Abaxis, Inc. v. Cepheid

Filing 87

Order by Hon. Lucy H. Koh granting 74 Motion to Dismiss Inequitable Conduct Claim. (lhklc1, COURT STAFF) (Filed on 8/25/2011)

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UNITED STATES DISTRICT COURT

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United States District Court
For the Northern District of California

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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ABAXIS, INC.,

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Plaintiff and Counter-Defendant,
v.
CEPHEID,
Defendant and Counter-Claimant.

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Case No.: 10-CV-02840-LHK
ORDER GRANTING MOTION TO
DISMISS INEQUITABLE CONDUCT
COUNTERCLAIM

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Currently before this Court is Plaintiff Abaxis, Inc.‟s motion to dismiss Defendant

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Cepheid‟s eighth and ninth defenses and ninth counterclaim. Dkt. No. 74 (“Mot.”); see also Dkt.

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No. 82 (“Reply”). Cepheid opposes this motion. Dkt. No. 78 (“Opp‟n”). After reviewing the

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parties‟ submissions, considering the relevant legal authorities, and hearing oral argument, the

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Court hereby GRANTS Abaxis‟s motion to dismiss.

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I.

BACKGROUND

In its first amended complaint (“FAC”), Abaxis alleges that Cepheid is infringing four of its

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patents and is in breach of a license agreement. Dkt. No. 24. Cepheid has denied liability.

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Cepheid‟s initial answer alleged inequitable conduct during the prosecution of United States Patent

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Nos. 5,413,732 (“the ‟732 patent”), 5,624,597 (“the ‟597 patent”), 5,776,563 (“the ‟563 patent”),

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Case No.: 10-CV-02840-LHK
ORDER GRANTING MOTION TO DISMISS INEQUITABLE CONDUCT COUNTERCLAIM

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and 6,251,684 B1 (“the ‟684 patent”) (collectively “the patents-in-suit”)1. Dkt. No. 32. On March

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22, 2011, this Court dismissed Cepheid‟s eighth defense and ninth counterclaim with leave to

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amend. Dkt. No. 45. Cepheid filed an amended answer and counterclaims on April 12, 2011. Dkt.

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No. 50. Abaxis filed a motion to dismiss on April 26, 2011. Dkt. No. 51. On June 15, 2011, this

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Court granted Cepheid leave to further amend its answer and counterclaims in light of the recent

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Federal Circuit decision, Therasense, Inc. v. Becton, Dickinson & Co., Nos. 2008-1511, 2008-

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1512, 2008-1513, 2008-1514 & 2008-1595, 2011 WL 2028255 (Fed. Cir. May 25, 2011). See Dkt.

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No. 67. Abaxis withdrew its motion to dismiss in anticipation of Cepheid‟s forthcoming

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amendments on June 16, 2011. Dkt. No. 68. In its subsequent amended answer and third amended

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For the Northern District of California

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counterclaims (“amended answer”), filed June 17, 2011, Cepheid raises ten defenses and asserts

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eleven counterclaims. Dkt. No. 72 (“Ans.”). Abaxis filed the instant motion to dismiss on June 29,

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2011. Dkt. No. 74.

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Cepheid‟s eighth and ninth defenses and ninth counterclaim are at issue here. They allege

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that Abaxis engaged in inequitable conduct during the prosecution of the ‟732, ‟597 and ‟563

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patents. Ans. 6-25. They also allege that the ‟684 patent is infected by the inequitable conduct

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during the prosecution of the ‟732, ‟597 and ‟563 patents. Ans. 25-28. As a result, Cepheid seeks

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judgment that the patents-in-suit are unenforceable. Ans. 33. Alternatively, Cepheid alleges that

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Abaxis‟s claims are barred by the doctrine of unclean hands because of Abaxis‟s inequitable

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conduct and are therefore unenforceable. Ans. 28, 33.

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A. Abaxis’s Alleged Failure to Disclose Material Prior Art

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Cepheid‟s eighth defense contains allegations that Kevin L. Bastian, the attorney who

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prosecuted the ‟732, ‟597 and ‟563 patents for Abaxis, knowingly and intentionally failed to

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disclose to the United States Patent & Trademark Office (“PTO”) material prior art while

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prosecuting these three patents.2 Ans. ¶¶ 17, 39.3 According to the amended answer, this material

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These patents were pending before the PTO for the following periods, at the close of which the
patents issued: (1) the ‟732 patent was pending from August 19, 1991, until May 9, 1995; (2) the
‟597 patent from May 8, 1995, until April 29, 1997; (3) the ‟563 patent from June 6, 1995, until
July 7, 1998; and (4) the ‟684 patent from April 24, 1998, until June 26, 2001. Dkt. No. 72
(“Ans.”) ¶¶ 18-21.
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Cepheid‟s ninth defense and ninth counterclaim are both based on the allegations made in its
eighth defense, which they incorporate by reference. Both parties focused their briefing on the
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Case No.: 10-CV-02840-LHK
ORDER GRANTING MOTION TO DISMISS INEQUITABLE CONDUCT COUNTERCLAIM

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prior art was United States Patent No. 4,470,202 (“the Buxton Patent”).4 Id. ¶ 17. As described in

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Cepheid‟s amended answer, the patents-in-suit “relate to the production of freeze-dried reagent

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beads for pharmaceutical and diagnostic applications. The beads are formed by dispensing drops

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of reagent solutions into a cryogenic liquid. The frozen drops are then lyophilized (i.e., freeze-

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dried), which is a process that drives off water molecules, leaving a dried, allegedly rapidly-

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dissolving bead.” Id. ¶ 26. Cepheid claims that “Abaxis‟ purported advance over the prior art is

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uniformity in bead production.” Id.

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Cepheid alleges that the Buxton Patent discloses “reagent spheres and a process of making
reagent spheres that have both short dissolution times and uniformity.” Id. ¶ 28. Specifically,

United States District Court
For the Northern District of California

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Cepheid alleges that the Buxton Patent‟s disclosures include: (1) “drop-wise dispensing of reagents

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for freezing;” (2) “use of [a] pump to dispense drops;” (3) “uniform size of spheres;” (4) “unit

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dosages;” (5) “fast dissolution;” and (6) a “chemical lattice.” Id. ¶ 30. Cepheid‟s amended answer

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provides four tables setting forth what Cepheid considers to be the “close overlap between the

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Buxton teachings and the Patents-in-Suit” that would make the patents-in-suit “unpatentable due to

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anticipation and/or obviousness in view of the Buxton patent.” Id. ¶ 31, 33. In particular, Cepheid

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considers the Buxton Patent‟s disclosure of “drop-wise dispensing of reagents into liquid for

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freezing” to be but-for material5 to the patents-in-suit and non-cumulative of other prior art

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submitted to the PTO. Id. ¶ 32-33.

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Cepheid claims that at least Kevin L. Bastian was aware of the but-for materiality of the

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Buxton Patent and failed to disclose the patent to the PTO during the prosecution of the patents-in-

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suit with the intent to deceive the PTO. Id. ¶ 39. Kevin L. Bastian, the same attorney who

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prosecuted the ‟732, ‟597, and ‟563 patents, also prosecuted United States Patent No. 5,275,016

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sufficiency of the eighth defense. This Court will likewise focus on the eighth defense, as its
viability determines the viability of the ninth defense and ninth counterclaim.
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Paragraph numbers refer to the paragraph numbers beginning on page 4 of Cepheid‟s amended
answer under the heading, “Affirmative and Other Defenses.”
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The Buxton Patent is entitled “Process and Apparatus for Freezing a Liquid Medium” and issued
on September 11, 1984, more than a year before the earliest claimed priority date for the patents-insuit. Id. ¶ 27.
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A withheld reference is but-for material “if the PTO would not have allowed a claim had it been
aware of the undisclosed prior art.” Therasense, 2011 WL 2028255, at *11. At oral argument, the
parties agreed that Therasense established a new standard for materiality.
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(“the ‟016 patent”). Id. ¶ 35. The ‟016 patent and the patents-in-suit share the same three

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inventors: Steven N. Buhl, Bhaskar Bhayani, and Thuy N. Tang. Id. ¶ 34. Cepheid alleges that the

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‟016 patent “performs the methods claimed in the Patents-in-Suit and produces the reagent spheres

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claimed in the Patents-in-Suit.” Id. ¶ 37. According to the amended answer, on July 16, 1993, Mr.

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Bastian received the International Search Report for the Patent Cooperation Treaty (“PCT”)

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counterpart of the ‟016 patent, which cited the Buxton Patent as a “document of particular

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relevance” to some of the claims of the PCT application. Id. ¶ 43. Cepheid alleges that these

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claims in the PCT counterpart of the ‟016 patent “closely parallel claims of the Patents-in-Suit.”

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Id. ¶ 44. On August 6, 1993, while prosecuting the ‟016 patent, Mr. Bastian submitted a

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For the Northern District of California

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supplemental disclosure statement to the PTO. Id. ¶ 51. Cepheid alleges that this statement was

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accompanied by a copy of the Buxton Patent. Id. According to Cepheid‟s amended answer, “[t]he

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identical features of the Buxton patent which made it material to the ‟016 patent . . . also made the

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Buxton patent but-for material to the ‟732, ‟597, and ‟563 patents.” Id. ¶ 53.6

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Cepheid further alleges that Mr. Bastian made several statements to the PTO while

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prosecuting the patents-in-suit. According to Cepheid, these statements were made in order to

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distinguish the patents-in-suit from prior art cited by the PTO. Id. ¶ 54, 58-64. Cepheid‟s amended

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answer alleges that in making these statements, Mr. Bastian claimed that the patents-in-suit taught

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features that were actually disclosed in the Buxton Patent. Id. Cepheid specifically claims that Mr.

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Bastian knew these statements “were false in light of information contained in the Buxton patent,

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which was not before the Examiners, and Mr. Bastian knowingly withheld this information.” Id. ¶

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64. Cepheid argues that had the Buxton Patent been disclosed, “neither the ‟732, ‟597, nor ‟563

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patents would have issued . . . because the claimed features allegedly missing from the prior art of

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record were disclosed in the Buxton Patent.” Id. ¶ 65.

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B. Infectious Unenforceability of the ‟684 Patent

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Cepheid also alleges that the Buxton Patent is material to the claims of the ‟684 patent and

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non-cumulative of the prior art submitted to the PTO during the prosecution of the ‟684 patent. Id.

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Cepheid does not allege, nor could it, that the Buxton Patent was “but-for material” to the ‟016
patent, for the ‟016 patent issued despite the disclosure of the Buxton Patent.
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Case No.: 10-CV-02840-LHK
ORDER GRANTING MOTION TO DISMISS INEQUITABLE CONDUCT COUNTERCLAIM

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¶¶ 74-75. According to the amended answer, “[t]he Examiner found that the claims of the ‟684

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patent were not patentably distinct from the claims of the [other patents-in-suit] and would be

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invalid for obviousness-type double patenting, absent a terminal disclaimer over these patents.” Id.

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¶ 78. Cepheid argues that absent the alleged inequitable conduct by Mr. Bastian, the ‟563, ‟732,

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and ‟597 patents would have been rejected. Id. ¶ 79. Thus, the ‟684 patent would not have issued

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either. Id. Cepheid also claims that if the Buxton Patent had been disclosed to the PTO during the

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prosecution of the other patents-in-suit, the Buxton Patent would have been included in the

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prosecution record of the ‟684 patent, and thus, the ‟684 patent would not have issued. Id. ¶ 85.

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II.

LEGAL STANDARD

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For the Northern District of California

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“To survive a motion to dismiss, a complaint must contain sufficient factual matter,

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accepted as true, to „state a claim to relief that is plausible on its face.‟” Ashcroft v. Iqbal, 129 S.

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Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim

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has facial plausibility when the plaintiff pleads factual content that allows the court to draw the

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reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly,

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550 U.S. at 556). These requirements apply with equal rigor to pleadings made under Rules 8 and

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9 of the Federal Rules of Civil Procedure. Id. at 1954.

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Under Rule 9(b), “[i]n alleging fraud or mistake, a party must state with particularity the

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circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “Malice, intent, knowledge,

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and other conditions of a person‟s mind may be alleged generally.” Id. “Inequitable conduct,

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while a broader concept than fraud, must be pled with particularity under Rule 9(b).” Exergen

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Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312, 1326 (Fed. Cir. 2009) (quoting Ferguson

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Beauregard/Logic Controls, Div. of Dover Res., Inc. v. Mega Sys., LLC, 350 F.3d 1327, 1344 (Fed.

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Cir. 2003)) (quotations and alterations omitted). The law of the Federal Circuit, not the law of the

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regional circuit, applies to the question of whether inequitable conduct has been pled in accordance

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with Rule 9(b). See Exergen, 575 F.3d at 1326 (citation omitted).

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Although Exergen was decided in the context of a motion for leave to amend to add an

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inequitable conduct claim, its pleading standard is also used to evaluate the sufficiency of

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pleadings under Rule 9(b) on motions to dismiss. See In re BP Lubricants USA, Inc., 637 F.3d
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1307, at 1311 (Fed. Cir. 2011) (holding, in the context of a motion to dismiss, that “Exergen’s

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pleading requirements apply to all claims under Rule 9(b)”). As outlined in Exergen, the

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substantive elements of inequitable conduct are as follows: “(1) an individual associated with the

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filing and prosecution of a patent application made an affirmative misrepresentation of a material

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fact, failed to disclose material information, or submitted false material information; and (2) the

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individual did so with a specific intent to deceive the PTO.” Id. at 1327 n.3 (citing Star Scientific,

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Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357, 1365 (Fed. Cir. 2008); Molins PLC v. Textron,

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Inc., 48 F.3d 1172, 1178, 1181 (Fed. Cir. 1995); 37 C.F.R. § 1.56 (2008)). As the parties agreed at

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the hearing on the motion, Therasense further heightened the standard for the materiality element

United States District Court
For the Northern District of California

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of inequitable conduct, holding that “the materiality required to establish inequitable conduct is

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but-for materiality. When an applicant fails to disclose prior art to the PTO, that prior art is but-for

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

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2011 WL 2028255, at *11.
“[I]n pleading inequitable conduct in patent cases, Rule 9(b) requires identification of the

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specific who, what, when, where, and how of the material misrepresentation or omission

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committed before the PTO.” Exergen, 575 F.3d at 1327.7 Furthermore, in pleading “knowledge”

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and “intent,” which may be averred generally under Rule 9(b), a pleading of inequitable conduct

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

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that a specific individual (1) knew of the withheld material information or of the falsity of the

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material misrepresentation, and (2) withheld or misrepresented this information with a specific

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intent to deceive the PTO.” Id. at 1328-29.
“[I]n dismissing for failure to state a claim under Rule 12(b)(6), „a district court should

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grant leave to amend . . . unless it determines that the pleading could not possibly be cured by the

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allegation of other facts.‟” Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (quoting Doe v.

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United States, 58 F.3d 494, 497 (9th Cir. 1995)). Whether to grant leave to amend a pleading

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Even though the Exergen court did not list “why” among the questions that a pleading must
answer with particularity, it did require, later in the opinion, that the pleading allege why the
withheld information is material and not cumulative. 575 F.3d at 1329.
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under Rule 15(a) is a procedural matter governed by the law of the regional circuit. See Exergen,

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575 F.3d at 1318.

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III.

ANALYSIS

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A. The ’732, ’597, and ’563 Patents

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Abaxis argues that Cepheid‟s amended allegations of inequitable conduct fail to meet the
pleading standard outlined in Iqbal and Exergen. Abaxis claims that Cepheid has not provided

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factual allegations from which knowledge and intent to deceive can be reasonably inferred. Mot. at

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6-7. According to Abaxis, Cepheid‟s counterclaim also fails to identify with sufficient particularity

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why the Buxton Patent is but-for material to the patents-in-suit and why it is non-cumulative of the

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United States District Court
For the Northern District of California

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prior art presented to the examiner. Mot. 7-8. This Court agrees with Abaxis that Cepheid has not

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pled sufficient facts to support a reasonable inference of knowledge and intent. Because failure to

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plead knowledge and intent is sufficient grounds to dismiss an inequitable conduct claim, the Court

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need not address whether Cepheid has met the pleading standard for materiality.
Specifically, Abaxis argues that Cepheid‟s amended answer does not properly allege that

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Mr. Bastian knew of the allegedly but-for material information contained in the Buxton Patent.

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Mot. 11-14. Abaxis also argues that the amended answer does not properly allege specific intent to

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deceive the PTO. Reply 5. Cepheid argues that its counterclaim provides ample facts from which

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it is reasonable to infer that Mr. Bastian knew of the material information contained in the Buxton

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Patent, that Mr. Bastian knew that information would be but-for material to the patents-in-suit, and

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that Mr. Bastian withheld the reference with the deliberate intent to deceive the PTO. Opp‟n 10-

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15.

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1. Knowledge
The Court finds the circumstances in this case sufficiently analogous to those in Exergen

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for Exergen to be controlling. In Exergen, as here, a material reference was disclosed during

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prosecution of one patent but not disclosed during prosecution of the patents-in-suit. 535 F.3d at

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1330. As in Exergen, this Court finds that Cepheid fails to allege sufficient facts to support a

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reasonable inference that Mr. Bastian “knew of the specific information in the [Buxton patent] that

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is alleged to be material to the claims of the [patents-in-suit].” See id. at 1330. Thus, although the
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inequitable conduct claim here does not suffer from the additional defect of failing to identify a

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specific person alleged to have knowledge of the material reference as in Exergen, see 575 F.3d at

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1329, the claim here still fails for failure to sufficiently allege knowledge.

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In the order granting Abaxis‟s prior motion to dismiss, this Court noted that Cepheid may
be able to support a reasonable inference that Mr. Bastian knew that specific information in the

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Buxton patent was material to the patents-in-suit by alleging facts to show that the Buxton Patent is

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material to the ‟016 patent for the same reasons that the ‟732 patent was referenced in the ‟016

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patent. Order at 10. Cepheid‟s amended answer does allege additional facts showing that the

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Buxton Patent is material to the ‟016 patent for the same reasons that the ‟016 patent is related to

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For the Northern District of California

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the patents-in-suit. Ans. 15-18. Just because the Buxton Patent was of “particular relevance” to

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some of the claims in the „016 patent, Ans. ¶ 43, and just because one of the patents-in-suit was

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referenced in the „016 patent, it does not necessarily follow that the Buxton Patent was but-for-

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material to the patents-in-suit. Even more central to the analysis here, the chain of inference is too

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tenuous to infer that Mr. Bastian knew that the information in the Buxton Patent was but-for

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material to the patents-in-suit.

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Indeed, the ‟016 patent appears to reference the then-pending ‟732 patent for the purpose of

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disclosing “[s]uitable reagent solutions.” ‟016 patent, Dkt. No. 75 Ex. 2, col. 4:7-9. This is distinct

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from the disclosure of the Buxton Patent‟s “drop-wise dispensing of reagents into liquid for

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freezing,” which Cepheid considers but-for material to certain claims of the patents-in-suit. Ans.

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¶¶ 32-33. Cepheid alleges only that Mr. Bastian “must have known that the same information

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made [the Buxton Patent] but-for material to the [patents-in-suit].” Id. ¶ 55. If there was any

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ambiguity after Exergen, Therasense made clear that such “should have known” inferences are

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insufficient to meet the knowledge requirement for inequitable conduct. 2011 WL 2028255, at

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*10; see also Exergen, 575 F.3d at 1330 (“[O]ne cannot assume that an individual, who generally

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

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reference.”) (emphasis in original). Even if Cepheid‟s allegation that “Mr. Bastian must have read

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the Buxton patent,” Ans. ¶ 52, supports an inference that Mr. Bastian should have been generally

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aware of the information contained in the Buxton patent, Cepheid‟s allegations as a whole fail to
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support the reasonable inference that he knew that specific information in the Buxton Patent was

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but-for material to the patents-in-suit. Accordingly, Cepheid‟s inequitable conduct counterclaim

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and defenses fail to adequately plead knowledge.

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2. Specific Intent

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“[A] pleading of inequitable conduct under Rule 9(b) must include sufficient allegations of

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underlying facts from which a court may reasonably infer that a specific individual . . . withheld”

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material information “with a specific intent to deceive the PTO.” Exergen, 575 F.3d at 1328-29

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(footnote omitted). “[T]he mere fact that an applicant disclosed a reference during prosecution of

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one application, but did not disclose it during prosecution of a related application, is insufficient to

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For the Northern District of California

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meet the threshold level of deceptive intent required to support an allegation of inequitable

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conduct.” Id. at 1331.

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Cepheid‟s amended answer also fails to allege that Mr. Bastian withheld the Buxton Patent

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reference with the specific intent to deceive the PTO. Cepheid‟s allegations of intent rely on the

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assumption that Mr. Bastian knew of the information in the Buxton Patent and of its but-for

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materiality to the patents-in-suit. Ans. ¶ 64. As the Court finds Cepheid‟s allegations of

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knowledge insufficient, its allegations of specific intent must also fail. Furthermore, Cepheid‟s

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argument that specific intent may be inferred from the combination of Mr. Bastian‟s knowledge of

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the Buxton Patent and his “motive to deceive the PTO” based on the alleged but-for materiality of

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the Buxton Patent, Opp‟n 14, would not meet the requirements of Therasense to the extent that

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Therasense restricts the Court‟s ability to infer intent based on the materiality of a withheld

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reference. “[A] district court may not infer intent solely from materiality. Proving that the

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applicant knew of a reference, should have known of its materiality, and decided not to submit it to

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the PTO does not prove specific intent to deceive.” Therasense, 2011 WL 2028255, at *10. Thus,

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Cepheid‟s inequitable conduct counterclaim and defenses also fail to adequately plead specific

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intent and are therefore dismissed.

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B. The ’684 Patent

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Cepheid‟s amended answer seeks to invalidate the ‟684 patent based on a theory of

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infectious unenforceability from inequitable conduct during the prosecution of the ‟732, ‟597, and
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‟563 patents. Because the Court finds that Cepheid has not met the pleading standard for

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inequitable conduct as to the ‟732, ‟597, and ‟563 patents, the inequitable conduct counterclaim

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and defenses against the ‟684 patent are also dismissed.

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IV.

CONCLUSION

For the foregoing reasons, the Court GRANTS Abaxis‟s motion to dismiss Cepheid‟s

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amended inequitable conduct defense. The Court also GRANTS Abaxis‟s motion to dismiss

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Cepheid‟s inequitable conduct counterclaim and its unclean hands defense, both of which rely on

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the allegations of the inequitable conduct defense. As Cepheid has already had the opportunity to

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amend its inequitable conduct counterclaims and defenses twice, the Court does not give Cepheid

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United States District Court
For the Northern District of California

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leave to amend because the deficiency in the pleading cannot be cured by alleging additional facts.

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IT IS SO ORDERED.

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Dated: August 25, 2011

_________________________________
LUCY H. KOH
United States District Judge

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Case No.: 10-CV-02840-LHK
ORDER GRANTING MOTION TO DISMISS INEQUITABLE CONDUCT COUNTERCLAIM