As a still-young judicial panel, the Business Court frequently has an opportunity to define its boundaries in the face of challenges to its jurisdictional reach. In Inhold, LLC v. PureShield, Inc., 2021 NCBC 2, the Court considered a trade secret misappropriation fact pattern common to its docket: alleged informational theft and skullduggery among industry combatants. The jurisdictional test came when plaintiffs sought to amend their complaint to include a related dispute about the scope of rights defendant PureShield had obtained from multiple patent licenses.
Defendants claimed that the patent disputes arose under federal law and were thus beyond the Business Court’s jurisdiction. Instead, they preferred resolution of the patent issues in a Middle District of North Carolina action they filed shortly after plaintiffs sought leave to amend the state court action.
The issue before the Business Court was whether a contract dispute over patent enforcement rights nonetheless arose under federal law. The Court noted the United States Supreme Court’s guidance that only a “special and small category” of actions would meet the test for federal jurisdiction to lie over a state law claim, when a federal issue is:
“(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”
Id. ¶ 12 (quoting Gunn v. Minton, 568 U.S. 251, 258 (2013)).
The Business Court acknowledged the defendants identified issues regarding the construction and assignability of the patents that were governed by federal law. ¶¶ 13-14. But the key factor for the Court was whether, aside from these identified issues of patent law, “[T]here are reasons completely unrelated to the provisions and purposes of the patent laws why the party may be entitled to the relief it seeks[.]” Id. ¶ 15. The Court readily identified grounds under state contract and corporate law under which plaintiffs’ claims could be resolved without reference to federal patent law. Thus,
“The upshot is that the Court could grant relief to Plaintiffs on these state-law theories `without ever reaching a patent law issue.’”
Moreover, the Court held the case did not raise “substantial” issues of federal patent law where the effect of its outcome “would be limited to these patents and these parties.” Here, the contractual relationships of the parties predominated over the implicated provisions of patent law. Id. ¶ 22.
- A well-pled state law claim arises under federal law “only when every legal theory supporting the claim requires resolution of a federal issue.”
Plaintiffs’ proposed amendment also raised claims for tortious interference and defamation based on allegations that defendants improperly raised patent rights they did not possess in cease-and-desist letters and other communications to third parties. The Business Court adopted the analysis of several federal courts that such state law claims are not preempted when they rely on allegations of false or bad-faith claims to patents. Id. ¶ 26. Further, Judge Conrad also rejected defendants’ claim that their preemption argument based in federal patent law stripped the Court of jurisdiction over the interference and defamation claims. “Preemption,” the Court reminded, “is a defense and therefore does not create arising under jurisdiction.” Id. ¶ 27 (citing Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 809 (1988)).
First to File Rule
The Court wryly observed that defendants had not gone so far as to claim that the federal case they filed in the Middle District promptly after plaintiffs sought leave to amend in the Business Court was a first-filed action that should take precedence. A good thing, the Court said, because a defendant should not be able “to bring a declaratory suit involving overlapping issues in a different jurisdiction as a strategic means of obtaining a more preferable forum.” Id. ¶ 33 (quoting Coca-Cola Bottling Co. Consol. v. Durham Coca-Cola Bottling Co., 541 S.E.2d 157, 164 (2000)).
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.