Supreme Court Questions Whether Patent Law Malpractice Claims “Arise Under” the US Patent Laws (And Thus Are Amenable to Federal Jurisdiction).

By Dennis Crouch

Gunn v. Minton (Supreme Court 2012)

Over the past few years we have seen an ongoing subject matter jurisdictional battle between state courts, regional federal circuit courts of appeal, and the Court of Appeals for the Federal Circuit. The issue as raised in various context is when a complaint stating a non-patent cause of action should be considered to “arise under” the patent laws so as to ensure that the case is heard by a federal district court and subsequently by the Court of Appeals for the Federal Circuit. These non-patent / patent cases can arise in a variety of disputes, including disputes over legal malpractice, contracts and licenses, employment disputes, bankruptcy, challenges to arbitrations, and antitrust disputes.

The issue in the present case is whether state courts in Texas properly have jurisdiction over legal malpractice claims against patent attorneys (or patent litigators). Legal malpractice is generally a state law tort claim, but the Federal Courts have jurisdiction over claims arising under the patent laws. Although there is Federal Circuit precedent on point, this case actually arises from a Texas state court dismissal of Mr. Minton’s malpractice claim based upon the state court’s interpretation of federal law.

Now, the Supreme Court has agreed offer its final view on the question of when the Federal Courts (and the Court of Appeals for the Federal Circuit) have jurisdiction here. Although nominally a patent case, the case could have much broader impact because it will essentially be interpreting the generic constitutional and statutory limitation of “arising under” jurisdiction.

Background on the Dispute: The case started several years ago when Mr. Vernon Minton developed a set of software that he leased to the Texas Int’l Stock Exchange (TISE). That lease to TISE occurred more than one year before he filed a provisional patent application on the invention embodied by the product. The USPTO granted Minton U.S. Patent No. 6,014,643. However, in a later lawsuit against NASDAQ, the patent was invalidated via the on-sale bar of 35 U.S.C. § 102(b) and that invalidity finding was upheld by the Federal Circuit on appeal. Minton v. Nat’l Ass’n of Sec. Dealers, Inc., 336 F.3d 1373 (Fed. Cir. 2003). In that decision, the Federal Circuit confirmed that the lease to TISE constituted a “sale” for 102(b). In a post-judgment motion, Minton asked the district court to consider whether the use by TISE was an experimental use. However, the district court refused to consider that issue because of its untimely introduction.

The present lawsuit arose when Minton sued his patent litigation counsel (who have now joined the Fulbright & Jaworski firm). The crux of the malpractice claim is that the litigation counsel failed to timely plead the experimental use question. Minton filed the lawsuit in Texas state court and lost on a pretrial motion based upon the trial court’s judgment that Minton had failed to present “a scintilla of proof . . . to support his claims.” That no-damages judgment was affirmed by the Texas court of appeals. However, the Supreme Court of Texas took an orthogonal view and held that Texas courts actually lacked subject matter jurisdiction over case. In particular, the Texas Supreme Court held that Minton’s malpractice claim required resolution of a substantial question of patent law and therefore fell within the exclusive “arising under” jurisdiction of the federal courts and, eventually, the Court of Appeals for the Federal Circuit. This ruling gives Minton another shot at winning the case – this time in federal district court. The Texas court wrote:

This case arises out of patent infringement litigation. We consider whether federal courts possess exclusive subject-matter jurisdiction over state-based legal malpractice claims that require the application of federal patent law. The federal patent issue presented here is necessary, disputed, and substantial within the context of the overlying state legal malpractice lawsuit. Additionally, the patent issue may be determined without creating a jurisdictional imbalance between state and federal courts. We conclude that exclusive federal jurisdiction exists in this case. Accordingly, without reaching the merits of the legal malpractice claim, we reverse the court of appeals’ judgment and dismiss this case.

The 5-3 Texas Supreme Court decision follows the lead set by the Court of Appeals for the Federal Circuit in Air Measurement Tech., Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. 2007) and Immunocept, L.L.C. v. Fulbright & Jaworski, L.L.P., 504 F.3d 1281 (Fed. Cir. 2007). In those cases the Federal Circuit gave a broad interpretation to arising under jurisdiction based upon the court’s congressionally mandated goal of national uniformity in the patent system. Both the Akin Gump and the Fulbright Jaworski cases were decided on the same day by the same panel and both penned by then Chief Judge Paul Michel. (Judges Lourie and Rader joined). Although the Texas court did not treat the Federal Circuit decisions as binding precedent, the Court chose to adopt the logic of those decisions. The dissent argued that the State of Texas has a strong interest in (and a regulatory scheme in place for) ensuring that Texas attorneys maintain a high level of quality and that federalism concerns suggest that many of these cases should be adjudged at the state court level. In a non-patent case, the Supreme Court approved of this more nuanced analysis of arising under jurisdiction in the case of Grable & Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005). In 2012, the Federal Circuit has decided at least three other jurisdictional disputes over attorney malpractice. In each case, Judge O’Malley argued against federal circuit jurisdiction based upon her reading of Grable. See Landmark Screens, LLC v. Morgan Lewis & Bockius, LLP (Fed. Cir. 2012)(O’Malley, J., concurring); Byrne v. Wood, Herron & Evans, LLP (Fed. Cir. 2012)(O’Malley, J., joined by Wallach, J., dissenting from denial of the petition for en banc rehearing); and USPPS, Ltd. v. Avery Dennison Corp. (Fed. Cir. 2012)(O’Malley, J., joined by Mayer, J., concurring).

Question Presented: The attorneys challenging federal jurisdiction raised the following questions:

Did the Federal Circuit depart from the standard this Court articulated in Grable & Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005), for “arising under” jurisdiction of the federal courts under 28 U.S.C. § 1338, when it held that state law legal malpractice claims against trial lawyers for their handling of underlying patent matters come within the exclusive jurisdiction of the federal courts? Because the Federal Circuit has exclusive jurisdiction over appeals involving patents, are state courts and federal courts strictly following the Federal Circuit’s mistaken standard, thereby magnifying its jurisdictional error and sweeping broad swaths of state law claims – which involve no actual patents and have no impact on actual patent rights – into the federal courts?

In his responsive brief, Minton reframed the question as follows:

Minton filed a legal malpractice claim against the Attorneys arising from a patent infringement lawsuit. Do federal courts have exclusive “arising under” jurisdiction where the sole substantive issue is the application of a patent law doctrine which is an essential element of Minton’s malpractice claim?

Underlying Law: As suggested by both questions presented, the underlying law on federal court jurisdiction over patent cases begins with the federal statute – 28 U.S.C. § 1338(a).

The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.

28 U.S.C. § 1338(a). There are two key phrases here. First, federal jurisdiction only exists when the civil action is considered to be “arising under [an] Act of Congress relating to patents.” Second, if federal circuit exists then it is exclusive of state jurisdiction.

Not a Constitutional Question: The statutory “arising under” language is intended to reflect the parallel language found in Article III, Section 2 of the U.S. Constitution that limits federal judicial power to cases “arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority…” However, the two sources have been interpreted somewhat differently. The constitutional “arising under” limits have been broadly interpreted to allow courts to hear cases even when the federal claim is only raised in a defense or counterclaim. See Osborn v. Bank of the United States, 22 U.S. 738 (1824). On the other hand, the “arising under” language in sections 1338 and 1331 have been more narrowly interpreted under the well pleaded complaint rule. In his 2004 article on Holmes Group, Professor Cotropia writes:

The phrase “arising under” originated from Article III of the Constitution, defining the jurisdiction of the federal court system. The Supreme Court interpreted this phrase, as it appears in Article III, to extend the constitutional grant of federal judiciary power to every case where federal law potentially forms an ingredient of a claim. Article III allowed “[t]he mere existence of a latent federal ‘ingredient’ that might in theory be dispositive of the outcome of a case . . . to bring the entire case, including ancillary nonfederal issues, within the jurisdiction of the federal courts.” An implementing statute is needed, however, for lower federal courts to exercise the powers conferred by Article III. With such an implementing statute, lower federal courts could enjoy some or all of the constitutional “arising under” grant of jurisdiction.

Christopher Cotropia, Counterclaims, the Well-Pleaded Complaint, and Federal Jurisdiction, 33 Hofstra L. Rev. 1 (Fall 2004); See also Donald L. Doernberg, There’s No Reason for It; It’s Just Our Policy: Why the Well-Pleaded Complaint Rule Sabotages the Purposes of Federal Question Jurisdiction, 38 Hastings L.J. 597 (1987).Because the Constitutional limitation has been so broadly interpreted, all of the practical discussion is focused on the meaning of “arising under” as it is found in the statutory context.

In Grable (following a long line of precedent), the Supreme Court confirmed that – under the statute – a case may “arise under” federal law even when the cause of action is purely a non-federal state-law claim. However, when the cause of action is not based on a federal claim, Grable requires (1) a substantial underlying contested federal issue and (2) that federal jurisdiction over the case “be consistent with congressional judgment about the sound division of labor between state and federal courts.” Grable interpreted the “arising under” language of 28 U.S.C. § 1331 rather than the patent jurisdictional statute of section 1338. However, in Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988), the Supreme Court recognized that those two statutes should be interpreted in parallel.

Is Patent Law Different?: Although I wrote above that the case has non-patent implications, patent law presents some particulars that might not exist in other areas of law. These involve the particular exclusive jurisdictional statute for patent law. Thus, although state courts have jurisdiction to also decide most federal claims, they cannot decide patent claims. In addition, Congress has spoken regarding its desire for uniformity in the application of the patent laws. These stated federal interests could be sufficient to explain a difference between federal jurisdiction over patent law malpractice claims and not over say trademark law malpractice claims. The malpractice is a relatively minor question compared with jurisdiction over contract claims that involve patent rights (such as a patent license or sale). It would be a big deal if the Supreme Court opened the door to greater federal jurisdiction over these claims. As I explain in the next paragraph, I think it is unlikely that this case would be a vehicle for expanding federal jurisdiction and instead will more likely be a vehicle for contracting federal jurisdiction – at least when compared with the holdings in Akin Gump and Fulbright jurisdictional decisions discussed above.

Grable is the Supreme Court’s most recent pronouncement on this issue and that case the court tempered federal arising under jurisdiction by requiring courts to be mindful of the appropriate balance of power between state and federal courts. Despite Grable, both the Federal Circuit and now the Texas Supreme Court have continued to maintain broad jurisdictional reach over these malpractice cases. In these cases, the minority dissenting viewpoint has argued for less expansive jurisdiction. In this setup, the Supreme Court is more likely to resolve the conflict between these ranges than it is to identify a result to the extreme. In addition, in the years since Grable, there has been a continued focus and recognition of legitimizing State’s rights. This notion of the importance of State’s rights places an additional thumb the scale of reduced federal jurisdiction over these types of cases.

AIA Expands Arising Under Jurisdiction: Although not applicable for this case, the Leahy-Smith America Invents Act (AIA) has altered federal court jurisdiction in a way that overrules the Supreme Court decision in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2002). In that case, the Supreme Court interpreted the applied the well pleaded complaint rule to the Federal Circuit appellate jurisdiction statute (28 U.S.C. § 1295) in holding that patent issues raised only in counterclaims do not “arise under” the patent law in a way that creates Federal Circuit jurisdiction. The AIA amends the statute to clarify that Federal Circuit jurisdiction includes cases where the patent issue is first raised in a compulsory counterclaim. In addition, the new law indicates that “No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents” and also provides a right of removal from state court if either party raises a claim for relief “arising under any Act of Congress relating to patents.”

27 thoughts on “Supreme Court Questions Whether Patent Law Malpractice Claims “Arise Under” the US Patent Laws (And Thus Are Amenable to Federal Jurisdiction).

  1. link to news.yahoo.com

    “The iPhone-maker has been granted more than 4,100 patents since 2001 and for the first time last year the company spent more money on patenting ideas than on research and development.”

    lulz lulz lulz

  2. I think it may be 9 Justices. Look at Grable, and you can see that every Justice on the Court at that time agreed in a limited view of 1331 jurisdiction. Justice Thomas is absolutely one of the four, but I would bet that it is more than that. This case is about federalism and the extent of the power of federal courts to have exclusive jurisdiction over a traditional state common law cause of action (legal malpractice), and my belief is that this case being chosen shows that the most limited view of jurisdiction will be taken. My bet is that Judges O’Malley, Wallach, and Mayer end up vindicated by the Supreme Court’s decision in this case, one by a large majority. I have to believe that this ends up being a 9-0 decision saying the Federal Circuit got it wrong. Grable is about respecting the division between state and federal claims, and while it doesn’t go as far as the probate exception (which applies to diversity jurisdiction) it suggests that certain types of claims, even if they do turn on an issue of federal law, would not fall within federal question jurisdiction. One has to think that a state legal malpractice claim is one where Congress expected the states to have jurisdiction, because the state courts should be responsible for determining the standard of legal malpractice for lawyers admitted to that state’s bar.

  3. Prof. Crouch, I respectfully request that the comment above be deleted.

    I find such personal attacks and anti-patent propaganda offensive and void of any value. If the person wants to condemn patents, there are better ways.

  4. Almost Nothing Patented is Ever Successful

    Did you know that of the over 8 Million patents issued in the USA since 1789 almost nothing every patented turns into a product for sale? If you need this verified, ask any patent attorney. They know.

    If this is news to you, do you think it is significant?

    Of the tiny fraction of patented items that actually become products, did you know that almost none of those ever turn a profit? Any patent attorney can tell you this.

    If this is news to you, do you think it is significant?

    What this means is if there is any correlation at all, it is patent equals failure.

  5. I think third party challenges are kaput in any form

    Yes Ned, I know that is what you think. The problem is that you seem to forget that standing is an issue in any court case and that any defendant (read that as anyone the Pirate is enforcing “his” (valid) patent against) need not be “the actual inventor” to challenge standing.

    Nothing in the AIA overrides this basic principle.

  6. Anon, I think third party challenges are kaput in any form.  I am wonder just how the real inventor can recover the patent if they did not file their own application and/or the pirate is claiming a variation as in OddzOn.
     

     

  7. This may require federal jurisdiction to sort out inventorship issues.

    Of course it will require federal jurisdiction.

    But that’s not the point.

    I would have you return to yet another of our conversations that you conveniently did not finish – that of standing as an ability to challenge a Pirate in a court action (overriding your contention that the new patent law somehow takes the issue of standing out of the equation because the path of “derivation proceedings” must be the only path).

    Hint: it’s not. Patent law cannot override basic legal principles such as standing. Put simply, a Pirate has no standing to attempt to enforce his (valid, that is the patent is valid, but it is NOT the pirate’s valid) patent.

  8. Anon, in the past we didn't have to worry about patents based on stoled technology.  They were invalid.  Now we do.  This may require federal jurisdiction to sort out inventorship issues.

  9. Because it’s simple. If the Supreme Court was going to likely uphold CAFC jurisdiction over these sorts of claims, Byrne would have been a better vehicle because it’s about a hypothetical patent, which is a pretty big stretch. If the Supreme Court is saying there’s no section 1338 jurisdiction over this claim or any claim like this, then this is the case to do it because it’s very clear. This doesn’t just affect federal question jurisdiction over patent malpractice claims, it affects all federal question jurisdiction over malpractice claims where federal law is at issue.

  10. I would presume… but I am not sure… I presume…I will presume…also assume…I presume…

    Thanks for the conjecture and dance.

    My thought? My thoughts are that I want you to address the points that I have raised.

  11. Actually anon, I was thinking of a real case that was reported in the press not long ago. It was between Seagate and Western Digital, and involved a researcher that knew of significant new technology involving, I believe, spin valve sensors. Apparently this researcher took with him a significant number of confidential files in addition to the subject matter in his head , and gave the whole technology to Western Digital. The court awarded damages of around 750million dollars.

    Obviously this technology was patentable and I would presume that Western Digital may have file patent applications on at least improvements of the technology.  One of the remedies I presume that Seagate pursued would have been for assignment of these patents from Western Digital to Seagate, but I am not sure.

    Regarding the agreements between the researcher and Seagate? I will presume that they required him to keep confidential both confidential and trade secret information, and not to use it or disclosed for his own benefit or to benefit of others. These are somewhat standard agreements. Such agreements would also require him to disclose and assign to Seagate inventions conceived or reduced to practice while employee. For the sake of this discussion, we should also assume that the agreements included a present assignment of these inventions.

    As to Law, the lawsuit was filed in Minnesota. Therefore I presume they use Minnesota trade secrets law which includes "an inevitable use and disclosure."

    Regarding improvements paid for by Western Digital an inventor by Western Digital inventors, I think that makes no difference to the ownership dispute because they would have nothing to improve but for the trade secret misappropriation. Furthermore, I believe strong case could be made that the Seagate inventors of the spin valve technology disclosing these patent applications should be named as coinventors.

    Your thoughts?

  12. Assume the following:

    No.

    Why would I dive into that complicated pile of shtt when you refuse to address the many (and much more straight forward) points that I have raised?

    At a a minimum, your hypo needs additional points:

    - what type of employment agreement was in place with the researcher?

    - do you really have trade secrets on what was “misappropriated”?

    -under which state law?

    -have any of the patent applications published? If so, do you really have a trade secret anymore?

    -do you have any right to claim variations and improvements? Under what notion of law would you attempt to have these assigned over to you (as clearly these are things not invented by you)?

    -How can you correct ownership of such things not invented by you?

    Ned, please stay real and not meander off on such frolics

  13. I’m not following you, anon.

    Assume the following: one of your most important researchers leaves the company and joins a competitor. He has knowledge of a secret project that is not revealed in published patent applications yet because products embodying the invention are not yet ready for sale.

    About two years later, you discover that your competitor has been filing patent applications on variations and improvements of the secret technology, naming in some instances your researcher as an inventor or coinventor.

    You have no patent applications on file. However you file the trade secret misappropriation case. One of the remedies you seek is that every competitor application disclosing the secret invention be assigned to your company.

    Once you obtain ownership of the patents and applications, you intend to correct inventorship to name your own inventors to the extent they invented the subject matter disclosed in your competitors patent applications.

    Is there anything at all here that implicates the new AIA? Are the patents obtained by the trade secret misappropriator invalid? Is jurisdiction proper in state courts?

  14. Jason,

    While I “get” your position, I do not find your arguments compelling at all.

    “They did in [some jurisdiction]” is quite meaningless, as that line or argument applies to both sides.

    “The issue at the heart of the matter” is likewise unavailing. You simply have stopped your analysis one step too short. While “malpractice” may have been at the heart of the matter, what was at the heart of the malpractice? Far from being “dead and gone,” it must be explored to deem whether or not malpractice truly happened.

    If upon examination of the issue involving the law of patents, there was no malpractice, what then..?

  15. Section 256 allows the District Court to correct inventorship. This allows it to, I believe, substitute inventors entirely under appropriate circumstances, and not just be limited to adding or subtracting joint inventors.

    Assume now a trade secret or confidential information misappropriation case. This is a state cause of action. But, in the case of patentable inventions, such misappropriation also is the kind of derivation that would form the basis of a derivation proceeding in the case of rival patent or applications. It would also form the basis of an action under 256 in the case of issued patents. I am not sure what statutory basis would be until the patent is issued – although 35 USC 116(c) seems to allow the director to allow correction of an inventorship (this section is not limited by its terms to joint inventors) while an application is pending. Does anybody know what the implementation rules are for 116(c) under the AIA?

    Thus in the case of confidential information or trade secret misappropriation, where this appropriator has used the information in a patent or application, and where the potential remedy would be a correction of inventorship, the jurisdiction would seem be exclusive in the federal courts, and the statutory authority would be under 256 (or 116) as the case may be.

    Is this right?

    Also, how would the one year statute of limitations for derivation actions implicate such a proceeding?

  16. To me in reviewing the Texas cases in which this originated this is a case that the state should have stayed with. Tex. Sup. Ct. was wrong in yielding to Fed. Cir.

    The issue at the heart of the matter is a malpractice issue – did the attorney perform his responsibilities in making the proper assessments and defenses in the underlying NASD matter? Did the attorney view the “experimental use” exception and go “nope, that won’t work” and move on? That’s a matter that any judge can assess. They did in New Tek. They did in Ft. Worth.

    The underlying patent infringement issue is dead and gone. It’s a red herring.

  17. To me, the interesting phrase is “arising under.”

    What exactly does this phrase mean?

    Is it a (purely) topical reference (more along the expansive Supreme Court view)?

    Is it a (purely) procedural reference?

    Does policy (where to steer the case load) affect the definition? Should it?

  18. I think that this is a more general question about whether attorney malpractice claims arising under federal law fall under federal question (or patent) jurisdiction, or if they can only be in federal court under diversity jurisdiction. While this does present *some* different circumstances because it is a patent case, where there is exclusive jurisdiction, the question is more about district court jurisdiction than appellate jurisdiction. While the AIA seems to change the language, a legal malpractice claim for patent malpractice is not a claim for relief arising under an Act of Congress relating to patents, it would still fall in the gray area of Grable.

    While the Federal Circuit in all of its cases has said that it has a role in providing uniformity in patent law that gives it (and federal courts) jurisdiction over these claims, I expect several state bar associations to weigh in and file amicus briefs arguing that they have a more important role in ensuring that their attorneys follow the state bar’s rules.

    With that being said, I was surprised that this was the case in which cert was granted rather than Byrne, because of the facts. This was more clearly, to me, a case in which Grable would allow jurisdiction because the case turned on an actual patent and an actual defense, whereas in Byrne, it turned entirely on a hypothetical patent. What this would suggest to me is that the Court is going to severely limit federal question jurisdiction over any state malpractice claims. I would fully expect the case where the Nebraska Supreme Court did claim construction (New-Tek?) to be front and center.

  19. Sounds correctly decided on the facts, because it requires understanding of the experimental use doctrine, which of course is a question of patent law. Maybe different facts might have led to a different result, though.

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