Covidien Sent to State Court in Patent Royalty Breach Case

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By Tony Dutra

July 19 — The America Invents Act of 2011 didn't alter the University of Florida Research Foundation Inc.'s right to pursue a claim of Covidien LP's breach of a patent license in state court, a federal court ruled July 15 ( Univ. of Fla. Research Found., Inc. v. Medtronic PLC , 2016 BL 228051, N.D. Fla., No. 1:16CV183-MW/GRJ, 7/15/16 ).

The court held that the AIA's provision allowing patent-related counterclaims to force a case into a federal district court didn't trump state immunity under the 11th Amendment.

But the AIA also barred state courts from ruling on those counterclaims. And the Florida state court in Alachua County will have to dismiss Covidien's request for a declaration of noninfringement on remand, if UFRF challenges it, according to another AIA provision.

Judge Mark Eaton Walker acknowledged Covidien's problem, but he was satisfied that Covidien could make its case “as a separate claim in federal court at a later time.”

“The option to file a separate claim in a federal court is technically available but a meaningless one,” Donald R. Dunner of Finnegan, Henderson, Farabow, Garrett & Dunner LLP, Washington, told Bloomberg BNA.

And that's because the state would still have its sovereign immunity defense, Dunner said.

With the remand back to state court, Covidien will be able to assert a defense of noninfringement against UFRF's breach charge in state court. But it loses the opportunity to appeal in the country's patent appeals court, the U.S. Court of Appeals for the Federal Circuit.

Noninfringement Defense vs. Counterclaim

Covidien, which was acquired by Medtronic in 2015, is the exclusive licensee of UFRF's U.S. Patent No. 7,062,251, which covers “Managing critical care physiologic data using data synthesis technology.”

From Covidien's perspective, some of its products were covered by the patent but others weren't. So it refused to pay royalties under the license for sales of products that it decided were not covered by the patent.

UFRF sued Covidien in state court for breach of contract and breach of implied duty of good faith and fair dealing.

“In general, a claim of failure to pay royalties due under a patent license agreement is one arising out of state contract law, not patent law,” according to Harmon on Patents: Black-Letter Law and Commentary. “Likewise, a case cannot arise under federal law where the patent claim is merely a defense to a state court action.”

Covidien attempted to remove the case to the U.S. District Court for the Northern District of Florida not by asserting a noninfringement defense, but with a counterclaim seeking a declaration that its products didn't infringe.

Source Material:

Docket (N.D. Fla.): No. 1:16-cv-00183

U.S. Patent:No. 7,062,251

“The counterclaim—rather than a defense—was a ploy to get the case into federal court,” according to Alexander B. Owczarczak and James H. Wallace Jr., patent lawyers at Wiley Rein LLP, Washington.

The AIA amended 28 U.S.C. §1454 by adding: “A civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, plant variety protection, or copyrights may be removed to the district court of the United States for the district and division embracing the place where the action is pending.”

Covidien's brief noted that the U.S. District Court for the Central District of California has recently interpreted Section 1454(a) such that a counterclaim forces removal to federal court. Alexsam, Inc. v. Green Dot Corp., No. 2:15-cv-05742-CAS(PLAx), 2015 BL 322881 (C.D. Cal. Sept. 28, 2015).

But State Immunity Wins

But the federal district court was not persuaded to accept this case because of UFRF's immunity as a state entity.

There is little doubt that the University of Florida is controlled by the state, but UFRF is a technology licensing entity with a separate organizational structure. A crucial factor in the immunity analysis is whether the separate entity got its funding from the state. The court said that, “in a sense UFRF is 'funded' by the state, in that it relies on the raw input of patents, etc. from state employees to make money.”

“Putting all this together, this Court is convinced that UFRF is an arm of the state—at least for the purposes of this case—and that it is entitled to Eleventh Amendment immunity,” the court concluded.

The remand concern arose because the AIA also amended 28 U.S.C. §1338 to read: “No State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents.”

The reference to a “claim” should only bar the counterclaim, though, and not noninfringement as a defense, assuming Harmon's commentary is still accurate.

Dell Graham P.A. represented UFRF. Moseley Prichard Parrish Knight & Jones represented Covidien.

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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