Cave Consulting Group, Inc. v. OptumInsight, Inc.,

Filing 127

Order by Chief Magistrate Judge Joseph C. Spero denying 103 Motion to Dismiss Second Amended Complaint. (jcslc2S, COURT STAFF) (Filed on 9/12/2016)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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CAVE CONSULTING GROUP, INC.,

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Case No. 15-cv-03424-JCS

Plaintiff,
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v.
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OPTUMINSIGHT, INC.,

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Defendant.

ORDER DENYING MOTION TO
DISMISS SECOND AMENDED
COMPLAINT
Re: Dkt. No. 103

United States District Court
Northern District of California

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I.

INTRODUCTION
Plaintiff Cave Consulting Group, Inc. (―CCGroup‖) brings antitrust, malicious prosecution,

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and false advertising claims against Defendant OptumInsight, Inc. based on OptumInsight‘s

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assertion, in litigation and otherwise, of patents that CCGroup contends are invalid or

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unenforceable. The Court previously dismissed CCGroup‘s First Amended Complaint with leave

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to amend, and OptumInsight now moves to dismiss the Second Amended Complaint. The Court

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held a hearing on September 2, 2016. For the reasons discussed below, OptumInsight‘s present

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motion is DENIED.1

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II.

BACKGROUND

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A.

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CCGroup‘s allegations are generally taken as true at the pleading stage. Parks Sch. of Bus.

Allegations of the Second Amended Complaint

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v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). This section summarizes the allegations but

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should not be construed as resolving any factual issues that might be disputed.
Both parties in this case are in the business of providing software, known as ―episode of

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care groupers‖ or simply ―groupers,‖ used to group medical claims data based on discrete periods

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The parties have consented to the jurisdiction of the undersigned magistrate judge for all
purposes pursuant to 28 U.S.C. § 636(c).

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of treatment in order to better evaluate the quality and efficiency of medical care. 2d Am. Compl.

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(―SAC,‖ dkt. 86) ¶¶ 22−28. From 2005 through 2014, only three groupers existed in the national

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market, including OptumInsight‘s ―ETG‖ product, CCGroup‘s ―Cave Grouper,‖ and a product

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sold by non-party Truven Health Analytics, Inc., formerly known as MedStat Group, Inc.

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(―MedStat‖). Id. ¶ 28. OptumInsight controlled eighty-five to ninety percent of the market during

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that period. Id. ¶ 30. OptumInsight (including its predecessors Ingenix, Inc. and Symmetry

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Health Data Systems Inc.) obtained its dominant market share through actual and threatened

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enforcement of a portfolio of patents, including two families: the ―Dang Patents‖ and the ―Seare

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Patents.‖ Id. ¶¶ 31−33.2
1. Symmetry and the ’897 Patent

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United States District Court
Northern District of California

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Dennis Dang, among others, formed Symmetry Health Data Systems Inc. (―Symmetry‖) in

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1993, and ―[b]y early 1994 . . . had developed a software grouping methodology, which Symmetry

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began advertising for sale under the trade name ‗Episode Treatment Groups‘ or ‗ETGs.‘‖ Id.

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¶¶ 43−44. On June 12, 1994, Symmetry responded to a request for proposal from Aetna, a large

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insurance company, by offering to license the ETG software to Aetna and providing a description

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of the software, sample reports generated by the software, and pricing information. Id. ¶¶ 45−46

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& Ex. A. The response stated that the ETG software was ―recently developed and available‖ and

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described features of the product, including a ―dynamic time window‖ function that allowed the

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software to determine the end of a period of treatment by recognizing the absence of recurring

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claims, and a ―shifting‖ function that helped account for patient severity to ensure ―clinical

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homogeneity.‖ Id. ¶¶ 54−66. The software was fully functional at the time of Symmetry‘s

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response to the request for proposal. Id. ¶ 67. Symmetry‘s response constituted an offer of sale

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describing the invention, and therefore triggered a one-year period to file a patent application

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under the then-existing version of 35 U.S.C. § 102(b). Id. ¶ 71.3

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The Dang Patents include U.S. Patent Nos. 5,835,897; 6,370,511; 7,620,560; 7,725,333;
7,774,216; 7,979,290; 8,121,869; 8,296,165; and 8,700,433. The Seare Patents include U.S.
Patent Nos. 7,222,079 and 7,774,252. This Order refers to these patents using the last three digits
of each number (e.g., the ‘897 patent).
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At the time, that statute read as follows: ―A person shall be entitled to a patent unless-- . . . (b)
the invention was patented or described in a printed publication in this or a foreign country or in
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More than one year after responding to Aetna‘s RFP, Symmetry filed a patent application

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for its grouping methodology. Id. ¶ 73. ―When [Symmetry‘s patent counsel David] Rosenbaum

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and Dang filed the patent application, they deliberately withheld from the USPTO all of the

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information in their possession regarding Symmetry‘s early efforts to commercialize Dang‘s

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invention, including Dang‘s offer to sell his inventive methodology to Aetna,‖ which ―would have

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rendered the claims . . . unpatentable‖ if properly disclosed. Id. ¶¶ 74−75. In response to that

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application, the USPTO issued the ‘897 patent in 1998. Id. ¶ 76. CCGroup‘s Second Amended

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Complaint discusses the claims of the ‘897 patent and their overlap with the RFP response in

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detail at paragraphs 240 through 314.

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2. Symmetry-MedStat Litigation

United States District Court
Northern District of California

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Immediately after the ‘897 patent was issued, Symmetry sued MedStat for infringing that

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patent. Id. ¶ 79 (citing Symmetry Health Data Sys., Inc. v. The MedStat Grp. Inc., No. 2:98-CV-

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02032-EHC (D. Ariz.)). ―Rosenbaum, Symmetry‘s patent prosecution counsel, served as

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litigation counsel in the MedStat litigation.‖ Id. Symmetry stated in sworn interrogatory

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responses that Dang conceived of the invention ―at least as early September 1993‖ and that, at that

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time, it was ―sufficiently complete to enable one of ordinary skill in the art to reduce the claimed

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invention to practice.‖ Id. ¶¶ 80−81. Dang confirmed that position in sworn testimony in both the

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MedStat litigation and later litigation against CCGroup. Id. ¶¶ 82, 85. According to CCGroup,

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Symmetry took the position that the invention occurred in 1993 ―in order to predate prior art cited

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by MedStat,‖ specifically a patent issued from a 1994 application by Jerry Seare. Id. ¶ 84. The

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MedStat litigation ultimately settled in 2000. See id. ¶ 88.

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3. Reexamination of the ’897 Patent
Earlier in 2000, before the MedStat case settled, Symmetry initiated a non-adversarial

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USPTO reexamination of the ‘897 patent. Id. The initial petition for reexamination focused on

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certain prior art references not at issue in the present case, but after the reexamination had been

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pending for nine months, Symmetry and Rosenbaum also disclosed the Aetna RFP response to the

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public use or on sale in this country, more than one year prior to the date of the application for
patent in the United States . . . .‖ 35 U.S.C. § 102 (prior to amendment in 2015).
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USPTO for the first time. Id. ¶ 89. CCGroup contends that if Dang had fully conceived the

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invention in 1993 (which was the position Symmetry took in the Medstat litigation) and offered it

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for sale to Aetna in 1994 (as evidenced by the RFP response), the ‘897 patent would be invalid

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under § 102(b). Id. ¶ 91. Over several months in 2000, Rosenbaum, Dang, and other Symmetry

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personnel ―concoct[ed] an explanation‖ for why the RFP response should not invalidate the patent,

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ultimately submitting affidavits to the USPTO falsely stating that Dang did not fully conceive the

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invention until August of 1994, shortly after Symmetry responded to Aetna‘s RFP. Id. ¶¶ 90–97.

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―The affidavits contained material falsehoods regarding the date of conception,‖ focusing on the

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―false‖ premise ―that at the time of the Aetna RFP Reponse, Dang had not yet conceived of
‗shifting‘ and ‗resetting‘ required by the ‗dynamic time windows‘ in the patent.‖ Id. ¶¶ 96, 98.

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United States District Court
Northern District of California

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Such statements ―directly contradicted Dang‘s earlier sworn testimony that he fully conceived of

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his invention by September of 1993.‖ Id. ¶ 100. Symmetry withheld from the USPTO the

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litigation materials in which Symmetry had asserted a 1993 conception date, which CCGroup

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alleges ―were material to the patentability of the ‘897 patent and all of the other patents that

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ultimately issued from the original application for the ‘897 patent.‖ Id. ¶¶ 102–03. CCGroup also

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contends that Rosenbaum ―lied about his knowledge of the Aetna RFP Response‖ by representing

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that he did not learn of it until July of 2000, when in fact he ―was intimately familiar with [it] at

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least as early as August 1999‖ based on communications he received from Symmetry‘s litigation

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counsel in the MedStat case seeking to avoid producing that document in response to a discovery

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request. Id. ¶¶ 104–11. ―Relying on Symmetry‘s material misrepresentations and omissions, and

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without any of the information evidencing Dang‘s actual conception in September of 1993, the

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USPTO issued a reexamination certification for the claims of the ‘897 Patent on February 19,

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2002.‖ Id. ¶ 112.

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4. Ingenix-Symmetry Litigation
―In April of 2001, while the reexamination of the ‘897 patent was pending, OptumInsight

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(then known as Ingenix) sued Symmetry for infringement of [Seare‘s ‘164 patent].‖ Id. ¶ 114

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(citing Ingenix, Inc. v. Symmetry Health Data Systems, Inc., No. 0:01-cv-00704 (D. Minn.)).

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Rosenbaum again assisted as Symmetry‘s litigation counsel. Id. ¶ 115. OptumInsight‘s counsel
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included Peter Lancaster4 of the Dorsey & Whitney firm, and Kevin McMahon and Steven Glazer

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of the Weil Gotshal firm. Id. ¶¶ 116–17.
Symmetry counterclaimed that Seare derived his invention from Dang‘s work. Id. ¶ 118.

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The Seare ‘164 patent‘s filing date was June 23, 1994, and Symmetry argued that Dang conceived

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his ETG invention in September of 1993—contradicting the position Symmetry took in the

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reexamination and reverting to the date it asserted in its litigation against MedStat. Id. ¶¶ 119–21.

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Symmetry disclosed dated source code to support the 1993 date, and asserted in a brief opposing

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summary judgment that ―‗Mr. Dang‘s undisputed testimony is that he first conceived of the

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invention, which is now known as ETGs, in the summer of 1993.‘‖ Id. ¶ 122–23 (quoting the
brief) (emphasis omitted). Lancaster, McMahon, and Glazer received or knew of the source code

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United States District Court
Northern District of California

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and the brief, and ―were also provided with the interrogatory responses and other materials from

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the earlier MedStat litigation that identified September 1993 as the actual conception date for

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Dang‘s invention.‖ Id. ¶¶ 124, 130. Symmetry‘s counsel argued at a hearing where Lancaster and

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McMahon were present that Dang conceived the invention in 1993. Id. ¶ 125.
Separate litigation between OptumInsight and Symmetry also occurred in the District of

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Arizona. See id. ¶ 113 (citing Symmetry Health Data Systems, Inc. v. Ingenix, Inc., No. CIV 00-

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1411 (D. Ariz.)). Symmetry sued OptumInsight for infringing the ‘897 patent, and OptumInsight

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counterclaimed that the ‘897 patent was unenforceable on account of inequitable conduct. Id.

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5. Interference Proceeding, Acquisition of Symmetry, and Subsequent
Representations and Prosecutions

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In addition to its infringement lawsuit, OptumInsight also provoked a USPTO interference
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proceeding between the ‘897 Dang patent and the then-pending application for what became the
‘079 Seare patent to determine who first invented the methodology claimed in those applications.
Id. ¶ 132. OptumInsight‘s application for the ‘079 patent included, verbatim, the first claim of the
‘897 patent, and OptumInsight‘s attorneys represented to the USPTO that the applications were

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directed to the same invention. Id. ¶ 134.
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Lancaster also represents OptumInsight in the present action, in which he is OptumInsight‘s lead
counsel.
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In May of 2003, OptumInsight purchased all the outstanding stock of Symmetry, and thus

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acquired Symmetry‘s intellectual property. Id. ¶ 138. To resolve the interference, OptumInsight

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decided unilaterally that the Seare application for the ‘079 patent had priority over the ‘897

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patent—now also owned by OptumInsight—without the issue being decided by a finder of fact.

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Id. ¶ 139. After OptumInsight represented that it had conducted ―a thorough investigation of the

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relevant facts‖ and determined that Seare invented first, and that Dang conceived his invention in

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1994, the Board of Patent Appeals and Interferences entered judgment to that effect ―‗[b]ecause

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[OptumInsight] has elected that [Seare] should prevail.‘‖ Id. ¶¶ 140, 145, 151, 153 (quoting the

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Board; second and third alterations in original). Neither Symmetry nor OptumInsight disclosed to

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the USPTO documents that, CCGroup contends, demonstrate a 1993 conception date for the ‘897

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United States District Court
Northern District of California

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patent. Id. ¶¶ 147−49. Later, in 2007, Symmetry merged into OptumInsight. Id. ¶ 149.
Since the interference proceeding, OptumInsight has contradicted the representations it

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made therein by representing that Dang‘s software was introduced in 1993 in white papers

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released in 2006 and 2012 and in response to a request for proposal in 2007. Id. ¶ 146.

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OptumInsight, through its general counsel (and former secretary of Symmetry) Brigid Spicola and

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attorneys at Dorsey & Whitney including Devan Padmanabhan, has prosecuted additional patents

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in the Dang family, all of which are related to the ‘897 patent and rely on it for priority, without

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disclosing the 1993 conception date.5 Id. ¶¶ 160−62. OptumInsight, through Spicola and

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The Second Amended Complaint separately discusses in detail a number of Dang family patents
and applications, including their relationship to the ‘897 patent and the Aetna RFP response.
Paragraphs 315 through 347 discuss the ‘511 patent, which differs from the ‘897 patent in that it
focuses on pharmaceutical claims data. Paragraphs 348 through 378 discuss the ‘560 patent,
which focuses on the ―clean periods‖ used to detect the end of a treatment group. Paragraphs 379
through 409 discuss the ‘333 patent. Paragraphs 410 through 420 discuss application number
10/106,626, which focused on the ―shifting‖ concept but which OptumInsight ultimately
abandoned. Paragraphs 421 through 457 discuss the ‘216 patent, which was initially rejected but
ultimately issued after OptumInsight amended its claims. Paragraphs 458 through 503 discuss the
‘290 patent, which CCGroup contends is essentially identical to claims of previous patents, except
that the ‘290 patent is directed to systems rather than methods. Paragraphs 504 through 524
discuss the ‘869 patent. Paragraphs 525 through 537 discuss the ‘165 patent, which the examiner
determined was not distinct from previous patents until OptumInsight amended its application to
add references to a computer processor. Paragraphs 538 through 549 discuss the ‘433 patent,
which was also initially rejected but issued after references to computer processors were added.
Several of these patents were only issued after OptumInsight filed terminal disclaimers against
enforceability beyond the expiration dates of earlier-issued patents. See, e.g., SAC ¶ 531.
CCGroup contends that the invention described and offered for sale in the Aetna RFP response
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Padmanabhan, among others, also prosecuted two patents in the Seare family—the ‘079 and ‘252

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patents,6 without disclosing Dang‘s 1993 conception date and evidence of that date constituting

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prior art, which were material to the applications and would have resulted in denial if disclosed.

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Id. ¶¶ 164−72. Neither OptumInsight nor Symmetry ever disclosed that conception date to the

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USPTO. Id. ¶ 157.

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6. Minnesota OptumInsight-CCGroup Litigation
On January 11, 2011, OptumInsight filed a complaint against CCGroup in the District of

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Minnesota for infringement of two Seare patents and five Dang patents. Id. ¶ 173 (citing Ingenix,

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Inc. v. Cave Consulting Grp., LLC, No. 11-cv-00077-DWF-FLN (D. Minn.)). CCGroup alleges
that OptumInsight and its attorneys, including Lancaster and Padmanabhan of Dorsey & Whitney,

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United States District Court
Northern District of California

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knew when they filed suit that both patent families were invalid and unenforceable due to

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inequitable conduct. Id. ¶¶ 174−80.

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OptumInsight did not serve the complaint on CCGroup, and ultimately dismissed the

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Minnesota lawsuit without prejudice on June 20, 2011. Id. ¶ 181. CCGroup nevertheless

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―received numerous inquiries from customers and potential customers regarding OptumInsight‘s

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allegations of infringement.‖ Id. ¶ 184. CCGroup asked OptumInsight to dismiss its claims with

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prejudice ―to ensure that OptumInsight‘s public allegations of infringement would not tarnish

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CCGroup‘s reputation and ability to compete in the marketplace,‖ but OptumInsight refused. Id.

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¶¶ 132–33.

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7. Declaratory Judgment Action and Infringement Counterclaims (Cave I)
―To clear the pall that OptumInsight‘s allegations had cast over CCGroup‘s business, on

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July 11, 2011, CCGroup filed a declaratory judgment action in the Northern District of California

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to resolve OptumInsight‘s infringement claims.‖ Id. ¶ 185 (citing Cave Consulting Grp., Inc. v.

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embodied or rendered obvious most if not all of the claims in the patents discussed above. See,
e.g., id. ¶ 546. A chart comparing specific claims of the patents at issue to language in the RFP
response is attached to the Second Amended Complaint as Exhibit B.
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The ‘079 patent, discussed above, has only a single claim, which is identical to the first claim of
the ‘897 Dang patent. See SAC ¶¶ 551−56. CCGroup contends that the four claims of the ‘252
patent are ―essentially identical‖ to various other claims of the ‘897 patent, all of which were
reflected in the response to Aetna‘s RFP. Id. ¶¶ 557−77.
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OptumInsight, Inc., No. 5:11-cv-00469-EJD (N.D. Cal.) (hereinafter, ―Cave I‖)).7 OptumInsight,

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again represented by Dorsey & Whitney attorneys including Lancaster and Padmanabhan, filed

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counterclaims asserting that CCGroup infringed the patents at issue in the Minnesota complaint, as

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well as an additional Dang patent issued in the intervening period. Id. ¶¶ 186–87. Based on

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information obtained from earlier litigation, ―Padmanabhan, Lancaster, OptumInsight, and Dorsey

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& Whitney knew before those counterclaims were filed that the Dang and Seare patents are invalid

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and unenforceable.‖ Id. ¶ 188.
The Cave I litigation continued for three years, and ―required CCGroup to undertake a

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costly claim construction, extensive fact discovery, and an in-depth review of the asserted patents
and prior art.‖ Id. ¶ 190. CCGroup contends that OptumInsight took positions during Cave I

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United States District Court
Northern District of California

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regarding the relationship between the concepts of ―shifting‖ and ―dynamic time windows‖ that

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contradicted Symmetry‘s position during the ‘897 patent reexamination, and would have led the

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USPTO to conclude in that proceeding that Symmetry‘s response to Aetna‘s RFP was an

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invalidating offer for sale. Id. ¶¶ 191−97. ―Two years into the litigation . . . OptumInsight . . .

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produc[ed] over 25,000 pages of confidential documents from its prior litigations involving the

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Dang and Seare patent portfolios.‖ Id. ¶ 200. Those documents form the basis for CCGroup‘s

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allegations summarized above regarding OptumInsight‘s alleged inequitable conduct, and

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CCGroup filed a second amended complaint in Cave I asserting that the Dang patents were invalid

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and unenforceable due to that conduct. See id. ¶¶ 201−04. Nearly one year later, OptumInsight

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dismissed its counterclaims based on the Dang patent family, although it continued to assert

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infringement of the Seare patents. Id. ¶¶ 206−07.
Judge Davila granted partial summary judgment for OptumInsight, holding that

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Symmetry‘s response to Aetna‘s RFP in 1994 was not prior invalidating art as to the Seare patents

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because it was not made public. Cave I, 2015 WL 740379, at *13 (N.D. Cal. Feb. 20, 2015). He

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declined to grant summary judgment for either party on other issues relating to the validity of the

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The Court takes judicial notice that Cave Consulting initially filed a claim in January of 2011
alleging that OptumInsight infringed a patent owned Cave Consulting, and filed an amended
complaint in July adding claims for declaratory judgment of non-infringement and invalidity of
OptumInsight‘s patents. See Cave I dkts. 1 (Complaint), 23 (First Amended Complaint).
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Seare patents because material facts remained disputed. Id. at *12–14. There is no indication that

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CCGroup made any argument in Cave I regarding inequitable conduct related to the Seare patents.

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OptumInsight withdrew the ‘252 Seare patent ―[o]n the eve of trial.‖ SAC ¶ 208. At trial,

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a jury determined that CCGroup did not infringe the remaining ‘079 Seare patent. Id. ¶ 211. On

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September 7, 2016, Judge Davila declined to alter the outcome of Cave I in any way relevant to

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the present action. See Cave Consulting Grp., Inc. v. OptumInsight, Inc., No. 5:11-cv-00469-EJD,

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2016 WL 4658979 (N.D. Cal. Sept. 7, 2016) (denying in relevant part motions for judgment as a

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matter of law and for a new trial). ―[T]he parties have indicated that appeals are anticipated at the

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Federal Circuit.‖ Id. at *24.

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8. Alleged Damages and Claims
CCGroup alleges that ―OptumInsight‘s fraud on the USPTO, and its resulting possession

United States District Court
Northern District of California

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and baseless assertion of the Dang and Seare patent families, has enabled OptumInsight to acquire

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and maintain monopoly power or, in the alternative, created a dangerous probability of

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OptumInsight obtaining monopoly power, in the Grouper Software Market.‖ SAC ¶ 214. Since

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CCGroup introduced its competing software in 2005, it has lost customers due to the perceived

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strength of OptumInsight‘s patents, and has incurred litigation expenses as a result of

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OptumInsight‘s efforts to enforce the patents through alleged sham litigation. See id. ¶¶ 217, 219,

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221.

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The Second Amended Complaint includes four claims. First, under the doctrine of Walker

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Process Equipment Inc. v. Food Machinery and Chemical Corporation, 382 U.S. 172 (1965),

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CCGroup alleges that OptumInsight violated Section 2 of the Sherman Act by monopolizing or

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attempting to monopolize the market for grouper software through fraud on the USPTO in

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connection with prosecution of the Dang and Seare patents. SAC ¶¶ 578−87. Second, under the

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doctrine of Handgards v. Ethicon, 601 F.2d 986 (9th Cir. 1979), CCGroup alleges that

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OptumInsight monopolized or attempted to monopolize the market through bad faith use of sham

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litigation to enforce Dang and Seare patents that OptumInsight knew were invalid or

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unenforceable. SAC ¶¶ 588−94. Third, CCGroup asserts that OptumInsight violated the Lanham

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Act, 15 U.S.C. § 1125(a)(1)(B), through false or misleading statements that its ETG software was
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―patented‖ or covered by specific Dang patents, despite OptumInsight‘s alleged knowledge that ―it

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had no valid or enforceable patent that covered the ETG software.‖ SAC ¶¶ 595−603. Finally,

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CCGroup brings a malicious prosecution claim under California law, asserting that OptumInsight

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acted without probable cause in bringing infringement counterclaims in the Cave I action when it

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allegedly knew that the patents at issue were invalid and unenforceable. Id. ¶¶ 604−12.

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B.

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After the Cave I trial concluded and judgment was entered in CCGroup‘s favor on April 6,

Procedural History

2015, CCGroup filed the present action in July of that year. See generally Compl. (dkt. 1).

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OptumInsight moved to dismiss, see dkt. 34, and CCGroup filed its First Amended Complaint

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(dkt. 39) rather than oppose that motion. OptumInsight moved to dismiss the First Amended

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United States District Court
Northern District of California

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Complaint. See dkt. 56. The Court held a hearing, took supplemental briefing on issues of

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preclusion that were first clearly raised in OptumInsight‘s reply brief, and ultimately granted the

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motion with leave to amend, primarily on the basis that CCGroup had not met the pleading

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standard of Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312 (Fed. Cir. 2009), for failure to

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include sufficient allegations as to which claims of the patents at issue were implicated by

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OptumInsight and its predecessors‘ alleged inequitable conduct, and how those claims related to

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that alleged conduct. See Order Granting Mot. to Dismiss (―Order,‖ dkt. 84) at 21−22.8
The Court also held, among other things: (1) that Judge Davila‘s determination in Cave I

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regarding the Aetna RFP response lacks preclusive effect, id. at 10−18; (2) that the Federal

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Circuit‘s decision in Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed. Cir. 2011)

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(en banc), concerns a plaintiff‘s burden of proof on the merits and does not alter the applicable

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pleading standard, Order at 21; (3) that ―Dang‘s and Rosenbaum‘s specific intent to defraud the

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USPTO ‗is plausible and . . . flows logically from the facts alleged,‘‖ id. at 22 (quoting Exergen,

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575 F.3d at 1329 n.5); (4) that CCGroup could not pursue a claim for malicious prosecution of

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infringement of the ‘079 patent so long as post-judgment motions or appeals were pending in Cave

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Cave Consulting Grp., Inc. v. OptumInsight, Inc., No. 15-cv-03424-JCS, 2016 WL 1611042
(N.D. Cal. Apr. 22, 2016). Citations herein to page numbers in the Court‘s previous Order refer to
the version filed in the Court‘s ECF docket.
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I, Order at 26−27; and (5) that an antitrust plaintiff such as CCGroup can seek attorneys‘ fees from

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a previous action as damages under the ―substantive law exception‖ to Rule 54 of the Federal

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Rules of Civil Procedure, Order at 27. The Court declined to reach other issues, including

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―whether CCGroup must plausibly allege that OptumInsight ‗maintained and enforced the patent

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with knowledge of the fraudulent manner in which it was [allegedly] obtained.‘‖ Id. at 22−23

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(quoting Ritz Camera & Image, LLC v. SanDisk Corp., 700 F.3d 503, 506 (Fed. Cir. 2012)).

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CCGroup filed its Second Amended Complaint on May 13, 2016, and OptumInsight again

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moves to dismiss.

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C.

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Parties’ Arguments

Much of OptumInsight‘s present motion is devoted to attacking the premise that

United States District Court
Northern District of California

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OptumInsight can be held liable for the alleged sins of Symmetry. OptumInsight begins its

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argument by contending that even if Symmetry obtained patents through inequitable conduct,

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there is no allegation that Symmetry sought to enforce its patents against CCGroup or otherwise

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exploit them for monopolistic gain to CCGroup‘s detriment. Mot. (dkt. 103) at 13. OptumInsight

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therefore argues that Symmetry had no liability to CCGroup that OptumInsight could have

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inherited after Symmetry merged into OptumInsight. Id. at 13−14. Next, OptumInsight contends

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that the merger does not suffice to impute Symmetry‘s knowledge of fraud on the USPTO to

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OptumInsight at the time of OptumInsight‘s allegedly wrongful conduct, either (1) as a matter of

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law, because CCGroup must instead plausibly allege that the specific individuals responsible for

20

OptumInsight‘s conduct had such knowledge, id. at 16−19, or (2) as a plausible basis for inferring

21

such knowledge by the individuals involved, id. at 15−16. OptumInsight also argues that Ingenix

22

v. Symmetry litigation and documents disclosed therein did not actually provide notice of

23

misconduct before the USPTO, and offers a number of court documents and transcripts for judicial

24

notice. Id. at 19−28; Lancaster Decl. (dkt. 104). According to OptumInsight, the infirmities

25

discussed above are sufficient to dismiss all four of CCGroup‘s claims. Mot. at 28−30.

26

CCGroup responds that it has sufficiently alleged that all of the patents at issue were

27

obtained through fraud on the USPTO, and that it need not demonstrate knowledge of such fraud

28

to state a Walker Process claim because OptumInsight, either through its own actions or as a result
11

1

of the merger with Symmetry, can be treated as having prosecuted all of the patents. Opp‘n (dkt.

2

119) at 8−9. CCGroup argues in the alternative that Symmetry‘s knowledge of fraud on the

3

USPTO can be imputed to OptumInsight as a result of the merger. Id. at 9−13. According to

4

CCGroup, it need not ―identify a single ‗mastermind‘‖ with guilty knowledge at the pleading

5

stage, id. at 13−15, and the Second Amended Complaint adequately alleges that OptumInsight

6

learned independently of the merger that the Symmetry patents were obtained through fraud, id. at

7

17−20. CCGroup disputes OptumInsight‘s reliance on securities cases subject to the statutory

8

pleading standard of the Private Securities Litigation Reform Act (―PSLRA‖). Id. at 15−16.

9

CCGroup also disputes OptumInsight‘s characterization of the documents that OptumInsight
submits, and moves to strike certain documents that it contends are not properly subject to judicial

11
United States District Court
Northern District of California

10

notice or otherwise appropriate for consideration at the pleading stage. Id. at 20−27, 30.

12

CCGroup argues that it has plausibly alleged actionable misconduct by OptumInsight and that all

13

of its claims should survive. Id. at 27−30.
OptumInsight reasserts in its reply that in order to proceed on any of its claims, CCGroup

14
15

must plausibly allege that individuals responsible for enforcing the patents at issue had knowledge

16

that they were obtained through misconduct or fraud, and argues that the PSLRA pleading

17

standard is equivalent to the standard appropriate for CCGroup‘s claims. Reply (dkt. 122) at 1−6.

18

According to OptumInsight, CCGroup‘s pleading does not meet that standard. Id. at 6−8.

19

OptumInsight also contends that CCGroup has not plausibly alleged that the patents OptumInsight

20

itself prosecuted were obtained through fraud. Id. at 8−14. OptumInsight concludes by arguing

21

that the documents submitted with its motion are appropriate for consideration at this stage

22

because they are referenced in the Second Amended Complaint. Id. at 15.

23

III.

24
25
26

ANALYSIS
A.

Legal Standard
1. General Pleading Standard: Rule 8, Iqbal, and Twombly
A complaint may be dismissed for failure to state a claim on which relief can be granted

27

under Rule 12(b)(6) of the Federal Rules of Civil Procedure. ―The purpose of a motion to dismiss

28

under Rule 12(b)(6) is to test the legal sufficiency of the complaint.‖ N. Star Int’l v. Ariz. Corp.
12

1

Comm’n, 720 F.2d 578, 581 (9th Cir. 1983). Generally, a plaintiff‘s burden at the pleading stage

2

is relatively light. Rule 8(a) of the Federal Rules of Civil Procedure states that ―[a] pleading

3

which sets forth a claim for relief . . . shall contain . . . a short and plain statement of the claim

4

showing that the pleader is entitled to relief.‖ Fed. R. Civ. P. 8(a).

5

In ruling on a motion to dismiss under Rule 12(b)(6), the court analyzes the complaint and

6

takes ―all allegations of material fact as true and construe[s] them in the light most favorable to the

7

non-moving party.‖ Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995).

8

Dismissal may be based on a lack of a cognizable legal theory or on the absence of facts that

9

would support a valid theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.
1990). A complaint must ―contain either direct or inferential allegations respecting all the material

11
United States District Court
Northern District of California

10

elements necessary to sustain recovery under some viable legal theory.‖ Bell Atl. Corp. v.

12

Twombly, 550 U.S. 544, 562 (2007) (citing Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101,

13

1106 (7th Cir. 1984)). ―A pleading that offers ‗labels and conclusions‘ or ‗a formulaic recitation

14

of the elements of a cause of action will not do.‘‖ Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

15

(quoting Twombly, 550 U.S. at 555). ―Nor does a complaint suffice if it tenders ‗naked

16

assertion[s]‘ devoid of ‗further factual enhancement.‘‖ Id. (quoting Twombly, 550 U.S. at 557).

17

Rather, the claim must be ―‗plausible on its face,‘‖ meaning that the plaintiff must plead sufficient

18

factual allegations to ―allow[] the court to draw the reasonable inference that the defendant is

19

liable for the misconduct alleged.‖ Id. (quoting Twombly, 550 U.S. at 570).

20
21

2. Heightened Pleading Standard for Fraud Claims
Rule 9(b) of the Federal Rules of Civil Procedure sets a heightened pleading standard for

22

claims based on fraud. ―In alleging fraud or mistake, a party must state with particularity the

23

circumstances constituting fraud or mistake.‖ Fed. R. Civ. P. 9(b). The Ninth Circuit has held

24

that in order to meet this standard, a ―complaint must specify such facts as the times, dates, places,

25

benefits received, and other details of the alleged fraudulent activity.‖ Neubronner v. Milken, 6

26

F.3d 666, 672 (9th Cir. 1993); see also McMaster v. United States, 731 F.3d 881, 897 (9th Cir.

27

2013). The Federal Circuit has similarly held that ―in pleading inequitable conduct in patent

28

cases, Rule 9(b) requires identification of the specific who, what, when, where, and how of the
13

1

material misrepresentation or omission committed before the PTO.‖ Exergen Corp. v. Wal-Mart

2

Stores, Inc., 575 F.3d 1312, 1326 (Fed. Cir. 2009).

3

3. Pleading Standard for Knowledge and Intent

4

The heightened pleading standard of Rule 9(b) does not apply to ―[m]alice, intent,

5

knowledge, and other conditions of a person‘s mind.‖ Fed. R. Civ. P. 9(b). OptumInsight

6

nevertheless cites a number of cases for the proposition that the facts alleged must ―‗create a

7

strong inference of scienter‘‖ that is ―‗cogent and at least as compelling as any opposing inference

8

one could draw from the facts alleged.‘‖ Mot. at 17−18 (quoting Glazer Capital Mgmt. v.

9

Magistri, 549 F.3d 736, 743−44 (9th Cir. 2008); Tellabs Inc. v. Makor Issue & Right Ltd., 551

10

United States District Court
Northern District of California

11

U.S. 308, 324 (2007)) (emphasis added).
OptumInsight‘s motion neglects to mention that the cases discussing that standard are

12

securities actions governed by the PSLRA, and base their analysis on that statute‘s explicit

13

mandate that ―in any private action arising under [Chapter 2B of Title 15],‖ a complaint must

14

―state with particularity facts giving rise to a strong inference that the defendant acted with the

15

required state of mind.‖ 15 U.S.C. § 78u-4(b)(2)(A), see also id. § 78u-4(b)(2)(B). The Supreme

16

Court has held that the PSLRA imposes ―special heightened pleading requirements for the

17

scienter element of § 10(b) fraud cases,‖ Merck & Co. v. Reynolds, 559 U.S. 633, 649 (2010)

18

(emphasis added), and ―unequivocally raised the bar‖ for pleading such cases, Tellabs, 551 U.S. at

19

321 (internal quotation marks, citation, and brackets omitted). To hold the PSLRA pleading

20

standard applicable in all other cases involving a scienter element, as OptumInsight suggests is

21

appropriate, would disregard the statute‘s limitation of the standard to ―private actions arising

22

under this chapter,‖ 15 U.S.C. § 78u-4(b)(2)(A), as well as the Supreme Court‘s repeated

23

recognition that the PSLRA imposes a special, heightened standard as compared to background

24

law, see Merck, 559 U.S. at 649; Tellabs, 551 U.S. at 321. OptumInsight‘s assertion that ―Rule

25

9(b) . . . is the strictest pleading standard imposed by the federal rules,‖ Reply at 5, is perhaps

26

literally accurate in that the PSLRA‘s standard for scienter is imposed by statute rather than by

27

rule, but as discussed above, the PSLRA standard is stricter than Rule 9. Under the rule,

28

―conditions of a person‘s mind may be alleged generally,‖ Fed. R. Civ. P. 9(b), and the usual Rule
14

1

8 standard of plausibility applies to such allegations. Iqbal, 556 U.S. at 686−87 (noting that the

2

―strictures of Rule 8‖ are ―operative‖ as to allegations of intent).

3

Exergen does not hold to the contrary in the context of pleading inequitable conduct.

4

While OptumInsight is correct that the Federal Circuit‘s opinion cites cases discussing scienter,

5

OptumInsight fails to identify any such case governed by the PSLRA‘s stringent pleading

6

standard, see Reply at 5, and moreover, nothing in Exergen suggests that the court intended to

7

import into patent law the ―at least as compelling‖ standard that courts have derived from the

8

PSLRA. Cf. Tellabs, 551 U.S. at 324. Instead, the Federal Circuit held that a complaint ―must

9

include sufficient allegations of underlying facts from which a court may reasonably infer‖
knowledge and fraudulent intent, explained that a ―reasonable inference is one that is plausible and

11
United States District Court
Northern District of California

10

that flows logically from the facts alleged,‖ and contrasted that standard with the ―clear and

12

convincing evidence‖ burden of proof on the merits, at which point—but not before—intent to

13

deceive must be ―the single most reasonable inference‖ from the evidence. See Exergen, 575 F.3d

14

at 1328−29 & n.5.

15

The Court finds no basis in case law, rule, or statute to impose anything more than Iqbal‘s

16

plausibility standard on CCGroup‘s pleading of knowledge and intent, and rejects OptumInsight‘s

17

position that cases governed by the PSLRA pleading standard are relevant to that inquiry. See

18

Mot. at 17−18 (citing Tellabs, 551 U.S. 308, 324; Glazer, 549 F.3d 736, 743−44; In re Daou Sys.,

19

Inc., 411 F.3d 1006, 1022 (9th Cir. 2005); Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365

20

F.3d 353, 366 (5th Cir. 2004); In re Impac Mortg. Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083,

21

1100 (C.D. Cal. 2008); In re Lockheed Martin Corp. Sec. Litig., 272 F. Supp. 2d 944, 956 (C.D.

22

Cal. 2003)); Reply at 4−6 (citing, e.g., In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701

23

(9th Cir. 2012)).

24

B.

25

In 1965, the Supreme Court held in Walker Process that a patent obtained through fraud on

Walker Process and Handgards Claims

26

the Patent Office can provide a basis for claims under the Sherman Act. See generally Walker

27

Process, 382 U.S. 172. The Federal Circuit more recently and succinctly summarized the standard

28

for such a claim:
15

1
2
3
4
5
6
7
8
9
10

Walker Process set forth two conditions for antitrust liability based
on the fraudulent procurement of a patent. First, the plaintiff must
show that the defendant procured the relevant patent by knowing
and willful fraud on the PTO or (in the case of an assignee) that the
defendant maintained and enforced the patent with knowledge of the
fraudulent manner in which it was obtained. Second, the plaintiff
must prove all the elements otherwise necessary to establish a
Sherman Act monopolization charge. Walker Process, 382 U.S. at
174, 176–77, 86 S. Ct. 347; see also id. at 179, 86 S. Ct. 347
(Harlan, J., concurring). With the first condition, the Court made
clear that the invalidity of the patent was not sufficient; a showing of
intentional fraud in its procurement was required. Id. at 176–77, 86
S. Ct. 347; id. at 179, 86 S. Ct. 347 (Harlan, J., concurring). With
the second condition, the Court incorporated the rules of antitrust
law generally. As Justice Harlan stated in his concurring opinion,
―as to this class of improper patent monopolies, antitrust remedies
should be allowed room for full play.‖ Id. at 180, 86 S. Ct. 347
(Harlan, J., concurring).
Ritz Camera & Image, LLC v. SanDisk Corp., 700 F.3d 503, 506 (Fed. Cir. 2012).

11
United States District Court
Northern District of California

The Ninth Circuit recognized a related basis for liability in Handgards, 601 F.2d 986.
12
13
14

Handgards itself was ―not a Walker Process case‖ because the plaintiff did ―not contend that [the
defendant] sought to enforce a fraudulently-procured patent,‖ and instead argued that the
defendant ―prosecuted infringement actions in bad faith, that is, with knowledge that the patents,

15
though lawfully-obtained, were invalid.‖ Id. at 994. Inspired by Walker Process, the Ninth
16
Circuit held that a plaintiff could pursue antitrust remedies for bad faith infringement actions—
17

even if not based on fraud on the patent office—so long as the jury is ―instructed that a patentee‘s

18
infringement suit is presumptively in good faith and that this presumption can be rebutted only by
19
clear and convincing evidence.‖ Id. at 996.
20
As illustrated in Handgards itself, not all Handgards claims are also Walker Process
21
claims: a Handgards claim can be based on bad faith litigation to enforce a patent known to be

22
invalid for reasons other than fraud on the USPTO. Conversely, not all Walker Process claims
23
24
25

arise from bad faith litigation: ―enforcement actions are not a sine qua non of monopolizing by
patent fraud.‖ Brunswick Corp. v. Riegel Textile Corp., 752 F.2d 261, 265 (7th Cir. 1984). Here,
CCGroup‘s Walker Process claim is based on a theory of monopolization through infringement

26
actions brought in bad faith to enforce patents obtained through fraud—thus basing both claims
27
largely on the same operative facts. The primary potential difference between the two claims is
28
16

1

the extent to which CCGroup must demonstrate OptumInsight‘s knowledge of fraud or invalidity,

2

because if OptumInsight is considered to be the original owner of the patents rather than an

3

assignee—a premise that OptumInsight vigorously disputes—the test for Walker Process claims

4

set forth in Ritz Camera would not require CCGroup to show that OptumInsight‘s attorneys knew

5

of fraud when they file counterclaims against CCGroup. Despite that potential difference, the

6

claims are sufficiently aligned to warrant consideration together, beginning with the question of

7

whether the patents at issue were obtained through fraud on the USPTO.

8

1. Fraud on the USPTO
OptumInsight‘s motion appears acknowledges ―the Rule 12(b)(6) assumption that

9

[CCGroup‘s] SAC validly alleges wrongdoing by Symmetry,‖ referring to the allegedly fraudulent

11
United States District Court
Northern District of California

10

prosecution of the ‘897 Dang patent. Mot. at 4−5 (emphasis omitted). The Court nevertheless

12

briefly discusses the standard for pleading such fraud, as set forth in Exergen.9
The heightened pleading standard of Rule 9(b) applies to allegations of inequitable

13
14

conduct, and Federal Circuit law governs ―the question of whether inequitable conduct has been

15

pleaded with particularity under Rule 9(b).‖ Exergen, 575 F.3d at 1326. ―[I]n pleading

16

inequitable conduct in patent cases, Rule 9(b) requires identification of the specific who, what,

17

when, where, and how of the material misrepresentation or omission committed before the PTO‖;

18

it is not sufficient to ―simply aver[] the substantive elements of inequitable conduct.‖ Id. at 1326–

19

27. Those elements are that an individual associated with prosecuting a patent application

20

(1) ―made an affirmative misrepresentation of a material fact, failed to disclose material

21

information, or submitted false material information; and (2) . . . did so with a specific intent to

22

deceive the PTO.‖ Id. at 1327 n.3.
―Moreover, although ‗knowledge‘ and ‗intent‘ may be averred generally, a pleading of

23
24
25
26
27
28

9

The Court‘s previous Order acknowledged earlier precedent holding that not all inequitable
conduct constituted the degree of fraud necessary to support a Walker Process claim, but
―assume[d] without deciding that Exergen and Therasense have effectively harmonized the
standards for Walker Process fraud and other assertions of inequitable conduct.‖ Order at 20 n.14
(citing Cornucopia Prods., LLC v. Dyson, Inc., 881 F. Supp. 2d 1086, 1099 n.4 (D. Ariz. 2012)).
No party has asserted that the Court should depart from that presumption for the purpose of
resolving the present motion.
17

1

inequitable conduct under Rule 9(b) must include sufficient allegations of underlying facts from

2

which a court may reasonably infer that a specific individual (1) knew of the withheld material

3

information or of the falsity of the material misrepresentation, and (2) withheld or misrepresented

4

this information with a specific intent to deceive the PTO.‖ Id. at 1328–29. ―A reasonable

5

inference is one that is plausible and that flows logically from the facts alleged, including any

6

objective indications of candor and good faith.‖ Id. at 1329 n.5. At the pleading stage, it need not

7

be ―the single most reasonable inference able to be drawn‖—unlike on the merits, where a ―clear

8

and convincing evidence‖ standard applies to inequitable conduct claims. Id. (citation and internal

9

quotation marks omitted). As discussed above, the Court further holds that pleadings need not
give rise to a ―strong inference‖ within the meaning of the PSLRA—i.e., an inference that is

11
United States District Court
Northern District of California

10

―cogent and at least as compelling as any opposing inference one could draw from the facts

12

alleged,‖ Tellabs Inc. v. Makor Issue & Right Ltd., 551 U.S. 308, 324 (2007)—because the

13

PSLRA applies to securities class actions, not patent litigation, and courts have acknowledged that

14

it imposes a more stringent pleading standard than is applicable in other cases.

15

a. Allegations of Fraud in Symmetry‘s Prosecution of the ‘897 and ‘511 Patents

16

CCGroup alleges that in prosecuting the ‘897 patent Dang and Rosenbaum failed to

17

disclose to the USPTO an offer to sell the same invention that they sought to patent, which would

18

have rendered their claims unpatentable. SAC ¶¶ 74−75. During the reexamination, they

19

exchanged drafts of declarations until they ―settled on the story they would tell,‖ and ultimately

20

they and others submitted false declarations asserting a later conception date, despite Dang‘s

21

sworn litigation testimony that he conceived the invention in 1993, to convince the USPTO that

22

the Aetna RFP response was not an offer to sell the invention described in the patent. Id.

23

¶¶ 90−100. Taking those and other factual allegations as true and drawing reasonable inferences

24

in CCGroup‘s favor for the limited purpose of resolving a challenge to the pleadings, the Court

25

finds that Dang‘s and Rosenbaum‘s specific intent to defraud the USPTO in their prosecution of

26

the ‘897 patent ―is plausible and . . . flows logically from the facts alleged.‖ See Exergen, 575

27

F.3d at 1329 n.5. The same is true of the ‘511 patent, which CCGroup plausibly alleges would

28

have been rejected if Dang, Rosenbaum, and others had not fraudulently failed to disclose
18

1

evidence supporting the 1993 conception date and concealed that the RFP response was an

2

invalidating offer for sale. See SAC ¶¶ 315−347.
In addition to those allegations, which are sufficient, a comparison among the RFP

3

response itself, SAC Ex. A, the claims of the patents at issue, see SAC ¶¶ 240−347, and the

5

allegedly fraudulent declarations submitted in the reexamination, Lancaster Decl. Exs. C−F,10 also

6

supports the plausibility of CCGroup‘s allegations. The declarations state that the ETF software

7

product was unfinished at the time of the RFP response in June of 1994. Id. Dang‘s declaration

8

specifically states that the dynamic time window and shifting functions were not working properly

9

at that time, and that until he prepared flowcharts of how those features should function in August

10

of 1994, he ―was unable to appreciate such integration of [his] invention.‖ Lancaster Decl. Ex. C

11
United States District Court
Northern District of California

4

¶¶ 4−5. The RFP response, however: (1) asserts that the ETG software was capable of classifying

12

and organizing claims data, with no indication that it was less than fully functional except for a

13

reference to ongoing ―peer review,‖ see SAC Ex. A at 598; (2) describes a ―flexible‖ capacity to

14

detect when a treatment period has ended, which CCGroup plausibly alleges corresponds to the

15

dynamic time window function claimed in the patent, see id. at 3; and (3) describes a capability to

16

―shift‖ episodes between groups, which CCGroup plausibly alleges corresponds to the shifting

17

function claimed in the patent, see id. at 5. OptumInsight does not meaningfully address the

18

content of the RFP response or explain how it differs from the patent claims. There may well be

19

other explanations for these apparent discrepancies between the RFP response and the

20

declarations, but viewing the pleadings (and documents subject to judicial notice) in the light most

21

favorable to CCGroup, one plausible conclusion is that the declarations were fraudulent.
b. Allegations of Fraud in OptumInsight‘s Prosecution of the Remaining Patents

22

Having determined that CCGroup plausibly alleges fraud on the patent office in

23
24

Symmetry‘s prosecution of the ‘897 and ‘511 patents—a conclusion it is not clear that

25

OptumInsight contests—the Court turns to OptumInsight‘s prosecution of the Seare patents and

26
10

27
28

CCGroup does not challenge OptumInsight‘s submission of these declarations, and the Court
agrees that they are appropriate for consideration at the pleading stage under the incorporation by
reference doctrine because the Second Amended Complaint references and relies on them for the
allegation that Symmetry engaged in fraud during the ‘897 reexamination.
19

1

the remaining Dang patents at issue. This analysis focuses on CCGroup‘s allegation that Devan

2

Padmanabhan, the only person allegedly involved in prosecuting all of those patents, see Opp‘n at

3

6−7 (summarizing allegations), knew of a 1993 conception date and 1994 pre-filing offer of sale

4

for Dang‘s invention, and thus engaged in fraud on the USPTO by prosecuting those patents

5

without adequate disclosures.

6

CCGroup‘s opposition brief does not address in any meaningful detail the allegations that
support a plausible inference of Padmanabhan having such knowledge. See Opp‘n at 26 (asserting

8

in a conclusory fashion that ―Devan Padmanabhan is also alleged to have knowledge of the

9

Ingenix v. Symmetry litigation‖). The Second Amended Complaint alleges that Padmanabhan and

10

other Dorsey & Whitney attorneys ―were privy to the source code, briefing, sworn testimony, and

11
United States District Court
Northern District of California

7

interrogatory responses proving that Dang actually conceived of his invention in September of

12

1993‖ because those attorneys were members of the same firm as OptumInsight‘s litigation

13

counsel. SAC ¶ 160. Later, in the context of OptumInsight‘s litigation against CCGroup, the

14

Second Amended Complaint alleges that Padmanabhan ―knew prior to filing suit that Dang had

15

evidence that he conceived his invention in September 1993, at least as a result of Symmetry‘s

16

representations and disclosures in the litigation between OptumInsight and Symmetry and through

17

OptumInsight‘s acquisition of and merger with Symmetry,‖ as well as that Dang and others ―had

18

submitted sworn statements to the USPTO that Dang conceived his invention in August 1994.‖

19

Id. ¶¶ 175−76. The SAC also alleges on information and belief that Padmanabhan reviewed the

20

prosecution histories of the Dang patents and discovered that Dang and others withheld materials

21

contradicting their asserted conception date, and that Padmanabhan therefore knew that the patent

22

family was invalid and unenforceable due to inequitable conduct. Id. ¶ 177−78. A paragraph of

23

the Second Amended Complaint summarizing Padmanabhan‘s knowledge of invalidity and role in

24

the patent prosecutions reads as follows:

25
26
27
28

Devan Padmanabhan, who represented OptumInsight in Cave I,
managed the preparation and prosecution of the patents and
applications in the Dang and Seare patent families after those files
were transferred to Dorsey & Whitney upon OptumInsight‘s
acquisition of Symmetry, and consequently Padmanabhan was
aware of the Aetna RFP Response and the statutory bars to
patentability that it raised. Padmanabhan and the other Dorsey &
20

Whitney attorneys who participated in the prosecution of the Dang
patents hid the invalidating effect of the Aetna RFP Response from
the USPTO. Then, in Cave I, Padmanabhan affirmatively relied on
the Aetna RFP Response and the affidavits from the reexamination
of the ‘897 patent to claim that Dang conceived of his invention in
1994, as evidence both of Dang‘s conception and of a pre-filing
offer for sale of the claimed invention. Additionally, because
Padmanabhan, like Lancaster, was associated with the Dorsey &
Whitney law firm, he was privy to the dated source code, briefing,
sworn testimony, and interrogatory answers proving that Dang
conceived his invention in September 1993, which Lancaster
received in prior litigation, and which conflicted with the affidavits
submitted by Rosenbaum, Dang, Portnoy, and Gardiner in the
reexamination of the ‗897 patent. Documents and other information
reflecting the existence of Symmetry‘s prior litigations involving the
subject matter of the Dang and Seare patents that Padmanabhan
prosecuted were also readily available to Padmanabhan at Dorsey &
Whitney, if he was not already aware of those litigations through his
work for OptumInsight or through his contact with other Dorsey &
Whitney attorneys doing work for OptumInsight.

1
2
3
4
5
6
7
8
9
10

United States District Court
Northern District of California

11
12

Id. ¶ 584(e).
The allegations that Padmanabhan engaged in fraud on the USPTO rest on two premises:

13

(1) that various documents transferred to OptumInsight upon its acquisition of Symmetry and

14

disclosed to Dorsey & Whitney during litigation evince a 1993 conception date and pre-filing offer

15

of sale of Dang‘s invention, and (2) that Padmanabhan saw and understood the significance of

16

such documents. The former question informs the latter, because, in the Court‘s view, the

17

significance of the documents is relevant to whether one can plausibly infer that they would have

18

been shared with Padmanabhan.

19

OptumInsight contends that some of the materials allegedly disclosed to Padmanabhan and

20

other Dorsey & Whitney attorneys do not actually demonstrate a 1993 conception date for the

21

invention or inventions at issue. For example, OptumInsight argues that the briefing in the Ingenix

22

v. Symmetry case concerned the conception date of a different invention (because that case

23

involved an Ingenix patent not at issue here, not the ‘897 patent), and that the 1993 date on the

24

source code indicates only when the programmer began writing it, not when it was complete.

25

Mot. at 22−24.

26

Having reviewed the brief on which OptumInsight relies, the Court agrees with CCGroup

27
28
21

1

that—drawing reasonable inferences in CCGroup‘s favor, as is required at the pleading stage11—

2

the references to Dang conceiving his invention in 1993 refer to the invention that later became the

3

‘897 patent, even though that patent was not the subject of the litigation. See Lancaster Decl. Ex.

4

L at 12 (―Mr. Dang‘s undisputed testimony is that he first conceived of the invention, which is

5

now known as ETGs, in the summer of 1993 . . . .‖ (emphasis added)). OptumInsight asserts in its

6

reply that the ETG software should not be conflated with the ‘897 patent, see Reply at 6−7, but

7

there is nothing in the pleadings to suggest a distinction between the two. The Court understands

8

the Second Amended Complaint to allege that the ETG software marketed by Symmetry

9

embodied the claims of the ‘897 patent; nothing in the brief that OptumInsight offers for judicial
notice alters that conclusion. The same is true of Symmetry‘s counsel‘s oral argument in that case.

11
United States District Court
Northern District of California

10

See Lancaster Decl. Ex. N at 41−42.
As for CCGroup‘s allegations that Symmetry‘s source code for its ETG software evinces a

12
13

1993 conception date, OptumInsight relies heavily on deposition testimony by Symmetry

14

programmer Daniel Gardiner in the Ingenix v. Symmetry litigation. See Mot. at 22−23 (quoting

15

Lancaster Decl. Ex. M (Gardner Dep. Tr.)). The Second Amended Complaint does not rely on, or

16

even cite, Gardiner‘s deposition transcript, and OptumInsight offers no other basis for the Court to

17

consider such evidence at the pleading stage. See Reply at 15 (responding to CCGroup‘s motion

18

to strike this and other exhibits, and asserting only that the Court may review documents

19

―encompassed by the SAC‖). No matter how strongly OptumInsight believes that certain

20

allegations of the Second Amended Complaint are contrary to fact, with the exception of certain

21

narrow doctrines of judicial notice—which OptumInsight‘s briefs barely address—the Court‘s

22

review at this stage is limited to the pleadings. The Court therefore does not consider Gardiner‘s

23

deposition testimony.12 Symmetry‘s brief in that litigation, which is appropriately considered at

24

this stage because the Second Amended Complaint explicitly relies on it as one basis for

25
11

26
27
28

The standard of review at this stage does not call upon to Court to determine whether a contrary
interpretation would also be permissible, and the Court declines to do so.
12
OptumInsight responds to CCGroup‘s challenge to its evidence by stating that ―[i]t is difficult to
tell how seriously Plaintiff intends its ‗Motion to Strike.‘‖ Reply at 15. Regardless of how
seriously CCGroup may have intended it, the Court takes the legal standard for review at the
pleading stage seriously.
22

1

OptumInsight‘s counsel‘s alleged knowledge of misconduct, also discusses the 1993 date on the

2

source code, noting that Gardiner testified that the date on the source code indicates when he

3

began writing it, not when he finished it. Lancaster Decl. Ex. L. at 11. But the brief goes on to

4

contend that ―[i]t is not a reasonable inference that a computer programmer, Mr. Gardiner

5

included, would simply start writing computer source code in 1993 without having an idea of what

6

was to be written,‖ and that the 1993 start date is therefore evidence that Dang had at that time

7

conceived his invention and communicated it to Gardiner. See Id. The brief is therefore not

8

inconsistent with CCGroup‘s allegations that the source code put OptumInsight attorneys on

9

notice of a 1993 conception date for the invention later described by the ‘897 patent, and that the

10

source code was material to the conception date and should have been disclosed to the USPTO.13
With respect to interrogatory responses from the Medstat litigation, OptumInsight contends

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Northern District of California

11
12

that, contrary to CCGroup‘s allegation that during the Symmetry litigation Dorsey & Whitney

13

attorneys were ―provided with the interrogatory responses and other materials from the earlier

14

MedStat litigation that identified September 1993 as the actual conception date for Dang‘s

15

invention,‖ SAC ¶ 130, those materials were in fact ―not provided,‖ Mot. at 24−25.14

16

OptumInsight asserts that ―[n]either the Medstat interrogatory response nor the related Dang

17

testimony was ever submitted in the Symmetry case,‖ and ―computer searches of court filings

18

indicate that the word ‗Medstat‘ appears in Symmetry litigation filings only as to the fact that such

19

litigation exists and that it was settled.‖ Id. at 25. This is a frivolous argument. OptumInsight

20

fails to explain why the nonexistence of such materials in the filings of a case proves that they

21

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23
24
25
26
27
28

13

OptumInsight argues for the first time in its reply that CCGroup‘s allegations regarding the
source code do not comply with Exergen‘s requirement that allegations be tied to specific claims
of the patents at issue. Reply at 6−7. That standard was crucial to the Court‘s previous order and
was the purported basis for CCGroup‘s amendment. If OptumInsight believes that the Second
Amended Complaint did not sufficiently tie its allegations to specific patent claims, there is no
reason it could not have raised that argument in its motion, and allowed CCGroup opportunity to
respond. The Court deems such arguments waived. See, e.g., McMillan v. United States, 112 F.3d
1040, 1047 (9th Cir. 1997) (―This argument was raised for the first time in the plaintiffs‘ reply
brief and has therefore been waived.‖).
14
OptumInsight notes that CCGroup ―omits the time and place at which the information was
allegedly provided to Dorsey,‖ Mot. at 25, but cites no authority holding that such detail is
required in pleading knowledge or intent—the issue that the alleged provision of information goes
to here. Under Rule 9(b), knowledge and intent may be alleged generally.
23

1

were not provided in discovery or through other channels, or why the Court should credit

2

OptumInsight‘s unsupported assertion of what is in the filings. That the materials were provided

3

is a factual allegation of CCGroup‘s Second Amended Complaint, and is therefore taken as true at

4

the pleading stage. A motion under Rule 12(b)(6) is not an appropriate vehicle to contest the truth

5

of such allegations.

6

The Court is satisfied that CCGroup has plausibly alleged that documents evincing a 1993

7

conception date of Dang‘s invention and a pre-filing offer for sale were provided to Dorsey &

8

Whitney attorneys. The next question is whether CCGroup plausibly alleges that Padmanabhan

9

knew of these documents and their significance.

10

As the Federal Circuit noted in Exergen, ―one cannot assume that an individual, who

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11

generally knew that a reference existed, also knew of the specific material information contained

12

in that reference.‖ Exergen, 575 F.3d at 1330. A number of courts have granted motions to

13

dismiss where allegations established only that a patent prosecutor had access to documents, and

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not that the prosecutor ―knew of the specific material information contained [therein] and withheld

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it with the intention to deceived the USPTO.‖ E.g., Breville Pty Ltd. v. Storebound LLC, No. 12-

16

CV-01783-JST, 2013 WL 1758742, at *6 (N.D. Cal. Apr. 24, 2013). That is reasonable as far as it

17

goes, but in the Court‘s view, the alleged facts of this case tend to support a plausible inference

18

that Padmanabhan knew of the specific material information. Here, the conception date of Dang‘s

19

invention was a central issue in various proceedings before the USPTO and in litigation. It is

20

therefore plausible to infer that Dorsey & Whitney attorneys representing OptumInsight in such

21

litigation would have reviewed material they received with a close eye for information relevant to

22

the conception date. It is also plausible to infer that upon discovering material evincing a 1993

23

conception date and a potential pre-filing offer for sale, those litigation attorneys would have

24

shared that information with their colleague—Padmanabhan—who represented OptumInsight in

25

prosecuting patents within the same family or, in the case of the Seare patents, directed to the

26

same subject matter.

27

The Court holds that CGroup has met its burden to plausibly allege that OptumInsight,

28

through Padmanabhan, engaged in fraud on the USPTO by omitting material information in its
24

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2
3
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5
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prosecution of the Seare patents and later-issued Dang patents at issue.
2. Knowledge of Fraud When Bringing Litigation
The next issue is whether OptumInsight‘s attorneys had knowledge of fraud on the USPTO
when they initiated infringement claims against CCGroup.
a. Relevance of Knowledge of Fraud
In the context of CCGroup‘s Handgards claim, OptumInsight‘s knowledge of fraud—or

7

some other basis for invalidity or unenforceability—is necessary to establish bad faith in bringing

8

the infringement action. See Handgards, 601 F.2d at 994−96.

9

The relevance of OptumInsight‘s knowledge to CCGroup‘s Walker Process claim is more
complex. There is no dispute that such knowledge is necessary for claims based on Symmetry‘s

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United States District Court
Northern District of California

10

patents if OptumInsight is treated as an assignee of those patents. Ritz Camera, 700 F.3d at 506.

12

OptumInsight asserts in its motion that an assignment actually occurred, Mot. at 14 n.1, while

13

CCGroup contends that ―the ‗assignments‘ OptumInsight recorded with the PTO were not

14

assignments at all, but simply a document evidencing the merger between Symmetry and

15

OptumInsight,‖ Opp‘n at 10−11 n.9. Neither party submits for judicial notice documents

16

supporting its position. The Court therefore looks to the allegations of the Second Amended

17

Complaint, which include no reference to an assignment of patents from Symmetry to

18

OptumInsight. See generally SAC. CCGroup alleges, and the Court takes as true at this stage,

19

that OptumInsight obtained Symmetry‘s patents when it purchased Symmetry‘s stock and

20

subsequently merged Symmetry into itself. SAC ¶¶ 138, 149.

21

The parties dispute what effect the merger has on CCGroup‘s Walker Process claim

22

against OptumInsight based on patents obtained by Symmetry. OptumInsight‘s brief concedes

23

that CCGroup can state a Walker Process claim by pleading that ―OptumInsight itself obtained

24

patents by fraud‖ as an alternative to pleading OptumInsight‘s knowledge of Symmetry‘s fraud,

25

Mot. at 14, although OptumInsight‘s counsel contested that point at the hearing. OptumInsight

26

argues at the very least that the requirement of showing knowledge at the time of enforcement

27

applies equally in this case, where OptumInsight purchased and merged with Symmetry, as it

28

would apply if Symmetry had assigned its patents to OptumInsight. See id.; Reply at 2. CCGroup
25

1

contends that the knowledge requirement applies only to an assignee of a patent obtained through

2

fraud, and that OptumInsight is not an assignee but instead stands in the shoes of Symmetry. See

3

Opp‘n at 9−13. The parties agree that no decision has addressed the precise issue of whether a

4

Walker Process plaintiff must allege knowledge of fraud where the defendant obtained a patent

5

through merger with the original patentee.

6

This dispute is based on the tension between the Federal Circuit‘s blanket statement in

7

Nobelpharma that ―[t]he plaintiff in the patent infringement suit must . . . have been aware of the

8

fraud when bringing suit,‖ 141 F.3d at 1069, and its later, more nuanced, statement of the rule in

9

Ritz Camera that ―the plaintiff must show that the defendant procured the relevant patent by
knowing and willful fraud on the PTO or (in the case of an assignee) that the defendant

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United States District Court
Northern District of California

10

maintained and enforced the patent with knowledge of the fraudulent manner in which it was

12

obtained,‖ 700 F.3d at 506 (emphasis added).

13
14
15
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18
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Both cases cite and rely on Walker Process itself, the relevant portions of which read as
follows:
Walker‘s counterclaim alleged that Food Machinery obtained the
patent by knowingly and willfully misrepresenting facts to the
Patent Office. Proof of this assertion would be sufficient to strip
Food Machinery of its exemption from the antitrust laws.5 By the
same token, Food Machinery‘s good faith would furnish a complete
defense. This includes an honest mistake as to the effect of prior
installation upon patentability—so-called ‗technical fraud.‘

20

[Footnote 5:] This conclusion applies with equal force to an assignee
who maintains and enforces the patent with knowledge of the
patent‘s infirmity.

21

Walker Process, 382 U.S. at 177 & n.5. A plain reading of the Supreme Court‘s opinion does not

22

require a plaintiff to show knowledge of fraud at the time of enforcement if the enforcing party is

23

the original patent owner—the fact that the defendant ―obtained the patent [through fraud] . . .

24

would be sufficient to strip [the defendant] of its exemption from the antitrust laws.‖ Id. at 177.

25

The next sentence, discussing good faith as a defense, refers in context to a defendant‘s good faith

26

in prosecuting the patent, not the state of mind of other agents of the defendant in later enforcing

27

it. Accordingly, as presented in Walker Process, the rationale for stripping a patent enforcer of

28

antitrust immunity is the enforcer‘s wrongful conduct. In the case of an original patentee, the
26

1

initial wrongful conduct in obtaining the patent through fraud is sufficient. In the case of an

2

assignee, to whom courts would not normally impute the assignor‘s earlier misconduct, the

3

Supreme Court indicated that some other misconduct by the assignee itself is necessary, i.e.,

4

enforcing the patent with knowledge that it was fraudulently obtained.

5

The rules stated in Nobelpharma and Ritz Camera are inconsistent: the former would

6

require an antitrust plaintiff to show that any party enforcing a patent knew at the time of

7

enforcement that it was fraudulently obtained, the latter would only require that where the enforcer

8

was an assignee. Based on this Court‘s reading of Walker Process, the rule of Ritz Camera better

9

follows the standard set by the Supreme Court. In Nobelpharma, the enforcing party was an
exclusive licensee, and later an assignee, of the patent. 141 F.3d at 1062 & n.5. The generalized

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United States District Court
Northern District of California

10

rule stated in that case therefore applied to the facts at hand, and the court had no occasion to

12

address how it would apply to an original patentee. In Ritz Camera, the Federal Circuit clarified

13

the rule and reaffirmed the Supreme Court‘s holding that knowledge of fraud is required for a

14

Walker Process claim only where the party enforcing the patent is an assignee. This Court

15

therefore holds that, to state a claim under Walker Process, CCGroup need not allege that

16

OptumInsight knew of fraud in the prosecution of patents that OptumInsight itself prosecuted.

17

That conclusion does not in itself resolve the issue of what is required for a Walker

18

Process claim based on patents originally obtained by Symmetry before it merged into

19

OptumInsight, but it is a starting point. The corporation that continues after a merger generally

20

stands in the shoes of both constituent corporations—under Delaware law, the resulting or

21

continuing corporation ―possess[es] all the rights, privileges, powers and franchises as well of a

22

public as of a private nature, and [is] subject to all the restrictions, disabilities and duties of each of

23

such corporations so merged or consolidated.‖ Del. Code Ann. tit. 8, § 259(a). OptumInsight

24

contends that a merger does not as a matter of law confer knowledge to the continuing corporation,

25

Mot. at 15−16, but under the analysis above, knowledge of fraud is necessary only where the party

26

enforcing the patent is not itself culpable for the fraud on the USPTO. While OptumInsight has

27

argued that a patent obtained through merger should be treated the same as if it were obtained

28

through assignment, a mere assignee does not take on ―all the restrictions, disabilities and duties‖
27

1

of the assignor. The Court holds that it is appropriate to treat a post-merger corporation as

2

standing in the shoes of its predecessors with respect to a predecessor‘s fraud on the USPTO,

3

based on the principle that the predecessor‘s conduct, rather than its knowledge of such conduct, is

4

imputed to the successor.
If CCGroup succeeds in demonstrating that Symmetry obtained its patents through fraud

5
6

on the USPTO, CCGroup therefore need not also show that OptumInsight was aware of that fraud

7

to state a Walker Process claim based on the enforcement of those patents.15 Because CCGroup

8

has plausibly alleged that the patents at issue were obtained through fraud on the USPTO,

9

OptumInsight‘s motion to dismiss CCGroup‘s Walker Process claim is DENIED.

10

b. Allegations Regarding Knowledge of Fraud

United States District Court
Northern District of California

11

Although the Court holds that knowledge of fraud at the time of enforcement is not

12

required for CCGroup‘s Walker Process claim, such knowledge is necessary to CCGroup‘s

13

alternative Handgards claim. OptumInsight contends that based on Exergen and other authority,

14

CCGroup must plausibly allege that an individual responsible for filing OptumInsight‘s

15

infringement claims had the requisite knowledge of fraud on the USPTO. Mot. at 16−19; Reply at

16

4−6. CCGroup disagrees that it has any such burden at the pleading stage, and argues that the

17

standard for pleading scienter of a person committing fraud on the USPTO does not apply to the

18

separate issue of pleading the state of mind of a person later initiating litigation in a Walker

19

Process or Handgards claim. Opp‘n at 16−17. Assuming for the sake of argument that

20

OptumInsight is correct,16 the Court‘s analysis above in the context of OptumInsight‘s patent

21

prosecution applies equally to this issue. CCGroup alleges that Padmanabhan represented

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27
28

15
16

Even if this were not so, CCGroup has plausible alleged such knowledge as discussed below.
Counsel for OptumInsight suggested at the hearing that the Court had already considered this
issue in its previous Order by treating Exergen as harmonizing the standards for inequitable
conduct and Walker Process fraud. The harmonization at issue there was the sort of conduct
before the USPTO that supports a claim, and whether the Federal Circuit‘s statement in
Nobelpharma that ―inequitable conduct is a broader, more inclusive concept than the common law
fraud needed to support a Walker Process counterclaim,‖ 141 F.3d at 1069, remains accurate in
light of Exergen and, more significantly, Therasense. See Order at 20 n.14. This Court did not at
that time assume that Exergen‘s pleading standard for knowledge of material misrepresentation by
the person prosecuting a patent in the context of establishing inequitable conduct also applies in
the context of a Walker Process claim to the separate issue of pleading knowledge of past fraud on
the USPTO by the person later initiating litigation.
28

1

OptumInsight in bringing claims against CCGroup. See, e.g., SAC ¶¶ 174, 584(d)−(e). For the

2

same reasons that it is plausible Padmanabhan knew of fraud on the USPTO when he prosecuted

3

patents for OptumInsight, it is also plausible that he knew of such fraud when he filed claims

4

against CCGroup.

5

CCGroup also alleges that Lancaster played a role in bringing those claims with
knowledge of the infirmity of the patents. See id. OptumInsight asserts that Lancaster had no role

7

in initiating that litigation, and submits billing records that, it contends, support that assertion.

8

Mot. at 25−26; Lancaster Decl. Ex. H. OptumInsight cites no authority that would permit the

9

Court to consider those billing records at the pleading stage, and CCGroup‘s motion to strike that

10

exhibit is therefore granted. Lancaster‘s involvement in initiating the Cave I litigation is a factual

11
United States District Court
Northern District of California

6

allegation that is taken as true at the pleading stage. For the same reasons applicable to

12

Padmanabhan, CCGroup has plausibly alleged that Lancaster—who played a more direct role than

13

Padmanabhan in the earlier litigation where significant documents were allegedly obtained, see

14

SAC ¶¶ 584(d), (e)—knew of fraud on the USPTO at the time that OptumInsight filed claims

15

against CCGroup.
***

16
17

OptumInsight‘s present motion does not attack any other element of CCGroup‘s Walker

18

Process and Handgards claims, i.e., ―all the elements otherwise necessary to establish a Sherman

19

Act monopolization charge.‖ See Ritz Camera, 700 F.3d at 506. Because CCGroup plausibly

20

alleges fraud on the USPTO and knowledge of such fraud when OptumInsight brought its claims

21

in Cave I, OptumInsight‘s motion to dismiss CCGroup‘s Walker Process and Handgards claims is

22

DENIED.

23

C.

24

OptumInsight‘s motion to dismiss CCGroup‘s malicious prosecution and Lanham Act

Malicious Prosecution and Lanham Act Claims

25

claims rests entirely on its arguments for dismissing the antitrust claims. Mot. at 29−30.

26

Although OptumInsight hints at other weaknesses of the Lanham Act claim, such as whether the

27

statements in question constitute advertising and whether the claim is barred by the statute of

28

limitations, it elects not to pursue those arguments. Id. at 29 n.6. OptumInsight‘s motion to
29

1

dismiss these remaining claims is DENIED for the same reasons as the antitrust claims discussed

2

above.

3

IV.

4

CONCLUSION
Although CCGroup faces a demanding burden of proof going forward, its allegations meet

5

the pleading standard to survive a motion to dismiss. Accordingly, for the reasons discussed

6

above, OptumInsight‘s motion to dismiss CCGroup‘s Second Amended Complaint is DENIED.

7
8
9
10

IT IS SO ORDERED.
Dated: September 12, 2016
______________________________________
JOSEPH C. SPERO
Chief Magistrate Judge

United States District Court
Northern District of California

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