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Patent exhaustion does not create a cuse of action; dismissal affirmed

September 24, 2008
Post by Blog Staff

In a decision last week, the Federal Circuit affirmed a district court's decision dismissing a case for lack of subject matter jurisdiction. The plaintiff brought suit when it believed the patent holder had fraudulently concealed a second licensee of the same patents. The plaintiff was a licensee of the defendant patent holder and therefore could not seek a declaration of noninfringement, so instead brought suit alleging the patent holder had violated the "Patent Exhaustion/First Sale doctrine" by collecting royalties on the same product twice. The district court held patent exhaustion was not an independent cause of action but instead a defense to an infringement claim, and dismissed the case for lack of subject matter jurisdiction so any state law claims could be pursued in state court.The Federal Circuit affirmed, observing the case met neither of the criteria for § 1338(a) jurisdiction under the Supreme Court's decision in Christianson v. Colt Industries Operating Corp. The complaint neither alleged claims created by federal patent law, nor was the plaintiff's right to relief dependent upon resolution of a substantial question of federal patent law. Accordingly, the court affirmed the district court's dismissal.More detail of ExcelStor Tech., Inc. v. Papst Licensing GmbH & Co. after the jump.In January 2004, ExcelStor, a manufacturer of computer products, entered into a license agreement with Papst to manufacture patented hard disk drives. The license required royalty payments from ExcelStor and quarterly reports from Papst as to the existence of other royalty-bearing licenses for the patented hard disk drives. The quarterly Papst reports consistently indicated that no other royalties were being paid. In 2006 or 2007, ExcelStor discovered a license agreement between Papst and Hitachi. Papst told ExcelStor that Hitachi was not paying royalties and that the Hitachi agreement came after the ExcelStor agreement. ExcelStor believed Papst's reports were fraudulent, and brought an action claiming fraud and breach of contract. After Papst moved to dismiss for lack of subject matter jurisdiction, ExcelStor filed an amended complaint including four counts, three of which were relevant to the appeal. Count I requested a declaratory judgment that Papst had violated the patent exhaustion/first sale doctrine by collecting two royalties from the sale of the same patented hard disk drives. Count III asserted fraud arising from Papst's failure to disclose its violation of the patent exhaustion doctrine. Count IV was a breach of contract claim for Papst's failure to notify ExcelStor of its violation of the patent exhaustion doctrine.The district court granted Papst's motion to dismiss. The district court concluded that because the patent exhaustion doctrine was a defense to patent infringement and not a cause of action, the mere citation of federal patent law was insufficient to confer federal jurisdiction. The district court also found that Counts III and IV were not based on federal patent law such that ExcelStor could not proceed in federal court.The Federal Circuit affirmed. Here, there was no diversity of citizenship, so federal question jurisdiction was necessary for the claim to proceed in federal court. ExcelStor asserted jurisdiction was proper under 28 U.S.C. § 1338, which provides exclusive federal jurisdiction over any civil action arising under any Act of Congress relating to patents.The Federal Circuit cited the Supreme Court's 1988 decision in Christianson v. Colt Industries Operating Corp. (although the opinion incorrectly states it was a 2005 decision), where the Court set forth a two-part test for determining whether federal courts have exclusive jurisdiction over a case pursuant to § 1338(a). Jurisdiction exists if either (1) federal patent law creates the cause of action, or (2) the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law. The Federal Circuit held ExcelStor's claims failed to meet either prong of the Christianson test. First, patent exhaustion is a defense to patent infringement, not a cause of action, so federal patent law does not create a cause of action based on patent exhaustion. Second, ExcelStor's claims did not require resolution of a substantial question of federal patent law. While the exhaustion doctrine prohibits patent holders from selling a patented article and then invoking patent law to control post-sale use of the article, it does not forbid multiple licenses on a single product or even multiple royalties. While Papst's collection of two sets of royalties may be prohibited by the terms of the license agreements or Papst's collection scheme may prove to be fraudulent, patent law is not a necessary element for these determinations, which are properly made by state courts under state law of contract and fraud, rather than by federal courts.Accordingly, the Federal Circuit affirmed the dismissal of the claims for lack of subject matter jurisdiction.To read the full decision in ExcelStor Tech., Inc. v. Papst Licensing GMBH & Co., click here.


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