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The Patent Exhaustion Doctrine Is A Defense, Not A Cause Of Action Providing Jurisdiction

September 24, 2008

In ExcelStor Technology, Inc. v. Papst Licensing GmbH & Co., KG (No. 2008-1140; Sept. 16. 2008), ExcelStor sued Papst in federal court on breach of contract and fraud claims. In an attempt to avoid being sent to the state courts, ExcelStor amended its complaint to add claims which included citations to federal patent law, including a claim that Papst has violated the "Patent/Exhaustion/First Sale doctrine" by collecting two royalties from the sale of the same patented computer component (ExcelStor had alleged Papst was receiving royalty payments from both ExcelStor and from one of ExcelStor's customers under a separate license agreement). The district court determined that the mere citation to federal patent laws did not cause ExcelStor's claims to "arise under the patent laws," and thus dismissed the complaint for lack of subject matter jurisdiction.

The Federal Circuit affirms the dismissal, noting that ExcelStor's complaint "fundamentally misunderstands the nature of the patent exhaustion doctrine." The Court reviews the two requirements for federal patent jurisdiction, i.e., that: (i) a claim must be based on a federal patent law which creates a cause of action, or (ii) the plaintiff's right to relief must necessarily depend on resolution of a substantial question of patent law. Citing caselaw for the well-established notion that patent exhaustion is not a cause of action, but a defense to infringement which prohibits patent holders from selling an article and then "invoking patent law to control postsale use of the article," the Court states that ExcelStor's claim failed to meet the jurisdiction tests because (i) there is no federal law creating a cause of action for collection of multiple royalties, and (ii) the patent exhaustion defense does not create a right for relief for ExcelStor against Papst. Noting that ExcelStor may have state law contract or fraud claims if collection of two royalties violated the terms of any license agreements, the Federal Circuit panel rejects ExcelStor's attempt to stay in a federal court.

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