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April 19, 2014

11th Circuit Retains Jurisdiction in “Contract” Case, But Construes Patent Claims and Opines on Infringement

You may think that because your litigation involves significant patent issues, such as the construction of claim terms and determination of infringement, you will have recourse at the Federal Circuit if the district court rules against your company or client. Not so fast. The Eleventh Circuit Court of Appeals issued an opinion finding that it had jurisdiction over an appeal involving certain breach of contract claims that, in order to be resolved, required a determination of whether a party’s products infringed several patents.

Rad Source Technologies, Inc., (“Rad Source ”), a Florida corporation with its principal place of business in Georgia, participated in the development of irradiation technology contained in the RS 3000 blood irradiation device. Rad Source was the first to replace radioactive isotopes with X-rays to irradiate blood. The first device, the RS 3000, was introduced in 1999 as a one blood bag device and by 2001 was modified to hold 2 or 3 bags. Rad Source obtained three patents covering the device (U.S. Patent Nos. 6,212,255, 6,489,099, and 6,614,876). According to the 11th Circuit opinion, in the late 1990s Rad Source began work on generating a three-dimensional field of X-rays through a long tube, for which it obtained two new patents referred to only as “the ‘147 and ‘686” (the “Long Tube Technology”). The author confirmed that these terms referred to U.S. Patent Nos. 7,346,147 and 7,515,686.

In the late 1990s Rad Source approached MDS (Canada) Inc. (“MDS”) (now known as MDS (Canada), Inc.), a Canadian company specializing in detection, prevention, and diagnosis of disease experienced with gamma source irradiation, but MDS expressed no interest in the RS 3000 technology. After 2002, MDS inquired about acquiring an interest in the RS 3000, and the parties executed a license agreement on August 20, 2003 (the “License Agreement”). MDS was cleared to market and sell the RS 3000 in the United States on September 26, 2003. The funds received under the License Agreement allowed Rad Source to pursue its new Long Tube Technology.

In 2007 the parties discussed licensing the Long Tube Technology, but reached no agreement. In December of that year MDS requested that Rad Source approve an assignment of the License Agreement to Best Medical International, Inc. (“Best”). Rad Source refused but left the door open to approve after review of documentation, which MDS did not furnish. A conference call in January 2008 did not end with agreement and MDS stated it would go forward with a sublicense to Best over Rad Source’s objection. MDS executed a sublicense agreement with Best in April 2008 and transferred a building and 155 employees to Best in May 2008 by way of an asset purchase. Rad Source believed a default notice would be futile, time-consuming, and expensive and did not send one until 2011 – over a year after MDS and Best filed suit.

Rad Source began marketing its new RS 3400 product based on the Long Tube Technology in 2009 as “a direct medical upgrade of the Rad Source 3000 research and industrial irradiator.” Best and MDS sent a cease and desist letter shortly thereafter and commenced litigation with MDS seeking a temporary restraining order which was granted on October 27, 2009. When they later learned that Rad Source had not paid the maintenance fees on the ‘255 patent they sued Rad Source for breach of the License Agreement. Rad Source counterclaimed. In January 2011, Rad Source sent a termination notice to MDS, which MDS and Best challenged as having been waived. Motions for partial summary judgment by both parties were denied and a ten-day bench trial followed in April 2011. The District Court ultimately ruled that the License Agreement remained in effect, but held the RS 3400 does not embody the Patents.

On these facts, the 11th Circuit recognized controlling statutory authority that “the Federal Circuit [has] exclusive jurisdiction ‘of an appeal from a final decision of a district court of the United States . . . if the jurisdiction of that court was based in whole or in part, on section 1338.” The 11th Circuit further acknowledged that 28 U.S.C. § 1338 “grants federal district courts original jurisdiction ‘of any civil action arising under any Act of Congress related to patents.’” The 11th Circuit then went on to hold that the District Court did not have “patent jurisdiction,” but only diversity jurisdiction under 28 U.S.C. § 1332 and supplemental jurisdiction under 28 U.S.C. § 1367. The 11th Circuit nevertheless acknowledged that “[t]o succeed on [its] claim, [MDS] must prove that the RS 3400 infringes the licensed patents.” However, the panel then found “the question of patent infringement here is not substantial.”

The 11th Circuit examined 28 U.S.C. § 1338 and found that, while patent construction and a finding of infringement or non-infringement was necessary to determine the state law claim for breach of contract brought by MDS and Best, the resolution of that patent claim was not substantial as required by Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314, 125 S.Ct. 2363, 2368, 162 L.Ed.2d 257 (2005). Grable involved the question of whether a state’s quitclaim deed was valid or not and was subject to the jurisdiction of the federal courts merely because there was a question whether an Internal Revenue Service gave adequate notice as required by federal law.Grable, however, found in favor of federal jurisdiction and did not involve patents or 28 U.S.C. § 1338. In Grable the issue was also addressed in the District Court, where the Rad Source decision does not reveal that any dispute over federal jurisdiction under 28 U.S.C. § 1338 arose at the District Court level. The opinion reached its conclusion that the patent claim was not substantial, finding that the patent issue involved in this case was not of importance to the federal system as a whole based on the three factors: (1) a pure question of law is more likely to be a substantial federal question (and patent cases are a mixture of fact and law and in this case the facts were more important than the law); (2) the factor of the patent law ruling controlling the outcome in other cases weighs against the case being substantial; and (3) there is no strong interest of the government here in litigating in a federal forum.

The opinion relies heavily on Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988). In Christianson the Supreme Court decided a dispute between the Federal and Seventh Circuits by ruling in favor of the expressed opinion of the Federal Circuit that it lacked jurisdiction by reversing its decision and remanding the case for transfer to the Seventh Circuit. The Supreme Court ruled that a case was not “one ‘arising under’ federal patent law” unless “’the plaintiff . . . set up some right, title, or interest under the patent laws, or at least makes it appear that some right or privilege will be defeated by one construction, or sustained by the opposite construction, of those laws.’” Id. at 807-08, 2173, 824 (quoting Henry v. A. B. Dick Co., 224 U.S. 1, 16, 56 L.Ed. 645, 32 S.Ct. 364 (1912)). Christianson went on to hold: “If ‘on the face of a well-pleaded complaint there are . . . reasons completely unrelated to the provisions and purposes of [the patent laws] why the [plaintiff] may or may not be entitled to the relief it seeks,’ . . . then the claim does not ‘arise under’ those laws.” Id., at 810, 2174, 826 (quoting Franchise Tax Board of California v. Construction Laborers Vacation Trust, 463 U.S. 1, 26, 77 L.Ed.2d 420, 103 S.Ct. 2841 (1983)).

The Christianson Court found that “[t]he patent-law issue, while arguably necessary to at least one theory under each claim, is not necessary to the overall success of either claim.” Christianson at 810, 2174-2175, 826. The determining factor for the Christianson Court appeared to be set forth in the following finding: “Since there are ‘reasons completely unrelated to the provisions and purposes’ of federal patent law why petitioners ‘may or may not be entitled to the relief [they] see[k]’ under their monopolization claim, the claim does not ‘arise under’ federal patent law.” Id., at 812, 2175-2176, 827-828 (citing Franchise Tax at 26). In contrast to Christianson, the 11th Circuit acknowledges that MDS cannot be successful on its claim to preclude the marketing of the RS 3400 unless that product infringes the licensed patents. While finding that there was no alternative theory under which plaintiffs could proceed to success other than by a finding of patent infringement, the 11th Circuit nonetheless held that its necessary implementation of patent construction and the patent laws, “the question of patent infringement” was not substantial.

The 11th Circuit ruling raises the prospect of forum shopping by appellants in matters where patent construction, validity, and infringement issues must be decided, but where the appellant can make an argument that those determinations are not substantial and are unlikely to affect future litigants. The 11th Circuit found that “[b]oth the highly specialized nature of patent claims and the niche market for blood irradiator devices suggest that the resolution of this issue is unlikely to impact any future constructions of claims.” By their very nature patents are the first in line of new technologies and it is rarely, if ever, known how far into the market place a particular innovation will extend. As a result, if may be inapt to suggest that a claim construction or infringement determination relating to patented inventions in a highly specialized field will have no impact on future claims, even in unrelated technological fields.

The takeaway for corporate and outside counsel is to make sure that patent claims are well-plead, carefully delineated, and clearly important to a case, if your company wants to ensure that the final decision on those patent claims are determined by the judicial body charged with expertise in that area (the Federal Circuit). The case had additional complex issues relating to the state law claims resulting in a certified question to the Florida Supreme Court. This blog has focused on the jurisdictional and intellectual property issues.

The case is MDS (Canada) Inc., et al. v. Rad Source Technologies, Inc., No. 11-15145, --- F.3d ---, 2013 U.S.App. LEXIS 13447 (11th Cir. July 1, 2013).

Copyright © 2014 Womble Carlyle Sandridge & Rice, PLLC. All Rights Reserved.

About the Author

Kirk Watkins, Womble Carlyle Law Firm, Business Litigation Attorney
Attorney

Kirk manages and tries complex business litigation, patent and international arbitration disputes. He believes thorough preparation and strategic theme development result in successful trials or settlements.    

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