In this combined decision, the U.S. Court of Appeals for the Federal Circuit agreed with the district court that an agency of a foreign government cannot hide behind sovereign immunity to shield itself from a declaratory judgment action where it had tried to license the patents in suit. Intel Corp. v. CSIRO, Case No. 06-1032; Microsoft Corp. v. CSIRO, Case No. 06-1040 (Fed. Cir. July 14, 2006) (Michel, C.J.).

CSIRO, Australia’s national science agency, is the assignee of the patent in suit directed to wireless local area networks. CSIRO asserts that the patent covers the IEEE standards 802.11a and 802.11g, i.e., the preferred specifications for high-speed data transfer. CSIRO initiated licensing negotiations with Dell, Intel, Microsoft and others. It proposed licensing terms, emphasizing that its offer was "available for only a limited time." In the case of Dell, CSIRO followed up with a formal license, noting that "this offer is only open for acceptance for a period of 187 days, after which time the licenses under this Voluntary Licensing Program will not be available."

Following CSIRO’s attempts to license the patent to various American companies, declaratory-judgment actions were filed. Intel, Dell and others sought declaratory judgment of non-infringement and invalidity. CSIRO moved to dismiss the complaint for lack of subject-matter jurisdiction, based on the Foreign Sovereign Immunities Act (FSIA). The district court denied the motion, finding that there was an actual case or controversy and that the "commercial activity" exception set forth in the FSIA applied.

CSIRO filed a timely notice of appeal and the district court certified the issue for interlocutory appeal, noting that it was unaware of any cases "expressly holding that initiation and involvement in licensing negotiations over a U.S. patent constitutes commercial activity sufficient to vitiate sovereign immunity under the FSIA," although it was "difficult to conceive of how CSIRO’s conduct could be characterized as anything other than commercial."

Pursuant to the FSIA, a foreign state is presumptively immune from the jurisdiction of United States courts, and unless a specified exception applies, a federal court lacks subject-matter jurisdiction over a claim against a foreign state. CSIRO argued that patent licensing negotiations that do not result in a fully executed, binding contract do not qualify as "commercial activity." "Commercial activity" is statutorily defined to mean "either a regular course of commercial conduct or a particular commercial transaction or act." CSIRO conceded that if its negotiations with potential licensees had been successful (i.e., if the proffered license agreement had been signed), it would not be entitled to claim immunity under the FSIA because the commercial activity exception would apply. In the alternative, CSIRO argues that the declaratory judgment suits are not "based upon" the alleged commercial activity. The Federal Circuit rejected both arguments.

Citing the Supreme Court decision in Republic of Argentina v. Weltover, the Federal Circuit explained that the meaning of "commercial activity" in the context of the restrictive theory of sovereign immunity and the public/private dichotomy it creates, occurs when a sovereign ‘exercise[s] only those powers that can also be exercised by private citizens.’" The Court went on to hold that "CSIRO’s acts of (1) obtaining a United States patent and then (2) enforcing its patent so it could reap the profits thereof – whether by threatening litigation or by proffering licenses to putative infringers – certainly fall within [that] category. Indeed, we have expressly recognized, in another context, that a patentee’s attempt to conduct license negotiations is a commercial activity.’"

The Court also held that a contract need not be fully consummated in order to qualify as commercial activity and that the present declaratory-judgment actions are, within the meaning of the FSIA, "‘based on’ CSIRO’s commercial acts of obtaining and asserting a United States patent." Noting that to the extent that CSIRO made certain representations as to the scope and validity of [its] patent when it proffered licenses . . . these are central to [plaintiff’s] claims of non-infringement, invalidity and patent misuse."

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