Laboratory Corp. of America Holdings v. Metabloite Laboratories, Inc. ( 2010 )

United States Court of Appeals for the Federal Circuit
2008-1597
LABORATORY CORPORATION OF AMERICA HOLDINGS
(doing business as LabCorp),
Plaintiff-Appellee,
v.
METABOLITE LABORATORIES, INC.,
Defendant-Appellant.
Gregory A. Castanias, Jones Day, of Washington, DC, argued for plaintiff-
appellee. With him on the brief was Leon F. DeJulius, Jr., of Pittsburgh, Pennsylvania.
Of counsel on the brief were Natalie Hanlon-Leh and Nina Y. Wang, Faegre & Benson
LLP, of Denver, Colorado.
Mark A. Perry, Gibson, Dunn & Crutcher LLP, of Washington, DC, argued for
defendant-appellant. With him on the brief were Glenn K. Beaton and Kourtney M.
Mueller, of Denver, Colorado.
Appealed from: United States District Court for the District of Colorado
Senior Judge Zita L. Weinshienk
United States Court of Appeals for the Federal Circuit
2008-1597
LABORATORY CORPORATION OF AMERICA HOLDINGS
(doing business as LabCorp),
Plaintiff-Appellee,
v.
METABOLITE LABORATORIES, INC.,
Defendant-Appellant.
Appeal from the United States District Court for the District of Colorado in
case no. 04-CV-1662, Senior Judge Zita L. Weinshienk.
_________________________
DECIDED: March 11, 2010
_________________________
Before GAJARSA, DYK, and MOORE, Circuit Judges.
Opinion for the court filed by Circuit Judge GAJARSA. Dissenting opinion filed by
Circuit Judge DYK.
GAJARSA, Circuit Judge.
Metabolite appeals from the United States District Court for the District of
Colorado’s grant of summary judgment. See Lab. Corp. of Am. Holdings v. Metabolite
Labs., Inc., 571 F. Supp. 2d 1199 (D. Colo. 2008). The district court granted LabCorp’s
motion for summary judgment on its complaint for declaratory judgment that it did not
breach a license agreement for failure to pay know-how royalties on homocysteine
assays performed after judgment had been entered in a prior patent infringement and
breach of contract action brought, in part, by Metabolite. Because the present cause of
action does not arise under federal patent law nor does Metabolite’s right to relief
necessarily depend on resolution of a substantial question of federal patent law, this
court does not have jurisdiction over this appeal. The action is a state law contract
dispute over know-how royalties brought pursuant to the district court’s diversity
jurisdiction. Therefore, we transfer the appeal to the United States Court of Appeals for
the Tenth Circuit.
BACKGROUND
Competitive Technologies, Inc. (“CTI”) owns U.S. Patent No. 4,940,658 (the “’658
patent”). The ’658 patent claims a method for detecting deficiencies of vitamin B12 and
folate by assaying total homocysteine levels and correlating an elevated level of total
homocysteine with a deficiency in either cobalamin or folate. Metabolite is a non-
exclusive licensee of the ’658 patent with the right to sublicense. It also developed
know-how technology, including software, to automate the testing process. In 1991,
Metabolite granted LabCorp a license to the know-how and a sublicense to the ’658
patent (“License Agreement”). The License Agreement covered four assays, including
a total homocysteine assay referred to as the “homocysteine-only assay.” In 1998,
LabCorp began using an alternative homocysteine-only assay in serum samples using
an immunoassay kit developed by Abbott Laboratories (the “Abbott Test”) and stopped
paying both patent and know-how royalties on just the serum-based homocysteine-only
2008-1597 2
assays. 1 Metabolite and CTI brought an action against LabCorp for breach of contract
and patent infringement. Metabolite Labs., Inc. v. Lab. Corp. of Am. Holdings, 2001
WL 34778749 (D. Colo., Dec. 3, 2001) (“Metabolite I”) (jury trial) aff’d, 370 F.3d 1354(Fed. Cir. 2004) (“Metabolite II”), cert. granted, 546 U.S. 999 (2005), cert. dismissed as
improvidently granted, 548 U.S. 124 (2006).
A.
In the first case, Metabolite claimed breach of contract with respect to the
homocysteine-only assay for failing to pay know-how royalties and sought contract
damages, and CTI claimed patent infringement and sought infringement damages. The
case was tried before a jury (Metabolite I). LabCorp contended that because the Abbott
Test did not infringe the ’658 patent it was not a Licensed Assay as defined by the
License Agreement. The termination provision of the License Agreement states in
relevant part:
4.02 [LabCorp] shall have the right . . . to terminate this Agreement with
respect to a particular Licensed Assay if (i) in the case of Licensed Assays
of homocysteine, a more cost effective commercial alternative is available
that does not infringe a valid and enforceable claim of the Licensed
Patents; . . . . 2
J.A. 8999. Thus, LabCorp argued, it did not violate its contractual obligations for the
homocysteine-only assay as to either the know-how license or the patent sublicense.
1
LabCorp tests for total homocysteine in both urine and plasma. LabCorp
continued to pay royalties for its urine-based assays utilizing Metabolite’s gas
chromatography/mass spectrometry know-how. LabCorp also continued to pay
royalties on the three other licensed assays that tested for deficiencies in vitamin B12
and/or folate also using the royalty-bearing GCMS method. Only the serum-based
homocysteine-only assay was the subject of the lawsuits below.
2
Pursuant to § 4.02 of the License Agreement, LabCorp could sever and
terminate the License Agreement as to individual Licensed Assays. Subsections (ii)-
(iv), not quoted above, provide how LabCorp could selectively terminate the remaining
three Licensed Assays.
2008-1597 3
A Special Verdict Form was submitted to the jury. It was asked the threshold
question of whether the License Agreement had been terminated with respect to the
homocysteine-only assay.
Do you find, by a preponderance of the evidence, that LabCorp breached
its license agreement by terminating it with respect to its performance of
the Abbott [T]est?
J.A. 21072-73. The jury found in the affirmative. It awarded infringement damages to
CTI of $1.02 million and breach of contract damages to Metabolite of $3.65 million.
Upon Metabolite’s and CTI’s post-verdict motions in Metabolite I, the district court
granted a permanent injunction to enjoin LabCorp from performing any homocysteine-
only assay, including any homocysteine-only assay performed using the Abbott Test.
LabCorp moved for a stay pending appeal, and the court entered the stay subject to
LabCorp paying a 6% royalty to CTI for all homocysteine-only assays performed after
entry of judgment. LabCorp was further required to provide Metabolite with an
accounting of the 21.5% of the sales attributable to the homocysteine-only assays that
LabCorp performed after entry of judgment.
This court affirmed the jury’s finding that LabCorp breached the License
Agreement holding that LabCorp’s refusal to pay royalties was a material breach that
constitutes termination even if the contract requires written notice. See Metabolite II,
370 F.3d at 1370. Once the stay of the injunction was lifted, LabCorp stopped
performing the homocysteine-only assays itself but outsourced the assay by entering
into an agreement with Specialty Laboratories, Inc. (“Specialty”) that was independently
licensed by CTI to perform the homocysteine-only assays referred by LabCorp. In
response, Metabolite filed a post-judgment motion in Metabolite I asserting that
2008-1597 4
LabCorp’s referral of the assays to a third party violated the injunction. LabCorp also
filed a post-judgment motion in Metabolite I seeking clarification of the injunction.
Simultaneously, LabCorp filed a new action in the same district court seeking a
declaratory judgment that it had not violated the License Agreement. Lab. Corp. of Am.
Holdings v. Metabolite Labs., Inc., 571 F. Supp. 2d 1199 (D. Colo. 2008) (“Metabolite
III”) (instant matter below). On September 21, 2006, the district court ruled on the post-
judgment motions, filed in Metabolite I, and stated in relevant part:
[T]here has never been a legal determination that LabCorp actually
committed any breach after the date of the Amended Judgment, or of the
amount of any resulting damages. Because there are no claims remaining
in this case, the issue of whether actions taken by LabCorp subsequent to
the Amended Judgment constitute breach of contract, and the amount of
damages for any such breach, cannot be resolved herein as a matter of
procedure. As a result, the Court is not able to state in this case, at this
juncture, that the amount stated on the letter of credit is now “due and
owing to Metabolite Laboratories.” However, LabCorp has filed a separate
action [Metabolite III], seeking “a declaratory judgment that LabCorp has
not violated the Agreement with various conduct occurring since the time
period covered by the Amended Judgment and occurring into the future.”
Whether LabCorp committed a contract breach after the date of the
Amended Judgment is appropriately resolved in [Metabolite III].
J.A. 21124-25 (emphasis added). The ’658 patent expired on July 9, 2007.
B.
As noted above, in Metabolite III, LabCorp brought a declaratory judgment
action, premised upon diversity jurisdiction, under 28 U.S.C. § 1332, seeking a
judgment on “whether Metabolite can recover damages for activity occurring after the
time period covered by the Amended Judgment with respect to a part of an Agreement
that has been terminated,” and “whether LabCorp’s outsourcing activity violates any
existing contract between LabCorp and Metabolite.” In response to the declaratory
2008-1597 5
judgment action, Metabolite counterclaimed for breach of contract, among other state-
law claims, including breach of obligation of good faith and fair dealing, unjust
enrichment, promissory estoppel, fraud, and equitable estoppel. The breach of contract
claim was premised on LabCorp’s continued referral of homocysteine-only assays to a
third party without paying know-how royalties after entry of the jury’s verdict. The
parties filed cross motions for summary judgment. LabCorp moved for judgment on its
contract claim and on each of Metabolite’s counterclaims, and Metabolite moved for
judgment on LabCorp’s declaratory judgment claim and its breach of contract
counterclaim. The Metabolite III district court held that no further royalties were due
under the License Agreement. The court further stated that “[a] plain reading of the
verdict form, coupled with the language of the License Agreement, leads to the
conclusion that the License Agreement was both breached and terminated,” and
resulted in the loss of all rights (both patent and know-how) under the contract, albeit
limited to the homocysteine-only assay. Metabolite appeals.
On appeal, LabCorp filed a motion to dismiss or, in the alternative, transfer the
appeal to the Tenth Circuit, for lack of jurisdiction. On February 2, 2009, a motion panel
of this court denied the motion without prejudice to allow the parties to raise the
jurisdictional issues in their merits briefs. The issue of this court’s jurisdiction over
Metabolite’s appeal is now squarely before us.
DISCUSSION
Before reaching the merits of this case, we must, however, first address whether
we have appellate jurisdiction under 28 U.S.C. § 1295(a) (1).
2008-1597 6
Under 28 U.S.C. § 1295(a)(1), this circuit has exclusive jurisdiction over an
appeal from a final decision of a district court “if the jurisdiction of that court was based,
in whole or in part, on § 1338.” See Bd. of Regents, Univ. of Tex. v. Nippon Tel. & Tel.
Corp., 414 F.3d 1358, 1361 (Fed. Cir. 2005). Section 1338(a) confers the district courts
with original jurisdiction over “any civil action arising under any Act of Congress relating
to patents.” The Supreme Court in Christianson v. Colt Industries Operating Corp., 486
U.S. 800 (1988) outlined a two-part test for § 1338 jurisdiction. Under Christianson,
“arising under” jurisdiction “extend[s] only to those cases in which a well-pleaded
complaint establishes either that federal patent law creates the cause of action or that
the plaintiff’s right to relief necessarily depends on resolution of a substantial question of
federal patent law, in that patent law is a necessary element of one of the well-pleaded
claims.” Christianson, 486 U.S. at 808-09. The Supreme Court in Christianson and
also in Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 830
(2002), grafted § 1331 precedent onto its § 1338 analysis and equated the statutory
“arising under” standard under § 1338 for patent cases with that established for claims
invoking general federal question under § 1331. Christianson, 486 U.S. at 808-09;
Vornado, 535 U.S. at 830. Accordingly, the Supreme Court’s decision in Grable & Sons
Metal Products, Inc., v. Darue Engineering & Manufacturing., 545 U.S. 308, 314 (2005),
addressing general federal question jurisdiction refined the Christianson two-part test for
§ 1338 jurisdiction by requiring a determination of whether “a state-law claim
necessarily raise[s] a stated federal issue, actually disputed and substantial, which a
federal forum may entertain without disturbing any congressionally approved balance of
2008-1597 7
federal and state judicial responsibilities.” Grable, 545 U.S. at 314; see also Empire
Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 689-90 (2006).
Under the well-pleaded complaint rule, “arising under” jurisdiction is determined
from the plaintiff’s statement of his or her own claim “unaided by anything alleged in
anticipation or avoidance of defenses which it is thought the defendant may interpose.”
Christianson, 486 U.S. at 809 (internal quotation marks and citation omitted). In an
action for declaratory judgment, we look “not to the declaratory judgment complaint, but
to the action that the declaratory defendant would have brought.” Speedco Inc. v.
Estes, 853 F.2d 909, 912 (Fed. Cir. 1988); Cedars-Sinai Med. Ctr. v. Watkins, 11 F.3d
1573, 1578 (Fed. Cir. 1993).
Metabolite, as the appellant, bears the burden of demonstrating that its
hypothetical claim depends on resolution of a substantial question of federal patent law.
Christianson, 486 U.S. at 808-09. The question is, does Metabolite’s hypothetical claim
necessarily raise a stated patent law issue that is actually disputed and substantial.
See Grable, 545 U.S. at 314. Metabolite does not meet this burden.
A.
Metabolite’s hypothetical claim would have been a breach of contract claim
premised on LabCorp’s continued referral of homocysteine-only assays to a third party
without paying know-how royalties on its post-judgment “Net Sales of Licensed Assays.”
Under the License Agreement, the payment of royalties to Metabolite was for
performance by LabCorp or referral of a Licensed Assay by LabCorp to Metabolite.
Section 2.02 In consideration of the grants made in Article 1, [LabCorp]
agrees to pay to [Metabolite] a royalty of 21.5% in respect to [LabCorp’s]
Net Sales of Licensed Assays other than Referral Assays.
2008-1597 8
J.A. 20784 (emphasis added). The Licensed Assays cover four types of assays:
(i) assays of homocysteine using methods and materials falling within the
claims of the Licensed Patents; . . . (ii) [methylmalonic acid]. . . (iii) [2-
methylcritic acid] . . . (iv) [cystathionine]. . . .
J.A. 20782-83 (emphasis added). “Licensed Patents” is defined as the ’658 patent and
any patents issuing from any continuations, continuations-in-part, divisions, and/or
reissues therefrom.
We have held “that issues of inventorship, infringement, validity and
enforceability present sufficiently substantial questions of federal patent law to support
jurisdiction under section 1338(a).” Bd. of Regents, 414 F.3d at 1363. In its
hypothetical claim, Metabolite would be required to prove the elements of a breach of
contract cause of action under New Jersey law—existence of a valid contract, breach,
and damages. See, e.g., Grow Co., Inc., v. Chokshi, 959 A.2d 252, 269 (N.J. Super. Ct.
App. Div. 2008). Metabolite contends that its entitlement to royalties requires it to prove
infringement as a necessary component of the breach element, i.e., “whether the
homocysteine[-only] assays performed by LabCorp fell within the claims of the Licensed
Patents and therefore were Licensed Assays.” Petr.’s Rep. Br. 19. Because
infringement of the ’658 patent was determined in Metabolite I, here Metabolite’s
hypothetical action does not require resolution of a disputed question of patent law
central to the disposition of the breach of contract claim. See Grable, 545 U.S. at 314-
15 (conferring federal jurisdiction where plaintiff’s state-law complaint, which sought to
quiet title to property that the IRS seized and sold at auction, depended solely on a
dispute about the adequacy of the IRS’s compliance with seizure notification procedures
set forth in the federal tax law). To be clear, we are not setting forth a new rule of law
2008-1597 9
that a concession after the filing of a complaint operates to defeat jurisdiction. Such a
rule would be contrary to established precedent. See Keene Corp. v. United States,
508 U.S. 200, 207 (1993)(citing Mollan v. Torrance, 22 U.S. 537, 539 (1824)(“It is quite
clear, that the jurisdiction of the Court depends upon the state of things at the time of
the action brought, and that after vesting, it cannot be ousted by subsequent events.”)).
Grable and Empire Healthchoice guide our analysis. First, for jurisdiction to exist
in our court, the substantial question of patent law must be disputed and require
resolution on the merits. Christianson, 486 U.S. at 808-09; Empire Healthchoice,
547 U.S. at 700-01. Here, the jury verdict and subsequent judgment in Metabolite I
determined that the homocysteine-only assay is a Licensed Assay because it infringes
the ’658 patent, and LabCorp materially breached the License Agreement by performing
assays without paying know-how royalties. See Special Verdict Form at J.A. 21072-74.
We affirmed. See Metabolite II, 370 F.3d at 1370. The issue of infringement, therefore,
has been resolved and is no longer disputed. Accordingly, Metabolite’s hypothetical
breach of contract claim presents this court with no disputed issue of patent law. See
Speedco, 853 F.2d at 912-13 (citing Franchise Tax Bd. v. Constr. Laborers Vacation
Trust for S. Cal., 463 U.S. 1, 13 (1983), for the proposition that “original federal
jurisdiction is unavailable unless it appears that some substantial, disputed question of
federal law is a necessary element of one of the well-pleaded state claims”).
This is not a case in which the contract claim requires resolution of a related
question of patent law. Cf. Air Measurement Tech., Inc. v. Akin Gump Strauss Hauer &
Feld, LLP, 504 F.3d 1262, 1272 (Fed. Cir. 2007) (finding a disputed, substantial issue of
patent law exists when a party is required to prove its patent infringement suit to satisfy
2008-1597 10
the “but for” causation requirement of a state legal malpractice claim); Immunocept, LLC
v. Fulbright & Jaworski, LLP, 504 F.3d 1281, 1285 (Fed. Cir. 2007) (same);
U.S. Valves, Inc. v. Dray, 212 F.3d 1368, 1372 (Fed. Cir. 2000) (holding that the
exercise of § 1338 jurisdiction by a district court is proper when a plaintiff, in order to
succeed on a breach of contract action, is required to prove that certain of defendant’s
products infringe). Such cases are distinguishable because the instant matter does not
present a “case within a case.” Here, it is undisputed that the post-trial conduct falls
within the scope of the ’658 patent. While the finding of breach is based on a finding of
infringement, the district court would not have to conduct an infringement analysis
because Metabolite I established infringement and neither party contests that decision.
Moreover, in Board of Regents, we clarified the scope of Valves and made clear that not
“all breach of contract actions involving patents require” a determination of patent
infringement. Bd. of Regents, 414 F.3d at 1364.
Second, the mere presence of a patent as relevant evidence to a claim does not
by itself present a substantial issue of patent law. See Excelstor Tech., Inc. v. Papst
Licensing GMBH & Co. KG, 541 F.3d 1373, 1376-77 (Fed. Cir. 2008) (affirming
dismissal for lack of § 1338 jurisdiction when declaratory judgment claim raised patent
exhaustion to challenge royalties due under a license agreement). Like the declaratory
defendant in Speedco, Metabolite’s claim would concern only state law contract claims.
Speedco, 853 F.2d at 912-13 (dismissing the declaratory judgment complaint for lack of
§ 1338 jurisdiction because defendant’s hypothetical claim would be to recover
damages under a contract to transfer patent ownership and plaintiff’s patent claims only
related to possible state law defenses). This case is even more attenuated than
2008-1597 11
Speedco because here the subject of the contractual dispute is not a patent, but rather
know-how rights that refer to a patent. Id. at 912.
Unlike Grable where the “meaning of the federal tax provision . . . [was] an
important issue of federal law that sensibly belongs in federal court,” breach of contract
is a fact specific application of state law. Empire Healthchoice, 547 U.S. at 700.
Though significant to Metabolite’s claim, a breach of contract analysis would not require
“resort to the experience, solicitude, and hope of uniformity that a federal forum offers.”
Grable, 545 U.S. at 312. Hearing a context-driven, state law contract issue in this court
provides no “hope of uniformity” in the patent laws. And adjudication of patent law
issues in the decisions of a regional circuit court would not defeat Congress’s goal of
uniformity in the patent laws. See Speedco, 853 F.2d at 913-14 (“[T]he statutory
limitations on the jurisdiction of this court and the federal district courts, in conjunction
with the well-pleaded complaint rule, can and do result in state courts resolving patent
issues.”); Green v. Hendrickson Publishers, Inc., 770 N.E. 2d 784, 793 (Ind. 2002)
(relying on Vornado to conclude in dicta that state courts can hear patent law claims
included in the answer and/or counterclaims because post-Vornado a patent law
counterclaim does not “arise under” within the meaning of § 1338). Because the issue
of patent law is not disputed and substantial, we do not have jurisdiction over this
appeal. See Grable, 545 U.S. at 314-15.
The dissent’s argument is based on a fundamental misunderstanding that
because LabCorp began to outsource the homocysteine-only assays after this court
issued its decision finding infringement, this court could not have resolved the issue of
whether LabCorp’s outsourced assays infringe the ’658 patent. Dissent, Op. at 4-5. But
2008-1597 12
at the time of filing of the complaint, neither party contended that the outsourced
homocysteine-only assays were different from the infringing in-house Abbott Test. See
Minneapolis & St. Louis R.R. Co. v. Peoria & Pekin Union Ry. Co., 270 U.S. 580, 586
(1926) (Jurisdiction depends upon “the state of things existing at the time the suit was
brought.”). The dissent cites to LabCorp’s statement in the second case’s Final Pretrial
Order, where LabCorp stated that “the homocysteine-only assays at issue in this case
are not ‘Licensed Assays,’” as a concession that Metabolite would have to establish that
the outsourced homocysteine assays were in fact covered by the ’658 patent in order to
prevail on its claim. However, the pretrial order is not relevant because jurisdiction over
a declaratory judgment action must be derived from Metabolite’s hypothetical claims.
The one-count complaint requested resolution of a contract dispute—a declaration
regarding whether the judgment in Metabolite I terminated the know-how license, and if
the agreement was still valid whether it was contractually obligated to pay a royalty on
homocysteine-only assays performed by a third party. Thus, Metabolite’s hypothetical
claims could not involve resolution of a substantial question of patent law because it
was undisputed that the outsourced conduct is the same as the in-house performance
of the Abbott Test. 3 Therefore, the issue is not whether the outsourced assays fall
within the claims of the ’658 patent but whether LabCorp breached the terms of the
License Agreement by its outsourcing activity.
Also, we do not agree that the res judicata effect of a prior judgment under a
3
At oral argument, counsel for Metabolite acknowledged that the
outsourced assays are the same as the infringing, in-house assays. Oral Arg. at 10:12-
11:00 (“We took the position, and still take the position, that the fact that these assays
are covered by the patent can’t be disputed because the judgment of the first case is
that these assays are covered by the patent.”).
2008-1597 13
“look through” approach provides the missing jurisdictional predicate under § 1338.
Dissent, Op. at 3. Relying on Semtek Int’l, Inc. v. Lockheed Martin Corp., 531 U.S. 497(2001), and Vaden v. Discover Bank, 129 S. Ct. 1262 (2008), the dissent claims that “if
a claimant is bringing a suit to enforce or determine the res judicata effect of a prior
judgment ‘arising under’ federal patent laws, that is a suit that itself arises under the
federal patent laws.” Dissent, Op. at 4. However, in Semtek, the Supreme Court simply
recognized that “federal common law governs the claim-preclusive effect of a dismissal
by a federal court sitting in diversity” and then announced as a matter of federal
common law that such an effect is governed by “the law that would be applied by state
courts in the State in which the federal diversity court sits.” 531 U.S. at 507-08. Semtek
is inapposite here because the Metabolite I court’s jurisdiction was not based on
diversity. Furthermore, in Vaden, the Supreme Court interpreted § 4 of the Federal
Arbitration Act, which authorizes a district court “to entertain a petition to compel
arbitration if the court would have jurisdiction, ’save for [the arbitration] agreement,’ over
’a suit arising out of the controversy between the parties.’” 129 S. Ct. at 1267-68
(alteration in original); see 9 U.S.C. § 4. According to the Vaden Court, “a complaint
purporting to rest on state law, we have recognized, can be recharacterized as one
‘arising under’ federal law if the law governing the complaint is exclusively federal.” 129
S. Ct. at 1273. The Court then approved this so-called “look through” approach in the
context of § 4, explaining that “[a] federal court may ‘look through’ a § 4 petition to
determine whether it is predicated on an action that ‘arises under’ federal law.” Id. The
present case, by contrast, does not invoke § 4 of the Federal Arbitration Act and cannot
be recharacterized as one arising under federal patent law. Thus the “look through”
2008-1597 14
approach does not support the dissent’s position.
All federal courts are courts of limited jurisdiction, and we do not take jurisdiction
over cases simply because they relate to the res judicata effect of our prior judgment.
We have considered the remainder of Metabolite’s arguments and find them
unpersuasive.
CONCLUSION
Metabolite has thus failed to show that we have jurisdiction under 28 U.S.C.
§ 1338 to resolve this case on the merits. Accordingly, pursuant to 28 U.S.C. § 1631,
we consider it in the interest of justice to transfer the present appeal to the Tenth Circuit.
TRANSFERRED TO TENTH CIRCUIT
COSTS
Costs to Appellee.
2008-1597 15
United States Court of Appeals for the Federal Circuit
2008-1597
LABORATORY CORPORATION OF AMERICA HOLDINGS
(doing business as LabCorp),
Plaintiff-Appellee,
v.
METABOLITE LABORATORIES, INC.,
Defendant-Appellant.
Appeal from the United States District Court for the District of Colorado in case no.
04-CV-1662, Senior Judge Zita L. Weinshienk.
DYK, Circuit Judge, dissenting.
At its heart, this case involves the question whether the res judicata effect of our
earlier decision in Metabolite Laboratories, Inc. v. Laboratory Corp. of America
Holdings, 370 F.3d 1354 (Fed. Cir. 2004) (“Metabolite II”), requires that the contract
provision here be treated as terminated. The majority finds that we lack jurisdiction over
that question and transfers to the 10th Circuit, so that the 10th Circuit must determine
the res judicata effect of our prior judgment. In my view, jurisdiction over this case lies
in this court for at least two reasons. First, we have jurisdiction because a suit to
enforce or determine the res judicata effect of a prior judgment “arising under” the
federal patent laws is itself a suit that arises under the federal patent laws. Second, the
determination of contract entitlement rests on a substantial question of patent law.
I
The present case arises from a declaratory judgment action filed in 2005,
Laboratory Corp. of America Holdings v. Metabolite Laboratories, Inc., 571 F. Supp. 2d
1199 (D. Colo. 2008) (“Metabolite III”), subsequent to our decision in Metabolite II,
affirming Metabolite Laboratories, Inc. v. Laboratory Corp. of America Holdings, No. 99-
CV-870, 2001 WL 34778749 (D. Colo. Dec. 3, 2001) (“Metabolite I”). Laboratory
Corporation of America Holdings (“LabCorp”) sought a declaration that Metabolite
Laboratories, Inc. (“Metabolite”) was not entitled to recover breach of contract damages
for activity occurring after the time period covered by the Amended Judgment in
Metabolite I, because the jury in Metabolite I had found that the License Agreement had
been terminated as to the homocysteine-only assay. Metabolite III, 571 F. Supp. 2d at
1204. Metabolite opposed declaratory relief, contending that the jury had not
terminated the License Agreement as to homocysteine assays, and that LabCorp
breached the still-valid license through its post-judgment performance of the
homocysteine-only test and refusal to pay know-how royalties. Id. Thus, the scope of
the prior judgment in Metabolite II is part of Metabolite’s hypothetical claim in this case, 1
1
In a declaratory judgment action, the court must look to the hypothetical
action that the declaratory defendant would have brought, rather than the complaint, in
order to determine whether jurisdiction attaches. See Speedco, Inc. v. Estes, 853 F.2d
909, 912 (Fed. Cir. 1988).
2008-1597 2
because the existence of a valid contractual obligation is a necessary predicate to
recovery of damages for breach of such contractual obligation. 2
In order to adjudicate Metabolite’s claim on the merits in this case, we would be
required to determine the scope of our prior judgment in Metabolite II, and assess
whether it would be entitled to res judicata effect. The issue of the res judicata effect of
the prior judgment suffices for the exercise of “arising under” jurisdiction. The res
judicata effect of a prior federal court judgment is itself determined by federal law. See,
e.g., Stoll v. Gottlieb, 305 U.S. 165, 171-72 (1938); Deposit Bank v. Frankfort, 191 U.S.
499, 514-15 (1903); see also Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497,
507-08 (2001). A suit to determine the res judicata effect of a judgment thus arises
under federal law. 3 The question is whether it also “arises under” federal patent law.
See 28 U.S.C. § 1338(a).
That question depends on whether we should “look through” the prior judgment
to determine whether it is predicated on an action that “arises under” the federal patent
laws. The Supreme Court’s decision in Semtek International (which looked through the
original judgment to determine that it rested on diversity) supports looking through the
prior judgment to determine the original source of jurisdiction in order to characterize the
judgment for res judicata purposes. 531 U.S. at 508-09. Similarly, under Vaden v.
Discover Bank, 129 S. Ct. 1262 (2009), the Supreme Court approved the “look through”
2
See, e.g., Persson v. Scotia Prince Cruises, Ltd., 330 F.3d 28, 34 (1st Cir.
2003) (“A breach of contract complaint must allege (1) the existence of a valid and
binding contract; (2) that plaintiff has complied with the contract and performed his own
obligations under it; and (3) breach of the contract causing damages.”); see also 5
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1235, at 388-
91 (3d ed. 2004).
3
In contrast, a suit to collect on a federal law judgment does not present a
federal question. See Metcalf v. Watertown, 128 U.S. 586, 588 (1888).
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approach to “arising under” jurisdiction in the context of the Federal Arbitration Act. Id.
at 1273 (“A federal court may ‘look through’ a § 4 petition to determine whether it is
predicated on an action that ‘arises under’ federal law . . . .”). Under the look through
approach, since the original judgment here depended in part on patent jurisdiction, we
have jurisdiction over the appeal. In other words, if a claimant is bringing a suit to
enforce or determine the res judicata effect of a prior judgment “arising under” federal
patent laws, that is a suit that itself arises under the federal patent laws.
II
Even putting to one side the res judicata issue, the majority has adopted an
erroneous construction of “arising under” jurisdiction under 28 U.S.C. § 1338(a) as to
the underlying contract claim. When filed, this case presented a substantial disputed
issue of patent law that had not been determined in our earlier decision in Metabolite II.
It is undisputed that the contract between LabCorp and Metabolite does make an issue
of patent law a determinative issue in this case. The royalties under the License
Agreement are tied to net sales of “Licensed Assays,” and licensed assays for
homocysteine are defined as “assays . . . using methods and materials falling within the
claims of the Licensed Patents.” J.A. 20782. Thus, royalties are only due under the
agreement if the assays LabCorp sold fall within the scope of the licensed patents, i.e.,
only if the unauthorized sales would be infringing.
Under very similar facts in U.S. Valves, Inc. v. Dray, 212 F.3d 1368 (Fed. Cir.
2000), we concluded that the case raised a substantial question of federal patent law,
and that jurisdiction existed. See id. at 1372. In Valves, the plaintiff (an exclusive
patent licensee) brought an action against the licensor, alleging breach of contract
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based on the licensor’s sale of allegedly equivalent valves in contravention of the
exclusive license agreement. We held that in order to show that the licensor sold valves
in contravention of the agreement, the licensee was required to show that the licensor
sold valves that were covered by the licensed patents. Consequently, “a court must
interpret the patents and then determine whether the . . . valve[s] infringe[] these
patents. Thus patent law is a necessary element of U.S. Valves’ breach of contract
action.” Id.In this case, as in Valves, the question of whether LabCorp breached the
agreement to pay “know-how” royalties necessarily turns on the question of
infringement of the ’658 patent, and this implicates a substantial question of patent law.
The majority does not appear to dispute this point. Instead, the majority points to
Supreme Court cases stating that the federal issue must be “actually disputed” and
concludes that there is no substantial disputed issue of patent law here because
infringement of the ’658 patent was determined in our earlier decision and is now not
contested. Majority Op. at 10. The majority’s reasoning is flawed in two critical
respects: (1) our decision in Metabolite II did not in fact determine whether the
outsourced assays were covered by the patent claims, and (2) the fact that the federal
issue becomes undisputed after the case was filed does not deprive a court of
jurisdiction.
The original Metabolite case involved the question of whether LabCorp induced
infringement of claim 13 of the ’658 patent. See Metabolite II, 370 F.3d at 1358-59.
Claim 13 of the ’658 patent claims the total homocysteine test: “[a] method for detecting
a deficiency of cobalamin or folate in warm-blooded animals comprising the steps of:
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assaying a body fluid for an elevated level of homocysteine; and correlating an elevated
level of total homocysteine in said body fluid with a deficiency of cobalamin or folate.”
’658 patent col.41 ll.58-65. Metabolite’s theory at the first trial was apparently that the
Abbott assays were licensed assays because LabCorp had induced infringement of
claim 13 of the patent with respect to the Abbott assays. See Appellee’s Br. 50,
Metabolite II, 370 F.3d 1354 (No. 03-1120).
Once we issued our mandate in Metabolite II on August 12, 2004, and the
injunction stay was lifted, LabCorp stopped performing homocysteine-only tests itself
and instead entered into an agreement with Specialty Laboratories, Inc. (“Speciality”),
which is licensed by Competitive Technologies, Inc. under the ’658 patent, for Specialty
to perform homocysteine-only tests for LabCorp. Metabolite Labs., Inc. v. Lab. Corp. of
Am. Holdings, No. 99-cv-870-ZLW-CBS, slip op. at 8-9 (D. Colo. Sept. 21, 2006). This
court in Metabolite II did not address the question of whether the outsourced assays
were licensed assays. At the time the complaint was filed in this case, there was a
substantial, disputed issue of patent law, because the issue of whether the outsourced
homocysteine assays were in fact covered by the ’658 patent claims was contested by
LabCorp.
The theory in Metabolite I was not (as the majority assumes) that the Abbott
assays standing alone were “licensed assays” protected by the ’658 patent, but that the
Abbott assays were “licensed assays” because LabCorp had induced infringement of
claim 13 of the patent using those assays; claim 13 of the patent did not in fact specify
use of a patented assay. See ’658 patent col.41 ll.58-65. The inducement issue with
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respect to the outsourced assays could well have been different than the original
inducement question resolved in Metabolite I.
In its initial complaint in this case in the district court, LabCorp sought a
declaratory judgment that it was not liable for any royalties with respect to the newly
outsourced homocysteine-only assays. First Amended Complaint for Declaratory
Judgment at 5, Metabolite III, 571 F. Supp. 2d 1199 (No. 04-cv-1662). As referenced in
the Final Pretrial Order signed by both parties, LabCorp asserted that the homocysteine
assays were not “Licensed Assays” because they did not fall within the claims of the
’658 patent. Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., No. 04-cv-1662, slip
op. at 3 (D. Colo. Feb. 7, 2008) (final pretrial order). At oral argument, counsel for
LabCorp conceded that “it is possible that the court could have had to decide [the
question of whether the outsourced homocysteine assays fell within the claims of the
’658 patent] in this case.” Oral Arg. at 22:58-23:01. In order for Metabolite to prevail on
its hypothetical claim for royalties, it would have had to establish that the outsourced
homocysteine assays were in fact covered by the ’658 patent.
The fundamental error of the majority is that, while it claims otherwise, it fails to
look at the controversy prevailing at the time that the complaint was filed. Under
established Supreme Court authority, later concessions (such as those ultimately made
in this case that the outsourced assays were licensed assays) do not operate to defeat
jurisdiction that rightfully attached at the outset of the case. See, e.g., Dole Food Co. v.
Patrickson, 538 U.S. 468, 478 (2003); St. Paul Mercury Indemnity Co. v. Red Cab Co.,
303 U.S. 283, 289-90 (1938) (“Events occurring subsequent to the institution of
suit . . . do not oust jurisdiction.”); Minneapolis & St. Louis R.R. Co. v. Peoria & Pekin
2008-1597 7
Union Ry. Co., 270 U.S. 580, 586 (1926) (“The jurisdiction of the lower court depends
upon the state of things existing at the time the suit was brought.”); Anderson v. Watt,
138 U.S. 694, 702-03 (1891) (“And the [jurisdictional] inquiry is determined by the
condition of the parties at the commencement of the suit.”); Mollan v. Torrance, 22 U.S.
(9 Wheat.) 537, 539 (1824) (“[T]he jurisdiction of the Court depends upon the state of
things at the time of the action brought, and . . . after vesting, it cannot be ousted by
subsequent events.”).
Thus, I think that the district court had jurisdiction over this case under 28 U.S.C.
§ 1338(a), and we accordingly can and must address the merits. I respectfully dissent
from the majority’s contrary holding.
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