FutureWei Technologies, Inc. v. Acacia Research Corp.

Request for Declaratory Relief Dismissed Under the First-to-File Rule When Infringement and Invalidity Claims to Be Tried in the Earlier-Filed Case

13-1090

December 03, 2013

Decision

Last Month at the Federal Circuit - January 2014

Judges: Reyna, Mayer, Taranto (author)

[Appealed from: C.D. Cal., Judge Guildford]

In Futurewei Technologies, Inc. v. Acacia Research Corp., No. 13-1090 (Fed. Cir. Dec. 3, 2013), the Federal Circuit affirmed the district court’s dismissal of Huawei Device USA Inc. and Futurewei Technologies, Inc.’s (collectively “Huawei”) complaint under the first-to-file rule in favor of an earlier-filed infringement suit brought by SmartPhone Technologies, LLC (“SmartPhone”) in the U.S. District Court for the Eastern District of Texas (“the Texas suit”).

Access Co., Ltd. (“Access”), a vendor of software for mobile communication devices, owns the five patents-at-issue in this case (“the five patents”). Access entered into an exclusive license agreement (“the Agreement”) with Acacia Patent Acquisition LLC (“APAC”), a wholly owned subsidiary of Acacia Research Corporation (“Acacia Research”). The Agreement gave APAC the exclusive right to sue, collect damages, and to seek injunctive or any other relief for infringement of specified patents, including the five patents. The Agreement also broadly disclaims the creation of any third-party-beneficiary rights, prohibits APAC from enforcing the covered patents against Access’s customers and end-users in connection with Access’s products and services, and specifies that APAC irrevocably consents to the exclusive jurisdiction of the U.S. District Court for the Central District of California over any suit, action, or proceeding arising out of or related to the Agreement.

APAC assigned the Agreement to a wholly owned subsidiary, SmartPhone, and SmartPhone subsequently sued Huawei for infringement of the five patents in the Texas suit. The day after SmartPhone filed suit in Texas, Huawei brought the present action against SmartPhone, Acacia Research, and Access in the Central District of California. Huawei’s sixteen-count complaint alleged that Huawei had been an Access customer for more than ten years and had contracted with Access to purchase software for certain of Huawei’s mobile handsets. Of relevance on appeal, counts 1-5 sought DJs of noninfringement and counts 6-10 sought DJs of invalidity of the five patents. Count 11 alleged that Huawei is a third-party beneficiary to the Agreement, although without expressly asking for a DJ that Huawei has that status, and count 16 sought a DJ that Acacia Research and SmartPhone are acting as corporate alter egos.

The district court granted a motion to dismiss Huawei’s complaint. The district court dismissed counts 1-10 under the first-to-file rule based on SmartPhone’s earlier-filed Texas suit since the subject matter of both cases is the infringement or validity of the five patents. The district court dismissed count 11 for failure to state a claim, concluding that the Agreement’s specific provisions disclaiming creation of any third-party beneficiaries must prevail over Huawei’s conclusory allegation of

third-party-beneficiary status. Lastly, the district court dismissed count 16 under Fed. R. Civ. P. 13(a) as a compulsory counterclaim to the claims in the Texas suit. Huawei appealed the district court’s dismissal of counts 11 and 16.

On appeal, the Federal Circuit affirmed, although on alternative grounds. Specifically, the Court relied on the first-to-file rule, concluding that, like counts 1-10, both counts 11 and 16 belonged in the Texas suit. The Court held that it was not precluded from relying on the first-to-file rule since Huawei would suffer no prejudice and it was an alternative ground that was supported by the record and consistent with the district court’s reasoning.

Applying the first-to-file rule to count 11, the Federal Circuit held that it would be both just and efficient to have Huawei litigate its status as third-party beneficiary, if necessary, in the Texas suit. The Court first assumed that count 11 requested a DJ that Huawei is a third-party beneficiary of the Agreement, as

third-party-beneficiary status would give Huawei the right to enforce certain contract provisions, e.g., provisions protecting Access’s customers and end-users against patent enforcement and dictating forum selection. Those provisions, however, the Court explained, were either already at issue in the first-filed Texas suit, or readily could be, via Huawei’s affirmative defense that, as an Access consumer, it is licensed to practice the patents, and Huawei’s motion to transfer. The Court thus concluded that keeping the issue in the Texas suit would serve the key objectives of the first-to-file rule, including avoiding the duplication of effort, waste of judicial resources, and the risk of inconsistent rulings.

The Court also held that no substantial countervailing considerations supported an exception to the first-to-file rule for count 11. The Court first concluded that Huawei had not shown any countervailing judicial or litigant interest in economy. Rather, Huawei, a Texas corporation with its principal place of business in Texas, did not dispute the dismissals of counts 1-10, and, thus, the noninfringement and invalidity issues would be litigated in the Texas suit, unless transferred. The Court also concluded that the interest in the just and effective disposition of disputes likewise did not warrant an exception to the first-to-file rule since the Texas court could decide the issues presented by count 11, including those that may raise questions of California law.

Finally, the Court held that the same conclusion follows for count 16 seeking a DJ that SmartPhone is acting as Acacia Research’s alter ego. Count 16, according to the Court, is directly related to Huawei’s affirmative defense in the Texas suit that it is licensed to practice the five patents, since SmartPhone’s status as an alter ego to Acacia Research matters only to SmartPhone’s substantive rights to enforce the five patents in the Texas suit. The Court noted that its conclusion was indirectly supported by the district court’s conclusion that count 16 is a compulsory counterclaim to the Texas suit, as the Rule 13(a) analysis confirmed the strong logical relationship between Huawei’s alter-ego claim and the other claims in the Texas suit, e.g., SmartPhone’s affirmative right to enforce the five patents, all of which arise from the Agreement.

Accordingly, the Federal Circuit affirmed the district court’s dismissal of counts 11 and 16 of Huawei’s complaint.

Summary authored by Ming W. Choy, Student Associate at Finnegan.