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Federal Jurisdiction Proper for Legal Malpractice Claim Because Question of Patent Infringement Was a “Necessary Element” of the Claim

October 15, 2007

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Last Month at the Federal Circuit - November 2007

Judges: Michel (author), Louie, Rader

[Appealed from: W.D. Tex., Judge Furgeson]

In Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., No. 07-1035 (Fed. Cir. Oct. 15, 2007), the Federal Circuit affirmed the interlocutory decision of a district court denying defendants’ motion to remand a lawsuit to state court. The Federal Circuit concluded that the question of patent infringement comprised a necessary element of the plaintiff’s malpractice claim and raised a substantial and contested question of patent law that Congress intended federal courts to resolve.

Herbert Stumberg and James A. Fulton developed technology for a safety device for emergency personnel who require supplemental oxygen. The safety device is integrated into self-contained breathing apparatuses (“SCBA”). Stumberg and Fulton formed Air Measurement Technologies, Inc. (“AMT”) to develop, license, and market the safety device. In 1989, the inventors hired patent attorney Gary Hamilton of Akin Gump Strauss Hauer & Feld, L.L.P. (“Akin Gump”) to patent their technology. With Hamilton’s knowledge, the inventors began marketing a prototype of their invention in 1989. Hamilton filed the first patent application on August 6, 1991, which issued as U.S. Patent No. 5,157,378. Hamilton also prosecuted continuation applications that issued as U.S. Patent Nos. 5,689,234; 5,910,771; 6,201,475; and 6,310,552.

Starting in 2000, AMT sued six SCBA manufacturers for patent infringement. All six suits settled for a total of approximately $10 million. During the course of the litigation, AMT discovered errors Hamilton allegedly made during patent prosecution and patent litigation. Specifically, AMT alleged that Hamilton, among other things, failed to file the initial patent application within the one year “on sale bar” of 35 U.S.C. § 102(b), failed to disclose prior art during prosecution of the patent applications, and made misrepresentations to AMT.

AMT sued Hamilton, Akin Gump, and two other law firms in Texas state court for legal malpractice, negligence, negligent misrepresentation, and breach of fiduciary duties. Hamilton and one of the law firms settled with AMT. AMT contended that Akin Gump’s errors forced AMT to settle the prior litigation with SCBA manufacturers below fair market value because the defendants were able to raise defenses such as invalidity and unenforceability due to Hamilton’s errors. Akin Gump removed the case to federal court pursuant to 28 U.S.C. § 1338, arguing that resolution of the suit required resolution of a substantial question of patent law.

The district court denied AMT’s subsequent motion to remand, concluding that, in order to prevail, AMT would need to establish the success of its infringement claims and that Hamilton’s negligence afforded the defendants certain defenses under patent law. Almost three years later, the parties changed postures; this time, the defendants moved to remand the case, asserting that federal jurisdiction under § 1338 was lacking. The district court denied the motion and Akin Gump petitioned for permission to appeal under 35 U.S.C. § 1292(b), which the Federal Circuit granted.

On appeal, the Federal Circuit applied the Supreme Court’s two-part test for determining whether federal courts have exclusive jurisdiction over a case pursuant to 28 U.S.C. § 1338(a). Quoting Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 809 (1988), the Supreme Court stated that § 1338 jurisdiction extends to any case “in which 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.” Slip op. at 6. Because federal patent law did not create the cause of action, the Federal Circuit concluded that its analysis turned on whether patent law was a necessary element of AMT’s malpractice claim as pleaded.

The Court concluded that patent law was a necessary element of AMT’s claim. The Court noted that, under Texas state law, the elements of a malpractice claim are: (1) an attorney owed plaintiff a duty stemming from the attorney-client relationship; (2) the attorney breached that duty; (3) the breach approximately caused plaintiff’s injuries; and (4) damages. Because AMT’s legal malpractice claim arose from prior litigation, the Court concluded that AMT must satisfy the “case within a case” requirement of the proximate cause element of malpractice. Id. at 8 (citing Ballesteros v. Jones, 985 S.W.2d 485, 489 (Tex. App. 1998)). That is, AMT must establish that it would have prevailed in the prior litigation but for Akin Gump’s negligence. The Court found that because the underlying suit was a patent infringement action against SCBA manufacturers, the district court would have to decide the merits of AMT’s infringement claim. Thus, the Court concluded that patent infringement was a necessary element of AMT’s malpractice claim that presented a substantial question of patent law, conferring § 1338 jurisdiction.

The Court also rejected Akin Gump’s contention that there existed a theory upon which AMT could prevail that did not involve a substantial question of patent law. Specifically, Akin Gump contended that AMT’s allegation that attorney error compromised the value of AMT’s patents amounted to a novel theory of malpractice that did not require resolution of a substantial question of patent law. Viewing AMT’s “impaired settlement value” theory as a damages theory rather than a malpractice liability theory, the Court concluded that it did not obviate the “case within a case” element of AMT’s claim because, in addition to the computation of any damages, AMT must still prove patent infringement.

The Court also rejected Akin Gump’s argument that two Supreme Court cases addressing jurisdiction pursuant to 28 U.S.C. § 1331 precluded federal jurisdiction in these circumstances. Akin Gump first asserted that Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308, 314 (2005), restricted federal jurisdiction under § 1338 to only those cases where “a state-law claim necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.” Slip op. at 13-14. The Federal Circuit found this test to be satisfied since the patent infringement issue was disputed and, because it was a necessary element of the malpractice case, it was substantial. Further, the Court concluded that there is a strong federal interest in adjudicating patent infringement claims in federal court because patents are issued by a federal agency. The Federal Circuit thus affirmed the district court’s denial of defendant’s motion to remand.