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Magnetek, Inc., A Delaware Corporation v. Kirkland and Ellis

June 30, 2011

MAGNETEK, INC., A DELAWARE CORPORATION,
PLAINTIFF-APPELLANT,
v.
KIRKLAND AND ELLIS, LLP, AN ILLINOIS LIMITED LIABILITY PARTNERSHIP,
DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County No. 08 L 008970 Honorable Charles R. Winkler, Judge Presiding.

The opinion of the court was delivered by: Justice Connors

JUSTICE CONNORS delivered the judgment of the court, with opinion. Justice Karnezis and Justice Harris concur in the judgment and opinion.

OPINION

Plaintiff, Magnetek, Inc. (Magnetek), filed a complaint in the circuit court of Cook County for legal malpractice against defendant, Kirkland & Ellis (Kirkland), for its allegedly deficient representation in a patent infringement lawsuit. The circuit court dismissed the complaint for lack of subject matter jurisdiction, reasoning that the underlying complaint involved substantial issues of federal patent law over which the federal courts have exclusive jurisdiction. Magnetek now appeals, arguing that its complaint does not implicate substantial issues of patent law because it merely requires the circuit court to resolve factual issues related to the underlying plaintiff's inequitable conduct before the United States Patent and Trademark Office. Moreover, Magnetek argues that the circuit court failed to consider principles of federalism in making its ruling, in contravention of United States Supreme Court case law. For the following reasons, we reverse the judgment of the circuit court and remand for further proceedings.

I. BACKGROUND

A. The Underlying Lawsuit

In 1998, an inventor named Ole Nilssen filed a patent infringement lawsuit against Magnetek in the United States District Court for the Northern District of Illinois (underlying lawsuit). Nilssen v. Magnetek, Inc., No. 98-CV-2229 (N.D. Ill.). Magnetek initially retained Kirkland to represent it in that action. Nilssen's complaint alleged that Magnetek infringed on seven patents owned by him, including United States Patent Number 5,432,409 (the '409 patent). See Nilssen v. Magnetek, Inc., No. 05 C 2933, 2008 WL 1774984, at *1 (N.D. Ill. Apr. 16, 2008) (mem. op.). In the course of that litigation, Magnetek entered into a settlement agreement with Nilssen in which Nilssen agreed to dismiss his infringement action in the district court and the parties agreed to arbitrate the dispute. Magnetek, 2008 WL 1774984, at *1. On April 29, 2005, the arbitrator found in favor of Nilssen and awarded him $23,352,439.63 in damages. Magnetek, 2008 WL 1774984, at *1. The parties later settled the matter for $18,750,000.

Nilssen then filed a petition for confirmation of the arbitration award in federal district court. Magnetek, 2008 WL 1774984, at *1. Magnetek had retained new counsel and was not represented by Kirkland in this proceeding. Magnetek filed a petition to vacate the arbitration award. Magnetek, 2008 WL 1774984, at *1. Magnetek argued that subsequent to the arbitration, it learned that Nilssen allegedly concealed facts from the United States Patent and Trademark Office (USPTO) in the prosecution of the '409 patent that would have prevented issuance of the patent. Therefore, Magnetek argued, the arbitration award was procured as a result of Nilssen's fraud before the USPTO. Magnetek further contended that had it known of Nilssen's misconduct before the USPTO at the time of the arbitration, it would not have entered into the settlement agreement with Nilssen. Magnetek, 2008 WL 1774984, at *2.

On April 16, 2008, the district court held that it could only vacate the arbitration award if Magnetek produced clear and convincing evidence of fraud in the procurement of the arbitration award and that such evidence was not discoverable with due diligence prior to the arbitration. Magnetek, 2008 WL 1774984, at *2. The district court concluded that Magnetek had failed to make such a showing and denied its petition. Specifically, the court noted several times that Magnetek could have discovered evidence of the alleged misconduct at the time of the arbitration, but failed to do so. Magnetek, 2008 WL 1774984, at *3-5.

Additionally, the court noted that "at the arbitrator's suggestion, the parties entered into an agreement" whereby Nilssen "agreed not to present any arguments for willful infringement and in exchange Magne[T]ek agreed not to pursue a defense of inequitable conduct in regard to Nilssen's 'alleged inequitable conduct before the [USPTO].' " Magnetek, 2008 WL 1774984, at *5. Therefore, the court reasoned, it would not interfere with the arbitration award in order "to allow Magne[T]ek to sidestep its agreement" to waive an inequitable conduct defense. Magnetek, 2008 WL 1774984, at *5. Therefore, the court entered judgment on the arbitration award and denied plaintiff's petition to vacate. Magnetek, 2008 WL 1774984, at *7.

B. Contemporaneous Litigation Involving the '409 Patent In 2001, while the underlying litigation was pending, Nilssen filed a patent infringement lawsuit against another company, Osram Sylvania, in the same jurisdiction as the underlying lawsuit. Nilssen v. Osram Sylvania, Inc., 440 F. Supp. 2d 884 (N.D. Ill. 2006) (Osram I). Osram I involved the alleged infringement of 11 patents, including the '409 patent. Kirkland represented Osram in that case as well. Osram I, 440 F. Supp. 2d at 889. Osram filed a counterclaim for a declaratory judgment that the patents at issue, including the '409 patent, were unenforceable because Nilssen engaged in inequitable conduct before the USPTO during the patent application process, which should have precluded issuance of the patents. Specifically, with respect to the '409 patent, Osram alleged that Nilssen improperly claimed and paid fees as a small entity, claimed an earlier filing date in the prosecution of the '409 patent than he was entitled to, and failed to disclose relevant litigation that was pending during the prosecution of the '409 patent. Osram I, 440 F. Supp. 2d at 889. Because of this misconduct, Osram argued that the '409 patent was unenforceable and could not be infringed.

The district court held a six-day bench trial on the allegations of inequitable conduct, which involved more than 400 exhibits and testimony from seven witnesses, including four expert witnesses and Nilssen himself. Osram I, 440 F. Supp. 2d at 889. On July 5, 2006, the district court issued its opinion declaring all 11 of the Nilssen patents at issue, including the '409 patent, unenforceable. Osram I, 440 F. Supp. 2d at 911. With respect to the '409 patent, the court specifically found that Nilssen (1) intentionally claimed and paid fees as a small entity despite entering into a licensing agreement that disqualified him from doing so (Osram I, 440 F. Supp. 2d at 903-04); (2) intentionally claimed incorrect filing dates during prosecution of the '409 patent in an effort to avoid disclosing certain "prior art"*fn1 and to obtain patent claims to which he otherwise would not be entitled (Osram I, 440 F. Supp. 2d at 908); and (3) intentionally failed to disclose relevant litigation that was pending at the time the '409 patent application was pending (Osram I, 440 F. Supp. 2d at 909-10).

On October 10, 2007, the United States Court of Appeals for the Federal Circuit affirmed. Nilssen v. Osram Sylvania, Inc., 504 F.3d 1223 (Fed. Cir. 2007) (Osram II). The Federal Circuit noted the highly deferential standard of review applied to a district court's determination of inequitable conduct, which itself requires a clear and convincing standard of proof. Osram II, 504 F.3d at 1229. The Federal Circuit concluded that the patents in suit, including the '409 patent, were "unenforceable due to inequitable conduct in improperly claiming small entity status" (Osram II, 504 F.3d at 1233); the '409 patent, among others, was "unenforceable for inequitable conduct in misclaiming priority [filing dates]" (Osram II, 504 F.3d at 1233); and that the '409 patent, among others, was "unenforceable for inequitable conduct in failing to disclose the [relevant] litigation" pending during the patent prosecution period (Osram II, 504 F.3d at 1234). A petition for certiorari was denied in that case (Nilssen v. Osram Sylvania, Inc., 554 U.S. 903 (2008)) and the Federal Circuit opinion is a final determination.

C. Plaintiff's Legal Malpractice Suit

On August 14, 2008, following confirmation of the arbitration award in the underlying lawsuit, Magnetek filed a one-count complaint for legal malpractice against Kirkland in the circuit court of Cook County (circuit court), which is the subject of this appeal. In its complaint, Magnetek alleged that it retained Kirkland to represent it in the underlying patent litigation lawsuit. Shortly before the start of that trial, Magnetek alleged, Kirkland advised it to enter into the settlement agreement to arbitrate this dispute, which would focus on the '409 patent alone, and to forego any further discovery before the arbitration began. The arbitrator ultimately found in favor of Nilssen and awarded damages of more than $23 million. Magnetek later agreed to pay Nilssen $18,750,000 in satisfaction of the judgment.

Between the time of the arbitrator's ruling and Nilssen's petition to confirm the arbitration award in the district court, Magnetek alleged that it "fortuitously and independently" learned of the undisclosed prior art and Nilssen's misconduct before the USPTO that it claimed Kirkland should have discovered. Magnetek further alleged that that evidence was "used in two other cases involving Nilssen in which Nilssen's patents and patent claims were found to be unenforceable and invalid." Magnetek attempted to use this newly-discovered evidence to vacate the arbitration award, which the district court rejected. Magnetek recounted the district court's finding that relief was not warranted because "[plaintiff's] counsel *** should have been able to ascertain such facts in time for the arbitration proceeding."

As a result of Kirkland's alleged negligence in "failing to investigate and discover the prior art and misconduct which had not been disclosed by Nilssen and entering into a settlement agreement which precluded any further discovery or investigation prior to an arbitration," Magnetek was prevented from "assert[ing] an effective defense that Nilssen engaged in inequitable conduct and fraud and that the patent was invalid and/or unenforceable." Magnetek alleged that as a proximate cause of Kirkland's negligence and breach of its professional duty, it was found liable on the judgment. Magnetek further alleged that it incurred attorney fees and expenses of more than $300,000 in seeking to vacate the arbitration award and defeat Nilssen's petition to confirm the award.

While the parties were engaged in discovery, this court issued an opinion in Premier Networks, Inc. v. Stadheim and Grear, 395 Ill. App. 3d 629 (2009). In Premier Networks, this court determined that the federal courts have exclusive jurisdiction over legal malpractice cases in which the issues are "necessarily inextricably bound to determinations of substantive issues of patent law." Premier Networks, 395 Ill. App. 3d at 637.

Kirkland then filed a motion to dismiss the underlying lawsuit pursuant to section 2-619(a)(1) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(1) (West 2008) (the Code), asserting that under Premier Networks, the circuit court lacked subject matter jurisdiction over the case because it involved substantial issues of patent law, which brought it within the exclusive jurisdiction of the federal courts. Specifically, Kirkland argued that to establish the proximate cause element of the malpractice claim, Magnetek would have to prove that but for Kirkland's alleged negligence, Magnetek would have persuaded the arbiter of the underlying lawsuit to deem the '409 patent unenforceable, meaning that no judgment for infringement of the '409 patent could stand. According to Kirkland, those questions must be resolved in federal court.

In response, Magnetek argued that its claim does not require the circuit court to resolve substantial issues of patent law. Rather, because its claim is based on Kirkland's failure to assert defenses in the underlying litigation that Kirkland successfully asserted for Osram's benefit, any substantive patent law issues relevant to the element of proximate cause have already been decided by the Osram courts. Therefore, according to Magnetek, had Kirkland asserted the Osram defenses in Magnetek's case, the '409 patent would have been rendered unenforceable, as it was in the Osram cases, and incapable of sustaining a judgment of infringement.

Magnetek also asserted in its response motion that its case would rely on expert testimony to establish that: (1) the prior art and misconduct defenses used in the Osram case should have been used for its benefit in the underlying lawsuit; (2) the district court has determined, and the Federal Circuit affirmed, that such prior art and misconduct defenses defeated Nilssen's claims of infringement; and (3) in the underlying lawsuit, the district court concluded that Kirkland could have discovered such prior art and misconduct before recommending that Magnetek enter into the settlement agreement to arbitrate the dispute and forego any further discovery. Therefore, Magnetek argued, the circuit court would merely evaluate the expert testimony in deciding whether the arbitrator would have found the patent unenforceable in the absence of Kirkland's alleged negligence, rather than decide a substantive issue of patent law.

After briefing and oral argument, the circuit court granted Kirkland's motion, reasoning:

"There is a great deal of overlapping patent law playing out in this case. I don't think the ultimate issue is this jury is going to decide what patent law is because that's been established.

But the fundamentals of the case, as I understand it, will involve some very complicated issues that, quite frankly, the state courts have not been called upon to resolve. *** I think the Constitution says that the [f]ederal [c]ourts should concern themselves with cases involving the application of patent law. I think it is of substance here. I don't think it's the only issue. But to ...


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