American Well Works Company v. Layne and Bowler Company

Supreme Court of the United States
1916 U.S. LEXIS 1751, 241 U.S. 257, 36 S. Ct. 585 (1916)

ELI5:

Rule of Law:

A suit arises under the law that creates the cause of action. For a case to invoke federal question jurisdiction, the plaintiff's statement of their own cause of action must be based on federal law, not on a potential defense that involves federal law.

Facts:

The plaintiff manufactures and sells a pump, for which it has or has applied for a patent.
The defendants also manufacture a pump and hold a patent.
The defendants made statements to the public and to potential customers that the plaintiff's pump infringed on the defendants' patent.
The defendants brought infringement suits against some of the plaintiff's customers who were using the pump.
The defendants threatened to sue all parties who used the plaintiff's pump.
The plaintiff alleged these statements and threats were false, malicious, made without probable cause, and damaged its business.

Procedural Posture:

The plaintiff filed suit against the defendants in a state court.
The defendants successfully removed the case to the United States District Court.
The plaintiff filed a motion in federal court to remand the case back to state court.
The United States District Court denied the motion to remand and instead dismissed the case entirely.
The District Court reasoned that the claim arose under federal patent law, meaning the state court lacked original jurisdiction, and thus the federal court could not acquire jurisdiction upon removal.
The plaintiff appealed the dismissal directly to the Supreme Court of the United States.

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Issue:

Does a state law claim for trade libel and business damages, based on a defendant's malicious statements that a plaintiff's product infringes the defendant's patent, arise under federal patent law for the purposes of federal court jurisdiction?

Opinions:

Majority - Mr. Justice Holmes

No. A suit for damages to a business caused by threats to sue under patent law is not itself a suit arising under patent law. The plaintiff's cause of action is created by state law, specifically the law governing torts like trade libel or slander of title. The core of the plaintiff's case is the damage to its business caused by the defendant's conduct; the plaintiff does not need to prove anything about patents to establish its claim. The question of whether the plaintiff's pump actually infringes the defendant's patent is a potential justification or defense for the defendant's statements, but it is not part of the plaintiff's case-in-chief. Jurisdiction must be determined from the face of the plaintiff's complaint, and this complaint alleges a wrong based on state law, not federal patent law.

Dissenting - Mr. Justice McKenna

Yes. The dissenting justice believed that the case involves a direct and substantial controversy under the patent laws.

Analysis:

This case establishes the foundational 'creation test,' also known as the 'Holmes test,' for determining federal question jurisdiction under 28 U.S.C. § 1331. The decision clarifies that jurisdiction is determined by the law that creates the plaintiff's right to sue, not by any federal issues that might be anticipated in the defendant's answer. This principle significantly shapes civil procedure by preventing defendants from manufacturing federal jurisdiction through removal simply by raising a federal defense. It reinforces the 'well-pleaded complaint' rule, which mandates that the basis for federal jurisdiction must appear on the face of the plaintiff's complaint.

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