Free Reply - District Court of California - California


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Case 3:08-cv-00385-DMS-NLS

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Paul Adams (Bar No. 42,146) THE ADAMS LAW FIRM California Address 550 West C Street, Suite 2000 San Diego, California 92101 Telephone: 619-241-4810 Facsimile: 619-955-5318 Paul Adams THE ADAMS LAW FIRM 901 Rio Grande Blvd. NW, Suite H262 Albuquerque, NM 87104 Telephone: 505-222-3145 Facsimile: 505-222-3147 [email protected] Attorneys for Plaintiff

10 11 12 13 JOON PARK, an individual, 14 Plaintiff, 15 16 17 18 19 20 21 22 23 24 25 26 27 28 v. CAS ENTERPRISES, INC., an Iowa Corporation d/b/a KREG TOOL COMPANY, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Civil No.: 08-cv-0385 DMS/NLS PLAINTIFF'S REPLY BRIEF IN OPPOSITION TO DEFENDANT'S RESPONSE TO MOTION TO DISMISS ONE DECLARATORY JUDGMENT COUNTERCLAIM FOR LACK OF CASE OR CONTROVERSY AND TO STRIKE CERTAIN AFFIRMATIVE DEFENSES AND DISMISS CERTAIN COUNTERCLAIMS Hearing: September 19, 2008 Time: 1:30 p.m. Place: Courtroom 10 UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA

Plaintiff submits the following Reply to Defendant's Opposition to Plaintiff's Motion to Dismiss: (1) One Declaratory Judgment Counterclaim for Lack of Case or Controversy; and (2) To Strike Certain Affirmative Defenses and Dismiss Certain Counterclaims. Plaintiff will respond in that order. A. DEFENDANT'S DECLARATORY JUDGMENT COUNTERCLAIM FAILS TO ESTABLISH A CASE OR CONTROVERSY Under the MedImmune test, there is no justiciable controversy and this Court lacks Reply to Motion to Dismiss - 1

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jurisdiction. Defendant states that "Plaintiff conveniently forgets MedImmune" but it could well be said that Plaintiff ignores the reputed change in the law, because in fact, MedImmune has changed the law in only one minor respect, or perhaps not at all. Several lower court cases have concluded that MedImmune has been read too broadly. WS Packaging Group, Inc. v. Global Commerce Group, LLC, 2007 WL 205559 (E.D. Wis.) ("WS argues that the United States Supreme Court recently set forth a new jurisdictional test for declaratory judgment action in MedImmune (full citation omitted). However, I do not read MedImmune so broadly.") Taylor Brands, LLC v. SOG Specialty Knives, Inc., 2008 WL 413625 (E.D. Tenn.) (Suggesting that the case may be limited to a dispute involving parties in existing contractual relationships.); Citizens Against Longwall Mining v. Colt, LLC, 2008 WL 2225809 (C.D. Ill.) (Focusing on the Supreme Court statement in MedImmune that the Court's precedents do not draw bright lines.). Yet it is the plethora of cases decided by the Federal Circuit, binding on this Court, that is more pertinent to the resolution of the present motion. Defendant's simplistic statement of the test -- post-MedImmune -- at page 3 of its Opposition masks the complexity in the analyses of the Federal Circuit decisions. The simplicity relied upon by Defendant is belied in Cat Tech, LLC v. TubeMaster, Inc., 528 F.3d 871 (Fed Cir. 2008) where the court states: "There is, however, no facile all-purpose standard to police the line between declaratory judgement actions which satisfy the case or controversy requirement and those that do not." (Id. at 879) The Cat Tech court quoted from Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S.Ct. 510 (1941) the case relied upon by the MedImmune court, commenting on the bright line difficulty in this area, stating: "The difference between an abstract question and a `controversy' contemplated by the Declaratory Judgment Act is necessarily one of degree, and it would be difficult, if it would be possible, to fashion a precise test for determining in every case whether there is such a controversy." The Cat Tech court then went on to state regarding the MedImmune holding:

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Accordingly, the analysis must be calibrated to the particular facts of each case, with the fundamental inquiry being "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." (Quoting from MedImmune, 127 S.Ct. at 771) Id. (Emphasis added) The court pointed out that after MedImmune there have been several opinions by the Federal Circuit that have "reshaped the contours of the first prong of our declaratory judgment jurisprudence." Id. at 880. The Cat Tech court was referring to the "reasonable apprehension" test which was the first prong in the pre-MedImmune era. (The second prong focused on the declaratory judgment plaintiff's conduct, examining whether there had been actual activity or "meaningful preparation" to conduct potentially infringing activity.) The court made reference to five other cases besides the SanDisk case concluding that the new test is the "all circumstances" test. However, Judge Mayer earlier pointed out with respect to the abandonment of the reasonable apprehension test that: "We have never said that the traditional two-part test must be satisfied in every instance to find a justiciable case or controversy." Teva Pharms USA, Inc. v. Pfizer Inc., 395 F.3d 1324, 1339-42 (Fed. Cir. 2005). Whether or not the MedImmune case lowered the bar for bringing a declaratory judgment in a patent cases is correct or not, "reasonable apprehension" has not been read out of the appropriate test, it is simply clear that it is not the only test. While the Supreme Court rejected the reasonable apprehension of suit test as the sole test for jurisdiction, it did not completely do away with the relevance of a reasonable apprehension of suit. Rather, following MedImmune, proving a reasonable apprehension of suit is Reply to Motion to Dismiss - 3

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one of multiple ways that a declaratory judgment plaintiff can satisfy the more general all-the-circumstances test to establish that an action presents a justiciable Article III controversy. Prasco, LLC v. Medicis Pharmaceutical Corp., 2008 WL 3546217 (Fed. Cir.) (Citing Caraco Pharmaceutical Labs, Ltd. v. Forest Labs, Inc., 537 F.3d 1278, 1291 (Fed. Cir. 2008)) With respect to apprehension, the court in Prasco stated: "More importantly, the Supreme Court has emphasized that fear of future harm that is only subjective is not an injury or threat of injury caused by the Defendant that can be the basis of an Article III case or controversy." (Citing City of LA v. Lyons, 461 U.S. 95, 103 S.Ct. 1660 (1983).) 2008 WL 3546217. The Prasco court quoted its approval: "A purely subjective apprehension of an infringement suit is insufficient to satisfy the actual controversy requirement." (Citing Indium Corp. of Am. v. Semi-Alloys, Inc., 781 F.2d 879, 883 (Fed. Cir. 1985)) It went on to state: Although MedImmune clarified that an injury-in-fact sufficient to create an actual controversy can exist even when there is no apprehension of suit, it did not change the bedrock rule that a case or controversy must be based on a real and immediate injury or threat of future injury that is caused by the defendants -- an objective standard that cannot be met by purely subjective or speculative fear of future harm. Id. (Emphasis in original) Defendants attempt to establish such reasonable apprehension by the supporting declaration of Todd Sommerfeld, the CEO of Kreg Tool, who states that he was "shocked when [he] saw that Mr. Adams is now arguing that my company should not have any apprehension of being sued for infringement of the `373 patent." (Sommerfeld Decl., ¶

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13) Yet the facts as recited in the declaration (that are germane to the jurisdiction question) would hardly support a reasonable "objective" apprehension that Park was going to initiate a patent infringement suit without Park counsel having read the patent or analyzed the product that Park believed infringed the patent. Defendant makes much of the fact that Mr. Park stated that the `373 patent was infringed, creating the apprehension. However, in December 2006 Mr. Park accused Kreg Tool of infringing the `988 and `814 patents (patents-in-suit). In a letter from Mr. Farrell, the attorney for Kreg Tool, he admits that Park made the charge. (Newman Decl., Exhibit 1) Yet Kreg Tool never was "placed in reasonable objective apprehension," at least not enough apprehension to bring a declaration judgment action! In the Caraco case, the Federal Circuit stated that to apply the MedImmune "all the circumstances" test, courts should be guided by the three-part framework for determining whether an action presents a justiciable controversy as laid out by the Supreme Court over the last 50 years: (1) does the plaintiff have standing, (2) are the issues ripe, and (3) has the case become moot. The court went on to state that in accordance with Supreme Court precedent, standing requires "injury in fact," that is, a harm suffered by the plaintiff that is "concrete," "actual or imminent," and not "conjectural or hypothetical." The second aspect of standing is whether there is causation and third, whether the relief requested will redress the alleged injury. Yet in this case, there is no injury-in-fact because there has been no statement that Park intends to sue Kreg Tool. If Kreg Tool can ignore a direct charge of infringement as indicated above, the occurrence at the May 29, 2008 settlement meeting could hardly be said to be a "restraint on the free exploitation of non-infringing goods." 537 F.3d at 1291. There is no conduct of Park that can be said to have caused any injury to Defendant because Defendant has been selling the possibly infringing pocket hole drilling machine for several years and has not discontinued, to the best knowledge of Park, selling the pocket hole drilling machine subsequent to the settlement meeting and the alleged charge of infringement. Plaintiff admits that if the first two elements of standing were established, that the declaratory judgment action would redress any alleged injury.

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More importantly, there is simply no evidence before the Court that would meet the requirement of ripeness. Ripeness requires the court to determine that the issues are fit for judicial decision, and decide whether there would be hardship to the parties in withholding court consideration. As to the first matter, the issue is not ripe simply because Park has made no threat of enforcing the `373 patent against Kreg Tool and it is presently unknown as to whether the `373 patent is infringed after a proper professional opinion is rendered as to the scope of the claims and applying the claims to the components of the machine. As for hardship, there is none. The Supreme Court in MedImmune relied on the particular facts of that case to show potential disastrous implications for the licensee (who believed it was not infringing the defendant's patent) because an injunction could shut down the licensee or as Justice Scalia stated: "The rule that a plaintiff must destroy a large building, bet the farm, or (as here) risk treble damages and the loss of 80% of its business before seeking a declaration of its actively contested legal right finds no support in Article III." 127 S.Ct. at 775. The single product that Mr. Park identified as infringing the `373 patent is one of many pocket hole drilling machines Kreg Tool manufactures does not likely constitute more than 10% of the business of Kreg Tool. And as indicated in the above letter from Mr. Farrell regarding the `988 and `814 patents in December 2006, apparently Kreg Tool has no fear of treble damages. Whether the MedImmune case generally lowered the bar for declaratory judgment actions, it certainly did not in this case, because replacing the "reasonable objective apprehension" test with the "all-the-circumstances" test leads to the same result. Plaintiff submits that the facts in this case are unique and precedent provides the Court with no direct guidelines. SanDisk Corp. v. ST Microelectronics, Inc., 480 F.3d 1372, 1381 (Fed. Cir. 2007) ("We need not define the outer boundaries of declaratory judgment jurisdiction, which will depend on the application of the principles of declaratory judgment jurisdiction to the facts and circumstances of each case."). The court went on to state that the Supreme Court only requires that the dispute be "`definite and concrete, testing the legal Reply to Motion to Dismiss - 6

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relations of the parties having adverse legal interests;' and that it be `real and substantial' and `admi[t] of specific relief to a decree of conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts'." MedImmune, 127 S.Ct. at 771. The MedImmune test does not ignore the well-established criterion for proving a justiciable controversy including "immediacy" and "reality." Yet those elements are clearly missing here. Indeed, given the circumstances in this case, the fact that Park has not amended its Complaint to add the `373 patent is proof enough that there is no immediate jeopardy to Defendant's manufacture of pocket hole drilling machines. Plain and simple, the reality in this case is that there is no actual case or controversy. Finally, even if the Court should find that the MedImmune test is a new test, the court in Sony Electronics, Inc. v. Guardian Media Tech., Ltd., 497 F.3d 1271, 1288 (Fed.Cir. 2007) has held that the Declaratory Judgment Act confers on federal courts "unique and substantial discretion in deciding whether to declare the right of litigants." (Citing Wilson v. Seven Falls Co., 515 U.S. 277, 286, 115 S.Ct. 2137 (1995)) Plaintiff would urge the Court to exercise its discretion in refusing to allow Defendant to force Plaintiff into a more expensive and difficult suit that it does not have the resources to litigate. Plaintiff submits that there is no justiciable controversy based on the allegedly new MedImmune test. B. THE FEDERAL CIRCUIT HAS ONCE MORE ATTEMPTED TO REIN IN THE OVER-USE OF THE INEQUITABLE CONDUCT DEFENSE In a case decided on August 25, 2008 the Federal Circuit ruled again in Star Scientific v. R.J. Reynolds Tobacco Co., 2008 WL 3891543 on the question of inequitable conduct. In addition to commenting on the "need to strictly enforce the burden of proof" involving clear and convincing evidence, the court stated that "courts must be vigilant in not permitting the defense to be applied too lightly." Id. at *6. But that is precisely what

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Kreg Tool urges this Court to do. The Federal Circuit repeated its view of inequitable conduct expressed in Molins PLC v. Textron, Inc., 48 F.3d 1172, 1181 (Fed. Cir. 1995) where it stated that there must be "specific intent to . . . mislead [ ] or deceiv[e] the PTO" and where the alleged inequitable conduct is non-disclosure (as opposed to affirmative misrepresentation) it must be shown that "the applicant made a deliberate decision to withhold a known material reference." (Emphasis added) Yet Kreg Tool insists on alleging intent without the slightest evidence that the intent was based on a deliberate decision to withhold references that Park knew about and also knew were material. The court pointed out that deceptive intent is usually proved by indirect and circumstantial evidence but that there must be clear and convincing evidence -- "an inference drawn from lesser evidence cannot satisfy the deceptive intent requirement." 2008 WL 3891543 at *6. Of course, these statements relate to the ultimate burden of proof of the party alleging the inequitable conduct. But it evidences the scrutiny which the Federal Circuit has directed the lower court to place upon this over-used, emotion-charged accusation with no further allegations than that Mr. Park specifically intended to mislead the PTO. On the question of materiality, which Kreg Tool has refused to allege except to label the prior art on which it relies as "material," the Federal Circuit pointed out that information is not material "if it is cumulative of other information already disclosed to the PTO." That would make it incumbent at the pleading stage to require the defender to explain why the evidence is not cumulative or exactly why it is allegedly material. Plaintiff appreciates that discovery may be appropriate for developing the detailed facts that will rebut the evidence that Kreg Tool submits to meet its clear and convincing burden but the particularity of Rule 9(b) is clearly intended to contain discovery and apprise Plaintiff by more specific pleading of facts relating to fraud. In short, the Star Scientific case demonstrates that the inequitable conduct defense is extremely difficult to establish. Rather than allow the party advocating such defense a wide latitude by sketchy allegations, the pleading phase of the case should set the stage for circumscribing the typical fishing expedition accompanying this defense. Exposing the Reply to Motion to Dismiss - 8

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defense to early scrutiny will save the time and expense of both the court and the litigants. It is well understood that Rule 12(b)(6) is extremely liberal -- when the pleading requirements are framed by Rule 8. The same is true for Rule 12(f). But when those motions are based on the failure to properly plead under Rule 9(b), the liberality of Rule 12 is directly confronted by the particularity of Rule 9(b). That is why cases under Rule 12(b)(6) that do not involve a claim of fraud are of no value in terms of precedent. In the Seville case cited at page 4 of Defendant's opposition, the court stated what was necessary in a fraud allegation was "some measure of precision and substantiation." The case is not binding on this Court nor does it involve inequitable conduct, but it is precisely what is lacking in the Kreg Tool affirmative defenses and counterclaims. There is no precision as to materiality, that is, why was it material. There is no substantiation for the materiality, for example, by alleging that the prior art allegedly withheld was not "cumulative" compared to the art considered by the Examiner. The allegations in the Ninth and Tenth Affirmative Defenses are based on information and belief. As the court stated in Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993): ". . . a plaintiff who makes allegations based on information and belief must state the factual basis for the belief" under Rule 9(b). Defendant offers no facts. Defendant cites a number of cases in which courts have found that the allegations of inequitable conduct have been satisfied. But those cases miss the point. As Plaintiff made clear in its motion with respect to inequitable conduct, Plaintiff's motion is restricted to two elements of the four or five elements required to establish inequitable conduct: intent to deceive and materiality. None of the cases cited by Defendant address the issue of materiality. The Raychem case is completely superficial. The Agere Systems case states: ". . . a party cannot merely rely on vague allegations that broadly cite the elements of fraud, but must instead either specify the time, place, and content of any alleged misrepresentations made to the PTO or otherwise `give the defendant [ ] notice of the precise misconduct alleged'." 109 F.2d at 734 (emphasis added). But the court never discussed the issue of Reply to Motion to Dismiss - 9

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materiality. Similarly, in the Poly-America case, there is no discussion of materiality with the court having satisfied itself with the fact that prior art references were particularized in nine separate paragraphs. The court never looked beyond who, when, where and what. The other cases cited by Defendant involve fraud in securities or RICO litigation. In an inequitable conduct case, the who, when and where parameters are simplistic; who else would omit material prior art other than the inventor and his representative, when else could it be done other than during prosecution of the patent application, and where else could it have occurred except in the USPTO. The question is whether or not the "what" parameter is satisfied by simply identifying the prior art references. As noted in the abovediscussed Star Scientific case, materiality is critical to a charge that an applicant failed to carry out his duty to disclose prior art to the PTO. The court in Star cited to 37 C.F.R. § 1.56(b) stating: "[I]nformation is material to patentability when it is not cumulative to information already of record or being made of record in the application. . . ." And to a similar case holding in Honeywell Int'l., Inc. v. Universal Avionics Sys. Corp., 488 F.3d 982, 1000 (Fed. Cir. 2007) ("Information cumulative of other information already before the Patent Office is not material."). Interestingly, not only has the Defendant failed to allege any facts which substantiate that prior art relied upon was "material" but does not even allege that these references were not "cumulative." As the evidence will show, the reason for that is obvious. But that still does not answer the question of whether there must be some facts alleged in support of a bare statement of materiality. By contrast, Plaintiff cited at page 18 of its Memorandum in support of its motion the Reid Ashman and Energy Absorption cases which clearly held that notwithstanding that the prior art references were pleaded with particularity, the pleadings were defective because the defendant had "failed to identify with particularity facts showing that the alleged omissions were material or that [plaintiff's] omission was done with the intent to deceive." Plaintiff submits that the focus on materiality at the pleading stage implicit in the Star Scientific case is convincing reason to follow the cases which have applied a stricter standard for pleading materiality than in the cases cited by Defendant.

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Similarly, although the intent element in the fraud allegation need not be pleaded with the same particularity as other facts under Rule 9(b), it is well established that the intent to deceive, on the merits, must be established with the same clear and convincing evidence as are other elements of a fraud claim. One of the few cases directly addressing the question of what must be pled with respect to the intent element of an inequitable conduct claim is the case cited at page 16 of Plaintiff's memorandum -- the Minegar case. That recent case from the Central District of California Courts is quoted at page 17 of movant's Memorandum concluding "[t]he court went on to hold that, if the party `believes it can later prove that [the applicant] intended to deceive the PTO -- whether through direct or circumstantial evidence -- [the] pleading should at the very least reflect that belief." In other words, the very minimum standard for pleading intent is to state whether or not it is going to be substantiated by direct or circumstantial evidence. Since direct evidence is extremely unusual, it can only be expected that pleading the defense would provide some circumstantial facts from which an inference that applicant harbored any intent to deceive could be drawn. The Defendants provide no such facts. Yet that is exactly what is necessary to respond to the allegations. It is clear that various district courts have taken different positions with respect to the issues of materiality and intent to deceive, many cases entirely ignoring the necessity for particularity of the former as required by Rule 9(b), and the minimum pleading of circumstantial facts with respect to the latter. Of course, discovery solves this problem, but at great expense to the parties because the vagueness of the allegations permit the wellfinanced Defendant to explore the many roads which arise out of the ambiguity of the pleadings. It is respectfully submitted that the Court should not allow Defendants such unfair latitude in the present case. C. PORTIONS OF THE SOMMERFELD DECLARATION SHOULD BE STRICKEN Plaintiff requests the Court to strike certain paragraphs in the Sommerfeld

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Declaration. Plaintiff readily concedes that facts submitted in a declaration are relevant and admissible on a motion to dismiss on the grounds that a Court lacks jurisdiction under Rule 12(b)(1). However, the present motion also includes Plaintiff's request for the Court to strike certain affirmative defenses and counterclaims relating to inequitable conduct. There is no evidence admissible under either Rule 12(b)(6) or Rule 12(f) motions which must be decided on the pleadings. Thus, the statements of Mr. Sommerfeld that are relevant to jurisdiction are certainly appropriate, but the other statements are not. In particular, Plaintiff requests that the Court strike Paragraphs 3-8 and the first sentence in Paragraph 10. Those paragraphs all relate to the inequitable conduct claim. More seriously, there are statements in Paragraphs 3-8 and the first sentence in Paragraph 10 that are false, particularly relating to what prior art Mr. Park was aware of prior to filing and prosecuting his patent application that matured into the patents-in-suit. D. SUMMARY It is therefore respectfully requested that this Court grant Plaintiff's Motion to Strike the Eighth and Ninth Affirmative Defenses and the Third Counterclaim in Defendant's Second Amended Answer, Affirmative Defenses and Counterclaims to Plaintiff's Complaint. Plaintiff further requests the Court to dismiss the counterclaims relating to the `373 patent for lack of jurisdiction, including Paragraphs 23-25, 61-83, 9193, 97-99, and 112. Dated this 11th day of September, 2008. Respectfully submitted, THE ADAMS LAW FIRM

By

s: Paul Adams Paul Adams, (Bar No. 42,146) 550 West C Street, Suite 2000 San Diego, California 92101 Telephone: 619-241-4810

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 s: Paul Adams Paul Adams John L. Haller Susan Meyer Gordon & Rees LLP 101 West Broadway, Suite 1600 San Diego, CA 92101 [email protected] [email protected] CERTIFICATE OF SERVICE The undersigned hereby certifies that on September 12, 2008, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to: Frank S. Farrell, admitted pro hac F.S. FARRELL, LLC 7101 York Avenue South, Suite 153 Edina, MN 55435 Telephone: 952-921-3260 Facsimile: 952-216-0106 [email protected]

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