Addressing the issue of declaratory judgment jurisdiction, the U.S. Court of Appeals for the Federal Circuit vacated the district court summary judgment finding declaratory judgment jurisdiction. The district court held that declaratory judgment jurisdiction was present when a single customer of the challenger was being sued for patent infringement by the patent owner/DJ defendant. Microchip Technology Inc. v. Chamberlain Group, Inc., Case No. 05-1339 (Fed. Cir. Mar. 15, 2006) (Lourie, J.).
Microchip is a manufacturer of microprocessors for use in garage door openers (GDOs). Microchip also provides optional software for use with its microprocessors that enables the GDOs to be programmed without requiring the user to input a long, cumbersome code. Chamberlain is a GDO manufacturer. Earlier litigation between Microchip and Chamberlain resulted in a settlement agreement wherein Chamberlain agreed not to sue Microchip in connection with several of Chamberlain’s patents, which arguably covered a GDO with a microprocessor, memory and software.
After the settlement, Chamberlain sued one of Microchip’s customers, Wayne-Dalton Corporation, for patent infringement for selling GDOs that used Microchip’s products. Microchip then filed a declaratory judgment action against Chamberlain asserting its other customers had a reasonable apprehension of suit because of the Wayne-Dalton litigation and, as a result, Microchip itself was at legal risk.
As explained by the Federal Circuit, the purpose of the Declaratory Judgment Act is to enable a person who is at legal risk because of an unresolved dispute to obtain judicial resolution of that dispute without having to await the commencement of a legal action. In Microchip, the Federal Circuit restated its two-part test for determining whether an actual controversy exists in actions involving a claim for declaratory judgment jurisdiction: (1) a reasonable apprehension that it will face a patent infringement suit if it commences or continues the activity at issue and (2) present activity by the declaratory plaintiff that could constitute infringement, or concrete steps taken by the plaintiff with the intent to conduct such activity.
The issue before the Federal Circuit was whether Microchip’s purported apprehension of its customers being sued satisfied the first criterion for declaratory judgment jurisdiction. The Federal Circuit held that although other Microchip customers may have been at legal risk of patent infringement, no actual controversy existed between Microchip and Chamberlain. Further, the Court held that the possibility of economic loss to Microchip (due to possible loss of customers) is not a legally recognizable interest sufficient to confer declaratory judgment jurisdiction. The Court also noted that Microchip failed to establish any legal connection between it and any of its customers that had a legal interest adverse to Chamberlain, such as the existence of an indemnification agreement.
The Federal Circuit vacated the district court’s summary judgment decision and remanded the case with instructions for the district court to dismiss the action.
Practice Note
Money exposure alone is not sufficient to establish declaratory judgment jurisdiction. The threatened party must have more than a risk of economic loss; legal interests must be at stake. Settlements on behalf of a manufacturer/distributor that do not insulate those downstream in the channel of commerce (e.g., customers) should be carefully scrutinized.
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