Federal Circuit Signals Trend To Reassert Jurisdiction Over Patent-Related State Law Actions

Thursday, October 23, 2014

Although the Supreme Court’s 2013 ruling in Gunn v. Minton, ___ U.S. ___, 133 S. Ct. 1059 (2013) restricted the types of state-law claims that are subject to exclusive federal court jurisdiction, the Federal Circuit may be poised to reassert jurisdiction to avoid potentially conflicting rulings in state and federal forums.

The federal courts exercise exclusive subject matter jurisdiction over claims for relief “arising under any Act of Congress relating to patents[.]” 28 U.S.C. § 1338(a). In the past, in addition to typical patent infringement actions, federal courts exercised “arising under” jurisdiction to a variety of state-law claims, including suits alleging breach of patent license agreements, defamation, and legal malpractice.

In Gunn, the Court held that a state-law claim “arises” under the Patent Act if patent issue implicated in a claim is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. Of particular importance is the requirement that the issue be “substantial.” As Gunn explained, it is not enough for the issue to be important to the outcome of the claim. Instead, an issue is substantial only if it is important “to the federal system as a whole.”

The state-law action in Gunn was for legal malpractice. The defendant attorney allegedly neglected to raise an argument in a patent infringement action that would have rebutted an alleged infringer’s argument that the patent was invalid due to a statutory bar. The Supreme Court held that while that argument was pivotal to the success of the malpractice claim, its “backward-looking” nature prevented federal jurisdiction:

Because of the backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense: If Minton’s lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been different? No matter how the state courts resolve that hypothetical “case within a case,” it will not change the real-world result of the prior federal patent litigation. Minton’s patent will remain invalid.

133 S. Ct. at 1068. For a more lengthy comment on Gunn, seeGunn v. Minton: Supreme Court Pokes Another Hole In Exclusive Federal Jurisdiction Over Patent Rights,” SSRN No. 2232879 (Mar. 13, 2013).

In applying Gunn, courts have focused on whether the patent law issue to be decided in the action is “backward-looking” or forward-looking. In other words, does the issue only relate to the state-law claim, or could it affect patent rights in future cases?

In Forrester Environmental Services, Inc. v. Wheelabrator Tech., Inc., 715 F.3d 1329 (Fed. Cir. 2013), the Federal Circuit applied Gunn to decline federal jurisdiction over a state court defamation action based on the defendant’s statements that the plaintiff was infringing three patents. The court noted that pre-Gunn cases in which it had recognized jurisdiction over disparagement claims “may well have survived the Supreme Court’s decision in Gunn.” 715 F.3d at 1334. Forrester’s claim did not survive, however, because any state court rulings on the scope or infringement of the patents would have no forward-looking affect: The patents all had expired and the defamatory statements referenced conduct in Taiwan, which would not be infringement in any event.

Like the Federal Circuit in Forrester, the majority of courts applying Gunnhave failed to recognize federal question jurisdiction. However, unlikeForrester, many of those involved patents which are not invalid or expired. The courts tend to brush aside patentee arguments that any determination of patent law issues could have future preclusive effects.

In MDS (Canada) Inc. v. Rad Source Techs., Inc., 720 F.3d 833 (11th Cir. 2013), the court ruled that the Federal Circuit lacked appellate jurisdiction over a breach of license dispute that turned on whether the licensee’s product infringed three patents. The court held that the issue of patent infringement was not substantial. Notably, the court stated that infringement of the patent was not a substantial issue because, “Both the highly specialized nature of patent claims and the niche market for [the accused] blood irradiation devices suggest that the resolution of this issue is unlikely to impact any future construction of claims.” 720 F.3d at 842. The court did not mention that the licensed patents do not expire until 2022.

A review of other decisions applying Gunn reveal that courts have interpreted it to broadly discourage federal jurisdiction even when the underlying claim involves the validity or infringement of “live” patents.See, e.g., Bonnafant v. Chico’s FAS, Inc., Case No. 2:13-CV-893-FTM-29CM, 2014 WL 1664554 (M.D. Fla. Apr. 25, 2014) (whistleblower case lacked federal question jurisdiction when issue whether employee was instructed in infringe patent “will hardly call into question the entire federal trademark/patent system. Instead, it will require the application of a set body of law to the facts at hand.”); Airwatch LLC v. Good Technology Corp, No. 1:13-cv-2870-WSD, 2014 WL 1651964 (N.D. Ga. Apr. 24, 2014) (no federal jurisdiction over defamation action because infringement issue was “context-specific”); Transcardiac Therapeutics, Inc. v. Yoganathan, No. 1:13-CV-3089-AT, 2014 WL 1624086 (N.D. Ga. Feb. 28, 2014) (breach of contract, interference and fraud claims involving inventorship dispute lack federal question where inventorship was “not substantial in any relevant sense”).

More recently, the Federal Circuit has signalled that federal jurisdiction may continue over state-law claims in similar circumstances. In Jang v. Boston Scientific Corp., No. 2014-134, 2014 WL 4746002 (Fed. Cir. Sept. 16, 2014), the court considered whether it had appellate jurisdiction over a patent license dispute. The appeals court distinguished Forrester and stressed the risks of allowing other courts to rule on patent validity or infringement:

Permitting regional circuits to adjudicate questions of patent validity, for example, could result in inconsistent judgments between a regional circuit and the Federal Circuit, resulting in serious uncertainty for parties facing similar infringement charges before district courts within that regional circuit. Maintaining Federal Circuit jurisdiction over such contractual disputes to avoid such conflicting rulings is important to “the federal system as a whole” and not merely “to the particular parties in the immediate suit.” Gunn, 133 S.Ct. at 1066.

Jang, 2014 WL 4746002 at *3. As a result, the appeals court ruled that the patent issues raised by Jang’s breach of license claim were substantial and triggered “arising under” jurisdiction. This was true even though Jang’s patent had been invalidated as a result of reexamination proceeding. The Federal Circuit reasoned that jurisdiction must be assessed at the time an action is commenced, and since the patent only was invalidated later, federal jurisdiction attached to Jang’s claim.

The Jang decision suggests that the Federal Circuit, the regional circuit courts of appeals, and potentially state courts will continue to struggle with jurisdiction over patent issues arising in the context of state-law claims. Despite broad language in Gunn, it is likely that the Federal Circuit will tend to find jurisdiction in cases involving patents which remain in effect and where the application of patent law may affect future market activity or be the subject of future litigation.