Capella Photonics, Inc. v. Cisco Systems, Inc.

Filing 146

ORDER by Judge Edward M. Chen Granting in Part and Denying in Part Plaintiff's Motion to Strike and Granting Plaintiff's Motion to Dismiss 115 116 . (emcsec, COURT STAFF) (Filed on 12/23/2014)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CAPELLA PHOTONICS, INC.,

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v.

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For the Northern District of California

United States District Court

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Plaintiff,

CISCO SYSTEMS, INC., et al.

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Defendants.
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No. C-14-3348 EMC
CONSOLIDATED CASES
C-14-3349 EMC
C-14-3350 EMC
C-14-3351 EMC
ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFF’S
MOTION TO STRIKE AND GRANTING
PLAINTIFF’S MOTION TO DISMISS

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(Docket Nos. 115, 116)
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Plaintiff Capella Photonics filed suit against Cisco Systems, Fujitsu Network

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Communications (collectively “Defendants”), and two other parties alleging infringement of U.S.

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Patent Nos. RE42,368 (the ‘368 patent) and RE 42,678 (the ‘678 patent). See, e.g., Docket No. 30

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(First Amended Complaint Against Cisco). Both Cisco and Fujitsu answered Capella’s complaint,

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and both assert inequitable conduct as an affirmative defense. Docket No. 108 (Cisco’s Amended

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Answer and Counterclaims) (hereafter CAAC); No. 14-cv-3349, Docket No. 23 (Fujitsu’s Answer)

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(hereafter FA).1 Cisco also brought a counterclaim against Capella for alleged violation of

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California’s Unfair Competition Law (UCL) related to the filing of this lawsuit. CAAC at 22; Cal.

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Bus. and Prof. Code §17200 et seq.

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Unless otherwise indicated, all citations to the docket are to Capella Photonics v. Cisco
Systems, C-14-3348 EMC, the lead case in this consolidated action.

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Capella now moves to strike Defendants’ largely identical inequitable conduct defenses, and

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to dismiss Cisco’s UCL counterclaim. Docket Nos. 115, 116. For the reasons discussed below, the

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Court grants Capella’s motions to strike in part and denies them in part. Capella’s motion to dismiss

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is granted because Cisco has not pleaded a necessary element of the “fraudulent” prong under the

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UCL, namely that members of the public were likely to be deceived by the challenged practice.

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I.
A.

BACKGROUND

Procedural Background
Capella filed this patent infringement action on February 12, 2014, in the Southern District

for use in optical transmissions networks,” and the patents-in-suit are directed towards methods of

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For the Northern District of California

of Florida. See Docket No. 1. Capella considers itself “a pioneer of optical switching technologies

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United States District Court

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optical switching in such communications networks. See Docket No. 30 at ¶¶ 7, 12-20, 26.

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Cisco answered Capella’s complaint on April 4, 2014. Docket No. 17. Fujitsu answered on

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April 15. FA at 25. Both answers pleaded substantially identical inequitable conduct defenses.

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Compare Docket No. 17 with FA. Cisco’s answer also contained a counterclaim for violation of the

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UCL, predicated on Capella’s alleged “bad faith” assertion of patent rights against Cisco that

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Capella “knew to be overbroad and invalid in light of prior art, and that [] Capella obtained through

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fraud on the Patent Office.” Docket No. 17 at 25-26. After Capella filed an amended complaint,

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and Cisco filed an amended answer, Capella moved to strike Cisco’s inequitable conduct defenses

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and dismiss Cisco’s UCL counterclaim. Docket Nos. 46, 47 (Motions to Strike and Dismiss).

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Capella did not move to strike Fujitsu’s inequitable conduct defenses.

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On July 14, 2014, Judge Seitz granted Capella’s motion to strike in a one-line order. Docket

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No. 74. Judge Seitz explained at oral argument that he felt Cisco should “cure” certain unspecified

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“defects” in its pleading, and granted Cisco leave to amend its inequitable conduct defenses.2

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Docket No. 125-4 at 8-9. The Court specifically declined to rule on Capella’s motion to dismiss

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It is entirely unclear from the Florida court’s order, or the available excerpts of the oral
argument transcript, precisely what pleading defects the Court identified in Cisco’s affirmative
defenses. It is also unclear whether the Court found defects with all three separately alleged grounds
of inequitable conduct, or with a discrete subset of Cisco’s allegations. Cisco represents that the
Court only intended to strike Cisco’s “first instance” for inequitable conduct, Docket No. 125 at 7,
and that is the only ground which Cisco amended after the Florida court issued its order.

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Cisco’s UCL counterclaim. Id. at 9. This case was transferred to the Northern District of California

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on July 24.3 Docket No. 77.

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Cisco filed its amended and operative answer on September 15, 2014. CAAC at 25. On

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September 25, Capella once again filed a motion to strike Cisco’s inequitable conduct defenses

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pursuant to Federal Rule of Civil Procedure 12(f), and to dismiss Cisco’s UCL counterclaim

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pursuant to Federal Rule of Civil Procedure 12(b). Docket No. 114.4 Capella also filed a motion to

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dismiss Fujitsu’s inequitable conduct defenses. Docket No. 115. This motion was filed 163 days

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after Fujitsu filed its answer. See FA at 22.

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B.

In their respective answers, both Defendants plead substantially similar affirmative defenses

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Cisco’s and Fujitsu’s Inequitable Conduct Defenses

of inequitable conduct with respect to the patents-in-suit. See CAAC at 6-20; FA at 6-20.

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Specifically, they claim that during the re-issue prosecutions of the patents-in-suit, Capella

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intentionally withheld or mischaracterized three different known pieces of invalidating prior art. As

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will be discussed in greater detail below, however, at oral argument counsel for both Cisco and

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Fujitsu explicitly disavowed any independent reliance on two of the three pieces of allegedly

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invalidating art pleaded in their answers, and thus Cisco’s and Fujitsu’s inequitable conduct defenses

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based on these references are stricken with prejudice.

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1.

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The two patents-in-suit are reissue patents. See Docket Nos. 127-4, 127-5 (Patents-In-Suit).

Prosecution of the Patents-in-Suit

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In order to obtain a reissue patent, an inventor must “specifically identify [to the Patent Office] at

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least one error” in the original patent “and state that the applicant believes the original patent to be

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wholly or partly inoperative or invalid” due to that error. 37 CFR § 1.175(a). Sometime around

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June 10, 2010, Capella sought reissue of what would become the patents-in-suit. FA at 13; CAAC at

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13.

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The Florida court also consolidated each of Capella’s related infringement actions for
pretrial purposes. Docket No. 76. The cases were then related in this District. Docket No. 100.
This Court subsequently ordered that all filings be made in Case No. 14-3348 EMC (Capella
Photonics v. Cisco Systems, Inc.) until further order of the Court. Docket No. 110.
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Capella filed a slightly amended version of its motion on September 30. Docket No. 116.

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In seeking re-issue of the patents-in-suit, Capella allegedly represented to the Patent Office

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that its originally issued patents were invalid because they claimed more than Capella had a right to

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claim. Specifically, Capella allegedly told the Patent Office in May 2011 that its original patents

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“fail[ed] to include limitations regarding the spatial array of beam deflecting elements being

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individually and continuously controllable in two dimensions to control the power of the spectral

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channels.” FA at 13; CAAC at 13. Put differently, Capella allegedly admitted that its patents were

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invalid because their claims did not require two-dimensional (2-D) micromirrors for power control.

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FA at 13-14; CAAC at 13-14. Consequently, Capella sought re-issue of its patents with narrower

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claims that added limitations calling for 2-D mirrors for power control. FA at 14; CAAC at 14. The
PTO eventually granted the amended claims as part of the reissue patents-in-suit, apparently

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concluding that “the prior art of record does not teach or suggest using” 2-D mirrors for power

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control. FA at 14; CAAC at 14. Defendants claim that Capella admitted that “the only allegedly

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novel aspects of” the reissue patents-in-suit over the prior art were 2-D mirrors and power control.

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FA at 14; CAAC at 13 (emphasis added).

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2.

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Defendants allege that the “first instance” of inequitable conduct occurred where Capella,

The “First Instance” of Inequitable Conduct

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and specifically Capella CEO Larry Schwerin, patent prosecutor Barry Young, and former CEO and

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current Emeritus Board Member Joseph Davis (collectively “the Applicants”), knowingly failed to

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cite U.S. Patent No. 6,798,941 (the Smith patent) to the PTO during the reissue prosecution of the

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patents-in-suit that took place in 2010 and 2011. See FA at 7-8; CAAC at 7. While the face of the

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Smith patent lists a filing date of September 20, 2001, it claims priority to a provisional application

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(the Smith provisional) filed on September 22, 2000. The earliest provisional application to which

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the asserted patents may claim priority was filed on March 19, 2001. Thus, according to

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Defendants, if the Smith patent is entitled to its earliest priority date, it would be prior art to the

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patents-in-suit.

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Defendants claim that the Applicants first learned about the Smith patent sometime in 2007

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when a patent examiner cited the Smith patent as prior art during the prosecution of another Capella

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patent on which Mr. Davis was a named inventor. See FA at 9-10, 12-13; CAAC at 9, 12.

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Defendants further allege that during the prosecution of this other Capella patent, the Applicants

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learned that the Smith patent discloses the use of 2-D mirrors for power control – the exact same

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features Capella allegedly told the PTO distinguished the patents-in-suit from the prior art during

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their reissue prosecution years later. See FA at 12-13; CAAC at 12-13.

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Defendants’ alleged “second instance” of inequitable conduct actually appears to be two

The “Second Instance” of Inequitable Conduct

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separate allegations of inequitable conduct. First, Defendants allege that Capella concealed the true

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“nature of the ‘mistake’ on which it based the reissue of the ‘368 and ‘678 patents.” FA at 15-16;

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CAAC at 15-16. Specifically, Defendants allege that Capella initially represented to the PTO that its
original patents “may have claimed more than there was a right to claim in view of the cited prior

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art.” FA at 16; CAAC at 16 (emphasis added). The Patent Office responded that “[t]he phrase ‘may

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have claimed more’” was insufficiently specific and failed to comply with the requirement that a

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party seeking a reissue patent must “specifically identify [to the Patent Office] at least one error” in

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the original patent “and state that the applicant believes the original patent to be wholly or partly

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inoperative or invalid” due to that error. FA at 16; CAAC at 16; 37 CFR § 1.175(a). Only after the

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Patent Office rejected Capella’s first attempt to obtain reissue patents did Capella eventually

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concede that its original patents were actually invalid in light of the prior art. FA at 16; CAAC at

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Defendants’ second claim is that the Applicants “said nothing about” about U.S. Patent No.

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5,629,790 (the Neukermans patent) to the PTO during the reissue prosecution of the patents-in-suit,

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despite the Applicants’ alleged awareness that the Neukermans patent disclosed 2-D mirror control.

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FA at 18; CAAC at 17. Defendants’ pleadings later acknowledge that Capella did, in fact, cite the

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Neukermans patent to the PTO in both re-issue prosecutions. FA at 18; CAAC at 17. They claim,

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however, that Capella “mischaracterized” the Neukermans patent by telling the PTO that

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Neukermans disclosed certain unimportant pieces of prior art while completely failing to disclose to

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the PTO that Neukermans also allegedly discloses critical and invalidating prior art (i.e., 2-D mirror

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control).

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4.

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For the “third instance” of inequitable conduct, Defendants allege that the Applicants

The “Third Instance” of Inequitable Conduct

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purposefully withheld a prior art reference they refer to as the “Lucent 2-Axis Mirror.” CAAC at

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18-19; FA at 19-20. According to Defendants, Applicants knew about the Lucent 2-axis mirror –

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which allegedly discloses the concept of using a 2-D mirror for power control – because they

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themselves cited it as prior art to the Patent Office in the original provisional patent application to

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which both patents-in-suit claim priority.5 CAAC at 18-19; FA at 19-20. Defendants allege that

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despite Capella’s knowledge of the Lucent 2-axis mirror, Capella later “excised” any reference to

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the Lucent 2-axis mirror in subsequent patent filings, and failed to disclose this apparent prior art to
the Patent Office during the re-issue prosecutions of the patents-in-suit. Id. Defendants further

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claim that Capella’s lone reference to the Lucent 2-axis mirror, made in its original provisional

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application, was effectively hidden from the Patent Office because “without any reason to do so []

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the Examiner of the Patents-in-Suit [during the re-issue prosecutions] would be unlikely to reach

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back and examine the provisional application that had been filed ten years earlier.” CAAC at 19;

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FA at 19.

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5.

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Defendants also allege that each of the three above-described instances of inequitable

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conduct were performed with the specific “intent to deceive the Patent Office.” See, e.g., CAAC at

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20; FA at 20 (“Applicants purposely omitted the disclosure of the Lucent 2-D mirrors with an intent

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to deceive the PTO.”). Fujitsu’s answer stated that “[t]he Applicants had strong motivations to

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[deceive the PTO], as they stood to profit from [the] sale of [the] company at a higher valuation or

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through a patent licensing campaign if the sale failed.” FA at 20; see also CAAC at 20 (same).

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Cisco’s answer alleges in even greater detail that:

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Alleged Intent to Deceive the Patent Office

at or near the time Capella filed the reissue applications that became
the Patents-in-Suit, Capella was actively trying to sell its patent
portfolio (including the pre-reissue versions of the Patents-in-Suit),
and was likely trying to increase the perceived value of that portfolio

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The Provisional Patent Application at issue is No. 60/277,217 filed by Capella on March
19, 2001. The faces of both patents-in-suit claim priority to this provisional application. See Docket
Nos. 127-4, 127-5.

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and/or prepare it for litigation. Executives at Capella, including Larry
Schwerin, would have known that the sale value of the company
would be based heavily on the value of its patent portfolio.

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CAAC at 13. Moreover, both Defendants assert that intent to deceive can further be inferred from

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Capella’s alleged “systematic[] withholding or obfuscating the relevance of the known prior art,” its

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“multiple attempts to hide the real ‘mistakes’ in the patents that were re-issued as the Patents-in-

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Suit,” and Capella’s claimed practice of “amending claims to highlight distinctions over weaker,

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disclosed, prior art while withholding art that disclosed some or all of those same distinctions.”

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CAAC at 20; FA at 20.

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C.

Cisco also filed a UCL counterclaim against Capella. Cisco contends that Capella engaged

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Cisco’s UCL Counterclaim

in unfair business practices by filing this infringement lawsuit against Cisco when Capella allegedly

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knew that the patents-in-suit are invalid and were procured by fraud.6 CAAC at 22. Specifically,

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Cisco alleges that Capella violated the “fraudulent” prong of the UCL by:

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deceptively and fraudulently obtaining patent rights and then, in bad
faith, (1) misrepresenting the validity of the patents, which it knew to
be false; (2) asserting those patents against Cisco and other
manufacturers; (3) filing this lawsuit; and (4) attempting to sell
Capella to other California businesses based in part on the
fraudulently-obtained patent rights.

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Id. at 22-23. Cisco prays for injunctive relief as well as restitution/disgorgement of any monies

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Capella received from Cisco as a result of Capella’s allegedly fraudulent practices. Id. at 23. Cisco

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does not identify, however, what monies Capella received from Cisco that would be subject to a

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UCL restitution award.

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In its opposition to Capella’s motion to dismiss, Cisco clarifies that it “did not plead [a
violation of] the ‘unfair’ prong” of the UCL. Docket No. 125 at 20. While Cisco’s complaint
alleges that Capella engaged in acts of “unfair competition,” it only brings a claim under the UCL’s
“fraudulent prong.” See id.

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II.
A.

DISCUSSION

Legal Standards

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Capella’s motions to strike are governed by Federal Rule of Civil Procedure 12(f), which

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allows the Court to strike any “insufficient defense, or any redundant, immaterial, impertinent, or

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scandalous matter.” Fed R. Civ. P. 12(f). “Motions to strike are regarded with disfavor [] because

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of the limited importance of pleadings in federal practice and because they are often used solely to

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delay proceedings.” Zep Solar Inc. v. Westinghouse Solar Inc., No. C-11-6493 JSW, 2012 WL

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1293873, at *1 (N.D. Cal. Apr. 16, 2012) (citation omitted). “Nonetheless, the Court may properly

Motions to Strike Inequitable Conduct Defenses

grant motions to strike when a defense or a claim is insufficient as a matter of law.” Id. (citations

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omitted). As with other attacks on the sufficiency of a pleading, the reviewing court must view the

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pleadings in the light most favorable to the pleader. Id.

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Federal Circuit law governs the sufficiency of allegations of inequitable conduct. See

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Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312, 1318 (Fed. Cir. 2009). “Under Federal

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Circuit law, all averments of fraud and inequitable conduct, including affirmative defenses, fall

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within the strictures of [Federal] Rule [of Civil Procedure] 9(b) and must be stated with

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particularity.” Zep Solar, 2012 WL 1293873 at *2 (citing Exergen, 575 F.3d at 1326). To satisfy

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the “particularity required by Rule 9(b), the pleading must state the ‘who, what, when, where, and

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how’ of the misrepresentation or omission made to the PTO.” Id. (quoting Exergen, 575 F.3d at

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1327).

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“The essential elements of a claim of inequitable conduct under Federal Circuit law are: (1)

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an individual associated with the filing and prosecution of a patent application affirmatively

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misrepresents a material fact, fails to disclose material information, or submits false material

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information; and (2) the individual does so with the specific intent to deceive the [Patent Office].”

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Id. (citing Exergen, 575 F.3d at 1327 n.3). The “materiality required to establish inequitable

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conduct is but-for materiality.” Therasense, Inc. v. Becton, Dickinson and Co., 649 F.3d 1276, 1291

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(Fed. Cir. 2011) (en banc). As the en banc court in Therasense explained, “prior art is but-for

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material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art.”

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Id.

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Capella’s motion to dismiss Cisco’s UCL counterclaim is governed by Federal Rule of Civil

Motion to Dismiss UCL Counterclaim

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Procedure 12(b)(6), which tests the legal sufficiency of Cisco’s pleading. “All well-pleaded

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allegations of material fact in the complaint are accepted as true and are construed in the light most

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favorable to the non-moving party.” Faulkner v. ADT Sec. Services, Inc., 706 F.3d 1017, 1019 (9th

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Cir. 2013) (citations omitted). “To survive a motion to dismiss, a complaint must allege enough

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facts to state a claim to relief that is plausible on its face.” Id. (internal quotation and quotation
marks omitted).

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B.

Defendants’ Inequitable Conduct Defenses

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Defendants alleged three separate “instances” of inequitable conduct in their answers. After

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carefully reviewing the Defendants’ pleadings and motions papers, the Court thus assumed that each

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separate “instance” of inequitable conduct was just that – a claimed instance of inequitable conduct.

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Put differently, the Court understood Defendants to allege that Capella committed inequitable

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conduct at least three separate times: first when it allegedly withheld the Smith patent; again when it

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concealed the “true nature” of the mistake on which reissue was initiated, including misrepresenting

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the contents of the Neukermans patent; and finally when it “excised” and/or withheld any reference

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to the Lucent 2-axis mirror during the reissue prosecution.7

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At the hearing on Capella’s motions to strike, however, both counsel for Cisco and Fujitsu

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expressly (and perplexingly) disavowed half of their second inequitable conduct defense, and the

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entirety of their third inequitable conduct defense. Specifically, counsel represented that neither

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Capella’s alleged mischaracterization of the Nuekermans patent, nor its claimed withholding of the

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Lucent 2-axis mirror, constituted inequitable conduct in its own right, and thus these actions could

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As previously indicated, Defendants’ counsel added to the confusion by pleading its
“second instance of inequitable conduct” to include two separate actions that could potentially
constitute inequitable conduct – concealing the nature of the mistake upon which reissue was based,
and mischaracterizing the contents of the Neukermans patent. Thus, as the Court previously
understood Defendants’ pleadings, Defendants had actually alleged four separate “instances” of
inequitable conduct.

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not support independent inequitable conduct defenses. Rather, counsel stated that those “instances”

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of inequitable conduct were apparently pleaded simply to bolster Defendants’ first inequitable

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conduct defense (i.e., withholding the Smith patent). In particular, Defendants claim that the

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Applicants misled the PTO in initially failing to disclose the severity of their problems with 2-D

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prior art, thus exacerbating the misleading nature of the Applicants’ non-disclosure of the Smith

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patent and its teaching of 2-D mirrors.

Fujitsu’s inequitable conduct defenses based on the alleged withholding or misrepresentation of the

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Nuekermans and Lucent references. As explained below, the Court will also strike with prejudice

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the remaining aspect of Defendants’ “second instance” of inequitable conduct, namely concealing

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The Court will hold counsel to its waiver, and thus strikes with prejudice Cisco’s and

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United States District Court

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the true nature of the “mistake” in Capella’s initial reissue filing, because that claim fails as a matter

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of law.

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However, the Court will not strike Defendants’ “first instance of inequitable conduct” based

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on Capella’s alleged withholding of the Smith patent, as the Court determines that both Defendants

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adequately pleaded that defense.

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1.

The Remaining Aspect of Defendants’ “Second Instance” of Inequitable Conduct Is
Legally Insufficient

Before discussing Defendants’ one legally sufficient inequitable conduct defense, the Court

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will attempt to put to bed the remainder of the legal quagmire that Defendants’ second and third

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inequitable conduct defenses have become. As noted above, Defendants conceded that their

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inequitable conduct allegations with respect to the Neukermans and Lucent references are

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insufficient as a matter of law. The Court thereby strikes with prejudice all separate allegations of

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inequitable conduct relating to those references.

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Defendants did not concede, however, the first part of their claimed “second instance” of

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inequitable conduct. Defendants allege that the Applicants committed inequitable conduct by

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concealing the “true nature of the mistake” on which they sought reissue of the asserted patents. FA

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at 15-16; CAAC at 15-16. Specifically, Defendants claim that Capella initially represented to the

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PTO that its original patents “may have claimed more than there was a right to claim in view of the

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cited prior art.” FA at 16; CAAC at 16 (emphasis added). Only after the Patent Office responded

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that Capella’s averment was insufficiently specific did Capella eventually concede that its original

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patents were actually invalid in light of the prior art. FA at 16; CAAC at 16.

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The Court strikes this aspect of Defendants’ defenses because the behavior alleged simply

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cannot constitute inequitable conduct. The PTO was not deceived by the Applicants’ allegedly

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deceptive statement. To prove inequitable conduct, an accused infringer must demonstrate that the

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“PTO would not have allowed a claim” had it not been misled. Therasense, 649 F.3d at 1291. But

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as both Fujitsu and Cisco admit in their pleadings, the PTO actually rejected Capella’s initial reissue

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applications because they failed to identify an error in the original patents with the requisite
specificity. See FA at 16. Only after Capella responded in greater detail about the mistake in its

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original applications (i.e., there was no limitation requiring 2-D mirrors for power control) did the

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PTO allow the reissue patents-in-suit. FA at 17-18; CAAC at 17-18. There can be no inequitable

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conduct liability based on Capella’s alleged concealment of any mistake where the PTO was not

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fooled by the concealment, and where Capella eventually chose to “come clean” with the Patent

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Office. To the extent Defendants contend that Capella concealed the “nature” of the mistake by

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mischaracterizing or withholding art that discloses 2-D mirrors for power control, the Court notes

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that the only remaining relevant art is the Smith patent, and the Court finds Defendants’ allegations

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regarding the Smith patent to be sufficient. To the extent Capella sought to further rely on the

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Neukermans patent or Lucent reference, however, these claims have now been waived. Moreover,

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as characterized by Defendants, these allegation add nothing material to the first claim of inequitable

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misconduct which, in the final analysis, turns on the disclosure, materiality, and intent with respect

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to the Smith patent.

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2.

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According to Defendants, Capella committed inequitable conduct when it failed to cite the

Defendants’ First Instance of Inequitable Conduct is Well-Pleaded

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Smith patent to the PTO during the reissue prosecutions of the patents-in-suit. FA at 8-15; CAAC at

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8-15. The Court finds that both Fujitsu and Cisco adequately pleaded this defense.

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a.

The Smith Patent is Material

Defendants allege that the Smith patent is but-for material8 prior art because it discloses the

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use of 2-D mirrors for power control. See, e.g., FA at 11-12. The Court agrees. Indeed, it is notable

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that Capella never challenges the materiality of the Smith patent.

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The patents-at-issue are reissue patents. In order to obtain a reissue patent, the applicant

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must “specifically identify at least one error” that caused the “original patent to be wholly or partly

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inoperative or invalid.” 37 C.F.R. § 1.175(a). Here, Defendants allege that the sole “mistake”

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identified by Capella was that its original patents were invalid because they did not limit their claims

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to require 2-D micromirrors for power control. FA at 13-14; CAAC at 13-14. Thus, Capella sought
re-issue of its patents with narrower claims that included limitations calling for 2-D mirrors for

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power control. FA at 14; CAAC at 14. According to Defendants, the PTO eventually granted the

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amended claims as part of the reissue patents-in-suit, apparently concluding that “the prior art of

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record does not teach or suggest using” 2-D mirrors for power control. FA at 14; CAAC at 14.

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Because the PTO specifically granted Capella’s re-issue patents on the ground that the prior

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art did not “teach or suggest using” 2-D mirrors for power control, any prior art that does teach the

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use of 2-D mirrors for power control is but-for material prior art: Capella would never have

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received the reissue patents had the PTO believed that 2-D mirrors for power control were well

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known in the prior art. Because Defendants allege that the Smith patent teaches the use of 2-D

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mirrors for power control, and Capella does not appear to dispute that claim, the Federal Circuit’s

20

materiality standard is met.

21

///

22

///

23
24
25
26
27
28

8

As previously explained, the Federal Circuit has held that an individual commits
inequitable conduct if he fails to disclose prior art to the PTO that is “but-for” material. Therasense,
649 F.3d at 1291. Failure to disclose prior art that is not but-for material, however, does not amount
to inequitable conduct. See, e.g., Nalco Co. v. Turner Designs, Inc., 13-cv-2727 NC, 2014 WL
645365, at *5 (N.D. Cal. Feb. 19, 2014) (holding that accused infringer failed to sufficiently plead
inequitable conduct defense because it made no showing that the withheld information was not
cumulative of other information disclosed during prosecution) (citations omitted). “[P]rior art is
but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed
prior art.” Id.

12

1
2

b.

Capella Knowingly Withheld Material Prior Art

According to Defendants, Capella (and specifically Mr. Davis) first learned of the Smith

3

patent by at least 2007.9 FA at 9-10; CAAC at 9. Davis was a named inventor on another Capella

4

patent not at issue in this litigation. Id. During the prosecution of that patent in 2007, the Examiner

5

cited the Smith patent as potential prior art on multiple occasions, and specifically noted that the

6

Smith patent disclosed 2-D mirrors for power control. FA at 10-11, 13; CAAC at 9-12. Indeed, the

7

face of the Smith patent confirms this allegation, as the very first sentence of the abstract of

8

invention reads: “A multi-wavelength or white-light optical switch including an array of mirrors

9

tiltable about two axes, both to control the switching and to provide variable power transmission
through the switch . . .” Docket No. 127-1 at 1 (Smith patent) (emphases added). Thus, Defendants

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10

claim that Davis had actual knowledge of the relevant features of the Smith patent at least three

12

years before Capella sought reissue of the patents-in-suit in 2010.10 Davis is a named inventor of the

13

patents-in-suit in this action, and Defendants expressly allege that he was “substantively involved”

14

in the prosecution of these patents. CAAC at 9; FA at 9. Nevertheless, Davis and the other Capella

15

Applicants failed to cite the Smith reference to the Patent Office during the asserted patents’ reissue

16

prosecutions.

17

The crux of Capella’s motion to strike the “first instance” of inequitable conduct is that

18

Defendants did not sufficiently plead or establish that Smith is actually prior art to the patents-in-

19

suit. Capella notes that the Smith patent was filed September 20, 2001. Docket No. 127-1 at 1. The

20
21

9

22

10

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25
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27
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Fujitsu alleges that Davis first learned of the Smith patent in 2006. FA at 9.

Defendants also claim in a rather conclusory fashion that Schwerin learned about the Smith
patent sometime in 2007. See, e.g., FA at 13 (“At least Davis and Schwerin, and possibly other
Applicants were aware of [Capella’s] statement” from the PTO describing Smith as disclosing 2-D
mirrors for power control). At the pleading stage, it is likely irrelevant that Defendants did not
provide more factual details to support their allegations of knowledge against Schwerin, because
knowledge can be pleaded generally under Rule 9(b) as long as the factual context of the complaint
renders the allegations sufficiently plausible. Here it is plausible that Davis, a named inventor who
likely had actual knowledge of the PTO’s rejection of his patent application over the Smith patent,
would have informed his CEO, Schwerin, of that rejection and its reasoning. This is particularly
true because Defendants allege that Schwerin “has been involved in the prosecution of Capella’s
patents since” 2005. FA at 9; CAAC at 9. But even if Davis hadn’t told the other Applicants about
the Smith patent, Defendants’ “first instance” of inequitable conduct would still be adequately
pleaded with regards to Davis, and thus will not be struck.

13

1

patents-in-suit, however, claim priority back to a provisional application filed on March 19, 2001.

2

See Docket Nos. 127-4, 127-5. Thus, if the Smith patent is not entitled to a priority date earlier than

3

March 19, 2001, it cannot be prior art, and Capella and the Applicants were under no duty to

4

disclose Smith to the PTO during reissue.

5

The face of the Smith patent, however, does claim priority back to an earlier application,

6

namely the Smith provisional application filed on September 22, 2000. The parties vigorously

7

dispute the merits of whether the Smith patent is actually entitled to this earlier priority date. For

8

instance, Capella argues that there is no written description support in the Smith provisional that

9

would entitle the Smith patent to claim the provisional’s earlier priority date (at least with respect to
Smith’s claims regarding 2-D mirrors for power control). See Docket No. 116 at 6. But these

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10

arguments are largely irrelevant at this stage of these proceedings. At the pleading stage, the Court

12

must review Defendants’ defenses in the light most favorable to them. Defendants pleaded that the

13

Smith patent is entitled to the provisional filing date of the Smith provisional, and cite portions of

14

the Smith provisional that seem to support this argument.11 Thus, this Court assumes at this stage of

15

the proceedings that the Smith patent is actually prior art to the Capella patents-in-suit.12

16

Assuming that the Smith patent is actually material prior art to the patents-in-suit, the

17

remaining dispositive question is whether any of the Capella Applicants knew that it was prior art at

18

the time of the reissue prosecution. Capella argues that Fujitsu’s inequitable conduct defense is

19

defective because it never alleges that any applicant had actual knowledge of the contents of the

20

Smith provisional, as opposed to the Smith patent.

21

Capella’s argument, however, is not well taken. Fujitsu alleges that at least Davis knew that

22

the Smith patent disclosed 2-D mirrors for power control – the very same features that Capella later

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24
25
26
27
28

11

For instance, Cisco’s answer contains an excerpt from the Smith provisional that seems to
support Cisco’s argument that the Smith provisional does provide written description support for the
2-D mirror control limitations in the issued Smith patent. Specifically, the Smith provisional
allegedly discloses the use of a “mirror array with elements that can be rotated in an analog fashion
about two orthogonal axes. . . . [A]ngular displacement about the orthogonal axis is used for power
control.” CAAC at 12 (emphases added).
12

At the hearing, Capella’s counsel agreed that at this stage of the proceedings, the Court
must assume that the Smith patent is entitled to its earliest priority date.

14

1

cited to the PTO as a point of novelty in order to obtain reissuance of the patents-in-suit. Indeed, the

2

face of the Smith patent seems to clearly disclose these features. And the face of the Smith patent

3

also clearly claims priority to a provisional application that pre-dates any filing to which Capella’s

4

asserted patents could claim priority. It is therefore a highly plausible inference that Davis would

5

have acquainted himself with the contents of the Smith provisional in order to determine whether or

6

not the Smith patent actually is but-for material prior art to either of the patents-in-suit.

7

Indeed, this is exactly the inferential reasoning that Cisco explicitly added to its pleading

8

after it was initially struck by Judge Seitz. Cisco’s amended (and operative) defense alleges that

9

“Schwerin, Young, and possibly other applicants such as Davis were aware of the [Smith]
provisional and its contents. This is because the Smith patent lists on its face the [Smith] provisional

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10

and the filing date of that provisional, and because the first paragraph in the Smith patent’s

12

specification claims priority to the [Smith] provisional application.” CAAC at 14. That is, Cisco’s

13

defense infers knowledge of the Smith provisional from the fact that any reasonable patent applicant

14

who knew that a patent (1) disclosed but-for material art, and (2) claimed a priority date before that

15

of the applicant’s own filing, would likely obtain the provisional application and determine for

16

himself whether or not that material art was material prior art, and thus would have determined

17

whether or not the provisional application and/or patent needed to be disclosed to the PTO. The

18

Court agrees with Defendants.13

19

In fact, the above logic is so plausible that Fujitsu did not need to explicitly plead each

20

inferential step in its defense in order to survive Capella’s motion to strike. Fujitsu alleges that the

21

Applicants knew what the Smith patent purports to claim, and knew that the Smith patent claims

22

priority to a provisional filing that pre-dated all of Capella’s filings. Under those circumstances, it

23

would be both reasonable and plausible for the Court to assume that the Applicants actually learned

24

of the contents of the Smith provisional, because the only way they could possibly determine

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27
28

13

The Court does note, however, that while the Applicants’ knowledge of the contents of the
Smith provisional can be inferred at the pleading stage, drawing all reasonable inferences in
Defendants’ favor, Defendants will have to make a far more significant showing to prevail on their
inequitable conduct defenses at either summary judgment or trial. See, e.g., Therasense, 649 F.3d at
1290 (explaining that knowledge of a material reference must be proved by “clear and convincing
evidence”).

15

1

whether the seemingly invalidating Smith patent actually is prior art would be to review the Smith

2

provisional and determine if the Smith patent is truly entitled to claim priority to that application.

3

In sum, Defendants “first instance” of inequitable conduct is well-pleaded. Defendants

4

identify the who (i.e., Davis and possibly the other Applicants), the what (i.e., the Smith patent’s

5

disclosure of 2-D mirrors for power control), the when (i.e., during the reissue prosecutions of the

6

asserted patents in 2010), the where (i.e., the abstract and specification of the Smith patent and the

7

disclosure of the Smith provisional), and how (i.e., the Examiner would have rejected the claims of

8

the reissue patent had she known Smith disclosed 2-D mirrors for power control) of the alleged

9

fraud. See Exergen, 575 F.3d at 1327. And, as described below, Defendants also have satisfactorily
alleged that the Applicants knowingly withheld the Smith patent from the PTO with the specific

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10

intent to deceive the Patent Office.

12
13
14

c.

Capella Knowingly Withheld the Smith Patent With the Intent to Deceive the
Patent Office

A finding of inequitable conduct also requires that the applicant (or applicants) withhold or

15

misrepresent material prior-art “with a specific intent to deceive the PTO.” Exergen, 575 F.3d at

16

1329. While intent “may be averred generally” under Rule 9(b), a pleading of inequitable conduct

17

“must include sufficient allegations of underlying facts from which a court may reasonably infer that

18

a specific individual” acted with the requisite state of mind. Id. at 1328; see also Ashcroft v. Iqbal,

19

129 S. Ct. 1937, 1954 (2009) (noting that “Rule 9 merely excuses a party from pleading [] intent

20

under an elevated pleading standard,” and holding that intent must be able to be inferred from a

21

pleading’s factual context to survive a motion to dismiss).

22

Here, the Court concludes that both answers contain sufficient factual material from which

23

the Applicants’s specific intent to deceive the PTO can reasonably be inferred, particularly given

24

that on a motion to strike this Court must view the pleadings in the light most favorable to the

25

pleader. Zep Solar, 2012 WL 1293873 at *1. Both answers aver that the Applicants (Larry

26

Schwerin, Joseph Davis, and Barry Young) had significant financial incentives to lie to the PTO

27

during the reissue prosecution of the patents-in-suit. And Defendants further point to Capella’s

28

16

1

alleged concealment of the nature of the mistake in its patents, and the misrepresentation/excision of

2

the Neukerman and Lucent references to support an inference of specific intent.14

3

Barry Young was the prosecuting attorney of the reissue patents,15 and it is reasonable to

4

infer that he had a personal financial interest in the success of the reissue applications. Joseph Davis

5

was President and CEO of Capella until 2005, and remains an “Emeritus Board Member” at the

6

company. FA at 9; CAAC at 9. Larry Schwerin is the current President and CEO of Capella. FA at

7

9; CAAC at 9. Given Messrs. Davis’s and Schwerin’s respective positions at Capella, it is

8

reasonable to infer that both men have at least some financial interest in the firm.

9

Moreover, with respect to both Davis and Schwerin, Fujitsu further explicitly alleged that
specific intent is reasonably inferable because “they stood to profit from the sale of [the] company at

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10

a higher valuation or through a patent licensing campaign if the sale failed.” FA at 20. And Cisco’s

12

answer goes into even more detail, alleging that:

13

at or near the time Capella filed the reissue applications that became
the Patents-in-Suit, Capella was actively trying to sell its patent
portfolio (including the pre-reissue versions of the Patents-in-Suit),
and was likely trying to increase the perceived value of that portfolio
and/or prepare it for litigation. Executives at Capella, including Larry
Schwerin, would have known that the sale value of the company
would be based heavily on the value of its patent portfolio.

14
15
16
17

CAAC at 13. The above factual allegations, taken together with allegations that Capella

18

misrepresented other references and purposefully filed a misleading request for patent re-issuance,

19

are sufficient to satisfy the intent requirement on a motion to strike.

20

Capella counters that a “desire to make money by obtaining patents (a desire common to

21

nearly every patent applicant)” cannot “support an inference of specific intent to deceive by

22

withholding material information.” Docket No. 132 at 11. Notably, Capella does not cite any

23

authority in support of this position, and it does not appear to hold up to scrutiny. The desire to

24
25
26
27
28

14

While Defendants waived any independent inequitable conduct defenses based on
Neukermans or Lucent, Defendants do claim that Capella’s alleged misrepresentations regarding
these references can bolster their claim that Capella withheld Smith with the requisite intent. The
Court agrees.
15

FA at 7; CAAC at 7.

17

1

make money is by far the most likely explanation for attempting to obtain patents via acts of

2

inequitable conduct.

3

In any event, there are additional allegations that bolster the inference of specific intent. For

4

instance, Capella initially refused to identify the precise flaw in its original patents when seeking re-

5

issue, only identifying the error with specificity after the PTO initially rejected its re-issue

6

application. Moreover, Capella allegedly failed fairly to disclose the Lucent 2-axis mirror – an

7

apparently material piece of 2-D mirror art Capella undoubtedly knew about – to the Patent Office in

8

a filing that was likely to be reviewed by the Examiner. Taken together, Defendants have

9

adequately pleaded intent at the pleading stage.16

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For the Northern District of California

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10

C.

Cisco’s UCL Counterclaim
Capella also moves to dismiss Cisco’s UCL counterclaim. Cisco alleges that Capella

12

engaged in a fraudulent business practice by filing this lawsuit against Cisco in bad faith, knowing

13

that the asserted patents-in-suit are invalid and were procured through fraud.17 Cisco’s UCL claim is

14

closely related to its inequitable conduct defense – if Cisco cannot prove that Capella knew its

15

patents were invalid and/or committed inequitable conduct to obtain them, Cisco would not be able

16
17
18
19
20
21
22
23
24
25
26
27
28

16

Defendants may have to show more to actually prevail on their inequitable conduct
defenses at summary judgment or trial given the rigorous burden of proof. See Exergen, 575 F.3d at
1329 n.5 (“In contrast to the pleading stage, to prevail on the merits, the accused infringer most
prove . . . intent by clear and convincing evidence,” and specific intent to deceive must be “the
single most reasonable inference able to be drawn from the evidence.”) (emphasis omitted).
17

Cisco’s pleading also alleges that Capella violated the “fraudulent” prong by: (1)
“misrepresenting the validity of the patents, which it knew to be false,” (2) “asserting those patents
against Cisco and other manufacturers”; and (3) “attempting to sell Capella to other California
businesses based in part on the fraudulently-obtained patent rights.” CAAC at 22-23. None of these
are well-pleaded UCL claims. As to the first claim, Cisco’s pleading does not identify or allege any
instance where Capella “misrepresented the validity of its patents” except in the context of this
lawsuit. Nor does Cisco allege that Capella actually asserted its patents against other manufacturers
outside the context of this lawsuit, which would be necessary to sustain its second UCL claim.
Hence, these two claims completely overlap with the claim analyzed in the main text of this memo
(i.e. that the filing of this lawsuit violates the UCL), and must be dismissed. And as for Capella
attempting to sell the business to third-parties based on its allegedly invalid patents rights, Cisco has
no standing to pursue this claim on behalf of those third-parties, nor does Cisco plead any facts to
support its claim (such as who the alleged third parties are, whether Capella actually made
fraudulent representations to those parties about the strength or validity of the patents-in-suit,
whether those parties relied on such representations, etc).

18

1

to proceed with its UCL counterclaim predicated on Capella’s alleged bad faith assertion of its

2

patent rights.

3

In its motion, Capella argues that the UCL claim must be dismissed for a number of reasons

4

including: (1) Cisco’s UCL claim is precluded by the Noerr-Pennington doctrine; (2) Cisco’s UCL

5

claim is pre-empted by Federal patent law; (3) Cisco cannot show it is entitled to restitution; (4) any

6

injunctive relief awarded under the UCL would be entirely co-extensive with any relief obtained

7

under the Patent Act, and therefore the UCL cause of action is duplicative and essentially moot; and

8

(5) Cisco has not adequately pleaded facts that constitute a violation of the “fraudulent” prong.

9

Docket No. 116 at 13-17. Because Capella’s fifth and final contention (i.e., Cisco has not
adequately alleged a fraudulent prong violation) is correct, the Court only discusses that argument.

11
For the Northern District of California

United States District Court

10

The California Supreme Court has held that a business practice is “fraudulent” in violation of

12

the UCL if “members of the public are likely [to be] deceived by the practice.” Committee on

13

Children’s Television v. Gen. Foods. Corp., 35 Cal.3d 197, 214 (1983); see also Nat’l Rural

14

Telecomm. Co-op. v. DIRECTV, 319 F. Supp. 2d 1059, 1077 (C.D. Cal. 2003). Under this standard,

15

Cisco’s UCL counterclaim is fatally defective for two straightforward reasons. First, Cisco does not

16

allege that members of the public have been deceived by Capella’s alleged fraudulent

17

misrepresentations about the strength of its patent rights. Indeed, Cisco does not even allege that

18

members of the public are aware of Capella’s alleged misrepresentations. See, e.g., Nat’l Rural

19

Telecomm. Co-op., 319 F. Supp. 2d at 1078 (“Here, Plaintiffs have not made a showing that the

20

public was impacted at all by DIRECTV’s alleged actions. Thus, Plaintiffs’ claims under the

21

‘fraudulent’ prong of the UCL fail as a matter of law.”). Hence, Cisco has not pleaded a viable UCL

22

claim.

23

Moreover, under prevailing case law, Cisco is not itself a member of the “public,” and thus it

24

is ineligible to bring a claim under the fraudulent prong for any alleged misrepresentations Capella

25

made to it. See Rosenbluth International, Inc. v. Superior Court, 101 Cal. App. 4th. 1073, 1077-79

26

(Cal. App. 2002) (holding that “sophisticated corporations” are not members of the “general public”

27

for the purposes of the UCL); see also Nat’l Rural Telecomm. Co-op., 319 F. Supp. 2d at 1078 n.28

28

(“Sophisticated companies, like Plaintiffs here, are not members of the ‘general public.’”). As one

19

1

judge succinctly explained, a corporate-competitor “is not entitled to the protection of [the

2

fraudulent] prong of § 17200 because it is not a member of the public or a consumer entitled to such

3

protection. The Court has identified no case under the ‘fraudulent’ prong of § 17200 allowing one

4

competitor to proceed against another on the basis that the defendant deceived him.” Watson

5

Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1121 (C.D. Cal. 2001).

6

Courts in this district have held similarly. See, e.g., Travelers Prop. Casualty Co. of America v.

7

Centex Homes, No. 12-0371-SC, 2013 WL 4528956, at *5 (N.D. Cal. Aug. 26, 2013) (holding that

8

corporation could not bring a UCL fraud prong claim absent a showing “that the alleged wrongdoing

9

has some impact on the general public”); Medical Instrument Development Laboratories v. Alcon

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For the Northern District of California

United States District Court

10

Laboratories, No. C-05-1138 MJJ, 2005 WL 1926673, at *5 (N.D. Cal. Aug. 10, 2005) (same).
At oral argument, Cisco’s attorney argued that a rule prohibiting “sophisticated” companies

12

from pursuing fraudulent prong claims under the UCL, while allowing arguably “unsophisticated”

13

companies to bring such claims is inadvisable as a policy matter, and requires the Court to draw an

14

arbitrary line between sophisticated companies and unsophisticated companies. While the Court

15

does not dismiss these arguments out-of-hand, it notes that the rule is one that the California Court

16

of Appeal and other California courts have seen fit to adopt. Cisco’s challenge to this line drawing

17

misses the notion established by case law that the protections of the UCL’s fraudulent prong are

18

directed to the protection of the “general public”; if a sophisticated business customer is deemed part

19

of the “general public,” it is hard to imagine what meaningful limitation would be imposed by that

20

term. Moreover, while in some cases, determining whether a company was so “sophisticated” as to

21

bar a fraudulent prong claim may be subtle, this is not such a case; by any measure or definition,

22

Cisco is a “sophisticated corporation.” Thus, Cisco may not bring a UCL action under the

23

fraudulent prong based on Capella’s allegedly fraudulent conduct in bringing this lawsuit over

24

purportedly invalid patents.

25

Because Cisco is not a member of the public itself, and because it does not allege Capella’s

26

misrepresentations about the patents-in-suit misled any members of the public, its UCL counterclaim

27

is dismissed with prejudice.

28

20

1
2

III.

CONCLUSION

Capella’s motions to strike Cisco’s and Fujitsu’s “first instance of inequitable conduct” are

3

DENIED. Capella’s motions to strike the remaining instances of inequitable conduct, however, are

4

GRANTED. Neither Defendant may rely on the Neukermans or Lucent reference to directly state a

5

claim of inequitable conduct.

6

To the extent Defendants wish to continue to rely on the Neukermans or Lucent references

7

solely for the purpose of proving that Capella withheld the Smith patent with the specific intent to

8

deceive the PTO, Defendants’ shall amend the specific intent portion of their defenses within thirty

9

(30) days of the date of this order.

11
For the Northern District of California

United States District Court

10

12

Capella’s motion to dismiss Cisco’s UCL counterclaim is GRANTED with prejudice, as the
Court determines that amendment would be futile.
This order disposes of Docket Nos. 115 and 116.

13
14

IT IS SO ORDERED.

15
16

Dated: December 23, 2014

17
_________________________
EDWARD M. CHEN
United States District Judge

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