County Materials Corp. v. Allan Block Corp.

• Decision Date: 18 September 2007
• Docket Number: No. 06-2857.,06-2857.
• Citation: 502 F.3d 730
• Parties: COUNTY MATERIALS CORPORATION, Plaintiff-Appellant, v. ALLAN BLOCK CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

502 F.3d 730

COUNTY MATERIALS CORPORATION, Plaintiff-Appellant, v. ALLAN BLOCK CORPORATION, Defendant-Appellee.

No. 06-2857.

United States Court of Appeals, Seventh Circuit.

Argued March 27, 2007.

Decided September 18, 2007.

Rehearing and Rehearing En Banc Denied October 22, 2007.

Jon G. Furlow, Michael Best & Friedrich, Madison, WI, Gary A. Ahrens (argued), Michael Best & Friedrich, Milwaukee, WI, for Plaintiff-Appellant.

Kurt J. Niederluecke (argued), Fredrikson & Byron, Minneapolis, MN, for Defendant-Appellee.

Before MANION, KANNE, and WOOD, Circuit Judges.

WOOD, Circuit Judge.

This case is one of those non-patent patent cases that, as we explain more fully below, falls within the jurisdiction of the regional courts of appeals rather than the Federal Circuit. See 28 U.S.C. §§ 1295(a)(1), 1338; Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S. 826, 829-30, 122 S.Ct. 1889, 153 L.Ed.2d 13 (2002) (applying well-pleaded-complaint rule to § 1338). Two companies, County Materials Corporation and Allan Block Corporation, entered into a production agreement ("the Agreement") giving exclusive rights to County Materials to manufacture Allan Block's patented concrete block; the issue is whether County Line was free to sell an allegedly non-infringing product, despite the presence of a covenant not to compete in the Agreement in which County Line promised not to sell competing products for 18 months if it stopped making Allan Block's product. Following the termination of the Agreement, County Line decided not to wait for the full 18 months before jumping back into the market with a competing product. Allan Block threatened to sue, but County Line beat it to the courthouse with this suit for a declaratory judgment. County Line wanted the district court to declare that the covenant not to compete was unenforceable because it violated federal patent policy, essentially raising an anticipatory patent misuse defense to its planned breach of the Agreement. The district court granted summary judgment to Allan Block, finding no violation of federal patent policy or Minnesota law. We agree with the district court's conclusions and affirm.

I

County Materials is in the business of manufacturing concrete blocks. Allan Block develops, markets, and licenses technology for the manufacturing of concrete blocks; it does not manufacture blocks itself. In April 1993, County Materials's predecessor in interest, County Concrete Corporation, entered into a production agreement with Allan Block. The Agreement granted to County Materials the exclusive right to manufacture Allan Block's patented block products in northwest Wisconsin. County also was granted the right to sell these products under the Allan Block trademark. Finally, Allan Block agreed to provide County Materials with significant technical, marketing, and strategic support while the Agreement was in effect.

The Agreement included a limited covenant not to compete, which allowed County Materials to make and sell two specific competing block products, without any time restrictions. The non-compete provision also required that for the 18 months following the termination of the Agreement, County Materials could not "directly or indirectly engage in the manufacture and/or sale of any other [competing] . . . block."

In 2005, Allan Block notified County Materials that it would be terminating the Agreement. Shortly thereafter, County Materials completed its own design for a new concrete block that would compete directly with the Allan Block products that it had been manufacturing and selling in northwest Wisconsin. As County Materials took steps to begin producing this new block, Allan Block threatened that it would sue to enforce the non-compete provision from the terminated Agreement. County Materials decided to move first, and so it filed this suit alleging that the inclusion of the non-compete provision in the Agreement constituted patent misuse, which made the Agreement void.

II

The district court's jurisdiction over this case was based on diversity. 28 U.S.C. § 1332(a)(1). County Materials is a Wisconsin corporation with its principal place of business in Wisconsin; Allan Block is a Minnesota corporation with its principal place of business in Minnesota, and County Materials alleges damages exceeding $75,000.

Even though the requirements of § 1332 are therefore satisfied, there is a second potential jurisdictional hurdle in our path. Allan Block, repeating an argument made to this court in advance of oral argument, contends that appellate jurisdiction over this appeal lies with the Federal Circuit and not this court. The Supreme Court has held that the Federal Circuit has appellate jurisdiction

only [in] 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, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988); see also Holmes Group, supra.

Looking as we must at the well-pleaded complaint, it is apparent that federal patent law does not create the cause of action here. It is instead a claim about the enforceability of a contract or license agreement. Resolution of this appeal does not "necessarily require[] resolution of substantial questions of federal patent law," as Allan Block claims. We faced almost the same arguments in Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014 (7th Cir.2002), where we concluded:

Federal jurisdiction over the suit is based on diversity of citizenship, because a suit to enforce a patent licensing agreement does not arise under federal patent law. E.g., Jim Arnold Corp. v. Hydrotech Sys., Inc., 109 F.3d 1567, 1575 (Fed.Cir.1997). The presence of a federal defense (here, patent misuse) is irrelevant to jurisdiction. Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988).

293 F.3d at 1016. The same is true for a declaratory judgment action, where the roles of plaintiff and defendant are reversed. As we have held before, "[i]n declaratory judgment cases, the well-pleaded complaint rule dictates that jurisdiction is determined by whether federal jurisdiction would exist over the presumed suit by the declaratory judgment defendant." Ne. Ill. Reg'l Commuter R.R. Corp. v. Hoey Farina & Downes, 212 F.3d 1010, 1014 (7th Cir.2000), quoting GNB Battery Techs., Inc. v. Gould, Inc., 65 F.3d 615, 619 (7th Cir.1995). The Fifth Circuit case cited by Allan Block is not to the contrary, because that case involved the question whether an attempt to raise claims under a patent licensing agreement that had arisen out of the settlement of a patent infringement suit was barred by res judicata. Natec, Inc. v. Deter Co., 28 F.3d 28 (5th Cir.1994). Declining to reach the merits, the Fifth Circuit held that "[t]he right of the patent holder . . . to enforce the settlement agreements and obtain royalties for use of the patent after it expires is a substantial question of federal patent law." Id. at 28. This meant that the suit arose under 28 U.S.C. § 1338, and that appellate jurisdiction necessarily lay in the Federal Circuit, under 28 U.S.C. § 1295. In our case, the district court's jurisdiction over the present case was not based even in part on § 1338. Appellate jurisdiction therefore lies in this court, see 28 U.S.C. §§ 41, 1291, and we are free to proceed to the merits.

III

This court reviews a district court's decision to grant summary judgment de novo. Balderston v. Fairbanks Morse Engine Div. of Coltec Indus., 328 F.3d 309, 320 (7th Cir.2003). The parties appear to agree that the production agreement is a patent license, which is the way that we too would characterize it. County Materials essentially claims that the inclusion of the covenant not to compete in the patent license here was per se unlawful patent misuse and the improper result of patent leverage. While at one time this argument might have had traction, in certain circumstances, it is at least disfavored today, if not entirely rejected. Today, the concept of patent misuse is cabined first by statute, 35 U.S.C. § 271(d), which essentially eliminates from the field of "patent misuse" claims based on tying and refusals to deal, unless the patent owner has market power, and second by case law. As the Federal Circuit explained in Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860 (Fed.Cir. 1997), there are certain practices that court identified as "constituting per se patent misuse," including "arrangements in which a patentee effectively extends the term of its patent by requiring post-expiration royalties." Id. at 869; see also Brulotte v. Thys Co., 379 U.S. 29, 32, 85 S.Ct. 176, 13 L.Ed.2d 99 (1964) (holding that "a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se"). The practices identified in § 271(d), in contrast may not be branded "misuse." Va. Panel Corp., 133 F.3d at 869.

If a practice is not per se unlawful nor specifically excluded from a misuse analysis by § 271(d)

a court must determine if that practice is reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims. If so, the practice does not have the effect of broadening the scope of the patent claims and thus cannot constitute patent misuse. If, on the other hand, the practice has the effect of extending the patentee's statutory rights and does so with an anti-competitive effect, that practice must then be analyzed in accordance with the rule of reason. Under the rule of reason, the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors,...