The Court Gives Roadmap to Patent Trolls on How to Obtain Lucrative Settlements from Customers without Declaratory Judgment Recourse from Manufacturers.

Stephen Parker | April 11, 2014

Microsoft v. DataTern, Inc. and SAP v. DataTern, Inc. (Precedential Opinion).

April 4, 2014

Before Chief Judge Rader, Prost and Moore.  Opinion by Moore.  Opinion dissenting-in-part by Rader.

Summary

DataTern, Inc., a company established to exploit IP opportunities (aka patent troll), sued hundreds of customers of Microsoft and SAP alleging infringement of its’ patents for a software product that facilitates interfacing of object-oriented applications with relational databases, seeking lucrative settlements from consumers disinterested in combating a full patent lawsuit without suing Microsoft and SAP.  Despite DataTern’s effort to avoid litigation with Microsoft and SAP, who as manufacturers of the products were well equipped and interested to seek legal recourse, Microsoft and SAP successfully filed declaratory judgment actions in New York district court and were awarded summary judgments for non-infringement.  DataTern appealed to the CAFC.   Although the CAFC affirmed the district court’s decision, as explained in the dissenting-in-part opinion of Chief Judge Rader, the CAFC’s opinion “creates a roadmap [for patent troll’s] to avoid declaratory judgment” actions by taking steps to ensure that their claim charts presented to allegedly infringing customers reference only customer activity and not activity of the product manufacturers.

Details

DataTern sued hundreds of customers of Microsoft and SAP alleging infringement of two patents for a software product that facilitates interfacing of object-oriented applications with relational databases – i.e., U.S. Patent Nos. 5,937,402 and 6,101,502.  DataTern’s litigation strategy was to sue customers of Microsoft and SAP and not to sue Microsoft and SAP.  In fact, prior to Microsoft’s action for declaratory judgment, DataTern’s CEO expressly told Microsoft that “DataTern was not interested in suing Microsoft.”

Both Microsoft and SAP filed declaratory judgment actions in the district court for the southern district of New York, and the district court denied DataTern’s motion to dismiss for lack of subject matter jurisdiction for the declaratory actions and granted summary judgment of non-infringement to both Microsoft and SAP.  DataTern appealed to the CAFC.   The CAFC affirmed-in-part and reversed-in-part the district court’s granting of subject matter jurisdiction and of summary judgment.

Declaratory Judgment Subject Matter Jurisdiction

According to the CAFC, the “threshold question for declaratory judgment jurisdiction is ‘whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory action.”  As explained in the dissenting-in-part opinion by Chief Judge Rader, “[t]he test for proper declaratory judgment jurisdiction … is not a rigid, inflexible test.”

In this case, the CAFC determined that declaratory judgment jurisdiction existed related to all challenges of the ‘502 patent and to SAP’s challenge of the ‘402 patent because DataTern’s original allegations of infringement against the end customers carried an implied assertion that [either Microsoft or SAP] was inducing or contributing to infringement.  The CAFC based this determination largely on claim charts provided by DataTern to accused infringers, which showed that (1) SAP provided customers with necessary components to infringe the patents as well as instruction manuals for using the components in an infringing manner and that (2) Microsoft encouraged the exact use DataTern asserted as direct infringement.

However, the CAFC expressed that there was no subject matter jurisdiction for Microsoft’s challenge of the ‘402 patent because, in contrast to the other challenges, the claim charts for that claim did not impliedly assert that Microsoft induced infringement because they did not suggest that Microsoft encouraged the acts of direct infringement.  The court expressed that simply selling a product that can be used in an infringing manner is not sufficient to create jurisdiction for inducement of infringement.   In addition, the CAFC also expressed that the claim charts did not impliedly assert contributory infringement because they did not imply or suggest that Microsoft’s product is not a “staple article or commodity of commerce suitable for non-infringing use.”  In addition, the CAFC also emphasized that in relation to the claim charts pertaining to Microsoft’s customers alleged infringements of the ‘402 patent, the claim charts showed that the customers – not Microsoft – performed several key limitations (i.e., including “defining” and “providing” steps at the center of the infringement dispute).

1.   Customer Suits:

The CAFC also expressly stated that a party does not have a right to bring a declaratory judgment action solely because their customers have been sued for direct infringement.

2.   Indemnification:

The CAFC also expressly stated that if a party had an obligation to indemnify the alleged infringers, they would have standing to bring suit because they would be standing in the shoes of the alleged infringers.  However, the CAFC explained that a customer’s request for indemnification does not afford this standing, absent a legal obligation for such indemnification.

3.   Covenant Not To Sue:

The CAFC also expressly rejected Microsoft’s argument that DataTern’s refusal to grant Microsoft a covenant not to sue warranted jurisdiction because “a patentee has no obligation to make a definitive determination, at the time and place of the competitor’s choosing, that it will never bring an infringement suit.”

4.   Aggressive Enforcement Strategy:

The CAFC also expressed that a patentee’s aggressive enforcement strategy, even in the absence of direct threats against the declaratory plaintiff, may sometimes support jurisdiction, but noted that in this case “DataTern’s litigation strategy appears to involve suing software users, not software suppliers.”

Summary Judgment Non-Infringement

Claim 1 of the ‘502 patent recited:

A method for interfacing an object oriented software application with a relational database, comprising the steps of:

selecting an object model;

generating a map of at least some relationships between schema in the database and the selected object model;

employing the map to create at least one interface object associated with an object corresponding to a class associated with the objected oriented software application; and

utilizing a runtime engine which invokes said at least one interface object with the object oriented application to access data from the relational database.

Here, the parties agreed that SAP’s and Microsoft’s products would not infringe if the terminology “object model” required “object classes.”  While DataTern asserted that the specification does not require such an interpretation, the district court concluded and the CAFC agreed that object model means a “template with a predetermined standardized structure both relating to an object-oriented software application and including object classes and inheritance relationships among classes.”   The CAFC stated that the plain and ordinary meaning of “object model” requires classes and that all of the evidence of record supported this plain and ordinary meaning.  The CAFC noted that the inventor of the ‘502 patent even testified that an object model includes a set of classes and the process described in the ‘502 patent makes clear that the object model must include classes.

Side note: While the Microsoft and SAP appeals were not consolidated cases, Microsoft incorporated by reference arguments in SAP’s briefing.  The CAFC explained that such incorporation by reference was only allowed in consolidated cases and that such incorporation could not be used to exceed word count.  However, based on the CAFC’s interpretation of the terminology “object model,” the CAFC affirmed granting of summary judgment of non-infringement for Microsoft.  Of course, the CAFC was able to consolidate its written opinion.

Scope of Summary Judgment in Declaratory Judgment Action

The district court’s order granted summary judgment to all products “that were or could have been accused of infringing” the patents.  However, the CAFC held that the district court erred by granting summary judgment of non-infringement to all products, stating that “Declaratory judgment jurisdiction must be determined on a product-by-product basis.”  Here, the claim charts of SAP, for example, only impliedly asserted indirect infringement of one specific product, BusinessObjects, not any other products.  Thus, regardless of the complaint and counterclaims invoking other products generally, the scope of summary judgment is limited to this product.

Chief Judge Rader’s Dissenting-in-Part Opinion

Chief Judge Rader argued that “[t]he test for proper declaratory judgment jurisdiction … is not a rigid, inflexible test.”  Judge Rader expressed that the majority decision takes on special importance because it outlines a lucrative way to sue numerous smaller commercial entities without recourse from the manufacturers by creating a roadmap to avoid declaratory judgment action.  “The practical effect of this holding creates a roadmap to allow [patent trolls] to keep [manufacturers] on the sidelines while running up wins against customers, who are often smaller and less-equipped to defend themselves,” according to Judge Rader.  Judge Rader admonished the majority for detailing how a patentee can defeat a declaratory judgment action by how it crafts its claim charts.   Judge Rader explained that the flawed roadmap consequence of the majority’s opinion can be avoided by avoiding a rigid, inflexible test but rather to focus on the fundamental question of “whether the facts alleged, under the circumstances, show that there is a substantial controversy, between the parties” sufficient for declaratory action, rather than relying on a “lone distinction on one factor (the source of the documents cited in claim charts).”

Take Away

1.   Summary Take Away:  In the words of Chief Judge Rader, “[t]he practical effect of this holding creates a roadmap to allow [patent trolls] to keep [manufacturers] on the sidelines while running up wins against customers, who are often smaller and less-equipped to defend themselves.”

2.   Patent Troll Take Away (i.e., The Patent Troll Road Map):

a.   File law suits only against customers.  While aggressive litigation can lead to declaratory judgment jurisdiction, the CAFC expressed that this would not suffice when none of the litigations were against manufacturers (i.e., suppliers).

b.   When alleging infringement by customers, create claim charts that:

i.   List limitations performed or implemented by the customers;

ii.   Do not include information that implies or shows inducement by the manufacturer.

c.   When crafting claim charts or otherwise alleging infringement, where possible limit the number of manufacturer products listed because the scope of any summary judgment action by the manufacturer would be limited to the identified products

3.   Manufacturer Take Away:

a.   If faced with a patent troll that follows the CAFC patent troll road map, use Judge Rader’s arguments in the dissenting-in-part opinion – i.e., explaining that claim charts alone are not the only factor and that the determination of jurisdiction is based on totality of the circumstances.

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