Holmes v. Vornado: A Restatement of the "Arising Under" Jurisdiction of Federal Courts

On June 3, 2002, the Supreme Court issued one of its most important decisions in decades construing the "arising under" jurisdiction of United States District Courts. In Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc.,[2] seven Justices of the Court[3] held that a civil action is not one "arising under" federal law – including federal patent, trademark, and copyright law – if the well-pleaded complaint of the plaintiff does not allege a claim whose resolution depends on a substantial question of federal law. In particular, the Court held that a counterclaim asserted in a defendant's answer does not and cannot render a civil action one "arising under" federal law for jurisdictional purposes, even if it asserts a claim based on federal patent law.

The occasion for the Court's restatement of federal court "arising under" jurisdiction was a case construing the appellate jurisdiction of the Court of Appeals for the Federal Circuit. In Christianson v. Colt Indus. Operating Corp., 486 U.S. 800 (1988), the Court had held that "cases fall within the Federal Circuit's patent jurisdiction 'in the same sense that cases are said to "arise under" federal law for purposes of federal question jurisdiction.'"[4] Thus, "the Federal Circuit's jurisdiction is fixed with reference to that of the district court, and turns on whether the action arises under federal patent law."[5]

In Holmes, the Court held that "a counterclaim – which appears as part of the defendant's answer, not as part of the plaintiff's complaint – cannot serve as the basis for 'arising under' jurisdiction." 122 S. Ct. at 1894. As construed by the Court in Holmes, the statutory phrase, "civil action arising under," found in 28 U.S.C. §§ 1331 and 1338(a), is governed exclusively by the contents of a plaintiff's well-pleaded complaint.[6] A defendant's patent law counterclaim can thus no more give rise to Federal Circuit appellate jurisdiction than it can give rise to original or removal jurisdiction in a District Court. The Holmes majority stated, "we decline to transform the longstanding well-pleaded-complaint rule into the 'well-pleaded complaint-or-counterclaim rule' urged by respondent."[7] In a rhetorical flourish, Justice Scalia wrote that "[i]t would take an unprecedented feat of interpretive necromancy to say that §1338(a)'s 'arising under' language means one thing (the well-pleaded-complaint rule) in its own right, but something quite different (respondent's complaint-or-counterclaim rule) when referred to by §1295(a)(1)."[8]

Holmes confirms that actions commenced in state court cannot be removed to federal court on the basis of a defendant's assertion of a federal law counterclaim.[9] More notably, Holmes is authority that state courts have jurisdiction to decide counterclaims for alleged patent or copyright infringement, notwithstanding that federal courts have exclusive jurisdiction over "civil action[s] arising under" federal patent and copyright law.[10] The Holmes majority went out of its way to justify its holding in terms of its impact on the jurisdiction of state courts:

Allowing a counterclaim to establish "arising under" jurisdiction would also contravene the longstanding policies underlying our precedents. First, since the plaintiff is "the master of the complaint," the well-pleaded complaint rule enables him, "by eschewing claims based on federal law, . . . to have the cause heard in state court." . . . The rule proposed by respondent, in contrast, would leave acceptance or rejection of a state forum to the master of counterclaim. It would allow a defendant to remove a case brought in state court under state law, thereby defeating a plaintiff's choice of forum, simply by raising a federal counterclaim. Second, conferring this power upon the defendant would radically expand the class of removable cases, contrary to the "[d]ue regard for the rightful independence of state governments" that our cases addressing removal require.[11]

The impact of Holmes on state court jurisdiction has been swift and dramatic. In Green v. Hendrickson Publishers, Inc.,[12] a book publisher filed suit in Indiana state court for alleged breach of contract; the defendants counterclaimed for copyright infringement. In a unanimous decision issued June 27, 2002, the Supreme Court of Indiana held, on the authority of Holmes, that notwithstanding federal courts' exclusive jurisdiction over "civil action[s] arising under" federal copyright law, a state court could exercise jurisdiction over a counterclaim for alleged copyright infringement:

[A]t the time this case arrived at our Court we regarded the federal authorities cited in this opinion as requiring us to force bifurcated litigation by finding exclusive federal jurisdiction over the Greens' counterclaim. However, we think the recent decision of the Supreme Court of the United States in Holmes . . . implies that there is no exclusive federal jurisdiction over this claim . . . .

. . . .

[U]ntil very recently the logic and language of a consistent body of federal decisions appeared to preclude a state court from entertaining a counterclaim under copyright law.

. . . .

. . . A number of state courts have also reached the conclusion that they may not entertain a claim that would be within [28 U.S.C.] section 1338 if filed as a complaint . . . .

All of the foregoing is, we think, trumped by the Supreme Court's ruling in Holmes . . . . [W]e think Holmes requires us to reject the federal authorities stating or implying that a state court may not entertain a counterclaim under patent or copyright law.[13]

Holmes thus overrules a substantial body of precedent holding that state courts lack jurisdiction to hear counterclaims arising under federal patent or copyright law.[14] Although state courts have long been recognized as having jurisdiction to decide questions of patent and copyright law arising in non-federal cases,[15] Holmes makes clear that state courts are equally competent to decide claims for alleged patent or copyright infringement when asserted in a state court defendant's answer. Omission of a compulsory counterclaim to a state court action can result in preclusion of the omitted claim in a subsequent federal court action.[16]

In the same way that Holmes has empowered state courts to hear patent and copyright counterclaims in cases not otherwise "arising under" federal patent law, the Holmes decision has similarly empowered the regional Courts of Appeals to hear and determine patent counterclaims notwithstanding the Federal Circuit's exclusive appellate jurisdiction over civil actions "arising under" federal patent law. This point is well-illustrated by the outcome in Holmes itself, as well as by the Federal Circuit's recent sua sponte transfer of an antitrust case to the Eleventh Circuit on the authority of Holmes.

In Holmes, the plaintiff filed suit in federal court (1) for a declaratory judgment of non-infringement of alleged "trade dress" claimed by the defendant in a "spiral grill design" embodied in household fan and heater fan products sold by the defendant, and (2) for injunctive relief and damages flowing from defendant's having allegedly competed unfairly with plaintiff by, among other things, making false, ex parte submissions to the United States International Trade Commission ("ITC")[17] and wrongfully disparaging products sold by the plaintiff. The plaintiff in Holmes asserted no claim "arising under" federal patent law; however, in its answer to the plaintiff's complaint, the defendant in Holmes asserted what the Supreme Court characterized as a compulsory counterclaim for alleged patent infringement.

The "trade dress" claim at issue in Holmes was the exact same claim held invalid in Vornado Air Circulation Sys., Inc. v. Duracraft Corp., 58 F.3d 1498 (10th Cir. 1995) ("Vornado I"), cert. denied, 516 U.S. 1067 (1996). Relying on the Tenth Circuit's judgment in Vornado I and the doctrine of offensive collateral estoppel,[18] the District Court in Holmes awarded summary judgment to the Holmes plaintiff on its first cause of action seeking a declaratory judgment of non-infringement of "trade dress".[19] The District Court rejected the defendant's argument that a 1999 decision of the Federal Circuit constituted a "change in the law" sufficient to justify re-litigation of the validity of the "trade dress" claim held invalid in Vornado I.[20] Final judgment was then entered in favor of the plaintiff under Fed. R. Civ. P. 54(b).

The Holmes defendant then took an appeal to the Federal Circuit, rather than the Tenth Circuit, notwithstanding that (1) the plaintiff's complaint had alleged no claim arising under federal patent law, (2) the District Court's judgment had determined no claim arising under federal patent law, (3) the defendant's patent counterclaim had been severed from the plaintiff's non-patent suit under Fed. R. Civ. P. 54(b), and (4) the defendant was openly seeking to mount a collateral attack on the final judgment of invalidity rendered by the Tenth Circuit in Vornado I. In its briefs to the Federal Circuit, the Holmes defendant openly urged that Court not to follow or enforce the law of the Tenth Circuit embodied in the Vornado I judgment.

Notwithstanding objections raised to its appellate jurisdiction, the Federal Circuit issued a 2-page Order in June 2001 which summarily vacated the District Court's summary judgment and remanded for further proceedings. The Federal Circuit appeared to accept the defendant's argument that under Aerojet-General Corp. v. Machine Tool Works, Oerlikon-Buehrle Ltd., 895 F.2d 736 (Fed. Cir. 1990) (en banc), the defendant's patent law counterclaim was sufficient to oust the Tenth Circuit of appellate jurisdiction over the plaintiff's non-patent suit. Aerojet had held that a patent law counterclaim was sufficient to bring a case within the exclusive appellate jurisdiction of the Federal Circuit, even if the plaintiff in an action sought no relief under patent law.

The Supreme Court granted certiorari in Holmes to consider whether the Federal Circuit properly asserted jurisdiction over the defendant's appeal. In its decision handed down June 3, 2002, the Court overruled Aerojet and held that a patent law counterclaim could not be the basis of Federal Circuit appellate jurisdiction, any more than it could be the basis of a District Court's original or removal jurisdiction. The Court accordingly vacated the Federal Circuit's judgment and remanded with instructions that the case be transferred to the Tenth Circuit for disposition. 122 S. Ct. at 1895.

In a concurring opinion, Justice Stevens stated that he was "persuaded that a correct interpretation of § 1295(a)(1) limits the Federal Circuit's exclusive jurisdiction to those cases in which the patent claim is alleged in either the original complaint or an amended pleading filed the plaintiff." 122 S. Ct. at 1896-97. Justice Stevens observed that "the interest in preserving the plaintiff's choice of forum includes not only the court that will conduct the trial but the appellate court as well. . . . In some cases that interest would be defeated by a rule that allowed a patent counterclaim to determine the appellate forum." Id. at 1897. With regard to the respondent's policy argument that having regional Circuits decide patent counterclaims could undermine the uniformity of, and thus be harmful to the development of, federal patent law, Justice Stevens responded:

An occasional conflict in decisions may be useful in identifying questions that merit this Court's attention. Moreover, occasional decisions by courts with broader jurisdiction will provide an antidote to the risk that the specialized court may develop an institutional bias. Id. at 1898 (footnote omitted).

Justice Ginsburg, in an opinion joined by Justice O'Connor, disagreed with the majority's view that the "well-pleaded complaint rule," as developed in the context of District Court original and removal jurisdiction, governed the scope of Federal Circuit appellate jurisdiction. Justices Ginsburg and O'Connor would have held that when a compulsory counterclaim "aris[es] under" federal patent law and is adjudicated on the merits by a federal district court, the Federal Circuit would have appellate jurisdiction over that adjudication and other determinations made in the same case. 122 S. Ct. at 1898. The Holmes majority rejected Justice Ginsburg's position as foreclosed by the statutory language of 28 U.S.C. § 1295(a)(1) and by Christianson which "held that the Federal Circuit's jurisdiction, like that of the district court, 'is determined by reference to the well-pleaded complaint, not the well-tried case.'" Holmes, 122 S. Ct. 1894 n.3 (quoting Christianson, 486 U.S. at 814). Justices Ginsburg and O'Connor nevertheless concurred in the judgment of the majority; for even under their view of the law, it was error for the Federal Circuit to have taken jurisdiction in a case where no patent claim was actually adjudicated. Id. at 1898.

Early in its history, the Federal Circuit had justified taking an expansive view of its jurisdiction under 28 U.S.C. § 1295(a)(1) in part on the basis that it would be applying regional Circuit law "in all but the substantive law fields assigned exclusively to this court."[21] The Federal Circuit stated in 1984, relatively shortly after the enactment of 28 U.S.C. § 1295(a)(1), that the Congress's "passage" of that statute "reflect[ed] its expectation that this court would not appropriate or usurp for itself a broad guiding role for the district courts beyond its mandate to contribute to uniformity of the substantive law of patents, plant variety, and the Little Tucker Act." [22]

In the late 1990's, however, the Federal Circuit reversed field and held that it would start fashioning "its own" substantive liability rules for antitrust, "trade dress," and other claims over which it had only pendent or non-exclusive jurisdiction.[23] The Federal Circuit justified its changed position on the basis that it was, in its words, "the tribunal having sole appellate responsibility for the development of patent law,"[24] which "responsibility" was further said to include "decid[ing] what patent law permits and prohibits" when asserted as a defense to a claim arising under non-patent law.[25] The Holmes case makes clear that (a) regional Circuits "have some role to play in the development of this area [federal patent law]"[26]; and (b) the Federal Circuit will no longer be fashioning non-uniform liability rules in cases commenced under antitrust, "trade dress," or other non-patent federal laws.

Holmes' diminution of Federal Circuit influence on non-patent law is illustrated by a pair of recent Federal Circuit decisions. In 2000, the Federal Circuit took jurisdiction over an antitrust case, CSU, L.L.C. v. Xerox Corp., 203 F.3d 1322 (Fed. Cir. 2000) ("Xerox"), cert. denied, 531 U.S. 1143 (2001), in which the plaintiffs alleged that the defendant had refused to supply them with patented replacement parts in alleged violation of Section 2 of the Sherman Act, 15 U.S.C. § 2. The purported basis of Federal Circuit jurisdiction in Xerox was a counterclaim for patent infringement set up by the defendant. In a controversial ruling,[27] the Federal Circuit held that "[w]hether conduct in procuring or enforcing a patent is sufficient to strip a patentee of its immunity from the antitrust laws is to be decided as a question of Federal Circuit law." 202 F.3d at 1325. The Federal Circuit then proceeded to hold that, according to its own view of federal antitrust legal standards, the defendant in Xerox was not liable to the plaintiffs. The Federal Circuit in Xerox expressly declined to follow the antitrust law articulated by the Ninth Circuit in Image Technical Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997) ("Kodak"), which involved similar facts and antitrust questions.

Subsequent to Holmes, a case very similar to Xerox came before the Federal Circuit and resulted in a very different outcome. In Telcomm Technical Serv., Inc. v. Siemens Rolm Communications, Inc., 2002 U.S. App. LEXIS 13189 (Fed. Cir. Jul. 2, 2002) ("Siemens"), the plaintiffs -- independent service organizations ("ISO's") like the plaintiffs in Xerox and Kodak -- sued under federal antitrust law based on the defendant's refusal to deal with them. The defendant counterclaimed for, among other things, patent infringement. In an Order issued July 2, 2002, the Federal Circuit held:

When the ISO's originally filed this appeal, our jurisdiction was predicated on the patent infringement counterclaim. . . . In the Supreme Court's intervening decision in Holmes Group, it held that the well-pleaded complaint rule endures no necromancy that would vest the statutory phrase "arising under" with a meaning that encompasses appellate jurisdiction in the Federal Circuit based on a patent infringement counterclaim. . . . Thus, we do not have jurisdiction to entertain the issues in the case, and accordingly we transfer this appeal to the Eleventh Circuit.

2002 U.S. App. LEXIS 13189, at *4-*5.

As exemplified by the recent Green and Siemens decisions, the Holmes case (1) strengthens the traditional right of plaintiffs to choose their law and forum, (2) contracts the exclusive appellate jurisdiction of the Federal Circuit, (3) reduces forum shopping opportunities between the Federal Circuit and regional Courts of Appeals on non-patent claims; (4) restores regional Circuit authority over cases commenced under antitrust, copyright, "trade dress," contract, or other non-patent law; and (5) expands the power of state courts to decide the entirety of cases properly brought before them under non-federal law. Seldom has one case effected such a multi-faceted reform of federal and state court litigation practice.