Opinion
CASE NO. 8:11-CV-22-T-17AEP.
July 12, 2011
ORDER
This cause is before the Court on:
Dkt. 6 Motion to Dismiss Count II of Complaint
Dkt. 12 Opposition
The Complaint (Dkt. 1) of Plaintiff Perma-Liner Industries, Inc. ("Perma-Liner") seeks a declaration that Defendant's Patents (`937, '413, `055, `081) are invalid (Count I), and a declaration that Plaintiff's second modified InnerSeal System does not infringe Defendant's `079 Patent (Count II). The Exhibits attached to the Complaint include: 1) Composite Exhibit A — Consent Judgment and Injunction in Case No. 8:08-CV-811-T-17, LMK Enterprises, Inc. et al. v. Perma-Liner Industries, Inc., Settlement Agreement, with attached Exhibit 1 (InnerSeal System), Exhibit 2 (Patent License Agreement); Exhibit 3 (Proposed Consent Judgment and Injunction, with attachments); 2) Exhibit B — Excerpt of Deposition of Gerald D'Hulster take June 9, 2010., Testimony pp. 21-26; and 3) Exhibit C — Letter of December 14, 2010, Jeffrey D. Harty, Esq. (LMK's counsel) to Suzette M. Marteny, Esq. (Perma-Liner's counsel).
Defendant LMK Enterprises, Inc. ("LMK") moves the Court to dismiss Count II because Count II requests an advisory opinion as to issues of infringement regarding an allegedly altered version of Plaintiff's InnerSeal System. Defendant LMK argues that no case or controversy exists between the parties regarding Count II, as Defendant LMK has never seen or observed the second altered InnerSeal System, Defendant LMK was not aware of the existence of a second altered InnerSeal System at the time the Complaint was filed, and Defendant LMK has had no contact with Plaintiff Perma-Liner relating to the second modified InnerSeal System. Defendant LMK argues that Plaintiff Perma-Liner has not suffered an injury-in-fact which is fairly traceable to Defendant's conduct. Defendant LMK argues that: 1) LMK has made no assertion of right concerning the second altered InnerSeal System; and 2) Perma-Liner's claims of substantial difference between the first and second altered systems preclude argument that prior litigation between the parties creates a justiciable controversy between the parties.
Defendant LMK argues that LMK has made no concrete claim of a specific right as to the second modified InnerSeal System, and, at the time the Complaint was filed, LMK was completely unaware of the potentially infringing method or device. Defendant LMK argues that, at the time Defendant's Motion to Dismiss was filed, LMK could not assert a concrete claim of right as to the second modified InnerSeal System, as no employee of LMK has seen or evaluated the second modified InnerSeal System. LMK argues that LMK's employees were not aware that Perma-Linder had developed a second modified InnerSeal System. Defendant LMK further argues that prior litigation between the parties does not create a justiciable controversy, although prior litigation is one circumstance to be considered in assessing whether the totality of the circumstances creates an actual controversy. Defendant LMK argues that Plaintiff Perma-Liner alleges that the second modified InnerSeal System is significantly different from prior products such that it does not infringe the `079 Patent. Defendant LMK argues that, in light of the allegation of a significant difference from prior product, the prior litigation cannot be asserted as the basis for declaratory judgment jurisdiction in the present suit.
The `079 patent is directed to the repair of the junction between main/lateral pipes. The `079 patent was the subject of Case No. 8:08-CV-811-T-17TGW, in which Plaintiff Perma-Liner admitted that its original InnerSeal System infringed the `079 Patent, and in which Plaintiff Perma-Liner was enjoined from further unlicensed sales of the InnerSeal System.
Plaintiff Perma-Liner Industries Inc. responds that there is a definite and concrete dispute between Plaintiff and Defendant LMK relating to the `079 Patent and any version of Plaintiff's Perma-Liner InnerSeal system. Plaintiff Perma-Liner argues that the only mechanism by which Plaintiff will be able to avoid another contempt sanction is to have this Court declare that the Second Modified InnerSeal System does not infringe the `079 Patent and is more than a colorable variation of the `079 Patent.
Plaintiff Perma-Liner refers to: 1) Case No. 8:08-CV-811-T-17TGW; 2) related contempt proceedings in 2009 and 2010; 3) this case; and 4) an Illinois state court action, filed 2/10/2011, for breach of patent licensing agreement (related to sales of various versions of InnerSeal System). (Dkt. 12, p. 3). Plaintiff argues that this case concerns the same dispute between the same parties over the same patent, and modifications to the same product.
I. Standard of Review A. Declaratory Judgment
The Declaratory Judgment Act is not an independent basis for subject matter jurisdiction, but provides a remedy available only if the court has jurisdiction from some other source. Prasco, LLC v. Medicis Pharm. Corp., 537 F.3d 1329, 1335 (Fed. Cir. 2008). The analysis must be calibrated to the particular facts of each case, with the basic standard being whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. Id. at 1336 (quoting Medimmune, Inc. v. Genentech, Inc., 127 S.Ct. 764, 771 (2007)).
Federal Circuit law governs case or controversy issues involving declaratory judgment determinations about patent infringement or validity. See Adenta GmbH v. OrthoArm, Inc., 501 F.3d 1364, 1368 (Fed. Cir. 2007).
An action is justiciable under Article III only where: 1) the plaintiff has standing; 2) the issues presented are ripe for judicial review; and 3) the case is not rendered moot at any stage of the litigation. These principles are a helpful guide in applying the "all-the-circumstances" test. Caraco Pharm. Labs. Ltd. v. Forest Labs., 527 F.3d 1278, 1290 (Fed. Cir. 2008).
In Medimmune, supra, the Supreme Court rejected the "reasonable apprehension of imminent suit" requirement, which required both: 1) an explicit threat or other action by the patentee, which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit; and 2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such an activity. Proving a reasonable apprehension of suit is only one of many ways a patentee can satisfy the Supreme Court's "under all the circumstances" test to establish an action presents a justiciable Article III controversy. Other ways may include demanding a right to royalty payments, or creating a barrier to regulatory approval of a product that is necessary for marketing the product.
A controversy is ripe for adjudication if the question presented is "`fit for judicial review,'" such that the controversy is entirely or substantially a question of law and the postponement of a decision would work a substantial hardship on the challenging party. Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceuticals Corp., 482 F.3d 1330, 1338 (Fed. Cir. 2007).
"Although Medimmune clarified that an injury-in-fact sufficient to create an actual controversy can exist even when there is no apprehension of suit, it did not change the bedrock rule that a case or controversy must be based on a real and immediate injury or threat of future injury that is caused by the defendants — an objective standard that cannot e met by a purely subjective or speculative fear of future harm. Thus . . . jurisdiction generally will not arise merely on the basis that a party learns of the existence of a patent owned by another or even perceives such a patent to pose a risk of infringement, without some affirmative act by the patentee."SanDisk, 480 F.3d at 1380-81." See Prasco LLC v. Medicis Pharmaceutical Corp., 537 F.3d 1329, 1339 (Fed. Cir. 2008).
II. Discussion
In determining jurisdiction, the Court properly focuses on the facts as they existed at the time of the filing of the complaint.GAF Bldg. Materials Corp. v. Elk Corp., 90 F.3d 479, 486 (Fed. Cir. 1996). Defendant LMK Enterprises, Inc. has made a factual attack on the Court's jurisdiction over Count II. Defendant LMK has presented affidavits which establish that Defendant had no knowledge of the Second Modified InnerSeal System at the time that this case was commenced.
If a declaratory judgment defendant adequately challenges jurisdiction in fact, the allegations of the complaint are not controlling. In the face of an adequate factual challenge, the burden is on Perma-Liner Industries, Inc. to demonstrate facts sufficient to support its contention as to the Court's jurisdiction. Once jurisdiction is factually challenged, allegations alone are insufficient to meet the complainant's burden. Perma-Liner must produce sufficient evidence to establish subject matter jurisdiction.
A. Background
The Court notes that in Case No. 8:08-CV-811-T-17TGW, the parties entered into a Settlement Agreement and Patent License Agreement. In the Settlement Agreement, Perma-Liner Industries, Inc. admitted that use of the InnerSeal System (in its then form) infringed claims 7, 8, and 9 of the `079 Patent. The `079 Patent is a method and apparatus patent for an improved method and apparatus for repairing the juncture of a main sewer line with a lateral pipe. The `079 Patent contains thirteen claims. The Court entered a Consent Judgment and Injunction, in which the parties stipulated that the `079 Patent is not invalid or unenforceable, and that Perma-Liner's InnerSeal System infringed claims 7, 8 and 9 of the `079 Patent. The Consent Judgment further provided that Perma-Liner is enjoined from practicing without a license, and from causing any other entity to practice without a license, the method of using the Perma-Liner InnerSeal System as described in Attachment A to the Consent Judgment, or any colorable variation thereof that also infringes the `079 Patent. The Court retained exclusive jurisdiction for the enforcement of the Consent Judgment and Injunction.
After termination of the License Agreement, LMK Enterprises, Inc. moved for an order to show cause and for a contempt order. LMK Enterprises, Inc. then learned that Perma-Liner, Inc. modified its InnerSeal System. After an evidentiary hearing before the assigned Magistrate Judge, and the issuance of a Report and Recommendation which addressed the manner of the modifications, the Court determined that the (first) modified InnerSeal System was a colorable variation of the infringing system and infringed the `079 patent. The Court found that Perma-Liner Industries, Inc. was in contempt of the Injunction previously entered. The Court further found that Perma-Liner's sales of the infringing InnerSeal System and the modified InnerSeal System which took place after termination of the license on January 11, 2009 were a violation of the Injunction. The Court retained jurisdiction for entry of order awarding monetary sanctions for civil contempt, including the award of attorney's fees and costs.
The Court notes that in Tivo, Inc. v. Echostar Corp., 2011 U.S. App. LEXIS 8142 (Fed. Cir. 4/20/2011) the Federal Circuit overruled the KSM Fastening test, "telescoping the two-fold inquiry into one, eliminating the separate determination whether contempt proceedings were properly initiated." In Tivo, Inc., the Federal Circuit held that a district court has broad discretion to determine whether contempt proceedings are appropriate, based on the detailed accusation from the injured party which sets forth the facts constituting the contempt. The Federal Circuit further held that, in determining whether an injunction against patent infringement has been violated, a district court would continue to employ the "more than colorable variation" standard. The test for colorable differences requires determining "whether substantial open issues with respect to infringement to be tried" exist. The Federal Circuit explains that contempt analysis must focus initially on the differences between the features relied upon to establish infringement and the modified features of the newly accused products. Where one of the elements previously found to infringe has been modified or removed, the court must make an inquiry into whether that modification is significant. If the differences between the old and new elements are significant, the newly accused product as a whole shall be deemed more than colorably different from adjudged infringing one, and the inquiry into whether the newly accused product actually infringes is irrelevant. Contempt is then inappropriate.
The Federal Circuit further explains the a district court must also look at relevant prior art to determine if the modification merely employs or combines elements already known in the prior art in a manner that would have been obvious to a person of ordinary skill in the art at the time the modification was made. A nonobvious modification may result in a finding of more than colorable difference. The district court may seek expert testimony in making the determination, where useful. The Federal Circuit further explains that the analysis may also take account of the policy that legitimate design-around efforts should always be encouraged as a path to spur further innovation, but noting that design-around efforts should not be used to mask continued infringement.
When the district court determines that the differences between the infringing product and newly accused product are not more than colorable, the Federal Circuit further explains:
Conversely, when a court concludes that there are no more than colorable differences between the adjudged infringing product and modified product, a finding that the newly accused product continues to infringe the relevant claims is additionally essential for a violation of an injunction against infringement. KSM, 776 F.2d at 1528. Thus, the court is required to evaluate the modified elements of the newly accused product against the asserted claim, on a limitation by limitation basis, to ensure that each limitation continues to be met. In making this infringement evaluation, out of fairness, the district court is bound by any prior claim construction that it had performed in the case. The patentee bears the burden of proving violation of the injunction by clear and convincing evidence, a burden that applies to both infringement and colorable differences.See, Tivo, Inc. v Echostar Corp., supra (internal citations omitted).
B. Standing
The party invoking federal jurisdiction bears the burden of proving the essential elements of standing, although "[a]t the pleading stage, general factual allegations of injury resulting from the defendant's conduct may suffice." Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). These elements include: 1) the plaintiff must have suffered an injury in fact — an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual and imminent, not conjectural or hypothetical; 2) there must be a causal connection between the injury and the conduct complained of — the injury has to be fairly traceable to the challenged action of the defendant and not the result of the independent action of some third party not before the Court; and 3) it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. Lujan, supra, at 560-561.
Standing is a threshold jurisdictional question which must be addressed prior to and independent of the merits of a party's claims. See Bochese v. Town of Ponce Inlet, 405 F.3d 964, 974 (11th Cir. 2005).
Defendant argues that there is no controversy as to the second modified InnerSeal System, of which Defendant had no knowledge prior to the filing of the Complaint, and which Plaintiff has alleged is significantly modified from the InnerSeal System which infringed Defendant's `079 patent. Defendant has provided affidavits to support Defendant's Motion to Dismiss. (Dkt. 6, Exhs. 1-4).
Plaintiff argues that Count II is a continuation of an on going controversy.
Under Medimmune, the reasonable apprehension of suit remains a relevant factor in determining jurisdiction. Plaintiff Perma-Liner does not argue that some other factor besides the reasonable apprehension of suit or threat of a future suit constitutes Plaintiff's injury-in-fact as to Count II.
Absent an injury-in-fact fairly traceable to the patentee, there can be no immediate and real controversy. A fear of future harm that is only subjective is not an injury or threat of injury caused by the defendant that can be the basis of an Article III case or controversy. "Jurisdiction generally will not arise merely on the basis that a party perceives a patent to pose a risk of infringement, without some affirmative act by the patentee. SanDisk at 1380-1381." Prasco, supra, at 1338-1339.
In this case, as in Prasco, LLC v. Medicis, supra, andMedimmune, supra, standing and ripeness boil down to the same question. At issue is the first prong of the "old" test; it is undisputed that Perma-Liner Industries, Inc. has produced a second modified InnerSeal System, and is currently marketing and selling it. The Court notes that there were ongoing negotiations and communication between the parties prior to the commencement of this case, but Perma-Liner never communicated the existence of the second modified InnerSeal System to LMK or outlined the differences between the second modified InnerSeal System and prior infringing products to LMK. Perma-Liner could have sought a covenant not to sue from LMK, but there is no evidence that Perma-Liner did so.
The Court recognizes that it has continuing jurisdiction as to products which are determined to be a colorable variation of the prior infringing products, but Perma-Liner's allegation of significant difference means that additional fact-finding will be necessary to resolve the dispute. Therefore, the Court gives little weight to its continuing jurisdiction to enforce the Injunction entered in Case No. 8:08-CV-811-T-17.
Perma-Liner and LMK are competitors in the trenchless sewer repair business and in the past have communicated in an effort to resolve business disputes without litigation, but Perma-Liner has proceeded directly to litigation as to the second modified InnerSeal System. Because Perma-Liner filed suit without ever communicating with LMK as to the second modified InnerSeal System, LMK does not know what the differences between the second modified InnerSeal System and other products include, has not had the opportunity to evaluate the System, and make any determination as to whether the second modified InnerSeal System infringes the `079 Patent. The Court notes that LMK has commenced litigation in the past, so it seems unlikely that there is any threat of delay prompted by the opposing party's unwillingness to litigate to resolve a dispute.
The purpose of the declaratory action is to allow a party "who is reasonably at legal risk because of an unresolved dispute, to obtain judicial resolution of that dispute without having to await commencement of legal action by the other side." There is no bright-line rule for determining whether an action satisfies the case or controversy requirement; it is a question of degree.
Perma-Liner has not brought forth any evidence to refute the LMK's factual challenge. Perma-Liner does not deny that Perma-Liner did not communicate with LMK as to the existence of the second modified InnerSeal System, or that Perma-Liner has no basis to determine whether sales of the second modified InnerSeal System would violate the Injunction (Dkt. 6, Exhs. 1-4). Perma-Liner has not established that LMK made a demand for royalty payments as to the second modified InnerSeal System. After consideration, the Court concludes that, in spite of the past litigation as to infringement of the `079 patent relating to other products, the Court does not have jurisdiction as to Count II due to the absence of standing and ripeness. Upon considering the totality of the circumstances, the Court finds that Perma-Liner has not alleged a controversy of sufficient "immediacy and reality" to create a justiciable controversy. Accordingly, it is
ORDERED that Defendant LMK's Motion to Dismiss Count Two is granted. DONE AND ORDERED.