CAFC Affirms District Court Dismissal of Declaratory Judgment Under Doctrine of ‘Abstention’

“The CAFC explained that the precedent illustrated that many different circumstances may arise whereby discretion is exercised on various facts, including ‘whether preclusion should be afforded to a state court’s ruling on an aspect otherwise properly before the federal court.’”

AffirmedOn October 14, the United States Court of Appeals for the Federal Circuit (CAFC), in Warsaw Orthopedic, Inc. v. Sasso, affirmed a decision of a district court dismissing Medtronic’s declaratory judgment complaint without prejudice and applying the doctrine of federal court “abstention” in view of a concurrent state court action. The CAFC concluded that the district court acted within its discretion in abstaining without prejudice because the question of contract interpretation was on appeal in state court and the federal action based on the federal issues was not precluded.

In 1999, Warsaw Orthopedic, Inc., Medtronic, Inc., and Medtronic Sofamor Danek, Inc. (collectively, Medtronic) entered into a purchase agreement with Dr. Rick Sasso (Sasso), a surgeon and inventor, which set forth Medtronic’s terms of purchase of certain of Sasso’s inventions and provided for quarterly royalty payments based on Medtronic’s sales of the defined Medical Device until “the last to expire of the patents included in Intellectual Property Rights, or if no patent application(s) issue into a patent having valid claim coverage of the Medical Device, then seven (7) years from the Date of First Sale of the Medical Device.” The agreement covered two patents: U.S. Patent No. 6,287,313 (the ’313 patent) and its continuation, U.S. Patent No. 6,562,046 (the ’046 patent), both of which were titled “Screw Delivery System and Method.”

In 2014, Sasso filed suit in the Marshall Circuit Court of Indiana for breach of contract and  damages, alleging that Medtronic was not paying royalties on sales of all relevant devices under the Agreement. Medtronic asserted that the devices for which Sasso was seeking additional royalties were not subject to the Agreement because they were not covered by a claim in either of the ‘313 or ‘046 patents. Sasso filed a “Motion for Summary Judgment on the Term of the Screw Delivery Agreement and on Patent Validity as a Defense to Payment” and the state court granted the motion and ruled that the “amount of money to be paid under the Agreement and the term depend on the issuance of patents and their expiration, not their validity.” At trial, the parties disagreed over whether any claim of the ’313 or ’046 patents covered the asserted products. The jury found that Medtronic breached the Agreement and awarded damages to Sasso. Judgment on the verdict was entered in 2018 and Medtronic filed an appeal to the Indiana Court of Appeals.

Also in 2018, Medtronic filed a declaratory judgment action in federal district court in Indiana.  In the complaint, Medtronic stated that “the devices for which Sasso sought additional royalties [were] not within the Agreement and the claims as construed to cover such devices [were] not valid as required by the Agreement.” Sasso moved for “abstention or stay” of the declaratory action based on a trial scheduled in the state court action. Following the stated court’s judgment in favor of Sasso, he moved the federal court for dismissal of Medtronic’s declaratory action on the grounds that the federal court did not have jurisdiction because the matter had already been decided. The district court dismissed the declaratory judgment action without prejudice. Medtronic appealed the dismissal to the CAFC, arguing “that the federal courts have exclusive jurisdiction over issues of patent validity, valid claims are required by the Agreement, and the state court erred in ruling that validity is irrelevant to royalty payments under the Agreement.”

Sasso’s Challenge of Federal Jurisdiction

On appeal, Sasso argued that “the counts of the declaratory judgment complaint do not ‘arise under’ the patent law, and thus the district court does not have jurisdiction under 28 U.S.C. § 1338.” In addition, Sasso stated that the Federal Circuit did not have jurisdiction over the appeal.

On the other hand, Medtronic asserted that district court and Federal Circuit jurisdiction were “present because the declaratory judgment complaint included determinations of patent validity and valid claim scope.” Citing NeuroRepair, Inc. v. Nath Law Group, the CAFC explained that “[a]n issue of patent law is ‘necessarily raised’ if ‘a well-pleaded complaint establishes 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, in that patent law is a necessary element of one of the well-pleaded claims.’” The CAFC noted that the issues of validity and claim scope were “well-pleaded in the declaratory complaint, …actually disputed, [were] substantial to the federal system as a whole, and the federal-state judicial balance would not be disrupted by the district court’s exercise of declaratory jurisdiction.” Thus, the CAFC concluded that the declaratory action was within the district court’s jurisdictional authority, and the CAFC had jurisdiction to review the appeal to “determine whether the district court abused its discretion in abstaining from exercise of declaratory jurisdiction.”

Review of the District Court’s Abstention

In considering whether the district court abused its discretion by abstaining from exercising declaratory jurisdiction, the CAFC cited Envision Healthcare, Inc. v. PreferredOne Insurance Co., in stating that “[u]nder what is known as the Wilton/Brillhart abstention doctrine, district courts possess significant discretion to dismiss or stay claims seeking declaratory relief, even though they have subject matter jurisdiction over such claims.” The CAFC explained that the district court applied the standard of Wilton/Brillhart and agreed that it was reasonable for the district court to abstain because there had already been a trial in the state court.

Medtronic argued that the district court abused its discretion and asserted that patent validity was essential to Sasso’s claim and was “wrongly excluded from the state court trial, producing a fatal flaw in the state court proceeding.” In response, Sasso noted that “[c]ommercial agreements traditionally are the domain of state law” and “[s]tate law is not displaced merely because the contract relates to intellectual property which may or may not be patentable.” The CAFC explained that the precedent illustrated that many different circumstances may arise whereby discretion is exercised on various facts, including “whether preclusion should be afforded to a state court’s ruling on an aspect otherwise properly before the federal court.” The CAFC noted that the Supreme Court in General Motors Corp. v. Romein, held that “in applying the Contract Clause, federal courts are ‘bound to decide for ourselves whether a contract was made,’ affording ‘respectful consideration and great weight,’ but not conclusive deference, ‘to the views of the State’s highest court.’” Thus, the CAFC concluded that the district court exercised ‘common-sense accommodation of judgment,’ and did not abuse its discretion in abstaining and dismissing Medtronic’s declaratory judgment complaint without prejudice.

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