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Licensees Entitled to Seek Declaratory Judgment Despite a License

The U.S. Court of Appeals for the Federal Circuit found that the district court erred in granting a motion to dismiss for lack of subject-matter jurisdiction, concluding that a controversy existed notwithstanding an existing license between the parties.  Powertech Technology Inc. v. Tessera, Inc., Case No. 10-1489 (Fed. Cir., Sept. 30, 2011) (Dyk, J.).

The plaintiff, Powertech Technology, Inc. (PTI) is a licensee of various patents assigned to Tessera, Inc., including the patent-in-suit, which is directed to a process of semiconductor chip packaging.   In 2007, Tessera filed a complaint against various parties before the International Trade Commission (ITC) and in the U.S. District Court for the Eastern District of Texas, alleging infringement of several Tessera patents, including the patent-in-suit, through the importation and sale of certain semiconductor chips.   Tessera licensed Powertech to manufacture both of the groups of accused semiconductor chips that were in issue before the ITC and in the Texas action.  Though Powertech was not named as a defendant in the above action, some of the accused companies were customers who directly or indirectly purchased their accused chips from Powertech. 

During the pendency of the ITC investigation, Powertech continued to make royalty payments “under protest” to Tessera because it believed certain accused chips did not infringe Tessera’s patent and that the patent was invalid.   Powertech subsequently filed a declaratory action for non-infringement and invalidity of the patent in the U.S. District Court for the Northern District of California.   Tessera responded by filing a motion to dismiss for lack of subject-matter jurisdiction; arguing that no controversy could exist so long as Powertech remained a licensee of the patent in question.   

The district court granted Tessera’s motion, finding that Powertech’s products could not have been at issue in the ITC action because “PTI’s products [were all] manufactured pursuant to a license with Tessera.”  The court also concluded that no actual controversy arose from the license agreement itself because Powertech was required to pay royalties irrespective of whether its products were covered by the patent.  Finally, the district court, acting sua sponte, held that even if an actual controversy existed, the court would decline to hear the case because judicial efficiency favored hearing the action with the pending E. D. Texas district court action.  Powertech appealed.

The Federal Circuit reversed, rebuffing Tessera’s argument that Powertech must be in breach of its license agreement to create a case or controversy.  Rather, as the Court explained, under the Supreme Court MedImmune decision Powertech need not be in breach of its license to challenge the validity or infringement of the patent.  Moreover, the Federal Circuit noted that in the ITC action, Tessera alleged that Powertech had underpaid its royalties or paid them late.  These allegations alone created a controversy as to whether certain sales of PTI’s products were unlicensed and infringing.

The Federal Circuit also concluded that the dispute between Powertech and Tessera as to whether the license agreement required royalty payments to be tied to valid patent coverage was sufficient to support declaratory judgment jurisdiction.

Finally, the Federal Circuit noted that the district court erred in finding that if a controversy existed, the dispute should be heard as part of Tessera’s action in Texas.  Reasoning that the forum selection clause in Powertech’s license agreement clearly called for disputes to be filed in California, the Court found the district court’s refusal of jurisdiction of the action to be an abuse of discretion.

© 2019 McDermott Will & Emery

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