May 13, 2013 Articles

Gunn v. Minton: The End of Legal-Malpractice Actions in Federal Court?

The Supreme Court's recent clarification of the contours of "arising under" jurisdiction may signal a shift in federalism.

By Justin J. Fields and Allison Lane Cooper

In February 2013, the U.S. Supreme Court held in Gunn v. Minton, 133 S. Ct. 1059 (2013), that there was no federal subject-matter jurisdiction over a legal-malpractice dispute arising out of the handling of an underlying patent case. Prior to the decision, applying federal-court precedent, one might have concluded that the “federal” nature of the underlying patent dispute in Gunn meant that the case belonged in federal court.

However, the Supreme Court’s explanation—and clarification—of the contours of “arising under” jurisdiction may signal a shift in federalism, at least in relation to legal-malpractice cases. The Supreme Court acknowledged that state courts can, and must, interpret potentially complex and difficult issues of federal law in the legal-malpractice context—and that it may not be the federal courts’ purview to accept subject-matter jurisdiction over such cases.

The ramifications of Gunn for lawsuits against attorneys and law firms extend beyond those arising out of patent disputes. The decision and its progeny suggest that state courts must adjudicate legal-malpractice disputes underpinned by virtually any area of federal law. Cases initiated in or removed to federal court on grounds of federal question before Gunn may no longer be welcome in federal court.

This is a significant development for legal-malpractice cases. There has long been a perception that federal courts are more qualified to handle the complex subject matter of federal questions, resulting in better and more consistent rulings when issues of causation, damages, and standard of care are considered in the legal-malpractice context. The Supreme Court’s decision in Gunn appears to have removed that option for legal-malpractice claims where there is no other basis for the exercise of subject-matter jurisdiction.

Background


Vernon Minton developed a computer program and telecommunications network for securities trading. He obtained a patent for his invention in 2000, and then filed a patent-infringement lawsuit against NASDAQ and others. Jerry Gunn represented Minton.

NASDAQ moved for summary judgment, arguing that Minton’s patent was invalid under the “on sale” bar, 35 U.S.C. § 102(b), which provides that an inventor is not entitled to a patent if the invention was on sale in the United States more than one year before the inventor applied for the patent. Minton had leased his system to a securities brokerage in 1995, more than one year before he applied for a patent. Accordingly, the district court granted summary judgment in favor of NASDAQ.

Minton moved for reconsideration of the district court’s ruling, arguing for the first time that his lease of the system fell within the “experimental use” exception to the on-sale bar. The district court denied the motion. The Federal Circuit affirmed, holding that Minton’s failure to raise the experimental-use exception earlier waived the argument.

Minton then sued Gunn for malpractice in Texas state court, alleging that Gunn’s failure to timely raise the experimental-use argument resulted in his loss of the patent-infringement lawsuit and the invalidation of his patent. The Texas state court granted Gunn’s motion for summary judgment, because Gunn demonstrated that Minton’s lease of the system was not, in fact, for an experimental use; the experimental-use argument would have failed even if timely raised in the patent lawsuit.

In his appeal of the legal-malpractice action, Minton argued that his malpractice claim arose under federal patent law for purposes of 28 U.S.C. § 1338(a), which provides for exclusive federal jurisdiction over “any claim for relief arising under any Act of Congress relating to patents[.]” Minton claimed that the Texas state court lacked subject-matter jurisdiction over his case. Essentially, Minton sought a clean slate to begin his lawsuit anew in federal court.

The Texas Court of Appeals affirmed the trial court’s summary-judgment ruling, applying the Supreme Court’s test in Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 314 (2005), for determining when an ostensibly state-law claim may give rise to federal subject-matter jurisdiction. The court of appeals held that the federal interests implicated in Minton’s state-law malpractice claim were not sufficiently substantial to trigger 28 U.S.C. § 1338, and that finding exclusive federal jurisdiction over state legal-malpractice actions would, contrary to Grable, disturb the balance of federalism.

The Texas Supreme Court, relying “heavily” on two Federal Circuit decisions that held federal jurisdiction existed over legal-malpractice claims arising from patent disputes, disagreed and reversed. See Air Measurement Technologies, Inc. v. Akin Gum Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. 2008); Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281 (Fed. Cir. 2007). The U.S. Supreme Court accepted review.

The Supreme Court’s Ruling

 
The Court noted and then ignored the Federal Circuit opinions upon which the Texas Supreme Court had relied. On strikingly similar facts as those cases, it reached the opposite conclusion as the Federal Circuit, while not expressly overruling the Federal Circuit’s earlier decisions.

A case may “arise under” federal law (1) when a federal law creates a cause of action or (2) where a claim “finds its origins in state rather than federal law” but fits within a “special,” “small,” and “slim” category and satisfies four requirements outlined in GrableGunn, 133 S. Ct. at 1064–65. Because legal-malpractice claims are grounded in state law, federal question jurisdiction will exist only if the claim fits within the latter category.

In trying to outline the abstract contours of “arising under” jurisdiction, the Supreme Court conceded that “[u]nfortunately, the canvas looks like one that Jackson Pollock got to first.” 133 S. Ct. at 1065. The purpose of Grable was “to bring some order to this unruly doctrine.” Id. While not rebuking the Federal Circuit expressly, the Supreme Court’s gloss over Air Measurement and Immunocept confirms that courts were not always applying Grable as it had intended. Gunn provided the Supreme Court, in a unanimous opinion written by its chief justice, an opportunity to try to establish “order” once again.

The Supreme Court confirmed the test outlined in Grable for determining when federal jurisdiction over a state-law claim implicating a federal issue will lie: “if a 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.” 133 S. Ct. at 1065. Applying Grable’sfour-part test, the Supreme Court easily concluded that resolution of a federal patent question was “necessary” to Minton’s case because Minton had to prove that he would have prevailed in his patent-infringement lawsuit if Gunn had timely made the experimental-use argument. In addition, the federal issue was “actually disputed,” because Minton claimed the experimental-use exception would apply to save his case from the on-sale bar, while Gunn claimed just the opposite.

However, the Supreme Court held the federal issue was “not substantial in the relevant sense.” 113 S. Ct. at 1066.

As our past cases show, [. . .] it is not enough that the federal issue be significant to the particular parties in the immediate suit; that will always be true when the state claim “necessarily raise[s]” a disputed federal issue, as Grable requires. The substantiality inquiry under Grable looks instead to the importance of the issue to the federal system as a whole.

Id. (emphasis in original).

The Supreme Court then cited two decisions exemplifying, in its view, a federal issue significant enough to the “federal system as a whole” to warrant federal jurisdiction over an ostensibly state-law claim. First was Grable, where the issue was federally imposed notice requirements before the IRS could seize property, which implicated the “strong interest” for the government to recover delinquent taxes. Second was Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921), where the case turned on “the constitutional validity of an Act of Congress which is directly drawn in question.”

The Supreme Court starkly distinguished legal-malpractice cases from its two classic examples of “arising under” jurisdiction:

Here, the federal issue carries no such significance. Because of the backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense: If Minton’s lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been different? No 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. Minton’s patent will remain invalid. [133 S. Ct. at 1066–67.]

The causation element of legal-malpractice actions requires a “case within a case” analysis of whether, had the attorney conducted himself or herself differently, the outcome of the earlier dispute would have been different. The court must examine the case underlying the malpractice action, which requires the court to reach a “hypothetical” decision about what would have happened but for the attorney’s alleged malpractice. The Supreme Court rejected the notion that the state court’s “hypothetical” ruling on patent law may have any “real-world effect.”

Finally, regarding federalism, the Supreme Court acknowledged that the states have a “special responsibility for maintaining standards among members of the licensed professions.” 133 S.Ct. at 1068. The Supreme Court had “no reason to suppose that Congress—in establishing exclusive federal jurisdiction over patent cases—meant to bar from state courts state legal malpractice claims simply because they require resolution of a hypothetical patent issue.” Id.

Decisions Following Gunn v. Minton


In the short period following Gunn, district courts have dismissed or remanded a number of legal-malpractice cases for lack of subject-matter jurisdiction.

In Weingram & Associates, PC v. Grayzel, No. 10-2362, 2013 WL 705041, *3 (D.N.J. Feb. 25, 2013), a law firm sued its former client for unpaid fees related to drafting and prosecuting patents. The former client asserted legal-malpractice and breach-of-fiduciary-duty counterclaims. The law firm removed, claiming there was federal subject-matter jurisdiction because the former client’s counterclaims implicated federal patent law. Citing Gunn, the district court remanded, noting “in the instant matter, the state court would have jurisdiction to hear [the former client’s] malpractice claims and removal was not proper.”

In Gerawan Farming, Inc. v. Townsend Townsend & Crew LLP, No. 1:10-cv-02011, 2013 WL 898634, *1 (E.D. Cal. Mar. 8, 2013), the law-firm defendants removed the action (before Gunn) over the objection of the plaintiff-former client. The court denied the plaintiff’s motion to remand, finding “proving both causation and damages will require resolution of a substantial question of federal law” relating to trademark law. After Gunn, the court reversed itself and sua sponte remanded the action to state court, finding that, “as articulated in Gunn, the mere need to analyze federal law is insufficient for a finding that a substantial federal issue exists in the litigation.” The court emphasized Gunn’s holding that “state legal malpractice claims will rarely, if ever, arise under federal law[.] Although such cases may necessarily raise disputed questions of patent law, those cases are by their nature unlikely to have the sort of significance for the federal system necessary to establish jurisdiction.”

The Gunn decision is relevant not just to legal-malpractice claims, but all those arising out of cases involving exclusive federal jurisdiction. Following Gunn, the federal courts seem far less inclined to invoke “arising under” jurisdiction over state-law claims outside the legal-malpractice context too. See Shore Bank v. Harvard, No. 2:12-cv-336, 2013 WL 872444, at *10–*11 (E.D. Va. Mar. 8, 2013) (motion to dismiss for lack of subject-matter jurisdiction granted even though state-law breach-of-contract claim involved a “substantial question of federal law” related to the Troubled Asset Relief Program); Haith v. Bronfman, Nos. 12-C-6781 and 12-C-6798, 2013 U.S. Dist. LEXIS 28042 (N.D. Ill. Mar. 1, 2013) (granting motion to remand state-law shareholder derivative actions, even though claims turned in part on application of the Health Insurance Portability and Accountability Act of 1996 and federal securities laws; noting “like Gunn: right or wrong, the state courts’ resolution of the federal issues will not have a substantial effect beyond the parties themselves.”).

In comparison, in Manning v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 12-4466, 2013 WL 1164838 (D.N.J. Mar. 18, 2013), the district court refused to remand (non-malpractice) state-law claims that depended on resolution of whether the Exchange Act and other federal regulations were violated. The district court distinguished the legal-malpractice dispute in Gunn because the instant dispute was not a “backward looking malpractice ‘case within a case[,]’” nor did the dispute involve regulation of licensed professionals.

What Will Happen to Legal-Malpractice Actions in Federal Court?

 
Will we see a flood of motions to remand or dismiss legal-malpractice actions currently pending in federal court? Will federal courts sua sponte dismiss or remand legal-malpractice cases? The Weingram and Gerawan Farming decisions suggest it likely, at least outside of the bankruptcy courts.

Decisions such as those in Manning v. Merrill Lynch may be a harbinger of future “arising under” cases that distinguish legal-malpractice cases from other disputes implicating federal law. The “hypothetical” federal-law analysis in the former, and the federalism considerations favoring states’ regulation of attorneys, may mean that legal-malpractice claims are treated differently, for jurisdictional purposes, than other state-law claims implicating federal law.

Of course, legal-malpractice actions will still be brought in federal court on the basis of diversity jurisdiction. Bankruptcy court is also a hotbed for malpractice disputes, where trustees, on behalf of bankrupt entities or creditors, regularly invoke federal jurisdiction over such actions. Thus, legal-malpractice cases will persist in federal court, to a certain degree.

The Supreme Court’s unanimous pronouncement on federalism in relation to legal-malpractice disputes seems to signal that state courts should and must be able to regulate their licensed professionals. “Federalizing” cases that significantly, but only hypothetically, involve federal law would undermine the state’s obligations in this regard, and perhaps overreach the federal courts’ limited jurisdiction. Gunn confirms the Supreme Court’s belief that legal-malpractice cases, absent exceptional circumstances, do not belong in federal court on an “arising under” basis.

On the other hand, the Supreme Court tacitly acknowledged in Gunn that its efforts to clarify “arising under” jurisdiction in Grable failed. It is too early to tell how Gunn will be applied by the lower courts, and Grable’s test remains largely intact. For example, will the lower courts interpret all legal-malpractice cases as not sufficiently implicating a federal issue because of the “hypothetical” nature of the “case within a case” method? Will federal courts carve out certain areas of federal law or types of litigants in malpractice disputes that demand recognition of “arising under” jurisdiction? No matter how important the issue of federal law, the nature of a legal malpractice dispute only addresses the issue in a “hypothetical” way—at least it would seem so, because the Supreme Court did not carve out any caveats in Gunn. It is not clear (yet) how a “hypothetical” assessment of federal law could ever be “substantial” enough for federal subject-matter jurisdiction to apply. We will have to wait and see.

Keywords: professional liability litigation, Gunn v. Minton, subject-matter jurisdiction, federal question, legal malpractice

 

Justin J. Fields is an associate, and Allison Lane Cooper is a partner, of Duane Morris LLP in San Francisco, California.