Burke v. Pittway Corp., 77-313

• Decision Date: 03 May 1978
• Docket Number: No. 77-313,77-313
• Citation: 20 Ill.Dec. 324,63 Ill.App.3d 354,380 N.E.2d 1
• Parties: , 20 Ill.Dec. 324, 201 U.S.P.Q. 619 Harold BURKE et al., Plaintiffs-Appellants, v. PITTWAY CORPORATION, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 1

380 N.E.2d 1

63 Ill.App.3d 354, 20 Ill.Dec. 324,

201 U.S.P.Q. 619

Harold BURKE et al., Plaintiffs-Appellants, v. PITTWAY CORPORATION, Defendant-Appellee.

No. 77-313.

Appellate Court of Illinois, First District, Third Division.

May 3, 1978.

As Modified On Denial of Rehearing Sept. 6, 1978.

Clemens Hufmann, Robert L. Rohrback, Timothy J. Vezeau, Ronald B. Coolley, Mason, Kolehmainen, Rathburn & Wyss, Chicago, for plaintiffs-appellants.

J. William Hayton, James B. Moran, Bell, Boyd, Lloyd, Haddad & Burns, Chicago Fish & Richardson, Boston, Mass., of counsel, for defendant-appellee.

McNAMARA, Justice:

Plaintiffs brought this action in the circuit court of Cook County seeking to recover damages resulting from defendant Pittway's failure to perform an agreement entered into by the parties. The trial court granted Pittway's motion to dismiss the complaint on the ground that the case arose under federal patent law and, therefore, was within the exclusive jurisdiction of the federal court. Plaintiff appeals contending that the action is within the subject matter jurisdiction of the state court.

BRK Electronics Incorporated was an Illinois corporation engaged in the development, manufacture, and sale of smoke and fire detectors. Among the assets of BRK were various patents and pending patent applications. Plaintiffs were the owners of all issued and outstanding shares of stock, options, rights and warrants to acquire BRK shares.

On February 28, 1970, plaintiffs and Pittway entered into a contract entitled "Agreement For the Purchase And Sale Of The Stock And Notes Of BRK . . . ." Pursuant to this agreement Pittway acquired all of the BRK outstanding notes, shares of stock, and stock rights. Pittway agreed to pay the holders of BRK notes the face amount of the notes plus accrued interest. Section 1.3 of the agreement provided that Pittway pay for BRK shares, rights, options and warrants, by paying a specific amount for each device covered by patents or pending patent applications owned by BRK at the time of acquisition. The agreed rate was $10.00 for each smoke and fire detector sold by Pittway. The rate of payment subsequently was decreased to $5.00 per device and then to $3.50 per device by subsequent agreement. The maximum contingent purchase price remained $3,500,000.00 less BRK's liabilities as of February 28, 1970.

The contract required Pittway to report to plaintiffs on a quarterly basis its sales of smoke and fire detectors. Pittway was to pay such portions of the contingent purchase price as had accrued in the preceding calendar quarter. The reports and payments were to continue until the contingent purchase price had been paid or until the patents and applications were transferred to plaintiffs because of payment defaults.

Among the assets which Pittway acquired from BRK was U. S. Patent Application No. 709,415 (hereinafter the Original Patent Application.) That application covered a smoke detector device utilizing two batteries. One of the batteries functioned as a monitor and sounded an alarm when the operative battery ran low. A circuit subsequently was devised which made it possible to eliminate the second battery. In its remarks pertaining to the request to include Claim 13 in the Original Patent Application, Pittway stated: "(C)laim 13 clearly and patentably sets forth the distinctions of the present invention's supervisory circuit over the cited references and affords applicants appropriate supplemental protection for their contribution to the art." The amendment was refused and no further action was taken concerning the Original Patent Application and its amendments. On July 20, 1971, the Original Patent Application matured into United States Letters Patent No. 3,594,751 (hereinafter the Original Patent.)

The aggregate payments on account of the contingent purchase price did not amount to $500,000.00 for the three year period following May 15, 1970. Pursuant to section 6.2 of the BRK contract plaintiffs requested Pittway to assign and transfer all patents and patent applications to the BRK Shareholders' Committee. On June 18, 1973, the transfer was effected through an assignment to the committee to hold all title to the patents for the benefit of plaintiffs. On July 13, 1973, the committee filed an application for reissue of the Original Patent which was allowed on July 20, 1976. According to plaintiffs, the Reissue Patent includes substantially all of the battery powered fire detectors currently manufactured, sold or used in the United States which utilize a supervisory circuit for monitoring the voltage output of the fire detector battery and signalling battery weakness on failure. Claim 13, however, was not includable in the Reissue Patent.

Plaintiffs filed a six count complaint alleging that Pittway breached the BRK agreement and was liable for actual damages, exemplary damages, and reasonable attorney's fees and costs. Plaintiffs requested that the court order Pittway to pay plaintiffs for its future use of plaintiffs' technology and inventions at the rates previously agreed to by the parties.

The issue is whether the cause of action pleaded in the complaint lies within the exclusive subject matter jurisdiction of the federal courts under 28 U.S.C. par. 1338(a) (1970). That statute provides:

"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 trade-marks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases."

A case arises under the patent laws "when the plaintiff in his opening pleading . . . sets up a right under the patent laws as ground for a recovery." (Pratt v. Paris Gas Light & Coke Co. (1897), 168 U.S. 255, 259, 18 S.Ct. 62, 64, 42 L.Ed. 458.) The general rule is that a suit by a patentee for royalties under an assignment by him or for any remedy sought pursuant to a contract permitting use of a patent is not a suit under the patent laws of the United States. (Luckett v. Delpark, Inc. (1926), 270 U.S. 496, 46 S.Ct. 397, 70 L.Ed. 703; Wilson v. Sandford (1850), 10 How. 99, 51 U.S. 99, 13 L.Ed. 344.) In American Well Works Co. v. Layne & Bowler Co. (1916), 241 U.S. 257, 36 S.Ct. 585, 60 L.Ed. 987, the Court, at p. 260, 36 S.Ct. at p. 586, set down the rule governing cases when State jurisdiction is challenged on the basis of 28 U.S.C. 1338: "A suit arises under the law that creates the cause of action." In T. B. Harms Co. v. Eliscu (2nd Cir. 1964), 339 F.2d 823, the court discussed the meaning of the "arising under" language of the federal statute and adhered to the principle enunciated in American Well Works :

"(T)he federal grant of a patent or copyright has not been thought to infuse with any national interest a dispute as to ownership or contractual enforcement turning on the facts or on ordinary principles of contract law. Indeed, the case for an unexpansive reading of the provision conferring exclusive jurisdiction with respect to patents and copyrights has been especially strong since expansion would entail depriving the state courts of any jurisdiction over matters having so little federal significance." p. 826.

In their complaint plaintiffs allege that upon execution of the BRK agreement, Pittway undertook certain obligations with respect to the pending patent applications. Count I charged Pittway with breach of section 6.4 of the BRK agreement which provides:

"Until the contingent purchase price shall have been paid in full, or the patents and patent applications listed on Exhibit E shall have been transferred for the benefit of the Shareholders and Rights Holders as provided in section 6.2, Purchaser shall maintain in full force and effect the patents and patents issuing on the applications listed on Exhibit E, and shall make reasonable businesslike efforts to prosecute all of the pending patent applications listed on Exhibit E, and to defend any attack made on the validity or scope of said patents and patent applications; provided, however, that the Purchaser may elect to discontinue such efforts if it shall determine in good faith that further action is unduly burdensome and shall give to the Shareholders and Rights Holders such timely notice of such determination as will permit them, at their expense, to continue or arrange for the continuation of such efforts."

Plaintiffs charge that Pittway failed to make reasonable businesslike efforts to secure and protect the patent applications filed by BRK and pending at the time of acquisition. Plaintiffs allege that reasonable businesslike efforts to prosecute the Original Patent Application would have included further prosecution of Claim 13 by either filing a continuation application or endeavoring to obtain allowance of Claim 13 after initial denial by the patent office. In Count II, plaintiffs allege that Pittway breached its duty under the agreement when it failed to provide plaintiffs with timely notice of Pittway's decision to discontinue efforts to prosecute the Original Patent Application and Claim 13.

Both counts are based upon Pittway's alleged breach of duties specifically set out in the agreement between the parties. The agreement provided that plaintiffs would receive certain sums for devices manufactured under patents and patent applications transferred to Pittway. The sums were to be paid to plaintiffs until or unless the patent application covering such device was held invalid by a competent tribunal, including the patent office. The complaint does not allege the validity of the Original Patent Application and Claim 13, but rather charges Pittway with improper conduct in regard to duties assumed concerning that application and claim.

Pittway contends that the complaint alleges the patentability of Claim 13 in each count. It points specifically to paragraph 24 of Count I which paragraph is...