Secure Axcess, LLC. v. Nintendo of America, Inc. et al

Filing 135

MEMORANDUM AND OPINION. Signed by Judge Rodney Gilstrap on 03/07/2014. (nkl, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION
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SECURE AXCESS, LLC,
Plaintiff,
v.
NINTENDO OF AMERICA INC., et al.
Defendants.

CASE NO. 2:13-cv-32-JRG

Member Case:
Case No. 2:13-cv-289-JRG

MEMORANDUM OPINION AND ORDER

Pending before the Court is Defendants’ Joint Motion to Sever and Transfer the Claims
Against Nintendo and to Stay the Claims Against the Retailer Defendants (Dkt. No. 61). On
January 18, 2013, Secure Axcess, LLC (“Secure Axcess”) filed suit against twelve defendants
for infringement of United States Patent No. 6,522,309 by making, using, selling, offering for
sale, and/or importing certain Nintendo DS systems. This case was consolidated with a member
case, Secure Axcess, LLC v. Accell Corporation, et al., Case No. 2:13-cv-289, for all pretrial
issues (except venue) on August 2, 2013. (See Dkt. No. 72.) Only Nintendo of America Inc.
(“Nintendo”) has moved to transfer venue.
Nintendo moves to be severed out of the above action, to transfer the case against it to the
Western District of Washington (WDWA), and to stay the case here against the remaining eleven
defendants pending resolution in WDWA. The Court held a hearing on this motion on February
25, 2014 and heard oral argument from both sides.

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I.

SEVERANCE
The Court will first evaluate whether severance of Nintendo is proper.
The defendants are self-divided into two groups: Nintendo and eleven Retailer

Defendants.1 The eleven Retailer Defendants sell Nintendo DS systems. There is no dispute that
Nintendo alone designs, develops, and manufactures the accused Nintendo DS systems. Based
on those facts, Nintendo contends that claims against the Retailer Defendants are peripheral to
the claims against Nintendo such that adjudication of the claims against Nintendo will likely
dispose of the other claims. Accordingly, Nintendo argues that the customer suit exception
applies and severance is appropriate.
In response, Plaintiff does not contest that for the issues of infringement and validity, a
resolution against Nintendo would resolve those issues for the Retailer Defendants. This is
especially true since the Retailer Defendants represent that they will stipulate to be bound by
Nintendo’s judgment if the Court grants the present motion. No such stipulation has yet been
filed with the Court. However, Plaintiff asserts that its damages claims against the Retailer
Defendants are different from its damages claims against Nintendo. Plaintiff argues that due to
higher retail prices and the practice of bundling the Nintendo DS systems with video games and
other accessories, the Retailer Defendants enjoy the benefits of convoyed sales. As such, Plaintiff
argues, its damages claims against the Retailer Defendants are independently significant from its
damages claim against Nintendo for the purposes of establishing a reasonable royalty.

1

The retailers include Micro Electronics, Inc.; Hastings Entertainment, Inc.; Game Stop
Corporation; Wal-Mart Stores, Inc.; Wal-Mart Stores Texas, LLC; Best Buy Stores, L.P.;
Bestbuy.com, LLC; K Mart Corporation; Target Corporation; Toys “R” US-Delaware, Inc.; and
Amazon.com, LLC (collectively, “Retailer Defendants”).
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A.

Applicable Law

Neither side asserts that there is misjoinder in this case. That said, the Court finds it
instructive to briefly address the standard for when joinder is proper before considering an
exception to the rule, commonly referred to as the customer suit exception. The Federal Circuit
in In re EMC I clarified the test for joinder by holding that “[c]laims against independent
defendants (i.e., situations in which the defendants are not acting in concert) cannot be joined
under Rule 20’s transaction-or-occurrence test unless the facts underlying the claim of
infringement asserted against each defendant share an aggregate of operative facts.” 677 F.3d
1351, 1359 (Fed. Cir. 2012). In addition, “joinder is not appropriate where different products or
processes are involved.” Id. “Unless there is an actual link between the facts underlying each
claim of infringement, independently developed products using differently sourced parts are not
part of the same transaction, even if they are otherwise coincidentally identical.” Id. Under Rule
20, joinder is proper where: (1) the claims against the defendants arise out of the “same
transaction, occurrence, or series of transactions or occurrences,” and (2) there is a “question of
law or fact common to all defendants.” Id. at 1356. Effective September 16, 2011, the LeahySmith America Invents Act (AIA) now governs joinder in patent cases. Pursuant to the AIA,
joinder of defendants in patent infringement actions is proper only if the allegations of
infringement “aris[e] out of the same transaction, occurrence, or series of transactions or
occurrences” and “relat[e] to the making, using, importing into the United States, offering for
sale, or selling of the same accused product or process.” 35 U.S.C. § 299 (emphasis added).
Consequently, the key to proper joinder is a set of facts and issues in common among all the
defendants in the same suit.

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However, the commonality of issues and facts among the defendants in making joinder
proper must be juxtaposed with exceptions to that rule. Rule 21 permits severance of any claim
against a party if the interests of justice so requires. One such instance of severance is often
employed in conjunction with the customer suit exception2—when so much is found to be in
common among the defendants that one defendant becomes merely peripheral to the other.
However, the customer suit exception has not always been used as a tool to sever the case against
a manufacturer. Rather, it was initially developed as an exception to the first-to-file rule.
Traditionally, the customer suit exception, as the label denotes, arises in patent
infringement actions where there are two separate but co-pending suits: an earlier-filed action
against customers selling accused devices and a later declaratory judgment action brought by the
manufacturer of the accused devices. In such situations, the district court may exercise its
discretionary authority to stay the suit as to the customers pending resolution of the
manufacture’s declaratory judgment action in the manufacturer’s chosen forum. Katz v. Lear
Siegler, Inc., 909 F.2d 1459, 1464 (Fed. Cir. 1990) (affirmed district court’s decision to stay the
customer suit pending resolution of a declaratory judgment action filed by the manufacturer in a
different court); Codex Corp. v. Milgo Elec. Corp., 553 F.2d 735, 737-38 (1st Cir. 1977) (held
the manufacturer’s declaratory judgment action in its home forum should take precedence over a
customer action in a jurisdiction in which the manufacturer could not be sued); William Gluckin
& Co. v. Int’l Playtex Corp., 407 F.2d 177 (2nd Cir. 1969) (affirmed district court’s decision to
restrain customer suit pending final disposition of a declaratory judgment action brought in
2

Nintendo does not explicitly refer to the term “customer suit exception” in making its
motion; rather, it moves for a severance, transfer, and stay pursuant to the three factor test
discussed herein. The Court also does not conflate the two issues. Instead, it reviews the genesis
of the “customer suit exception” in conjunction with certain instances in which such a set of facts
are applied through the three factor test in the course of evaluating a manufacturer defendant’s
request to sever, transfer, and stay.
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another district). This preference for the manufacturer suit to take precedent over the claims
against the reseller or distributor of the accused products has its roots in the notion that the
manufacturer is the “true defendant” and should bear the burdens of trial. Codex, 553 F.2d at
737-38.
However, application of the customer suit exception has more recently been applied in
multi-defendant actions where both the manufacturer and retailer are defendants in the same
case. In those cases, the customer suit exception can be used as a tool to facilitate transfer of the
manufacturer defendant to a venue where suit against the retailer defendants could not have been
originally brought. Toshiba Corp. v. Hynix Semiconductor, Inc., 2005 WL 2415960 at *5 (N.D.
Tex. Sept. 30, 2005) (“That the Court lacks power to transfer the claims against Millenium and
Nova to the Northern District of California does not mean that transfer of the claims against the
Hynix Defendants would be improper”); Koh v. Microtek Intern., Inc., 250 F. Supp. 2d 627, 632
(E.D. Va. 2003) (ordered severance to facilitate transfer to CDCA when it found retailer
defendant MCSC is not subject to in personam jurisdiction in California), Corry v. CFM
Majestic Inc., 16 F. Supp. 2d 660, 664 (E.D. Va. 1998) (“Given that the action as a whole cannot
be transferred to the Northern District of Indiana, the question then presented is whether
plaintiff’s claim against Thulman may be severed from the claims against the CFM entities so
that the latter claims may be transferred to Indiana”). The application to sever one lawsuit into
two and transfer the severed case to the manufacturer’s desired forum has been argued to achieve
the same purpose for which the customer suit exception was originally developed, but when it is
driven more by a desire to transfer than achieve efficiencies for the parties and the courts, it must
be viewed with a discerning eye.

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B.

Analysis

The purpose of permitting severance by applying the customer suit exception, where
joinder is otherwise proper, is premised on traditional notions of fundamental fairness and
judicial efficiency. Koh, 250 F. Supp. 2d at 632 (“Severance is also appropriate where a
defendant is peripherally connected to the action with the consequence (whether intentional or
not) that the burdens of trial are increased on other defendants….”); L.G. Elec., 126 F. Supp. 2d
at 421 (“Ultimately, the infringement claim against the manufacturer and central distributor is
more likely to restore contested property rights nationwide than will enjoining one Virginia
merchant from selling infringing products from existing inventory”). As stated in Codex:
At the root of the preference for a manufacturer's declaratory judgment action is
the recognition that, in reality, the manufacturer is the true defendant in the
customer suit.... it is a simple fact of life that a manufacturer must protect its
customers, either as a matter of contract, or good business, or in order to avoid the
damaging impact of an adverse ruling against its products.
Codex, 553 F.2d at 737-38 (citations omitted).
This Court does not disagree with the purpose of the customer suit exception in any
respect. However, application of the exception should be tempered when severance of the
manufacturer is made primarily to facilitate transfer to a forum more convenient to the
manufacturer while the case against the remaining defendants, who are outside the jurisdictional
reach of that forum, is stayed and left in the hands of the transferor court. This is especially true
where the original court is one experienced in the trial of patent litigation and has developed case
management techniques uniquely targeted to the efficient administration of patent litigation.3

3

The Eastern District of Texas has one of the most extensive patent dockets in the nation.
Its local patent rules, participation in the national Patent Pilot Program, and its recent adoption of
alternative Track B case management for appropriate patent cases (see General Order 14-3) are
evidence of experienced case management techniques.
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The original rationale for severing to facilitate transfer was “to prevent a plaintiff from
manipulating the system by joining a peripherally connected defendant to the main action for the
sole purpose of accentuating the burdens of trial upon a defendant who would otherwise have
been entitled to a § 1404(a) transfer.” Corry, 16 F. Supp. 2d at 664 (citations and quotations
omitted). However, rather than being the general rule, this far-reaching remedy should be
reserved for that small subset of cases where an attempt to manipulate venue is clear. This is not
such a case. This suit involves eleven Retailer Defendants with headquarters located throughout
the country. Two of the Retailer Defendants are headquartered in Texas but neither is actually
within the Eastern District of Texas. Defendants have not, nor can they reasonably allege, that
the Plaintiff added the Retailer Defendants to this case purely to manipulate venue.
The severance-and-transfer method also does not simplify or streamline all issues in a
patent infringement case. Though the “core” questions of infringement and validity may be
disposed by litigating the claims against the manufacturer, an evaluation of damages is
necessarily a defendant-specific inquiry (as contrasted from the Katz, Codex and Playtex cases,
which were declaratory judgment actions brought by the manufacturer that does not reach the
issue of damages and, therefore, did not have this concern).
Several courts have reasoned—correctly—that if a judgment is obtained against the
manufacturer and the plaintiff collects on that judgment, the plaintiff may not in turn also collect
against the retailer. Shifferaw v. Emson USA, et al., 2010 WL 1064380 at *3 (E.D. Tex. Mar. 18,
2010); Koh, at 632-633; LG Elec. Inc. v. Asustek Computers, 126 F. Supp. 2d 414, 422 (E.D. Va.
2000). However, each of those instances presumes that the plaintiff will elect to collect on the
judgment only against the manufacturer rather than abstain and pursue their case elsewhere
against the retailer defendants. Real world experience shows that such an assumption is very

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often accurate. Balanced against the option of reopening their case against the retailers in another
district court with little or no knowledge of the transferred case, the plaintiffs are likely to be
compelled, as a practical matter, to collect on the judgment they have already obtained at
significant cost and over significant time. Such a resolution where the patentee is essentially
coerced to recover from the manufacturer rather than other defendants should not be an intended
or acceptable consequence of the customer suit exception.
On the other hand, if despite the above coercive pressures, the judgment goes uncollected
against the manufacturer while the patentee returns to lift the stay against the retailers in the
transferor court, the laudable goal of judicial efficiency and overall economy is significantly
frustrated because now the same suit must be adjudicated in two different forums, if only on the
damages issue. Accordingly, in an effort to reconcile this undesirable dichotomy of potential
outcomes and while staying true to the underlying objective for which the customer suit
exception was created, this Court adopts an alternative solution.
C.

Application

In evaluating a manufacturer defendant’s request to sever, transfer, and stay, courts have
typically considered three factors: (1) whether the claims against the retailers are peripheral to
the claims against the manufacturer; (2) whether adjudication of the severed claims would
potentially dispose of the remaining claims; and (3) whether the § 1404(a) factors warrant
transfer of the severed claims. Shifferaw, 2010 WL 1064380 at *4 (citing Toshiba, 2005 WL
2415960 at *4-7). This Court will first review the facts before it under the first two factors to
make an initial determination of whether the customer suit exception should apply to sever the
case against the manufacturers in this case. If severance is found appropriate, the Court will
consider the § 1404(a) factors as to Nintendo only. If severance if found inappropriate, the Court

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will evaluate transfer as to the case in its entirety as if all the defendants all moved to transfer
venue. Otherwise, the Court will not reach the third factor.4
1.

Whether the claims against the retailers are peripheral to the claims
against the manufacturer

It is undisputed in this case that Nintendo is the sole manufacturer in the United States of
the only accused product, the Nintendo DS systems, and sells it at wholesale to the Retailer
Defendants. The Retailer Defendants do not assert that they have any role in the design or
manufacture of the Nintendo DS systems. Indeed, Nintendo represents that it is indemnifying
and defending all the Retailer Defendants. The Retailer Defendants likely have very little to offer
in the way of evidence regarding the underlying technology of the accused devices or the
substantive aspects of the infringement case. Therefore, the Retailer Defendants are only
peripherally involved in determining the issues of infringement and, to some extent, issues of
invalidity.5 Shifferaw, 2010 WL 1064380 at *3. The Court finds that the claims of infringement
and validity against the Retailer Defendants are peripheral to Nintendo. However, the same logic
cannot be extended to the calculation of damages.
In responding to Defendants’ motion, Plaintiff argued that the Retailer Defendants are not
peripheral to Nintendo because its damages claims are different. Plaintiff contends that it will
4

This Court’s approach in evaluating these factors is not unique. Courts have consistently
treated the third prong as a separate transfer analysis as to the severed defendant after severance
is found proper under factors (1) and (2). See Shifferaw, 2010 WL 1064380 at *4 (“Because the
court has found that severance is proper as to Mishan, the court analyzes whether transfer of the
claims against Mishan is appropriate”); Koh, 250 F. Supp. 2d at 633 (“Therefore, it is appropriate
to consider transfer of the claims against the Microtek defendants and MEI, having in mind
severance and stay of the claims against MCSC”); Toshiba, 2005 WL 2415960 at *6 and Corry,
18 F. Supp. 2d at 666 (found severance was warranted before moving on to the transfer factors).
5
Each defendant is entitled to assert the affirmative defense of patent invalidity. However,
as the Retailer Defendants are represented by common counsel and have indicated a willingness
to be bound by the WDWA’s ruling on Nintendo’s invalidity defense, the Court will assume for
the purposes of this analysis that the Retailer Defendants are only peripherally involved on the
issue of invalidity.
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obtain a higher recovery from the retailers than the manufacturer because of the higher retail
prices and the retailers’ practice of bundling the accused systems with video games and other
accessories. Plaintiff should have the opportunity to pursue damages from either Nintendo or the
Retailer Defendants or both, as it clearly intended by filing this single suit, rather than have those
options directly or indirectly foreclosed through the relief Nintendo has requested.
A fundamental tenant of patent law is that a patentee may file suit against anyone who
without authority makes, uses, offers to sell, or sells any patented invention within the United
States during the term of the patent. 35 U.S.C. § 271. The law imposes no arbitrary limit on
which private citizen, corporation, or other entity may be the subject of such a suit. This Court is
not aware of any authority that forbids a patentee from suing a distributor or retailer of an
accused product when the manufacturer resides in the United States. It is also clear that upon a
judicial finding for the claimant, the court shall award damages adequate to compensate for the
infringement, but in no event less than a reasonable royalty. 35 U.S.C. § 284. Damages is no less
a core issue in a patent infringement case than the issues of infringement and validity. Therefore,
the Court finds that as to the issue of damages, the claims against the Retailer Defendants are not
peripheral to those of Nintendo.
Where there is not added bundling or other activity that materially alters the damages
claims between a manufacturer and its co-defendant retailers; that is to say, where the damages
sought by plaintiff are the same among all the defendants, then severance and transfer might not
work the same tangible harm on the plaintiff as exists in this case. Cases under those
circumstances might be appropriately dealt with by the severance and transfer methodology
Nintendo urges here. However, the scope and degree of damages are not common in this case
and this Court does not reach the issue of severance and transfer where damages are common.

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2.

Whether adjudication of the severed claims would potentially dispose of
the remaining claims

Where adjudication of the claims of infringement and validity against the manufacturer
would potentially dispose of those claims against the retailer, time and resources would be
wasted if litigation proceeds against all the defendants simultaneously. In this case, there is no
dispute that the issues of infringement and validity are common to Nintendo and the Retailer
Defendants. The Retailer Defendants could only be found liable if the patent infringement claims
against Nintendo are resolved in Plaintiff’s favor. However, if the patent is adjudicated as both
valid and infringed, then Plaintiff should be allowed to pursue Nintendo and the Retailer
Defendants simultaneously for an award of damages, even though it may only collect once. LG
Elec., 126 F. Supp. 2d at 422 (citing Intel v. ULSI, 995 F.2d 1566, 1568-69 (Fed. Cir. 1993)
(holding that patentee can collect only one royalty from patent infringement)). Accordingly, this
factor is only satisfied insofar as an adjudication of noninfringement or invalidity would dispose
of the claims against the Retailer Defendants. It is not satisfied as to the issue of damages based
upon a reasonable royalty.
After studying the traditional application of the customer suit exception and considering
the parties’ arguments, as well as the facts in this case, the Court agrees with Nintendo that it is
the “true defendant” in this case for purposes of determining the issues of infringement and
validity. However, rather than engaging in the process of severing, transferring, and then staying
the case, the interests of preventing the waste of both time and resources can also be achieved by
permitting Nintendo to proceed alone in this Court on infringement and validity while the
Retailer Defendants are stayed, conditioned upon their consent to be bound by Nintendo’s

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judgment.6 Proceeding in this manner is a fair and equitable solution to otherwise unnecessary
piecemeal litigation of one case across multiple district courts. It also works to insure that
efficiency and economy, for the parties and the judiciary, are achieved. It prevents the customer
suit exception from becoming a means to secure a transfer of venue when such was never a part
of its originating purpose and there is no claim of venue manipulation through the addition of the
eleven Retailer Defendants.
Accordingly, having considered not only the briefing and argument but also having had
an opportunity to judge the nuances of credibility and intent, as is unique to the position of a trial
court such as this, the Court in exercising its recognized discretion finds that severance is not an
appropriate remedy and the defendants should remain joined “in the interest of avoiding
prejudice and delay, ensuring judicial economy, [and] safeguarding principles of fundamental
fairness.” In re EMC I, 677 F.3d at 1360 (citing Acevedo v. Allsup’s Convenience Stores, Inc.,
600 F.3d 516, 521 (5th Cir. 2010)).7

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The Court has also given much thought to evaluating the bifurcated portion of the
infringement/validity case involving Nintendo for transfer in a § 1404(a) analysis. After due
consideration, however, the Court believes the fragmented resolution of portions of the same
case by multiple courts and multiple judges is not in the best interests of justice.
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This holding is consistent with pending legislation before Congress introduced by
Senator Patrick Leahy on November 18, 2013 and designated as the “Patent Transparency and
Improvements Act of 2013” (S. 1720). Section 4 of S. 1720 creates a “Customer Stay” provision
which states “the court shall grant a motion to stay at least the portion of the action against a
covered customer that relates to infringement of a patent involving a covered product or process”
when both a customer and manufacturer have been sued for patent infringement, and (i) they
both consent in writing to the stay, (ii) the manufacturer is a party to the action involving the
same patent relating to the same product, (iii) the customer agrees to be bound by any issues
finally decided as to the manufacturer, and (iv) the motion is filed within 120 days after service
of the complaint or the date of the first scheduling order, whichever is later. The Court believes
the present case is precisely the type of situation contemplated by this proposed legislation.
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II.

TRANSFER
The third factor in evaluating severance and transfer is (3) whether the § 1404(a) factors

warrant transfer of the severed claims. Having found severance of Nintendo to be improper, the
Court notes that the Defendants did not request transfer of this action as a whole and does not
need to reach this third factor. Indeed, the Defendants alleged no facts to show that they can each
satisfy the initial question of whether the suit could have originally been brought in WDWA.
Volkswagen I, 371 F.3d at 203. Based on the record before the Court, a transfer of the entire
action would clearly be improper.8
III.

CONCLUSION
For the foregoing reasons and in the interests of justice, the Court ORDERS as follows:
The Retailer Defendants shall within fourteen (14) days of this Order file a stipulation

agreeing to be bound by the verdict and rulings in this suit against Nintendo on issues of
infringement and validity. Conditioned upon receipt of such stipulation, the Court ORDERS
bifurcation of the liability/validity issues from the issue of damages and STAYS the case against
the Retailer Defendants as to damages until a disposition of the liability/validity issues has been
reached or until subsequent order of this Court.
Defendants’ Joint Motion to Sever and Transfer the Claims Against Nintendo and to Stay
the Claims Against the Retailer Defendants (Dkt. No. 61) is DENIED.

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During oral argument, Defendants’ counsel indicated that the Defendants would waive
any objection to venue and not oppose transferring the entire action to WDWA. However, the
threshold inquiry to evaluating transfer under § 1404(a) depends upon whether the plaintiff has a
right to sue in that district, not on the “wish or waiver” of a defendant. Toshiba, F. Supp. 2d at 4
(citing Hoffman v. Blaski, 363 U.S. 335, 343, 80 S.Ct. 1084 (1960)).
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The stay previously entered by the Court (Dkt. No. 133) is hereby LIFTED. The parties
are directed to meet and confer to file a motion to amend the docket control order, if needed,
within fourteen (14) days.

SIGNED this 19th day of December, 2011.
So ORDERED and SIGNED this 7th day of March, 2014.

____________________________________
RODNEY GILSTRAP
UNITED STATES DISTRICT JUDGE

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