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Federal Circuit Has Jurisdiction over State Law Fraud Claim Arising out of Patent Prosecution

April 23, 2012

Decision icon Decision

Last Month at the Federal Circuit - May 2012

Judges: Bryson, Clevenger (author), O'Malley (concurring)

[Appealed from: N.D. Cal., Judge Fogel]

In Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP, No. 11-1297 (Fed. Cir. Apr. 23, 2012), the Federal Circuit reversed the district court’s SJ dismissal of Landmark Screens, LLC’s (“Landmark”) state law fraud claim against Morgan, Lewis & Bockius, LLP (“MLB”) and Thomas D. Kohler under the California statute of limitations, vacated the district court’s partial SJ damages order, and remanded the case for trial on the fraud claim.

Landmark invented a light-emitting diode electronic billboard and retained Kohler, who was at that time a partner at Pennie & Edmonds LLP (“Pennie”), to acquire a patent. In 2002, Kohler filed U.S. Patent Application No. 10/045,096 (“the ’096 application”), which included seventy-two claims covering different aspects of Landmark’s invention. The PTO issued a restriction requirement and Kohler chose one embodiment, electing to pursue the others through divisional applications. Ultimately, the PTO issued U.S. Patent No. 6,639,574 (“the ’574 patent”) that covered the elected claims. In addition, Kohler submitted Divisional Application No. 10/640,916 (“the ’916 divisional application”), but he failed to include the required drawings and specifications, did not incorporate by reference materials filed in the ’096 application, and did not use the PTO’s “postcard receipt method” (and therefore did not receive prompt notification from the PTO). The PTO issued a notice about these missing parts, but neither Kohler nor MLB (Kohler’s new firm) took action until more than one year after the publication of the application that led to the parent ’574 patent. Therefore, that published application became prior art against the ’916 divisional application under 35 U.S.C. § 102(b). “Unless the PTO could be convinced to give the ’916 divisional application the benefit of an earlier filing date, all claims in the ’916 divisional application would be lost.” Slip op. at 4. Rather than notifying Landmark, Kohler filed an unsuccessful petition, which the PTO dismissed, to grant the ’916 divisional application the original filing date. Kohler told Landmark, without explanation, that the claims in the ’916 divisional application were “lost,” but indicated that the firm was working to fix the claims. Id. at 5. Landmark alleged Kohler and MLB actively misled it at that point by falsely communicating a possibility to fix the claims. Id.

The following year, Landmark turned to new patent counsel to rectify the “lost” claims. The new counsel determined that Landmark could seek a broadening reissue of the ’574 patent under 35 U.S.C. § 251. The PTO granted reissue patent RE40,953 (“the RE’953 patent”), which includes the claims in the ’574 patent and new claims 24-66. Id. at 15-16.

Landmark filed suit against Kohler, Pennie, and MLB in the California state court, alleging legal malpractice, negligence, and breach of fiduciary duty. Landmark settled with Pennie and entered a partial settlement with Kohler. On May 21, 2008, the California state court dismissed Landmark’s remaining claims against MLB and Kohler as an MLB lawyer for lack of subject matter jurisdiction, stating that the federal courts had exclusive jurisdiction, as the case depended on a substantial question of patent law. Id. at 5-6.

That same day, Landmark filed a complaint in the federal district court that contained the same claims as in the state court action plus a claim for breach of contract. Landmark subsequently also added a claim for fraud. With the exception of the fraud claim, the district court dismissed all of the claims for being barred by California’s one-year statute of limitations for legal malpractice—which Landmark did not appeal. Id. at 6. Regarding the fraud claim, the district court entered partial SJ to damages, limiting Landmark’s recovery were it to succeed on the merits of its fraud claim, and the district court granted SJ to the defendants, ruling that Landmark had notice of its fraud claim more than three years before filing its federal lawsuit, and that the claim was barred by the three-year statute of limitations. Id. at 6-7.

On appeal, as an initial matter, the Court determined, based on a review of the original complaint, that it had proper jurisdiction over Landmark’s claims because they were appealed from a final district court decision where the action arose “under any Act of Congress relating to patents.” See id. at 7-9. As the underlying question of Landmark’s original claims was whether it “would have been able to achieve patent protection for its invention” absent the alleged malpractice and fraud, id., the Court’s jurisdiction was proper, id. at 8-9 (citing California state law). The Court applied the Ninth Circuit’s standard of review and statute of limitations laws, reviewing the district court’s SJ order and decision whether to toll the statute of limitations de novo.

Under the California Code of Civil Procedure, a fraud claim has a three-year statute of limitations. See id. at 11 (citing Cal. Civ. Proc. Code § 338(d) (West 2011)). Landmark filed the district court suit on May 21, 2008. The district court found that Landmark had received notice of its fraud claim over three years earlier in late March 2005, when Kohler sent Landmark a letter stating that there had been an error with the ’916 divisional application and that all of the claims were potentially lost, triggering the statute of limitations. Landmark sought relief from the statute of limitations via equitable estoppel and equitable tolling. The district court rejected Landmark’s equitable estoppel theory and did not address the tolling issue. The Court concluded that the district court erred in not tolling the three-year statute of limitations for fraud claims during the time the case was pending in the state courts and, therefore, did not address equitable estoppel.

Under California state law, equitable tolling applies when a party with several legal remedies in good faith pursues one remedy designed to lessen the extent of his injuries or damage. The law tolls the limitation period of a second action during the pendency of a first action later found to be defective because “California law ‘favors avoiding forfeitures and allowing good faith litigants their day in court.’” Id. at 12 (citation omitted). In determining whether equitable tolling should apply, courts consider (1) timely notice to the defendant in filing the first claim; (2) lack of prejudice to the defendant in gathering evidence to defend against the second claim (i.e., if the claims are based on essentially the same set of facts); and (3) good faith and reasonable conduct by the plaintiff in filing the second claim. Landmark gave timely notice to MLB and Kohler by filing the state court lawsuit less than one year after receiving notice of problems with the ’916 divisional application, within the statute of limitations for malpractice. MLB and Kohler were on notice of all key facts from the state court action, so they did not suffer any prejudice. Lastly, because “Landmark reasonably and in good faith pursued a remedy in the state courts, only to learn that the state courts lacked jurisdiction over its legal remedy[,] Landmark thus qualifies for equitable tolling under California law.” Id. at 14-15. Accordingly, the Federal Circuit reversed the district court’s judgment that the fraud claim was time barred.

Regarding the appeal from the damages order, the Federal Circuit found that the district court erred in holding Landmark could suffer no harm after the issuance of the RE’953 patent. Id. at 15-17. Under 35 U.S.C. § 251, patent protection cannot be extended to substantially identical claims that were not properly prosecuted in divisional applications, but rather where claims in a reissue application are not substantially identical to previously nonelected claims. When the reissue claims are broader than the corresponding issued claims, the patentee may assert that the issued claims are “wholly or partly inoperative or invalid . . . by reason of the patentee claiming . . . less than he had a right to claim in the patent.” Id. at 16 (alterations in original) (citing In re Doyle, 293 F.3d 1355, 1360 (Fed. Cir. 2002)). The district court compared the claim language of independent reissue claims 43 and 58 (and their dependent claims) to corresponding claims in the ’916 divisional application. It reasoned that the scope of the reissue claims were broader and that because the scope of the “lost” claims was recovered by the broader reissue claims, Landmark’s right to any damages related to those reissue claims must be cut off from the date of the reissue patent. The Federal Circuit, however, found that the district court overlooked the fact that reissue claims 43 and 58 are—in other respects—actually more narrow than their corresponding divisional claims. Id. at 17-18. Because the district court did not reconcile these opposing scopes, its conclusion that the reissue claims necessarily encompass the divisional claims was incorrect. The Court therefore vacated the damages order.

In a concurring opinion, Judge O’Malley stated additional reasons why the damages order should be vacated, namely, that reasonable jurors could have predicted a damages award to Landmark and that the judge failed to address what a reasonable juror might or might not have concluded on the facts presented. The trial judge had treated the issue as a matter of law, as proper in a patent infringement action—not a matter of fact as it were in the state law fraud action at hand. Judge O’Malley additionally indicated that she believed the case law regarding the scope of the Federal Circuit’s jurisdiction should be considered en banc, specifically in light of the fact that Landmark’s malpractice claims, which were “far from frivolous,” were “irretrievably lost” due to changes in the Federal Circuit’s case law regarding jurisdiction. O’Malley Concurrence at 5.

Summary authored by Victoria S. Lee, Esq.