May 2013 - “It Was My Understanding There Would Be No Patent Law!” Why State Court Judges and Legal Malpractice Attorneys Should Dust Off Their Patent
by Isabelle M. Smith and Todd W. Smith
A few years back, our former law firm defended another law firm whose client had brought a legal malpractice lawsuit against it for missing a patent filing deadline with the United States Patent and Trademark Office (“USPTO”). The legal malpractice case originated in a California state court. We successfully removed the case to federal court on the basis that federal courts had exclusive jurisdiction over the matter. Specifically, we argued that since a plaintiff alleging legal malpractice must establish the element of “causation,” which requires the “case within a case” analysis set forth in Viner v. Sweet, 30 Cal. 4th 1232 (2003), that a hypothetical patent case only could be decided by a federal court. In light of a recent United States Supreme Court opinion, however, the same case pending today would head right back to state court for a state court judge to determine whether the missed patent deadline was the proximate cause of plaintiff’s injuries.
On February 20, 2013, the United States Supreme Court issued its unanimous opinion in Gunn v. Minton, 185 L. Ed. 2d 72 (2013). The Court held that legal malpractice claims based on underlying substantive patent law should proceed in state court, not federal court. Specifically the court held that 28 U.S.C. § 1338(a), which provides for exclusive federal jurisdiction over any case “arising under any Act of Congress relating to patents,” “does not deprive the state courts of subject matter jurisdiction over Minton’s malpractice claims.” Id. at 75. The Supreme Court reached its holding after applying the test set forth in Grable & Sons Metal Products, Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005) for determining whether there is federal jurisdiction over a state law claim. “Does the state law claim necessarily raise 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?” Gunn, 185 L. Ed. 2d at 79-80 (quoting Grable, 545 U.S. at 314).
Even though state courts have to resolve the underlying patent issues to decide the legal malpractice claim, the Supreme Court reasoned that nothing the state court does will set a precedent or affect patent law as a whole. As such, “there is no serious federal interest in claiming the advantages thought to be inherent in a federal forum.” Gunn, 185 L. Ed. 2d at 84 (quoting Grable, 545 U.S. at 313).
However, the parties litigating legal malpractice claims based on an underlying patent law dispute of course do have an interest in how courts resolve the “case within a case.” Indeed, legal malpractice cases involving patent law issues, like the case at issue in Gunn, have become increasingly prevalent over the last few years as companies go to battle over intellectual property rights. Even more, these patent cases and the follow-on malpractice cases are high-stakes “bet the company” cases that have the potential to generate substantial publicity—good and bad—for the clients and law firms involved.
As a result, it is important for legal malpractice attorneys, particularly those handling cases where the underlying issues involve patent law or other federal issues, to understand the Supreme Court’s decision in Gunn v. Minton. Among other implications, Gunn will make it more likely that legal malpractice cases filed in or removed to federal court will get remanded to state court. Practitioners also potentially could be subject to sanctions if they remove to federal court a case which is properly in state court in light of the Supreme Court’s analysis and holding in Gunn. Additionally, litigators handling legal malpractice cases involving patent issues in state court may need to take steps to educate their state court judges on the underlying federal issues.
Where It All Began: The Underlying Patent Case Brought By Minton
Back in the nineties, respondent Vernon Minton applied for a patent for an interactive securities trading system based substantially on a system he developed known as the Texas Computer Exchange Network or TEXCEN. Gunn, 185 L. Ed. 2d at 77. In January 2000, the USPTO issued the patent. Id. Subsequently, Minton filed a patent infringement suit in Federal District Court in Texas against the National Association of Securities Dealers, Inc. (“NASD”) and the NASDAQ Stock Market, Inc. (“NASDAQ”). Id. The District Court granted NASD and NASDAQ’s motion for summary judgment declaring Minton’s patent invalid under the “on sale” bar (35 U.S.C. § 102(b)). Id. Specifically, since Minton had leased TEXCEN to securities brokerage firm R.M. Stark & Co. (“Stark”) in 1995, more than a year prior to the date of the patent application, the Section 102 on sale bar applied. Id. Minton then argued for the first time in his motion for reconsideration that the “experimental use” exception to the on sale bar applied because the lease to Stark was part of ongoing testing of TEXCEN. Minton v. Nat’ l Ass’n of Secs. Dealers, Inc., No. 9:00-cv-00019, 2002 U.S. Dist. LEXIS 26587 (E.D. Tex., July 15, 2002). The District Court denied Minton’s motion. Id. The United States Court of Appeal affirmed, finding that the District Court correctly held that Minton waived his experimental use argument by not raising it earlier. Id. (citing Minton v. Nat’l Assn. of Secs. Dealers, Inc., 336 F.3d 1373, 1379-1380 (Cal. 2003)).
“It Was My Lawyers’ Fault”: The State Court Legal Malpractice Action
Minton followed his defeat by filing a lawsuit against his former attorneys, the petitioners, on the grounds that his lawyers’ failure to make the experimental use argument earlier caused him to lose the patent infringement case and invalidated his patent. Gunn, 185 L. Ed. 2d at 77. The trial court granted the lawyers’ motion for summary judgment holding that there was “less than a scintilla of proof” put forth by Minton that the lease was for experimental purposes. Id. Refusing to stop there, Minton appealed, raising a new argument: that the Texas state court, the venue in which he initially chose to file suit, did not have subject matter jurisdiction over his legal malpractice claim because it was based on an underlying patent case which, under 28 U.S.C. § 1338(a), is exclusively federal. Id. at 78. Relying on the test articulated in Grable & Sons Metal Prods., Inc., 545 U.S. at 314, the Texas Court of Appeal disagreed with Minton’s argument and instead agreed with the trial court’s finding that Minton had failed to prove that the experimental use exception applied. Id.
Unwilling to take no for an answer, Minton appealed to the Supreme Court of Texas. Id. The third time must be a charm because the Supreme Court sided with Minton and reversed. Id. (citing Minton v. Gunn, 355 S.W.3d 634, 641-42 (Tex. 2011)). The highest court of Texas determined that under the Grable test, Minton’s legal malpractice claim involved “a substantial federal issue” because “the federal government and patent litigants have an interest in the uniform application of patent law by courts well versed in that subject matter.” Id. at 644 (citing Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281, 1285-86 (2007); Air Measurement Techs., Inc. v. Akin Gump Strauss Hauer & Feld, LLP, 504 F.3d 1262, 1272 (2007)).
The End of the Line for Minton: The United States Supreme Court Reverses
On February 20, 2013, the United States Supreme Court reversed and remanded. In reaching its decision, the Court provides a detailed analysis of 28 U.S.C. § 1338(a) and the Grable factors, which likely will be relied upon by not only legal malpractice attorneys with underlying federal issues cases, but any practitioner with a state claim based on a federal issue. Gunn, 185 L. Ed. 2d at 79-83.
There is no question that federal courts have exclusive jurisdiction over patent cases. In fact, 28 U.S.C. § 1338(a) forbids states from hearing patent cases: “[n]o State court shall have jurisdiction over any claim for relief arising under any Act of Congress relating to patents.” Id. at 79. The United States Supreme Court opined that for it to determine whether the Texas state court had jurisdiction over Minton’s legal malpractice claim based on an alleged error in a patent case, it first had to “determine whether it would have been proper in a federal district court—whether the case ‘aris[es] under any Act of Congress relating to patents.’” Id. As the Court explained, a case may “aris[e] under” federal law in one of two possible ways. First, a case arises under federal law when federal law creates the cause of action, which would include, for example, Minton’s patent suit against NASD and NASDAQ in federal district court in Texas. Id. A legal malpractice claim, however, is not created by federal law, and thus such a claim does not arise under federal law in that respect.
The second way for a case to “arise” under federal law is limited to a “special and small category” of claims with “state origins,” “in which arising under jurisdiction still lies.” Id. To be admitted into this exclusive club, “the state law claim [must] necessarily raise 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.” Id. at 79-80 (quoting Grable, 545 U.S. at 314). This doctrine has been broken down into four requirements, all of which must be met in order for federal jurisdiction to exist over a state law claim. Specifically, the federal issue must be: (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. Gunn, 185 L. Ed. 2d at 80. The United States Supreme Court has decided that if all of these requirements are met, then jurisdiction is proper in federal court because there is a “‘serious federal interest in claiming the advantages thought to be inherent in a federal forum which can be vindicated without division of labor between state and federal courts.” Id. (quoting Grable, 545 U.S. at 313-14).
As to Minton’s legal malpractice claim, the Supreme Court concluded that it does not arise under federal patent law and that, in fact, “state legal malpractice claims based on underlying patent matters will rarely, if ever, arise under federal patent law for purposes of 28 U.S.C. § 1338(a).” Gunn, 185 L. Ed. 2d at 80. In reaching its conclusion, the United States Supreme Court analyzed each of the four requirements identified in Grable.
1. Resolution of a Federal Patent Issue Is “Necessary” to Minton’s Claim
The first requirement under Grable is whether the resolution of the federal issue is “necessary” to Minton’s claim. Under Texas law, like California law, to prevail on a legal malpractice claim, a plaintiff must prove four elements: “(1) that the defendant attorney owed the plaintiff a duty; (2) that the attorney breached that duty; (3) that the breach was the proximate cause of the plaintiff’s injury; and (4) that damages occurred.” Id. (quoting Alexander v. Turtur & Assocs., Inc., 146 S.W. 3d 113, 117 (Tex. 2004)); see also Banerian v. O’Malley, 42 Cal. App. 3d 604, 611-612 (1974). Recognizing that the causation element required a “case within a case” analysis regarding whether Minton would have prevailed if Minton’s attorneys had made a timely argument that the experimental use exception applied, the Court concluded that the analysis “will necessarily require application of patent law to the facts of Minton’s case.” Gunn, 185 L. Ed. 2d at 80.
2. The Federal Patent Issue Is “Actually Disputed”
Moving on to the second requirement, whether the federal issue is “actually disputed,” the Court found that “it is the central point of dispute.” Id. “Minton argues that the experimental-use exception properly applied to his lease to Stark, saving his patent from the on-sale bar; petitioners argue that it did not. This is just the sort of ‘dispute . . . respecting the . . . effect of [federal] law’” that Grable envisioned. Id. (quoting Grable, 545 U.S. at 313 (quoting Shulthis v. McDougal, 225 U.S. 561, 569 (1912))).
3. The Federal Patent Issue Is Not Substantial to the Federal System
On the third requirement, the Supreme Court disagreed with the Supreme Court of Texas and Minton. Under Grable, the federal issue must be “substantial” to the federal system as a whole, not just to the case and parties, as the Supreme Court of Texas incorrectly concluded. Gunn 185 L. Ed. 2d at 80-81 (quoting Gunn v. Minton, 355 S.W. 3d at 644).
In Gunn, the Supreme Court determined that since the patent issue is raised solely as a hypothetical “case within a case,” it has no bearing on patent law and thus is not substantial to the federal system as a whole. Gunn, 185 L. Ed. 2d at 81. The answer to the question of “If Minton’s lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been any different?” will not set patent law precedent and will not “undermine ‘the development of a uniform body of [patent] law’” because federal courts are not bound by state court “‘case within a case’ patent rulings.” Id. at 81-82.
Most notable is the Supreme Court’s recognition that state courts will need to closely follow federal patent law precedent in resolving the “case within a case.” Id. at 82. However, most troubling is the Court’s apparent lack of concern for state courts’ deciding “novel questions that may arise for the first time in state court.” Id. The Court’s justification for this position appears to be that any error by the state court in deciding those novel questions will have no precedential value and, if frequently raised, ultimately will be decided by the Federal Circuit. Id. Thus, any such error would affect only the parties and not the federal system. Id.
The United States Supreme Court also was not swayed by the “suggestion that the federal court’s greater familiarity with patent law means that legal malpractice cases like this one belong in federal court.” Id. The mere chance that a state court’s misunderstanding of patent law could render an incorrect result in the legal malpractice case simply does not warrant federal jurisdiction, according to the Court. Id.
4. The Federal Patent Issue Is Not Capable of Resolution in Federal Court Without Disrupting the Federal-State Balance
The last requirement deals with the “balance of federal and state judicial responsibilities.” Gunn, 185 L. Ed. 2d at 83 (quoting Grable, 545 U.S. at 314). Recognizing that states have “a special responsibility for maintaining standards among members of the licensed profession [citation],” the Court opined that it “ha[d] no reason to suppose that Congress—in establishing exclusive federal jurisdiction over patent cases—meant to bar from state courts state legal malpractice claims simply because they require resolution of a hypothetical patent issue.” Gunn, 185 L. Ed. 2d at 83.
The Likely Fall-Out: How Does Gunn v. Minton Affect Me?
Increased Possibility of Remand: If you currently are litigating a legal malpractice case in federal court, and that case involves an underlying federal issue such as patent law, your case may well be remanded to state court based on the reasoning in Gunn v. Minton.
Possibility of Sanctions for Removing Case to Federal Court: Practitioners also could be subject to sanctions if they decide to remove a legal malpractice case based on underlying patent law issues to federal court. Although it is possible that a legal malpractice case based on patent law could fall outside the holding in Gunn, even the Supreme Court recognized that such a case “will rarely, if ever, arise under federal patent law for purposes of 28 U.S.C. § 1338(a).” Gunn, 185 L. Ed. 2d at 80.
The Need To Educate Your State Court Judge: For obvious reasons, state court judges are not likely to be as well-versed in patent law, or other federal issues, as their federal counterparts. Regardless, with Gunn v. Minton on the books, it will be up to you, the practitioner, to understand these federal issues and to educate your state court judge as necessary to obtain the rulings and results most favorable to your client. In the burgeoning area of legal malpractice based on patent law, lawyers and judges alike will need to dust off their patent law books to adequately and properly analyze the patent case within the case.
Isabelle Smith is a freelance attorney with Montage Legal Group, LLC. Ms. Smith formerly was a partner at Howrey, LLP in Irvine practicing in Howrey’s Commercial Litigation Group, focusing on attorney professional liability and securities litigation. Ms. Smith is a member of the OCBA Professionalism and Ethics Committee. She can be reached at Isabelle@montagelegal.com.
Todd Smith is a litigation associate at Morgan, Lewis & Bockius LLP in Irvine. Mr. Smith also practices in the area of attorney professional liability and securities litigation. He can be reached at firstname.lastname@example.org.