The first-to-file rule, in which the forum of the first-filed action is favored over the forum of a later filed lawsuit, may be overcome in the presence of equitable considerations such as when the first-filed action was anticipatory, disruptive to ongoing negotiations, and inconsistent with the purpose of the Declaratory Judgment Act.
The United States Court of Appeals for the Federal Circuit recently ruled on an appeal regarding a Pennsylvania district court’s decision to decline jurisdiction over a first filed declaratory judgment filed by Communications Test Design, Inc. (“CTDI”) in favor of a patent infringement suit filed six days later in a New York district court by Contec LLC (“Contec”). The Federal Circuit concluded that the Pennsylvania district court did not abuse its broad discretion under the Declaratory Judgment Act to departure from the typical first-to-file rule given the presence of equitable considerations. See Communications Test Design, Inc. v. Contec, LLC, 2019-1672, 2020 U.S. App. LEXIS 8019 (Fed. Cir. Mar. 13, 2020) (Before O’Malley, Mayer, and Wallach, Circuit Judges) (Opinion for the Court, O’Malley, Circuit Judge).
CTDI is an engineering, repair, and logistics company with its principal place of business in Pennsylvania. CTDI developed and used “Gen3” and “Gen5” test systems within the United States for testing multimedia devices, such as set-top boxes. Contec operates a similar business, offering “repair, test and reverse logistics for electronics hardware used in a broad range of markets.” Contec owns two patents at issue in this case: (1) U.S. Patent No. 8,209,732, titled “Arrangement and Method for Managing Testing and Repair of Set-Top Boxes” and (2) U.S. Patent No. 8,689,071 titled “Multimedia Device Test System.”
This case arises out of a controversy developing over a number of years between Contec and CTDI. In September of 2017, Contec sent CTDI a letter to determine whether CTDI’s “Gen3” and “Gen5” test systems infringe any claims of the asserted patents. The parties exchanged numerous letters and emails between September of 2017 and September of 2018, and counsel for both parties met in person in June 2018, but the negotiations were not successful. In September of 2018, Contec’s counsel sent a letter to CTDI stating that the extrajudicial process for obtaining information regarding CTDI’s systems were insufficient without the full discovery obligations that would be required during litigation. The letter stated that Contec had a good faith basis to believe at least one claim of the asserted patents was infringed by CTDI’s test systems and gave a deadline for CTDI to indicate its willingness to discuss potential licensing terms. Contec warned that without such confirmation, it would sue for patent infringement, and Contec attached a draft of the proposed complaint to the letter.
In response to the letter, CTDI Charmain and CEO spoke with Contec’s CEO regarding a possible license for Contec’s patents on September 19, 2018. Later that same day, CTDI’s counsel sent an email to Contec’s counsel confirming that CTDI remained willing to consider licensing terms. The two CEOs agreed to discuss license terms in more detail on September 24. However, two days after accepting Contec’s request to discuss licensing terms, CTDI filed a declaratory judgement in the United States District Court for the Eastern District of Pennsylvania. On September 24, CTDI’s counsel emailed Contec’s counsel a copy of the declaratory judgment complaint and noted that official service would be held to allow for further discussion between the executives.
Following the filing of the Pennsylvania action on September 21, 2018, Contec moved to dismiss CTDI’s complaint on November 13, 2018. Contec argued that CTDI had filed the 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.” Contec requested that the court decline exercising jurisdiction over the action and dismiss the complaint in favor of the later-filed New York action.
The District Court granted Contec’s motion and dismissed CTDI’s complaint. The District Court reasoned that, although the first-filed action is preferred because of the first-to-file rule, equitable considerations favored the later-filed Contec suit. In coming to its decision, the district court relied on the timing and content of the communications between the two parties. The Court found that, although CTDI had the right to break off negotiations and resort to litigation, it did not have the right to “string Contec along just long enough to get the judicial drop and file this lawsuit in its own backyard.” The Court noted that the communications revealed CTDI’s “nefarious motive” and its conduct was “inconsistent with the policy of promoting extrajudicial dispute resolution.” The District Court considered additional factors in its analysis, finding CTDI’s declaratory judgement interfered with ongoing negotiations, and that the convenience of the parties and availability of witnesses also weighed in favor of New York being a more convenient forum than Pennsylvania.
The Federal Circuit reviewed the findings of the of the district court for abuse of discretion. According to CTDI, the Pennsylvania action should have taken “precedence” because there was no “sound reason” to depart from the first-to-file rule. CTDI asked the Federal Circuit to find an abuse of discretion, reverse the district court’s dismissal, and remand for further proceedings on the merits of the declaratory judgment action. Alternatively, CTDI asked for an evidentiary hearing so that the district court could make factual findings regarding CTDI’s alleged motive for filing the declaratory judgment.
The Federal Circuit carefully considered the record of the parties’ dispute up to the filing of the competing actions and concluded that several factors warranted a departure from the traditional first-to-file rule, which favored the forum of the first-filed case. The Federal Circuit found that: “(1) CTDI filed its declaratory judgment complaint in anticipation of Contec’s patent infringement complaint; (2) CTDI’s suit interfered with ongoing negotiations between the parties and did not serve the objectives of the Declaratory Judgement Act;… (3) on balance, the Northern District of New York is a more convenient forum”; and (4) the district court did not abuse its discretion.
With respect to finding the declaratory judgment in anticipation of Contec’s later filed suit, the Federal Circuit explained that its decision to dismiss the suit was based on a careful analysis of the parties’ pre-filling actions and communications to make the determination that CTDI was not acting in good faith when it induced Contec to delay the filing of its suit with a pretense of good faith negotiations.
With respect to interfering with ongoing negotiations, the Federal Circuit reasoned that “[i]nterference with ongoing negotiations” provided “another sound reason that would make it unjust to exercise jurisdiction over the declaratory judgment action.” Commc’ns Test Design, 367 F. Supp. 3d at 358 (internal quotations omitted). Here, the Federal Circuit found that, given that license negotiations were ongoing when the declaratory judgement was filed, “CTDI took advantage of the fact that Contec deferred filing its compliant based on Contec’s reasonable belief that licensing discussions were taking place in earnest, with the obvious hope that litigation would not be necessary.” Id. at 359.
With respect to the greater convenience of the New York forum, the Federal Circuit court noted that Contec witnesses, its record databases, and three of the six inventors of the patents resided in New York, and five of the inventors, considered key witnesses, were beyond the subpoena power of the Eastern District of Pennsylvania. Considering all relevant factors, the Federal Circuit found that New York was a more convenient forum, on balance. Because all of the factors weighed in favor of New York as the more appropriate forum, the Federal Circuit found that the district court had not abused its discretion.
With respect to CTDI’s alternative plea for remand for an evidentiary hearing, the Federal Circuit held that no such hearing is necessary. CTDI argued that Contec’s motion to dismiss was “akin to a factual attack on subject matter jurisdiction” and relied on procedures used by district courts in the context of reviewing factual challenges to subject matter jurisdiction under Rule 12(b)(1) challenges. The Federal Circuit found that subject matter jurisdiction was not at issue; rather, Contec had moved to dismiss CTDI’s complaint under the district court’s discretion granted under the Declaratory Judgment Act, which does not involve the court’s subject matter jurisdiction. Since CTDI attempted to invoke an inapplicable procedure, and a court is not required to hold evidentiary hearings to evaluate its jurisdiction “so long as the court has afforded [the parties] notice and a fair opportunity to be heard,” the Federal Circuit found no basis for remanding for an evidentiary hearing. Tanzymore v. Bethlehem Steel Corp., 457 F.2d 1320, 1323–234 (3d Cir. 1972). Accordingly, the Federal Circuit affirmed the Eastern District of Pennsylvania’s dismissal of CTDI’s complaint.
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