In a conundrum worthy of a law school civil procedure examination, plaintiff Gensetix found itself apparently with no remedy for infringement by Baylor College of Medicine, Diakonos Research Ltd., and William Decker of patents licensed from the University of Texas (UT), when UT refused to join as a necessary party on sovereign immunity grounds.  The Federal Circuit, in a fractured decision reminiscent of the alignment of the judges in Amgen v Sandoz, remedied this situation in its decision last Friday in Gensetix, Inc. v. Board of Regents of the University of Texas System.

The case arose related to Gensetix' exclusive license of UT-owned patents, U.S. Patent Nos. 8,728,806 and 9,333,248 relating to methods of modifying a patient's immune system to kill cancer cells.  Defendant Dr. Decker had invented the claimed methods when we was a UT faculty member and then left (as professors are wont to do) to join the faculty at Baylor.

The license between Gensetix and UT provided that Gensetix was obliged to pursue infringement at its own expense and was entitled to any recovery from such enforcement efforts.  However, should Gensetix fail to pursue its legal remedies within six months of obtaining knowledge that there was infringement, UT had a secondary right to pursue enforcement of these patents (with a corresponding entitlement to any recovery).  There were provisions in the contract of mutual cooperation between the parties of any such lawsuits.  Importantly, however, the contract also contained an express provision that UT did not waive its sovereign immunity as a State by entering into the contract.

Gensetix attempted to join UT under Fed. R. Civ. Pro. 19(a) as an involuntary plaintiff upon filing suit against Baylor and Dr. Decker when UT refused to voluntarily join.  UT responded with a motion to dismiss under Rule 12(b)(1) on the grounds that as an arm of the State, UT was shielded from compulsory joinder by the State's sovereign immunity under the Eleventh Amendment.  Baylor responded by arguing that UT was a necessary party because it was the owner/assignee of the patents-in-suit and thus, if State sovereign immunity under the Eleventh Amendment precluded involuntary joinder then the District Court should dismiss under Rule 19(b).  The District Court agreed and dismissed the case.

The Federal Circuit affirmed-in-part (as to the sovereign immunity issue), reversed-in-part (as to the motion to dismiss), and remanded, in a decision by Judge O'Malley joined by Judge Newman with regard to reversing the District Court's grant of Baylor's motion to dismiss and Judge Taranto on affirming UT's exercise of sovereign immunity as an arm of the State of Texas.  Judge O'Malley's opinion with regard to the sovereign immunity issue was straightforward.  The Eleventh Amendment (as interpreted by the Supreme Court; the actual wording of the Amendment is more limited in scope) precludes involuntary joinder of a State in a lawsuit brought by a citizen of the State or other States (or a foreign country, for constitutional completeness).  The opinion rejects the distinction advanced by Gensetix that by its terms the Amendment merely "bars suits brought by private citizens against the state."  Rather, the Court noted that the Amendment has a broader sweep than that, citing Coll. Sav. Bank v. Fla. Prepaid Postsecondary Ed. Expense Bd., 527 U.S. 666, 687 n.5 (1999), insofar as the amendment "serves to avoid the indignity of subjecting a State to the coercive process of judicial tribunals at the instance of private parties," citing Seminole Tribe of Fla. v. Fla., 517 U.S. 44, 58 (1996).  The Court found no basis for Gensetix' proposition that these principles do not apply in the context of joining a State as an involuntary plaintiff, distinguishing Gensetix' cited authority, Regents of the Univ. of Cal. v. Eli Lilly & Co., 119 F.3d 1559, 1564 (Fed. Cir. 1997), on the grounds that in Regents the arm of the State had brought the lawsuit in California and the issue was whether it could be forced to litigate in Indiana on a motion to transfer (i.e., whether sovereign immunity could be used to enforce which district court heard the matter; it could not).  Indeed, the opinion finds this distinction "dispositive," in that UT was not a plaintiff in this case, did not bring the action ab initio, and had refused to join as a plaintiff.  Under these circumstances, the Court held that State sovereign immunity precluded joining UT as an involuntary plaintiff under Rule 19(a).

Finally, the panel majority rejected Gensetix' contention that UT entering into an exclusive contract imposed an "implied obligation" (an argument that registered with Judge Newman in her dissent on this issue; vide infra) to support Gensetix' infringement suit against Baylor and Dr. Decker.  "[I]t is of no moment that the license agreement requires initiation of an infringement suit by Gensetix or cooperation by UT in any infringement suit," according to the opinion, because "[a]lthough UT willingly entered into the license agreement, so too, did Gensetix" and Gensetix was aware of the express reservation of sovereign immunity that was also part of that contract.

With regard to the issue of whether Rule 19(b) required the District Court to dismiss the case in the absence of UT as a necessary plaintiff, Judge Newman joined Judge O'Malley in concluding that it did not.  Reviewing the District Court's decision under an abuse of discretion standard, the Court held that dismissal was an abuse of discretion because the circumstances were not consistent with the reasoning behind the Rule.  Rule 19(b) provides that, where a necessary party cannot be joined, "the court must determine whether, in equity and good conscience, the action should proceed among the existing parties or should be dismissed."  This inquiry has been understood to depend on four considerations:  "(1) the extent to which a judgment rendered might prejudice the missing required party or the existing parties; (2) the extent to which any prejudice could be lessened or avoided (3) whether a judgment rendered in the required party's absence would be adequate; and (4) 'whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder.'"  The District Court based its decision to dismiss on "three out of the four Rule 19(b) factors weigh[ing] in favor of dismissing the case."  With regard to the first factor, the District Court held that "a judgment rendered in UT's absence might prejudice UT or the parties to the litigation," citing A123 Systems, Inc. v. Hydro-Quebec, 626 F.3d 1213 (Fed. Cir. 2010) (that risk being that UT's patent(s) might be invalidated).  This precedent was not apropos here, according to the panel majority on this issue, because unlike in A123 Systems, Gensetix had a license in every field making identical the parties' interests in the patents-in-suit.  "The prejudice to UT is minimal, or at least substantially mitigated, because, unlike the licensee in A123, Gensetix will adequately protect UT's interests in the validity of the patents-in-suit," according to the opinion.  As to the second prong, the District Court had dismissed this as a risk inherent in patent licensing from a sovereign, which the panel majority held was an abuse of discretion because "the district court should have given weight to the fact that Gensetix is without recourse to assert its patent rights because UT cannot be feasibly joined."  Also contrary to the proper application of the District Court's discretion was its application of the third prong, because according to the panel majority there was no risk to defendants of multiple suits because the contract provided Gensetix with the primary right to sue and UT with a secondary right triggered only if Gensetix did not sue within six months of knowledge of infringing activity.  As for the fourth prong, the majority held that the District Court did not properly weigh as a factor that Gensetix had no ability to assert its licensed patent rights in the absence of UT as a party unless the District Court denied Baylor's motion to dismiss.

The panel majority on this issue held that the District Court's error was that instead of considering these factors it relied too heavily on UT's status as an arm of the State and the sovereign immunity asserted on that basis.  The District Court's grant of Baylor's motion to dismiss was an abuse of discretion according to the panel majority and accordingly the Federal Circuit reversed and remanded on those grounds.

Judge Newman's opinion, concurring in part, dissenting in part, and concurring in the judgment, was based on her opinion that State sovereign immunity should not be used as a shield in cases like this one where the "arm of the State" actively engaged in licensing its patents to private parties.  The Eleventh Amendment, according to Judge Newman, "does not insulate a State from its contractual obligations."  "[T]he State must pay its bills," according to Judge Newman, and in like manner it must comply with its contractual obligations.  The Judge cited Justice Breyer's dissent in College Savings Bank in this regard, wherein "[w]hen a State engages in ordinary commercial ventures, it acts like a private person, outside the area of its 'core' responsibilities, and in a way unlikely to prove essential to the fulfillment of a basic governmental obligation."  In Judge Newman's view, UT's position is directly contrary to its obligation under the terms of the contract with Gensetix to "cooperate" with regard to patent infringement litigation brought in the first instance by Gensetix under rights granted by the contract.  Judge Newman disagreed with the majority that upholds that exercise of sovereign immunity.

With regard to the Rule 19(b) issue, Judge Newman concurred with the result but would have held that UT transferred sufficient rights to Gensetix in its license that Gensetix should be entitled to sue infringers "in its own name" without joining UT as a necessary party.

Judge Taranto, concurring in part and dissenting in part, believes that the District Court properly dismissed under Rule 19(b), relying on Republic of Philippines v. Pimentel, 553 U.S. 851 (2008), which held that "when a sovereign entity is a required party under Rule 19(a), is protected against joinder by sovereign immunity, and makes a non-frivolous assertion that it will be prejudiced by a suit proceeding in its absence, a district court is generally obligated to dismiss the suit under Rule 19(b)."  While the panel majority distinguished Pimentel on its facts, Judge Taranto believes that such distinctions are inadequate and the Federal Circuit erred in reversing the District Court's decision to dismiss.  Judge Taranto sees the Supreme Court's holding in Pimentel as a "bright line rule" mandating dismissal.  The Judge also sees that there could be an occasion for UT's patent interests to be harmed in its absence and to be precluded from relitigating the bases for such harm should the need for UT to assert these patents arise.  And as for Gensetix' predicament, Judge Taranto cited the Supreme Court's recent Allen v. Cooper decision for the reality that "state sovereign immunity jurisprudence contemplates that patent owners may be left without a remedy when States are involved."

Gensetix, Inc. v. Board of Regents of the University of Texas System (Fed. Cir. 2020)
Panel: Circuit Judges Newman, O'Malley, and Taranto
Opinion by Circuit Judge O'Malley; opinion concurring in part and dissenting in part by Circuit Judge Newman; opinion concurring in part and dissenting in part by Circuit Judge Taranto