IOENGINE LLC v. Interactive Media Corp.

Filing 150

MEMORANDUM. Signed by Judge Gregory M. Sleet on 1/4/2017. Associated Cases: 1:14-cv-01571-GMS, 1:14-cv-01572-GMS(mdb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
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IOENGINE LLC,
Plaintiff,
v.

INTERACTNE MEDIA
CORPORATION.,

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IOENGINE LLC,
Plaintiff,
v.
IMATION CORP.,
Defendants.

Civil Action No. 14-1571-GMS

Civil Action No. 14-1572-GMS

.MEMORANDUM

I.

BACKGROUND
On December 31, 2014, the plaintiff IOENGINE, LLC a Delaware Limited Liability

Company ("IOENGINE") filed patent infringement actions against Imation Corp. ("Imation") and
Interactive Media Corp. ("IMC") asserting infringement of United States Patent No. 8,539,047
("the '047 patent").

(D.I. 1.) The '047 patent was issued to the inventor, Scott McNulty

("McNulty"), who also founded IOENGINE. Id.

if 9. Subsequently, Imation and IMC answered

the Complaint. (C.A. No. 14-cv-1571, D.I. 8; C.A. No. 14-cv-1572, D.I. 12.) 1 Imation filed an

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For clarity, all docket references will refer to IOENGINE, LLC v. Imation Corp., C.A. No. 14-cv-1572,
unless noted otherwise.

Amended Answer and Counterclaim, asserting counterclaims against IOENGINE and McNulty
for inequitable conduct. (D.I. 46 ifif 80-92.)
On October 7, 2014, a Patent Assignment was executed between Scott McNulty and
IOENGINE. (D.I. 178, Ex. A.) The assignment purported to "assign, transfer, convey, sell and
deliver to [IOENGINE, LLC] all right, title and interest in, to and under the ['047 patent.] (Id.)
On October 7, 2014, Mr. McNulty executed a Certificate of Formation ofIOENGINE, LLC. (179
at Ex. 3.) On October 8, 2014, the Certificate of Formation was filed with the office of the
Secretary of State of Delaware. (D.I. 173, Ex. B; D.I. 178 at 1-2.)
On December 1, 2016, Imation filed the present Motion to Dismiss Plaintiff's Complaint
for Lack of Standing pursuant to Federal Rules of Civil Procedure 12(c) and 12(b)(l). 2 (D.I.173.)
For the reasons set forth below, the court will deny Imation's motiol}. to dismiss. 3

II.

STANDARD OF REVIEW
a. Rule 12(b)(l) Standard
"A motion to dismiss for want of standing is properly brought pursuant to Rule 12(b)(1)

[of the Federal Rules of Civil Procedure], because standing is a jurisdictional matter." Ballentine

v. US., 486 F.3d 810 (3d Cir. 2007). Such a motion may present either a facial or factual challenge
to subject matter jurisdiction.

Lieberman v. Delaware, C.A. No. 96-523-GMS, 2001 WL

1000936, at *1 (D. Del. Aug. 30, 2001) (citing Mortensenv. First Savings and Loan, 549 F.2d
884, 891 (3d Cir. 1977)). When the movant mounts a facial challenge, the court must accept all

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IMC joined in Imation's motion to dismiss on December 1, 2016. (C.A. 14-1571, D.I. 139).
As a preliminary matter, IOENGINE asserts that the motion to.dismiss is procedurally improper and
untimely, because Imation filed the motion "on the eve of trial" and did not seek leave to file this motion consistent
with the schedulirig order. (D.I. 178 at 2-4.) Although the court prefers to address standing issues earlier in the
proceedings, they can arise at any time and standing is not subject to waiver. See Fed. R. Civ. P. 12(h)(3) ("If the
court determines at any time that it lacks subject matter jurisdiction, the court must dismiss the action."); Pandrol
USA, LP v. Airboss Ry. Prods., Inc., 320 F.3d 1354, 1367-68 (Fed. Cir. 2003) ("It is well-established that any party,
and even the court sua sponte, can raise the issue of standing for the first time at any stage of the litigation, including
on appeal.") The court is not persuaded by Imation's procedural argument. Thus, the court will resolve the motion.
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factual allegations in the complaint as true and may only consider the complaint and documents
referenced therein or attached. Samsung Elecs. Co., Ltd. v. ON Semiconductor Corp., 541
F.Supp.2d 645, 648 (D. Del. 2008) (citing Gould Elecs., Inc. v. United States, 220 F.3d 169, 176
(3d Cir. 2000)).
When a factual challenge is presented, however, the court is not limited to the allegations
of the complaint or required to accept its allegations as true. Resnikv. Woertz, 774 F.Supp.2d 614,
627 (D. Del. 2011). The court is free to weigh evidence outside the pleadings to resolve factual
issues bearing on jurisdiction and the existence of disputed material facts will not prevent the court
from analyzing the merits of jurisdictional claims. Lemon Bay Partners, LLP v. Hammonds, C.A.
No. 05-327-GMS, 2007 WL 1830899, at *3 (D. Del. June 26, 2007). Although the plaintiff bears
the burden to prove the existence of j~sdiction, the burden is light, since "dismissal for lack of
_jurisdiction is not appropriate merely because the legal theory alleged is probably false, but only
because the right claimed is 'so insubstantial, implausible, foreclosed by prior decisions of the
Court, or otherwise completely devoid of merit as to not involve a federal controversy."' Kulick

v. Pocono Downs Racldng Ass'n, 816 F.2d 895, 899 (3d Cir. 1987) (quoting Oneida Indian Nation
v. County of Oneida, 414 U.S. 661, 666 (1974))~ 4
Importantly, "the touchstone of constitutional standing in a patent infringement suit is
whether a party can establish that it has an exclusionary right in a patent, that if violated by another,
would cause the party holding the exclusionary right to suffer legal injury:" WiA V Sol. LLC v.

Motorola, Inc., 63 F.3d 1257, 1265 (Fed. Cir. 2010). Furthermore, only the party who holds all
legal rights to the patent as patentee or assignee of all patent rights can sue in their own name.

Morrow v. Microsoft, 499 F.3d 1332, 1339 (Fed. Cir. 2007) ("When a party holds all rights or all

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ln its motion, Imation attacks IOENGINE's complaint on factual grounds. The court will therefore
consider evidence outside of the pleadings to determine whether subject matter jurisdiction exists.

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substantial rights, it alone has standing to sue for infringement."). The Federal Circuit instructs
that "establishing ownership of a patent that has been infringed satisfies the requirements of Article
III standing." Pandrol, 320 F.3d 1354at1367-68.
b. Rule 12(c) Standard
Pursuant to Federal Rule of Civil Procedure 12(c), a party may move for judgment on the
pleadings "[a]fter pleadings are closed-but early enough not to delay triaL" When evaluating a
motion forjudgment on the pleadings, the court must accept all factual allegations in a complaint
as true and view them in the light most favorable to the non-moving party. See Rosenau v. Unifund
Corp., 539 F.3d 218, 221 (3d Cir. 2008); see also Maio v. Aetna, Inc., 221F.3d472, 482 (3d Cir.

2000). A Rule 12(c) motion will not be granted "unless the movant clearly establishes that no
material iss.ue of fact remains to be resolved and that he is entitled to judgment as a matter oflaw."
Rosenau, 539 F.3d at 221. This is the same standard as a Rule 12(b)(6) motion to dismiss. See
Revell v. PortAutk., 598 F.3d 128,134 (3d Cir. 2010).

III.

DISCUSSION
.a. Validity of The Assignment: De Jure

IOENGINE has the burden of proving that jurisdiction exists, i.e. that there was a valid
assignment. 5 The Federal Circuit Court of Appeals has made clear that "if the original plaintiff
lacked Article III initial standing, the suit must be dismissed, and the jurisdictional defect cannot

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The recording of an assignment with the USPTO "creates a presumption of validity as to the assignment
and places the burden to rebut such a showing on one challenging the assignment." SiRF Technology, Inc. v.
International Trade Com'n, 601F.3d1319, 1327-28 (Fed. Cir. 2010); Dow Chemical Co. V. Nova Chemicals Corp.
(Canada), 458 Fed. Appx. 910, 912 (Fed. Cir. 2012). However, "[a] court may exercise jurisdiction only ifa
plaintiff has standing to sue on the date it files suit." Abraxis Bioscience, Inc. v. Navinta LLC, 625 F.3d 1359, 1364
(Fed. Cir. 2010). There is undisputed evidence that IOENGINE recorded the assignment of the '047 patent from
Mr. McNulty at the USPTO on June 1, 2015. (D.I. 179, Deel. Ex. 1). Imation has challenged the assignment's
validity by its citation to the fact that it wasn't recorded until five months after this lawsuit was filed. Accordingly,
the burden is on IOENGINE to prove that it is the valid assignee and owner of the '047 patent.

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be cured." Abraxis Bioscience, Inc. v. Navinta LLC, 625 F.3d 1359, 1364 (Fed. Cir. 2010) (quoting

Schreiber Foods, Inc. v. Beatrice Cheese, Inc., 402 F.3d 1198, 1203 (Fed. Cir. 2005)).
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In support of its standing challenge, Imation contends that the undisputed facts show that
on December 31, 2014, IOENGINE did not own the patent-in-suit and thus lacked standing to
bring the lawsuit. (D.I. 173 at 1.) Put simply, Imation asserts that the proffered assignment is void

ab initio. In other words, Imation maintains that IOENGINE LLC did not exist at the time of the
proffered assignment and therefore could not have received any rights in the '047 patent. (Id at
3-4.)

To support its position, Imation relies on the Delaware Secretary of State record of

"incorporation/formation'', which indicates that the IOENGINE, LLC was not formed until
October 8, 2014-one day after the assignment. (Id, Ex. B); see Del Code Ann. tit. 6, § 18-201(b)
("A limited liability company is formed at the time of the filing of the initial certificate of formation
in the office of the Secretary of State ... ").
In response, IOENGINE argues that the '047 patent was validly assigned to IOENGINE,
LLC on October 7, 2014. (D.I. 178 at 6.) IOENGINE contends that it was Mr. McNulty's intention
to assign the '047 patent to IOENGINE LLC on that date. (Id at 6-9.)
Because IOENGINE was formed in Delaware, Delaware law controls the issue of its
formation. 6 See Del. Code Ann. tit. 6, § 18-111. As just noted, Delaware law provides that "a
limited liability company is formed at the time of filing of the initial certificate of formation in the
office of the Secretary of State." Del. Code Ann. tit. 6, § 18-201(b). IOENGINE's contention that

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"Delaware law with regard to limited liability companies is contractarian; individuals may create an
organization that reflects their perception of the appropriate relationships among the parties, most conducive to their
interests, as represented by their mutual agreement. Chapter 18 of Title 6 of the Delaware Code provides default
provisions applicable to Delaware LLCs where the parties' agreement is silent; where they have provided otherwise,
with limited exceptions, such agreements will be honored by a reviewing court." Huatuco v. Satellite Healthcare,
2013 WL 6460898, at *l (Del. Ch. 2013).

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Mr. McNulty's intent to form IOENGINE on October 7 controls is inconsistent with the law and
the plain language in the Certificate of Formation. The Certificate of Formation provides:
3. The term of the Company shall commence on the filing of this certificate ....
4. The Company shall be formed as of the date of filing of this Certificate.
(D.I. 179, Ex. 3.)
The Certificate was not filed until October 8. Mr. McNulty's intent cannot overcome these
facts or the requirements of the Delaware statute. Thus, it would seem that IOENGINE did not
exist in a de Jure sense at the time of the purported assignment.
In an effort to meet its burden, IOENGINE argues that it satisfied the requisites under
Delaware law to be considered, de Jure, and LLC. The cases that IOENGINE relies upon are cited
for the proposition that errors in assignment do not necessarily preclude a finding of standing. See
LP Matthews LLC v. Bath & Body Works, Inc., 458 F. Supp. 2d 211, 215 (D. Del. 2006) (holding

that the intent of the parties was to assign rights despite assignment documents mistakenly
referring to the assignee as a "Company" instead of a "Corporation" where both entities existed at
the time of assignment); Southwest efuel Network, L.L.C. v. Transaction Tracking Techs., Inc.,
Civ. No. 2:07-cv-311-TJW, 2009 WL 4730464, at *2-3 (E.D. Tex. Dec. 7, 2009) (finding standing
despite a clerical error in assignment where both entities existed at the time the assignment was
executed, and where the assignment was signed by an officer of both entities); Shower Enclosures
America, Inc. v. BBC Distrib. Corp., Civ. No. 3:15-cv-627, 2016 WL 3031081, at *2-3 (N.D. Ind.

May 27, 2016) (finding standing despite the assignment mistakenly referring to the assignee as
"Shower Enclosures, Inc." rather than "Shower Enclosures America, Inc." where the intended
assignee existed at the time of the assignment). These cases are, however, distinguishable from
the one at hand.

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Unlike those cases where the assignee did legally exist at the time of the assignment,
IOENGINE, LLC did not exist under Delaware law at the time of the patent assignment. Here,
IOENGINE's delay in filing the certificate of formation with the Delaware Secretary of State's
office is not tantamount to a typographical error or trivial defect in formation. And, despite Mr.
McNulty's subjective intent or belief, IOENGINE did not formally exist and could not, as a dejure
entity, have obtained ownership of the '047 patent on October 7, 2014.

b. Validity of the Assignment: De Facto
Thus, the answer to the standing question seems dependent upon whether IOENGINE can
overcome its technical non-compliance with the rules of limited liability company formation under
Delaware law. IOENGINE contends, regardless of technical non-compliance, that Delaware law
would recognize IOENGINE as a de facto LLC as of October 7, 2014. (D.I. 178 at 9-13.) Imation
challenges this contention on two grounds: first, that Delaware does not recognize de facto limited
liability companies; second, that IOENGINE has not adduced facts that would establish its de facto
LLC status. (D.I. 181 at 7D.I. 173 at 6.)
The court will first consider whether Delaware law would recognize IOENGINE as a de
facto LLC as of October 7, 2014. IOENGINE has not cited any decision wherein a de facto

limited liability company has been recognized, and the court has been unsuccessful in its effort to
locate such cases. Nevertheless, IOENGINE maintains that, where case law may be deficient in
the LLC context, the court can take guidance from the rules of law and equity, particularly the
more developed Delaware corporation law. See Del. Code Ann. tit. 6, § 18-1104; see also
Grunstein v. Silva, 2009 WL 4698541, at *18 (Del. Ch. Dec. 8, 2009) (applying general

principles of corporate acceptance of preincorporation contract to a limited liability company).

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The court agrees with IO ENGINE. Delaware law does recognize the common law-doctrine
of de facto incorporation. See Trustees ofPeninsula Annual Conference of the Methodist Church,

Inc. v. Spencer, 183 A.2d 588, 592 (Del. Ch. 1962); Read v. Tidewater Coal Exchange, Inc., 116
A. 898, 905 (Del. Ch. 1922)). Imation has not offered, nor can the court discern, any principled

reason to conclude that a limited liability company would or should be treated differently from a
corporation when considering the de facto formation of one or the other. Therefore, for purposes
of resolving the present standing issue, the court will look to this equitable doctrine. 7
In Delaware, it has been held that "[t]here are no clear set of circumstances nor a unique

bright line at which a business demonstrates a de facto corporation status. However, generally if
there has been a good faith or bona fide attempt to create and operate a corporation, but certain
procedural or technical shortcomings prevent .a corporation from being created, the Courts have
found a de facto corporation exists." Caudill v. Sinex Pools, Inc., 2006 WL 258302, at *2 (Del.
Super. 2006). 8
Under Delaware law, "the existence ofa de facto corporation requires (1) a special act or
general law under which a corporation may lawfully exists, (2) a bona fide attempt to organize
under the law and colorable compliance with the statutory requirements, and (3) actual use[] or
exercise of corporate powers in pursuance of such law or attempted organization." Trustees, 183
A.2d at592 (citing Read, 116 A. 898 at 905).
The following cases provide guidance on how courts apply the three-pronged test. In Big

Valley Associates v. DiAntonio, the court recognized de facto status for a corporation where there
was a one month delay in filing the certificate of corporation due to an attorney oversight. 1995

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Delaware law provides latitude for a court to exercise its equitable powers to recognize a de facto entity.
See 1 Treatise on the Law of Corporations § 6: 10 (3d) ("A wrongdoer should not be allowed to quibble over
incorporation defects to escape liability to the corporation.")

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WL 339072, at *1-2 (Del. Super. May 10, 1995) (unpublished opinion). The court relied on the
following facts in finding that the corporation made a bona fide attempt to incorporate: it began
business operations, it obtained and IRS corporate identification number, and it made an election
for Subchapter S status. Id. at *3. The court also emphasized that "the corporation's dejure
status was perfected well in advance of the claims" at issue. Id.

Caudill v. Sinex Pools, Inc., 2006 WL 258302 (Del. Super. Jan. 18, 2006) is also
instructive. In Caudill, the court found that Sinex Pools met the criteria for a de facto
corporation status despite no evidence of actual submission of incorporation documents to the
Secretary of State. The court looked to Sinex's actual operation as a corporation-"[c]ontracts
were executed in the name of the corporation, and there [was] nothing to suggest either bad faith
or a deviant motiye by [the founder] in the representations that were made about the business's
corporate status." Id. at *3.
Circumstances analogous to these would appear to exist with regard to IO ENGINE. First,
the Delaware Limited Liability Company Act provides a general law under which IOENGINE,
LLC may lawfully" exits. See Del. Code Ann. tit. 6 § 18-201. Second, Mr. McNulty made a bona

fide attempt to organize IOENGINE under the Act and to effect colorable compliance with its
requirements. Mr. McNulty signed and had notarized the formation document for IOENGINE,
LLC "pursuant to the Delaware Limited Liability Company Act" on October 7, 2014. (D.I. 179,
Deel. Ex. 3.). Third, the fact that IOENEINE's documents were finalized, executed, and notarized
by October 7, 2014 evidenced its formation. The IOENGINE, LLC formation document also states
that on October 7, 2014, IOENGINE designated United Corporate Services, Inc. as its registered
agent in Delaware, as required by the Delaware LLC Act. Mr. McNulty also testified that upon
forming IOENGINE he provided funds with which to pay United Corporate Services and open a

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bank accountin the name "IOENGINE." (D.I. 179, Ex. 4 at 16:11-19.) In addition, the execution
of a patent assignment to obtain property on behalf ofIOENGINE appears to have been an exercise
of corporate powers on October 7, 2014. All of these efforts demonstrate a good faith, bona fide
attempt to comply with the statutory requirements of formation of a limited liability company
under Delaware law.
Imation relies on Leber Assocs., LLC v. Entm 't Group Fund, Inc. to attempt to persuade
the court that IOENGINE's actions fail to earn it de facto status. 2003 WL 21750211 (S.D.N.Y.
July 29, 2003); (D.I. 173 at 6; D.I. 181 at 5.) This case is distinguishable from Leber where the
district court, applying Delaware law, held that the plaintiff entity was not a de facto LLC. 2003
WL 21750211,_at *10 ("Merely giving instructions to an attorney is insufficient as a matter oflaw
to establish de facto status.") In Leber, the district cc;mld not find a good faith attempt to comply
with the statutory requirements, because the record lacked evidence that "anybody connected to
Leber Associates [LLC] ever drew up a certificate of formation or attempted to file such _a
certificate until after this lawsuit commenced." In the present case, however, formation documents
had been drafted and finalized with the advice of counsel as of October 7, 2014. Furthermore, like
the entity in Big Valley Associates, IOENGINE perfected its de jure status well in advance of the
inception of this lawsuit. The court will, therefore, recognize IOENGINE as a de facto LLC atthe
time of the Patent Assignment and find that IOENGINE has standing to bring suit.
·CONCLUSION
For the foregoing reasons the court will deny the motion to dismiss for lack of subject
matter jurisdiction under Federal Rule of Civil Procedure 12(c) and 12(b)(l).

tit,

Dated: January _j_, 2017

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