The U.S. Court of Appeals for the Federal Circuit affirmed the Eastern District of Pennsylvania's dismissal of an action seeking declaratory judgment of patent non-infringement, notwithstanding that the lawsuit was filed prior to a latter-filed patent infringement suit involving the same parties, in another district. In Communications Test Design, Inc. v. Contec, LLC, Appeal No. 2019-1672, the Court found that the district court did not abuse the broad discretion accorded to it both under the Declaratory Judgment Act and pursuant to the first-to-file rule.

By way of background, Communications Test Design, Inc. ("CTDI") is a Pennsylvania-based engineering, repair and logistics company. Contec is the owner by assignment of the asserted patents related to management testing and repair of set-top boxes. Relevant here, CTDI has facilities nationwide, including one in the Northern District of New York. Contec is headquartered in the Northern District of New York, which also is where the systems described in the patents were designed and developed.

Contec initially wrote to CTDI in September 2017 regarding alleged infringement of Contec's patents. Discussions proceeded for the better part of a year, including in person meeting of counsel in June 2018. In September 2018, Contec's counsel sent a letter to CTDI stating that "the parties' extrajudicial process for obtaining information about CTDI's systems, without the full discovery obligations that would be imposed during litigation, has proved unsatisfactory," and arguing that Contec had a good faith basis to believe that CTDI infringes at least one claim of the asserted patents. The letter gave CTDI until September 19 to indicate whether it was willing to "discuss potential terms for a pa-tent license agreement," or face suit for patent infringement.

On September 19, the CEOs for the two companies spoke by phone about a possible license for Contec's patents, including discussion of proposed initial terms, and agreed to talk again on September 24. CTDI's counsel wrote back also on September 19, saying the company "remain[ed] willing to consider reasonable licensing terms" and "encourage[ing] a continued conversation between the executives."

CTDI filed its declaratory judgment action two days later, in Pennsylvania. The same day, CTDI wrote to Contec, confirming that it would put a licensing proposal together and accepting Contec's suggested time for a follow-up call. CTDI did not mention filing its declaratory judgment complaint.

On September 24—the day the CEOs were scheduled to talk—CTDI's counsel emailed Contec's counsel a copy of the declaratory judgment complaint. Counsel stated that official service would be held for a period of time to allow further discussion between the executives. Contec filed its complaint for patent infringement in the Northern District of New York, three days later.

On November 13, 2018, Contec moved to dismiss, or in the alternative, transfer or stay, CTDI's declaratory judgment complaint, arguing that CTDI 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." The district court granted Contec's motion on February 15, 2019, noting, inter alia, that although CTDI "had every right, in its business and legal judgment, to break off negotiations and 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 court found that CTDI's communications before and after its filing reveal its "nefarious motive," and ultimately determined that "CTDI's conduct was inconsistent with the policy of promoting extrajudicial dispute resolution, not to mention sound judicial administration and the conservation of judicial resources." The district court also cited "[i]nterference with ongoing negotiations" as another "'sound reason that would make it unjust' to exercise jurisdiction over the declaratory judgment action."

On appeal, the Federal Circuit held that the district court did not abuse its discretion in dismissing the first-filed lawsuit, noting that as long as the district court "acts in accordance with the purposes of the Declaratory Judgment Act and the principles of sound judicial administration, [it] has broad discretion to refuse to entertain a declaratory judgment action."

In this instance, where the issue is whether a declaratory judgment suit should yield to a later-filed infringement suit, the trial court's discretion is guided by the first-to-file rule, "whereby the forum of the first-filed case is favored." Here, the Federal Circuit found that the district court carefully considered the record of the parties' dispute, including the competing filings, and concluded that several factors warranted departure from the first-to-file rule: (1) CTDI filed its declaratory judgment complaint in anticipation of Contec's infringement complaint; (2) CTDI's suit interfered with ongoing negotiations between the parties and did not serve the objectives of the Declaratory Judgment Act; and (3) on balance, the Northern District of New York was a more convenient forum.

The Court disagreed with CTDI's argument that the district court's dismissal was "largely if not entirely based" on its "nefarious motive" determination, and that such a determination "was an abuse of discretion." Rather, per the Federal Circuit, the lower court the court analyzed the parties' pre-filing actions and communications and found that CTDI filed suit in anticipation of Contec's impending infringement suit. The court explained that, "[a]rmed with the knowledge that Contec intended to sue if the parties did not enter into a patent license, CTDI continued the pre-tense of good faith negotiations." Indeed, CTDI expressly agreed to have further licensing discussions the following week, thereby ensuring that Contec would refrain from filing its complaint. At the same time, however, CTDI was preparing its declaratory judgment complaint.

The Court found that, "[o]n this record, regardless of CTDI's motive or intent, its pre-suit communications and conduct support the district court's conclusion that the declaratory judgment action was filed in anticipation of Contec's infringement suit. As such, we find no abuse of discretion in the district court's characterization of CTDI's complaint as anticipatory."

The Court also rejected CTDI's argument that it filed the declaratory action "to obtain a resolution that nearly a year of discussions had failed to achieve," finding that the undisputed evidence demonstrates that license negotiations were ongoing when CTDI filed suit. Given these facts, the Federal Circuit held that the district court was within its discretion in finding that "CTDI took advantage of the fact that Contec deferred filing its complaint based on Contec's reasonable belief that licensing discussions were taking place in ear-nest, with the obvious hope that litigation would not be necessary" and concluding that CTDI's conduct was "inconsistent with the policy promoting extrajudicial dispute resolution, not to mention sound judicial administration and the conservation of judicial resources."

The Court also rejected CTDI's argument that the district court erred in finding that, "on balance the Northern District of New York is a more convenient forum to resolve the dispute between the parties," citing the substantial evidence supporting jurisdiction in the Northern District of New York, including analysis of five factors that favored Contec's later-filed action.

The Court also refused CTDI's request that it remand for further an evidentiary hearing, claiming the district court made factual findings regarding CTDI's "motive" necessary to its decision. The Court noted that Contec's motion to dismiss was not for lack of subject matter jurisdiction but was pursuant to the district court's discretion under the Declaratory Judgment Act. As such, CTDI's proposed hearing if there is a dispute of material fact relevant to a jurisdictional issue were inapplicable. CTDI cited no authority requiring a district court to hold an evidentiary hearing when deciding whether it should, in its discretion, exercise jurisdiction over a declaratory judgment action.

Second, the Court found that the parties had ample opportunity to be heard through declarations and briefs and neither party requested oral argument or an evidentiary hearing. Finally, the Federal Circuit held that the district court's statement that CTDI acted with a "nefarious motive" was not necessary to its decision. Per the Court, "The district court found that CTDI's filing was anticipatory, disruptive to ongoing negotiations, and inconsistent with the purpose of the Declaratory Judgment Act."

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