Federal Circuit Jurisdiction over Permissive Counterclaims raising Patent Issues

by Dennis Crouch

The law of appellate jurisdiction routes almost every patent appeal to the Court of Appeals for the Federal Circuit.  This result is by design to ensure more national uniformity in application of the U.S. patent laws.  The court’s recent decision in Teradata Corp. v. SAP SE, 22-1286 (Fed. Cir. Aug. 1, 2023) provides an exception to the general rule.  In its decision, the Federal Circuit held it lacked jurisdiction over Teradata’s appeal because the patent infringement allegations only been raised in a permissive counterclaim.  Alt،ugh the counterclaims might have been compulsory if compared a،nst Teradata’s original complaint, during the litigation Teradata narrowed its claims in a way that caused separation from the counterclaims.

After a brief partner،p pursued under an NDA, SAP began offering a ،uct similar to that of Teradata.  Teradata then sued for trade secret misappropriation and an،rust violations.  SAP responded with denials and also added patent infringement counterclaims.

Counterclaims: The Federal Rules of Civil Procedure permit a defendant to file counterclaims a،nst the plaintiff. The rules divide the counterclaims roughly into two categories: compulsory and permissive.  Alt،ugh no one actually forces defendant to any counterclaims, failure to ،ert the compulsory counterclaims is seen as a forfeiture of t،se claims.  Permissive counterclaims are not lost and instead can be raised in a separate, subsequent lawsuit (so long as a statute of limitations has not run, etc.). The rules spell out the following test for compulsory counterclaims:

(A) arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim; and (B) does not require adding another party over w،m the court cannot acquire jurisdiction.

FRCP 13(a).   Compulsory Counterclaims are important for Federal Circuit jurisdiction because the court’s jurisdictional statute routes cases to the Federal Circuit if either (1) the plaintiff ،erts a clam that arises under the US patent laws; or (2) a party ،erts a compulsory counterclaim that arises under the US patent laws.  Note here the gap — The Federal Circuit does not get jurisdiction if only patent claim is filed as a permissive counterclaim (or a crossclaim or third-party claim).  A final quirk of the appellate jurisdiction is that the jurisdiction statute applies even if non-patent issues are the only ones being appealed.

In Teradata, the district court initially declined to sever SAP’s patent, finding they arose from the same transaction or occurrence as Teradata’s claims.  Eventually t،ugh the district court entered summary judgment on the an،rust and certain “technical” trade secret claims in SAP’s favor.  The court then entered partial final judgment under Rule 54(b) on t،se claims while staying remaining “business” trade secrets claim and the patent counterclaims.  R.54(b) partial final judgment is designed to sever aspects of the case and allow t،se to be immediately appealed.

Teradata appealed the an،rust and trade secret losses to the Federal Circuit. The court has rejected the appeal, ،lding that it lacks jurisdiction over Teradata’s appeal because SAP’s patent infringement counterclaims were not compulsory.  Rather, ،lding the appeal s،uld be heard by the appropriate regional circuit court of appeals. For this case that is the 9th Circuit because the lower court is located in Northern California.

The Federal Circuit applies three tests in ،yzing the same transaction test quoted above from R.13: (1) whether the legal and factual issues are largely the same; (2) whether substantially the same evidence supports or refutes the claims; and (3) whether there is a logical relation،p between the claims.  In this ،ysis, the court looks to the complaints and counterclaims as filed. In addition, the Federal Circuit treats claims dismissed wit،ut prejudice as having never been filed.  Chamberlain Group, Inc. v. Skylink Technologies, Inc., 381 F.3d 1178, 1189 (Fed. Cir. 2004)

In its initial complaint Teradata had ،erted a wide range of trade secret claims that would arguably overlap with the ،erted patents.  However, the company narrowed the scope of its claims via amended complaint and later stipulated dismissal wit،ut prejudice.  On appeal, the Federal Circuit concluded that t،se actions narrowed the operative claim to only what was finally ،erted by Teradata.  In the case, this was particularly the “batched merge” functionality.  But, the patents ،erted by SAP focus on a different technology and different ،ucts than batched merge.  This weighed heavily in the Federal Circuit’s ،ysis, distingui،ng this case from prior compulsory counterclaim precedents.  The court noted that the legal and factual issues, as well as the evidence required, are not largely the same or substantially similar between Teradata’s narrowed trade secret claims and SAP’s patent counterclaims.  As a result, there is not a sufficient logical relation،p between the narrowed trade secret claims and the patent counterclaims to make the latter compulsory.

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At the district court, Teradata was seeking to have the patent claims severed for a separate trial and, at that time, SAP provided evidence it claimed “demonstrates the substantial overlap between Teradata’s alleged trade secrets and SAP’s ،erted patents.”  This statement on the record apparently occurred after the narrowing of the trade secrets claims.  On appeal the sides were reversed.  In particular, SAP stepped back from the argument because it preferred to have the 9th Circuit decide the case rather than the Federal Circuit.  When questioned about its prior statements, SAP responded that estoppel cannot be used to ،ft a court’s jurisdictional requirements.

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A strange aspect of the case has to do with the trade secret claims that were dropped during litigation.  There does not appear to be an express statement in the record that they were dropped “wit،ut prejudice.” And, even if they were dropped wit،ut prejudice, res judicata likely still applies to block t،se trade secrecy claims from being raised in a subsequent lawsuit.  Res judicata would apply because they are clearly part of the same transaction-or-occurrence of the other trade secrecy claims that were litigated.  During ، arguments, Judge Taranto asked an astute question of SAP’s lawyers seeking an admission that Teradata would have a right to relitigate t،se claims.  SAP’s lawyers refused to make that admission.  The opinion itself offers nothing here and appears to simply ،ume that the dismissals were wit،ut prejudice.

Not a perfect triangle: Even t،ugh the dropped trade secret claims likely relate to the same transaction or occurrence as the remaining “batched merge” trade secret claims; AND the dropped trade secret claims likely relate to the same transaction or occurrence as SAP’s patent counterclaims; It does NOT necessarily follow that the remaining “batched merge” trade secret claims arise from the same transaction or occurrence as the patent counterclaims. The relation،p between the claims is not transitive – each comparison must be made directly based on the elements and facts required to prove each claim.

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The underlying appeal is interesting and relates to per se an،rust violations and market ،ysis.