The U.S. Court of Appeals for the Federal Circuit upheld the district court’s dismissal of ExcelStor’s complaint for lack of subject matter jurisdiction, holding that ExcelStor’s breach of contract claim invoking the patent exhaustion doctrine, does not confer federal jurisdiction over the case. ExcelStor Tech., Inc. v. Papst Licensing GmbH & Co., Case No. 08-1140 (Fed. Cir., Sept. 16, 2008) (Lourie, J.).

In January 2004, ExcelStor entered into a manufacturing license agreement with Papst. The license agreement permitted ExcelStor to manufacture Papst’s patented hard disk drive in exchange for royalty payments. The license agreement required Papst to notify ExcelStor of any other royalty-bearing license agreement for the same patented product. In this connection and over a period of three years, Papst sent many letters to ExcelStor indicating that no royalties were being paid other than those from ExcelStor.

Around 2007, ExcelStor learned of another hard disk license agreement entered into by Papst. Papst asserted that the other license agreement did not generate any royalties. Not convinced with Papst’s assertion, ExcelStor brought an action in a district court claiming, inter alia, that Papst was collecting a second royalty on hard disks made by ExcelStor and sought a declaratory judgment that Papst has violated the patent exhaustion doctrine by collecting two royalties and failed to disclose that violation, thereby breaching its contract with ExcelStor.

The district court dismissed ExcelStor’s complaint for lack of subject matter jurisdiction, asserting that patent exhaustion doctrine is not a cause of action but is rather a defense to patent infringement. ExcelStor appealed, asserting that the jurisdiction is proper under 28 U.S.C. § 1338 because its claim arises under the federal patent law.

The Federal Circuit, relying on the Supreme Court decision in Christianson v. Colt Industries disagreed, noting that to arise under the federal patent law, a claim must establish 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.

The Federal Circuit concluded that ExcelStor’s claim does not meet either prong of the Christianson test. Specifically, the Federal Circuit held that ExcelStor’s claim does not arise under the federal patent law because it is a defense to patent infringement and not a cause of action. Furthermore, the Federal Circuit held that ExcelStor’s claim does not establish federal subject-matter jurisdiction because it does not depend on resolution of a substantial question of federal patent law. The Federal Circuit, citing the recent Quanta decision, noted that the patent exhaustion doctrine prohibits patentees from selling a patented device and then invoking patent laws to control post-sale use of such a device. Here, the Federal Circuit noted that ExcelStor’s claim does not allege that the defendant invoked the patent laws to control the post-sale use of the patented hard disk drive. Rather, it alleges that the defendant violated the patent exhaustion doctrine by collecting two royalties for the same patented product, which the Federal Circuit noted is not prohibited under the patent exhaustion doctrine.