Cyanotech Corp. v. U.S. Nutraceuticals LLC, et al., case number 1:12-cv-00352, in the U.S. District Court for the District of Hawaii.

Cyantotech Corporation filed an action in the U.S. District Court for the District of Hawaii seeking a declaratory judgment of non-infringement or invalidity of U.S. Patent No. 5,527,533 (“the ‘533 Patent”) owned by the University of Illinois and licensed to U.S. Nutraceuticals, LLC, d/b/a Valensa International (“Valensa”). The defendants moved to dismiss under Rules 12(b)(7) and 9(b) of the Federal Rules of Civil Procedure on the grounds that the University is a required party whose joinder is not feasible because it has Eleventh Amendment immunity. The Court granted the motion and dismissed the action without prejudice to Cyanotech asserting its claims in a parallel infringement action filed by Valensa, U.S. Nutraceuticals LLC v. Cyanotech Corp., No. 5:12-cv-366OC-10TBS (M.D. Fla.) (the “Florida Case”).

Cyanotech and Valensa both sell “retail health-related” supplements containing “astaxanthin, an antioxidant that is claimed to have a wide variety of human health benefits.” Cyanotech’s complaint alleged that astaxanthin “is a natural product long known for its ability to neutralize free radicals, thereby promoting eye health, reducing sunburn, and reducing other types of photic damage.” The ‘533 Patent relates to a method of using astaxanthin for “retarding and ameliorating central nervous system and eye diseases.” Under the license agreement with Valensa for the ‘533 Patent, the University retains “the right to practice the rights licensed . . . for its own non-commercial and research activities.”

Cyanotech also supplies astaxanthin-containing microalgae to Valensa under a Biomass Supply Agreement. Using the licensed ‘533 Patent methods, Valensa extracts axtaxanthin from the biomass and sells formulations to others who package, distribute, and sell retail health-related products. A dispute arose, with Valensa asserting that Cyanotech infringes on Valensa’s rights in the ‘533 Patent when Cyanotech holds out to others that its own astaxanthin products prevent “photic damage to the eye or improve eye health.” Valensa sent an email demanding that Cyanotech cease and desist selling such products “for eye health indications” and agree to pay a retroactive royalty, after which Cyanotech filed its declaratory judgment action.

Cyanotech’s complaint alleged that the University “is a public entity of the State of Illinois” and also that the University “is or may be a necessary party pursuant to Fed. R. Civ. P. Rule 19[.]” Based on these allegations and an “overwhelming body of caselaw,” the Court found that the University is “‘an arm of the state’ for Eleventh Amendment purposes” and that the action “is barred against the University in this court unless it waived its Eleventh Amendment immunity.”

Cyanotech argued that the Illinois Constitution waived the state’s sovereign immunity except as provided by the Illinois legislature, and that any such immunity does not apply to declaratory relief actions. The Court rejected the argument, finding that the Illinois appellate court case cited by Cyanotech held only that immunity was waived for certain types of actions in Illinois state court, and that the Illinois court did not, and could not, decide “whether the University waived Eleventh Amendment immunity in a federal forum.” Noting that “under binding Federal Circuit precedent,” Tegic Commc’ns Corp. v. Bd. of Regents of the Univ. of Texas Sys., 458 F.3d 1335, 1340 (Fed. Cir. 2006), “Eleventh Amendment immunity in this context is venue specific,” the Court found that the later-filed Florida Case waived the University’s immunity in the Middle District of Florida, but did not waive immunity in the District of Hawaii. The Court also found that Ex Parte Young did not apply because suit for a declaratory judgment of non-infringement and invalidity did not seek “only prospective, injunctive relief to enjoin [the University] from ongoing violations of federal law.” Instead, according to the Court, it seeks “the opposite -- a declaration that there is no ongoing violation of federal law (by Cyanotech).”

The Court further found that the University was a required party because it had not licensed or assigned all of its rights to Valensa, and its rights as patent owner could be impaired without it participating in the suit, and that the University’s immunity rendered joinder not feasible. Applying Ninth Circuit law because joinder under Rule 19 is not an issue unique to patent law, the Court found that the applicable four-factor balancing test -- (1) the prejudice to any party or to the absent party; (2) whether relief can be shaped to lessen prejudice; (3) whether an adequate remedy, even if not complete, can be awarded without the absent party; and (4) whether there exists an alternative forum -- favored dismissal of the entire action.