Federal Circuit Bases Personal Jurisdiction on Enforcement Letter

A patent owner sends a cease and desist letter to a would be infringer in a remote location. The recipient of the letter files a declaratory judgment claim of non-infringement in its home district; the patent owner’s only contact to the district is the enforcement letter. Is that sufficient for jurisdiction?

Since Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998), the Federal Circuit has held that such letters, as a matter of policy, do not suffice to give rise to jurisdiction.

But in December, the Federal Circuit upheld jurisdiction in just such a situation. Jack Henry & Assocs. v. Plano Encryption Techs. LLC, 910 F.3d 1199 (Fed. Cir. 2018). Although it did attempt to distinguish Red Wing Shoe on the facts of the case, it is now unclear when an enforcement letter could lead to jurisdiction in a distant forum.

Patent owners for now must be more careful when sending out such letters and understand that they may be risking litigation in a distant forum. Conversely, recipients of such letters, especially from non-practicing entities (often referred to as trolls) may have greater leverage to sue in their own forum.

Plano Encryption Technologies, LLC (PET) has its offices in Plano, Texas, in the Eastern District of Texas. Its sole business is to license and enforce its intellectual property, a portfolio of patents directed to authenticating and securing accounts and processes. PET wrote letters to eleven Texas banks, all located in the Northern District of Texas, with detailed allegations of infringement of its patents, and inviting them to license the patents.

The banks and their software supplier, Jack Henry & Associates, who is indemnifying them against such claims, brought suit in the Northern District of Texas seeking a declaratory judgment of non-infringement and invalidity.

Texas has four districts, and venue in such cases is determined by statute, 28 U.S.C. 1391. The statute provides that in a multi-district state like Texas, venue is proper for a corporation where its contacts would suffice to create jurisdiction in that district if it were a separate state. 28 U.S.C. 1391(d). In a case like Jack Henry, the districts are treated as if separate states, and then the usual “minimal contacts” analysis that applies for personal jurisdiction determines if venue is proper.

Generally, courts look at three factors to determine if due process permits jurisdiction: (1) whether the defendant “purposefully directed” its activities at residents of the forum; (2) whether the claim “arises out of or relates to” the defendant’s activities within the forum; and (3) whether assertion of personal jurisdiction is “reasonable and fair.”

That would usually mean that jurisdiction in a declaratory judgment case is proper where the patent owner sent an enforcement letter into the forum, since (1) the letters were purposefully directed there; (2) the claim arises from the threats of litigation; and (3) it is reasonable and fair to allow jurisdiction where the patent owner has instigated the dispute.

Nevertheless, in Red Wing Shoe, the Federal Circuit held that, as a policy matter, patent owners, absent more extensive business contacts, should not be required to answer in a distant forum merely for trying to enforce their patent rights.

The Jack Henry court acknowledged Red Wing Shoe and later cases in that vein. But it stressed that due process considerations are determined on the facts of each case, and here the facts supported jurisdiction. The key passage states:

Here, PET has undertaken a licensing program, with threats of litigation, directed to the Banks conducting banking activity in the Northern District. The Appellants stress the breadth and detail of PET's accusations of infringement, and the obligation of the forum to resolve disputes involving its residents and businesses. The Appellants point out that PET’s contacts with banks in the Northern District are in conduct of PET's only business, that of licensing and litigating its patents.

The burden befalls PET, as the source of the minimum contacts, to make a “compelling case” that the exercise of jurisdiction in the Northern District would be unreasonable and unfair.

This seems particularly directed to non-practicing entities (trolls), as such letters (and resulting litigation or licenses) are their only business.

Two of the three judges on the panel appended “additional views” to the opinion which questioned the entire Red Wing Shoe holding as possibly contrary to Supreme Court precedent, and ripe for re-examination in a future case.

For now, certainly in cases involving non-practicing entities, it appears that it has become easier for a target to assert jurisdiction in its home forum. Whether that will be expanded to include all patent (and other intellectual property) owners and enforcement letters remains an open question.