Monday, October 25, 2004

CAFC case on declaratory judgments: Capo v. Dioptics

The factual background of the case depicts a frequent theme in patent law. A patent holder (here, Dioptics) becomes aware that an entity (here, Capo) may be infringing claims of its patents. The patent holder brings up the issue to the possibly infringing entity ("competitor"). The intensity of the dialog escalates. The patent holder talks about patent litigation. At some point, the competitor, fearing that the threats of patent litigation are real and business-threatening, files a declaratory judgment action in federal district court to resolve the issue once and for all. That is, the competitor (here, Capo) files suit in court to obtain a determination that its commercial products do not infringe the claims of the patentee (here, Dioptics). In this particular case, the district court dismissed the declaratory judgment action, but the Court of Appeals for the Federal Circuit determined that the district court was wrong, and that the competitor (Capo) did have a right to obtain a determination of whether or not its products infringed the claims of the patent of Dioptics. Successful declaratory judgment filings give the competitor some advantages, as the competitor gets to make the initial choice of where the action will be (venue) and when it will commence.

In Capo v. Dioptics, the Federal Circuit reviewed (under the abuse of discretion standard, Wilton v. Seven Falls, 515 US 277 (1995)) a district court's decision dismissing a declaratory judgment [DJ] action, and vacated the dismissal. Text within the case gives guidance to patent holders on "what not to do" when seeking to license patents to competitors.

The Federal Circuit cited several cases on DJ actions, including Webb v. Southern, 742 F.2d 1388 (CAFC 1984), Indium v. Semi-Alloys, 781 F.2d 879 (CAFC 1985), and Arrowhead v. Ecolochem, 846 F.2d 741 (CAFC 1988). The Federal Circuit noted that there must be well-founded reasons for declining to entertain a DJ action. Public Affairs v. Rickover, 369 US 111 (1962). On the facts presented in the Capo case, the Federal Circuit did find an abuse of discretion in dismissing the DJ action. [Minnesota Mining v. Norton, 929 F2d 670 (CAFC 1991).]

The Federal Circuit found significant that the patent holder's threats were aimed not a negotiation, but at impeding a competitor's commercial activity. The Federal Circuit also observed that the competitor is not required to verify the extent to which the patent holder has studied the competitor's accused product before the competitor starts a DJ action. That the patent holder declined to file an infringement action (here, based on lack of knowledge of the competitor's product) does not mean that the competitor does not have a reasonable apprehension of suit. To determine whether a DJ action is appropriate, one takes an objective measure of the patentee's words and actions. [citing to BP Chemicals, 4 F.3d at 939; Arrowhead, 846 F.2d at 736.]

Within the decision, the Federal Circuit cited Learned Hand's remark about certain patents functioning as "scarecrows." Bresnick v. U.S. Vitamin, 139 F.2d 239 (CA2 1943). [At some other time, I believe Judge Hand referred to bad patents as derelict ships.]

As a minor point, I note that the disagreement between the two companies started in September 2002 when the presidents of both companies met at a Wal-Mart suppliers meeting. Dioptics is a maker of sunglasses and Capo was buying from Dioptics but decided to become a maker. Of relevance to Knorr-Bremse, the competitor Capo engaged patent counsel to design around the Dioptics product and to furnish a noninfringement opinion. [Note that this behavior is contrary to that discussed by Mark Lemley in "rational ignorance."] The president of the patentee Dioptics cautioned the competitor Capo about "charging down a path here that's going to end up into a multi-million dollar law suit." The president also mentioned not having any choice but to defend the patents against infringement.


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