## United States Court of Appeals for the Federal Circuit

05-1547, -1578

HIGHWAY EQUIPMENT COMPANY, INC., Plaintiff-Cross Appellant,

v.

FECO, LTD. and STAN DUNCALF, Defendants-Appellants.

Stephen J. Holtman , Simmons, Perrine, Albright & Ellwood, PLC, of Cedar Rapids, Iowa, argued for plaintiff-cross appe llant. With him on the brief was David A. Hacker

. David A. Tank , Davis, Brown, Koehn, Shors & Roberts, P.C., of Des Moines, Iowa, argued for defendants-appel lants. With him on the brief was Deborah M. Tharnish

. W. Michael Garner , Dady & Garner, P.A., of Mi nneapolis, Minnesota, for amici curiae. Appealed from: United States District C ourt for the Northern District of Iowa Magistrate Judge John A. Jarvey

## United States Court of Appeals for the Federal Circuit

05-1547, 1578

HIGHWAY EQUIPMENT COMPANY, INC. Plaintiff-Cross Appellant,

v.

FECO, LTD. and STAN DUNCALF, Defendants-Appellants.

__________________________ DECIDED: November 21, 2006

__________________________ Before SCHALL, LINN, and DYK Circuit Judges

. LINN, Circuit Judge

. FECO, Ltd. (“FECO”) appeals from a judgment of the U.S. District Court for the Northern District of Iowa making final an order grantin g Highway Equipment Company, Inc.’s (“Highway Equipment”) summary judgment on FECO’s claim for wrongful termination of dealership and de nying FECO’s motion for a ttorney fees and expenses pursuant to 35 U.S.C. § 285. Highway Equipment cross-appeals from the ruling that the district court had subject matter jurisdiction over FECO’s motion for attorney fees. Because the district court properly entertai ned FECO’s claim for attorney fees and did not err in denying attorney fees, and because t he district court lacked jurisdiction over FECO’s wrongful termination of dealership claim, we a ffirm-in-part, vacate-in-part, and remand.I. BACKGROUND FECO and Highway Equipment are Iowa corporations that manufacture and sell agricultural equipment including spreaders fo r applying particulate materi al, such as fertilizer to fields or sa lt to roads. Highway Equi pment is a l so the ow ner of U.S. Patent No. 6,517, 281 (the ’281 patent), di rected t o an adjus table spreader that allows for a more precise applic ation of the various types and densities of parti culate material. On October 1, 1996, Highway Equipment entered into an agreem ent with F E CO, authorizing FECO to sell Highw ay Equipm ent’s adjus table spreader. The agreement
was gover ned by the Iowa Agricultural Equi pment Dealer Statute, Iowa Code § 322F (“322F”), which regulates certain aspects of contractual relations h ips between agricultural equipment suppliers and dealer s

. 322F pr ovides, am ong other things, that a supplier shall terminat e a dealers hip agreem ent only upon good caus e and wit h at least ninety-days prior writt en notic e. On September 16, 20 02, without good cause and without prior written notice, Highway Equipment terminated F E CO as it s agricultural equipment dealer. In Decem ber of 2002, or sometime shortly thereafter, FECO began manufacturing an adjustable spreader. The ’281 patent issued on February 11, 2003. On June 17, 2003, Highway Equipment sued FECO and its president, Stan Dunc alf (collectively “FECO”) for infringement of t he ’281 patent. Also na med as a defendant in that case was Doyle E quipment Manufacturing Company (“Doyle”). Highway Equipment averred in its complaint that t he district court possessed subject matter jurisdiction over the counts alleging infr ingement pursuant to 28 U.S.C. § 1338(a).

05-1547, 1578 2FECO filed affirmative defenses, based on inventorship and inequitable c o nduct, and counterclaimed for a declarat o ry judgment of non-infringement and invalidity and for tortious interference with a prospective bu siness relationship. FECO also sought damages pursuant to 322F for wrongful termi nation of its dealer ship agreement with Highway Equipment. FECO as serted that the district court possessed supplemental jurisdiction over the countercl aim, alleging violation of th e Iowa Code purs uant to 28 U.S.C. § 1367(a). FE CO also sought attorney fees and costs. On November 1, 2004, Highw ay Equipment moved for par tial summary judgment on FECO’s counterclaim for damages pursuant to 322F. On March 22, 2005, the district court, by an interlocut ory or der, granted High w ay Equipment’s summary judgment motion. The district court held that, as a matter of law, FECO was not entitled to damages for wrongful termination of dealersh ip under the statute because the statute
express l y lists certain acts that are “vio lations” of 322F and wr ongful termination of dealership is not enum erated on the list. See Highway Equipm ent Co. v. FECO, Ltd. , No. 03-CV-0076 (N.D. Iowa Mar. 22, 2005) (“ 322F Order ”); see als o Iowa Co de § 322F.7. T r ial on the remaining patent-related issues was sche d uled to begin in April, with the final pretrial confer ence set for April 1, 2005. On March 31, 2005, Highway Equipment filed a stipulation and motion for dismissal with prejudice of all of its claims against Doyle. Doyle likewise st ipulated to dismiss with prejudice all cl aims against Highway Equipment. The next day, on April 1, 2005, Highway Equipment filed the following “Declaration and Covenant Not to Sue” (“covenant”): Highway Equipment Company, on behalf of itself and any successors-in-interest to [the ’281 patent], h e reby

05-1547, 1578 3unconditionally and irrevocably c o venants not to assert at any time any claim of patent infringement including direct infringement, contributory infri ngement and/or inducing infringement against [FECO] under the ’281 patent , as it currently reads, based on [FECO’s] manufacture, use, offer for sale, or sale of (1) any product that [FECO] currently manufactures; and/or (2) any product that [FECO] manufactured prior to the date of this declaration. By order dated that same day, the di strict court entered a dismissal with prejudice as to the claims between High way Equipment and Doyle, bas ed on the stipulations between t hem. Because the co venant withdrew the c ontroversy regarding infringement, on April 4, 2005, t he district court canceled the jury trial and set April 5, 2005 as the deadline for FECO to file a motion for attorney fees under 35 U.S.C. § 285. On April 7, 2005, FECO fil ed its motion for attorney fees pursuant to 35 U. S.C. § 285 and requested a hearing. FECO alle ged the case was ex ceptional under 35 U.S.C. § 285 bec ause Highw ay Equipment engaged in litigation misconduct and inequitable conduct during prosecution of t he ’281 patent. On April 12, 2005, Highway Equipment filed an opposit ion to the motion, contending that the court could not properly entertain the attorney fee issue because Highway Equipment’s covenant not to sue FECO for infringement divested the court of subject matter ju risdiction over the claim for attorney’s fees and that, in the alternativ e, FECO did not obtain a dispos ition on the merits that would make it a prevaili ng party for purposes of 35 U.S

. C. § 285. On April 18, 2005, pursuant to Fed. R. Ci v. P. 41(a)(2), FE CO sought an order dismissing Highway Equipment’s underlying infringement claim with prejudice an d retaining jurisdiction to entertain the fee request. On April 20, 200 5 , Highwa y Equipment filed a brief “resisting” the motion, arguing that, although the covenant

05-1547, 1578 4rendered all matters moot such that the cour t should dis m iss all c l aims, including the fee claim, a dismissal wit h prejudice was not wa rranted. On April 21, 2005, FECO filed a reply, arguing that a dismissa l with prejudice was required under the facts of this case because, a m ong othe r things, the filin g of the covena nt is a “unilateral dec l aration of intent not supported by cons ideration, which [Highway Equipm ent] can attempt to withdraw, amend, or alter at any time.” FECO’s April 21, 2005 brief reiterated it s demand for dismissal of the patent claims with prejudice, arguing that “[a]bsent a definitive and judic i ally s anctioned resoluti on of [ Highway Equipment’s] affirmati ve claims [demanding among other things damages for past infringement], the threat of further litigation is substantial.” On April 22, 2005, the district court ru led that, although it was dismissing the entire action under Fed. R. Ci v. P. 41(a)(2) in light of the filing of the covenant, it nonetheles s retained subject matter jurisdic tion over FECO’s fee request under 35 U.S.C. § 285. See Highway Equipment Co. v. FECO, Ltd. , No. 0 3 -CV-0076 (N.D. Iowa, April 22, 2005) (“ Jurisdiction Or der ”). The court also found t h at it could properly entertain the fee claim becaus e it concluded that F E CO was a prevailin g party for purposes of § 285. T he court then set a hearing date on FECO’s fee motion. Id. , slip op. at 9. On July 27, 2005, after a four-day evi dentiary hearing on the fee question, the court found that the case wa s not exceptional and denied FE CO’s request for attorney fees. See Highway Equipment Co. v. FECO, Ltd. , No. 03-CV-0076 (N.D. Iowa Jul. 27, 2005) (“ Fee Order ”). On July 29, 2005, the distri ct court entered final judgment, dismissing Highway Equipment’s claims against FECO and FECO’s counterclaims

05-1547, 1578 5against Highway Equipment wit h prejudice based on the covenant and denying F E CO ’s claim for attorney fees and costs under 35 U.S.C. § 285. See H i ghw ay E q ui pment C o

. v. FECO, L t d. , No. 03-CV-0076 (N.D. Iowa Jul. 29, 2005) (“ Final Order ”). FECO appeals the district court’ s Fee Or der and the district court’s 322F Order. Highway Equipment cross-appeals the dis t rict court’s Jurisdiction Order. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(1). II. DISCUSSION A. Standard of Review Whether an actual controversy exists to support subject matter jurisdiction is a question of law subject to de nov o review. Fort James Corp. v. Solo Cup Co. , 412 F.3d 1340, 1346 (Fed. Cir. 2005) (citing BP Che m s. Ltd. v. Unio n Carb ide Corp. , 4 F.3d 975, 978 (Fed. Cir. 1993)). The district court’s fact ual determinations made in the process of resolving questions of law are reviewed for clear error. See Vanguard Research, Inc. v. Peat, Inc. , 304 F.3d 1249, 1254 (Fed. Cir. 2002). In co nsidering the jurisdictional iss u es presented herein, we follow the “ f undamental precept that feder al courts are courts of limited jurisdiction,” empowered to act only wit hin the bounds of Articl e III of the United States Constitution. Owen Equip. & Erection Co. v. Kroger , 437 U.S. 365 (1978) ; Marbury v. Madison , 5 U.S. (1 Cranch) 137, 173-80 (1803); see also Mansfield, Cold water & Lake Mich. Ry. v. Swan , 111 U.S. 379, 384 (1884) (“[T]he judicial power of the United States must not be ex erted in a case to which it does not extend, even if both parties desire to have i t exerted”). Before considering the effect of the dist rict court’s dismissa l with prejudice, we must first determine whether to apply Eighth Circuit law or Federal Circuit law to the

05-1547, 1578 6question of what effec t a dismiss a l with pr ejudice has on the lega l requirements under 35 U.S.C. § 285. Keeping in mind the policy interests both in “bring[ing] about uniformity in the area of patent law” and in “minimizing confusion and conf licts in the federal judicial system,” Manildra Milling Cor p . v. Ogilvie Mills, Inc. , 76 F.3d 1178, 1181 (Fed. Cir. 1996) (c itations omitted), and that F ederal Cir cuit law “governs the substantive interpretation of 35 U. S.C. § 285, whic h is u n ique to patent law,” Pharmacia & Upjohn Co. v. Mylan Pharms., Inc. , 182 F

. 3d 1256, 1359 (Fed. Cir. 1999), we resolv e the issue by deciding that the question of the effect of a di smissal with prejudice on 35 U.S.C. § 285 is a matter of Federal Circuit la w. We do so in order to promote national uniformity concerning the availability of atto rney fees under 35 U.S. C. § 285. Were we to apply regional circuit law, the effect of a dismissal with prejudi ce on 35 U.S.C. § 285 might vary with the regional circ uit in whic h the case originated. As discussed below, there is a noted lack of uniformi ty among the regional circuits regarding the effect of a dismissal with prejudice on the availability for attorney fees . Applying our own law will ensure uniformity when patent is s ues are litigated. W e apply a de nov o st andard of review to this question of law. I n land Steel Co. v. LT V Steel Co. , 364 F.3d 1318, 1320 (Fed. Cir. 2004). Where a district court finds a cas e exc eptional under 35 U.S.C. § 285, this c o urt reviews the underlying factual findings for clear error and legal conclus i ons without deference. Rambus Inc. v. Infineon Techs. AG , 318 F.3d 1081, 1088 (Fed. Cir. 2003). Once the district court has found a cas e t o be exceptional, we review any award of attorney fees for an abuse of discretion. Id.

05-1547, 1578 7B. Analysis 1. Fee Order Highway Equipment first argues that the district court erred in retaining jurisdiction over FECO’s request for attorney fees under 35 U.S.C. § 285 beca u se, once Highway Equipment gave F E CO a pre-verdict cov enant not to sue on the patent infringement issues, the court lost Article II I subject matter jurisdiction over the patentbased fee request. We disagree. Under our precedent, the district court correctly retained jurisdiction over FECO’s clai m for attorney fees under 35 U.S.C. § 285. 1 Se e H.R. Tech., Inc. v. Astechnologies, Inc. , 275 F.3d 1378 , 1386 (Fed. Cir. 2002) (holding that a claim for attorney fees under § 285 is in dependently within the district court’s federal question jurisdiction); Imagineering, Inc. v. Van Klassens , Inc. , 53 F.3d 1260, 1263 (Fed. Cir. 1995) (“Since section 285 appear s in title 35 and was enacted as a part of United States patent law, the question whether a ca se is exceptional within the meaning of section 285 arises under the Patent Act.”); Cambridge Prods., Ltd. v. Penn Nutrients, Inc. , 962 F.2d 1048, 1050-51 (Fed. Cir. 1992). Highway Equipment also argues that, in t he alternative, even if the district court had subjec t matter juri sdiction, the district c ourt erred in entertaining FECO’s r equest for attorney fees under 35 U.S.C. § 285 because FE CO did not receive judicial relief on the

1 While the covenant may hav e eliminated the case or controversy pled in the patent-related counterclaims and deprived the dist ri ct court of Article III jurisdiction with respect to those counterclaims, see Super Sack Mfg. Corp . v. Chase Packaging Corp. , 57 F.3d 1054, 1058-59 (Fed. Cir. 1995) (“[A] patentee defending against an action for a declaratory judgment of invalidit y c an div e st the trial court of jurisdiction ov er the case b y filin g a c o venant n o t to assert the patent at issue against the putativ e infringer.”), the covenant does not deprive the district court of jurisdiction to determine the dispos ition of the patent in fringement claims raised in the Complaint under Rule 41 or the request for attorney fees under 35 U.S.C. § 285.
05-1547, 1578 8merits that alters the legal relationship of the parties. Highway Equipment argues that its strategic decision t o file the covenant and not to assert its infringement claim reveals nothing about the merits of Highway Equipm ent’s cas e . It contends that because the
covenant c annot be c onstrued as anything other than an abandonment of the litigation, the dismissal, even though characterized as “with prejudice,” did not and could not change the legal relationship bet ween the part ies on the merits of the underly ing c l aim, which was not considered by the district court. We disagree. 35 U.S.C. § 285 provides that “[t]he c ourt in exce ptional cas e s may award reasonable attorney fees to the prevailing par ty.” The Supreme Court has considered several similarly-wor ded fee s h ifting statut es and has cons is tently held that such statutes prohibit an award of fees to the pl aintiff unless the court awards relief on the merits, either through a judgment on the me rits or through a se ttlement agreement enforced through a consent decree. See Buckhannon Bd. and Care Home, Inc. v. W. Va. Dep’t of Heal th a nd Human Res. , 532 U.S. 598 (2001) (addr essing a request for attorney fees under the Fair Housing Amendments Act and the Americans with Disab ilities Act); see also Kent ucky v. Graham , 473 U.S. 159 (1985) (addressing a request for attorney fees under the Civ il Rights Attorney’s Fees Awards Act of 1976). In Buckhannon , the Supreme Court rejected the so -called “catalyst theory,” which maintained that a plaintiff obtai ned relief on the merits if the plaintiff achieved its desired result due to the defendant’s voluntary change in conduct. Buc k hannon , 532 U.S. at 600. In rejecting this theory, the Court ex plained that the critical focus is not on the defendant’s voluntary change in conduct , but ra ther whether there is a “judicially sanctioned change in the legal r e lations hip of the parties.” Id. at 605. The Court held

05-1547, 1578 9that a defendant’s voluntary c hange in conduct, even if it acco mplishes what the plaintif f sought to achieve, lacks the necessary “ju d icial imprimatur on the change.” Id. W e apply the r equirement s of Buckhannon to 35 U.S.C. § 285. See I ndep. Fed’n of Flight Attendants v. Zipes , 491 U.S. 754, 759 n. 2 (1989) (noting that the similar languag e of fee-shifting statutes is “a st rong indication” that they are to be interpreted alike). The dispos itive issue is thus whether t he dismissal wit h prej udice had sufficient judicial imprimatur to constitute a “judicia lly sanctioned change in the legal relations hi p of the parti es.” Buckhannon , 532 U.S. at 605. In this case, the district court exercise d it s discretion in dismis sing the patent claims rais ed in the underlying action with prejudice pursuant to Fed. R. Civ. P. 41(a)(2). That rule provides in relevant part that “ an action sha ll not be dis m i ssed at the plaintiff’s instance [ a fter answer] save upon order of the court and upon suc h terms and conditions as the court deems proper.” As ex press l y provided in Rule 41, the district court has discretion t o condit ion the plaintif f’s voluntary dismissal on terms that would avert any prejudice to the defendant, including dismissing the case “with prejudice.” The Eighth Circuit has held that voluntary dismissals under F ed. R. Civ. P. 41(a) should be granted only if no other party will be prejudiced. Ke rn v. TXO Production Corp. , 738 F.2d 968, 970 (8th Cir. 1984). O ne sort of prejudice that cannot be cured simply by a reimbursement of costs (and dismissal wit hout prejudice) is the loss by defendant of success in the first case. Id. (stating that “[i]f defendant has already won its case, reimbursement of fees and expenses cannot ma ke it whole from the injury of being sued again, perhaps this time to lose”). Fa ctors that the Eighth Circuit considers in determining whether to dismiss with or wit hout prejudice inc l ude whether the party ha s

05-1547, 1578 10presented a proper explanation fo r its desire to dismiss; whether a dismissal wou l d result in a waste of judicial tim e and e ffort; whether a dismissal will prejudice the defendants ; and whether a dismissal is sought merely to esc ape an adv e rse decis i on or to seek a more favorable forum. Hamm , 187 F.3d at 950. T he district court als o considers whether the motion to dismiss is presented at a la te time in the proceedings

. See Willia ms v. Ford Motor Credit Co. , 627 F.2d 158, 160 (8th Cir. 1980). Highway Equipment cites Rice Services, LTD v. United States , 405 F.3d 1017 (Fed. Cir. 2005), as s upport for it s argument that the dismissa l with prejudic e does not make FECO a prevailing party for purposes of 35 U.S. C. § 285. In Rice , Ric e brought a bid protest action in the Court of Federal Claims again s t the Navy, disputin g the awar d of a contract for dining services. The Na v y then voluntarily agr eed to reevaluate the bids, and the government moved to dismiss t he case without prejudice as moot. The Court of Federal Claims order ed the Navy to take the pr omised actions and dismissed the case without prejudice. Id. at 1019. W e noted that “the Nav y acted unilaterally in initiating a reevaluation of bids” and that the Navy acted voluntar ily by taking “remedial action before any rulings by the Court of Federal Claims.” Id. at 1027. We then held that Rice was not a prevailing party because “ t he government had voluntarily abandoned its position” and “the c ourt did not state t hat it was entering the order as a merits adjudication in the face of a continuing controversy.” Id. at 1027. The present situation is diffe rent from the situation in Rice , in which volu ntary action was taken outside the proceedings , was not designed to be judicially enforceable, and resulted in a dismissal without prejudi ce. In contrast to Rice , the voluntary filing of the covenant in this ca se was designed to be judicially enforceable

05-1547, 1578 11and was the basis for the court’s order di smissing the claims with prejudice. Th e covenant was not simply an extrajudicial pr omise made by one party to another outsid e the context of litigation. The district court’s determinat ion to dismiss the remaining controversy with prejudice evid ently was prompted by the fa ct that H i g hw ay E q ui pment had prosec uted the case against FECO through t he final pretrial c onference to the eve of trial without any explanation of why the covenant was only then filed with the court. In exercising its discretion and dismissing t he case with prejudice, following and in light of the covenant, the district c ourt extinguis h ed Highway Equi pment’s ability to sue again on those claims. To hold that, in this ci rcumstance, there has been no dis position on the merits would undermine t he purpose of Rule 41 t o encourage a plaintiff’s voluntar y dismissal under such t e rms as to avoid prej udice. Suc h a holding would imply that the only way f o r a defendant to obt ain a disposition on the meri ts would be to oppose a dismissal and proceed to lit igation on the merits, and woul d enc ourage the litigation of unreasonable or groundless claims. See, e.g. , Christiansburg Garment Co. v. EEOC , 434 U.S. 412, 421 (1978) (holdi ng that prevailing defendants may receive attorney’s fees under Title VII of the Civil Rights Act of 1964 where the plaintiff’s actions wer e

“ frivolous, unreasonable, or without foundation”). We have likewise held that a defendant was the prevailing party for purposes of costs under Rule 54 where the plaintiff vo luntarily dismissed it s case against one defendant with prejudice. Power Mosfet Techs., L.L.C v. Siemens AG , 378 F.3d 1396, 1416 (Fed. Cir. 2004). In that case, we st ated, “The dismissal of a claim with prejudice

. . . is a judgment on t he merits under the law of the Federal Circuit.” Id. Furthermore, we hav e treated the prevailing par ty iss ue under Rule 54 and 35 U.S.C. §

05-1547, 1578 12285 similarly. See Inland Steel , 364 F.3d at 1319-20; see also Manildra Milling , 76 F.3d at 1181 n.1 (noting that “the meaning of pr evailing party is the same” under § 1988 and Rule 54(d)(1)); Dattner v. Conagr a Foods, I n c. , 458 F.3d 98, 101 (2d Cir. 2006) (“[T]he Court [in Buckhannon ] did not suggest—and there is no reason to conclude—that the distinction [ between c o sts and fees] affects t he meaning of the separate term ‘prevailing party’”); Tunison v. Continental Airlines Corp., Inc. , 162 F.3d 1187, 1189-90 (D.C. Cir. 1998) (noting that the meaning o f “prevailin g party” is gener ally s a me in e i ther contextattorney's fees or costs). In light of the foregoing precedent, we conc lude that as a matter of patent law, the dismiss a l with prejudice, bas ed on the c o venant and granted pursuant to the district court’s dis c retion under Rule 41(a)(2), ha s the necessary judicial impr imatur to constitute a judicially sanctioned change in t he legal relationship of the parties, such that the district court properly could entertain FECO’s fee cl aim under 35 U.S.C. § 285. See Power Mosfet , 378 F.3d at 1416 (holding that a patent infringement defendant obtained a dispos ition on the merits for pur poses of Fed. R. Civ. P. 54(d)(1) where patentee voluntarily dismissed its in fringement claim with prejudice); Inland Steel , 364 F.3d at 1321 (holding that a patent infringement defendan t, who moved for dismissal after obtaining c ancellation of patents through reexamination proceedings before the Patent and Trademark Office obt ained a disposition on the merits in infringement action for purposes of obtaining attorney fees and c o st s). FECO’s prevailing party status is not predicated on whether Hig hway Equipment filed a Rule 41(a)(2) motion to dismiss with prejudice at the outset but is s u fficiently ba s ed on its having filed a covenant not to sue with the court to end the litigation, re sulting in a dismissal with prejudice.

05-1547, 1578 13We note that our holding is cons istent with t he treatment of similar cases within other circuits. For example, the Seventh Circ u it has held that a voluntary dis m issal with prejudice meets the Buckhannon test, reasoning that such di sposition “effects a material alteration of [the] legal rela tions hip with the other partie s, because it terminates any claims [the plaintiff] may have had against [t he defendants] arising out of this set of operative facts.” Claiborne v. Wisdom , 414 F.3d 715, 719 (7th Cir. 2005); see Mother and Father v. Cassidy , 338 F.3d 704, 708 (7th Cir. 2003) (“ [A] voluntary dis m issal with prejudice renders the opposing party a ‘preva iling party’ within t he meaning of Rule 54.”). The Tenth Circuit, in a pre- Buckhannon case, has stated that “a defendant is a prevailing party under Rule 54 when, in c i rcumstances not involving settlement, the plaintiff dismisses its case against the defendant, whether the dismissal is with or without prejudice.” Cantrell v. Int’l Brot herhood of Elec. Workers , 69 F.3d 456, 456 (10th Cir. 1995) (en banc); see also Samsung Elec. Co. v. Rambus Inc. , 440 F. Supp. 2d. 495, 511 (E.D. Va. 2006) (holding that a Rule 41(a)(2) dismiss a l of patent infringement counterclaims with prejudice f o llowing th e patentee’s covenants not to sue, was sufficient to constitute a dispositi on on the merits under 35 U.S.C. § 285). While the Fifth Circuit has held that, w here a plaintiff voluntarily dismisses it s claims, the defendant is generally not the prevailing party unless “the defendant can demonstrate that the plaintiff withdrew to av oid a disf avorable judgm ent on the merits,” Dean v. Riser , 240 F.3d 505, 510-11 (5th Cir. 2001) , th at exception to the rule was strongly grounded on the competing policies that undergird 42 U.S.C. § 1988, which ar e different from the polic ies that undergird 35 U.S.C. § 285. Also, while the Eighth Circuit has applied a rationale similar to that of t he Fifth Circuit, holding t hat, to be a prevailing

05-1547, 1578 14party, a defendant must point to a judicial determination to it s benefit, that holding was based on t he Eight Circuit’s view (before Buckhan non ) that the “‘materi al alteration of the legal r e lations hip among the parties’ definit ion of a prevailing plaintiff [is not the same as the] definition fo r prevailing defendant.” Marquart v. Int’l Ass’n of Machinists & Aerospace Workers , 26 F.3d 842, 851-52 (8th Cir. 1994). Subsequent decisions of the Eighth Circ u it have continued to address under what c i rc umstances court or ders may result in the requisit e judici ally sanctioned material altera tion in the parties’ legal rel a ti onshi p. See, e.g. , N. Cheyenne Tribe v. Jackson , 433 F.3d 1083, 1085 n.2. Turning to the merits of the fee claim, FE CO asserts that the district court erred in denying attorney fees becaus e it proved by clear and conv incing ev idenc e that this case was “exceptional” pursuant to 35 U.S. C. § 285. FECO argues that Highwa y Equipment engaged in litigati on misconduct and inequitable c onduct before the Patent and Trademark Office (“PTO”). Regarding inequitable conduct, FECO argues that Highway Equipment f a iled to dis c lose materi al prior art and failed to name an alleged co-inventor, Dick Serbousek. For the reasons below, we agree with the di strict court that FECO did not prove that this case is exceptional by clear and co nvincing ev idence, and we affirm the district court’s determination of no ineq uitable conduct and no liti gation misconduct. First, as concerns inequitable conduct, we see no error in the district court’ s determi nation that FECO failed to produce clear and convincing evidence that Highway Equipment did not act with the requis i te intent to deceive the PTO. Fee Order , slip op. at 19. The district court found that Highway Equipment disc uss ed the alleged material prior art with its patent attorney and investigated its relevance. After this investigation, they were not

05-1547, 1578 15able to dis c ern how the device operated or w hether or not it had a spreader which allowed for adjustment of the drop point as disclos ed in the ’281 patent. Id. , slip op. at 11-12. Based on these factual findings, whic h are not clearly erroneous, the district court correctly held that FECO has not prov en, by clear and convincing evidence, tha t Highway Equipment possessed the requi sit e intent to deceive the PTO. Second, F E CO has not shown c l ear error in the district court’s findings that t h ere

was no ev idence of any int ent by Highway Equipment to mislead the PT O by not identifying Serbousek as a joint inventor. Id. , slip op. at 22. To the contrary, the record shows that, at the time the patent was filed, Serbous ek indicated that he s hould not be named as an inventor. Fee Order , slip op. at 10. Based on these factual findings, which are not clearly erroneous, t he district court correctly hel d that the failure to name Serbousek as an inventor did not constitute inequitable conduct. Id. , slip op. at 22. Third, as concerns Highway Equipm ent’s alleged litigat ion mis c onduct, FECO submits six instances of misc onduct including improper or untimely disclosure of expert reports and exhibits, evasive wit ness testimony , failure to honor its statutory obligation under 322 F, and filin g the covenant on the “eve of trial.” FECO did not argu e before the district court that t he filing of the covenant not to sue constituted litigation misconduct, and we therefore do not address it in the first instance on appeal. FECO cites no authority to support that its ar guments with respect to 322F ar e in any way relevant to litigation misconduct and we dec li ne to hold t hat FECO’s assertion of an alleged failure to comply with 322F means that this cas e is exception a l. See Cambridge Pr ods, Ltd. v. Penn Nutrients, Inc. , 962 F.2d 1048, 1051 (F ed. Cir. 1992). We have considered FECO’s remaining allegations of litigation misconduct related to expert reports, witness

05-1547, 1578 16testimony, and exhibit s . FECO has shown no clear error in the district court’s findings and we decline to second-gues s the district court’s judgment that the defendant is not entitled to attorney fees based on litigatio n misconduct. See Lighting World, Inc. v. Birchwood Lighting, Inc. , 382 F.3d 1354 (Fed. Cir. 2004) (hol ding that “[t]he district judge is in a far better position to assess [ litigation mis c onduct] than we are” ). FECO has not shown that the district court’s fi nding of no litigation misconduct is so clearly
erroneous as to warrant our ov erturning the di strict court’s ruling on that issue. T h e district court’s judgment as to a ttorney fees under § 285 is affirmed. 2. The 322F Order The district court did err, however, in exercising su pplemental j u risdiction by authority of 28 U.S.C. § 1367 over FECO’s c ounterclai m for damages under Iowa Code § 322F. Highway Equipment and FECO do not qualify for diversity jurisdiction and did not plead the 322F claim as a diversity clai m or otherwise ind ependently subject to federal jurisdiction. T herefore, the district court’s only basis for jurisdiction over the non

federal claim would have been that the claim was not only joined with a federal claim over which it had original jurisdic tion but, si gnificantly, if the non-federal claim was “so related to claims in the action within such or iginal jurisdiction that they form part of the
same case or controv e rsy under Article III o f the United States Constitution.” 28 U.S.C. § 1367(a); United Mine Workers of Am. v. Gibbs , 383 U.S. 715, 725 (1966) (holding that the district court has supplement al jurisdiction to enter final judgment on a non-federal claim only if “the entire action before the cour t comprises but one constitutional ‘cas e’”). For this relatedness requirement to be sati sfied, “[t]he state and federal claims must

05-1547, 1578 17derive from a common nucleus of operative fa ct” such that they would or dinarily be expected to be tried in one proceeding. United Mine Workers , 383 U.S. at 725. The distric t court erred in exercising supplemental jurisdiction pursuant to § 1367(a) to hear the 322F c ount because the 322F count a nd the patent counts are not derived from a common nucl eus of operative fact. See Mars, Inc. v. Kabushiki-Kaisha Nipp on Co nlu x , 24 F.3d 1368 (F ed. Cir. 1994). In Ma rs , the plaintiff sued the defendant for infringement of a United States and a J apanese patent, asserting that supplement a l jurisdiction existed ov er the count alleging infringement of the J apanese patent. Both patents were directed to electronic coin discriminators with programmable memories. The district court assumed that it had supplem ental jurisdiction ov er the count alleging infringement of the Japanese patent, but appl ied its discretion not to exercis e jurisdiction over the count. Id. at 1371. We held that the dist rict court erred in assuming that it had jurisdiction becaus e the claims did not derive from a common nuc l eus of operative fact. Id. at 1375. We noted that the asserted claims of the U.S. patent were method claims whereas the ass e rted claim of the Japanese pat ent was an apparatus claim; that the range of accused devic es in Japan wa s broader than in the United States; and that the alle gations of infringement of the U. S. patent included direct and induced infringement whereas the defendant was charged only with direct in fringement of the Japanese patent. Id. Because neither “similar acts” nor the “same instrumentality” were at iss ue, we held that “the foreign patent infringement claim at issue here is not so related to the U.S. patent infringement claim that the claims form part of the same case or c ontroversy and would thus ordinar ily be expected to be tried in one proc eeding.” We thus c oncluded that the district cour t erred in assuming that it

05-1547, 1578 18had power to hear t he Japanese patent infringement claim. Id. ; see also Ideal Instruments, Inc. v. R i vard Instru ments, Inc. , 434 F. S upp. 2d 598, 628-33 (N.D. Iowa 2006) (disc u ssing Mars and find ing it to be controllin g). In Ideal Instruments , the district court in Iowa held that, although original jurisd iction existed over the plaintiff’s first count involv ing the defendants’ alleged infringement of its United States patent, supplemental jurisdiction did not extend to t he plaintiff’s second count for a declaratory judgment that it does not infringe the defendants’ Canadi an patent. The Iowa court concluded that , because the actor and the acts in each count ar e different such that the allegations of infringement of the United States and fore ign patents do not arise from a common nucleus of operative fact, it would di smiss the plaintiff’s second count. Id. at 630-31. In the present case, the 322F c o unt and th e federal counts are not derived from a “common nucleus of operative fact.” The facts alleged in the 322F count inv o lved the alleged wrongful ter m ination of a dealer s hip agreement between the parties that designated FECO as a dealer for certain outdoor power equipment manufactured and supplied by Highway Equipment. That dealership agreement was terminated on September 16, 2002. The fact s alleged in the federal counts inv o lved not a contract, but a patent that issued on Febr uary 11, 2003, months a fter the dealership agreement was terminated. F u rthermore, the facts al leged in the 322F count involved the distribution of Highway Equipment’s produc ts, whereas the facts alleged in the federal counts involved a product manufactured by F E CO subs equent to t he termination of the dealership agreement. Here, as in Ma rs and Ideal Instruments , the respective instrumentalities are different, the product s at issue are different, the alleged acts are different, and the gov erning laws are differen t. Because the facts at issue in the 322F

05-1547, 1578 19count are not sufficiently related t o those in t he federal counts that it forms a part of the same case or controversy under Article III of the U.S. Constitution, the district court erred in exercising authority to hear the 322F claim under its supplemental jurisdiction pursuant to 28 U. S.C. § 1367(a). Mars , 24 F.3d 1375 (“Federal courts may not assume jurisdiction where none exists.”) . Thus, the district cour t’s judgment on the 322F claim is vacated and the case is remanded with instru ctions to dismiss that claim for lack of jurisdiction. CONCLUS ION For the above reasons, the final j udgment is affirmed-in-part, vacated-in-part, and the case is remanded to the district court for further proceedings consistent with this opinion. AFFIRMED-IN-PART, VACATED -IN-PART a nd REMANDED. COSTS No costs.

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