ACCUSED'S DILEMMA
Federal Circuit May Have Limited Strategies for Responding to Infringement Claims
By William B. Bunker

Receipt of a cease-and-desist letter accusing a client of patent infringement is a troubling event. With the U.S. Court of Appeals for the Federal Circuit's decision in Serco Services Co. L.P. v. Kelley Co. Inc., 51 F.3d 1037 (Fed. Cir. 1995), such an incident became a little more troubling. This case undermined, to some extent, one of the accused patent infringer's most potent weapons -- a declaratory judgment action for noninfringement brought in its local court.

Since patent infringement can occur innocently, a cease-and-desist letter or some other type of demand letter in connection with a patent often takes an accused infringer by surprise. The patent owner, to establish infringement, is not required to prove the alleged infringer had prior knowledge or even "inquiry notice" of the patent. Nor is the owner required to give notice to the industry of its patent or to "mark" the patent number on its product or literature (although the patent-marking statute, 35 U.S.C. Section 287(a), provides that the failure to so mark limits the patent owner's right to recovery of monetary damages in infringement cases). Even more disconcerting, if the patent owner has no product or literature, then the accused infringer is still liable for damages.

Once aware of the patent, the accused infringer is often confused by it. On its face, the patent may seem to be directed to completely different technology, often obsolete. Clients may not realize that the scope of the patent is not solely determined by the drawings or their description, but the "claims" of the patent -- the written paragraphs at the end of the patent that describe, often very broadly, the scope of the invention claimed in the patent.

These claims are often difficult to read without assistance from patent counsel. Moreover, the claims must also be interpreted using the "file history" of the patent -- a record of the transactions and correspondence between the patent owner (or, more typically, its patent lawyer or patent agent) and the U.S. Patent and Trademark Office. Although publicly available, a patent's file history is often difficult to obtain and once obtained, difficult to analyze.

Even with the assistance of patent counsel, the issue of infringement is usually fuzzy. Logic and reason are sometimes stretched to conclude that there is infringement. On the other hand, patent claims are usually drafted broadly for the purpose of ensnaring competitors. Broad claims often transcend advances in technology. Moreover, the patent itself, enjoying a presumption that it was validly granted, may be difficult and expensive to attack on grounds of invalidity.

In the weeks after receipt of a cease-and-desist letter, the accused infringer has often incurred great expense and may be no closer to a favorable resolution. In fact, with the knowledge of the patent and the alleged infringement, he may be worse off.

This is because of the doctrine of "willfulness." The court in its discretion may award up to three times actual damages to the patent owner. 35 U.S.C. Section 284. Moreover, in an "exceptional" case, the district court has the discretion to award lawyers' fees to the prevailing party. 35 U.S.C. Section 285. Willful infringement has consistently been found to be a basis for both treble damages and lawyers' fees assessed against the infringer.

Once the competitor is aware of the patent and the infringement accusation, continued competitive activity will usually be viewed as willful infringement. Shiley Inc. v. Bentley Laboratories Inc., 794 F.2d 1561 (Fed. Cir. 1986).

Thus, the accused infringer has a dilemma. Should it acquiesce to the patent owner's demand to either cease and desist or pay royalties (neither of which are very attractive options), or should it continue business in the face of the accusation of infringement and possibly incur liability for damages, treble damages, or even lawyers' fees?

One alternative is to attack the validity of the patent. One of the accused infringer's few aggressive courses of action is to file in its local district court a declaratory judgment action for noninfringement and/or invalidity. Not only is it typically more convenient and less expensive to have the home-court advantage, a declaratory judgment action can also bring the matter to a quicker and more favorable resolution. The inconvenience of having to litigate the patent in a foreign jurisdiction may urge the defendant patent owner toward settlement. In fact, patent owners will often try to avoid outright accusations of infringement to eliminate the case-or-controversy requirement for a declaratory judgment action.

Heretofore, it was believed that if an accused infringer was the first to file a declaratory judgment action, it would prevail over any subsequently filed infringement action brought by the patent owner. However, this may have changed significantly after Serco.

On December 23, 1992, Serco received a letter asserting infringement of Kelley's U.S. Patent No. 4,448,325, directed to a truck locking device. The letter concluded: "Unless we receive a reply from you no later than February 1, 1993 to the effect that your company is discontinuing the sale of this infringing truck restraint, the Kelley Company will take legal action to stop such infringement." Serco responded by letter that it did not infringe the patent.

Nothing was heard from Kelley until September 8, 1993, when Serco received another letter, ending with the warning: "Unless you confirm to us by September 20, 1993 that Serco will discontinue the manufacture or sale of any infringing device, Kelley will commence a lawsuit to enjoin further infringement in addition to seeking other available remedies."

On September 17, Serco filed a declaratory judgment action in the Northern District of Texas. On September 20, Kelley filed suit in the Eastern District of Wisconsin, seeking damages and injunctive relief and a motion to dismiss Serco's declaratory judgment action in Texas. The district court granted the motion.

In affirming the dismissal, the Federal Circuit had to deal with its own prior decision in Genentech Inc. v. Eli Lilly & Co., 998 F.2d 931 (Fed. Cir. 1993). In that case, the Federal Circuit embraced the "first-filed" rule for declaratory judgment actions. The Federal Circuit vacated a district court dismissal and found the first-filed rule more compatible with "the purpose of the Declaratory Judgment Act to enable a person caught in controversy to obtain a resolution of the dispute, instead of being forced to await the initiative of the antagonist." Genentech at 937. The only stated reason for the district court's discretionary dismissal of the declaratory judgment action was because one party subsequently brought an action against Genentech elsewhere. The Federal Circuit held that reason "insufficient to warrant refusal to maintain the action."

In Serco, on the other hand, the district court had considered the availability of witnesses and documents in each forum and found that the action was brought mainly to preempt Kelley's infringement suit in Wisconsin. The Federal Circuit concluded that it was not "an abuse of discretion to consider that Serco intended to preempt Kelley's infringement suit ... as one factor in the decision whether to dismiss the declaratory suit in favor of Kelley's subsequent infringement action."

The problem here is that an attempt to preempt an infringement suit is almost always the intent of an accused infringer. If that factor is given substantial weight, earlier filed declaratory judgment actions are much more likely to be dismissed in the future. Thus, this case does not bode well for accused infringers already in the throes of a dilemma.

There may be some strategies still available. For example, the accused infringer should consider filing the action before a specific "drop-dead" date is given by the patent owner. The accused infringer should attempt to build a record that indicates that it did not believe the patent owner's infringement litigation was imminent. Of course, that option can be eliminated if the patent owner has set a definite date or time by which the accused infringer must acquiesce.

Second, the accused infringer should consider the availability of witnesses and documents. For example, if the accused infringer has corporate headquarters in one location but production facilities or a research and development center in another location, a careful analysis of the availability of witnesses and documents should be made before automatically bringing the action in the jurisdiction of the corporate headquarters.

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