A Forum-Selection Clause in a License Agreement May Not Necessarily Prevent a Litigation From Being Filed and Permitted to Proceed in a Different Court
By John Paul, Brian Kacedon, and Hala Mourad
When two separate actions relating to common subject matter are filed, the so-called first-filed rule gives preference to the forum of the first-filed action, unless considerations—such as judicial and litigant economy, and the just and effective disposition of disputes—require otherwise. Rather than having multiple lawsuits proceed separately, the first-filed rule permits courts to combine related lawsuits into a single action.
In Mitek Systems, Inc. v. U.S. Services Automobile Association, the United States District Court for the District of Delaware considered the effect of a forum-selection clause in a licensing agreement between the plaintiff and defendant, which specified a forum other than the forum of the first-filed action. Specifically, the court considered whether such a clause precludes application of the first-filed rule. The court also examined whether the licensor's pre-lawsuit communications indicating that the licensee was operating beyond the scope of the licensing agreement triggered the "anticipatory" exception to the first-filed rule. Determining that neither circumstance warranted a departure from the first-filed rule, the court then considered the propriety of transfer under § 1404(a). It found transfer appropriate because of both the first-filed rule and § 1404(a), and ordered the transfer of the second-filed action to the forum of the first-filed action.
Mitek Systems is a Delaware corporation with its principal place of business in California. United States Services Automobile Association is a reciprocal interinsurance exchange and unincorporated association with its principal place of business in Texas. In 2006, Mitek and USAA entered into a licensing agreement in which Mitek licensed technology relating to remote check depositing to USAA.
In March 2012, USAA filed suit in the Western District of Texas (the "Texas action"), seeking a declaratory judgment of noninfringement, invalidity, and unenforceability of five patents covered by the license agreement. USAA also claimed trade-secret misappropriation, breach of confidentiality agreements, and fraud. After USAA filed suit, Mitek likewise filed suit in the District of Delaware (the "Delaware action"), alleging that USAA infringed the same five patents and breached the license agreement. The license agreement contained a Delaware choice-of-law clause and a forum-selection clause stating that "any suit or action filed to enforce or contest any provision of this Agreement, or the obligations imposed, shall be brought and prosecuted in a court of competent jurisdiction sitting in the State of Delaware."
After Mitek filed suit, USAA moved to dismiss the Delaware action, or in the alternative, to transfer it to the Western District of Texas, contending that the Texas action was commenced before the Delaware action and that the first-filed rule governed. Mitek argued that the forum selection clause in the license agreement rendered the first-filed rule inapplicable because the clause bound USAA to file in Delaware. Mitek further argued that the anticipatory nature of the Texas action presented an exception to the first-filed rule. The Texas action was stayed pending the Delaware district court's decision on the applicability of the first-filed rule.
The Mitek Decision
The district court first considered whether the forum-selection clause of the license agreement precluded the applicability of the first-filed rule. Although the forum-selection clause provided for "a court of competent jurisdiction sitting in the State of Delaware" for resolution of actions relating to the License Agreement, the district court rejected Mitek's argument that the first-filed rule did not apply simply because of the presence of the forum‑selection clause. Although the court noted that "the clause appears valid" and agreed that a forum-selection clause is given substantial consideration, the court explained that forum-selection clauses are not enforced when they violate strong concerns of public policy. Finding that judicial efficiency and comity would be undermined if both the Texas and Delaware actions proceeded in parallel, the district court determined that the forum-selection clause did not preclude the application of the first-filed doctrine.
The district court next examined whether the Texas action was wrongfully filed in anticipation of Mitek filing suit and thus fell within the anticipatory exception to the first-filed rule. Before filing suit, Mitek directly accused USAA of infringing its patents and operating beyond the scope of the license agreement. While the district court agreed that it is proper to consider the bad faith or anticipatory nature of a declaratory-judgment action in evaluating the applicability of the first-filed rule, the court determined that Mitek's pre-lawsuit communications fell short of the "specific, concrete indications that a suit by [Mitek] was imminent." The district court explained that although Mitek accused USAA of infringing its patents, Mitek did not threaten to file suit but instead demanded that USAA make additional payments to acquire new licenses. The district court further noted that even a finding of an anticipatory exception did not alone warrant a departure from the first-filed rule unless the anticipatory nature of the first-filed action was accompanied by additional "convenience factors," which the court determined were not present.
Having determined that it should not override the first-filed rule, the Delaware court then considered whether transfer under 28 U.S.C. § 1404(a) was proper. Specifically, the district court considered: (1) whether the Delaware action could have been brought in the Western District of Texas, the proposed transferee venue; and (2) whether "convenience factors" demonstrated that on balance the litigation would more conveniently proceed and the interests of justice be better served by transfer.
The district court easily found that the Delaware action could have been brought in the Western District of Texas at least since USAA is headquartered in San Antonio, Texas, and personal jurisdiction would be proper under Rule 4 of the Federal Rules of Civil Procedure. The court also found subject-matter jurisdiction and venue to be proper.
The district court next turned to whether balancing the considerations of convenience and fairness warranted transfer by considering private- and public-interest factors. In evaluating the private-interest factors, the district court first considered the plaintiff's and defendant's choices of forum. While the district court accorded some deference to Mitek's decision to litigate in Delaware, its state of incorporation, the district court found that Mitek's maintenance of its principal place of business outside Delaware reduced the weight given to this factor, while USAA's maintenance of its principal place of business in Texas weighed in favor of transfer.
The district court next considered whether the claims arose elsewhere. Noting that infringement possibly took place in both districts, the district court determined that the allegedly infringing application was designed, tested, and operated in the Western District of Texas, weighing in favor of transfer. The district court further found that the convenience of the parties as indicated by their relative physical and financial condition weighed in favor of transfer due to Mitek's location in California and USAA's location in Texas. Because the bulk of the relevant evidence in patent-infringement cases typically comes from the infringer, the district court further found that the location of books and records weighed slightly in favor of transfer. The district court found that the factor relating to the convenience of the witnesses was neutral since the record did not indicate the unavailability of necessary witnesses in either forum.
Finally, the district court evaluated the public-interest factors relating to judicial efficiency. Finding most of the public-interest factors to be neutral regarding a decision to transfer, the district court noted that avoiding the risk of inconsistent judgments weighed slightly in favor of transfer while the familiarity of the trial judge with the applicable state law weighed slightly against transfer—due to Mitek's breach-of-contract claim that might be governed by Delaware law. Having concluded that the public-interest factors balanced out, the court found that the overwhelming private-interest factors accordingly warranted transfer.
Strategy and Conclusion
Courts consider many factors in determining whether to transfer a subsequently filed case to a forum of a first-filed action when the actions relate to common subject matter. The first-filed rule gives preference to the forum of the first-filed action. Although a forum-selection clause is often entitled to significant consideration in the evaluation of the propriety of transfer, its mere presence in this case was insufficient to defeat transfer in light of other private- and public-interest factors. Similarly, although the anticipatory nature of a first-filed action can operate as an exception to the first-filed rule, the patentee's request for additional payments in this case failed to provide the concrete indications of an imminent suit necessary for application of the anticipatory exception.
The Mitek decision can be found here.
Editors and authors
The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, L.L.P.
John Paul firstname.lastname@example.org
Brian Kacedon email@example.com
Douglas W. Meier firstname.lastname@example.org
Jason W. Melvin email@example.com
Hala Mourad firstname.lastname@example.org
This article is for informational purposes and does not constitute legal advice.
The views expressed do not necessarily reflect the views of LES or Finnegan.