Opinion
Case No. 6:05CV90, PATENT CASE.
September 1, 2005
MEMORANDUM OPINION AND ORDER
Before the Court are Defendants EBSCO Industries, Inc. ("EBSCO") and Moultrie Products, LLC's ("Moultrie") Motion to Dismiss Under Federal Rule of Civil Procedure 12(b)(1) or to Transfer (Docket No. 27). Co-defendant Testa Associates, LLC ("Testa") joins EBSCO and Moultrie (collectively, "Defendants") in its own Motion to Dismiss Under Rule 12(b)(1) or to Transfer (Docket No. 28). Also before the Court is Plaintiff Good Sportsman Marketing, LLC's ("GSM") Motion for Leave to Amend Complaint to Add IP Holdings as Co-Plaintiff (Docket No. 36). Having considered the parties' written submissions, the Court DENIES the motions to dismiss or transfer and GRANTS the motion for leave to amend the complaint.
BACKGROUND
GSM brought suit against Testa on March 17, 2005, in the Eastern District of Texas ("Texas Action") and alleged that Testa infringed on various claims of two of its patents, U.S. Patent Nos. 6,735,387 (the "'387 Patent") and 6,678,868 (the "'868 Patent").
On April 26, 2005, Moultrie filed a Declaratory Judgment Action against GSM, the licensee, and IP Holdings, Inc. ("IP Holdings"), GSM's parent and assignee of the patents, in the Northern District of Alabama ("Alabama Action"), seeking a declaration that the '387 Patent, the '868 Patent, and U.S. Patent No. 6,384,162 (the "'162 Patent") are invalid, unenforcable, and not infringed. GSM amended its complaint before the Court on May 23, 2005 and added EBSCO and Moultrie as defendants. On June 16, 2005, Defendants filed a motion to dismiss for lack of jurisdiction claiming that, as a licensee, GSM lacks standing to bring this suit. Alternatively, Defendants move to transfer venue to the Northern District of Alabama arguing that the Alabama Action was first filed and that Alabama is a more convenient forum. On July 6, 2005, GSM filed a motion seeking leave to amend its complaint to add IP Holdings as a co-plaintiff in this action. The deadline for adding additional parties to the suit was June 3, 2005.
IP Holdings owns the '387, '868 and '162 Patents and licenses them to GSM under the EXCLUSIVE PATENT LICENSING AGREEMENT ("Agreement"). GSM and IP Holdings are closely related entities. Timothy Schnell owns IP Holdings and the Schnell Family Trust owns GSM.
Moultrie is a single member limited liability corporation owned by a wholly-owned subsidiary of EBSCO. In early 2005, EBSCO acquired Testa's allegedly infringing camera business through an asset purchase.
MOTION TO DISMISS
Standing to Bring Patent Infringement Suit
To bring a patent infringement lawsuit, the plaintiff must establish prudential standing under the Patent Act, 35 U.S.C. § 281, in addition to Article III standing. Intellectual Prop. Dev., Inc. v. TCI Cablevision of CA, Inc., 248 F.3d 1333, 1345 (Fed. Cir. 2001). For a plaintiff to have prudential standing under the Patent Act, it must possess all substantial rights under the patent. Id.
To determine if a licensee possesses all substantial patent rights under a licensing agreement, courts look at the substance of the transaction and the surrounding circumstances of the patentee's intent to transfer all substantial rights to the licensee. Vaupel Textilmaschiken KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 875 (Fed. Cir. 1991). The patentee's transferring the right to sue for patent infringement is particularly dispositive in determining if a patentee transferred all substantial rights to the licensee. Id. The right to sue includes "the right to indulge infringements." Id. at 875; Abbott Labs. v. Diamedix Corp., 47 F.3d 1128, 1132 (Fed. Cir. 1995).
A provision in an agreement that grants a licensee the exclusive right to license the patents renders the licensor's right to sue nugatory, even if the licensor retains the right to sue infringers because the licensee can grant an alleged infringer a royalty-free sublicense. Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245 (Fed. Cir. 2000). In Speedplay, the licensing agreement granted the licensee the "sole right to enforce the Licensed Patents," while the licensor retained "the option to initiate appropriate legal proceedings in his/their own name" if the licensee had failed to halt infringement within three months. Id. at 1251. The agreement also granted the licensee the exclusive right to license the patents covered by the agreement. Id. The court found that under the licencing agreement, the licensee controlled enforcement of the patent for all practical purposes and had standing to bring a patent infringement suit without joining the patentee as a co-plaintiff. Id.
The Agreement between IP Holdings and GSM grants GSM "the right to enforce and defend the Licensed Patents, including . . . the right to take any and all actions . . . against any and all infringers of the Licensed Patents." The language does not explicitly give GSM the exclusive right to enforce the patents, but a subsequent provision restricts IP Holdings from granting other licenses and gives GSM the right to sublicense the patents. The Agreement only requires GSM to advise the IP Holdings of the grant of any sublicense and provide IP Holdings with a copy of the sublicense.
Even if the Agreement does not grant GSM the exclusive right to enforce the Licensed Patents, GSM's exclusive right to license the Licensed Patents renders ineffectual whatever enforcement rights IP Holdings retained. IP Holdings does not have veto power over GSM's sublicenses and does not have rights to any royalties GSM derives from its sublicensing agreements. GSM possesses all substantial rights to the Licensed Patents and, for all practical purposes, controls enforcement of the Licensed Patents. It therefore has standing to bring a patent infringement suit on the Licensed Patents without joining IP Holdings as a co-plaintiff. Accordingly, the Court denies Defendants' motions to dismiss.
First-To-File
Defendants argue that the Court should dismiss this case in deference to the Alabama Action, which they claim is first filed. In patent cases where the parties dispute venue, courts generally favor trying the case in the first-filed forum. Genentech, Inc. v. Eli Lilly Co., 998 F.2d 931, 937 (Fed. Cir. 1993), overruled in part sub nom. Wilton v. Seven Falls Co., 515 U.S. 277, 289 (1995); Texas Instruments Inc. v. Micron Semiconductor, Inc., 815 F. Supp. 994, 997 (E.D. Tex. 1993) (Hall, J.).
The first-to-file rule applies when the two actions involve closely related questions or subject matter or the core issues substantially overlap, but the core issues do not need to be identical. Texas Instruments Inc., 815 F. Supp. at 997. A subsequent action that does not have complete identity of the parties can still substantially overlap on the substantive issues of the first-filed action, warranting dismissal or transfer. Superior Sav. Ass'n v. Bank of Dallas, 705 F. Supp. 326, 328-29 (N.D. Tex. 1989); see Save Power Ltd. v. Sintek Fin. Corp., 121 F.3d 947, 950 (5th Cir. 1997).
Once it has been proven that the two actions might substantially overlap, the court with the second-filed action transfers the case to the court where the first-filed action is pending, and the court where the action was first-filed decides if the cases actually do substantially overlap and require consolidation. Cadle Co. v. Whataburger of Alice, Inc., 174 F.3d 599 (5th Cir. 1999). The underlying policies supporting the first-to-file rule are comity and the orderly administration of justice. Superior Sav. Ass'n, 705 F. Supp. at 331.
The core issues in the Texas and Alabama Actions substantially overlap. Both actions concern IP Holdings's patents, and the additional patent in the Alabama Action issued from a continuation of the application that eventually became the '387 Patent. A continuation application can only claim the same invention disclosed in the earlier application and, though the continuation application can vary the scope of the claims, it cannot include any subject matter that would constitute a new matter if inserted in the original application. 37 C.F.R. § 1.53; Transco Prods. Inc. v. Performance Contracting, Inc., 38 F.3d 551, 555 (Fed. Cir. 1995) (citing MPEP § 201.07).
The '162 and the '387 Patents, though the scope of the claims may be different, disclose the same invention, have similar prosecution histories, and cover identical subject matter. Any inquiries into the enforcability and validity of the '387 patent necessarily implicate the enforcability and validity of the '162 patent, whether brought as a defense in the Texas Action or claimed in the Alabama Action.
The parties in the Texas and Alabama Actions are not identical, but that is not dispositive as "complete identity of parties is not required for dismissal or transfer of a case subsequently filed to a substantially related action." Save Power Ltd., 121 F.3d at 950. A subsequent action that does not have complete identity of parties can still substantially overlap on the substantive issues of the first-filed action, as is the case here. Id. The core issues in the Texas and Alabama Actions substantially overlap. Therefore, the Texas Action is the first-filed action.
A court can decline to hear the first-filed action in compelling circumstances. Mann Mfg., Inc. v. Hortex, Inc., 439 F.2d 403, 407 (5th Cir. 1971). While exceptions to the first-to-file rule are not rare, "there must be sound reason that would make it unjust or inefficient to continue the first-filed action." Genentech, Inc., 998 F.2d at 937. No such compelling circumstances that warrant dismissing the case are present here. Therefore, the Court denies Defendants' motions to dismiss or transfer under the first-filed rule.
MOTION TO TRANSFER
A district court has the discretion, for the convenience of the parties and witnesses, in the interest of justice, to transfer an action to a district or division where it might have been brought. 28 U.S.C. § 1404(a). The court must first determine if the plaintiff could have brought the claim in the judicial district to which transfer is sought. In re Volkswagen AG, 371 F.3d 201, 203 (5th Cir. 2004). To transfer a case, a court must find that the balance of the private and public interests substantially favor transferring the case to another district. See LeDoux v. Isle of Capri Casinos Inc., 218 F. Supp. 2d 835, 837 (E.D. Tex. 2002) (Cobb, J.). The private factors include: (1) the convenience and location of the parties and material witnesses; (2) the cost of obtaining witnesses to testify and the subpeona power of the court; (3) the location of the alleged wrong; (4) the accessability and location of the evidence; and (5) the possibility of delay and prejudice if the court transfers the case. See Mohamed v. Mazda Motor Corp., 90 F. Supp. 2d 757, 771 (E.D. Tex. 2000) (Heartfield, J.). The public factors include: (1) administrative difficulties resulting from court congestion; (2) the local interest in having local juries decide local issues; (3) the forum's familiarity with the governing law; and (4) avoiding unnecessary conflict of law problems involving the application of foreign law. Id. While a court should consider the plaintiff's forum choice, it is not by itself conclusive or determinative. In re Horseshoe Entm't, 337 F.3d 429, 434 (5th Cir. 2003); Z-TEL Communications, Inc. v. SBC Communications, Inc., 331 F. Supp. 2d 567, 571 (E.D. Tex. 2004) (Folsom, J.).
GSM does not contest that it could have brought this action in the Northern District of Alabama. Accordingly, the Court assumes that venue would be proper in the Northern District of Alabama.
Private Interests
The first private factor is the convenience of the parties and witnesses. EBSCO is one of the nation's 200 largest privately held companies and has operations throughout the United States and overseas. Trying a case in Tyler hardly inconveniences a global company with assets and operations dispersed throughout the United States and the world. Maurice Mitchell Innovations, L.P. v. Intel Corp., Case No. 2:04-CV-450 (Docket No. 15) (E.D. Tex. Mar. 30, 2005) (Davis, J.). Defendants' preference for another forum, without more, is insufficient to warrant a transfer, and a transfer is not warranted if the result is to simply shift the inconvenience from one party to another. Kimball v. Schartz, 580 F. Supp. 582, 588 (W.D. Pa. 1984). While transfer will benefit EBSCO and Moultrie, it will inconvenience GSM. Further, Testa and EBSCO's allegedly-infringing division remain in Rochester, New York, and witnesses from Rochester will be equally inconvenienced by traveling to Tyler as they would be by traveling to Birmingham, Alabama. This factor does not favor transfer.
The second private factor deals with the cost of obtaining the attendance of witnesses and the subpeona power of each court. This factor accords greater weight to the convenience of the non-party witnesses rather than the employee witnesses. Gundle Lining Constr. Co. v. Fireman's Fund Ins. Co., 844 F. Supp. 1163, 1166 (S.D. Tex. 1994). Defendants claim that one non-party witness, Dan Stoneburner, will be greatly inconvenienced by traveling from Atlanta to Tyler, as opposed to Birmingham, since there are no direct flights from Atlanta to Tyler and there are daily direct flights from Atlanta to Birmingham. This reasoning, however, would allow a defendant to defeat a plaintiff's forum choice by simply adding a non-party witness who resides outside the state, an outcome that is not in the interests of justice and not warranted by 28 U.S.C. § 1404(a). While the Northern District of Alabama would be more convenient for EBSCO and Moultrie's Birmingham personnel, it will not be more convenient for Testa and EBSCO's employees who reside in Rochester. Although this factor slightly weighs in Defendants favor, it does not substantially favor transferring the case to the Northern District of Alabama.
The third factor is the place of the alleged wrong. GSM alleges that Defendants engaged in infringing activity by selling allegedly infringing products throughout the United States. A plaintiff holding all substantial rights in a patent may bring its action in any district where the alleged infringement occurred. See Beam Laser Sys. Inc. v. Cox Communications, Inc., 117 F. Supp. 2d 515, 518-519 (E.D. Va. 2000) (finding that the "nationwide character of the alleged infringement does not diminish [plaintiff's] choice of Virginia as its forum, however: If there is no center of infringement activity in a particular case, then, as long as the plaintiff brings its action in a forum where the alleged infringement is occurring, that choice should not be undermined by allegations that infringing activities occur throughout the country.); see also 28 U.S.C. § 1400(b). The allegedly-infringing goods were sold in the Eastern District of Texas, and therefore this factor does not favor transfer.
In analyzing the fourth factor, courts look at the accessability and location of the sources of proof. Defendants state that all of Moultrie's relevant documents relating to the design, research, development, testing, marketing, and sales for the allegedly infringing products are located in Birmingham. Additionally, Defendants state that all of Moultrie's files, correspondence, computer records, and purchase and sales records are in Birmingham and all of EBSCO's files are located in Birmingham and Farmington, New York. Id. However, the sources of proof will probably not be limited to those locations, as patent cases typically involve battles of documents and technical experts scattered across the nation. Further, records, or copies of records are easily transported, either physically or electronically. See Smith Int'l Inc. v. Halliburton Energy Servs. Inc., 6:05-CV-93 (Docket No. 28) (E.D. Tex. Jun. 3, 2005) (Davis, J.); see Am. Standard, Inc. v. Bendix Corp., 487 F.Supp. 254, 264 (W.D. Mo. 1980) ("But because usually many records, or copies thereof, are easily transported, their location is not entitled to great weight."). This factor does not support transfer.
Fifth, courts consider the possibility of delay or prejudice if the motion to transfer is granted or denied. GSM claims that it will be prejudiced if the case is transferred to the Northern District of Alabama because caseload statistics show that the Court will resolve this case faster than a court in the Northern District of Alabama. Defendants claim it will take the Northern District of Alabama, on average, an additional two and a half months to resolve the dispute. If the Court transfers the case to the Northern District of Alabama it will slightly prejudice GSM, and this factor slightly weighs against transfer. Taken together, the private interest factors do not warrant transferring the case to the Northern District of Alabama.
Public Interests
The first public interest factor, the administrative difficulties in granting or denying transfer, is similar to the fifth private interest factor and likewise does not substantially favor transfer.
The second public interest factor is the local interest in resolving local controversies. The allegedly infringing goods were sold in the Eastern District of Texas, and the residents of this district have a significant interest in making sure federal patent laws are enforced. Cummins-Allison Corp. v. Glory Ltd., No. Civ. A. 20-30-CV-385TJ, 2004 WL 1635534, *5 (E.D. Tex. May 26, 2004) (Ward, J.). This factor does not does not weigh in favor of transfer.
The third factor, the forum's familiarity with the governing law, does not favor transfer. Similarly, the fourth factor, the unnecessary conflict of law problems involving the application of foreign law, also does not favor transfer. This is a patent infringement action arising under federal patent laws, which on substantive patent matters is uniform in all circuits. There are no potential conflict of law problems, and both courts are equally capable of applying federal law. Overall, the public interest factors do not favor transfer. Defendants have not shown that the balance of conveniences and the interests of justice substantially weigh in favor of transfer to the Northern District of Alabama.
MOTION FOR LEAVE TO AMEND COMPLAINT
Rule 16(b) allows a party to modify the Court's Docket Control Order upon a showing of good cause. Fed.R.Civ.P. 16. The good cause standard requires the party seeking relief to show that, despite its exercise of diligence, it cannot reasonably meet the scheduling deadlines. SW Enters., L.L.C. v. Southtrust Bank of Alabama, 315 F.3d 533, 535 (5th Cir. 2003). The Court has broad discretion to allow scheduling order modifications and considers four elements to determine if modification is appropriate: (1) the explanation for the party's failure to meet the deadline; (2) the importance of what the Court is excluding; (3) the potential prejudice if the Court allows the thing that would be excluded; and (4) the availability of a continuance to cure such prejudice. Id. at 536. A party's failure to meet a deadline due to mere inadvertence is equivalent to no explanation at all. Id.
GSM moved to amend its complaint to add IP Holdings as a co-plaintiff on July 6, 2005, one month after the deadline to add parties to the lawsuit. GSM claims that it is moving to add IP Holdings to moot Defendants' argument that it lacks standing to bring this suit, which Defendants made in their motion to dismiss filed after the deadline to add parties had passed. GSM's explanation for its delay is reasonable, and, with the absence of any evidence of bad faith, this factor weighs towards granting the motion to amend the complaint.
GSM states that IP Holdings will be a nominal party in this suit, as IP Holdings and GSM are affiliated entities. This supports granting the motion for leave to amend because adding IP Holdings as a co-plaintiff will not substantively or procedurally prejudice Defendants. GSM and IP Holdings will have to prove the same infringement claims on the same patents and Defendants will assert the same invalidity, noninfringement, and unenforcability defenses. However, as GSM can bring this action without joining IP Holdings, GSMs's Motion for Leave to Amend is not important to the lawsuit, which makes this factor neutral as to allowing leave.
Although discovery has begun, Defendants are unlikely to be prejudiced by allowing GSM to join IP Holdings as a co-plaintiff because IP Holdings is unlikely to add additional infringement or invalidity issues to the lawsuit. Although the Court does not expect Defendants to be prejudiced if GSM is allowed to add IP Holdings, the Court can reset the trial date to overcome any prejudice Defendants do face. This factor favors granting the motion for leave to amend the complaint.
GSM has given a reasonable explanation for why it did not add IP Holdings as a co-plaintiff before the Court's Docket Control Order deadline and, although joining IP Holdings is not of great importance, Defendants will not be incurably prejudiced as a result. Thus, GSM has shown good cause to amend its complaint, and the Court grants its motion.
CONCLUSION
GSM has all substantial rights to the '387 and '868 Patents and has standing to sue Defendants for patent infringement. The core issues in the Texas and Alabama Actions substantially overlap, and therefore the Texas Action is the first-filed action. The exceptions to the first-to-file rule do not apply. The motion to dismiss is therefore DENIED.
As most factors do not favor transfer, the Court will not disturb GSM's choice of forum for this litigation. The motion to transfer to the Northern District of Alabama is DENIED.
GSM has given a reasonable explanation for why it did not meet the Docket Control Order deadline, and Defendants will not be incurably prejudiced if IP Holdings is joined as a co-plaintiff. The motion for leave to amend the complaint is GRANTED.