CAFC "Punts" Medimmune Issue on 12(b)(6), but Allows Standing in Walker Process Claim

Hydril Co. LP v. Grant Prideco LP (06-1188) - January 25, 2007

Hydril and Grant Prideco had cross-licensed various patents related to threaded connections for interlocking lengths of drill pipe used in drilling oil and gas wells. Under terms of the agreement, Grant Prideco was restricted to developing only large-diameter connections, while Hydril was restricted to developing only small-diameter connections.

While the agreement was in force, Grant Prideco obtained a patent that pertained to small-diameter connections and subsequently sent numerous letters to Hydril's customers suggesting that they take action to "ensure that [Grant Prideco's] patent rights are being respected." Feeling a "reasonable apprehension" that a lawsuit was forthcoming, Hydril filed for declaratory judgment relief, alleging that Grant Prideco (1) monopolized two product markets by enforcing a patent that had been obtained by fraud on the Patent and Trademark Office (i.e., a Walker Process claim), (2) infringed a different patent that Hydril owns, and (3) breached the agreement between the parties.

The district court dismissed the case under Rule 12(b)(6) for failure to state a valid claim for relief, concluding that Hydril could not objectively establish reasonable apprehension that Grant Prideco intended to enforce its patent against Hydril. Also, the district court dismissed the patent claim, claiming that the agreement provided only a breach of contract remedy, and refused to grant supplemental jurisdiction over the state law contract claim.

While the majority decision reversed and vacated the district court's decision, it was apparent that the CAFC did not want to make the first extensive post-Medimmune analysis on the facts of the case (and, notably, prior to the Medimmume remand itself). It's also worth noting that the oral arguments took place back in October of 2006, which was 3 months prior to Medimmune. As one reader commented, it seems as though this case, decided just over two weeks after Medimmune, came at the CAFC like Kato flying out of Inspector Clouseau's broom closet ("no Kato - now is not zee time!").

Under a Walker Process claim, enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act. Walker Process fraud is a variant of common law fraud, which includes: (1) a representation of a material fact, (2) the falsity of that representation, and (3) the intent to deceive or, at least, a state of mind so reckless as to the consequences that it is held to be the equivalent of intent (scienter). Looking at the conduct alleged by Hydril, the court concluded that the conduct, if proven, would constitute Walker Process fraud.

The court decided narrowly that the district court improperly dismissed the case under 12(b)(6) as it pertained to the Walker Process claim, but the court carefully avoided any analysis on the standing issue ("this case does not present an occassion to address the Supreme Court's recent decision in Medimmune").

Regarding the patent infringement, the court interestingly concluded that Grant Prideco's conduct was a breach of the agreement, despite questioning earlier whether or not a breach actually occurred. Since there was material breach, the CAFC stated that the agreement was irrelevant to the claims of patent infringement, and that the rules of patent law apply. Again, the CAFC declined to address standing, and concluded:

To avoid any possible misunderstanding of our narrow decision, we point out (perhaps unnecessarily) that in reversing and remanding we neither express nor intimate any view on the remaining issues in this case. We hold only that, in response to a motion to dismiss under Rule 12(b)(6), the district court should not have dismissed the Sherman Act and patent infringement claims.

Judge Mayer's dissent: The dissent chided the majority for not affirming the dismissal, since Hydril admitted that it only competes with Grant Prideco in the market outside the United States. "Thus, as a matter of both law and logic, a "reasonable apprehension" of patent enforcement cannot exist where neither the plaintiff nor any of its customers may be subject to the exclusionary power of a patent. "

The dissent also argued that dismissal wasn't even dependent on the facts of the case, and that the pleadings alone warrant dismissal of the case:

This is a question of law that should be resolved without any further ado, especially since the instant appeal is from a Rule 12(b)(6) motion to dismiss for failure to state a claim. It should be decided on the sufficiency of the pleadings, and is not dependant on the factual record of the case. Accordingly, rather than punt this question of law back to the district court, we should hold that Hydril does not have standing to bring a Walker Process antitrust claim with respect to the finished drill pipe market because it admittedly only competes with Grant Prideco in that market "outside the United States."

REVERSED-IN-PART, VACATED-IN-PART, AND REMANDED