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.