Allegations Regarding Third-Party Beneficiary Issues and Alter-Ego Status Belong in the First-Filed Venue - Futurewei Technologies, Inc. v. Acacia Research Corp

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Addressing an appeal of a dismissed action filed second-in-time, the U.S. Court of Appeals for the Federal Circuit affirmed a lower court’s ruling on defendants’ motion to dismiss, finding that additional, related claims for declaratory judgment added in a second-filed case did not meet the criteria for overcoming the “first-to-file” rule in an U.S. District Court for the Eastern District of Texas patent case.  Futurewei Technologies, Inc. v. Acacia Research Corp., Case No. 13-1090 (Fed. Cir., Dec. 3, 2013) (Taranto, J.).

Declaratory judgment plaintiffs Futurewei Technologies and Huawei Device (DJ Plaintiffs) sued three defendants in California: a patent owner and software maker, Access; the parent of an exclusive licensee to the patents, Acacia Research Corporation; and a sublicensee, SmartPhone Technologies.  DJ Plaintiffs filed their action one day after SmartPhone Technologies sued Huawei in Texas for infringement of five patents that allegedly read on Huawei’s smartphone handset and tablet devices.  DJ Plaintiffs sought, inter alia, a declaratory judgment that SmartPhone Technologies was an alter ego of the exclusive licensee, Acacia Patent Acquisition (APAC), and that DJ Plaintiffs were third-party beneficiaries of the licensing agreement for the purpose of enforcing its terms.

The district court granted defendants’ motion to dismiss, concluding that Huawei could not be a third-party beneficiary due to a general provision in the license agreement disclaiming creation of third-party beneficiary status, and that DJ Plaintiff’s “alter ego” allegation was properly a compulsory counterclaim in the Texas case, and, therefore, was improperly before the California court.  The DJ Plaintiffs appealed.

On appeal, the DJ Plaintiffs contested only the district court’s dismissal of the third-party beneficiary claims and the alter ego claims based on the terms of the license agreement.  The exclusive license to APAC allowed APAC to assign all enforcement rights to a sublicensee, here, SmartPhone.  The license agreement expressly disclaimed the creation of third-party beneficiary rights, but contained an arguably contradictory provision stating that the exclusive licensee was not permitted to enforce, or seek licenses for, the licensed patents from Access’s customers and end-users in connection with Access’s products and services.  The exclusive license further provided that “APAC and [Access] each irrevocably consent to the exclusive jurisdiction of any California state or federal court sitting in the Central District of California, over any suit, action or proceeding arising out of or relating to this Agreement.” In its complaint, DJ Plaintiffs alleged that Huawei had been an Access customer for more than 10 year and had contracted with Access to purchase Access products, including software for use on certain models of Huawei’s mobile handsets.

The Federal Circuit affirmed the dismissal of the third-party beneficiary and alter ego claims, albeit on different grounds than those articulated by the district court.  Rather the Court relied on the first-to-file rule.  The Federal Circuit’s reasoning tracked the rational of the district court that the subject matter in the second case is either the infringement or validity of the patents asserted in the first action or the fact that SmartPhone attempted to assert those patents against Huawei in Texas. The court reasoned that the previous case had substantially similar parties and issues to those in the Texas case, and the case did not meet any of the enumerated considerations that would warrant displacement of the rule.

Topics:  Alter Ego, First-to-File, License Agreements, Motion to Dismiss, Patents, Third-Party Beneficiaries

Published In: Civil Procedure Updates, General Business Updates, Intellectual Property Updates, Science, Computers & Technology Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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