Kirk et al v. Palmer et al

Filing 43

MEMORANDUM AND ORDER. The Case is Remanded to the 24th Judicial District Court of Goliad County, Texas.(Signed by Judge Gregg Costa) Parties notified.(ltrevino, 3)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
VICTORIA DIVISION
BILLY R KIRK, et al,
Plaintiffs,
VS.
MICHAEL J. PALMER, et al,
Defendants.

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§ CIVIL ACTION NO. 6:12-CV-10
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MEMORANDUM AND ORDER
The Court sua sponte raised and requested briefing on the following issue:
Does this dispute arise under federal law? See Docket Entry No. 40; Giles v.
NYLCare Health Plans, Inc., 172 F.3d 332, 336 (5th Cir. 1999) (“[A] court sua
sponte must raise the issue if it discovers it lacks subject matter jurisdiction.”).
The parties’ responses belie the procedural history of this case.

Though

Defendants removed the case, they now argue that their removal was improvident
and that the case should be remanded. Plaintiffs, by contrast, might not have
initially chosen to litigate in this forum, but they now assert that this Court can try
the case.
I.

BACKGROUND
Although Plaintiffs Billy Kirk and Kirk Oilfield Equipment Sales, Inc. and

Defendants Michael Palmer and Thunder Rose Enterprises, Inc. present different
versions of the events underlying this suit, see Docket Entry Nos. 16, 33, some
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basic facts are not in dispute. In 2007, Palmer developed a pressure balanced
equalized frac and wellhead component valve system. Docket Entry No. 16 ¶ 7.
He filed a patent application for the valve and assigned the rights in the patent to
Thunder Rose, a company in which he is an officer but not an owner. He also later
applied for trademarks for the valve. Plaintiffs, who buy and sell oil and gas
equipment, allege that they and Palmer formed a partnership agreement under
which Plaintiffs would provide financing to bring the valve to the market in
exchange for 50% of the partnership’s profits. Plaintiffs would also allegedly
receive “rights and interests in and to the Patent and Trademarks obtained and an
exclusive right or license to market the Valves.” Docket Entry No. 33 ¶ 10.
Palmer and Thunder Rose assert that no partnership agreement was ever formed.
Docket Entry No. 16 ¶ 19.
Plaintiffs initially filed this suit in Goliad County state court, alleging that
Defendants violated the parties’ partnership agreement. Docket Entry No. 1-1 at 7.
Defendants filed their notice of removal in February 2012 on the basis of federal
question jurisdiction (the parties are not diverse). In May 2012, the case was
reassigned to this Court. Since the removal, Plaintiffs have twice amended their
complaint, while Defendants have asserted counterclaims that they did not
previously bring in the state proceedings.

In April 2014—with trial rapidly

approaching—the Court became concerned about its jurisdiction to hear this case,
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and requested briefing on the issue. See MCG, Inc. v. Great W. Energy Corp., 896
F.2d 170, 173 (5th Cir. 1990) (“Federal courts . . . have a continuing obligation to
examine the basis for their jurisdiction.”).
II.

SUBJECT MATTER JURISDICTION
A. Do Plaintiffs assert a federal cause of action?
Federal district courts are authorized “to exercise original jurisdiction ‘in all

civil actions arising under the Constitution, laws, or treaties of the United States,’
28 U.S.C. § 1331, and, more particularly, over ‘any civil action arising under any
Act of Congress relating to patents [and trademarks],’ § 1338(a).” Gunn v. Minton,
133 S. Ct. 1059, 1064 (2013).

“Adhering to the demands of ‘linguistic

consistency,’” the Supreme Court has “interpreted the phrase ‘arising under’ in
both sections identically.” Id. (citation omitted). The most frequent way that a case
arises under federal law is “when federal law creates the cause of action asserted.”
See id. (noting that cases asserting federal causes of action account for “the vast
bulk of suits that arise under federal law.” (citing Franchise Tax Bd. Of Cal. v.
Construction Laborers Vacation Trust of S. Cal., 463 U.S. 1, 9 (1983))).
This commonly treaded path to federal question jurisdiction is unavailing
because Plaintiffs have not asserted any federal causes of action.1 This is not a

1

Plaintiffs argue that the Court has jurisdiction to review decisions made by the Trademark Trial
& Appeal Board (TTAB). Although this is true, see 15 U.S.C. § 1071(b), Plaintiffs did not
request de novo review of a TTAB proceeding in their First Amended State Court Petition or in
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patent invalidity or infringement suit, see 35 U.S.C. §§ 271(a), 282, or a trademark
infringement suit, see 15 U.S.C. § 114. And the facts as alleged are not the kind
that would typically lead to such a dispute. See, e.g., Dall. Cowboys Football
Club, Ltd. v. America’s Team Props., Inc., 616 F. Supp. 2d 622, 646 (N.D. Tex.
2009) (holding in trademark infringement suit that Dallas Cowboys’ “America’s
Team” mark was protectable and that defendants were enjoined from using
producing or promoting a similar mark).
This is a dispute over ownership rights to property that were allegedly set
out in a partnership agreement. Accordingly, all of the claims that Plaintiffs
pursued in their First Amended State Court Petition—declaratory judgment, breach
of partnership agreement, misappropriation of trademark, promissory estoppel,
unjust enrichment, breach of fiduciary duty, fraud, conversion, and tortious
interference—are venerable state law causes of action. Docket Entry No. 1-1 at
26–33. Even the misappropriation claim—which could, but does not necessarily,
involve a federal trademark—arises under state law. See U.S. Sporting Prods., Inc.
v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 217 (Tex. App.—Waco
1993, writ denied) (recognizing a cause of action under Texas law for

their Third Amended Complaint. Furthermore, TTAB proceedings involving these two parties
were stayed pending the outcome of this case. Docket Entry No. 41 ¶ 10. Accordingly, the fact
that TTAB proceedings have been initiated is insufficient to confer jurisdiction at this stage
because there is no final TTAB decision for this Court to review. See 15 U.S.C. § 1071(a)(1)
(allowing an applicant “who is dissatisfied with the decision of the Director or Trademark Trial
and Appeal Board” to appeal (emphasis added)).
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misappropriation). The one potential wrinkle is that Plaintiffs also asserted a
“Negligent failure to prosecute patent application claim” that they later abandoned
in federal court, likely because the patent issued. Docket Entry No. 1-1 at 29–30;
Docket Entry No. 42 at 3. But the Court considers the “negligent failure” claim to
be a variation on a traditional state law negligence claim, not an independent
federal cause of action.

See id. (requesting damages “that may result from

Defendants’ negligent failure to timely and adequately prosecute the patent
application for the Valve, in an amount to be proven at trial.”). If such a claim
were submitted to a jury, the instructed elements would come from state
negligence law, not federal patent law.
Furthermore, the claims Plaintiffs assert in their Third Amended Complaint
are all state—not federal—causes of action. See Docket Entry No. 33 (asserting
claims for breach of partnership agreement, misappropriation, promissory estoppel,
unjust enrichment, breach of fiduciary duty, fraud, and conversion). Although
Plaintiffs amended their complaint once it was in federal court to seek a
declaratory judgment under 28 U.S.C. section 2201, that request does not invoke
federal jurisdiction because the law is “well settled that the section does not confer
subject matter jurisdiction on a federal court where none otherwise exists.”
Lawson v. Callahan, 111 F.3d 403, 405 (5th Cir. 1997). Accordingly, Plaintiffs

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did not allege any federal causes of action when the case was removed or in
amended complaints in this Court.
In the normal course, the Court would not consider whether Defendants’
counterclaims arise under federal law because of the well-pleaded complaint rule,
which requires a plaintiff’s complaint—not the defendant’s answer—to
demonstrate a basis for federal jurisdiction. Louisville & N.R. Co. v. Mottley, 211
U.S. 149, 152 (1908) (“It is the settled interpretation of these words, as used in this
statute, conferring jurisdiction, that a suit arises under the Constitution and laws of
the United States only when the plaintiff’s statement of his own cause of action
shows that it is based upon those laws or that Constitution.”). But Plaintiffs argue
that Defendants’ counterclaims arise under patent law and therefore allow the
Court to exercise jurisdiction—even if Plaintiffs’ claims do not—because of 2011
amendments to 28 U.S.C. section 1454(a), which now provides that a “civil action
in which any party asserts a claim . . . arising under any Act of Congress . . . may
be removed” to federal court. See Leahy–Smith America Invents Act, Pub. L. No.
112-29, 125 Stat. 284 (2011). The Court, however, need not decide this novel
issue whether patent counterclaims independently allow federal jurisdiction. Upon
close examination, none of the counterclaims Defendants assert in this Court is a
freestanding federal cause of action; rather, like Plaintiffs’ claims, they are all
commonly litigated and well-recognized state law causes of action. See Docket
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Entry No. 16 (asserting several state law counterclaims, including breach of
contract, conspiracy, attorney’s fees, and exemplary damages).
B. Do Plaintiffs’ state law claims arise under federal law?
Although this case thus lacks an independent federal cause of action, the
jurisdictional inquiry does not end there. In a “‘special and small category’ of
cases,” state law claims can raise such substantial federal issues that they arise
under federal law. Minton, 133 S. Ct. at 1064 (quoting Empire Healthchoice
Assurance, Inc. v. McVeigh, 547 U.S. 677, 699 (2006)). The relevant inquiry is:
“Does the ‘state-law claim necessarily raise a stated federal issue, actually disputed
and substantial, which a federal forum may entertain without disturbing any
congressionally approved balance of federal and state judicial responsibilities?’”
Id. at 1065 (quoting Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545
U.S. 308, 314 (2005)). For instance, in Grable, the Supreme Court held that a state
law quiet title claim arose under federal law because the federal issue it raised—
how to interpret the notice statute in a federal tax law—would require a court to
determine “the meaning of the federal statute . . . actually in dispute.” 545 U.S. at
315. But Minton indicates a more restrictive approach to this ground of “arising
under” jurisdiction. Despite the fact that a state law legal malpractice claim turned
entirely on a federal issue—whether an attorney should have raised an
experimental-use argument in a prior patent infringement suit—the Supreme Court
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held that the federal issue was insubstantial because it “was unimportant to the
federal system as a whole.” 133 S. Ct. at 1065–69.
As Plaintiffs acknowledge, the crux of this lawsuit is “who owns what rights
under the Patent and Trademarks and in what capacity or percentage share.”
Docket Entry No. 41 ¶ 12.

Nonetheless, they argue that deciding whether

Defendants “misappropriated federally protected trademarks and ownership rights
in[] and license to a US Patent” involves an actually disputed and substantial
federal issue. Docket Entry No. 41 ¶ 15. Numerous federal courts, however, have
thoroughly and persuasively rejected this argument, basing their holdings on the
widely agreed upon proposition that a “dispute over property ownership does not
properly fall under federal law just because the property is a federally-created
interest like a trademark or a copyright.” Gibraltar, P.R., Inc. v. Otoki Group, Inc.,
104 F.3d 616, 619 (4th Cir. 1997) (Wilkinson, C.J.); Jim Arnold Corp. v.
Hydrotech Sys., Inc., 109 F.3d 1567 (Fed. Cir. 1997) (“It is well settled that if the
patentee pleads a cause of action based on rights created by a contract, or the
common law of torts, the case is not one ‘arising under’ the patent laws.”). For
instance, in Gibraltar, two clothing companies disputed “the ownership of certain
trademarks under a joint agreement between the two parties.” 104 F.3d at 617.
The court dismissed the suit for lack of jurisdiction, explaining that under the
Lanham Act, “a complainant must demonstrate that it has a valid, protectable
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trademark and that the defendant’s use of a colorable imitation of the trademark is
likely to cause confusion.” Id. (emphasis in original, citation and internal quotation
marks omitted). What the plaintiff was actually protesting was use of a trademark
“in violation of rights of ownership.”

Id.

The court therefore held that the

plaintiff’s claim was not covered by the Lanham Act, which “is designed to
address the registration and infringement of trademarks, not ownership disputes
arising out of contracts.” Id. at 619.
The basic principle articulated in Gibraltar has been the prevailing approach
in the federal courts for decades. Judge Friendly wrote a landmark opinion for the
Second Circuit on this question in T.B. Harms Co. v. Eliscu, in which the court
held that “a dispute about the ownership of a copyright does not arise under federal
law, even though the dispute could not exist but for the property right created by
copyright.” 339 F.2d 823 (2d Cir. 1964). Many Circuits, including the Fifth, have
adopted Eliscu’s jurisdictional test. See Goodman v. Lee, 815 F.2d 1030, 1031
(5th Cir. 1987) (“[A]n action ‘arises under’ the Copyright Act if and only if the
complaint is for a remedy expressly granted by the Act . . . or asserts a claim
requiring constructing of the Act, . . . or, at the very least and perhaps more
doubtfully, presents a case where a distinctive policy of the Act requires that
federal principles control the disposition of the claim.” (quoting Eliscu, 339 F.2d at
823)); Int’l Armor & Limousine Co. v. Moloney Coachbuilders, Inc., 272 F.3d 912,
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915–16 (7th Cir. 2001) (citing Eliscu and finding no subject matter jurisdiction
because the dispute at issue “ar[ose] under the law of contracts; any trademark
claims [we]re entirely derivative of the contract issues.”). These holdings indicate
why Grable’s “actually disputed and substantial” requirement is not met when
parties dispute ownership rights to federally-created property. A federal issue
cannot be substantial (or, in this case, even disputed) when the only controverted
legal issues will necessarily be resolved under state law. Even “if the property at
issue were lawnmowers rather than trademarks, the proper legal resolution of the
case would be no different.” Gibraltar, 104 F.3d at 319. Regardless of the nature
of the underlying property, state law fiduciary and contract principles will govern
the outcome of this suit.
Based on the well-established body of case law, the Court concludes that
Plaintiffs’ state law claims asserting ownership rights in a pending patent and
trademarks do not raise any “actually disputed and substantial” federal issues, and
therefore, do not arise under federal law.

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III.

CONCLUSION
For the reasons explained above, the Court lacks jurisdiction to hear this

case. Accordingly, the case is REMANDED to the 24th Judicial District Court of
Goliad County, Texas.
SIGNED this 2nd day of May, 2014.

___________________________________
Gregg Costa
United States District Judge

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