When infringement is not at issue, a lawsuit for breach of know-how and patent license agreement does not arise under patent law.

Laboratory Corporation of America Holdings v. Metabolite Laboratories, Inc., No. 2008-1597 (Fed. Cir. Mar. 11, 2010).

The non-exclusive licensee granted the alleged infringer a license to the know-how of the patent and a sublicense to the patent. After several years of using the test and paying royalties, the alleged infringer began using an alternative test developed by another company and stopped paying both patent and know-how royalties to the non-exclusive licensee. The non-exclusive licensee and the patentee sued the alleged infringer for breach of contract and patent infringement.

After a trial, a jury found that the patent was valid and that the alleged infringer had infringed. (Metabolite I). The district court granted a permanent injunction to enjoin the alleged infringer from performing any further testing, including any testing using the alternative test. The Federal Circuit affirmed, holding that the alleged infringer’s refusal to pay royalties was a material breach that constituted termination of the license. (Metabolite II).

The alleged infringer then began to outsource the testing to another company that was independently licensed by the patentee. In response, the non-exclusive licensee filed a post-judgment motion in Metabolite I asserting violation of the injunction. Simultaneously, the alleged infringer filed a new action seeking a declaratory judgment that the non-exclusive licensee was not entitled to recover damages for activity occurring after the judgment with respect to the newly outsourced tests. (Metabolite III).

In Metabolite III, the district court held that no further royalties were due under the license agreement. The license agreement was both breached and terminated, resulting in the loss of all rights (both patent and know-how) under the contract. The non-exclusive licensee appealed.

The Federal Circuit determined that it did not have jurisdiction over the appeal because the present cause of action did not arise under patent law, nor did the non-exclusive licensee’s right to relief necessarily depend on resolution of a substantial question of patent law. 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. The non-exclusive licensee’s hypothetical claim would have been a breach of contract claim premised on the alleged infringer’s post-judgment continued referral of the testing to a third-party without paying know-how royalties on its sales. Because infringement was determined in Metabolite I, the non-exclusive licensee’s hypothetical action would not require resolution of a question of patent law. This situation is not a “case within a case” wherein proof of infringement is required in order to succeed on a claim for breach of contract. It is undisputed that the alleged infringer’s post-trial conduct fell within the scope of the patent. In addition, the mere presence of a patent as relevant evidence does not by itself present a substantial issue of patent law.

The majority rejected the argument of the dissent that a suit to enforce or determine the res judicata effect of a prior judgment “arising under” the patent laws is itself a suit that arises under the patent laws (the “look through” approach). This action is a state law contract dispute over know-how royalties brought pursuant to the district court’s diversity jurisdiction. Accordingly, the appeal was transferred to the Tenth Circuit.

A copy of the opinion can be found here.