The U.S. Court of Appeals for the Federal Circuit has determined that federal declaratory judgment jurisdiction exists when the defendant’s coercive action arises under federal law, even if the defense to the coercive action is not federal in nature. ABB Inc. v. Cooper Industries LLC, Case No. 10-1227 (Fed. Cir., Feb. 17, 2011) (Dyk, J.).

Cooper Industries sued ABB, claiming infringement of a dielectric fluid used to insulate and thermally protect transformers. The parties entered into a settlement and license agreement granting ABB a non-exclusive license to make and sell the fluid, but stated that the license did not grant any third party to make any fluid covered by Cooper’s patents.

ABB began outsourcing the manufacture of the fluid to Dow Chemicals and agreed to indemnify Dow for any infringement claims by Cooper. Cooper contacted ABB and Dow stating that third-party manufacture was not covered under the license agreement and that Cooper would “vigorously defend its rights” with regard to products covered by Cooper’s patents.

ABB filed a declaratory judgment action in federal court, seeking declarations of non-infringement and that its activities were authorized under the license agreement. Cooper moved to dismiss for lack of subject-matter jurisdiction. ABB did not raise any potential federal defenses, such as patent invalidity or non-infringement, but instead relied on Cooper’s potential claim for patent infringement as raising a justiciable dispute and ABB’s license defense. The district court found that the issues did not arise under the patent laws, but hinged exclusively on the interpretation of the settlement agreement and dismissed the case. ABB appealed.

On appeal, the Federal Circuit considered the issue of federal jurisdiction in the context of a declaratory judgment (DJ) action based on a federal cause of action but a state law defense.

Addressing the threshold DJ issue, the Court concluded that there was a controversy “of sufficient immediacy and reality” so as to meet the jurisdictional standard of MedImmune and that the issue involved a question of patent infringement. Citing Acceleron, the Court noted that a specific threat of infringement litigation by the patentee is not required to establish jurisdiction. The warning letters from Cooper to ABB and Dow were sufficient to show an immediate controversy surrounding infringement. ABB had an interest in determining whether it would be liable for induced infringement or indemnification for infringement by Dow.

Turning to the federal jurisdiction issue—i.e., whether federal jurisdiction would lie where only a state law was invoked as a defense to an anticipated federal action—the Federal Circuit considered the issue as one of the first impression, noting that the issue was previously addressed by the Supreme Court in Textron v. Auto. Workers but was left undecided.

The Court pondered whether it was the purpose of the Declaratory Judgment Act to permit such anticipation of a federal action, noting that language in Skelly Oil suggested that a declaratory-judgment plaintiff must have an independent federal claim. However, in Skelly Oil, Justice Breyer, in a concurrence, argued that the whether a plaintiff’s defense could independently support jurisdiction was beside the point and emphasized that it is the character of the threatened action, and not of the defense, that determines federal question jurisdiction.

Despite the lack of authority on point and the language of Skelly Oil, the Federal Circuit concluded that federal question jurisdiction existed and reversed the district court. The Federal Circuit explained that a court should examine the defendant’s hypothetical well-pleaded complaint to determine if subject-matter jurisdiction exists, and it saw no reason to depart from that general principle when the defense is not federal in nature. It concluded that this case, similarly to the Supreme Court decision in Franchise Tax Board, the federal character of the hypothetical infringement suit over which the federal courts have exclusive jurisdiction, was dispositive.

Practice Note: The Federal Circuit appears to be broadly interpreting §1338 in granting federal question jurisdiction. Combined with the less stringent declaratory judgment standard in MedImmune, settlement and license agreements may be susceptible to scrutiny by the federal courts even in situations in which no federal law defense is raised.