infringement issue because defendants expressly reserved the right to sue SmartHealth’s

customers or affiliates for the purchase or sale of the New Aloe Gloves.

Defendants primarily rely on the Federal Circuit’s decision in /ntellectual Property
Development, Inc. v. TCI Cablevision of California, Inc., 248 F.3d 1333 (Fed. Cir. 2001). In that
case, the plaintiff patent-holder sued the defendant and twelve of its subsidiaries, including TCI-
California, for patent infringement /d. at 1337. TCI-California counter-claimed, seeking
declaratory judgment on the issues of noninfringement, invalidity, and unenforceability of the
patent-in-suit. /d. Plaintiff subsequently submitted a statement of non-liability that neither the
plaintiff nor any successors-in-interest to the patent-in-suit would sue TCI-California for
infringement of the patent-in-suit. /d. at 1338. The Federal Circuit held that this statement of
non-liability extinguished the controversy between the parties and divested the district court of
jurisdiction over TCI-California’s declaratory judgment counterclaims. Jd. at 1342. The court
rejected TCI-California’s argument that a case or controversy remained because it might in the
future be required to indemnify another entity found liable for infringement of the patent. The
court reasoned that TCI-California did not have the requisite reasonable apprehension that it
would face an infringement suit, because “a suit filed against a different party, even if TCI-
California could potentially be required to indemnify that party, is not a suit that TCI-California

itself faces.” Id. at 1341-42.

Defendants argue that /ntellectual Property Development is “directly controlling in this
case,” ignoring the fact that the court explicitly distinguished the facts of the case from a
situation in which the declaratory plaintiff’s customers, as opposed to its potential indemnitees,
face the threat of an infringement suit by the patent holder. /d. at 1341 n. 8 (“We recognize that

5


declaratory plaintiff or its customers will face an infringement suit, and (2) present activity by the
declaratory plaintiff or its customers which could constitute infringement or concrete steps taken
with the intent to conduct such activity. Fina Research, S.A. v. Baroid Ltd., 141 F.3d 1479, 1481
(Fed. Cir, 1998); Arrowhead Industrial Water, Inc. v. Ecolochem, Inc., 846 F.2d 731, 736-37
(Fed. Cir. 1988). Importantly, this test is applied “to the facts existing when the complaint is
filed.” Arrowhead, 846 F.2d at 736. The declaratory plaintiff bears the burden to establish, by a
preponderance of the evidence, that the two-part test for an actual controversy has been met. See
McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189 (1936)("[T]he court may
demand that the party alleging jurisdiction justify his allegations by a preponderance of
evidence."). Finally, even if there is an actual controversy and thus jurisdiction, the exercise of
that jurisdiction rests within the sound discretion of the district court. See, ¢.g., Serco Servs. Co.

v. Kelley Co., 51 F.3d 1037, 1039 (Fed. Cir.1995).
IIL. Discussion

Defendants argue that their covenant not to sue SmartHealth for infringement of the "154
or °328 patents in relation to the New Aloe Glove and their covenant not to assert any claim
against SmartHealth for breach of the settlement agreement extinguish the controversy between

the parties, thus removing the matter from this court’s jurisdiction.

SmartHealth no longer disputes that the covenant executed on April 5, 2005 extinguishes
the controversy over the Settlement Agreement issue. SmartHealth argues, however, that the

covenant executed on April 5, 2005 does not extinguish the controversy over the patent


‘apprehension’ may also apply to a declaratory plaintiff's customers . . . .” (citing Arrowhead,
846 F.2d 731)). In Arrowhead, the Federal Circuit, “rightly respecting the realities of business
life,” held that the “reasonable apprehension” prong of the case or controversy test is satisfied if
the “plaintiff or its ‘customers face an infringement suit or threat of one.” 846 F.2d at 736
(quoting Grafon Corp. v. Hausermann, 602 F.2d 781, 783 (7" Cir. 1979)(emphasis added by the
Arrowhead court)). Thus, even if SmartHealth no longer has a reasonable apprehension of facing
an infringement suit itself, the threat of an infringement suit against SmartHealth’s customers by

defendants satisfies the “reasonable apprehension” prong of the case or controversy test.

The only evidence SmartHealth offers to support its contention that its customers have a
reasonable apprehension of an infringement suit, however, is defendants’ express reservation of
the right to file such a suit.' As SmartHealth argues, “[b]ecause defendants expressly reserve the
right to sue SmartHealth’s ‘affiliates’ and ‘customers,’ Defendants presumably could sue anyone
who might be connected with the manufacture, purchase or resale of SmartHealth’s gloves.”
(SmartHealth’s Resp., at 2, emphasis added.) Just because defendants “presumably could sue”
SmartHealth’s customers does not mean that those customers have a reasonable apprehension of
suit. A patentee’s refusal to give assurances that it will not enforce its patent rights, while
relevant to the reasonable apprehension analysis, is not dispositive. BP Chems. Ltd. v. Union

Carbide Corp., 4 F.3d 975, 980 (Fed. Cir. 1993). Without any other evidence that defendants

'SmartHealth alleges that defendants have “threatened to sue those that do business with SmartHealth.”
{SmartHealth’s Resp., at 9.) SmartHealth refers to only one example of such a threat-two letters sent by Medline
and one of Medline’s distributors to publishers of trade magazines that ran ads for the New Aloe Gloves threatening
action for false advertising. Even if these letters provoked a reasonable apprehension of suit on the part of
SmartHealth’s customers, which is doubtful, the letters were sent in September and October, 2003, months after
SmartHealth initiated this action. A party cannot establish a case or controversy based on facts that occur after a
declaratory judgment complaint is filed. See Arrowhead, 846 F.2d at 736 (holding that the test for a justiciable case
or controversy must be applied “to the facts existing when the complaint is filed.”).

6


UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
SMARTHEALTH, INC. d/b/a )
SMARTPRACTICE, an Arizona )
corporation,
)
Plaintiff, )
)
v. ) No. 03 C 3417
) Judge Joan H. Lefkow
SHEN WEI (USA), INC., a California )
corporation, and MEDLINE )
INDUSTRIES, INC., an Illinois )
corporation, )
)
Defendants. )

MEMORANDUM OPINION AND ORDER

On May 21, 2003, plaintiff, SmartHealth, Inc., filed suit against defendants, Shen Wei
(USA), Inc. (“Shen Wei”) and Medline Industries, Inc. (“Medline”), seeking a declaratory
judgment that the production, marketing, and sale of its “New Aloe Glove” does not infringe
certain patents owned by Shen Wei and that the production, marketing, and sale of the New Aloe
Gloves does not violate a November 22, 2002 settlement agreement between the parties. By
letter dated February 10, 2005, defendants covenanted not to sue SmartHealth for infringement of
the patents at issue by the New Aloe Gloves. By letter dated April 5, 2005, defendants further
covenanted not to sue SmartHealth for breach of the parties’ November 22, 2002 settlement
agreement for the production, marketing, and sale of the New Aloe Gloves. Defendants now
move to dismiss SmartHealth’s declaratory judgment complaint for lack of subject matter
jurisdiction, arguing that the covenants remove the actual case or controversy required for this

court’s jurisdiction over the matter. For the reasons stated below, the court grants the motion.


threatened suit or took other actions creating a reasonable apprehension that SmartHealth’s
customers will face an infringement suit, SmartHealth fails to meet its burden of establishing, by
a preponderance of the evidence, that an actual controversy exists. Thus, this court lacks
jurisdiction over SmartHealth’s declaratory judgment complaint.
CONCLUSION

For the reasons set forth above, the court grants defendants’ motion to dismiss
SmartHealth’s declaratory judgment complaint for lack of subject matter jurisdiction [#94].
SmartHealth’s declaratory judgment complaint is dismissed. The only remaining dispute
concerns defendants’ counterclaim for breach of the settlement agreement with regard to
SmartHealth’s “Old Aloe Gloves.” The parties will be called for a status hearing on this issue on

April 28, 2005 at 9:30 am.

Enter: (fete. C KKebn
§0AN HUMPHREY €£FKOW
United States District Judge

Dated: April 14, 2005


I. Background

SmartHealth is in the business of developing, marketing, selling, and distributing dental
and medical supplies, including medical grade gloves, to health care professionals. Among
SmartHealth’s former glove products was a glove having an aloe vera-based surface coating. In
2002, defendants filed suit against SmartHealth in this court for infringement of U.S. Patent No.
6,274,154 (“the ’154 Patent”) or U.S. Patent No. 6,423,328 (“the 328 Patent”), which
defendants alleged covered the processes of coating gloves with aloe vera. On or about
November 22, 2002, SmartHealth and defendants settled those claims. Pursuant to a November
22, 2002 Settlement Agreement, SmartHealth agreed to discontinue selling a glove having an
aloe vera-based surface coating.

Thereafter, SmartHealth began developing, producing and marketing a new glove
containing aloe vera but without an aloe vera-based surface coating (the “New Aloe Vera
Glove”). On May 21, 2003, SmartHealth filed the instant suit against defendants seeking a
declaratory judgment that its New Aloe Glove does not infringe the ’154 Patent or the ”328
Patent. SmartHealth also seeks a declaration that the production, marketing, and sale of the New
Aloe Gloves does not breach the November 22, 2002 settlement agreement.

By letter dated February 10, 2005, defendants provided SmartHealth with the following
covenant not to sue SmartHealth:

Shen Wei and Medline hereby covenant that they will not assert any claim against

SmartHealth, Inc. for infringement of U.S. Patent Nos. 6,274,154 or 6,423,328 with

respect to the gloves that SmartHealth has defined in the above referenced Complaint as

the “New Aloe Gloves,” which are manufactured in accordance with a process which is
the same or insubstantially different than the process disclosed in this litigation . . . and

are currently made, used, offered for sale, sold, or imported by SmartHealth under the
brand name “le soothe.” This covenant does not extend to any claim in any other patent,


whether related or unrelated to the ’154 or ’328 patents, nor does this covenant extend to
any affiliate or customer of SmartHealth, Inc.

Defendants then requested that SmartHealth dismiss this action since defendants agreed
not to assert the patents at issue against SmartHealth in relation to the New Aloe Vera Gloves. In
response, SmartHealth notified defendants that it would not withdraw its declaratory judgment
claims because it does not believe that the Covenant resolves the parties’ dispute regarding
infringement or breach of the Settlement Agreement. Defendants thereafter filed the instant
motion to dismiss.

On April 5, 2005, defendants executed the following covenant:

Shen Wei and Medline covenant that they will not assert any claim against SmartHealth

that the production, marketing, selling, or importing of the New Aloe Glove breaches the

parties’ Settlement Agreement in matters 02 C 3080 (N.D. THinois) and 02 C 5197 (N.D.

Tilinois).

11. Requirements for Jurisdiction Under the Declaratory Judgment Act

The Declaratory Judgment Act limits issuance of a declaratory judgment to cases of
“actual controversy.” 28 U.S.C. § 2201(a). If no actual controversy exists between the parties
regarding the subject on which declaratory judgment is sought, the court lacks subject matter
jurisdiction. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-40 (1937); Spectronics Corp. v.
H.B. Fuller Co., 940 F.2d 631, 634 (Fed. Cir. 1991), A declaratory judgment “may not be a

medium for securing an advisory opinion in a controversy which has not arisen.” Coffman v.

Breeze Corp., 323 U.S. 316, 324 (1945).

In declaratory judgment actions involving allegations of patent noninfringement,
invalidity, or unenforceability, an “actual controversy” exists where there is both (1) an explicit

threat or other action by the patentee, which creates a reasonable apprehension that the