Federal Circuit Review - Issue 273

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Troutman Pepper

273-1 Federal Circuit Holds University of Texas is Immune from Involuntary Joiner, Holds Case against Potential Infringer may Proceed in School’s Absence

The Federal Circuit recently affirmed-in-part, reversed-in-part, and remanded a case related to sovereign immunity for state universities under the Eleventh Amendment. The Federal Circuit affirmed that a state university cannot be compelled to join an involuntary plaintiff under Rule 19(a). The Court reversed the district court’s conclusion holding that the case must be dismissed without the university as a plaintiff, however. The Court held that the absent university and the plaintiff had “identical” interests in the validity of the patents. See Gensetix, Inc. v. Bd. of Regents, No. 2019-1424, 2020 U.S. App. LEXIS 23262 (Fed. Cir. July 24, 2020) (Before Newman, O’Malley, and Taranto, Circuit Judges) (Opinion for the Court, O’Malley, Circuit Judge) (Opinion concurring in part and dissenting in part, Newman, Circuit Judge) (Opinion concurring in part and dissenting in part, Taranto, Circuit Judge).

The case arose when Gensetix, Inc. (Gensetix) sued Baylor College of Medicine, Diakonos Research Ltd., and William K. Decker (collectively, Baylor) for infringement of U.S. Patent Nos. 8,728,806 and 9,333,248, both related to cancer treatments. The U.S. patents are owned by the University of Texas (UT), an arm of the state of Texas. Gensetix is the exclusive licensee of the patents, and the license agreement states that Gensetix must enforce the patents, that UT retained a secondary right to sue for infringement, and that UT does not waive its sovereign immunity by entering into the license agreement.

When Gensetix sued Baylor for infringement, it sought to include UT, but UT declined. In response, Gensetix sought to add UT as an involuntary plaintiff under Rule 19(a). UT filed a motion to dismiss, stating that the district court lacked subject matter jurisdiction in light of its sovereign immunity. Baylor agreed, arguing that:

(1) UT is a necessary party because it owns the patents-in-suit and transferred less than all substantial patent rights to Gensetix; (2) UT cannot be joined as an involuntary plaintiff because, as an entity of the State of Texas, it is entitled to Eleventh Amendment sovereign immunity; and (3) the Rule 19(b) factors weigh in favor of dismissing the suit, rather than proceeding in UT’s absence.

The district court agreed, and granted UT’s motion to dismiss for lack of subject matter jurisdiction. After considering the factors of Rule 19(a), the district court held that UT was an indispensable party and dismissed the case. Gensetix subsequently appealed.

The issues in the case were (1) whether UT’s sovereign immunity barred its involuntary joinder under Rule 19(a), and (2) if so, should the case proceed without UT as a plaintiff?

Although the three-judge panel was split, the panel held that UT cannot be compelled to join as an involuntary plaintiff (Opinion joined by Judges O’Malley and Taranto; dissenting opinion by Judge Newman). Gensetix argued that the Eleventh Amendment immunity only applies when suits are against the State, and urged that no claims or counterclaims were filed against UT. UT any Baylor argued that the immunity extends to involuntary joinder and when no claims are against the State.

The Court agreed with UT, holding that “the Eleventh Amendment transcends the narrow text of the Amendment itself” and “serves to avoid the indignity of subjecting a State to the coercive process of judicial tribunals at the instance of private parties.” Gensetix pointed to Regents of the Univ. of Cal. v. Eli Lilly & Co., 119 F.3d 1559 (Fed. Cir. 1997) for support of its argument. The Court disagreed with the comparison, holding that in Regents of UC, the arm of the State availed itself to federal jurisdiction, but here UT is attempting to avoid litigation.

The Court considered the additional cases cited by Gensetix, noted that UT did not waive its sovereign immunity in the license agreement, and held that Rule 19(a) must yield to the state’s assertion of sovereign immunity.

The next issue was whether the case should be dismissed in light of UT’s absence, or, in other words, should the case proceed even if UT is immune to involuntary joinder. Although the three-judge panel was split, the panel held that the district court erred in weighing the Rule 12(b) factors such that UT was an “indispensable” plaintiff (Opinion joined by Judges O’Malley and Newman; dissenting opinion by Judge Taranto).

The Rule 19(b) factors include:

(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.”

Fed. R. Civ. P. 19(b). The district court found only factor (4) “seemingly” weighed in favor of Gensetix. The Court concluded “that the district court abused its discretion by collapsing the multi-factorial Rule 19(b) inquiry into one dispositive fact: UT’s status as a sovereign.”

For factor (2) above, the district court pointed to A123 Systems, Inc. v. Hydro-Quebec, 626 F.3d 1213 (Fed. Cir. 2010) to hold that UT would be prejudiced without an opportunity to defends its patent. In A123 Systems, the licensee and licensor had “overlapping” but not “identical” interests, “because the licensee had only a field-of-use license.” Here, however, Gensetix, had a license for all fields, so the interest of Gensetix and UT were “identical” with respect to the validity of the patents. The Court also found the district court erred in its factor (4) analysis and held that Gensetix has no remedy if the case does not proceed.

Judge O’Malley also distinguishes the case Republic of the Phil. v. Pimentel, 553 U.S. 851 (2008), stating that case involved matters not at issue here, namely (1) comity and dignity interests and (2) the inability to protect the parties’ interests. Here, even with the absence of the sovereign, the interests in the patents do not go unprotected because Gensetix can step into UT’s shoes.

In conclusion, the Court held that the district court abused its discretion in dismissing the case and remanded for further proceedings.

Judge Newman issued an opinion concurring in part, dissenting in part, and concurring in the judgment. Judge Newman agreed that, if UT is immune from involuntary joinder, the case should proceed. She disagreed, however, that UT was immune from joinder. To Judge Newman, the Eleventh Amendment does not give arms of the State the right to “violate their commercial and contractual obligations.” The license required Gensetix to enforce the patents, UT can step in if Gensetix did not assert within 6 months of learning of infringement, and the parties agreed “to cooperate fully with each other” in any infringement action. The State (UT) contracted to cooperate, and now it is refusing to do so. “When a State enters into commerce, it accedes to the rules of commerce.” Citing White v. Massachusetts Council of Const. Employers, Inc., 460 U.S. 204, 207 (1983).

Judge Newman concurred in the decision that the case must go on. In addition to the opinion above, Judge Newman asserted that, in addition to Rule 19(b), “legal and equitable theories of property rights” compels the case to continue.

Judge Taranto issued an opinion concurring in part and dissenting in part. Judge Taranto agreed that UT could not be compelled to be a plaintiff but disagreed that the case should proceed in UT’s absence. Judge Taranto relied heavily on Pimentel, finding a “bright-line-rule” that states “where sovereign immunity is asserted, and the claims of the sovereign are not frivolous, dismissal of the action must be ordered where there is a potential for injury to the interests of the absent sovereign.” Citing Republic of the Phil. v. Pimentel, 553 U.S. at 867 (emphasis in opinion). Judge Taranto states that this rule applies not only to a foreign sovereign or the United States, meaning UT is immune.

As for the abuse of discretion for dismissing the case, Judge Taranto was the only judge on the panel to conclude that the case should not proceed. “UT has made a non-frivolous claim that its interests as patent owner could easily be harmed—by, e.g., narrow-scope rulings or invalidation—if the suit proceeds in its absence.” UT also reserved substantial rights in the patents, including (1) “a broad right to sue and control litigation,” (2) the ability publish findings or other papers and allow other institutions to conduct research use, and (3) the right to terminate the license.

He concludes by asserting that, as Gensetix may be left without a remedy, “sovereign immunity jurisprudence contemplates that patent owners may be left without a remedy when States are involved.”

In cases where a state university licenses rights to a patent, the university (an arm of the State) may not be compelled to be an involuntary plaintiff pursuant to Rule 19(a). The absence of the “necessary party,” however, may not preclude the case from proceeding without the State, as long as the licensee’s interest in the patent are “identical” to the university’s interest. This “identical” interest may exist if the license is for “all fields of use.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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