Sending Infringement Notice Letters May Create Personal Jurisdiction

The United States Court of Appeals for the Federal Circuit recently reversed a district court’s grant of motion to dismiss a declaratory judge action against Plano Encryption Technologies LLC (PET). The district court, which is situated in the Northern District of Texas, held that PET’s contacts with the Northern district did not subject it to personal jurisdiction and venue was thus improper. On appeal, the Federal Circuit reversed and remanded for further proceedings. See Jack Henry & Assocs., Inc. v. Plano Encryption Techs. LLC, No. 2016-2700, 2018 WL 6423448 (Fed. Cir. Dec. 7, 2018) (Before Newman, Wallach, and Stoll, J.) (Opinion for the court, Newman) (Additional views filed by Stoll, J. and joined by Wallach, J.).

PET is a limited liability company registered to do business throughout Texas, and its registered address is in Plano, Texas, which is located in the Eastern District of Texas. PET, which states that its “sole business is to enforce its intellectual property,” sued eleven banks, which are located in the Northern District of Texas, for patent infringement.

Prior to bringing suit, PET sent a letter to each bank, inviting them to take non-exclusive licenses to PET’s patent portfolio. Each letter stated that PET believed the corresponding bank was infringing PET’s patents by way of the bank’s mobile apps and online banking features, and PET included claim charts detailing the alleged infringement.

Jack Henry provides software systems for each of the banks’ mobile apps and states that it is indemnifying the banks for any liability for infringement. Jack Henry’s counsel wrote to PET, contesting PET’s infringement positions, questioning validity of PET’s patents, and requesting a meeting with PET and its counsel to discuss the issues. PET did not respond to Jack Henry but instead wrote to each bank, stating that “only your bank is accused of infringement.” Jack Henry and the banks then filed a declaratory action in the Northern District of Texas. PET moved for dismissal, stating that venue is improper.

Venue in a multidistrict state, such as Texas, is subject to 28 U.S.C. § 1391, which holds in part that a “corporation shall be deemed to reside in any district in that State within which its contacts would be sufficient to subject it to personal jurisdiction if that district were a separate State . . . .” The district court granted PET’s motion for dismissal stating that PET’s actions do not subject it to personal jurisdiction in the Northern District because “based on policy considerations unique to the patent context, letters threatening suit for patent infringement sent to the alleged infringer by themselves do not suffice to create personal jurisdiction.”

On appeal, the Federal Circuit first noted that determination of venue is dominated by due process considerations, and because Texas’s long-arm statute extends to the limits of federal constitutional due process, only the due process inquiry is required to establish personal jurisdiction. Further, acts of soliciting business in Texas have been deemed subject to the Texas Long-Arm Statute.

Three relevant factors are weighed when applying due process to a determination of specific jurisdiction and venue: (1) whether the defendant “purposefully directed” its activities at residents of the forum, (2) whether the claim “arises out of or relates to” the defendant’s activities within the forum, and (3) whether assertion of personal jurisdiction is “reasonable and fair.”

During oral arguments on appeal, PET’s counsel “concede[d] that . . . the first two elements would be met by the mere sending of a letter into a forum.” Thus, the question here is whether the exercise of personal jurisdiction is reasonable and fair. PET, however, did not assert that jurisdiction in the Northern District is unreasonable or unfair.

While evaluating the reasonableness and fairness of personal jurisdiction the Court noted that personal jurisdiction “is not susceptible to mechanical application” but instead requires evaluation of the specific facts of a case. In the instant case, the Court found that PET has undertaken a licensing program, with threats of litigation, directed to banks located in and conducting business in the Northern District, and “PET’s contacts with banks in the Northern District are in conduct of PET’s only business, that of licensing and litigating its patents.”

PET cited Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998) and Avocent Huntsville Corp. v. Aten Int’l Co., 552 F3d 1324 (Fed. Cir. 2008) for the proposition that patent enforcement letters can never provide a basis for jurisdiction in a declaration judgment action, but the Court disagreed with PET’s interpretation of those cases, stating “Red Wing Shoe and Avocent did not create such a rule, and doing so would contradict the [Supreme] Court’s directive to ‘consider a variety of interests’ in assessing whether jurisdiction would be fair.”

Moreover, controlling precedent provides that “where a defendant who purposefully has directed his activities at forum residents seeks to defeat jurisdiction, he must present a compelling case that the presence of some other considerations would render jurisdiction unreasonable.” Thus, “[t]he burden befalls PET . . . to make a ‘compelling case’ that the exercise of jurisdiction in the Northern District would be unreasonable and unfair.” PET, however, never argued that litigating in the Northern district would be unduly burdensome or otherwise unfair.

Accordingly, the Court found that PET met the minimum contacts requirement of personal jurisdiction without offense to due process such that personal jurisdiction and venue in the Northern District are proper. Thus, the Court reversed the dismissal for improper venue.

PET also challenged the standing of Jack Henry, arguing that PET did not accuse Jack Henry of infringement and that there is no adversity between PET and Jack Henry. Jack Henry stated that it agreed to indemnify the banks for any patent infringement liability. The Court found that Jack Henry, as the supplier of the accused systems and indemnitor of the banks, has standing to participate in the action, and the Court remanded to the Northern District of Texas for further proceedings.

Judge Stoll, joined by Judge Wallach, agreed with the Court’s judgment but wrote separately to address Red Wings Shoe’s statement that “principles of fair play and substantial justice afford a patentee sufficient latitude to inform others of its patent rights without subject itself to jurisdiction in a foreign forum.” Judge Stoll noted that this statement has been interpreted to mean that the “sending of infringement letters would satisfy the minimum contacts requirement of due process except for policy considerations unique to the patent context,” which contravenes “the Supreme Court’s warning against creating special rules for patent cases.” Moreover, “the Supreme Court has made it clear that ‘[o]nce it has been decided that a defendant purposefully established minimum contacts within the forum State, these contacts may be considered in light of other factors to determine whether the assertion of personal jurisdiction would comport with ‘fair play and substantial justice,’” but Judge Stoll struggles to harmonize these instructions with the cases that indicate, where patent enforcement letters are concerned, a comprehensive analysis of the fairness factors provided by the Supreme Court are not required. Thus, Judge Stoll believes that, “[t]o the extent that Red Wing or its progeny fail to adequately assess these factors, [Judge Stoll] suggest[s] they be reconsidered as directly contrary to established Supreme Court precedent.”

Take Away

While personal jurisdiction and venue are fact-dependent inquiries, sending patent enforcement letters to a recipient located and doing business in a forum can be enough to establish personal jurisdiction over the sending party in the forum such that venue is proper in the forum. Such a finding may be particularly true when the sending party’s “sole business is to enforce its intellectual property.”

Image Source: Gene Quinn