Symbiont v. Bjm Feed ( 2022 )

NOTICE: NOT FOR OFFICIAL PUBLICATION.
UNDER ARIZONA RULE OF THE SUPREME COURT 111(c), THIS DECISION IS NOT PRECEDENTIAL
AND MAY BE CITED ONLY AS AUTHORIZED BY RULE.
IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
SYMBIONT NUTRITION, LLC, et al.,
Plaintiffs/Appellees,
v.
BJM FEED INGREDIENTS, LLC, et al.,
Defendants/Appellants.
No. 1 CA-CV 21-0218
FILED 5-19-2022
Appeal from the Superior Court in Maricopa County
No. CV2019-097220
The Honorable David J. Palmer, Judge
VACATED AND REMANDED
COUNSEL
Bueler Jones, LLP, Chandler
By Gordon S. Bueler
Counsel for Plaintiffs/Appellees
Snell & Wilmer, LLP, Phoenix
By Cory L. Braddock, Andrew M. Jacobs
Counsel for Defendants/Appellants
SYMBIONT, et al. v. BJM FEED, et al.
Decision of the Court
MEMORANDUM DECISION
Judge James B. Morse Jr. delivered the decision of the Court, in which
Presiding Judge D. Steven Williams and Judge David B. Gass joined.
M O R S E, Judge:
¶1 BJM Feed Ingredients, LLC, John Link, and Matrix Nutrition
of Texas, LLC (collectively "Defendants") appeal the superior court's entry
of a preliminary injunction on behalf of Symbiont Nutrition, LLC and Mark
Holt (collectively "Plaintiffs"). Because the superior court erred, we vacate
the injunction.
FACTS AND PROCEDURAL BACKGROUND
¶2 In 2016, the United States Patent and Trademark Office issued
Mark Holt and Matthew Garner a patent for a manufacturing process for
dairy cow feed. The resulting feed, OZ45, purports to increase cows'
protein levels and, in turn, improve their reproduction rates and milk
production. The patented process involves heat-treating and extruding
corn.
¶3 After receiving the patent, Holt transferred his patent rights
to Symbiont Nutrition, LLC ("Symbiont") to license the patented process.
Symbiont is an Arizona limited liability company and Holt is its sole
member. Garner did not assign his patent rights and, at the time of the
preliminary injunction hearing, still retained his rights in the patent.
¶4 In 2017, Holt and John Link formed Matrix Nutrition of Texas,
LLC ("Matrix"), a Texas limited liability company created to manufacture
and sell feed using the patented process. Holt and Link each held a 50%
membership interest in the company. In February 2018, Symbiont and
Matrix entered a Patent and Know-How License Agreement. The license
agreement licensed use of the patent to Matrix and provided know-how
regarding the patented process. The agreement required Matrix to "return
any and all confidential or trade-secret materials" and "permanently stop
[its] use of all Licensed Process(es) and all Licensed Product(s)" when the
agreement ended. Plaintiffs also allege Symbiont and Matrix entered a
confidentiality and non-disclosure agreement, which required Matrix to
keep confidential all information related to Symbiont's patent. Plaintiffs,
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Decision of the Court
however, failed to produce documentary evidence substantiating this
allegation, and Defendants contest the existence of such an agreement.
¶5 In March 2018, Symbiont entered a similar Patent and Know-
How License Agreement with BJM Feed Ingredients, LLC ("BJM"), a
Pennsylvania limited liability company. Link is also a member of BJM
through Link Feed Ingredients, LLC. The scope of the license granted in
the BJM agreement is identical to the license granted to Matrix. In
exchange, BJM agreed to pay Symbiont royalties for feed sold using its
process. Upon termination, the agreement required BJM to "return any and
all confidential or trade-secret materials" to Symbiont, "permanently stop"
its use of the patented process, and hand over "all unpatented data and
know-how" BJM developed "in the course of [its] efforts to develop
Licensed Products and Licensed Processes." Further, Symbiont and BJM
entered a Non-Disclosure and Non-Circumvention Agreement ("NDA").
The NDA prohibited BJM from disclosing "any proprietary, confidential
and/or trade secret information of [Symbiont]."
¶6 In March 2019, Holt resigned from Matrix and sold his
membership interest to Link. The same day, Symbiont and Matrix ended
their license agreement. Days later, Matrix filed termination paperwork
with the Texas Secretary of State. In May 2019, the Secretary of State filed
a certificate of termination, dissolving Matrix as an entity.
¶7 In June 2019, BJM terminated its license agreement with
Symbiont. And, in October 2019, BJM began working with Garner to
manufacture feed. At the end of October, Plaintiffs filed this lawsuit against
Defendants. Plaintiffs allege four counts: (1) BJM breached its license
agreement and NDA with Symbiont; (2) Matrix breached its NDA with
Symbiont; (3) BJM and Matrix converted Plaintiffs' "assets, monies and
intellectual property"; and (4) Link breached his fiduciary duties of care and
loyalty to Holt.
¶8 Matrix moved to dismiss counts two and three for lack of
subject matter jurisdiction, arguing both claims arose under patent law
subject to exclusive federal jurisdiction. The superior court denied Matrix's
motion, stating it "agree[d] with Plaintiff's position" that "the resolution of
the case is not dependent on the application of patent law or a
determination that a patent has been infringed, and/or that patent law does
not 'in any sense' create the breach of contract or conversion claims at issue
here[.]"
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Decision of the Court
¶9 Subsequently, Plaintiffs moved for a preliminary injunction
against Defendants. Specifically, Plaintiffs asked the court to enjoin
Defendants from "the continued use of Plaintiffs' patents" and "transferring
or otherwise distributing Plaintiffs' patent and proprietary information,
technology and know-how." After several delays, the court held an
evidentiary hearing on Plaintiffs' motion in October 2020. At the conclusion
of the hearing, the court requested the parties submit written closing
arguments.
¶10 The court granted Plaintiffs' motion and enjoined Defendants
from (1) "manufacturing or selling OZ45 using Plaintiff[s'] patented process
and know-how"; (2) "discussing Plaintiff[s'] patented process and know-
how with other persons or entities"; and (3) "soliciting others to use
Plaintiff[s'] processes, information, know how, technology and any
improvements." The court also ordered the Defendants to "return all
confidential and trade and secret information" they received under both the
BJM and Matrix licensing agreements.
¶11 Defendants timely appealed. We have jurisdiction under
A.R.S. § 12-2101(A)(5)(b).
DISCUSSION
I. Subject-Matter Jurisdiction.
¶12 As a threshold issue, we must address Defendants' argument
that federal patent law preempts Plaintiffs' claims because the claims hinge
on whether Defendants' conduct infringed Plaintiffs' patent. We review the
superior court's jurisdiction de novo, Medina v. Ariz. Dep't. of Transp., 185
Ariz. 414, 417 (App. 1995), and conclude state courts may hear state-law
claims that implicate "run-of-the-mill question[s] of infringement," Inspired
Dev. Grp., LLC v. Inspired Prods. Grp., LLC, 938 F.3d 1355, 1369 (Fed. Cir.
2019).
¶13 Federal courts have exclusive jurisdiction, effectively
preempting state-court jurisdiction, over any case "arising under any Act of
Congress relating to patents." 28 U.S.C. § 1338(a). A case can "arise under"
federal patent law in two ways. Gunn v. Minton, 568 U.S. 251, 257 (2013).
First, a case arises under federal patent law when federal patent law creates
the cause of action. Id. Second, in instances "where a claim finds its origins
in state rather than federal law," the Supreme Court has "identified a
'special and small category' of cases in which arising under jurisdiction still
lies." Id. at 258 (citation omitted). Gunn clarified that exclusive "federal
jurisdiction over a state law claim will lie if a federal issue is: (1) necessarily
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raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in
federal court without disrupting the federal-state balance approved by
Congress." Id. A plaintiff's claim must satisfy all four prongs of the test for
exclusive federal jurisdiction to lie. Id.¶14 Because exclusive federal jurisdiction is an issue of federal
law, we look to the decisions of the federal courts "as persuasive authority."
Arizonans for Second Chances, Rehab., & Pub. Safety v. Hobbs, 249 Ariz. 396,
412, ¶ 60 n.6 (2020).1 Recently, in Blackhawk Network Inc. v. SL Card Co. Inc.,
the United States District Court for the District of Arizona dismissed a state-
law breach of contract claim for lack of subject-matter jurisdiction even
though the claim depended on adjudicating issues of patent infringement.
--- F. Supp. 3d ---, ---, 2022 WL 704032, at *9-11 (D. Ariz. Mar. 9, 2022).2 We
proceed using Blackhawk as a guide.
¶15 All four of Plaintiffs' claims originate in state law but
exclusive federal jurisdiction may still lie if those claims fall under the
"special and small category" of state-law claims that raise substantial
questions under federal patent law. Although the parties debate whether
Plaintiffs' claims necessarily raise a disputed patent issue, we need not
resolve this disagreement:
Even assuming the claims necessarily raise a federal patent
law issue, and the issue is actually disputed, . . . the issue is
not "substantial" in the relevant sense. The substantiality
inquiry is focused not "on the importance of the issue to the
plaintiff's case and to the parties before it," but rather on "the
importance of the issue to the federal system as a whole."
1 Other state's courts have reached contradictory decisions on this
point. Compare Point Conversions, LLC v. WPB Hotel Partners, LLC, 324 So.
3d 947 (Fla. Dist. Ct. App. 2021) (determining that state-law claims that
turned on issues of patent infringement were not preempted ), review
granted, SC21-1071, 2021 WL 5804319 (Fla. Dec. 7, 2021), with Point
Conversions, LLC v. Omkar Hotels, Inc., 321 So. 3d 326 (Fla. Dist. Ct. App.
2021) (deciding that essentially identical state-law claims were subject to
exclusive federal jurisdiction).
2 The district court recently amended its decision but did not change
its federal jurisdiction analysis. See Blackhawk Network Inc. v. SL Card Co.
Inc., CV-21-00813-PHX-MTL, 2022 WL 1136633, at *1-2 (D. Ariz. Apr. 18,
2022).
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Id. at ---, *9 (quoting Gunn, 568 U.S. at 260).
¶16 As in Blackhawk, "[t]he patent law issues implicated in this
case carry no such significance." Id. at ---, *9; see also Inspired Dev., 938 F.3d
at 1364 (stating the "touchstone" for substantiality is whether state-court
involvement would undermine uniform patent law). Federal courts have
developed a three-factor test to guide the substantiality inquiry:
A substantial federal issue is more likely to be present if:
a) a pure issue of federal law is dispositive of the case,
b) the court's resolution of the issue will control numerous
other cases, [and]
c) the Government has a direct interest in the availability of a
federal forum to vindicate its own administrative action.
Inspired Dev., 938 F.3d at 1364 (cleaned up and citation omitted).
¶17 All three factors weigh against considering Plaintiffs' claims
as raising a substantial federal patent issue. First, Plaintiffs' claims
"involve[] a question of federal law, at most, as only one of several elements
needed to prevail." NeuroRepair, Inc. v. The Nath Law Grp., 781 F.3d 1340,
1346 (Fed. Cir. 2015). While issues of federal patent law may be embedded
in Plaintiffs' claims, the resolution of their claims rests ultimately on the
application of Arizona law, not federal patent law. To succeed on counts
one and two, Plaintiffs must prove the existence and validity of the
licensing and nondisclosure agreements, that these agreements governed
Defendants' conduct, and that Defendants' conduct violated the
agreements. Similarly, Plaintiffs' conversion claim turns on a showing of
Plaintiffs' ownership or right to possession of certain property and
Defendants' wrongful interference with that property. Autoville, Inc. v.
Friedman, 20 Ariz. App. 89, 91-92 (1973). Finally, Plaintiffs' fiduciary duty
claim rests on Plaintiffs proving the existence of such a duty and
Defendants' breach of that duty. Arizona law, not federal patent law, is
dispositive of each of these claims. See Blackhawk, --- F. Supp. 3d at ---, 2022
WL 704032, at *10-11 (finding an issue of federal patent law was not
dispositive when a breach of contract claim required the court to determine
whether one set of patents infringed on another set of patents).
Accordingly, the first factor cuts against treating the patent issue as
substantial.
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Decision of the Court
¶18 Second, because the state court's resolution of any embedded
patent issues in this case "will have no real-world impact on the validity,
scope, or ownership of the parties' patent[ ]," any patent issues amount to a
"hypothetical 'case within a case.'" Id. at ---, *11; see also NeuroRepair, 781
F.3d at 1347 ("If the state court action would neither affect the scope of any
live patent nor require resolution of a novel issue of patent law, it is unclear
how it could control numerous other cases or impact the federal system as
a whole."). Although the adjudication of Plaintiffs' claims may require the
court to determine whether Defendants used a feed-manufacturing process
that infringed on Plaintiffs' patented process, there is little to suggest that
the state court's analysis of this issue "will affect uniformity in patent law."
Inspired Dev., 938 F.3d at 1366; see also Gunn, 568 U.S. at 262 ("[F]ederal
courts are of course not bound by state court case-within-a-case patent
rulings."). Indeed, the embedded patent issues in this case are "fact-bound
and situation-specific" and will have no precedential effect on federal courts
or federal patent law generally. See Gunn, 568 U.S. at 263 (stating that even
if "a state court's case-within-a-case adjudication may be preclusive under
some circumstances," the resulting "'fact-bound and situation-specific'
effects are not sufficient to establish federal arising under jurisdiction"
(quoting Empire Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 701
(2006))). Nor do Plaintiffs' claims raise novel patent issues. To the extent
they raise patent issues, they are ones of basic infringement. See Inspired
Dev., 938 F.3d at 1366-67 (noting Gunn "suggests that state courts can
faithfully apply federal precedent to embedded issues of basic infringement
and invalidity in a particular case"). Thus, the second factor also militates
against substantiality.
¶19 Third, "[g]iven the 'fact-bound' nature of the embedded
patent law issues" in this case, the government has no direct interest
litigating this suit in a federal forum. Id. at 1368-69 (quoting MDS (Can.)
Inc. v. Rad Source Techs., Inc., 720 F.3d 833, 842 (11th Cir. 2013)). Plaintiffs'
claims implicate only one potential patent issue: whether Defendants' feed
manufacturing process infringed Plaintiffs' patent in violation of the
parties' agreements. See Blackhawk, --- F. Supp. 3d at ---, 2022 WL 704032, at
*11 (finding no direct government interest where the dispute "involve[d]
comparing the claims of four particular patents to determine whether this
particular invention was impermissibly used by these particular
Defendants"). Because the "government interest in having any single case
of patent infringement heard in a federal forum is limited," the final factor
additionally counsels against substantiality. Inspired Dev., 938 F.3d at 1369
(quoting MDS, 720 F.3d at 842).
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¶20 Defendants rely extensively on Jang v. Boston Scientific
Corporation, 767 F.3d 1334 (Fed. Cir. 2014) to argue the patent issues are
substantial because Plaintiffs' claims are "neither entirely backward-
looking nor hypothetical." Defendants' reliance on Jang is misplaced. Jang
addressed whether a claim filed in federal court on diversity of citizenship
grounds should be appealed to the Federal Circuit or a regional circuit. Id.
at 1338. This issue is materially different from determining whether a state-
law claim touching on issues of patent infringement should be heard in
state or federal court. As Inspired Development explains, "the reasoning in
Jang turned on the system-wide conflict that could arise in the federal courts
if regional circuits reached different conclusions about validity." 938 F.3d
at 1365. Thus, "[g]iven the 'serious uncertainty' of whether a district court
would follow its regional circuit or the federal circuit, such conflicts raised
'substantial' concerns for the federal system[,]" and the patent issues were
substantial enough to confer jurisdiction on the Federal Circuit. Id. (citation
omitted). Even if the patent issues here are not entirely backward-looking
or hypothetical, the risk of creating a system-wide conflict in the federal
courts is absent. Accordingly, unlike in Jang, in this case, Plaintiffs' claims
do not raise substantial federal patent issues. See Gunn, 568 U.S. at 262 ("If
the question arises frequently, it will soon be resolved within the federal
system, laying to rest any contrary state court precedent; if it does not arise
frequently, it is unlikely to implicate substantial federal interests.").
¶21 In sum, even though the issue of patent infringement might
be "vitally important" to deciding Plaintiffs' four state-law claims,
"something more, demonstrating that the [patent] question is significant to
the federal system as a whole, is needed" to establish exclusive federal
jurisdiction. Gunn, 568 U.S. at 263-64. That "something more" is missing
here. Accordingly, the superior court correctly denied Defendants' motions
to dismiss.
II. Preliminary Injunction.
¶22 We turn now to whether the superior court properly enjoined
Defendants. We review the superior court's grant of a preliminary
injunction for an abuse of discretion. Shoen v. Shoen, 167 Ariz. 58, 62 (App.
1990). "An abuse of discretion exists if the superior court applied the
incorrect substantive law or preliminary injunction standard, based its
decision on an erroneous material finding of fact, or applied the appropriate
preliminary injunction standard in a manner resulting in an abuse of
discretion." TP Racing, L.L.L.P. v. Simms, 232 Ariz. 489, 492, ¶ 8 (App. 2013).
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¶23 A party seeking a preliminary injunction must establish: "(1)
a strong likelihood of success on the merits, (2) the possibility of irreparable
harm if the relief is not granted, (3) the balance of hardship favors the party
seeking injunctive relief, and (4) public policy favors granting the injunctive
relief." Fann v. State, 251 Ariz. 425, 432, ¶ 16 (2021). The crucial factor is
relative hardship, which requires the movant to show either "1) probable
success on the merits and the possibility of irreparable injury; or 2) the
presence of serious questions and the balance of hardships tips sharply in
the [movant's] favor." Schoen, 167 Ariz. at 63 (citation and internal quotation
marks omitted). "The greater and less reparable the harm, the less the
showing of a strong likelihood of success on the merits need be.
Conversely, if the likelihood of success on the merits is weak, the showing
of irreparable harm must be stronger." Fann, 251 Ariz. at 432, ¶ 16 (quoting
Smith v. Ariz. Citizens Clean Elections Comm'n, 212 Ariz. 407, 410 ¶ 10 (2006)).
¶24 The superior court erred when it relied on Smith International
Inc. v. Hughes Tool Co., 718 F.2d 1573 (Fed. Cir. 1983) to conclude "immediate
irreparable harm is presumed" in patent-infringement cases. In eBay Inc. v.
MercExchange, LLC, the Supreme Court rejected any presumption of
irreparable harm and held that "traditional principles of equity" govern the
decision whether to grant or deny injunctive relief in patent infringement
cases. 547 U.S. 388, 391, 394 (2006); see also Robert Bosch LLC v. Pylon Mfg.
Corp., 659 F.3d 1142, 1149 (Fed. Cir. 2011) (noting "eBay abolishes our
general rule that an injunction normally will issue when a patent is found
to have been valid and infringed"). More importantly, although Plaintiffs'
claims raise issues of patent infringement, they do not assert a patent-
infringement claim. Instead, because Plaintiffs bring only state-law claims,
the superior court must apply Arizona law, which does not presume
irreparable harm, to determine whether to issue injunctive relief. See Fann,
251 Ariz. at 432, ¶ 16 (requiring a showing of the possibility of irreparable
harm to grant a preliminary injunction).
¶25 Here, Plaintiffs were required to show the possibility of
irreparable harm "not remediable by damages." Shoen, 167 Ariz. at 63. An
award of monetary damages generally is an adequate remedy when
damages are calculable with reasonable certainty and "address the full
harm suffered." IB Prop. Holdings, LLC v. Rancho Del Mar Apartments Ltd.
P'ship, 228 Ariz. 61, 65, ¶¶ 10-11 (App. 2011). Because the court presumed
irreparable harm, it never determined whether Plaintiffs met their burden.
See id. at ¶ 10 ("[T]he party seeking an injunction must show a possibility of
irreparable injury 'not remediable by damages'" (quoting Shoen, 167 Ariz. at
63)). Accordingly, the superior court abused its discretion in enjoining
defendants.
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Decision of the Court
CONCLUSION
¶26 We vacate the superior court's preliminary injunction and
remand for further proceedings consistent with this decision.
AMY M. WOOD • Clerk of the Court
FILED: AA
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