Highway Equipment Company, Inc. v. Feco, Ltd ( 2006 )

Error: Bad annotation destination
United States Court of Appeals for the Federal Circuit
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HIGHWAY EQUIPMENT COMPANY, INC.,
Plaintiff-Cross Appellant,
v.
FECO, LTD. and STAN DUNCALF,
Defendants-Appellants.
Stephen J. Holtman, Simmons, Perrine, Albright & Ellwood, PLC, of Cedar
Rapids, Iowa, argued for plaintiff-cross appellant. With him on the brief was David A.
Hacker.
David A. Tank, Davis, Brown, Koehn, Shors & Roberts, P.C., of Des Moines,
Iowa, argued for defendants-appellants. With him on the brief was Deborah M.
Tharnish.
W. Michael Garner, Dady & Garner, P.A., of Minneapolis, Minnesota, for amici
curiae.
Appealed from: United States District Court for the Northern District of Iowa
Magistrate Judge John A. Jarvey
United States Court of Appeals for the Federal Circuit
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HIGHWAY EQUIPMENT COMPANY, INC.
Plaintiff-Cross Appellant,
v.
FECO, LTD. and STAN DUNCALF,
Defendants-Appellants.
__________________________
DECIDED: November 21, 2006
__________________________
Before SCHALL, LINN, and DYK Circuit Judges.
LINN, Circuit Judge.
FECO, Ltd. (“FECO”) appeals from a judgment of the U.S. District Court for the
Northern District of Iowa making final an order granting Highway Equipment Company,
Inc.’s (“Highway Equipment”) summary judgment on FECO’s claim for wrongful
termination of dealership and denying FECO’s motion for attorney fees and expenses
pursuant to 35 U.S.C. § 285. Highway Equipment cross-appeals from the ruling that the
district court had subject matter jurisdiction over FECO’s motion for attorney fees.
Because the district court properly entertained FECO’s claim for attorney fees and did
not err in denying attorney fees, and because the district court lacked jurisdiction over
FECO’s wrongful termination of dealership claim, we affirm-in-part, vacate-in-part, and
remand.
I. BACKGROUND
FECO and Highway Equipment are Iowa corporations that manufacture and sell
agricultural equipment including spreaders for applying particulate material, such as
fertilizer to fields or salt to roads. Highway Equipment is also the owner of U.S. Patent
No. 6,517,281 (the ’281 patent), directed to an adjustable spreader that allows for a
more precise application of the various types and densities of particulate material.
On October 1, 1996, Highway Equipment entered into an agreement with FECO,
authorizing FECO to sell Highway Equipment’s adjustable spreader. The agreement
was governed by the Iowa Agricultural Equipment Dealer Statute, Iowa Code § 322F
(“322F”), which regulates certain aspects of contractual relationships between
agricultural equipment suppliers and dealers. 322F provides, among other things, that a
supplier shall terminate a dealership agreement only upon good cause and with at least
ninety-days prior written notice. On September 16, 2002, without good cause and
without prior written notice, Highway Equipment terminated FECO as its agricultural
equipment dealer.
In December of 2002, or sometime shortly thereafter, FECO began
manufacturing an adjustable spreader. The ’281 patent issued on February 11, 2003.
On June 17, 2003, Highway Equipment sued FECO and its president, Stan Duncalf
(collectively “FECO”) for infringement of the ’281 patent. Also named as a defendant in
that case was Doyle Equipment Manufacturing Company (“Doyle”). Highway
Equipment averred in its complaint that the district court possessed subject matter
jurisdiction over the counts alleging infringement pursuant to 28 U.S.C. § 1338(a).
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FECO filed affirmative defenses, based on inventorship and inequitable conduct,
and counterclaimed for a declaratory judgment of non-infringement and invalidity and for
tortious interference with a prospective business relationship. FECO also sought
damages pursuant to 322F for wrongful termination of its dealership agreement with
Highway Equipment. FECO asserted that the district court possessed supplemental
jurisdiction over the counterclaim, alleging violation of the Iowa Code pursuant to 28
U.S.C. § 1367(a). FECO also sought attorney fees and costs.
On November 1, 2004, Highway Equipment moved for partial summary judgment
on FECO’s counterclaim for damages pursuant to 322F. On March 22, 2005, the
district court, by an interlocutory order, granted Highway Equipment’s summary
judgment motion. The district court held that, as a matter of law, FECO was not entitled
to damages for wrongful termination of dealership under the statute because the statute
expressly lists certain acts that are “violations” of 322F and wrongful termination of
dealership is not enumerated on the list. See Highway Equipment Co. v. FECO, Ltd.,
No. 03-CV-0076 (N.D. Iowa Mar. 22, 2005) (“322F Order”); see also Iowa Code §
322F.7. Trial on the remaining patent-related issues was scheduled to begin in April,
with the final pretrial conference set for April 1, 2005.
On March 31, 2005, Highway Equipment filed a stipulation and motion for
dismissal with prejudice of all of its claims against Doyle. Doyle likewise stipulated to
dismiss with prejudice all claims against Highway Equipment. The next day, on April 1,
2005, Highway Equipment filed the following “Declaration and Covenant Not to Sue”
(“covenant”):
Highway Equipment Company, on behalf of itself and
any successors-in-interest to [the ’281 patent], hereby
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unconditionally and irrevocably covenants not to assert at
any time any claim of patent infringement including direct
infringement, contributory infringement and/or inducing
infringement against [FECO] under the ’281 patent, as it
currently reads, based on [FECO’s] manufacture, use, offer
for sale, or sale of
(1) any product that [FECO] currently manufactures;
and/or
(2) any product that [FECO] manufactured prior to the
date of this declaration.
By order dated that same day, the district court entered a dismissal with
prejudice as to the claims between Highway Equipment and Doyle, based on the
stipulations between them. Because the covenant withdrew the controversy regarding
infringement, on April 4, 2005, the district court canceled the jury trial and set April 5,
2005 as the deadline for FECO to file a motion for attorney fees under 35 U.S.C. § 285.
On April 7, 2005, FECO filed its motion for attorney fees pursuant to 35 U.S.C.
§ 285 and requested a hearing. FECO alleged the case was exceptional under 35
U.S.C. § 285 because Highway Equipment engaged in litigation misconduct and
inequitable conduct during prosecution of the ’281 patent. On April 12, 2005, Highway
Equipment filed an opposition to the motion, contending that the court could not properly
entertain the attorney fee issue because Highway Equipment’s covenant not to sue
FECO for infringement divested the court of subject matter jurisdiction over the claim for
attorney’s fees and that, in the alternative, FECO did not obtain a disposition on the
merits that would make it a prevailing party for purposes of 35 U.S.C. § 285.
On April 18, 2005, pursuant to Fed. R. Civ. P. 41(a)(2), FECO sought an order
dismissing Highway Equipment’s underlying infringement claim with prejudice and
retaining jurisdiction to entertain the fee request. On April 20, 2005, Highway
Equipment filed a brief “resisting” the motion, arguing that, although the covenant
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rendered all matters moot such that the court should dismiss all claims, including the fee
claim, a dismissal with prejudice was not warranted. On April 21, 2005, FECO filed a
reply, arguing that a dismissal with prejudice was required under the facts of this case
because, among other things, the filing of the covenant is a “unilateral declaration of
intent not supported by consideration, which [Highway Equipment] can attempt to
withdraw, amend, or alter at any time.” FECO’s April 21, 2005 brief reiterated its
demand for dismissal of the patent claims with prejudice, arguing that “[a]bsent a
definitive and judicially sanctioned resolution of [Highway Equipment’s] affirmative
claims [demanding among other things damages for past infringement], the threat of
further litigation is substantial.”
On April 22, 2005, the district court ruled that, although it was dismissing the
entire action under Fed. R. Civ. P. 41(a)(2) in light of the filing of the covenant, it
nonetheless retained subject matter jurisdiction over FECO’s fee request under 35
U.S.C. § 285. See Highway Equipment Co. v. FECO, Ltd., No. 03-CV-0076 (N.D. Iowa,
April 22, 2005) (“Jurisdiction Order”). The court also found that it could properly
entertain the fee claim because it concluded that FECO was a prevailing party for
purposes of § 285. The court then set a hearing date on FECO’s fee motion. Id., slip
op. at 9.
On July 27, 2005, after a four-day evidentiary hearing on the fee question, the
court found that the case was not exceptional and denied FECO’s request for attorney
fees. See Highway Equipment Co. v. FECO, Ltd., No. 03-CV-0076 (N.D. Iowa Jul. 27,
2005) (“Fee Order”). On July 29, 2005, the district court entered final judgment,
dismissing Highway Equipment’s claims against FECO and FECO’s counterclaims
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against Highway Equipment with prejudice based on the covenant and denying FECO’s
claim for attorney fees and costs under 35 U.S.C. § 285. See Highway Equipment Co.
v. FECO, Ltd., No. 03-CV-0076 (N.D. Iowa Jul. 29, 2005) (“Final Order”).
FECO appeals the district court’s Fee Order and the district court’s 322F Order.
Highway Equipment cross-appeals the district court’s Jurisdiction Order. We have
jurisdiction pursuant to 28 U.S.C. § 1295(a)(1).
II. DISCUSSION
A. Standard of Review
Whether an actual controversy exists to support subject matter jurisdiction is a
question of law subject to de novo review. Fort James Corp. v. Solo Cup Co., 412 F.3d
1340, 1346 (Fed. Cir. 2005) (citing BP Chems. Ltd. v. Union Carbide Corp., 4 F.3d 975,
978 (Fed. Cir. 1993)). The district court’s factual determinations made in the process of
resolving questions of law are reviewed for clear error. See Vanguard Research, Inc. v.
Peat, Inc., 304 F.3d 1249, 1254 (Fed. Cir. 2002). In considering the jurisdictional issues
presented herein, we follow the “fundamental precept that federal courts are courts of
limited jurisdiction,” empowered to act only within the bounds of Article III of the United
States Constitution. Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365 (1978);
Marbury v. Madison, 5 U.S. (1 Cranch) 137, 173-80 (1803); see also Mansfield,
Coldwater & Lake Mich. Ry. v. Swan, 111 U.S. 379, 384 (1884) (“[T]he judicial power of
the United States must not be exerted in a case to which it does not extend, even if both
parties desire to have it exerted”).
Before considering the effect of the district court’s dismissal with prejudice, we
must first determine whether to apply Eighth Circuit law or Federal Circuit law to the
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question of what effect a dismissal with prejudice has on the legal requirements under
35 U.S.C. § 285. Keeping in mind the policy interests both in “bring[ing] about
uniformity in the area of patent law” and in “minimizing confusion and conflicts in the
federal judicial system,” Manildra Milling Corp. v. Ogilvie Mills, Inc., 76 F.3d 1178, 1181
(Fed. Cir. 1996) (citations omitted), and that Federal Circuit law “governs the
substantive interpretation of 35 U.S.C. § 285, which is unique to patent law,” Pharmacia
& Upjohn Co. v. Mylan Pharms., Inc., 182 F.3d 1256, 1359 (Fed. Cir. 1999), we resolve
the issue by deciding that the question of the effect of a dismissal with prejudice on 35
U.S.C. § 285 is a matter of Federal Circuit law. We do so in order to promote national
uniformity concerning the availability of attorney fees under 35 U.S.C. § 285. Were we
to apply regional circuit law, the effect of a dismissal with prejudice on 35 U.S.C. § 285might vary with the regional circuit in which the case originated. As discussed below,
there is a noted lack of uniformity among the regional circuits regarding the effect of a
dismissal with prejudice on the availability for attorney fees. Applying our own law will
ensure uniformity when patent issues are litigated. We apply a de novo standard of
review to this question of law. Inland Steel Co. v. LTV Steel Co., 364 F.3d 1318, 1320
(Fed. Cir. 2004).
Where a district court finds a case exceptional under 35 U.S.C. § 285, this court
reviews the underlying factual findings for clear error and legal conclusions without
deference. Rambus Inc. v. Infineon Techs. AG, 318 F.3d 1081, 1088 (Fed. Cir. 2003).
Once the district court has found a case to be exceptional, we review any award of
attorney fees for an abuse of discretion. Id.
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B. Analysis
1. Fee Order
Highway Equipment first argues that the district court erred in retaining
jurisdiction over FECO’s request for attorney fees under 35 U.S.C. § 285 because, once
Highway Equipment gave FECO a pre-verdict covenant not to sue on the patent
infringement issues, the court lost Article III subject matter jurisdiction over the patent-
based fee request. We disagree. Under our precedent, the district court correctly
retained jurisdiction over FECO’s claim for attorney fees under 35 U.S.C. § 285.1 See
H.R. Tech., Inc. v. Astechnologies, Inc., 275 F.3d 1378, 1386 (Fed. Cir. 2002) (holding
that a claim for attorney fees under § 285 is independently within the district court’s
federal question jurisdiction); Imagineering, Inc. v. Van Klassens, Inc., 53 F.3d 1260,
1263 (Fed. Cir. 1995) (“Since section 285 appears in title 35 and was enacted as a part
of United States patent law, the question whether a case is exceptional within the
meaning of section 285 arises under the Patent Act.”); Cambridge Prods., Ltd. v. Penn
Nutrients, Inc., 962 F.2d 1048, 1050-51 (Fed. Cir. 1992).
Highway Equipment also argues that, in the alternative, even if the district court
had subject matter jurisdiction, the district court erred in entertaining FECO’s request for
attorney fees under 35 U.S.C. § 285 because FECO did not receive judicial relief on the
1
While the covenant may have eliminated the case or controversy pled in
the patent-related counterclaims and deprived the district court of Article III jurisdiction
with respect to those counterclaims, see Super Sack Mfg. Corp. v. Chase Packaging
Corp., 57 F.3d 1054, 1058-59 (Fed. Cir. 1995) (“[A] patentee defending against an
action for a declaratory judgment of invalidity can divest the trial court of jurisdiction over
the case by filing a covenant not to assert the patent at issue against the putative
infringer.”), the covenant does not deprive the district court of jurisdiction to determine
the disposition of the patent infringement claims raised in the Complaint under Rule 41
or the request for attorney fees under 35 U.S.C. § 285.
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merits that alters the legal relationship of the parties. Highway Equipment argues that
its strategic decision to file the covenant and not to assert its infringement claim reveals
nothing about the merits of Highway Equipment’s case. It contends that because the
covenant cannot be construed as anything other than an abandonment of the litigation,
the dismissal, even though characterized as “with prejudice,” did not and could not
change the legal relationship between the parties on the merits of the underlying claim,
which was not considered by the district court. We disagree.
35 U.S.C. § 285 provides that “[t]he court in exceptional cases may award
reasonable attorney fees to the prevailing party.” The Supreme Court has considered
several similarly-worded fee shifting statutes and has consistently held that such
statutes prohibit an award of fees to the plaintiff unless the court awards relief on the
merits, either through a judgment on the merits or through a settlement agreement
enforced through a consent decree. See Buckhannon Bd. and Care Home, Inc. v. W.
Va. Dep’t of Health and Human Res., 532 U.S. 598 (2001) (addressing a request for
attorney fees under the Fair Housing Amendments Act and the Americans with
Disabilities Act); see also Kentucky v. Graham, 473 U.S. 159 (1985) (addressing a
request for attorney fees under the Civil Rights Attorney’s Fees Awards Act of 1976). In
Buckhannon, the Supreme Court rejected the so-called “catalyst theory,” which
maintained that a plaintiff obtained relief on the merits if the plaintiff achieved its desired
result due to the defendant’s voluntary change in conduct. Buckhannon, 532 U.S. at
600. In rejecting this theory, the Court explained that the critical focus is not on the
defendant’s voluntary change in conduct, but rather whether there is a “judicially
sanctioned change in the legal relationship of the parties.” Id. at 605. The Court held
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that a defendant’s voluntary change in conduct, even if it accomplishes what the plaintiff
sought to achieve, lacks the necessary “judicial imprimatur on the change.” Id. We
apply the requirements of Buckhannon to 35 U.S.C. § 285. See Indep. Fed’n of Flight
Attendants v. Zipes, 491 U.S. 754, 759 n.2 (1989) (noting that the similar language of
fee-shifting statutes is “a strong indication” that they are to be interpreted alike).
The dispositive issue is thus whether the dismissal with prejudice had sufficient
judicial imprimatur to constitute a “judicially sanctioned change in the legal relationship
of the parties.” Buckhannon, 532 U.S. at 605.
In this case, the district court exercised its discretion in dismissing the patent
claims raised in the underlying action with prejudice pursuant to Fed. R. Civ. P. 41(a)(2).
That rule provides in relevant part that “an action shall not be dismissed at the plaintiff’s
instance [after answer] save upon order of the court and upon such terms and
conditions as the court deems proper.” As expressly provided in Rule 41, the district
court has discretion to condition the plaintiff’s voluntary dismissal on terms that would
avert any prejudice to the defendant, including dismissing the case “with prejudice.”
The Eighth Circuit has held that voluntary dismissals under Fed. R. Civ. P. 41(a) should
be granted only if no other party will be prejudiced. Kern v. TXO Production Corp., 738
F.2d 968, 970 (8th Cir. 1984). One sort of prejudice that cannot be cured simply by a
reimbursement of costs (and dismissal without prejudice) is the loss by defendant of
success in the first case. Id. (stating that “[i]f defendant has already won its case,
reimbursement of fees and expenses cannot make it whole from the injury of being
sued again, perhaps this time to lose”). Factors that the Eighth Circuit considers in
determining whether to dismiss with or without prejudice include whether the party has
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presented a proper explanation for its desire to dismiss; whether a dismissal would
result in a waste of judicial time and effort; whether a dismissal will prejudice the
defendants; and whether a dismissal is sought merely to escape an adverse decision or
to seek a more favorable forum. Hamm, 187 F.3d at 950. The district court also
considers whether the motion to dismiss is presented at a late time in the proceedings.
See Williams v. Ford Motor Credit Co., 627 F.2d 158, 160 (8th Cir. 1980).
Highway Equipment cites Rice Services, LTD v. United States, 405 F.3d 1017(Fed. Cir. 2005), as support for its argument that the dismissal with prejudice does not
make FECO a prevailing party for purposes of 35 U.S.C. § 285. In Rice, Rice brought a
bid protest action in the Court of Federal Claims against the Navy, disputing the award
of a contract for dining services. The Navy then voluntarily agreed to reevaluate the
bids, and the government moved to dismiss the case without prejudice as moot. The
Court of Federal Claims ordered the Navy to take the promised actions and dismissed
the case without prejudice. Id. at 1019. We noted that “the Navy acted unilaterally in
initiating a reevaluation of bids” and that the Navy acted voluntarily by taking “remedial
action before any rulings by the Court of Federal Claims.” Id. at 1027. We then held
that Rice was not a prevailing party because “the government had voluntarily
abandoned its position” and “the court did not state that it was entering the order as a
merits adjudication in the face of a continuing controversy.” Id. at 1027.
The present situation is different from the situation in Rice, in which voluntary
action was taken outside the proceedings, was not designed to be judicially
enforceable, and resulted in a dismissal without prejudice. In contrast to Rice, the
voluntary filing of the covenant in this case was designed to be judicially enforceable
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and was the basis for the court’s order dismissing the claims with prejudice. The
covenant was not simply an extrajudicial promise made by one party to another outside
the context of litigation. The district court’s determination to dismiss the remaining
controversy with prejudice evidently was prompted by the fact that Highway Equipment
had prosecuted the case against FECO through the final pretrial conference to the eve
of trial without any explanation of why the covenant was only then filed with the court.
In exercising its discretion and dismissing the case with prejudice, following and in light
of the covenant, the district court extinguished Highway Equipment’s ability to sue again
on those claims. To hold that, in this circumstance, there has been no disposition on
the merits would undermine the purpose of Rule 41 to encourage a plaintiff’s voluntary
dismissal under such terms as to avoid prejudice. Such a holding would imply that the
only way for a defendant to obtain a disposition on the merits would be to oppose a
dismissal and proceed to litigation on the merits, and would encourage the litigation of
unreasonable or groundless claims. See, e.g., Christiansburg Garment Co. v. EEOC,
434 U.S. 412, 421 (1978) (holding that prevailing defendants may receive attorney’s
fees under Title VII of the Civil Rights Act of 1964 where the plaintiff’s actions were
“frivolous, unreasonable, or without foundation”).
We have likewise held that a defendant was the prevailing party for purposes of
costs under Rule 54 where the plaintiff voluntarily dismissed its case against one
defendant with prejudice. Power Mosfet Techs., L.L.C v. Siemens AG, 378 F.3d 1396,
1416 (Fed. Cir. 2004). In that case, we stated, “The dismissal of a claim with
prejudice . . . is a judgment on the merits under the law of the Federal Circuit.” Id.Furthermore, we have treated the prevailing party issue under Rule 54 and 35 U.S.C. §
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285 similarly. See Inland Steel, 364 F.3d at 1319-20; see also Manildra Milling, 76 F.3d
at 1181 n.1 (noting that “the meaning of prevailing party is the same” under § 1988 and
Rule 54(d)(1)); Dattner v. Conagra Foods, Inc., 458 F.3d 98, 101 (2d Cir. 2006) (“[T]he
Court [in Buckhannon] did not suggest—and there is no reason to conclude—that the
distinction [between costs and fees] affects the meaning of the separate term ‘prevailing
party’”); Tunison v. Continental Airlines Corp., Inc., 162 F.3d 1187, 1189-90 (D.C. Cir.
1998) (noting that the meaning of “prevailing party” is generally same in either context-
attorney's fees or costs).
In light of the foregoing precedent, we conclude that as a matter of patent law,
the dismissal with prejudice, based on the covenant and granted pursuant to the district
court’s discretion under Rule 41(a)(2), has the necessary judicial imprimatur to
constitute a judicially sanctioned change in the legal relationship of the parties, such
that the district court properly could entertain FECO’s fee claim under 35 U.S.C. § 285.
See Power Mosfet, 378 F.3d at 1416 (holding that a patent infringement defendant
obtained a disposition on the merits for purposes of Fed. R. Civ. P. 54(d)(1) where
patentee voluntarily dismissed its infringement claim with prejudice); Inland Steel, 364
F.3d at 1321 (holding that a patent infringement defendant, who moved for dismissal
after obtaining cancellation of patents through reexamination proceedings before the
Patent and Trademark Office obtained a disposition on the merits in infringement action
for purposes of obtaining attorney fees and costs). FECO’s prevailing party status is not
predicated on whether Highway Equipment filed a Rule 41(a)(2) motion to dismiss with
prejudice at the outset but is sufficiently based on its having filed a covenant not to sue
with the court to end the litigation, resulting in a dismissal with prejudice.
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We note that our holding is consistent with the treatment of similar cases within
other circuits. For example, the Seventh Circuit has held that a voluntary dismissal with
prejudice meets the Buckhannon test, reasoning that such disposition “effects a material
alteration of [the] legal relationship with the other parties, because it terminates any
claims [the plaintiff] may have had against [the defendants] arising out of this set of
operative facts.” Claiborne v. Wisdom, 414 F.3d 715, 719 (7th Cir. 2005); see Mother
and Father v. Cassidy, 338 F.3d 704, 708 (7th Cir. 2003) (“[A] voluntary dismissal with
prejudice renders the opposing party a ‘prevailing party’ within the meaning of Rule
54.”). The Tenth Circuit, in a pre-Buckhannon case, has stated that “a defendant is a
prevailing party under Rule 54 when, in circumstances not involving settlement, the
plaintiff dismisses its case against the defendant, whether the dismissal is with or
without prejudice.” Cantrell v. Int’l Brotherhood of Elec. Workers, 69 F.3d 456, 456
(10th Cir. 1995) (en banc); see also Samsung Elec. Co. v. Rambus Inc., 440 F. Supp.
2d. 495, 511 (E.D. Va. 2006) (holding that a Rule 41(a)(2) dismissal of patent
infringement counterclaims with prejudice following the patentee’s covenants not to sue,
was sufficient to constitute a disposition on the merits under 35 U.S.C. § 285).
While the Fifth Circuit has held that, where a plaintiff voluntarily dismisses its
claims, the defendant is generally not the prevailing party unless “the defendant can
demonstrate that the plaintiff withdrew to avoid a disfavorable judgment on the merits,”
Dean v. Riser, 240 F.3d 505, 510-11 (5th Cir. 2001), that exception to the rule was
strongly grounded on the competing policies that undergird 42 U.S.C. § 1988, which are
different from the policies that undergird 35 U.S.C. § 285. Also, while the Eighth Circuit
has applied a rationale similar to that of the Fifth Circuit, holding that, to be a prevailing
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party, a defendant must point to a judicial determination to its benefit, that holding was
based on the Eight Circuit’s view (before Buckhannon) that the “‘material alteration of
the legal relationship among the parties’ definition of a prevailing plaintiff [is not the
same as the] definition for prevailing defendant.” Marquart v. Int’l Ass’n of Machinists &
Aerospace Workers, 26 F.3d 842, 851-52 (8th Cir. 1994). Subsequent decisions of the
Eighth Circuit have continued to address under what circumstances court orders may
result in the requisite judicially sanctioned material alteration in the parties’ legal
relationship. See, e.g., N. Cheyenne Tribe v. Jackson, 433 F.3d 1083, 1085 n.2.
Turning to the merits of the fee claim, FECO asserts that the district court erred
in denying attorney fees because it proved by clear and convincing evidence that this
case was “exceptional” pursuant to 35 U.S.C. § 285. FECO argues that Highway
Equipment engaged in litigation misconduct and inequitable conduct before the Patent
and Trademark Office (“PTO”). Regarding inequitable conduct, FECO argues that
Highway Equipment failed to disclose material prior art and failed to name an alleged
co-inventor, Dick Serbousek.
For the reasons below, we agree with the district court that FECO did not prove
that this case is exceptional by clear and convincing evidence, and we affirm the district
court’s determination of no inequitable conduct and no litigation misconduct. First, as
concerns inequitable conduct, we see no error in the district court’s determination that
FECO failed to produce clear and convincing evidence that Highway Equipment did not
act with the requisite intent to deceive the PTO. Fee Order, slip op. at 19. The district
court found that Highway Equipment discussed the alleged material prior art with its
patent attorney and investigated its relevance. After this investigation, they were not
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able to discern how the device operated or whether or not it had a spreader which
allowed for adjustment of the drop point as disclosed in the ’281 patent. Id., slip op. at
11-12. Based on these factual findings, which are not clearly erroneous, the district
court correctly held that FECO has not proven, by clear and convincing evidence, that
Highway Equipment possessed the requisite intent to deceive the PTO.
Second, FECO has not shown clear error in the district court’s findings that there
was no evidence of any intent by Highway Equipment to mislead the PTO by not
identifying Serbousek as a joint inventor. Id., slip op. at 22. To the contrary, the record
shows that, at the time the patent was filed, Serbousek indicated that he should not be
named as an inventor. Fee Order, slip op. at 10. Based on these factual findings,
which are not clearly erroneous, the district court correctly held that the failure to name
Serbousek as an inventor did not constitute inequitable conduct. Id., slip op. at 22.
Third, as concerns Highway Equipment’s alleged litigation misconduct, FECO
submits six instances of misconduct including improper or untimely disclosure of expert
reports and exhibits, evasive witness testimony, failure to honor its statutory obligation
under 322F, and filing the covenant on the “eve of trial.” FECO did not argue before the
district court that the filing of the covenant not to sue constituted litigation misconduct,
and we therefore do not address it in the first instance on appeal. FECO cites no
authority to support that its arguments with respect to 322F are in any way relevant to
litigation misconduct and we decline to hold that FECO’s assertion of an alleged failure
to comply with 322F means that this case is exceptional. See Cambridge Prods, Ltd. v.
Penn Nutrients, Inc., 962 F.2d 1048, 1051 (Fed. Cir. 1992). We have considered
FECO’s remaining allegations of litigation misconduct related to expert reports, witness
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testimony, and exhibits. FECO has shown no clear error in the district court’s findings
and we decline to second-guess the district court’s judgment that the defendant is not
entitled to attorney fees based on litigation misconduct. See Lighting World, Inc. v.
Birchwood Lighting, Inc., 382 F.3d 1354 (Fed. Cir. 2004) (holding that “[t]he district
judge is in a far better position to assess [litigation misconduct] than we are”). FECO
has not shown that the district court’s finding of no litigation misconduct is so clearly
erroneous as to warrant our overturning the district court’s ruling on that issue. The
district court’s judgment as to attorney fees under § 285 is affirmed.
2. The 322F Order
The district court did err, however, in exercising supplemental jurisdiction by
authority of 28 U.S.C. § 1367 over FECO’s counterclaim for damages under Iowa Code
§ 322F. Highway Equipment and FECO do not qualify for diversity jurisdiction and did
not plead the 322F claim as a diversity claim or otherwise independently subject to
federal jurisdiction. Therefore, the district court’s only basis for jurisdiction over the non-
federal claim would have been that the claim was not only joined with a federal claim
over which it had original jurisdiction but, significantly, if the non-federal claim was “so
related to claims in the action within such original jurisdiction that they form part of the
same case or controversy under Article III of the United States Constitution.” 28 U.S.C.
§ 1367(a); United Mine Workers of Am. v. Gibbs, 383 U.S. 715, 725 (1966) (holding that
the district court has supplemental jurisdiction to enter final judgment on a non-federal
claim only if “the entire action before the court comprises but one constitutional ‘case’”).
For this relatedness requirement to be satisfied, “[t]he state and federal claims must
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derive from a common nucleus of operative fact” such that they would ordinarily be
expected to be tried in one proceeding. United Mine Workers, 383 U.S. at 725.
The district court erred in exercising supplemental jurisdiction pursuant to
§ 1367(a) to hear the 322F count because the 322F count and the patent counts are not
derived from a common nucleus of operative fact. See Mars, Inc. v. Kabushiki-Kaisha
Nippon Conlux, 24 F.3d 1368 (Fed. Cir. 1994). In Mars, the plaintiff sued the defendant
for infringement of a United States and a Japanese patent, asserting that supplemental
jurisdiction existed over the count alleging infringement of the Japanese patent. Both
patents were directed to electronic coin discriminators with programmable memories.
The district court assumed that it had supplemental jurisdiction over the count alleging
infringement of the Japanese patent, but applied its discretion not to exercise
jurisdiction over the count. Id. at 1371. We held that the district court erred in assuming
that it had jurisdiction because the claims did not derive from a common nucleus of
operative fact. Id. at 1375. We noted that the asserted claims of the U.S. patent were
method claims whereas the asserted claim of the Japanese patent was an apparatus
claim; that the range of accused devices in Japan was broader than in the United
States; and that the allegations of infringement of the U.S. patent included direct and
induced infringement whereas the defendant was charged only with direct infringement
of the Japanese patent. Id. Because neither “similar acts” nor the “same
instrumentality” were at issue, we held that “the foreign patent infringement claim at
issue here is not so related to the U.S. patent infringement claim that the claims form
part of the same case or controversy and would thus ordinarily be expected to be tried
in one proceeding.” We thus concluded that the district court erred in assuming that it
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had power to hear the Japanese patent infringement claim. Id.; see also Ideal
Instruments, Inc. v. Rivard Instruments, Inc., 434 F. Supp. 2d 598, 628-33 (N.D. Iowa
2006) (discussing Mars and finding it to be controlling). In Ideal Instruments, the district
court in Iowa held that, although original jurisdiction existed over the plaintiff’s first count
involving the defendants’ alleged infringement of its United States patent, supplemental
jurisdiction did not extend to the plaintiff’s second count for a declaratory judgment that
it does not infringe the defendants’ Canadian patent. The Iowa court concluded that,
because the actor and the acts in each count are different such that the allegations of
infringement of the United States and foreign patents do not arise from a common
nucleus of operative fact, it would dismiss the plaintiff’s second count. Id. at 630-31.
In the present case, the 322F count and the federal counts are not derived from a
“common nucleus of operative fact.” The facts alleged in the 322F count involved the
alleged wrongful termination of a dealership agreement between the parties that
designated FECO as a dealer for certain outdoor power equipment manufactured and
supplied by Highway Equipment. That dealership agreement was terminated on
September 16, 2002. The facts alleged in the federal counts involved not a contract,
but a patent that issued on February 11, 2003, months after the dealership agreement
was terminated. Furthermore, the facts alleged in the 322F count involved the
distribution of Highway Equipment’s products, whereas the facts alleged in the federal
counts involved a product manufactured by FECO subsequent to the termination of the
dealership agreement. Here, as in Mars and Ideal Instruments, the respective
instrumentalities are different, the products at issue are different, the alleged acts are
different, and the governing laws are different. Because the facts at issue in the 322F
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count are not sufficiently related to those in the federal counts that it forms a part of the
same case or controversy under Article III of the U.S. Constitution, the district court
erred in exercising authority to hear the 322F claim under its supplemental jurisdiction
pursuant to 28 U.S.C. § 1367(a). Mars, 24 F.3d 1375 (“Federal courts may not assume
jurisdiction where none exists.”). Thus, the district court’s judgment on the 322F claim
is vacated and the case is remanded with instructions to dismiss that claim for lack of
jurisdiction.
CONCLUSION
For the above reasons, the final judgment is affirmed-in-part, vacated-in-part, and
the case is remanded to the district court for further proceedings consistent with this
opinion.
AFFIRMED-IN-PART, VACATED-IN-PART and REMANDED.
COSTS
No costs.
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