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State Court’s Judgment Concerning License Precludes Federal Patent Suit

October 10, 2001

Decision icon Decision

Last Month at the Federal Circuit - November 2001

Judges: Lourie, Bryson, and Linn (per curiam)

In Johnson v. Way Cool Manufacturing, L.L.C., No. 01-1306 (Fed. Cir. Oct. 10, 2001) (nonprecedential decision), the Federal Circuit affirmed a district court’s dismissal of a patent infringement lawsuit because of the preclusive effect of a prior state court’s judgment.

Robert and Janice Johnson had entered into an exclusive licensing agreement (“Agreement”) with Way Cool Manufacturing, L.L.C. (“Way Cool”) that granted Way Cool the exclusive right to make, use, or sell evaporative cooling units based on U.S. Patent No. 5,857,350 (“the ‘350 patent”). After manufacturing cooling units for a period of time, Way Cool concluded that its products were not covered by the ‘350 patent and stopped making royalty payments. The Johnsons asserted that Way Cool had breached the Agreement and that the license was thus terminated. Pursuant to an arbitration clause in the Agreement, Way Cool served the Johnsons with a demand for arbitration. When the Johnsons refused to submit to arbitration, Way Cool filed suit in Minnesota state court to compel arbitration.

The Johnsons countered by filing suit in the United States District Court for the District of Minnesota, alleging that Way Cool was infringing the ‘350 patent, had breached the Agreement, and had tortiously interfered with business relations. After the Johnsons filed this action, the state court appointed an arbitrator. An arbitration hearing was held, but the Johnsons failed to attend. The arbitrator determined that the Johnsons had breached the Agreement and ordered both monetary and injunctive relief against them. The state court then entered a judgment confirming the arbitrator’s award. On cross motions for SJ, the federal district court dismissed the Johnsons’ complaint.

The Federal Circuit affirmed under the Rooker- Feldman Doctrine, which precludes lower federal courts from reviewing state courts’ judgments. Because lower federal courts lack jurisdiction to review state courts’ judgments and must accord them full faith and credit, a lower federal court may not entertain an action that directly or in effect seeks to overturn a state court’s judgment. The Rooker- Feldman Doctrine deprives lower federal courts of jurisdiction not only over claims that are identical to claims adjudicated in the state court, but also over claims that are inextricably intertwined with claims that were the subject of a state court’s judgment, even if the state and federal claims were not identical. In other words, a federal action is precluded if the relief requested would effectively reverse a state court’s decision or void its ruling.

Specifically, the Federal Circuit found that all causes of action asserted by the Johnsons were precluded. The Johnsons’ contract and tort claims were obviously subject to the Rooker-Feldman Doctrine because a ruling by the district court could effectively reverse the state court’s judgment. In addition, the Johnsons’ patent infringement claim was inextricably linked to the state court’s judgment despite the fact that the arbitrator never visited the infringement issue. Instead, the arbitrator had found that the Agreement was valid. As such, the Federal Circuit noted that an infringement action cannot proceed in the face of a valid license to practice a patent. By asserting infringement, the Johnsons were essentially challenging the state court’s judgment that the Agreement was valid. Therefore, the patent infringement action was precluded.

The Johnsons argued that the Rooker-Feldman Doctrine did not apply because the state court did not have jurisdiction over the contract dispute. If the state court lacked jurisdiction, then its judgment would be invalid, thus allowinga federal case to proceed. The Federal Circuit noted that both parties consented to jurisdiction in Minnesota under a choice of forum clause in the Agreement. In addition, the Federal Circuit held that the state court obviously had jurisdiction over the contract and tort claims and noted that jurisdiction was properly asserted over the patent infringement action to the extent that it arises as a defense to the contract action.