Beneficial Innovations, Inc. v. Advance Publications, Inc. et al

Filing 497

MEMORANDUM AND OPINION; The Court hereby DISMISSES the issue of patent exhaustion as between Google Inc. and Beneficial Innovations, Inc. in this case. Signed by Judge Rodney Gilstrap on 1/16/14. (mrm, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION

GOOGLE INC.,
Plaintiff,
v.
BENEFICIAL INNOVATIONS, INC.,
Defendant.

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CASE NO. 2:11-cv-229-JRG-RSP

MEMORANDUM AND OPINION
Before the Court are the parties’ trial briefs concerning whether patent exhaustion properly
remains in this case. The Court held a hearing on January 15, 2014 and heard argument from both
parties as well as Amazon.com (“Amazon”). Having considered the parties’ written submissions
and arguments, the Court finds that continued inclusion of patent exhaustion as a live issue in this
case is improper. Accordingly and for the reasons below, the Court hereby DISMISSES the
issue of patent exhaustion as between Google Inc. (“Google”) and Beneficial Innovations, Inc.
(“Beneficial”) in this case.
This case arose from a Settlement Agreement that Google and Beneficial entered into in
2010 (“Settlement Agreement”). (See Dkt. No. 273-4.) Thereafter, Beneficial in the instant
action sued a number of entities for infringing U.S. Patent Nos. 6,712,702 and 7,496,943
(collectively, the “patents in suit”). Some of the named defendants were Google customers.
Google intervened and answered on behalf of the specifically accused Google customers and pled

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an affirmative claim for breach of contract (the Settlement Agreement) against Beneficial.
(Google’s Complaint in Intervention, Dkt. No. 193). Google sought, among other things, a
finding that “Beneficial materially breached the terms of the Settlement Agreement granting a
license to Google and the Accused Google Partners.” (Dkt. No. 193 at 13).
Google first raised the issue of patent exhaustion in its answer on behalf of certain
“Accused Google Partners,” as an affirmative defense against Beneficial’s patent infringement
claims. (Dkt. No. 193). Google’s Complaint clearly identifies its “Accused Google Partners”
as: Advance Publications, Inc.; ALM Media Properties, LLC; American Media, Inc.;
Autotrader.com, Inc.; and Demand Media, Inc. (Id. at 1). At present, all of these defendants
have been dismissed from the case with prejudice. While Google acknowledges this, it
nonetheless argues that the issue of patent exhaustion remains in the case “as one of the bases for
Google’s claim for breach of the Settlement Agreement.” (Dkt. No. 488.) The Court will
address each of these matters in turn.
I.

Google’s Affirmative Defense of Patent Exhaustion Has Become Moot
As part of the “case or controversy’” requirement of Article III of the United States

Constitution, the doctrine of mootness prohibits federal courts from considering questions “that
cannot affect the rights of litigants in the case before them.” C & H Nationwide, Inc. v. Norwest
Bank Texas NA, 208 F.3d 490, 493 (5th Cir. 2000) (citing North Carolina v. Rice, 404 U.S. 244,
246 (1971)). Under this doctrine, a case or controversy must exist not only at the commencement
of the action, but throughout the existence of the litigation. Dailey v. Vought Aircraft Company,
141 F.3d 224, 227 (5th Cir. 1998). A claim must be dismissed for want of jurisdiction if, at any
time in the course of litigation, the controversy ceases to exist. Id.
Here, it is undisputed that Google raised patent exhaustion as an affirmative defense to

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Beneficial’s patent infringement claims against the “Accused Google Partners.”

It is also

undisputed that all Beneficial’s claims against the “Accused Google Partners” have been
dismissed with prejudice. As a result, a live controversy has ceased to exist against which the
affirmative defense of patent exhaustion could apply in this case. See Dailay, 141 F.3d at 227; see
also ExcelStor Tech., Inc. v. Papst Licensing GMBH & Co. KG, 541 F.3d 1373, 1376 (Fed. Cir.
2008) (“[P]atent exhaustion is a defense to patent infringement, not a cause of action.”).
Consequently, the affirmative defense of patent exhaustion has become moot in this case and
should be dismissed.1 See Lodsys Grp., LLC v. Brother Int'l Corp., 2:11-CV-00090-JRG, 2013
WL 5353004 (E.D. Tex. Sept. 24, 2013).
II.

Google Cannot Base Its Breach of Contract Claim on Patent Exhaustion
Google further argues that the issue of patent exhaustion may properly remain in this case

as “one of the bases for Google’s claim for breach of the Settlement Agreement.” At the hearing,
Google argued that the Settlement Agreement effectively conferred a license not only for itself, but
also for its customers through the operation of the patent exhaustion doctrine. (See also Google’s
Motion for Summary Judgment, Dkt. No. 275 at 29). This Court disagrees.
It is well settled that the goal in construing contracts “is to give effect to the parties’ mutual
intentions.” Cal. Civ. Code § 1636; Minkler v. Safeco Ins. Co. of Am., 49 Cal. 4th 315, 321 (Cal.
2010). 2 “If contractual language is clear and explicit, it governs.” Cal. Civ. Code § 1638;
Minkler, 49 Cal. 4th at 321. “[T]here can be no implied covenant where the subject is completely
covered by the contract.” Hinckley v. Bechtel Corp., 41 Cal. App. 3d 206, 211 (Cal. Ct. App.
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At the January 15, 2014 hearing, Google also urged the Court to keep its affirmative defense in the case based on
considerations of judicial economy. Google based its argument primarily on the parties’ previous Stipulation to
Bifurcate Trial (Dkt. No. 455), wherein Amazon.com, Inc. (“Amazon”) agreed to be bound by the judgment in the
Google trial as it relates to the issue of exhaustion. Judicial economy, however, cannot trump the fundamental
requirements of an existing “case or controversy” as mandated by Article III of the Constitution.
2
The parties agreed that the Settlement Agreement at issue should be construed and controlled by California law.
(See Dkt. No. 462 at 3.)

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1974) (citing Stockton Dry Goods Co. v. Girsh, 36 Cal. 2d 677 (Cal. 1951)). Nor can implied
terms vary the express terms of the contract. Wolf v. Walt Disney Pictures & Television, 162 Cal.
App. 4th 1107, 1120 (Cal. Ct. App. 2008). Further, the Court will not “rewrite contracts to relieve
parties from bad deals nor make better deals for parties than they negotiated for themselves.”
Series AGI W. Linn of Appian Grp. Investors DE LLC v. Eves, 217 Cal. App. 4th 156, 164 (Cal. Ct.
App. 2013) (citing Naify v. Pacific Indemnity Co., 11 Cal. 2d 5, 11 (1938)); see Cal. Civ. Proc.
Code § 1858 (“the office of the Judge is ... not to insert what has been omitted”).
Guided by these principles, this Court begins by examining the express language of the
Settlement Agreement to determine what right, if any, Google procured on behalf of its customers
regarding the practice of the patents in suit.

Paragraphs II.A and II.B of the Settlement

Agreement provide as follows:
A. Beneficial and its Affiliates grant a worldwide, royalty-free,
non-exclusive, non-transferable (except as provided below) fully
paid-up, perpetual, license under the Licensed Patents to (i) Google,
YouTube, NBC Universal (“Defendants”), and their past, current,
and future Affiliates, including a license for prior activities of future
Affiliates, and (ii) Defendants and their Affiliates’ past, current
and future Partners, whether direct or indirect, but only to the
extent that Partner’s role in making, having made, using, selling,
offering for sale, or importing any products or services of
Defendants or their Affiliates and only to the extent such act by
such Partner would constitute direct or indirect infringement of a
claim of the Licensed Patents by Defendants or their Affiliates but
for this license.
B. For the avoidance of doubt, the license in subparagraph (ii)
above does not license a direct or indirect customer of Defendants
or their Affiliates simply because the customer uses a product or
service supplied by Defendants or their Affiliates if such use does
not constitute direct or indirect infringement of the Licensed
Patents by Defendants or their Affiliates. For example, assume
(a) claim “x” of a Licensed Patent covers some activity of a Third
Party’s website, (b) the Third Party uses products or services
provided by Google when engaging in the infringing activity, and
(c) the provision of those products or services would not constitute
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direct or indirect infringement by Google of claim “x.” In this
example, the Third Party is not licensed under claim “x” to engage
in such activity because only the Google products or services are
licensed.
(Dkt. No. 273-4 at 2 (emphasis added)). By the clear terms of Paragraph II.A, the parties have set
forth the specific circumstances under which Google’s customers are licensed to practice the
patents in suit, i.e., Google’s customers are licensed only to the extent that their use of Google’s
products or services would constitute direct or indirect infringement on Google’s part. This is
reinforced in Paragraph II.B, where “[f]or the avoidance of doubt,” the parties clarified that the
agreement “does not license a direct or indirect customer of [Google]… simply because the
customer uses a product or service supplied by [Google]…if such use does not constitute direct or
indirect infringement of the [patents in suit] by Google.” See Cal. Civ. Code § 1641 (“The whole
of a contract is to be taken together, so as to give effect to every part, if reasonably practicable,
each clause helping to interpret the other.”). Neither party argues that the contractual language in
Paragraphs II.A and II.B is ambiguous and the Court finds it is not. Accordingly, the Settlement
Agreement requires that the question of whether or not a customer’s use of a particular Google
product or service is licensed must be answered by determining if such use constitutes a direct or
indirect infringement on Google’s part. Undeterred by this clear provision from within the four
corners of the Settlement Agreement itself, Google nevertheless argues that it has also procured a
license for its customers “[by] operation of patent exhaustion law.” According to Google, the
Agreement provided a license to Google customers to the extent that the customers use a Google
product or service which “substantially embodies the [patented] method” and “has no reasonable
noninfringing use.” See Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1373 (Fed. Cir. 2013)
(establishing the legal standard for patent exhaustion). The Agreement itself makes no reference
to patent exhaustion, and does not contain the above language embodying the legal standard for
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patent exhaustion.
Google’s contention that a license exists for its customers “by operation of patent exhaustion
law” is in reality a request that this Court find such through an implied covenant. The Court
cannot do so. As discussed above, the scope of Google customers’ license has been completely
and unambiguously defined within the contract. Any effort to nonetheless impose an implied
covenant upon the parties concerning the same subject is improper. See Hinckley, 41 Cal. App.
3d at 211. Further, Google has identified no evidence establishing the parties’ mutual intent at the
time of the contract to also provide Google customers with a license through operation of the
patent exhaustion doctrine. See Minkler, 49 Cal. 4th at 321. Absent such a showing, this Court
is not at liberty to alter the express terms of the license, nor can it rewrite the contract by
unilaterally inserting an implied license not previously consented to by the parties, regardless of
how much it might now assist Google in the present case. See 217 Cal. App. 4th at 164; Levi
Strauss & Co. v. Aetna Casualty & Surety Co., 184 Cal. App. 3d 1479, 1486 (Cal. Ct. App. 1986)
(“The court…cannot insert in the contract language which one of the parties now wishes were
there.”). The license to Google’s customers being explicitly defined within the express terms of
the contract, Google is not now entitled to the benefit of an implied license by way of the patent
exhaustion doctrine. The issue of patent exhaustion cannot properly serve as the basis for
Google’s breach of contract claim and should be dismissed from this case for this additional
reason.
To be clear, this ruling does not impede a Google customer’s right to raise an affirmative
defense of patent exhaustion should Beneficial assert a patent infringement claim against that
customer. Nor does this prevent Google from filing a declaratory judgment action, in a venue of
its choosing, seeking a judicial declaration that Beneficial’s patent right has been exhausted with

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respect to certain of Google’s products. Much of our nation’s commercial conduct has long relied
upon the simple rule that when the subject matter is addressed clearly within the four corners of the
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written agreement, claims of an implied nature will not be permitted to lessen, expand or otherwise
alter that agreement. This Court affirms such simple rule and appreciates the certainty which it
continues to provide.
III.

Conclusion
For the reasons stated above, the Court hereby ORDERS that the issue of patent

exhaustion be and it is DISMISSED from this case as between Google and Beneficial.3

SIGNED this 19th day of December, 2011.
So ORDERED and SIGNED this 16th day of January, 2014.

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RODNEY GILSTRAP
UNITED STATES DISTRICT JUDGE

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Amazon’s right to maintain the affirmative defense of patent exhaustion in the bifurcated portion of this case is not
affected by this ruling.

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