EMC Corp. v. Norand Corp.

• Decision Date: 11 July 1996
• Docket Number: No. 95-1540,95-1540
• Citation: 39 USPQ2d 1451,89 F.3d 807
• Parties: EMC CORPORATION, Plaintiff-Appellant, v. NORAND CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 807

89 F.3d 807

39 U.S.P.Q.2d 1451

EMC CORPORATION, Plaintiff-Appellant, v. NORAND CORPORATION, Defendant-Appellee.

No. 95-1540.

United States Court of Appeals Federal Circuit.

July 11, 1996.

Rehearing Denied; Suggestion for Rehearing In Banc Declined

Aug. 16, 1996.

Richard L. Stanley, Arnold, White & Durkee, Houston, Texas, argued for plaintiff-appellant. With him on the brief were Wayne M. Harding and Gay L. Bonorden. Of counsel were Paul T. Dacier and John M. Gunther, EMC Corporation, Hopkinton, Massachusetts, and Thomas J. Dougherty and James R. Carroll, Skadden, Arps, Slate, Meagher & Flom, Boston, Massachusetts.

Lawrence M. Jarvis, McAndrews, Held & Malloy, Ltd., Chicago, Illinois, argued for defendant-appellee. With him on the brief were William M. Wesley and Christopher C. Winslade. Of counsel were Gael Mahony and Timothy J. Dacey, III, Hill & Barlow, Boston, Massachusetts.

Before MAYER, SCHALL, and BRYSON, Circuit Judges.

BRYSON, Circuit Judge.

EMC Corporation filed an action in the United States District Court for the District of Massachusetts seeking a declaratory judgment against Norand Corporation. EMC requested that the court declare certain patents owned by Norand to be invalid and to declare that EMC did not infringe those patents. The district court dismissed the action, exercising its discretion to decline jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201(a). Because we conclude that the district court did not abuse the broad discretion accorded it by the Act, we affirm.

I

The parties present widely divergent versions of the circumstances that led to EMC's filing of its request for a declaratory judgment. Because the district court decided this case without making findings of fact, we confine ourselves to those facts that are undisputed.

EMC manufactures disk drive storage subsystems. Norand does not manufacture or sell such devices but holds four United States patents on technology in that general field. In August 1994, W. Mark Goode, the president of a consulting company representing Norand, wrote to an EMC vice president suggesting that Norand and EMC initiate license negotiations related to Norand's patents. After receiving no reply to his letter, Goode sent a letter to Paul Dacier, EMC's General Counsel, again suggesting license negotiations. In the letter, Goode stated that Norand had "requested that we simply turn the matter over to McAndrews, Held & Malloy [Norand's outside patent counsel] for action," but that he wanted to have a preliminary business discussion, "perhaps avoiding this matter escalating into a contentious legal activity."

EMC officials agreed to meet with Norand. Norand's outside patent counsel then contacted EMC and requested that the meetings not be used as a basis for filing a declaratory judgment action. EMC and Norand held meetings in September and October 1994 in which the parties discussed the potential sale or license of the patents. EMC alleges that Norand's representatives made explicit claims of infringement by EMC at the meetings; Norand denies that its representatives made any such claims or otherwise threatened suit.

At the parties' third meeting, held on January 19, 1995, Norand informed EMC that there were six other companies in EMC's market that Norand was approaching regarding the sale or licensing of its patents. Goode subsequently sent a letter to EMC officials confirming plans for a fourth meeting and assuring EMC that he would call later in the week to arrange a time for the meeting. Three days later, however, EMC filed its declaratory judgment action in the United States District Court for the District of Massachusetts. A telephone message left by an EMC attorney on the day after the filing indicated that EMC had taken the step because its management "thought it was in their interest to protect themselves first and continue discussions." The parties held two further meetings while the action was pending and scheduled a third meeting, but that meeting was later canceled.

Norand moved to dismiss the complaint for lack of jurisdiction on the ground that EMC had failed to establish that there was a justiciable case or controversy between the parties. In addressing the motion, the district court first considered whether Norand's conduct gave rise to a reasonable apprehension that Norand would sue EMC for patent infringement. The court found that making that determination would be a significant undertaking and would involve a close question. The court therefore decided that it would not determine whether EMC could prove a case or controversy for jurisdictional purposes, but that it would exercise its discretion under the Declaratory Judgment Act to decline to entertain the action.

The court found that the parties were still in active license or sale negotiations, that Norand was not a competitor of EMC, and that it was considering entering negotiations with others as well. Under those circumstances the court concluded, to entertain the declaratory judgment action would be inconsistent with the purposes of the Declaratory Judgment Act. In particular, the court found, to allow a declaratory judgment action to proceed under such circumstances would encourage parties who were negotiating with patentees to use the declaratory judgment procedure to improve their bargaining positions and to impede negotiations between patentees and other potential licensees or buyers. The court explained that a plaintiff in EMC's position

may be able to obtain a more favorable bargaining position with the defendant by filing a declaratory judgment action, thereby inducing if not virtually forcing defendant to consider whether as a practical matter it would be better to avoid litigation costs and any risk of adverse rulings that might render their patents less valuable. It would be reasonable to expect that, if there is in fact a market for the patents, the mere pendency of the lawsuit may negatively affect the value of the defendant's patents in that market and the price any potential purchaser, either the plaintiff or another prospective purchaser, might be willing to pay.

The court added that a plaintiff such as EMC "may prefer that a defendant, such as Norand, own a patent rather than that a competitor of the plaintiff own the patent," as a competitor might be more likely to try to enforce the patent against EMC than Norand would. In that setting, the district court concluded, the pendency of a declaratory judgment action might have the effect of impeding the sale of the patent to the plaintiff's competitor, regardless of whether it was filed for that reason. The court therefore determined that to exercise its discretionary jurisdiction in this case would create "an incentive structure that is inconsistent with the public interest in preserving declaratory proceedings for cases closer to the central objectives of declaratory proceedings."

II

The Declaratory Judgment Act, 28 U.S.C. § 2201(a), provides in pertinent part:

In a case of actual controversy within its jurisdiction ... any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.

The Act, paralleling Article III of the Constitution, requires an actual controversy between the parties before a federal court may exercise jurisdiction over an action for a declaratory judgment. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-41, 57 S.Ct. 461, 463-64, 81 L.Ed. 617 (1937); Shell Oil Co. v. Amoco Corp., 970 F.2d 885, 887, 23 USPQ2d 1627, 1629 (Fed.Cir.1992). In general, the presence of an "actual controversy" within the meaning of the statute depends on "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." Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510, 512, 85 L.Ed. 826 (1941); Arrowhead Indus. Water, Inc. v. Ecolochem, Inc., 846 F.2d 731, 735, 6 USPQ2d 1685, 1688 (Fed.Cir.1988).

Even if there is an actual controversy, the district court is not required to exercise declaratory judgment jurisdiction, but has discretion to decline that jurisdiction. Public Serv. Comm'n v. Wycoff Co., 344 U.S. 237, 241, 73 S.Ct. 236, 239, 97 L.Ed. 291 (1952). As this court summarized in Spectronics Corp. v. H.B. Fuller Co., 940 F.2d 631, 634, 19 USPQ2d 1545, 1547 (Fed.Cir.), cert. denied, 502 U.S. 1013, 112 S.Ct. 658, 116 L.Ed.2d 749 (1991): "When there is no actual controversy, the court has no discretion to decide the case. When there is an actual controversy and thus jurisdiction, the exercise of that jurisdiction is discretionary."

The district court did not decide whether this case presented an actual case or controversy, as it concluded that it would dismiss as a discretionary matter even if it found that it had jurisdiction. EMC argues that the district court erred in bypassing the question of jurisdiction and contends that there is a sufficient case or controversy as a matter of law. In addition, EMC argues that the district court abused its discretion by not relying on any of the "legitimate bases for exercising discretion not to hear a declaratory judgment action."

A

We agree with EMC that the undisputed facts establish a sufficient controversy between the parties to give the district court statutory and constitutional authority to hear this declaratory judgment action. We therefore find it unnecessary to decide whether it was appropriate for the district court to bypass the issue of jurisdiction without deciding that issue.

This court has developed a two-part inquiry to determine whether there is an actual controversy in suits requesting a declaration of patent non-infringement or invalidity. First,...