Federal Court Jurisdiction Over Patent-Related State Law Claims

While “legal malpractice claims traditionally fall under the domain of state courts,” the Texas Supreme Court recently held that those claims may fall within the  exclusive jurisdiction of the federal courts when an underlying patent issue “is necessary, disputed, and substantial.” Minton v. Gunn, 2011 WL 6276121 (Tex. Dec. 16, 2011).  Moreover, the impact of these rulings may extend beyond the realm of legal malpractice as the same analysis can be applied to other claims such as breach of fiduciary duty
and breach of the UCC warranty against infringement.

Minton v. Gunn

The issue in Minton was whether “federal courts possess exclusive subject-matter jurisdiction over state-based legal malpractice claims that require the application of federal patent law.”  This state court case followed a federal suit filed by Minton alleging patent infringement. The defendant in the federal suit moved for summary judgment on grounds that Minton’s patent was invalid under the “on-sale bar” rule.  Under that rule, a patent is invalid when the claimed invention is sold more than a year prior to the patent application date.  The federal district court granted the defendants’ motion for summary judgment and declared the patent
invalid.  Minton then retained new counsel to file a motion to reconsider based on the experimental use exception to the on-sale bar rule.  The district court denied the motion to reconsider and the Federal Circuit affirmed.

After losing his federal infringement suit, Minton sued his original attorneys in state court alleging that they committed alpractice by not raising the experimental use exception.  Minton claimed that the attorneys’ negligence had cost him the opportunity to win his infringement suit or alternatively had cost him a potential settlement of his $100,000,000.00+ claim.  The attorney’s moved for summary judgment alleging that the experimental exception was neither a legally nor a factually viable defense and, therefore, Minton could not win his malpractice claim.  The state district court granted the motion and Minton appealed.

While the appeal was pending, the Federal Circuit Court of Appeals decided two cases involving Texas state law attorney malpractice claims.  Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. 207) and Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281 (Fed. Cir. 2007).  In both cases, the court found that the state law claims arose under the federal Patent Act and, therefore, were subject to exclusive federal jurisdiction.  Based on these decisions, Minton moved to dismiss his appeal.  The Fort Worth Court of Appeals declined to follow the federal decisions, denied the motion to dismiss, and affirmed the judgment.  The Texas Supreme Court granted Minton’s petition for review.

Before considering the merits of the appeal, the Supreme Court considered whether the claim arose under a federal statute and, therefore, whether the federal courts had exclusive jurisdiction to hear the malpractice claim.  The Court applied a four part test in
determining that the federal courts had exclusive jurisdiction over Minton’s malpractice claim.

[F]ederal question jurisdiction exists where (1) resolving a federal issue in necessary to the resolution of the state-law claim; (2) the federal issue is actually disputed; (3) the federal issue is substantial; and (4) federal jurisdiction will not disturb the balance of federal and state judicial responsibilities.

Minton, slip opinion page 9, quoting Singh v. Duane Morris LLP, 538 F.3d 334, 338 (5th Cir. 2008).  The Supreme Court found that Minton’s claim fit within this analytical framework and dismissed the case.

Other Patent-Related State Law Claims subject to Federal Jurisdiction

Legal malpractice claims are not the only patent-related state law claims that may end up in federal court.  A federal district court in Pennsylvania found that a claim for breach of the UCC warranty against patent infringement was properly in federal court and the Fifth Circuit came to a similar conclusion in a case involving fraud and breach of fiduciary duty.

84 Lumber Co. purchased hand-held laser devices to use in its bar code scanning system.  After settling a patent infringement suit related to these devices, 84 Lumber filed a state court suit alleging that the sellers of the devices had breached the UCC warranty that goods delivered by a “merchant … shall be delivered free of the rightful claim of any third person by way of infringement or the like.”  See e.g., Tex. Bus. & Com Code § 2.312(c).  The defendants removed the suit to federal court.  Arguing that its claim arose solely under state contract law, 84 Lumber moved for a remand.

In 84 Lumber Co. v. MRK Technologies, Ltd., 145 F.Supp.2d 675 (W.D. Pa. 2001), the Court reasoned that a plaintiff in a UCC infringement warranty case had to “show (1) the defendants were merchants regularly dealing in goods of the kind; (2) that the goods were delivered; and (3) that the goods were not delivered free of the rightful claim of infringement of any third-party.”  Focusing on the third element, the court found that since 84 Lumber’s claim could not “be resolved without also deciding a substantial issue of federal patent law, namely, that there was an adequate basis for [the patent owner’s] assertion that defendants’ products infringed his patents” that federal jurisdiction was proper.

USPPS, Ltd. v. Avery Dennison Corp, 647 F.3d 274 (5th Cir. 2011), is a fraud and fiduciary duty case that arose from the efforts of USPPS and its founder, Beasley, to obtain a patent.  After filing his application with the United States Patent and Trademark Office, Beasley negotiated a licensing and manufacturing contract with Avery and gave Avery’s counsel a power of attorney
to prosecute the patent on his behalf.  Acting under this power of attorney, Avery’s counsel abandoned Beasley’s original application and submitted a second application pursuing additional claims.  After the second patent application was denied, Beasley, and later USPPS, sued Avery and its counsel contending that the law firm’s representation of Avery created a conflict of interest with its representation of Beasley and USPPS in the patent prosecution process.

The district court dismissed Beasley’s suit for lack of standing because he had transferred all of his intellectual property rights to USPPS and dismissed USPPS’s subsequent suit as being time barred. On appeal from the second judgment, the Fifth Circuit requested additional briefing on the issue of federal jurisdiction.  Finding that USPPS could not prevail on its fraud and breach of fiduciary duty claims without proving the patentability of the invention, the Fifth Circuit held that the claims were subject to federal jurisdiction.

Appellate Jurisdiction Over Minton-type cases

The various cases that found federal jurisdiction for patent-related state law cases like Minton, 84 Lumber, and USPPS are based on 12 U.S.C. § 1338, which gives federal district courts original and exclusive jurisdiction of civil actions “arising under any Act of Congress relating to patents ….”

In USPPS, the Fifth Circuit took the next logical step in deciding that appeals in such Minton–type cases are properly directed to the Federal Circuit Court of Appeals.  “Under 28 U.S.C. § 1295(a), the Federal Circuit has exclusive of an appeal where the district
court’s jurisdiction was based, in whole or in part, on 28 U.S.C. § 1338.”

 

 

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