Nefarious Motives Could Mean No Declaratory Judgment for You

By on April 2, 2020
Posted In Patents

The US Court of Appeals for the Federal Circuit affirmed a district court’s decision to dismiss a first-filed declaratory judgment complaint, finding that equitable considerations warranted departure from the first-to-file rule. Communications Test Design, Inc. v. Contec, LLC, Case No. 19-1672 (Fed. Cir. Mar. 13, 2020) (O’Malley, J.).

Communications Test Design (CTDI) is an engineering, repair and logistics company that develops, manufactures and uses test systems for set-top boxes and multimedia devices. Contec also provides repair, test and reverse logistics for electronic hardware in a broad range of markets. Contec owns two patents related to testing set-top boxes that were designed and developed by six inventors at Contec, one of whom currently works at CTDI.

In September 2017, Contec sent a letter to CTDI to determine whether CTDI’s test systems infringed any claims in Contec’s patents. The parties exchanged numerous emails and letters over the course of a year. In September 2018, Contec’s counsel sent a letter to CTDI notifying it that efforts to obtain information had proved unsatisfactory. Counsel explained that Contec had a good-faith basis to believe that CTDI infringed its patents, and asked CTDI to indicate whether it was willing to discuss terms for a license agreement. The parties engaged in licensing discussions. On the day CTDI’s CEO agreed to provide a counterproposal, counsel for CTDI emailed Contec a copy of a declaratory judgment complaint CTDI had filed three days earlier in Pennsylvania. Three days later, Contec filed its complaint for patent infringement in New York.

Contec moved to dismiss CTDI’s complaint, arguing that CTDI filed its Pennsylvania action “in bad faith during active licensing discussions, only after inducing Contec to refrain from filing its own complaint against CTDI in a different forum.” Although it recognized that CTDI’s first-filed action was preferred under the first-to-file rule, the district court granted Contec’s motion. The district court noted that CTDI filed its suit in anticipation of Contec’s impending infringement suit. Although CTDI had every right to resort to litigation, it “was not permitted to ‘string Contec along just long enough to get the judicial drop and file this lawsuit in its own backyard,’” the district court explained. The court found CTDI’s motives, communications and conduct nefarious enough to warrant departure from the rule.

CTDI appealed, arguing that the district court abused its discretion and that there was no sound reason to depart from the first-to-file rule. The Federal Circuit disagreed, noting that trial courts have discretion to make exceptions to the general rule in the interest of justice or expediency. The Court noted that “when one of two competing suits in a first-to-file analysis is a declaratory judgment action, district courts enjoy a ‘double dose’ of discretion: discretion to decline to exercise jurisdiction over a declaratory judgment action and discretion when considering and applying the first-to-file rule and its equitable exceptions.” The Court noted that the district court had carefully considered the record and concluded that several factors warranted the first-to-file rule. These factors included CTDI’s filing of the declaratory judgment complaint in anticipation of Contec’s patent infringement lawsuit, and the fact that CTDI’s complaint interfered with ongoing negotiations and did not serve the objectives of the Declaratory Judgment Act.

The Federal Circuit noted with approval the district court’s finding that CTDI’s filing was anticipatory. But anticipation is only one factor—following Federal Circuit precedent, the district court also found that CTDI’s interference with ongoing negotiations was another reason that it would be unjust to allow the declaratory judgment action to proceed. The Federal Circuit agreed, noting that when there are ongoing negotiations, a district court may find that “the need for judicial relief is not as compelling as in cases in which there is no real prospect of a non-judicial resolution of the dispute.”

Practice Note: Parties should be mindful of their good-faith negotiations before seeking a declaratory judgment.

Jodi Benassi
Jodi Benassi focuses her practice on litigation and investigations. Jodi has experience in federal court district actions in California, Texas, Florida and Michigan and actions before the US Trademark Trial and Appeal Board (TTAB) of the US Patent and Trademark Office (USPTO). She has also conducted internal investigations on behalf of audit committees from high profile Fortune 500 organizations to Silicon Valley start-ups. Jodi Benassi's full bio.