186 F.3d 981 (7th Cir. 1999), 98-2010, Dawn Equipment Co. v. Bassett

Docket Nº:98-2010
Citation:186 F.3d 981
Party Name:DAWN EQUIPMENT COMPANY, Plaintiff-Counterclaim Defendant-Appellee, and JAMES H. BASSETT, Counterclaim Defendant-Appellee, v. MICRO-TRAK SYSTEMS, INCORPORATED, Defendant-Appellant.
Case Date:August 04, 1999
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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186 F.3d 981 (7th Cir. 1999)

DAWN EQUIPMENT COMPANY, Plaintiff-Counterclaim Defendant-Appellee,

and

JAMES H. BASSETT, Counterclaim Defendant-Appellee,

v.

MICRO-TRAK SYSTEMS, INCORPORATED, Defendant-Appellant.

No. 98-2010

United States Court of Appeals, Seventh Circuit

August 4, 1999

Argued December 1, 1998

Appeal from the United States District Court for the Northern District of Illinois, Western Division. No. 95 C 50267--Philip G. Reinhard, Judge.

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[Copyrighted Material Omitted]

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Before COFFEY, ROVNER and DIANE P. WOOD, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

This diversity case might have been avoided had the parties taken more pains with drafting the contract here in dispute. Dawn Equipment Company ("Dawn"), a Minnesota corporation, sold Micro-Trak Systems, Inc. ("Micro-Trak"), an Illinois

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corporation, a patent for a device called a "Harvestyield," an invention designed to measure the flow of grain through a combine while "on the go" or while the combine is moving and operating. The contract specified that Dawn was to be paid at a higher rate if the patent was "suitable" and at a lower rate if it was not. After paying the higher rate for a while, Micro-Trak decided that the patent was not "suitable" and began paying the lower rate. Dawn sued for breach of contract and Micro- Trak counterclaimed. On cross motions for summary judgment, the district court found for Dawn. On the central issue, whether Micro-Trak was in breach, we reverse and remand.

I.

Dawn, a company which develops and markets agricultural technology, developed the Harvestyield device in 1988-1993. The device is designed to monitor the amount of grain harvested, threshed, and cleaned by a combine as it harvests a field. With this technology, the clean yield harvested by the combine deflects an actuating arm at the top of the combine grain elevator. The deflection of the arm varies with the flow and is converted into an electrical signal to measure the yield. Dawn applied for a patent for the Harvestyield in September 1992, making 44 distinct claims. In June 1993, after some negotiations, Dawn signed an Asset Purchase Agreement (the "contract") with Micro-Trak, another agricultural technology firm. The contract provided, among other things, that Micro-Trak would buy the rights to the Harvestyield in exchange for a lump sum payment and a royalty payment per sale the amount of which depended upon a condition. If the Harvestyield device was issued a "suitable patent," Micro-Trak would make a royalty payment of $80 for each Harvestyield unit it sold and release $150,000 from an escrow account, but if the patent was not suitable, Micro-Trak would owe $40 per unit sold.1 The reason for the two-tier royalty system is that a broader patent which excluded a greater range of "on the go" yield monitors using similar technology would be more valuable.

The term "suitable patent" was defined in the contract as:

a patent covering the Harvestyield in its entirety or such significant part as to make [Micro-Trak] the exclusive producer of a device utilizing the means described in the patent application presently pending for the Harvestyield. Such a "Suitable Patent" shall include, but not necessarily be limited to, a patent issuing with any one or more of the following pending claims in the application in their current form or in a form substantially similar to their present form: 1, 2, 3, 15, 18, 19, 22, 28, 30, or 33.

These ten listed claims were among the 44 claims in the June 1992 patent application (the "initial application") and the parties agree that these claims were selected because they were the broadest of the 44 claims in the initial application.

According to Micro-Trak, the main concern in inserting this language was to exclude a potential competitor device called the Yield Monitor 2000 ("YM2000") manufactured by Ag Leader. The YM2000 was the only "on the go" device to use technology similar to the Harvestyield with a deflecting arm sensor at the top of the combine elevator. The YM2000 was not the subject of any patent when the contract was executed or the Harvestyield patent issued. The contract does not mention the YM2000, supposedly because it was desirable that the term "suitable patent" not be defined in terms of a single competitive product. The parties had been aware of the existence of the YM2000 and the potential threat it posed to the Harvestyield patent since September 1992, shortly after Dawn filed its patent application

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and well before the contract was signed, when Micro-Trak sent Dawn a copy of an Ag Leader brochure advertising the YM2000. Dawn did not disclose the existence of this brochure to the Patent and Trademark Office ("PTO") during the prosecution of the patent application. In August 1993, the PTO rejected the claims in Dawn's patent application, including the claims listed in the contract under the "suitable patent" provision, essentially because they were too broad. The examiner cited an element of a prior art patent, Strubbe, United States Patent No. 4,765,190, as corresponding to the actuating arm of the Harvestyield claims.

Dawn amended the rejected claims in September 1993 by adding language which limited the width of the actuating arm. Claim 1 of the initial application, for example, had stated that the improvement for which a patent was sought comprised "means including an actuating arm for producing a signal indicative of a pressure being applied . . . ; and means for mounting [this] . . . so that the actuating arm intercepts clean yield product . . . ." The width of the actuating arm was not specified in the initial application beyond the statement in Claim 4 that "the actuating arm has a width, taken transversely to the direction of the flow of clean yield product . . . that is less than the total width of the flow . . . that it intercepts." The amended Claim 1 now included language reading, "said actuating arm having a dimension which is significantly less than the dimension of the elevator means." Similar language was inserted throughout the amended application. This satisfied the PTO, which issued Patent No. 5,282,389 to Dawn on February 1, 1994.

When the patent was issued, Micro-Trak released $100,000 from the escrow account and began paying at the $80 per unit-sold rate for a "suitable patent." In September 1994, the PTO issued Ag Leader a patent on the YM2000. This patent application had been filed in June 1991, 15 months before Dawn filed its Harvestyield patent application. In order to bolster a patent infringement case against Ag Leader, Micro-Trak then requested documentation from Dawn to show that the Harvestyield was invented first even though its patent application was filed second.

Among the documents Dawn provided was an advertisement Dawn had placed in the July 1991 issue of New Farm magazine for another Dawn product (the "Trashwheels") which, in a list of Dawn's other products, mentions the Harvestyield by name but does not describe it, although the ad does describe and depict the Trashwheels device. This ad had not been disclosed to Micro-Trak or to the PTO during the prosecution of the Harvestyield patent application. Micro-Trak expressed concern that Dawn's patent was statutorily barred because the ad constituted offering a completed invention for sale more than a year before the filing of a patent application for that invention. Micro-Trak then decided that the Harvestyield patent was not "suitable" under the contract because it could not exclude the YM2000, and accordingly reduced its royalty payments to the $40 per unit rate and refused to release the remaining funds from escrow.

Dawn sued for breach of contract in Illinois state court. After the case was removed to federal court, Micro-Trak counterclaimed under contract and quasi-contract theories based on the premise that Dawn had failed to disclose material information to the PTO as required by the applicable regulations and the contract. The district court held in December 1996 that the term "suitable patent" was not ambiguous and could only reasonably be interpreted to mean "the patent as applied for on the Harvestyield device." In January 1998, the district court granted summary judgment for Dawn, holding that the patent Dawn ultimately obtained was "in a form substantially similar in scope to the patent applied for" and so was a "suitable patent." The district court denied Micro-Trak's counterclaims, ruling that neither the Trashwheels ad nor the Ag Leader

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brochure for the YM2000 was material to the Harvestyield patent application. Micro-Trak appeals.

II.

Since this case involves a patent, a natural question arises about our jurisdiction. The Federal Circuit has exclusive jurisdiction over appeals from final decisions of a district court whose jurisdiction was "based, in whole or in part," on the federal monopoly on patent cases. 28 U.S.C. sec. 1295(a)(1) (citing id. sec. 1338(a)). The exclusive jurisdiction of the Federal Circuit, however, is limited to cases "arising under" the patent laws. For a case to "arise under" the patent laws, either federal patent law must "create[ ] the cause of action or . . . patent law [must be] a necessary element of one of the [plaintiff's] well-pleaded claims." Christianson v. Colt Indust., 486 U.S. 800, 809 (1988). The "arising under" analysis parallels the well-pleaded complaint rule for federal jurisdiction. See id.; Kennedy v. Wright, 851 F.2d 963, 968-969 (7th Cir. 1988). If the plaintiff must succeed on a question of patent law in order to prevail, then jurisdiction is founded on sec. 1338, and if not, not. Unique Concepts, Inc. v. Manuel, 930 F.2d 573, 574 (7th Cir. 1991).

Here Dawn need not succeed under a question of patent law but only under state contract law. Although the present case involves a patent, it turns on the construction of the...

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