An Arm of a State That Licenses a Patent Under a Field-of-Use License Can Nullify the Forum-Seeking Advantage Otherwise Provided by DJ Jurisdiction

A123 Sys., Inc. v. Hydro-Quebec, No. 2010-1059 (Fed. Cir. Nov. 10, 2010).

Holding:

Where a district court action involves a patent licensed by an arm of a state under a field-of-use license, and the state has waived Eleventh Amendment sovereign immunity in a later-filed action involving the same patent in another district, the action must be dismissed in the first district.

Relevant Facts:

The University of Texas System (“UT”) owned two patents directed to cathode materials for batteries, which UT licensed to Hydro-Quebec (“HQ”) under an exclusive license. A123 Systems, Inc. (“A123”) filed suit in the District of Massachusetts, seeking a declaration of noninfringement and invalidity of the patents. HQ moved to dismiss A123’s declaratory judgment suit, arguing, inter alia, that UT was a necessary and indispensable party because UT had transferred to HQ less than all substantial rights in the patents, granting HQ only a field-of-use license. HQ also argued that UT could not be joined as a defendant because UT is entitled to Eleventh Amendment sovereign immunity.

A123 countered that HQ held itself out as an exclusive licensee of all the technology claimed in the patents. A123 also argued that that UT waived its Eleventh Amendment sovereign immunity by its voluntary participation in a later infringement suit in the Northern District of Texas involving the same patents.

The district court disagreed with A123 and agreed with HQ on the first two grounds.

At the Federal Circuit, A123 repeated its arguments and further asserted that UT, even if a necessary party, was not an indispensable party under Federal Rule of Civil Procedure 19 (“Rule 19”). The Federal Circuit affirmed the district court’s decision, additionally holding that UT is an indispensable party under Rule 19 and the declaratory judgment action could therefore be dismissed.

The Federal Circuit agreed with the district court’s finding, based on testimony by executives of HQ and UT as well as the four corners of the license, that HQ received an exclusive license to only a significant portion of the field of technology, not all fields of technology described and claimed in the patents. Accordingly, UT was held to be a necessary party who must be joined in a declaratory or infringement action. The Federal Circuit also pointed to Biomedical Patent Management Corp. v. California, Department of Health Services, 505 F.3d 1328 (Fed. Cir. 2007), for the holding that a state university’s participation in one lawsuit does not amount to a waiver of immunity in a separate lawsuit.

Finally, the Federal Circuit evaluated whether UT is indispensable under the factors of Rule 19. The Federal Circuit found that Although HQ and UT undoubtedly share the same overarching goal of defending the patents’ validity, neither that goal nor UT’s decision to file suit jointly with HQ in Texas demonstrates that UT’s interests will be adequately represented by HQ in this action because HQ only has a field-of-use license. In addition, the Federal Circuit reasoned, because HQ is a field-of-use licensee and UT has retained non-overlapping rights in the patents in suit, UT may very well be able to assert infringement claims against A123 that HQ cannot, creating the risk of multiple lawsuits and of inconsistent relief. Finally, the district court considered A123’s interest in having a forum to litigate its defenses to claims of infringement, finding that A123 may assert counterclaims for a declaration of noninfringement and invalidity in the Texas action. Accordingly, the Federal Circuit determined, three of the four Rule 19(b) factors weigh in favor of holding UT to be an indispensable party. Thus, UT was held to be not only a necessary party but also an indispensable party, making dismissal appropriate.

Comments:

HQ and UT jointly initiated their infringement suit in the Northern District of Texas a month after HQ moved to dismiss A123’s declaratory judgment suit in the District of Massachusetts. Where a patent is licensed from an arm of a state, such as a university or research institute, under a field-of-use license, the state licensor apparently has absolute discretion to nullify the forum-seeking advantage otherwise provided by declaratory judgment jurisdiction to a party threatened with suit. The state licensor has an incentive to exercise this discretion to protect its patent, giving the licensee a potential advantage.

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