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Threats Directed to Customers Support a Walker Process Claim, Even Absent Reasonable Apprehension of Suit

January 25, 2007
Totten, Jeffrey C.

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Last Month at the Federal Circuit - February 2007

Judges:  Mayer (dissenting), Friedman (author), Bryson

[Appealed from: S.D. Tex., Judge Atlas]

In Hydril Co. LP v. Grant Prideco LP, No. 06-1188 (Fed. Cir. Jan. 25, 2007), the Federal Circuit reversed the dismissal of Sherman Act and patent infringement claims under Fed. R. Civ. P. 12(b)(6), vacated the dismissal of a state law claim, and remanded the case to the district court for further proceedings.

Hydril Company LP and Hydril U.K. Ltd. (collectively “Hydril”) manufacture threaded connections for interlocking lengths of drill pipe used in drilling oil and gas wells. Grant Prideco, Inc. (“Grant Prideco”) competes with Hydril by selling both drill pipe and drill pipe connections. Grant Prideco owns U.S. Patent No. 6,244,631 (“the ’631 patent”), directed toward certain combinations of drill pipe and connections fitting such pipe. The ’631 patent covers 5 7/8-inch drill pipe, which, according to Hydril, has “unique characteristics” desirable in certain types of drilling applications. Grant Prideco has publicized the existence of the ’631 patent, writing letters mentioning the patent to distributors of Hydril’s products and other industry players. Such letters asked the recipients to take action to ensure that Grant Prideco’s patent rights were being respected.

Hydril owns U.S. Patent Reissue No. 34,467 (“the ’467 patent”), covering high-torque connections between neighboring sections of drill pipe. In 1994, Hydril settled a lawsuit with XLS Holding, Inc. and XL Systems, Inc. (collectively “XLS”) regarding the ’467 patent and related trade secrets and know-how. Under this settlement agreement, XLS agreed to use the licensed technology only on large-diameter connections and Hydril received an equity stake in XLS. In 1997, Grant Prideco purchased XLS, with Hydril’s written consent in the form of a merger agreement. Under this merger agreement, Hydril licensed Grant Prideco to use the ’467 patent, other intellectual property, and know-how to manufacture large-diameter connections. The merger agreement prohibited Grant Prideco from using this intellectual property and know-how in the small-diameter connection market. Finally, the merger agreement limited the parties’ remedies “relating” to the agreement to breach of contract claims. In pertinent part, the agreement stated that “each party waives any and all rights and remedies relating to this Agreement and the transactions contemplated hereby sounding in tort, fraud, misrepresentation, statute, warranty, constructive or resulting trust, equitable rescission, quantum meruit, implied contract, or injury outside this Agreement.” Slip op. at 13.

In 2005, Hydril filed suit against Grant Prideco, alleging that Grant Prideco had (1) violated Section 2 of the Sherman Act by obtaining and maintaining market power through threats to enforce the ’631 patent, which Grant Prideco had procured via fraud; (2) breached the settlement agreement with Hydril; and (3) infringed the ’467 patent.

Specifically, Hydril’s complaint alleged that Grant Prideco intentionally withheld relevant art from the PTO when prosecuting the ’631 patent and a subsequent reissue of the ’631 patent. According to Hydril, Grant Prideco’s letters regarding the ’631 patent allowed Grant Prideco to attain a dominant position in the market for 5 7/8-inch drill pipe. Hydril’s complaint also alleged that Grant Prideco breached the settlement agreement between the parties by using the licensed technology to develop small-diameter connections. Finally, Hydril alleged that these small-diameter connections infringed the ’467 patent.

After Grant Prideco moved for dismissal, the district court dismissed the antitrust and patent infringement claims. The district court held that “[b]ecause Hydril has failed to allege enforcement activity . . . which would create an objectively reasonable apprehension that Grant Prideco intended to enforce the ’631 Patent against Hydril, Plaintiffs have failed to allege the minimum level of enforcement to state a Walker Process claim against Prideco.” Id. at 7. Specifically, the court found Hydril’s reliance on Grant Prideco’s notice letters misplaced, because they did not contain an explicit threat or other language sufficient to create a reasonable apprehension that Grant Prideco might sue Hydril for patent infringement. With respect to the patent infringement claim, the district court held that, by executing the merger agreement, Hydril had waived the right to sue for patent infringement “relating to this agreement.” After disposing of the federal question claims, the district court declined to exercise its supplemental jurisdiction over the state law breach of contract claim raised in Hydril’s complaint.

On appeal, the Federal Circuit noted that the district court’s decision made it “unclear whether the defect the court discerned in Hydril’s complaint was a failure to allege sufficient enforcement activity by Grant Prideco . . . or a failure to threaten such activity against Hydril itself rather than against Hydril’s customers.” Id. at 10. “Neither ground,” the Federal Circuit continued, “justifies dismissal of the complaint . . . . ” Id. Indeed, “a valid Walker Process claim may be based on enforcement activity directed against the plaintiff’s customers.” Id. at 11. The Court explained that “[t]hreats of patent litigation against customers, based on a fraudulently-procured patent, with a reasonable likelihood that such threats will cause the customers to cease dealing with their supplier, is the kind of economic coercion that the antitrust laws are intended to prevent.” Id. Accordingly, the Federal Circuit declined to extend its decision in Microchip Technology, Inc. v. The Chamberlain Group, 441 F.3d 936 (Fed. Cir. 2006)—finding no jurisdiction under the Declaratory Judgment Act where threats of litigation directed against the patentee’s customers did not establish a reasonable apprehension of suit—to Walker Process claims based on threats to customers. The Federal Circuit declined to consider the alternative grounds for affirmance raised by Grant Prideco.

Turning to the patent infringement claim, the Federal Circuit found that, once the merger agreement had been terminated by breach (as alleged in the complaint), “a claim for patent infringement that occurred after the termination is not one ‘relating to this [Merger] Agreement and the transactions contemplated therein.’” Slip op. at 16. Accordingly, the merger agreement did not preclude Hydril from bringing suit for patent infringement. Finally, the Federal Circuit vacated the dismissal of the state law claims, given the reversal of the district court’s decision regarding the federal claims.

In his dissent, Judge Mayer argued that Hydril lacked standing to bring either an antitrust claim or a claim for infringement of the ’467 patent. Judge Mayer noted that Hydril failed to plead that either it or its customers participated, attempted to participate, or intended to participate in the finished drill pipe market in the United States. Thus, Hydril could have no “reasonable apprehension” that Grant Prideco would enforce the ’467 patent against it or its customers.

Judge Mayer also found that the merger agreement limited the parties’ remedies to an action for breach of contract or specific performance. The language of the merger agreement waived rights to remedies arising out of “tort, . . . statute, . . . or injury outside this agreement.” As patent rights are statutory and sound in tort, Judge Mayer felt that the parties’ agreement eliminated standing to bring a patent infringement suit.