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December 23, 2013 Articles

Patent Litigation: The Role of State-Law Causes of Action

Although traditionally a federal domain, patent litigators must be aware of the role that state law can play in their practice.

By Paul C. Van Slyke

It would seem that state law would have no place in most patent disputes. In many cases, however, a myriad of state-law claims can be used against a patent owner in a suit for declaratory judgment as well as against defendants in patent-infringement suits. This article will outline the intersection of state law with the traditionally federal domain of patent infringement. The patent litigator should be wary of ignoring potential state-law declaratory judgment claims and potential counterclaims under state law and the Lanham Act. This article gives a brief overview of the Texas tort-law claims for tortious interference with existing contractual relations and unfair competition. Not discussed in this article are additional state-law claims that may be pled, depending on the facts, such as tortious interference with prospective contractual relations, business disparagement, and trade libel.

Personal Jurisdiction over State-Law Claims
Although patent infringement is a uniquely federal claim, the prudent patent litigator cannot ignore the myriad of state-law causes of action that may be used to a litigant's advantage in a patent-infringement dispute. As a general rule, these state-law claims will be heard by a federal court under jurisdiction that is supplemental to the federal-question jurisdiction conferred by the issue of a patent infringement or validity. In some cases, federal courts, however, may exercise original and exclusive jurisdiction over such state-law causes of action even if a patent claim arising under 28 U.S.C. § 1338(a) (2012) is not yet ripe for adjudication. Oddly enough, in these instances, it is actually the state-law claims that provide entry to the federal courts.

Jurisdiction Revisited: Subject Matter Jurisdiction
When faced with the possibility of being sued for patent infringement, the best course is often to take the offensive and seek a declaratory judgment of either noninfringement or invalidity. For a court to have jurisdiction over such a declaratory-judgment action, however, there must be an "actual controversy." 28 U.S.C. § 2201(a). In Medimmune, Inc. v. Genentech, Inc., the Supreme Court held that the proper test of whether an action for declaratory judgment presents a justiciable controversy for a federal question is "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." 549 U.S. 118, 127 (2007). The Federal Circuit recently applied Medimmune in finding declaratory-judgment jurisdiction in a case in which suppliers who have contracted to provide a product to customers asked for a ruling of no liability for indirectly infringing patents covering methods of using such a product. Arkema Inc. v. Honeywell Int'l, Inc., 706 F.3d 1351 (Fed. Cir. 2013). This is true even if the supplier cannot identify customers that may be directly practicing the claimed methods at the time the declaratory judgment is sought. Because of this ruling, suppliers wary of waiting to be sued when they have knowledge of competitor patents can consider proactively moving forward in court to protect their interests.

Medimmune overruled decades of precedent that required the plaintiff in a declaratory-judgment action to allege "acts of defendant indicating an intent to enforce its patent" and that the plaintiff has "reasonable apprehension" of being sued. See, e.g., Hunter Douglas, Inc. v. Harmonic Design Inc., 153 F.3d 1318, 1336 (Fed. Cir. 1998), overruled on other grounds, Midwest Indus., Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed. Cir. 1999). In Hunter Douglas, the Federal Circuit noted that the plaintiffs failed to allege that the defendants had signaled any intention to file an infringement suit. In fact, the plaintiffs merely alleged that the defendants owned and had publicized the potentially infringed patents. Id. Accordingly, the Federal Circuit held that because the allegations did not support the plaintiffs' reasonable apprehension, no actual controversy existed under the law at that time.

Under Medimmune, the conclusion of an actual controversy does not end the jurisdictional inquiry. In addition to this federal question, the declaratory-judgment plaintiffs in Hunter Douglas asserted six causes of action that are creatures of California law (the state-law causes of action pled by the plaintiffs were unfair competition under common law, violation of California's Unfair Competition Act, injurious falsehood, negligence, intentional interference with prospective economic advantage, and negligent interference with prospective economic advantage). While the remaining "six state law counts st[ood] naked," the court continued with its analysis of whether subject matter jurisdiction existed and looked at whether the state-law claims might provide original jurisdiction through the "arising under" clause of 28 U.S.C. § 1338(a) (2012). Id.

Section 1338(a) provides in pertinent part that "[t]he district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents. . . . Such jurisdiction shall be exclusive of the courts of the states in patent . . . cases." In applying section 1338(a) (2012), the Supreme Court has relied on its "arising under" jurisprudence developed primarily in considering 28 U.S.C. § 1331, which is the general federal-question jurisdiction provision. Out of respect for "[l]inguistic consistency," in that both sections 1331 and 1338(a) use the phrase "arising under" to delineate the reach of their respective grants of federal jurisdiction, the Supreme Court in Christianson v. Colt Industries Operating Corp. grafted section 1331 precedent onto section 1338(a). 486 U.S. 800, 808–9 & n.2 (1988).

In Christianson, the Supreme Court succinctly summarized the jurisdictional boundaries set by section 1338(a):

Section 1338(a) jurisdiction . . . extend[s] only to those cases in which a well-pleaded complaint establishes either [1] that federal patent law creates the cause of action or [2] 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.

486 U.S. at 808–9. Citing Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 9 (1983), which considered jurisdiction under section 1331, the Hunter Douglas court further clarified the two possible types of federal jurisdiction under section 1338(a) that were enunciated in Christianson:

There is federal jurisdiction under the first type if, in the words of Justice Holmes, federal law "creates the cause of action." American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 260 (1916), quoted in Franchise Tax, 463 U.S. at 9. This definition is not limiting, however, for "it is well settled that Justice Holmes' test is more useful for describing the vast majority of cases that come within the district courts' original jurisdiction than it is for describing which cases are beyond district court jurisdiction." Franchise Tax, 463 U.S. at 9. Under the second source of jurisdiction, a case arises under federal law "where the vindication of a right under state law necessarily turn[s] on some construction of federal law." Id. (citing Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921).

Hunter Douglas, 153 F.3d at 1325.

Because the remaining (non-dismissed) causes of action in Hunter Douglas were all state-law claims, it is clear that federal law did not create any of these causes of action. Jurisdiction, therefore, could only be conferred under the second type of section 1338(a) analysis. The Federal Circuit found such a cause of action in the plaintiffs' claim for injurious falsehood. Injurious falsehood is, in essence, the California counterpart to business disparagement under Texas law. See, e.g., Additive Controls & Measurements Sys., Inc. v. Flowdata, Inc., 986 F.2d 476, 478 (Fed. Cir. 1993) (finding 1338(a) jurisdiction over Texas state-law claim for business disparagement). The Federal Circuit held that that this state-law cause of action "necessarily depends on the resolution of a substantial question of federal patent law, in that patent law is a necessary element of [this] well-pleaded claim." Hunter Douglas, 153 F.3d at 1325 (quoting Christianson, 486 U.S. at 808–9).

In California, injurious falsehood requires, among other elements, an allegation of a false statement. Id. (citations to California cases omitted). The plaintiffs in Hunter Douglas alleged in their complaint that the falsity was the defendants' assertion that they held exclusive rights to make or sell window shades covered by the subject patents. Id. According to the plaintiffs, this assertion is false because certain claims in the defendants' patents are invalid and all claims are unenforceable. Id. In holding that this claim, as pled, arose under section 1338(a), the Federal Circuit explained:

First, the action satisfies the well-pleaded complaint rule, for a required element of the state law cause of action—a falsity—necessarily depends on a question of federal patent law, in that either certain claims of the [defendants'] patents are invalid or all of the claims are unenforceable. Cf. Speedco, Inc. v. Estes, 853 F.2d 909, 912–13 (Fed. Cir. 1988) (denying federal jurisdiction because the complaint failed the well-pleaded complaint rule); McArdle v. Bornhofft, 980 F. Supp. 68, 71–73 (D. Me. 1997)(same). To make out that falsity, count four [the claim for injurious falsehood] relies on only federal patent law. Second, all the theories upon which Hunter Douglascould prevail depend on resolving a question of federal patent law, because Hunter Douglas does not plead, in its complaint, any other basis for a falsity on the Defendants' part. Cf. Christianson, 486 U.S. at 813 (concluding that "the appearance on the complaint's face of an alternative, non-patent theory compels the conclusion that the . . . claim does not 'arise under' patent law"); American Tel. & Tel. Co. v. Integrated Network Corp., 972 F.2d 1321, 1324 (Fed. Cir. 1992) (same); McArdle, 980 F. Supp. at 71–73 (same).


In addition, once original jurisdiction was established over one of the state-law claims, the Hunter Douglas court was properly able to exercise jurisdiction over the remaining state-law causes of action under the supplement jurisdiction provisions of section 1367. Id.

The Hunter Douglas court found that the cause of action for injurious falsehood pled by the plaintiff relied solely on resolving a question of federal patent law. Id. Because the "falsity" at issue was entirely based on the validity of the patents and because the plaintiffs did not plead any other basis for such falsity, the court was able to exercise original jurisdiction over the state-law claim. Id. Had the plaintiffs pled an alternative, non-patent theory for recovery under the state-law claim of injurious falsehood, this result could not have been reached. Id. (concluding that the "appearance on the complaint's face of an alternative, non-patent theory compels the conclusion that the claim does not 'arise under' patent law").

Examples of Relevant State-Law Torts Available in Texas
To appreciate the uses for which state-law torts may be made in a patent context, it is important to understand the elements of such torts. The following summaries provide examples of some of the state-law causes of action that may be used under Texas law. Although this list is not meant to be exhaustive, it should be instructive as to the types of state-law claims that patent litigators should include in their largely federal mindset. Corresponding torts in other states can be found for patent-litigation suits in other state venues.

Many state-law torts are implicated when a patent owner sends written notices of infringement. Such notices are sometimes motivated by 35 U.S.C. § 287(a), which provides in pertinent part:

Patentees, and persons making, offering for sale, or selling within the United States any patented article for or under them, or importing any patented article into the United States, may give notice to the public that the same is patented, either by fixing thereon the word "patent" or the abbreviation "pat.," together with a number of the patent. . . . In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter.

This statutory provision provides for constructive notice of patent ownership through patent marking. However, it also authorizes actual notice of infringement as a partial cure for failing to mark.

Generally, these notices are sent to parties whom the patentee believes are the source of the infringement. This is usually the patentee's competitor, but in some cases, notice is sent directly to customers of the competitor. Notice of such infringement regularly elicited a declaratory-judgment action from the accused infringer. The Federal Circuit has become more reluctant to grant this option to declaratory-judgment plaintiffs. See generally Jerry Sellinger, Jurisdiction and Notice: Damned if You do Damned if You Don't (Intellectual Property Law Inst. Mar. 1998). However, accused infringers should consider relying on state-law claims, such as those discussed below.

Tortious interference with existing contractual relations. Texas law provides that in order to maintain an action for interference with a contract, it must be established that (i) a contract existed that was subject to interference; (ii) that the act of interference was willful and intentional; (iii) that the intentional act was the proximate cause of the plaintiff's damage; and (iv) that actual damage or loss occurred. See Bellefonte Underwriters Ins. Co. v. Brown, 663 S.W.2d 562, 573 (Tex. App. Hous. [14th Dist.] 1983) (writ denied), rev'd on other grounds, 704 S.W.2d 742 (Tex. 1986); Anthony Pools, A Div. of Anthony Indus., Inc. v. Charles & David, Inc., 797 S.W.2d 666 (Tex. App. Hous. [14 Dist.] 1990) (writ denied). Second, the injuredcompetitor must establish that the defendant acted maliciously by intentionally preventing the relationship from occurring with the purpose of harming the plaintiff. Id.

Naturally, the second element depends on the defendant's knowledge of the possible relationship. The plaintiff must also show that but for the conduct of the defendant, a reasonable certainty existed that the relationship would have continued. Martin v. Phillips Petroleum Co., 455 S.W.2d 429 (Tex. Civ. App. Houston [14th Dist.] 1970) (no writ). Finally, all the damages resulting from the interference must be asserted by the injured competitor.

The third element is the intent requirement. The intent that must be established means that the actor either desires to cause the consequences of the act or believes that the consequences are substantially certain to result from the act. See Sw. Bell v. John Carlo Tex., 843 S.W.2d 470 (Tex. 1992). A finding that a party "intentionally" did a certain act is not supportable without a finding that there was an intent to interfere or a belief that interference would result from the act. Id. at 472.

Significantly, tortious interference with a contractual relationship includes interference without necessarily inducing a breach. For example, if the defendant injures a party who is then unable to perform, or destroys or damages property that is the subject matter of the contract, or does any other act that makes performance more burdensome, difficult, impossible, or of less or no value to the person entitled to performance, an actionable tort is constituted under the theory that there is an invasion of the property rights of the parties of the contract. Tippett v. Hart, 497 S.W.2d 606, 610 (Tex. Civ. App. Amarillo 1973), ref'd n.r.e. per curiam, 501 S.W.2d 874 (Tex. 1973).

Unfair competition under Texas common law. Unfair competition in its most basic form is almost universally regarded as a question of whether the defendant is misrepresenting his or another's goods or services, leading to confusion on the part of potential customers. This label has generally been associated with the common-law torts of "palming off," "dilution," "false advertising," and "tarnishment." These were all codified into section 43(a) of the Lanham Act. Recently, Texas created a specific anti-dilution statute and apparently carved this tort off from the other lines of the common law.

The tort of unfair competition under the cases dealing with Texas common law has mainly been directed to the "palming off" or "tarnishment" lines. Whether the "false advertising" prong of section 43(a) of the Lanham Act exists as a tort under the common law of Texas appears to be an undecided question.

Several jurisdictions have agreed that the action of "false advertising" is in fact actionable under the common law of unfair competition. This has been carried through in the formulation of section 2(a)(5) of the Uniform Deceptive Trade Practices Act, which states:

a person engages in a deceptive trade practice when, in the course of his business, he represents that goods or services have sponsorship, approval, [or] characteristics… that they do not have[.]

Also, section 761 of the Restatement (Second) of Torts notes that a misrepresentation of goods for the purpose, and with the effect, of diverting trade is actionable. Thus, there is strong secondary authority supporting a contention that the tort of "false advertising," or misrepresenting another's goods, is actionable under a common-law unfair-competition claim.

As illustrated by Hunter Douglas,the patentee action of advertising its claimed ownership of its patent may be sufficient to establish a claim for false advertising. Of course, it should be remembered that the declaratory-judgment plaintiff that includes such a false advertising claim must also plead bad faith to establish subject matter jurisdiction and avoid preemption.

Although patent protection is originally and foremost a creature of federal law, state-law causes of action cannot be overlooked when representing and advising clients on patent-litigation issues. From trial tactics to damages, state-law causes of action can be useful tools in patent litigation. Patent litigators must be aware of the role that state law can play in their practice or risk being outmaneuvered by a better-prepared opponent.

Keywords: litigation, intellectual property, state-law cause of action, Lanham Act, unfair competition, tortious interference

Paul C. Van Slyke – December 23, 2013

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