Federal circuit: manufacturer permitted to file declaratory judgment action when its customers face threat of patent infringement suit

In Arris Group Inc. v. British Telecommunications PLC, the Federal Circuit allowed a manufacturer to file a declaratory judgment action after its customers were accused of patent infringement, even through the manufacturer itself was not directly accused of infringement.  

In the case, British Telecommunications (BT) held several patents relating to voice over Internet protocol (VOIP) systems and services.  BT sent several letters to Cable One in which BT accused Cable One of infringing the claims, and BT engaged in licensing negotiations with Cable One.  Cable One purchased the allegedly infringing systems from Arris.  Arris participated in the licensing discussions with BT, but BT refused to include Arris as a party to the license agreement.  After settlement talks broke down, Arris filed a declaratory judgment action.

BT challenged Arris’ standing to bring the action, stating that BT never accused Arris of infringing the patents.  To determine whether Arris had standing to file the suit, the Federal Circuit applied the Supreme Court’s decision in Medimmune Inc. v. Genentech Inc., which states that declaratory judgment standing exists if “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.” 

Arris asserted that the potential for economic injury (loss of its customer relationship with Cable One) showed that such a substantial controversy existed.  The court disagreed, stating that economic injury alone is insufficient to create standing” in a patent infringement case.  However, the court found that Arris had standing for other reasons. Specifically, the court stated that:

where a patent holder accuses customers of direct infringement based on the sale or use of a supplier’s equipment, the supplier has standing to commence a declaratory judgment action if (a) the supplier is obligated to indemnify its customers from infringement liability, or (b) there is a controversy between the patentee and the supplier as to the supplier’s liability for induced or contributory infringement based on the alleged acts of direct infringement by its customers.

In the case, the court found a controversy between Arris and BT based on Arris’ potential liability for contributory infringement:   

When the holder of a patent with system claims accuses a customer of direct infringement based on the customer’s making, using, or selling of an allegedly infringing system in which a supplier’s product functions as a material component, there may be an implicit assertion that the supplier has indirectly infringed the patent.

Similarly:

[W]hen the holder of a patent with method claims accuses the supplier’s customers of direct infringement based on their use of the supplier’s product in the performance of the claimed method, an implicit assertion of indirect infringement by a supplier may arise.

Applying this standard, the court noted that BT’s infringement accusations against Cable One “explicitly and repeatedly” singled out Arris’ products.  Thus, the court found that BT’s assertions against Cable One also implied that Arris was infringing the patents, and the court held that Arris had standing to bring the action.

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