Jurisdiction over patent licensing disputes is a tricky concept to navigate. The U.S. Code grants district courts original jurisdiction “of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks.”[1] However, cases involving patent license agreements implicate federal patent law issues and state contract interpretation issues. Thus, in such situations, the issue presented is determining the presence of “arising under” jurisdiction under 28 U.S.C. § 1338.
In Gunn v. Minton, the U.S. Supreme Court synthesized and applied a four-part test for “arising under” jurisdiction. The claim(s) must raise an issue of federal law that is(1) necessarily raised; (2) actually disputed; (3) substantial;[2] and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.[3] The second factor is typically addressed briefly because usually parties are disputing the use of a patented device, process, etc.
Gunn was a malpractice case in which the plaintiff-appellant claimed his patent was invalidated because his attorney failed to timely raise an exception to the on-sale bar.[4] Applying the above four-factor test, the Supreme Court held the malpractice claims brought were so hypothetical, backward-looking, and fact-specific that the outcome of the case would affect only the parties involved; thus, jurisdiction was proper in state court.[5] However, Gunn did not provide a road map for determining jurisdiction in patent license disputes. Thus, courts have wrestled with the four-factor test established in Gunn and its jurisdictional consequences in such disputes. It is a fact-intensive test requiring analysis of contract language to find potential avenues of resolving a dispute. The test is unforgiving—resolution of the contract issue must absolutely depend on resolution of an underlying patent issue. So, under the current regime, if there is any route that does not involve resolution of an issue unique to patent law, jurisdiction is not proper in federal court.
Jang v. Boston Scientific Corporation
Interestingly, one of the first cases to apply the Gunn test did not involve a dispute concerning state versus federal jurisdiction. In Jang v. Boston Scientific Corporation, diversity jurisdiction existed, and the issue was whether the Ninth Circuit Court of Appeals or the Federal Circuit should have jurisdiction over an appeal in a patent licensing case.[6] The Federal Circuit cited language of the agreement defining “Contingent Payment Products” as “any stent . . . the development, manufacture, use, or sale of which is covered by one or more Valid Claims of the Patents . . . or which, but for the assignment made pursuant to this Agreement, would infringe one or more Valid Claims of the Patents.”[7] The agreement further defined “Valid Claim” as “(a) a claim of any issued patent which is contained within the [licensed patents] and which has not expired, lapsed, or been held invalid, unpatentable or unenforceable by a final decision, which is unappealed or unappealable, of a court of competent jurisdiction, or of an administrative agency having authority over patents.”[8] Importantly, the court noted that (1) the contract claim itself requires resolution of the underlying issue of patent infringement, and (2) because of the diversity jurisdiction and the potential for future infringement suits to be brought, maintaining jurisdiction in the Federal Circuit was best for consistency.[9]
Levi Strauss & Co. v. Aqua Dynamics Systems, Inc.
Parties have since relied on Jang to argue jurisdiction of federal courts over state courts and other agreed forums. First, in Levi Strauss & Co. v. Aqua Dynamics Systems, Inc., the Northern District of California applied Jang to a jurisdictional dispute involving an arbitration clause in a license agreement.[10] Levi Strauss entered into a licensing agreement with Aqua Dynamics’ predecessor in interest, Earth Aire.[11] Aqua claimed that Levi breached the contract by discontinuing royalty payments. [12]
The court analyzed the relevant provisions:
10.1.1 For the use of any Licensed Ozone Process which is covered by a valid and enforceable patent [“Covered Process”], during the life of the patent as to product produced by the process claimed by that patent, but in no event for more than seventeen (17) years after the end of the Development Period.
10.1.2 For the use of any Licensed Ozone Process not covered by a valid and enforceable patent [“Uncovered Process”], for seven (7) years after the end of the Development Project. LS&CO may freely use the affected Licensed Ozone Process after the expiration of this Agreement as to it.[13]
The court then reasoned that this case required that Levi continued using the Covered Processes after its obligation to pay royalties on the Uncovered Processes had lapsed on December 14, 2001, thus requiring a finding that Levi infringed Aqua’s patents and that Aqua’s patents were valid.[14] In addition, Aqua did not dispute that (1) a validity determination was necessary, and (2) there was potential for further enforcement of the patents.[15] Thus, the court determined that it would be consistent with Jang to find that the patent issues sufficiently supported “arising under” jurisdiction, and therefore jurisdiction was proper in federal court, despite the arbitration clause.[16]
Sanyo Electric Co., Ltd. v. Intel Corporation
Next, in Sanyo Electric Co., Ltd. v. Intel Corporation, the District of Delaware decided jurisdiction in a dispute involving a cross-license agreement and the products defendant Intel was authorized to make under the agreement.[17] Hera Wireless had acquired a portion of Sanyo’s patent portfolio relating to Wi-Fi chips.[18] Hera and its authorized licensing company, Sisvel UK Ltd., sued Lenovo, a client of Intel.[19] Lenovo used Intel’s chips and Intel raised a license defense.[20] Sanyo sought declaratory judgment that Intel was not authorized to sell wireless communication modules under the cross-license agreement.[21] Intel counterclaimed that the asserted patents were invalid or unenforceable as to Lenovo computers containing the accused Wi-Fi chips, and the patent rights covering those chips were exhausted.[22]
Sanyo claimed that Intel incorrectly informed third parties that Hera’s patent rights were exhausted because Sanyo had authorized Intel to make the Wi-Fi chips.[23] Analyzing the first Gunn factor, the court reasoned that although it was possible to resolve Sanyo’s claims and Intel’s breach of contract counterclaim using patent exhaustion, the controversy could be resolved by determining the products Intel could rightfully sell pursuant to the agreement. Accordingly, an issue of federal law was not necessarily raised.[24] For much the same reason, in analyzing the third Gunn factor, the court found that the potential federal issue was not substantial because the issue revolved more around an interpretation of the contract than an interpretation of federal patent law.[25] (Note that the court determined it need not make a finding as to whether a federal issue was actually disputed to satisfy the second Gunn factor.[26])
Regarding the fourth Gunn factor, the court decided the federal-state balance would be disrupted by bringing this case into federal court because the patent issues at hand did not sufficiently outweigh the interest in having the state court resolve issues involving state contract law.[27] Unlike in Levi or Jang, where determinations of infringement or invalidity were necessary, there was at least one avenue to resolve the dispute that did not involve making a determination on a patent issue. Having made these considerations, the court granted Sanyo’s motion for remand, holding that it did not have jurisdiction because the claims and counterclaims did not satisfy the Gunn test.[28]
Inspired Development Group, LLC v. Inspired Products Group, LLC
Next, in Inspired Development Group, LLC v. Inspired Products Group, LLC d/b/a KidsEmbrace, LLC, the Federal Circuit distinguished Jang and clarified the requirements for obtaining federal jurisdiction over a licensing dispute, holding that some patent law issue must need resolution, with no alternative route offered in contract law.[29] Plaintiff Inspired Development granted KidsEmbrace an exclusive license to manufacture and commercialize car seats.[30] KidsEmbrace sought additional investment from a third party, which forced KidsEmbrace and Inspired Development into a binding letter agreement.[31] The third party forced the founder and CEO out of KidsEmbrace, which then terminated the initial license agreement.[32] Inspired Development sued KidsEmbrace in the Southern District of Florida for breach of contract (i.e., failing to pay royalties) and, alternatively, unjust enrichment.[33] The court granted summary judgment in KidsEmbrace’s favor, and Inspired Development appealed to the Court of Appeals for the Eleventh Circuit.[34] The Eleventh Circuit found that diversity jurisdiction did not exist and transferred the case to the Federal Circuit to determine whether “arising under” jurisdiction existed.[35]
KidsEmbrace argued that “arising under” jurisdiction existed because Inspired Development’s unjust enrichment claim was actually an infringement claim in that proving unjust enrichment required showing that KidsEmbrace continued to use the process described in the letter agreement.[36] The court disagreed, and much of its decision hinged on substantiality. It reasoned that the license agreement conferred a number of potential benefits on KidsEmbrace, including litigation avoidance and securing investment.[37] Thus, the patent law issue was not dispositive of the case—a negative for substantiality.[38] The lack of potential for conflicting future rulings and a dearth of government interest in the dispute further cut against substantiality, a distinguishing factor in view of Jang.[39] Finally, the court reasoned federal jurisdiction was improper because otherwise parties could insert any infringement or invalidity issue that would pull a contract dispute into federal court.[40] Taking all these factors into account, the court held federal jurisdiction was improper.[41]
Sasso v. Warsaw Orthopedic, Inc.
Most recently, in Sasso v. Warsaw Orthopedic, Inc., the District Court for the Northern District of Indiana found that federal jurisdiction was improper where two separate licensing agreements between plaintiff Dr. Rick Sasso and defendant Warsaw Orthopedic were at issue.[42] The first dispute centered on which provision applied to determine the termination of the agreement.[43] One provision required that the patents be valid, while the other merely depended on the issuance and expiration date of the patents.[44] In any event, the state court decided the governing provision was the provision dependent on the patent’s issuance and expiration date, and it held in Sasso’s favor on that ground.[45]
Under the second agreement, payment of royalties undisputedly required a device covered by a valid claim.[46] However, the plaintiff argued that the issue was not one of the validity of the patent at issue, but whether the patent at issue was covered by the agreement.[47] Given that a party offered a theory that did not require resolution of a patent law issue, no such issue was both actually disputed and substantial.[48] The decision of the Northern District of Indiana comports with the Federal Circuit and other federal district courts: If patent law is not necessary in determining the outcome, federal jurisdiction is improper.
Recommendations
To ensure jurisdiction will properly lie in federal courts, parties should ensure that their claims or counterclaims allow for resolution only by applying the tenets of patent law. IP-related agreements should be drafted so that an analysis of patent law is required to settle a dispute. For instance, a party could include a provision ensuring that the definition of a product covered by the agreement requires a valid claim, such as the provision in Jang. Further, there should be no ambiguity regarding which provision applies to determine which products are covered products, as in Sasso.
A complaint should specifically discuss provisions defining covered products and call out issues of patent validity or infringement. Current caselaw suggests that these actions land a case firmly in federal jurisdiction.
Conclusion
The Federal Circuit and district courts are clearly consistent in application of Gunn to jurisdictional issues presented by patent license disputes. As the Federal Circuit pointed out in Inspired Development, it remains to be seen how Jang would apply to a case with its particular fact pattern but requiring resolution of a jurisdictional issue between state and federal courts, as opposed to two federal courts. One thing is evident: Federal jurisdiction is improper if the dispute can be resolved without patent law.
[1] 28 U.S.C. § 1338(a).
[2] There tends to be overlap between this factor and the fourth factor because in Neurorepair v. The Nath Law Group, the Federal Circuit established a three-part test for substantiality including determination of the decision’s impact on future decisions.
[3] Gunn v. Minton, 568 U.S. 251, 258 (2013).
[4] Id. at 255.
[5] Id. at 261, 264‒65.
[6] Jang v. Boston Scientific Corp., 767 F.3d 1334, 1335 (Fed. Cir. 2014). Note that the Court of Appeals for the Federal Circuit usually handles appeals of patent issues from district courts, as opposed to the circuit courts of appeals for the district courts.
[7] Id. at 1337.
[8] Id.
[9] Id. at 1337‒38.
[10] Levi Strauss & Co. v. Aqua Dynamics Systems, Inc., 15-cv-04718-WHO, 2016 WL 1365946, at *1 (N.D. Cal. Apr. 6, 2016).
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id. at *6.
[16] Id. at *5.
[17] 18-1709-RGA, 2019 WL 1650067, at *1 (D. Del. Apr. 17, 2019).
[18] Id. at *1.
[19] Id.
[20] Id.
[21] Id. at *3.
[22] Id.
[23] Id. at *6.
[24] Id.
[25] Id. at *8.
[26] Id. at *7.
[27] Id. at *9‒10.
[28] Id. at *1, 11.
[29] Inspired Development Group, LLC v. Inspired Products Group, LLC, 938 F.3d 1355 (Fed. Cir. 2019).
[30] Id. at 1358.
[31] Id. at 1358.
[32] Id. at 1358‒59.
[33] Id. at 1359.
[34] Id. at 1358.
[35] Id.
[36] Id. at 1361.
[37] Id. at 1363.
[38] Id. at 1364.
[39] Id. at 1368‒69.
[40] Id. at 1369.
[41] Id. at 1371.
[42] Sasso v. Warsaw Orthopedic, Inc., 3:19-cv-298 JD, 2020 WL 1043104 (N.D. Ind. Mar. 4, 2020).
[43] Id. at *4.
[44] Id.
[45] Id.
[46] Id. at *6.
[47] Id.
[48] Id.
