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Patent Misuse and Patent Exhaustion Asserted as Stand Alone Claims Dismissed for Failure to State a Claim

Continental Automotive GmbH and Continental Automotive Systems, Inc. (collectively “Continental”) filed a multi-claim lawsuit against iBiquity Digital Corporation (“iBiquity”), which asserted causes of action for patent exhaustion (Count I), patent misuse (Count II), declaratory judgment of patent rights (Count III), as well as several state law claims. iBiquity moved to dismiss Counts I, II, and III, arguing that patent exhaustion (Count I) and patent misuse (Count II) do not arise under federal patent law because they are not proper independent claims but, rather, are defenses to an anticipated patent infringement suit. iBiquity also contended that Continental’s claim seeking a declaratory judgment of patent rights (Count III) does not arise under federal patent law because it is merely a state law breach of contract claim in disguise, seeking to interpret a license agreement.

The district court began its analysis with the patent exhaustion and patent misuse claims. “iBiquity argues that the claims are merely defenses and not affirmative causes of action and, as such, they do not ‘arise under’ federal patent law. Def.’s Mem. Supp. Mot. Dismiss 6-8. Continental responds that this argument is irrelevant ‘[b]ecause subject matter jurisdiction in a declaratory judgment action is based on the claims that could be brought by the declaratory judgment defendant, rather than the declaratory judgment plaintiff.’ Pl.’s Resp. Mot. Dismiss 5. Moreover, Continental asserts that patent misuse may be asserted as an affirmative claim. Id.”

The district court then analogized the case to C.R. Bard, Inc. v. Schwartz, 716 F.2d 874, 875 (Fed. Cir. 1983). “There, the licensee stopped making payments under its agreement with the patentee.1 The patentee then filed suit in a state court, but did not allege patent infringement. Id. at 875-76. In return, the licensee brought a declaratory judgment action in a federal court, alleging patent invalidity and unenforceability. Id. at 876. The district court, however, dismissed the complaint, holding that it lacked subject matter jurisdiction. Id. The Federal Circuit reversed, noting that the licensee “had ceased payment of royalties under the agreement to the licensor and patentee” and that “[t]his was a material breach of the agreement that, under the very terms of the agreement, enabled [patentee] to terminate the agreement.” Id. at 880-81. Hence, the patentee “could at any time take action against [licensee] by bringing an infringement suit” as manufacturing of the products covered by the patent had not ceased. Id. at 881; see also Medtronic, Inc. v. Mirowski Family Ventures, LLC, 134 S. Ct. 843, 848 (2014) (stating that the relevant question is not whether “an infringement suit would be unlikely,” but rather “the nature of the threatened action in the absence of the declaratory judgment suit”). Thus, in C.R. Bard, the licensee’s declaratory judgment action was “not in defense of the state court action brought but in defense of an actual federal controversy ‘arising under’ the patent law,” 716 F.2d at 882, and subject matter jurisdiction was found to exist under 28 U.S.C. ยง 1338(a). Id.

The district court then concluded that “[s]imilar to C.R. Bard, given Continental’s failure to make its licensing payments, iBiquity’s hypothetical well-pleaded complaint could contain a patent infringement claim against Continental. And “it is well-established that a claim for infringement arises under federal law.” ABB Inc., 635 F.3d at 1350. As such, this Court is satisfied that it has subject matter jurisdiction over the declaratory judgment claims for patent exhaustion and misuse.”

Having found that it had subject matter jurisdiction over the two claims, the district court analyzed whether the claims were valid affirmative claims. “[A]fter considering the various cases, this Court concludes that patent misuse cannot be brought as a stand-alone cause of action. First, B. Braun cannot be read as allowing such a stand-alone cause of action. There, patent misuse was raised in response to a patent infringement action and not as a stand-alone cause of action as in the present case. B. Braun Med. Inc. v. Abbott Labs., 892 F. Supp. 115, 116 (E.D. Pa. 1995). Thus, the Federal Circuit had no occasion to speak to whether the defendant in B. Braun could have appropriately brought a stand-alone declaratory judgment claim of patent misuse. Second, even after B. Braun, the Federal Circuit has repeatedly defined patent misuse as a defense, rather than a cause of action in its own right. See Va. Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868 (Fed. Cir. 1997) (“[p]atent misuse is an affirmative defense to an accusation of patent infringement”); U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1184 (Fed. Cir. 2005) (“[p]atent misuse is an equitable defense to patent infringement”). Third, in cases where district courts have allowed a patent misuse claim, the claim has been brought with accompanying patent invalidity or non-infringement claims and in opposition to infringement claims. See, e.g., Rosenthal Collins Grp., LLC, 2005 WL 3557947, at *1 (plaintiff also brought an action requesting declaratory judgment of patent invalidity and non-infringement and defendant asserted an infringement counterclaim); Internet Pipeline, Inc., 2011 WL 4528340, at *1 (stating that plaintiff sued defendant for infringement and defendant raised affirmative defense of patent invalidity, among others); Semco, Inc., 2007 WL 2693268, at *2 (“[a]lthough courts have allowed patent misuse claims to be presented as counterclaims, these have been limited to circumstances where patent infringement claims were also involved”).”

Accordingly, the district court dismissed the patent exhaustion and patent misuse claims with prejudice for failure to state a claim upon which relief can be granted.

Turning to the declaratory relief claim, iBiquity argued that Count III “asks this Court to interpret the parties’ License Agreement in light of representations made by iBiquity that it would license its patents on RAND terms” and that such “[c]ontract disputes, even those involving patents, do not arise under federal law.” iBiquity also asserted that Continental failed to plead a case or controversy with respect to federal patent law or patent rights, and the only “definite and concrete” dispute under Count III is a breach of contract action.

The district court then read Count III to be a “request for interpretation of the license in light of iBiquity’s representations that it would license its patents on RAND terms. The hypothetical, well-pleaded complaint by iBiquity would be a contract claim. Thus, federal patent law would not create the cause of action in the hypothetical complaint and iBiquity’s right to relief would not depend on the resolution of a substantial question of federal patent law. Therefore, such action would not arise under the patent laws. See, e.g., Microsoft Corp. v. Motorola, Inc., 564 F. App’x 586, 589-90 (Fed. Cir. 2014) (holding that it is plausible to conclude that action alleging that patentee improperly refused to offer licenses for the use of its standard essential patents on RAND terms does not arise under the patent laws). . . . Therefore, Count III does not arise under the patent laws and does not, in and of itself, provide a basis for subject matter jurisdiction.”

The district court then declined to exercise supplemental jurisdiction over the state law claims and dismissed the case.

Continental Automotive GMBH v. Ibiquity Digital Corporation, Case No. 14 C 1799 (N.D. Ill. Feb. 26, 2015)

The authors of are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. For more information about this case, contact Stan Gibson at 310.201.3548 or