Federal Circuit Finds Subject Matter Jurisdiction in PTI Claim - Federal Circuit
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Federal Circuit Finds Subject Matter Jurisdiction in PTI Claim

Some courts believe that declaratory actions cannot occur absent a case or controversy. Luckily, the Federal Circuit Court of Appeals is always ready to clear up a controversy over a controversy.

Last week, the Federal Circuit reinstated a case previously dismissed for lack of subject matter jurisdiction, finding that the facts presented a case or controversy, even in the relatively amicable relationship between the parties.

Tessera has patented methods for preventing semiconductor chip contamination during encapsulation, a common problem in chip production. Here, Powertech Technology Inc. (PTI) filed a declaratory action seeking declarations of non-infringement and invalidity of Tessera's patent.

In October 2003, Tessera and PTI entered into a Tessera Compliant Chip License Agreement (TCC License), under which PTI agreed to pay running royalties to Tessera in return for a license under the Tessera's process patent to assemble, use, or sell certain "TCC Licensed Products."

After Tessera and PTI entered their agreement, Tessera filed infringement actions against a number of companies, including PTI customers, for selling products without a TCC license. PTI was not named in the claims because it had a TCC license.

During those proceedings, an administrative law judge (ALJ) found that Tessera's patent was not invalid and not infringed by the accused products. The ALJ also determined that Tessera's patent rights were exhausted with respect to all accused products sold by Tessera's licensees, including PTI.

Despite the ALJ's finding, PTI continued making royalty payments to Tessera for the TCC Licensed Products. These payments, however, were made "under protest" because PTI believed that it did not need the license to make the products.

In response to PTI's complaint, Tessera filed a motion to dismiss for lack of subject matter jurisdiction. According to Tessera, actions against PTI's customers could not create a controversy because, so long as PTI remained a licensee in good standing, PTI's customers would also enjoy protection against any infringement suit. The district court agreed, holding that PTI's products could not have been at issue in the ITC action because they were manufactured under a TCC License, which explicitly excluded licensed products from its enforcement actions.

The Federal Circuit Court of Appeals reversed the district court, relying on the Supreme Court's opinion in MedImmune, Inc. v. Genentech, Inc. In MedImmune, the Supreme Court held that a licensee did not need to repudiate a license agreement by refusing to pay royalties in order to have standing to declare a patent invalid, unenforceable, or not infringed.

How would you advise clients to contest patent validity under a licensing agreement? Would you tell your client to continue paying royalties, like PTI? Is it easier for a challenger to stop paying the royalties, and force a case or controversy to create subject matter jurisdiction?

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