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STC.UNM v. Quest Diagnostics Inc.

United States District Court, D. New Mexico

March 8, 2019

STC.UNM, Plaintiff,
v.
QUEST DIAGNOSTICS INCORPORATED and QUEST DIAGNOSTICS CLINICAL LABORATORIES, INC., Defendants.

          PROPOSED FINDINGS OF FACT AND RECOMMENDED DISPOSITION

         THIS MATTER comes before the Court on two motions filed by Plaintiff STC.UNM (“STC”): its Motion to Dismiss (Doc. 10), filed December 7, 2017, and its Motion to Remand (Doc. 12), filed December 8, 2017. These motions were not fully briefed until October 29, 2018, when STC filed its Consolidated Reply Doc. 67. By two separate Orders of Reference, entered January 31, 2018 and July 30, 2018, the motions were referred to me by the presiding judge to conduct hearings if warranted, including evidentiary hearings, and to perform any legal analysis required to recommend to the Court an ultimate disposition of this case. Doc. 37, 59. Having reviewed the motions, the memoranda and exhibits submitted by the parties, and the relevant authorities, the Court recommends that STC's Motion to Remand be granted and that Defendant's Motion to Dismiss be denied as moot, as the Court lacks subject matter jurisdiction.

         I. BACKGROUND

         Plaintiff STC is a nonprofit research park corporation formed, owned and controlled by the University of New Mexico's (“UNM's”) Board of Regents. Doc. 1-1 ¶ 5. STC's purpose is to “nurture innovation and catalyze economic development of new technologies developed at UNM.” Id. ¶ 6. STC furthers its role by “protecting technologies developed at UNM and transferring those technologies to the marketplace, connecting the business community to UNM for access to UNM's expertise, facilities, and research activities, and facilitating UNM's role as a contributor to New Mexico's economic development.” Id. ¶ 7. STC allows UNM to “more efficiently transfer technology developed at [UNM] to the marketplace through the creation of start-up companies and the negotiation of license agreements with start-ups and established companies.” Doc. 63-1, at 169 (2015 Designation Application).[1] In short, through the creation of STC, UNM has delegated to it the commercialization of intellectual property. Doc. 63-1 at 24, Kuuttila Dep. at 90:3-9.[2]

         In 2006, STC entered into a License Agreement with Quest Diagnostics Incorporated. Doc. 63-1, Ex. 6 at 173-188. Thereafter, STC filed its Complaint, on September 25, 2017, in the Second Judicial District Court, County of Bernalillo, State of New Mexico, asserting claims against Defendant Quest Diagnostics Incorporated and Quest Diagnostic Clinical Laboratories, Inc. (the “Quest Defendants”) for breach of contract, declaratory judgment, and breach of the implied covenant of good faith and fair dealing. Doc. 1-1. Quest Defendants removed the case to federal court on November 9, 2017, and they indicated that “[w]ithin (7) days of filing this Notice of Removal, Quest will file its Answer to Plaintiffs Complaint along with a compulsory counterclaim . . . .” Doc.1 ¶ 3.

         The Notice of Removal asserted three bases for subject matter jurisdiction in federal court. Doc. 1. First, Quest Defendants contend that subject matter jurisdiction exists because STC alleges a cause of action in which “its rights to relief necessarily depends [sic] on the resolution of a substantial question of federal patent law.” Id. at 4. Accordingly, they maintain that jurisdiction exists pursuant to 28 U.S.C. § 1331 and 28 U.S.C. § 1338(a). Id. Second, they suggest that the Court has exclusive jurisdiction under 28 U.S.C. § 1338(a) and 28 U.S.C. § 1454(a), given their plan to later assert a compulsory federal patent counterclaim. Id. at 6-7. In their Notice of Removal, Quest Defendants explained that they “will seek a declaratory judgment” regarding the non-infringement of Licensed Patents. Id. at 6. To the extent that STC's claims do not depend upon the resolution of a substantial question of federal patent law, Quest Defendants submit that the Court has supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a). Id. at 7. Finally, Quest Defendants assert that the Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332, because the action is between citizens of different states and the amount in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs. Id.

         One week after the removal of this action, Quest Defendants indeed filed an Answer asserting counterclaims for declaratory judgments of non-infringement and invalidity. See Doc. 4 at 21-28. Specifically, Quest Defendants seek a declaration that “Disputed Products” are not “Licensed Products” as defined in the parties' License Agreement because none of the “Disputed Products infringes any valid claim of the ‘Licensed Patents.'” Id. at 17.

         II. LEGAL STANDARD

         An action is removable if the federal district court would have original jurisdiction over the matter. 28 U.S.C. § 1441(a). It is the obligation of the removing party, here Quest Defendants, to establish the subject matter jurisdiction of the federal court. Huffman v. Saul Holdings Ltd. P'ship, 194 F.3d 1072, 1079 (10th Cir. 1999). There is a presumption against removal jurisdiction. Laughlin v. Kmart Corp., 50 F.3d 871, 873 (10th Cir. 1995).

         Federal district courts have original jurisdiction over civil actions which arise under “the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. Additionally, they have original jurisdiction over civil actions between citizens of different states when the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs. 28 U.S.C. § 1332. For purposes of diversity jurisdiction, both the existence of diversity and the requisite amount in controversy must be affirmatively established by a preponderance of the evidence on the face of either the complaint or the removal notice. Martin v. Franklin Capital Corp., 251 F.3d 1284, 1290 (10th Cir. 2001). Diversity jurisdiction requires complete diversity in that no plaintiff be the citizen of the same state as any defendant. Gadlin v. Sybron Int'l Corp., 222 F.3d 797, 799 (10th Cir. 2000). Furthermore, a defendant may only remove the action to federal court if no defendant “is a citizen of the State in which such action is brought.” 28 U.S.C. § 1441(b).

         III. ANALYSIS

         Before reaching the merits of the parties' claims, the Court must resolve the jurisdictional issue raised by STC's Motion to Remand. Quest Defendants maintain, both in their Notice of Removal and in their Combined Memorandum in Opposition to STC.UNM's Motion to Dismiss and Motion to Remand, that the Court has federal question jurisdiction, patent jurisdiction, patent counterclaim jurisdiction, and diversity jurisdiction. Docs. 1; 63. STC, in contrast, insists that the Court lacks subject matter jurisdiction altogether. See Doc. 12. Although the Court concludes that it must determine, first, whether the case must be remanded for lack of subject matter jurisdiction, it concurrently considers the arguments in STC's Motion to Dismiss to the extent that they bear on this analysis.

         Quest Defendants invoked the Court's jurisdiction upon removal and therefore bear the burden of establishing that jurisdiction exists, Montoya v. Chao, 296 F.3d 952, 955 (10th Cir. 2002), with “all doubts [being] resolved against removal.” Fajen v. Found. Reserve Ins. Co., 683 F.2d 331, 333 (10th Cir. 1982). The Court considers each of the three grounds of jurisdiction asserted by Quest Defendants in turn.

         A. Federal Question or Patent Jurisdiction under 28 U.S.C. § 1331 or 28 U.S.C. § 1338

         Under the well-pleaded complaint rule, a suit “arises under” federal law and is appropriate for removal to federal court, when a federal question is presented on the face of the plaintiff's properly-pleaded complaint. Franchise Tax Bd. v. Constr. Laborers Vacation Tr., 463 U.S. 1, 9-12 (1983). Here, examination of STC's Complaint, which asserts only state law contract claims, fails to reveal a federal question on its face. Yet, this does not end the inquiry, because federal district courts also “have original jurisdiction of any civil action arising under any Act of Congress relating to patents . . . .” 28 U.S.C. § 1338(a). Borrowing from its interpretation of federal question jurisdiction, the United States Supreme Court explained that § 1338(a) jurisdiction extends:

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 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, 808-09 (1988). Put another way, a case arises under federal patent laws when patent law creates the cause of action or the claims asserted “necessarily raise” an “actually disputed” and “substantial” question of patent law “capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Gunn v. Minton, 133 S.Ct. 1059 (2013). The Supreme Court has clarified that alternative theories in a complaint may not form the basis for § 1338(a) jurisdiction if patent law is not essential to each of those theories. Christianson, 486 U.S. at 801.

         STC's state-law claims for breach of contract, declaratory judgment, and breach of the implied covenant of good faith and fair dealing relate to the parties' License Agreement. STC's claims were not created by federal patent law but by state contract law. The question becomes, then, whether STC's right to relief on these claims necessarily depends on resolution of a substantial question of federal patent law. In answering that question, STC urges the Court to follow the rationale applied by the Federal Circuit Court of Appeals in University of Florida Research Foundation, Inc. v. Medtronic plc, No. 16-2422, 2017 WL 6210801, at *2 (Fed. Cir. Jan. 27, 2017). The factual similarities between Medtronic and the present case are striking. Indeed, the only factual difference that the Court can discern is a slight variation in the procedural posture: Medtronic being decided on appeal by the Federal Circuit, the appellate court with jurisdiction over patent appeals, and the present case being decided in the first instance by a federal district court.

         In Medtronic, the University of Florida Research Foundation (“the research foundation”) moved to dismiss or transfer an appeal to the Eleventh Circuit Court of Appeals. Id. at *1. The case involved a license agreement, into which the research foundation had previously entered with a company later acquired by Medtronic. Id. Under the license agreement, the licensee agreed to pay royalties to the research foundation on “Licensed Products.” Id. The agreement defined “Licensed Products” as those covered by specified patents. Id. The licensee agreed to provide a “certified full accounting statement” of the royalty amounts payable to the research foundation and to maintain “books and records sufficient to verify the accuracy and completeness” of the accounting. Id. Moreover, the licensee agreed to “take all steps necessary so that” the research foundation could “audit, review, and/or copy all books and records” in order to “verify the accuracy of [the] accounting.” Id. When Medtronic refused a request by the research foundation to audit records, the research foundation filed suit in Florida state court, asserting claims for breach of contract and breach of the implied duty of good faith and fair dealing and seeking a declaratory judgment on its right to an accounting. Id. Medtronic counterclaimed for declaratory judgments of “noninfringement and invalidity” and for a determination that the disputed products were not “Licensed Products” because they did not infringe valid patents. Id. Medtronic removed the action to federal court, asserting both diversity jurisdiction and patent jurisdiction. Id. The federal district court granted the research foundation's motion to remand and Medtronic appealed. Id.

         Medtronic argued that the research foundation's claims to an audit arose under patent laws, because its right to relief on its audit claim depended on whether the disputed products qualified as “Licensed Products” covered by the parties' license agreement. Id. at *2. The research foundation countered, arguing that the claims in its complaint, including its request for a declaratory judgment of entitlement to an audit of Medtronic's accounting, did not require the court to determine patent infringement issues. Id.

         Critically, the Federal Circuit offered the following rationale in determining that it lacked patent jurisdiction: “We interpret the Research Foundation's complaint to assert a contract claim seeking an accounting that is not dependent on whether the products as to which that accounting is sought qualify as ‘Licensed Products' under the license agreement.” Id. The Federal Circuit explained that although the research foundation's “ultimate right to monetary relief” stemming from the failure to pay royalties might give rise to future compulsory patent counterclaims by Medtronic, the immediate claims at issue - those asserted by the research foundation in its complaint - could be resolved without resort to patent law. Id. (emphasis added). Because the research foundation's claims did not arise under federal patent law, the Federal Circuit concluded that it therefore lacked jurisdiction over the appeal. Id.

         Cellport Systems Inc. v. Peiker Acustic GMBH & Co. KG, 762 F.3d 1016 (10th Cir. 2014) is also instructive, though not as factually similar as Medtronic. In Cellport Systems, the plaintiff sued its licensee for refusing to pay royalties or to provide an accounting on certain products allegedly covered by a license agreement. Id. at 1019. The licensee maintained that the plaintiff could only claim royalties on products that practiced the plaintiff's patents. Id. at 1022. The plaintiff insisted that it was entitled to royalties on sales of “Licensed Products, ” as defined by the license agreement, and that the agreement did not require any patent infringement analysis. Id. After the district court determined that the licensee owed royalties on only two of seven products, the plaintiff appealed. Id. at 1018. The licensee cross-appealed and moved to transfer the appeal to the Federal Circuit based upon federal patent jurisdiction. Id. at 1021. The Tenth Circuit denied the licensee's motion to transfer, holding that patent law was not essential to determining whether the licensee breached its royalty obligations under the parties' license agreement. Id. at 1023. The court emphasized that the plaintiff's “complaint state[d] claims based on contract law, not patent law.” Id. at 1021. Moreover, the court found that it could ascertain whether royalties were owed on certain products without resolution of a substantial question of federal patent law. Id. at 1023. As a result, the plaintiff's breach of contract claims did not give rise to federal patent jurisdiction. Id.

         As in Medtronic and Cellport Systems, STC's right to relief on its contract claims does not depend on the resolution of a substantial question of federal patent law. A court need not determine whether patents have been infringed in order to resolve STC's contract claims. Instead, a court need only decide: (1) whether Quest Defendants breached the parties' License Agreement by failing to permit an audit; (2) whether Quest Defendants breached their duty of good faith and fair dealing in failing to cooperate and provide a meaningful audit; and (3) whether STC is entitled to a declaratory judgment in its favor concerning the scope of the contemplated audit. A court can construe the parties' License Agreement's audit provisions and Quest Defendants' duties thereunder without determining whether any products infringe the licensed patents. Accordingly, Quest Defendants have failed to establish federal question or patent jurisdiction based upon STC's claims, and the Court therefore recommends a finding that no such jurisdiction exists.

         B. Removal Jurisdiction under 28 U.S.C. § 1454

         In their Notice of Removal, Quest Defendants also assert jurisdiction pursuant to 28 U.S.C. § 1454, which provides removal jurisdiction in a case in which “any party asserts a claim for relief arising under any Act of Congress relating to patents.” § 1454 (emphasis added). According to Quest Defendants, § 1454 jurisdiction arises here because they assert “a Counterclaim where [STC's] right to relief necessarily depends on the resolution of a substantial issue of federal patent law.” Doc. 1 at 6. “[B]y enacting Section 1454, Congress has broadened federal court removal jurisdiction to better ensure that whenever claims arise under federal patent law, they are removable, irrespective of who asserted them.” Univ. of Ken. Research Found., Inc. v. Niadyne, Inc., No. Civ. 13-16-GFVT, 2013 WL 5943921, at *5 (E.D. Ky. Nov. 5, 2013).

         Curiously, at the time they removed this case, Quest Defendants had not yet asserted a counterclaim at all. It was a week after removal to this Court that they filed their Answer to STC's Complaint and Counterclaims. Compare Doc. 1 (filed Nov. 9, 2017), with Doc. 4 (filed Nov. 16, 2017). The Notice of Removal itself merely indicated that Quest Defendants “will seek a declaratory judgment that none of the products identified in Exhibit F to STC's Complaint in the State Court Action infringes any of the Licensed Patents, and are, therefore, not Licensed Products.” Doc. 1 at 7 (emphasis added). As such, no party had technically asserted - at least not in any pleading before the Court - a claim for relief under any Act of Congress relating to patents at the time of removal. This begs the question whether Quest Defendants' reference to anticipated patent counterclaims in its Notice of Removal conferred patent counterclaim jurisdiction upon this Court.

         STC contends that removal under § 1454 was improper prior to the formal filing of Quest Defendants' patent counterclaims in a pleading, citing Masimo Corp. v. Mindray DS USA, Inc., No. 14-0405 SDW/SCM, 2015 WL 93759 (D.N.J. Jan. 7, 2015). In Masimo, the plaintiff filed suit in state court alleging state law contract claims against the defendant in connection with a purchasing and license agreement under which the plaintiff agreed to license patented technology to the defendants. 2015 WL 93759, at *1. The defendant removed the action to federal court, alleging that the court had original jurisdiction over patent infringement claims that were implicated by the plaintiff's claims. Id. The plaintiff moved to remand, noting that no counterclaims had been filed in any pleading and maintaining that removal had therefore been improper. Id. After the motion to remand was fully briefed, the defendant filed its answer with counterclaims and argued that the motion to remand was thereby rendered moot. Id. The plaintiff responded that removal under § 1454 remained improper given the lack of any formally-asserted patent claims at the time of removal. Id.

         Guided by the plain language of § 1454, which requires a party to “assert[] a claim for relief, ” and the strict construction of removal statutes, the District of New Jersey determined that the defendant's “reference to potential patent law counterclaims in its Notice of Removal [was] insufficient to establish jurisdiction pursuant to Section 1454.” Id. at *3. That the defendant did eventually assert removable ...


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