Sanyo Electric Co., Ltd. v. Intel Corporation
Next, in Sanyo Electric Co., Ltd. v. Intel Corporation, the District of Delaware decided jurisdiction in a dispute involving a cross-license agreement and the products defendant Intel was authorized to make under the agreement. Hera Wireless had acquired a portion of Sanyo’s patent portfolio relating to Wi-Fi chips. Hera and its authorized licensing company, Sisvel UK Ltd., sued Lenovo, a client of Intel. Lenovo used Intel’s chips and Intel raised a license defense. Sanyo sought declaratory judgment that Intel was not authorized to sell wireless communication modules under the cross-license agreement. Intel counterclaimed that the asserted patents were invalid or unenforceable as to Lenovo computers containing the accused Wi-Fi chips, and the patent rights covering those chips were exhausted.
Sanyo claimed that Intel incorrectly informed third parties that Hera’s patent rights were exhausted because Sanyo had authorized Intel to make the Wi-Fi chips. Analyzing the first Gunn factor, the court reasoned that although it was possible to resolve Sanyo’s claims and Intel’s breach of contract counterclaim using patent exhaustion, the controversy could be resolved by determining the products Intel could rightfully sell pursuant to the agreement. Accordingly, an issue of federal law was not necessarily raised. For much the same reason, in analyzing the third Gunn factor, the court found that the potential federal issue was not substantial because the issue revolved more around an interpretation of the contract than an interpretation of federal patent law. (Note that the court determined it need not make a finding as to whether a federal issue was actually disputed to satisfy the second Gunn factor.)
Regarding the fourth Gunn factor, the court decided the federal-state balance would be disrupted by bringing this case into federal court because the patent issues at hand did not sufficiently outweigh the interest in having the state court resolve issues involving state contract law. Unlike in Levi or Jang, where determinations of infringement or invalidity were necessary, there was at least one avenue to resolve the dispute that did not involve making a determination on a patent issue. Having made these considerations, the court granted Sanyo’s motion for remand, holding that it did not have jurisdiction because the claims and counterclaims did not satisfy the Gunn test.
Inspired Development Group, LLC v. Inspired Products Group, LLC
Next, in Inspired Development Group, LLC v. Inspired Products Group, LLC d/b/a KidsEmbrace, LLC, the Federal Circuit distinguished Jang and clarified the requirements for obtaining federal jurisdiction over a licensing dispute, holding that some patent law issue must need resolution, with no alternative route offered in contract law. Plaintiff Inspired Development granted KidsEmbrace an exclusive license to manufacture and commercialize car seats. KidsEmbrace sought additional investment from a third party, which forced KidsEmbrace and Inspired Development into a binding letter agreement. The third party forced the founder and CEO out of KidsEmbrace, which then terminated the initial license agreement. Inspired Development sued KidsEmbrace in the Southern District of Florida for breach of contract (i.e., failing to pay royalties) and, alternatively, unjust enrichment. The court granted summary judgment in KidsEmbrace’s favor, and Inspired Development appealed to the Court of Appeals for the Eleventh Circuit. The Eleventh Circuit found that diversity jurisdiction did not exist and transferred the case to the Federal Circuit to determine whether “arising under” jurisdiction existed.
KidsEmbrace argued that “arising under” jurisdiction existed because Inspired Development’s unjust enrichment claim was actually an infringement claim in that proving unjust enrichment required showing that KidsEmbrace continued to use the process described in the letter agreement. The court disagreed, and much of its decision hinged on substantiality. It reasoned that the license agreement conferred a number of potential benefits on KidsEmbrace, including litigation avoidance and securing investment. Thus, the patent law issue was not dispositive of the case—a negative for substantiality. The lack of potential for conflicting future rulings and a dearth of government interest in the dispute further cut against substantiality, a distinguishing factor in view of Jang. Finally, the court reasoned federal jurisdiction was improper because otherwise parties could insert any infringement or invalidity issue that would pull a contract dispute into federal court. Taking all these factors into account, the court held federal jurisdiction was improper.
Sasso v. Warsaw Orthopedic, Inc.
Most recently, in Sasso v. Warsaw Orthopedic, Inc., the District Court for the Northern District of Indiana found that federal jurisdiction was improper where two separate licensing agreements between plaintiff Dr. Rick Sasso and defendant Warsaw Orthopedic were at issue. The first dispute centered on which provision applied to determine the termination of the agreement. One provision required that the patents be valid, while the other merely depended on the issuance and expiration date of the patents. In any event, the state court decided the governing provision was the provision dependent on the patent’s issuance and expiration date, and it held in Sasso’s favor on that ground.
Under the second agreement, payment of royalties undisputedly required a device covered by a valid claim. However, the plaintiff argued that the issue was not one of the validity of the patent at issue, but whether the patent at issue was covered by the agreement. Given that a party offered a theory that did not require resolution of a patent law issue, no such issue was both actually disputed and substantial. The decision of the Northern District of Indiana comports with the Federal Circuit and other federal district courts: If patent law is not necessary in determining the outcome, federal jurisdiction is improper.
To ensure jurisdiction will properly lie in federal courts, parties should ensure that their claims or counterclaims allow for resolution only by applying the tenets of patent law. IP-related agreements should be drafted so that an analysis of patent law is required to settle a dispute. For instance, a party could include a provision ensuring that the definition of a product covered by the agreement requires a valid claim, such as the provision in Jang. Further, there should be no ambiguity regarding which provision applies to determine which products are covered products, as in Sasso.
A complaint should specifically discuss provisions defining covered products and call out issues of patent validity or infringement. Current caselaw suggests that these actions land a case firmly in federal jurisdiction.
The Federal Circuit and district courts are clearly consistent in application of Gunn to jurisdictional issues presented by patent license disputes. As the Federal Circuit pointed out in Inspired Development, it remains to be seen how Jang would apply to a case with its particular fact pattern but requiring resolution of a jurisdictional issue between state and federal courts, as opposed to two federal courts. One thing is evident: Federal jurisdiction is improper if the dispute can be resolved without patent law.