By Robert Margolis, J.D.
Parties had already tried to completion breach of contract claim in state court where validity issues were deemed "irrelevant."
A district court did not abuse its discretion in applying a federal abstention doctrine to a declaratory judgment action in a patent dispute, given pending state court litigation between the parties, the U.S. Court of Appeals for the Federal Circuit has held. The appellate court affirmed the district court’s decision dismissing the declaratory judgment action without prejudice. The Federal Circuit rejected the argument by the declaratory judgment plaintiffs, Warsaw Orthopedic, Inc., and Medtronic, Inc. (collectively, "Medtronic"), that because the parties’ dispute concerns issues of claim validity of patents, federal courts have exclusive jurisdiction over the dispute (Warsaw Orthopedic, Inc. v. Sasso, October 14, 2020, Newman, P.).
Contract. Dr. Rick C. Sasso, an inventor, entered into a contract with a predecessor of medical device manufacturer Medtronic, whereby Medtronic purchased a device invented by Dr. Sasso in exchange for the payment of royalties. Two patents were issued for the invention: U.S. Patent No. 6,287,313 (the ’313 patent), and its continuation, U.S. Patent No. 6,562,046 (the ’046 patent). Both patents are entitled "Screw Delivery System and Method."
The agreement provided for quarterly royalty payments based on Medtronic’s sales of the device for a defined period that would end seven years from the date of first sale "if no patent applications issue into a patent having valid claim coverage of the Medical Device." Medtronic made royalty payments from 2002 to 2018.
State court case. During that period a dispute arose, however, with Dr. Sasso contending that Medtronic was not making all required royalty payments. Medtronic disagreed, and in June 2014, Dr. Sasso brought a breach of contract action in Indiana state court. Medtronic answered that the devices for which Dr. Sasso sought additional royalties are not subject to the Agreement because they are not covered by a valid claim of either the ’313 or ’046 patent. The case was tried to a jury, which found for Dr. Sasso, and awarded him damages against Medtronic for breach of contract. The state court determined that the issue of validity of claims of the patents was "irrelevant" to whether royalty payments must be made. After the verdict was entered in November 2018, Medtronic appealed to the Indiana Court of Appeals.
Federal court case. Separately, on June 8, 2018, Medtronic filed a declaratory judgment action in federal district court in Indiana, contending that the devices for which Dr. Sasso seeks the additional royalties are not within the parties’ agreement, and seeking a declaration to that effect, and similarly that the claims in the patents-at-issue as construed to cover the devices are not valid.
The district court dismissed Medtronic’s declaratory judgment action, without prejudice, on the grounds that the Indiana state court has already entered judgment in favor of Dr. Sasso on that claim and that it was proper for the court to "abstain." Medtronic appealed the dismissal of its declaratory judgment action to the Federal Circuit, arguing that the district court abused its discretion by abstaining. The Federal Circuit affirmed.
Federal jurisdiction. Medtronic contended that abstention was an abuse of discretion because federal courts have exclusive jurisdiction to resolve issues of patent validity, which are at the center of the parties’ dispute (despite the state court finding those issues irrelevant).
The Federal Circuit agreed with Medtronic that federal jurisdiction (and thus appellate jurisdiction) exists over the declaratory judgment claims, as issues of patent law are "necessarily raised" in the case. The court cited one of its recent decisions, holding that "[a]n issue of patent law is ‘necessarily raised’ if ‘a well-pleaded complaint establishes either that federal patent law creates the cause of action or that the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded claims.’" NeuroRepair, Inc. v. Nath Law Group, 781 F.3d 1340, 1344 (Fed. Cir. 2015). Because validity and claim scope are "well-pleaded [issues] in the complaint, actually disputed, and substantial to the federal system as a whole," the declaratory judgment is within the district court’s exercise of declaratory jurisdiction, the court held.
Abstention. But even where a federal court has declaratory jurisdiction, under Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942), it may abstain from exercising that jurisdiction when the issues "can better be settled in [a] proceeding pending in . . . state court." Id. at 495. More recently, the Supreme Court has stated that a district court has "unique and substantial discretion in deciding whether to declare the rights of litigants," Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995). Thus, under what is known as the Wilton/Brillhart abstention doctrine, district courts have discretion to dismiss or stay declaratory judgment claims, even where they have jurisdiction over them. And when a district court abstains under that doctrine, the decision is reviewed for abuse of discretion. Here, the Federal Circuit found that the district court properly exercised that discretion in abstaining, without prejudice, while the judgment of the Indiana trial court was pending on appeal.
Which abstention doctrine? The parties raised, but did not resolve, whether the more exacting standard for abstention under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), was applicable, rather than Wilton/Brillhart. Colorado River held that district courts may abstain only in extraordinary and narrow circumstances, when they have jurisdiction over a controversy. As the Federal Circuit described, Colorado River precludes staying a federal case in favor of a state proceeding where the federal case includes a claim over which federal courts have exclusive jurisdiction.
The Federal Circuit found it "reasonable" that the district court considered Wilton/Brillhart more applicable to the situation than Colorado River. It highlighted the fact that in the state case a trial already had been completed and the matter was on appeal. It found unavailing Medtronic’s argument that patent validity is essential to Dr. Sasso’s claim and that the state court erred by excluding the issue from the trial. Instead, it found that the district court did not abuse its discretion in abstaining, crediting Dr. Sasso’s argument that commercial agreements traditionally are the domain of state law, and state law is not displaced merely because a contract concerns intellectual property that may or may not be patentable.
This case is No. 19-1583.
Attorneys: Mark Christopher Fleming (Wilmer Cutler Pickering Hale and Dorr LLP) for Warsaw Orthopedic, Inc., Medtronic, Inc., and Medtronic Sofamor Danek, Inc. Frederick D. Emhardt (Emhardt Law LLC) for Rick C. Sasso, M.D.
Companies: Warsaw Orthopedic, Inc.; Medtronic, Inc.; Medtronic Sofamor Danek, Inc.
MainStory: TopStory Patent GCNNews FedCirNews
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