Induction Innovations, Inc. et al v. Pacholok
Filing
155
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 9/30/2014: David Pacholok's Motion to Dismiss 144 is granted in part and denied in part. The motion is denied as it pertains to plaintiffs' request for a declarati on that no money is owed Pacholok under the Stock Purchase Agreement (Count V). The motion is granted as it pertains to all other claims in the second amended complaint, 139 , which are dismissed without prejudice for lack of jurisdiction. Status hearing remains set for 10/17/14 at 9:30 a.m. [For further detail see attached order.] Notices mailed by Judicial Staff.(psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INDUCTION INNOVATIONS, INC., and
SARGE HOLDINGS COMPANY, LLC,
Plaintiffs,
No. 13 CV 5102
v.
Judge Manish S. Shah
DAVID PACHOLOK,
Defendant.
MEMORANDUM OPINION AND ORDER
David Pacholok and Thomas Gough are the named inventors on two U.S.
patents relating to heating devices for use in automotive repair. Pacholok and
Gough also co-founded Induction Innovations, an Illinois corporation that
manufactures and sells products practicing some of the patented inventions.
Several years after creating Induction, Pacholok and Gough decided to part ways.
Pacholok resigned from his position as corporate officer and sold his stock in
Induction, receiving in exchange a promise by Induction to pay him royalties on the
sale of goods embodying the patented inventions. Following his departure from
Induction, Pacholok made contact with one of the company’s competitors, Lace
Technologies, and began to license the patents to Lace. In 2013, Induction—along
with Sarge Holdings, the assignee of Gough’s ownership share in the two patents—
filed in federal court a breach-of-fiduciary-duty claim against Pacholok. Plaintiffs’
second
amended
complaint
also
included
four
additional
claims:
patent
infringement; interference with business relations; and two requests for declaratory
judgment (one a declaration of inventorship for the two patents-in-suit, the other a
declaration that no money is owed Pacholok under his Stock Purchase Agreement).
Pacholok now movies to dismiss plaintiffs’ claims pursuant to Rule 12(b)(1) of the
Federal Rules of Civil Procedure. For the reasons discussed below, I grant in part
and deny in part Pacholok’s motion.
I.
Legal Standard
In evaluating a motion to dismiss brought under Rule 12(b)(1), I accept as
true all well-pleaded factual allegations and draw all reasonable inferences in the
plaintiff’s favor. See G & S Holdings LLC v. Cont’l Cas. Co., 697 F.3d 534, 539 (7th
Cir. 2012) (citing Scanlan v. Eisenberg, 669 F.3d 838, 841 (7th Cir. 2012)). Where
the jurisdictional challenge is based on facts extrinsic to the complaint, however, I
may look beyond the complaint’s allegations and view whatever evidence has been
submitted on the issue. See Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440,
443–44 (7th Cir. 2009).
II.
Facts
In 2000, David Pacholok and Thomas Gough co-founded Induction
Innovations, Inc., a company that manufactured and sold (and continues to
manufacture and sell) induction heaters for use in the automotive aftermarket.
[139]1 ¶¶ 4, 6. Upon incorporation, Pacholok and Gough each owned 50 percent of
Induction’s issued stock. See id. ¶¶ 2–3. Pacholok and Gough are also the named coCitations to the record are designated by the document number as reflected on the district
court’s docket, enclosed in brackets.
1
2
inventors of U.S. Patent Nos. 6,563,096 and 6,670,590, id. ¶ 5, which issued in 2003,
see [139-1] at 3, 11. The patents recite method- and apparatus-type claims relating
to heating devices to be used in automotive repair. See id.; see also [139] ¶ 26.
In 2006, Gough and Pacholok decided to part ways, and Pacholok resigned
from his position as an officer and director of Induction. See [139] ¶¶ 2, 19.
Pursuant to a “Stock Purchase Agreement,” Pacholok also agreed to relinquish his
shares in the company, see id., in exchange for which Induction agreed, inter alia, to
pay Pacholok an annual royalty on sales by Induction of any products practicing the
’096 or ’590 patent (if, within the calendar year, such sales exceeded one million
dollars). See id. ¶ 56. Gough formally assigned his ownership rights in both patents
to Sarge Holdings, LLC, which then licensed to Induction the right to practice and
enforce the patents; Pacholok, however, refused to do the same. See id. ¶¶ 11, 22,
43.2
Five years after Pacholok’s departure from Induction, Pacholok entered a
series of agreements with Lace Technologies, Inc., a company that formerly had
manufactured heating units for Induction, see id. ¶ 9. Through these agreements,
Pacholok granted (or purported to grant) to Lace a license to manufacture and sell
products practicing the ’096 and ’590 patents. See id. ¶¶ 13–14. Pursuant to the
(purported) license, Lace began to produce and sell items embodying the patented
At one time, Pacholok (and Gough) did execute a written assignment of the patents to
Induction Holding Company, see [151-11] at 2 (dated December 2006), in order to facilitate
litigation against a third party not involved in the current suit, see [151] at 10. Once that
suit had concluded, however, all rights to the patents were assigned back to each of the
inventors. See [151-11] at 3 (dated August 2008); [151] at 10.
2
3
technology—items that competed directly with Induction’s own heating products.
See id. ¶¶ 15–16.
In July 2013, Induction and Sarge filed suit against Pacholok in federal court,
alleging that Pacholok’s failure to formally assign to Induction his legal title to the
patents—coupled with his attempt to license his interest in those patents to
Induction’s competitor—constituted a breach of Pacholok’s fiduciary duty to the
corporation. See [1] ¶¶ 22–39. In his answer to the original complaint, [20],
Pacholok included two counterclaims: the first alleging that Pacholok, not Gough,
was the true (and only) inventor of the ’096 and ’590 patent (and requesting a
corresponding correction of the named inventors pursuant to 35 U.S.C. § 256), see
id. ¶¶ 30–37; the second alleging a breach of contract by Induction based on
Induction’s purported failure to pay Pacholok royalties owed under the 2006 Stock
Purchase Agreement, see id. ¶¶ 45. Plaintiffs subsequently amended their
complaint (twice), ultimately including with their fiduciary-breach claim (now
Count II), see [139] ¶¶ 31–49, four additional counts: declaratory judgment of patent
inventorship (Count I), id. ¶¶ 25–30; patent infringement (Count III3), id. ¶¶ 50–52;
interference with business relations (Count IV), id. ¶¶ 53–54; and a declaratory
judgment that Induction owes nothing to Pacholok under the 2006 Stock Purchase
Agreement (Count V), id. ¶¶ 55–58.
Plaintiffs include in their second amended complaint, [139], two separate claims labeled
“Count 2.” See id. at 5 (fiduciary breach); id. at 7 (patent infringement). I assume that
plaintiffs intended to label their counts sequentially, and thus refer to the counts as they
should have been numbered.
3
4
Pacholok filed a motion to dismiss plaintiffs’ second amended complaint for
lack of subject-matter jurisdiction. [144]. Attached to this motion was a covenant by
Pacholok not to re-plead or file against plaintiffs any counterclaim or action seeking
correction of inventorship. See id. at 62–63. But the covenant included an exception:
should a third party challenge the validity of either the ’096 or ’590 patent, and base
that challenge on the inventorship of the patent(s), Pacholok reserved the right to
pursue his correction-of-inventorship claim. See id. at 62 ¶ 4.
III.
Analysis
In his motion to dismiss for lack of federal jurisdiction, Pacholok asserts that
only two of plaintiffs’ five claims—inventorship (Count I) and patent infringement
(Count III)—arise under the patent laws and therefore fall, at least ostensibly,
within the Court’s original jurisdiction. See id. at 2. But, says Pacholok, the Court
nonetheless does not have jurisdiction over these claims, because plaintiffs do not
have standing to bring them. See id. at 2–3, 5–7. Pacholok further contends that the
remaining three claims—fiduciary breach (Count II), interference with business
relations (Count IV), and construction of the Stock Purchase Agreement
(Count V)—are state-law claims, and urges that these claims, too, must be
dismissed since: (1) without jurisdiction over the patent-based claims, the Court
cannot exercise supplemental jurisdiction over any state-law claims; and
(2) regardless, supplemental jurisdiction is inappropriate because the state-law
claims do not stem from the same “nucleus of facts” as the federal claims. See id. at
3–4, 14–15.
5
A.
The Infringement and Inventorship Claims
1.
Patent Infringement (Count III)
Plaintiffs assert that Pacholok both has infringed the patents-in-suit and has
induced infringement of those patents by plaintiffs’ competitor, Lace Technologies.
See [139] ¶ 52. Plaintiffs seek as remedy both monetary and injunctive relief. See id.
at 8–9.
a.
Infringement Damages
Article III of the Constitution limits federal judicial power by requiring that
courts resolve only true “cases” or “controversies.” U.S. Const. art. III, § 2. The
requirement of “standing”—that the plaintiff has “a right to judicial relief”—ensures
that a suit involves a case or controversy. Morrow v. Microsoft Corp., 499 F.3d 1332,
1338–39 (Fed. Cir. 2007) (quoting Warth v. Seldin, 244 U.S. 490, 500 (1975)).4
Under federal patent law, only a “patentee” has a right to legal relief for
infringement. See id. at 1339 (citing 35 U.S.C. § 281).
Congress has defined “patentee” to include not just the individual to whom
the patent originally issued, but also that individual’s “successors in title.” Id.
(citing 35 U.S.C. § 100(d)). Successors in title are those who possess legal title to the
patent. See id. (citing Enzo Apa & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093
(Fed. Cir. 1998); Prima Tek II LLC v. A-Roo Co., 222 F.3d 1372, 1377 (Fed. Cir.
2000)). Here, plaintiffs allege that Pacholok’s co-inventor, Thomas Gough (who is
not a party to this action), formally assigned his ownership rights to Sarge
As patent infringement is a matter “unique to patent law,” I apply Federal Circuit law.
See Revision Military, Inc. v. Balboa Mfg. Co., 700 F.3d 524, 526 (Fed. Cir. 2012).
4
6
Holdings, which then licensed those rights to Induction. Thus, according to
plaintiffs, they collectively possess legal title to the patents-in-suit to the extent
that Thomas Gough held title prior to this assignment. See [139] ¶ 43; see also id.
¶ 8 (alleging that plaintiffs own legal title “as to Thomas Gough”).5
Plaintiffs are correct that, as an inventor of the patents-in-suit, Gough
“presumptively own[ed] a pro rata undivided interest” in the patents. Univ. of Utah
v. Max-Planck-Gesellschaft Zur Forderung Der Wissenschaften E.V., 734 F.3d 1315,
1324 (Fed. Cir. 2013) (citing Ethicon, Inc. v. U.S. Surgical Corp., 135 F.3d 1456,
1465 (Fed. Cir. 1998)). Consequently, when Gough assigned that interest to Sarge
Holdings, Sarge acquired the same (pro rata) rights—including Gough’s right to
exclude others from practicing the patented inventions, see Morrow, 499 F.3d at
1339 (“A patent grant bestows the legal right to exclude others from making, using,
selling, or offering to sell the patented invention . . . .” (citing 35 U.S.C. §§ 154,
271)). But a pro rata ownership interest—even if undivided—is not enough to confer
In their complaint, plaintiffs state in multiple instances that Induction owns Gough’s title
to the patents-in-suit. See, e.g., [139] ¶¶ 8, 43, 45. However, as paragraph 43 of the
complaint makes clear, it is Sarge Holdings—not Induction—that formally holds Thomas
Gough’s ownership rights. See id. ¶ 43 (explaining that Gough “assigned [his ownership]
rights to Sarge”). Induction is the exclusive licensee of Sarge, see id, and licensees do not
always have the ability to enforce patent rights without the true owner’s say-so, see
Morrow, 499 F.3d at 1340 (observing that “exclusionary rights ‘must be enforced through or
in the name of the owner of the patent’” (quoting Indep. Wireless Tel. Co. v. Radio Corp. of
Am., 269 U.S. 459, 467 (1926))). With certain exceptions, licensees must therefore join as coplaintiff the actual title-holder in any infringement suit. See id. Because Sarge Holdings
(the purported title-holder) has voluntarily joined Induction (the licensee) as co-plaintiff in
this suit, however, the joinder requirement is satisfied—at least with respect to the
ownership interest that Sarge Holdings has obtained from Gough. I therefore refer to
plaintiffs’ ownership interests collectively even though, as a technical matter, the complaint
suggests that only Sarge possesses legal title.
5
7
upon plaintiffs standing to sue Pacholok for infringement because, according to
plaintiffs’ complaint, Pacholok still holds that same interest.
Plaintiffs admit that Pacholok did not formally assign to Induction or Sarge
any of his ownership rights in the patents-in-suit. See, e.g., [139] ¶ 11 (stating that
“Pacholok has refused to formally assign any ownership rights” to the patents); id.
¶ 44 (similar); see also id. ¶ 8 (stating that plaintiffs own legal title “as to Thomas
Gough but not as to David Pacholok”) (emphasis added).6 And there is no allegation
that Pacholok has assigned those rights to any other entity. Plaintiffs therefore
concede that the pro rata interest Pacholok presumptively acquired as co-inventor
of the patents remains with him, and that, consequently, he retains the same
“exclusionary” rights as plaintiffs. Pacholok, too, has the legal authority to make,
use, or sell the patented inventions to the exclusion of others who do not possess
such rights. Plaintiffs therefore lack standing to sue Pacholok for infringement
because, as the Federal Circuit has made clear, plaintiffs who hold the exclusionary
rights to a patent suffer a legally cognizable injury—and thus have standing to
sue—only “when an unauthorized party encroaches upon those rights.” WiAV
Solutions LLC v. Motorola, Inc., 631 F.3d 1257, 1264–65 (Fed. Cir. 2010) (citing
Morrow, 499 F.3d at 1340) (emphasis added); see also Jim Arnold Corp. v.
Hydrotech Sys., Inc., 109 F.3d 1567, 1571–72 (Fed. Cir. 1997) (observing that a
plaintiff
seeking
relief
for
patent
infringement
must
allege
“facts
. . . demonstrat[ing] that he, and not the defendant, owns the patent rights on which
Pacholok contends that other documents extrinsic to the complaint contain similar
admissions. See, e.g., [144] at 5–6, 9, 13–14. Because the complaint itself concedes the point,
however, I need not look beyond those allegations. See Apex, 572 F.3d at 444.
6
8
the infringement suit is premised”) (emphasis added). Plaintiffs have failed to plead
a violation of their exclusionary rights, and therefore do not have standing to sue
Pacholok for infringement, because plaintiffs were not entitled to “exclude”
Pacholok in the first place.7
Plaintiffs contend that standing is not a problem for them here because, in
point of fact, they have held complete title to the patents all along. See [151] at 16–
17. According to plaintiffs, both Gough and Pacholok entered an implied contract
with Induction, through which the inventors agreed to assign to the corporation the
inventors’ ownership rights in exchange for, inter alia, salaries received while
working at the company beginning in 2000. See id.; see also [139] ¶ 44. Thus, argue
plaintiffs, they have held complete legal title to the patents-in-suit since that time—
and so necessarily have standing to sue Pacholok for infringement now. See [151] at
17. In addition, plaintiffs contend that I have the authority to confirm that plaintiffs
had legal title before filing suit, see id. at 18–19, thus removing any jurisdictional
Pacholok asserts that plaintiffs are also barred from bringing an infringement suit against
him because “[a]ny titleholder . . . may block a patent infringement claim.” [144] at 8
(citing, inter alia, Ethicon, Inc. v. U.S. Surgical Corp., 135 F.3d 1456, 1468 (Fed. Cir.
1998)). Pacholok is indeed a title-holder, and generally, all co-owners of a given patent must
voluntarily consent to suit against an alleged infringer: a single co-owner alone cannot seek
relief, see Israel Bio-Engineering Project v. Amgen, Inc., 475 F.3d 1256, 1264–65 (Fed. Cir.
2007) (“Absent the voluntary joinder of all co-owners of a patent, a co-owner acting alone
will lack standing.” (citing Prima Tek II, 222 F.3d at 1377)). However, the voluntary-joinder
rule is an element of prudential—not constitutional—standing requirements. See id. at
1265 (citing Prima Tek II, 222 F.3d at 1377). Moreover, the case law provides for exceptions
to such requirements where the alleged infringer is also the patentee and “cannot sue
himself.” Mentor H/S, Inc. v. Med. Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed. Cir.
2001) (citing Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1030 (Fed. Cir.
1995)). In any event, I need not determine whether any such exception applies here—and
therefore whether the prudential standing requirements have been satisfied as to
Pacholok—because, as explained above, plaintiffs do not have constitutional standing to sue
him for infringement.
7
9
bar to reaching the merits of their infringement claim. But plaintiffs’ theory falters
on several fronts.
First, although plaintiffs now maintain that they have held complete legal
title to the patents since 2000, their complaint admits exactly the opposite. See
[139] ¶ 8 (alleging that Induction “owns legal title as to Thomas Gough but not as to
David Pacholok”) (emphasis added); id. ¶ 11 (“Pacholok has refused to formally
assign any ownership rights . . . to Induction.”); id. ¶ 44 (similar); id. ¶ 48
(“Induction has been damaged by Pacholok’s failure to formally assign his legal title
in the [patents-in-suit] to Induction . . . .”); id. ¶49 (similar). Having chosen the field
for their battle, plaintiffs cannot now protest that the turf is too feeble to hold their
claim. See D.B. ex rel. Kurtis B. v. Kopp, 725 F.3d 681, 686 (7th Cir. 2013)
(“Allegations [in a complaint] are binding admissions . . . .” (quoting Jackson v.
Marion Cnty., 66 F.3d 151, 153–54 (7th Cir. 1995))); see also Jackson, 66 F.3d at 154
(“[A]dmissions in a complaint can . . . admit the admitter to the exit from the
federal courthouse.”). Even putting aside these allegations, however, the
infringement claim still cannot proceed because, contrary to what plaintiffs suggest,
I cannot determine today that plaintiffs had legal title to the patents before filing
suit in order to then reach the infringement claim on its merits.
Relying on Air Products & Chems. v. Reichhold Chems., Inc., 755 F.2d 1559
(Fed. Cir. 1985) and its progeny, plaintiffs maintain that the lack of a formal, presuit assignment of complete (non-pro rata) title is no bar to their claim of
infringement because, under Federal Circuit precedent, I may simply confirm that
10
title transferred to them by operation of law fourteen years ago. See [151] at 18–19.
But plaintiffs’ reliance on Air Products is misplaced.
In Air Products, the patent-owner (Air Products) had granted a nonexclusive
license to DuPont (which later assigned its rights to the defendant) to practice the
patent-in-suit. See 755 F.2d at 1560. Air Products claimed that the defendantlicensee had breached the terms of the license agreement, causing Air Products to
then terminate the agreement and file an infringement suit. See id. The district
court dismissed the suit for lack of jurisdiction, concluding that the “primary issue
for resolution” was not the alleged infringement but breach of contract. See id. at
1561. The Federal Circuit reversed, observing that the district court’s need to first
resolve the license dispute did not strip the court of original jurisdiction over the
patent-infringement issue. See id. at 1563.
But Air Products and its brethren are inapposite here. Those cases, as the
Federal Circuit later clarified, involved license agreements—not a dispute about
whether there was a valid assignment of legal title. See Jim Arnold, 109 F.3d at
1577. The plaintiff-licensor’s title to the patent-in-suit (and thus the plaintiff’s
standing to sue for infringement damages) was not at issue in Air Products because
legal “title to the patent does not change hands under a license agreement,” id.
Here, by contrast, plaintiffs’ standing to bring their claim for infringement
damages—and, consequently, my jurisdiction over that claim—hinges on who,
precisely, owned legal title to the patents-in-suit during the period of alleged
11
infringement: plaintiffs alone, or plaintiffs and Pacholok (each with a 50-percent pro
rata share)? And on that question, plaintiffs face an un-scalable jurisdictional wall.
Plaintiffs cannot successfully argue complete, pre-suit title to the patents-insuit because their argument is premised on a de facto assignment of ownership
rights. Federal patent law does not recognize such assignments. To the contrary,
Congress has expressly limited the validity (and thus enforceability) of patent-right
assignments to written transfers. See 35 U.S.C. § 261 (“Applications for patent,
patents, or any interest therein, shall be assignable in law by an instrument in
writing.”); see also Abraxis Bioscience, Inc. v. Navinta LLC, 625 F.3d 1359, 1365
(Fed. Cir. 2010) (“Abraxis I”) (observing that a “written agreement is necessary to
consummate [an] assignment” of patent rights) (citing IpVenture v. ProStar
Computer, Inc., 503 F.3d 1324, 1327 (Fed. Cir. 2007))); cf. Mentor H/S, Inc. v. Med.
Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed. Cir. 2001) (“The party asserting
that it has all substantial rights in the patent ‘must produce . . . written
instrument[s] documenting the transfer of proprietary rights.’” (quoting Speedplay,
Inc. v. Bebop, Inc., 211 F.3d 1245, 1250 (Fed. Cir. 2000)). Because plaintiffs did not
obtain a written assignment of Pacholok’s ownership rights before filing suit (as
plaintiffs concede), plaintiffs did not at that time have Pacholok’s legal title as
defined by federal law, and so do not now have standing to pursue an infringement
claim against him.8
Plaintiffs counter that Illinois common law recognizes implied or de facto contracts, and
that, consequently, an implied contract in this instance may constitute a legitimate
assignment (thus saving from dismissal plaintiffs’ infringement claim). See [151] at 16–17.
That Illinois may recognize implied contracts in other contexts is irrelevant to whether
8
12
Plaintiffs’ “vesting” theory suffers from a similar defect. As an alternative to
their implied-contract theory, plaintiffs also allege in their complaint that Pacholok,
as a former co-owner of Induction, owed to the corporation a fiduciary duty—which
included an obligation to formally assign to that entity Pacholok’s ownership rights
in the patents. See [139] ¶ 47. Thus, argue plaintiffs, when Pacholok failed to so
assign his rights, the resulting fiduciary breach automatically “vested” in plaintiffs
full and complete title to the patents-in-suit. See id. ¶ 51. This cannot be. As
explained above, Congress has demanded that patent assignments be in written
form. See Gaia Techs., Inc. v. Reconversion Techs., Inc., 93 F.3d 774, 780 (Fed. Cir.
1996) (“[T]he relevant statutes require an assignment of [the] patents . . . to be in
writing.”). And, importantly, the written assignment must be acquired before suit is
filed. See id. at 780; see also Abraxis Bioscience, Inc. v. Navinta LLC, 672 F.3d 1239,
1240 (Fed. Cir. 2011) (denying rehearing en banc of Abraxis I).
In short, the ownership interest that plaintiffs claim to possess—under either
theory—is not a complete legal title at all, but a partial legal title (to Gough’s
former 50-percent share) coupled with an equitable interest (in Pacholok’s pro rata
half).9 Consequently, plaintiffs’ demand for “confirmation” of their complete
plaintiffs acquired complete legal title to the patents in this case. Where, as here, “Congress
has adopted a statutory scheme to apply in a particular field, federal law preempts state
law.” Abraxis Bioscience, Inc. v. Navinta LLC, 672 F.3d 1239, 1241 (Fed. Cir. 2011) (citing
Campbell v. Hussey, 368 U.S. 297 (1961); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230
(1947)). In the patent arena, Congress has decided that only written assignments will
suffice.
Compare [139] ¶ 8 (alleging that Induction “owns legal title as to Thomas Gough but not
as to David Pacholok) with id. ¶ 18 (alleging that the patents-in-suit are “equitably owned”
by Induction).
9
13
ownership is, in reality, a request that I convert, through judicial order, their
equitable interest into a legal one. But, as the Federal Circuit made clear in Jim
Arnold, this is precisely what I cannot do. Whereas the federal district courts may
adjudicate true cases of infringement, they do not have the power to restore or
transfer ownership of a patent as a precondition for determining that infringement
claim on its merits. See 109 F.3d at 1571–72 (observing that “federal court is not the
place to seek . . . judicial intervention” changing ownership where the plaintiff
cannot plead from the outset “that he, and not the defendant, owns the patent”).
The question of who owns a patent “typically is a question exclusively for [the] state
courts,” id. at 1572—and thus is not a question I may answer absent diversity
jurisdiction, see id. at 1577. There is no diversity jurisdiction here, as both plaintiffs
and the defendant are citizens of Illinois.10 See 28 U.S.C. § 1332(a).11
See [139] ¶ 2 (alleging that Pacholok resides in Illinois); id. ¶ 1 (alleging that Induction is
an Illinois corporation that does business in Illinois); id. ¶ 20 (alleging that Sarge Holdings
is a Delaware corporation with its principal place of business in Illinois); see also 28 U.S.C.
§ 1332(c) (“[A] corporation [is] a citizen of every . . . state by which it has been incorporated
and . . . where it has its principal place of business . . . .”).
10
Despite plaintiffs’ argument to the contrary, Vink v. Hendrikus Johannes Schijf Rolkan
N.V., 839 F.2d 676 (Fed. Cir. 1988), is in accord with Jim Arnold and does not rescue from
dismissal their infringement claim. The Vink court did say that whether “a non-federal
issue (ownership of the patent) must be resolved before the federal issue (infringement) is
immaterial in determining whether there is federal jurisdiction.” Id. at 679 (citing Air
Products, 755 F.2d at 1563). This statement seems inconsistent with the approach later
taken by the Jim Arnold court. A closer examination of the facts in Vink, however, reveals
no inconsistency. The plaintiff in Vink pleaded that he had acquired title to the patent by
assignment following a bankruptcy proceeding. See id. at 676. The defendant, the original
patentee, then claimed that the bankruptcy had not divested him of ownership (and thus
that the plaintiff’s title was invalid as a matter of law). See id. The plaintiff therefore filed a
claim requesting a declaration that he was the rightful owner of the patent-in-suit, as well
as a claim for infringement. See id. at 677. But unlike in Jim Arnold—and unlike the
situation here—the Vink court did not need to transfer ownership to the plaintiff before the
11
14
Plaintiffs are burdened with the less-than-complete title they brought to the
federal table. This is a heavy burden indeed, as plaintiffs hold at best only an
equitable interest in Pacholok’s ownership rights; and equitable interests are
“insufficient to confer standing to sue for legal relief from infringement,” Morrow,
499 F.3d at 1343 (citing Arachnid Inc. v. Merit Indus., Inc., 939 F.2d 1574, 1579–80
(Fed. Cir. 1991)) (emphasis added); see also Arachnid, 939 F.2d at 1579 (“[O]ne
seeking to recover money damages for infringement . . . must have held . . . legal
title to the patent during the time of the infringement.”) (second emphasis omitted).
As plaintiffs did not hold complete legal title to the patents-in-suit before filing the
complaint, they do not have standing to assert a claim for infringement damages
against Pacholok.12
b.
Injunctive Relief
Although plaintiffs cannot seek damages from Pacholok, equitable relief may
still be available if plaintiffs are correct that Pacholok, as a former co-founder and
co-owner of Induction, either agreed to assign or did impliedly assign his ownership
rights to the corporation—thus endowing plaintiffs with equitable ownership of his
pro rata share. See Arachnid, 939 F.2d at 1580 (explaining that, where the plaintiff
court could reach the merits of the infringement claim. No such “judicial intervention” was
required because, in Vink, the plaintiff already had proof of legal title: a written
assignment.
I note that even if, through diversity jurisdiction, I had the authority to adjudicate
plaintiffs’ ownership claim—and even if, as plaintiffs urge, I declared them to have been the
de facto owners of the patents since 2000—plaintiffs still would not have standing to seek
legal relief from Pacholok. As the Federal Circuit made clear in Arachnid, a judicial decree
establishing plaintiffs to have been the patents’ true owners does not “retroactively divest
[Pacholok] of legal title . . . during [the alleged infringement] timeframe and revest that
legal title in [plaintiffs] for standing purposes,” 939 F.2d at 1579.
12
15
is adjudged an equitable title-holder of a patent, federal district courts have
jurisdiction to determine a claim for infringement “as a prerequisite to awarding
equitable relief”).
In their complaint, plaintiffs do claim an equitable interest in the patents, see
[139] ¶ 18 (alleging that the patents “are equitably owned by Induction”); and
plaintiffs also request (in addition to damages) an equitable form of relief, see id. at
8 (requesting an injunction preventing Pacholok from making, using, or selling the
patented inventions). In their response to Pacholok’s motion to dismiss, however,
plaintiffs appear to disclaim any reliance on their supposed equitable title. See [151]
at 20 (“Pacholok says Plaintiffs do not have equitable title in the [patents-in-suit].
Because Induction relies on legal, not equitable, title, these arguments are
inapplicable.”) (emphasis added); see also id. at 19 (asserting that certain cases cited
by Pacholok in his motion “are inapposite” because they “involve equitable title
issues”). I take plaintiffs at their word and assume that they no longer intend to
move forward with a claim of equitable ownership.
Even if I made no such assumption, however, plaintiffs’ claim for injunctive
relief still could not proceed at this time. As discussed previously, plaintiffs hold at
best an equitable interest in Pacholok’s pro rata share of the patent rights. But a
mere allegation of equitable interest does not open the doors of the federal
courthouse, because only “adjudged” equitable title-holders may rightfully pursue
equitable relief for infringement. See Arachnid, 939 F.32d at 1580. This means that,
before a federal court may determine whether a plaintiff is entitled to an injunction,
16
for example, “the plaintiff’s claim of equitable ownership [must be] adjudged valid
by a court having jurisdiction over that question.” Id. (citation omitted). Here,
however—and as I explain above—I do not have jurisdiction over plaintiffs’
ownership claim because, absent complete diversity, ownership is a question of
state law, and diversity here is incomplete. As I cannot properly adjudge plaintiffs
to be the patents’ true and complete title-holders in equity, I cannot reach the
merits of plaintiffs’ infringement claim—even if limited to a claim for equitable
relief. See id. To move forward with such an action, plaintiffs must first try their
hand in state court. See Jim Arnold, 109 F.3d at 1572, 1577.13
Count III of plaintiffs’ second amended complaint (patent infringement) is
therefore dismissed for lack of standing and, consequently, jurisdiction.
2.
Patent Inventorship (Count I)
Plaintiffs also seek a judgment declaring Pacholok and Thomas Gough to be
the “true and proper inventors” of the ’096 and ’590 patents. See [139] ¶ 29; id. at 8.
Although the patents already say as much, see id. ¶ 29, plaintiffs maintain that an
actual controversy of inventorship exists between the parties—and I therefore have
jurisdiction over this claim—because plaintiffs have reason to believe that Pacholok
will sue to remove Gough as a named inventor, see id. ¶ 28, 30; [151] at 12–14.
Federal patent law provides that, where an error has been made in naming
the true inventors on an issued patent, the error may be corrected. See 35 U.S.C.
Pacholok contends that plaintiffs’ supposed equitable interest cannot be adjudged a true
equitable ownership. See [144] at 10–12. However, because I do not have jurisdiction to
adjudicate plaintiffs’ claim of equitable ownership, I do not reach these arguments.
13
17
§ 256. Actions to correct inventorship arise under the patent laws, such that the
federal district courts have (exclusive) jurisdiction over those claims. See Larson v.
Correct Craft Inc., 569 F.3d 1319, 1324–25 (Fed. Cir. 2007) (citing 28 U.S.C.
§ 1338(a); MCV, Inc. v. King-Seeley Thermos Co., 870 F.2d 1568, 1570 (Fed. Cir.
1989)).14 But whether the federal courts also have jurisdiction to declare that a
recorded inventorship is already correct entails a more complicated inquiry. A
plaintiff seeking such a decree must establish: (1) that the plaintiff holds a
recognized interest in the patent that “could be adversely affected by an action”
brought under Section 256; and (2) that another party with the right to bring a
Section 256 action “has created in the . . . plaintiff a reasonable apprehension that
[the party] will do so.” Fina Oil & Chem. Co. v. Ewen, 123 F.3d 1466, 1471 (Fed. Cir.
1997). Where both requirements are satisfied, the plaintiff has demonstrated the
existence of a controversy appropriate for a federal court to decide. See id. (citing
Public Serv. Comm’n v. Wycoff Co., 344 U.S. 237, 244 (1952)).15
Like infringement, patent inventorship is also a “unique question of patent law.” HIF Bio,
Inc. v. Yung Shin Pharm. Indus. Co., Ltd., 600 F.3d 1347, 1353 (Fed. Cir. 2010). I therefore
look to Federal Circuit precedent here, as well.
14
The Fina test derives from the Federal Circuit’s earlier-established standard for
determining whether a would-be infringement defendant may seek a declaratory judgment
that the patent is invalid. See id. at 1470–71. That test, too, includes a “reasonable
apprehension of suit” element. See id. at 1470. But the “reasonable apprehension”
requirement—at least in the infringement context—was later abandoned in the wake of the
Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). In
MedImmune, the Court concluded that such a requirement sets the case-or-controversy bar
too high. See id. at 126–37; see also Arkema Inc. v. Honeywell Int’l, Inc., 706 F.3d 1351,
1358 (Fed. Cir. 2013) (explaining that the reasonable-apprehension-of-suit test has been
discarded). Post MedImmune, declaratory plaintiffs in the infringement context need only
establish that, between parties with adverse legal interests, there exists a “substantial
controversy . . . of sufficient immediacy and reality” that declaratory judgment is
appropriate. Arkema, 706 F.3d at 1356 (quoting MedImmune, 549 U.S. at 127). Thus,
15
18
a.
Existence of a Controversy
Relying on Larson v. Correct Craft, Pacholok asserts that when plaintiffs filed
their inventorship claim, they did not have a recognized interest in the patents that
could be adversely affected by a Section 256 action—and therefore did not have
constitutional standing to seek a declaratory judgment of inventorship—because
plaintiffs did not (and do not) have a financial interest in the inventorship of the
patents-in-suit. See [144] at 6–7 (citing 569 F.2d at 1325–27). Pacholok’s argument
is unpersuasive.
First, I disagree that plaintiffs lack a financial interest in the inventorship of
the patents-in-suit. As the now-owners of Gough’s 50-percent undivided title—
which Gough presumptively acquired when he was named as co-inventor of the
patents, see Max-Planck, 734 F.3d at 1324—plaintiffs have the right to make, use,
and sell the patented inventions, and to profit from doing the same. If, on the other
hand, Pacholok were to bring a successful Section 256 action correcting
although Fina—and its test for determining whether there exists a live “controversy” in the
inventorship context—has never been expressly overruled, there is reason to believe that at
least the reasonable-apprehension prong of that test no longer applies. (Though at least
some courts continue to apply both prongs. See Am. Navigation Sys., Inc. v. Michalson, No.
11-10304-FDS, 2011 WL 5330533, at *2 (D. Mass. 2011).)
Nevertheless, even if a reasonable apprehension of suit is no longer required, the
Federal Circuit has determined that it is at least sufficient to establish a justiciable
controversy where the parties’ interests are legally adverse. See Arkema, 706 F.3d at 1358
n. 5 (“While a declaratory judgment plaintiff is no longer required to demonstrate a
reasonable apprehension of suit, . . . such a showing remains sufficient to establish
jurisdiction.”) (citations omitted). As I explain further infra, I do find that plaintiffs here
were at one point laboring under a reasonable apprehension that Pacholok would bring an
action to correct inventorship, and also that Pacholok’s interests in inventorship were
adverse to plaintiffs’. I therefore conclude that, whether or not the “reasonable
apprehension” test still governs in the inventorship arena, plaintiffs have necessarily
established that there was at one time a justiciable controversy with Pacholok. But see
Section III.2.b infra (discussing the effect of Pacholok’s covenant not to sue).
19
inventorship, thereby removing Gough as inventor, plaintiffs’ derivative ownership
rights—and their corresponding right to practice the patents-in-suit—would
evaporate. Plaintiffs would no longer be able to profit from the sales of the patented
invention, or to extract royalty payments from would-be infringers. Certainly,
plaintiffs’ interest in collecting profits and royalties was and is a “financial” one.
Regardless, Pacholok’s reliance on Larson is misplaced. In Larson, the
Federal Circuit focused specifically on whether the plaintiff had a separate financial
interest in inventorship (and thus had standing to bring a Section 256 claim)
because the plaintiff had already assigned away all of their ownership rights. See
569 F.3d at 1326–27; see also Shum v. Intel Corp., 629 F.3d 1360, 1366 n. 7 (Fed.
Cir. 2010) (explaining that the court’s decision in Larson “was based on [the]
transfer of ownership rights”). Not so here. Where no transfer of title has occurred,
the plaintiff-owner necessarily retains an interest in its patents that could be
adversely affected by the removal of that owner (or that owner’s assignor) as
inventor of those patents. Cf. Shum, 629 F.3d at 1366 n. 7 (noting that a plaintiff
has standing to pursue a Section 256 claim if he has not assigned to another his
ownership rights). As owners of the patents-in-suit, plaintiffs here had a concrete
interest in keeping inventorship intact when they filed their claim for declaratory
judgment on that issue.16
Plaintiffs’ interests in inventorship were therefore legally adverse to Pacholok’s. Whereas
Pacholok would remain an owner of the patents even if Thomas Gough’s name were
removed as an inventor, plaintiffs would not. Consequently, Pacholok’s later argument that
he shared or shares with plaintiffs the same interests in inventorship, see [153] at 4–5, is
unpersuasive. Pacholok also suggests that Induction, at least, does not have standing to
bring an inventorship claim because the corporation does not actually own either of the
16
20
Not only did plaintiffs have an interest in maintaining the patents’
inventorship as-is, but plaintiffs also had a reasonable apprehension that Pacholok
would take action directly adverse to that interest. Indeed, plaintiffs had more than
a reasonable apprehension that Pacholok would do so, because Pacholok had in fact
already done it: in his answer to plaintiffs’ original complaint, Pacholok included a
counterclaim requesting that Gough’s name be removed from the patents. See [20]
¶¶ 30–37 (Count I of Pacholok’s counterclaims). Although Pacholok’s initial answer
has since been rendered inoperative by the amendment of plaintiffs’ original
complaint, Pacholok certainly made clear his intent to pursue a Section 256 claim;
and but for the covenant discussed below, there is no reason to believe that
Pacholok would not renew his counterclaim if, for example, his motion to dismiss
were unsuccessful here. I therefore find that when plaintiffs filed their inventorship
claim, there existed a true and immediate inventorship controversy between
plaintiffs and Pacholok.
b.
Covenant Not to Sue
Pacholok contends that, to the extent there existed an inventorship
controversy, the controversy is now moot because Pacholok has filed a covenant not
to sue on that issue. See [144] at 7 (referencing id. at 62–63). The filing of a
covenant not to sue can, in some circumstances, extinguish the controversy between
patents-in-suit. See [144] at 7. Whether Induction (as licensee) may bring its own
inventorship action is immaterial to the inquiry at hand, because Sarge Holdings (the
licensor) is a pro rata owner and has voluntarily joined in Induction’s suit. Thus, to the
extent that plaintiffs’ inventorship claim is governed by prudential standing rules—which
typically require patent licensees to join as co-plaintiff the patentee who granted the
license, see Morrow, 499 F.3d at 1340—those rules have already been satisfied.
21
parties such that the court no longer has Article III jurisdiction over that claim.
Dow Jones & Co., Inc. v. Ablaise Ltd., 606 F.3d 1338, 1349 (Fed. Cir. 2010); see also
Arris Grp., Inc. v. British Telecomms. PLC, 639 F.3d 1368, 1380 (Fed. Cir. 2011)
(citing Super Sack Mfg. Corp. v. Chase Packaging Corp., 57 F.3d 1054, 1059–60
(Fed. Cir. 1995)). Whether a covenant operates to nullify an existing controversy
depends on what, precisely, is covered by the agreement. See Dow Jones, 606 F.3d
at 1347 (citing Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 556 F.3d 1294, 1297
(Fed. Cir. 2009)). While broad or unconditional covenants are likely to moot a case,
narrow covenants, or those with significant exceptions, are less likely to do so.
Compare, e.g., King Pharm., Inc. v. Eon Labs, Inc., 616 F.3d 1267, 1282 (Fed. Cir.
2010) with Revolution, 556 F.3d at 1300.17
The covenant Pacholok has filed in this case is not unlimited. Although
Pacholok has agreed generally not to re-plead or to otherwise file against plaintiffs
any counterclaim or action seeking to remove Gough’s name from the patents-insuit, Pacholok makes no such commitment in the event that a third party
Plaintiffs contend that Dow Jones (and other cases addressing the mooting effect of
covenants not to sue) are inapposite here because, in those cases, the plaintiffs requested a
declaration of non-infringement, not a confirmation of inventorship. See [151] at 14–15.
Unlike infringement, argue plaintiffs, an inventorship challenge cannot be “disclaimed”
once it has been raised. See id. at 15. While plaintiffs are not incorrect that covenants in
patent cases typically arise in the infringement context—and that the case law has
therefore addressed the effect of such covenants largely in that same arena—I do not agree,
and plaintiffs point to no authority suggesting, that covenants not to sue can never operate
to moot an inventorship controversy. Indeed, had Pacholok filed an unrestricted covenant
not to sue for correction of inventorship—that is, a promise not to seek the removal of
Thomas Gough’s name under any circumstances—then, at least between plaintiffs and
Pacholok, there would be no “controversy” to adjudicate at all. At bottom, what plaintiffs
complain of is not that Pacholok filed a covenant not to sue, but that he filed a covenant
that is, as plaintiffs term it, “voidable,” see id. But the voidability of a covenant is a
separate issue from whether a covenant not to sue may operate to nullify a case or
controversy in the first instance.
17
22
challenges the validity of either patent based on incorrect inventorship, see [144] at
62 ¶ 4(a). In short, Pacholok has reserved the right to sue for correction of
inventorship in certain circumstances.
A retention of the right to sue in certain situations may indeed preserve a
case or controversy that otherwise would have been mooted by a covenant not to
sue. See King, 616 F.3d at 1283 (citing Revolution, 556 F.3d at 1298). Nonetheless,
the mere existence of such an exception is not enough to negate automatically that
case-mooting effect. A promise not to sue, even with an exception, will still erase the
controversy if the declaratory plaintiff does not demonstrate a non-speculative
likelihood that the exception will actually apply. See Organic Seed Growers and
Trade Ass’n v. Monsanto Co., 718 F.3d 1350, 1360 (Fed. Cir. 2013); cf. Already, LLC
v. Nike, Inc., 133 S.Ct. 721, 728–29 (2013) (concluding that a case was mooted by a
covenant not to sue where there was no reasonable expectation that future conduct
would fall outside the scope of the covenant).
Plaintiffs urge that the exception to Pacholok’s covenant may be triggered if,
for example, plaintiffs were to become embroiled in an infringement suit with their
competitor, Lace Technologies, and Lace were to challenge the patents’ inventorship
in defense. See [151] at 15. Failure to name inventors on a patent correctly does
render that patent invalid, see Pannu v. Iolab Corp., 155 F.3d 1344, 1348–50 (Fed.
Cir. 1998) (citing generally 35 U.S.C. § 102(f));18 and invalidity is a defense to an
The Leahy-Smith America Invents Act (AIA), Pub. L. No. 112–29, amended portions of
the Patent Act, including Section 102. Because the applications for the patents-in-suit here
(filed on June 13 and August 12, 2002, respectively, see [139-1] at 3, 11), were filed before
18
23
accusation of infringement, see Commil USA, LLC v. Cisco Sys., Inc., 737 F.3d 699,
702 (Fed. Cir. 2013) (“If a patent is found invalid, that is a complete defense to
[infringement] liability . . . .”). Thus, if Lace Technologies were indeed sued for
infringement of the ’096 or ’590 patent, the issue of inventorship may very well
come into play. The problem with plaintiffs’ argument, however, is not that the
hypothetical scenario they describe could never come to fruition; the problem is that
plaintiffs have failed to provide any facts suggesting that the likelihood of that
situation occurring is anything but speculative. And “fears of hypothetical future
harm” are not enough to create a justiciable controversy. Organic Seed Growers, 718
F.3d at 1360.
In Organic Seed Growers, the court confronted a promise by a patentee not to
sue individuals who grew or sold with their own seed products only “trace” amounts
of the seed product covered by the patents at issue. See id. at 1359. The question
presented to the court was whether, because the promise contained an exception—
that is, the reservation of the patentee’s right to sue those who grew or sold more
than trace amounts of patented product—the promise operated to moot the
controversy. The court answered this question in the negative, because the
declaratory plaintiffs had failed to allege any concrete plans or steps taken to bring
them within the scope of the exception. See id. at 1359–60 (citing Cat Tech LLC v.
TubeMaster, Inc., 528 F.3d 871, 880 (Fed. Cir. 2008); Arkema, 706 F.3d at 1357).
Declaratory plaintiffs, the court explained, “need not be . . . certain that the harm
the AIA took effect on March 18, 2013, the pre-AIA version of Section 102 governs. See
Medism Ltd. v. BestMed, LLC, 758 F.3d 1352, 1354 n. 1 (Fed. Cir. 2014).
24
they identify will come about,” but they must at least show that “they are at
substantial risk of that harm.” Id. at 1360 (quoting Clapper v. Amnesty Int’l USA,
133 S.Ct. 1138, 1150 n. 5 (2013)). That the plaintiffs in Organic Seed Growers might
one day grow or sell product with more than a “trace” amount of patented invention
in it, thus triggering the exception to the patentee’s promise not to sue, was “too
speculative” to warrant judicial intervention. See Id.19
Plaintiffs here find themselves in a position similar to that of the declaratory
plaintiffs in Organic Seed Growers. In this case, plaintiffs contend that Pacholok’s
covenant not to sue will not apply if “Induction and Lace have an infringement
dispute” and if “Lace challenges inventorship.” [151] at 15. Importantly—and most
detrimentally to plaintiffs’ inventorship claim—there is no indication that plaintiffs
have any concrete plans to sue Lace Technologies (or another third party) for
infringement, or that Pacholok, also a co-owner, has taken any such steps.20 And
Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 556 F.3d 1294 (Fed. Cir. 2009), is not to
the contrary. In Revolution, the patentee had covenanted not to sue for infringement based
on the manufacture or sale of any patent-practicing products before the conclusion of the
civil action, but reserved the right to sue on future sales of the same products. See id. at
1295–96, 1298. The reservation of this right, the court concluded, preserved the controversy
such that the defendant could pursue its counterclaim for declaratory judgment of
invalidity. See id. at 1299. But the court was careful to explain how very not speculative the
potential harm was: not only did the accused infringer have concrete plans to sell the same
products moving forward, but the patentee had already represented that it would return to
court should those sales occur. See id.
19
Plaintiffs do contend in their response brief, [151], that they have already filed an action
against Lace Technologies for copying Induction’s products. See id. at 10. However, that
case has settled. See id. Plaintiffs have alleged no steps taken toward suing Lace for a
second time, or more specifically, for the infringement of the patents at issue here. Indeed,
plaintiffs’ ability to sue Lace (or another third party) for such infringement is hampered by
the fact that Pacholok still owns pro rata title to the patents-in-suit. Because Pacholok
remains a co-owner, prudential standing rules provide that, with limited exceptions,
plaintiffs cannot sue Lace—or anyone else—for patent infringement without Pacholok’s go20
25
while it is true that third parties such as Lace need not wait until sued for
infringement—or even for a particularized threat of such suit—before they may
assert (through a declaratory-judgment action) the invalidity of a patent, see
MedImmune, 549 U.S. at 130–37, third parties cannot proceed with such a claim
unless and until the patentee has affirmatively asserted his rights in some way, see,
e.g., id. at 121–22 (describing a letter warning that royalties were owing under a
license); SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372, 1382 (Fed. Cir.
2007) (describing statements warning that a license was needed by the declaratory
plaintiff because, in the patentee’s estimation, the plaintiff was practicing the
patentee’s invention). Here, however, there is no allegation that plaintiffs have
asserted their patent rights against Lace Technologies (or any other entity), or that
Pacholok himself has done so. As far as the complaint is concerned, plaintiffs have
attempted to assert their rights only against Pacholok.
That plaintiffs might one day assert their patent rights against a third party,
or might one day (with Pacholok) file an infringement action against that third
party, is too uncertain a hypothetical to present a dispute of such “immediacy” that
declaratory judgment is warranted. See Organic Seed Growers, 718 F.3d at 1360.21
ahead. See Israel Bio-Engineering, 475 F.3d at 1256 (“Absent the voluntary joinder of all coowners of a patent, a co-owner acting alone will lack standing.” (citing Prima Tek II, 222
F.3d at 1377)); see also Ethicon, 135 F.3d at 1468 (dismissing an infringement suit because
the complaint “lack[ed] the participation of a co-owner”).
Indeed, the probability that plaintiffs (and Pacholok) will sue a third party for
infringement, or that plaintiffs will assert against a third party their rights in the patentsin-suit, appears to be the same now as it was before Pacholok filed his counterclaim—the
very counterclaim that plaintiffs say generated the immediacy of the current inventorship
dispute. See [151] at 13–14. If it was the filing of the counterclaim that flipped the
21
26
Under the totality of the circumstances presented here, I therefore find that
although there is an exception to Pacholok’s covenant not to sue, this exception is in
effect quite narrow, as plaintiffs have failed to demonstrate a non-speculative
likelihood that the exception will ever apply. Pacholok’s covenant is sufficient to
moot the inventorship controversy that existed previously; therefore, Count I of
plaintiffs’ complaint is dismissed for lack of jurisdiction.22
B.
The Remaining Claims
Pacholok maintains that only plaintiffs’ infringement and inventorship
claims (Counts I and III, as discussed above) “arise under” the federal patent laws,
and that, assuming dismissal of those counts, the court cannot exercise
supplemental jurisdiction over the remaining (state-based) claims. See [144] at 3.
For the reasons explained below, however, one of the remaining claims does arise
under federal law. I therefore address whether supplemental jurisdiction applies to
the other two counts.
“immediacy” switch, I do not see how Pacholok’s covenant would not flip it back—since, in
effect, the covenant essentially returns the parties to where they were before the
counterclaim was ever filed. (And though a party accused of infringement tomorrow may be
more likely to assert an invalid-for-misjoinder defense than if sued before the counterclaim
appeared in the public record, such a defense—as I explain above—cannot come into play
unless and until the patentees have filed suit against that third party, or have asserted
their rights against that party in some concrete way. Plaintiffs have given no indication
that either event has taken place here.) As Pacholok’s covenant not to sue effectively
returns us to the pre-“immediate controversy” landscape, declaratory judgment is no longer
appropriate.
In his reply brief, [153], Pacholok argues that there are several additional reasons why
plaintiffs’ inventorship claim should be dismissed. See id. at 4–6. As I have already
determined that I do not have jurisdiction over this claim, I do not address these additional
arguments.
22
27
1.
Payments Under the Stock Purchase Agreement (Count V)
Plaintiffs seek a declaratory judgment that they do not owe Pacholok any
money pursuant to the Stock Purchase Agreement from 2006. See [139] ¶¶ 55–58.
Pacholok treats this claim as one arising solely under state law. I disagree.
The federal district courts have original jurisdiction over any civil action
“arising under any Act of Congress relating to patents.” Lab. Corp. of Am. Holdings
v. Metabolite Labs., Inc., 599 F.3d 1277, 1282 (Fed. Cir. 2010) (quoting 28 U.S.C.
§ 1338(a)). Whether an action truly “arises under” the patent laws is governed by
the well-pleaded complaint rule, which provides that Section 1338 jurisdiction
extends only to cases where: (1) a well-pleaded complaint establishes that federal
patent law creates the cause of action; or (2) a well-pleaded complaint shows that
the plaintiff’s right to relief necessarily depends on the resolution of a patent-law
question—i.e., that “patent law is a necessary element of one of the . . . claims.” Id.
(citing Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 808–09 (1988)). In
a declaratory-judgment action such as the one presented here, the complaint to be
assessed is not the declaratory plaintiff’s complaint, but a hypothetical complaint
from an action that the defendant would have brought but for the plaintiff’s
declaratory suit. See id. (citing Speedco Inc. v. Estes, 853 F.2d 909, 912 (Fed. Cir.
1988); Cedars-Sinai Med. Ctr. v. Watkins, 11 F.3d 1573, 1578 (Fed. Cir. 1993)).
Here, plaintiffs contend that Induction, through the 2006 Stock Purchase
Agreement, committed to pay Pacholok a royalty on sales of goods covered by the
patents-in-suit for each year in which said sales exceeded one million dollars. See
28
[139] ¶ 56. Plaintiffs maintain that no such sales have exceeded the threshold dollar
amount, and thus Induction does not owe Pacholok any royalties under the
Agreement. See id. ¶ 57. In his hypothetical claim against plaintiffs, Pacholok
would therefore be required to prove that Induction has breached the Stock
Purchase Agreement by failing to pay the royalties owed under the contract. A
breach-of-contract claim sounds in state law; but if, in proving any element of that
claim, a question of patent law must be resolved, the claim arises under federal law
and may be entertained in a federal forum, see Metabolite, 599 F.3d at 1282. That is
the case here.
To prove that Induction has breached the Stock Purchase Agreement,
Pacholok would necessarily have to show that at least some of the products sold by
Induction within the relevant time period were covered by the ’096 or ’590 patent.
Whether Induction’s goods practiced, or were “covered by,” the patents-in-suit is in
essence a question of infringement—and is, therefore, an issue of federal law. See
Jang v. Bos. Scientific Corp., 532 F.3d 1330, 1334 n. 5 (Fed. Cir. 2008) (citing
Christianson, 486 U.S. at 808–09; U.S. Valves, Inc. v. Dray, 212 F.3d 1368, 1372
(Fed. Cir. 2000)); see also U.S. Valves, 212 F.3d at 1372 (noting that a contract case
“contains a substantial issue of federal patent law” when, to prevail in that case, the
plaintiff must show that the products sold were “covered by” the licensed patents).
The Stock Purchase Agreement, in other words, effectively operates as a license
from Pacholok to Induction (whereby Induction has obtained the right to practice
the ’096 and ’590 patents in exchange for royalty payments to Pacholok). If
29
Induction then fails to pay as it should, it is both infringing the patents and
breaching the agreement.23
Because Pacholok’s hypothetical, well-pleaded complaint for breach of
contract necessarily contains an issue of federal patent law, there is federalquestion jurisdiction over plaintiffs’ claim for declaratory judgment regarding the
Stock Purchase Agreement. Pacholok’s motion to dismiss for lack of jurisdiction is
therefore denied as it pertains to Count V of the second amended complaint.
2.
Fiduciary Breach (Count II)
Because Pacholok was a former co-owner and director of Induction, plaintiffs
allege that Pacholok owed certain duties to the corporation. See [139] ¶¶ 32–34, 44.
Plaintiffs maintain that these duties—including a duty of loyalty and a fiduciary
duty—continued even after Pacholok parted ways with the company. See id. ¶ 42,
46. Pacholok breached these duties, plaintiffs contend, when: (1) he failed to
formally assign to Induction his ownership rights in the patents-in-suit; and (2) he
purported to license the patents to Induction’s competitor, Lace Technologies,
without Induction’s approval. See id. ¶ 47–49.
As plaintiffs’ claim of fiduciary breach sounds purely in state law, and as this
is not a diversity case, my jurisdiction over this claim (if any) is limited to
I note that, in practice, Pacholok’s hypothetical infringement claim against Induction
would not necessarily survive a motion to dismiss for lack of standing. As discussed further
above, Induction is an exclusive licensee of Sarge Holdings, which currently holds 50percent undivided title to the patents-in-suit. Thus, for the same reasons that plaintiffs do
not now have standing to sue Pacholok for infringement, Pacholok, conversely, may not
have standing to bring an infringement suit against Induction. Nevertheless, whether
Pacholok’s hypothetical breach-of-contract suit could survive a standing challenge is a
separate issue from whether the hypothetical suit contains an issue of federal patent law.
23
30
supplemental jurisdiction. District courts have supplemental jurisdiction over stateclaims “that are so related to claims [within the court’s] original jurisdiction that
they form part of the same case or controversy.” 28 U.S.C. § 1367(a). Two claims
form part of the same case or controversy if they “derive from a common nucleus of
operative facts.” Sanchez & Daniels v. Koresko, 503 F.3d 610, 614 (7th Cir. 2007)
(quoting Baer v. First Options of Chicago, Inc., 72 F.3d 1294, 1299 (7th Cir. 1995)).
Here, the only original-jurisdiction claim remaining is Count V, plaintiffs’
declaratory-judgment action regarding the 2006 Stock Purchase Agreement. Thus,
to exercise supplemental jurisdiction over plaintiffs’ claim of fiduciary breach, I
must find a nucleus of operative facts common with Count V.
I see no such nucleus here. The facts underlying plaintiffs’ claim of fiduciary
breach speak to Pacholok’s failure to assign his ownership rights to Induction, and
his interactions with Lace Technologies. The Stock Purchase claim, by contrast,
concerns whether Induction sold products covered by the patents-in-suit, and if so,
how much. If there is an overlap in facts between these two claims, it is negligible at
best (and not an overlap of operative facts).
Count II of plaintiffs’ second amended complaint is therefore dismissed for
lack of jurisdiction.
3.
Interference with Business Relations (Count IV)
According to plaintiffs, Pacholok continued to represent to third parties that
he was affiliated with Induction even after he had severed ties with the company.
See [139] ¶ 54. This, plaintiffs say—in combination with Pacholok’s having licensed
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the patents-in-suit to plaintiffs’ competitor—constituted a wrongful interference
with Induction’s business. See id. Like plaintiffs’ claim for fiduciary breach, this
claim is a matter of state law, and federal jurisdiction (if any) is limited to
supplemental jurisdiction. Here again, however, I find no commonality between the
facts underlying the state-law claim and those underlying the request for
declaratory judgment on the Stock Purchase Agreement. Whether Pacholok misled
third parties into believing that he was still a part of Induction—or cut plaintiffs
out of receiving royalty payments (and profits) by unilaterally licensing the patentsin-suit to Lace Technologies—is unconnected to whether, between 2007 and 2013,
Induction sold products embodying either patented invention.
Count IV of plaintiffs’ second amended complaint is therefore dismissed for
lack of jurisdiction.
IV.
Conclusion
Pacholok’s retention of ownership rights in the patents-in-suit has created a
thorn in the side of Induction, and the company’s attempt to sever ties through
contractual arrangements has in a sense backfired—preventing Induction from
accessing a federal forum to resolve the most pressing of the parties’ disputes:
control over the patents. In the end, that fight belongs in state court. For the
reasons discussed above, Pacholok’s motion to dismiss is granted in part and denied
in part. The motion is denied as it pertains to plaintiffs’ request for a declaration
that no money is owed Pacholok under the Stock Purchase Agreement (Count V).
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The motion is granted as it pertains to all other claims in the second amended
complaint, [139], which are dismissed without prejudice for lack of jurisdiction.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: 9/30/14
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