Erie Doctrine, General Principles, and Running-Out the Clock

by Dennis Crouch

Nippon Shinyaku Co. v. Sarepta Therapeutics, Inc. (Fed. Cir. 2022) (en banc petition pending)

After a failed negotiation, Sarepta petitioned for Inter Partes Review of Nippon Shinyaku’s patents.  But, the two parties had a prior agreement to litigate patent disputes in Delaware courts (i.e., not before the PTAB).  After Sarepta petitioned for IPR, Nippon Shinyaku responded with an action in Delaware Federal Court for breach of contract seeking a preliminary injunction that would force Sarepta to withdraw its IPR petitions based upon the forum selection clause. The Delaware court (Judge Stark) sided denied preliminary relief and instead sided with the patent challenger – finding (1) evidence of breach was lacking and (2) the real irreparable harm would come from barring the IPR.  On appeal the Federal Circuit reversed based upon its own plain language interpretation of the contract.  The result then is that the district court should enter the preliminary injunction on remand.

Sarepta has now petitioned for en banc review: asking two procedural questions, including one on the Erie Doctrine.

Timing Part I: Before getting into the merits of the en banc petition, I want to look for a moment at timing issues.  The IPR petitions have been granted, but are currently stayed until April 24.  Of course, the PTAB is under a statutory duty to quickly complete its IPRs.  In my original post on the case, I suggested a likelihood that Sarepta would seek en banc review and subsequently certiorari in order to “run-out the clock” on the IPRs.  “While the appeal was pending the PTO granted all seven of the IPR petitions and an en banc petition followed by a petition for certiorari will easily eat-up that timeline.”  More on this timing issue toward the bottom of the post.

The petition asks two questions paraphrased as follows:

1. Does the Erie Doctrine require this Court to apply state substantive law when deciding an issue of contract interpretation under state law? [Under Delaware law a contractual waiver of a statutory right (such as right to file an IPR) requires that waiver be clearly and affirmatively expressed. Kortum v. Webasto Sunroofs, Inc., 769 A.2d 113 (Del. Ch. 2000)]
2. Should the court have vacated-and-remanded rather than reversed? [Although Fed.Cir. found the movant had established the first two gateway factors for preliminary injunction, the district court still should “reevaluate and balance the four preliminary injunction factors before entering any injunction.”]

Do you remember Erie Railroad Co. v. Tompkins (1938)? In that famous decision, the Supreme Court held that federal courts sitting in diversity must apply state substantive law rather than principles of federal common law.  The lawsuit here asserts diversity jurisdiction for the state law contract claim and federal question jurisdiction over a separate set of declaratory judgment claims (asserting several Sarepta patents are invalid or not infringed).  In a mixed situation like this, the standard approach is that Erie applies to the claims whose jurisdiction are based upon diversity grounds.

The Federal Circuit’s opinion in the case does not cite Erie, but does purport to be answering “a question of contract interpretation under Delaware law.” So far so good.  The problem arises as you delve into further opinion. It quickly becomes clear that a good portion of the court’s conclusions are based upon “general principles” with no regard to Delaware law.  Another name for those general principles is Federal Common Law — the exact approach rejected in Erie.

The most Erie-offensive paragraph from the case is excerpted below:

As a general principle, this court has recognized that parties are entitled to bargain away their rights to file IPR petitions, including through the use of forum selection clauses. For example, in Dodocase VR, Inc. v. MerchSource, LLC, 767 F. App’x 930 (Fed. Cir. 2019) (nonprecedential), we affirmed a district court’s grant of a preliminary injunction on the basis that a defendant had likely violated a forum selection clause by filing IPR petitions, even though the forum selection clause did not explicitly mention IPRs. Even in Kannuu Pty Ltd. v. Samsung Electronics Co., 15 F.4th 1101, 1106–10 (Fed. Cir. 2021), where we determined that the parties’ forum selection clause did not extend to IPRs, that determination was based on the specific language in the forum selection clause at issue in that case. Inherent in our holding in Kannuu was an understanding that a differently worded forum selection clause would preclude the filing of IPR petitions.

Nippon Shinyaku Co., Ltd. v. Sarepta Therapeutics, Inc., 25 F.4th 998 (Fed. Cir. 2022).   What is the problem here: (1) the court talks about “general principles” for determining whether this is a proper element of a contract rather than a question of Delaware Law; (2) the court references its own cases to prove the point (rather than Delaware cases; (3) Dodocase involved a question of California state law rather than Delaware state law; (4) Kannuu purported to interpret New York state law rather than Delaware state law.   Although these it makes sense to consider non-Delaware law cases in the attempt to make an Erie Guess in situations where there is no state precedent on-point.  However the Erie Guess is focused on divining Delaware Law rather than being bound by some general principal of law that arches across the states.  Here, the Delaware high courts have not faced the specific question of contractual waiver of IPR rights.  However, they have addressed the larger question of contracts that appear to waive statutory rights. In particular, the Delaware court have held that waiver must be “clearly and affirmatively expressed in the agreement.”  Kortum v. Webasto Sunroofs, Inc., 769 A.2d 113 (Del. Ch. 2000).  The Federal Circuit decision did not attempt to contend with this principle of Delaware Law.

= = = =

Back to Timing: Although I see  merit in the en banc petition, its filing is also part of a timing game.  As soon as the Federal Circuit released its decision in February, Nippon Shinyaku asked Judge Stark to immediately enter the preliminary injunction.  Judge Stark refused–holding that the Federal Circuit has not yet issued its mandate and thus that the Federal Circuit held jurisdiction over the preliminary injunction issues in the case.  (That is a shaky decision, IMO since this was an interlocutory appeal.)  As back-up, Judge Stark further explained that “even if the Court did have jurisdiction over the preliminary injunction issues, the Court would exercise its discretion to defer further letter briefing until the Federal Circuit issues its mandate.”  So, Nippon Shinyaku’s only hope for quick entry of the preliminary injunction is expedited action by the Federal Circuit.  In that regard, the company has has requested the Federal Circuit issue an expedited mandate – ordering entry of the Preliminary Injunction to halt the IPRs.

The PTAB cases are currently stayed (until April 24, 2022), but the motion practice regarding the en banc petition could easily extend beyond that date.  Nippon Shinyaku explains:

Expedited issuance of the mandate would prevent Sarepta from, as Professor Dennis Crouch has hypothesized, using its motion for rehearing to “run-out the clock,” nullifying this Court’s decision. Dennis Crouch, Contractually Agreeing to Not Petition for Inter Partes Review, PATENTLY-O (Feb. 8, 2022), https://patentlyo.com/patent/2022/02/contractually-agreeing-petition.html. . . .

If Sarepta had not sought rehearing, the mandate would have issued on March 17. This would have provided ample time for any additional briefing in the district court and entry of the injunction by April 24, when the stay entered by the PTAB will expire.

But now that Sarepta has filed a petition for rehearing, the mandate will not issue until 7 days after the entry of the order denying rehearing. Even if no response to Sarepta’s petition is requested, issuance of the mandate could easily be delayed by 30 days or more.  . . .

To avoid nullification of this Court’s decision and to avoid the irreparable harm to Nippon Shinyaku already recognized in the panel opinion, this Court should issue the mandate no later than March 17, 2022, allowing the district court to enter an injunction before expiration of the PTAB’s stay. . . .

Petition for Expedited Mandate.   The Federal Circuit has ordered responsive briefing on the expedited mandate that appears to be due Monday 3/21 (If I have counted 5 days correctly).

Great litigating by folks at both Morgan Lewis and Finnegan Henderson.

Back to Erie: Despite being 84 years old, the case is still regularly cited — with about 200 citations by Federal appellate courts in the past 5 years.  None of those citations came from the Federal Circuit.  I’m not giving these figures to denigrate the Federal Circuit.  Rather, the lack of citations are not surprising. Erie focuses on diversity cases and ordinary diversity cases are never heard by the Federal Circuit.  The figure does show that the court is out of practice at thinking through the Constitutional implications of its state law interpretative questions.