After DataTern Inc. accused dozens of SAP AG and Microsoft Corp. customers of patent infringement, the two companies sprang into action and used declaratory judgment actions to knock out DataTern’s patents in 2012. The U.S. Court of Appeals for the Federal Circuit blessed that tactic on Friday, but with some reservations.
In a 27-page ruling, a three-judge Federal Circuit panel ruled that DataTern’s litigation threats against SAP customers gave the software giant jurisdiction to respond with a declaratory judgment action. The court handed Microsoft a less forceful endorsement, finding that it could only challenge one of the two DataTern patents at issue.
In a partial dissent, Chief Judge Randall Rader wholeheartedly endorsed SAP and Microsoft’s effort and criticized his colleagues for partially stymieing Microsoft. “Microsoft’s and SAP’s willingness to step into this case as suppliers defending their customers should be encouraged, not discouraged,” Rader wrote. “The practical and problematic effect of the court’s holding today is that it gives aggressive parties a road map to avoid supplier suits.”
DataTern, a nonpracticing entity represented by McCarter & English, holds software patents on a process of populating databases with information. Instead of asserting those patents against Microsoft and SAP—two giants in the software industry—it brought a slew of infringement cases against businesses that use Microsoft and SAP’s software, including Chevron Corp., Bayer Corp., and Allstate Corp. DataTern filed most of those cases in the Eastern District of Texas in 2010.
To protect its customers, Microsoft and SAP could have intervened in those cases. But instead they sought to invalidate the DataTern patents through declaratory judgment actions in U.S. district court in Manhattan, a jurisdiction known for being relatively harsh on patent plaintiffs. Weil, Gotshal & Manges represented SAP. Woodcock Washburn (now Baker & Hostetler) represented Microsoft. Weil partner Edward Reines argued on behalf of both defendants.
The Texas cases against the customers were stayed so that U.S. District Judge Katherine Forrest in Manhattan could rule on the validity of DataTern’s patents. In a series of 2012 rulings, Forrest handed total victory to Microsoft and SAP. As a threshold matter, she held that they could bring the declaratory judgment actions in the first place. Then she ruled that Microsoft and SAP don’t infringe the patents. Finally, she crafted a highly unusual injunction that blocked DataTern from trying to negotiate any last-minute, nuisance value settlements from defendants in the Texas cases.
On appeal, DataTern argued that Microsoft and SAP shouldn’t have been allowed to bring the declaratory judgment actions because they didn’t have much of a financial stake in the underlying litigation. The companies hadn’t been sued, DataTern pointed out, and they weren’t on the hook for the legal costs of their customers. DataTern also defended its litigation tactics, claiming that it went after the customers because they infringe the patents in different ways than Microsoft and SAP.
In a majority opinion written by Judge Kimberly Ann Moore, the Federal Circuit mostly agreed with Microsoft and SAP that they could bring suit. After inspecting the materials DataTern sent to its targets, the court concluded that the company was essentially accusing the suppliers of inducing or contributing to infringement. That gave Microsoft and SAP the sort of stake in the litigation needed to bring declaratory judgment actions, the court wrote.
There was one big exception to the court’s ruling. It held that with regard to one of the two patents DataTern was asserting, Microsoft hadn’t shown that “a substantial controversy existed” as to whether it infringed.
It was that part of the panel’s decision that provoked Rader’s ire. He wrote that his colleagues had given patent plaintiffs a road map for shaking down end-users of technology for nuisance settlements. “DataTern and other potential patent litigants would like to find a way to keep Microsoft or other major corporations on the sidelines while seeking numerous settlements with their customers who cannot afford the cost of a major lawsuit,” he wrote. “Thus, this decision takes on special importance because it shows DataTern and its successors a way to achieve that lucrative objective.”
Nonetheless, Reines praised the panel’s decision on Friday. “We are delighted that the Federal Circuit vindicated SAP’s decision to step up to protect its customers,” he wrote in an email.
McCarter & English’s Lee Carl Bromberg, who argued at the Federal Circuit for DataTern, wasn’t immediately available for comment.