Gust, Inc. v. AlphaCap Ventures, LLC

Filing 65

OPINION & ORDER.....AlphaCap and Juarezs November 6, 2015 and May 25, 2016 motions are granted. A scheduling order accompanies this Opinion. Gust has leave to replead its antitrust claim and may bring a motion for attorneys fees. The remainder of Gusts claims and all of AlphaCaps claims are dismissed with prejudice. (Signed by Judge Denise L. Cote on 7/28/2016) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
GUST, INC.,
:
:
Plaintiff,
:
:
-v:
:
ALPHACAP VENTURES, LLC and RICHARD
:
JUAREZ,
:
:
Defendants.
:
:
-------------------------------------- :
:
ALPHACAP VENTURES, LLC,
:
:
Plaintiff,
:
:
-v:
:
GUST, INC.,
:
:
Defendant.
:
:
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APPEARANCES
For AlphaCap Ventures LLC:
Marie A. McCrary
GUTRIDE SAFIER LLP
100 Pine Street, Suite 1250
San Francisco, CA 94111
For Gust, Inc.:
Frank A. Bruno
WHITE AND WILLIAMS LLP
1650 Market Street
One Liberty Place, Suite 1800
Philadelphia, PA 19103

15cv6192 (DLC)

OPINION & ORDER

16cv1784 (DLC)

DENISE COTE, District Judge:
A non-practicing entity (“NPE”) AlphaCap Ventures LLC
(“AlphaCap”) has brought patent infringement claims against ten
companies participating in the internet crowdfunding market.
One of these defendants, Gust, Inc. (“Gust”), refused to settle
with AlphaCap and has counter-claimed, and separately sued, with
attacks on the validity of the AlphaCap patents and with charges
of abuse of process, monopolization, and patent misuse.

This

Opinion addresses both the impact of AlphaCap’s issuance of a
covenant not to sue Gust, and AlphaCap’s motion to dismiss all
of Gust’s claims.
are dismissed.

As described below, all claims in this action

Gust, however, may amend its antitrust claim and

proceed with a motion for an award of attorney’s fees.
BACKGROUND
The following facts are drawn from the pleadings and the
documents attached thereto.
Gust.

The facts are construed in favor of

See Keiler v. Harlequin Enters. Ltd., 751 F.3d 64, 68 (2d

Cir. 2014).
AlphaCap is a California limited liability company in the
business of licensing intellectual property assets, including

2

patents it does not practice.1

It owns three method patents2

(the “AlphaCap Patents”) that claim computer-implemented methods
of managing information related to “financing” and “equity and
debt financing,” and that provide related “data collection
templates.”3

These patents purport to cover computer programs

that allow investors to search for startup companies that are
seeking investors.

Because multiple investors may invest in a

single startup using these programs, such programs have come to
be known as “crowdfunding.”
On June 19, 2014, the Supreme Court issued Alice
Corporation Pty. Ltd. v. CLS Bank International, 134 S. Ct. 2347
(2014).

Alice held that three patents were too abstract to be

patentable.

The patents claimed (1) a “method for exchanging

[financial] obligations,” (2) “a computer system configured to
carry out the method for exchanging obligations,” and (3) “a
computer-readable medium containing program code for performing

Richard Juarez is AlphaCap’s principal as its de facto sole
director and officer.
1

A method patent covers a “process, art or method, and [may]
include[] a new use of a known process, machine, manufacture,
composition of matter, or material.” 35 U.S.C. § 100. Method
patents may cover “an act, or a series of acts, performed upon
the subject-matter to be transformed and reduced to a different
state or thing.” Bilski v. Kappos, 561 U.S. 593, 604 (2010)
(citation omitted).
2

The AlphaCap Patents are U.S. Patent Nos. 7,848,976, 7,908,208,
and 8,433,630.
3

3

the method of exchanging obligations.”

Id. at 2353.

In

invalidating these patents, the Court elaborated on the long
held rule that “[l]aws of nature, natural phenomena, and
abstract ideas are not patentable.” Id. at 2354 (citation
omitted).

Accordingly, “the mere recitation of a generic

computer cannot transform a patent-ineligible abstract idea into
a patent-eligible invention.

Stating an abstract idea while

adding the words ‘apply it’ is not enough for patent
eligibility.”

Id. at 2358 (citation omitted).

On January 23, 2015, despite knowledge that the decision in
Alice rendered its patents invalid, AlphaCap initiated an action
in Texas (the “Texas Action”) against Gust, alleging three
counts of patent infringement.

This was one of ten essentially

identical actions that AlphaCap filed on the same day in the
Eastern District of Texas against every major entity that
provides internet crowdfunding services.
On March 26, Gust answered with six counterclaims seeking a
declaratory judgment of non-infringement and invalidity for each
of the three AlphaCap Patents.

AlphaCap settled each action it

filed in the Eastern District of Texas, except for the Texas
Action against Gust.
On June 29, 2015, the Hon. Katherine Failla issued her
decision in Kickstarter, Inc. v. Fan Funded, LLC, 11cv6909
(KPF), 2015 WL 3947178 (S.D.N.Y. June 29, 2015), finding that
4

the cloaking of the otherwise abstract idea of fan-funding in
“the guise of a computer-implemented claim” does not make the
idea patent-eligible.

Id. at *13 (citation omitted).

Gust

claims that AlphaCap abused the judicial process not only by
knowingly instituting a frivolous lawsuit after the Court’s
decision in Alice, but also by continuing with its Texas Action
notwithstanding the Kickstarter decision.
On August 6, 2015, Gust filed an action in the Southern
District of New York (the “New York Action”) against AlphaCap.
It amended its complaint on November 27 to add Juarez as a
defendant.

Gust alleges that AlphaCap has litigated in bad

faith and that the AlphaCap Patents are invalid.

On November 6,

AlphaCap moved pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss
all claims against it in the New York Action.4
Gust filed an Amended Complaint.
new motion to dismiss.

On November 27,

AlphaCap chose not to file a

Rather, the parties were allowed to file

sur-replies in response to the Amended Complaint.

The motion

became fully submitted on February 23, 2016.5
On March 2, the Texas Action was transferred to this
District.

The Hon. Ronnie Abrams, who was then presiding over

AlphaCap also filed a motion for sanctions pursuant to Fed. R.
Civ. P. 11 with this motion to dismiss. This Opinion does not
address the Rule 11 motion.
4

5

Juarez joined this motion on February 23.
5

the New York Action, consolidated the two cases on April 28.
Both actions were transferred to this Court on May 13, 2016.
The Court held a conference with the parties on June 10.
Gust asserts six claims in its Amended Complaint.

The

first six counts, duplicative of Gust’s six counterclaims in the
Texas Action, seek declaratory judgments of non-infringement and
invalidity for the three AlphaCap Patents.

Count Seven and

Eight are abuse of process and patent misuse claims against
AlphaCap and Juarez.

Lastly, Count Nine is an antitrust

monopolization claim brought under Section 2 of the Sherman Act,
15 U.S.C. § 2.
On May 18, AlphaCap provided Gust with a covenant not to
sue it for infringement of the AlphaCap Patents (the
“Covenant”).

The Covenant states in relevant part that

AlphaCap unconditionally and irrevocably covenants
not to assert patent infringement . . . against Gust
and its direct or indirect subsidiaries under any
claim of the Patents-in-Suit, based upon Gust’s
previous, current, or future making, using,
manufacturing, development, marketing, licensing,
distributing, importing, offering for sale, or
selling of any of its product(s) or service(s),
including the Gust online startup funding platform
product and service . . . as they exist today, have
existed in the past, or will exist in the future.
AlphaCap further covenants not to sue Gust’s
suppliers, distributors, customers, partners, or
their successors and assigns, under any claim of the
Patents-in-Suit based upon their previous, current,
or future making, using, manufacturing, development,
marketing, licensing, distributing, importing,
offering for sale, or selling any of Gust’s
product(s) or service(s) . . . .
6

(Emphasis added.)

Relying on the Covenant, on May 25, AlphaCap

filed a second motion to dismiss, which became fully submitted
on June 20.

AlphaCap seeks to voluntarily dismiss its own

patent infringement claims in the Texas Action pursuant to Fed.
R. Civ. P. 41(a)(2), as well as Gust’s invalidity and noninfringement claims in both actions for lack of subject matter
jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1).
There are, therefore, two motions to dismiss pending.
There is AlphaCap’s motion to voluntarily dismiss each of its
own claims, and to dismiss as moot each of Gust’s claims of noninfringement and invalidity.

AlphaCap also seeks to dismiss

Gust’s remaining claims for its failure to plead a cause of
action.

The parties agree that Gust’s application of an award

of attorney’s fees pursuant to 35 U.S.C § 285 and 28 U.S.C.
§ 1972 will survive.
DISCUSSION
I.

The Impact of AlphaCap’s Covenant Not to Sue
AlphaCap moves to dismiss Gust’s claims seeking a

declaration that the AlphaCap Patents are invalid and not
infringed by Gust, pursuant to Fed. R. Civ. P. 12(b)(1).
parties agree that the Covenant renders them moot.

The

See Already,

LLC v. Nike, Inc., 133 S. Ct. 721, 726-29 (2013); Dow Jones &
Co., Inc. v. Ablaise Ltd., 606 F.3d 1338, 1345 (Fed. Cir. 2010);

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see also Nike, Inc. v. Already, LLC, 663 F.3d 89, 94-95 (2d Cir.
2011).
AlphaCap’s requests that its patent infringement claims and
Gust’s declaratory judgment claims be dismissed as moot is
granted.

AlphaCap’s Covenant not to sue Gust is binding and

applies broadly to all present and future litigation arising
from the AlphaCap Patents.

The plain language of the Covenant

ensures that AlphaCap will never again pursue any action to
enforce the AlphaCap Patents against Gust, and Gust does not
suggest otherwise.
While the Covenant renders the claims and counterclaims
addressed directly to the infringement of the AlphaCap Patents
and the validity of the patents moot, it does not have that
effect on Gust’s requests for attorney’s fees and costs under 35
U.S.C. § 285 and 28 U.S.C. § 1927.

See Highway Equip. Co. v.

FECO, Ltd., 469 F.3d 1027, 1032-33 (Fed. Cir. 2006) (Section
285); Tedeschi v. Barney, 757 F.2d 465, 466 (2d Cir. 1985) (per
curium) (Section 1927).

To assist the parties in their briefing

of that motion, the prevailing standards for an award of
attorney’s fees are briefly described here.
Section 285 of the Patent Act provides that “[t]he court in
exceptional cases may award reasonable attorney fees to the
prevailing party.”

35 U.S.C. § 285 (emphasis added).

An

“exceptional” case is “one that stands out from others with
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respect to the substantive strength of a party’s litigating
position (considering both the governing law and the facts of
the case) or the unreasonable manner in which the case was
litigated.”

Lumen View Tech. LLC v. Findthebest.com, Inc., 811

F.3d 479, 482 (Fed. Cir. 2016) (citation omitted).

“District

courts may determine whether a case is ‘exceptional’ in the
case-by-case exercise of their discretion, considering the
totality of the circumstances.”

Id. (citation omitted).

District courts may also consider a “nonexclusive” list of
factors to determine whether a case is exceptional, including
“frivolousness, motivation, objective unreasonableness (both in
the factual and legal components of the case) and the need in
particular circumstances to advance considerations of
compensation and deterrence.”

Octane Fitness, LLC v. ICON

Health & Fitness, Inc., 134 S. Ct. 1749, 1756 n.6 (2014).
Under 28 U.S.C. § 1927, “[a]ny attorney . . . who so
multiplies the proceedings in any case unreasonably and
vexatiously may be required by the court to satisfy personally
the excess costs, expenses, and attorneys’ fees reasonably
incurred because of such conduct.”

An award of attorney’s fees

under § 1927 is only appropriate “when there is a finding of
conduct constituting or akin to bad faith.”

Zurich Am. Ins. Co.

v. Team Tankers A.S., 811 F.3d 584, 591 (2d Cir. 2016) (citation
omitted).

To constitute bad faith, “[t]he attorney’s actions
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must be so completely without merit as to require the conclusion
that they must have been undertaken for some improper purpose
such as delay.”
II.

Id. (citation omitted).

November 6, 2015 Motion
With the dismissal of the patent infringement and

declaratory judgment claims in the two Actions, three causes of
action remain in the New York Action: Gust’s claims against
AlphaCap for abuse of process, patent misuse, and attempted
monopolization under the Sherman Act.

AlphaCap has moved to

dismiss each claim for failure to plead a cause of action.
When deciding a motion to dismiss under Rule 12(b)(6), a
court must accept all allegations in the complaint as true and
draw all inferences in the non-moving party’s favor.
Loginovskaya v. Batratchenko, 764 F.3d 266, 269-70 (2d Cir.
2014).

“To survive a motion to dismiss under Rule 12(b)(6), a

complaint must allege sufficient facts which, taken as true,
state a plausible claim for relief.”

Keiler v. Harlequin

Enters. Ltd., 751 F.3d 64, 68 (2d Cir. 2014); Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (“[A] complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief
that is plausible on its face.” (citation omitted)).

A claim

has facial plausibility when “the factual content” of the
complaint “allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.”
10

Tongue v. Sanofi, 816 F.3d 199, 209 (2d Cir. 2016) (citation
omitted).
A. Sherman Act
Section 2 of the Sherman Act penalizes “[e]very person who
shall monopolize, or attempt to monopolize, or combine or
conspire . . . to monopolize . . . trade or commerce.”
U.S.C. § 2.

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To state a claim for monopolization under Section

2, a plaintiff must allege (1) the defendant’s “possession of
monopoly power in the relevant market,” and (2) the defendant’s
“willful acquisition or maintenance of that power as
distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident.”

In re

Adderall XR Antitrust Litig., 754 F.3d 128, 133 (2d Cir. 2014)
(citation omitted).

“To safeguard the incentive to innovate,

the possession of monopoly power will not be found unlawful
unless it is accompanied by an element of anticompetitive
conduct.”

New York ex rel. Schneiderman v. Actavis PLC, 787

F.3d 638, 651 (2d Cir. 2015) (citation omitted).
“[A]nticompetitive conduct is conduct without a legitimate
business purpose that makes sense only because it eliminates
competition.”

In re Adderall XR Antitrust Litig., 754 F.3d at

133 (citation omitted).
A core element of a monopolization claim is market power,
which is defined as “the ability to raise price by restricting
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output.”

Pepsico, Inc. v. Coca-Cola Co., 315 F.3d 101, 107 (2d

Cir. 2002) (citation omitted).

To prove a monopolization claim,

plaintiffs may demonstrate market power either through direct
evidence that the defendant can control prices or exclude
competition, or through the inference that flows from the
defendant’s “large percentage share” of the relevant market.
Tops Markets, Inc. v. Quality Markets, Inc., 142 F.3d 90, 98 (2d
Cir. 1998).
As discussed in Illinois Tool Works Inc. v. Indep. Ink,
Inc., 547 U.S. 28, 42, 43 n.4 (2006), the “mere existence of a
patent” does not by itself constitute the requisite market power
to support an antitrust claim or even create a presumption of
market power, much less confer a monopoly in violation of
antitrust law.

See also Actavis PLC, 787 F.3d at 660.

To

pursue an antitrust claim against a patent-holder based on its
initiation of litigation, the plaintiff must allege that the
patent-holder’s claims constituted “sham litigation” in the
sense that it pursued claims that were “so baseless that no
reasonable litigant could realistically expect to secure
favorable relief.”

Prof’l Real Estate Investors, Inc. v.

Columbia Pictures Indus., Inc., 508 U.S. 49, 62 (1993).

A party

holding intellectual property rights may seek to enforce its
rights even in circumstances where it is not clear that a
defendant’s conduct is actually infringing “as long as a
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similarly situated reasonable litigant could have perceived some
likelihood of success.”

Id. at 65.

Gust’s complaint gives a limited explanation of its
antitrust claim.

It defines the relevant market as “the market

for crowdfunding effectuated through the use of a computer that
the [AlphaCap] Patents purport to cover.”

It defines the

geographic market as the entire United States.

It explains

AlphaCap’s market power as the power to extract licensing
revenue through the assertion of intellectual property rights
arising from its patents.

Gust contends that this power is

enhanced because SEC regulations will soon authorize equity
crowdfunding “on a massive scale.”
AlphaCap argues that Gust’s antitrust claim fails because
(1) Gust does not allege a plausible relevant market; and (2)
Gust fails to allege that AlphaCap has market power.
Additionally, AlphaCap argues that Gust lacks antitrust
standing.

It is unnecessary to discuss each of these

objections, as Gust has failed to sufficiently allege AlphaCap’s
market power.

Gust will be granted leave to amend.

Should it

choose to do so, it must seek to cure each of the deficiencies
asserted by AlphaCap.

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B. Patent Misuse
Gust asserts a claim of patent misuse against AlphaCap.6
The patent misuse doctrine seeks “to prevent a patentee from
using the patent to obtain market benefit beyond that which
inheres in the statutory patent right.”

Princo Corp. v. Int’l

Trade Comm’n, 616 F.3d 1318, 1328 (Fed. Cir. 2010) (citation
omitted).

The key inquiry under the patent misuse doctrine, is

“whether, by imposing the condition in question, the patentee
has impermissibly broadened the physical and temporal scope of
the patent grant and has done so in a manner that has
anticompetitive effects.”

Id. (citation omitted).

“What patent

misuse is about, in short, is patent leverage, i.e., the use of
the patent power to impose overbroad conditions on the use of
the patent in suit that are not within the reach of the monopoly
granted by the Government.”

Id. at 1331 (citation omitted).

The scope of the doctrine is narrow.

Id. at 1329.

A

patentee “begins with substantial rights under the patent grant
-- including the right to suppress the invention while
continuing to prevent all others from using it, to license

Patent misuse is ordinarily asserted as an affirmative defense
against a claim of infringement. There is some authority that
suggests that the doctrine may support a claim for declaratory
relief or be asserted through a counterclaim. See, e.g.,
Glitsch Inc. v. Koch Eng’g Co. Inc., 216 F.3d 1382, 1386 (Fed.
Cir. 2000); see also In Critical–Vac Filtration Corp. v.
Minuteman Int’l, Inc., 233 F.3d 697, 703-04 (2d Cir. 2000).
6

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others, or to refuse to license, to charge such royalty as the
leverage of the patent monopoly permits, and to limit the scope
of the license to a particular field of use.”

Id. at 1328-29.

As such, the doctrine of patent misuse “has largely been
confined to a handful of specific practices by which the
patentee seemed to be trying to extend his patent grant beyond
Id. at 1329 (citation omitted).

its statutory limits.”

Gust alleges that AlphaCap has engaged in patent misuse
because it has asserted objectively baseless claims of patent
infringement in its Texas lawsuits.

This claims fails to state

any benefit that AlphaCap has sought or gained beyond that which
naturally accrues to its possession of patents.

The motion to

dismiss is granted.
C. Abuse of Process
Finally, Gust asserts a claim of abuse of process against
AlphaCap.

Under New York law,7 an abuse of process claim exists

where a defendant “(1) employs regularly issued legal process to
compel performance or forbearance of some act (2) with intent to
do harm without excuse of justification, and (3) in order to
obtain a collateral objective that is outside the legitimate
ends of the process.”

Savino v. City of New York, 331 F.3d 63,

The parties’ briefs assume that New York law controls Gust’s
abuse of process claim, which is “sufficient to establish choice
of law.” Chau v. Lewis, 771 F.3d 118, 126 (2d Cir. 2014)
(citation omitted).
7

15

76 (2d Cir. 2003) (citation omitted).

“[T]he institution of a

civil action by summons and complaint is not legally considered
process capable of being abused.”

PSI Metals, Inc. v. Firemen's

Ins. Co. of Newark, N.J., 839 F.2d 42, 43 (2d Cir. 1988)
(citation omitted).

Rather, “[t]he gist of abuse of process is

the improper use of process after it is regularly issued.”

Cook

v. Sheldon, 41 F.3d 73, 80 (2d Cir. 1994) (citation omitted).
“[T]he basis of the tort lies in the use of the process to gain
a collateral objective, the accomplishment of which the process
in question was not intended to secure.”

Pagliarulo v.

Pagliarulo, 293 N.Y.S.2d 13, 15 (2d Dep’t 1968).

A plaintiff

bringing an abuse of process claim must allege actual or special
Bd. of Educ. v. Farmingdale Classroom Teachers Ass’n,

damages.

38 N.Y.2d 397, 405 (1975).
Gust’s abuse of process claim is premised entirely on
AlphaCap’s filing of the patent infringement complaints in
Texas.

It asserts that AlphaCap used the lawsuits to obtain

settlements, rather than as a sincere effort to obtain a
determination on the merits of its infringement claims.
claim fails as a matter of law.

This

Initiating a civil action,

without more, is insufficient to sustain an abuse of process
claim.

PSI Metals, Inc., 839 F.2d at 43.

Nor does Gust have

standing to assert a claim based on harm done to other entities.

16

CONCLUSION
AlphaCap and Juarez’s November 6, 2015 and May 25, 2016
motions are granted.
Opinion.

A scheduling order accompanies this

Gust has leave to replead its antitrust claim and may

bring a motion for attorney’s fees.

The remainder of Gust’s

claims and all of AlphaCap’s claims are dismissed with
prejudice.
SO ORDERED:
Dated:

New York, New York
July 28, 2016
________________________________
DENISE COTE
United States District Judge

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