FORUM SELECTION ISSUES IN PATENT
INFRINGEMENT COVERAGE CASES
By: M. Elizabeth Medaglia, Robert N. Kelly and Peter A. von Mehren* Footnote1
This article analyzes insureds' forum selection decisions over the last decade when bringing actions seeking coverage for patent infringement under the Advertising Injury provisions of CGL policies. Endnote1 It posits that the interplay of four separate types of factors (i.e., comfort factors, forum-competency factors, efficiency factors, and choice-of-law factors) usually controls plaintiffs' forum selection decision. The article also provides an overview of the history of patent infringement coverage litigation in an effort to discern how these various considerations/factors have affected plaintiff's forum selection decisions in this particular area of the law. The article suggests that plaintiffs have given increasingly greater weight to factors related to the substantive and procedural law a particular tribunal will apply as the law interpreting the Advertising Injury provisions has evolved over the last decade. The final section of the article discusses several options available to an insurance company in dealing with issues related to forum selection in patent infringement coverage actions and coverage actions generally.
I. FACTORS AFFECTING FORUM SELECTION DECISIONS.
A party contemplating legal action to vindicate its common law rights, whether based on contract or tort, often can choose to bring its action in one of several different forums that can appropriately assert jurisdiction over the matter in dispute. The factors that influence the selection among the available forums in a particular case are extremely varied and defy any effort at rigid classification, since they often involve the potential plaintiffs' undefinable preferences for and prior experiences with one or more of the available forums. Nevertheless, factors related to the available forums' perceived biases, the plaintiff's perception of forum competency, the efficiency associated with using one or another forum, and the procedural and substantive rules the different forums might apply unquestionably play a role in most forum selection decisions.
A. Comfort Factors
As most experienced litigators know, one of the goals plaintiffs sometimes seek to obtain when choosing a forum is the "home court" advantage. In this regard, a plaintiff may wish to bring an action in its home town because it knows and feels comfortable with the manner in which disputes are resolved in that locale. Such a plaintiff might also believe that it will obtain the benefits of a tribunal that is sympathetic to its particular concerns by bringing the action in its home town or in another forum where it has a substantial local presence. Most of the limitations our legal system places on a plaintiff's ability to select a forum reflect the concern that the selection process will result in a forum adjudicating the dispute that is unfair or unduly inconvenient for the defendant.
The American legal system employs a number of legal rules to level the playing field between the plaintiff and defendant. For example, the constitutional limits placed on a court's ability to adjudicate matters involving defendants over whom they do not have personal jurisdiction, Endnote2 as well as various statutory venue requirements, unquestionably serve this end. See Leroy v. Great Western United Corp., 443 U.S. 173, 180, 183-84 (1979) (federal statutory venue provisions designed to protect defendant "against the risk that the plaintiff will select an unfair or inconvenient place of trial"). In 1789, Congress also explicitly established the federal system's diversity jurisdiction in order to reduce or eliminate the perceived prejudices of the state courts against out-of-state defendants. See Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 3601 (1986 & 1995 Supp.) (traditional explanation of diversity jurisdiction is the "fear that state courts would be prejudiced against out-of-state litigants").
The desire to obtain the "home court" or similar advantage thus plays a large role in many forum selection decisions, and the American legal system consistently seeks to place limits on a plaintiff's ability to pursue these ends to the detriment of other factors related to the overall fairness and convenience of litigating a dispute in a particular forum.
B. Forum Competency Factors
Another set of factors closely related to the comfort factor involves the plaintiff's perception of the comparative capabilities of the different available forums. For example, a plaintiff might choose to bring an action in a particular forum because its courts are known for being able to handle effectively complex cases involving many difficult questions of law. Another forum might be preferred because it resolves more routine matters quickly and efficiently. Indeed, Congress implicitly recognized the role of competency concerns when it established specialized tribunals with limited jurisdiction to handle tax, bankruptcy, government contract, and other disputes governed by complex statutory rules and administrative regulations. Experienced litigators also know that the decision to bring a particular case in a particular court within the same jurisdiction often involves an evaluation of these types of competency concerns.
Other than the statutory provisions governing specialized courts similar to those mentioned in the preceding paragraph, consideration of competency factors by plaintiffs when making forum selection decisions is basically unregulated by our legal system. This approach is consistent with the well-accepted idea that the litigants, rather than the judiciary, are the engine that drives our adversarial system of dispute resolution. It thus reflects our society's belief that the vast majority of plaintiffs will seek to have their claim addressed by a competent court capable of resolving their dispute in the most effective manner possible. And, the aggregate result of those decisions will be to maximize the overall effectiveness of the dispute resolution system in appropriately resolving private disputes.
C. Efficiency Factors
Efficiency factors include matters related to the efficient operation of the dispute resolution system (i.e., reducing the expenses associated with gathering the relevant evidence to present the case, ensuring that witnesses and other relevant information are within the coercive power of the selected tribunal, and eliminating costs associated with travel and other related expenditures). These efficiency factors, which are firmly rooted in our legal system's expectations as to how a plaintiff should act when selecting a forum, have played a significant role in shaping the requirements set forth in federal venue statutes and the common law doctrine of forum non conveniens, both of which serve to limit the options that a plaintiff has when selecting a forum. The federal system thus takes the view that statutory venue provisions limiting a plaintiff's forum selection decisions focus "primarily [on the] matter of choosing a convenient forum." Leroy v. Great Western United Corp., 443 U.S. at 180. Therefore, that system limits a plaintiff's forum choices in civil cases to those judicial districts where the defendant resides, where the subject matter of the action is located, or any forum where the defendant is subject to personal jurisdiction, so long as the action cannot be brought in any other forum. See 28 U.S. § 1391(a).
Similarly, when discussing the scope of the doctrine of forum non conveniens, the Supreme Court has recognized that plaintiffs may be tempted "to resort to a strategy of forcing the trial at a most inconvenient place for an adversary, even at some inconvenience to himself." Gulf Oil Corporation v. Gilbert, 330 U.S. 501, 508 (1947). A plaintiff's choice of forums thus can be overridden on forum non conveniens grounds, even when venue and jurisdiction are proper, where it unfairly burdens the defendant or otherwise undermines the "easy, expeditious and inexpensive" resolution of a dispute. Id. The courts, therefore, will evaluate a plaintiff's forum choice by considering the relative ease of access to sources of proof in the different available forums, the availability of compulsory process in those forums, the cost of obtaining the attendance of willing witnesses, and other practical problems relating to the cost of litigating a matter in the forum chosen by the plaintiff. See Id. If a court concludes that these factors strongly weigh in favor of litigating the matter elsewhere, it will -- where federal venue is in question -- transfer the plaintiff's claim to a more appropriate forum -- where it is not -- stay proceedings in favor of litigation in another forum or, in some instances, dismiss the action altogether. See Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 3828.
As the above discussion of the federal venue statute and the doctrine of forum non conveniens demonstrates, a plaintiff that ignores these efficiency factors when choosing a particular forum does so at its peril.
D. Choice-of-Law Factors
Choice-of-law factors also can have a substantial effect on the forum selection choices of those plaintiffs with the resources to litigate in distant forums. In this regard, since most courts employ their own law when deciding procedural matters, a plaintiff might wish to bring its claims in a jurisdiction that employs discovery rules (either liberal or restrictive) that it believes will favor its perceived interests. For example, the fact that a particular federal court has adopted the discovery procedures embodied in the recently amended Rule 26 might influence forum selection in certain cases. Endnote3 It also could be important to a particular plaintiff that a jurisdiction encourages settlement by employing mandatory mediation procedures.
In addition, a plaintiff might wish to take advantage of a particular forum's choice-of-law rules because it believes that favorable substantive rules of law will be applied. Indeed, the published reporters are replete with cases where plaintiffs filed their claims in a particular court in order to escape another forum's substantive law barring recovery. See e.g., Keaton v. Hustler Magazine, Inc., 105 S.Ct. 1473 (1984) (Supreme Court upholds plaintiff's decision to file suit in New Hampshire, even though that forum-selection decision was based on a desire to avoid the statute-of-limitations bar applicable in all alternative forums). There also may be instances where a plaintiff wishes to bring its claim in a forum where there is uncertainty with respect to how the choice-of-law rules will operate. The plaintiff proceeding in this fashion seeks to take advantage of this uncertainty surrounding the forum's choice-of-law rules in order to preserve its flexibility concerning the position(s) it can legitimately take with respect to the substantive legal rules to be applied to the dispute.
Although the American legal system frowns on the idea of forum shopping, Endnote4 it does not take the view that it is improper for a plaintiff to select a forum on the grounds that it will apply favorable procedural or substantive legal rules. Indeed, the federal system will respect the plaintiff's chosen law even after a case has been transferred on venue grounds by applying the law that would have been applied by the district court where the case was originally brought. See Van Dusen v. Barrack, 376 U.S. 612, 639 (1964) ("A change of venue under § 1404(a) generally should be, with respect to state law, but a change of courtrooms"). Endnote5 Consequently, although not accepted without reservation, the system recognizes that choice-of-law considerations do affect forum selection decisions and usually will not abrogate such choices simply because a plaintiff wishes to take advantage of a forum's favorable law. See e.g., Stein, Forum Non Conveniens and the Redundancy of Court-Access Doctrine, 133 Penn. L. Rev. 781, 783 (1985) ("courts . . . , have not responded to this forum shopping by prohibiting forum courts from applying their own law when the forum's connection with the controversy is tenuous").
II. HISTORICAL OVERVIEW OF PATENT INFRINGEMENT COVERAGE LITIGATION
As a general matter, it is difficult to determine the particular motives a plaintiff might have for choosing a forum, since these decisions are considered confidential and the reasoning process is protected from disclosure by applicable privileges. The reported decisions also usually do not provide the types of factual information needed to evaluate fully the reasons for a plaintiff's forum-selection decision.
Nevertheless, the history of patent-infringement-coverage actions over the last decade provides some indication that plaintiffs have considered the four types of factors outlined above. This history also suggests that the weight given to particular factors has changed as the substantive law in patent infringement coverage cases has evolved and become more defined over the years.
Many of the early patent infringement coverage cases appear to have been brought in California federal courts by companies with a substantial presence in that state. In all probability, the insureds that brought these coverage actions were motivated by the comfort, competency, and efficiency concerns discussed in Sections I.A through I.C of this article. It would be reasonable for a plaintiff to anticipate that the courts in California would be particularly receptive to policyholder demands for insurance coverage for patent infringement suits, since such cases involve intellectual property issues that might affect the economic well being of the entertainment and computer industries that make up such a large part of California's economy. In addition, the decisions to bring most of these first generation cases in federal courts in California would seem to reflect either local lawyers' perceptions of the efficiency of state tribunals, or the limitations on plaintiffs' forum selection powers embodied in the rules governing removal to federal court. See 28 U.S.C. § 1441.
Those early plaintiffs that decided to bring their actions in the California courts proved correct (at least initially) when a few trial courts ruled there was coverage for patent infringement claims. See e.g., Continental Insurance Co. v. Del Astra, 1992 U.S.Dist. LEXIS 20522 (N.D.Cal. 1992); Intex Plastics Sales Co. v. United National Insurance Co., 1990 U.S. Dist. LEXIS 18200 (C.D.Cal. 1990). In addition, the federal district courts ruled against those insurance companies that brought declaratory judgment actions in California during this developmental stage of the law. See Aetna Casualty and Surety Co. v. Watercloud Bed Co., 1988 U.S. Dist. LEXIS 1988 (C.D. Cal. 1988) (coverage for patent infringement).
As a result of these early rulings, plaintiffs capable of pursuing their claims in a variety of different forums brought their actions in California courts. See e.g., Aqua Queen MFG, Inc. v. Charter Oak Fire Insurance, 830 F. Supp. 536 (C.D. Cal. 1993), reversed, 46 F.3d 1138 (9th Cir. 1995) (Nebraska plaintiff prevails in district court, but Ninth Circuit reverses judgment in its favor). At the same time, insurance companies brought declaratory judgment actions in other jurisdictions, such as Pennsylvania, in an apparent effort to forestall suit by their insureds. See Atlantic Mutual Insurance Co. v. Brotech Insurance Co., 857 F. Supp. 423 (E.D.Pa. 1994), aff'd without op., 1995 U.S.App. LEXIS 15297 (3d Cir. May 12, 1995).
Despite their early successes, those insureds that sought an advantage in bringing their coverage actions in California were disappointed in the end. The Ninth Circuit Court of Appeals -- and California's appellate courts as well -- eventually concluded in every case presented to them that there was no coverage for patent infringement claims under the Advertising Injury provisions of the CGL policy. See e.g., Everest and Jennings, Inc. v. American Motorist Insurance Co., 23 F. 3d 226 (9th Cir. 1994); Iolab v. Seaboard Surety Company, 15 F. 3d 1500 (9th Cir. 1994); Clary Corp. v. Union Standard Insurance Co., 33 Cal. Rptr. 2d 486 (Cal. Ct. App. 1994); Aetna Casualty and Surety Co. v. Superior Court, 23 Cal. Rptr. 2d 442 (Cal. Ct. App. 1993). As a result, plaintiffs seeking coverage for patent infringement claims have begun to bring their actions in forums other than California.
A few of the second generation of cases appear to have been filed in courts where the plaintiffs apparently believed they would obtain the "home court" or other similar advantage. See e.g., Gencor Industries, Inc. v. Wausau Underwriters Insurance Co., 857 F.Supp. 1560 (M. D. Fla. 1994). Overall, however, choice-of-law considerations became even more important in the forum selection process during this period, as many insureds chose forums that they believed would allow them to avoid the application of California precedents.
In addition to avoiding the substantive law of California, an insured might select a particular forum in the hope that its procedures will permit extensive discovery into extrinsic evidence of intent when contracting. The insured is then likely to argue that such discovery is necessary before the court can decide whether there is coverage for patent infringement on a motion for summary judgment. See e.g., WEA Manufacturing, Inc. v. Aetna Casualty & Surety Co., No. 93C-20-28 (Lackawanna Co. Pa., Mar. 23, 1995). Most recently, such an argument by an insured was rejected by a Delaware court. ABB Flakt, Inc. v. National Union Fire Insurance Co., C.A. No. 94C-11-24 (August 15, 1995). It remains to be seen whether insureds will be able to avoid repetition of their early set-backs in California.
III. OPTIONS AVAILABLE TO INSURANCE COMPANIES
In this milieu where forum selection can be potentially decisive when the issue of coverage for patent infringement is litigated, insurance companies should give careful consideration to their options with respect to the forum-selection issue. One approach is to consider the steps that might be taken at the underwriting stage that would require disputes to be brought before a particular tribunal. Alternatively, insurance companies can deal with the issue at the litigation stage by: (1) initiating their own declaratory-judgment coverage action upon receipt of a demand for coverage for patent infringement claims; or (2) filing a variety of motions (venue, forum non conveniens, removal) in an effort to level the playing field in connection with an already filed declaratory-judgment action.
A. Underwriting Options
At the underwriting stage, insurance companies have a number of options that can reduce the insured's incentive to select a forum for comfort or choice-of-law reasons. For example, they might include a choice-of-law provision in the insurance policy that dictates the application of a certain jurisdiction's law with respect to the contract as a whole or, at the very least, the Advertising Injury provision. The infrequency of such provisions in existing policies may indicate, however, the reluctance of insurance companies to utilize this idea.
Insurance companies might also consider including a forum selection or arbitration provision in their policies that would require the insured to bring its claim to a particular tribunal where it is expected that certain procedural and legal standards would be applied. Although not favored by the courts until recently, Endnote6 choice-of-forum provisions might serve to eliminate this issue from patent infringement litigation. See generally, Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction, 2d, § 3803.1 ("Contractual provisions undertaken to provide where suits may be brought in disputes arising out of the agreement are not uncommon"). Similarly, arbitration provisions have become increasingly common in many forms of casualty insurance, as insurance companies seek to reduce their transaction costs associated with claims handling. See Couch On Insurance 2d (Rev. Ed.), § 50:1 (1982 & 1995 Supp.). Although (like forum-selection clauses) arbitration provisions are not always fully embraced by the judiciary, Endnote7 they have been employed in the past and could be used to address forum selection in connection with coverage disputes involving patent infringement claims or other claims under the Advertising Injury provision of the CGL policy.
It remains to be seen, however, whether the various constituencies involved in the development of the language in insurance policies (insurers, brokers, and regulators) will turn to choice-of-forum or arbitration provisions as a solution to the uncertainty engendered by an insured's or insurer's ability to select a particular forum to litigate a coverage dispute merely because that forum might apply favorable procedural and substantive law.
B. Litigation Options
There also are a variety of litigation options available to insurers. For example, when an insurer receives a demand for coverage in connection with a patent infringement claim, it may respond by declining coverage and filing a declaratory judgment action in the forum of its choice. Indeed, such an approach has already been employed successfully by some insurers. See Atlantic Mutual Insurance Co. v. Biotech Insurance Co., 857 F.Supp. 423 (E.D.Pa. 1994), aff'd without op. 1995 U.S.App. LEXIS 15297 (3d Cir. May 12, 1995). Of course, the insurer (like any plaintiff) must be careful to select a forum whose assertion of jurisdiction can be justified on the convenience factors embodied in our legal system's venue statutes and forum non conveniens doctrine. Otherwise it risks dismissal or transfer to another court that might not be hospitable to its claim of no coverage.
If the insured has beaten the insurer to the punch and filed its own declaratory judgment action, an insurer still can file a removal, venue and/or forum non conveniens motion in an effort to escape the consequences of having the case heard in the jurisdiction of the insured's choosing. In order to prevail on a venue or forum non conveniens motion (the applicability of the federal removal statute should be rather straight forward in most cases), the insurer must convince the court that the exercise of its power to adjudicate the dispute is inconsistent with the fairness and convenience considerations underlying these limitations on a plaintiff's forum-selection powers. In many cases, this will be difficult to do, since most courts will defer to a plaintiff's selection of forum unless clearly improper. Consequently, insurers cannot be confident of their ability to avoid the insured's choice of forum decision where they have not taken any action prior to the filing of a coverage action.
CONCLUSION
Plaintiffs' forum choices in patent infringement coverage actions reflect the same basic considerations (i.e., comfort factors, forum-competency factors, efficiency factors, and choice-of-law factors) that affect plaintiffs' forum selection choices generally within our legal system. Most of the early patent infringement coverage cases were brought by insureds in California. These insureds presumably believed the courts there would be sympathetic to their claims for coverage. As the case law in this area evolved, choice-of-law considerations have become increasingly important, with both insureds and insurers bringing declaratory judgment actions in jurisdictions thought to have favorable substantive law. After the recent rash of appellate court decisions in California concluding that there was no coverage for patent infringement claims in the cases presented to them, insureds will most likely seek to bring their coverage actions in forums that they believe will allow liberal discovery in contract disputes. They will do so in hopes that this discovery will reveal extrinsic evidence supporting their view that the Advertising Injury provision in the CGL policy provides coverage for patent infringement claims. It remains to be seen whether this new approach to forum selection will enable insureds to overcome their early losses in California.
ENDNOTES
*©Copyright 1995, M. Elizabeth Medaglia, Washington, D.C.
M. Elizabeth Medaglia and Robert N. Kelly are Directors at the law firm of Jackson & Campbell. Peter A. von Mehren is an Associate at Jackson & Campbell. The views reflected in this article are those of the authors and are not intended to reflect the opinions of their firm or their clients.
. This article assumes that, in the normal course of affairs, it is the insured that commences a coverage action. The reader should remember, however, that insurers do bring such actions on occasion.
. See International Shoe Co. v. State of Washington, 326 U.S. 310, 319 (1945) ("Whether due process is satisfied must depend rather upon the quality and nature of the activity in relation to the fair and orderly administration of the laws in which is the purpose of the due process clause to insure").
. Rule 26, as amended in 1993, permits each district court to issue an order opting out of its provisions if they so choose. If a particular district court has not opted out, the amended Rule 26 imposes on litigants a "duty to disclose, without waiting for formal discovery, certain basic information that is needed in most cases to prepare for trial or make an informed decision about settlement." F.R.C.P., Rule 26 notes. The major purpose behind this change is to accelerate the exchange of basic information about the case and eliminate the paper work involved in requesting such information.
. See e.g., Hanna v. Plumber, 380 U.S. 460, 468 (1965) (Supreme Court states that question of applicable law in diversity cases must be viewed in light of "the twin aims of the Erie rule: discouragement of forum shopping and avoidance of inequitable administration of the laws").
. This rule does not apply, of course, if there are other limitations on the transferor court's ability to adjudicate the matter, such as lack of personal jurisdiction over the defendant. See Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d, § 3827.
. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972) (after stating that "[f]orum selection clauses have historically not been favored by American courts," Supreme Court holds that "forum clause should control absent a strong showing that it should be set aside").
. See Appleman, Insurance Law & Practice, § 5111 (1981 & 1995 Supp.).
© 1995, 1996 American Bar Association. All Rights Reserved.