Carter v. Alk Holdings Inc. (doing Bus. As Acme Sec.)

• Decision Date: 24 May 2010
• Docket Number: No. 2008-1168.,2008-1168.
• Parties: Randall B. CARTER, Plaintiff-Appellant,v.ALK HOLDINGS, INC. (Doing Business as ACME Security) and Michael D. Hassebrock, Defendants-Appellees.
• Court: U.S. Court of Appeals — Federal Circuit

605 F.3d 1319

Randall B. CARTER, Plaintiff-Appellant,v.ALK HOLDINGS, INC. (Doing Business as ACME Security) and Michael D. Hassebrock, Defendants-Appellees.

No. 2008-1168.

United States Court of Appeals Federal Circuit.

May 24, 2010.

Robert M. Ward, Kaplan Ward & Patel, LLC, of Atlanta, GA, argued for plaintiff-appellant. Of counsel were Barry E. Kaplan and Ashish Patel.

Elizabeth G. Borland, Smith, Gambrell & Russell, LLP, of Atlanta, GA, for defendant-appellees.

With her on the brief were Kerri A. Hochgesang, and Todd R. Williams.

Before MICHEL, Chief Judge, NEWMAN, and DYK, Circuit Judges.

Opinion for the court filed by Circuit Judge DYK. Opinion concurring-in-part, dissenting-in-part filed by Circuit Judge NEWMAN.

DYK, Circuit Judge.

Myers & Kaplan Intellectual Property Law, LLC (“Myers & Kaplan”) appeals from an order of the United States District Court for the Northern District of Georgia imposing sanctions of $30,356.89 pursuant to Rule 11 of the Federal Rules of Civil Procedure.¹ The district court imposed the sanctions after it found that three claims advanced by Myers & Kaplan on behalf of the plaintiff Randall B. Carter (“Carter”), Counts I, VIII, and XI, were baseless legal theories that had no chance of success and for which no reasonable argument could be advanced.

We uphold the district court's findings that Counts I and XI were frivolous. However, we conclude that the district court erred in finding Count VIII frivolous. We therefore affirm-in-part, reverse-in-part, and remand for a determination of whether sanctions should be imposed, and, if so, in what amount.

Background

The complaint alleges the following. From 1992 to July 14, 2006, Carter was employed as Vice President and General Manager of Acme Security, the trade name for ALK Holdings, Inc. (“ALK”). During Carter's period of employment at Acme Security, he allegedly developed a high security locking assembly for a safe deposit box door on his own time and with his own resources. The lock assembly included a customer lock mechanism that was capable of at least five million actuation configurations. Acme Security and Michael Hassebrock (“Hassebrock”), the President of Acme Security at that time, initially showed no interest in the invention. After a bank expressed an interest in acquiring a license to the invention, Hassebrock proposed a “50/50 partnership” with Carter. Hassebrock and Carter retained a patent attorney (referred to as “John Doe I”) to draft a patent application for the invention. The provisional application listed Hassebrock, Carter, and Curtis P. Taylor (“Taylor”) ² as coinventors. John Doe I then filed with the United States Patent and Trademark Office (“PTO”) a non-provisional patent application, Patent Application No. 11/299,853, which claimed priority benefit to the earlier-filed provisional patent application. The non-provisional application listed Hassebrock and Carter as inventors. Taylor's name was not listed on it. Subsequently, Hassebrock allegedly demanded that Carter assign his patent rights to Acme Security. Carter refused, and Acme Security terminated his employment.

On August 31, 2006, Carter filed suit against ALK, Hassebrock, and John Doe I. Carter's complaint contained fifteen claims: nine claims purportedly based on federal law and six on state law. All of the claims related to the allegedly improper listing of Hassebrock on the patent application as a co-inventor with Carter, the purported true inventor of the locking mechanism. John Doe I's representation of both Hassebrock and Carter was alleged to be a breach of duty because of their conflicting interests. Carter also alleged that Carter's interests were sacrificed to those of Hassebrock. Count VIII in particular alleged that John Doe I had represented both Hassebrock and Carter in the drafting and filing of the patent applications and had a fiduciary duty to both of them, which he breached “in violation of 35 U.S.C et seq., 37 CFR et seq., and the Manual of Patent Examination Procedure (MPEP).” Supplemental App. 35 (capitalization altered).

On June 5, 2007, the district court dismissed Carter's federal claims for failure to state a claim. Carter v. ALK Holdings, Inc., 510 F.Supp.2d 1299, 1308 (N.D.Ga.2007). The court also declined to exercise supplemental jurisdiction over his state-law claims and dismissed them without prejudice. Id. The court expressed sympathy, however, for Carter's situation:

The Court is not unsympathetic to Carter's plight. His allegations related to the attempted theft of his invention are troublesome and, if true, will likely entitle him to relief. Unfortunately, this Court is unable to provide Carter with the relief he seeks. If Carter is to vindicate his rights, it must be in the PTO for his claims related to inventorship and in Georgia state courts for his claims related to Defendants' bad faith conduct.

Id. The district court then found sua sponte that the following three claims were frivolous: (1) “ COUNT I- VIOLATION OF ARTICLE I, SECTION 8, CLAUSE 8 OF THE UNITED STATES CONSTITUTION AND 35 U.S.C. et seq.”; (2) “ COUNT VIII- BREACH OF FIDUCIARY DUTY BY JOHN DOE I IN VIOLATION OF 35 U.S.C. et seq., 37 CFR et seq., AND THE MANUAL OF PATENT EXAMINATION PROCEDURE (MPEP) ”; and (3) “ COUNT XI- VIOLATION OF 35 U.S.C. § 122.” ³

Id. at 1307-08. The three counts are set forth in an appendix to this opinion. The court directed “counsel for Plaintiff” to show cause as to why sanctions should not be imposed pursuant to Rule 11 of the Federal Rules of Civil Procedure. Id.

Myers & Kaplan replied to the district court's show cause order on June 19, 2007. On July 3, 2007, ALK filed a response to Myers & Kaplan's submission and a renewed motion for sanctions against Myers & Kaplan.⁴ On December 13, 2007, the district court granted the renewed motion and imposed sanctions of $30,356.89 pursuant to Rule 11 against “Plaintiff's counsel.” ⁵ Carter v. ALK Holdings, Inc., No. 06-2080, slip op. at 10 (N.D.Ga. Dec. 13, 2007) (order granting sanctions). The court emphasized that Count VIII “attempted to manufacture a federal cause of action by couching a garden-variety malpractice claim in terms of patent law.” Id. at 5.

Myers & Kaplan timely appealed, and we have jurisdiction under 28 U.S.C. § 1295(a)(1).

Discussion

We review the district court's Rule 11 determination for an abuse of discretion. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); Antonious v. Spalding & Evenflo Cos., 275 F.3d 1066, 1072 (Fed.Cir.2002). A court abuses its discretion when it makes a clear error of law or fact in determining whether to impose sanctions. Cooter, 496 U.S. at 405, 110 S.Ct. 2447; Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1448 (11th Cir.1998). In reviewing Rule 11 sanctions, we apply the law of the regional circuit. Intamin, Ltd. v. Magnetar Techs., Corp., 483 F.3d 1328, 1337 (Fed.Cir.2007) (citing Antonious, 275 F.3d at 1072). Thus, we must apply the law of the Eleventh Circuit here.

Under the Eleventh Circuit's jurisprudence, Rule 11 sanctions should only be imposed in limited circumstances where the frivolous nature of the claims-at-issue is unequivocal. The Eleventh Circuit has explained that: “Rule 11 is intended to deter claims with no factual or legal basis at all; creative claims, coupled even with ambiguous or inconsequential facts, may merit dismissal, but not punishment.” Davis v. Carl, 906 F.2d 533, 538 (11th Cir.1990) (emphasis in original). Rule 11 sanctions are appropriate when (1) a party files a pleading that has no reasonable factual basis; (2) the party files a pleading that is based on a legal theory that has no reasonable chance of success and that cannot be advanced as a reasonable argument to change existing law; or (3) the party files a pleading in bad faith for an improper purpose. Worldwide Primates v. McGreal, 87 F.3d 1252, 1254 (11th Cir.1996) (quoting Jones v. Int'l Riding Helmets, Ltd., 49 F.3d 692, 694 (11th Cir.1995)).

The central question on appeal is whether the district court erred in finding that Counts I, VIII, and XI were frivolous.

Count VIII

Count VIII alleged a “breach of fiduciary duty by John Doe I in violation of 35 U.S.C et seq., 37 CFR et seq., and the Manual of Patent Examination Procedure (MPEP).” Supplemental App. 35 (capitalization altered). The district court found that “[t] he gravamen of Count VIII is that Defendant John Doe I breached the fiduciary duty owed to Plaintiff by representing two parties with conflicting interests and by sacrificing the interests of one party for another.” Carter, slip op. at 5. In evaluating this claim, the district court stressed its concern that the claim constituted an attempt “to manufacture a federal cause of action by couching a garden-variety malpractice claim in terms of patent law.” Id. In the district court's view, “[h]owever Plaintiff's counsel couches it, no federal cause of action exists for breach of fiduciary duty under federal patent law or the MPEP.” Id. at 6.

Resolution of whether Count VIII is a frivolous federal claim requires us to determine if Count VIII arises under 28 U.S.C. § 1338(a). Section 1338(a) provides that “[t]he district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.” The Supreme Court has instructed that a district court's jurisdiction under § 1338(a) “extend[s] 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 the 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....