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IP Alert: Federal Circuit Bounces Trade Secret Case Back to State Court Because Patent Issues Deemed Tangential to Dispute

April 10, 2020

Trade secret and patent license disputes cases are frequently brought in state courts, as they often involve issues of state law. Sometimes, however, technology-based trade secret disputes implicate issues of both state trade secret law and federal patent law, raising the question of whether jurisdiction is proper in state or federal court. On April 3, in Intellisoft v. Acer America, the Federal Circuit addressed such a dispute, holding that Acer’s removal of a trade secret misappropriation case from state court to federal district court was improper, even though Intellisoft raised patent-related issues including inventorship of Acer’s patent. The court reached this conclusion because Intellisoft’s trade secret claim did not necessarily depend on resolution of a substantial question of federal patent law, and because Acer’s inventorship counterclaim was not legally operative.

Intellisoft originally sued Acer in California state court, claiming that Acer misappropriated trade secrets Intellisoft disclosed to Acer under a non-disclosure agreement. Intellisoft claimed that Acer had obtained a patent that disclosed those trade secrets and incorporated them into products without Intellisoft’s authorization. Intellisoft also asserted that its president, Bruce Bierman, should have been named as a co-inventor on Acer’s patent, and that Acer should pay royalties for its use of the trade secrets.

After three years of litigation, Acer filed a cross-complaint seeking a declaratory judgment that Bierman was not an inventor on Acer’s patent. Acer did so without seeking leave of court, as is required in California. At the same time, Acer filed a notice to remove the action to the U.S. District Court for the Northern District of California, asserting that removal was proper because Intellisoft’s claim for trade secret misappropriation arose under federal patent law. Federal statute 28 U.S.C. § 1441 provides that “any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant . . . to the district court of the United States.” Section 1338(a) of Title 28 states that “district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents.” Acer’s removal was based on Intellisoft’s claim that Bierman should have been named as a co-inventor and on Acer’s cross-complaint seeking declaratory judgment on the inventorship issue.

The district court denied Intellisoft’s request for remand back to state court on the ground that its claims necessarily raised substantial issues of patent law and that the case boiled down to inventorship. The district court granted summary judgment in favor of Acer because Intellisoft failed to prove under federal patent law that Bierman was an inventor of the Acer patent.

On appeal, the Federal Circuit first evaluated whether the district court had original jurisdiction over the state law trade secret claim in light of the federal inventorship cross-claim by applying the four-prong test articulated in the U.S. Supreme Court case Gunn v. Minton. Under the Gunn test, a district court has original jurisdiction over a state law claim if the 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.”

With respect to the first prong, the court found that Intellisoft did not need to prove inventorship under federal patent law to establish ownership of the trade secret. Intellisoft’s burden was to satisfy the ownership standards under California law rather than prove that Bierman was an inventor, and ownership of the trade secrets did not require proof of patent inventorship. In addition, the court found that Intellisoft did not need to establish patent infringement to prove trade secret misappropriation. Rather, Intellisoft was only using the patent as evidence to support its state law claims, and the analysis did not require claim construction or proof of infringement. The court concluded that because Intellisoft’s trade secret claim did not necessarily depend on resolution of a substantial question of patent law, the first prong of the Gunn test was not met.

Alternatively, Acer claimed that removal was proper under 28 U.S.C. § 1454 because of its inventorship cross-complaint. Section 1454 provides that a “civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents . . . may be removed to the district court. . . .” The court found that because Acer never obtained leave of court to file its cross-complaint adding its inventorship claim, the cross-complaint was not operative and was thus never “asserted” for purposes of section 1454. The court vacated the district court’s judgment and reversed its denial of Intellisoft’s motion to remand.

There are number of important takeaways from this case. First, the case reinforces that a plaintiff’s reliance on a patent as evidence to support its state law claim does not necessarily require resolution of a substantial patent question. Second, it demonstrates that proving ownership of a trade secret is not the same as proving inventorship of a patent. Third, it highlights that in cases touching on patent issues, such as trade secret cases or patent license disputes, care must be taken when pleading those state law claims, responding to written discovery, and crafting expert reports to avoid inadvertently injecting a federal issue into a case. Here, Intellisoft’s allegations hinted at patent inventorship, but did not directly raise such issues in a manner requiring federal resolution. This case demonstrates that it can be challenging to avoid inadvertently pushing your case into the confluence of state and federal claims in a way that justifies removal to federal court.

For more information on this development, please contact Fitch Even partner Joseph F. Marinelli, author of this alert.

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