An issue that frequently arises in the context of patent infringement litigation is whether a first-filed declaratory judgment action brought by an accused infringer should be stayed, transferred or dismissed on the basis of a subsequently filed infringement action brought by the patent holder--or vice versa. In the typical scenario, the actions are brought in different jurisdictions, thereby presenting a conflict of venue. According to the first-to-file rule, the first-filed action is generally given deference in terms of venue. Genentech, Inc. v. Eli Lilly & Co., 998 F.2d 931 (Fed. Cir. 1993). In two recently decided decisions involving Ninth Circuit law, the Federal Circuit followed the first-to-file rule.
In In re Vertical Computer Systems, Inc., 2011 U.S. App. LEXIS 17214 (Fed. Cir. Aug. 17, 2011), after receipt of a cease and desist letter from Vertical Computer Systems, Inc. ("Vertical") and unsuccessful licensing negotiations, Interwoven, Inc. ("Interwoven") filed a declaratory judgment action in the Northern District of California seeking a declaration of non-infringement and invalidity of the patents-in-suit. One month later, Vertical filed a patent infringement action against Interwoven and other defendants in the Eastern District of Texas--notoriously well-known among patent practitioners for generating pro-plaintiff verdicts.
Vertical subsequently moved to transfer the California case to Texas. The lower court denied this motion, reasoning that the Texas court had no greater familiarity with or deeper investment in the case than the California court. The trial court noted that Vertical had named additional defendants in the Texas case but did not view this factor as favoring Vertical's position; according to the court, the infringement claims in the Texas suit involved defendants with products separate and distinct from those of Interwoven. The court also pointed out that if naming additional defendants were enough to trump the first-to-file presumption, this rationale would invite abuse (a party could avoid an undesired forum merely by adding defendants to a subsequently filed suit).
On appeal, the Federal Circuit upheld the lower court's decision, noting that the district court had considered all appropriate factors. The Federal Circuit made only two specific comments about the facts.
First, the court noted that Vertical had one corporate director located in the Northern District of California. Second, the court stated that the Texas case against the other defendants involved "significantly different products and issues" than the case against Interwoven.
In In re Board of Regents of University of Texas, 2011 U.S. App. LEXIS 17234 (Fed. Cir. Aug. 17, 2011), the Federal Circuit was presented with the opposite factual scenario--the inventors first filed an infringement action in the Eastern District of Texas, and then the defendants in that case filed suit in the Northern District of California seeking a declaratory judgment of non-infringement and invalidity of the patents. The inventors moved to transfer the California case to Texas, and the district court granted their motion. On appeal, the Board of Regents argued that transfer was improper because it had defenses of sovereign immunity and lack of subject matter jurisdiction. The Federal Circuit rejected this argument on the grounds that those defenses were not specific to the Eastern District of Texas and could be raised at a later time.
The lesson to be gleaned from the Federal Circuit's recent decisions on this issue is that there may be a significant litigation advantage to be gained by being the first to file suit. Montana companies that receive cease and desist letters from patent trolls ought to consider the feasibility of filing a declaratory judgment action before they are named as one of many defendants in a patent infringement case in the Eastern District of Texas or elsewhere.
There are two additional considerations to keep in mind when evaluating whether to file a declaratory judgment action in a patent infringement case. The first issue is whether the cease and desist letter creates a "case or controversy" sufficient to confer standing on the recipient to initiate a declaratory judgment action. This issue was addressed by the U.S. Supreme Court in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). The second issue is whether the "customer suit exception" applies. The customer suit exception to the first-to-file rule is based on the theory that the manufacturer is the true party-in-interest in a patent infringement case. This exception allows courts to stay first-filed suits against customers in favor of a later-filed declaratory judgment action brought by the manufacturer.
