Authors: John J. Thuermer and Bart A. Gerstenblith (Finnegan)
Laboratory Corporation of America Holdings v Metabolite Laboratories, Inc., 599 F.3d 1277 (Fed. Cir. 2010)
Citation: Journal of Intellectual Property Law & Practice (2010) doi: 10.1093/jiplp/jpq144
An issue of patent law must be disputed in a suit based on state contract law in order for the Federal Circuit to have appellate jurisdiction.
In this appeal from a declaratory judgment action in the US District Court for the District of Colorado, the US Court of Appeals for the Federal Circuit considered whether it had subject matter jurisdiction where the declaratory defendant's hypothetical breach of contract claim did not arise under federal patent law or raise a substantial question of patent law.
Competitive Technologies, Inc. (CTI) owned US Patent No. 4,940,658, which claimed a method for detecting folate deficiencies by assaying total homocysteine levels.
The license agreement
The second license was a know-how license. Metabolite developed know-how consisting of protocols and software that enabled automated assay testing. Metabolite licensed its know-how to LabCorp in conjunction with the patent sublicense and received 21.5% of LabCorp's net sales of licensed assays as royalties. The license agreement defined ‘licensed assays’ as assays using ‘methods and materials falling within the claims of the licensed patents’. ‘Licensed patents’, in turn, was defined to include the patent. LabCorp did not have to pay know-how royalties if it used Metabolite's know-how on unlicensed assays or if LabCorp referred the assays to Metabolite for processing. Additionally, the license agreement provided that it could be terminated in-whole or in-part if LabCorp or another party developed a more profitable non-infringing assay.
In an earlier litigation between the parties (Metabolite I), Metabolite sued LabCorp for patent infringement and breach of the license provisions pertaining to homocysteine assays after LabCorp used a third-party assay and stopped paying royalties. LabCorp contended that its use of the third-party assays did not infringe the patent and were not therefore ‘licensed assays’ within the terms of the license agreement. The jury, however, found that LabCorp breached the license agreement because the third-party assays infringed the patent and LabCorp failed to pay royalties. On appeal (Metabolite II) the Federal Circuit agreed, finding that LabCorp's refusal to pay royalties constituted a material breach that could have terminated the homocysteine assay provisions of the license agreement. Thereafter, LabCorp outsourced the testing to a third party that had an independent license from CTI to perform the assays.
In the current case (Metabolite III), LabCorp sued Metabolite for a declaratory judgment that it did not breach the license agreement by using Metabolite's know-how and outsourcing the testing. LabCorp's declaratory complaint raised a contract claim and averred that the district court had diversity jurisdiction. In response, Metabolite filed several counterclaims. Thereafter the parties filed competing motions for summary judgment, although Metabolite chose to pursue only its breach of contract counterclaim.
On summary judgment, the district court determined that the only issue in the case was whether the know-how license survived the breach of the patent license. The district court found that, because the license agreement could be severed and terminated for individual licensed assays, LabCorp had terminated the provisions of the license agreement (patent and know-how licenses) pertaining to homocysteine assays by not paying royalties for the third-party assays (even though the other provisions of the license agreement may have remained in force because LabCorp continued to make royalty payments for the other licensed assays). Thus LabCorp's outsourcing of the homocysteine assays did not breach the license agreement since the provisions applying to that assay had been terminated. Accordingly, the court granted LabCorp's motion for summary judgment.
Metabolite appealed to the Federal Circuit. LabCorp filed a motion to transfer the appeal to the Tenth Circuit (the regional circuit court for cases originating in the District of Colorado), arguing that the Federal Circuit lacked appellate jurisdiction. The Federal Circuit denied LabCorp's motion but permitted the parties to address the jurisdictional issue in their merit briefs.
The majority opinion
A panel majority found that the Federal Circuit did not have jurisdiction over the appeal. The majority began by reviewing the scope of its appellate jurisdiction. First, 28 USC § 1295(a)(1) gives the Federal Circuit exclusive appellate jurisdiction over patent cases arising under 28 USC § 1338. Second, the Federal Circuit also has jurisdiction where a party's right to relief necessarily depends on the resolution of a substantial question of federal patent law: Christianson v Colt Indus. Operating Corp., 486 US 800 (1988). Examples of substantial questions of federal patent law include issues of inventorship, infringement, validity, and enforceability.
To determine if an action arises under federal patent law in the context of a declaratory judgment action the Federal Circuit looks to the hypothetical well-pleaded complaint that the declaratory defendant would have brought had it initiated suit. The majority concluded that because (i) Metabolite I and II determined that LabCorp infringed the patent and (ii) neither party disputed whether the outsourced assays infringed in Metabolite III, Metabolite's hypothetical complaint would have raised a breach of contract claim rather than a patent infringement claim arising under section 1338.
Additionally, the majority did not find that Metabolite's right to relief (for its hypothetical claim) necessarily depended on a substantial question of federal patent law despite the definition of ‘licensed assays.’ To prove its hypothetical breach of contract claim, Metabolite would not have to prove infringement because neither party argued that LabCorp's outsourced assays differed from the assays previously found to infringe. Thus, while breach of the license agreement was, on its face, conditioned on proof of infringement, this was not the typical ‘case within a case’ because infringement was established prior to the time of the hypothetical complaint (cf. Air Measurement Tech., Inc. v Akin Gump Strauss Hauer & Feld, LLP, 504 F.3d 1262, 1272 (Fed. Cir. 2007: proof of infringement required to prevail on a malpractice claim; US Valves, Inc. v Dray, 212 F.3d 1368, 1372 (Fed. Cir. 2000: proof of infringement required to prevail on a breach of contract claim). Consequently, the majority determined that Metabolite's claim did not depend on a substantial question of federal patent law and that the Court lacked appellate jurisdiction.
Judge Dyk dissented on two independent grounds. First, under a ‘look through’ approach, Judge Dyk asserted that a claim, which implicates a prior judgment involving a patent, also arises under section 1338 based on a res judicata theory. Under that theory, Metabolite I and II provided the jurisdictional basis for the present appeal.
Second, Judge Dyk believed that Metabolite's hypothetical claim raised a substantial question of patent law because Metabolite I and II had not determined whether the outsourced assays infringed the patent and the parties disputed infringement at the time of the hypothetical claim. In his view, the majority improperly focused on a time after the filing of Metabolite's hypothetical complaint rather than at the time of filing as required by Supreme Court precedent. Thus he would have found these facts to present a ‘case within a case’ because Metabolite's hypothetical contract claim hinged upon whether the outsourced assays infringed the patent.
The majority's response
First, the majority distinguished the cases upon which Judge Dyk relied to support his ‘look through’ argument. In particular, the majority found that those cases were distinguishable from the federal question context of the present dispute before the Court. Second, the majority found that Judge Dyk improperly relied on a post-complaint document, the Final Pre-Trial Order, in Metabolite III to support his view that infringement was disputed, rather than focusing on the time Metabolite would have filed its hypothetical claim.
First, it may be beneficial to license unpatented proprietary information and patented technology separately. In particular, Metabolite might have structured the license agreement to provide know-how royalties that were not contingent on using the patented technology to avoid having to prove infringement as part of a breach of contract claim. Second, the decision reinforces the ongoing need to consider possible appellate venues when drafting complaints and responding to declaratory judgment actions. Ironically, although Metabolite appealed to the Federal Circuit in this instance, it is unlikely that Metabolite wanted to dispute infringement as it would then have to prove an additional element of its breach of contract counterclaim (ie that the outsourced assays fell within the definition of ‘licensed assays,’ and, thus infringed the patent). Third, the decision reiterates that the mere mention of a patent is insufficient, in and of itself, to confer Federal Circuit jurisdiction.