United States: District Court’s Refusal to Hear Declaratory Judgment Suit Found to be Abuse of Discretion

Last Updated: February 4 2005
Article by Paul Devinsky

Applying the "abuse of discretion" standard, the U.S. Court of Appeals for the Federal Circuit reversed a district court’s dismissal of a declaratory judgment suit and remanded the case. Electronics For Imaging, Inc. v. Jan R. Coyle, Case No. 04-1266, (Fed. Cir., Jan. 5, 2005) (Lourie, J.)

Electronics For Imaging Inc. (EFI) specializes in network printing solutions. It sells its products to companies such as Canon Inc., Hewlett-Packard Company and Xerox Corporation, which in turn incorporate EFI’s technology into their own print servers, printers and copiers. EFI is a Delaware corporation with its principal place of business in California. Jan Coyle, a Nevada resident, is a listed inventor on two patents directed to printing technology. Kolbet Labs is a Nevada sole proprietorship owned by Daniel Kolbet, who is also a Nevada resident and an inventor listed on both patents.

Coyle first contracted EFI in 1997, offering to license his then-unpatented technology. Subsequently, Coyle and EFI met in Nevada under a non-disclosure agreement. EFI left that meeting uninterested in Coyle’s work and did not retain any written information from it. In 1999, the two parties convened again; EFI indicating an interest in discussing Coyle’s statements concerning progress on the technology and a pending patent application. Coyle also apparently informed EFI about his own history of filing patent infringement lawsuits against such corporations as Atari Inc., Nintendo, Sega and NEC Technologies. In 2000, the two parties met under a new non-disclosure agreement to discuss possible licensing arrangements, but those talks also ended without any agreement.

In 2001, Coyle discovered certain EFI sales and marketing information that convinced him that EFI was manufacturing products that were within the scope of Coyle’s patent application, then still pending. Soon thereafter, Coyle notified EFI that his patent would soon issue and asserted that the patent would cover all of EFI’s print controllers. Later, Coyle began to pressure EFI on an almost daily basis, threatening to drive EFI out of business. Coyle even identified specific attorneys and law firms in support of his litigation threats. Coyle purportedly leveled an ultimatum, warning EFI that December 15 was the deadline to pay, saying, "If we don’t get a deal, we will pull the trigger and execute the litigation." However, negotiations between the two parties again broke down. A few days before the ultimatum date, EFI sued Coyle and Kolbet Labs in the Northern District of California, seeking a declaratory judgment that EFI did not breach the two non-disclosure agreements and that EFI did not misappropriate Coyle’s trade secret.

A few weeks later, Coyle’s patent issued, and EFI amended its complaint that same day to assert non-infringement and invalidity of the patent. Coyle filed motions to dismiss the complaint for lack of personal jurisdiction, for improper venue and for failure to comport with the objectives of the Declaratory Judgment Act. The court granted Coyle’s motion to dismiss for lack of personal jurisdiction, but reserved judgment on Coyle’s other motions to dismiss. EFI appealed and the Federal Circuit, applying its own law on the issue of personal jurisdiction, concluded that Coyle had not shown that the case was "one of the ‘rare’ situations in which sufficient minimum contacts exist but where the exercise of jurisdiction would be unreasonable."

On remand, the district court considered the other grounds for dismissal previously raised by Coyle. The court determined that EFI did not have any uncertainty about Coyle’s intention to sue and was not uncertain about the strength of its legal position. The district court thus concluded that EFI’s declaratory judgment suit did not serve the objectives of the Declaration Judgments Act and was merely anticipatory, designed to preempt Coyle’s suit and to secure EFI’s own choice of forum instead and granted Coyle’s motion to dismiss.

In this appeal, the Court, while noting that a district court has "unique and substantial discretion" to decline to exercise declaratory judgment jurisdiction, warned that discretion is not plenary: "[t]here must be well-founded reasons for declining to entertain a declaratory judgment action."

Noting that the question of whether to accept or decline jurisdiction in an action for a declaration of patent rights in view of a later-filed suit for patent infringement "is an issue that falls within our exclusive subject matter jurisdiction," the Federal Circuit announced that it would not defer to the procedural rules or decisional law of the regional circuit on this issue.

Based on the purpose of the Act ("to provide the allegedly infringing party relief from uncertainty and delay regarding its legal rights"), the Federal Circuit held that "the district court erred as a matter of law when it held that EFI suffered no uncertainty of the kind recognized by the Declaratory Judgment Act."

[A] patent owner . . . attempts extra-judicial patent enforcement with scare-the-customer-and-run tactics that infect the competitive environment of the business community with uncertainty and insecurity. . . . Before the Act, competitors victimized by that tactic were rendered helpless and immobile so long as the patent owner refused to grasp the nettle and sue. After the Act, those competitors were no longer restricted to an in terrorem choice between the incurrence of a growing potential liability for patent infringement and abandonment of their enterprises; they could clear the air by suing for a judgment that would settle the conflict of interests.

The Federal Circuit explained that the district court "misinterpreted the term ‘uncertainty’ in the Act." "The proper inquiry should not have been whether a party is ‘certain’ that its legal position and defense theories are sound, because litigation is rarely ‘certain,’ even if one is confident of one’s position. ... " "‘Uncertainty’ in the context of the Act refers to the reasonable apprehension created by a patentee’s threats and the looming specter of litigation that result from these threats."

The Federal Circuit also found that the district court abused its discretion in its dismissal order by focusing on the anticipatory nature of the suit: "We apply the general rule favoring the forum of the first-filed case, ‘unless considerations of judicial and litigant economy, and the just and effective disposition of disputes, requires otherwise.’"

The Court reasoned that whether a party intended (by filing a declaratory judgment action) to preempt another’s infringement suit is merely one (non-dispositive) factor. "The considerations affecting transfer to or dismissal in favor of another forum do not change simply because the first-filed action is a declaratory action."

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