How the AIA is Getting Breach-of-License Cases into Federal Court

Alexsam, Inc. v. Wildcard Systems, Inc. (Supreme Court 2018)

In its new petition for certiorari, Alexsam argues that its breach-of-contract case should have never been removed to Federal Court. The petition relies heavily on Gunn v. Minton, 568 U.S. 251 (2013) and raises important issues of when licensing disputes issues should be heard in Federal Court [AlexsamPetition]

The State/Federal Balance: In Gunn, the Supreme Court held that a patent-attorney malpractice case did not “arise under” the patent laws.  Even though the case required consideration of patent law issues, those issues were not deemed “substantial” enough to “disturb[ the] congressionally approved balance of federal and state judicial responsibilities.” Grable & Sons Metal Products, Inc., 545 U.S. 308 (2005).

Disturbing the Balance: While Gunn narrowed the scope of federal jurisdiction, the “congressionally approved balance” is expansive enough to permit removal of state cases to federal court whenever “any party” raises a claim (including counterclaims) relating to patents or copyrights.  In addition, the law particularly preempts state court jurisdiction over “any claim for relief” arising under the patent laws. [NOTE: This Section was Updated to Eliminate an Error]

28 U.S.C. § 1454 A civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights may be removed to the district court of the United States for the district and division embracing the place where the action is pending.

28 U.S.C § 1338 No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights.

Back in 2004, Alexsam sued WildCard for infringing two of its payment systems patents. (U.S. Patent Nos. 6,000,608 and 6,189,787).  The parties settled the lawsuit in 2005 and entered into a “settlement and license agreement.” The agreement indicated it would end if “the claims of the Licensed Patents are held invalid or unenforceable by a court of competent jurisdiction. . . ”  Zoom up to 2015 – Alexsam sued WildCard (and its owners) in Florida state court for breach of the agreement and asking for the royalties owed under the contract.  Respondents filed a counterclaim of invalidity and unenforceability then removed the case to Federal Court (S.D.Fla.).  The Federal Court then heard the case and sided with WildCard – finding no breach of contract (holding it had been terminated in 2009) and then dismissed the patent claims as barred by preclusion (and as an alternative holding, that the claims no longer had an independent basis for existence).

Note here – this setup is odd and seemingly improper: The Federal Court agreed to hear the state-law contract claims because they were supplemental to the patent claims, but then turned around and found that there was no independent basis for the patent claims to be brought. In its briefing before the Federal Circuit, WildCard explained this result in its Federal Circuit briefing: “Whether or not a claim is barred by res judicata has nothing to do with whether it arises under federal law, and thus has no bearing on the trial court’s subject-matter jurisdiction.”  See Smalls v. U.S., 471 F.3d 186 (D.C. Cir. 2006) (“the defense of res judicata, or claim preclusion, while having a “somewhat jurisdictional character,” does not affect the subject matter jurisdiction of the district court.”)  I would suggest a counterclaim must still state a plausible claim — and one barred by res judicata is not plausible and should have been dismissed from the get-go.

Alexsam appealed to the 11th Circuit Court of Appeals. However, that court transferred its case to the Federal Circuit who affirmed without opinion (R.36).  Note here that the Federal Circuit only has appellate jurisdiction over district court patent cases where either (1) the civil action (i.e., well pled complaint) or (2) a compulsory counterclaim arises under the patent laws.

28 U.S. Code § 1295(a) The United States Court of Appeals for the Federal Circuit shall have exclusive jurisdiction—(1) of an appeal from a final decision of a district court of the United States . . . in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents . . . ;

There is a clear dispute here as to whether the counterclaim filed here was “compulsory” — if not then the 11th Circuit was the proper court to hear the appeal.

Bringing these issues together, Alexsam has asked two questions in its petition for writ of certiorari:

  1. Was there an independent basis for Respondents’ assertion of an invalidity counterclaim sufficient to invoke federal subject matter jurisdiction over petitioner’s state law claim for breach of the patent license agreement?
  2. Under Gunn v. Minton, where is the line drawn for federal jurisdiction for a state law Breach of Contract claim for the breach of a patent license?

Interesting and very important case that raises the basic question of whether the AIA amendments were designed to open-the-door to patent license disputes that would otherwise be determined by state law.

13 thoughts on “How the AIA is Getting Breach-of-License Cases into Federal Court

  1. 6

    It’s the Giles Rich competition problem!

  2. 5

    Because the defendant raised a counterclaim for declaratory relief of invalidity and unenforceability, the court should look to the threatened action that would give rise to the declaratory relief to determine the federal patent question jurisdiction on the counterclaim. Here, presumably that would be the hypothetical infringement action arising from the terminated license agreement (and MedImmune suggests that would be the case even if it hadn’t been terminated).

    The amendments to 1338 and 1294, along with the addition of the new removal provision in 1454 suggest this type of counterclaim could not stay in state court, despite the patent owner’s best efforts to frame this case as a simple contract one. Gunn and Grable (the 1331 case that guides Gunn) do narrow the set of claims that might arise under the patent laws, but the other statutes do the heavy-lifting here with regard to the counterclaim of invalidity, whether compulsory or not.

    The amendments were designed to overrule Holmes Group on the counterclaim question and adjust removal in the same manner, but the unintended consequence might be picking up these pure contract cases if the licensee files counterclaims that trigger DJ jurisdiction. The Federal Circuit was already doing this by holding invalidity and unenforceability questions in contract cases as arising under the patent laws, but at least the 11th Circuit had disagreed on the grounds that validity is presumed and not a part of the contract plaintiff’s case.

    Really complex jurisdictional issues. If you agree with Justice Thomas’s dissent in Medimmune that invalidity is a mere defense and can’t carry a counterclaim, then that might be one argument to keep it in state court. But he was a minority of one.

  3. 4

    Anon, I am pleased to finally see your admission that “It is not me with a salary dependent thing going on here Greg…” after years of insulting anyone else making comments on this and other blogs for no longer doing PTO prep and prosecution work [as if that somehow makes one a constitutional law expert].

    1. 4.1

      I have no idea what “admission” it is that you think is in my words, Paul.

      I have never been the one to attempt to portray “no longer doing PTO prep and prosecution work” as any type of MONEY driver.

      I have portrayed that “no longer” in the more appropriate sense: that you are out of touch with the substantive content of such. I have portrayed that “no longer” as reflecting your actual drivers and biases. That is NOT a “money driver” per se, as it is a “your focus” driver.

      Any error as to my slights being merely some type of “ha, money” are most bizarre and surely rest within you.

      Further, your attempted slight at Con Law views is also untethered to the conversation here. I happen to know FAR MORE about Con Law than you. Such has never had a tie to whether or not you no longer practice prep and pros or bother with having a registration number. Nor have I ever stated or even insinuated that the knowledge of Con Law is or must come from maintaining such a practice.

      It also does not excuse your LACK of actually engaging on the merits of any Con Law discussion, nor your preferred choice of merely sniping from the sidelines.

      Any (and all) of my denigrations of you still fully apply – and apply with no loss of merit given my (fully consistent) posts here. Whatever “spin” you are attempting – stop. Please. You are only embarrassing yourself.

  4. 3

    Over the weekend, while I was doing my grocery shopping over the weekend, I was listening to the oral argument from Lear v. Adkins. Justice Douglas came down really hard on the patentee’s counsel when the patentee suggested that the interpretation of a license agreement was a matter of state contract law (“Could you give a memorandum to us on that because we do not have a lot of cases in this field and this is the first time anybody has stood there and had the temerity to make that suggestion?”).

    It is ironic to think that the Court might be about to suggest that not only is license construction a matter of state law, but that it is so obviously a matter of state law that the Federal Courts should consider themselves to be without subject matter jurisdiction to consider the issue (absent diversity, or some such similar alternative ground to supply subject matter jurisdiction). In other words, the Court is swinging all the way from of course the interpretation and sufficiency of license agreements is a matter of federal law (because patents) to of course the interpretation and sufficiency of license agreements is a matter of state law (because contracts).

    Basically, what this illustrates is that the justices really are not all that good at thinking about patent issues. Reason 1,000,002 why their jurisdiction to consider patent questions should simply be rescinded by statute.

    1. 3.1

      while I was doing my grocery shopping over the weekend, I was listening to the oral argument from Lear v. Adkins.

      Did you remember to pick up the bacon?

  5. 2

    Dennis, you’re comments about the AIA are off-base.

    All Congress did with the AIA was give the CAFC jurisdiction over appeals that include patent law counterclaims. This was done to expressly overrule Holmes Group v. Vornado (2002), in which the Supreme Court held that the Federal Circuit had no jurisdiction over a patent infringement claim that was brought only as a counterclaim. The Supreme Court’s ruling was correct under the then-existing statute, which required that federal jurisdiction be determined only from the complaint.

    But under Holmes Group, any rulings on a patent infringement counterclaim would have to be heard by the regional circuit court, which kind of defeats the whole purpose of the CAFC in establishing supposed uniformity in patent law.

    So I respectfully disagree that Congress changed the balance at all with the AIA; they simply plugged a narrow loophole. They didn’t change what it means for a claim to “arise under” patent law; they simply told federal courts that they weren’t limited to the Complaint in finding it.

    As an aside, the concern over Holmes Group that prompted the AIA amendment never materialized. There were very, very, very few cases from 2002-2011 where someone actually tried to bring a patent claim as a counterclaim to a Complaint that stated no patent claims. It almost never happened, for the obvious reason that patent owners viewed the Federal Circuit as far more pro-patent than the regional circuit courts would likely be.

  6. 1

    Typically, if Federal Preemption is to be advanced, does there not need to be an extensive coverage under the Federal domain? The “tie” to patents (and copyrights) by Congress in the AIA does not appear to support that.

    Does the nature of the patent as a Franchise Right (a Federal Franchise Right at that) change anything?

    Before dismissing this question, one should recognize that going from a personal property right to a Federal Franchise Right is NOT a small undertaking. Even if one wants to call both “property rights” – they are two very different types of property rights.

    1. 1.1

      The Sup. Ct. Oil States decision “narrowly” holds that Congress can provide a non Article III government run administrative system to decide if patent claims were erroneously issued [over prior patents or publications]. It does NOT otherwise change private, personal, property rights in patents.

      1. 1.1.1

        I know this, and you know this, and I dare say that every federal judge who will ever have occasion to consider the issue will know it, but some people deliberately choose not to know this because they find it rhetorically inconvenient to understand Oil States in the context of the rest of SCotUS patent jurisprudence. As Upton Sinclair wisely observed, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

        1. 1.1.1.1

          Yes Greg, it is not surprising that some of those who had been miss leading the public by repeatedly predicting that Oil States or some other alleged unconstitutionality assertion would be the angel of deliverance from all IPRs would now take an erroneous extremist disaster view of it.

          1. 1.1.1.1.1

            Rah Rah

      2. 1.1.2

        That entirely remains to be seen Paul.

        You know this. Greg knows this, Everyone know this ( in at least one form of property is not multimorphic and able to be two distinct things at once.

        As to “rhetorically inconvenient to understand Oil States in the context of the rest of SCotUS patent jurisprudence – this coming from the same guy that has agreed with me that the Supreme Court (especially 101) jurisprudence is irretrievably conflicting…?

        It is not me with a salary dependent thing going on here Greg….. Maybe you ought to do that look in the mirror for that log in your own eye first thing….

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