Supreme Court Expands Patent Jurisdiction

The U.S. Supreme Court recently issued a decision that will have a significant impact on the uniformity of patent law. As a result of Holmes v. Vornado, 535 U.S. 826, 122 S. Ct. 1889, 62 USPQ2d 1801 (2002), many cases involving patent counterclaims will be directed away from the Federal Circuit and into the regional circuit courts of appeals. Although this decision clarifies the jurisdiction of the Federal Circuit, it does so at the expense of consistency in patent law.

The Case

The plaintiff, Holmes, filed an action against Vornado seeking, inter alia, a declaratory judgment that it did not infringe Vornado's trade dress. Holmes did not raise patent claims in the complaint. Vornado asserted a compulsory counterclaim alleging patent infringement. The district court ruled in Holmes' favor on the trade dress claim and stayed the proceedings relating to Vornado's counterclaim. Vornado appealed to the decision to the Federal Circuit, whereupon Holmes challenged the Federal Circuit's jurisdiction. After losing the challenge, Holmes appealed to the U.S. Supreme Court.

The question presented to the Supreme Court, as framed by Justice Scalia, was whether the Federal Circuit has appellate jurisdiction over a case in which the complaint contains no claim arising under patent law, but in which the answer contains a patent-law counterclaim. The majority held that the Federal Circuit erred in basing jurisdiction on Vornado's patent counterclaim. A counterclaim based on patent law does not provide the Federal Circuit with jurisdiction. 

The Reach of Holmes in Federal Courts: When Holmes Applies

For patent holders, the circumstances in which Holmes is most likely to have an impact are cases involving compulsory patent counterclaims, where the patent holder is forced to litigate a patent counterclaim under regional circuit law or be barred from doing so later. Since a counterclaim is compulsory if it arises out of the same transaction or occurrence that is the subject matter of the opposing party's claim, Holmes is most likely to have an impact on patent holders who are sued under related causes of action, such as trade secret, trade dress, copyright, trademark and antitrust claims.

Although the Holmes case involved a compulsory counterclaim, the basis for the decision does not rest on the compulsory nature of the counterclaim. Thus, the Federal Circuit would also lack jurisdiction to hear cases involving permissive patent counterclaims where the complaint did not arise under the patent laws.

Patent Law Applied by Regional Circuits

An important consideration in cases involving patent counterclaims that are appealed to a regional circuit, and governed by Holmes, is what law applies. The Federal Circuit sits as a sister court to the regional circuits and therefore has no authority to bind them to follow Federal Circuit law. On the other hand, regional circuits are bound to follow their own precedent, including patent cases decided before the creation of the Federal Circuit in 1982.

As a practical matter, it is likely that the regional circuits will rely on Federal Circuit precedent considerably if it does not conflict with their own binding precedent. After all, the Federal Circuit is a highly specialized court and its judges are expert in the relevant subject matter.

While the regional circuits may readily follow this approach in cases in which they have no conflicting precedent of their own, it is a different matter where conflicting precedent exists. Stare decisis compels the regional circuits and their respective district courts to follow prior decisions of the regional circuit. The patent laws of the regional circuits will therefore develop on a case-by-case basis as the regional circuits decide how much deference to pay to the Federal Circuit.

Relevance of Federal Circuit's Non-Patent Law

The Federal Circuit has developed a considerable body of law that is not substantive patent law, but is closely related to it. In some cases, the Federal Circuit's non-patent law is of particular significance. Most notably, the Federal Circuit has ruled that it will follow its own law in deciding certain antitrust claims, and the court has taken a decidedly pro-patent stance in ruling on such claims. See In re Independent Service Organizations v. Xerox, 203 F.3d 1322, 53 USPQ2d 1852 (Fed. Cir. 2000).

Prior to Holmes, the Xerox case was very useful to antitrust defendants who could assert a patent counterclaim to avail themselves of the Federal Circuit's antitrust law. Of course, after Holmes, it is no longer possible for an antitrust defendant to file a patent counterclaim and direct the appeal to the Federal Circuit. In fact, the Federal Circuit has already decided such a case. See Telcomm Technical Services, Inc. v. Siemens Rolm Communications, Inc., 295 F.3d 1249, 63 USPQ2d 1606 (Fed. Cir. 2002) (transferring case involving ISOs' Sherman Act claims and Siemens' patent and copyright infringement counterclaims to the 11th Circuit). Thus, one of the more significant effects of the Holmes decision is to reduce the availability of the Federal Circuit's antitrust law to antitrust defendants who are patent holders.

The Reach of Holmes in State Courts: Jurisdiction to Decide Patent Issues

The Court in Holmes held that a suit involving a non-patent claim and a patent law counterclaim does not 'arise under' the patent laws for the purposes of 28 U.S.C. '1338. This conclusion, in addition to limiting the Federal Circuit's jurisdiction, has another significant consequence because the exclusive nature of the federal district courts' jurisdiction to hear patent and copyright cases is also defined by the 'arising under' language of 28 U.S.C. '1338:

The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.

Thus, under Holmes, the federal district courts do not have exclusive jurisdiction over cases involving a non-patent claim and a patent or copyright counterclaim. Consequently, patent and copyright counterclaims can also be brought in state courts. This was the holding in Green v. Hendrickson Publishers, Inc., 770 N.E.2d 784, 793 (Ind. 2002), in which the court remarked: '[W]e think Holmes requires us to reject the federal authorities stating or implying that a state court may not entertain a counterclaim under patent or copyright law.' Id. at 793.

Law Applied by State Courts

State courts ordinarily follow the interpretations of the lower federal courts, particularly when those decisions are uniform or persuasive. Moreover, unlike a federal district court, a state court is not bound by its regional federal court of appeals. Thus, in the area of patent law, it is very likely that the state courts will follow Federal Circuit patent law decisions, since a primary purpose of that court is to develop a uniform body of patent law.

How Holmes Can be Exploited: Potential Infringers

Parties concerned with infringement liability can force the litigation of patent disputes under regional circuit law in one of two ways. First, a party may be able to devise a cause of action related to patent infringement, such as an antitrust claim, forcing the patent holder to file a compulsory patent counterclaim at the risk of later being barred. By shopping for the proper district court, the plaintiff may take advantage of the patent laws of a circuit hostile to patents. Moreover, with an antitrust claim, the plaintiff obtains the added benefit of avoiding the Federal Circuit's pro-patent antitrust law. Thus, Holmes encourages potential infringers to race to the courthouse. This is particularly true for suits with both patent and antitrust claims, since the party filing the complaint will determine what law applies, and this difference in choice of law may be significant.

Second, a party concerned with patent infringement liability may proactively file a declaratory judgment action for a related (non-patent) claim of the patent holder. Again, the plaintiff's choice of forum determines the patent law to be applied, encouraging a race to the courthouse. 

Companies fearful of being sued for patent infringement may take advantage of Holmes by evaluating whether they have any non-patent cause of action against the patent holder or whether they have jurisdiction to file a declaratory judgment suit on a non-patent cause of action. If either option is available, and the company is reasonably sure that the patent holder will sue, the company should file first and thereby choose the best forum and law for its case.

Patent Holders

From the opposite perspective, patent holders normally desire the predictability of Federal Circuit patent law and the Federal Circuit's pro-patent antitrust law. Therefore, patent holders may take certain precautions to preserve these options, such as filing earlier to win the race to the courthouse and by limiting communications with suspected infringers to prevent creating an actual controversy that would give rise to declaratory judgment jurisdiction.

If they lose the race to the courthouse, patent holders must evaluate whether a patent counterclaim is compulsory. Because the failure to bring a compulsory counterclaim bars the patent holder from bringing it later, most patent holders will err on the side of filing the counterclaim.

If the patent holder determines that its patent counterclaim is permissive, he or she may elect to litigate the counterclaim under the law of the regional circuit ' if that law happens to be more favorable to the patent holder than Federal Circuit law. Thus, the decision whether to file permissive counterclaims in federal court will be made on a case-by-case basis depending on the law of the circuit and the facts of the case.

In state court, it may be more difficult for a defendant patent holder to take advantage of favorable regional circuit law because the state courts are more likely to follow the uniform Federal Circuit patent law than the regional circuit law which is not binding on them. Nonetheless, a patent holder may decide to litigate a patent counterclaim in state court for other reasons. For example, it is conceivable that a patent holder with a weak case could derive an advantage based on a state court's inexperience with patents. Patent holders sued in state court must evaluate whether the circumstances of the case are more likely to produce a favorable outcome in state court than in a conventional district court patent litigation.

Conclusion

The Holmes decision has a number of significant consequences, including expanded regional circuit jurisdiction to decide patent counterclaims, reduced availability of the Federal Circuit's antitrust law, and state court jurisdiction to hear patent and copyright counterclaims. The decision clarifies the jurisdiction of the Federal Circuit, but at the expense of consistency in the patent laws. The expanded patent jurisdiction of the regional circuit courts and the state courts will likely produce interesting results as they enjoy their new share of patent infringement counterclaims.

Thomas G. Slater, Jr. is a partner at Hunton & Williams and the head of the firm's Litigation, Intellectual Property, and Antitrust Section. He is based in the firm's Richmond, VA office. Tyler Maddry is an associate in the firm's Washington, DC office, where he specializes in patent law.

The U.S. Supreme Court recently issued a decision that will have a significant impact on the uniformity of patent law. As a result of Holmes v. Vornado , 535 U.S. 826, 122 S. Ct. 1889, 62 USPQ2d 1801 (2002), many cases involving patent counterclaims will be directed away from the Federal Circuit and into the regional circuit courts of appeals. Although this decision clarifies the jurisdiction of the Federal Circuit, it does so at the expense of consistency in patent law.

The Case

The plaintiff, Holmes, filed an action against Vornado seeking, inter alia, a declaratory judgment that it did not infringe Vornado's trade dress. Holmes did not raise patent claims in the complaint. Vornado asserted a compulsory counterclaim alleging patent infringement. The district court ruled in Holmes' favor on the trade dress claim and stayed the proceedings relating to Vornado's counterclaim. Vornado appealed to the decision to the Federal Circuit, whereupon Holmes challenged the Federal Circuit's jurisdiction. After losing the challenge, Holmes appealed to the U.S. Supreme Court.

The question presented to the Supreme Court, as framed by Justice Scalia, was whether the Federal Circuit has appellate jurisdiction over a case in which the complaint contains no claim arising under patent law, but in which the answer contains a patent-law counterclaim. The majority held that the Federal Circuit erred in basing jurisdiction on Vornado's patent counterclaim. A counterclaim based on patent law does not provide the Federal Circuit with jurisdiction. 

The Reach of Holmes in Federal Courts: When Holmes Applies

For patent holders, the circumstances in which Holmes is most likely to have an impact are cases involving compulsory patent counterclaims, where the patent holder is forced to litigate a patent counterclaim under regional circuit law or be barred from doing so later. Since a counterclaim is compulsory if it arises out of the same transaction or occurrence that is the subject matter of the opposing party's claim, Holmes is most likely to have an impact on patent holders who are sued under related causes of action, such as trade secret, trade dress, copyright, trademark and antitrust claims.

Although the Holmes case involved a compulsory counterclaim, the basis for the decision does not rest on the compulsory nature of the counterclaim. Thus, the Federal Circuit would also lack jurisdiction to hear cases involving permissive patent counterclaims where the complaint did not arise under the patent laws.

Patent Law Applied by Regional Circuits

An important consideration in cases involving patent counterclaims that are appealed to a regional circuit, and governed by Holmes, is what law applies. The Federal Circuit sits as a sister court to the regional circuits and therefore has no authority to bind them to follow Federal Circuit law. On the other hand, regional circuits are bound to follow their own precedent, including patent cases decided before the creation of the Federal Circuit in 1982.

As a practical matter, it is likely that the regional circuits will rely on Federal Circuit precedent considerably if it does not conflict with their own binding precedent. After all, the Federal Circuit is a highly specialized court and its judges are expert in the relevant subject matter.

While the regional circuits may readily follow this approach in cases in which they have no conflicting precedent of their own, it is a different matter where conflicting precedent exists. Stare decisis compels the regional circuits and their respective district courts to follow prior decisions of the regional circuit. The patent laws of the regional circuits will therefore develop on a case-by-case basis as the regional circuits decide how much deference to pay to the Federal Circuit.

Relevance of Federal Circuit's Non-Patent Law

The Federal Circuit has developed a considerable body of law that is not substantive patent law, but is closely related to it. In some cases, the Federal Circuit's non-patent law is of particular significance. Most notably, the Federal Circuit has ruled that it will follow its own law in deciding certain antitrust claims, and the court has taken a decidedly pro-patent stance in ruling on such claims. See In re Independent Service Organizations v. Xerox , 203 F.3d 1322, 53 USPQ2d 1852 (Fed. Cir. 2000).

Prior to Holmes, the Xerox case was very useful to antitrust defendants who could assert a patent counterclaim to avail themselves of the Federal Circuit's antitrust law. Of course, after Holmes, it is no longer possible for an antitrust defendant to file a patent counterclaim and direct the appeal to the Federal Circuit. In fact, the Federal Circuit has already decided such a case. See Telcomm Technical Services, Inc. v. Siemens Rolm Communications, Inc. , 295 F.3d 1249, 63 USPQ2d 1606 (Fed. Cir. 2002) (transferring case involving ISOs' Sherman Act claims and Siemens' patent and copyright infringement counterclaims to the 11th Circuit). Thus, one of the more significant effects of the Holmes decision is to reduce the availability of the Federal Circuit's antitrust law to antitrust defendants who are patent holders.

The Reach of Holmes in State Courts: Jurisdiction to Decide Patent Issues

The Court in Holmes held that a suit involving a non-patent claim and a patent law counterclaim does not 'arise under' the patent laws for the purposes of 28 U.S.C. '1338. This conclusion, in addition to limiting the Federal Circuit's jurisdiction, has another significant consequence because the exclusive nature of the federal district courts' jurisdiction to hear patent and copyright cases is also defined by the 'arising under' language of 28 U.S.C. '1338:

The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.

Thus, under Holmes, the federal district courts do not have exclusive jurisdiction over cases involving a non-patent claim and a patent or copyright counterclaim. Consequently, patent and copyright counterclaims can also be brought in state courts. This was the holding in Green v. Hendrickson Publishers, Inc., 770 N.E.2d 784, 793 (Ind. 2002), in which the court remarked: '[W]e think Holmes requires us to reject the federal authorities stating or implying that a state court may not entertain a counterclaim under patent or copyright law.' Id. at 793.

Law Applied by State Courts

State courts ordinarily follow the interpretations of the lower federal courts, particularly when those decisions are uniform or persuasive. Moreover, unlike a federal district court, a state court is not bound by its regional federal court of appeals. Thus, in the area of patent law, it is very likely that the state courts will follow Federal Circuit patent law decisions, since a primary purpose of that court is to develop a uniform body of patent law.

How Holmes Can be Exploited: Potential Infringers

Parties concerned with infringement liability can force the litigation of patent disputes under regional circuit law in one of two ways. First, a party may be able to devise a cause of action related to patent infringement, such as an antitrust claim, forcing the patent holder to file a compulsory patent counterclaim at the risk of later being barred. By shopping for the proper district court, the plaintiff may take advantage of the patent laws of a circuit hostile to patents. Moreover, with an antitrust claim, the plaintiff obtains the added benefit of avoiding the Federal Circuit's pro-patent antitrust law. Thus, Holmes encourages potential infringers to race to the courthouse. This is particularly true for suits with both patent and antitrust claims, since the party filing the complaint will determine what law applies, and this difference in choice of law may be significant.

Second, a party concerned with patent infringement liability may proactively file a declaratory judgment action for a related (non-patent) claim of the patent holder. Again, the plaintiff's choice of forum determines the patent law to be applied, encouraging a race to the courthouse. 

Companies fearful of being sued for patent infringement may take advantage of Holmes by evaluating whether they have any non-patent cause of action against the patent holder or whether they have jurisdiction to file a declaratory judgment suit on a non-patent cause of action. If either option is available, and the company is reasonably sure that the patent holder will sue, the company should file first and thereby choose the best forum and law for its case.

Patent Holders

From the opposite perspective, patent holders normally desire the predictability of Federal Circuit patent law and the Federal Circuit's pro-patent antitrust law. Therefore, patent holders may take certain precautions to preserve these options, such as filing earlier to win the race to the courthouse and by limiting communications with suspected infringers to prevent creating an actual controversy that would give rise to declaratory judgment jurisdiction.

If they lose the race to the courthouse, patent holders must evaluate whether a patent counterclaim is compulsory. Because the failure to bring a compulsory counterclaim bars the patent holder from bringing it later, most patent holders will err on the side of filing the counterclaim.

If the patent holder determines that its patent counterclaim is permissive, he or she may elect to litigate the counterclaim under the law of the regional circuit ' if that law happens to be more favorable to the patent holder than Federal Circuit law. Thus, the decision whether to file permissive counterclaims in federal court will be made on a case-by-case basis depending on the law of the circuit and the facts of the case.

In state court, it may be more difficult for a defendant patent holder to take advantage of favorable regional circuit law because the state courts are more likely to follow the uniform Federal Circuit patent law than the regional circuit law which is not binding on them. Nonetheless, a patent holder may decide to litigate a patent counterclaim in state court for other reasons. For example, it is conceivable that a patent holder with a weak case could derive an advantage based on a state court's inexperience with patents. Patent holders sued in state court must evaluate whether the circumstances of the case are more likely to produce a favorable outcome in state court than in a conventional district court patent litigation.

Conclusion

The Holmes decision has a number of significant consequences, including expanded regional circuit jurisdiction to decide patent counterclaims, reduced availability of the Federal Circuit's antitrust law, and state court jurisdiction to hear patent and copyright counterclaims. The decision clarifies the jurisdiction of the Federal Circuit, but at the expense of consistency in the patent laws. The expanded patent jurisdiction of the regional circuit courts and the state courts will likely produce interesting results as they enjoy their new share of patent infringement counterclaims.

Thomas G. Slater, Jr. is a partner at Hunton & Williams and the head of the firm's Litigation, Intellectual Property, and Antitrust Section. He is based in the firm's Richmond, VA office. Tyler Maddry is an associate in the firm's Washington, DC office, where he specializes in patent law.