Carter v. Alk Holdings, Inc.

Claim That a Patent Practitioner Breached His Fiduciary Duty Established Federal Jurisdiction, and Court Denies Sanctions for Allegedly Frivolous Appeal


May 24, 2010


Last Month at the Federal Circuit - June 2010

Judges: Michel, Newman (concurring−in−part and dissenting−in−part), Dyk (author)

[Appealed from: N.D. Ga., Chief Judge Camp]

In Carter v. ALK Holdings, Inc., No. 08−1168 (Fed. Cir. May 24, 2010), the Federal Circuit held that a claim for breach of fiduciary duty by a patent practitioner was nonfrivolous and established federal jurisdiction.

Randall D. Carter was Vice President and General Manager of Acme Security, the trade name for ALK Holdings, Inc. (“ALK”), when he allegedly developed a high−security locking assembly for a safe deposit box door using his own resources. When a bank expressed interest in acquiring a license, the President of Acme Security, Michael Hassebrock, proposed a 50/50 partnership to pursue the invention. Carter and Hassebrock thus retained a patent attorney (“John Doe I”) to file a provisional patent application and subsequent nonprovisional application. When Hassebrock allegedly demanded that Carter assign his patent rights to Acme Security, Carter refused and his employment was terminated.

Carter filed suit against ALK, Hassebrock, and John Doe I, asserting six state law claims and nine federal law claims regarding the improper listing of Hassebrock as an inventor. The district court dismissed the federal claims for failure to state a claim, and declined to exercise supplemental jurisdiction over the state law claims, dismissing them without prejudice.

The district court then determined sua sponte that three of the asserted claims were frivolous: Count I − violation of Article I, Section 8, Clause 8 of the U.S. Constitution (“the Patent Clause”); Count VIII − breach of fiduciary duty by John Doe I in violation of 35 U.S.C. et seq., 37 C.F.R. et seq., and the MPEP; and Count XI − violation of 35 U.S.C. § 122 regarding the PTO’s requirement to keep patent applications in confidence. The district court imposed Rule 11 sanctions of $30,356.89 on Carter’s counsel, Myers & Kaplan Intellectual Property Law, LLC (“Myers & Kaplan”), and Myers & Kaplan appealed.

The Federal Circuit applied regional circuit law to review the district court’s Rule 11 determination for an abuse of discretion. Under Eleventh Circuit law, Rule 11 sanctions should only be imposed in limited circumstances where the frivolous nature of the claims−at−issue is unequivocal.

Turning first to Count VIII, the Federal Circuit disagreed with the district court’s characterization that the claim was “an attempt ‘to manufacture a federal cause of action by couching a garden−variety malpractice claim in terms of patent law.’” Slip op. at 7 (citation omitted). The Federal Circuit noted that the Code of Federal Regulations and the MPEP establish a patent practitioner’s expected fiduciary duties to a client, such as 37 C.F.R. § 10.66(b), which generally prohibits a practitioner from “continuing ‘multiple employment if the exercise of the practitioner’s independent professional judgment in behalf of a client will be or is likely to be adversely affected by the practitioner’s representation of another client, or if it would be likely to involve the practitioner in representing differing interests.’” Id. at 10. Thus, the Court held that Count VIII properly fell within 28 U.S.C. § 1338(a) federal jurisdiction as involving a substantial question of federal patent law.

Regarding Count I, Myers & Kaplan argued that Count I alleging a violation of the U.S. Constitution presented a nonfrivolous argument for establishing new law, which is expressly permitted by

Rule 11(b)(2). The Federal Circuit rejected that argument, agreeing with the district court that the Patent Clause does not create private rights of action on behalf of inventors. The Court thus held that Count I was frivolous and unsupported by any reasonable explanation.

Similarly with respect to Count XI, the Federal Circuit found that 35 U.S.C. § 122 does not apply to inventors but only to the actions of the PTO. Section 122(a) requires that “applications for patents shall be kept in confidence by the Patent and Trademark Office.” Myers & Kaplan argued that the defendants’ unlawful listing of Hassebrock as a co−inventor fraudulently induced the PTO to violate § 122 by intentionally disclosing the application to an unauthorized individual. The Federal Circuit declined to find a private cause of action in § 122 and noted that any parties that may have become aware of the application’s contents did so because of disclosure by the patent attorney, not the PTO.

Finally, the Federal Circuit observed that since Count VIII was nonfrivolous, the appeal was nonfrivolous. The Court therefore denied a motion filed by ALK and Hassebrock for additional sanctions against Myers & Kaplan for pursuing an allegedly frivolous appeal. The case was remanded to the district court to determine whether sanctions should be imposed with respect to Counts I and XI. The Court further noted that because Count VIII established federal jurisdiction, and because the district court’s primary concern appeared to be an impermissible claim to jurisdiction, the district court could appropriately conclude that no sanctions should be imposed.

Judge Newman filed a separate opinion concurring−in−part and dissenting−in−part. While she agreed that Count VIII was nonfrivolous and established federal jurisdiction, Judge Newman argued that sanctions should be reversed rather than remanded regarding Counts I and XI. She noted that the issue on appeal was not whether Counts I and XI were properly dismissed, but the necessity of sanctions, and cited Eleventh Circuit law, wherein Rule 11 is intended to deter claims with no factual or legal basis at all, not to chill an attorney’s enthusiasm or creativity in pursuing factual or legal theories. Because the Court had determined that Count VIII established federal jurisdiction, Judge Newman argued that the pleading of Counts I and XI did not warrant sanctions.