Patent Law

Inexhaustible

By Gary Odom and Jordan Kuhn

Hapless Excelstor, a Chinese company, wanted to sue its patent licensor, Papst, for not notifying it of a patent license agreement that Papst had for the same patent Excelstor licensed. The district court pitched the case for lack of subject matter jurisdiction. The appeals court affirmed, with a bit of patent law 101, namely, that the patent exhaustion doctrine is not a cause of action.

Excelstor v. Papst Licensing (CAFC 2008-1140)

Exclestor sought federal court action under patent law, when, if anything, it should have punted under contract law and/or fraud in state court.

ExcelStor asserts that jurisdiction is proper under 28 U.S.C. § 1338, which provides district courts with exclusive federal jurisdiction over "any civil action arising under any Act of Congress relating to patents." 28 U.S.C. § 1338(a).

In Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (2005), the United States Supreme Court set forth a two-part test for determining whether federal courts have exclusive jurisdiction over a case pursuant to 28 U.S.C. § 1338(a). The Court held 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." Christianson, 486 U.S. at 809. In analyzing whether patent law is a necessary element of ExcelStor's claims, we are limited to an analysis of ExcelStor's well-pleaded complaint. See Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987). Under the well-pleaded complaint rule, "arising under" jurisdiction "must be determined from what necessarily appears in the plaintiff's statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation or avoidance of defenses which it is thought the defendant may interpose." Christianson, 486 U.S. at 809 (citations omitted). A claim does not arise under the patent laws if a patent issue appears only in a defense to that claim. Thompson v. Microsoft Corp., 471 F.3d 1288, 1292 (Fed. Cir. 2006) (quoting Christianson, 486 U.S. at 809).

On appeal, ExcelStor argues that the three causes of action at issue arise under federal patent law. ExcelStor claims that Counts I, III, and IV arise under the patent exhaustion doctrine of patent law, and are therefore within the jurisdiction of the federal courts.

We disagree. ExcelStor's claims fail to meet either prong of the Christianson test. First, patent law does not create the cause of action in this case. In arguing that it does, ExcelStor's appeal fundamentally misunderstands the nature of the patent exhaustion doctrine. As the district court held, patent exhaustion is a defense to patent infringement, not a cause of action. See, e.g., Monsanto Co. v. Scruggs, 459 F.3d 1328, 1332-36 (Fed. Cir. 2006) (referring to exhaustion as an affirmative defense). Thus, ExcelStor's claims, which merely invoke defenses to hypothetical claims of patent infringement, do not "arise under" the patent laws. Christianson, 486 U.S. at 809 ("[A] case raising a federal patent law defense does not, for that reason alone, 'arise under' patent law . . .").

Furthermore, ExcelStor's claims do not establish federal subject matter jurisdiction because they do not require resolution of a substantial question of federal patent law. The exhaustion doctrine prohibits patent holders from selling a patented article and then "invoking patent law to control postsale use of the article." Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. ___, 128 S. Ct. 2109, 2122 (2008). ExcelStor's amended complaint does not allege that Papst invoked the patent laws to control the post-sale use of the hard disk drives. Indeed, Papst could not bring another infringement action against ExcelStor unless the dismissal of Papst's earlier infringement action against ExcelStor were vacated by the court. ExcelStor, 2007 U.S. Dist. LEXIS 79305, at *13. Instead, ExcelStor's amended complaint alleges that Papst violated the patent exhaustion doctrine by "collecting two different royalties from the same patented product." Appellants' Am. Compl. at 3. But there is no federal cause of action for collecting royalties twice on the same goods. Patent exhaustion prohibits patentees from enforcing patent rights in certain circumstances, but it does not forbid multiple licenses on a single product or even multiple royalties. Papst's alleged collection of two sets of royalties in this case may, eventually, prove to have been prohibited by the terms of the individual license agreements, or such a collection scheme may prove to have been fraudulent, but patent law is not a necessary element of such determinations. They are properly made in this case by state, not federal, courts, under state law of contract and fraud.

Full post as published by The Patent Prospector on September 16, 2008 (boomark / email).