February 07, 2017 Articles

The Timing for Removal of a Patent-Related Counterclaim Post-AIA

A defendant must be diligent in acting to remove before the 30-day window closes

By Michael A. Oropallo and Jason C. Halpin

To remove or not to remove? That is a question pondered by many federal court litigators. It has been particularly critical in cases involving patent license disputes. But until recently, even though patent law issues may have permeated the dispute, with rare exception removal was not permitted. That changed when the much-heralded Leahy-Smith America Invents Act (AIA) took effect in 2013, though many are unaware of the specifics as they relate to removal jurisdiction.

The typical scenario involves a dispute over the terms of a license agreement, usually having to do with the amount or satisfaction of royalty payments. A breach of contract action ensues, most likely in state court, and often involves issues of patent invalidity or whether royalties are owed, but without allegations of infringement.

In the past, a would-be defendant seeking to remove the contract action to federal court was often met with a remand by the federal court because the grounds for removal based on the "arises under" standard were narrowly construed. Since the effective date of the AIA, removal jurisdiction is not so limited.

This article summarizes the AIA's removal statute, how it has changed the grounds for removal in patent-related licensing disputes, and what triggers the time for filing a notice of removal.

The License Agreement

Generally, a license agreement involves a right from the licensor to the licensee to make, sell, or use certain proprietary rights, such as a patent. There are a myriad of ways to draft such an agreement, but typically the agreement defines the scope of the license/rights and more often than not provides some compensation for those rights. Royalties are often a component of a license agreement.

One of the most important provisions of a license agreement is the grant or scope of the license. For example, in the case of a patent license, it usually involves the right to make, use, or sell a product that would otherwise infringe the claims of the patent at issue. If one is not careful (or if the law changes) there can be ambiguities in what is permitted under the license. Similarly, a licensee may decide it does not want to pay license fees anymore and looks to design around the patent.

Regardless of the reason, when a dispute arises there is often a conflict between whether the ensuing legal action is based on a contract, a patent, or, more often, some hybrid of the two. And often, the latter type of action is brought in state court. This puts the defendant in a dilemma. Should you, and can you, remove the action to federal court (where the judges are more familiar with patent law issues)?

Section 1454

In 2011, Congress passed the AIA. Most practitioners know the effect the AIA had on patent litigation with its introduction of the now often used inter partes review process. What is less well known is its creation of 28 U.S.C. section 1454.

This statute provides, in relevant part, that "[a] civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights may be removed to the district court of the United States for the district and division embracing the place where the action is pending." 28 U.S.C. § 1454(a) (emphasis added). This had the effect of abrogating Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2002), by allowing counterclaims arising under federal patent law to provide grounds for federal removal jurisdiction. See Joe Matal, "A Guide to the Legislative History of the America Invents Act: Part II of II," 21 Fed. Cir. B.J. 539 (2012) (citing H.R. Rep. No. 112-98, at 81 (2011); Leahy-Smith America Invents Act, Pub. L. No. 112-29, § 19, 125 Stat. 284, 332 (2011); 157 Cong. Rec. S1378 (daily ed. Mar. 8, 2011) (statement of Senator Kyl)).

Though only a few courts have had occasion to consider section 1454, there is a growing consensus among them that the statute broadens federal court jurisdiction over patent-related counterclaims to better ensure that all claims arising under federal patent law are removable, regardless of who has asserted them. See, e.g., Inselberg v. N.Y. Football Giants, Inc., No. 14-1317, 2014 U.S. Dist. LEXIS 82613 (D.N.J. June 18, 2014); Mirowski Family Ventures, LLC v. Bos. Scientific Corp., No. WDQ-13-2627, 2014 U.S. Dist. LEXIS 77875 (D. Md. June 5, 2014); Andrews v. Daughtry, 994 F. Supp. 2d 728 (M.D.N.C. 2014); Univ. of Ky. Research Found., Inc. v. Niadyne, Inc., No. 13-16-GFVT, 2013 U.S. Dist. LEXIS 158018 (E.D. Ky. Nov. 5, 2013).

Prior to the enactment of section 1454(a), federal removal jurisdiction depended on whether an asserted claim arose under "the Constitution, laws, or treaties of the United States," 28 U.S.C. § 1331, or "any Act of Congress relating to patents," 28 U.S.C. § 1338. To determine whether a claim "arises under" federal law, courts employed the "well-pleaded complaint" rule and looked to "the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). A counterclaim could not establish "arising under" jurisdiction as a matter of law. See Holmes Grp., 535 U.S. at 831–32.

In addition, it was well settled that claims involving breaches of patent contracts do not arise under the patent laws, and that an infringement claim would not invoke federal jurisdiction if it was merely incidental to a primary dispute over patent ownership under state law. Tollinger v. Ithaca Gun Co., No. 86-CV-1351, 1988 U.S. Dist. LEXIS 3230 (N.D.N.Y. Mar. 14, 1988). Thus, litigation involving the breach of a license agreement did not confer federal jurisdiction, even if the defendant sought to challenge the validity of the patent that was the subject of the license agreement. Unless a defendant could establish that a contract action involving a patent was preempted by the Patent Act, removing the dispute to federal court was not an option.

Now, however, a defendant accused of breaching a license agreement may counterclaim its way into federal court by alleging, for example, that the patent that is the subject of the agreement is invalid, or that it is not infringed based on patent exhaustion and patent misuse. See, e.g., Univ. of Ky. Research Found., 2013 U.S. Dist. LEXIS 158018. While such counterclaims seek declaratory relief, they may nonetheless serve as the basis for federal removal jurisdiction because they require an analysis of the validity or scope of the patent and therefore arise under federal patent law.

Even though defendants now have the keys to the federal court door, a defendant must be diligent in acting to remove before the window for doing so closes.

The Interplay Between Section 1454 and Section 1446

Section 1446 requires the notice of removal of a civil action to be filed "within 30 days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based," or "if the case stated by the initial pleading is not removable, . . . within 30 days after receipt by the defendant, through service or otherwise, of a copy of an amended pleading, motion, order or some other paper from which it may first be ascertained that the case is one which is or has become removable." 28 U.S.C. § 1446(b)(1), (3).

Section 1454 provides that "the time limitations contained in section 1446(b) may be extended at any time for cause shown." However, post-AIA district court decisions make clear that this good cause exception is not a way around section 1446(b)'s 30-day clock. See, e.g., XIP LLC v. CommTech Sales LLC, No. 4:15-CV-664-A, 2015 U.S. Dist. LEXIS 149174 (N.D. Tex. Nov. 3, 2015); Accutrax, LLC v. Kildevaeld, 140 F. Supp. 3d 168 (D. Mass. 2015); Univ. of Ky. Research Found., 2013 U.S. Dist. LEXIS 158018. These courts have also made clear that the filing of a counterclaim itself does not extend the 30-day deadline.

In the context of patent-related counterclaims, these rules trigger two important questions. First, can the patent-related counterclaim be asserted against the claims in the initial pleading? If the answer is yes, then the action is most likely removable and action must be taken within 30 days, regardless of whether the claims in the initial pleading create a basis for removal.

The district court's decision in University of Kentucky Research Foundation is instructive on this issue. There, the district court ruled that the 30-day clock began to run when the defendant received the complaint, which the plaintiff brought to enforce its rights under a patent license agreement, because the defendant "had solid and unambiguous information [at that point] that it could assert a claim for declaratory judgment on the federal issue of patent noninfringement." 2013 U.S. Dist. LEXIS 158018, at *25. In reaching this conclusion, the court stated, "it is not the state of the record or the actions of the court that are the relevant focus of the Section 1446(b) analysis, but the actual knowledge of [the defendant]." Id.

Second, if the patent-related counterclaims cannot be asserted against the claims in the initial pleading, when does the 30-day clock otherwise begin to run? Recall that the language of section 1446(b)(3) indicates that the 30-day clock begins to run when a defendant receives "some other paper from which it may first be ascertained that the case is . . . removable." Some courts have ruled that "some other paper" includes documents exchanged during discovery, which can trigger the running of the 30-day clock. See Mirowski Family Ventures, LLC, 2014 U.S. Dist. LEXIS 77875 (noting that because the parties, during the litigation, exchanged documents, which reflected the defendant's knowledge of its intellectual property counterclaims and equated to knowledge of the basis for removal under section 1454, the court need not choose the initial pleading date or filing of counterclaim date); Daughtry, 994 F. Supp. 2d 728 (same). The court in Accutrax applied the "some other paper" language to conclude that the issue date of a patent that was the subject of a preissuance contractual dispute was operative.

While the "some other paper" language would appear to apply to a proposed amended pleading, such an interpretation is inconsistent with the "majority rule" that removal ripens only after the state judge grants a motion to amend. See Lion Raisins, Inc. v. Fanucchi, 788 F. Supp. 2d 1167 (E.D. Cal. 2011) (collecting cases applying the majority rule).

This leaves a defendant accused in a proposed amended pleading of breaching a license agreement in a precarious situation if one of the strategies for defending against the proposed claim is through a counterclaim for noninfringement or patent invalidity. Technically, the defendant is on notice when it receives the proposed amended pleading of information that it could assert a claim for declaratory judgment. Moreover, the language of section 1446 also includes a defendant's receipt of a "motion" as forming the basis for knowledge "that the case is one which is or has become removable," which the "majority rule" appears to disregard. But then again, a counterclaim cannot be asserted against a proposed pleading.

It would therefore seem that the 30-day clock does not begin to run until the proposed amended pleading has been accepted for filing. However, if that occurs more than 30 days after the defendant's receipt of the instrument, a notice of removal will only be timely if the district court follows the "majority rule" and also ignores the rule pronounced in recent cases applying section 1454 that "it is not the state of the record or the actions of the court that are the relevant focus of the Section 1446(b) analysis, but the actual knowledge of [the defendant of a viable counterclaim]." Univ. of Ky. Research Found., 2013 U.S. Dist. LEXIS 158018, at *25.

By way of example, a proposed amended pleading could include a claim that the defendant breached a license agreement by offering a product for sale that infringes the patent that is the subject of the license agreement. This would seem to constitute a threat of infringement and satisfy the Supreme Court's MedImmune standard for declaratory judgment jurisdiction, as success on the breach of contract claim would require proof of infringement. Assuming this is true, a defendant in this situation would have knowledge of a viable counterclaim upon receipt of the proposed amended pleading, and could commence a declaratory judgment action even if the proposed amended pleading is not accepted for filing. See 10B Charles A. Wright et al., Federal Practice and Procedure § 2761 (3d ed. 1998) ("If the patentee has threatened an infringement suit or has notified the trade that a competitor is infringing, that is enough, and the action can be maintained even though the patentee withdraws his charge of infringement after it is commenced."). Thus, the fact that the proposed amended pleading has not been accepted for filing in state court might not matter.

Conclusion

Removal jurisdiction continues to evolve post-AIA. In certain circumstances, there are apparent inconsistencies between 28 U.S.C. section 1454 and 28 U.S.C. section 1446. It is important to be mindful of timing under section 1446 when contemplating removal jurisdiction based on a counterclaim.

When a proposed amended pleading forms the basis of a defendant's knowledge of a viable counterclaim, the best practice to avoid the risk of filing a notice of removal too late would seem to be accepting the proposed amended pleading under a reservation of rights, and then filing a declaratory judgment answer with counterclaims and notice of removal all within 30 days of receipt.


Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).