Warsaw Orthopedic, Inc. v. Sasso

977 F.3d 1224

WARSAW ORTHOPEDIC, INC., Medtronic, Inc., Medtronic Sofamor Danek, Inc., Plaintiffs-Appellants

v.Rick C. SASSO, M.D., Defendant-Appellee

2019-1583

United States Court of Appeals, Federal Circuit.

Decided: October 14, 2020

MARK CHRISTOPHER FLEMING, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, argued for plaintiffs-appellants. Also represented by MARY VIRGINIA SOOTER, Denver, CO.

FREDERICK D. EMHARDT, Emhardt Law LLC, Carmel, IN, argued for defendant-appellee. Also represented by GEORGE T. PATTON, JR., Bose McKinney & Evans LLP, Washington, DC; JOHN M. BRADSHAW, Bradshaw Law LLC, Indianapolis, IN.

Before NEWMAN, SCHALL, and WALLACH, Circuit Judges.

NEWMAN, Circuit Judge.

This appeal is from the decision of the United States District Court for the Northern District of Indiana,¹ dismissing a declaratory judgment complaint filed by Warsaw Orthopedic, Inc.; Medtronic, Inc.; and Medtronic Sofamor Danek, Inc. (collectively, "Medtronic") against Dr. Rick Sasso, a surgeon and inventor. The district court dismissed the complaint without prejudice, applying the doctrine of federal court "abstention" in view of the concurrent action in Indiana state court between the same parties concerning the same dispute; that decision is on appeal to the Indiana Court of Appeals.²

The state court action is described by Dr. Sasso as a contract case for payment for patent rights, and the federal action is described by Medtronic as a patent case in which payment requires valid patents. Medtronic argues that the district court's "abstention" was an abuse of discretion, because the federal courts have exclusive jurisdiction over patent cases, and patent validity is fundamental to resolution of this dispute. Thus, Medtronic argues that abstention was inappropriate because the federal court had the obligation to receive and resolve this dispute.

We conclude that the district court acted within its discretion, abstaining without prejudice, on the facts hereof, for the question of contract interpretation is on appeal in the Indiana state court, and federal action based on the federal issues is not precluded.

DISCUSSION

Medtronic's declaratory judgment complaint requests a declaration that Medtronic did not violate its royalty payment obligation as set forth in a certain Purchase Agreement between Medtronic and Dr. Sasso ("Agreement"). The Agreement, also called the Facet Screw Agreement, is dated December 1, 1999 and states Medtronic's terms of purchase of certain Dr. Sasso inventions. The Agreement provides for quarterly royalty payments based on Medtronic's sales of the defined Medical Device until "the last to expire of the patents included in Intellectual Property Rights, or if no patent application(s) issue into a patent having valid claim coverage of the Medical Device, then seven (7) years from the Date of First Sale of the Medical Device." Agreement ¶ 7.

For the invention at issue, the initial patent application was filed on November 23, 1999, and two patents were issued: U.S. Patent No. 6,287,313 ("the ’313 patent") and its continuation, U.S. Patent No. 6,562,046 ("the ’046 patent") ; both patents are entitled "Screw Delivery System and Method." The record states that Medtronic made royalty payments from 2002 to 2018.

Proceedings in Indiana state court

A dispute arose, for Dr. Sasso stated that Medtronic was not paying royalties on sales of all relevant devices, but Medtronic disagreed. In June 2014, Dr. Sasso filed suit in Marshall Circuit Court, County of Marshall, State of Indiana, for breach of contract and damages.³ Medtronic answered that the devices for which Dr. Sasso is seeking additional royalties are not subject to the Agreement because they are not covered by a valid claim of the ’313 or ’046 patents. Dr. Sasso then filed a "Motion for Summary Judgment on the Term of the Screw Delivery Agreement and on Patent Validity as a Defense to Payment." The state court granted the motion, ruling:

The amount of money to be paid under the Agreement and the term depend on the issuance of patents and their expiration, not their validity. Patent No. 6,287,313 (" ’313 patent") or 6,562,046 (" ’046 patent") issued and have not expired.

Summ. J. Order, Marshall Circuit Court, No. 50C01-1806-PL-000027 (Sept. 13, 2018). The state court excluded the issue of validity from the jury trial. See Order Excluding Witnesses and Striking the Affirmative Defense of Patent Invalidity, No. 50C01-1806-PL-000027 (Sept. 13, 2018) ("All evidence related to the defense of patent invalidity is excluded.").

At the trial, the parties disagreed over whether any claim covered the asserted products. Dr. Sasso testified that claim 26 of the ’313 patent is "really really broad." Trial Tr. Nov. 9, 2018, at 51. Medtronic was not permitted to raise any questions concerning the validity of claims of the asserted scope.

The jury found that Medtronic had breached the Agreement, and awarded damages. Judgment on the verdict was entered on November 29, 2018. Medtronic filed an appeal to the Indiana Court of Appeals.

The federal declaratory judgment action

Meanwhile, on June 8, 2018, Medtronic filed this declaratory judgment action in federal district court in Indiana. The complaint contains two counts, captioned as follows:

COUNT I

Declaratory Judgment of No Breach of the Facet Screw Agreement Because No Valid Claim of the ’313 or ’046 Patent Covers the Medtronic Products for Which Dr. Sasso Seeks Royalties

* * *

COUNT II

Declaratory Judgment of No Breach of the Facet Screw Agreement Because No Claim of the ’313 or ’046 Patents, as Construed by Dr. Sasso, Is Valid

Complaint, at 13–14. Medtronic stated in the complaint that the devices for which Dr. Sasso seeks additional royalties are not within the Agreement, and the claims as construed to cover such devices are not valid as required by the Agreement.

In September 2018, Dr. Sasso moved the district court for "abstention or stay" of the declaratory action, citing the scheduled November 2018 trial in state court. The district court did not act before that trial. After the state court judgment in favor of Dr. Sasso, he moved the federal court for dismissal of Medtronic's declaratory action, stating that the federal court did not have jurisdiction because the matter had been decided. Medtronic opposed dismissal, arguing that the state court erred in law by refusing to permit Medtronic's defenses concerning invalidity of the claims as construed to cover the additional Medtronic devices.

The district court dismissed the declaratory judgment action without prejudice, stating that:

Here, there is no purpose to be served by the declaratory judgment Medtronic seeks, at least at this time. Medtronic is asking for a declaratory judgment that it did not breach the Facet Screw Agreement and does not owe Dr. Sasso any damages. But the state court has already entered judgment in Dr. Sasso's favor on that claim. No order or judgment of this Court can undo that judgment—only the Indiana courts of appeals and the United States Supreme Court have authority to review that judgment.

Dist. Ct. Op. at *3. The district court acknowledged that the state court decision was being appealed, and that "it is possible that the state judgment will be vacated at some point," but that such possibility did not affect the present situation. Id . The district court also cited "the discretion provided by the Declaratory Judgment Act, assuming but not deciding that jurisdiction exists." Id. at *2. The court exercised this discretion and dismissed the action.

Medtronic now appeals this dismissal, stating that the federal courts have exclusive jurisdiction over issues of patent validity, valid claims are required by the Agreement, and the state court erred in ruling that validity is irrelevant to royalty payments under the Agreement. Medtronic points to the requirement in ¶ 7 for "valid claim coverage":

7. Term of Agreement.... Unless sooner terminated, this Agreement shall expire upon the last to expire of the patents included in Intellectual Property Rights, or if no patent application(s) issue into a patent having valid claim coverage of the Medical Device, then seven (7) years from the Date of First Sale of the Medical Device. ... Agreement ¶ 7. Medtronic also points to the Schedules in the Definitions of the Facet Screw Agreement's subject matter:

1. Definitions.

A. The Invention. The Invention shall mean any product, method or system relating to a facet screw instrumentation and a headless facet screw fixation system as described in Schedule A, attached hereto.

* * *

C. Medical Device. Medical Device shall mean any device, article, system, apparatus or product including the Invention. Such Medical Devices shall be listed in accordance with SDH [Sofamor Danek] catalog numbers and will be listed in Schedule B attached hereto. ...

Agreement ¶ 1. Medtronic states: "Schedule A describes a ‘Facet Screw Instrumentation and a Headless Facet Screw Fixation System consisting of bone screws and associated instruments for installation thereof.’ ... Schedule B lists ‘Facet Screw Instrumentation, and A Headless Facet Screw Fixation System,’ " with no listed catalog numbers. Medtronic Br. 8 n.3.

Medtronic states that royalties under the Agreement are based on the products set forth in the Agreement Schedules, and that those royalties were regularly and fully paid. Medtronic states that this dispute concerns "whether Medtronic owes royalties on other products not listed in Schedules A or B." Id. (emphasis in original). Medtronic further states that valid claim coverage is required by the Agreement, that patent validity is within exclusive federal jurisdiction, and that the claims as construed by Dr. Sasso are invalid.

Dr. Sasso states: "Right or wrong, this state court ruling is binding." Sasso Br. 21.

Patent reexamination

Medtronic had, on May 1, 2018, requested Patent and Trademark Office reexamination of designated claims of the ’313 patent and on July 20, 2018, of designated...