Addressing declaratory judgment jurisdiction based infringement allegations against customers, the U.S. Court of Appeals for the Federal Circuit affirmed in part and reversed in part the district court’s finding of jurisdiction.  Microsoft v. DataTern, Inc., Case No. 2-13-1184, consolidated with SAP AG and SAP America, Inc. v. DataTern, Inc., Case No. 2013-1185 (Fed. Cir., Apr. 4, 2014) (Moore, C.J.) (Rader, J., dissenting-in-part).

DataTern sued Microsoft and SAP customers in Texas, providing claim charts alleging infringement by use of Microsoft and SAP software.  Several of the customers demanded indemnification.  Microsoft and SAP filed declaratory judgment actions in the U.S. District Court for the Southern District of New York, which DataTern moved to dismiss for lack of subject matter jurisdiction.  After the district court denied DataTern’s motion to dismiss, DataTern appealed.

The Federal Circuit rejected the argument that where there is no duty to indemnify, jurisdiction existed “solely because [Microsoft and SAP] customers have been sued for direct infringement.”  The Court went on to hold that even if an obligation to indemnify existed, Microsoft and SAP would not be entitled to bring a separate declaratory judgment action in a different jurisdiction but would have to act to indemnify in the existing (customer) action.  The Court was careful to note that “[w]e do not address whether Appellees would be entitled to file a declaratory judgment action if they were obligated to indemnify a customer who had not already been sued by DataTern.”

The Court also rejected the argument that the customer lawsuits automatically gave rise to jurisdiction over induced infringement allegations.  To establish a substantial case or controversy concerning inducement, the patentee must make sufficient allegations to establish a reasonable potential that the accused inducer took an affirmative act to encourage infringement with the knowledge that the induced acts constituted patent infringement.

The Federal Circuit analyzed the customer claim charts to parse where DataTern based its allegation of direct customer infringement on instructions from Microsoft and SAP in user manuals and documentation.  In those instances, where the claim charts specifically indicated that Microsoft and SAP had provided the instructions, the Federal Circuit found DJ jurisdiction.  This resulted in DJ jurisdiction for Microsoft in one of two patents and for SAP on both patents.

The Federal Circuit rejected the district court’s reliance on DataTern’s counterclaims, for DJ jurisdiction, or DataTern’s allegations that referenced refusal to grant a covenant not to sue—finding these were post complaint facts that cannot support jurisdiction at the time of the filing of the complaint.

Microsoft also argued that DataTern’s aggressive litigation strategy, including suing more than 100 entities for infringement of the patents-in-suit, supported the existence of a substantial controversy.  The Federal Circuit was “sympathetic” to the argument, but noted that DataTern’s litigation strategy focused on suing software users, not suppliers, and that there was no record evidence that Microsoft encouraged the acts that DataTern alleges result in direct infringement.

Judge Rader dissented in part and would have held that the totality of the circumstances supported declaratory judgment jurisdiction over both patents.  He argued that the majority improperly reviewed each alleged fact in isolation.  Rader argued that Microsoft’s lawsuit would resolve DataTern’s claims in the most efficient manner in a single focused lawsuit.  DataTern and other patent licensing plaintiffs “would like to find a way to keep Microsoft and other major corporations on the sidelines while seeking numerous settlements with their customers who cannot afford the cost of a major lawsuit.”

Practice Note:  Suppliers may have some opening to bring a declaratory judgment action to resolve cases against their customers, but the facts have to align.  In all likelihood Judge Rader is correct and NPEs will use this opinion to carefully avoid supplying the facts needed for declaratory judgment jurisdiction.   As noted by the dissent, the majority decision was of “special importance because it shows DataTern and its successors a way to achieve that lucrative objective.”