Patent Malpractice Litigation: State versus Federal Jurisdiction

Magnetek, Inc. v. Kirkland & Ellis, LLP, 2011 Ill. App. LEXIS 708 (Ill. App. 2011)

In 2005, Ole Nilssen and Magnetek settled Nilssen’s infringement lawsuit with an agreement to arbitrate the final award.  The arbitrator awarded $23 million in damages to Nilssen and the parties eventually agreed to an $18 million payment.  During that time, Magnetek was represented by the litigation powerhouse Kirkland & Ellis.  Magnetek later learned that Nilssen had (allegedly) obtained its patents through fraud. At that point, Magnetek obtained new counsel, however, the court refused to set aside the arbitration award — holding that Magnetek “could have discovered evidence of the alleged misconduct at the time of the arbitration, but failed to do so.” (In the background, Nilssen’s patents were eventually held unenforceable in a separate case involving a different defendant).

Magnetek’s malpractice suit against Kirkland & Ellis is based upon the alleged facts that the law firm advised Magnetek to enter into the settlement agreement to arbitrate the dispute and to forego further discovery (that would have likely uncovered problems with the patent). 

After a briefing and oral arguments, the state court dismissed the case – holding that the substantive overlapping patent law issues require that the case be heard in Federal Court. 

On appeal, the state appellate court reversed — finding that the case did not “arise under” federal patent law and therefore should be heard in state court.

Legal Background: In a 2005 dispute over a tax seizure & subsequent claim to quiet title, the U.S. Supreme Court ruled that federal-question jurisdiction over state law claims require both (1) the presence of a disputed and substantial federal issue; and (2) abidance with “congressional judgment about the sound division of labor between state and federal courts governing the application of [federal-question jurisdiction].” Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005). Appling Grable in the patent law situation, the court wrote that

[T]he jurisdictional question then becomes whether, based on the well-pleaded complaint, the state-law claim necessarily raises a stated federal patent law issue, actually disputed and substantial, which the federal courts may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.”

In considering Magnetek’s complaint, the court recognized that Magnetek’s successful malpractice claim would require proof that – absent the alleged malpractice – it would have proved Nilssen’s patents unenforceable. However, because the patent has already been held unenforceable in a separate case, that issue is no longer “disputed” and therefore does not give rise to federal jurisdiction.

Consequently, as the Federal Circuit discussed in Laboratory Corp. of America Holdings, the issue of the unenforceability … “has been resolved and is no longer disputed.” While a finding of legal malpractice would depend on the unenforceability of the ’409 patent, the circuit court would not have to conduct an independent analysis of unenforceability because the district court established, and the Federal Circuit affirmed, the merits of that claim and neither party contests those decisions. Therefore, there is no “disputed” federal patent issue raised by Magnetek’s legal malpractice complaint that would give rise to federal jurisdiction.

For these reasons, this case is distinguishable from Air Measurement, Immunocept, and Premier Networks, on which both parties rely to support their respective arguments. In each of those cases, the plaintiffs in the legal malpractice case were also the plaintiffs in the underlying lawsuits. In each of those underlying suits, whether for patent infringement or negligent claims drafting, the plaintiffs lost on the merits of their claims. To prove that they would have been successful in the underlying lawsuits, the plaintiffs would have to prove that their patents were infringed to satisfy the proximate cause element, which their former attorneys did not concede in the malpractice cases. Additionally, in Immunocept, the plaintiff would have to prove that its patent would have been issued with a broader claim scope before proving infringement. Thus, unlike the present case, those plaintiffs were asking a state court to retry the infringement case and evaluate the effect of the evidence they claim would have changed the outcomes, without the benefit of a separate and final determination on the merits of those claims.

The malpractice action is now remanded to the Cook County trial court.  

18 thoughts on “Patent Malpractice Litigation: State versus Federal Jurisdiction

  1. So where do all the Crimes go? What about the Fake Record? What about the RAPE? What about the ESKIMO?
    JUSTICE WILL BE MINE!

  2. That is another good point. It is certainly normally strongly contrary to the financial interests of the litigating law firm to push their litigation client into a settlement the client did not itself want, since that will end millions of dollars in discovery and litigation billings for defending the patent infringer all the way to the Fed. Cir. [Even some resisting of recomending reexaminations in some cases.] Hence, it is far more likely that a litigation firm WOULD have told the client that they might find a good defense if they pursued a lot more discovery.

  3. You seriously think Kirkland didn’t try to litigate it out? They didn’t want to press on raking in litigation fees? Right.

    They got skittish about litigation costs, demanded a settlement, and Kirkland delivered. That’s the FAR more likely scenario than Kirkland (or any firm, business, or solo attorney) saying, “well, we’re done here; there’s no possible way we could win this thing even if we found out all of the facts.”

  4. “Way too high.”

    What a great line. It takes 1-2 mil, and the awards are on the order of 10x that with a 50/50 chance. Run the numbers, it’s a great deal. Companies simply don’t want to pay what it costs. You’ve got to pay to play the sport of kings.

  5. Normally true, but is not the essential element of this case that the law firm did not VOLUNTEER a warning that if they continued the suit they might discover an inequitable conduct defense?

  6. Easy. You stay the malpractice litigation (put it in abeyance) until the appeal is concluded. If the unenforceability decision is upheld on appeal, no issue and no federal jurisdiction because unenforceability was already established. If it’s reversed, you deal with it then, most likely go to federal court to try the issue in your case (the accused infringer is not bound to the other case unless you were a party, which in this example you weren’t because it’s a different defendant) but the malpractice claim is probably DOA.

  7. You’d think that would be the expedient way to do it. But perhaps the defendants want the delay in the state court proceedings to run limitations. In a lot of states pendency in the wrong forum does not toll the limitations period.

  8. Couldn’t they have removed this to federal court; and therefore had the federal court decide the issue? Instead they wanted to get the case dismissed and that backfired.

  9. Paul, you make you point quite clearly. Based solely on the facts given to us in this post, it seems that the case for malpractice here should be non suited on the pleadings.

  10. Corrected:

    need to offer to give an opinion to every patent suit defendant client, before recommending a settlement, that contains a list of every way a defendant might win, however unlikely

    We can only offer our services – the client’s still get to decide whether to spend the money or not.

  11. Will malpractice plaintiffs now argue that law firms need to give an opinion to every patent suit defendant client, before recommending a settlement, that contains a list of every way a defendant might win, however unlikely, if the defendant continues to spend several million dollars in years of discovery and litigation, in order to avoid malpractice for recommending a settlement? Especially where the defendant is probably infringing and presumably the usual preliminary prior art search did not find any good prior art? Even IF so told orally, how many clients would not remember, and deny, being told? Yet only giving such advice orally in such situations is vastly safer for the client than a written opinion containing admissions as to why they think the client may lose if they do not settle.

  12. Good question. But they have to file someplace fairly fast, as a number of alleged patent malpractice cases against attorneys [not necessarily all patent attorneys] seem have gotten tossed out for being filed too late under applicable statutes of limitations.

  13. Perhaps there may be a more sympathetic view from an appellate court that this kind of malpractice suit should be strongly disfavored as greatly inhibiting and discouraging law firms from encouraging pre-trial litigation settlements and arbitration, clogging the courts with more extensive litigation.
    But it looks to me as if this jurisdictional decision is correct, and that Kirkland & Ellis, and its malpractice insurer, if any, are now at risk here for $18 million and attorney fees unless they can convince a Cook County jury [not normally a friend of lawyer-defendants] that they were not negligent in urging such a large* pre-trial settlement without further discovery. They should not even have to prove that the fraud was not discoverable at the time of settlement, although that would certainly help if they could.
    A trial over the gory details would be interesting, but my bet is that instead we will more typically see a big quiet payoff to repress more bad publicity.
    P.S. Even if one has malpractice insurance coverage, it may be “capped” at less than the amount in dispute.

    *Presumably the arbitrators must have concluded that there was extensive patent infringement to get the award up to that $18 million amount.

  14. “However, because the patent has already been held unenforceable in a separate case, that issue is no longer “disputed” and therefore does not give rise to federal jurisdiction.”

    So what happens if the unenforceability is still under appeal to the Federal Circuit or the US Supreme Court? Do they have to file in Federal Court, and wait for a final disposition before the judge then order the case transferred to state court if the unenforceability is upheld by the appellate court?

  15. Translation: Discovery is expensive and the client wanted to settle before incurring those costs. Kirkland negotiated an acceptable deal. The client signed. …. Years later, the patents were held invalid, so the cost conscious client sues the lawyers for doing what the client asked.

    If only we could figure out why patent malpractice insurance is so high.

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