Opinion
4:22-cv-00040-SHL-HCA
2022-11-21
HULL PARTNERS, LLC, and California Fueling, LLC, Plaintiffs/Counter-Defendants, v. CLEAN FUELS ALLIANCE AMERICA, formerly known as National Biodiesel Board, Defendant/Counter-Plaintiff.
Mollie Pawlosky, John E. Lande, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, Andrew Victor Jablon, Pro Hac Vice, Resch Polster & Berger LLP, Los Angeles, CA, Craig R. Smith, Pro Hac Vice, Boston, MA, for Plaintiffs/Counter-Defendants. David Yoshimura, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, Thomas J. Joensen, Gordon Rees LLP, Des Moines, IA, Evan Kline-Wedeen, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Chicago, IL, Lauren J.F. Barta, Pro Hac Vice, Timothy Grimsrud, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Minneapolis, MN, for Defendant/Counter-Plaintiff.
Mollie Pawlosky, John E. Lande, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, Andrew Victor Jablon, Pro Hac Vice, Resch Polster & Berger LLP, Los Angeles, CA, Craig R. Smith, Pro Hac Vice, Boston, MA, for Plaintiffs/Counter-Defendants. David Yoshimura, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, Thomas J. Joensen, Gordon Rees LLP, Des Moines, IA, Evan Kline-Wedeen, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Chicago, IL, Lauren J.F. Barta, Pro Hac Vice, Timothy Grimsrud, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Minneapolis, MN, for Defendant/Counter-Plaintiff.
ORDER ON PARTIAL MOTION TO DISMISS COUNTERCLAIMS
STEPHEN H. LOCHER, UNITED STATES DISTRICT JUDGE
I. INTRODUCTION
This is a breach of contract case revolving around ownership and control of patent rights. The Court must decide, first, whether Defendant has standing to bring counterclaims for breach of contract that revolve around the alleged invalidity of patents in a situation where standing would not exist for freestanding claims of invalidity. Under Federal Circuit precedent governing intertwined claims for breach of contract and patent invalidity, the Court concludes that two counterclaims must be dismissed for lack of standing, but a third counterclaim survives. The Court further concludes that Plaintiffs have not established as a matter of law that they have the exclusive right to enforce the disputed patents, nor that Defendant violated an alternative dispute resolution requirement of the parties' contract by bringing a counterclaim for unpaid royalties. Finally, the Court concludes that one of Defendant's affirmative defenses must be stricken, but not three others. The Court therefore GRANTS IN PART and DENIES IN PART Plaintiffs' partial motion to dismiss and motion to strike.
II. BACKGROUND
A. Biodiesel and the Parties' Agreement.
The State of California has taken executive and legislative action to reduce greenhouse gas emissions by encouraging the development of alternatives to diesel fuel. (ECF 8, ¶¶ 9, 12.) One such alternative is biodiesel, which is better in many ways when it comes to emissions. (Id., ¶¶ 11-14.) However, biodiesel generates higher levels of ozone-forming nitrous oxide emissions ("NOx") than traditional diesel. (Id., ¶ 13.) Accordingly, California officials created incentives for the development of products to mitigate NOx. (Id.).
Plaintiffs Hull Partners, LLC ("Hull Partners") and California Fueling, LLC ("California Fueling"), and Defendant Clean Fuels Alliance America (f/k/a National Biodiesel Board) ("NBB") are involved in the development and/or sale of products designed to mitigate the amount of NOx produced by biodiesel fuel. (E.g., id., ¶ 14.) On April 21, 2017, Hull Partners, California Fueling, and NBB (along with non-party Pacific Fuel Resources, LLC ("PFR")) entered an Assignment and Assignment Back Agreement (the "Agreement"). (Id., ¶ 17; ECF 8-1.) The Agreement refers to Plaintiffs, collectively, as "HP" in the singular. For simplicity, the Court will likewise use "HP" (singular) for the remainder of this Order to refer to Plaintiffs collectively.
The parties disagree about the purpose, scope, and interpretation of the Agreement. For present purposes, the Court will let the Agreement speak for itself, starting with the section entitled "PRELIMINARY STATEMENTS," which states:
NBB, HP and PFR recognize that biodiesel is a renewable, clean-burning diesel replacement that is creating jobs and improving the environment, and are entering into this Agreement with the aim of increasing access to, and the use of domestically produced biodiesel through the Application and use of Additive (both as defined below), specifically an Additive used in combination with domestically produced biodiesel to reduce emissions in the Territory (as defined below). In keeping with the purpose of this Agreement, the Parties and PFR understand and acknowledge that the Additive is to be made only for use in the Field, and for the benefit of customers in the Territory on the terms set out in this Agreement. In the spirit of this Agreement, the Parties and PFR, based on the Forecasts as defined in the Supply Agreement between PFR and HP (the "Supply Agreement") shall make every commercially reasonable effort to ensure that adequate quantities of the Additive are made available to meet the needs of customers in the Territory. In addition, it is the spirit and purpose of this Agreement to increase the use of domestically produced biodiesel, and it is expected that the Parties and PFR shall make every commercially reasonable effort to ensure increased access to the Additive.(ECF 8-1, p. 1.) The Agreement then contains a section entitled "RECITALS," including the following:
WHEREAS, NBB is a non-profit organization with a mission to create sustainable growth in the domestically produced biodiesel industry;(Id., pp. 1-2.)
WHEREAS, the Parties have certain pre-existing and jointly developed Intellectual Property (hereinafter, "IP") and contractual agreements regarding IP and Know-How (both as defined below) relating to biodiesel, Additive and fuel as it pertains to reducing nitrous oxide emissions of biodiesel blends with fuel;
WHEREAS, subject to the terms and conditions of this Agreement, the Parties desire to assign to HP all associated IP and Know-How on the terms and conditions set out in this Agreement, solely to allow HP to sell the Additive to PFR for use in the Field within the Territory;
WHEREAS, subject [to] the terms and conditions of this Agreement, the Parties desire to assign from HP to NBB the IP and Know-How in the event one or more Assignment Back Trigger Events occur.
Section 2 of the Agreement is entitled "ASSIGNMENT AND ASSIGNMENT BACK" and sets out the parties' rights and obligations with respect to Intellectual Property, Know How, and related assets. Section 2.1 is entitled "Grant" and involves the transfer of rights from NBB to HP. Section 2.4 is entitled "Assignment Back Trigger Event" and involves the transfer of rights from HP back to NBB in certain circumstances, consistent with the definition of "Assignment Back Trigger Event" in § 1.1. These provisions of the Agreement, as well as others, will be discussed in context below.
B. The Parties' Dispute.
The parties' dispute revolves largely around two patents obtained by Hull Partners after the effective date of the Agreement: U.S. Patent Nos. 11,186,789 (the "'789 Patent") and 11,306,266 (the "'266 Patent"). (ECF 20, ¶ 21.) NBB alleges that the '789 Patent and '266 Patent are "Intellectual Property" as defined by the Agreement and therefore subject to its terms. (Id.) If true, this would mean NBB possesses many rights in connection with the Patents, including, inter alia, the power to bring and control infringement claims, limit licensure and assignment, and reversionary rights in a wide range of circumstances. (E.g., ECF 8-1, §§ 2.3, 2.4, 2.8, 7.2.) NBB also alleges the Patents are invalid under federal patent laws. (E.g., ECF 20, ¶¶ 111-140.) HP, by contrast, alleges that Hull Partners owns all substantial rights in the '789 and '266 Patents. (ECF 8, ¶¶ 21, 25.)
HP filed suit against NBB seeking declaratory relief that it has not breached the Agreement in connection with the '789 Patent or otherwise. (ECF 8, p. 19, WHEREFORE clause). In turn, NBB filed Counterclaims that included, inter alia, eleven requests for declaratory relief, five of which are at issue here:
- Counterclaim Count 3: "HP has not been assigned all substantial rights and is not a patentee under 35 U.S.C. § 281" (ECF 20, ¶ 174);HP moves to dismiss these five Counterclaims for lack of subject matter jurisdiction, lack of standing, and/or failure to state a claim. (ECF 27-1.) HP also moves to dismiss Counterclaim Count 10, which alleges breach of contract, based on NBB's alleged failure to comply with the Agreement's alternative dispute resolution requirements prior to filing suit. (Id., pp. 19-20.) Finally, HP moves to strike NBB's affirmative defenses. (Id., pp. 20-22.)
- Counterclaim Count 4: "HP does not have the right to enforce 'Patent Rights,' including the '789 Patent and '266 Patent, under the Agreement" (id., ¶ 184);
- Counterclaim Count 6: "HP violated provisions of patent laws and regulations in obtaining the '789 Patent" (id., ¶ 197);
- Counterclaim Count 7: "HP violated provisions of patent laws and regulations in obtaining the '266 Patent" (id., ¶ 203); and
- Counterclaim Count 14: "HP committed serious and/or intentional violations of patent laws and regulations in obtaining the '789 Patent and/or '266 Patent, and that NBB has the right to terminate the Agreement under Section 11.3(k)" (id., ¶ 284).
In one place in the briefing, HP also states that it is moving to dismiss Counterclaim Count 5. (ECF 27-1, p. 3.) In context, however, this clearly seems to be a typographical error, as the argument section of HP's brief makes no further reference to Count 5 and instead focuses solely on Counts 3, 4, 6, 7, 10, and 14. (Id., pp. 10-18.) The Court therefore will treat Counterclaim Count 5 as not being at issue in the motion to dismiss.
III. LEGAL STANDARDS AND BACKGROUND
When ruling on a motion to dismiss, the Court must "accept the well-pled allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor." Meardon v. Register, 994 F.3d 927, 934 (8th Cir. 2021). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Schriener v. Quicken Loans, Inc., 774 F.3d 442, 444 (8th Cir. 2014) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. The Court may draw on its "judicial experience and common sense" in evaluating plausibility. Id. at 679, 129 S.Ct. 1937. "[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
Whether an actual case or controversy exists so that a district court may entertain an action for a declaratory judgment of patent invalidity is governed by Federal Circuit law. Microchip Tech. Inc. v. Chamberlain Grp., 441 F.3d 936, 940 (Fed. Cir. 2006). "To satisfy standing, the plaintiff must allege (1) an injury-in-fact, i.e., a harm that is concrete and actual or imminent, not conjectural or hypothetical, (2) that is fairly traceable to the defendant's conduct, and (3) redressable by a favorable decision." Prasco, LLC v. Medicis Pharm. Corp., 537 F.3d 1329, 1338 (Fed. Cir. 2008) (quoting Caraco Pharm. Lab'ys, Ltd. v. Forest Lab'ys, Inc., 527 F.3d 1278, 1291 (Fed. Cir. 2008)) (cleaned up).
IV. LEGAL ANALYSIS
A. The Court Grants the Motion to Dismiss as to Counterclaim Counts 6 and 7 But Denies the Motion to Dismiss as to Counterclaim Count 14.
1. Subject Matter Jurisdiction and Standing Revolve Around the Terms of the Parties' Agreement.
To establish standing and an actual case or controversy sufficient to create subject matter jurisdiction, a party seeking a declaration of patent invalidity typically "must allege both (1) an affirmative act by the patentee related to the enforcement of his patent rights, and (2) meaningful preparation to conduct potentially infringing activity." Ass'n for Molecular Pathology v. U.S. Pat. & Trademark Off., 689 F.3d 1303, 1318 (Fed. Cir. 2012) (internal citation omitted) aff'd in part, rev'd in part on other grounds sub nom. Ass'n for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. 576, 133 S.Ct. 2107, 186 L.Ed.2d 124 (2013). The parties appear to agree that these requirements are not satisfied here because NBB is not attempting to engage in potentially infringing activity. NBB argues, however, that the Ass'n for Molecular Pathology test is not governing because the validity of the '789 and '266 Patents is relevant to the parties' rights and obligations under the Agreement. In other words, NBB argues the "case or controversy" arises under the Agreement and not purely under federal patent laws.
Federal Circuit law governs this issue. See Microchip Tech., 441 F.3d at 940. When cases involve an interrelationship between patent validity and breach of contract claims, the Federal Circuit has held that the existence of standing depends on whether "the validity of the patents at issue will affect [the plaintiff's] contract rights." Apple Inc. v. Qualcomm Inc., 992 F.3d 1378, 1383 (Fed. Cir. 2021). If so, Article III is satisfied. See Samsung Elecs. Co. v. Infobridge Pte. Ltd., 929 F.3d 1363, 1368 (Fed. Cir. 2019) (concluding Article III requirements were satisfied where patent validity affected the size of royalty payments to plaintiff). By contrast, Article III is not satisfied if a party "provide[s] no evidence as to how, if at all, its obligations under the [contract] would change if it is successful in its attempts to have the [ ] patent declared invalid." ModernaTx, Inc. v. Arbutus Biopharma Corp., 18 F.4th 1352, 1362 (Fed. Cir. 2021); see also Apple, 992 F.3d at 1384 (no Article III standing where "validity of the challenged patents would not impact [the plaintiff's] ongoing payment obligations"). The Court therefore must evaluate standing in the context of the Agreement between NBB and HP.
2. The Court Does Not Have Subject Matter Jurisdiction Over Counterclaim Counts 6 and 7.
In Counterclaim Counts 6 and 7, NBB asks for a "declaration from the Court that HP violated provisions of patent laws in obtaining the ['789 and '266] Patents." (ECF 20, ¶¶ 197, 203.) NBB does not, however, identify any rights or obligations in the Agreement that will be impacted if the Court grants the requested relief in Counts 6 and 7. Instead, NBB simply alleges that the "Court has the authority to declare each Party's respective rights and liabilities concerning the Agreement." (Id., ¶¶ 196, 202.) This is insufficient to satisfy Article Ill's standing and case or controversy requirements. See ModernaTx, 18 F.4th at 1362; Apple, 992 F.3d at 1384. Counts 6 and 7 therefore must be dismissed. See id.
In reaching this conclusion, the Court is cognizant of the noticeable shift between how Counts 6 and 7 are characterized in NBB's pleading compared to how they are characterized in NBB's response to HP's motion to dismiss. In its Answer to First Amended Complaint and Counterclaims, NBB repeatedly alleges that the '789 and/or '266 Patents are "invalid" (ECF 20, ¶¶ 17, 111, 136, 140, 278, 280) and devotes more than three dozen paragraphs to alleged deficiencies in the Patent applications, including the failure to identify the correct inventors and failure to satisfy the written description, enablement, and definiteness requirements of federal patent laws (id., ¶¶ 111-140). By contrast, NBB insists in its response to the motion to dismiss that Counts 6 and 7 "are not 'patent claims' seeking 'declarations of invalidity,' " but rather seek only "declarations of disputed rights under the contract at issue." (ECF 33, p. 7.) NBB allows, at most, that proof of its allegations "may place the validity of the patents in question." (Id., p. 6 n.4.) The Court must evaluate standing based on the allegations of the pleading, not a party's subsequent efforts to recharacterize those allegations. See Allen v. Wright, 468 U.S. 737, 752, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984) ("[T]he standing inquiry requires careful judicial examination of a complaint's allegations to ascertain whether the particular plaintiff is entitled to an adjudication of the particular claims asserted."), abrogated on other grounds by Lexmark Int'l v. Static Control Components, Inc., 572 U.S. 118, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014). Using this approach, standing does not exist for Counts 6 and 7 given the pleading's failure to connect those Counts to any specific provisions of the Agreement. The Court therefore GRANTS the motion to dismiss as to Counterclaim Counts 6 and 7.
3. The Court Will Assume, for Now, the Existence of Subject Matter Jurisdiction Over Counterclaim Count 14.
In contrast to Counterclaim Counts 6 and 7, NBB attempts in Counterclaim Count 14 to tie the alleged invalidity of the '789 and '266 Patents to the Agreement. Specifically, NBB relies on § 11.3(k), which gives NBB the right to terminate if HP commits a "serious or intentional violation of any laws and regulations . . . which in NBB's judgment, may reflect unfavorably on NBB, its reputation or the Additive." (ECF 8-1, p. 21, § 11.3(k).) NBB argues that HP breached § 11.3(k) by improperly failing to name NBB's representatives as inventors on the '789 and '266 Patents and failing to satisfy the written description, enablement, and definiteness requirements of federal patent laws. (ECF 33, p. 14.) NBB further argues that HP's "threats to enforce these improperly obtained patents, which cover technology developed by NBB, further injure NBB's reputation throughout the biodiesel industry and stifle biodiesel usage, which is inconsistent with the entire purpose of the Agreement." (Id.)
The Court rejects NBB's argument that it suffered an injury-in-fact in the form of reputational harm based on HP's failure to name NBB's "representatives" as co-inventors of the '789 and '266 Patents. (ECF 33, p. 14.) This argument fails in the first instance because the reputational harm is to the "representatives," not NBB itself. See Chou v Univ. of Chicago, 254 F.3d 1347, 1359 (Fed. Cir. 2001). NBB cannot use someone else's injury to establish its own standing, as a plaintiff "generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975); see also Potthoff v. Morin, 245 F.3d 710, 715 (8th Cir. 2001).
Even if NBB itself had suffered reputational harm due to the omission of co-inventors, NBB has not explained how the invalidation of the '789 and '266 Patents would redress it. See California v. Texas, — U.S. —, 141 S. Ct. 2104, 2115, 210 L.Ed.2d 230 (2021) ("To determine whether an injury is redressable, a court will consider the relationship between 'the judicial relief requested' and the 'injury' suffered.") (quoting Allen, 468 U.S. at 753 n.19, 104 S.Ct. 3315). A person does not suffer an injury by not being identified as a co-inventor on patents that were invalid in the first place. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 107, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) ("Relief that does not remedy the injury suffered cannot bootstrap a plaintiff into federal court; that is the very essence of the redressability requirement."). NBB's position is akin to an artist, upon learning that someone else wrongfully received credit for the artist's painting, responding by lighting it on fire. See id.; Allen, 468 U.S. at 753 n.19, 104 S.Ct. 3315 (concluding standing did not exist in part because "the relief requested goes well beyond the violation of law alleged").
The analysis is more complicated with respect to NBB's other standing argument—that it is facing a threat of reputational harm from HP's efforts to enforce patents that allegedly should not have been issued in the first place. As with the issue of reputational harm to co-inventors, there is tension between the alleged harm to NBB and the relief it seeks. In Counterclaim Counts 3 and 4, NBB asserts that it owns "substantial rights" in the '789 and '266 Patents. (ECF 20, ¶¶ 168, 178.) Moreover, if NBB were to establish the right to terminate the Agreement pursuant to § 11.3(k) as set forth in Counterclaim Count 14, one of the most important consequences would be the transfer to NBB of "all of HP's right, title and interest in and to the Know-How, all Intellectual Property, and all HP Trademark Rights and goodwill associated therewith" pursuant to § 2.4 of the Agreement. (ECF 8-1, § 2.4; see also ECF 20, ¶ 10.) Thus, according to NBB, it either already owns the '789 and '266 Patents (Counts 3 and 4) or should become the owner pursuant to §§ 2.4 and 11.3(k) (Count 14). (Id.) Yet, as alleged in Count 14, NBB proposes to achieve this result by establishing the invalidity of those same Patents. Meaning: NBB wants to undermine intellectual property rights in order to own them. This makes little sense in the abstract and raises questions about redressability. See Steel Co., 523 U.S. at 107, 118 S.Ct. 1003; cf. Apple, 992 F.3d at 1383-84 (concluding standing did not exist because the plaintiff's contractual rights would not change if patents were invalid).
Nonetheless, the Court concludes the redressability requirement has been satisfied. Although a declaration of patent invalidity might be overkill, it would indeed stop the reputational harm NBB claims to be at risk of suffering from HP's threats to enforce the '789 and '266 Patents. The injury is therefore "likely to be redressed by a favorable judicial decision." Spokeo, Inc. v. Robins, 578 U.S. 330, 338, 136 S.Ct. 1540, 194 L.Ed.2d 635 (2016); see also Liddell v. Special Admin. Bd. of Trans. Sch. Dist. of City of St. Louis, 894 F.3d 959, 966 (8th Cir. 2018).
Whether there has been a concrete injury-in-fact is a different question. In many instances, the mere possibility of reputational harm stemming from the hypothetical reaction of third parties might be insufficient to establish Article III standing. See, e.g., Clapper v. Amnesty Int'l USA, 568 U.S. 398, 410, 133 S.Ct. 1138, 185 L.Ed.2d 264 (2013) ("[T]hreatened injury must be certainly impending to constitute injury in fact.") (quoting Whitmore v. Arkansas, 495 U.S. 149, 158, 110 S.Ct. 1717, 109 L.Ed.2d 135 (1990)); Kamdem-Ouaffo v. PepsiCo Inc., 657 F. App'x 949, 954 (Fed. Cir. 2016) (affirming dismissal for lack of standing where plaintiff "did not clearly allege facts demonstrating actual harm to his reputation and that his alleged reputational harm had an economic component"). This is particularly true in patent cases. See id.; cf., e.g., ModernaTX, 18 F.4th at 1361 (dismissing for lack of standing based on "speculative" arguments about financial harm). This case, however, presents an unusual twist on standing principles because § 11.3(k) of the Agreement gives NBB the right to terminate based on its perception of how third parties might react to a violation of law by HP. Specifically, it says NBB may terminate "in the event of any serious or intentional violation of any laws and regulations . . . which in NBB's judgment, may reflect unfavorably on NBB, its reputation or the Additive" (emphasis added). The Agreement therefore arguably gives concrete rights to NBB in circumstances where no traditional injury-in-fact has occurred.
The parties have not cited, and the Court cannot independently locate, any cases providing clear guidance in a scenario like the one presented here, which stands at the junction of competing standing principles. At most, the Court has merely found cases recognizing a split of authority on whether Article III requires a concrete, injury-in-fact when a contract allegedly has been breached but the plaintiff has not suffered tangible harm. See In re AXA Equitable Life Ins. Co. COI Litig., No. 16-CV-740 (JMF), 2022 WL 3018104, at *3, n.3 (S.D.N.Y. July 29, 2022) ("In the wake of Spokeo[ ], some courts have concluded that breach of contract, in the absence of some other injury, does not give rise to standing . . . But the weight of authority supports the [opposite] position.") (internal citation omitted). The relevance of this split of authority is unclear here because NBB argues there are tangible implications if it establishes the right to terminate pursuant to § 11.3(k); namely, that it will be entitled to the return of Intellectual Property rights, including rights in the '789 and '266 Patents. HP does not directly respond to this argument, instead relying on generic standing principles from non-contract cases. HP also does not address other contract interpretation issues the Court sees as crucial, including whether the parties intended technical deficiencies in a patent application to constitute a "serious or intentional violation of any laws and regulations" for purposes of § 11.3(k) and, if so, whether the parties intended for these deficiencies to give rise to termination in a situation where the potential harm to NBB arose not from the "violations" of law in and of themselves, but rather from later threats by HP to enforce patents obtained through those "violations."
HP's failure to address these interpretive questions compels the Court to deny its motion to dismiss as to Count 14. Under Federal Circuit law, standing is intertwined with contract interpretation when a plaintiff seeks a declaration of patent invalidity as part of the adjudication of a contract dispute. See, e.g., Samsung, 929 F.3d at 1368. Here, NBB has identified a provision of the Agreement, § 11.3(k), that it says is affected by whether the '789 and '266 Patents are valid. HP has not offered the Court any reason to conclude otherwise. The Court therefore DENIES the motion to dismiss as to Counterclaim Count 14.
The parties should not read too much into the Court's conclusion. As a species of subject matter jurisdiction, standing is never waived. See Brooks v. City of Des Moines, Iowa, 844 F.3d 978, 979 (8th Cir. 2016); see also ModernaTx, 18 F.4th at 1358 (party seeking relief must have standing at all times). HP therefore is free to try to create a more complete record in the future regarding whether standing exists. Similarly, the Court offers no view on the proper interpretation of § 11.3(k). It simply holds that NBB has done enough to survive HP's motion to dismiss by identifying a contract provision that allegedly is affected by the validity (or invalidity) of the '789 and '266 Patents. See Samsung, 929 F.3d at 1368; see also Graham v. Catamaran Health Sols. LLC, 940 F.3d 401, 408 (8th Cir. 2017) ("[W]hether [ ] claims may succeed on the merits is a question separate and apart from our standing analysis.").
B. The Court Denies the Motion to Dismiss as to Counterclaim Counts 3 and 4.
35 U.S.C. § 281 states: "A patentee shall have remedy by civil action for infringement of his patent." In Counterclaim Count 3, NBB alleges that HP is not a "patentee" for purposes of § 281 because HP was not assigned "all substantial rights" to the '789 Patent. (ECF 20, ¶ 168.) Similarly, in Counterclaim Count 4, NBB alleges that HP "does not have the right to enforce 'Patent Rights' under the Agreement, but rather only has the right to join a patent enforcement action brought by NBB or its Affiliates." (Id., ¶ 178.) Both Counts are primarily concerned with whether HP can bring claims for infringement of the '789 and '266 Patents against third parties without NBB's involvement or consent. (Id., ¶¶ 170, 180.) HP moves to dismiss Counts 3 and 4, arguing it is a "patentee" as a matter of law and can pursue infringement actions as it sees fit.
Although Counterclaim Counts 3 and 4 are pled separately, they heavily overlap and thus the Court will evaluate them together. The Court will leave for another day whether NBB theoretically could prevail on Count 3 but not Count 4, or vice versa. For present purposes, the Court believes they rise and fall together.
Although only Counterclaim Counts 3 and 4 are presently at issue, it is important to evaluate them in the context of Counterclaim Counts 1 and 2, which allege that the '789 and '266 Patents are "Intellectual Property" under the Agreement. (ECF 20, ¶¶ 21, 74, 83, 103, 148-156, 158-166.) The Court must assume, for present purposes, that the factual allegations underlying Counts 1 and 2 are true, including, especially, the allegation that the '789 and '266 Patents are "directed to the Additive or its manufacture or use." (ECF 8-1, § 1.1.) See also Delker v. MasterCard Int'l, Inc., 21 F.4th 1019, 1024 (8th Cir. 2022) ("[W]e assume the truth of all factual allegations in the complaint and make all reasonable inferences in favor of the nonmoving party . . . ."). The question then becomes whether HP has sufficient rights in the '789 and '266 Patents to qualify as a "patentee" for purposes of 35 U.S.C. § 281 (Count 3) and to bring enforcement actions without NBB's involvement or consent (Count 4).
The word "patentee" is defined in 35 U.S.C. § 100(d), but not in a way that provides meaningful guidance in a dispute like this one. Section 100(d) states, in full: "The word 'patentee' includes not only the patentee to whom the patent was issued but also the successors in title to the patentee." In cases involving disputed or unclear ownership of a patent as between parties to a contract, Federal Circuit precedent requires careful analysis of the contract itself to determine who has the status of "patentee." See, e.g., Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225, 1230-31 (Fed. Cir. 2019).
The matter is governed by both Iowa and Federal Circuit law. See Sky Techs. LLC v. SAP AG, 576 F.3d 1374, 1379 (Fed. Cir. 2009) ("Usually, federal law is used to determine the validity and terms of an assignment, but state law controls any transfer of patent ownership by operation of law not deemed an assignment."); Abraxis Bioscience, Inc. v. Navinta LLC, 625 F.3d 1359, 1364 (Fed. Cir. 2010) (quoting DDB Techs., L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284, 1290 (Fed. Cir. 2008)) (applying federal law when interpretive issues are "bound up with the question of standing in patent cases"). The overarching question is whether the contract grants an "assignment" or mere "license" to the party seeking to bring an infringement action. See Lone Star, 925 F.3d at 1230-31. An assignee can bring an infringement action in its own name without joining additional parties, while a mere licensee cannot. See id.
1. The Agreement Grants HP a Mere License in Intellectual Property and Know-How.
In arguing that it is a patentee, HP focuses heavily on § 2.1 of the Agreement, which uses the words "assigns" and "Assignment" to describe the conveyance of rights to HP from NBB. (ECF 8-1, § 2.1. See also id., § 3.) Section 2.1 further states that NBB "conveys, transfers, assigns and quitclaims to HP all of its right, title and interest in and to the Intellectual Property and Know-How" and refers to "HP's ownership of the Know-How, Intellectual Property, and HP Trademark Rights." (Id. (emphasis added).) Other provisions of the Agreement appear to show why NBB agreed to the "assignment" of "all of its rights, title and interest": it wanted to protect itself against claims by third parties or government entities for infringement, regulatory violations, or other forms of liability arising out of the marketing and sale of the Additive. Sections 6.1(e) and 7.2(c), for example, make HP "solely responsible" for infringement claims brought by third parties and establish that "NBB shall not have any obligation to defend or indemnify HP for any such claim." It seems clear, in context, that NBB believed an "assignment" of rights would better insulate it from potential liability to third parties.
It is tempting to hold NBB to the consequences of the words it chose when it entered into the Agreement, particularly given the Agreement's recognition in § 15.14 that each party was represented by "competent counsel" and "the final agreement contained in this Agreement, including the language whereby it has been expressed, represents the joint efforts of the Parties and their counsel." (Id., § 15.14.) The problem for HP, however, is that the Federal Circuit has repeatedly and consistently refused to "allow[ ] labels to control by treating bare formalities of 'title' transfer as sufficient to determine that an 'assignment' of the entire exclusive right has occurred." Diamond Coating Techs., LLC v. Hyundai Motor Am., 823 F.3d 615, 618 (Fed. Cir. 2016). "Rather, we have explained that, 'to determine whether a provision in an agreement constitutes an assignment or license, one must examine the substance of what was granted.' " Id. (quoting Vaupel Textilmaschinen KG v. Meccanica Euro Italia S.P.A., 944 F.2d 870, 874 (Fed. Cir. 1991)) (cleaned up).
The Federal Circuit emphasizes substance over form in this context because an agreement to transfer patent rights is not a mere matter of contract law affecting the parties to the agreement and no one else. Instead, such an agreement implicates federal patent statutes, which are designed in part to define the rights and obligations of third parties, including alleged infringers. The Supreme Court has long recognized that Congress did not want alleged infringers "to be harassed by a multiplicity of suits instead of one, and to successive recoveries by different persons holding different portions of the patent right in the same place." Crown Die & Tool Co. v. Nye Tool & Machine Works, 261 U.S. 24, 38, 43 S.Ct. 254, 67 L.Ed. 516 (1923) (quoting Gayler v. Wilder, 51 U.S. 477, 494-95, 10 How. 477, 13 L.Ed. 504 (1850)); see also Indep. Wireless Tel. Co. v. Radio Corp. of Am., 269 U.S. 459, 468, 46 S.Ct. 166, 70 L.Ed. 357 (1926) ("The presence of the owner of the patent as a party is indispensable, not only to give jurisdiction under the patent laws, but also in most cases to enable the alleged infringer to respond in one action to all claims of infringement for his act, and thus either to defeat all claims in the one action, or by satisfying one adverse decree to bar all subsequent actions."). Federal Circuit precedent emphasizing substance over form in deciding whether a transfer of rights is an assignment or license gives effect to Congress's intent by ensuring that private parties do not agree amongst themselves to divide patent rights in a way that might subject alleged infringers to a multiplicity of potential lawsuits. See Ortho Pharm. Corp. v. Genetics Inst., Inc., 52 F.3d 1026, 1034 (Fed. Cir. 1995) ("[A] contract cannot change the statutory requirement for suit to be brought by the 'patentee.' "); Abbott Labs. v. Diamedix Corp., 47 F.3d 1128, 1130-33 (Fed. Cir. 1995).
To the extent this issue is governed by state law, the same principles of substance over form apply. Like the Federal Circuit, the Iowa Supreme Court has held that the substance of a contract prevails over the labels used by the parties when the contract affects statutory rights and obligations. See C & J Vantage Leasing Co. v. Wolfe, 795 N.W.2d 65, 76 (Iowa 2011) (concluding that a "lease" agreement was actually a disguised "sale with a security interest" for purposes of the Uniform Commercial Code).
With this precedent in mind, the Court concludes HP has a mere "license" to Intellectual Property and Know-How and did not receive a true "assignment," notwithstanding the terminology in § 2.1. This is because NBB retains substantial rights in the Intellectual Property and Know-How, including: (a) reversionary rights in a wide range of circumstances, including, inter alia, upon HP's failure to ensure a sufficient supply of the Additive, failure to make timely royalty payments, failure to comply with governing regulations, other breaches of the Agreement, or if HP has a change in control or goes into bankruptcy (§§ 2.4, 11.2, 11.3); (b) the right to control and limit future assignments and licenses (§§ 2.3, 2.8, 11.2(e)); and (c) the right to "bring an infringement action at its own expense, in its own names and entirely under its own direction and control" in the event of suspected or actual infringement of "Patent Rights" (§ 7.2). These are precisely the types of retained rights that have caused the Federal Circuit in other cases to conclude a conveyance was a mere "license" and not a true "assignment." See, e.g., Diamond Coating, 823 F.3d at 619; Propat Int'l Corp. v. Rpost, Inc., 473 F.3d 1187, 1190-91 (Fed. Cir. 2007); Abbott Labs., 47 F.3d at 1130.
The fact that NBB expressly retained the right to bring and control patent infringement claims is "particularly dispositive" in concluding the transfer is a mere "license." AsymmetRx, Inc. v. Biocare Med. LLC, 582 F.3d 1314, 1319 (Fed. Cir. 2009) (quoting Vaupel, 944 F.2d at 874); accord Alfred E. Mann Found. for Sci. Rsch. v. Cochlear Corp., 604 F.3d 1354, 1361 (Fed. Cir. 2010) ("[T]he nature and scope of the exclusive licensee's purported right to bring suit, together with the nature and scope of any right to sue purportedly retained by the licensor, is the most important consideration."). The Federal Circuit has repeatedly held that a transfer is a mere license when the transferor retains even partial control over infringement cases. See, e.g., AsymmetRx, 582 F.3d at 1319 (mere license where transferor and transferee had joint control over infringement cases); Alfred E. Mann, 604 F.3d at 1363-64 (mere license where transferor could bring infringement claims if transferee declined to do so); Abbott Labs., 47 F.3d at 1130 (same). Here, the rights NBB retained are more extensive: it has the power to bring infringement claims "entirely under its own direction and control" (ECF 8-1, § 7.2(b)), subject only to HP having the "right to participate and be represented . . . at its own expense" and a provision requiring consent of both parties before settlement. HP has not cited, and the Court cannot locate, any authority treating a transfer of patent rights as an "assignment" when the transferor retained such substantial control over infringement claims. The Federal Circuit precedent therefore weighs overwhelmingly in favor of concluding the Agreement creates a mere license in Intellectual Property and Know-How. See Diamond Coating, 823 F.3d at 619; AsymmetRx, 582 F.3d at 1319; Alfred E. Mann, 604 F.3d at 1361; Abbott Labs., 47 F.3d at 1132.
The analysis does not, however, end there. HP correctly points out that the circumstances here are different than those in the Federal Circuit cases identified above. There, the contracts in question transferred rights to a patent that already existed from the original owner to someone else. Here, by contrast, the '789 and '266 Patents did not already exist when the parties entered into the Agreement; instead, HP applied for and obtained them later. HP argues, in this factual scenario, that it should be treated as the transferor of rights in the Patents, not the transferee. In other words, HP argues that the Federal Circuit authority described above establishes HP as the patentee of the '789 and '266 Patents, with NBB, at most, a putative licensee of certain rights that fall short of giving NBB the authority to bring infringement actions or otherwise control patent rights.
The governing question is who holds patent rights in the first instance when the patents arise out of an agreement that transferred certain rights in intellectual property to the eventual patent applicant before the patents came into existence. The parties have not cited, and the Court cannot locate, any Federal Circuit cases directly addressing this question. The Court has, however, located analogous precedent analyzing whether a successful patent applicant has the exclusive right to sue for infringement upon the patent's issuance if there is a preexisting agreement between the applicant and someone else regarding ownership or control of the patent rights. See, e.g., Abraxis Bioscience, 625 F.3d at 1364-65. Not surprisingly, this precedent requires careful analysis of the contract to determine who has standing to bring infringement claims. See id. The Court therefore must dig another layer deeper into the Agreement to determine the rights it gave NBB and HP, respectively, in patents that did not yet exist on the Agreement's effective date. This, again, is a blended question of state and federal law, although Federal Circuit precedent governs the overarching question of who has standing to sue alleged infringers. See id.
2. The Agreement Gives NBB Sufficient Rights in Future Patents to Prevent HP From Bringing Patent Infringement Cases Without NBB's Involvement.
The analysis of future patent rights starts with § 2.1 of the Agreement, pursuant to which NBB transferred its rights "in and to the Intellectual Property and Know-How." (ECF 8-1, § 2.1.) Although patent rights are not expressly mentioned in § 2.1, the Agreement elsewhere defines Intellectual Property to include "all current and future patents and patent applications of NBB or HP that are, or may in the future be, in existence during the Term of this Agreement and that are directed to the Additive or its manufacture or use, including those listed on Schedule C." (Id., § 1.1.) It is therefore clear that the Agreement transferred certain rights in future patent applications and patents from NBB to HP. It is equally clear—based on the Court's conclusion above that this transfer was a mere "license," not an outright assignment—that NBB retained important rights in those same applications and patents, provided they were "directed to the Additive or its manufacture or use." In other words, NBB did not give exclusive ownership or control of future patents to HP.
Several provisions of the Agreement drive this home. In § 1.1, the parties defined Intellectual Property in a manner that focuses exclusively on patent rights. Thus, when they entered into the Agreement and divided the rights to Intellectual Property—with NBB, importantly, keeping control over future assignments and licenses and getting reversionary rights in a wide range of circumstances—the parties knew they were doing so specifically with respect to "all current and future patents and patent applications." It would undermine this definition, and the corresponding division of rights, for the Court to conclude that HP nonetheless has an unfettered right to control and enforce the '789 and '266 Patents.
Section 7.2(b) is even more squarely on point. It states that "NBB (and/or its affiliates) shall have the right, but shall not be obligated, to bring an infringement action at its own expense, in its own names, and entirely under its own direction and control," subject to HP having the right to be involved "at its own expense." (Id., § 7.2(b).) This section would be meaningless if, as HP contends, the parties intended for HP to have the exclusive right to control and enforce patents that did not yet exist on the Agreement's effective date. See Iowa Fuel & Mins., Inc. v. Iowa State Bd. of Regents, 471 N.W.2d 859, 863 (Iowa 1991) ("[A]n interpretation which gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.").
The language of § 7.2(b) is particularly noteworthy given the Federal Circuit precedent described above, which places tremendous significance on whether a transferor retains the right to sue for infringement when evaluating whether an agreement constitutes an assignment or mere license. See, e.g., Diamond Coating, 823 F.3d at 619; AsymmetRx, 582 F.3d at 1319; Propat Int'l, 473 F.3d at 1190-91; Prima Tek II, L.L.C. v. A-Roo Co., 222 F.3d 1372, 1380 (Fed. Cir. 2000); Abbott Labs., 47 F.3d at 1130. By drafting § 7.2(b) in a manner that reserves for NBB the right to bring and control infringement cases, the Agreement directly implicates these Federal Circuit cases. The parties either knew exactly what they were doing when they drafted § 7.2(b) or inadvertently stumbled into a long line of outcome-determinative Federal Circuit precedent. Either way, the conclusion is the same: the Agreement did not give HP the exclusive right to control or enforce future patent rights and is therefore a mere "license" of those rights. See, e.g., Diamond Coating, 823 F.3d at 619; AsymmetRx, 582 F.3d at 1319.
Even provisions of the Agreement that give patent rights to HP, if read carefully, show substantial rights being retained by NBB. For example, § 7.1 states that HP "shall be responsible (at its own expense and discretion) for, and shall control, the prosecution (including any interferences, reissue proceedings and reexaminations) and maintenance of Patent Rights." (ECF 8-1, § 7.1 (emphasis added).) HP attaches significance to § 7.1, but it is most notable for its failure to include the word "enforcement" in the list of patent rights given to HP. This was clearly not mere oversight, as the parties used the word "enforcement" twice in the very next section to describe the rights retained by NBB. In context, the parties clearly intended to give HP the right to "prosecut[e] and maint[ai]n" patent rights while reserving to NBB the right to "enforce." This division of rights is of critical importance under Federal Circuit precedent.
In arguing otherwise, HP focuses heavily on the language of § 2.1 granting HP "all . . . right, title and interest in and to the Intellectual Property and Know-How" and stating that HP "assumes all responsibility and shall bear all costs and logistics associated with further evidencing, enforcing, registering, or defending HP's ownership of the Know-How, Intellectual Property, and HP Trademark Rights." (ECF 8-1, § 2.1.) HP argues the plain language of § 2.1 makes it a "patentee" as a matter of law—a conclusion it argues is reinforced by the language of § 7.1 and the fact that HP prosecuted the '789 and '266 Patents in its own name.
There are two problems with HP's arguments. First, as the Court has already explained, Federal Circuit precedent teaches that the language of §§ 2.1 and 7.1 cannot be isolated from the rest of the Agreement in determining whether the transfer of rights was an assignment or mere license. See, e.g., Lone Star, 925 F.3d at 1230-31 (concluding agreement merely granted license despite purporting to transfer "all right, title and interest"). Cf. Wolfe, 795 N.W.2d at 76 (concluding agreement was a sale with a security interest despite being labeled as a "lease"). Taken as a whole, the Agreement simply does not give HP the exclusive right to control enforcement efforts of the '789 and '266 Patents if those Patents are "directed to the Additive or its manufacture or use"—which, at this stage, the Court must assume is true. To conclude otherwise would, among other things, effectively remove § 7.2 from the Agreement. See Lone Star, 925 F.3d at 1230-31. Similarly, HP's argument would eviscerate §§ 2.3 and 2.8, which reserve for NBB substantial rights in Intellectual Property—i.e., "all current and future patents and patent applications." (ECF 8-1, § 1.1.) Finally, HP's position, if accepted, would put alleged infringers at risk of multiple lawsuits—one by HP, another by NBB—for the same acts of infringement. This is exactly what Federal Circuit precedent is designed to avoid. See Aspex Eyewear, Inc. v. Miracle Optics, Inc., 434 F.3d 1336, 1343 (Fed. Cir. 2006) (concluding agreement was mere license where, inter alia, holding otherwise would subject alleged infringers to multiple lawsuits); Abbott Labs., 47 F.3d at 1133 (describing adverse consequences to alleged infringer if owner was not joined as party to infringement case).
The use of the word "enforcing" in the list of responsibilities given to HP in § 2.1 does not counsel otherwise. The relevant sentence of § 2.1 states, in full, that HP "assumes all responsibility and shall bear all costs and logistics associated with further evidencing, enforcing, registering, or defending HP's ownership of the Know-How, Intellectual Property, and HP Trademark Rights." (ECF 8-1, § 2.1.) In context, the word "enforcing" modifies "ownership" in the sense that HP is obligated at its own expense to defend its rights in the Intellectual Property from third parties who may claim to hold contrary ownership rights. This is different from "enforcing" patent rights by bringing an infringement claim against an alleged infringer, as alleged infringers generally are not understood as claiming "ownership" of patent rights. Moreover, and in any event, § 7.2(b) speaks specifically to the issue of enforcement of patent rights against alleged infringers, whereas the sentence of § 2.1 on which HP relies uses the word "enforcing" in a more general sense. In such circumstances, the specific governs over the general and requires the Court to reject HP's argument. See Hometown Fin., Inc. v. United States, 409 F.3d 1360, 1369 (Fed. Cir. 2005) ("Our precedent establishes as a principle of contract interpretation that a specific contract provision will control over a general contract provision."); Iowa Fuel & Mins., 471 N.W.2d at 863 ("[W]hen a contract contains both general and specific provisions on a particular issue, the specific provisions are controlling.").
The Court has already explained why the word "ownership" cannot be interpreted literally under Federal Circuit and Iowa Supreme Court precedent given the substantial rights retained by NBB. In context, the word "ownership" is perhaps best understood as meaning that NBB "owns" certain rights in the Intellectual Property and Know-How, but not all substantial rights.
Second, HP's arguments conflate the authority to apply for a patent with the authority to enforce it. The Federal Circuit has recognized that the party authorized to apply for a patent will not have the exclusive right to enforce it upon issuance if the patent rights were automatically transferred to someone else by virtue of a preexisting contract. See, e.g., DDB Techs., 517 F.3d at 1290; Speedplay, Inc. v. Bebop, Inc., 211 F.3d 1245, 1252-53 (Fed. Cir. 2000). This is exactly what the Agreement here does: it appears to have given HP the right to apply for the '789 and '266 Patents in its own name, but not the exclusive right to enforce those Patents once they were issued or the unfettered right to assign or license them to third parties. Instead, those substantial rights were reserved to NBB all along.
Admittedly, the present situation involves an inverted factual scenario compared to cases like DDB and Speedplay. There, the patent applicant was the transferor. Here, by contrast, the patent applicant (HP) was initially the transferee in the sense that it received rights to the Intellectual Property from NBB pursuant to the Agreement. This distinction is immaterial, however, because HP did not receive all substantial rights in any patents it obtained that were "directed to the Additive or its manufacture or use." (ECF 8-1, § 1.1.) Instead, §§ 2.3, 2.8, and 7.2 (among other relevant provisions) kept such rights with NBB. The outcome is therefore the same as in DDB and Speedplay: the party who applied for the patent does not have the exclusive right to enforce it. Or, stated differently, there are "contractually divided patent rights" in which HP has the right to prosecute but not the exclusive right to enforce. See, e.g., Morrow v. Microsoft Corp., 499 F.3d 1332, 1337-38 (Fed. Cir. 2007).
For these reasons, the Court cannot conclude as a matter of law that HP is a "patentee" in the sense of having the exclusive right to enforce the '789 and '266 Patents. The Court therefore DENIES HP's motion to dismiss as to Counterclaim Counts 3 and 4.
C. The Court Denies HP's Motion to Dismiss as to Counterclaim Count 10.
In Counterclaim Count 10, NBB alleges, "[u]pon information and belief," that HP failed to pay royalties on certain sales of the Additive. (ECF 20, ¶ 237.) HP argues Count 10 should be dismissed because NBB failed to comply with the dispute resolution requirements set forth in § 12 of the Agreement, which include: written notice, "negotiation and consultation" between "the Parties" for thirty days, and referral of the dispute after 30 days to "Designated Officers" for thirty additional days of "good faith negotiation." (ECF 8-1, § 12.)
It is difficult to see any purpose that would be served by requiring the parties to go through this dispute resolution process for one isolated issue in a scenario where they already have been enmeshed in litigation of other issues for months, particularly when the case was filed in the first instance by the very party (HP) now trying to insist that litigation is premature. (ECF 1.) Moreover, in its Reply Memorandum, HP argues that good faith negotiations over royalties should not occur until after the Court decides how the Agreement's audit provisions should be interpreted and applied. (ECF 38, p. 8.) In HP's words, "[t]he parties disagree as to how the audit is to be performed. Once that is resolved (a subject of the First Amended Complaint), the audit will proceed. If the audit results in a dispute over royalties, the parties would engage in their contractual dispute resolution procedures." (Id.)
Resolution of the dispute over the audit provisions could take years. Thus, in context, HP is not trying to enforce the Agreement's dispute resolution procedures so much as delay them indefinitely. Nothing in § 12 gives HP such sweeping authority. Section 12 does not mention audits at all, much less suggest that one side can unilaterally delay good faith negotiations over other disputed issues until a court first resolves disputes about audit rights. Rather, §12 simply contemplates sixty days of "good faith negotiations," the first thirty of which are between "the Parties" and the last thirty of which are between "the Designated Officers." (ECF 8-1, § 12.) HP's suggestion that it will not engage in royalty negotiations until the audit dispute is settled therefore is either inconsistent with § 12 or indicates that enforcement of § 12 as to royalties would be futile (or both).
Regardless, NBB appears to have done enough to satisfy the requirements of § 12. It sent correspondence on December 9, 2021, and February 1, 2022, "invoking its rights to inspect and audit HP under Section 8.2, including with respect to . . . royalty obligations" (ECF 20-7, p. 4). When this correspondence failed to yield meaningful progress, NBB sent additional correspondence on February 9, 2022, expressing its belief that "HP has continued to sell Additive" and asking for "[r]ecords and documents reflecting all sales and revenue of [the Additive] on a monthly basis throughout the Territory from 2017 to today" (ECF 20-8, p. 1). HP responded a few days later not by engaging in negotiations, but rather by filing this lawsuit. (ECF 1.) Under these circumstances, NBB's correspondence amounts to substantial compliance with the alternative dispute resolution requirements of § 12. See Colonial Life Ins. Co. of Am. v. Elec. Data Sys. Corp., 817 F. Supp. 235, 245 (D.N.H. 1993) (finding substantial compliance sufficient). Moreover, by filing suit in response to NBB's correspondence, HP appears to have waived its right to insist on further compliance with § 12 as to issues within the scope of NBB's correspondence, including royalty issues. See Skold v. Galderma Lab'ys, L.P., 99 F. Supp. 3d 585, 595 (E.D. Pa. 2015) (party waived alternative dispute resolution requirements when it "accepted the judicial process"). The Court therefore DENIES the motion to dismiss as to Counterclaim Count 10.
Nonetheless, to avoid any lingering dispute over compliance with § 12, the Court will STAY litigation regarding Counterclaim Count 10 for a period not to exceed sixty days from the date of this Order, subject to the following: first, during the initial thirty days, the parties must "attempt in good faith to resolve [the royalty dispute] by negotiation and consultation between themselves" in accordance with § 12(c), treating the allegations of Counterclaim Count 10 as the "notice" required by § 12(b); second, assuming the dispute is not resolved during the thirty days, the parties must refer the dispute to the Designated Officers (as defined in § 12(d)) for "attempted resolution by good faith negotiation" for an additional thirty days. The parties may, if they wish, also engage in negotiations regarding disputed audit issues during this sixty-day period, but any such negotiations about audit rights will not toll the running of the sixty-day period as to the royalty dispute. In other words, the Court rejects HP's argument that royalty negotiations need not begin until disputes regarding audit issues are resolved.
The stay automatically will expire after sixty days with no further motion practice or Court action required. It will expire sooner if mutually agreed upon by the parties. The stay does not apply to any claims or counterclaims other than Counterclaim Count 10.
D. The Court Strikes Affirmative Defense 3 But Not Affirmative Defenses 1, 2, or 4.
The final issue is whether the Court should strike NBB's Affirmative Defenses 1 through 4, each of which contains one sentence of barebones allegations purporting to raise the defenses of failure to state a claim (Affirmative Defense 1), unclean hands (Affirmative Defense 2), ratification, waiver, and/or estoppel (Affirmative Defense 3), and non-entitlement to costs (Affirmative Defense 4).
The Eighth Circuit has not decided whether the heightened pleading standard recognized in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), applies to affirmative defenses, although it held in a case pre-dating Twombly and Iqbal that the "bare assertion" of an affirmative defense is sufficient to satisfy Fed. R. Civ. P. 8(b) and (c). See Zotos v. Lindbergh Sch. Dist., 121 F.3d 356, 361 (8th Cir. 1997). District courts within the Eighth Circuit are split on whether the Twombly and Iqbal standard applies to affirmative defenses. See generally Summers Mfg. Co., Inc. v. Tri-Cty. AG, LLC, 300 F. Supp. 3d 1025, 1043-44 (S.D. Iowa 2017). The split is significant enough that district courts do not even agree on what the majority position is on the issue. Some have held that "[a]t first, the majority of district courts extended the pleading standard articulated in Twombly and Iqbal to affirmative defenses, but this is now the minority position." U.S. Commodity Futures Trading Comm'n v. U.S. Bank, N.A., No. 13-CV-2041-LRR, 2014 WL 294219, at *10 (N.D. Iowa Jan. 27, 2014). Or, to put it slightly differently, the "recent trend for courts is to apply the less-stringent notice pleading standard to affirmative defenses." Acosta v. Luxury Floors, Inc., No. 18CV01489WMWECW, 2018 WL 7350478, at *2 (D. Minn. Dec. 7, 2018), report and recommendation adopted, No. 18-CV-1489 (WMW/ECW), 2019 WL 652419 (D. Minn. Feb. 15, 2019)); accord Summers Mfg., 300 F. Supp. 3d at 1043 ("Recently, however, district courts have noted a trend toward applying the less-stringent notice pleading standard to affirmative defenses."). At least one court in the Eighth Circuit, however, continues to believe that "a majority of the District Courts have decided that Iqbal applies to affirmative defenses." Moore v. GreenSky, LLC, No. 4:20-CV-00002-FJG, 2020 WL 12697467, at *1-2 (W.D. Mo. June 11, 2020) (quoting Sch. of the Ozarks, Inc. v. Greatest Generations Found., Inc., No. 10-3499-CV-S-ODS, 2011 WL 1337406, at *1 (W.D. Mo. Apr. 7, 2011)).
Regardless of the majority position, this Court concludes the proper approach is to apply the Twombly and Iqbal standard to affirmative defenses only when the plaintiff can show a meaningful risk of prejudice from the failure to do so. The Court reaches this conclusion for several reasons. First, motions to strike are governed by Fed. R. Civ. P. 12(f), which are generally granted only upon a showing of prejudice. See Arbogast v. Healthcare Rev. Recovery Grp., 327 F.R.D. 267, 269-70 (E.D. Mo. 2018) (recognizing that a motion to strike should be granted only if the plaintiff "shows that it is prejudiced by the inclusion of a defense or that a defense's inclusion confuses the issue"); Factory Mut. Ins. Co. v. Nebraska Beef, Inc., No. 8:09CV159, 2009 WL 2886315, at *2 (D. Neb. Sept. 2, 2009).
Second, with neither the Supreme Court nor Eighth Circuit ever having directly addressed how Iqbal and Twombly apply to affirmative defenses, the prudent course is to continue to follow the earlier, on-point Eighth Circuit precedent recognizing the more lenient standard. See Zotos, 121 F.3d at 361; U.S. Commodity Futures Trading Comm'n, No. 13-CV-2041-LRR, 2014 WL 294219, at *10 (declining to apply Iqbal and Twombly standard in light of earlier Eighth Circuit precedent "liberally constru[ing] arguably deficient affirmative defenses").
Third, unlike dismissal of a plaintiff's claims, which ends the case, there is often no meaningful efficiency advantage from imposing a heightened pleading standard to affirmative defenses. For example, many motions to strike are "purely semantic," such as a motion to strike the so-called "affirmative defense" of failure to state a claim upon which relief can be granted (which is not an affirmative defense at all). See Oliverires v. Nationwide Ins. Co. of Am., No. 4:18-cv-2139-SPM, 2019 WL 1469673, at *2 (E.D. Mo. Apr. 3, 2019). Striking this defense accomplishes nothing. By contrast, efficiency is harmed when parties engage in motion practice on "purely semantic" pleading issues. See Wells Fargo & Co. v. United States, 750 F. Supp. 2d 1049, 1052 (D. Minn. 2010) ("[Motions to strike] increas[e] the burden on the federal courts, and add[ ] expense and delay for the parties.")
Turning to the merits, the Court concludes HP has not made a sufficient showing of prejudice to warrant striking Affirmative Defenses 1, 2, or 4. Numbers 1 ("HP's claims in whole or in part fail to state a claim upon which relief can be granted.") and 4 ("HP is not entitled to an award of costs.") are not affirmative defenses at all, and thus there is no harm to HP from their inclusion in NBB's pleading. See Oliverires, 2019 WL 1469673, at *2 (defense of failure to state a claim is "purely semantic"). Number 2 ("unclean hands") is an affirmative defense, but HP has ample information from the remainder of NBB's pleading to understand the basis for it. Indeed, NBB's Counterclaims contain 293 paragraphs of allegations revolving largely around wrongful acts allegedly committed by HP. NBB was not required to restate those same allegations in Affirmative Defense 2 to support the defense of unclean hands. See Adtrader, Inc. v. Google LLC, No. 17-CV-07082-BLF, 2019 WL 8508038, at *1 (N.D. Cal. Sept. 4, 2019) (denying motion to strike because affirmative defense provided sufficient notice to plaintiffs when viewed in the larger context of defendant's lengthy answer). The Court therefore DENIES the motion to strike as to Affirmative Defenses 1, 2, and 4.
By contrast, the Court cannot tell from NBB's lengthy pleading why it believes "ratification, waiver, and/or estoppel" might be valid affirmative defenses as set forth in Affirmative Defense 3. HP therefore will have to devote time and energy in the discovery process to understanding those defenses, including, potentially, through targeted interrogatories and requests for production that will count toward the presumptive limits in Fed. R. Civ. P. 30(a)(2) and 33(a). This is a form of prejudice that warrants striking Affirmative Defense 3. See, e.g., Cynergy Ergonomics, Inc. v. Ergonomic Partners, Inc., No. 4:08-CV-243 JCH, 2008 WL 2817106, at *2 (E.D. Mo. July 21, 2008) ("The prejudice requirement is satisfied if striking the defense would, for example, prevent a party from engaging in burdensome discovery, or otherwise expending time and resources litigating irrelevant issues that will not affect the case's outcome."). The Court therefore GRANTS the motion to strike as to Affirmative Defense 3.
V. CONCLUSION
The Court GRANTS HP's motion to dismiss as to Counterclaim Counts 6 and 7. The Court DENIES HP's motion to dismiss as to Counterclaim Counts 3, 4, 10, and 14, although it STAYS litigation on Counterclaim Count 10 for a period not to exceed sixty days to allow the parties to complete the process set forth in § 12 of their Agreement as to that Count. The Court GRANTS HP's motion to strike as to Affirmative Defense 3 but DENIES the motion to strike as to Affirmative Defenses 1, 2, and 4.
IT IS SO ORDERED.