The Death of Uniformity? The Supreme Court Erodes the Federal Circuit's Jurisdiction over Patent Cases
 
September 24, 2002
 
Michael Colitz - Tampa

The U.S. Supreme Court recently limited the role of the Court of Appeals for the Federal Circuit in patent cases.  In Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 122 S.Ct. 1889 (2002), the Court held that the Federal Circuit does not have jurisdiction over cases where the only patent issue is brought via a counterclaim.  One implication of Holmes is readily apparent:  regional appellate courts will now decide substantive issues of patent law whenever the issues are brought in a counterclaim.  Another implication of Holmes is less apparent:  state courts may soon decide patent cases as the Supreme Court’s decision also has ramifications on the jurisdiction of district courts.

Holmes concerned a patented spiral grill fan design that Vornado Air Circulation Systems, Inc. claimed was protectable as trade dress.   The Holmes group, a competitor of Vornado, filed an action in a Kansas district court seeking a declaratory judgment that its products did not infringe Vornado’s trade dress.  Vornado counterclaimed alleging that Holmes infringed its patent on the fan design.  The district court found that Vornado was collaterally estopped from claiming trade dress in light of a previous ruling by the Tenth Circuit Court of Appeals, and it entered a declaratory judgment in favor of Holmes.  The district court went on to stay all proceedings related to Vornado’s patent counterclaim pending an appeal to the Federal Circuit. 

The Federal Circuit, disregarding Holmes’ challenge to its jurisdiction, vacated the district court’s judgment and remanded the case for consideration of whether a change in the law exception to collateral estoppel applied in the case.  Thereafter, the Supreme Court granted certiorari to consider the issue of the Federal Circuit’s jurisdiction.

The Supreme Court held that the Federal Circuit’s exercise of appellate jurisdiction was improper and remanded the case with instructions to transfer it to the Tenth Circuit Court of Appeals.  In reaching its decision, the Court analyzed the interplay of three jurisdictional statutes: 28 U.S.C. §1295; 28 U.S.C. §1338; and 28 U.S.C. §1331.

Section 1295 gives the Federal Circuit exclusive jurisdiction in appeals from a final decision in a district court, if the jurisdiction in the district court was based “in whole or in part” on §1338.  Section 1338, in turn, gives district courts exclusive jurisdiction for any “civil action arising under any Act of Congress relating to patents.”  Finally, §1331, which uses the same operative language as §1338, gives district courts original jurisdiction for all “civil actions arising under the Constitution, laws, or treaties of the Untied States.”

The ultimate issue in Holmes was whether counterclaims should be examined for purposes of determining if an action “arises under” a patent-related statute, so as to invoke a district court’s original jurisdiction under §1338 and the Federal Circuit’s appellate jurisdiction under §1295.  The Court resolved this issue by relying upon the established case law interpreting “arising under” as it is used in §1331. The Court held that “arising under” triggers the “well-pleaded complaint” rule.  Under this rule, only the face of a complaint is referenced for purposes of determining jurisdiction.  The application of the well-pleaded complaint rule to § 1338 — and by extension §1295 — means that Federal Circuit jurisdiction is only proper if the patent-related cause of action is contained within the complaint itself. 

Holmes overruled Aerojet – General Corp. v. Machine Tool Works, Oerlikon-Buehrle Ltd., 895 F.2d 736 (Fed. Cir. 1990), which had been the leading case on the issue of Federal Circuit jurisdiction.  In Aerojet, the Federal Circuit held that a counterclaim should be analyzed as if it was a separate complaint for purposes of determining jurisdiction under §1295.  Under the Federal Circuit’s reasoning, the distinction between complaints and counterclaims was unimportant.  This interpretation of §1295 was an effort to promote the uniformity Congress sought when it established the Federal Circuit in 1982.  Nonetheless, Holmes now makes it clear that this view of §1295 is no longer the law. 

One of the less apparent implications of Holmes concerns the ability of state courts to hear cases that were previously thought to be within the exclusive jurisdiction of the district courts. This implication was recently highlighted by the Indiana Supreme Court in Green v. Hendrickson Publishers, Inc., 770 N.E.2d 784 (Ind. 2002). 

In Green, Hendrickson Publishers sued copyright holders Jay and Mary Green in Tippecanoe Superior Court for breach of contract.  The Greens’ answer contained a counterclaim for copyright infringement.  At issue was whether the counterclaim could remain in state court in light of the language of §1338.  The second sentence of §1338 makes jurisdiction exclusive to the district courts for “any civil action arising under” the patent or copyright laws.  The Indiana Supreme Court, pointing to the holding in Holmes, concluded that, because the Greens’ copyright action was brought via a counterclaim, it did not fall within the purview of §1338. Consequently, there was nothing to prevent the Greens from maintaining their copyright counterclaim in state court. Although Green dealt with a copyright case, the same reasoning applies to patent-related counterclaims.

The aftermath of Holmes brings many interesting possibilities.  One possibility is forum shopping.  Namely, potential defendants may now consider initiating pre-emptive actions in favorable jurisdictions in an effort to provoke a patent-related counterclaim. The aftermath may also see splits of authority among the regional appellate courts on substantive issues of patent law.  These splits of authority will appear sooner should the regional circuits disregard Federal Circuit precedent and instead rely upon their own pre-1982 case law.  Finally, Holmes will undoubtedly expand the role of state courts in both copyright and patent litigation.

For more information, contact Michael J. Colitz, toll free at 888-688-8500, or via e-mail at mcolitz@hklaw.com.