics tried hard to avoid.

Although the Geneva-based company believed a competitor was infringing 14 of its patents on flash-memory storage products, it was determined to resolve the matter amicably.

From April to October 2004, the company carefully negotiated with rival SanDisk Corp., seeking to convince the Milpitas, Calif.-based firm it should license ST's patents. ST explained in detail how these patents covered a variety of SanDisk products--and even provided SanDisk with a 300-page claim chart that analyzed all the patents and alleged infringements. But lest this seem like a threat, ST's vice president of IP and licensing, Lisa Jorgenson, assured SanDisk that "ST has absolutely no plan whatsoever to sue SanDisk."

SanDisk, however, was not of the same mind. On Oct. 15, 2004, the company filed suit in San Jose federal court, seeking a declaratory judgment that SanDisk didn't infringe ST's patents and that those 14 patents were invalid.

The district court threw out the declaratory judgment claims. It held that there was no justiciable controversy, as Article III of the Constitution requires, because SanDisk didn't have an objectively reasonable apprehension it would be sued.

SanDisk appealed, and on March 26 the Federal Circuit reversed, creating a new standard that makes it far easier to file declaratory judgment suits concerning patents. According to many experts, this decision dramatically weakens companies' ability to license their patents.

"For patentees, this increases the chances that your patents will be under attack by third parties, especially if you contact them about taking a license," says John Carlin, a patent attorney in the Manhattan office of Fitzpatrick, Cella, Harper & Scinto. He adds, "This decision moves the balance of control away from the patentee and toward the potential licensor or infringer."

New Rules

For years the Federal Circuit had a clear and simple rule for declaratory judgment (DJ) suits. If the suit concerned a patent, it could go forward only if the patentee's actions created a reasonable apprehension on the part of the plaintiff seeking declaratory judgment that it would be sued for infringement and if the plaintiff had either infringed the patent or had taken concrete steps to do so. If this two-part test wasn't met, the court would throw out the suit because there was no case or controversy.

That all changed Jan. 9, when the Supreme Court issued its ruling in MedImmune Inc. v. Genentech Inc. The decision threw out the "reasonable apprehension" part of the Federal Circuit's test.

The Federal Circuit responded three months later with its ruling in SanDisk Corp. v. STMicroelectronics NV. Following the Supreme Court's lead, a three-judge panel rewrote the first part of the DJ justiciablity test: "We hold only that where a patentee asserts rights under a patent ?? 1/2 [against] ongoing or planned activity of another party, and ?? 1/2 that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise."

This decision goes beyond what the Supreme Court had held.

"In MedImmune, the Supreme Court said, 'We don't agree with the Federal Circuit's reasonable-apprehension-of-suit test,' but the Court didn't say what the new test should be," says Barbara Mullin, a Philadelphia-based patent attorney at Woodcock Washburn. "In SanDisk, the Federal Circuit said what the new test for declaratory judgment jurisdiction should be."

Licensing Dangers

The full ramifications of SanDisk are unclear--because no one knows how broadly the Federal Circuit and lower courts will read the case.

"The Federal Circuit might limit this case to its facts, so there would be no DJ jurisdiction unless the patentee expressly alleges infringement. Or the case might be broadly interpreted ?? 1/2 so almost any invitation to take a licensee could trigger a declaratory judgment action," says David Fox, a patent attorney in the Houston office of Fulbright & Jaworski. "I would not be surprised if there is a split in the Federal Circuit, with different panels having different levels of activity that ?? 1/2 trigger DJ jurisdiction."

Given the uncertainty in this area of the law, what is a patentee to do when it is seeking to license its patents? "The wisest move for a patent owner is to assume the worst and to be most conservative in making overtures [to potential licensees]," Fox says.

But if courts read SanDisk broadly, making such overtures while avoiding a declaratory judgment action will be difficult. No one knows quite how to do it.

"Right now there is a standstill in licensing activity," Fox says. "Corporations large and small are trying to figure out what they can do to protect themselves."

The danger facing every patentee is that by simply offering a license, the patent owner might be dragged into court and forced to defend its patents in an unfavorable locale. "There are certain courts that are known to be very favorable and others known to be very unfavorable to patentees," Fox says. "So where you have the suit is very important."

A Preemptive Strike

Patentees are scrambling to find some type of safe harbor which would allow them to conduct negotiations without exposing themselves to DJ suits. One option is to conduct negotiations under a confidentiality agreement, which prevents the discussions from being disclosed as evidence for DJ jurisdiction.

This method has one major flaw, however. "[I]t would normally work only when it was not needed--only a party that was not interested in bringing a declaratory judgment action would enter into such an [confidentiality] agreement," wrote Judge William Bryson, in his concurring opinion in SanDisk. "A party that contemplates bringing a declaratory judgment action or at least keeping that option open would have no incentive to enter into such an agreement."

A patent owner can attempt to solve the problem by suing in a favorable forum and then opening negotiations. But this can be expensive, and it sours the atmosphere for negotiations.

"The parties are in a much more adversarial relationship than if no lawsuit were filed," Carlin says. Still, he says this approach can be worthwhile if the patent owner thinks a potential licensee is likely to sue for declaratory judgment in an unfavorable forum.

According to some experts, the end result of SanDisk will be a big boost in patent litigation as both patentees and potential licensees rush to court. And this will make it harder to negotiate patent licenses.

Others, however, believe business considerations will typically prevent companies from litigating.

"I don't think there will be a race to the courthouse because of the time and money it costs to litigate," says Michael Ladra, the Wilson Sonsini Goodrich & Rosati partner who represented SanDisk in this suit. He adds, "I don't think the sky will fall on patent licensing."

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Steven Seidenberg

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