Federal Circuit Lacked Jurisdiction Where Breach-of-Contract Claim Did Not Present a Disputed Issue of Patent Law
March 11, 2010
Last Month at the Federal Circuit - April 2010
Judges: Gajarsa (author), Dyk (dissenting), Moore
[Appealed from: D. Colo., Senior Judge Weinshienk]
In Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., No. 08-1597 (Fed. Cir. Mar. 11, 2010), the Federal Circuit held that it lacked jurisdiction over the appeal because the contract dispute at issue did not arise under federal patent law and the DJ defendant’s requested relief did not necessarily depend on the resolution of a substantial question of federal patent law. Thus, the Federal Circuit transferred the appeal to the United States Court of Appeals for the Tenth Circuit.
U.S. Patent No. 4,940,658 (“the ’658 patent”) is owned by Competitive Technologies, Inc. (“CTI”) and claims a method for detecting deficiencies of vitamin B12 and folate by assaying total homocysteine levels and correlating an elevated level of total homocysteine with a deficiency in cobalamin or folate. Metabolite Laboratories, Inc. (“Metabolite”), a nonexclusive licensee of the ’658 patent with the right to sublicense, developed know-how technology to automate the testing process. In 1991, Metabolite granted Laboratory Corporation of America Holdings (“LabCorp”) a license to the know-how and a sublicense to the ’658 patent (the “License Agreement”). The License Agreement covered four assays, including a total homocysteine assay performed on serum samples referred to as the “homocysteine-only assay.” In 1998, LabCorp began using an alternative homocysteine-only assay using an immunoassay kit developed by Abbott Laboratories (the “Abbott Test”) and stopped paying royalties for the assay to Metabolite.
Metabolite and CTI brought an action against LabCorp for breach of contract and patent infringement. A jury found that LabCorp had breached the License Agreement by terminating it with respect to the performance of the Abbott Test and awarded infringement damages to CTI and breach-of-contract damages to Metabolite. The district court granted Metabolite’s request for a permanent injunction enjoining LabCorp from performing any homocysteine-only assays. The Federal Circuit affirmed.
LabCorp stopped performing the homocysteine-only assays itself but began outsourcing the assay to Specialty Laboratories, Inc. (“Specialty”), which was independently licensed by CTI to perform homocysteine-only assays. LabCorp filed a new action in the District of Colorado premised on diversity jurisdiction, seeking a DJ that it had not violated the License Agreement. Metabolite counterclaimed for breach of contract and other state law claims. Metabolite’s breach-of-contract claim was premised on LabCorp’s referral of homocysteine-only assays to Specialty without paying know-how royalties after entry of the jury’s verdict. The district court held that LabCorp owed no further royalties under the License Agreement, which had been breached and terminated, resulting in the loss of all patent and know-how rights under the contract with respect to the homocysteine-only assay. Metabolite appealed to the Federal Circuit.
Addressing jurisdiction under 28 U.S.C. § 1295(a)(1), the Federal Circuit noted that it has exclusive jurisdiction over an appeal from a final decision of a district court whose jurisdiction was based at least in part on 28 U.S.C. § 1338, which confers district courts with original jurisdiction over “any civil action arising under any Act of Congress relating to patents.” Citing Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 808-09 (1988), the Court noted that jurisdiction under § 1338 is extended when 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 patent law, in that patent law is a necessary element of one of the well-pleaded claims. The Court also cited to Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308, 314 (2005), as refining the Christianson test to require a determination of whether “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.” (Alteration in original.)
According to the Court, Metabolite, as the appellant, bore the burden of demonstrating that its hypothetical claim depended on the resolution of an issue of federal patent law that was actually disputed and substantial. The Federal Circuit noted that Metabolite’s hypothetical claim would have been a breach-of-contract claim premised on LabCorp’s continued referral of homocysteine-only assays to Specialty without paying know-how royalties, requiring Metabolite to prove existence of a valid contract, breach, and damages. Metabolite contended that, to show breach, it would have to prove infringement, a sufficiently substantial question of federal patent law to support jurisdiction under § 1338. The Court disagreed, finding that infringement of the ’658 patent by the homocysteine-only assay had already been determined in the earlier jury trial and thus was no longer in dispute.
Specifically, neither party contested the previous decision of infringement, and at the time of the filing of the complaint, neither party contended that the outsourced homocysteine-only assays were different from the Abbott Test previously found to infringe. Accordingly, the Court concluded that Metabolite’s state law contract claims presented no disputed issue of patent law establishing the Federal Circuit’s jurisdiction under § 1338. The Court then transferred the appeal to the Tenth Circuit.
In a dissenting opinion, Judge Dyk set forth two reasons why he believed jurisdiction lies with the Federal Circuit. First, according to Judge Dyk, to adjudicate Metabolite’s claim on the merits, the Federal Circuit would be required to determine the scope of its earlier judgment and assess whether that judgment would be entitled to res judicata effect. Judge Dyk stated that a suit to enforce or determine the res judicata effect of a prior judgment “arising under” the federal patent laws is itself a suit that arises under the federal patent laws.
Second, Judge Dyk noted that determining contract entitlement presented a substantial, disputed question of patent law. In Judge Dyk’s view, the question of whether LabCorp breached the agreement turned on infringement, and the Court’s earlier decision did not determine whether the outsourced assays were covered by the patent claims. Judge Dyk also believed that infringement was contested at the time of the filing of the complaint, and noted that, at oral argument, counsel for LabCorp conceded that it is possible that the Federal Circuit could have had to decide whether the outsourced assays fell within the claims of the ’658 patent. Thus, Judge Dyk determined that the district court had jurisdiction under § 1338 and that the Federal Circuit should address the merits of the appeal.
Summary authored by Kay H. Hill, Esq.