Northern District of Illinois Finds That Declaratory Judgment Action Available Against Private Sector Owner of Patent Owned in Common with Government

In Sourceone Global Partners LLC. V. KGK Synergize, Inc., Civ. Case No. 08 C 7403 (N.D. Il. May 13, 2009), KGK Synergize (“KGK) is an assignee of U.S. Patent No. 6,987,125 (the ‘125 patent), which generally relates to a nutritional supplement for lowering cholesterol.  The ‘125 patent was invented by Najla Guthrie, Elzbieta Kurowska, John Manthey, and Robert Horowitz pursuant to a partnership between the Department of Agriculture and KGK.  Pursuant to the partnership agreement, Mr. Mathaney and Mr. Horowtiz assigned their rights to the Federal Government, and Ms. Guthrie and Ms. Kurowska assigned their rights to the KGK.  KGK later exclusively licensed their interest in the ‘125 patent to Sourceone Global Partners (Sourceone) for the purpose of making and selling Sytrinol.  The Government is not a signatory to this license.

Subsequently, Sourceone developed on its own Cholesstrinol, which Sourceone believed did not infringe the ‘125 patent and therefore was not subject to the royalty provisions of the license.  KGK sent threatening letters to Sourceone’s partners, suppliers, and customers indicating that Cholesstrinol infringed a number of patents, including the ‘125 patent.  In response, Sourceone filed a Declaratory Judgment Action alleging, among other issues related to tortuous interference with contracts, that Cholesstrinol does not infringe the ‘125 patent and that the ‘125 patent was invalid.

KGK moved for dismissal of the Declaratory Judgment Action as to those claims related to the ‘125 patent since the ‘125 patent is co-owned by the Federal Government.  As any judgment resulting from the Declaratory Judgment Action affecting the validity of the ‘125 patent will affect a property owned by the Federal Government, the Declaratory Judgment Action violates the Federal Government’s sovereign immunity to Declaratory Judgment Actions. In essence, KGK’s position was that any patent commonly owned by a private party and the Federal Government could not be the subject of a Declaratory Judgment Action to the same extent that a Declaratory Judgment Action cannot lie against a patent wholly owned by the Federal Government since Rule 19 requires joinder of the Federal Government in such situations.

In disagreeing with KGK, Magistrate Judge Schenkier found that the court retained subject matter jurisdiction over the Declaratory Judgment Action since the mere fact that one owner enjoys sovereign immunity does not affect the liability of the remaining owners. In reaching this decision, the court first acknowledged that Rule 19 does not require joinder since KGK is a co-owner of the patent.   In this manner, the court distinguished the situation from the situation in Enzo APA & Son, Inv. V. Geapag A.G., 134 F.3d 1090 (Fed. Cir. 1998) where the failure of a join the patent owner prevented a Declaratory Judgment Action since the non-exclusive licensee who was actually sued lacked standing to bring suit.  Since KGK was a co-owner, KGK was not in the same situation as a non-exclusive licensee and therefore could be the subject of a Declaratory Judgment Action without the remaining co-owners.

The Court further noted that the failure to join a party is not a matter of subject matter jurisdiction, but instead falls within the joinder requirements of Rule 19.  While Rule 19 requires joinder of indispensible parties and the parties agreed that the Government is an indispensible party, Rule 19(b) provides an exception where the court determines, according to a set of four factors, whether “in equity and good conscience, the action should proceed among the existing parties or should be dismissed.” Quoting Rule 19(b).

In applying the exception, the court noted that it needed to balance the harm against the missing party should the action proceed as compared to the harm against the party opposing dismissal.  According to this balance, the court found that there was greater harm in dismissing the action to Sourceone than there was harm to the Federal Government in forcing dismissal under Rule 19 for failure to join an indispensible party. 

In applying the first factor, the Court cited to the Federal Circuit’s decision in Dainippon Screen Mfg. Co. v. CFMT, Inc. 142 F.2d 1266 (Fed. Cir. 1998) for the proposition that, in the case of a licensee who is sued under a Declaratory Judgment Action, Rule 19(b) should allow the suit to proceed where the interest of the licensee is aligned with the interest of the patent owner.  In Dainippon, CFMT was the licensee of a patent, and patent was owned by the parent of CFMT.  In the same way, while the Government had argued that its interest in the ‘125 patent would be prejudiced should the Declaratory Judgment Action proceed and the ‘125 patent be found invalid, the Court found that there was no action of adverse interests between the coowners of the ‘125 patent.  As such, this alignment of interest indicated that the first factor weighed heavily in favor of maintaining the suit.

After finding the second and third factors were also in favor of Sourceone, the court applied the fourth factor, which considers whether Sourceone would have an adequate remedy outside of the Declaratory Judgment Action.  The court found that there was no alternative remedy available should the action be dismissed.  Specifically, while KGK noted that the Government can be sued under 28 U.S.C. §1498 for patent infringement, there was no allegation of Government infringement.  Moreover, since the Court of Federal Claims can only grant money damages under 28 U.S.C. §1498, there would be no available remedy for Sourceone should a Declaratory Judgment Action be filed under 28 U.S.C. §1498. Therefore, 28 U.S.C. §1498 failed to provide a remedy.  Thus, the court held that, while KGK and the Government “see no unfairness in requiring Sourceone to wait until they together decide to sue Sourceone before Sourceone can raise its invalidity and noninfringement defenses” as KGK continues threatening infringement against Sourceone and its partners, when viewed from the perspective of equity, the court “failed to see how the public interest is advanced by allowing a private patentee such as KGK that kind of unreviewable sway in exercising its patent rights.”   Thus, the fourth factor also weighed heavily in favor of maintaining the suit.

Therefore, the court found that merely because the Federal Government could not be joined under Rule 19, Rule 19(b) provided an exception which allowed the Declaratory Judgment Action to continue.

Significance for Government Licensed Patents

Sourceone demonstrates that co-ownership of a patent does not always require joinder of all owners for purposes of declaratory judgment actions, and that even where joinder is others necessary, an exception is available.  Thus, merely because one owner enjoys sovereign immunity does not mean that the remaining owners enjoy the same immunity.  However, the situation in Sourceone is relatively unique.  Unanswered is the question of what would have happened if the patent is not commonly owned with the Government.  In the more typical situation, the Government will license the patent and it is the licensee who, with authority to bring suit in its own name, sends such letters which can result in a declaratory judgment action.  In this situation, the result may well not be the same.  For instance, unless the license is fully paid up, the interests of a licensee is not exactly the same as that of the patent owner since the licensee may want to reduce royalties is owes. An example of this situation was recently demonstrated in MedImmune, Inc. v. Genentech Inc., 549 U.S. 118 (2007).  Further, since all licenses for Government patents, even exclusive ones, allow the Government to re-license the patent to others under limited circumstances as set forth in 37 CFR 404.5, the Government may be in a position to terminate a suit by negotiating a deal directly with the accused infringer in limited circumstances.  Therefore, unlike the situation in  Sourceone, the parties’ interests are not wholly aligned and the Government may well be required for maintaining a declaratory judgment action in order to ensure that public assets are adequately protected.  Therefore, while declaratory judgment actions appear more viable against private parties who own patents commonly with the Government, the same may not be possible for exclusive licensees of Government owned patents.

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