Geni-Chlor Intern., Inc. v. Multisonics Development Corp.

• Decision Date: 21 August 1978
• Docket Number: No. 76-1993,GENI-CHLOR,76-1993
• Citation: 580 F.2d 981,200 USPQ 67
• Parties: INTERNATIONAL, INC., a corporation, Plaintiff/Appellee, v. MULTISONICS DEVELOPMENT CORP., a corporation, Defendant/Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 981

580 F.2d 981

200 U.S.P.Q. 67

GENI-CHLOR INTERNATIONAL, INC., a corporation, Plaintiff/Appellee, v. MULTISONICS DEVELOPMENT CORP., a corporation, Defendant/Appellant.

No. 76-1993.

United States Court of Appeals Ninth Circuit.

Aug. 21, 1978.

Ed W. Hendren (argued), Palo Alto, Cal., for defendant-appellant.

Thomas O. Herbert (appeared), David E. Lovejoy (argued), of Flehr, Hohbach, Test, Albritton & Herbert, San Francisco, Cal., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California.

Before KILKENNY, TRASK and SNEED, Circuit Judges.

SNEED, Circuit Judge:

Appellant Multisonics Development Corporation (Multisonics) agreed to sell to appellee Geni-Chlor International, Inc. (Geni-Chlor) a patent for a "Swimming Pool Water Conditioner," along with "related inventions and know-how applicable to swimming pool use and pertaining to hypochlorite generating processes and apparatus." A detailed written contract was prepared and executed by the parties on March 9, 1973. The contract provided for a purchase price of $201,000, payable with regular installments. Multisonics retained title to the patent as security until the full purchase price was paid, but granted Geni-Chlor an exclusive license to utilize the patent and related know-how in the interim. The contract also required that all disputes, except for those concerning the validity of the patent, be arbitrated. Geni-Chlor agreed to Multisonics' express disclaimer of warranty of the patent's validity.

Geni-Chlor failed to pay the January 1974 installment. Multisonics gave notice of default and submitted the matter to arbitration. The parties and the arbitrator agreed that the validity of the patent could not be determined by the proceedings. Geni-Chlor did not then try to obtain a collateral judgment that the patent was invalid, but participated in the arbitration, claiming that it was a licensee of the patent and could claim invalidity of the patent as a defense in a contract action under the theory of Lear, Inc., v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969).

The arbitrator found that the contract was a good faith agreement to purchase an unwarranted patent, and that other consideration included in the agreement would support the contract even if the patent should be invalid. Multisonics was awarded the balance owed under the contract, $190,000 plus interest.

The arbitrator's decision was mailed to the parties on February 10, 1975. Multisonics was required by California Civil Procedure Code § 1288.4 ¹ to wait 10 days after service of the award before it could confirm the award in state court. On February 11 Geni-Chlor filed this action in United States District Court for declaratory judgment that the patent is invalid, to set aside the arbitrator's award, and to permanently enjoin Multisonics from enforcing the award. Jurisdiction was claimed under 28 U.S.C. § 1338(a), which provides that "the district court shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents. . . ." The parties are both California corporations, precluding jurisdiction based on diversity.

Multisonics moved to confirm the arbitration award in state court upon expiration of the 10-day waiting period. The state court denied confirmation and stayed its proceedings pending the outcome of this action.

The district court denied Multisonics' motion to dismiss under Federal Rule of Civil Procedure 12(b). Multisonics then admitted the patent's invalidity. Geni-Chlor was awarded summary judgment enjoining enforcement of the arbitration award and declaratory judgment that the patent was invalid. Multisonics brings this appeal, challenging the district court's jurisdiction over the subject matter and the award of summary and declaratory judgment. We find that the district court did have jurisdiction to consider this action but hold that the district court should have stayed its proceedings until final adjudication in the state court proceedings concerning the arbitration award.

Geni-Chlor contends the district court's jurisdiction exists because the action "arises under" the patent laws pursuant to 28 U.S.C. § 1338(a). We agree, although the issue is a close one indeed. ² It is well established that notwithstanding the substantial federal interest in patent matters, enforcement and construction of patent contracts can be the business of state courts, even though a Question arising under the patent laws is presented. Federal courts assume jurisdiction only when the Case "arises under" the patent laws. Pratt v. Paris Gas Light & Coke Company, 168 U.S. 255, 259, 18 S.Ct. 62, 42 L.Ed. 458 (1897); Milprint, Inc. v. Curwood, Inc.,562 F.2d 418, 420 (7th Cir. 1977).

The cases establishing the meaning of "arising under" jurisdiction begin with Wilson v. Sandford, 51 U.S. (10 How.) 99, 13 L.Ed. 344 (1850). There the plaintiff licensor sought to void a contract because of the licensee's failure to pay as required by the contract while the licensee defended, Inter alia, on the ground that the patent had expired. The court held that the case did not "arise under" the patent laws, thus barring federal jurisdiction. Id. at 101. Pratt v. Paris Gas Light & Coke Company, supra, held that a state court retains jurisdiction over a patent contract dispute although the defendant claims that the patent was invalid. 168 U.S. at 259, 18 S.Ct. 62. In a somewhat similar case, Mr. Justice Holmes noted:

whether it (threats to sue users of plaintiff's pumps for patent infringement) is a wrong or not depends upon the law of the state where the act is done, not upon the patent law, and therefore the suit arises under the law of the state.

American Well Works Company v. Layne and Bowler Company, 241 U.S. 257, 260, 36 S.Ct. 585, 586, 60 L.Ed. 987 (1916).

In Lear Siegler, Inc. v. Adkins, 330 F.2d 595, 599 (9th Cir. 1964) we put the matter this way:

Long before the enactment of the Federal Declaratory Judgments Act the Supreme Court had established two correlative rules relating to jurisdiction in patent matters. The first is that a case is within the exclusive federal jurisdiction when it seeks to enforce a patent against an infringer, even though the complaint may show, in anticipation of a defense, the existence of an agreement between the parties relating to the patent. The second is that if the suit is to enforce or to revoke a patent licensing or other similar agreement, it "is not a suit under the patent laws of the United States, and cannot be maintained in a federal court as such." (citations omitted) ³

It is beyond dispute that the Federal Declaratory Judgments Act,28 U.S.C. § 2201, does not confer jurisdiction on a federal court to declare a patent invalid under 28 U.S.C. § 1338(a). The Act provides that a federal court may issue a declaratory judgment "in a case of actual controversy Within its jurisdiction . . . ." (Emphasis added). Thus, a declaratory judgment must conform to traditional jurisdictional requirements. Milprint, supra, 562 F.2d at 421. Declaratory judgment merely provides procedural and remedial flexibility to the federal courts. It does not, however, extend their jurisdiction. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876, 94 L.Ed. 1194 (1950).

Nonetheless, this court held in Lear Siegler, Inc. v. Adkins, 330 F.2d at 598, that the federal district court had jurisdiction under 28 U.S.C. § 1338(a) to hear a complaint seeking a declaratory judgment in which the plaintiff's purpose was "to test the validity of the appellee's (defendant's) patent and to establish that what Lear (plaintiff) is doing does not infringe the patent if it is valid." The fact that the plaintiff's action might reveal a contract between the parties relating to the patent did not preclude the complaint from setting forth an action "arising under" the patent laws. We did not stop there, however. We further held that the declaratory judgment procedure should not be used as a device to bring within federal jurisdiction a controversy in litigation in a state court. As a consequence, we concluded that the federal district court acted properly in staying its proceedings until the final adjudication in the related state proceedings.

We hold the district court in this case should have followed the example of the Lear district court. To act otherwise under the circumstances of this case was an abuse of discretion. In so holding, we treat the complaint in this case as not significantly different from that in Lear Siegler, although our opinion in Lear Siegler, 330 F.2d at...