Breckenridge Pharm., Inc. v. Metabolite Labs., Inc., Nos. 05-1221, 05-1428, 2006 WL 895208 (Fed. Cir. Apr. 7, 2006)
The Federal Circuit’s recent holding in Breckenridge Pharm., Inc. v. Metabolite Labs., Inc., Nos. 05-1221, 05-1428, 2006 WL 895208 (Fed. Cir. Apr. 7, 2006), has made life easier for forum shoppers by establishing that a defendant in a patent declaratory judgment action may have the necessary "minimum contacts" with a forum state to confer personal jurisdiction simply by virtue of the defendant’s relationship with an exclusive licensee headquartered or otherwise doing business in the forum state – even if the defendant has no other contact with that state. Many patent holders would not expect this result.
The practical impact of the ruling will be felt, as in Breckenridge, in the context of a declaratory judgment action filed by a potential infringer against a patentee. Potential infringers often use declaratory judgment actions to shop for the forum that provides the best chance of success against the patentee. Breckenridge makes it easier for the potential infringer to bring the action in a favored forum by providing a more attenuated basis for a court to find personal jurisdiction over a patentee.
Case Analysis
In 1985, the Supreme Court set forth the current paradigm for determining personal jurisdiction in Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985). Under that paradigm, if a defendant is not subject to general personal jurisdiction, then the district court determines whether the defendant is subject to specific personal jurisdiction because the cause of action "arises out of" or "relates to" the defendant’s in-state activity. See Burger King, 471 U.S. at 472-73. The determination of specific personal jurisdiction involves a two-part inquiry. "First, the state long-arm statute must permit service of process on the defendant." Breckenridge, 2006 WL 895208, at *2 (citing Fed.R.Civ.P. 4(e), 4(k)(1)(A)). "Second, the exercise of personal jurisdiction must satisfy due process requirements." Id. (citing Burger King, 471 U.S. at 474-76).
The due process requirements for personal jurisdiction are satisfied where the defendant maintains sufficient "minimum contacts" with the forum state such that a lawsuit in that state does not offend "traditional notions of fair play and substantial justice." Id. (citing Burger King, 471 U.S. at 476-78). In patent litigation, the issue of what constitutes "minimum contacts" for due process purposes is governed by Federal Circuit law. See id. at *3 (citation omitted). The Federal Circuit "employs a three-prong test, in which [it] determine[s] whether: (1) the defendant purposefully directed its activities at residents of the forum, (2) the claim arises out of or relates to those activities, and (3) assertion of personal jurisdiction is reasonable and fair." Id. at *4 (citation omitted).
In Breckenridge, the Federal Circuit focused on the due process requirements necessary for a district court to have personal jurisdiction over an out-of-state defendant patentee in a declaratory judgment action brought by a potential infringer. The patentee Metabolite Industries, Inc. ("Metabolite") faced a declaratory judgment action filed in the Southern District of Florida by potential infringer Breckenridge Pharmaceutical, Inc. ("Breckenridge"). Id. at *2. Metabolite contended it had no direct contact with Florida other than having sent cease and desist letters to three of Breckenridge’s Florida customers. See id. at *1-2. Metabolite, however, also had an exclusive license agreement with PamLab L.L.C. ("PamLab") authorizing PamLab to manufacture and sell products covered by Metabolite’s patents throughout the United States, including Florida. See id. at *1. PamLab actively sold licensed products in Florida, but was headquartered in another state.
After deciding that Metabolite was subject to service of process in Florida, the Breckenridge court turned its attention to the due process analysis and Metabolite’s exclusive license agreement with PamLab. The Federal Circuit reasoned that, in determining personal jurisdiction, a patentee need not direct its activities at the potential infringer to have the necessary "minimum contacts" with the forum state. See id. at *5. Thus, it is proper to look "to the defendant’s [i.e. patentee’s] relationship with its exclusive licensee to determine the extent of the defendant’s forum state contacts." Id.
The Breckenridge court held the mere existence of an exclusive license agreement does not establish "minimum contacts" if the patentee has no relationship with its licensee beyond the receipt of royalty income. Id. at *7. The possibility of establishing "minimum contacts," and thus personal jurisdiction, increases, however, when the license agreement contains terms and conditions beyond the payment of royalties from the licensee to the patentee. As the Federal Circuit explained:
[T]he crux of the due process inquiry should focus first on whether the defendant has had contact with parties in the forum state beyond the sending of cease and
desist letters or mere attempts to license the patent at issue there. Where a defendant-licensor has a relationship with an exclusive licensee headquartered or doing business in the forum state, the inquiry requires close examination of the license agreement. In particular, our case law requires that the license agreement contemplate a relationship beyond royalty or cross-licensing payment, such as granting both parties the right to litigate infringement cases or granting the licensor the right to exercise control over the licensee’s sales or marketing activities.
Id. (emphasis added). The Federal Circuit concluded these requirements were met here, where "Metabolite has established a relationship with… its exclusive licensee which promotes, advertises and sells [the licensed product] in Florida, and with which Metabolite coordinates cease and desist letters and infringement litigation." Id. at *10.
Practical Impact
Most businesses would not expect that a license agreement with one company could create jurisdiction for a lawsuit brought by a different company, but that is the result of Breckenridge. A patentee facing a declaratory judgment action now must examine its existing license agreements to determine if the patentee has unwittingly exposed itself to suit in states in which it has no contact other than the license, or its licensee’s activities in the forum state. Moreover, in negotiating future licenses that include terms beyond the requirement of royalty payments, a patentee must consider the possibility of being hailed into court in any state in which the potential licensee is headquartered or otherwise does business.
Unfortunately for patentees, the Federal Circuit provides little guidance as to what factors in a license agreement (other than the two examples listed above) establish the "relationship beyond royalty or cross-licensing payment[s]" that may result in a court finding personal jurisdiction over a patentee. Nor does it state whether its finding of actual activity pursuant to the license is essential to establishing jurisdiction. That will be left to the courts to develop in subsequent cases.
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
