On December 28, 2015, in Allergan, Inc. v. Ferrum Ferro Capital, LLC, the US District Court for the Central District of California ruled that it did not have subject matter jurisdiction over state law extortion and malicious prosecution claims made against a venture capital fund that filed an inter partes review (IPR) petition allegedly for the sole purpose of monetizing the petition via settlement (No. 8:15-cv-00992 (C.D. Cal. 2015)). The district court dismissed the action without prejudice.

Ferrum Ferro Capital LLC, a venture capital fund, filed an IPR petition to invalidate one of Allergan’s patents. Allergan asserted that Ferrum’s petition was baseless and filed solely to extort money from the company by monetizing the IPR process. Allergan then sued Ferrum in federal court for attempted civil extortion, malicious prosecution, and unfair competition under California state law.

The district court raised the issue of subject matter jurisdiction via an order to show cause, without prompting from the parties. Ferrum took no position on the issue. After briefing from Allergan, the court analyzed whether it had subject matter jurisdiction over the state law claims. Allergan did not offer any other basis for federal jurisdiction.

Under Gunn v. Minton, a federal court can properly exercise jurisdiction over a state law claim if a federal issue is:

(133 S. Ct. 1059, 1065 (2013).)

The district court found that the federal question of whether the IPR petition had merit was necessarily raised and actually disputed. The court found that jurisdiction was not proper, however, because the federal question raised was not substantial and because the case could not be resolved without disrupting the federal-state court balance.

The court found that the federal question was not substantial because the patent issues were merely hypothetical and would not change the real-world result of any federal patent litigation. The court specifically reasoned that:

Notably, the court stated that whether a party may properly file or threaten to file an IPR solely to extract a monetary settlement may be significant to the federal process, but found that that particular question was not raised by the case. The court reasoned that a patent holder could resolve that question during IPR proceedings by filing a motion for sanctions with the Patent Trial and Appeal Board challenging a petition as an abuse of the IPR process.

The district court further ruled that exercising jurisdiction would upset the federal-state judicial balance because of California's strong interest in the proper application of its laws and the lack of a substantial federal question.

The court also rejected Ferrum's argument that Allergan's claims were completely preempted by federal law. The court found that federal patent law does not expressly provide for preemption. The court also found that the federal IPR statute providing for sanctions did not completely preempt the state law claims.

This case is notable as it suggests that patent holders who can only allege subject matter jurisdiction in federal court will need to challenge IPR petitions filed for monetary gain either by requesting sanctions during the IPR proceeding itself or by filing an action in state court.