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United States Waived Sovereign Immunity with Respect to DJ Patent Suits

August 24, 2011
Rodkey, Kevin D.

Decision icon Decision

Last Month at the Federal Circuit - September 2011

Judges: Bryson (author), Schall, Prost

[Appealed from: E.D. Cal., Senior Judge Wanger]

In Delano Farms Co. v. California Table Grape Commission, No. 10-1546 (Fed. Cir. Aug. 24, 2011), the Federal Circuit affirmed the district court’s decision that the United States Department of Agriculture (“USDA”) is a necessary party to a DJ suit, reversed the district court’s decision that 5 U.S.C. § 702 does not waive sovereign immunity with respect to DJ suits, reversed the district court’s decision that Delano Farms Co. (“Delano Farms”) failed to properly plead inequitable conduct, and affirmed the district court’s decision that Delano Farms failed to properly plead a violation of the Sherman Act.

The USDA is the owner of three table grape patents issued under the Plant Variety Protection Act: PP15,891 (“the Sweet Scarlet patent”); PP16,229 (“the Scarlet Royal patent”); and PP16,284 (“the Autumn King patent”). The USDA licensed the rights in the three patents to the California Table Grape Commission (“Grape Commission”), which is an agency of the State of California. The Grape Commission pays royalties to the USDA, which are collected from the growers sublicensed by the Grape Commission under a “Domestic Grower License Agreement.”

The plaintiffs (collectively “Delano”) are all California grape growers who purchased grapevines covered by the patents, signed the Domestic Grower License Agreement, and paid the licensing fee. Delano brought a DJ suit against the Grape Commission and the USDA seeking a ruling that the patents are unenforceable because of prior use, and that the Sweet Scarlet patent is unenforceable due to inequitable conduct during prosecution. Specifically, Delano alleged that one of the coinventors of the three varieties displayed fruit of the patented varieties at public meetings that were held before the critical dates for each patent and had distributed the varieties in advance of the critical dates. Delano also alleged that the USDA unlawfully obtained the patents and that the Grape Commission violated state and federal unfair competition laws through its licensing efforts.

The district court held that the USDA, as a patent owner who had retained substantial rights in the patents, was a necessary party to the DJ suit. The district court also determined that the USDA was an indispensible party and could not be joined because of sovereign immunity. The district court then granted the USDA’s motion to dismiss because Delano had not exhausted its administrative remedies under the APA. The district court also dismissed the state unfair competition and Sherman Act claims brought by Delano. Delano appealed.

On appeal, the Federal Circuit first assessed whether the USDA was a necessary party to the DJ suit. The Court determined that, under the license agreement with the Grape Commission, the USDA had retained substantial rights in the patents and was therefore a necessary party. Analyzing the license agreement, the Court determined that the Grape Commission had the exclusive right to use, propagate, and sell the patented varieties, as well as to grant sublicenses to growers. But the Grape Commission did not have the right to enforce the patents against suspected infringers. Rather, the Court concluded that the USDA retained the right to enforce the patents, but could grant that right to the Grape Commission. The Court found nothing in the license to curtail the USDA’s right as patentee to sue on the patents. Moreover, the USDA retained a royalty-free right to practice the patents and reserved approval power over the Grape Commission’s sublicenses. For these reasons, the Court held that the USDA retained substantial rights in the patents and was a necessary party to the DJ action.

The Court then turned to whether sovereign immunity barred Delano’s DJ claims based on the Patent Act. If Congress has not waived the federal government’s immunity for a particular claim, courts lack jurisdiction over that claim and must dismiss it. Here, the Federal Circuit examined the text and legislative history of 5 U.S.C. § 702 to determine whether the district court has jurisdiction over the claim.

The Court first explained that the APA can be said to do three things with respect to judicial review of actions or failures to act by government agencies or employees. First, it recognizes a right of judicial review for “agency action” made reviewable by another statute and provides rules governing such review. Second, it creates a right of judicial review, even in the absence of a review-authorizing statute, for “final agency action” for which there is no other adequate remedy in a court. Third, it waives sovereign immunity for any action stating a claim against the United States (or its officers or employees) and seeking relief other than money damages.

The United States and the Grape Commission argued that the waiver of sovereign immunity is limited to the first two categories—the types of judicial review recognized or created by the APA. Reviewing the legislative history, the Court observed that § 702 was intended to eliminate the sovereign immunity defense in all equitable actions for specific relief against a federal agency or officer acting in an official capacity. The Court rejected the defendants’ argument that § 702 was limited to actions arising under the APA. The Court instead noted that § 702 was intended to eliminate the defense of sovereign immunity with respect to any action in a court of the United States seeking relief other than money damages and based on an assertion of unlawful activity by a federal officer or employee. The Court concluded that § 702 of the APA waives sovereign immunity for nonmonetary claims against federal agencies, subject to the limitations of subsections 1 and 2, and that the waiver is not limited to “agency actions” or “final agency actions” as defined in the APA. Thus, the Court held that the waiver of sovereign immunity in § 702 is broad enough to allow Delano to pursue equitable relief against the USDA on its patent law claims. The Court reviewed decisions of several regional circuits and found them to be in accord with this determination.

The Court rejected the Grape Commission’s arguments that a pair of prior Federal Circuit cases held that § 702 did not waive sovereign immunity for actions arising outside of the APA. The Court determined that, in each of those cases, Smith v. Secretary of the Army, 384 F.3d 1288 (Fed. Cir. 2004), and Christopher Village, L.P. v. United States, 360 F.3d 1319 (Fed. Cir. 2004), a plaintiff cannot invoke the § 702 waiver to obtain judicial review under the APA when Congress had provided an alternative and exclusive forum for such a dispute. The Court further observed that in neither case did it hold that the waiver of immunity applies only to a cause of action based on the APA and does not apply to a cause of action based on another source, such as the DJ Act. The Court further observed that in Nebraska Public Power District v. United States, 590 F.3d 1357 (Fed. Cir. 2010) (en banc), § 702 waives sovereign immunity for actions seeking DJ under the Nuclear Waste Policy Act, and that, because the right of judicial review arose under a statute other than the APA, § 702 waives sovereign immunity without the need to satisfy the requirements of the APA.

The Court also noted that while § 702 waives sovereign immunity with respect to nonmonetary actions, it does not have any effect on the exclusive jurisdiction of the United States Court of Claims over suits for monetary damages falling within that court’s jurisdiction. The Federal Circuit observed, however, that this principle does not apply to DJ Patent Act claims, which are not within the exclusive jurisdiction of the Court of Claims.

Next, the Court rejected the argument that the Quiet Title Act bars other nonmonetary relief relating to patents and copyrights. The Court rejected this argument because nothing in the Quiet Title Act suggests that Congress intended to apply the act narrowly, and because the House report explained that waiver under § 702 should apply to equitable actions generally. The Court determined that nothing in Congress’s consent to money damages for patent infringement by the government implied that Congress intended to bar equitable actions related to the validity of government-owned patents. For these reasons, the Court held that § 702 of the APA waived sovereign immunity for DJ claims arising under the Patent Act and that the USDA could be joined as a party in such claims.

The Federal Circuit next considered whether Delano’s complaint provides an adequate factual basis from which the district court could conclude that anyone at the USDA made a deliberate decision to withhold the fact of prior use with the intent to deceive the PTO. The Court held that a reasonable jury could infer from Delano’s allegations that the applicant knew of the prior use, appreciated that the prior use was material, and decided not to disclose the information to the PTO with deceptive intent. Accordingly, the Court held that Delano’s complaint was sufficient to plead inequitable conduct.

Finally, the Court turned to Delano’s claim that, by entering into sublicense agreements with grape owners for the Sweet Scarlet patent, the Grape Commission had enforced a fraudulently obtained patent in violation of section 2 of the Sherman Antitrust Act. The Court noted that to establish the antitrust portion of a Walker Process allegation such as this, a plaintiff must show that the defendant held monopoly power in the relevant market and willfully acquired or maintained that power by anticompetitive means. A plaintiff must also define the market within which the defendant engaged in the challenged conduct. Here, Delano contended that the Sweet Scarlet variety was its own market and that other grapevines could be reasonable substitutes for it. The Court concluded that Delano could not rely on “the naked assertion that noninfringing goods are not an adequate substitute for a patented product, especially when it is undisputed that other vines possess at least some of the [same] relevant characteristics.” Slip op. at 26. Accordingly, the Court affirmed the district court’s dismissal of the antitrust claim.

Summary authored by Kevin D. Rodkey, Esq.