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Federal Circuit Considers Transferred Patent-Related State Law Malpractice Case, but Questions Balance Between Federal and State Judicial Responsibilities

April 17, 2012

Decision icon Decision

Last Month at the Federal Circuit - May 2012

Judges: Prost (concurring), Mayer, O'Malley (concurring) (per curiam)

[Appealed from: W.D. Tex., Chief Judge Biery]

In USPPS, Ltd. v. Avery Dennison Corp., No. 11-1525 (Fed. Cir. Apr. 17, 2012), the Federal Circuit affirmed the district court’s decision to dismiss a claim for breach of fiduciary duty and fraud, holding that the Court had jurisdiction pursuant to 28 U.S.C. § 1338 and that USPPS, Ltd.’s (“USPPS”) complaint was untimely.

In 1999, Joe Pat Beasley filed a patent application for personalized postage stamps. In 2001, the PTO issued a notice of allowance of U.S. Patent Application No. 09/326,712 (“the ’712 application”). Beasley then entered into a licensing agreement with Avery Dennison Corporation (“Avery”). The agreement specified that Avery would assume responsibility for prosecution of the ’712 application and would pay patent prosecution expenses. Beasley appointed Renner, Otto, Boisselle & Sklar, L.L.P. (“Renner”) to prosecute the ’712 application. A Renner attorney filed a supplemental IDS disclosing a prior art reference and also filed a continuation application. The PTO issued a second notice of allowance.

Beasley transferred the ownership of the ’712 application to USPPS. USPPS and Avery entered into an agreement concerning the personalized postage stamps. Later, as part of its own independent quality review, the PTO vacated its notice of allowance and issued final rejections in the ’712 application and the continuation application, based on a newly discovered prior art patent reference.

Beasley and USPPS alleged that Avery mismanaged the applications. In a prior action, Beasley brought suit against Avery and Renner, alleging negligence, among other things, but the district court dismissed Beasley’s suit, concluding that Beasley lacked standing because he had transferred title to the ’712 application to USPPS. Later, USPPS filed the instant action, alleging breach of fiduciary duty and fraud, based on Avery’s alleged representation that Beasley was the client of Renner and failure to inform USPPS that Avery (not Beasley or USPPS) was the client. USPPS contended that Beasley and USPPS had no legal representation in the prosecution of the patent that caused injury and damages. The district court dismissed USPPS’s complaint as barred by the statute of limitations, but the Court of Appeals for the Fifth Circuit reversed, determining that it could not definitively say that the discovery rule and fraudulent concealment exceptions to the running of the limitations period did not apply. On remand, following a limited discovery period, the district court granted Avery’s motion for SJ, concluding that neither exception served to postpone the accrual of USPPS’s claims. USPPS appealed for a second time to the Fifth Circuit.

This time, the Fifth Circuit transferred the appeal to the Federal Circuit, reasoning that the Federal Circuit has exclusive jurisdiction of an appeal where the district court’s jurisdiction was based, in whole or in part, on 28 U.S.C. § 1338. The Fifth Circuit also found that the Federal Circuit has jurisdiction over state law malpractice claims where the alleged malpractice involves “a question of patentability [even] where no patent ha[s] actually issued.” Slip op. at 7 (alterations in original) (quoting USPPS, Ltd. v. Avery Dennison Corp., 647 F.3d 274, 280 (5th Cir. 2011) (“Transfer Order”)). The Fifth Circuit acknowledged that the decision to transfer USPPS’s state law tort claim raised an important “federalism inquiry,” and noted that the transfer would be appropriate only if the patent issue presented in USPPS’s state law claim rose “to the level of creating a substantial federal interest such that the Federal Circuit has exclusive appellate jurisdiction.” Id. at 8 (quoting Transfer Order, 647 F.3d at 278). The Fifth Circuit then concluded that the patent issues raised in USPPS’s appeal involved a sufficiently substantial federal interest to permit federal jurisdiction over a state law tort.

Following the transfer, the Federal Circuit affirmed that it has jurisdiction over the state law malpractice claims. Citing Davis v. Brouse McDowell, L.P.A., 596 F.3d 1355, 1359-62 (Fed. Cir. 2010), the Court reasoned that unless USPPS could demonstrate that its invention was patentable over the prior art, it could not establish that the defendants’ actions “caused [it] to suffer any damages.” Slip op. at 9 (alteration in original). The Court concluded that it is bound by the Davis decision regarding the exercise of § 1338 jurisdiction, unless it is overruled en banc. The Court also noted that if the Court refused to adjudicate the merits of USPPS’s appeal, it would subject the parties to precisely the sort of “jurisdictional ping-pong” the Supreme Court has cautioned against. Id.

Next, the Court held that the district court correctly determined that USPPS’s complaint was untimely. In its analysis, the Court reviewed two exceptions to the Texas law that the statute of limitations begins to run when a legal injury occurs, i.e., the “discovery rule” and the “fraudulent concealment” doctrine. Id. at 11. Regarding the discovery rule, the Court observed that because USPPS knew, or should have known, by May 2003 that it had suffered an actionable injury as a result of the defendants’ alleged wrongdoing, the discovery rule does not serve to defer the accrual of its claim. After considering USPPS’s arguments, the Court found that regardless of whether USPPS believed that the defendants had acted negligently or with fraudulent intent, USPPS’s cause of action accrued when it learned that it had suffered an actionable injury.

Regarding the fraudulent concealment doctrine exception, the Court rejected USPPS’s assertions that, due to Avery’s alleged misrepresentations and fraud, USPPS did not learn until 2004 that Renner was working for Avery and not for USPPS. The Court pointed out that the fraudulent concealment doctrine “only tolls the running of limitations until the fraud is discovered or could have been discovered with reasonable diligence.” Id. at 14 (quoting BP Am. Prod. Co. v. Marshall, 342 S.W.3d 59, 67 (Tex. 2011)).

Given that Avery was paying Renner’s fees and had acted to restrict communications between Renner and USPPS, the Court found that USPPS knew, or in the exercise of due diligence should have known, that Renner was acting as legal counsel to Avery in the prosecution of the ’712 application. Further, the Court noted that, even assuming arguendo that the defendants failed to disclose the fact that Renner was working for Avery, the statute of limitations was tolled only until such time as USPPS, with exercise of reasonable diligence, should have discovered that fact. Thus, the Court affirmed the district court’s dismissal, holding that it had jurisdiction and that USPPS’s complaint was untimely.

In her concurring opinion, Judge Prost agreed that the Fifth Circuit’s transfer to the Federal Circuit was appropriate, but noted that the federalism question raised in Judge O’Malley’s concurring opinion was not presented, briefed, or argued in this case. Referring to the concurrence in the denial of the petition for rehearing en banc in Byrne v. Wood, No. 11-1012, 2012 U.S. App. LEXIS 6021, at *2-8 (Fed. Cir. Mar. 22, 2012), Judge Prost also noted that the substantive patent law issues implicated in the patent-based malpractice cases in the Court necessarily make the issues “substantial” within the meaning of Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 809 (1988), and indicate a “serious federal interest” in federal adjudication within the meaning of Grable & Sons Metal Products,
Inc. v. Darue Engineering & Manufacturing
, 545 U.S. 308, 313 (2005).

In her separate concurring opinion, Judge O’Malley reviewed the federalism concerns raised by the Court’s exercise of jurisdiction over state law claims. According to her opinion, the Court’s case law requiring the exercise of jurisdiction over state law claims such as those at issue conflicts with Supreme Court precedent, citing Christianson, 486 U.S. at 817-19. In Judge O’Malley’s view, under the correct application of Supreme Court case law, this case did not invoke jurisdiction under 28 U.S.C. § 1338. She reasoned that USPPS asserted only state law claims for fraud and breach of fiduciary duty, for which federal law does not create a cause of action. Further, Judge O’Malley stated that even considering the Supreme Court’s warning against “jurisdictional ping-pong,” it is inefficient and unproductive for this Court to hear the same case upon which the Fifth Circuit has already ruled.

Judge O’Malley noted that the claims in this case fail at least two factors under the Grable analysis, i.e., “if a federal issue is substantial,” and if “exercising federal jurisdiction will disturb the balance of federal and state.” O’Malley Concurrence at 5-6 (citing Grable, 545 U.S. at 314). First, the purported “patent” issue in this case is not “substantial” under Grable, because determining whether USPPS likely could have obtained a patent in light of the specific prior art is a case-specific, factual inquiry and requires only application, not interpretation, of the federal patent laws. Second, exercising federal jurisdiction in this case would disturb the balance of federal and state judicial responsibilities. Judge O’Malley noted that state courts are the traditional arbiter of such misconduct, which is governed by long-standing common law principles of negligence, fraud, and breach of fiduciary duty. Judge O’Malley raised a concern about “the far-reaching nature of [the Court’s] reasoning” in these patent-related malpractice cases. Id. at 8.

Summary authored by Hojung Cho, Ph.D., student associate at Finnegan.