Supreme Court Addresses Federal Circuit Jurisdiction, Reaffirms "Well-Pleaded Complaint Doctrine" as Limit on Federal Circuit Jurisdiction in Cases Involving Compulsory Patent Counterclaims

On Monday, June 3, 2002, the U.S. Supreme Court rendered a decision in The Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., reversing the Court of Appeals for the Federal Circuit’s ("CAFC") decision exercising CAFC jurisdiction in a trade dress case involving a patent counterclaim. The majority of the Supreme Court justices held that where plaintiff had not asserted claims arising under the patent laws of the United States, but defendant filed a compulsory counterclaim for patent infringement, the CAFC did not have appellate jurisdiction. Two of the Justices, Ginsberg and O’Connor, concurred in the result, but noted that the appeal at issue did not involve the patent counterclaim. If the appeal had involved questions of patent law, they would have affirmed CAFC appellate jurisdiction.

The majority opinion, written by Justice Scalia, held that the appellate jurisdiction of the CAFC was to be determined by the "well pleaded complaint" of the plaintiff, i.e., by reference only to the claims asserted in the plaintiff’s complaint, regardless of any counterclaims that may assert claims otherwise subject to the exclusive jurisdiction of the federal courts in cases arising under the patent laws. The majority based its decision on the language of the CAFC’s jurisdictional statute 28 U.S.C.A. § 1295(a)(1) which, even though it grants appellate jurisdiction in cases based, in whole or in part, on the patent laws, still defines patent cases by referring to 28 U.S.C.A. § 1338, the statute which confers exclusive jurisdiction on the district courts in cases "arising under" the patent laws of the United States. Thus, unless the district court’s jurisdiction is based upon 28 U.S.C.A. § 1338, asserting a claim arising under the patent laws of the United States under the "well pleaded complaint doctrine," the appellate jurisdiction of the CAFC is likewise limited under 28 U.S.C.A. § 1295(a)(1).

Justice Stevens concurred in the result, but did not agree with all the reasons for the majority’s decision, pointing out that jurisdiction also might arise by amendments or be lost by the voluntary dismissal of the patent claim, issues that the majority expressly declined to decide.

Justices Ginsberg and O’Connor disagreed with the majority’s reliance on the "well pleaded complaint doctrine," but concluded that in this case the CAFC did not have jurisdiction over the appeal because the district court’s decision under review involved only the plaintiff’s trade dress claims, and did not involve an adjudication of any of the patent issues.

This decision reflects the tension between the Congressional intent of achieving uniformity of the patent laws and the judiciary’s interest in defining the jurisdiction exercised by the CAFC under otherwise well-established federal jurisdictional rules. The Court emphasized the historical interests of plaintiffs to choose their forum; to plead their case in the manner most advantageous to their interests; and for the federal courts to determine jurisdiction based upon a relatively easily administered rule of looking only at the "plaintiff’s well pleaded complaint." Further, Justice Stevens stated, "an occasional conflict in [patent] decisions may be useful in identifying questions [for Supreme Court attention]," and "occasional decisions by courts with broader jurisdiction will provide an antidote to. . .the risk that the specialized court may develop an institutional bias."

The Supreme Court’s majority decision raises a number of issues:

• it appears to open the door for other federal appellate courts to independently develop rules for decision on patent issues in cases before them, even notwithstanding what otherwise might appear to be controlling CAFC authority;
• it clearly recognizes the role of the other circuits in developing law on intellectual property issues generally, notwithstanding recent trademark, copyright and antitrust decisions rendered by the CAFC;
• it raises questions regarding the litigation strategy potential patent infringers may employ to avoid CAFC jurisdiction or to select an otherwise favorable circuit by pleading only non-patent law claims, such as unfair competition, antitrust, trademark or other tort or contract law claims, against a patent owner, thereby forcing the patent owner to assert any compulsory patent infringement counterclaims in cases not subject to CAFC review and in otherwise undesirable or uncertain circuits;
• it will create additional litigation over the effect of a plaintiff’s assertion of a counterclaim for invalidity (or possibly even an affirmative defense of invalidity) in response to a defendant’s counterclaim of patent infringement; and
• it will create additional litigation over whether patent infringement counterclaims are compulsory in those cases in which the patent owner chooses not to engage the plaintiff in its selected forum, but files a separate action in order to assure CAFC jurisdiction over appeals of patent issues.

The Supreme Court’s Reasons for Applying the "Well Pleaded Complaint Doctrine" and the Conflict With the Congressional Intent of Establishing Uniformity in Patent Cases

Prior to this decision, the CAFC had long held that its jurisdiction could be based upon the presence of a compulsory patent counterclaim because such claims also involved the exclusive jurisdiction of the federal court. The CAFC supported this interpretation of its jurisdiction based upon the congressional intent to establish uniformity in patent cases. In rejecting this position, the Supreme Court majority opinion based its decision primarily on the universal application of the "well pleaded complaint doctrine" in determining jurisdiction, particularly in view of the plain and compelling "arising under" language of the district court’s jurisdictional statute. The majority also noted that by limiting the appellate jurisdiction of the CAFC based upon the "well pleaded complaint doctrine," more certainty would be created in determining the CAFC’s appellate jurisdiction. The majority also stated that its decision would preserve the traditional deference given to plaintiffs to select the forum for their claims and, by not interpreting 28 U.S.C.A. § 1338 to allow counterclaims to invoke exclusive federal patent jurisdiction, the Court avoided an "expansion" of the types of case removable to federal court preserving the balance between state courts and federal courts.

The underlying facts and procedural history in this case also provide insight into the Supreme Court’s view of conflicts between the CAFC and the other circuits in intellectual property cases.

The Holmes Group’s complaint against Vornado sought a declaratory judgment and injunction against claims against Holmes Group’s customers that its products infringed Vornado’s trade dress. Vornado filed a counterclaim for patent infringement. Vornado had previously litigated the trade dress claims against Holmes Group in 1992, but the district court had held Vornado’s trade dress unenforceable because the alleged trade dress, while not claimed, was nevertheless described in its patent. The Tenth Circuit Court of Appeals affirmed ("Vornado I"), creating a conflict with the rule in other circuits.

In 1999, Vornado again asserted claims against a Holmes Group customer in the International Trade Commission seeking to exclude importation of the Holmes Group products on the grounds that the products violated Vornado’s trade dress and also violated Vornado’s patent rights. As a result, Holmes Group filed this declaratory judgment and injunction action in district court within the Tenth Circuit, claiming collateral estoppel. Vornado contended that an intervening CAFC decision had changed the trade dress law since 1992, and that its trade dress was enforceable under current CAFC law. The district court rejected this argument and held that collateral estoppel resulting from the prior 1992 litigation barred Vornado’s assertion of the trade dress claims, and enjoined Vornado from asserting its trade dress claims. (In the meantime, the district court also had stayed any consideration of Vornado’s patent counterclaims.)

Vornado appealed the adverse ruling to its trade dress claims to the CAFC. Holmes Group objected to the CAFC’s appellate jurisdiction, but the CAFC denied the objection on the grounds that the patent counterclaim provided jurisdiction over all appeals in the case. The CAFC then reversed, based in part upon the subsequent U.S. Supreme Court decision in TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001), decided after the district court decision. The TrafFix case resolved the circuit split between the Tenth Circuit and CAFC on the trade dress issue favorably to Vornado, and the CAFC remanded for reconsideration under the TrafFix case. Holmes Group petitioned the U.S. Supreme Court for certiorari.

In its decision, the Supreme Court implicitly recognized that, even absent the intervening Supreme Court decision in the TrafFix case resolving the conflict between the circuits, it would not expect the other circuit courts of appeals to defer to the CAFC in exercising appellate review of these trade dress issues. Further, the concurring decision by Justice Stevens clearly states that the Supreme Court would expect to be the arbiter of any conflicts between the circuits on trade dress and even patent issues.

Possible Amendments to Restore CAFC Jurisdiction and the Effect of this Decision

Finally, the next step is clearly up to Congress. A revision to the language of the CAFC’s jurisdictional statute 28 U.S.C.A. § 1295(a)(1) omitting the reference to 28 U.S.C. § 1338, and simply restating the CAFC’s jurisdiction in the manner in which the CAFC previously construed it, viz., providing federal appellate court jurisdiction in federal cases in which the appeal arises wholly or in part under the patent laws of the United States, would eliminate the basis for the Supreme Court’s reliance on the underlying district court jurisdictional statute 28 U.S.C. § 1338, and the Court’s concern for maintaining the proper balance between the federal and state judicial systems. It is also likely, however, that in the final analysis, other circuit courts will follow CAFC authority on patent issues and that the CAFC will continue to perform its role of achieving uniformity in patent cases. The most likely potential areas of conflict on patent issues will involve cases in which the CAFC may attempt to change long-standing patent law principles; the interpretation and application of relatively recent Supreme Court decisions on patent issues, such as those in the recent Festo decision, to future patent cases; and the evolution of patent law in areas of new technology.