CPLRG™ 0033 - Laboratory Corp. of America Holdings v. Metabolite Laboratories - Mar. 11, 2010

Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., 599 F.3d 1277 (Fed. Cir. 2010) (GAJARSA & Moore; DYK, dissenting)LabCorpMetabolite03112010

MAJOR ISSUES: declaratory judgment; federal court jurisdiction; cases arising under patent law; jurisdiction determined at outset of suit; prior suit resolving infringement issue

COMMENT.  Suits alleging that a party has breached a contractual agreement that pertains to patent rights may, or may not, arise under federal patent law for the purpose of determining the jurisdiction of a federal district court and of the Federal Circuit on appeal.  Jurisdiction depends on whether a patent law issue is substantial, disputed and essential to the contract claim.  This case is one of many cases drawing the line.

An already difficult jurisdictional inquiry became more so in this case.  The case was one for a declaratory judgment suit by an accused infringer and former sublicensee regarding the accused infringer’s modified conduct after a patent owner and its licensee had succeeded in a first suit for infringement.  In a declaratory judgment suit, federal court patent jurisdiction exits only if the hypothetical claim the declaratory defendant would have asserted was created by patent law or required resolution of a patent law issue.  Here, the inquiry was whether the declaratory defendant’s hypothetical affirmative suit would have required a resolution of the patent law issue of infringement or only of non-patent contract issues.  The majority held that the question of infringement had been settled in the first suit and thus was not a substantial part of the hypothetical claim.  Judge Dyk dissented, arguing that infringement had not been determined as of the date the second suit was filed.

1. VITAMIN DEFICIENCY DETECTION.  The patent concerned a method of detecting vitamin deficiencies by detecting elevated homocysteine levels.  U.S. Pat. No. 4,940,658. USPatNo4940658 

2. LICENSE; TECHNOLOGY DEVELOPMENT; SUBLICENSE.  A party (Metabolite) obtained from the owner of the patent a license with a right to sublicense.  Metabolite developed know-how technology for assays.  In 1991, Metabolite and LabCorp entered into an agreement, which granted LabCorp a license to the know-how and a sublicense to the patent.  The agreement covered four assays, including an  “homocysteine-only” assay.  The license provided that LabCorp should pay a 21.5% royalty to Metabolite for sales of “Licensed Assays,” including a homocysteine assays that used “methods and materials falling within the claims” of the patent.  The license provided that LabCorp could sever and terminate the agreement as to individual Licensed Assays.

3. ALTERNATIVE ASSAY; ABBOTT TEST KIT; ROYALTIES STOPPED.  In 1998, LabCorp began using an alternative homocysteine-only assay for serum using an Abbott test kit.  It stopped paying both patent and know-how royalties for serum homocysteine-only assays but continued paying royalties on other three assays.

4. FIRST SUIT BY PATENT OWNER AND LICENSOR; BREACH OF CONTRACT; PATENT INFRINGEMENT; INJUNCTION.  Metabolite and the patent owner sued LabCorp for breach of contract and patent infringement in the Colorado district court.  At trial, a jury answered affirmatively a question whether LabCorp had “breached its license agreement by terminating it with respect to its performance of the Abbott [T]est.”  The jury awarded $1.02 million patent infringement damages to the patent owner and $3.65 contract breach damages to Metabolite. 
    a. The district court granted a permanent injunction barring LabCorp from performing homocysteine-only assays.  It stayed the injunction pending an appeal subject to LabCorp paying, for homocysteine-only assays LabCorp performed after the judgment, a 6% royalty to the patent owner and a 21.5% royalty to Metabolite.
    b.  In 2004, the Federal Circuit affirmed the jury’s finding that LabCorp’s refusal to pay royalties was a material breach constituting termination.  Metabolite Labs., Inc. v. Lab. Corp. of Am. Holdings, 370 F.3d 1354 (Fed. Cir. 2004), cert. granted, 546 U.S. 999 (2005), cert. dismissed as improvidently granted, 548 U.S. 124 (2006).  In the Supreme Court, Justice Breyer with two other justices dissented from the dismissal, suggesing that the patent claims were invalid under Section 101 as preemptive of a natural phenomenon.

5. POST-INJUNCTION:  OUTSOURCING ASSAYS TO INDEPENDENTLY-LICENSED COMPANY.   When the injunction stay lifted, LabCorp stopped performing assays.  However, it “outsourced” its assays by entering into an agreement with a company, Specialty Laboratories, that was independently licensed by the patent owner to perform homocysteine-only assays.
      a. POST-TRIAL MOTIONS ON INJUNCTION’S SCOPE.  Metabolite filed a post-judgment motion in the district court, asserting that LabCorp’s outsourcing violated the injunction.  LabCorp also filed a post-trial motion for clarification of the injunction. LabCorp also filed a new suit seeking a declaratory judgment that it did not violate License Agreement.
      b. DISTRICT COURT: NO DETERMINATION AS TO POST-JUDGMENT BREACH; ISSUE APPROPRIATE FOR NEW SUIT.  In ruling on the post-trial motions, the district court noted that (1) there had been no determination whether LabCorp committed any breach after the judgment, (2) whether there was a breach could not be resolved “as a matter of procedure,” and (3) whether LabCorp had committed a contract breach after the date of the judgment was “appropriately resolved” in LabCorp’s new suit.
      c. PATENT EXPIRES.  The patent expired on July 9, 2007.

6. DECLARATORY JUDGMENT SUIT.  In the new suit (Metabolite III), LabCorp. sought a declaratory judgment on (1) whether Metabolite could recover damages for activity after the judgment with respect to a part of the Licensee Agreement that had been terminated, and (2) whether LabCorp’s outsourcing violated any contract between LabCorp and Metabolite.  In response, Metabolite filed counterclaims, including breach of contract by failing to pay know-how royalties on outsourced homocysteine-only assays.

7. SUMMARY JUDGMENT; NO ROYALTIES OWED; JURY VERDICT THAT AGREEMENT WAS TERMINATED.  On cross-motions for summary judgment, the district court ruled that LabCorp owed no further royalties because the “plain reading” of the jury verdict was that the License Agreement was breached and terminated, resulting in a loss of all rights (patent and know-how) as to homocysteine-only assays.  Metabolite appealed.

8. NO APPELLATE JURISDICTION IN FEDERAL CIRCUIT.  The Federal Circuit lacks appellate jurisdiction over the appeal because the suit does not arise under patent law.  The appeal is transferred to the pertinent regional circuit (the Tenth).
     a. STANDARDS FOR SECTION 1338 JURISDICTION.  A two-part test governs determination of patent law jurisdiction under Section 1338: federal patent law must either create the cause of action or be an essential element of a cause of action.  Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988).
          i. FEDERAL ISSUES IN STATE LAW CLAIMS; SUBSTANTIAL AND DISPUTED.  Supreme Court authority on Section 1331 jurisdiction requires that a federal issue in a state law claim be “actually disputed and substantial.”  Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006); Grable & Sons Metal Products, Inc., v. Darue Engineering & Manufacturing., 545 U.S. 308 (2005).  The Supreme Court equates the “arising under” standard of Sections 1331 and 1338.  Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826 (2002).
          ii. DECLARATORY JUDGMENTS; DEFENDANT’S HYPOTHETICAL CLAIM.  In declaratory judgment suit, such as this one, the pertinent cause of action is the hypothetical one the declaratory defendant would have brought.  Speedco Inc. v. Estes, 853 F.2d 909 (Fed. Cir. 1988).
     b. Here, the hypothetical claim of the declaratory defendant, Metabolite, is one of breach of contract based on LabCorp’s outsourcing without paying know-how royalties.  Because state law, not federal patent law, creates that hypothetical claim, jurisdiction depends on whether patent law is an essential element.  On that, the appellant, Metabolite, bears the burden of demonstrating that “its hypothetical claim depends on resolution of a substantial question of federal patent law.”  It fails to do so.
     c. Metabolite argued that its entitlement to royalties depends on a showing that the LabCorp’s assays infringe the patent’s claims because the License Agreement defines “Licensed Assays” in terms of the patent’s claims.  However, the federal patent issue of infringement is not substantial and disputed, as required by Grable, because it has already been determined in the first suit (Metabolite I).  This case is unlike ones in which a “contract claim requires resolution of a related question of patent law.  U.S. Valves, Inc. v. Dray, 212 F.3d 1368 (Fed. Cir. 2000).

9. DISSENT; JURISDICTION AT TIME ACTION FILED; NO DISPUTE ON INFRINGEMENT.  The majority responded to the argument by Judge Dyk.
      a. Judge Dyk argued that on the date the declaratory action was filed, infringement by the post-judgment outsourcing  had not yet been determined.  The first suit (Metabolite I) did not and could not determine whether the subsequent post-judgment outsourcing infringed.  The majority dismissed Judge Dyk’s arguments.
     c. True, jurisdiction is determined on the date an action is filed, and it cannot be ousted by subsequent events.  Keene Corp. v. United States, 508 U.S. 200 (1993); Mollan v. Torrance, 22 U.S. 537 (1824).  However, here, at the time the action was filed, neither party contended that the outsourced assays “were different from the infringing in-house Abbott Test.”  Therefore, Metabolite’s hypothetical contract claim does not require resolution of a substantial, disputed patent law question.

     d. RES JUDICATA EFFECT OF FEDERAL COURT JUDGMENT.  Alternatively, the dissent argues that Section 1338 jurisdiction is present because the action must determine the res judicata effect of the prior judgment (Metabolite I), that is, whether that judgment established that the License Agreement had been terminated.  The dissent argues that the res judicata effect of a federal court judgment is a matter of federal law and is a matter of federal patent law under a “look through” principle recognized by Supreme Court decisions.  Under those decisions, the court looks at the jurisdictional basis of the court rendering the judgment that is to be given res judicata effect.  Semtek Int’l, Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001), and Vaden v. Discover Bank, 129 S. Ct. 1262 (2008).  Here, the judgment to be given res judicata effect was by a court exercising patent law jurisdiction.  However, the dissent’s argument lacks merit.  “All federal courts are courts of limited jurisdiction, and we do not take jurisdiction over cases simply because they relate to the res judicata effect of our prior judgment.”

CROSS REFERENCES.  For a discussion of federal question jurisdiction in declaratory judgment suits, see Chisum Patent Law Digest 8113, 8121; Chisum on Patents 21.02[1][c][iii], 21.02[1][d].

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