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February 20, 2013

Gunn v. Minton (February 20, 2013) 2013 WL 610193, ___ U.S. ___

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The U.S. Supreme Court holds a legal malpractice case that involved underlying patent issues does not invoke exclusive federal jurisdiction.

Vernon Minton developed a computer program and telecommunications network to facilitate securities trading.  He leased the system to a securities brokerage, R.M. Stark & Company (“Stark”).  More than one year later he applied for a patent, which was later issued.

Jerry Gunn and other attorneys represented Minton in a federal patent infringement suit against the National Association of Securities Dealers, Inc. (NASD) and the NASDAQ Stock Market.  Defendants prevailed on summary judgment asserting the patent was invalid under the “on-sale” bar due to Minton’s lease of the product more than one year prior to filing the patent application.  On a motion for reconsideration he argued for the first time the lease agreement with Stark was part of on-going testing of the product falling within the “experimental use” exception to the on-sale bar.  The decision denying the motion for reconsideration became final.

Minton sued his attorneys for legal malpractice in Texas state court.  The state court granted summary judgment on the defense that the lease was not an experimental use, and the patent infringement claims would have failed even had the experimental use argument been timely raised.

Minton subsequently raised a new argument: under 28 U.S.C. §1338(a) the legal malpractice claims were subject to exclusive federal jurisdiction because they were based on federal patent law.  The case rose through the Texas state courts to the U.S. Supreme Court on this issue.

The Supreme Court noted in cases falling within the patent-specific jurisdiction of section 1338(a), Congress not only provides for federal jurisdiction but also eliminates state jurisdiction.  However, the Court held the case could not have been properly filed in a federal district court as a case that “arises under any Act of Congress relating to patents.” To be eligible for exclusive federal jurisdiction, it must belong to a special and small category of cases where a federal issue is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.

The Court observed that state legal malpractice claims based on underlying patent matters will rarely, if ever, arise under federal patent law for purposes of section 1338(a).  Such cases may necessarily raise disputed questions of patent law, but by their nature are unlikely to have the sort of significance for the federal system necessary to establish jurisdiction.

Applying the exclusive federal jurisdiction standards, the Court observed that resolution of a federal patent question was indeed “necessary” to Minton’s case.  The causation element of the legal malpractice “case within a case” analysis requires review of whether, had the experimental use argument been timely raised in the litigation, the outcome would have been different.  The second requirement was also satisfied because the issue of experimental use was actually disputed.

However, the third requirement — that the federal issue in the case be substantial — was not satisfied.  The Court disagreed with the conclusion in Air Measurement Technologies, Inc  v. Akin Gump Strauss Hauer & Feld, L.L.C., 504 F.3d 1262, 1272 (2007) that an issue is substantial if it is a necessary element of the malpractice case.  The Court observed that more than the “necessary element” argument is required for substantiality.  See also, Immunocept, LLC v. Fulbright & Jaworski, LLC, 504 F.3d 1281 (2007) and Lockwood v. Sheppard, Mullin, Richter & Hampton (2009) 173 Cal.Ap.4th 675, 687 [applying concept to malicious prosecution suit against attorneys practicing in patent court]

Moreover, state courts determining patent legal malpractice actions do not actually rule on patents.  No matter what the outcome of the litigation, Minton’s patent would still be invalid as it was previously adjudicated by a federal court.  Due to the “backward looking nature” of a legal malpractice claim, questions of the interpretation of law are almost always cast in hypothetical terms.  Thus, the opportunity for state courts to undermine the uniformity of federal patent law in legal malpractice actions is quite limited.

The Supreme Court also rejected Minton’s argument that the state court’s answers to the hypothetical patent questions could have real world effect on other patents through issue preclusion.  Minton claimed that, in a continuing patent application, such as one he was pursuing, a patent examiner could be bound by a Texas state court’s interpretation of the scope of Minton’s original patent.  However, the USPTO’s procedures apply res judicata effect only to a prior decision of the USPTO Board of Appeals or certain federal reviewing courts.

The Court also rejected an argument accepted in Air Measurement Technologies: that legal malpractice cases involving patent law should be litigated in federal court because of the federal courts’ greater familiarity with the body of patent law.  The possibility that a state court could incorrectly resolve a patent claim is not enough to trigger the federal court’s exclusive jurisdiction.

Finally, the Court concluded that the goal of preserving an appropriate balance of federal and state responsibilities was undermined by invoking exclusive federal court jurisdiction.  The states have a special responsibility for maintaining standards among members of the licensed professions, including the regulation of lawyers.

Comment: This case severely restricts when federal jurisdiction over patent legal malpractice cases can be invoked.  It is interesting, however, that the Supreme Court did not expressly overrule Air Measurement and Immunocept.  There is some sense in the opinion that there may be “rare” exceptions under which exclusive federal jurisdiction will still apply.  However, the lower courts will likely be extremely reluctant given this unanimous opinion to rule that a case falls within such an exception.


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