Cont'l Auto. GMBH & Cont'l Auto. Sys., Inc. v. Ibiquity Digital Corp.

• Decision Date: 26 February 2015
• Docket Number: 14 C 1799
• Parties: CONTINENTAL AUTOMOTIVE GMBH and CONTINENTAL AUTOMOTIVE SYSTEMS, INC., Plaintiffs, v. IBIQUITY DIGITAL CORPORATION, Defendant.
• Court: U.S. District Court — Northern District of Illinois

CONTINENTAL AUTOMOTIVE GMBH and CONTINENTAL AUTOMOTIVE SYSTEMS, INC., Plaintiffs, v. IBIQUITY DIGITAL CORPORATION, Defendant.

14 C 1799

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

February 26, 2015

Judge John Z. Lee

MEMORANDUM OPINION AND ORDER

Continental Automotive GmbH and Continental Automotive Systems, Inc. (collectively "Continental") has sued iBiquity Digital Corporation ("iBiquity") asserting the following nine causes of actions: patent exhaustion (Count I), patent misuse (Count II), declaratory judgment of patent rights (Count III), unjust enrichment (Count IV), breach of covenant of good faith and fair dealing (Count V), breach of license agreement between Continental and iBiquity (Count VI), promissory estoppel (Count VII), breach of contract with the National Radio Systems Committee (Count VIII), and wrongful interference with a business relationship (Count IX). iBiquity has moved to dismiss Counts I, II, and III pursuant Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction or, alternatively, under Rule 12(b)(6) for failure to state a claim. iBiquity then argues that, once the federal claims are dismissed, the Court should decline to exercise supplemental jurisdiction over the state law claims.

For the reasons set forth herein, the Court denies Continental's Rule 12(b)(1) motion as to Counts I and II, but grants the motion as to Count III. With respect to Continental's Rule 12(b)(6) motion, because the doctrines of patent exhaustion and patent misuse are defenses andcannot be asserted as affirmative claims, the Court grants Continental's motion to dismiss with regard to Counts I and II. The Court further declines to exercise supplemental jurisdiction over the remaining claims, Counts IV through IX.

Background

iBiquity is a developer and owner of the intellectual property underlying the HD Radio™ technology for digital radio broadcasting. Am. Compl. ¶ 12. In order to have its technology adopted as a standard, iBiquity bound itself to the National Radio Systems Committee's ("NRSC") requirement to license the patents covering the technology to all manufacturers of HD Radio receivers on reasonable and non-discriminatory ("RAND") terms. Id. Thus, on June 28, 2005, iBiquity executed a nonexclusive agreement with Siemens VDO Automotive Corporation ("Siemens"), under which it licensed intellectual property for the HD technology to Siemens in exchange for royalty payments. Id. ¶ 13.

In 2007, Continental merged with Siemens and became a successor-in-interest to the license agreement with iBiquity. Id. ¶¶ 13-14; Def.'s Mem. Supp. Mot. Dismiss 2-3. Continental is an equipment manufacturer for major automobile manufacturers. Am. Compl. ¶ 7. It supplies head-end units that can receive and decode HD Radio signals for use in a variety of vehicles. Id. ¶¶ 7-8. In order to make these units, Continental buys HD Radio semiconductor components from third parties, who are also iBiquity licensees. Id. ¶¶ 10, 30.

Initially, Continental paid royalties to iBiquity under the license agreement. Am. Compl. ¶ 17; Def.'s Mem. Supp. Mot. Dismiss 3. But in 2013 it stopped, arguing that royalties should be based not on the price of the entire head-end unit Continental sells to its customers, but rather only on those components that implement technology patented by iBiquity. Am. Compl. ¶¶ 17-19; Def.'s Mem. Supp. Mot. Dismiss 3. The parties attempted to negotiate to resolve the dispute, but they failed to come to an agreement. Def.'s Mem. Supp. Mot. Dismiss 3.

Unable to resolve their dispute, on February 7, 2014, iBiquity sued Continental for breach of contract in the Maryland state court. Def.'s Mem. Supp. Mot. Dismiss 3, Ex. A, Compl., iBiquity v. Cont'l, No. 386953V. Just over a month later, Continental filed the present action in this Court.

Analysis

I. Subject Matter Jurisdiction

There is no diversity between the parties as Continental Automotive Systems, Inc., and iBiquity are Delaware corporations. Am. Compl. ¶¶ 3-4. Accordingly, Continental asserts that the Court has jurisdiction over this action pursuant 28 U.S.C. §§ 1331, 1338, and 2201. Id. ¶ 5. Section 1331 establishes federal question jurisdiction over civil actions "arising under" the laws of the United States. 28 U.S.C. § 1331. And Section 1338 provides that district courts have original jurisdiction of "any civil action arising under any Act of Congress relating to patents." 28 U.S.C. § 1338. Finally, 28 U.S.C. § 2201 allows a plaintiff to bring declaratory judgment action in federal court. 28 U.S.C. § 2201.

iBiquity moves to dismiss Counts I through III - the only claims alleged under federal law - for lack of subject matter jurisdiction pursuant Rule 12(b)(1). Def.'s Mem. Supp. Mot. Dismiss 5-13. In short, iBiquity argues that patent exhaustion (Count I) and patent misuse (Count II) do not arise under federal patent law because they are not proper independent claims but, rather, are defenses to an anticipated patent infringement suit. Id. iBiquity also contends that Continental's claim seeking a declaratory judgment of patent rights (Count III) does notarise under federal patent law because it is merely a state law breach of contract claim in disguise, seeking to interpret the license agreement in light of certain public statements by iBiquity. Id.

A. Legal Standard

An attack on subject matter jurisdiction pursuant to Rule 12(b)(1) may be facial or factual. Stroman Realty, Inc. v. Grillo, 438 F. Supp. 2d 929, 932 (N.D. Ill. 2006). When a defendant makes a facial attack, it contends that allegations in the pleadings are insufficient on their face to support federal jurisdiction. See Freiburger v. Emery Air Charter, 795 F. Supp. 253, 256 (N.D. Ill. 1992). In such cases, "allegations [in the complaint] are taken as true and construed in a light most favorable to the complainant." See Cedars-Sinai Med. Ctr. v. Watkins, 11 F.3d 1573, 1583 (Fed. Cir. 1993). But when a defendant makes a factual attack, courts may look beyond the jurisdictional allegations in the complaint and "consider relevant evidence in order to resolve the factual dispute" as to whether subject matter jurisdiction exists. Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 747 (Fed. Cir. 1988); see also Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188, 191 (7th Cir. 1993) (per curiam). In either case, the party seeking to invoke subject matter jurisdiction bears the burden of establishing it. DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006); Cedars-Sinai Med. Ctr., 11 F.3d at 1583; Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 445 (7th Cir. 2009).

Federal courts have exclusive jurisdiction over civil actions "arising under" federal patent law under 28 U.S.C. § 1338(a). This occurs when a well-pleaded complaint establishes either that (1) "federal patent law creates the cause of action" or that (2) "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). But in declaratory judgment cases "[w]here thecomplaint . . . seeks in essence to assert a defense to an impending or threatened . . . action, it is the character of the threatened action, and not of the defense, which will determine whether there is federal-question jurisdiction in the District Court." Pub. Serv. Comm'n of Utah v. Wycoff Co., 344 U.S. 237, 248 (1952) (emphasis added). Hence, courts have to examine "the declaratory defendant's hypothetical well-pleaded complaint to determine if subject matter jurisdiction exists." ABB Inc. v. Cooper Indus., LLC, 635 F.3d 1345, 1349 (Fed. Cir. 2011); see also Cnty. Materials Corp. v. Allan Block Corp., 502 F.3d 730, 734 (7th Cir. 2007). And where it is impossible for a declaratory judgment defendant to bring a claim "arising under" federal patent law, federal courts lack subject matter jurisdiction. See, e.g., ExcelStor Tech., Inc. v. Papst Licensing GMBH & Co. KG, 541 F.3d 1373, 1376-77 (Fed. Cir. 2008) (holding that district court lacked subject matter jurisdiction where the declaratory judgment defendant could not bring another infringement action against plaintiff unless the dismissal of defendant's earlier infringement action was vacated by the court); Cnty. Materials Corp., 502 F.3d at 733-34 (holding that the case does not arise under patent laws where the case's issue was whether licensee could sell a non-infringing product despite the presence of a covenant not to compete); Speedco, Inc. v. Estes, 853 F.2d 909, 913 (Fed. Cir. 1988) (holding that the district court lacked subject matter jurisdiction where declaratory judgment plaintiff could only be sued for breach of contract, not for patent infringement under federal law).

B. Patent Exhaustion and Patent Misuse Claims (Counts I and II)

The Court begins its analysis with the patent exhaustion and patent misuse claims. iBiquity argues that the claims are merely defenses and not affirmative causes of action and, as such, they do not "arise under" federal patent law. Def.'s Mem. Supp. Mot. Dismiss 6-8. Continental responds that this argument is irrelevant "[b]ecause subject matter jurisdiction in adeclaratory judgment action is based on the claims that could be brought by the declaratory judgment defendant, rather than the declaratory judgment plaintiff." Pl.'s Resp. Mot. Dismiss 5. Moreover, Continental asserts that patent misuse may be asserted as an affirmative claim. Id.

iBiquity's patent exhaustion argument centers around the Federal Circuit case ExcelStor Tech., Inc. v. Papst Licensing GMBH & Co. KG. Def.'s Mem. Supp. Mot. Dismiss 6-7. ExcelStor, a licensee, sought declaratory judgment against Papst, a licensor, for the alleged violation of the patent exhaustion doctrine. ExcelStor Tech., Inc., 541 F.3d at 1375. Importantly, prior to that action,...