In Gunn v. Minton, 133 S. Ct. 1059 (2013), the U.S. Supreme Court unanimously held that 28 U.S.C. § 1338(a) does not deprive state courts of subject-matter jurisdiction regarding patent-related legal-malpractice claims. Although Federal Circuit precedent had held otherwise, the Supreme Court concluded that such claims are not “substantial” under the test enunciated by Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308 (2005).
In 1990, Vernon Minton began developing software that would allow investors to open brokerage accounts and execute trades. In March 1995, he leased the system, known as TEXCEN, to a securities brokerage, R.M. Stark & Co. Over one year later, Minton applied for a patent for a trading system substantially similar to TEXCEN. The U.S. Patent and Trademark Office issued Minton a patent in January 2000.
Subsequently, Minton filed suit against the National Association of Securities Dealers, Inc. (NASD) and the NASDAQ Stock Market, Inc., for patent infringement. NASD and NASDAQ moved for summary judgment, alleging invalidity of Minton’s patent under the “on-sale bar” provision of the U.S. Patent Act, 35 U.S.C. § 102(b). After the court granted summary judgment on behalf of NASD and NASDAQ, Minton filed a motion for reconsideration of the district court decision, asserting that the “experimental use” exception applied to the lease agreement with Stark. The federal district court denied Minton’s motion for reconsideration because Minton had not timely raised the experimental-use exception during trial. The U.S. Court of Appeals for the Federal Circuit affirmed.
Minton then brought a legal-malpractice claim against his former attorneys who prosecuted the patent-infringement case in federal district court. The trial court granted summary judgment on behalf of Minton’s former attorneys because (1) Minton had not provided sufficient evidence that the Stark lease had been for an experimental purpose and (2) the patent-infringement claims would have failed even if that argument had been timely raised. Minton appealed and argued, for the first time, that the trial court’s order should be vacated because it lacked subject-matter jurisdiction to decide the case.
Although Minton argued that his legal-malpractice claim arose under exclusive federal jurisdiction, a divided panel of the Court of Appeals of Texas affirmed the trial court’s ruling. The Supreme Court of Texas reversed, relying on then-existing Federal Circuit authorities.
Federal Circuit Welcomed Patent-Related Legal-Malpractice Claims
In two 2007 decisions issued on the same day, the Federal Circuit found federal jurisdiction was proper for patent-related legal-malpractice claims. In Air Measurement Technologies, Inc., v. North-South Corp., 504 F.3d 1262 (Fed. Cir. 2007), the plaintiffs alleged that their attorneys’ errors led to the defenses of patent invalidity and unenforceability, which would not have existed but for counsel’s errors. The court concluded that the issue was substantial and contested because “establishing patent infringement is a necessary element of a malpractice claim stemming from alleged mishandling of a patent prosecution and earlier patent litigation.” Similarly, in Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281 (Fed. Cir. 2007), the plaintiffs alleged patent-related malpractice claims against their lawyers related to the scope of patent protection related to blood-filtration technology. The Federal Circuit explained that claim-scope determination is a complex question of law and that the litigants would benefit from the expertise of judges familiar with the complexity inherent in such claims. As a result, the court concluded that claim scope was a substantial question of patent law and that federal jurisdiction was proper.
Both Air Measurement and Immunocept required the resolution of substantive patent-law issues. Subsequent cases followed their rationale. See Warrior Sports, Inc. v. Dickinson Wright, P.L.L.C., 631 F.3d 1367 (Fed Cir. 2011); Davis v. Brouse McDowell, L.P.A., 596 F.3d 1355 (Fed Cir. 2010) (federal jurisdiction proper when complaint alleged various deficiencies with patent application, precluding plaintiff from securing patents on her inventions); Touchcom, Inc. v. Bereskin & Parr, 574 F.3d 1403 (Fed. Cir. 2009). However, cracks in this foundation soon developed. In Byrne v. Wood, Herron & Evans, LLP, 450 Fed. Appx. 956 (Fed. Cir. 2011), Judge O’Malley questioned the wisdom of these cases and suggested the re-evaluation of previous decisions to determine “whether jurisdiction exists to entertain a state law malpractice claim involving the validity of a hypothetical patent. . . .” Judge O’Malley also indicated that it was difficult to see the federal interest in hearing such cases as they would involve only the application and not the interpretation of patent law. Echoing Justice Souter’s concerns in Grable, Judge O’Malley expressed concern regarding opening the federal courts to an entire class of cases traditionally the province of state courts.
In March 2012, Judge O’Malley also dissented regarding the court’s decision to deny the petition for rehearing en banc in Byrne, stating bluntly at the outset that “[i]t is time we stop exercising jurisdiction over state law malpractice claims.” Byrne v. Wood, Herron & Evans, LLP, 676 F.3d 1024, 1027 (per curiam) (Fed. Cir. 2012). Judge O’Malley noted that the causation analysis in the malpractice milieu is an “academic inquiry into what likely would have happened absent the attorney negligence” and, therefore, would have “zero potential impact on the validity or enforceability of an issued patent.” Id. at 1032. Judge O’Malley again expressed concern that the federal-state balance would be disrupted as the case law has “appropriated authority over an entire class of state law claims that traditionally belong in state court.” Id. at 1038.
Chief Justice Roberts’s Reasoning in Gunn
It is against this backdrop that the Supreme Court decided Gunn. As enunciated in Grable, federal jurisdiction over a state-law claim will exist when the federal issue is “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Chief Justice Roberts’s opinion quickly and briefly recognizes that the first two elements of the Grable test are met; the resolution of the patent issue is necessary and actually disputed.
Although the Court concludes that neither the third nor fourth elements of the Grable test are satisfied, the heart of the opinion is found in its analysis of the substantiality requirement. Chief Justice Roberts explains that for a federal question to be “substantial,” it is not enough “that the federal issue be significant to the parties in the immediate suit. . . .” Rather, as in Grable, the claim must not only raise a disputed federal issue, but also must carry significance for “the federal system as a whole.” Relying on Grable and Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921), the Court concludes that due to the “backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense . . . [n]o matter how the state courts resolve that hypothetical ‘case within a case,’ it will not change the real-world result of the prior federal patent litigation.”
Whereas Air Measurement and Immunocept made passing reference to the importance of uniformity in patent law, Chief Justice Roberts explains that allowing state courts to resolve these types of cases will not undermine the development of a uniform body of patent law because state courts can be expected to hew closely to federal precedent, comparable to state courts adjudicating civil Racketeer Influenced and Corrupt Organizations Act claims. The Court also dismisses any suggestion that the state-courts decision would have any real-world effect through issue preclusion, based upon the Patent and Trademark Office’s Manual of Patent Examining Procedure. Moreover, even though the federal courts may have a greater familiarity with patent law, the mere possibility a state court would incorrectly resolve such a claim is not sufficient to trigger federal jurisdiction. Chief Justice Roberts concludes here that, given the nature of the malpractice claim, the mere potential for error is not strong enough to warrant federal jurisdiction.
Gunn makes clear that patent-related legal-malpractice claims will be litigated in state courts. The parties will not benefit from federal judges’ familiarity with patent law. Undoubtedly, state-court judges interpret federal law all the time. However, given the highly technical nature of patent law, this may increase the likelihood of an incorrect application and/or interpretation of the law. Although this may have little, if any, precedential value for future federal cases, that is likely of little comfort to the parties involved in such a case. A likely greater concern, however, is the use of such a state-court decision in a separate, factually related, patent case. As the majority indicated in the denial of the petition for rehearing en banc in Byrne, “[d]enying federal jurisdiction over these cases would allow different states to reach different conclusions as to the requirements for federal patent law in the context of state malpractice proceedings.” Byrne, 676 F.3d at 1027.
Gunn explicitly puts an end to the Federal Circuit’s apparent overreaching in finding federal jurisdiction under section 1338(a) for such cases. As the basis of the decision, Chief Justice Roberts relies on the backward-looking hypothetical nature of the case-within-a-case analysis of malpractice claims, the lack of precedential value, and the traditional authority of state courts to hear such claims, precisely the reasoning set forth by Judge O’Malley.
The Court, however, does not slam the door completely on the possibility that a patent-related malpractice claim might arise under federal patent law. Rather, Chief Justice Roberts explains that “state legal malpractice claims based on underlying patent matters will rarely, if ever, arise under federal patent law for purposes of § 1338(a).” Although such cases are not welcome in federal court, the possibility has not yet been completely foreclosed.
Keywords: professional liability litigation, Gunn v. Minton, patent law, legal malpractice, federal jurisdiction
Ray Pinkham is an associate of Vorys, Sater, Seymour & Pease LLP in Washington, D.C.