Federal Circuit Transfers "Hot Potato" Diagnostic Method Case

    By Kevin E. Noonan —

The Federal Circuit's majority decision in Laboratory Corp. of America Holdings ("LabCorp") v. Metabolite Laboratories, Inc., and Judge Dyk's
dissent, illustrate how often factual considerations, and different views of
the same facts, can influence if not determine a legal outcome.  Here, the issue was the Federal Circuit's
jurisdiction to hear an appeal on a patent and know-how license from the same
parties who went before the Supreme Court three years ago on a patent question
relating to diagnostic assays for vitamin deficiencies.  The Supreme Court's non-decision left intact
the Federal Circuit's underlying affirmance of an infringement judgment by the Colorado District Court.  This case concerned LabCorp's declaratory judgment suit over
whether it had breached its licensing agreement with Metabolite rather than
addressing patent infringment per se.  And that basis, and how the different
members of the panel viewed it, was outcome-determinative for both the majority
opinion (written by Judge Gajarsa and joined by Judge Moore) as well as Judge
Dyk in dissent.

The lawsuit involved a dispute over the terms of
the judgment entered in the original patent infringement/breach of contract
case.  The license between the
parties encompassed both the patent (U.S. Patent No. 4,940,658) as well as "know-how"
developed by Metabolite under a license from the patent owner, Competitive
Technologies Inc. (CTI).  LabCorp
licensed the homocysteine-based assay recited in Claim 13 of the '658 patent
until 1998, when it began using a competing test sold by Abbott Laboratories.  This action led to the first lawsuit,
filed by Metabolite and claiming patent infringement and breach of
contract.  That action led to a
jury verdict of infringement in favor of CTI and breach of contract for
Metabolite.  Significantly for the
present decision, the jury found by Special Verdict that the license from
Metabolite had been terminated.  The
case then famously went before the Federal Circuit, where the judgment was
affirmed, and to the Supreme Court, which granted certiorari, heard argument, and then decided that certiorari had been improvidently granted, Justices
Breyer, Souter, and Stevens dissenting.

The action below was a declaratory judgment under
diversity jurisdiction under 28 U.S.C. § 1332, by LabCorp that it did not breach
the License Agreement by post-judgment activities, including outsourcing the
homocysteine assay to a third party company that had a non-exclusive license
from CTI (and thus raised no patent infringement issues).  Metabolite filed a counterclaim for
breach of contract and other state law claims.  The District Court held on summary judgment that there was
no breach of contract since the contract had been adjudged to be terminated by
the jury in the first Metabolite case.  In response to Metabolite's appeal of this decision to
the Federal Circuit, LabCorp moved for the CAFC to transfer the appeal to the
Tenth Circuit, based on an asserted lack of jurisdiction.  "The issue of this court's jurisdiction
over Metabolite's appeal is now squarely before [the court]," according
to the opinion.

The Federal Circuit's majority opinion, by Judge Gajarsa and
joined by Judge Moore, first addressed the question of its own
jurisdiction.  While based on
specific statutory provisions (28 U.S.C §§ 1295(a)(1) and 1338), the CAFC
assessed its jurisdiction under the two-prong test enunciated by the Supreme Court
in Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988):

Under Christianson, "arising under"
jurisdiction "extend[s] only to those cases in which 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."  Christianson, 486 U.S. at 808-09.

This test was refined, according to the opinion, by
the Court's decision in Grable & Sons Metal Products, Inc.,
v. Darue Engineering & Manufacturing, 545 U.S. 308, 314 (2005), which "refined the
Christianson two-part test for § 1338 jurisdiction by requiring a determination
of whether 'a state-law claim necessarily raise[s] a stated federal issue,
actually disputed and substantial, which a federal forum may entertain without
disturbing any congressionally approved balance of federal and state judicial
responsibilities.'"  Grable, 545
U.S. at 314.  Turning to the
requirements of the well-pleaded complaint rule, the Court said that "arising
under" jurisdiction was determined "from the plaintiff's statement of
his or her own claim 'unaided by anything alleged in anticipation or avoidance
of defenses which it is thought the defendant may interpose,'" Christianson, 486 U.S. at 809, and that
the Court looked "'not to the declaratory judgment complaint, but to the
action that the declaratory defendant would have brought,'" citing Speedco, Inc. v. Estes, 853 F.2d 909, 912
(Fed. Cir. 1988) and Cedars-Sinai Med.
Ctr. v. Watkins, 11 F.3d 1573, 1578 (Fed. Cir. 1993).

Applying
this law to these facts, the majority held that Metabolite did not bear its
burden of "demonstrating that its hypothetical claim depends on resolution
of a substantial question of federal patent law,'" citing Christianson, 486 U.S. at 808-09.  The "hypothetical" claim
Metabolite would have brought in response to LabCorp's declaratory judgment
complaint "would have been a breach of contract claim," according to
the Court, and in order to prevail Metabolite would be required to "prove
the elements of breach of contract cause of action under New Jersey law."  Metabolite claimed that in order to
prevail on its breach of contract claim, it had to establish that it was
entitled to royalties, and this required evidence of patent infringement.  The majority disagreed, based on
the determination of patent infringement in the first Metabolite case.  There was no "disputed question of
patent law central to the disposition of the breach of contract claim."  This requirement for a substantial
question of patent law to be in dispute for the Federal Circuit to have
jurisdiction is consistent with Supreme Court precedent according to the
majority, citing Christianson and Empire Healthchoice Assurance, Inc. v.
McVeigh, 547 U.S. 677, 689-90 (2006).  This was not such a case, in the majority's opinion,
because the infringement question was not in dispute (having been finally
adjudicated in the first Metabolite case).  Thus, "[b]ecause the issue of patent law is
not disputed and substantial, we do not have jurisdiction over this appeal,"
citing Grable, 545 U.S. at 314-15.

In dissent
Judge Dyk disagreed, characterizing the question as involving "whether the
res judicata" effect of the Federal Circuit's earlier Metabolite decision required
treating the contract provisions as having been terminated.  Judge Dyk supported his view that the
case should not be transferred with two lines of reasoning.  First, a suit to determine the res judicata
effects of a prior judgment "arising under" the patent laws is itself a suit that arises under
patent law in his view.  Second, in
Judge Dyk's view, a necessary predicate of deciding the contract question
raised a substantial question of patent law, i.e., what activity regarding patented technology fell within the
scope of the license.  The parties'
contentions directly disputed the scope of the prior judgment, with LabCorp contending
that the license was terminated by that judgment and Metabolite maintaining that
the judgment did not terminate the license.  In this context, Judge Dyk believed that the question
of the scope of the earlier judgment directly affected the question before the Court, because of the necessity for a contractual obligation in order for there
to be damages for breach of that obligation.

Considering
the res judicata effect of the District Court's prior judgment certainly "arises
under" federal law; the question was whether it arose under federal patent
law.  And the dissent maintained that
this question required the Court to consider whether it should "'look
through' the prior judgment to determine whether it [was] predicated on an
action that 'arises under' federal patent law."  Citing Semtek Int'l
Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507-08 (2001) and Vaden v. Discover Bank, 129 S. Ct. 1262
(2009), Judge Dyk contended that such a "look through approach" was
appropriate here, and that the result was the conclusion that the issue "arose
under" federal patent law.  In the alternative, Judge Dyk contended that the issue between the
parties when the complaint was filed involved a contract that made a patent
issue "determinative" (the royalties under the contract being tied to
net sales of "licensed assays" falling within the scope of licensed
patent claims), analogizing the facts here with U.S. Valves, Inc. v. Dray, 212 F.3d 1368 (Fed. Cir. 2000).  Timing is also critical:  "[a]t
the time the complaint was filed in this case, there was a substantial,
disputed issue of patent law, because the issue of whether the outsourced
homocysteine assays were in fact covered by the '658 patent claims was
contested by LabCorp."  According to Judge Dyk, the fact that the patent issue "became"
undisputed during the course of the lawsuit was not sufficient to deprive the Court of jurisdiction.  "[L]ater
concessions (such as those ultimately made in this case that the outsourced
assays were licensed assays) do not operate to defeat jurisdiction that
rightfully attached at the outset of the case," citing a plethora of
Supreme Court precedent:  Dole Food Co. v.
Patrickson, 538 U.S. 468, 478 (2003); St.
Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 289-90 (1938); Minneapolis & St. Louis R.R. Co. v.
Peoria & Pekin Union Ry. Co., 270 U.S. 580, 586 (1926); Anderson v. Watt, 138 U.S. 694, 702-03
(1891); and Mollan v. Torrance, 22
U.S. (9 Wheat.) 537, 539 (1824).

One
immediate consequence of the transfer is a greatly reduced risk that this case
will make it back to the Supreme Court on a patent question.  This is good news in view of the stance
of at least some of the Justices regarding the patent-eligibility of (in)famous
Claim 13 of the '658 patent (see "The Relevance of In re Bilski to the Patentability of the Metabolite Claim").  In any event, the
Supreme Court is said by some to be poised to issue its decision on Bilski v. Kappos, which has the
potential to address fundamentally the way the courts assess
patent-eligibility of method claims.  In addition, the Supreme Court is expected to send the Prometheus Laboratories, Inc. v. Mayo Collaborative Services case back to the Federal Circuit for
reconsideration in view of its decision in Bilski.  Thus, the ultimate question of whether
diagnostic method claims like Metabolite's Claim 13 are patent-eligible will likely take some time
to be decided, and as a consequence uncertainty on this question will persist,
to no one's benefit.

Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc. (Fed. Cir. 2010)
Panel:  Circuit Judges Gajarsa, Dyk, and Moore
Opinion by Circuit Judge Gajarsa, dissenting opinion by Circuit Judge Dyk