University of Michigan v. St. Jude Medical, Inc.

Filing 30

Memorandum and Order Denying Plaintiff/Counter Defendant's 25 Motion to Dismiss Count 1 of Defendant/Counter Plaintiff's First Amended Counterclaim. Signed by District Judge Avern Cohn. (SCha)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

REGENTS OF THE UNIVERSITY
OF MICHIGAN,
Plaintiff/Counter-Defendant,
vs.

Case No. 12-12908

ST. JUDE MEDICAL, INC.,

HON. AVERN COHN

Defendant/Counter-Plaintiff.
_____________________________/

MEMORANDUM AND ORDER DENYING PLAINTIFF/COUNTER
DEFENDANT’S MOTION TO DISMISS COUNT I OF
DEFENDANT/COUNTER PLAINTIFF’S
FIRST AMENDED COUNTERCLAIM (Doc. 25)1
I. INTRODUCTION
This is a breach of contract/patent case. Plaintiff/Counter-Defendant Regents of
the University of Michigan (U of M) is suing Defendant/Counter-Plaintiff St. Jude Medical,
Inc. (St. Jude) claiming breach of a license agreement in which U of M granted St. Jude a
licence under certain U of M patents, including U.S. Patent No. 5,746,775 (the ‘775 patent).
U of M’s first amended complaint is in one count: breach of contract. St. Jude’s first
amended counterclaim is in two counts: count I- unjust enrichment; and count IIdeclaration of invalidity. Now before the Court is U of M’s motion to dismiss count I of St.
Jude’s first amended counterclaim on the grounds that St. Jude failed to file a notice of
claim in the Michigan Court of Claims (Doc. 25). For the reasons that follow, the motion
1

Upon review of the papers, the Court deems this matter appropriate for decision
without oral argument. See Fed. R. Civ. P. 78(b); E.D. Mich. LR 7.1(f)(2).

is DENIED.
II. BACKGROUND
On September 1, 1997, U of M and St. Jude entered into a license agreement in
which U of M granted St. Jude an exclusive license under certain U of M patents, including
the ‘775 patent, entitled “Method of Making Calcification-Resistant Bioprosthetic Tissue.”
Bioprosthetic tissue is human or animal tissue that is implanted in living beings to replace
malfunctioning or diseased native tissue, e.g. a heart valve. Frederick J. Schoen, MD, PhD
and Robert J. Levy, MD, Calcification of Tissue Heart Valve Substitutes: Progress Toward
Understanding and Prevention, 79 Ann. Thorac. Surg. 1072, 1072 (2005). A major role in
the failure of bioprosthetic tissue substitutes has been calcification. Id. Calcification is the
deposition of calcium and subsequent hardening of the tissue, which causes structural
damage to the implanted tissue, possibly requiring replacement if the damage becomes so
severe that the tissue no longer functions. The ‘775 patent provides methods of making
bioprosthetic tissue resistant to calcification. This, in turn, prevents hardening of the tissue
and allows the bioprosthetic tissue to have a longer life.
The license agreement required St. Jude to pay three or five percent of its net
sales, in quarterly royalty fees, depending on the product and where it was sold. St. Jude
produces the EPIC™ and TRIFECTA™ cardiovascular valve products, which U of M says
are manufactured using a process claimed in the ‘775 patent and subject to the royalty
obligation. U of M says the license agreement requires St. Jude to pay five percent
quarterly royalty fees for net sales of EPIC™ and TRIFECTA™ products manufactured or
sold in the United States or Israel, and three percent quarterly royalty fees for net sales of
EPIC™ and TRIFECTA™ products sold outside of the United States and Israel.
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On June 13, 2011, St. Jude notified U of M by letter that its EPIC™ and
TRIFECTA™ products sold outside of the United States were not subject to any royalty
obligation under the license agreement. Further, St. Jude notified U of M that it had
overpaid royalties for EPIC™ and TRIFECTA™ products manufactured and sold outside
of the United States from 2009 to 2011.

St. Jude claimed the overpayment was

approximately $4.3 million, and that it would apply this amount as a credit towards future
royalties. Prior to sending the June 13 letter, St. Jude had paid a five percent royalty on
all sales of its TORONTO ROOT™, EPIC™ and TRIFECTA™ products.
On July 2, 2012, U of M filed a one-count breach of contract complaint against St.
Jude.2 U of M says that it is owed royalty payments from June 2011 through the present
date for St. Jude’s manufacturing and selling of the EPIC™ and TRIFECTA™ products.
In addition, U of M says that it is owed royalty payments for St. Jude’s use of technology
that is covered by the license agreement.
St. Jude filed a two-count counterclaim:
Count I- Unjust Enrichment
Count II- Declaration of Invalidity
St. Jude seeks a declaration that the ‘775 patent is invalid. In addition, St. Jude says U of
M will be unjustly enriched if it is allowed to keep royalty payments that it was never owed.
St. Jude says it changed its manufacturing process in April of 1998. Based on this
change, St. Jude says it no longer uses the U of M’s patents or technology that is covered
by the license agreement, and its manufacturing and selling of the

EPIC™ and

TRIFECTA™ products is not covered by the license agreement. St. Jude says that, in
2

On November 30, 2012, the complaint was amended. Like the original complaint, the
amended complaint is in one count: breach of contract.
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June of 2011, it became aware that the change in manufacturing process relinquished its
royalty obligations under the license agreement.
III. LEGAL STANDARD3
A motion to dismiss under Fed. R. Civ. P. 12(b)(6) tests the sufficiency of a
complaint.

To survive a Rule 12(b)(6) motion to dismiss, the complaint's “factual

allegations must be enough to raise a right to relief above the speculative level on the
assumption that all of the allegations in the complaint are true.” Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 545 (2007). See also Ass’n of Cleveland Fire Fighters v. City of
Cleveland, Ohio, 502 F.3d 545, 548 (6th Cir. 2007). The court is “not bound to accept as
true a legal conclusion couched as a factual allegation.” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009) (internal quotation marks and citation omitted). Moreover, “[o]nly a complaint
that states a plausible claim for relief survives a motion to dismiss.” Id. at 679. Thus, “a
court considering a motion to dismiss can choose to begin by identifying pleadings that,
because they are no more than conclusions, are not entitled to the assumption of truth.”
Id. “While legal conclusions can provide the framework of a complaint, they must be
supported by factual allegations. When there are well-pleaded factual allegations, a court
should assume their veracity and then determine whether they plausibly give rise to an
entitlement to relief.” Id. In sum, “[t]o survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its
face.” Id. at 678 (internal quotation marks and citation omitted).

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U of M brings its motion under Fed. R. Civ. P. 12(c) and 12(b)(6). A motion to dismiss
under Fed. R. Civ. P. 12(c) is reviewed in the same manner as a motion to dismiss
under Fed. R. Civ. P. 12(b)(6). See Jelovske v. Bredesen, 545 F.3d 431, 434 (6th Cir.
2008). Therefore, the Court will apply the Fed. R. Civ. P. 12(b)(6) standard.
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IV. DISCUSSION
U of M says St. Jude’s unjust enrichment counterclaim must be dismissed for
failing to file a written claim notice under Mich. Comp. Laws § 600.6431. The Court of
Claims Act, 600.6401, et seq. (the Act), provides that,
No claim may be maintained against the state unless the
claimant, within 1 year after such claim has accrued, files in the
office of the clerk of the court of claims either a written claim or
a written notice of intention to file a claim against the state or
any of its departments, commissions, boards, institutions, arms
or agencies, stating the time when and the place where such
claim arose and in detail the nature of the same and of the
items of damage alleged or claimed to have been sustained,
which claim or notice shall be signed and verified by the
claimant before an officer authorized to administer oaths.4
Mich. Comp. Laws § 600.6431(1).
The Act provides that the Court of Claims generally has exclusive jurisdiction over
claims against the state, see Mich. Comp. Laws § 600.6419, but that a claimant is not
permitted to file a claim in the Court of Claims “against the state nor any department,
commission, board, institution, arm or agency thereof [if the claimant] has an adequate
remedy upon his claim in the federal courts.” Mich. Comp. Laws § 600.6440. Essentially,
where a claimant has an adequate remedy in federal court, the Court of Claims is stripped
of subject matter jurisdiction to hear the claim.
U of M says St. Jude’s failure to comply with Mich. Comp. Laws § 600.6431(1) is
a statutory bar to its counterclaim. U of M has not provided the Court with a single case
applying Mich. Comp. Laws § 600.6431(1) to bar a counterclaim against a state agency,
where the state agency is the party who initiates the lawsuit in federal court. Nor would
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U of M is a creature of the Michigan Constitution, and, as such, a part of the State of
Michigan. See Ritter v. University of Mich., 851 F.2d 846, 848 (E.D.Mich. 1988).
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such a strained interpretation of Mich. Comp. Laws § 600.6431(1) make sense. As
explained by the Michigan Court of Appeals, the purpose of Mich. Comp. Laws §
600.6431(1) “is to apprise the governmental agency that an action is contemplated, so that
they may take appropriate measures to gather evidence before the requisite information
is lost.” In re Estate of Fair v. State Veterans Facility of Mich., 55 Mich. App. 35, 39 (1974).
Further, Mich. Comp. Laws § 600.6431(1) ensures “that notice will be provided to the
proper governmental entity, thereby protecting plaintiffs and defendants alike from having
the wrong component of government notified.” McCahan v. Brennan, 492 Mich. 730, 744
(2012) (citation omitted) (emphasis in original).
When Mich. Comp. Laws § 600.6431(1) is read together with Mich. Comp. Laws
§ 600.6440 and Fed. R. Civ. P. 13(a), it is clear that the notice requirement does not apply
to St. Jude’s claim, whose only remedy is now in federal court. By bringing suit against St.
Jude for breach of contract in federal court, U of M created a situation where St. Jude had
to raise the unjust enrichment claim as a compulsory counterclaim. Fed. R. Civ. P. 13
states, in pertinent part,
(a) Compulsory Counterclaim.
(1) In General. A pleading must state as a counterclaim any
claim that– at the time of its service– the pleader has against
an opposing party if the claim:
(A) arises out of the transaction or occurrence that is the
subject matter of the opposing party’s claim; and
(B) does not require adding another party over whom the
court cannot acquire jurisdiction.

The Sixth Circuit has explained that a failure to raise a compulsory counterclaim

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bars the claim, whether it be under a theory of res judicata, or a theory of waiver or
estoppel. Kane v. Magna Mixer Co., 71 F.3d 555, 562-63 (6th Cir. 1995) (citing Carnation
Co. V. T.U. Parks Constr. Co., 816 F.2d 1099, 1103 (6th Cir. 1987)); see also Bluegrass
Hosiery, Inc. v. Speizman Indus., Inc., 214 F.3d 770, 772 (6th Cir. 2000) (“According to the
Supreme Court, claims coming within the definition of ‘compulsory counterclaim’ are lost
if not raised at the proper time.”) (citing Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 469
n.1 (1974)). Indeed, this requirement “serves the desirable goal of bringing all claims
arising out of the same transaction or occurrence before the court in a single action.”
Bluegrass Hosiery, 214 F.3d at 772. The “logical relationship” test applies to determine
“whether the issues of law and fact raised by the claims are largely the same and whether
substantially the same evidence would support or refute both claims.” Central West
Virginia Energy Co. v. Wheeling-Pittsburgh Steel Corp., 245 F. App’x 415, 424 (6th Cir.
2007) (quoting Sanders v. First Nat’l Bank & Trust Co. in Great Bend, 936 F.2d 273, 277
(6th Cir. 1991)).
Here, St. Jude’s unjust enrichment claim is logically related to, and arises out of
the same “transaction or occurrence that is the subject matter” of, U of M’s breach of
contract claim. The issues of law and fact are largely the same and the same evidence
would support or refute both claims. Both claims require interpreting the license agreement
and its effect on the parties’ obligations. In order to determine which party has put forth the
correct interpretation of the license agreement, the Court must consider both claims. Thus,
St. Jude’s counterclaim is compulsory.
Because St. Jude did not have the option to bring its counterclaim in the Court of
Claims after U of M brought its breach of contract claim in this Court, providing notice to the
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Court of Claims clerk that it intended to file a counterclaim in this case would be
meaningless. St. Jude’s “adequate remedy”– in fact, its only remedy– is in federal court.
Thus, the Court of Claims does not have subject matter jurisdiction to hear the
counterclaim, see Mich. Comp. Laws § 600.6440, and St. Jude is not obligated to comply
with the notice requirements for filing suit in that court.

The Michigan legislature

contemplated situations where a party bringing a claim against a state agency has an
“adequate remedy” in federal court, and stripped the Court of Claims of jurisdiction in these
cases. See Mich. Comp. Laws § 600.6440. This is one of these cases.
Further, U of M cannot claim that sovereign immunity bars St. Jude’s
counterclaim. By bringing this action in federal court, U of M waived any claim to sovereign
immunity. See, e.g., Lapides v. Bd. of Regents of Univ. Sys. Of Georgia, 535 U.S. 613
(2002) (finding waiver of sovereign immunity where state removed a lawsuit from state
court to federal court).
SO ORDERED.
s/Avern Cohn
AVERN COHN
UNITED STATES DISTRICT JUDGE

Dated: February 25, 2013

I hereby certify that a copy of the foregoing document was mailed to the attorneys of record
on this date, February 25, 2013, by electronic and/or ordinary mail.

S/Sakne Chami
Case Manager, [phone]

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