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Inspired Development Group, LLC v. Inspired Products Group, LLC

United States Court of Appeals, Federal Circuit

September 18, 2019


          Appeal from the United States District Court for the Southern District of Florida in No. 9:16-cv-80076-RLR, Judge Robin L. Rosenberg.

          Steven L. Brannock, Brannock & Humphries, Tampa, FL, argued for plaintiff/counterclaim defendant-appellant. Also represented by Joseph T. Eagleton.

          Thomas A. Dye, Cozen O'Connor, West Palm Beach, FL, argued for defendant/counterclaimant-appellee. Also represented by James A. Gale, Arthur Robert Weaver, Miami, FL.

          Before Prost, Chief Judge, Newman and Stoll, Circuit Judges.


         Appellant Inspired Development Group, LLC ("Inspired Development") sued Appellee Inspired Products Group, LLC, d/b/a KidsEmbrace, LLC ("KidsEmbrace") for breach of contract and other related state law claims in federal district court on the basis of diversity jurisdiction under 28 U.S.C. § 1332(a). The district court granted summary judgment in KidsEmbrace's favor on certain claims and Inspired Development appealed to the U.S. Court of Appeals for the Eleventh Circuit. After the Eleventh Circuit discovered that diversity jurisdiction did not exist, the district court concluded on remand that it retained jurisdiction over the suit based on federal question jurisdiction. The Eleventh Circuit transferred the case to this court to determine whether the parties' claims "aris[e] under" the patent laws pursuant to 28 U.S.C. § 1338(a). For the reasons below, we vacate and remand for dismissal of the lawsuit for lack of jurisdiction.



         This case arose as a business dispute. After developing children's car seat designs in the shape of cartoon and comic book characters, Mitchell Prine formed Inspired Development. Inspired Dev. Grp. v. Inspired Prods. Grp., No. 9:16-CV-80076, 2017 WL 411997, at *1 (S.D. Fla. Jan. 31, 2017). Mr. Prine obtained several patents for the safety seats. Id. The first design patent issued as U.S. Design Patent No. D524,559, which incorporated a representation of Batman into the car seat. J.A. 2667–72.

         Inspired Development held the patents as assignee. Inspired Dev. Grp., 2017 WL 411997, at *1. With the help of some investors, Mr. Prine then formed a second company, KidsEmbrace, to manufacture and sell the car seats. Id. Mr. Prine acted as CEO of KidsEmbrace. Id. at *2.

         In 2007, the two companies entered into an Exclusive Patent Licensing Agreement ("Agreement"), which granted KidsEmbrace an exclusive license to practice the patents to commercialize the car seats in exchange for certain royalties. Id. at *1.

         In 2009, a third company entered the picture. KidsEmbrace sought additional investment from a Bulgarian corporation named Boliari, EAD ("Boliari"). Id. at *2. As a condition of its investment, Boliari made both Inspired Development and KidsEmbrace execute a Binding Letter of Agreement ("Binding Letter"). Id. The Binding Letter required Inspired Development to transfer the patent rights to KidsEmbrace in the event KidsEmbrace was acquired. In exchange, Inspired Development would receive a minimum royalty payment. Id.

         Shortly after the deal with Boliari was struck, Mr. Prine was removed as CEO of KidsEmbrace. Id. Subsequently, KidsEmbrace began questioning the value of licensing Inspired Development's patents. Id. Eventually, KidsEmbrace unilaterally terminated the Agreement. Id. Inspired Development believed it was owed outstanding royalties under the Agreement and a lump-sum payment under the Binding Letter. Id.


         In 2016, Inspired Development filed suit against KidsEmbrace in the U.S. District Court for the Southern District of Florida, alleging breach of contract and other equitable state law claims.

         Count I of the complaint alleged that KidsEmbrace breached the written terms of the Agreement.

         J.A. 98 ¶¶ 34–35 (alleging Section 2 of Agreement required "the greater of $100,000 or one percent (1%)" of yearly "net sales" as well as late fees, which KidsEmbrace failed to pay in the fourth quarter of 2012 and all of 2013). Count II alleged breach of the Binding Letter. J.A. 99 ¶¶ 39–41 (alleging Section 5 of Binding Letter required "a minimum of $3,000,000 in total royalties during the duration of the Agreement," which KidsEmbrace refused to pay after "unjustifiably and unilaterally" terminating the Agreement). Count III pled a claim for unjust enrichment in the alternative to the breach of contract claims. Id. ¶ 43 ("As an alternative to Counts I and II (Breaches of the Agreement and Binding Letter, respectively), Plaintiff brings a cause of action against Defendant for unjust enrichment."). Count IV pled promissory estoppel. J.A. 100 ¶¶ 50–52.

         In response, KidsEmbrace asserted counterclaims, which included breach of contract, fraud, negligent misrepresentation, restitution, and breach of fiduciary duty.

         Both parties relied on diversity to establish subject matter jurisdiction over their respective claims. See 28 U.S.C. § 1332(a).

         On summary judgment, the claim for breach of the Agreement (Count I) survived, see Inspired Dev. Grp., 2017 WL 411997, at *3–5, but was later settled. The rest of the case was resolved entirely on state law grounds under Florida contract law. Inspired Development lost on its claim for breach of the Binding Letter (Count II), id. at *8, and equitable claims of unjust enrichment (Count III), id. at *9, and promissory estoppel (Count IV), id. Inspired Development appealed to the Eleventh Circuit.

         On appeal, the Eleventh Circuit spotted a potentially fatal problem with the case: diversity of citizenship might not exist. As the Eleventh Circuit explained, "to allege the citizenship of a limited liability company, a party must identify all the members of the limited liability company, and list the citizenship of each member." Jurisdiction Question, Inspired Dev. Grp. v. Inspired Prods. Grp., No. 17-11072 (11th Cir. Mar. 23, 2017) (discussing Mallory & Evans Contractors & Eng'rs, LLC v. Tuskegee Univ., 663 F.3d 1304, 1305 (11th Cir. 2011)). Neither party had done so in their pleadings. The Eleventh Circuit issued a "Ju-risdictional Question," finding that "the relevant pleadings did not sufficiently allege the citizenship of any party, as necessary to establish the district court's subject matter jurisdiction over the relevant claims in the first instance." Id.

         The Eleventh Circuit's concerns were well founded. After a closer examination of their respective members, the parties "admitted that they are not diverse." Limited Remand, Inspired Dev. Grp. v. Inspired Prods. Grp., No. 17-11072 (11th Cir. June 6, 2017); see also 28 U.S.C. § 1332(a)(1) (requiring an amount in controversy exceeding $75,000 and a claim between citizens of different states). At this point, cut loose from its jurisdictional moorings, the dispute appeared to be headed for dismissal.[1] But the case did not end there.

         KidsEmbrace attempted to anchor jurisdiction on a different basis. KidsEmbrace argued for "the first time on appeal that federal subject matter jurisdiction exists" because the case presented a federal question. J.A. 2550. The Eleventh Circuit remanded to let the district court answer that question in the first instance.

         Before the district court, Inspired Development opposed the new jurisdictional theory. It argued that because there was no diversity of citizenship and it only alleged state law claims, the case no longer belonged in federal court. KidsEmbrace framed the state law breach of contract and equitable claims in the complaint as "arising under" federal patent law rather than state law. KidsEmbrace also argued its state law counterclaims- which it had already voluntarily dismissed from the suit- provided a basis for staying in federal court.

         The district court accepted KidsEmbrace's arguments, concluding it retained jurisdiction over this breach of contract action. See Order on Subject Matter Jurisdiction at 9, Inspired Dev. Grp. v. Inspired Prods. Grp., No. 9:16-CV-80076 (S.D. Fla. Dec. 4, 2017) (concluding district court had "subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1338(a)"). The case then returned to the Eleventh Circuit for review of that decision.

         On appeal, however, the Eleventh Circuit revisited KidsEmbrace's motion to transfer the appeal to this court. In "the interests of justice and judicial economy," the Eleventh Circuit granted KidsEmbrace's motion to transfer, "expressly leav[ing] the question of whether federal subject matter jurisdiction exists under 28 U.S.C. § 1338(a) to be resolved by the Federal Circuit." Inspired Dev. Grp. v. Inspired Prods. Grp., No. 17-11072, 2018 WL 1282412, at *1 (11th Cir. Feb. 22, 2018).

         We have jurisdiction to decide whether the district court had subject matter jurisdiction pursuant to 28 U.S.C. § 1338(a). NeuroRepair, Inc. v. The Nath Law Grp., 781 F.3d 1340, 1342 (Fed. Cir. 2015).



         "Subject matter jurisdiction is a question of law that we review de novo." Litecubes, LLC v. N. Light Prods., Inc., 523 F.3d 1353, 1360 (Fed. Cir. 2008); see also Sec. & Exch. Comm'n v. Mutual Benefits Corp., 408 F.3d 737, 741 (11th Cir. 2005) (same).[2]

         "'Federal courts are courts of limited jurisdiction,' possessing 'only that power authorized by Constitution and statute.'" Gunn v. Minton, 568 U.S. 251, 256 (2013) (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). "Federal courts may hear only those cases over which they have subject matter jurisdiction." Semiconductor Energy Lab. Co. v. Nagata, 706 F.3d 1365, 1368 (Fed. Cir. 2013). Subject matter jurisdiction "may be based upon either diversity of citizenship or federal question jurisdiction." Id. at 1369.

         "Where, as here, [the parties] do not claim diversity of citizenship, there must be federal question jurisdiction." ExcelStor Tech., Inc. v. Papst Licensing GmbH & Co. KG, 541 F.3d 1373, 1375 (Fed. Cir. 2008). By statute, federal district courts are authorized to exercise original jurisdiction in civil actions "arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. "Federal courts have exclusive jurisdiction over cases 'arising under any Act of Congress relating to patents.'" Gunn, 568 U.S. at 253 (quoting 28 U.S.C. § 1338(a)).

         For statutory purposes, a case will "arise under" federal law in two ways. Id. at 257. First, the case qualifies if federal law "creates the cause of action asserted." Id. This category accounts for the "vast bulk of ...

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