Koninklijke Philips Electronics N.V. et al v. The ADS Group et al

Filing 205

ORDER...For the foregoing reasons, the MTD defendants' motions to dismiss are ALLOWED. This decision applies to the following actions: 08-cv-4068 (Dkt. #s 27, 133, and 141); 08-cv-4070 (Dkt.#57), and 08-cv-4071 (Dkt. #63). So Ordered. (Signed by Judge Richard G. Stearns on 3/12/10) (fk)

UNITED STATES DISTRICT

COURT

SOUTHERN DISTRICT OF NEW YORK

Koninklijke Philips Electronics N.V.,
Plaintiffs, -against-

et al.,

The ADS Group,

et al.

08 Civ 04068

(RGS)

Entertainment Distribution

Company

(USA)

LLC,

et al.

08 Civ 04070
08 Civ 04071

(RGS)
(RGS)

Optical Experts,

et al.

ORDER

RICHARD G.

STEARNS,

United States District Judge.1

This breach of contract and patent infringement action brought by Koninklijke Philips Electronics
Philips)

N.V.
against

and
a

U.S.
number

Philips
of CD

Corporation

(collectively,

replicator
Incorporated

companies,
(Zomax),

including

the

ADS

Group

(ADS),

Zomax
LLC

Entertainment Distribution Company

(USA)

(EDS), and Optical Experts Manufacturing, a dispute over the scope of various

Inc.

(OEM),

arises out of and Side

License

Agreements
of the

Letters

(the

Agreements)

entered

between

each

defendant

replicators and Philips.

The Agreements pertain to a Sony/Philips

aOf the District of Massachusetts,

sitting by designation.

patent pool asserting ownership rights over the manufacture of CD-

Audio Discs, CD-ROM Discs,

and other CD formats
Patent No.

(CDs).

Included in
(the V846

the pool is the patent-in-suit, U.S.

5,068,846

Patent).*
In addition to the replicator companies, Philips has named as

defendants
well as

various

of

the

companies'

officers
Inc.

and

directors,

as
a

Hudson Valley

Capital

Partners,

(Hudson Valley),

venture capital firm that has an ownership interest in ADS. the individual defendants and Hudson Valley defendants)
12 (b) (6), or

All of the MTD Civ. P.

(collectively, to Fed.
on

move
in

for
the

dismissal

pursuant
for

R.
the

alternative,

judgment

pleadings

pursuant to Fed.
held in the

R.

Civ.

P.

12 (c) .3

A hearing on the motions was
10, 2009.
2009,

Southern District

of New York on September

For the reasons stated at the Markman hearing on December 2,

2Philips filed five related cases in the Southern District of
New York. This motion, however impacts only three of these cases.

The cases and the associated defendant replicators are 08-cv-4068: The ADS Group, American Media International, Ltd., Zomax Incorporated, Metatec International, Inc., and Music City Optical

Media, Inc.; 08-cv-4070: Entertainment Distribution Company (USA) LLC, Entertainment Distribution Company, and UMG Manufacturing & Logistics, Inc.; and 08-cv-4071: Optical Experts Manufacturing,
Inc.

3The motions to dismiss were filed in 08-cv-4 068 by John Edgar
Moll and John Steven Moll (the Molls) (Dkt. #27), Jean A. Lagotte, Jr., and Hudson Valley Capital Partners, Inc. (Dkt. #133), Michael F. Hardwick (Dkt. #141) , and Arun Khurana and David A. Silvon (Dkt. #143) . In 08-cv-4070, a motion was filed by James Caparro and Jordan Copland (Dkt. #57) ; and in 08-cv-4 07l, a motion was filed by Raymond Bernard Zerrusen and Clifford Steven Boyd (Dkt. #63) . Philips voluntarily dismissed Khurana and Silvon as defendants on November 25, 2009. See 08-CV-4068, Dkt. #181.

the motions to dismiss were ALLOWED in an Order entered on January
22, 2010.4
BACKGROUND

The

MTD

defendants

are

not

themselves

CD

replicators

or

signatories
directors of

to

the

Agreements,

but

are

corporate
(and in one

officers
instance,

and
an

the

replicator

defendants

investment partnership).
failed to allege

The MTD defendants argue that Philips has
facts sufficient to justify the

plausible

extraordinary equitable remedy of corporate veil-piercing, without
which the MTD defendants cannot be held liable on theories of

patent infringement or breach of contract. contend that if the Agreements

The MTD defendants also (as the

are valid and enforceable

court has ruled),

it follows that they cannot be held to infringe
Philips asserts

a patent that they are licensed to practice.5
the following claims
1. Direct Patent

against

the MTD defendants.

Infringement

Philips

alleges

that

the

MTD

defendants

are

intimately

"At the Markman hearing, the court orally stated the substance of its decision. The dismissals were formalized in an Order issued on January 22, 2010. This Memorandum explains at greater length the rationale underlying that Order. The court inadvertently omitted the Molls and Hardwick from the January 22, 2010 Dismissal
Order.

5The MTD defendants rely on the earlier March 26, 2009 Order of the court finding that the Agreements are valid and enforceable. They argue that the finding precludes Philips from suing simultaneously and for patent {and inconsistently) for breach of the Agreements infringement.

involved

in

the

day-to-day

operations

and

management

of

the

replicator companies. are alleged to have

As controlling persons, authorized
activities.

the MTD defendants the replicator
defendants to

and

condoned

defendants' are said

infringing

Moreover,

the MTD

to have willfully directed the from paying Philips
These

replicator defendants that it was

refrain
the

the

royalties

owed under
are

Agreements.

allegations,

Philips

contends,

sufficient to support a piercing of the corporate veil.
2. Active Inducement of Patent Infringement

Philips

argues

that

this

claim can be

sustained without

the

necessity of veil-piercing.

The Amended Complaint alleges that the

MTD

defendants

knew

that

their

actions

would

result

in

the

manufacture and sale of infringing CDs by the replicator companies. Philips contends that this allegation is sufficient to satisfy the
"plain and short statement" requirement of Fed.
3. Active Inducement of Breach of

R.

Civ.

P.

8 (a) (2) .

Contract

Philips domination of

alleges the

that

the

MTD

defendants

exploited

their the

replicator defendants In this regard, in support of a

to induce breaches of

Licensing Agreements. allegations advanced

Philips relies on the prior piercing of the corporate

veil.
4. Summary

The nonce to

court will make an

find:

(1)

that

Philips its

is

not

required at and breach

the of

election

between

infringement

contract

claims;

(2)

that

Philips'

claims

against

the

MTD

defendants are insufficiently pled to sustain its active inducement
of patent infringement claim; (3) that the pleadings are

insufficient to support a piercing of the corporate veil; and as a result (4) the claims of direct patent infringement and active

inducement of breach of contract also fail.
DISCUSSION

Standing

As

an

initial

matter,

the

court

will

address

the

issue

of

whether

Philips

is

barred

as

a

matter

of

law

from

prosecuting

claims of
March 26,

infringement of

the

'846 Patent by reason of the court's
The MTD defendants argue that

2009 Memorandum and Order.

as

a result of

the

court's holding that

the Agreements are

"valid

and subsisting,"
as a matter of

they cannot as licensees infringe the
See Boynton v. Headwaters. Inc..

'846 Patent
243 F. App'x

law.

610,

614-615

(6th Cir.

2007)(the holder of

a valid

license cannot

be a direct infringer of its
897,

a patent,

nor by extension can it induce v. Edwards, 599 F. Supp.

infringement).
900 (S.D.

See also Lisle Corp.

Iowa 1984)(permanently enjoining a patent owner from

asserting infringement claims

against defendants who manufactured
aff'd, 777 F.2d 693

and sold patented goods under a valid license),

(Fed.

Cir.

1985) .
(3D)

Cf.

Fairchild
Inc..

Semiconductor
589 F. Supp.

Corp.
2d 84,

v.

Third
(D.

Dimension

Semiconductor,

87-88

Maine 2008)(where a valid license is in effect,

an aggrieved patent

holder-licensor may seek only an accounting of unpaid royalties).
Philips licensees in counters Boynton with and a material had distinction continued to of fact: the

Lisle

make

royalty

payments despite their objections to the validity of the patents in
suit. Philips further distinguishes Fairchild by arguing that the in that case had covenanted so
-

plaintiff claims

not as

to the
a

bring

infringement Agreement
arose over

against

the

licensee
even if

long

License
dispute

remained

in effect,

as happened

the scope of

the coverage of the patents.

As

Philips points out,

there

is

no

similar

covenant

in

this

case.6

While

the

MTD

defendants maintain that no royalties are owed if the

'846 patent

has

not

been

infringed,

Philips

counters

that

nothing

in

the

Agreements prevents it from asserting that infringing activity has

6Philips maintains that it promised not to sue for infringement only with respect to those CD-Discs that were duly reported and on which royalties were paid. Stated another way, Philips argues that it "does not grant licenses to manufacture and sell %CD-Discs' per se. Rather, it grants licenses to manufacture and sell 'Licensed Products.'" Philips Rebriefed Opp'n at 15. Defendants' responsive argument characterizes Philips' contention as the assertion of an "advanced payment" licensing scheme under which Philips claims the right to sue for infringement in the interval between the sale of a CD and the payment of the royalty. At first glance, Philips' argument that the Agreements allow it to demand royalties on all CD-Discs that are not "duly reported" would seem to either concede the MTD defendants' election argument or to suggest that defendants have the burden of proving that unreported CDs are not infringing. See Model Jury Instructions: Patent Litigation, 2005 A.B.A. Sec. Litigation 52 ("The patent owner has
the burden of proving infringement by a preponderance of the

evidence."). Nonetheless, the merits of the respective arguments and the scope of Philips' remedies under its contract and infringement claims is a matter better left to summary judgment.

in fact occurred.

Finally,

Philips argues that the MTD defendants'

breach

of

the

Agreements

has

had

the

effect

of

working

their

termination,

thus clearing the way for this

lawsuit.
the court's March plaintiff the in

The MTD defendants characterize, 26, this 2009 case Order by as holding of that

correctly, is a

Philips

proper

virtue

the

licensing

authority

that

parent

company
Philips. Inc.. not, 603

Koninklijke
See F.

had

been

granted

by

its
N.V.

subsidiary
v. Cinram

U.S.

Koninklijke 2d 735,

Philips 739-740

Elecs.

Int'l,

Supp.

(S.D.N.Y.

2009).

The court did

however,

hold that Philips was required as a result to make an patent infringement and breach of contract

election

between

remedies,

or

that

it

had

waived
the

the

infringement
of breach of at

claims

by

asserting standing to prosecute It is not unusual, nor is it

claims

contract. the early

untoward,

especially

stages

of

litigation,

for

a

plaintiff

to

advance

inconsistent Inc.. 42
Cf.

theories or causes of action.
F.3d 89, 95 (2d Cir.
Co. v.

See Henry v.
citing Fed.
43

Daytop Vill..
Civ. P.

1994),

R.

8(e)(2).
1555

Aetna Cas.

Sur.

P & B Autobody.

F.3d 1546,

(1st Cir.

1994).

Applicable Legal Standard In considering a motion to dismiss under Fed. R. Civ. P. 12 (c)

(or Rule 12(b)(6)),
in the complaint

the court must accept
and [draw] all

"all factual allegations
inferences in the

reasonable

plaintiff's

favor."7 ATSI

Commcn's.

Inc.

v.

Shaar

Fund,

Ltd..

4 93

F.3d

87,

98

(2d

Cir.

2007).

However,

to

survive

a

motion

to

dismiss under even this indulgent standard,
"a plausible entitlement
550 U.S. 544, 559 (2007),

a complaint must allege
Corp. v. Twomblv,
41,

to relief."

Bell Atl.

disavowing Conlev v.

Gibson.

355 U.S.

45-46

(1957).

See also Ashcroft v.

Iabal.

129 S.

Ct.

1937

(2009).

"While a complaint attacked by a Rule 12(b)(6) detailed factual allegations,

motion does not need

a plaintiff's obligation to provide

the grounds of his entitlement to relief requires more than labels
and conclusions, and a formulaic recitation of the elements of a

cause of action will not do."
citations and quotations Corporate Veil-Piercing

Twombly.

550 U.S.

at 555

(internal

omitted).

As a rule, set aside only
Under

the corporate form is accorded great respect and is when
New

necessary
York

to

avoid

a

manifestly
seeking

inequitable
to pierce a

result.

law,n[t]he

party

corporate veil

[must]

make a two-part

showing:

(i)

that

the owner

exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to

7A motion to dismiss brought after a complaint is answered is
appropriately treated as a motion for judgment on the pleadings. Rule 12 (c) permits a party to move for judgment on the pleadings at any time "[a]fter the pleadings are closed," as long as the motion
does not delay the trial. Fed. R. Civ. P. 12(c). A Rule 12(c) motion differs from a Rule 12(b)(6) motion in that it implicates the pleadings as a whole as opposed to simply the complaint and its attachments. See 5 Charles A. Wright, et al., Federal Practice &
Procedure. §§ 1367, 1368 (2d ed.
8

1995).

commit a fraud or wrong that
the veil." Am. Fuel Corp. v.

injured the party seeking to pierce
Utah Energy Dev. Co.. 122 F.3d 130,

134

(2d Cir.

1997) ,

quoted in MAG Portfolio Consult. GmbH v. Merlin

Biomed Group LLC,

268

F.3d 58,

63

(2d Cir.

2001).

See also
Inc.. 933 F.2d

Passalacqua Builders,

Inc. v. Resnick Developers S.,

131,

137

(2d

Cir.

1991)

("[T]o

pierce

the

corporate

veil,

the

parent corporation must at the time of the transaction complained of ... have exercised such control of the that the subsidiary is the 'has real

become

a mere

instrumentality'

parent,

which

actor.") 144, 157

(quoting Lowendahl v. (1st Dept.)(1936).

Baltimore & Ohio R.R. 272 N.Y. 360

Co.,

247 A.D.

aff'd.

(1936) ) ; Gartner V.

Snyder.

607 F.2d 582,

586

(2d Cir.

1979)

{"Because New York courts

disregard corporate form reluctantly,
has been used to achieve fraud, dominated by an individual or

they do so only when the form

or when the corporation has been so another corporation . . . and its

separate identity so disregarded,
dominator's
other's

that it primarily transacted the
its own and can be called
481

business
ego.");

rather

than

the
F.

alter

Novak v.

Scarborough Alliance

Corp.

Supp.

2d 289,

293

(S.D.N.Y.

2007)

("Generally,

'[a]

director

[or

officer]

of a corporation is not personally liable

to one who has

contracted with the corporation on the theory of inducing a breach of contract, merely due to the fact that, while acting for the

corporation,

he has made decisions and taken steps that resulted in

the

corporation's

promise

being

broken.'")

(quoting

Murtha

v.

Yonkers Child Care Ass'n,
New
analyzing

Inc..

45 N.Y.2d 913,
to the

915

(1978)).
factors in

York
the

courts

have

looked

following

domination and control

element:

(1)

[whether
the

corporate

formalities
is

are

observed],
(3)

(2)

[whether

capitalization

adequate],

whether

funds are put in and personal rather than

taken out of the corporation for corporate purposes, (4) [whether

there is] overlap in ownership, officers, directors, and personnel, (5) [whether the corporate entities share] common office space, address and telephone numbers!] , (6)
the amount of business discretion displayed by the

allegedly dominated corporation, (7) whether the [alleged dominator] deal [s] with the dominated corporation at arms length, (8) whether the corporation[] [is] treated as [an] independent profit center[], (9) [whether others pay] or guarantee [] debts of the dominated corporation[], and (10) whether the corporation in question had property that was used by [the alleged dominator] as if it were [the dominator's] own.
Wm. Passalacqua Builders, 933 F.2d at 139.

Philips' case for corporate domination and control consists of
the following allegations:
or directors of

(1)
the

that

the

individual defendants are
companies; (2) that the

officers

replicator

individual
management"

defendants
of the

were

"actively

involved

in the
and (3)

control
that

and
the

replicator

companies;

individual replicator these fact.

defendants companies.

were As

therefore the MTD

the

"alter

ego[s]" out,

of none

the of

defendants

point

assertions

bridge

the

gap

separating

mere

allegation

from

Virtually identical conclusory allegations were rejected in
USTS New York. Inc.. 798 F. Supp. 128 (S.D.N.Y. 1992),

Zinaman v.

a pre-Twombly case.

In Zinaman,

plaintiff alleged that USTravel was

the

"alter

ego"

of

defendant

USTS

New

York,

Inc.

However,

the

10

complaint alleged only that US Travel

"owned and controlled" USTS.

Zinaman does not allege that USTS was controlled and dominated to such an extent that it "had no existence of
its own."

the

. factors

.

. Moreover, Zinaman makes no reference to typically considered in applying the alter

ego theory, such as the absence of formalities in corporate decision making, and inadequate capitalization. Hence, Zinaman's allegations fail to plead the "control and domination" necessary to justify bringing the USTravel into this dispute (internal citations omitted).
Id. at 132.

Philips argues that its allegations are "better developed" and that Zinaman can be distinguished because of the heightened

pleading

requirements
however, ego

that
matters

attach

to

fraud-based

claims.

The

distinction, Philip's

little because the second element of a showing that the alleged

alter

theory

requires

domination
See EED

was

used
v.

"to

commit

fraud

or

other

injurious
Corp., 228

wrong."
F.R.D.

Holdings

Palmer

Johnson Acquisition

508,

512

(S.D.N.Y.

2005)

("[W]here a veil-piercing claim is based
*the heightened pleading standard of Rule

on allegations of fraud,

9 (b)

is

the

lens

through In re

which

those

allegation [s] Fee

must

be

examined.'")

(quoting

Currency

Conversion

Antitrust

Litiq..

265 F.

Supp.

2d 385,

425

(S.D.N.Y.

2003)).8

8Philips also argues that patent claims are not subject to the
heightened pleading requirement governing claims of fraud. Philips relies heavily on the holding of McZeal v. Sprint Nextel Corp., 501 F.3d 1354 (Fed Cir. 2007). The decision in McZeal, however, was motivated by a (perhaps) misplaced indulgence of the pleadings of
a pro se plaintiff. was decided before See id. the at 1356. Of greater relevance, made clear that McZeal Iqbal decision Twombly' s

heightened pleading standard applied in all cases, like Twombly that assert antitrust violations.
11

not merely those

Active Inducement of Infringement9
A claim of active inducement of patent infringement does not,
according to Philips, require corporate veil-piercing as a

predicate for liability.10

See 35 U.S.C.

§ 271(b) ("Whoever actively

induces

infringement
Whether

of
or

a

patent

shall

be

liable
is

as

an

infringer."). personal
defendant

not

Philips' attach

assertion a
but

accurate, that a
in

liability
not only

does
knew

not
of the

absent

showing
also

infringement

engaged

culpable conduct with the specific intent of encouraging the direct
infringer's activities. 1293, 1306 (Fed. Cir. DSU Med. Corp. v. JMS Co., Ltd.. 471 F.3d

2006)
Sales

(en bane,
Corp. v.

in relevant part adopting the
Sys.. Inc.. 917 F.2d

holding of Manville

Paramount

544,

553

(Fed.

Cir.

1990)).
specific

("It

must

be
to

established
encourage

that

the

defendant

possessed

intent

another's

infringement and not merely that the defendant had knowledge of the

9The rejection of the veil-piercing claim necessarily entails a rejection of the claims of inducement of breaches of the Licencing Agreements. Philips concedes that veil-piercing is a
necessary element of the claims inducement of breach of contract. of direct infringement and

10The MTD defendants do not necessarily agree, pointing to the
surprising
Paramount

dearth
Svs..

of

case

law.

But

see
544,

Manville
553

Sales

Corp.

v.

Inc..

917

F.2d

(Fed.

Cir.

1990)

(" [C]orporate officers who actively assist with their corporation's infringement may be personally liable for inducing infringement
regardless of whether the circumstances are such that a court should disregard the corporate entity and pierce the corporate veil.") (emphasis in original). However, given that the court finds that Philips' pleading on the inducement of infringement claim does not meet the standard of Manville Sales, this issue need
not be decided.
12

acts alleged to constitute infringement.").
alleges only that defendants "personally,

The Amended Complaint
and knowingly

actively,

controlled and directed" the replicator defendants in producing CDDiscs that infringed the
v. Hover-Davis. Inc..

"846 Patent.
936 F. Supp.

Compare Fuji Mach.
93, 95-96

Mfg.

Co.

(W.D.N.Y.

1996)

(inducement plaintiff

claim

sufficient that

to

survive

motion parts

to

dismiss

where and

asserted

defendant

sold

and

aided

encouraged purchasers to use them in the combinations and processes
covered by the patent and that defendant had actual notice of the

patent

and

deliberately Zenith
at

and

willfully v.
Aug.

committed Inc..

the No.

infringing 93 C 5041,

activities);

Elecs.
(N.D.

Corp.
111.

ExZec,
15,

1994 WL 444804,

*2

1994)

(inducement claims

against alleged infringer's president sufficient to survive motion to dismiss where plaintiff alleged that the president personally, willfully, and wantonly infringed plaintiff's patents through his
Unlike these do not

own promotion of the allegedly infringing product). and other cases cited by Philips, the the Amended that

Complaints MTD

allege

facts

permitting

conclusion

the

defendants

acted culpably,

with the specific intent of inducing infringement,
an inducement
ORDER

a necessary element of

claim.

For

the

foregoing

reasons,

the

MTD

defendants'

motions

to

dismiss actions:

are

ALLOWED.

This #s

decision 27, 133,

applies and 141);

to

the

following (Dkt.

08-CV-4068

(Dkt.

08-CV-4070

13

#57),

and 08-CV-4071
SO ORDERED.

(Dkt.

#63) -11

Dated:

March

12,

2010

Lchard 6.

Steams

United States District Judge

"The

court

notes

that

the

decision

on

the

MTD

defendants'

motions to dismiss was deferred (as Philips requested) until after the January 15, 2010 cutoff date for discovery expired. Philips did not ask leave to further amend the Complaints to conform their allegations to the Twombly-Iqbal requirements.
14