Opinion
01-CV-0113A.
October 14, 2004
REPORT RECOMMENDATION
PRELIMINARY STATEMENT
The above-captioned case has been referred to the undersigned by order of the Hon. Richard J. Arcara, Chief United States District Judge, for the supervision of pre-trial discovery and the hearing and disposition of all non-dispositive motions, pursuant to 28 U.S.C. §§ 636(b)(A) and (B), and for the report and recommendation of dispositive motions, pursuant to 28 U.S.C. § 636(b)(1)(B) and (C). (Docket # 35). Currently before this Court are defendants' motion to dismiss the Complaint with prejudice and plaintiff's motion for voluntary dismissal without prejudice and for leave to file a new complaint. (Docket ## 45 and 48).
Chief United States District Judge Richard J. Arcara originally referred the above-captioned matter to United States Magistrate Judge Leslie G. Foschio on April 30, 2001. (Docket #4). On May 30, 2001, Judge Arcara referred the matter to United States Magistrate Judge Jonathan W. Feldman to act in place of Magistrate Judge Foschio, who at the time was unable to perform his duties because of physical illness. (Docket # 6). The case was thereafter transferred to United States Magistrate Judge William G. Bauer on September 4, 2001. (Docket # 10). On February 3, 2003, the matter was again referred to Magistrate Judge Feldman following Magistrate Judge Bauer's departure from the bench. (Docket # 27). Finally, on April 14, 2003, this case was reassigned to the undersigned consistent with the terms of the original referral order. (Docket # 35).
FACTUAL BACKGROUND
On February 16, 2001, plaintiff Ivoclar Vivadent Inc. ("Ivoclar") filed the original Complaint in this matter alleging that defendants Corporation Cortex Machina, Dentalmatic Technologies Inc., Digital Dental Systems, and Cynovad were infringing three United States patents: No. 5,766,006 (the "`006 patent"); No. 5,961,324 the ("`324 patent"); and No. 6,132,210 (the "`210 patent"). (Docket # 1). Defendants answered the Complaint on April 26, 2001. (Docket # 3).According to Ivoclar, the patents cover a system and method for analyzing tooth shades, which is used to fabricate reconstructed teeth. Ivoclar alleges that the defendants manufacture a shade measurement system under the name "ShadeScan System" that infringes various of the patents' claims. (Docket # 1, Complaint). The Complaint asserts that Ivoclar is the "exclusive licensee of all right, title and interest" in the '006, '324, and '210 patents "through an assignment of an exclusive license agreement." (Docket # 1 at ¶¶ 23-25). As Ivoclar maintains, it obtained that exclusive license as a result of the following series of transactions: the patents were duly and properly issued to Maryann Lehmann; Ms. Lehmann thereafter assigned the patents to Shade Analyzing Technologies, Inc. ("SAT"); SAT, in turn, granted an exclusive license in the patents to Ivoclar AG, Ivoclar's parent corporation; finally, Ivoclar AG, with the consent of SAT, assigned its rights under the license agreement to Ivoclar. (Docket # 50, Proposed New Complaint ¶¶ 22-24).
The license agreement between SAT and Ivoclar AG mistakenly referenced Patent No. 5,766,066 instead of Patent No. 5,766,006. As defendants conceded during oral argument before this Court, such discrepancy was the result of a mere scriviner's error, and does not render the license invalid. (Docket # 71).
On September 17, 2002, Ivoclar moved to file an amended complaint adding SAT as a co-plaintiff. (Docket # 19). Two weeks later, on October 1, 2002, Ivoclar filed a second motion to amend, seeking to add a claim that defendants also infringed a related fourth patent, No. 6,210,159 (the "`159 patent"). (Docket # 22). Defendants opposed Ivoclar's motions to amend, and cross-moved to dismiss the Complaint for failure to state a claim, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Docket # 24). According to defendants, Ivoclar lacked standing to file the Complaint because the assignment of Ivoclar's exclusive license from Ivoclar AG to Ivoclar was not executed until February 26, 2001, ten days after the Complaint was filed. Defendants further argued that this defect could not be cured either by executing a nunc pro tunc assignment or by amending the Complaint. In the alternative, defendants contended that the assignment, even if it had been executed prior to the lawsuit, was void because the license possessed by Ivoclar AG provided that it could only be assigned with the written consent of SAT, which defendants claim was not obtained. (Docket # 24).
Before such motions were heard by the Court, this case was stayed at the joint request of the parties in order to permit them to engage in settlement negotiations. In February 2004, the parties informed the Court that their settlement efforts had been unsuccessful and requested that the previously filed motions be addressed. At the request of this Court, the parties withdrew their motions without prejudice on April 9, 2004, and a new scheduling order was issued to allow the parties the opportunity to resubmit their motions with updated memoranda of law. (Docket ## 42-44). Instead of refiling its motions to amend, however, Ivoclar filed the pending motion for voluntary dismissal without prejudice and for leave to file a new action. (Docket # 45). According to Ivoclar, the proposed new Complaint will cure any standing defects because it will post-date the February 26, 2001 assignment and will join the patentee as a co-plaintiff. Defendants have cross-moved for dismissal with prejudice on the grounds of undue delay, prejudice and bad faith. Defendants have also moved for an award of attorneys' fees. (Docket # 54).
Ivoclar does not concede that it lacked standing to file the original Complaint. (Docket ## 49, 57).
DISCUSSION
Dismissal of Complaint : Ivoclar has filed suit in this matter, claiming that it is the exclusive licensee of the patents allegedly violated by defendants. Before addressing the merits of a patent infringement claim, however, a court must first determine whether the plaintiff has standing to sue on the patent. See Fieldturf, Inc. v. Southwest Recreational Indus., Inc., 357 F.3d 1266, 1268 (Fed. Cir. 2004) (citations omitted). "To bring an action for patent infringement, a party must be either the patentee, a successor in title to the patentee or an exclusive licensee on the patent at issue." Id. (citing Mentor H/S, Inc. v. Med. Device Alliance, Inc., 240 F.3d 1016, 1017 (Fed. Cir. 2001)); H.R. Technologies, Inc. v. Astechnologies, Inc., 275 F.3d 1378, 1384 (Fed. Cir. 2002) (quoting Intellectual Prop. Dev., Inc. v. TCI Cablevision of Cal., Inc., 248 F.3d 1333, 1342-46 (Fed. Cir.), cert. denied, 534 U.S. 895 (2001); Textile Prods., Inc. v. Mead Corp., 134 F.3d 1481, 1483-84 (Fed. Cir. 1998)). To establish its claim as an exclusive licensee, a party must demonstrate that it holds "all substantial rights in the patent." Id. (internal quotation omitted). Without such a showing, a party seeking to file suit on a patent may do so only as a co-plaintiff with the patentee or as a successor in title to the patentee. Otherwise, the party lacks standing. Id.
In its initial Complaint, Ivoclar claimed to have standing because an exclusive license in the patents had been granted from SAT to Ivoclar AG, and was thereafter assigned to Ivoclar. (Docket # 1, ¶¶ 23-25). Ivoclar subsequently filed two motions to amend its Complaint to add SAT as a party and to add an additional patent claim. Defendants opposed such motions on the grounds that Ivoclar lacked standing as a licensee because the assignment from Ivoclar AG to Ivoclar did not occur until ten days after the filing of the original complaint. Defendants further asserted that Ivoclar had acted in bad faith by failing to disclose its lack of standing and that such bad faith warranted dismissal with prejudice.
While declining to concede that it lacked standing, Ivoclar nonetheless has now moved for an order dismissing the Complaint without prejudice under Fed.R.Civ.P. 41(a)(2), and granting leave to file a new action within thirty days. (Docket # 50, ¶ 8). The proposed complaint adds SAT as a co-plaintiff and thus, Ivoclar maintains, cures any conceivable standing defects. Ivoclar further asserts that such dismissal would not prejudice defendants because the proposed complaint is substantially similar to the original and because, other than settlement negotiations, scant activity has occurred in this case.
While the parties agree that Ivoclar's pending Complaint should be dismissed, they disagree as to whether the Complaint should be dismissed with or without prejudice. Under Fed.R.Civ.P. 41, a dismissal made pursuant to a plaintiff's request shall be made without prejudice, unless otherwise specified by the court. See Palmieri v. Defaria, 88 F.3d 136, 140 (2d Cir. 1996); D'Alto v. Dahon California, Inc., 100 F.3d 281, 283 (2d Cir. 1996) (citing Jones v. S.E.C., 298 U.S. 1, 19 (1936)). Specifically, rule 41(a)(2) provides:
[A]n action shall not be dismissed at the plaintiff's instance save upon order of the court and upon such terms and conditions as the court deems proper. If a counterclaim has been pleaded by a defendant prior to the service upon the defendant of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court. Unless otherwise specified in the order, a dismissal under this paragraph is without prejudice.
The standing issues presented in the case at bar are substantially similar to those that were before the court in H.R. Technologies, Inc. v. Astechnologies, Inc., 275 F.3d 1378 (D.C. Cir. 2002). In that case, the plaintiff, H.R. Technologies, filed suit claiming that the defendant had violated its patent. H.R. Technologies asserted standing on the grounds that it had obtained ownership of the patent at issue under an assignment by ESFI Acquisition, a company owned by the patent's inventor. During discovery, however, the parties learned that ESFI had not actually owned the patent at the time of the purported assignment to H.R. Technologies because, prior to the purported assignment, the patent had been transferred back to the inventor. As a result of this discovery, the defendant moved to dismiss the complaint with prejudice, alleging that H.R. Technologies lacked standing to prosecute the action. Id. at 1381.
The district court dismissed the complaint, finding that H.R. Technologies could not retroactively correct its standing problem. That dismissal, however, was without prejudice to H.R. Technologies' right to file another complaint in the event that it obtained standing. Following such dismissal, H.R. Technologies corrected the assignment error and filed a new complaint. Id.
The defendant appealed, claiming that the denial should have been with prejudice because it was based upon a lack of standing. Applying the law of the relevant Circuit (in that case, the Sixth Circuit), the Federal Circuit held that the district court had not abused its discretion by dismissing without prejudice, noting that "[b]ecause lack of standing is not an issue that goes to the merits of the underlying patent issues, a dismissal of a complaint for lack of standing would not normally be expected to be made with prejudice. Id. at 1384 (emphasis added). In so doing, the court distinguished its earlier decision in Textile Productions, Inc. v. Mead Corp., 134 F.3d 1481 (Fed. Cir. 1998), in which it had affirmed a district court's dismissal of an infringement claim with prejudice. The court reasoned that in that case, unlike H.R. Technologies, "it was plainly unlikely that the plaintiff would have been able to cure the standing problem," thus making dismissal with prejudice appropriate. Id. at 1385.
Earlier this year, in Fieldturf, Inc. v. Southwest Recreational Indus., Inc., 357 F.3d at 1266, the Federal Circuit reaffirmed the general rule articulated in H.R. Technologies that dismissal of an infringement claim based upon lack of standing ordinarily should be granted without prejudice unless it is so clearly unlikely that the plaintiff will be able to remedy the standing defect. In that case, Fieldturf filed suit alleging that the defendant had infringed its patent for an artificial turf system. Fieldturf claimed that it had obtained the exclusive license to use the patent as a result of a letter agreement with the original patentee. The Federal Circuit disagreed and remanded the case, finding that Fieldturf lacked standing because the alleged exclusive licensing agreement did not actually convey a substantial interest in the patent. Upon remand, the district court was directed to determine whether the dismissal should be with or without prejudice. Id. The Federal Circuit explicitly advised that "[o]rdinarily, dismissal for lack of standing is without prejudice. . . . [u]nless it is plainly unlikely that the plaintiff will be able to cure the standing problem." Id. (quoting H.R. Technologies, Inc., 275 F.3d at 1385). If, for example, a district court determines that the plaintiff can cure a defect in standing by joining the patentee as a co-plaintiff, dismissal without prejudice is appropriate. Id. at 1270-71.
Here, Ivoclar's proposed new complaint seeks to join SAT (the patentee) as a co-plaintiff. Defendants have not contested that SAT may properly be named as a co-plaintiff in this case or that SAT's joinder as a co-plaintiff serves to cure any standing deficiencies. Accordingly, this Court finds that application of the rule articulated in H.R. Technologies and Fieldturf counsels in favor of the Court's exercise of its discretion to dismiss the pending Complaint without prejudice to Ivoclar's right to file a new Complaint adding SAT as a co-plaintiff. See, e.g., D'Alto v. Dahon California, Inc., 100 F.3d at 283 ("decision whether to grant a motion for voluntary dismissal under Rule 41(a)(2) rests with the sound discretion of the trial court"); Zagano v. Fordham Univ., 900 F.2d 12, 14 (2d Cir.) (denial of motion to dismiss without prejudice reviewed only for abuse of discretion), cert. denied, 498 U.S. 899 (1990).
Defendants also argue that Ivoclar should not be permitted to file a new complaint because such filing will prejudice the defendants. Defendants maintain that the filing of a new complaint will require them to duplicate the significant expenses they have already incurred. (Docket # 54). Ivoclar's proposed new complaint, however, is substantially similar to the prior complaint. Thus, the efforts defendants previously expended should be equally availing when applied to the new complaint. Moreover, despite the substantial amount of time that has passed since the filing of the original complaint, very little discovery has been completed, largely as a result of the parties' choice to devote their efforts to settlement negotiations. (Docket # 50, Calihan Decl. ¶ 10). On this record, the Court cannot conclude that defendants would be unfairly prejudiced by the filing of a new complaint.
To the extent that defendants have wasted time responding to two prior motions to amend that plaintiff has now withdrawn, that time may be compensated through an award of attorneys' fees as discussed infra at 11-12.
Allegations of Bad Faith : Defendants further assert that dismissal of the Complaint with prejudice is warranted because Ivoclar acted in bad faith. (Docket # 54). Dismissal with prejudice on this basis, however, is a "harsh remedy to be used only in extreme situations." Valentine v. Museum of Modern Art, 29 F.3d 47, 49 (2d Cir. 1994) (citing Bobel v. Rensselaer Polytechnic Inst., 916 F.2d 759, 764 (2d Cir. 1990), cert. denied, 499 U.S. 943 (1991)). "Although courts may order dismissal with prejudice in order to `deter those who might be tempted to such conduct in the absence of such a deterrent,' Nat'l Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 643 (1976), this mechanism is used mostly in cases where a plaintiff either violated a court order or refused to appear for a court proceeding." Johnson v. City Univ. of New York, 2002 WL 1750841, * 4 (S.D.N.Y. 2002).
Here, defendants claim that Ivoclar had acted in bad faith by (1) filing a complaint containing false representations of standing; (2) attempting to insulate its parent corporation by colluding to have the patents assigned to Ivoclar; (3) misleading the court by serving discovery responses and motions in the name of SAT to create the illusion that the absence of SAT from the action was a "housekeeping" issue; (4) filing two meritless motions to amend the false Complaint without acknowledging the false allegations and lack of standing; and (5) repudiating a settlement reached during court-supervised settlement negotiations. (Docket # 54 at 9-10, 15-16).
With respect to defendants' challenge to Ivoclar's standing to file the Complaint, Ivoclar maintains that it had standing because the license from SAT to Ivoclar AG defined "licensee" to include Ivoclar AG and its subsidiaries. It is undisputed that Ivoclar is in fact the subsidiary of Ivoclar AG. Thus, in light of the plain language of the licensing agreement, Ivoclar's assertion of standing does not appear frivolous. Accordingly, while I decline to resolve whether the language of the license agreement was sufficient to confer standing, I find that this argument is not so lacking in merit as to demonstrate bad faith.
More easily resolved is defendants' claim that Ivoclar misled the court by serving discovery responses and motions in the name of SAT. A review of the documents in question reveals that each document specifically identified SAT as a proposed plaintiff (see Docket ## 22 and 66, Calihan Decl., Ex. A), and thus this Court cannot conclude that the responses were designed to mislead the Court. This Court also finds no evidence, nor have defendants offered any, to indicate that Ivoclar colluded to insulate its parent organization.
Finally, defendants' assertions that Ivoclar acted in bad faith by filing two motions to amend, which it has now abandoned, and by repudiating an alleged settlement agreement reached with defendants are more appropriately addressed through motions other than the pending motion to dismiss with prejudice. If defendants believe they reached an enforceable settlement agreement with Ivoclar, they may file a motion to enforce the agreement. In the absence of such a motion, this Court declines to find, on the record before it, that Ivoclar's conduct during settlement negotiations justifies forfeiture of its rights to pursue an infringement action against defendants. With respect to Ivoclar's previously-filed, now withdrawn motions to amend, I find that Ivoclar's action does warrant some relief to defendants. The relief that is best tailored to that conduct, however, is not dismissal of the suit with prejudice, but reimbursement of attorneys' fees and costs. See infra at 11-12.
Accordingly, I find that defendants have not made a sufficient showing of bad faith to warrant dismissal of Ivoclar's Complaint with prejudice. It is thus my recommendation that defendants' motion to dismiss with prejudice be denied and that Ivoclar's motion to dismiss the Complaint without prejudice be granted.
Defendants' Claim for Attorneys' Fees : Defendants also move for an award of attorneys' fees. Under rule 41 of the Federal Rules of Civil Procedure, "[i]f a plaintiff who has once dismissed an action in any court commences an action based upon or including the same claim against the same defendant, the court may make such order for the payment of costs of the action previously dismissed as it may deem proper and may stay the proceedings in the action until the plaintiff has complied with the order." Fed.R.Civ.P. 41(d). Applying this rule, "[c]ourts often grant fee awards when a plaintiff dismisses a suit without prejudice." Colombrito v. Kelly, 764 F.2d 122, 133 (2d Cir. 1985); Jewelers Vigilance Comm., Inc. v. Vitale Inc., 1997 WL 582823, *4 (S.D.N.Y. 1997) (citing Colombrito v. Kelly, 764 F.2d at 133). See also Mercer Tool Corp. v. Friedr. Dick GmbH, 179 F.R.D. 391, 395 (E.D.N.Y. 1998) (granting award of attorneys' fees in connection with dismissal of complaint without prejudice under Rule 41(a)(2)); Nixon Constr. Co. v. Frick Co., 45 F.R.D. 387, 390 (S.D.N.Y. 1968) (granting plaintiffs' motion for voluntary dismissal without prejudice but awarding costs to defendants for defending against dismissed complaint).
"The purpose of [awarding attorneys' fees] is generally to reimburse the defendant for the litigation costs incurred, in view of the risk (often the certainty) faced by the defendant that the same suit will be re-filed and will impose duplicative expenses upon him." Colombrito v. Kelly, 764 F.2d at 133 (citations omitted); Mercer Tool Corp. v. Friedr. Dick GmbH, 179 F.R.D. at 395. Considering that purpose, "payment of fees [upon dismissal without prejudice] must be limited to compensation for work that cannot be used in a second contemplated action, and the amount of fees awarded must be supported by evidence in the record." Mercer Tool Corp., 179 F.R.D. at 396 (quoting Ames v. Clifford, 1996 WL 563098, *1 (S.D.N.Y. 1996)).
In this case, Ivoclar seeks to dismiss its Complaint and to file a new one, alleging essentially identical claims. Thus, many of the costs incurred by defendants in defense of the original Complaint will be applicable to the second contemplated action and thus are not subject to reimbursement under rule 41. The one obvious exception, however, is the expense to respond to Ivoclar's previous motions to amend the Complaint. Defendants objected to those motions, asserting a lack of standing. That work, consisting of research and motion responses, is largely irrelevant to Ivoclar's new Complaint, which is specifically designed to "resolv[e] any issues regarding the sufficiency of the original exclusive license to Ivoclar A.G. of the patent interests at issue here." (Docket # 49 at 4). On these facts, it is appropriate to reimburse defendants for their wasted efforts in opposing the previous motions — efforts that would have been unnecessary had Ivoclar simply moved as they have now, to dismiss the Complaint without prejudice.
Accordingly, defendants are directed to submit an affidavit to this Court describing the nature and amount of work performed opposing Ivoclar's prior motions to amend. Such affidavits shall delineate (1) the category of work performed; (2) the number of hours billed; (3) the total amount of fees; and (4) the total amount of fees and costs subtracted in light of the provisions of rule 41. Failure to submit such affidavit within twenty days of the date of this Order shall constitute a waiver of the defendants' right to fees and costs for such work.
CONCLUSION
For the foregoing reasons, it is the recommendation of this Court that plaintiff's motion to dismiss without prejudice (Docket # 48) be GRANTED. It is this Court's further recommendation that defendants' motion to dismiss the Complaint with prejudice (Docket # 45) be DENIED and defendants' motion for attorneys' fees (Docket # 45) be GRANTED.
Pursuant to 28 U.S.C. § 636(b)(1), it is hereby
ORDERED, that this Report and Recommendation be filed with the Clerk of the Court.
ANY OBJECTIONS to this Report and Recommendation must be filed with the Clerk of this Court within ten (10) days after receipt of a copy of this Report and Recommendation in accordance with the above statute, Fed.R.Civ.P. 72(b), 6(a) and 6(e) and Local Rule 72.3(a)(3).
The district court will ordinarily refuse to consider on de novo review arguments, case law and/or evidentiary material which could have been, but was not, presented to the magistrate judge in the first instance. See e.g. Patterson-Leitch Co., Inc. v. Massachusetts Municipal Wholesale Electric Co., 840 F.2d 985 (1st Cir. 1988).
Failure to file objections within the specified time or to request an extension of such time waives the right to appeal the District Court's Order. Thomas v. Arn, 474 U.S. 140 (1985); Small v. Secretary of Health and Human Services, 892 F.2d 15 (2d Cir. 1989); Wesolek v. Canadair Ltd., et al., 838 F.2d 55 (2d Cir. 1988).
The parties are reminded that, pursuant to Rule 72.3(a)(3) of the Local Rules for the Western District of New York, "written objections shall specifically identify the portions of the proposed findings and recommendations to which objection is made and the basis for such objection and shall be supported by legal authority." Failure to comply with the provisions of Rule 72.3(a)(3), or with the similar provisions of Rule 72.3(a)(2) (concerning objections to a Magistrate Judge's Decision and Order), may result in the District Court's refusal to consider the objection.
Let the Clerk send a copy of this Order and a copy of the Report and Recommendation to the attorneys for the Plaintiff and the Defendant.