Cases Dispelling The Myth
In our fact pattern, if DJ filed a declaratory judgment action, C&D's first step would be to file a motion to dismiss in the court where DJ filed. The basis for dismissal would be that DJ filed an improper anticipatory filing. The cases also indicate that C&D should file (and serve) its own complaint in the forum of its choice. But this does not appear to be a requirement, especially if C&D does not want to go forward with a lawsuit.
Generally "where there are two competing lawsuits, the first suit should have priority, absent a showing of special circumstances" by the challenger (C&D).9 Several factors are considered to determine whether the first to file rule should apply: "(1) the chronology of the filings, (2) the similarity of the parties involved, and (3) the similarity of the issues involved."10 Courts will deviate from the first-filed rule when a suit, such as a declaratory judgment suit, is filed in anticipation of an infringement action, and specifically, when a filing is made "under the apparent threat of a presumed adversary filing the mirror image of that suit."11 This is called an "anticipatory filing."
At least one court12 has identified two "red flags" that indicate special circumstances exist: the first is when the first-filed action is for declaratory judgment, indicating that the action may be a preemptive strike; and the second is whether the first to file party knew that it was under imminent threat of a lawsuit.
This is precisely why the Seventh Circuit, in what appears to be the seminal case on the matter, declined to assert declaratory judgment jurisdiction in Tempco Electric Heater Corp. v. Omega Engineering, Inc ., 819 F.2d 746 (7th Cir. 1987). The Tempco court held that the district court correctly declined to exercise jurisdiction over a declaratory judgment action that was filed in anticipation of a trademark infringement action.
In Tempco, the infringement action was filed four days after the declaratory judgment action was filed. The court stated "[t]he mere fact that Tempco filed its declaratory judgment action first does not give it a 'right' to choose a forum. This circuit has never adhered to a rigid 'first to file' rule...As we have noted before, 'the wholesome purpose of declaratory acts would be aborted by its use as an instrument of procedural fencing either to secure delay or to choose a forum.'"13
Following this decision closely was the more recently decided Wilson Sporting Goods Co. v. Nicklaus Golf Equipment, 71 USPQ.2d 1153 (N.D. Ill. Jan. 6, 2004) case in the Northern District of Illinois. The Wilson court also found "special circumstances" in declining to entertain a first-filed declaratory judgment action.
The Wilson case arose out of a trademark dispute over the use of the name "JACK" for a golf ball. In October 2002, Nicklaus sent a letter to Wilson that the use of the term "JACK" for golf balls would create confusion in the marketplace.14 After discussions and correspondence between both parties, Nicklaus' counsel sent Wilson a letter stating that the use of "JACK" for golf balls violated the Lanham Act and various other state laws. Wilson's outside counsel sent a letter to Defendants on February 26, 2003 stating Wilson would like to resolve the matter without litigation, and asking that Nicklaus contact it to discuss alternative dispute resolution.15 Two days later, Wilson filed a complaint in the Northern District of Illinois seeking declaratory judgment that Wilson had not infringed Nicklaus' "JACK" trademark. Forty-five days later Nicklaus filed an infringement action in the Southern District of Ohio.16
The Illinois district court held "[d]efendants' prompt filing of the Ohio trademark infringement action obviates the need for Wilson's declaratory judgment action."17 Essentially the Wilson court found that Wilson acted improperly by filing an anticipatory lawsuit, and did so during settlement negotiations that the parties were having at the time. The court viewed such conduct as forum shopping, and as undermining the purpose of the Declaratory Judgment Act.
Two very recent cases dispel the first to file myth even more clearly: U.S. Vinyl Manufacturing, Corp. v. Design Tex Group, Inc ., Civ. No. 4:04-CV-124 (Nov. 10, 2004) and Mill Creek v. Kinkade, 2004 WL 2607987 (N.D. Tex. Nov. 16, 2004).
In U.S. Vinyl, the copyright owner sent a cease and desist letter to the defendant demanding that they cease and desist all future sales of the infringing pattern.18 Within one month of receiving the cease and desist letter, the recipient of the letter filed a declaratory judgment action in the Northern District of Georgia against the copyright owner, seeking a declaration that its design does not infringe the copyright. The copyright owner filed a copyright infringement suit in the Southern District of New York, and then moved to have the Georgia action dismissed on the basis that the filing in Georgia was improper.19
In deciding to dismiss the first-filed declaratory judgment action, the court first determined that a true threat of litigation existed based on the letters exchanged between the parties.20 The court then determined that the declaratory judgment action was filed under the apparent threat of litigation because the accused party was attempting "to secure a favorable forum and avoid facing further litigation in the Southern District of New York."21
After determining that the accused was engaging in procedural fencing and racing to its choice of forum, the court looked to see if special circumstances existed that warranted an exception to the first-filed rule. The court found that the following factors weighed in favor of dismissal: the accused infringer immediately filed the declaratory judgment action upon receiving the cease and desist letter without contacting the copyright owner or its counsel;22 and the copyright owner's infringement action was filed in the Southern District of New York only 35 days after the declaratory judgment action was filed in Georgia, and only 63 days after the cease and desist letter was dated. The court concluded that the period of time between the two filings was prompt and therefore weighed in favor of the copyright owner's later filed suit.23
Similarly, in Mill Creek the Northern District of Texas also dismissed a first-filed declaratory judgment action.24 In Mill Creek, the intellectual property owner believed that the accused infringer was using transparencies or digital images without authorization.25
Acting on its suspicions, the owner's general counsel spoke with the accused's representatives on Tuesday morning, June 3, 2004, and later followed with telephone calls and letters warning the accused that its conduct constituted infringement and violated the owner's intellectual property rights. The letter also expressly stated if the parties could not resolve this matter by 9:00 AM on June 4, 2004, "[owner] would be forced to file suit in the United States District Court for the Central District of California and seek a temporary restraining order against [accused's] scheduled sales."26 The two parties agreed that neither would file suit without notifying the other.
On the morning of June 4, the two parties had a conference call where they exchanged information about the infringing material. The owner reiterated that it would be forced to file suit by the end of the day, and the accused sent a letter claiming that the owner's allegations were without merit and that it hoped the parties would seek an amicable resolution.27
But, immediately following the conference call the accused filed a suit for declaratory judgment in Texas (the "Texas Action"), and did not tell the owner. After reconvening at 1:00PM and failing to reach a resolution, the owner informed the accused that it would file suit at 4:00. Owner filed in the Central District of California that same day (the "California Action").28 The accused sold the infringing material on June 8, 2004, and it sold out.
The owner moved to dismiss the Texas Action on the grounds that it constituted an anticipatory filing and because it failed to state a claim upon which relief can be granted.29 The Texas district court dismissed the Texas Action on both grounds. The court stated that the accused "have engaged in a 'classic' anticipatory suit and that the anticipatory filing of a declaratory judgment action creates a negative incentive to negotiate prior to filing suit."30 More generally, the Mill Creek court stated "[c]ourts will generally not allow a party to select its preferred forum by filing an action for a declaratory judgment when it has notice that another party intends to file suit involving the same issues in a different forum."31
Among the reasons for dismissal, the court noted that dismissal was warranted because the accused filed during settlement negotiations, and knew the owner intended to file suit if the issues went unresolved. The court noted that the "swiftness with which the [accused] reacted to [owner's] ultimatum" evidences that the accused wanted to choose the forum.32
The court in Mill Creek also looked at other factors in dismissing the Texas Action, including the efficiency of the forums. Although both forums would be equally inconvenient for the adverse party, the California Action would allow the court to resolve the California state law claims asserted by the owner. Finally, the court noted that since the factors did not weigh in favor or against the Texas court's retention of jurisdiction, in the interest of fairness and efficiency, the court would dismiss the declaratory judgment.
Turning back to our scenario, DJ's first-filed action is for a declaratory judgment which may indicate that it is in fact a preemptive strike rather than a suit for damages or injunctive relief. Also, since DJ received C&D's cease and desist letter, DJ knew that C&D was about to commence suit. These factors would likely weigh in favor of deviating from the first-filed rule based on the cases discussed above. The cases also illustrate that whether or not a court will dismiss a first-filed declaratory judgment action is at the court's discretion. Nonetheless, the enumerated factors and outcomes can guide us on how to manage cease and desist letter campaigns, and avoid having to litigate in inconvenient or unwanted forums.
The cases discussed herein dispel the myth supporting an intellectual property owner's fear of sending a cease and desist letter and subjecting itself to a lawsuit in an unfavorable forum chosen by the infringer. Those fears are further diminished if one takes the necessary precautions in the cease and desist letter. For example, if you are going to send a cease and desist letter without first filing a lawsuit, mention that you will file a lawsuit and give a date and/or forum. This will put receiver of the letter on notice of suit, and if they file first, a court is more likely to find forum shopping and/or an improper anticipatory filing. The cease and desist letter should be very explicit about the deadline for filing suit so a court will not consider the letter as a mere overture for settlement negotiations, as opposed to an imminent threat of suit.
In C&D's predicament, and in view of its desire not to first file, C&D should send DJ a cease and desist letter demanding that DJ halt its infringing activities. The letter should expressly state that "if DJ does not contact C&D to resolve this matter within 10 days, C&D will have no choice but to take further action in the [jurisdiction of choice]." Although this might seem harsh, if DJ does in fact first file a declaratory judgment action in another forum, that forum will more than likely recognize that DJ is forum shopping and engaging in procedural fencing. This will increase the likelihood that DJ's chosen forum will refuse to take the case, as well as increase the likelihood that C&D will be able to litigate in the forum of its choice.
Intellectual property owners should no longer fear that sending a cease and desist letter will result in litigation in an unfavorable forum. The courts have spoken and provided guidance to dispel this myth.
9 Tempco Electric Heater Corp. v. Omega Engineering Inc., 819 F.2d 746 (7th Cir. 1987).
10 In Remington Arms Comp. Inc. v. Alliant Techsystems, Inc., 2004 WL 444574 (Fe. 25, 2004).
11 Ontel Products, Inc. v. Project Strategies, Corp., 899 F.Supp. 1144 (S.D.N.Y. 1995).
12 The Eighth Circuit, in Northwest Airlines, Inv. v. American Airlines, Inc., 989 F.2d 1002 (8th Cir. 1993).
13 Id. at 759 (quoting American Auto Ins. Co. v. Freundt, 103 F.2d 613, 617 (7th Cir. 1939)).
14 Id. at 1154.
15 Id. at 1155.
16 Id. at 1156.
17 Id. at 1157.
18 Id. at 2.
19 Id. at 3.
20 Id. at 7.
22 Id. at 9.
23 Id. at 10.
24 Mill Creek v. Kinkade, 2004 WL 2607987 (N.D. Tex., Nov. 16. 2004).
25 Id. at 2.
29 The owner also moved in the alternative to stay the case pending the resolution of the California Action.
31 Id. at 7.
32 Id. at 8.
Stephen W. Feingold and Marc A. Lieberstein are both Partners in the New York office of Pitney Hardin LLP's Intellectual Property and Technology Group. Danielle R. Mendelsohn is an Associate in the Group. This article represents only the authors' opinions and does not necessarily reflect the views of Pitney Hardin or any of its clients. Questions concerning the article or Pitney Hardin's practice may be directed to Mr. Feingold or Mr. Lieberstein at (212) 297-5800.