A123 Systems, Inc. v. Hydro-Quebec

The Federal Circuit on November 10, 2010 issued an opinion affirming a district court dismissal of a declaratory judgment case involving a patent owned by a state university.

A123 Systems v. Hydro-Quebec concerned two battery cell patents, for which the Board of Regents, the University of Texas System (UT) had granted field-of-use licenses to Hydro-Quebec. In April 2006, A123 had filed a declaratory judgment action for noninfringement and invalidity against Hydro-Quebec in the U.S. District Court for the District of Massachusetts. Hydro-Quebec moved to dismiss the declaratory judgment action in August 2006, alleging that UT was a necessary and indispensable party that could not be joined due to its Eleventh Amendment-based sovereign immunity from suit in federal court. Within a month, Hydro-Quebec and UT sued A123 for infringement in the Northern District of Texas.

The District of Massachusetts dismissed the declaratory judgment action due to pending reexamination of both patents at issue. After reexamination, A123 moved to reopen the case before the District of Massachusetts. The District of Massachusetts denied the motion, finding that UT was a necessary party to the suit, that UT had not waived its sovereign immunity in Massachusetts, and that A123 had an opportunity for remedy in the Northern District of Texas, where UT had waived immunity by itself filing suit.

In affirming the dismissal in the District of Massachusetts, the Federal Circuit first found that HQ had fewer than all of the substantial rights in the patents at issue and that therefore they could not be subject to a declaratory action without UT, the assignee of the patent. Citing Federal Circuit precedent that waiver of immunity in one suit does not extend to a separate suit with the same subject matter or the same parties, the Federal Circuit then found that UT did not waive immunity in the declaratory judgment suit by itself suing for infringement. The Federal Circuit then found that allowing HQ to defend the patents without UT would prejudice the patent rights of UT, that a judgment without UT’s involvement would be inadequate, and that A123 could litigate its noninfringement and invalidity claims in the Northern District of Texas suit. Therefore, the Federal Circuit ruled that UT was an indispensable party.

Because federal courts have exclusive subject matter jurisdiction over patent matters under 28 U.S.C. § 1338(a), and because the states have sovereign immunity from federal suit under the Eleventh Amendment, private parties may need to take extra care when practicing technology that may infringe a patent owned by a state university or other state government entity. Inability to file a declaratory judgment suit against state patent owners may prevent parties from verifying their rights to practice certain technologies. Parties cannot circumvent immunity of a state patent owner by suing a licensee with less than the full rights of the patent. To avoid the uncertainty of waiting to see if a state entity sues for infringement, parties trying to practice potentially infringing technologies may consider promptly negotiating licenses for state-owned, patented technologies.