In a fractured decision issued July 24, 2020, the Federal Circuit affirmed-in-part and reversed-in-part the District Court for the Southern District of Texas’ decision to dismiss based upon a determination that the Eleventh Amendment barred joinder of the University of Texas (“UT”) and that the suit could not proceed without UT.
Background
Gensetix, Inc. (“Gensetix”) is the exclusive licensee of two U.S. Patents owned by UT, directed to methods of modifying a patient’s immune system to kill cancer cells (U.S. Patent Nos. 8,728,806 & 9,333,248). Under the license agreement, Gensetix must, at its own expense, enforce any patent covered by the license and is entitled to recover from such enforcement. If Gensetix fails to file an infringement suit within six months of knowledge of infringement, UT retains the right to sue. Both parties agreed to fully cooperate with each other in any infringement suit. However, the agreement also stated that UT does not waive its sovereign immunity by entering the contract.
Gensetix filed the underlying suit against Baylor College of Medicine, Diakonos Research Ltd, and William K. Decker (collectively, “Baylor”) in April 2017, alleging infringement of the licensed patents. As an interesting side note, defendant William K. Decker is a named inventor of the patents-in-suit, which were developed during his employment at UT. Dr. Decker subsequently left UT and joined the faculty at Baylor.
Upon filing suit, Gensetix noted that they contacted UT to request that they join as co-plaintiff, but UT declined. As such, Gensetix named UT to the suit as an involuntary plaintiff pursuant to Rule 19(a).
UT proceeded to file a motion to dismiss pursuant to Rule 12(b)(1), seeking to dismiss itself from the lawsuit on the grounds that it is a sovereign entity as an arm of the state of Texas and thus shielded from compulsory joinder under the Eleventh Amendment. UT noted that they did not waive sovereign immunity in the license agreement with Gensetix.
Baylor, in turn, argued that UT is a necessary party as owner of the patents-in-suit and agreed with UT’s position that UT cannot be joined as an involuntary plaintiff due to Eleventh Amendment sovereign immunity. Baylor further argued that Rule 19(b) factors weighed in favor of dismissing the suit.
The District Court granted UT’s motion to dismiss, holding that “[t]he purpose of the Eleventh Amendment is to prevent states from being compelled to litigate.”[1] Since UT did not waive immunity or agree to participate in the suit, the District Court found the Eleventh Amendment prohibited involuntary joinder of UT. Regarding the issue of whether the suit could proceed without UT, the District Court held that UT was a “necessary” and “indispensable” party under Rule 19(a) since they retained substantial rights in the patents-in-suit.
Gensetix Appeals
Gensetix appealed the decision, arguing that the District Court (1) erred in holding that sovereign immunity bars coercive joinder of UT pursuant to Rule 19(a); and (2) abused its discretion in determining that the suit should be dismissed under Rule 19(b) rather than proceed in UT’s absence.
Specifically, regarding joinder, Gensetix argued that the Eleventh Amendment bars suits brought by private citizens against the state, which is not the case here, making sovereign immunity inapplicable.
Majority Decision
The majority decision of the Federal Circuit, authored by Judge O’Malley, disagreed with Gensetix’s attempt to limit the Eleventh Amendment to solely cases “against” a state, finding this argument is contrary to Supreme Court guidance applying the Eleventh Amendment more broadly. The majority decision noted that the only cases limiting Eleventh Amendment immunity are those initiated by the State itself where the State later attempts to remove itself or otherwise limit its participation. In such cases, the States voluntarily pursued claims in federal court, thereby constructively waiving immunity. In this case, however, UT repeatedly resisted joining suit and thus, the majority decision affirmed that UT cannot be forced to join the suit under the Eleventh Amendment.
Of note, the majority decision found it to be “of no moment that the license agreement requires initiation of an infringement suit by Gensetix or cooperation by UT in any infringement suit. Although UT willingly entered into the license agreement, so too did Gensetix. It agreed to terms expressly stating that UT was not waiving its sovereign immunity, and terms that allow UT to initiate a suit on behalf of Gensetix, but not the other way around.”
Judge Newman Dissention
Judge Newman dissented from this portion of the decision, stating that the Eleventh Amendment does not insulate a State from its contractual obligations. In her dissent, Judge Newman stated that the license agreement between UT and Gensetix requires Gensetix to enforce the patents-in-suit against infringement by third parties and requires the parties to cooperate fully with each other in any infringement action. By refusing to be named as a party to this suit, UT prevents enforcement of the patents. This not only violates UT’s agreement to “cooperate fully,” but also deprives its licensee of the agreed upon exclusivity. “When a State enters into commerce, it accedes to the rules of commerce.” Judge Newman therefore disagreed with,
“the majority’s conclusion that the Eleventh Amendment shields the University from compliance with its contractual obligation to ‘cooperate fully’ with its exclusive licensee, Gensetix, in enforcing these patents against infringers.”
The panel then turned to the question of whether the case should proceed without UT. On this point, the majority disagreed with the District Court and agreed with Gensetix that the District Court abused its discretion by failing to meaningfully analyze each of the Rule 19(b) factors. These factors are:
- the extent to which a judgment rendered might prejudice the missing required party or the existing parties;
- the extent to which any prejudice could be lessened or avoided
- whether a judgment rendered in the required party’s absence would be adequate; and
- whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder.
Regarding the first factor, the District Court found that “a judgment rendered in UT’s absence might prejudice UT or the parties to the litigation” because of the risk that UT’s patent(s) may be invalidated. The majority decision, however, noted that Gensetix has a license in every field of use and thus, Gensetix’s interest in the validity of the patents-in-suit is identical to UT’s interest. Accordingly, the prejudice to UT is minimal because Gensetix will adequately protect UT’s interests.
Further, the majority decision found that “the district court also to properly analyze the third Rule 19(b) factor.” The District Court “decline[d] to determine whether UT would be judicially estopped from later filing suit against [Baylor] for the purposes of this Rule 19(b) analysis.” However, the District Court explicitly found that UT’s right to sue is secondary to Gensetix and thus it is clear that UT cannot initiate suit against Baylor now that Gensetix has already done so. Therefore, the Federal Circuit concluded that allowing the litigation to proceed in UT’s absence does not pose a substantial risk of multiple suits.
Finally, the majority decision found that the District Court did not place appropriate weight on its analysis of the fourth Rule 19(b) factor by dismissing the prejudice to Gensetix as simply “an inherent risk for anyone who chooses to contract with a sovereign entity.” Although the majority decision agreed there is an inherent risk in contracting with a sovereign entity, “the district court should have given weight to the fact that Gensetix is without recourse to assert its patent rights because UT cannot be feasibly joined.” Thus, the majority found that this factor weighs heavily in favor of allowing the case to proceed without UT.
Judge Tarento Dissention
Judge Tarento dissented with this portion of the majority decision and would have affirmed dismissal of the suit under Rule 19(b). Relying on the Supreme Court’s decision in Republic of Philippines v. Pimentel, 553 U.S. 851 (2008), since UT cannot be joined and made a non-frivolous assertion that it will be prejudiced by the suit proceeding in its absence, Judge Tarentowould have found that the district court did not abuse its discretion in dismissing the case.
Takeaways
In view of the majority decision, the Federal Circuit reversed the portion of the District Court’s decision dismissing the case and remanded the case for proceedings consistent with their opinion.
Although this case will proceed in the absence of the patent owner, the fractured decision suggests the jurisprudence is far from settled in this area. Care should be taken when negotiating licenses with sovereign entities to ensure the roles and responsibilities of each party in potential infringement actions are well defined.
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Sources
[1] Gensetix, 354 F. Supp.3d at 766 (internal quotation marks omitted).
