Federal Circuit Vacates And Remands For Dismissal District Court’s Jurisdictional Finding That Parties’ Claims Arose Under U.S. Patent Law
On September 18, 2019, the Court of Appeals for the Federal Circuit (CAFC) issued an opinion vacating and remanding the jurisdictional finding of the United States District Court for the Southern District of Florida. Inspired Development Group, LLC v. Inspired Products Group, LLC, __ F.3d __ (Fed. Cir. Sept. 18, 2019). The CAFC ruled that the district court lacked subject matter jurisdiction because the parties’ claims did not arise under the patent laws of the United States pursuant to 28 U.S.C. § 1338(a).
Section 1338(a) states, in relevant part, that “[t]he 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.”
More generally, a case will “arise under” federal law if (1) federal law creates the cause of action asserted, or (2) even if the claim finds its origins in state rather than federal law, there is a serious federal interest in claiming the advantages thought to be inherent in a federal forum, which can be vindicated without disrupting Congress’s intended division of labor between state and federal courts. Gunn v. Minton, 568 U.S. 251, 258 (2013). The Supreme Court set forth a four-part test (the Gunn test) to determine whether the second prong has been met. Under the Gunn test, federal jurisdiction over a state law claim will lie if a federal issue is (1) necessarily raised, (2) actually disputed, (3) substantial and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. Gunn, 568 U.S. at 257.
In 2007, Inspired Development licensed certain design patents (on safety car seats shaped as cartoon and comic book characters) to Inspired Products Group (KidsEmbrace) so that KidsEmbrace could make and sell the patented car seats. The deal eventually broke down, and, in 2016, Inspired Development sued KidsEmbrace in federal district court, alleging breach of contract and other equitable state law claims; KidsEmbrace then asserted counterclaims for, e.g., breach of contract, fraud, negligent misrepresentation, restitution and breach of fiduciary duty.
The parties both initially alleged that there was federal jurisdiction based on diversity of citizenship. However, on appeal from a summary judgment decision of the district court, the United States Court of Appeals for the Eleventh Circuit discovered that diversity was lacking and remanded the case to the district court. KidsEmbrace—to save the dispute from dismissal—then alleged that federal jurisdiction was proper because the case presented a federal question. Specifically, KidsEmbrace framed the state law breach of contract and equitable claims in the complaint as “arising under” federal patent law rather than state law. The district court accepted KidsEmbrace’s jurisdictional allegations, and the case subsequently returned to the Eleventh Circuit for review. The Eleventh Circuit then transferred the appeal to the CAFC to determine whether federal subject matter jurisdiction did, in fact, exist under §1338(a).
The CAFC found that the parties’ claims did not arise under U.S. patent law, and therefore vacated and remanded the case for dismissal for lack of jurisdiction. In so holding, the CAFC first analyzed whether federal law created the cause of action and then analyzed whether there was a serious federal interest in claiming the advantages thought to be inherent in a federal forum, which can be vindicated without disrupting Congress’s intended division of labor between state and federal courts.
With regard to the first type of case that “arises under” federal law, the CAFC explained that no claims at issue alleged a cause of action created by federal patent law because this was a state law contract case for past-due royalties and was facially not a patent infringement lawsuit. In doing so, the CAFC rejected KidsEmbrace’s contention that this was a “thinly disguised patent infringement claim” simply “masquerading” as a claim for unjust enrichment.
With regard to the second type of case that “arises under” federal law, the CAFC walked through each factor of the four-factor Gunn test, explaining why three of the four factors were not met.
With respect to the first factor, the CAFC found that a patent law issue was not “necessarily raised” in the unjust enrichment claim. The CAFC noted that while the unjust enrichment claim could potentially raise a question of patent law regarding infringement, demonstrating infringement was not the only way that the claim could succeed. Thus, the question of infringement was not a “necessary element” of the claim.
The CAFC found that the second factor was met because whether KidsEmbrace used the patents was “actually disputed.”
With respect to the third factor, the CAFC found that the federal issue in the case was not substantial. The CAFC noted that it is not enough that the federal issue is significant to the particular parties in the immediate suit because that will always be true. “Instead, the touchstone for ‘substantiality’ is whether allowing state courts to resolve the case would undermine ‘the development of a uniform body of [patent] law.’” In determining that the federal issue was not substantial, the CAFC explained that (i) the patent infringement issue in the case was not dispositive of whether Inspired Development was entitled to relief, (ii) a state court’s resolution of the issue involved would not control “numerous other cases” and (iii) the government had no direct interest in this contract dispute between private parties.
With respect to the fourth factor, the CAFC found that exercising federal jurisdiction would upset the balance of federal and state responsibilities. The CAFC noted that accepting KidsEmbrace’s argument—that any breach of contract claim or related equitable claim involving a patent license agreement must “arise under” the patent laws—would lead to undesirable consequences. For example, a plaintiff could create a federal jurisdictional hook to avoid state court in any case involving almost any state law claim by doing little more than pleading allegations that involve an embedded patent infringement or validity analysis. The CAFC stated that “[c]learly such gamesmanship in non-diversity actions would upset the balance between state and federal courts.”