Utah District Court Rejects Personal Jurisdiction Based on Cease-and-Desist Letters Sent By “Patent Troll”

The United States District Court for the District of Utah, Central Division recently granted defendant Furnace Brook LLC’s (“Furnace Brook”) motion to dismiss plaintiff Overstock.com’s (Overstock) declaratory judgment action for lack of personal jurisdiction. Relying on Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998), the Court held that cease-and-desist letters sent by Furnace Brook from its New York headquarters were not sufficient to justify personal jurisdiction in Utah and that Furnace Brook had not performed the necessary “other activities”—such as negotiating license agreements or collecting royalty payments—required in order for a patentee to be subject to personal jurisdiction in the forum. Although the Court found that the jurisdictional question was “clear,” it observed that the defendant was a “patent troll,” or a person who tries to make money off of a patent he is not practicing and has never practiced by threatening out-of-state companies with expensive litigation. Furnace Brook, a New York-based company, owns a patent on software and computer systems that facilitate internet purchases. The company purchased its patent at a bankruptcy auction and has used it to threaten several prominent retailers, including the plaintiff, with patent infringement suits. Unwilling to comply with Furnace Brook’s repeated cease-and-desist letters, Overstock, which is based in Utah, filed an action in Utah seeking a declaratory judgment that “Furnace Brook’s patent was invalid, or, if valid, that Overstock’s technology d[id] not infringe it.” In response, Furnace Brook filed a motion to dismiss the action for lack of personal jurisdiction because Furnace Brook’s only contacts with Utah were the aforementioned cease-and-desist letters.

The Court granted Furnace Brook’s motion because the mere sending of cease-and-desist letters to Utah did not meet the personal jurisdiction standards established by the governing Federal Circuit precedent, Silent Drive, Inc. v. Strong Indus. Inc., 326 F.3d 1194 (Fed. Cir. 2003). The Court noted that in Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998), the Federal Circuit specifically held that, for fairness reasons, cease-and-desist letters alone do not justify personal jurisdiction: “Principles of fair play and substantial justice afford a patentee sufficient latitude to inform others of its patent rights without subjecting itself to jurisdiction in a foreign forum.” The Court explained that, in order to meet due process, the establishment of personal jurisdiction requires “other activities”—most notably exclusive licensing agreements or royalty payments—beyond the cease-and-desist letters, as they indicate that the infringement letter created some benefit for the patentee. As there was no evidence of such benefits accruing to Furnace Brook, this standard was not met.

Overstock attempted to distinguish the case by citing OpenLCR.com, Inc. v. Rates Technology, Inc., 112 F. Supp.2d 1223 (D. Colo. 2000), a case in which an out-of-state patentee was subject to personal jurisdiction under similar circumstances. However, while the Court found OpenLCR’s reasoning persuasive, it insisted that in this patent case it was bound by Federal Circuit precedent. Additionally, it found that there were “arguable factual distinctions” in the amount of contact the patentees had with the forum state.

Noting that it had “no choice” but to grant the motion to dismiss under current law, the Court expressed its concern regarding “patent trolls.” The Court explained that by exploiting Federal Circuit precedent in order to threaten out-of-state entities with expensive litigation in a foreign forum, “patent trolls” are receiving a “benefit” that might make it reasonable to hold them subject to personal jurisdiction based solely on cease-and-desist letters. Also, because of the chilling effect that “patent trolls” have on business, there is a strong public policy motivation for Congress to reconsider the jurisdictional laws that apply to them.

Because both parties agreed that the question of proper venue was subsumed into the Court’s ruling on personal jurisdiction, the Court also granted Furnace Brook’s motion to dismiss for improper venue. Moreover, although there was evidence that Furnace Brook had sent licensing letters to another Utah company, the Court also denied the plaintiff’s motion for leave to perform jurisdictional discovery because, as the Court had established, such letters could not be sufficient to establish personal jurisdiction.