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University of Kentucky Research Foundation, Inc. v. Niadyne, Inc.

United States District Court, Sixth Circuit

November 5, 2013

NIADYNE, INC., Defendant.



The University of Kentucky Research Foundation brought suit in state court claiming that Niadyne breached their licensing agreement in failing to sufficiently report sales and pay royalties on products that utilize certain patented niacin molecules possessing cosmetic and medicinal skin repairing properties. Niadyne, however, has added a wrinkle to what UKRF claims to be a facially simple breach of contract action. Several months after filing its original answer, Niadyne entered an amended answer that asserted counterclaims for declaratory judgment of noninfringement based on patent exhaustion and patent misuse. [R. 1-2 at 27-29]. Niadyne then removed the case to federal court on the grounds of federal question jurisdiction. [R. 1]. UKRF now moves this Court to remand the case to state court because there is no federal question, removal is untimely, and immunity bars Niadyne's counterclaims. [R. 6]. The Court, having reviewed the record and considered the motions of the parties, now GRANTS the University of Kentucky Research Foundation's Motion and REMANDS this case to Franklin Circuit Court.


The University of Kentucky Research Foundation is a non-profit corporation controlled by the University of Kentucky and chartered to promote education and research. UKRF owns the rights to the so-called Jacobson Patents on certain niacin molecules with skin repairing properties that are used in cosmetic and medicinal creams. Niadyne is a corporation "involved in the discovery of uniquely efficacious molecules that penetrate the skin to address unmet health care needs." [R. 1-4 at 6]. On June 10, 1998, UKRF and Niadyne entered into a licensing agreement, wherein UKRF granted Niadyne an exclusive license for the aforementioned molecular technology in exchange for Niadyne's promise to commercially develop and pay royalties on it. Of particular importance to this claim, Paragraph 4.1 of the agreement stated that the "LICENSEE" shall pay UKRF "a royalty in the amount of two percent (2%) of the Net Sales Price" of products and processes it used, leased, or sold." [R. 1-4 at 22-23]. Under the agreement, the "LICENSEE" includes Niadyne and any of its affiliates or subsidiaries. [R. 1-4 at 18]. In addition, the licensing agreement required Niadyne to provide UKRF semi-annual reports of transactions involving the patented molecular technology in order to enable UKRF to conduct an accounting of the royalties due them. [R. 1-4 at 8-9].

After the parties entered into this licensing agreement and its later amendment, UKRF claims that, through a series of merger transactions, Niadyne became affiliated with StriVectin Operating Company and Catterton Partners. In the view of UKRF, Niadyne permitted both of these affiliates to use the patented molecular technology in the sale of products and processes without disclosing or paying royalties from their transactions, which violates the license agreement. Further, UKRF claims that Niadyne engaged in the bulk sale of licensed products to StriVectin using artificially low transfer pricing, resulting in under-reporting of royalties. Altogether, UKRF claims that Niadyne's breach of the licensing agreement has resulted in over two million dollars in unpaid royalties from the products and processes incorporating the Jacobson Patents.

Not surprisingly, Niadyne characterizes these events differently. According to Niadyne, it "sells patented molecule products in bulk to third-party aggregators who incorporate the patented molecule as an ingredient in a formulation to arrive at the finished skin care products that are sold and delivered to StriVectin by the third-party aggregator." [R. 9 at 1]. In other words, Niadyne claims that it engaged in an arms-length transaction for the sale of bulk molecule products to another company, who then used them to create a product that was purchased and subsequently sold by StriVectin. In Niadyne's view, StriVectin's sale of its skin care products is down stream of Niadyne's initial sale of the bulk molecule products to the third-party aggregator and so no royalty must be paid under the licensing agreement. Thus, Niadyne argues that when it reported to UKRF all authorized sales of molecule products to third-party manufacturers and paid the required royalties on those sales, UKRF's patent and license rights were exhausted, such that it was entitled to no additional accounting or royalties.

On October 31, 2011, general counsel for UKRF sent a letter to Niadyne addressing this difference of opinion. [R. 9-1 at 1-2]. The express purpose of the letter was to "begin a dialogue with Niadyne in connection with the license agreement between UKRF and Niadyne, Inc." [Id. at 1]. The letter went on to specify UKRF's concerns that Niadyne had not been paying royalties to UKRF, as required under the license agreement. The record also contains a second letter from UKRF's outside counsel dated January 6, 2012, which suggests the dialogue had not gone well. [R. 9-1 at 3-4]. The express purpose of this letter was to "demand immediate correction of [Niadyne's] defaults under the License Agreement dated June 10, 1998 between UKRF and Niadyne." [R. 9-1 at 3]. The letter specified that Niadyne had breached the license agreement by failing to pay royalties and bring to market and exploit the intellectual property rights as required under the agreement. The letter concludes, "[i]f Niadyne fails to take immediate actions to correct its defaults, UKRF will pursue all available rights and remedies under the license agreement and otherwise, including without limitation terminating the License Agreement and filing a legal action for an accounting and damages." [ Id. ]

True to their word, UKRF filed suit in Franklin Circuit Court on June 20, 2012, alleging breach of the license agreement under state contract law. [R. 1-4 at 5]. Niadyne countered with a motion to dismiss, which was denied on November 14, 2012. [R. 1-3 at 1-10]. Subsequently, on November 26, 2012, Niadyne filed its answer to the complaint and the parties commenced discovery pursuant to the scheduling order entered by the state court. [R. 1-3 at 1; R. 1-2 at 52]. On March 1, 2013, Niadyne filed a motion for leave to amend its answer, which UKRF did not contest. [R. 1-2 at 1, 9]. In its amended answer, Niadyne brought, among other things, counterclaims for declaratory judgment of noninfringement based on patent exhaustion and patent misuse. [R. 1-2 at 21-29]. On March 26, 2013, nine (9) months after the original complaint was filed but less than thirty (30) days after the amended answer was filed, Niadyne removed this case to federal court. [R. 1]. UKRF has now countered with the motion to remand that is presently pending. [R. 6].



UKRF argues that remand is warranted in this case because neither the complaint nor the counterclaim raises a federal question sufficient to support federal jurisdiction, and even if either did, remand would be required because Niadyne's removal was untimely. As these two arguments are ultimately interrelated, the Court shall consider them jointly.

"Federal courts are courts of limited jurisdiction, possessing only that power authorized by Constitution and statute." Gunn v. Minton, 133 S.Ct. 1059, 1064 (2013) (quoting Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994)) (internal quotation marks omitted). Pursuant to 28 U.S.C. § 1331, Congress has opened the doors of the federal courts to "all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. In addition, Congress has also granted to federal courts statutory original jurisdiction to hear "any civil action arising under any Act of Congress relating to patents." 28 U.S.C. § 1338. When a claim is brought in state court over which a federal court would have original jurisdiction on these grounds, the case may be removed to federal court under 28 U.S.C. § 1441, so long as removal is effectuated in accordance with the procedure outlined in § 1446. 28 U.S.C. § 1441 ("any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending.").

In making jurisdictional determinations, the Supreme Court has interpreted the phrase "arising under" in § 1331 and § 1338(a) to have the identical meaning such that the Court's precedents for each may be used interchangeably. Gunn, 133 S.Ct. at 1064, (citing Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 808-809 (1988)). To determine whether a claim "arises under" federal law so as to provide jurisdiction under these statutory provisions, courts employ the "well-pleaded complaint" rule. Roddy v. Grand Trunk W. R.R. Inc., 395 F.3d 318, 322 (6th Cir. 2005) (citing Loftis v. United Parcel Serv., Inc., 342 F.3d 509, 514 (6th Cir. 2003)). Under this rule, "[f]ederal jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly pleaded complaint." Id. at 322 (citing Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 96 L.Ed.2d 318 (1987)). "The well-pleaded complaint rule recognizes that the plaintiff is the master of his complaint. Accordingly, if the plaintiff chooses to bring a state law claim, that claim generally cannot bèrecharacterized' as a federal claim for the purpose of removal." Id. (citations omitted).

Niadyne argues that it may remove this case to federal court because federal patent claims are at issue and federal courts have exclusive jurisdiction over such claims. In its motion to remand, UKRF maintains that its claims are for breach of the licensing agreement, and therefore its suit is a general state law breach of contract action that only happens to involve a dispute over patents. Further, UKRF states that Niadyne's counterclaims are not relevant to the jurisdictional analysis. Of course, in reviewing a motion to remand, the defendant bears the burden of showing that removal was proper. Rogers v. Wal-Mart, 230 F.3d 868, 871 (6th Cir. 2000). Any doubts regarding federal jurisdiction should be construed ...

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