Versata Software, Inc. et al v. Internet Brands, Inc. f/k/a CarsDirect.com et al

Filing 180

MEMORANDUM AND ORDER -. Signed by Judge William C. Bryson on 1/17/2012. (ch, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION
VERSATA SOFTWARE, INC., f/k/a
TRILOGY SOFTWARE, INC.; and
VERSATA DEVELOPMENT GROUP, INC.,
f/k/a TRILOGY DEVELOPMENT GROUP,
INC.
Plaintiffs,
v.
INTERNET BRANDS, INC., f/k/a
CARSDIRECT.COM, INC.,
AUTODATA SOLUTIONS COMPANY,
and AUTODATA SOLUTIONS, INC.
Defendants.

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CIVIL ACTION No. 2:08-cv-313-WCB

MEMORANDUM AND ORDER
Before the Court are several pretrial motions, two filed by the plaintiffs and one
by the defendants.

After reviewing the parties’ submissions and hearing counsels’

argument at a hearing on December 19, 2011, the Court disposes of these motions as
follows:
(1)

The Plaintiffs’ Motion to Dismiss Defendants’ Affirmative Defense and

Counter Claim of Inequitable Conduct (Dkt. No. 122): the Court DENIES that motion.
(2) The Plaintiffs’ Motion for Leave to Amend Complaint (Dkt. No. 133): the
Court GRANTS that motion.
(3) The Defendants’ Motion for Partial Reconsideration of Order on Plaintiffs’
Motion to Compel and Defendants’ Motion for Protective Order (Dkt. No. 168): The
Court DENIES that motion.

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The remaining outstanding motion in this case, the Plaintiffs’ Motion for Partial
Summary Judgment (Dkt. No. 151), will be addressed in a separate order.
I.

Plaintiffs’ Motion to Dismiss Defendants’ Affirmative Defense and Counter

Claim of Inequitable Conduct.
In their fourth amended answer and counterclaim, the defendants have raised
inequitable conduct, both as an affirmative defense to the plaintiffs’ infringement claims
and as a separate counterclaim. The plaintiffs have moved to dismiss both the affirmative
defense and the counterclaim of inequitable conduct, contending that the allegations of
inequitable conduct are insufficiently specific to satisfy the pleading requirements set
forth by the Federal Circuit in Exergen Corp. v. Wal-Mart Stores, Inc., 575 F.3d 1312
(Fed. Cir. 2009). After careful analysis of the defendants’ allegations, the Court is
persuaded that the defendants’ allegations are sufficient to withstand a motion to dismiss.
The Court therefore DENIES the plaintiffs’ motion.
The Federal Circuit’s decision in Exergen stands for the proposition that an
allegation of inequitable conduct, like an allegation of fraud, is subject to the enhanced
pleadings standards of Rule 9(b) of the Federal Rules of Civil Procedure.

Under

Exergen, “a pleading that simply avers the substantive elements of inequitable conduct,
without setting forth the particularized factual bases for the allegation, does not satisfy
Rule 9(b).” 575 F.3d at 1326-27. The court added that, “in pleading inequitable conduct
in patent cases, Rule 9(b) requires identification of the specific who, what, when, where,
and how of the material misrepresentation or omission committed before the PTO.” Id.
at 1327. With respect to the elements of knowledge and intent, the court stated that those
elements may be averred generally, but the pleading “must include sufficient allegations

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of underlying facts from which a court may reasonably infer that a specific individual (1)
knew of the withheld material information or of the falsity of the material
misrepresentation, and (2) withheld or misrepresented this information with a specific
intent to defraud the PTO.” Id. at 1328-29.
Even measured against that exacting standard, the defendants’ allegations are
sufficient to survive a motion to dismiss. Although bulk alone is not sufficient to save
otherwise insufficient pleadings, the defendants’ factual allegations on the issue of
inequitable conduct run to six and a half pages of their answer and counterclaim, and the
allegations set forth the elements of the defendants’ inequitable conduct claim in
considerable detail. In their opposition to the motion to dismiss, the defendants state that
they are asserting their inequitable conduct claim only with respect to the two principal
patents in suit in this case, U.S. Pat. Nos. 7,130,821 (“the ’821 patent) and 7,206,756
(“the ’756 patent”); they are not alleging inequitable conduct with respect to the other
patents initially asserted by the plaintiffs, U.S. Pat. Nos. 5,825,651 (“the ’651 patent”),
6,405,308 (“the ’308 patent”), and 6,675,294 (“the ’294 patent”). The plaintiffs have
separately stated that they no longer assert infringement with respect to the ’651, ’308,
and ’294 patents.
The core of the defendants’ allegations is their contention that, before the priority
date for the two patents in suit, defendant Autodata provided the plaintiffs’ predecessor
company, Trilogy Software, Inc., with information regarding its technology as part of a
confidential relationship between the two parties. According to the defendants, Trilogy
used that technology, without authorization and without revealing its source, to obtain the

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patents in suit.

Autodata’s technology, according to the defendants, constituted

invalidating prior art with respect to all of the claims of the ’821 and ’756 patents.
The defendants’ Answer and Counterclaim describes the events surrounding
Trilogy’s alleged acquisition and use of Autodata’s technology in detail, including
identifying the persons who had access to that technology and the circumstances under
which that technology was revealed to Trilogy employees. The defendants supported
their assertion that the Autodata prior art was material to the prosecution of the ’821
patent by alleging that the Patent and Trademark Office in reexamination proceedings,
has held that all of the claims of that patent are anticipated by the Autodata technology.
In addition, the defendants asserted that Trilogy representatives were aware of particular
third-party technology that would have been material to the patentability of the ’821
patent.
The defendants also allege that Trilogy’s representatives failed to disclose that
they had sold and offered for sale the same technology that is recited in the ’821 patent
more than a year before the earliest priority date for that patent. In so doing, the
defendants identified the particulars of the sales and offers, including the identities of
persons involved in those activities and the documents reflecting the sales and offers for
sale.

With respect to the ’756 patent, the defendants alleged that the Trilogy

representatives had offered for sale the vehicle price and quotation technology in that
patent as early as 1998, and they identified the individual purportedly responsible for one
such offer (the sole inventor of the ’756 patent) as well as a document reflecting that
offer.

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The defendants further alleged that various named individuals with direct
knowledge of the allegedly invalidating events “intentionally and/or deliberately failed to
disclose” the invalidating information to the PTO because they knew that if they had
disclosed that information, “the PTO would have had no choice but to refuse to issue
these patents to Plaintiffs or in the names of the named inventors.”
In their motion to dismiss the inequitable conduct claim and to strike the
affirmative defense of inequitable conduct, the plaintiffs assert that the defendants’
allegations are insufficient to satisfy the Exergen standards in a variety of ways. The
Court has reviewed the plaintiffs’ submission with care and concludes that the
defendants’ allegations are sufficient to survive the motion to dismiss. With regard to the
Autodata prior art and the alleged offers to sell, in particular, the defendants’ allegations
are quite specific. Similarly, the defendants identify particular individuals by name who,
they allege, deliberately concealed that information from the PTO with deceptive intent.
And while the PTO’s initial decision to cancel the claims of the ’821 patent is not
conclusive on the issue, it certainly provides support for the defendants’ assertion that at
least the Autodata prior art was material to patentability.
The plaintiffs’ challenges to the sufficiency of the defendants’ pleadings are not
persuasive. For example, the plaintiffs contend that the defendants have not shown that
the withheld information was material. According to the plaintiffs, the defendants should
have demonstrated that the withheld information was not cumulative. Such a showing is
unnecessary in a case such as this, in which the defendants have alleged that the withheld
information anticipated the claimed inventions. It is unlikely that anticipating prior art
would ever be immaterial, even if the PTO had before it other information that cast doubt

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on the patentability of the applicant’s invention. It would go beyond even the enhanced
pleading requirements of Exergen to require a party to demonstrate, by analyzing each of
the references before the examiner, that an allegedly anticipating reference was not
cumulative.
Likewise, there is no force to the plaintiffs’ argument that the defendants have
failed to allege that each limitation of the claimed inventions was met by the asserted
prior art. In light of the definition of anticipation, the allegation that the prior art
anticipated the inventions was sufficient to allege that each limitation of the claimed
inventions was satisfied.
The plaintiffs also point to asserted inadequacies in the defendants’ allegations
regarding certain third-party websites, which the defendants allege should have been
disclosed to the PTO. While the allegations regarding the third-party websites are not as
specific as other allegations in the defendants’ pleading—they do not, for example,
specifically allege that the third-party websites anticipate the plaintiffs’ claims—the other
allegations in the defendants’ pleading are sufficient to withstand the motion to dismiss,
and the Court concludes that the pleadings regarding the third-party websites contain
sufficient averments that those websites would have been material to the filed claims.
Finally, the plaintiffs argue that the defendants’ allegations as to the requisite
knowledge and deceptive intent are insufficient to withstand the motion to dismiss. As to
knowledge and intent, the Federal Circuit in Exergen held that those elements could be
“averred generally,” as long as the pleadings “allege sufficient underlying facts from
which a court may reasonably infer that a party acted with the requisite state of mind.”
Exergen, 575 F.3d at 1327. Taking the defendants’ allegations as true, as the Court is

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required to do at this juncture, the Court concludes that the defendants’ allegations are
sufficient to meet that standard.
In sum, the Court is persuaded that the defendants have adequately alleged the
“who, what, when, where, and how” of the asserted inequitable conduct as to the ’821
patent sufficiently to allow them to overcome the plaintiffs’ Rule 12(b)(6) motion to
dismiss for failure to state a claim on which relief can be granted. While the allegations
regarding the ’756 patent are less comprehensive, they are sufficient, especially in light
of the close relationship between the two patents.

In particular, the defendants’

allegations regarding the 1998 offer by the sole inventor of the ’756 patent to sell
software that would anticipate the ’756 patent are sufficient to satisfy the defendants’
pleading burden with respect to that patent. The motion to dismiss the inequitable
conduct counterclaim and to strike the inequitable conduct defense to the infringement
claims is therefore DENIED.
II. Plaintiffs’ Motion for Leave to Amend Complaint
The plaintiffs seek leave to amend their complaint by adding two state law
claims—a new claim for breach of contract and an additional claim of tortious
interference with contract. Where the court has entered a scheduling order, as in this
case, the court must determine as a preliminary matter whether “good cause” exists to
permit an amendment to the complaint at a time after the period provided for in the
scheduling order. See S&W Enters. v. Southtrust Bank of Ala., 315 F.3d 533, 535-36
(5th Cir. 2003). If good cause is found, leave of court will be granted “freely” if “justice
so requires.” Fed. R. Civ. P. 15(a)(2). In this case, the Court is satisfied that both of

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those requirements are met and therefore GRANTS the plaintiffs’ motion for leave to
amend.
The defendants focus mainly on the asserted futility of the amended claims as a
basis for opposing the amendments. With respect to whether good cause has been shown
for the delay in seeking to amend the complaint, the defendants assert that the motion to
amend is based largely on testimony and exhibits from a deposition that occurred in April
2011, but that the plaintiffs waited until July 2011 to state their intention to move to
amend the complaint. The plaintiffs argue that the three-month period of delay was
attributable to an examination of voluminous records produced in discovery and
assessment of the viability of the new claims. The Court is satisfied that the period of
delay was not unreasonable under these circumstances.
With respect to the defendants’ argument that the amendment would be futile
because of the weakness of the new claims and that the motion to amend should be
denied on that ground, the Court concludes that the new claims contain detailed
allegations that are sufficient to state claims on which relief could be granted. Applying
the legal standard for motions under Fed. R. Civ. P. 12(b)(6), as the Court is required to
do, see Stripling v. Jordan Prod. Co., 234 F.3d 863, 872-73 (5th Cir. 2000), the Court will
not look behind the pleadings to determine the factual viability of the asserted claims, as
long as the new allegations are sufficient to state claims on which relief can be granted.
The Court concludes that the new claims are sufficient to satisfy the Rule 12(b)(6)
standard and that they contain detailed factual allegations, not barebones legal claims of
the sort that have been deemed insufficient in other circumstances. See Bell Atl. Corp. v.
Twombly, 550 U.S. 544 (2007).

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The defendants make two arguments in support of their contention that the new
claims are futile.

With respect to the plaintiffs’ allegation that Autodata reverse

engineered Versata software, they first argue that there is no evidence that Autodata was
ever in possession of software owned by Versata. Instead, they contend, the data that
Autodata was investigating belonged to Chrysler, not Versata. Second, the defendants
argue that the plaintiffs are relying on a contract that was superseded and has no
application to the defendants’ conduct. The applicable contract, they contend, has no
prohibition against reverse engineering.
The questions as to whether Autodata reverse engineered software that belonged
to Versata and whether the contract provisions governing reverse engineering applied to
Autodata’s conduct during the time it was working with Chrysler are sharply disputed
between the parties. Those questions may be appropriate for resolution prior to trial
through motions for summary judgment, but they are not suitable for resolution under the
Rule 12(b)(6) standard, and because that standard applies to assessing “futility” in
connection with a motion to amend a complaint, the Court declines the defendants’
invitation to attempt to resolve those issues at this juncture. The motion for leave to
amend the complaint is therefore GRANTED.
III. Defendants’ Motion for Partial Reconsideration of Order on Plaintiffs’ Motion
to Compel and Defendants’ Motion for Protective Order
The defendants moved for reconsideration of an order granting plaintiffs’ motion
to compel discovery and for a protective order. The motion was predicated on the fact
that the Court had not yet ruled on the plaintiffs’ motion for leave to amend the

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complaint. Because the Court has now granted that motion, there is no remaining reason
to grant the relief sought in the defendants’ motion. That motion is therefore DENIED.
SIGNED this 17th day of January, 2012.

__________________________________________
WILLIAM C. BRYSON
UNITED STATES CIRCUIT JUDGE

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