EDTX Monthly Wrap-Up — April 2020

This month's Wrap-Up summarizes a decision on patent venue law from the Eastern District of Texas. The decision addresses venue transfer under 28 U.S.C. § 1404(a) when a forum selection clause applied to only a portion of the asserted patent claims for less than all defendants. Severing only the covered claims for the covered defendants was an option. The court found partial severance was "not workable" in this instance and ordered wholesale transfer of the partially covered defendants to Delaware.

Venue transfer was warranted when a forum selection clause applied to most, but not all, of two defendants' cases. Implicit, LLC v. Fortinet, Inc., Case No. 2:19-cv-00040-JRG-RSP, Dkt. 252, at *1 (E.D. Tex. Apr. 22, 2020) (Payne, M.J.)

This consolidated case involved Defendants Juniper Networks, Inc. and Fortinet, Inc.'s motion to transfer venue based on a forum selection clause in a license agreement.[1] Id. at 1. Intel entered into a licensing agreement ("Intel Agreement") with Plaintiff Implicit, LLC, in 2009. Id. at 1, 6. The Intel Agreement has a forum selection clause where Delaware has "exclusive jurisdiction" over all disputes regarding the agreement. Id. at 1, 9. Defendants asserted they were "third-party beneficiaries" of the agreement, "making the forum selection clause applicable." Id. at 1—2. Plaintiff disputed this, an issue that "often arises when a defendant asserts a defense based on a license agreement." Id. at 3 (citation omitted).

The complication here was that the Intel Agreement could only cover most (but not all) of Defendants' accused products. Accused products with Intel chips could be covered, but not all products had Intel chips and not all asserted claims required chips. Id. at 1, 13. Plaintiff requested the court partially sever the case and retain the uncovered portion. Id. at 2. The court concluded severance was "not workable here" and granted Defendants' transfer motions. Id. at 2, 4.

Venue Transfer Law under a Forum Selection Clause

Most venue transfer analysis under 28 U.S.C. § 1404(a) only concerns the forum's convenience to the parties. Id. at 2. But the same statute applies to transfer under a forum selection clause. Id. at 3. The clause is "given controlling weight in all but the most exceptional cases." Id. (quoting Atl. Marine Constr. Co., Inc. v. U.S. Dist. Court for the W. Dist of Tex., 571 U.S. 49, 52 (2013)). Courts apply a two-step analysis for determining whether transfer is appropriate. Id. "The court first determines if the forum selection clause governs the dispute." Id. (citing Gen. Protecht Grp., Inc. v. Leviton Mfg. Co., 651 F.3d 1355, 1359 (Fed. Cir. 2011)). If it does govern, the court then considers whether there are "extraordinary circumstances" that disfavor transfer. Id. at 4 (quoting Atl. Marine, 571 U.S. at 62). Convenience is irrelevant. Id.

Step 1: Whether the Forum Selection Clause Governs

Defendants only needed to demonstrate a "non-frivolous" nexus between the license and the case to show the forum selection clause governed. Id. at 3 (quoting Gen. Protecht Grp., 651 F.3d at 1359)). The court noted this not a precise standard, but EDTX precedent places the "elusive attachment point [] almost assuredly" between the middle and one-quarter mark of a spectrum. Id. at 4 (citing Zix Corp. v. Echoworx Corp., No. 2:15-cv-01272-JRG, 2016 WL 7042221, at *3 (E.D. Tex. June 9, 2016)). Something like a preponderance of a preponderance of the evidence, if you will. A showing that there likely is a connection without having to prove there actually is.

(1) Defendants were third-party beneficiaries to the Intel Agreement.

The court found Defendants had "easily shown that they have a non-frivolous argument that they are third-party beneficiaries" of the Intel Agreement. Id. at 7. Defendants were clearly Intel customers; many of their products used Intel chips. Id. at 1. And the Intel license provided a broad covenant not to sue Intel's customers. Id. at 6. But "third-party beneficiaries" was not defined in the Intel Agreement. The phrase was mentioned in a single section in a context where it could not apply to Defendants. Id. Plaintiff argued that this sole section "defines the scope of third-party beneficiaries . . . ." Id. Applying Delaware law, the Court refused to "draw this negative implication" because the Intel Agreement evidenced an intent to benefit third parties, and Delaware cases finding otherwise analyzed agreements where the wording made it clear that the intent was only for contracting parties to benefit. Id. at 7—8 (citation omitted).

(2) As third-party beneficiaries, Defendants could assert the forum selection clause.

The court also found that Defendants were entitled to exercise the forum selection clause. Id. at 9. "Little dispute exists that [Defendants'] non-frivolous license defenses constitute disputes regarding the Intel License." Id. Indeed, the Intel Agreement's forum selection clause provided extensive language covering just about any situation regarding the agreement:

[Plaintiff] and Intel agree that all disputes and litigation regarding this Agreement and matters connected with its performance shall be subject to the exclusive jurisdiction of the courts of the State of Delaware, or of the Federal courts sitting therein. Each Party hereby irrevocably submits to the personal jurisdiction of such courts and irrevocably waives objections to such venue.

Id. (emphasis added) (citing the Intel Agreement). The court rejected Plaintiff's rebuff, pointing out that the only case it cited in support was one where the court "actually rejected the plaintiff's argument . . . ." Id. at 9—10 (citation omitted).

(3) Defendants showed a non-frivolous nexus between the Intel Agreement and a majority of the claims.

The Intel Agreement only covers customer's products where infringement "would not exist" but for the inclusion of Intel processors in the accused product. Id. at 10. The court could not address Plaintiff's arguments about whether an Intel processor actually satisfied certain claim elements because those arguments get to the merits of the license defense. Id. at 10—11. The forum selection clause applied, so by adjudicating those issues the court "would exceed its authority at this preliminary stage." Id. at 11 (citation omitted).

The court instead focused on which accused products included Intel processors. Id. Defendants presented evidence indicating "that the majority of accused products included Intel processors." Id. Fortinet, for example, "provided a list with the accused products, which showed that approximately 75% of the accused products possessed an Intel processor as the central processing unit." Id. (citation omitted). Defendants also "walked through how [Plaintiff]'s infringement contentions were directed at functionality provided by the Intel processors." Id. (citation omitted).

What's more, the Court found that 18.5% of Plaintiff's asserted claims were Beauregard claims and thus could be infringed by covered products. Id. at 12—13. Beauregard claims, also known as "computer-readable medium claims," implicate computer storage devices like a hard drive. Id. at 12 n.5. The court found that all of Defendants' accused products could infringe these Beauregard claims simply by using, selling, etc. products with computer memory containing code that would infringe if executed. Id. at 12 (quoting Finjan, Inc. v. Blue Coat Sys., Inc., No. 13-CV-03999-BLF, 2015 WL 3630000, at *13 (N.D. Cal. June 2, 2015)). This meant the Intel Agreement covered an even smaller portion of the case.

But the court ultimately found Defendants established a non-frivolous nexus between license and product because a larger "portion of the case is covered by the forum selection clause within the Intel license" and "a smaller portion . . . is not . . . ." Id. at 13.[2] Now the court had to order the appropriate remedy for this scenario. The court could transfer Defendants, retain Defendants, or sever the portion of the case covered by the Intel Agreement.

Step 2: Whether extraordinary circumstances unrelated to the convenience of the parties the disfavor transfer

There was "no practical way to cleanly sever the case." Id. Plaintiff, the court noted, could not "clearly identify the accused products that possess the Intel processors and the claims that implicate them . . . ." Id. If the court partially severed the case, then two different forums would be construing "the exact same claim limitations" and might "address the same infringement issues." Id. The risk of "conflicting rulings" was too high and the inefficiencies too great. Id. at 13—14. The court found the facts here "even less favorable" than those in In re Rolls Royce where the Fifth Circuit granted a writ of mandamus from a court's decision to retain a case when "a forum selection clause applied for some parties but not others." Id. at 14 (discussing In re Rolls Royce Corp., 775 F.3d 671 (5th Cir. 2014).

The traditional private interest factors under § 1404(a) cannot be a consideration for the covered portion of the case. Id. The only public interest factor weighing against transfer was "the administrative difficulties flowing from court congestion . . . ." ainst transfer. Id. The court thus concluded that the applicability of the forum selection clause meant the covered portion of the case should be transferred. Id. For the uncovered portion of the case, there was "little showing that a trial in Marshall would be more convenient under the private interest factors." Id. The court could not consider the private interest factors for the Plaintiff because they were a party to the forum selection clause. Id. at 15 (citing In re Rolls Royce, 775 F.3d at 681). The presence of a third defendant had "a limited impact" on the transfer analysis. Id.

The court granted Defendants' Motion to Transfer. Id. Juniper and Fortinet will litigate all of their claims in Delaware, while the court retained the third defendant's case. Id.

[1] A third defendant (Imperva, Inc.) did not join in the transfer motion. Id. at 15. "Defendants" means Juniper and Fortinet.

[2] Assuming that the 75% of Fortinet's covered products actually infringed all 18.5% of the asserted Beauregard claims, and including the 25% uncovered products, means that slightly less than 40% of Plaintiff's case against Fortinet could be uncovered.

Author: Collin Marshall