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Audio MPEG, Inc. v. Dell Inc.

United States District Court, E.D. Virginia, Norfolk Division

May 31, 2017

AUDIO MPEG, INC., et al., Plaintiffs/ Countere1aim Defendants,
v.
DELL INC., Defendant / Counterclaimant / Third-Party Plaintiff. and SOCIETA ITALIANA PER LO SVILUPPO DELL'ELETTRONICA S.P.A., Third-Party-Defendant,

          OPINION AND ORDER

          MARK S. DAVIS UNITED STATES DISTRICT JUDGE

         This matter is before the Court on a Motion to Dismiss Dell's Counterclaims I-X and Strike Dell's Seventh Affirmative Defense, ECF No. 248, and, in the alternative, a Motion for a Separate Trial and Stay of Dell's Counterclaims I-X and Patent Misuse Affirmative Defense, [1] ECF No. 253, both of which were jointly filed by Audio MPEG, Inc. ("Audio MPEG"), U.S. Philips Corporation ("Philips"), TDF SAS ("TDF"), Institute fur Rundfunktechnik GmbH ("IRT") (collectively, "Plaintiffs"), and Counterclaim Defendant Society Italiana per lo Sviluppo dell'Elettronica S.p.A. ("SISVEL") (collectively with Plaintiffs, "Counter-Defendants").[2] For the reasons set forth below, the Court GRANTS the Motion for a Separate Trial, DISMISSES as MOOT the Motion to Stay the counterclaims and patent misuse defense, and TAKES UNDER ADVISEMENT the Motion to Dismiss.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         This patent infringement action arises out of alleged infringement by Defendant Dell Inc. ("Defendant" or "Dell"), of the following audio technology patents: United States Patent No. 5, 323, 396 ("the '396 patent"), United States Patent No. 5, 777, 992 ("the *992 patent"), and United States Patent No. 5, 539, 829 ("the '829 patent") (collectively, the "asserted patents"). Compl. ¶¶ 19-46. Through compression of audio files using MPEG Standards[3] to encode and decode digital audio signals, the patented technologies facilitate the playing of music and other audio on electronic devices. Id. ¶¶ 2, 22.

         According to the complaint, plaintiffs Philips, TDF, and IRT ("Patent Owners")/ own the asserted patents, id. ¶ 24, and plaintiff Audio MPEG has the exclusive right in the United States to license, sue, and collect fees, costs, and damages relating to infringement of the asserted patents on behalf of all Plaintiffs, id. ¶ 41. Since 1996, the Patent Owners have offered a "joint license" on all of the Patent Owners' MPEG audio patents, including the asserted patents, prior to their expiration. Id. ¶ 42. The '396 patent and thex 992 patent expired on June 21, 2011, id. ¶¶ 6, 30, and the '829 patent expired on July 23, 2013, id. ¶ 36.

         On February 20, 2015, Plaintiffs filed a three-count complaint in the Norfolk Division of this Court alleging that Hewlett-Packard Company ("HP") infringed the asserted patents. See generally HP Compl., ECF No. 1. On December 21, 2015, Plaintiffs filed a three-count complaint against Dell in the Alexandria Division of this Court alleging that Dell infringed the asserted patents. Compl., Audio MPEG, Inc., v. Dell, Inc., No. I:15cvl674 (E.D. Va. 2015). On February 22, 2016, the Alexandria Division transferred the Dell case to the Norfolk Division to be consolidated with the HP case. No. 2:15cv73, ECF No. 73. On May 16, 2016, Plaintiffs and HP settled, leaving Dell as the sole remaining defendant in the case. Hr'g Tr. 3:22-4:16, ECF No. 136.

         Plaintiffs allege that Dell directly infringed claims in the asserted patents by "manufacturing, using, selling, importing, and/or offering for sale products that include capabilities required by the MPEG standards, including, but not limited to[, ] Dell computers and electronic devices containing Cyberlink PowerDVD (such as Latitude D530, Latitude D630, Latitude D830, and Dell Precision M6300) or Roxio Creator (such as Latitude D630)." Compl. ¶¶ 51, 60, 69. Plaintiffs also allege that Dell indirectly infringed claims in the asserted patents by inducing and contributing to infringement by others. Id. ¶¶ 52-53, 61-62, 70-71. Plaintiffs further allege that Dell continued its infringing activities even after Audio MPEG informed Dell, no later than July 1, 2004, that "all Defendant's products incorporating the MPEG Audio encoding and decoding capabilities required by at least one of the MPEG standards are covered by [the asserted patents]." Id. ¶¶ 52, 61, 70.

         Dell denies that the patents were "duly and legally issued, " Answer ¶¶ 47, 56, 65, ECF No. 184, arguing that the patents are invalid because the inventors failed to satisfy the conditions of patentability specified in 35 U.S.C. § 100, et seq., Aff. Defenses ¶ 1, ECF No. 184. Further, Dell denies that it has directly or indirectly infringed on the patents. Answer ¶¶ 51-53, 60-62, 69-71. Dell asserts defenses of prosecution history estoppel; exhaustion; license; waiver, laches, [4] and/or estoppel; patent misuse; prosecution laches; and argues for a limit on any damages. Aff. Defenses ¶¶ 2-22.

         In a Counterclaim against Counter-Defendants, Dell asserts violations of the Sherman Act, civil conspiracy under Virginia state law, common law conspiracy, breach of contract, promissory estoppel, waiver, and prosecution laches (collectively, the "antitrust claims"). Countercl. ¶¶ 152-224. Arguing both federal antitrust law and Virginia state law, Dell alleges that Counter-Defendants are direct competitors with each other but have illegally pooled their patents together (the "SISVEL patent pool"), which improperly restrains trade and creates a monopoly. Id. ¶¶ 152-187, 196-203. According to Dell, Counter-Defendants illegally pooled their patents together by including expired and unrelated patents in the SISVEL patent pool and not varying or reducing the licensing fee as patents within the pool expired, and by not competing against each other in the marketplace due to their patent pool arrangement. Id. ¶¶ 131-147, 169-172. Dell argues that Counter-Defendants specifically conspired to injure Dell through license agreements with "Co-Conspirator A" and "Co-Conspirator B, " respectively, which required "Counter-Defendants to license the SISVEL patent pool to Dell or sue Dell for infringement." Id. ¶¶ 159, 189-195.

         In addition to improperly pooling their patents, Dell argues that, because MPEG was adopted as an international standard, Counter-Defendants were obligated to offer patent licenses on fair, reasonable, and nondiscriminatory terms ("FFAND terms"), but failed to do so. Id., ¶¶ 204-209. According to Dell, Counter-Defendants are charging a "supra-competitive" license fee for the patent pool, in violation of federal and state law. Id. ¶¶ 145-149. Dell asserts that it has "suffered substantial injury to its business and property as a result of the Counter-Defendants' unlawful conduct, " id. ¶ 144, and asserts that Counter-Defendants' conduct "has caused, and will continue to cause, substantial anticompetitive effects to competition generally, and specifically to competition in the United States, " Id. ¶ 179.

         On August 26, 2016, Counter-Defendants filed a Motion to Dismiss Dell's Counterclaims I-X and Strike Dell's Seventh Affirmative Defense (patent misuse defense), ECF No. 248, and filed an alternative Motion for a Separate Trial and Stay of Defendant's Counterclaims I-X and Patent Misuse Affirmative Defense, ECF No. 253. On October 24, 2016, Dell filed a response to Counter-Defendants' Motion to Dismiss, ECF No. 308, and a response to the Motion for Separate Trial, ECF No. 206. On November 4, 2016, Counter-Defendants filed a reply brief in support of their Motion to Dismiss, ECF No. 334, and a reply-brief in support of the Motion for a Separate Trial, ECF No. 329. The case was then reassigned to this Judge on March 20, 2017. In a telephonic status conference with the parties on April 24, 2017, the Court reviewed the case status with the parties and explained that it would rule on the motion to bifurcate and would consult with the co-assigned Magistrate Judge regarding the motions in limine. Status Conf. Tr. 65-66, ECF No. 616. The Court recommended that, after receiving its bifurcation ruling, the parties may wish to consider returning to settlement discussions. Id. Having been fully briefed and considered by this Court, Counter-Defendants' Motion to Dismiss and Motion for a Separate Trial are now ripe for review.

         II. LEGAL STANDARD

         Under Federal Rule of Civil Procedure 42(b), "the court may order a separate trial" of counterclaims "[f]or convenience, to avoid prejudice, or to expedite and economize. ..." Fed.R.Civ.P. 42(b). As an initial matter, the Court must determine which circuit law controls application of Rule 42 (b) to the combined patent infringement and antitrust claims in this case. While there is little discussion of this question in the case law, it appears that the Court should look to precedent from the United States Court of Appeals for the Federal Circuit to determine "[w]hether and under what sets of facts patent issues should be separated for trial, " because, while a procedural matter, it "implicat[es] the jurisprudential responsibilities of [the Federal Circuit] in the field of patent law." In re Innotron Diagnostics, 800 F.2d 1077, 1084 (Fed. Cir. 1986). Therefore, the Court primarily will look to Federal Circuit precedent in deciding whether to bifurcate trial of the patent infringement claims from the antitrust claims.

         Because a trial court "has broad discretion with regard to trial management, " a decision to bifurcate a trial is reviewed for an abuse of discretion. Shum v. Intel Corp., 499 F.3d 1272, 1276 (Fed. Cir. 2007) (citing Danjag v. Sony, 263 F.3d 942, 961-62 (9th Cir. 2001)). "In the context of patent cases, '[e]xperienced judges use bifurcation and trifurcation both to simplify the issues in patent cases and to maintain manageability of the volume and complexity of the evidence presented to a jury.'" Enzo Life Scis., Inc. v. Digene Corp., No. CIV.A. 02-212-JJF, 2003 WL 21402512, at *5 (D. Del. 2003) (quoting Thomas L. Creel & Robert P. Taylor, Bifurcation, Trifurcation, Opinions of Counsel, Privilege and Prejudice, 424 PLI/PAT 823, 826 (1995)). However, the Court's discretion is not without limits. For example, "[w]hen deciding whether issues should be separately tried, trial courts must ensure that a litigant's constitutional right to a jury is preserved." Shum, 499 F.3d at 1276. In examining the factors of convenience, prejudice, and judicial economy under Rule 42(b), the United States Court of Appeals for the Federal Circuit has stated that "the major consideration is directed toward the choice most likely to result in a just final disposition of the litigation." In re Innotron Diagnostics, 800 F.2d at 1084 (citing 9 Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 2388 (1971)).

         A. Bifurcation of ...


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