Natural Alternatives, LLC et al v. JM Farms et al

Filing 27

OPINION AND ORDER: DENYING pla's 22 Motion to Dismiss the dft's counterclaim. Signed by Judge Karen K. Caldwell on 9/30/13. (KJR)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
AT LEXINGTON
CIVIL ACTION NO. 5:12-CV-333-KKC
NATURAL ALTERNATIVES, LLC ET AL.,

v.

PLAINTIFFS

OPINION AND ORDER

JM FARMS, ET AL.,

DEFENDANTS
** ** ** ** **

This matter is before the Court on the Plaintiffs’ motion to dismiss (DE 22) the
counterclaim filed against them by Defendants JM Farms and Max Smith (the “Defendants”).
The Plaintiffs argue that this Court does not have subject matter jurisdiction over the
counterclaim and that the counterclaim should be dismissed for failure to state a claim. For the
following reasons, the motion will be denied.
I.

Facts.

This action began when the Plaintiffs, Natural Alternatives, LLC and Todd A. Bloomer,
filed a complaint against the Defendants asserting that the Defendant JM Farms had breached a
license agreement by which the Plaintiffs had granted JM Farms certain exclusive rights to
certain United States and Canadian patents and trademarks.
According to the complaint, together, the Plaintiffs own five U.S. patents (the “330
patent,” the “422 patent,” the “753 patent,” the “684 patent,” and the “308 patent,” ) and three
U.S. trademarks (the Geomelt, Geosalt and Mountain Melt trademarks). (DE 1, Complaint, ¶ 9.)
The Plaintiff Bloomer also owns one Canadian patent (the “795 patent”) and one Canadian
trademark for the term “Geomelt.” Bloomer has applied for four additional Canadian patents (the

“738 patent,” the “532 patent,” the “829 patent,” and the “253 patent”). With the license
agreement, the Plaintiff Natural Alternatives granted Defendant JM Farms exclusive rights to the
patents and trademarks. In return, JM Farms agreed to pay Natural Alternatives a monthly
royalty of $25,000. JM Farms has ceased paying this amount. The Plaintiffs assert a breach of
contract claim against the Defendants.
The claim at issue in this motion is the Defendants’ counterclaim. In their counterclaim,
the Defendants assert that they have ceased paying the royalty payments because, in June 2012,
the U.S. Patent and Trademark Office entered a final rejection of all the claims of one of the
patents – the ‘330 patent. Thus, in July 2012, the Defendants provided the Plaintiffs with notice
that they were immediately terminating the License Agreement. The Defendants assert that, later,
the USPTO also rejected the claims of the ‘684 patent. The Plaintiffs assert that they have
appealed or asked for reconsideration of the rejection of both of these patents and, thus, the status
of both patents is still pending.
The Defendants assert that they are justified in ceasing to pay the royalty payment and
terminating the license agreement because:
1) “[i]f the claims of a patent are rejected as unpatentable and, therefore, invalid .
. . by reexamination at the United States Patent Office, then even before the
reexamination is final, the enforceability of those claims becomes tenuous at
best;” and
2) “if the claims receive a final rejection by the Patent Office during a
reexamination, then the claims are unenforceable. . . [and] then there are no patent
rights remaining in that patent and the exercise of those rights is prohibited.
(DE 9, Counterclaim ¶ 11.)
The Defendant JM Farms asserts a claim against the Plaintiffs under the Declaratory
Judgment Act, 28 U.S.C. § 2201(a) asking the Court to declare that the ‘330 and ‘684 patents are

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unenforceable and, thus, the license agreement is not enforceable and that JM Farms is not
infringing the other patent rights that are the subject of the license agreement.
The Plaintiffs move to dismiss the counterclaim arguing that this Court lacks subject
matter jurisdiction over it because there is no justiciable controversy. The Plaintiffs further
assert that the Defendants’ counterclaims should be dismissed for failure to state a claim.
II.

Analysis.

A

Subject Matter Jurisdiction.

The Declaratory Judgment Act provides that, “[i]n a case of actual controversy within its
jurisdiction . . . any court of the United States. . . may declare the rights and other legal relations
of any interested party seeking such declaration, whether or not further relief is or could be
sought.” 28 U.S.C. § 2201(a). “[T]he phrase ‘case of actual controversy’ in the Act refers to the
type of ‘Cases’ and ‘Controversies’ that are justiciable under Article III.” MedImmune, Inc. v.
Genentech, Inc., 549 U.S 118, 127 (2007).
This court has the jurisdiction to hear a declaratory judgment action when “the facts
alleged, under all the circumstances, show that there is a substantial controversy, between parties
having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a
declaratory judgment.” Id. (quoting Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S.
270, 273 (1941)). The dispute must be “definite and concrete, touching the legal relations of
parties having adverse legal interests” and be “real and substantial and admit of specific relief
through a decree of a conclusive character, as distinguished from an opinion advising what the
law would be upon a hypothetical state of facts.” Id. at 126 (internal quotations omitted).
In Medimmune, a patent licensee believed that one of the patents it had rights to under the
license agreement was not valid and that, even if it were valid, it did not cover one of the drugs

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that the licensee was selling. Nevertheless, it continued making royalty payments and filed a
declaratory-judgment action. The district court dismissed the action for lack of subject matter
jurisdiction determining that the licensee could not have any “reasonable apprehension” of being
sued for infringement since it continued paying the royalty payments. Id. at 122.
The Supreme Court reversed, finding that “the requirements of [a] case or controversy are
met where payment of a claim is demanded as of right and where payment is made, but where
the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or
to challenge the legality of the claim.” Id at 131. Important for the case before this Court,
however, the Supreme Court noted that there was no dispute that the “actual controversy”
standards of the Declaratory Judgment Act would have been satisfied if the licensee had simply
ceased making royalty payments as the Defendants have done in this case. Id. at 128.
Here, the Plaintiffs have sued the Defendants for breach of the license agreement because
the Defendants have ceased paying royalty payments as required under the agreement. The
Defendants argue that the patent rights they agreed to pay for are no longer valuable because of
the reexamination proceedings and, thus, they need not continue paying the royalty payments.
They ask for a declaration that the ‘330 and ‘684 patents are not enforceable. They also ask for a
declaration that the license agreement is no longer enforceable because its purpose has been
frustrated.
Thus, the enforceability of the patents and the license agreement is a definite and
concrete dispute between the parties. In fact, it is the central dispute between the parties In
arguing that the Defendants’ declaratory action does not present an actual case or controversy,
the Plaintiffs recognize that “a patent validity challenge can be brought by the licensee if the
validity of the patent is relevant to the issues to be resolved between the licensee and the patent

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holder.” (DE 22, Mem. at 14.) The Plaintiffs argue that here that is not the case because, even if
the ‘330 and ‘684 patents are not enforceable, the Defendants would still owe royalties to the
Plaintiffs under the terms of the license agreement at issue in this case.
This is an argument that goes to the merits of the Defendants’ counterclaim. It is not an
argument against subject-matter jurisdiction. The Plaintiffs cite two cases in support of their
proposition that a licensee may be required to pay royalties even if a patent is not enforceable but
those two cases do not deal with subject-matter jurisdiction. Those cases address the ultimate
issue of the licensees’ claim that payment of royalties depended upon the validity of the
underlying patents. In addressing that issue, the court analyzed the language of the particular
license and settlement agreements at issue. See Studiengellschaft Kohle, M.B.H. v Shell Oil Co.,
112 F.3d 1561, 1567 (Fed Cir. 1997); Hemstreet v Spiegel, Inc., 851 F.2d 348, 351 (Fed. Cir.
1988). The Plaintiffs may be correct that the Defendants owe them royalties whether or not the
patents at issue are enforceable but that argument goes to the merits of the dispute between the
parties and not this Court’s subject-matter jurisdiction.
In arguing that the enforceability of the patents and license agreement is not actually in
controversy, the Plaintiffs argue that the Defendants have not alleged that the Plaintiffs have
threatened to sue them for infringement of the patents or taken any action that would create in
the Defendants a “reasonable apprehension” that the Plaintiffs would sue them for infringement.
(DE 22, Mem at 7.) But the Plaintiffs recognize that, in MedImmune, the Supreme Court
determined that, whether the declaratory judgment plaintiff has a reasonable apprehension of suit
is no longer the sole test for jurisdiction in patent declaratory judgment actions. See Prasco, LLC
v. Medicis Pharmaceutical Corp., 537 F.3d 1329, 1336 (Fed. Cir. 2008). “[F]ollowing
MedImmune, proving a reasonable apprehension of suit is one of multiple ways that a declaratory

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judgment plaintiff can satisfy the more general all-the-circumstances test to establish that an
action presents a justiciable Article III controversy.” Id.
In Prasco, the court recognized that a patentee can cause injury sufficient to satisfy the
case-or-controversy requirement in a number of ways including, as in this case, by demanding
royalty payments. Id. at 1339. As discussed, in MedImmune, the Court concluded that
“declaratory judgment jurisdiction was proper in the context of a patent licensing agreement
when the patentee claimed a right to royalties under the licensing agreement, and the licensee
asserted that no royalties were owing because the patent was invalid and not infringed.” Id. For
the same reason, declaratory judgment is proper in this case and this Court has subject matter
jurisdiction to resolve that issue.
B.

Failure to state a claim

As to their argument that the counterclaim should be dismissed for failure to state a
claim, the Plaintiffs appear to raise two issues. First, they argue that, even if the ‘330 and ‘684
patents are not enforceable, the Defendants still must pay royalties pursuant to the terms of the
licensing agreement. Second, the Plaintiffs argue that the license agreement cannot be deemed
unenforceable due to frustration of purpose because it was foreseeable to the Defendants that the
patents would be found unenforceable.
Both of these arguments require an analysis of at least the language of the license
agreement and likely also require an analysis of the circumstances of the negotiation and signing
of the license agreement. Accordingly, these arguments cannot be resolved on a motion to
dismiss.
The Plaintiffs also assert that the Defendants’ counterclaim must be dismissed because it
is hypothetical since the claims of the patents at issue have not been finally rejected. In their

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counterclaim, however, the Defendants assert that, “if the claims of a patent are rejected as
unpatentable. . . then even before reexamination is final, the enforceability of those claims
becomes tenuous at best.” (DE 9, Counterclaim ¶ 11.)
Thus, the Defendants appear to assert that the value of the patents has been diminished
even while their status is pending at the USPTO. In their response, they state that the
“reexaminations have weakened the market’s perception of how strong the Plaintiffs’ patent
rights are. . .and that the value of the license granted to Defendants has been diminished to the
point of being worthless.” (DE 24, Response at 9.)
Setting aside the issue of whether this allegation is correct, it at least asserts an actual
injury instead of a hypothetical one. The Plaintiffs cite statistics indicating that it is likely that,
after reexamination, the patent claims will be held valid. The Court cannot consider these
statistics, however, on a motion to dismiss. Further, these statistics do not refute the Defendants’
argument that the reexamination proceedings themselves have diminished the value of the
license.
The Plaintiffs also cite case law indicating that the fact that a patent is undergoing
reexamination does not establish a likelihood that it will be determined invalid. But, again, this
case law does not address the Defendants’ argument that the value of the patents has been
diminished by the reexamination process.
III.

Conclusion.

For all these reasons, the Court hereby ORDERS that the Plaintiffs’ motion to dismiss the
Defendants’ counterclaim (DE 22) is DENIED.
Dated this 30th day of September, 2013.

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