U.S. Valves Inc. v. Dray Sr.

• Decision Date: 09 September 1999
• Docket Number: 98-3823,Nos. 98-3794,s. 98-3794
• Parties: (7th Cir. 1999) U.S. Valves, Incorporated, Plaintiff-Appellee, Cross-Appellant, v. Robert F. Dray, Sr., Defendant-Appellant, Cross-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 811

190 F.3d 811 (7th Cir. 1999)

U.S. Valves, Incorporated, Plaintiff-Appellee, Cross-Appellant, v. Robert F. Dray, Sr., Defendant-Appellant, Cross-Appellee.

Nos. 98-3794, 98-3823

United States Court of Appeals, Seventh Circuit

Argued May 13, 1999

Decided September 9, 1999

Appeals from the United States District Court for the Southern District of Indiana, Evansville Division. No. 96 C 66--Richard L. Young, Judge.

Before Bauer, Manion, and Kanne, Circuit Judges.

Manion, Circuit Judge.

Robert F. Dray, Sr. invented a valve which regulates the flow of molten plastic into molds. This valve prevents the molten plastic from flowing back into the injector machine, which makes for more uniform molds and less wasted plastic. The parties refer to this as the "internal piston valve," and so shall we. Dray patented his invention, and in 1991 exclusively licensed this patent to U.S. Valves, Inc. in exchange for a royalty commission on every internal piston valve sold by U.S. Valves. After a few years of U.S. Valves manufacturing and selling the internal piston valve, Dray and U.S. Valves had a falling out, and by the end of 1995 the business relationship had substantially deteriorated. Dray sought to audit U.S. Valves' accounts pertaining to his royalty commissions, and when he was unable to do so, he terminated the license agreement. He then began manufacturing and selling these valves himself. He also began producing and selling another valve, called the sliding ring valve, which serves the same purpose as the internal piston valve. Dray has filed a patent application on this invention; U.S. Valves claims that this valve is the equivalent of the internal piston valve, and therefore covered by the exclusive licensing arrangement.

U.S. Valves sued Dray for breach of contract.¹ U.S. Valves claimed that Dray sold valves covered by the licensed patents (both the internal piston valves and the sliding ring valves, in their view). It also requested an injunction against Dray to prevent him from selling any of these valves. Dray counterclaimed, seeking an accounting and damages for unpaid royalties. The district court found that Dray had sold valves in violation of the agreement, issued a permanent injunction, and awarded damages of $241,351.17.

Dray has asked that we transfer this case to the Federal Circuit, as U.S. Valves' claim for breach of contract necessarily includes patent law as an essential element of the claim. He notes that the parties have presented extensive testimony on whether the sliding ring valve infringes on the patents for the internal piston valves. He further notes that U.S. Valves has asked on appeal that we remand this case to the district court with instructions to address the patent issues on the merits.

Dray conceded that his company manufactured and sold some internal piston rings that were covered by the patents.² The district court accepted this concession and found a breach of contract. To measure the damages from the breach, the district court would also have to determine whether the sale of sliding ring valves was in violation of the contract, because they were covered under the licensed patents. However, the district court effectively avoided making the distinction between the two valves. He declined to address whether the sliding ring valves were covered by the license agreement, and instead, he relied on the records kept by Dray's valve customers.³ U.S. Valves asks this court to instruct the district court to address whether the sliding ring valves are covered by the license agreement, although curiously, it does not object to the calculation of damages. At oral argument, we asked U.S. Valves to what court the appeal should go if the district court ruled on the applicability of the license agreement to the sliding ring valves, and we were told the Federal Circuit.⁴ U.S. Valves contends that without a district court decision on the patent issues, we are free to address the other issues in this appeal. However, our analysis does not rest on the subject matter of the judge's decision, but rather the well-pleaded complaint. See Kennedy v. Wright, 851 F.2d 963, 968 (7th Cir. 1988); Scherbatskoy v. Halliburton Co., 125 F.3d 288, 291 (5th Cir. 1997). Therefore, the judge's decision that he need not address the patent issues in this case does not control our appellate jurisdictional inquiry.

Whether this court or the Federal Circuit has jurisdiction over this appeal turns on whether the district court's jurisdiction over the complaint was premised on diversity jurisdiction, 28 U.S.C. sec. 1332, or patent law jurisdiction, 28 U.S.C. 1338(a).⁵ Patent law jurisdiction "extends 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 v. Colt Indus. Operating Corp., 486 U.S. 800, 809 (1988).⁶

Initially we note that U.S. Valves' claim for breach of contract does not state a patent law claim, thus the first prong does not apply. The second prong of Christianson's test--whether relief depends on resolution of a patent law question--presents a more difficult question. The license agreement between Dray and U.S. Valves gives U.S. Valves "an exclusive right to manufacture, use, sell, advertise, and distribute the Licensed Product . . . ."⁷ U.S. Valves claimed that Dray sold valves in contravention of this provision, and the district court awarded damages to U.S. Valves for this breach of contract. If the only way for U.S. Valves to establish this claim is for it to show that Dray sold valves covered by the patents licensed to U.S. Valves (the "Licensed Product"), then the court must first examine the patent and determine which valves are covered and whether the patent was infringed. Thus patent law is a necessary element of U.S. Valves' breach of contract action, and jurisdiction belongs to the Federal Circuit.

Recent circuit cases illuminate when patent law is considered a necessary element of a claim. In Scherbatskoy v. Halliburton Co., 125 F.3d at 291, the Fifth Circuit held that "[c]learly, determining whether [the defendant's subsidiary] infringed the [plaintiff's] patents is a necessary element to recovery of additional royalties or a finding that [the defendant] breached the Patent License Agreement." Similarly, in Additive Controls & Measurement Sys., Inc. v. Flowdata, Inc., 986 F.2d 476 (Fed. Cir. 1993), the Federal Circuit found federal jurisdiction over a state law business disparagement claim. Flowdata stated, falsely in Additive Control's view, that Additive Controls was infringing Flowdata's patent. To establish a business disparagement claim, Additive Controls would have to prove the falsity of Flowdata's statement, which in turn would require Additive Controls to prove noninfringement, an issue of patent law. As the claim necessarily involved patent law, the district court had jurisdiction under 28 U.S.C. sec. 1338(a), and the Federal Circuit had jurisdiction under 28 U.S.C. sec. 1295. Finally, in Hunter Douglas, Inc. v. Harmonic Design, 153 F.3d 1318, 1329-30 (Fed. Cir. 1998), the Federal Circuit found subject matter jurisdiction under sec. 1338(a) (and appellate jurisdiction under sec. 1295) for a state law claim of injurious falsity that required Hunter Douglas to prove that the patents in question were invalid or...