IP malpractice claims rising

By J. Randolph Evans, Shari Klevens and Suzanne Y. Badawi

Legal malpractice lawsuits arising from intellectual property disputes are on the rise in California, and throughout the country. California patent attorneys are particularly vulnerable as the number of malpractice actions stemming from patent representation is experiencing particular growth.

There are many theories regarding why the number of suits is increasing, but the prevailing perception seems to be higher stakes in response to the ever increasing value of intellectual property, including patents, copyrights and trademarks. Indeed, the case discussed below involves the allegation of a $100 million mistake by counsel. If a client loses the protection afforded by its intellectual property, including licensing and exclusivity rights, it may experience significant lost revenues. Accordingly, when such a loss occurs, clients look for a way to recover. Suing the attorney who filed the patent, papered the deal, or litigated the issue, is one avenue for potential recovery. Notwithstanding this bad news, however, a recent decision by the U.S. Supreme Court creates a potential opportunity for California attorneys to avoid a legal malpractice case filing against the attorney, as described more fully below.

As background, when a former client is looking to sue his attorney, one of the client's first decisions to make is where to bring the lawsuit. Intellectual property is governed by federal law and is therefore a federal question. However, that does not mean that suits arising out of alleged breach of duty in handling intellectual property cases will necessarily constitute a federal question or otherwise fall within the ambit of federal subject matter jurisdiction.

In California, as of 2010, the prevailing precedent was that a legal malpractice case arising from a patent matter did fall within federal subject matter jurisdiction and therefore belonged in the federal courts. Specifically, in the case Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP, 183 Cal. App. 4th 238 (2010), rehearing denied (Apr. 28, 2010), review denied (July 14, 2010), the court, relying heavily on various circuit court decisions, held that a legal malpractice case alleging that the attorney filed a defective patent application raised substantial federal patent law questions. Consequently, a patent legal malpractice case filed in California could be removed to federal court if filed in state court and denied remand if filed in federal court.

But a recent U.S. Supreme Court decision effectively upended the federal circuit court precedent relied on by the Landmark Screens court. Specifically, in Gunn v. Minton, 2013 DJDAR 2342 (Feb. 20, 2013), the Supreme Court addressed the very question of whether the federal courts had subject matter jurisdiction over state law claims alleging legal malpractice in the handling of patent infringement litigation. The answer was, no. In that case, the former client, Minton, originally sued his attorneys in Texas state court, arguing that the attorneys' failure to raise the experimental use exception to patent infringement. The exception generally applies where an alleged infringer uses the patented invention for the mere purpose of intellectual curiosity. Not raising the exception, claimed Minton, led to him losing the lawsuit and to the invalidation of his patent for a computer program and telecommunications network. The trial court granted summary judgment to the attorneys, finding that Minton failed to put forward evidence that, had the attorneys raised the exception in the underlying case, the exception would apply. Minton appealed, arguing that, because his malpractice claim was based on an alleged error in a patent case, it arose under federal patent law for purposes of 28 U.S.C. Section 1338(a). The Texas Court of Appeal rejected the argument, the Texas Supreme Court reversed, and the case went to the U.S. Supreme Court.

At the heart of the jurisdictional debate in the Gunn case was the issue of whether a malpractice claim that stems from an intellectual property case arises under any act of Congress relating to patents, such that it would fall within the exclusive jurisdiction of the federal courts. Because the case did not raise a federal question, the Gunn court applied a 3-part test, articulated in Grable & Sons Metal Products, Inc. v. Darue Engineering & Mtg., 545 U.S. 308 (2005), to decide whether the federal courts had subject matter jurisdiction. In applying the 3-part test, the court decides 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.

In Minton's case, the court held that legal malpractice arising out of patent infringement litigation failed to raise a substantial federal issue. Minton argued that, to determine whether failing to argue the experimental use exception constituted malpractice, the court would have to consider whether Minton would have prevailed under the experimental use exception to patent infringement, and therefore the case-within-the-case was a federal question that gave rise to federal jurisdiction to insure the uniform application of patent laws. The court disagreed, explaining that no matter how the state court resolved the hypothetical case-within-the-case, it would not change the "real-world result" of the prior federal patent litigation that gave rise to the malpractice action. In fact, the court articulated that claims based on underlying patent matters will "rarely if ever" arise under federal patent law and that such cases are "by their nature" unlikely to have the "sort of significance for the federal system necessary to establish jurisdiction." Indeed, within one week after Gunn was decided, a district court applied the Gunn case and dismissed a patent-based malpractice claim against Patten Boggs LLP and two other firms. Citing Gunn, the judge in that case held that there was no federal subject matter jurisdiction over the malpractice action regarding an underlying patent matter.

In summary, malpractice cases against patent attorneys will likely stay in state court based on the Gunn ruling. What does this mean for attorneys in California? First, because Gunn held that there is no federal subject matter jurisdiction over patent-based legal malpractice cases, the Landmark Screens case is effectively overruled for all intents and purposes. Second, if an attorney is sued in federal court for malpractice stemming from an intellectual property matter, and if diversity does not exist, the attorney may want to consider filing a motion to dismiss for lack of subject matter jurisdiction. In such cases, if the plaintiff seeks to re-file in state court, their claim may barred by the statute of limitations and subject to a dispositive state court motion. Third, given the court's analysis on the substantiality element, it seems plausible that the ruling may be broadened to cover malpractice cases arising from other federal question subject matter cases, such as intellectual property disputes other than patent (copyright and trademark), CERCLA, ERISA, bankruptcy, federal securities actions, antitrust, and Section 1983 claims. Accordingly, despite the underlying federal question in each instance, there may be no basis for federal subject matter jurisdiction over subsequent malpractice claims.

J. Randolph Evans is a partner in the Georgia office of McKenna Long & Aldridge LLP.

Shari Klevens is a partner in the Washington, D.C. office of McKenna Long & Aldridge LLP.

Suzanne Y. Badawi is a partner in the Los Angeles office of McKenna Long & Aldridge LLP.

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