When Cease-and-Desist Letters Create a Risk of a Declaratory Judgment Backlash: Observations from Trimble Inc. v. PerDiemCo LLC
With its recent decision in Trimble Inc. v. PerDiemCo LLC, the Federal Circuit has opened the door for declaratory judgment actions a bit wider. The Court reversed the Northern District of California’s dismissal of a patent declaratory relief action based on lack of personal jurisdiction, and limited the scope previously articulated by its 1998 decision in Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., which afforded a patentee “latitude when informing others of its patent rights without subjecting itself to jurisdiction in a forum in a foreign state.” In doing so, the Federal Circuit moved away from “special” patent-specific rules and reemphasized the Supreme Court’s general focus in exercising specific personal jurisdiction, in particular, whether the nature and extent of a patent asserter’s relationship to the forum State is sufficient to establish minimum contacts with the forum State (i.e., the personal availment test). In this post, we note certain activities that could allow a state to exercise personal jurisdiction over an out-of-state patent owner engaged in a patent licensing letter campaign.
The Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc. Personal Jurisdiction Test
In its 1998 Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc. decision, the Federal Circuit articulated the view that “[a] patentee should not subject itself to personal jurisdiction in a forum solely by informing a party who happens to be located there of suspected infringement.” According to the Federal Circuit the “[p]rinciples of fair play and substantial justice afford a patentee sufficient latitude to inform others of its patent rights [via a cease-and-desist letter that included an offer for a license] without subjecting itself to jurisdiction in a foreign forum.” Since that time, many patent enforcers have taken the position that there is a per se rule that engaging in a cease-and-desist patent enforcement/licensing campaign does not create personal jurisdiction the target’s state forum.
Twenty-Years Later, Trimble Inc. v. PerDiemCo LLC
In October 2018, some twenty years after Red Wing, a Texas Limited Liability Company called PerDiemCo sent a letter to Innovative Software Engineering, LLC (“ISE”) — a company incorporated and located in Iowa that was wholly owned by Trimble Inc. PerDiemCo’s letter accused ISE of using technology allegedly covered by several of PerDiemCo’s patents. The letter further claimed that PerDiemCo “actively licenc[es]” its patents and had entered into nonexclusive licenses with several companies after they had “collectively spent tens of millions of dollars in litigation expenses.” The letter offered ISE a nonexclusive license to PerDiemCo’s patents and attached a nondisclosure agreement to facilitate further negotiations between the parties. Adding further weight to PerDiemCo’s demands, its letter was accompanied by a draft complaint for patent infringement for possible filing in the Northern District of Iowa together with an infringement chart mapping the patents to ISE’s products.
ISE promptly forwarded the letter to Trimble — incorporated in Delaware and headquartered in Sunnyvale, California — who then responded to PerDiemCo in an attempt to resolve the matter. In reply, PerDiemCo sent Trimble a letter along with a second infringement chart accusing Trimble’s own products of infringement in addition to those of ISE. The parties continued to negotiate through December 2018, with PerDiemCo communicating with Trimble at least twenty-two times via letter, email, or telephone. By the end of this time, PerDiemCo had ultimately accused Trimble and ISE of infringing eleven patents and threatened to sue them for patent infringement in the Eastern District of Texas, going so far as to identify litigation counsel that PerDiemCo had retained for this purpose.
After exchanging twenty-two communications with PerDiemCo in three months, Trimble and ISE filed a complaint on January 29, 2019 in the Northern District of California seeking a declaratory judgment of non-infringement against PerDiemCo. PerDiemCo moved to dismiss the complaint on the ground that the district court lacked personal jurisdiction under the rule established in Red Wing that a patentee “should not subject itself to personal jurisdiction in a forum solely by informing a party who happens to be located there of suspected infringement.” The district court dismissed Trimble and ISE’s complaint, holding that it lacked specific personal jurisdiction over PerDiemCo under Red Wing, because “exercising specific personal jurisdiction over PerDiemCo would be constitutionally unreasonable.” It reached this conclusion despite having also found that PerDiem had the requisite minimum contacts since its cease-and-desist letters and subsequent communications were purposefully directed at Trimble, headquartered in the Northern District of California, and Trimble’s declaratory judgment claim arose out of or related to those activities.
Trimble and ISE appealed, arguing that the district court erred in refusing to exercise specific personal jurisdiction over PerDiemCo.
The Federal Circuit’s Reversal
On May 12, 2021, the Federal Circuit granted Trimble’s appeal, reversing and remanding back to the Northern District of California. In its analysis supporting reversal, the Federal Circuit laid out several factors to consider when deciding whether specific personal jurisdiction should be exercised against an out-of-state patent owner engaged in patent license letter campaign.
Importantly, the Federal Circuit noted the Supreme Court’s instruction in its recent 2021 Ford Motor Co. v. Mont. Eighth Jud. Dist. Ct. decision to treat “isolated or sporadic contacts differently from continuous ones.” Under this rubric, the Federal Circuit claimed Red Wing remained correctly decided with respect to the limited number of communications involved in that case but clarified there was “no general rule that demand letters can never create specific personal jurisdiction.” Rather, the Supreme Court’s directives required courts to “‘consider a variety of interests’ in assessing whether jurisdiction would be fair.”
Lesson 1: Personal Jurisdiction does not rest on any special “patent” considerations
The Federal Circuit recognized that in the years since Red Wing, the Supreme Court made it clear that personal jurisdiction cannot rest on any “special” considerations or policies unique to patent cases because personal jurisdiction is not an area in which Congress had enacted any patent-specific statutes that place patent infringement cases in a class by themselves. Rather, the Supreme Court has repeatedly emphasized that “patent law is governed by the same procedural rules as other areas of civil litigation.” In making this observation, the Federal Circuit referenced the lesson it learned from eBay Inc. v. MercExchange, L.L.C., where the Supreme Court admonished it for creating “general [patent] rules” (e.g., issuance of a permanent injunction once infringement and validity have been adjudged) and emphasized, instead, that a court’s decision to grant injunctive relief “must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.”
Lesson 2: The nature and scope of communications related to a cease-and-desist letter influence the assessment of personal jurisdiction in a state
The Federal Circuit explicitly rejected “the proposition that patent enforcement letters can never provide the basis for jurisdiction in a declaratory judgment action.” In fact, “a business need not have a physical presence in a State to satisfy the demands of due process.” In particular, an entity that repeatedly sends communications into a forum state “clearly has fair warning that its activities may subject it to that state’s jurisdiction.”
The Court explained that “negotiation efforts, although accomplished through mail, email, telephone and the like from outside the forum state, may be considered as activities ‘purposefully directed’ at residents of the forum.” Similarly, communications threatening suit or proposing settlement or patent licenses can be sufficient to establish personal jurisdiction. As an example, the Federal Circuit highlighted its 2018 decision in Jack Henry & Associates, Inc. v. Plano Encryption Technologies LLC, where it found personal jurisdiction was properly exercised over a patent holder after it had sent communications to eleven banks located in the same forum state, where the letters identified patents, asserted that the Banks were believed to be infringing the patents, and invited the banks to enter non-exclusive licenses.
The Federal Circuit also listed several additional contacts that could be relevant to the purposeful availment inquiry in declaratory judgment patent cases, including inter alia:
(i) hiring an attorney or patent agent in the forum state to prosecute a patent application that leads to the asserted patent;
(ii) physically entering the forum to demonstrate the technology underlying the patent to the eventual plaintiff, or to discuss infringement contentions with the eventual plaintiff;
(iii) the presence of “an exclusive licensee doing business in the forum state”; and
(vi) “extra-judicial patent enforcement” targeting business activities in the forum state.
In view of these examples, the Federal Circuit concluded that the purposeful availment test for personal jurisdiction was satisfied by PerDiemCo’s activities, which were far more extensive than those in Red Wing. PerDiemCo’s twenty-two contacts with Trimble and the forum state in a short period of time made it clear to the Federal Circuit that PerDiemCo’s actions went far beyond “solely informing a party who happens to be located in California of suspected infringement,” and therefore easily satisfied the minimum contacts requirement.
Lesson 3: Contacts that demonstrate a deliberate reaching out beyond a party’s home state can support personal jurisdiction in a foreign state
The Supreme Court’s 2021 decision in Ford Motor Co. v. Mont. Eighth Jud. Dist. Ct. establishes that a broad set of contacts with a forum are relevant to the minimum contacts analysis. In Ford, the Supreme Court emphasized that a defendant’s contacts “must show that the defendant deliberately reached out beyond its home—by, for example, exploiting a market in the forum State or entering a contractual relationship centered there.”
In Ford, the issue was whether the courts of Montana and Minnesota could exercise personal jurisdiction over Ford for accidents involving two Ford vehicles that took place in the states despite the two vehicles not having been sold in either state. Rather than focus on the contacts related to the specific vehicles, the Court focused on the broader efforts by Ford to sell similar vehicles in each state. It was, thus, Ford’s “veritable truckload of contacts” with both states—while not directly related to the underlying suit—that were still “relevant in assessing the link between the defendant’s forum contacts and the plaintiff’s suit.” In Ford, the Supreme Court stated that “relevance is a key part” of the minimum contacts inquiry. In other words, the “link” or “connection” between the contacts and the suit required for a court to exercise jurisdiction “simply demands that the suit arise out of or relate to the defendant’s contacts with the forum such that there is a strong relationship among the defendant, the forum, and the litigation.” This was recognized as the essential foundation of specific jurisdiction.
If, the Federal Circuit reasoned, sales of similar vehicles and the presence of dealerships in a forum could support personal jurisdiction in the tort context of Ford, then so too could nonexclusive patent licenses in the case of PerDiemCo. The Federal Circuit characterized PerDiemCo’s attempts to extract a license in this case as being more akin to “an arms-length negotiation in anticipation of a long-term continuing business relationship,” over which a district court may exercise jurisdiction.
The Court found that PerDiemCo had negotiated some ten other nonexclusive licenses, including several with large firms operating nationwide. And since Trimble is headquartered in California, the Court found that these other licenses further connect PerDiem to California. With all of the discussed connections to California, the Court determined that the minimum requirement was satisfied in this case.
In view of the lessons of Trimble v. PerDiemCo, patent owners seeking to enforce their patents in a broad licensing campaign or with an extended negotiation against a party in a foreign state should understand that they may be subject to personal jurisdiction in that foreign state. Parties who are targeted as part of a licensing campaign or involved in protracted negotiations should appreciate that a declaratory judgment action is a possibility, and one that may help them avoid being subjected to suit in an unfavorable forum.