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Delano Farms Co. v. California Table Grape Commission

July 26, 2010

DELANO FARMS COMPANY, FOUR STAR FRUIT, INC., AND GERAWAN FARMING, INC., PLAINTIFFS,
v.
THE CALIFORNIA TABLE GRAPE COMMISSION, UNITED STATES OF AMERICA, UNITED STATES DEPARTMENT OF AGRICULTURE, TOM VILSACK, SECRETARY OF THE UNITED STATES DEPARTMENT OF AGRICULGURE (IN HIS OFFICIAL CAPACITY), DEFENDANTS.



The opinion of the court was delivered by: Oliver W. Wanger United States District Judge

MEMORANDUM DECISION AND ORDER GRANTING FEDERAL DEFENDANTS AND CALIFORNIA TABLE GRAPE COMMISSION'S MOTIONS TO DISMISS THE SECOND AMENDED COMPLAINT (DOCS. 99 & 101); AND DENYING AS MOOT PLAINTIFFS' MOTION FOR CERTIFICATION OF INTERLOCUTORY APPEAL (DOC. 93).

I.INTRODUCTION

The United States, et al., ("Federal Defendants") and the California Table Grape Commission ("Commission"), separately move to dismiss Plaintiffs', Delano Farms Company ("Delano"), Four Star Fruit, Inc. ("Four Star"), and Gerawan Farming, Inc. ("Gerawan"), entire Second Amended Complaint ("SAC") pursuant to Federal Rules of Civil Procedure 12(b)(6).

Federal Defendants argue:

(1) Plaintiffs have waived their Administrative Procedure Act ("APA") claims concerning the grant of exclusive licenses by failing to exhaust those claims at the administrative level; and

(2) to the extent that Plaintiffs directly challenge the enforceability of the patents held by Federal Defendants, any such challenge should be rejected.

Doc. 100.

The Commission's motion argues:

(1) the APA challenge fails for lack of exhaustion;

(2) the unfair competition claim, Cal. Bus. & Prof. Code § 17200 et seq., against the Commission must be dismissed because it is:

(a) preempted by federal law;

(b) the Commission is not a proper defendant under § 17200; and

(c) the cause of action fails to state a claim; and

(3) the unjust enrichment and constructive trust claims also fail to state valid claims.

Doc. 102.

Plaintiffs oppose both motions. Doc. 109. Defendants replied. Docs. 111 & 113. The matter came on for hearing June 29, 2010.

A. USDA Research Program

California table grape growers and shippers have funded a USDA research program to develop new table grape varieties through assessment imposed by the Commission on each box of table grapes shipped in California. SAC ¶18. Prior to 2002, the USDA provided the new varieties under development to area growers for evaluation of growing potential and commercial marketability. Id. Once new varieties appeared commercially viable, the USDA "released" the variety, and distributed plant material of the variety to area growers free of charge. Id. It is alleged that USDA did not charge California growers for the new varieties because California growers and shippers already paid for a large portion of the development. Id.

B. Patenting of Grape Varieties

In the late 1990s, at the urging of the Commission, the USDA agreed to begin patenting new table grape varieties. SAC ¶19. The first three varieties the Commission referred to the USDA for patenting, Sweet Scarlet, Autumn King, and Scarlet Royal, had been under development for years. It is alleged that at least one of the varieties, Sweet Scarlet, had been distributed to growers for wide-scale commercial evaluation and sale. SAC ¶¶ 22-23. Patent applications for Sweet Scarlet, Autumn King, and Scarlet Royal, were filed with the United States Patent and Trademark Office ("USPTO") on February 20, 2003 (Application No. 371,512), September 28, 2004 (Application No. 953,387), and September 28, 2004, (Application No. 953,124), respectively. Patents were issued on July 26, 2005 (Patent No. PP15,891 ("891 Patent")), February 21, 2006 (Patent No. PP16,284 ("284 Patent")), and January 31, 2006 (Patent No. PP16,229 ("229 Patent")). See SAC ¶¶ 25-33.

The USDA agreed to give the Commission an exclusive license to all newly Patented Varieties, and to allow the Commission to charge royalties when growers wished to obtain the new varieties. SAC at ¶41. The USDA also agreed to give the Commission exclusive enforcement powers over its new patent rights. SAC ¶19.

The Commission then selected three nurseries to exclusively sell all new patented table grape varieties ("Licensed Nurseries"). SAC ¶20. Unlike the prior free distribution, the nurseries were authorized to sell new varieties to growers. Id. In accordance with the agreement between the Commission and the USDA, the Commission charges nurseries who distribute Patented Varieties a $5000.00 participation fee per patented variety and an additional $1.00 per production unit royalty. SAC ¶46. The Licensed Nurseries are responsible for paying the royalty, but the Licensed Nurseries may and do pass the royalty cost on to the purchasing growers. SAC ¶¶ 20, 76.

When a grower seeks to obtain a new variety from a nursery, it is required to enter into a "Domestic Grower License Agreement" ("License Agreement") with the Commission. Under the terms of the License Agreement, the grower cannot propagate the variety beyond the plant purchased. SAC ¶21. If the Commission believes the grower has violated the License Agreement, it can void the License Agreement and order that all purchased plants be destroyed. Id.

Recognizing that at least one of the new varieties identified for patenting (and perhaps all three) had been previously in public use and/or sold commercially, the Commission created a so-called "amnesty program," allegedly designed to hide the fact that valid patents could not be obtained, and to "extort" funds from growers already in possession of the varieties. SAC ¶23. Under the amnesty program, the Commission widely disseminated notices to growers and shippers stating that they were in violation of the law if they possessed the varieties intended for patenting. The notices also offered confidential "settlements" to any growers who, within a narrow time window, agreed to license the varieties, pay a "penalty" to the Commission, and accept the Commission's license restrictions on further propagation. Id.

Under its so-called "amnesty" program, a grower with Sweet Scarlet could keep the vines reproduced, so long as the grower: (i) admitted to possession prior to July 2004, (ii) paid $2 per vine reproduced, (iii) paid $2 per box of Sweet Scarlet grapes previously shipped, and (iv) agreed to no further propagation of the Sweet Scarlet variety from the plants possessed. SAC ¶55. In July 2004, the Commission sent another notice to all California table grape growers and shippers extending the "amnesty" time period for one month, and extending the "amnesty" to include Autumn King and Scarlet Royal varieties. SAC ¶56.

In both notices, the Commission threatened to sue growers who did not come forward, and to seek money damages and injunctions. Plaintiffs claim that at the time of the second notice, the USDA patent application on Sweet Scarlet had not been issued and had been rejected by the USPTO. Moreover, the USDA had not even applied for a patent on either Autumn King or Scarlet Royal. The USDA had no patent rights, and the Commission lacked any enforcement rights in either grape variety. SAC ¶57.

C. Plaintiffs' License Agreements

Plaintiffs are in possession of the Autumn King, Sweet Scarlet and Scarlet Royal varieties, which they purchased through Licensed Nurseries. SAC ¶60. Plaintiffs paid the royalties imposed by the Commission on each purchased plant. Id. Plaintiffs have entered into a License Agreement with the Commission for each of the Patented Varieties. SAC ¶¶ 60-63. In consideration for this limited, nonexclusive license, Plaintiffs have paid a license fee to a Licensed Nursery. Id. Under the terms of this agreement, Plaintiffs have a limited, nonexclusive license to grow the Patented Varieties and sell the fruit produced. Id. Plaintiffs cannot propagate the grapevines or distribute the vines to third parties. Id. Further, Plaintiffs are obligated to destroy all Patented Varieties' plant material upon termination of the agreement. Id.

D. Original Complaint and February 20, 2009 Decision

Plaintiffs' original complaint named only the Commission as a defendant, alleging (at claims 1-3) the patents for all three varieties should be declared invalid, Doc. 1 at ¶¶ 66-86; (at claim 4) the patent for the Sweet Scarlet variety should be declared unenforceable because neither the Commission nor USDA disclosed to the USPTO that the three varieties had been in public use prior to February 2002, id. at ¶¶ 87-85; (at claim 5) the Commission violated the Sherman and Clayton Acts by illegally monopolizing the market for table grapes, id. at ¶¶ 96-103; (at claim 6) the Commission misused the patents "in violation of antitrust laws and in a manner that attempts to extend [the] patents beyond their lawful scope, id. at ¶¶ 104-109; (at claim 7) unfair competition, id. at ¶¶ 110-114; (at claim 8) unjust enrichment, id. at ¶¶ 115-117; and (at claim 9) constructive trust, id. at ¶¶ 118-121. The Commission moved to dismiss, arguing the United States is a necessary and indispensable party that is immune from suit and that all of the claims in the case were without legal foundation.

As to the issue of joinder, the February 20, 2009 Decision emphasized that because Plaintiffs' substantive causes of action sought to invalidate patents owned by the United States, the United States is a necessary party under Federal Rule of Civil Procedure Rule 19(a). Doc. 42 at 22-34. Once it has been determined that an absent party to the suit is "necessary" under Rule 19(a), the inquiry is whether that party, the United States, can be joined in the action. Dawavendewa v. Salt River Project Agr. Imp. and Power Dist., 276 F.3d 1150, 1159 (9th Cir. 2002). "Absent a waiver, sovereign immunity shields the Federal government and its agencies from suit." F.D.I.C. v. Meyer, 510 U.S. 471, 475 (1994). A waiver of sovereign immunity must be unequivocally expressed. Department of Army v. Blue Fox, Inc., 525 U.S. 255, 261 (1999). The February 20, 2009 Decision decided sovereign immunity had not been waived:

A declaratory judgment seeking invalidity of a U.S.-owned patent squarely implicates sovereign immunity. Further, property owners are generally necessary parties to actions that could affect their property interests adversely. The United States, as owner of the Patented Varieties, is no exception....

***

Under the only patent-related waiver of sovereign immunity, 28 U.S.C. § 1498 permits private parties to bring patent infringement suits in United States Federal Claims Court to seek money damages only. 28 U.S.C. § 1498. "In waiving its own immunity from patent infringement actions in 28 U.S.C. § 1498(a) (1994) ed. and Supp. III)," the United States did not consent to treble damages nor injunctive relief, and permitted reasonable attorney's fees in a narrow Florida Prepaid Post-secondary Educ. Expense Bd. v. College Sav. class of specified instances.

Bank, 527 U.S. 627, 648, n.11 (1999). This suit must be brought in Federal Claims Court against the United States and by its plain terms 28 U.S.C. § 1498 does not cover declaratory judgments seeking to invalidate a patent. Further, the federal statute covering declaratory relief actions, the Declaratory Judgment Act, 28 U.S.C. §2201, standing alone, does not waive sovereign immunity. Wyoming v. United States, 279 F.3d 1214, 1225 (10th Cir. 2002) (the declaratory judgment statute, 28 U.S.C. §2201, itself does not confer jurisdiction on a federal court where none otherwise exists). "It is well settled, however, that said Act [Declaratory Act] does not of itself create jurisdiction; it merely adds an additional remedy where the district court already has jurisdiction to entertain the suit." Wells v. United States, 280 F.2d 275, 277 (9th Cir. 1960).

***

The United States cannot be joined absent a clear waiver of sovereign immunity. Plaintiffs have not shown such a waiver exists. The United States cannot be joined.

Doc. 42 at 35-38.

Plaintiffs argued that APA section 702, 5 U.S.C. § 702, constitutes a sufficient waiver of sovereign immunity. After discussing the APA's waiver of sovereign immunity and relevant Ninth Circuit authority, the February 20, 2009 decision concluded:

Plaintiffs have cited no case where the APA § 702 was invoked as an asserted waiver of sovereign immunity for purposes of bringing a patent invalidity case against the United States. However, if Plaintiff can amend the Complaint to adequately state a § 702 APA claim against the United States, it may.

Doc. 42 at 41.

Because the United States was a necessary party that could not be joined, the February 20, 2009 Decision considered whether the United States was "indispensable." See Fed. R. Civ. P. 19(b). "A party is indispensable if in 'equity and good conscience,' the court should not allow the action to proceed in its absence." Dawavendewa, 276 F.3d at 1161, quoting Fed. R. Civ. P. 19(b). Rule 19(b) sets out four factors to determine whether a case must be dismissed:

(1) prejudice to any party or to the absent party;

(2) whether relief can be shaped to lessen prejudice;

(3) whether an adequate remedy, even if not complete, can be awarded without the absent party; and

(4) whether there exists an alternative forum. Kescoli v. Babbitt, 101 F.3d 1304, 1310-11 (9th Cir. 1996). However, where the absent party cannot be joined in light of sovereign immunity, "there may be very little need for balancing ... because immunity itself may be viewed as the compelling factor." Id. at 1311.

These factors were applied as follows:

The first factor weighs in favor of dismissal....Plaintiffs seek to invalidate and declare unenforceable patents owned by the United States. The validity of the USDA's patent has been challenged. If invalidated ... the Patents, would be destroyed, Patented Varieties would be freely marketed, and the USDA would lose royalties. The patents would be declared invalid under claims one through three of the Complaint and unenforceable under claim four for inequitable conduct and claim six for patent misuse.

***

The second factor, whether prejudice can be lessened by shaping the relief provided, also weighs in favor of dismissal. No declaratory, injunctive or compensatory relief would be granted under the Complaint if the patent's validity were not challenged. "Any measures to lessen these prejudices would necessarily dilute the efficacy of the judgment sought." Messerschmitt-Boelkow-Blohm GmgH v. Hughes Aircraft, 483 F. Supp. 49, 53 (S.D.N.Y. 1979). Although the Complaint is brought against the Commission alone, granting declaratory relief requires finding that the Commission had no authority to enforce an invalid patent, that the patent is invalid and unenforceable, a patent which is owned by the USDA, a branch of the United States. Here, any judgment cannot be tailored to eliminate the prejudice to the United States. A finding for Plaintiffs would declare invalid patents owned by the United States, abrogating the United States' interest in the patents, not only depriving the United States of royalties under the patents, but ending the United States' ability to license the patents.

***

The third factor, adequacy of remedy, also favors dismissal. "'[A]dequacy' refers not to satisfaction of [Plaintiffs'] claims, but to the 'public stake in settling disputes by wholes, whenever possible.'" Republic of Philippines Provident Tradesmens Bank & Trust Co. v. Patterson, 128 S.Ct. at 2183, citing, 390 U.S. 102, 111 (1968). Republic of Phillippines As in, "[g]oing forward with the action in the absence of" the United States, "would not further this public interest because they could not be bound by a judgment to which they were not parties." Id. The Court held the University had not waived its Eleventh Amendment immunity.

The fourth factor is whether there is an available alternative forum. First is the Court of Federal Claims, expressly authorized by statute. Plaintiffs have an opportunity to raise the defense of patent invalidity and unenforceability in an action brought against them for patent infringement brought by the United States or the Commission. See 35 U.S.C. § 282. [Footnote] However, to require Plaintiffs to violate the license and wait to see whether the patent owner sues for infringement creates an unfavorable situation as damages could be exacerbated. Where "no alternative forum exists, the district court should be 'extra cautious' before dismissing an action." Kescoli v. Babbitt, 101 F.3d 1304, 1311 (9th Cir. 1996). But just as the courts have held in actions involving tribal immunity and state immunity, sovereign immunity of the United States can justify dismissal for inability to join an indispensable party, despite the fact that no alternative forum is available. "If the necessary party is immune from suit, there may be very little need for balancing Rule 19(b) factors because immunity itself may be viewed as the compelling factor." Id. at 1311 (internal citations and quotations omitted). The latest Supreme Court case, Republic of Philippines v. Pimentel, 128 S. Ct. 2180 (2008), to address Rule 19, held as to immunity barring an action from proceeding without the sovereign party:

The analysis of the joinder issue in those cases was somewhat perfunctory, but the holdings were clear: A case may not proceed when a required-entity sovereign is not amenable to suit. These cases instruct us that where sovereign immunity is asserted, and the claims of the sovereign are not frivolous, dismissal of the action must be ordered where there is a potential for injury to the interests of the absent sovereign. 128 S.Ct. at 2190-91. In this context, dismissal is appropriate even if Plaintiffs have no alternative forum for their claim. See Dawavendewa, 276 F.3d at 1162.

Because the proceedings in this case threaten both the property and sovereign immunity of the United States, the United States' failure to waive its immunity from suit strongly supports dismissing this litigation in its absence.

Doc. 42 at 42-47. All of the claims relating to patent invalidity, inequitable conduct, and patent misuse were dismissed on the ground that the United States is a necessary and indispensable party.

The Commission's separate motion to dismiss the antitrust claim was granted with leave to amend because Plaintiffs did not adequately allege each of the Patented Varieties constitutes its own relevant market. Id. at 62. The misuse claim was likewise dismissed. Id. Plaintiffs' misuse claim rested in part on allegations that the Commission illegally monopolized interstate and foreign commerce in bad faith by enforcing alleged patent rights, as the exclusive licensee of the patents, and collecting royalty fees on the Patented Varieties under its "amnesty" program. The amnesty program was rejected as a basis for a misuse claim:

As to the first theory, there is no viable claim for the "amnesty program" as the Commission could not have misused patents that did not exist and at most were inventions in the pre-issuance stage. License agreements entered into after a patent application has been filed but before the patent issues are not necessarily unenforceable. Aronson v. Quick Point Pencil Co., 440 U.S. 257, 264-65 (1979). The "key inquiry is whether, by imposing conditions that derive their force from the patent, the patentee has impermissibly broadened the scope of the patent grant with anticompetitive effect." C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1372 (Fed. Cir. 1998). Pre-issuance, there is no patent right to impermissibly broaden. The doctrine of patent misuse could not be brought into play in Aronson, which concerned a license agreement entered into before issuance of the patent, but after patent application submitted. 440 U.S. at 264-65; see also Technology Licensing Corp. v. Gennum Corp., No. 01- 04204, 2007 WL 1319528, at *23 (N.D. Cal. May 4, 2007) ("As to Gennum's argument that TLC's interactions with Ross Video constituted misuse of the '250 patent, it is a peculiar notion that a party could "misuse" a patent that is not in existence. While it has been called patent misuse where a patentee seeks to collect royalties after the expiration of the patent term, it appears that in such cases the patentee and licensor have typically entered into the royalty agreement at a time when the patent is in force. Again, to the extent a party demands royalties or demands that another cease using a product where no patent has yet issued, the other party is not put to the type of choice that patent misuse doctrine normally guards against. The other party is free to ignore the demands.")

Doc. 42 at 65-66.

The Commission's motion to dismiss the unfair competition claim was denied to the extent that the allegations extended beyond the dismissed anti-trust allegations. Id. at 67-71. Because the unfair competition claim survived, the claims for unjust enrichment and constructive trust, which are purely derivative of other claims in the case, survived as well. Id. at 71.

E. First Amended Complaint and October 27, 2009 Decision

On March 19, 2009, Plaintiffs filed a first amended complaint ("FAC"). The first cause of action, invoking the APA, 5 U.S.C. § 702, alleges Federal Defendants acted arbitrarily, capriciously, and otherwise not in accordance with applicable laws and regulations by agreeing to engage in a patenting program with the Commission and engaging in activities to pursue that program. FAC ¶¶ 74-80. The second, third, and fourth causes of action, brought against all defendants, sought a declaration that the patents are invalid. FAC ¶¶ 103-138. The fifth cause of action against all defendants, sought a declaration that the 891 Patent is unenforceable due to Defendants' inequitable conduct. FAC ¶¶ 139-152. The sixth cause of action alleged the Commission violated the Sherman and Clayton Acts by monopolizing the national market for grapevine plant material. FAC ¶¶ 153-165. The seventh cause of action sought to have the exclusive license agreements between the United States and the Commission invalidated under the patent laws of the United States and the APA. FAC ¶¶ 166-176. The eighth claim sought to have the exclusive licenses declared void under state law. FAC ¶¶ 177-185. The ninth claim, against the Commission only, was for unfair competition in violation of California Business and Professions Code § 17200 and California common law. FAC ¶¶ 186-190. Finally, the tenth and eleventh claims were against the Commission alone for unjust enrichment, FAC ¶¶ 191-93, and constructive trust, FAC ¶¶ 194-97. Defendants moved to dismiss.

An October 27, 2009 Decision rejected Plaintiffs' argument that MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007), stands for the proposition that the United States' immunity does not bar declaratory relief claims against it for patent invalidity. Doc. 84 at 20-28. The October 27, 2009 Decision next examined whether the APA's waiver of sovereign immunity had been satisfied. APA § 702's waiver of sovereign immunity does not apply where a particular statute "precludes judicial review." § 701(a)(1)*fn1 ; Heckler v. Chaney, 470 U.S. 821, 828 (9th Cir 1985). The Patent Act precludes judicial review of any direct challenges to the patents:

The Patent Act "reveals Congress's intent to preclude judicial review of USPTO examination decisions at the behest of third parties protesting the issue or reissue of a patent." Hitachi Metals, Ltd. v. Quigg, 776 F. Supp. 3, 7 (D.D.C. 1991). The district court in Hitachi succinctly summarized the operation of the Patent Act and its judicial review provisions:

The Patent Statute is addressed to patent owners and patent applicants. The patent examination process is an ex parte proceeding, not an adversarial one, and the Patent Statute's judicial review provisions contain no gaps requiring the Court to exercise its power. [FN8]

[FN8] Congress has explicitly designated other PTO proceedings as inter partes, including patent interferences, 35 U.S.C. § 135(a), and trademark oppositions and cancellations, 15 U.S.C. §§ 1063, 1064, 1067. In contrast, the provisions governing the patent application and examination process prescribe an ex parte proceeding.

35 U.S.C. ยงยง 131, 132, 133, 134, 141, and See also Williams Mfg. Co. v. United Shoe Machinery Corp 145. ., 121 F.2d 273, 277 (6th Cir.1941) ( "[T]he granting of a patent is not, except when an interference is declared, the result of an adversary proceeding."); Godtfredsen v. Banner, 503 F. Supp. 642, 646 (D.D.C. 1980) ("It may well be desirable as a matter of policy to permit an individual to ...


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