Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Alleged patent infringer could amend pleadings to add antitrust counterclaims, (Feb 21, 2014)

By Mark Engstrom, J.D.

Fluorometer supplier Turner Designs could amend its pleadings to include a patent misuse defense and an attempted monopolization counterclaim against Nalco Company, the owner of a patent that described a “Method for Using an All Solid-State Fluorometer in Industrial Water System Applications” (the “fluorometry” patent), a magistrate judge for the federal district court in San Francisco has determined (Nalco Company v. Turner Designs, Inc., February 19, 2014, Cousins, N.).

The magistrate also decided that Turner could add an inequitable conduct defense and a Walker Process antitrust counterclaim, but only if Turner could allege sufficient facts to support its assertion that a “water monitoring” patent by the same inventor was not cumulative of information that was before the PTO during the prosecution of the fluorometry patent.

Nalco alleged that Turner was encouraging its customers to use Turner’s products—including “The Little Dipper,” a device that monitored concentrations of chemicals in industrial water systems—in a manner that directly infringed Nalco’s fluorometry patent. Nalco further alleged that Turner’s products: (1) were designed to be used in a way that infringed Nalco’s patent and (2) had no substantial non-infringing use.

Turner filed a motion to amend it pleadings to include an inequitable conduct defense, a patent misuse defense, a Walker Process counterclaim, and an attempted monopolization counterclaim. Turner alleged that Nalco had engaged in fraud by failing to disclose the water monitoring patent during the prosecution of its fluorometry patent. According to Turner, the water monitoring patent anticipated the fluorometry patent or “at the very least” rendered it obvious. For that reason, Turner argued that the fluorometry patent would not have issued if the water monitoring patent had been disclosed.

Inequitable Conduct Defense

The court noted that, to plead the circumstances of inequitable conduct with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure, the pleadings had identify the “who, what, when, where, and how” of the material misrepresentation or omission that was committed before the PTO. To plead the requisite intent, the pleadings had to include factual allegations that were sufficient to allow a court to reasonably infer that a specific individual: (1) knew of the withheld material information or the falsity of the material misrepresentation and (2) withheld or misrepresented that information with a specific intent to deceive the PTO.

In this case, Turner’s proposed amendment sufficiently alleged the “who, what, where, and when” requirements. It also alleged the intent requirement. The amendment failed, however, to sufficiently allege the “why” requirement.

Turner alleged that John E. Hoots, the inventor of both the water monitoring patent and the fluorometry patent, failed to disclose the former patent in the prosecution of the latter. In doing so, Turner satisfied the “who” and “when” requirements. Turner also satisfied the “what” and “where” requirements by identifying: (1) the specific claims and limitations to which the withheld references were relevant and (2) where in those references the material information was found.

In addition, the proposed amendment adequately alleged the intent prong of inequitable conduct. To show knowledge of the withheld material information, Turner alleged that both patents had a common inventor. That allegation allowed the court to reasonably infer that the inventor knew about the water monitoring reference and the specific material information that was contained in the reference.

Further, Turner’s assertion that Hoots had withheld the water monitoring reference was sufficient to allege that a “specific individual associated with the filing or prosecution of the application” was responsible for the deceptive conduct. By alleging that Hoots had withheld material information, Turner adequately identified a “specific individual” who was associated with the prosecution of the fluorometry patent and who knew about the withheld information.

Although Turner alleged deceptive intent on information and belief, the court concluded that Turner had adequately stated the factual basis for intent. The court noted that “Pleading on ‘information and belief’ [wa]s permitted under Rule 9(b) when essential information l[ay] uniquely within another party’s control, but only if the pleading set[] forth the specific facts upon which the belief is reasonably based.”

In this case, Turner alleged that Hoots and Nalco: (1) knew that the water monitoring patent deterred competitive entry into the market; (2) knew that the patent would expire on October 14, 2008; (3) knew that competitive entry into the market was a virtual certainty once the patent expired; and (4) fraudulently concealed the water monitoring patent, during the prosecution of its fluorometry patent, for the purpose of obtaining a new patent that would allow Nalco to “deter competitive entry into the market for an additional eight years after the water monitoring patent expired.”

The court found that Turner’s factual allegations regarding the expiration date of the water monitoring patent—and the importance of that patent to the deterrence of competitive entry into the market—reasonably supported an allegation of deceptive intent. Those facts, together with the fact of common inventorship, were sufficient to plead the intent prong of inequitable conduct under rule 9(b), the court explained.

Nevertheless, Turner failed to explain “why” the withheld information was material and not cumulative. Because Turner’s proposed amendment and reply brief lacked supporting facts to show that the water monitoring patent was not cumulative of other references before the PTO, the proposed amendment was inadequate to plead inequitable conduct under Rule 9(b). The amendment was not futile, however, because “some” set of facts could be “proved under the amendment to the pleadings that would constitute a valid and sufficient claim or defense.”

For that reason, the court allowed Turner to amend its answer—to add the inequitable conduct defense—but only if Turner could allege specific facts that would show that the water monitoring patent was not cumulative of information that was already before the PTO during the prosecution of Turner’s fluorometry patent.

Monopolization Counterclaim

The court noted that the enforcement of a patent procured by fraud on the PTO could violate §2 of the Sherman Act if the “other elements” of a §2 case were present. To establish the antitrust portion of its Walker Process allegation, Turner would have to show that Nalco held a monopoly power in the relevant market and willfully acquired or maintained that power by anticompetitive means.

Walker Process fraud. To adequately plead Walker Process fraud, Turner had to allege sufficient facts from which the court could infer that: (1) the fluorometry patent was procured by knowing or willful fraud on the PTO; (2) Nalco was aware of that fraud when the patent was enforced; (3) independent evidence of a clear intent to deceive the examiner was present; and (4) unambiguous evidence of reliance existed.

The court concluded that Turner’s proposed amendment adequately alleged the first three elements, but not the fourth (reliance). More specifically, the proposed amendment failed to adequately allege that the PTO would not have issued the fluorometry patent “but for” Hoots’s failure to disclose the water monitoring patent.

The court noted that Turner had alleged where each element of the fluorometry patent could be found in the water monitoring patent, and that explained why the water monitoring patent might be material to the patentability of the fluorometry patent. However, failure to disclose a reference that was cumulative of information that was already disclosed to the PTO could not be a but-for cause of issuance, according to the court. Because Turner did not allege any facts that allowed the court to reasonably infer that the water monitoring patent was not cumulative of information that had already been disclosed to the PTO, Turner’s proposed amendment failed to plead that the fluorometry patent “would not have issued but for the misrepresentation or omission.”

Nevertheless, Nalco failed to persuade the court that “no set of facts” could be proved, under the proposed amendment, that would adequately allege but-for materiality of the claimed omission. For that reason, the court concluded that an amendment would not be futile.

Walker Process antitrust elements. To state a valid claim under the Sherman Act, a plaintiff had to allege that the defendant possessed market power within a “relevant market.” More specifically, the plaintiff had to allege that: (1) a “relevant market” existed and (2) the defendant had power within that market. In this case, Turner’s proposed amendment adequately alleged both.

Turner alleged that the relevant market was the U.S. national market for “systems and chemicals used in monitoring concentrations of chemicals in industrial water systems using fluorometers”; that its allegedly infringing product—the Little Dipper—was a product within the relevant market; and that Nalco had a monopoly in the relevant market, as evidenced by its 90 percent share of the U.S. market. In addition, Turner alleged sufficient facts to plead the willful acquisition or maintenance of monopoly power through anticompetitive means.

Because Turner’s proposed amendment adequately alleged the antitrust elements of a Sherman Act §2 violation, and because the court was not persuaded that Turner could not proffer a set of facts that properly alleged the fraud elements, the court granted Turner’s request to add the antitrust counterclaim, but only if Turner could proffer sufficient facts to support a reasonable inference that the water monitoring patent was not cumulative of other information that was disclosed to the PTO during prosecution of the fluorometry patent.

Attempted Monopolization Counterclaim

Turner’s proposed amendment sufficiently alleged an attempt to monopolize. To state a claim for attempted monopolization, a plaintiff had to allege facts that, if true, would prove: (1) the defendant’s predatory or anticompetitive conduct; (2) a specific intent to monopolize; and (3) a dangerous probability of achieving monopoly power. An attempted monopolization claim also required a showing of anticompetitive injury.

Anticompetitve conduct, specific intent to monopolize. Turner alleged that Nalco was asserting the fluorometry patent against a product that “no reasonable person could believe was infringed.” In addition, Turner alleged that Nalco had intended and expected Turner to discontinue its product and exit the market rather than defend a baseless lawsuit, regardless of the merits, because Nalco believed that Turner’s revenues were insufficient to permit costly litigation. Turner further alleged that Nalco had threatened Turner’s customers with lawsuits if those customers continued to purchase Turner’s product. If Nalco was successful in forcing Turner out of the market by engaging in litigation, Turner alleged, Nalco’s market share would increase to 100 percent. At the pleading stage, those assertions were sufficient to allege anticompetitive conduct with a specific intent to monopolize, the court concluded.

Dangerous probability of monopoly power. Because Turner alleged that Nalco’s current market share—90 percent—would increase to 100 percent if Nalco forced Turner’s product out of the market through baseless litigation, Nalco’s allegations were sufficient to plead a dangerous probability of success, according to the court.

Anticompetitive injury. In addition to adequately alleging unlawful conduct by asserting that Nalco was trying to enforce a fraudulently procured patent that “no reasonable person would believe was infringed,” Turner adequately alleged an injury that was caused by Nalco’s conduct—by alleging that Nalco had: (1) threatened Turner’s customers with lawsuits if they refused to discontinue their purchases of Turner’s product and (2) subjected Turner to baseless litigation that could force Turner out of the market.

Further, the proposed amendment sufficiently alleged causation by asserting that the Turner’s injury was caused by Nalco’s “baseless and unlawful litigation.” More specifically, the proposed amendment adequately alleged that Turner’s injury—being forced to engage in costly litigation that could force Turner to discontinue its product and cede its 10 percent market share to Nalco—was the type of anticompetitive injury that the antitrust laws intended to prevent. In the court’s view, Turner’s proposed amendment sufficiently alleged an antitrust injury.

Conclusion. Because Turner’s proposed amendment alleged sufficient factual content to state a claim for attempted monopolization, the court concluded that the amendment was not futile. The court thus granted Turner’s request to amend its answer and add a counterclaim for attempted monopolization.

Patent Misuse Defense

The court noted that the patent misuse defense was used to “prevent a patentee from using the patent to obtain [a] market benefit beyond that which inhere[d] in the statutory patent right.” The key inquiry was whether the patentee had impermissibly broadened the scope of the patent, with anticompetitive effect. Although the Federal Circuit had not provided clear guidance on the question of whether a patent misuse defense could be premised on patent enforcement, the court followed “the trend among district courts,” which allowed the patent misuse defense to survive a motion to dismiss as long as the defendant alleged facts to show “bad faith and improper purpose in bringing the suit.”

To plead patent misuse, Turner had to allege facts that supported a reasonable inference that Nalco had: (1) acted with “bad faith” in bringing its lawsuit; (2) acted with “improper purpose” in filing the suit; and (3) “impermissibly broadened” the scope of the patent grant, with anticompetitive effect.

Bad faith. Turner provided two separate grounds for its assertions of bad faith. According to Turner: (1) Nalco had engaged in inequitable conduct in the prosecution of the fluorometry patent and (2) no reasonable person could believe that Turner’s product infringed the fluorometry patent because no part of Turner’s product corresponded to the claim limitation that required “a sample chamber which is a cell.”

Insofar as Turner’s assertions of bad faith depended on an allegation of inequitable conduct, the court concluded that the proposed amendment was insufficient to plead bad faith because the amendment failed to adequately plead inequitable conduct. As the court previously determined, Turner failed to provide a factual basis for its assertion that the water monitoring patent was not cumulative of other information that was submitted to the PTO during the prosecution of the fluorometry patent.

Nevertheless, Turner’s proposed amendment adequately alleged a separate and independent factual basis for its bad faith allegations—that the “cell” limitation of the asserted patent could not reasonably be construed to cover Turner’s product. According to Turner, a person of skill in the art would understand “a sample chamber which is a cell” to mean “a specialized transparent enclosure used to facilitate measurement.” Moreover, Turner’s proposed amendment identified intrinsic and extrinsic evidence to support that construction.

Nalco argued that a party could not bring patent misuse or antitrust claims that were based solely on disputed claim construction issues. The court disagreed. On a motion for leave to amend, Turner could allege “some set of facts” that would allow the court to draw the reasonable inference that Nalco was liable for the misconduct that Turner had alleged. The mere fact that Turner’s patent misuse claim depended on the construction of a claim limitation did not render the proposed amendment futile, the court explained.

According to the court, Turner’s factual assertions were sufficient to allege that Nalco had acted in bad faith by trying to enforce its patent against Turner’s product.

Improper purpose. Turner alleged that: (1) Nalco had ninety percent of the relevant market; (2) Turner was the only supplier to Nalco’s competitors; (3) Nalco knew that Turner’s revenues (one percent of Nalco’s revenues) were insufficient to defend Nalco’s lawsuit, irrespective of its merits; and (4) Nalco had sent copies of its complaint to Turner’s customers and threatened them with lawsuits, expecting that the customers would stop purchasing Turner’s products. Further, if Nalco succeeded in forcing Turner out of the market through litigation, Nalco’s market share would increase to 100 percent, according to Turner.

Based on Turner’s factual allegations regarding revenue, market share, and the likely consequence of subjecting Turner and its customers to costly litigation, the court could reasonably infer that Nalco’s goal in suing Turner was “not to win a favorable judgment, but to harass a competitor and deter others from competition, by engaging the litigation process itself, regardless of the outcome.” In the court’s view, Turner’s allegations were sufficient to plead an improper purpose.

Impermissible broadening. To support its contention that Nalco had broadened the scope of its patent grant, Turner alleged that Nalco had: (1) asserted the fluorometry patent against a product that “no reasonable person could believe was infringed” and (2) threatened to sue Turner’s customers for using that product.

By alleging that no aspect of Turner’s product could possibly correspond to the “cell” limitation of the asserted patent, and that no reasonable person could believe that Turner’s product infringed that patent, Turner had adequately alleged that Nalco was seeking to broaden the scope of its patent by attempting to exclude non-infringing conduct, the court decided. Therefore, the court concluded that Turner’s proposed amendment was adequate to allege the “broadened scope” element of patent misuse.

Anticompetitive effect. Turner alleged that Nalco was suing Turner with the expectation that Turner would be forced to discontinue its product because Turner would not be able to afford the cost of litigation. Turner further alleged that Nalco’s market share would increase to 100 percent if Nalco was successful in forcing Turner out of the market.

According to the court, “at least one district court [the Middle District of Florida] has found such allegations sufficient to meet the pleading standard for alleging anticompetitive effect.” The court agreed with the Florida court and decided that Turner’s allegations regarding the effect that bad faith litigation would have on Turner’s ability to compete in the market “satisfie[d] the pleading standard for alleging anticompetitive effect.”

Conclusion. Because Turner’s proposed amendment alleged sufficient facts to plead patent misuse, the amendment was not futile. The court thus granted Turner’s request to amend its answer to add a patent misuse defense.

The case is No. 13-cv-02727 NC.

Attorneys: Bryan Joseph Wilson (Morrison & Foerster, LLP) for Nalco Company. Elizabeth Day (Feinberg, Day, Alberti & Thompson, LLP) for Turner Design, Inc.

Companies: Nalco Company; Turner Designs, Inc.

Cases: Antitrust CaliforniaNews