Denbicare U.S.A. Inc. v. Toys R Us, Inc.

• Decision Date: 24 May 1996
• Docket Number: No. 94-16615,94-16615
• Citation: 84 F.3d 1143
• Parties: 1996 Copr.L.Dec. P 27,539, 38 U.S.P.Q.2d 1865, 96 Cal. Daily Op. Serv. 3682, 96 Daily Journal D.A.R. 6019 DENBICARE U.S.A. INC., and Ernest McCoy, Plaintiffs-Appellants, v. TOYS "R" US, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1143

84 F.3d 1143

1996 Copr.L.Dec. P 27,539, 38 U.S.P.Q.2d 1865,

96 Cal. Daily Op. Serv. 3682,

96 Daily Journal D.A.R. 6019

DENBICARE U.S.A. INC., and Ernest McCoy, Plaintiffs-Appellants, v. TOYS "R" US, INC., Defendant-Appellee.

No. 94-16615.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 14, 1996.

Decided May 24, 1996.

Ernest H. McCoy, Bruce & McCoy, Oakland, California; Christopher J. Palermo, Fish & Richardson, Menlo Park, California, for plaintiffs-appellants.

Paul Fields, Darby & Darby, New York City; Neil A. Smith, Limbach & Limbach, San Francisco, California, for defendant-appellee.

Appeal from the United States District Court for the Northern District of California, Thelton E. Henderson and Fern M. Smith, District Judges, Presiding. D.C. No. CV-87-05746-TEH.

Before ALARCON, LEAVY, and KLEINFELD, Circuit Judges.

LEAVY, Circuit Judge:

Denbicare U.S.A. Inc. ("Denbicare") and Ernest H. McCoy appeal from a partial final judgment entered under Rule 54(b) after grants of summary judgment against them on their claims of copyright infringement, trademark infringement, unfair competition, and tortious denial of contract against Toys "R" Us ("Toys"). We have jurisdiction under 28 U.S.C. § 1291 and affirm.

FACTUAL BACKGROUND

Denbi Products, Inc. ("DPI"), a California company founded in 1981, sold reusable diapers made according to a design patented by its president, Debra Shaw. In 1983, DPI ordered a large quantity of diapers from its Hong Kong manufacturer. Approximately 450,000 diapers (the "Hong Kong diapers") were shipped by the manufacturer to the United States and held in the foreign trade zone ¹ in San Francisco awaiting DPI's payment of import duties. The parties dispute whether these diapers were defective, but Denbicare does not dispute that DPI did not formally reject the diapers as defective.

DPI filed for bankruptcy in the Northern District of California in 1984. At a trustee's sale in September 1985, McCoy purchased DPI's United States and Canadian patents on the diapers, its copyrights in the packaging, and its trademarks. McCoy then formed Denbicare, became its president, and licensed the purchased intellectual property rights to it; Denbicare began making and selling reusable diapers. Toys purchased diapers from Denbicare.

In November 1986, DPI's bankruptcy trustee applied to the bankruptcy court for approval of a sale of the Hong Kong diapers, which were still in the foreign trade zone, to Marc Rosenberg and Raul Martinez. McCoy objected to the sale because of his ownership of the United States patents, trademarks, and copyrights, and asked the court to confirm the sale only in conjunction with the issuance of a permanent injunction against "selling, reselling, distributing or disposing" of the diapers in the United States or Canada. The bankruptcy court entered such an injunction on December 4, based on the "stipulation of [McCoy and the purchasers] in open court." McCoy registered no further objection and the court approved the sale on December 29, 1986.

In March 1987, Denbicare's CEO and its manufacturers representative met with a Toys buyer at Toys' headquarters in Paramus, New Jersey. The meeting concerned Toys' inventory of Denbicare diapers, which was packaged in a format that Denbicare was no longer using. The parties dispute whether an agreement was reached at this meeting concerning the repackaging of this inventory and what the terms of any such agreement were.

Clark Harris, doing business as Clark Harris Sales, bought about 235,000 of the Hong Kong diapers from Jaime Martinez, and in turn sold the diapers to Toys under a contract dated August 17, 1987. Neither Harris nor Toys had any notice of the bankruptcy court's injunction or any reason to believe that the diapers were not legally in the United States and freely marketable. Denbicare discovered in October 1987 that Toys was selling the diapers in the original copyrighted boxes (bearing the original trademark) and attempted unsuccessfully to persuade Toys to remove the diapers from sale. Toys attempted unsuccessfully to persuade Harris to take back the diapers.

PROCEDURAL HISTORY

In November 1987, Denbicare brought this action in the United States District Court for the Northern District of California alleging patent infringement, copyright infringement, trademark infringement, unfair competition, breach of contract, and tortious bad-faith denial of contract. At Denbicare's request the district court enjoined sale of the Hong Kong diapers.

In January 1989, after a two-day hearing, then-Magistrate Judge Claudia Wilken found that the diapers were not defective. The district court dissolved the injunction against sale in May 1989, but did not adopt Judge Wilken's finding that the diapers were not defective, stating that the issue of defectiveness was to be decided at trial.

Denbicare moved for dismissal of its claim for patent infringement. Toys opposed the motion and sought leave to amend its answer to add a counterclaim seeking a declaratory judgment that Denbicare's patents were invalid. The district court granted Denbicare leave to amend its complaint pursuant to Federal Rule of Civil Procedure 15 to dismiss the patent infringement claim with prejudice. The district court also granted Toys leave to amend, but asked the parties to brief whether it had jurisdiction to hear the counterclaim under the Declaratory Judgment Act. After briefing, the district court found that Toys potential for liability was "purely speculative," and dismissed the counterclaim under Societe de Conditionnement en Aluminium v. Hunter Eng'g Co., 655 F.2d 938, 944 (9th Cir.1981), which requires a party seeking a declaratory judgment of patent invalidity to demonstrate "a real and reasonable apprehension that he will be subject to liability" for his activity.

On October 5, 1989, the court granted Toys' motion for summary judgment on Denbicare's claim of copyright infringement. At the same time, the court granted Denbicare's motion for summary judgment on its trademark infringement claims, but on November 7 it granted Toys' motion for reconsideration and denied summary judgment on the trademark claims.

Although the case had been set for trial in November 1989, the Loma Prieta earthquake in October of that year forced a delay until March 1991. Meanwhile, the case was transferred to Judge Fern Smith, who referred it to a magistrate judge and then adopted his recommendation that she review the trademark claims de novo. In December 1991, Judge Smith ruled against Denbicare on its trademark claims. In May 1993, Judge Smith granted Toys' motion for summary judgment on Denbicare's claim of tortious denial of contract. In October 1993, the case was reassigned to Chief Judge Henderson for trial.

As the trial was set to begin, Clark Harris was unable to appear because of a serious back injury he had just suffered. In the interests of judicial economy, the parties and the court agreed that the court should enter a partial final judgment under Rule 54(b) on its summary judgment rulings against the plaintiff on the copyright, trademark, unfair competition, and tortious denial of contract claims in order to allow the plaintiff to appeal

                those rulings;  the trial of the remaining contract issue was stayed pending a decision on appeal.   Denbicare and McCoy timely appealed
                

JURISDICTION

Toys moved to dismiss this appeal, arguing that appellate jurisdiction in this case lies properly in the Court of Appeals for the Federal Circuit.

I. Discussion

The Federal Circuit has exclusive jurisdiction under 28 U.S.C. § 1295(a)(1) over appeals from final district court decisions when the district court's jurisdiction "was based, in whole or in part," on the patent provisions of 28 U.S.C. § 1338. ² A district court has jurisdiction under the relevant portions of § 1338 over actions "arising under any Act of Congress relating to patents." The Supreme Court has held that the standards for determining whether an action "arises under" the patent laws are the same as those for determining whether an action "arises under" federal law for purposes of the general federal-question jurisdiction granted in 28 U.S.C. § 1331 and include the well-pleaded-complaint rule. See, e.g., Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 807-809, 108 S.Ct. 2166, 2172-74, 100 L.Ed.2d 811 (1988).

The mere fact that the present appeal relates only to nonpatent issues does not mean that jurisdiction is not in the Federal Circuit. "[W]hen the district court's jurisdiction is based in part on § 1338, the appeal of the entire case, not solely the patent claims, lies in" the Federal Circuit. Schwarzkopf Dev. Corp. v. Ti-Coating, Inc., 800 F.2d 240, 244 (Fed.Cir.1986) (emphasis supplied). See also Abbott Lab. v. Brennan, 952 F.2d 1346, 1349-50 (Fed.Cir.1991) ("The path of appeal is determined by the basis of jurisdiction in the district court, and is not controlled by the district court's decision or the substance of the issues that are appealed."), cert. denied, 505 U.S. 1205, 112 S.Ct. 2993, 120 L.Ed.2d 870 (1992). The Federal Circuit has also held that it has exclusive appellate jurisdiction "when a nonfrivolous well-pleaded compulsory patent law counterclaim is present in a case originally and properly filed in the district court." Aerojet-General Corp. v. Machine Tool Works, Oerlikon-Buehrle Ltd., 895 F.2d 736, 741 (Fed.Cir.1990). See also Xeta, Inc. v. Atex, Inc., 825 F.2d 604 (1st Cir.1987).

As discussed above, both Denbicare's patent claim and Toys counterclaim for a declaratory judgment that Denbicare's patents are invalid were dismissed by the district court. The propriety of these dismissals is not before us in this appeal, although, by opposing the dismissals, Toys has preserved its right to raise the issue in a subsequent appeal.

A district court's dismissal of all patent claims or patent counterclaims, when unopposed, will remove the...