KLA : Federal Circuit Clarifies The Scope Of Its Jurisdiction Over Walker Process Antitrust Claims In Chandler. v. Phoenix Services LLC

On June 10, 2021, the Federal Circuit issued a precedential order in Chandler v. Phx. Servs. LLC, No. 2020-1848 (Fed. Cir. Jun. 10, 2021) that clarified the scope of its jurisdiction over Walker Process¹ claims of monopolization brought under § 2 of the Sherman Act. Walker Process holds that a party that knowingly asserts a fraudulently procured patent in an effort to monopolize a market may be liable for an antitrust violation. To prevail in a Walker Process action, a claimant must prove (i) that a patentee secured its patent through knowing and willful fraud upon the PTO, then maintained and enforced the patent despite knowledge of the fraud, and (ii) all other elements required to prove a monopolization or attempted monopolization claim under the Sherman Act.² Because Walker Process claims typically arise as counterclaims in patent litigation, the Federal Circuit often hears appeals on Walker Process claims as a matter of course.³ However, a Walker Process claim may be brought as a "standalone claim" (i.e. outside of patent litigation), and the Federal Circuit's decision in Chandler sought to clarify when the court has jurisdiction over such claims.

Heat On-The-Fly's U.S. Patent No. 8,171,993 (the '993 patent) is directed to methods of using a fracking technology.⁴ During prosecution, the sole inventor and Heat On-The-Fly owner, Mark Hefley, failed to disclose 61 prior public uses of the claimed invention that occurred more than a year before the patent application was filed.⁵ Plaintiffs Ronald Chandler, Chandler Manufacturing, LLC, Newco Enterprises, LLC, and Supertherm Heating Services, LLC (Chandler) alleged that Heat On-The-Fly asserted the '993 patent, and further that this enforcement "continued in various forms" following Defendants Phoenix Services, LLC and Mark Fisher's (Phoenix) acquisition of Heat On-The-Fly and the '993 patent.⁶ In an unrelated suit in 2018,⁷ the Federal Circuit declared the '993 patent unenforceable on account of the knowing failure to disclose prior uses during prosecution.⁸ Thereafter, in the present case, Chandler brought a Walker Process antitrust claim against Phoenix over continued assertion of the '993 patent. The question the Federal Circuit faced was whether it has jurisdiction over an appeal to a standalone Walker Process antitrust claim that involves ancillary patent law issues. The court concluded that it did not.

The statutory source of the Federal Circuit's jurisdiction is 28 U.S.C. § 1295(a)(1), which states that the court's jurisdiction extends to appeals from the district courts "in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents." However, not all appeals "relating to patents" fall under the Federal Circuit's jurisdiction, only 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.⁹

The Federal Circuit previously addressed this limitation in Xitronix Corp v. KLA-Tencor Corp. (Xitronix I).¹⁰

In Xitronix I, the Federal Circuit held that a Walker Process claim does not present a substantial issue of patent law, and that it lacks jurisdiction over a standalone Walker Process claim based upon the assertion of a "live" patent. Even the risk that a regional circuit might err in deciding a patent "case within a case" would not justify the Federal Circuit's jurisdiction over all appeals from federal patent cases.¹¹ The Federal Circuit reasoned that:

[b]ecause Federal Circuit law applies to substantive questions involving our exclusive jurisdiction, the fact that at least some Walker Process claims may be appealed to regional circuits will not undermine our uniform body of patent law. even if the result of this case is preclusive in some circumstances, the result is limited to the parties and the patent involved in th[e] matter."¹²

However, upon transfer the Fifth Circuit disagreed and returned the case to the Federal Circuit.¹³ At the heart of the disagreement were two issues.

The first issue was whether or not the Supreme Court's decision in Gunn v. Minton¹⁴ remained relevant to an analysis of the Federal Circuit's jurisdiction over standalone Walker Process claims.¹⁵ Gunn involved the interpretation of 28 U.S.C. § 1338, which confers jurisdiction to the district courts over cases that involve statutes relating to patents. In Gunn, the Supreme Court held that a malpractice case involving a patent attorney did not "arise under" the federal patent laws pursuant to § 1338¹⁶ — even though the case involved resolution of a patent law issue.¹⁷ The Supreme Court was satisfied that a state court's resolution of a patent "case-within-a-case" would have no effect on prior federal patent litigation or undermine federal patent law because "federal courts are of course not bound by state court case-within-a-case patent rulings."¹⁸ The Fifth Circuit considered Gunn irrelevant to interpretation of "arising under" in 28 U.S.C. § 1295(a)(1) because while § 1295(a)(1) expressly referenced § 1338 before, the America Invents Act (AIA) replaced that reference with the phrase "any civil action arising under. any Act of Congress relating to patents."¹⁹ The Federal Circuit disagreed and found that Gunn continued to remain relevant to an analysis of "arising under" in § 1295(a)(1), noting that Section 19 of the AIA amended § 1295(a)(1) to read in parallel to § 1338, though it also expanded the Federal Circuit's jurisdiction to cover compulsory counterclaims.²⁰ This meant that Congress intended the statutes to remain linked.²¹

The second issue was whether or not Federal Circuit precedent dictated that the court had jurisdiction over standalone Walker Process claims. The Fifth Circuit cited two cases for the proposition that it did.²² First, in Nobelpharma AB v. Implant Innovations, Inc.,²³ the Federal Circuit held that its own law - and not regional circuit law - applied to Walker Process claims; the Fifth Circuit concluded on the basis of Nobelpharma AB that the Federal Circuit has jurisdiction over standalone Walker Process claims. The Federal Circuit disagreed, noting a distinction between "the scope of our jurisdiction and whether Federal Circuit law applies": while Walker Process claims typically arise in patent litigations, appeals to which invoke Federal Circuit jurisdiction, "that does not mean every Walker Process claim gives rise to Federal Circuit jurisdiction."²⁴ The Fifth Circuit also pointed to a footnote in In re Ciprofloxacin Hydrochloride Antitrust Litig²⁵ in which the Federal Circuit stated that "the determination of fraud before the PTO necessarily involves a substantial question of patent law."²⁶ However, because the case was transferred to the Federal Circuit, it reviewed the question of jurisdiction under the plausibility standard of Christianson²⁷ and never conducted a de novo analysis.²⁸ Thus, the Federal Circuit rejected the inference that it has jurisdiction over all Walker Process cases, though it accepted the transfer of Xitronix from the Fifth Circuit, stating that the rationale behind the Transfer Order was "not implausible."²⁹ Specifically, the Supreme Court's decision in Gunn "could be read to imply that whether the patent question at issue is substantial depends on whether the patent is 'live' such that the resolution of any question of patent law is not 'merely hypothetical.'"³⁰ Because the patent at issue in Xitronix remained a live patent and litigation could render the patent unenforceable, the Federal Circuit accepted jurisdiction.

Turning back to the case at hand, the Federal Circuit found Xitronix line of cases to be instructive. The Xitronix cases were distinguishable from the present case for a simple reason: here, the patent at issue had already been rendered unenforceable.³¹ Discussion of the '993 patent would be "merely hypothetical," and any decision would not change the validity of the '933 patent or the result of the prior federal patent litigation.³² However, the court precautionarily noted that "we do not hold that our jurisdiction turns on whether a patent can still be asserted."³³

Accordingly, the Federal Circuit concluded that it lacked subject matter jurisdiction over the appeal and transferred the case to the Fifth Circuit to address an issue of first impression in that circuit: whether a parent company may be liable for attempted monopolization by its subsidiary.³⁴

In Chandler, the Federal Circuit has clarified under what circumstances Walker Process claims will fall under its own appellate jurisdiction versus that of the regional circuit. Underlying this opinion is the concept that while Walker Process cases may or may not present live patent disputes, they always, by their nature, include substantive antitrust claims that are distinguishable from any underlying patent claims.

Footnotes

¹In Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., the Supreme Court held that enforcement of a patent procured by fraud could amount to a violation of § 2 of the Sherman Act, provided that the other elements necessary to prove a claim under § 2 of the Sherman Act, such as monopoly power, antitrust injury, and injury-in-fact were present; in such cases, the injured party would have a claim to treble damages. 382 U.S. 172 (1965).
²TransWeb, LLC v. 3M Innovative Props. Co., 812 F.3d 1295, 1306 (Fed. Cir. 2016).
³Xitronix Corp. v. KLA-Tencor Corp., 882 F.3d 1075, 1079 (Fed. Cir. 2018).
⁴See Chandler v. Phx. Servs. LLC, No. 2020-1848, slip op. at 3 (Fed. Cir. Jun. 10, 2021).
⁵Id.
⁶Id.
⁷Energy Heating, LLC v. Heat On-The-Fly, LLC, 889 F.3d 1291, 1296 (Fed. Cir. 2018).
⁸Chandler, No. 2020-1848, slip op. at 3.
⁹Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 809 (1988).
¹⁰882 F. 3d 1075 (Fed. Cir. 2018).
¹¹Chandler, No. 2020-1848, slip op. at 5.
¹²Xitronix I, 882 F.3d at 1078 (alteration added) (citations omitted).
¹³See Xitronix Corp. v. KLA-Tencor Corp., 916 F.3d 429 (5th Cir. 2019) (Xitronix II).
¹⁴568 U.S. 251 (2013).
¹⁵Chandler, No. 2020-1848, slip op. at 6.
¹⁶Pursuant to § 1338, the federal district courts have jurisdiction over cases that involve statutes relating to patents.
¹⁷Chandler, No. 2020-1848, slip op. at 4-5 (citing Gunn, 568 U.S. 258-59).
¹⁸Id. at 5 (citing Gunn, 568 U.S. 262).
¹⁹Id. at 6.
²⁰Id.
²¹Id. at 6-7.
²²Id. at 7-8.
²³141 F.3d 1059, 1068 (Fed. Cir. 1998).
²⁴Chandler, No. 2020-1848, slip op. at 7-8.
²⁵544 F. 3d 1323, 1330 n.8 (Fed. Cir. 2008).
²⁶Id.
²⁷Under this plausibility standard, as long as the transferee court finds a transfer decision to be plausible, the jurisdictional inquiry ends. Christianson, 486 U.S. 800, 819 (1988).
²⁸Chandler, No. 2020-1848, slip op. at 8.
²⁹Xitronix Corp. v. KLA-Tencor Corp., 757 F. App'x 1008, 1010 (Fed. Cir. 2019) (Xitronix III) (nonprecedential).
³⁰Id.
³¹Chandler, No. 2020-1848, slip op. at 9.
³²Id.
³³Id. at 6.
³⁴Id. at 10.

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