DePuy Orthopaedics Inc v. Orthopaedic Hospital

Filing 42

OPINION AND ORDER DENYING 14 Motion to Dismiss for Lack of Jurisdiction. Signed by Judge Rudy Lozano on 2/22/2013. (lyf)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
SOUTH BEND DIVISION
DEPUY ORTHOPAEDICS, INC.,

)
)
)
)
)
)
)
)
)

Plaintiff,
v.
ORTHOPAEDIC HOSPITAL,
Defendant.

No. 3:12-CV-299

OPINION AND ORDER
This matter is before the Court on the Motion to Dismiss for
Lack of Subject Matter Jurisdiction filed by Orthopaedic Hospital
(“Hospital”) on August 6, 2012.

For the reasons set forth below,

the motion is DENIED.

BACKGROUND
Plaintiff

DePuy

orthopedic devices.
with

Defendant

Orthopaedics,

Inc.

(“DePuy”)

makes

In 1999 it entered into a license agreement

Hospital,

a

hospital

in

Los

Angeles,

which

provided that DePuy would pay royalties to the Hospital for
certain patent rights.

Earlier this year DePuy reviewed the

agreement and concluded that it had expired in 2006.

When it

contacted the Hospital about the expiration of the agreement,

1

however, the Hospital disputed DePuy’s conclusion and claimed
that the agreement remained in full effect.

DePuy therefore

initiated this suit, pursuant to the Declaratory Judgment Act,
seeking a judicial declaration that the agreement had expired in
2006 and had not been breached.
The

Hospital

has

now

moved

to

dismiss

the

suit

on

the

grounds that there is no subject-matter jurisdiction here because
there is no actual dispute sufficient to invoke the Declaratory
Judgment

Act.

The

motion

is

fully

briefed

and

ripe

for

adjudication.

DISCUSSION
Federal Rule of Civil Procedure 12(b)(1) governs dismissal
for lack of subject matter jurisdiction.

Jurisdiction is the

“power to decide” and must be conferred upon a federal court.

In

re Chicago, Rock Island & Pacific R.R. Co., 794 F.2d 1182, 1188
(7th Cir. 1986).

When considering a motion to dismiss under Rule

12(b)(1), the court must accept all of the plaintiff’s well-pled
factual allegations as true and all reasonable inferences derived
from those allegations must be drawn in the plaintiff’s favor.
United Transp. Union v. Gateway Western R.R. Co., 78 F.3d 1208,
1210 (7th Cir. 1996).

However, the court may also look beyond

2

the complaint and review any extraneous evidence submitted by the
parties to determine whether subject matter jurisdiction exists.
Id.

The facts recounted here are derived from DePuy’s Complaint

and the correspondences between the parties cited in the briefing
on the motion to dismiss.
DePuy designs and manufactures orthopedics products.
at 2.]

[DE 1

DePuy and the Hospital began their work together in 1999

when they entered into a research agreement whereby the Hospital
provided research and development services to DePuy to improve
the wear of polyethylene bearings on DePuy’s products.
2-3.]

[DE 1 at

The two also entered into the license agreement, which

addressed the patent rights that might emerge from the research
agreement.

[DE 1 at 3.]

The license agreement, by its terms,

“expire[d] on the later of 7 years from the Effective Date or the
expiration of the last applicable Patent.”

[DE 1 at 4-5.]

effective date of the license agreement was March 1, 1999.
at 5.]

The
[DE 1

Since there were no patents between the parties covered

under the agreement as of March 1, 2006, DePuy alleges that the
agreement terminated on that date.

[DE 1 at 5.]

On February 16, 2012, DePuy, after conducting a review of
its contract files, informed the Hospital via letter that the
license agreement between them had expired on March 1, 2006.

3

[DE

1 at 5.]

Dr. Harry McKellop, the Hospital’s Vice President,

replied in a letter dated March 27, 2012, which rejected DePuy’s
claim that the agreement had expired and indicated that DePuy
could not continue to market and sell products based on the
Hospital’s technology without paying the required royalties.
1 at 5.]
was

[DE

Referring specifically to a particular technology that

allegedly

“invented

by

Orthopaedic

Hospital

under

[the]

Research Agreement,” Dr. McKellop wrote:
The notion that DePuy can send us a letter
announcing that its obligations to Orthopaedic Hospital
ended six years ago and therefore can now disregard
Orthopaedic Hospital’s ownership of the 110 technology,
and market and sell products based on the 110
technology without paying the agreed royalties to
Orthopaedic Hospital, simply does not fly. . . . The
bottom line is that Orthopaedic Hospital licensed the
110 technology to DePuy and DePuy is obligated to pay
royalties on it and otherwise perform its duties under
the Agreement.
[DE 16-2 at 3-4.]

Dr. McKellop further stated that Depuy’s

position was “contrary to the text of the [license] Agreement and
DePuy’s consistent conduct for the past six years,” asked that
DePuy “[p]lease reconsider this matter immediately,” and also
raised the potential that it might be necessary to seek legal
action:

“We can provide additional chapter and verse under our

Agreement but we hope that is not necessary. … It would be the
height of folly to turn this matter over to the lawyers.”

4

[DE

16-2 at 3-4.]
DePuy

promptly

responded

with

a

March

29,

2012,

letter

stating that it was in receipt of Dr. McKellop’s letter and that
it would review it and “respond in good time.”

[DE 16-3 at 2.]

Without yet receiving a response, Dr. McKellop sent an April 4,
2012, letter stating that he was “confident that, once you have
reviewed the relevant text, you will agree that the Patent Rights
and License Agreement and its companion Research Agreement remain
in full effect” and that he hoped to be able to state to the
Hospital’s

Board

of

Directors

that

the

matter

had

“been

satisfactorily resolved without the need for legal remedies.”
[DE 16-4 at 3.]

DePuy promptly responded once again in an April

10, 2012, letter that it was continuing to review the matter and
would respond when its review was complete. [DE 16-5 at 2].

Dr.

McKellop then sent an April 20, 2012, letter again asking about
the status of DePuy’s review; DePuy did not respond to this
letter. [DE 16-6 at 3.]
Next, in June of 2012, the parties exchanged a series of
emails about the issue.

On June 5, 2012, Dr. McKellop emailed

DePuy’s President, Andrew Ekdahl, asking about the status of the
matter, suggesting a conference call between the parties, and
stating that he was hoping to tell his Board of Directors that

5

“we have resolved this disagreement, without the need for formal
legal action that would constitute an unnecessary expense for us
and for DePuy.”
the next day:

[DE 16-7 at 3-4.]

Ekdahl responded in an email

“I recommend that we have our attorney’s speak to

one another.”

[DE 16-7 at 3.]

Later that week, the parties

exchanged the information about their respective attorneys.

On

the Monday of the following week, DePuy filed this lawsuit for
declaratory judgment. [DE 1.]
the

telephone

the

next

When the parties’ lawyers spoke on

day,

DePuy’s

attorney

informed

the

Hospital’s attorney about the suit and emailed him a courtesy
copy of the Complaint.

[DE 21 at 1-2.]

The Hospital now argues in its motion to dismiss DuPuy’s
declaratory judgment action that this Court lacks subject-matter
jurisdiction because no case or controversy existed between it
and DePuy at the time the Complaint was filed.

According to the

Hospital, there was not an imminent threat of litigation.

The

Hospital also asserts that, even if there was an imminent threat
of litigation, this Court should refuse to accept jurisdiction
because DePuy used misleading tactics to ensure it obtained its
venue of choice.
Since the filing of the instant motion, the Hospital has
filed

a

separate

legal

action

against

6

DePuy

in

the

Central

District of California.

That action also seeks a declaratory

judgment, but raises additional claims against DePuy too.

See DE

23-1 Orthopaedic Hospital v. DePuy Orthopaedics, Inc., Case No.
CV12-11004 ODW (PLAx)(C.D. Cal. Dec. 28, 2012).

The Hospital has

also filed a motion to transfer this case to the Central District
of California. [DE 28].

That motion will be addressed in a

separate order; at the moment, this Court limits its inquiry to
subject matter jurisdiction.

Hospital’s Motion
The Declaratory Judgment Act affords relief to parties from
uncertainty and insecurity with respect to their legal relations.
Nucor Corp. v. Aceros y Maquilas de Occidente, S.A. de C.V., 28
F.3d 572, 578 (7th Cir. 1994).
unequivocally stated:

As the Seventh Circuit has

“[A] party may seek a declaratory judgment

to determine whether a particular contract term is binding and
need not risk breaching the contract and await a suit.” Johnson
v. McCuskey, 72 Fed. App’x. 475, 477 (7th Cir. 2003).
In determining if an action for declaratory relief can be
heard, this Court looks to see if “a declaratory judgment will
settle the particular controversy and clarify the legal relations
in issue.”

Nucor Corp., 28 F.3d at 579.

7

And to determine if

there is a sufficient controversy between the parties to invoke
the Declaratory Judgment Act, this Court looks at “whether the
facts alleged, under all circumstances, show that there is a
substantial controversy, between parties having adverse legal
interests, of sufficient immediacy and reality to warrant the
issuance of declaratory judgment.”

MedImmune, Inc. v. Genentech,

Inc., 549 U.S. 118, 127 (2007).
The

Hospital

argues

that

at

the

time

DePuy

filed

its

Complaint it could not meet this standard because there was no
immediate and real controversy.
Hospital’s
consistent

multiple
and

responses

This argument is a stretch.
to

unequivocal:

DePuy’s

it

initial

disagreed

letter

with

The
were

DePuy’s

interpretation of the license agreement, stated that DePuy needed
to continue to pay royalties pursuant to that agreement, and
indicated that legal action could be necessary to sort out the
differing interpretations.
was

perfectly

justified

In the face of this response, DePuy
in

filing

this

suit

and

seeking

a

definitive judicial determination as to the interpretation and
enforceability of the license agreement.
The Court, in MedImmune, summarized the central question at
issue in that case:
Respondents claim a right to royalties under the
licensing agreement. Petitioner asserts that no

8

royalties are owing because the Cabilly II patent is
invalid and not infringed; and alleges (without
contradiction) a threat by respondents to enjoin sales
if royalties are not forthcoming. The factual and
legal dimensions of the dispute are well defined and,
but for petitioner's continuing to make royalty
payments, nothing about the dispute would render it
unfit
for
judicial
resolution.
[However,]
the
continuation of royalty payments makes what would
otherwise be an imminent threat at least remote, if
not nonexistent. As long as those payments are made,
there is no risk that respondents will seek to enjoin
petitioner's sales. Petitioner's own acts, in other
words, eliminate the imminent threat of harm.
The
question before us is whether this causes the dispute
no longer to be a case or controversy within the
meaning of Article III.
Id. at 128.

The Court went on to definitively answer the

question it posed:

the dispute was fit for judicial resolution

under the Declaratory Judgment Act, and thus “the dismissal of
this

action

error.

for

lack

of

subject-matter

jurisdiction”

was

in

Id. at 137.

The same is true here.

The Hospital has claimed “a right to

royalties under the licensing agreement.”

DePuy “asserts that no

royalties are owing” because the agreement expired.

The “factual

and legal dimensions of the dispute are well defined” and are fit
“for judicial resolution.”

Therefore, a controversy sufficient

to invoke the Declaratory Judgment Act exists and this Court has
subject-matter jurisdiction over the case.
The fact that this case involves patents seems to have

9

unnecessarily confused things in the parties’ briefing.

There is

a whole species of case law regarding the Declaratory Judgment
Act’s application to disputes over patent infringement (of which
MedImmune is an important new member), which makes sense since
the constant threat of litigation in the patent world is somewhat
unique.1

But this case is not really a dispute over the validity

and enforceability of various patents – it is a contractual
dispute that happens to involve patents.
the

Declaratory

Judgment

Act’s

And the law regarding

application

to

contractual

disputes is even more straightforward:
In the context of disputes between parties to a
contract, the declaratory judgment remedy “is intended
1

Indeed, the potential headaches particular to patent litigation
appear to have been one of the central motivations for the
Declaratory Judgment Act in the first place, as aptly summarized
by one of the Act’s supporters during Senate hearings:
I assert that I have a right to use a certain patent.
You claim that you have a patent. What am I going to do
about it? There is no way that I can litigate my right,
which I claim, to use that device, except by going
ahead and using it, and you [the patent holder] can sit
back as long as you please and let me run up just as
high a bill of damages as you wish to have me run up,
and then you may sue me for the damages, and I am
ruined, having acted all the time in good faith and on
my best judgment, but having no way in the world to
find out whether I had a right to use that device or
not.
Hearings on H.R. 5623 Before a Subcomm. of the Senate Comm. on
the Judiciary, 70th Cong. 35 (1928)(statement of E.R.
Sunderland).
10

to provide a means of settling an actual controversy
before it ripens into a violation of the civil or
criminal law, or a breach of a contractual duty.” Rowan
Cos. v. Griffin, 876 F.2d 26, 28 (5th Cir. 1989). If
there is “a real, substantial, and existing controversy
.... a party to a contract is not compelled to wait
until he has committed an act which the other party
asserts will constitute a breach.”
Keener Oil & Gas
Co. v. Consol. Gas Utils. Corp., 190 F.2d 985, 989
(10th Cir. 1951). In these situations, relevant Article
III considerations include whether the contractual
dispute is real, in the sense that it is not factually
hypothetical; whether it can be immediately resolved by
a judicial declaration of the parties' contractual
rights and duties; and whether “the declaration of
rights is a bona fide necessity for the natural
defendant/declaratory judgment plaintiff to carry on
with its business.” Hyatt Int'l Corp. v. Coco, 302 F.3d
707, 712 (7th Cir. 2002); cf. MedImmune, 549 U.S. at
132, 127 S.Ct. 764 (“actual or threatened serious
injury to business or employment by a private party” is
coercive).
Maytag Corp. v. International Union, United Auto., Aerospace
& Agricultural Implement Workers of America, 687 F.3d 1076 (8th
Cir. 2012).
All of these factors have been satisfied here:

The dispute

here is real, not hypothetical; it can be resolved by judicial
determination; and it is a bone fide threat of injury to DePuy’s
business (i.e., DePuy needs to know whether it has to continue to
pay royalties pursuant to the agreement).

See also

Medical

Assur. Co., Inc. v. Hellman, 610 F.3d 371, 379 (7th Cir. 2010)
(district court abused its discretion by staying a declaratory
judgment

action

that

would

have

11

resolved

the

parties’

“contractual relations”); Johnson, 72 Fed. App’x. at 477 (“[A]
party may seek a declaratory judgment to determine whether a
particular contract term is binding and need not risk breaching
the contract and await a suit.”); Northland Ins. Co. v. Gray, 240
F. Supp. 2d 846, 850 (N. D. Ind. 2003) (denying a motion to
dismiss alleging that there was no actual controversy for a
declaratory judgment and finding it had the power to determine
the contractual rights of the parties).
The

Hospital

also

argues

that

there

is

no

immediate

controversy because it repeatedly made statements to DePuy that
it “expressed a strong preference against litigation.

And what

did not happen was the Hospital threatening suit, much less
filing one. On the contrary, the Hospital repeatedly told DePuy
that it did not want to litigate.”
is hard to take seriously.

[DE 22 at 6.]

This argument

One who repeatedly says that he hopes

he does not have to call in his attorney to litigate a dispute
clearly

raises

the

tacit

threat

that

litigation

is

indeed

possible. DePuy was entirely justified, in the face of these
statements, to believe there was a substantial dispute that could
result in litigation over the interpretation of the licensing
agreement and to opt to take the preemptive step of filing a
declaratory judgment action.

12

Subject-matter jurisdiction thus exists here.

Moreover, at

this juncture, this Court sees no persuasive reason why, as the
Hospital
decline

urges,

the

Court

jurisdiction.

The

should

exercise

Hospital

has

its
filed

discretion
a

motion

to
to

transfer pursuant to 28 U.S.C. § 1404(b), and arguments relative
to the proper forum, including the Hospital’s allegation that
DePuy brought this suit in bad faith, will be addressed by way of
a separate order on the motion to transfer.

This Court finds

that there is a substantial controversy between the parties and
therefore denies the Hospital’s motion to dismiss.

CONCLUSION
For the foregoing reasons, the Hospital’s Motion to Dismiss
for Lack of Subject Matter Jurisdiction [DE 14] is DENIED.

DATED: February 22, 2013

/s/RUDY LOZANO, Judge
United States District Court

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