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CAFC: Federal Jurisdiction Exists Over a Declaratory Judgment Action Where There Is a Federal Cause of Action but Only a State Law Defense

February 17, 2011

The U.S. Court of Appeals for the Federal Circuit ruled Feb. 17 that a declaratory judgment suit was wrongly dismissed for lack of subject matter jurisdiction because the district court ignored the anticipated claim for infringement that could be brought by the declaratory defendant and placed too much attention on the fact that the declaratory plaintiff’s suit only asserted a state law license defense to infringement (ABB Inc. v. Cooper Industries LLC, Fed. Cir., No. 2010-1227, 2/17/11).

While noting that this issue has not been squarely resolved, the appellate court said that the U.S. Supreme Court’s cases do support the general rule that the proper course is for a court to examine the hypothetical claim that could be asserted by the declaratory defendant, and here that claim was for patent infringement—a federal claim.

Declaratory Suit Follows Settlement and Letters from Patentee Over Third-Party Outsourcing.

In this case, Cooper Industries LLC had sued ABB Inc. in federal court, charging that the company infringed its patents (6,037,537; 6,184,459; 6,352,6556,398,986; 6,613,250; and 6,905,638) covering electrical equipment containing dielectric fluid, which is used to electrically insulate and thermally protect devices such as transformers. At the heart of that dispute was Cooper’s claim that ABB’s BIOTEMP vegetable oil based dielectric fluid infringed the patents.

That suit was settled in 2005 when ABB took a license, paid Cooper $1 million, and acknowledged that the patents are valid and enforceable and that BIOTEMP is covered by one or more claims of the patents. However, trouble stirred after ABB began outsourcing the manufacture of BIOTEMP to Dow Chemicals under an agreement in which it agreed to indemnify Dow for any claims by Cooper. In June 2009, Cooper wrote to ABB and Dow, stating that such outsourcing “would be a material breach” and that “Cooper will act vigorously to protect its rights in that event.”

One month later, ABB filed for a declaratory judgment in Texas federal district court, seeking a declaration that its activities were authorized under the license agreement. ABB later ABB amended its original complaint, seeking declarations that it “does not infringe … any valid enforceable claim” of the Cooper patents. Cooper moved to dismiss ABB’s declaratory judgment claim for lack of subject matter jurisdiction, arguing that there was no actual controversy involving infringement and that ABB’s complaint raised only a state law license defense to infringement.

The district court agreed to dismiss the suit for lack of subject matter jurisdiction, reasoning that there was no federal question at issue because ABB’s complaint “only entails a determination of the parties’ rights under the [settlement agreement].”

ABB appealed, arguing that its declaratory suit indeed arose under 28 U.S.C. § 1338, which grants federal question jurisdiction in “any civil action relating to patents.”

Similar Warning Letters Led to Jurisdiction in MedImmune.

From the outset, the Federal Circuit pointed to a recent Supreme Court case which held that statements similar to Cooper’s created a case or controversy sufficient to establish declaratory judgment jurisdiction, MedImmune Inc. v. Genetech Inc., 549 U.S. 118 (2007). The petitioner in that case was served with a letter expressing the belief that the accused product was covered by one of the respondent’s patents and that the petitioner would have to pay royalties. Quoting Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270 (1941), MedImmune found that there was jurisdiction for purposes of Article III of the Constitution because there was “a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” Here, Cooper’s letters said that it “will act vigorously to protect its rights” and that it would “vigorously defend its rights,” Judge Timothy B. Dyk stressed.

Continuing, Dyk pointed out that MedImmune rejected the Federal Circuit’s rigid rule that there could not be a case or controversy without a reasonable apprehension of imminent suit. While Cooper insisted that this case only involved a state law dispute over the interpretation of a license, Dyk found that there was a controversy “of sufficient immediacy and reality” surrounding infringement “to warrant the issuance of a declaratory judgment” under the language of MedImmune. “To obtain an injunction or damages remedy, Cooper would have to sue ABB for induced infringement or Dow for direct infringement (which would have obligated ABB to indemnify Dow),” he explained. In a similar case that followed MedImmune, this court found jurisdiction where the declaratory defendant had sent veiled warnings to the declaratory plaintiff and had already sued other companies that produced the same product accused of infringement, Dyk noted, citing Micron Techology Inc. v. Mosaid Technologies Inc., 518 F.3d 897 (Fed. Cir. 2008).

Dyk added:

The warning letters from Cooper to ABB and Dow indicate that, under Micron and MedImmune, there was an immediate controversy surrounding infringement. ABB had an interest in determining whether it would incur liability for induced infringement, and it had an interest in determining whether it would be liable for indemnification, which turned on whether Dow would be liable for infringement.

Cooper’s Hypothetical Complaint Here Involves a Federal Claim—Infringement.

Still, Cooper argued that, even if there is an immediate controversy as to infringement, that controversy would be insufficient to create jurisdiction under Section 1338 because ABB raises only a state law defense to the infringement claim.

The Federal Circuit disagreed. “[I]t is the character of the threatened action, and not of the defense, which will determine whether there is federal-question jurisdiction in the District Court,” the court said, quoting Public Serv. Comm’n of Utah v. Wycoff Co., 344 U.S. 237 (1952). Thus, focusing on a declaratory defendant’s hypothetical well-pleaded complaint to determine subject matter jurisdiction, the court reasoned as follows:

Because the actual controversy in this case is over infringement, the declaratory defendant’s hypothetical coercive complaint here is a patent infringement suit. It is well-established that a claim for infringement arises under federal law. Even if the only issue in that suit would be a state law defense, subject matter jurisdiction does not depend on whether a federal law issue will be the crux of the case but instead whether “federal patent law creates the cause of action.” … Cooper could unquestionably bring its patent infringement claim in the federal courts, even if ultimate resolution of the case depended entirely on ABB’s state law defense, because an infringement suit is a federal cause of action. Therefore, the defendant’s cause of action here arises under federal law, and the cases suggest that the district court possesses subject matter jurisdiction over a declaratory action seeking a declaration that there is no infringement liability.

Though Cooper argued that this rule should not apply because ABB’s sole defense is based on the state law license, Dyk noted that a Supreme Court case left open the question of whether federal courts have jurisdiction over a declaratory judgment action where there is a federal cause of action but only a state law defense. Textron Lycoming Reciprocating Engine Div., AVCO Corp. v. Auto. Workers, 523 U.S. 653 (1998).

In Textron, Justice Stephen Breyer argued in his concurring opinion that the Court should have resolved the question and found that the anticipated federal claim would have created subject matter jurisdiction over the declaratory judgment action even though the defense arose under state law. While Dyk could find no authority directly on point, he concluded that there was indeed federal question jurisdiction in this case. For support, he cited Franchise Tax Bd. of Cal. v. Constr. Laborers Vacation Trust, 463 U.S. 1 (1983), for the general rule that declaratory judgment jurisdiction exists where the defendant’s coercive action arises under federal law. “We see no reason to depart from that general principle where the defense is non-federal in nature,” Dyk said. Further, he emphasized Franchise Tax Board’s statement that “federal courts have consistently adjudicated suits by alleged patent infringers to declare a patent invalid, on the theory that an infringement suit by the declaratory judgment defendant would raise a federal question over which the federal courts have exclusive jurisdiction.”

Finally, the appellate court turned away Cooper’s reliance on two older Supreme Court cases, Luckett v. Delpark, Inc., 270 U.S. 496 (1926), and Wilson v. Sandford, 51 U.S. 99 (1850). These cases involving a suit to collect royalties under a license and a suit for forfeiture of a license stand “only for the unremarkable proposition that a plaintiff’s coercive complaint in a normal civil action does not arise under federal law when it is based on a contract or license,” Dyk wrote. Noting that those cases predate the Declaratory Judgment Act, he said that they in no way suggest that a declaratory judgment of non-infringement does not arise under the patent laws.

The dismissal of ABB’s suit for lack of subject matter jurisdiction was reversed.

The opinion was joined by Chief Judge Randall R. Rader and Judge Alan Lourie.

ABB Inc. was represented by David L. Burgert of Porter & Hedges, Houston. Cooper Industries was represented by Robert J. McAughan Jr. of Locke Lord Bissell & Liddell, Houston.

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