Netflix, Inc. v. Blockbuster, Inc.

Filing 21

MOTION to Dismiss OR, ALTERNATIVELY, TO BIFURCATE AND STAY DEFENDANT BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS AND TO STRIKE AFFIRMATIVE DEFENSES OF UNENFORCEABILITY AND PATENT MISUSE filed by Netflix, Inc.. Motion Hearing set for 8/17/2006 08:00 AM. (Attachments: # 1 Exhibit A)(Durie, Daralyn) (Filed on 7/6/2006)

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Netflix, Inc. v. Blockbuster, Inc. Doc. 21 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 1 of 27 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 KEKER & VAN NEST, LLP JEFFREY R. CHANIN - #103649 DARALYN J. DURIE - #169825 KEVIN T. REED - #240799 710 Sansome Street San Francisco, CA 94111-1704 Telephone: (415) 391-5400 Facsimile: (415) 397-7188 Attorneys for Plaintiff NETFLIX, INC. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION NETFLIX, INC., a Delaware corporation, Plaintiff, v. BLOCKBUSTER, INC., a Delaware corporation, DOES 1-50, Defendant. Case No. C 06 2361 WHA PLAINTIFF NETFLIX'S NOTICE OF MOTION AND MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY DEFENDANT BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS AND TO STRIKE AFFIRMATIVE DEFENSES OF UNENFORCEABILITY AND PATENT MISUSE Date: Time: Judge: August 17, 2006 8:00 a.m. Hon. William Alsup 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Dockets.Justia.com Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 2 of 27 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 B. 2. 3. I. II. A. TABLE OF CONTENTS Page INTRODUCTION ...............................................................................................................2 ARGUMENT.......................................................................................................................3 BLOCKBUSTER HAS FAILED TO ALLEGE FACTS SUFFICIENT TO STATE A CLAIM FOR WALKER PROCESS FRAUD OR "SHAM LITIGATION" ........................................................3 1. Blockbuster Fails to Allege Walker Process Fraud With the Requisite Particularity..............................................................................................................3 a. b. Blockbuster's "Flooding" Allegation Fails..................................................6 Blockbuster's Allegations Regarding the Failure to Disclose Prior Art Fail ................................................................................................7 (i) Blockbuster's Allegation that Netflix Failed to Disclose the 100 References in Connection with the `450 Application Fails..............................................................................7 Blockbuster's Accusatory Assertions that Netflix Failed to Disclose Unspecified Prior Art Are Insufficient..........................8 Blockbuster Does Not (And Could Not) Allege that the NCR Patents are Invalidating Prior Art ...........................................8 Blockbuster Does Not Adequately Allege that the Nondisclosure of Any Prior Art Was Intentional ............................9 (ii) (iii) (iv) Without a Sufficient Allegation of Fraud, Blockbuster's "Sham Litigation" Claim Cannot Survive .........................................................................10 Blockbuster's Second Affirmative Defense of Unenforceability and Third Affirmative Defense of Patent Misuse Must Be Stricken For Failure to Allege Inequitable Conduct with Sufficient Particularity .....................11 a. b. The "Inequitable Conduct" Defense Cannot Survive ................................12 The "Patent Misuse" Defense Fails ...........................................................13 IN THE ALTERNATIVE, THIS COURT SHOULD BIFURCATE AND STAY DEFENDANT'S ANTITRUST CLAIMS.....................................................................................14 1. 2. Bifurcation is Necessary to Effectuate Netflix's Constitutionally Protected Interests..................................................................................................14 Bifurcation And A Stay Of Discovery On Antitrust Claims Will Minimize The Cost And Burden On The Parties And Third Parties And Will Also Promote Efficiency........................................................................16 a. This Court Has Broad Discretion To Order Bifurcation And A Stay Of Discovery......................................................................................16 i 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 3 of 27 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 III. b. c. d. TABLE OF CONTENTS (cont'd) Page Bifurcation Will Allow For The Early Determination Of Issues That May Dispose Of The Antitrust Claims ..............................................17 Bifurcation Will Simplify the Case, Avoid Confusion, and Minimize Cost And the Burden of Antitrust Discovery ............................18 There Will Be No Prejudice To Blockbuster, And Bifurcation Will Lead To A Just, Final Determination Of Litigation...........................19 CONCLUSION..................................................................................................................20 ii 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 4 of 27 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 TABLE OF AUTHORITIES Page(s) CASES ASM America, Inc. v. Genus, Inc., No. 01-2190 EDL, 2002 WL 24444, at *6 (N.D. Cal. Jan. 9, 2002) .....................12, 17, 18, 19 Advanced Cardiovascular System v. Medtronic, Inc., 1996 WL. 467273 (N.D. Cal. 1996) ..........................................................................8, 9, 11, 13 American Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350 (Fed. Cir. 1984)..................................................................................................7 In re Benedictin Litigation, 857 F.2d 290 (6th Cir. 1988), cert. denied, 488 U.S. 1006, 109 S. Ct. 788, 102 L. Ed. 2d 779 ..................................................................16 C.R. Bard v. M3 Systems, 157 F.3d 1340 (Fed. Cir. 1998)................................................................................................10 Carlisle Corp. v. Hayes, 635 F. Supp. 962 (S.D. Cal. 1986)...........................................................................................19 Cataphote v. De Soto Chemical Coatings, 450 F.2d 769 (9th Cir. 1972) .............................................................................................10, 11 Chip-Mender, Inc. v. Sherwin-Williams Co., 2006 WL. 13058 (N.D. Cal. Jan. 3, 2006) .............................................................................4, 8 Components, Inc. v. Western Electric Co., 318 F. Supp. 959 (D. Me. 1970) ..............................................................................................18 Computer Associate International v. American Fundware, 831 F. Supp. 1516 (D. Colo. 1993)..........................................................................................15 County of Santa Clara v. Astra U.S., Inc., 428 F. Supp. 2d 1029 (N.D. Cal. 2006) .....................................................................................4 Dentsply International v. New Technology Co., 1996 WL. 756766 (D. Del. 1996) ............................................................................................15 Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961).................................................................................................................14 Ecrix Corp. v. Exabyte Corp., 191 F.R.D. 611 (D. Colo. 2000) ........................................................................................15, 19 Erie Technological Products, Inc. v JFD Electronics Components Corp., 198 U.S.P.Q. 179 (E.D.N.Y. 1978)............................................................................................8 Ferguson Beauregard/Logic Controls v. Mega Systems, LLC, 350 F.3d 1327 (Fed. Cir. 2003)................................................................................................12 iii NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 5 of 27 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 TABLE OF AUTHORITIES (cont'd) Page(s) FilmTec v. Hydranautics, 67 F.3d 931 (Fed. Cir. 1995)....................................................................................................15 Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir. 1997) ...................................................................................................3 Glaverbel S.A. v. Northlake Marketing & Supply, Inc., 45 F.3d 1550 (Fed. Cir. 1995)..................................................................................................13 Hunter Douglas, Inc. v. Comfortex Corp., 44 F. Supp. 2d 145 (N.D.N.Y. 1999).......................................................................................18 Hydranautics v. FilmTec, 70 F.3d 533 (9th Cir. 1995) .....................................................................................................15 Implant Innovations, Inc v. Nobelpharma AB, 1996 WL. 568791 (N.D. Ill. 1996) ..........................................................................................15 In re Innotron Diagnostics, 800 F.2d 1077 (Fed. Cir. 1986)..........................................................................................16, 17 Jinro Am, 266 F.3d at 998 ........................................................................................................................17 Landis v. North American Co., 299 U.S. 248 (1936).................................................................................................................17 Liberty Lake Investments v. Magnuson, 12 F.3d 155 (9th Cir. 1993) .....................................................................................................15 MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005)................................................................................................4, 7 Molins PLC v. Textron, 48 F.3d 1172 (Fed. Cir. 1995)..................................................................................................10 Music Center v. Prestini Musical Instruments Group, 873 F. Supp. 543 (S.D.N.Y. 1995)...........................................................................................15 Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed. Cir. 1998)....................................................................................3, 7, 9, 10 PB Farradyne, Inc. v. Peterson, 2006 WL. 132182 (N.D. Cal. Jan. 17, 2006) ...........................................................................12 Pharmacia, AB v. Hybritech, Inc., 224 U.S.P.Q. (BNA) 975 (S.D. Cal. 1984)........................................................................17, 18 Professional Real Estate Investors v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993).............................................................................................................14, 15 iv NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 6 of 27 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 TABLE OF AUTHORITIES (cont'd) Page(s) SNK Corp. of America v. Atlus Dream Ent. Co., 188 F.R.D. 566 (N.D. Cal. 1999).............................................................................................15 Schreiber Distributing Co. v. Serv-Well Furniture Co., 806 F.2d 1393 (9th Cir. 1986) ...................................................................................................4 Scioto County Regional Water District v. Scioto Water Inc., 916 F. Supp. 692 (S.D. Ohio 1995) .........................................................................................15 Semiconductor Energy Laboratories Co., Ltd. v. Samsung Electrics Co., Ltd., 204 F.3d 1368 (Fed. Cir. 2000)................................................................................................12 Slaven v. BP America, Inc., 190 F.R.D. 649 (C.D. Cal. 2000) .............................................................................................16 Stoddard v. Ling-Temco-Vought, Inc., 513 F. Supp. 314 (C.D. Cal. 1980) ..........................................................................................16 Syncsort Inc. v. Sequential Software, Inc., 50 F. Supp. 2d 318 (D.N.J. 1999) ............................................................................................11 U.S. v. 1,071.08 Acres of Land, 564 F.2d 1350 (9th Cir. 1977) .................................................................................................16 United Mine Workers of America v. Pennington, 381 U.S. 657 (1965).................................................................................................................14 Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., 373 F.3d 1341 (Fed. Cir. 2004) (reversed, in part, on other grounds)......................................9 Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) ...................................................................................................4 Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965)...................................................................................................................3 In re Warfarin Sodium Antitrust Litigation, 1998 WL. 883469 (D. Del. 7 Dec. 1998).................................................................................11 In re Worlds of Wonder Sec. Litigation, 694 F. Supp. 1427 (N.D. Cal. 1988) ..........................................................................................4 v 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 7 of 27 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 TABLE OF AUTHORITIES (cont'd) STATUTES Page(s) 35 U.S.C. 271(d)(3) ....................................................................................................................13 Fed. R. Civ. P. 9(b) ................................................................................................................ passim Fed. R. Civ. P. 12(b)(6)....................................................................................................................2 Fed. R. Civ. P. 42(b) ......................................................................................................................16 Civil Local Rule 7-4(a)(3)) ..............................................................................................................2 vi 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 8 of 27 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 3. 2. 1. NOTICE OF MOTION AND MOTION PLEASE TAKE NOTICE, that on August 17, 2006, at 8:00 a.m. before the Honorable William Alsup, United States District Court, San Francisco, California, Plaintiff Netflix, Inc. ("Netflix") will, and hereby does, move the Court pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) for an Order dismissing, or in the alternative, bifurcating and staying discovery and proceedings on Blockbuster, Inc.'s ("Blockbuster") Antitrust Counterclaims, and striking Blockbuster's affirmative defenses of patent unenforceability and patent misuse. This Motion is based on this Notice of Motion and Motion; the Memorandum of Points of Authorities below; all pleadings and papers filed herein; oral argument of counsel; and any other matter that may be submitted at the hearing. ISSUES TO BE DECIDED (Civil Local Rule 7-4(a)(3)) Whether Blockbuster's antitrust counterclaims should be dismissed for Blockbuster's failure to plead with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure; Whether, if not dismissed, Blockbuster's antitrust counterclaims should be bifurcated, with discovery and all related proceedings stayed, pending resolution of the underlying patent claims. Whether Blockbuster's affirmative defenses of unenforceability and patent misuse should be stricken. 1 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 9 of 27 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 MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION Netflix sued Blockbuster for infringement of two Netflix patents. In response, Blockbuster filed boilerplate antitrust counterclaims (which it immediately trumpeted with a press release). Blockbuster's antitrust counterclaims allege that Netflix has restrained or attempted to restrain trade by (1) defrauding the Patent and Trademark Office ("PTO") in the course of obtaining its patents ("Walker Process fraud"), and (2) bringing this patent infringement action, which Blockbuster characterizes as a "sham." These claims fail as a matter of law because Blockbuster has not plead any underlying fraud with the particularity required by Federal Rule of Civil Procedure 9(b). For the most part, Blockbuster simply asserts, in the most conclusory terms, that Netflix withheld prior art from the PTO. Courts have routinely found such allegations to be insufficient. Blockbuster does identify one group of patents, which it asserts should have been cited as prior art--a series of patents issued to NCR with titles such as "Security Aspects of Computer Resource Repositories", "Privacy-Enhanced Database", and "Method and Apparatus for Forming Subject (Context) Map"-- but Blockbuster fails to plead that the NCR patents have anything to do with the inventions claimed in the patents at issue in this case. Blockbuster's claim that this litigation is actionable because it is a sham fares no better. Blockbuster's sham litigation claim is entirely derivative of its Walker Process claim, and thus fails for the same reasons. Blockbuster's affirmative defenses of unenforceability and patent misuse are also insufficiently pled for the same reasons as the Walker Process claim, and thus likewise should be stricken. If the Court does not dismiss Blockbuster's counterclaims outright, those counterclaims should be bifurcated and stayed pending the disposition of the underlying patent infringement action. First, under the Noerr-Pennington doctrine, Netflix is immune from antitrust liability based upon the filing of this lawsuit unless this Court makes a threshold determination that the lawsuit is a sham. The predicate to any such finding is that Blockbuster prevail on the patent claims. Second, the Walker Process claims are predicated on the assertion that Netflix engaged 2 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 10 of 27 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 in fraud on the PTO, an issue which will be resolved in the patent case. For these reasons, this Court should, at a minimum, bifurcate and stay antitrust counterclaims as a means to simplify the case, avoid unnecessary confusion, and minimize the burden of antitrust-related discovery. II. A. ARGUMENT BLOCKBUSTER HAS FAILED TO ALLEGE FACTS SUFFICIENT TO STATE A CLAIM FOR WALKER PROCESS FRAUD OR "SHAM LITIGATION" Blockbuster's antitrust counterclaims must be dismissed because: (1) Blockbuster has failed to plead Walker Process fraud with the particularity required under Fed. R. Civ. P. 9(b); and (2) without a sufficient allegation of fraud, Blockbuster's "sham litigation" claim cannot survive. The same pleading deficiencies also require this Court to strike Blockbuster's affirmative defenses of unenforceability and patent misuse, because those defenses are predicated on the same insufficient allegations of fraud. 1. Blockbuster Fails to Allege Walker Process Fraud With the Requisite Particularity Although a patentee is generally immune from antitrust liability for any anticompetitive consequences resulting from obtaining and enforcing a patent, the courts have carved out a narrow exception to that broad rule where the patentee obtained its patent by defrauding the PTO. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 (1965). In order to establish such a Walker Process claim, a claimant must allege that: (1) the patentee "obtained the patent by knowingly and willfully misrepresenting facts to the [PTO]"; (2) the "party enforcing the patent was aware of the fraud when bringing suit"; (3) "independent and clear evidence of deceptive intent," (4) "a clear showing of reliance, i.e., that the patent would not have issued but for the misrepresentation or omission"; and (5) the "necessary additional elements of a [underlying] violation of the antitrust laws." Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1068-69, 1071 (Fed. Cir. 1998) (quoting Walker Process, 82 U.S. at 177). 1 1 To prevail on a claim of monopolization under section 2 of the Sherman Act, a plaintiff must allege: "(1) [p]ossession of monopoly power in the relevant submarket; (2) willful acquisition or 3 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 11 of 27 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 Like all fraud-based claims, "Walker Process allegations are subject to the pleading requirements of Fed. R. Civ. P. 9(b)." MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958, 967 (Fed. Cir. 2005); see also Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003). Fed. R. Civ. P. 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The "pleader must state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." County of Santa Clara v. Astra U.S., Inc., 428 F. Supp. 2d 1029, 1036 (N.D. Cal. 2006) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). Where the defendant in a patent infringement suit has failed to satisfy their obligations under Rule 9(b), the appropriate remedy is to dismiss the Walker Process claim. See, e.g., Chip-Mender, Inc. v. Sherwin-Williams Co., 2006 WL 13058, at *6 (N.D. Cal. Jan. 3, 2006) (dismissing antitrust claim because defendant failed to sufficiently specify which references were concealed or allege the patents would not have been issued "but for" the concealment). As a general matter, Blockbuster's counterclaims recite conclusions, not facts from which conclusions might be drawn. "Mere conclusory allegations of fraud are insufficient." County of Santa Clara, 428 F. Supp. 2d at 1036 (citing Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989)). For example, nearly all of Blockbuster's fraud allegations are made on information and belief. Answer and Counterclaims 93-95, 97, 99-104, 106-108, 110-117. It is well established that "[a]llegations based on `information and belief' do not satisfy the requirement of [Rule 9(b)] unless the complaint sets forth the facts on which the belief is founded." In re Worlds of Wonder Sec. Litig., 694 F. Supp. 1427, 1432-33 (N.D. Cal. 1988). When Blockbuster does plead facts, those facts often have no relevance to the asserted claims. Despite Blockbuster's best efforts to fill its Answer and Counterclaims with impressivelooking lists and timelines, much of the conduct upon which Blockbuster relies simply is not actionable: maintenance of that power; and (3) causal antitrust injury." Forsyth v. Humana, Inc., 114 F.3d 1467, 1475 (9th Cir. 1997). 4 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 12 of 27 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 First, Blockbuster complains that, before the `450 patent issued, Netflix filed a continuation application in order to get narrower claims to issue. Answer and Counterclaims 39(c). That is irrelevant: filing a continuation application in order to pursue additional (or narrower) claims is a permissible (and indeed commonplace) practice. See Manual of Patent Examining Procedure ["MPEP"] 201.07 (8th ed. 2005). Second, Blockbuster complains that Netflix did not publicly disclose that Netflix was prosecuting the continuation application that led to the issuance of the `381 patent. Answer and Counterclaims 39(f). No rule required Netflix to make any such disclosure.2 Third, Blockbuster complains that Netflix did not assert the `450 patent when Blockbuster first launched Blockbuster Online, instead waiting for the `381 patent to issue. Id. 39(g). But no rule required Netflix to bring suit as soon as it obtained one patent, instead of waiting to assert multiple, related patents together in the same case. Fourth, Blockbuster complains that Netflix "lull[ed] and entic[ed]" its competitors to enter the online market in some entirely unspecified way. Id. 39(h). No rule required Netflix to warn off its competitors. (And it makes little sense that Netflix would want to encourage Blockbuster to enter the market so that it could spend money on attorneys' fees in order to recoup its losses.) In any event, Blockbuster was and remains free to compete in the online DVD rental market so long as it does so without infringing Netflix's patents. Fifth, Blockbuster complains that Netflix sued Blockbuster for patent infringement "without warning." Id. 39(j). No rule required Netflix to send Blockbuster a cease and desist letter before bringing this infringement action. Blockbuster is left with only three allegations pertaining (however tangentially) to its Walker Process claim: (1) Netflix "flooded" the PTO with around 100 prior art references in connection with prosecuting the `381 patent application; (2) Netflix did not disclose these same 100 references when prosecuting the `450 patent application; and (3) Netflix did not disclose the Moreover, none of the issues raised in points 2 through 5 has anything to do with fraud on the PTO. The allegations thus do not have any relevance to a claim of Walker Process fraud for that additional reason. 5 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 2 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 13 of 27 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 NCR patents in connection with prosecuting either patent application. Id. 39(b), (d), (e). These allegations all fail as the predicate for a Walker Process claim because none is pled with the particularity required by Rule 9(b). a. Blockbuster's "Flooding" Allegation Fails Blockbuster first points to Netflix's submission of "over 100 references" of prior art in connection with the `381 patent as supposed evidence of fraud. But Blockbuster never alleges (let alone with any particularity) how submitting these references could constitute fraud on the PTO. There is no magic "rule of 100" when it comes to prior art: many patents issue with far more cited references.3 The applicant's duty is to submit all prior art that the applicant considers to be potentially material to patentability, not to cut off the list at some arbitrary number. See MPEP 2001.04-05 (8th ed., 2005). Indeed, far from pleading fraud with particularity, Blockbuster sets forth no factual basis for concluding that Netflix's disclosures were anything but proper. Blockbuster does not allege that any particular reference should not have been submitted because it was not material to patentability. Indeed, to the contrary, Blockbuster alleges that all the cited prior art in fact was material to patentability, and thus properly was disclosed to the PTO. Answer and Counterclaims 53 (all prior art allegedly not disclosed in connection with the `450 patent application --which includes all the art cited in connection with the `381 prosecution--"was material to both the `450 and `381 patents.") Nor does Blockbuster allege that Netflix believed that a particular reference should not have been disclosed, but disclosed it anyway in order to "overwhelm" the PTO. Even to the extent that Blockbuster had pled that Netflix deliberately "buried" relevant references among irrelevant ones--which Blockbuster has not done--that allegation still would not suffice to make out a claim of Walker Process fraud. The MedImmune case is instructive. See, e.g., Systems and Methods for Secure Transaction Management and Electronic Rights Protection, U.S. Patent No. 7,069,451 (issued June 27, 2006) (citing over 1250 references); Lockbox Imaging System, U.S. Patent No. 7,068,832 (issued June 27, 2006) (citing nearly 300 references); Portable Shopping and Order Fulfillment System, U.S. Patent No. 7,040,541 (issued May 9, 2006) (citing over 100 references). 6 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 3 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 14 of 27 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 See Exhibit A (MedImmune, Inc. v. Genentech, Inc., 03-CV-02567 (C.D. Cal. Dec. 24, 2003). There, MedImmune alleged that Genentech had buried allegedly anticipatory prior art references "in the voluminous documents that comprised its submission." Id. at *20; see also U.S. Patent No. 6,331,415 (issued Dec. 18, 2001) (the patent at issue contained over 340 prior art references). The district court explained that such a "burying" claim could not serve as the predicate for Walker Process fraud because "the PTO is presumed to be aware of the references before it, which would include ... the other prior art that was submitted, even if it was buried." Id. (citing American Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1359 (Fed. Cir. 1984). By definition, MedImmune could not show that the patent would not have issued but for the submission of the "extra" references, and thus could not state a claim. Id. The Federal Circuit affirmed. MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958, 967 (Fed. Cir. 2005). Blockbuster simply cannot predicate a Walker Process claim on the allegation that Netflix "flooded" the PTO with 100 prior art references. b. Blockbuster's Allegations Regarding the Failure to Disclose Prior Art Fail (i) Blockbuster's Allegation that Netflix Failed to Disclose the 100 References in Connection with the `450 Application Fails After accusing Netflix of committing fraud by disclosing around 100 references in connection with the prosecution of the `381 application, Blockbuster turns around and accuses Netflix of committing fraud by not disclosing those same references in connection with the `450 application. These allegations of fraud fail for reasons other than their internal inconsistency. First, Blockbuster fails to allege that Netflix even knew about these references at the time that the `450 patent application was pending. Blockbuster does allege that some of the references predated the issuance of the `450 patent, but whether the references existed, and whether Netflix knew about them, are different questions. Second, Blockbuster does not allege with particularity that, had a particular reference been disclosed to the PTO in connection with the `450 application, the `450 patent would not have issued. See Nobelpharma, 41 F.3d at 1071 ("Walker Process claim requires a clear showing of that the patent would not have issued but for the misrepresentation or omission.") 7 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 15 of 27 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 (emphasis added) Blockbuster's conclusory assertions that all prior art "was material to both the `450 and `381 patents" and that "Blockbuster is informed and believes that . . . the Patent Office justifiably relied on the . . . omissions of material prior art" are simply inadequate under Fed. R. Civ. P. 9(b). See, e.g., Chip-Mender, Inc., 2006 WL 13058 *6; Erie Technological Products, Inc. v JFD Electronics Components Corp., 198 U.S.P.Q. 179, 185-86 (E.D.N.Y. 1978) (holding that the antitrust claimant had not stated a claim for relief under the antitrust laws where claim failed to specify the nature of the misrepresentation allegedly made nor showed that the patent would not have issued but for the fraud.). (ii) Blockbuster's Accusatory Assertions that Netflix Failed to Disclose Unspecified Prior Art Are Insufficient Blockbuster alleges that Netflix withheld three general categories of prior art--video rental industry standards; video and film subscription methods; and e-commerce business methods--without further elaboration. Answer and Counterclaims 44(b)-(d). These general categories fail to identify any prior art with any specificity, let alone whether any such art was cumulative of art already offered, otherwise already contemplated by the PTO, or whether the PTO would have relied on this prior art to reject Netflix's patent--and thus cannot substantiate the antitrust counterclaims. See Advanced Cardiovascular Sys. v. Medtronic, Inc., 1996 WL 467273, at *17 (N.D. Cal. 1996) (defendant's reference to the alleged misconduct as simply a "failure to disclose pertinent material prior art of which [the patent holder] was aware" did not sufficiently identify the particulars of what the patentee failed to disclose). (iii) Blockbuster Does Not (And Could Not) Allege that the NCR Patents are Invalidating Prior Art The only pieces of prior art that Blockbuster identifies with any particularity are the "NCR Patents" (NCR is the former National Cash Register Corporation). Id. 44(a), 45-47. The NCR patents have titles such as "Security Aspects of Computer Resource Repositories", "Privacy-Enhanced Database"; and "Method and Apparatus for Forming Subject (Context) Map . . ."4 Blockbuster itself notes that the NCR Patents may not "in fact cover online DVD 4 See Netflix's Request for Judicial Notice, July 6, 2006, Exhibits A-I. 8 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 16 of 27 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 rental services like those operated by Netflix and Blockbuster." Id. 52. It is thus unsurprising that Blockbuster fails to allege that any of the NCR patents anticipates or renders obvious any claim of the `381 patent. Blockbuster thus fails to allege that the PTO would have relied on the NCR patents to reject the claims. See Nobelpharma, 141 F.3d at 1071 (Walker Process claims require a "clear showing of reliance, i.e. that the patent would not have issued but for the misrepresentation or omission.") Instead of alleging with particularity that the NCR patents invalidate the claims of the `381 patent, Blockbuster simply asserts that the NCR patents must be relevant because NCR at one time asserted these patents against Netflix. This is apples and oranges. Whether NCR's patents cover Netflix's operations has nothing to do with whether those patents anticipate or render obvious the claims of Netflix's patents. Netflix could (hypothetically) get sued for patent infringement by Intel for using (unlicensed) microprocessors, or by Oracle for using (unlicensed) database software. But so what? Whether Netflix's operations do or don't infringe someone else's patents simply has nothing to do with whether Netflix committed fraud in failing to disclose those patents to the PTO when prosecuting patent applications covering its own inventions. (iv) Blockbuster Does Not Adequately Allege that the Nondisclosure of Any Prior Art Was Intentional In addition to failing to plead that Netflix failed to disclose invalidating prior art, the counterclaims also fail to adequately allege the third prong of Walker Process fraud: deceptive intent. Nobelpharma, 141 F.3d at 1070-71 (a finding of Walker Process fraud "must be based on independent and clear evidence of deceptive intent."). In analyzing the intent prong of Walker Process fraud, the Federal Circuit has observed: "[G]iven the ease with which a relatively routine act of patent prosecution can be portrayed as intended to mislead or deceive, clear and convincing evidence of conduct sufficient to support an inference of culpable intent is required . . . . While intent to deceive the PTO may be found as a matter of inference from circumstantial evidence, circumstantial evidence cannot indicate merely gross negligence . . . . [C]lear and convincing evidence must prove that an applicant had the specific intent to accomplish an act that the applicant ought not to have preformed, viz., misleading or deceiving the PTO. 9 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 17 of 27 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 Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., 373 F.3d 1341, 1360 (Fed. Cir. 2004) (reversed, in part, on other grounds) (citing Molins PLC v. Textron, 48 F.3d 1172, 1180-81 (Fed. Cir. 1995)). Blockbuster fails to allege any facts showing that Netflix failed to disclose any prior art with a deceptive intent. Blockbuster similarly fails to plead any facts supporting an inference that Netflix believed that the NCR patents invalidated the claims of the `381 patent. The mere failure to cite a reference will not support a claim for Walker Process fraud. Nobelpharma, 141 F.3d at 1071; see also, C.R. Bard v. M3 Systems, 157 F.3d 1340, 1365 (Fed. Cir. 1998) ("[d]eceptive intent is not inferred simply because information was in existence that was not presented to the examiner"). Rather "deceptive intent" requires a showing of a "deliberately planned and carefully executed scheme to defraud." Cataphote v. De Soto Chemical Coatings, 450 F.2d 769, 772 (9th Cir. 1972). For example, in the MedImmune case, MedImmune alleged that Genentech knew about and failed to disclose certain allegedly anticipatory references. See Exhibit A. The district court rejected these allegations as a predicate for a Walker Process fraud claim because "omissions cannot be fraudulent absent evidence of fraudulent intent," id. at 22. Thus, the court concluded: "MedImmune cannot base a Walker Process claim on the omission of references without alleging independent evidence of deceptive intent. Even if such allegations . . . were true, they would be insufficient to support a claim of Walker Process fraud." Id. at 23. Because Blockbuster has similarly failed to allege any independent evidence of deceptive intent, its counterclaims must be dismissed. 2. Without a Sufficient Allegation of Fraud, Blockbuster's "Sham Litigation" Claim Cannot Survive Blockbuster alleges that this patent infringement action is a "sham" because Netflix filed the underlying patent infringement case with "full knowledge of the patent's fraudulent origin, invalidity, and unenforceability." Answer and Counterclaim 101. In order to prove that a lawsuit fits within Noerr's "sham" exception, an antitrust plaintiff must prove that the suit was "both objectively baseless and "subjectively motivated by a desire to impose collateral, anti10 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 18 of 27 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 competitive injury rather than to obtain a justifiable remedy." See Nobelpharma, 141 F.3d at 1071 (citing Professional Real Estate Investors ["PREI"] v. Columbia Pictures, Inc., 508 U.S. 49, 60-61 (1993)). A lawsuit is "objectively baseless" if "no reasonable litigant could realistically expect success on the merits." Id. (quoting PREI, 506 U.S. at 60). In determining whether a litigant meets the second, subjective prong, "the court should focus on whether the baseless lawsuit conceals `an attempt to interfere directly with the business relationships of a competitor, ` through the `use [of] governmental process--as opposed to the outcome of that process--as an anticompetitive weapon.'" Id. at 1071-72 (quoting PREI, 506 U.S. at 61). Blockbuster's sham litigation claim is entirely derivative of its Walker Process claim. Blockbuster cites no basis for asserting that this litigation is a sham apart from its allegation that the Netflix patents are unenforceable by reason of Netflix's alleged fraud on the PTO.5 Because Netflix has not met it obligation under Rule 9(b) to plead this supposed fraud with particularity, the court must also dismiss Defendant's counterclaim for sham litigation. See, e.g., Advanced Cardiovascular Sys., 1996 WL 467273 *6 (dismissing patent misuse defense and antitrust claim because defendant had failed to provide a sufficient factual basis for alleging that plaintiff knew patent was invalid or unenforceable at the time it filed the action); Syncsort Inc. v. Sequential Software, Inc., 50 F. Supp. 2d 318, 334-5 (D.N.J. 1999) (dismissing counterclaims where antitrust plaintiff did not plead facts revealing defendant acted with an improper or malicious purpose); In re Warfarin Sodium Antitrust Litig., 1998 WL 883469, at *7 (D. Del. 7 Dec. 1998) (granting motion to dismiss where antitrust plaintiff merely alleged "conclusory allegations that defendant's petition lacked evidentiary support [and] offer[ed] no basis for its assertion that defendant initiated [its petition to the court] without any `realistic expectation of success on the merits'"). 3. Blockbuster's Second Affirmative Defense of Unenforceability and Third Affirmative Defense of Patent Misuse Must Be Stricken For Failure to Allege Inequitable Conduct with Sufficient Particularity Blockbuster alleges in its Second Affirmative Defense that Netflix's patents are The throw-away line attributed to Netflix's CEO could at most be relevant to the subjective portion of the inquiry, but not to whether the lawsuit objectively lacks merit. 11 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 5 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 19 of 27 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 unenforceable as a result of Netflix's inequitable conduct. Blockbuster's Third Affirmative Defense alleges patent misuse based upon Netflix's assertion of its patents against Blockbuster. Because these defenses are entirely based upon the same insufficient allegations as the Walker Process claim, this Court should strike these defenses for the reasons set forth above. a. The "Inequitable Conduct" Defense Cannot Survive Inequitable conduct requires "affirmative misrepresentation of a material fact, failure to disclose material information, or submission of false material information, coupled with an intent to deceive." Semiconductor Energy Lab. Co., Ltd. v. Samsung Elecs. Co., Ltd., 204 F.3d 1368, 1373 (Fed. Cir. 2000). The defense of inequitable conduct is subject to the same heightened pleading requirements of Fed. R. Civ. P. 9(b). See PB Farradyne, Inc. v. Peterson, 2006 WL 132182, at *4 (N.D. Cal. Jan. 17, 2006) (citing Ferguson Beauregard/Logic Controls v. Mega Systems, LLC, 350 F.3d 1327, 1344 (Fed. Cir. 2003)). Just as with Walker Process fraud, materiality and intent to deceive must be specifically pleaded. See Semiconductor Energy Lab. Co., Ltd., 204 F.3d at 1373. In ASM America, Inc. v. Genus, Inc., No. 01-2190 EDL, 2002 WL 24444, at *6 (N.D. Cal. Jan. 9, 2002), the defendant levied strikingly similar allegations: "inventors . . . were aware of prior art that was material . . . , including without limitation, an article entitled "Atomic layer epitaxy of Si using atomic H," . . . but withheld this prior art from the U.S. Patent and Trademark Office, materially misrepresenting the state of the art, with an intent to deceive that Office. Id. at *3. In striking the defense, the court held that the defendant's reference to general prior art lacked specificity, particularly because the reference to prior art was prefaced with the phrase "including, without limitation." Id. at *4. The court demanded defendants "provide greater specificity about [plaintiff's] failure to comply with the requirements of applicable sections of the patent regulations and [plaintiff's] intent to mislead the PTO thereby." Id. See also Advanced Cardiovascular Sys. v. Medtronic, Inc., 1996 WL 467273, at *6 (N.D. Cal. July 24, 1996). Here, as in ASM, Blockbuster prefaces its listing of the NCR patents by noting "such prior art included some or all of the following," and blindly refers to the "NCR Patents and all 12 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 20 of 27 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 the other prior art Netflix . . . knew about and failed to disclose to the Patent Office" without identifying what that prior art is. Moreover, as set forth above, Blockbuster has also failed to allege facts demonstrating the materiality of the patents it does identify, as well as to plead facts from which one could infer Netflix's intent to deceive. Blockbuster's "inequitable conduct" defense must be stricken. b. The "Patent Misuse" Defense Fails Blockbuster's one-sentence patent misuse defense fails to identify any factual allegations substantiating it, instead incorporating the pleading in its entirety. Answer and Counterclaims 70. Netflix is unable to discern upon what grounds Blockbuster asserts the defense, and can only speculate that Blockbuster alleges misuse in connection with its "sham litigation" theory. As a general rule, a patent holder cannot be deemed guilty of misuse for seeking to enforce its rights against patent infringement. See 35 U.S.C. 271(d)(3); Advanced Cardiovascular Sys. 1996 WL 467273, at *6. Interpreting patent misuse in the enforcement context, the Federal Circuit has treated the defense in the same way it treats similar antitrust claims, requiring that the underlying patent suit be objectively baseless and improperly motivated. See Glaverbel S.A. v. Northlake Marketing & Supply, Inc., 45 F.3d 1550, 1558 (Fed. Cir. 1995) (enforcement of patent rights "does not of itself constitute violation of the anti-trust laws or patent misuse; there must be bad faith and improper purpose in bringing the suit, in implementation of an illegal restraint of trade); Eastman Kodak v. Goodyear Tire & Rubber, 114 F.3d 1547, 1558 (Fed. Cir. 1997) ("acquisition and enforcement of a patent do not in themselves constitute patent misuse"). Thus, for the same reasons that Blockbuster's "sham litigation" pleading was deficient, its patent misuse defense must be stricken. See Advanced Cardiovascular Sys., 1996 WL 467273, at *6 (striking misuse defense grounded entirely on allegation of "sham litigation" where defendant had failed to plead adequate basis for "sham litigation"). 13 376442.02 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 21 of 27 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 B. IN THE ALTERNATIVE, THIS COURT SHOULD BIFURCATE AND STAY DEFENDANT'S ANTITRUST CLAIMS If the antitrust issues raised in Blockbuster's counterclaim merit any attention at all, they should be tried separately and discovery into those claims should be stayed. 1. Bifurcation is Necessary to Effectuate Netflix's Constitutionally Protected Interests Netflix has a First Amendment right to petition the PTO for a patent and to seek enforcement of its intellectual property rights through the courts. The Noerr-Pennington doctrine, first articulated in Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), and United Mine Workers of America v. Pennington, 381 U.S. 657 (1965), provides antitrust immunity for individuals "petitioning" government, whether through lobbying, administrative processes, patent application, or litigation. As stated in Noerr itself, "the Sherman Act does not prohibit ... persons from associating together in an attempt to persuade the legislature or the executive to take particular action with respect to a law that would produce a restraint or a monopoly." Id. at 136; see also Professional Real Estate Investors v. Columbia Pictures Industries, Inc., 508 U.S. 49, 56 (1993) ("PREI") (petitioning courts). Thus, under the Noerr-Pennington doctrine, Netflix is categorically immune from Blockbuster's antitrust claims unless Blockbuster can show that Netflix's litigation is itself a sham. See PREI, 508 U.S. at 60. Courts have made clear that the two steps of the Noerr-Pennington inquiry are to be taken in order, first determining whether the suit is objectively baseless before considering subjective intent. Id. ("Only if challenged litigation is objectively meritless may a court examine the litigant's subjective motivation.") And only if both objective baselessness and improper motivation are proven may the court proceed to consider the merits of the antitrust claim. This step-by-step analysis is necessary to effectuate the defendant's constitutional rights. See 1 Herbert Hovenkamp et al., IP and Antitrust 11.3b6(C), at 11-32 (2003 Supplement) ("Noerr immunity issues must be resolved before the substantive merits of the antitrust claim can be reached."). Determining whether Netflix's suit is objectively baseless will require this Court to analyze the underlying patent issues. Thus, bifurcating the claims to allow initial consideration of 14 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 22 of 27 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 the patent claims makes sense. Accord Hydranautics v. FilmTec, 70 F.3d 533 (9th Cir. 1995); FilmTec v. Hydranautics, 67 F.3d 931 (Fed. Cir. 1995); Liberty Lake Investments v. Magnuson, 12 F.3d 155 (9th Cir. 1993).6 This bifurcation should be accompanied by a stay of discovery: to permit discovery and litigation of the merits of an antitrust claim to proceed before objective baselessness has been shown would render the Noerr-Pennington doctrine a mere defense, not an immunity from suit. And, as one treatise has concluded, "it should be clear that the overwhelming majority of intellectual property lawsuits are immune from antitrust scrutiny under the objective prong." 1 Herbert Hovenkamp et al., IP and Antitrust 11.3b2, at 11-20 (2003 Supplement); see also id. at 11-23-24 (finding that 79 cases as of 2000 had rejected such claims as a matter of law, and no case had found antitrust liability since PREI). In PREI, the court refused to permit discovery into improper motivation, much less the underlying merits of the antitrust claim, unless the antitrust plaintiff could first prove objective baselessness. PREI, 508 U.S. at 65. A number of district courts have followed suit. See Scioto County Regional Water Dist. v. Scioto Water, 916 F. Supp. 692 (S.D. Ohio 1995); Music Center v. Prestini Musical Instruments Group, 873 F. Supp. 543 (S.D.N.Y. 1995);7 accord Hovenkamp et al., supra, at 11-32 ("It makes sense to defer discovery in those cases in which objective baselessness can likely be determined early in the litigation. Further, if the court agrees to bifurcate the case, it may make sense to defer all antitrust discovery until after the infringement dispute is resolved."). Because Blockbuster's antitrust counterclaims implicate Netflix's constitutional right to petition the government, this court should bifurcate the antitrust issues and stay discovery on those counterclaims until the question of Netflix's constitutional rights is resolved. Numerous district courts have bifurcated such claims. See, e.g., Ecrix Corp. v. Exabyte Corp., 191 F.R.D. 611, 613 (D. Colo. 2000); Dentsply Int'l v. New Technology Co., 1996 WL 756766 (D. Del. 1996); Implant Innovations, Inc v. Nobelpharma AB, 1996 WL 568791 (N.D. Ill. 1996); Scioto County Regional Water Dist. v. Scioto Water Inc., 916 F. Supp. 692 (S.D. Ohio 1995); Computer Assoc. Int'l v. American Fundware, 831 F. Supp. 1516 (D. Colo. 1993). 7 One district court has permitted discovery before ruling on objective baselessness, but only into improper motivation, not into the myriad issues that must be decided in the substantive antitrust claim. SNK Corp. of Am. v. Atlus Dream Ent. Co., 188 F.R.D. 566 (N.D. Cal. 1999). 15 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 6 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 23 of 27 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 2. Bifurcation And A Stay Of Discovery On Antitrust Claims Will Minimize The Cost And Burden On The Parties And Third Parties And Will Also Promote Efficiency Alternatively, whether or not Netflix is constitutionally entitled to bifurcation and a stay of discovery, this Court should grant Netflix's motion to bifurcate in the exercise of its discretion and in the interests of judicial economy. a. This Court Has Broad Discretion To Order Bifurcation And A Stay Of Discovery This Court has broad discretion to bifurcate this case and stay discovery and proceedings regarding Blockbuster's antitrust claims. This power to bifurcate is rooted in Federal Rule of Civil Procedure 42: The court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition and economy, may order a separate trial of any claim . . . Fed. R. Civ. P. 42(b). Rule 42 has consistently been applied in recognition of the district court's broad discretion to order bifurcation. See, e.g., In re Benedictin Litig., 857 F.2d 290 (6th Cir. 1988), cert. denied, 488 U.S. 1006, 109 S. Ct. 788, 102 L. Ed. 2d 779 ("Rule 42(b) is sweeping in its terms and allows the courts, in its discretion, to grant a separate trial of any kind of issue in any kind of case."); U.S. v. 1,071.08 Acres of Land, 564 F.2d 1350, 1351 (9th Cir. 1977) ("the district court had broad discretion to order separate trials"); Slaven v. BP America, Inc., 190 F.R.D. 649, 658 (C.D. Cal. 2000) ("The decision to bifurcate a trial rests within the sound discretion of the trial court."). The "principal goal of Rule 42(b) is efficient judicial administration." Stoddard v. LingTemco-Vought, Inc., 513 F. Supp. 314, 327 (C.D. Cal. 1980). Courts managing cases with both patent and antitrust issues, as here, have described bifurcation of these claims as "standard practice." See In re Innotron Diagnostics, 800 F.2d 1077, 1084 (Fed. Cir. 1986) (describing the "now-standard practice of separating for trial patent issues and those raised in an antitrust counterclaim").8 8 In In re Innotron, the Federal Circuit found that bifurcation of patent and antitrust claims is often appropriate because: (1) Economy is served because issues of patent validity and 16 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 24 of 27 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 The power to bifurcate claims under Rule 42(b) includes the power to stay pretrial proceedings and discovery in order to effectuate the bifurcation. See ASM America, Inc. v. Genus, Inc., No. 01-2190 EDL, 2002 WL 24444, at *6 (N.D. Cal. Jan. 9, 2002) (bifurcating patent claims and staying antitrust claims and related discovery). The power to bifurcate under Rule 42(b) is reinforced by this Court's inherent equitable powers to control and manage the cases on its docket to meet the needs of judicial economy and efficiency. See, e.g., Landis v. North American Co., 299 U.S. 248, 254-55 (1936) ("[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants."). b. Bifurcation Will Allow For The Early Determination Of Issues That May Dispose Of The Antitrust Claims Bifurcation will allow the Court to make factual determinations relating to Netflix's patent claims that may resolve issues relevant to the antitrust claims. Rule 42(b) gives this Court broad discretion to "bifurcate a trial to permit deferral of costly and possibly unnecessary proceedings pending resolution of potentially dispositive preliminary issues." Jinro Am, 266 F.3d at 998 (finding bifurcation "was a reasonable way to promote clarity and judicial economy" because resolution of one issue "informed the resolution of the other claims"). Courts have recognized that cases involving antitrust claims are particularly appropriate for bifurcation because antitrust claims often involve massive discovery and can be narrowed by addressing them following the resolution of other claims in the case. See Pharmacia, AB v. Hybritech, Inc., 224 U.S.P.Q. (BNA) 975 (S.D. Cal. 1984) (staying antitrust claims achieved an "advantageous result" because of "the extensive and protracted discovery inherent in trial of the antitrust issues"); see also Manual for Complex Litigation, Third 33.62, at 461 (2001) ("Discovery and affirmative defenses will be established and will not need to be retried in a subsequent antitrust trial; (2) Convenience of all is served by trying less complex patent issues first; (3) Judicial expedience results because patent issues will be ready for trial substantially earlier than antitrust issues; and (4) Prejudice and confusion can be avoided by trying patent issues first without injecting different proof and witnesses related only to antitrust counterclaims. In re Innotron, 800 F.2d at 1085. 17 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 25 of 27 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 trial with respect to claims of unfair competition and antitrust counterclaims frequently are deferred until resolution of the patent issues, at which time these claims are often resolved by voluntary dismissal or settlement."). Here, Blockbuster's antitrust counterclaims all rest on the allegation that Netflix committed fraud on the PTO. A Netflix victory with respect to the patent validity issues would resolve the antitrust counterclaims as well. In ASM America, for example, the Northern District bifurcated the patent and antitrust claims because the antitrust claims were based on allegations of sham litigation and fraudulent procurement and thus would be simplified if the patents were found valid. See ASM America, 2002 WL 24444, *6 (N.D. Cal. Jan. 9, 2002) (stay of antitrust claims "would promote an efficient resolution" of "patent invalidity issues" and "substantially narrow or eliminate antitrust claims"); see also Hunter Douglas, Inc. v. Comfortex Corp., 44 F. Supp. 2d 145, 151-52 (N.D.N.Y. 1999) (explaining benefits of a stay to determine patent validity because Noerr can provide immunity on a sham litigation antitrust claim). Given the enormous delay and expense traditionally associated with antitrust litigation, it makes sense to delay litigation of the antitrust claims where, as here, they will likely be resolved on immunity grounds without the need for any inquiry into the antitrust merits. Accord Pharmacia, 224 U.S.P.Q. at 975 ("Thus trial of most of the antitrust counterclaims may be obviated. In view of the extensive and protracted discovery inherent in trial of the antitrust issues, this is a particularly advantageous result.") c. Bifurcation Will Simplify the Case, Avoid Confusion, and Minimize Cost And the Burden of Antitrust Discovery Antitrust counterclaims involve a host of complex issues that are not raised in the underlying suit for patent infringement--the definition of the relevant market, determination of market shares, proof of specific intent, anticompetitive conduct, dangerous probability of achieving monopoly power, causal antitrust injury, etc. Patent cases are complex enough standing alone; interjecting the antitrust issues invites jury confusion and prejudice. See Components, Inc. v. Western Electric Co., 318 F. Supp. 959, 966-67 (D. Me. 1970) (bifurcating the trial and staying discovery on antitrust counterclaims). Furthermore, lengthy and expensive 18 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 26 of 27 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 discovery proceedings are inherent in any antitrust case. See ASM America, 2002 WL 24444, at *6 (granted bifurcation and a stay of antitrust claims, finding that it would likely "simplify the case, avoid confusion, and reduce the burden and costs imposed on the Court, the attorneys, and the parties by deferring the burdensome and expensive discovery that would necessarily arise from litigation of the antitrust claims, and possibly avoiding it altogether."); Carlisle Corp. v. Hayes, 635 F. Supp. 962, 967 (S.D. Cal. 1986) (separate trial of antitrust counterclaims in patent infringement suit is particularly advantageous in view of extensive and protracted discovery inherent in trial of antitrust issues). Blockbuster's antitrust counterclaims will require extensive inquiry into various entertainment-related markets (including online DVD rental), whether Netflix has monopoly power in those markets, whether Netflix is guilty of anticompetitive conduct, whether Blockbuster has suffered causal antitrust injury, and so on. Protracted and costly discovery, involving not only the parties but also third party suppliers of movies and consumers, will be required, as well as extensive expert discovery. Thus, separation of these issues for trial and stayed discovery will further the interests of judicial economy and help to avoid prejudice. d. There Will Be No Prejudice To Blockbuster, And Bifurcation Will Lead To A Just, Final Determination Of Litigation Finally, this Court should grant bifurcation of the patent and antitrust claims because there will be no prejudice to Blockbuster. In a case of this potential magnitude, bifurcation can ultimately help streamline the relevant issues and reduce the overall size and burden to all parties. See, e.g., ASM America, 2002 WL 24444, at *7 ("a stay at this time will not necessarily delay the ultimate determination of the antitrust claims significantly longer than no stay at all, because of the added complexity of proceeding on a variety of fronts simultaneously."). Bifurcation will also serve the ends of promoting a just, final determination of this litigation because it will insure that Netflix will have a fair chance to defend the validity of the `450 and `381 Patents without the distraction and prejudice that could be engendered by Blockbuster's antitrust allegations. See Ecrix Corp. v. Exabyte Corp., 191 F.R.D. 611, 613-14 (D. Colo. 2000) (granting bifurcation to prevent the use of antitrust and unfair competition 19 NETFLIX'S MOTION TO DISMISS OR, ALTERNATIVELY, TO BIFURCATE AND STAY BLOCKBUSTER'S ANTITRUST COUNTERCLAIMS Case No. C 06 2361 WHA 376442.02 Case 3:06-cv-02361-WHA Document 21 Filed 07/06/2006 Page 27 of 27 1 2 3 4

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