ULEAD SYSTEMS v. Lex Computer & Management Corp.

Citations: 130 F. Supp. 2d 1137; 58 U.S.P.Q. 2d (BNA) 1366; 2001 U.S. Dist. LEXIS 2983; 2001 WL 111156Docket: CV 98-5880 DT(CTx)

Court: District Court, C.D. California; January 22, 2001; Federal District Court

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Ulead Systems, Inc. (Plaintiff) filed a motion for summary judgment against Lex Computer Management Corp. (Defendant) in the U.S. District Court for the Central District of California. Ulead seeks a declaratory judgment that U.S. Patent No. 4,538,188 (the '188 Patent), owned by Lex, is unenforceable, invalid, and expired due to Lex's failure to pay required maintenance fees. Ulead’s MediaStudio Pro software, which manages digital sound and image files, is alleged by Lex to infringe on the '188 Patent, which pertains to video and sound manipulation of analog images. Ulead denies any infringement and argues that the patent is invalid and/or unenforceable. The motion is supported by undisputed facts, including that Simon V. Haberman, Lex's President and sole shareholder, is a licensed attorney with expertise in intellectual property law. Ulead asserts that there is a justiciable controversy regarding its right to continue using and selling its software.

Mr. Haberman failed the U.S. Patent Exam but is the lead counsel in a patent case and a related patent infringement case filed by Lex in New York. He has taken patent review courses from the Practicing Law Institute (PLI) in 1995 and 1997, which covered topics including maintenance fees and 'small entity' fee payments. The responsibility for maintaining the '188 Patent and paying its maintenance fees lies with patent attorney Irving Weiner, who is aware that Lex focuses solely on licensing patents, including the '188 Patent, and does not engage in manufacturing or selling products. By summer 2000, Lex had issued twenty-one licenses, all signed by Haberman, who is knowledgeable about the companies involved.

Lex delegated the maintenance fee payment for the '188 Patent to Weiner, who petitioned the U.S. Patent and Trademark Office (PTO) to accept an 'unintentionally delayed payment' for the patent. Lex claimed small entity status in its petition, supported by a Verified Statement signed by Haberman, who did not read the relevant regulation prior to signing. As of January 8, 2000, Lex believed it qualified as a small entity. However, Weiner failed to pay the 12th year maintenance fee. On October 5, 1998, he submitted a second petition to the PTO asserting that a verified statement confirming small entity status had been filed in November 1993. Lex does not recall discussing the payment of the 12th-year maintenance fee with Weiner and has not addressed the implications of its licensing activities on its entity status.

Lex's second petition for the reinstatement of the '188 Patent due to "unintentionally delayed payment of maintenance fee" was accepted by the PTO. Lex claims small entity status for all nine patents it holds, despite its belief that its licensees—Microsoft, Sony, Matsushita, Hitachi, Adobe, Macromedia, Avid, and Tectronix—employ over 500 people, allowing Lex to save approximately $25,000 in maintenance fees over the last ten years. 

The procedural history reveals that Ulead filed a Complaint on July 21, 1998, to which Lex responded with an Answer and Counter-Claim for patent infringement on April 7, 1999. Ulead then answered the Counter-Claim on April 29, 1999. Lex's motion to join Ulead-Taiwan and extend discovery deadlines was initially denied but later granted on July 18, 2000. Lex subsequently filed a Cross-Claim against Ulead-Taiwan for patent infringement on July 25, 2000. Ulead entities filed multiple motions, including for summary judgment regarding the invalidity and non-infringement of the '188 Patent, which are to be addressed later.

The discussion section highlights the standard for a Motion for Summary Judgment under Rule 56(c) of the Federal Rules of Civil Procedure, stating that summary judgment is appropriate when there are no genuine issues of material fact. The moving party must demonstrate this absence, and if successful, the opposing party must then present specific facts to indicate that a genuine issue remains for trial.

A non-moving party in a summary judgment motion must demonstrate a genuine dispute of material fact regarding an essential element of their case, rather than relying solely on allegations or denials. If the non-moving party's claim seems implausible, the burden to show a genuine issue increases. Summary judgment can no longer be avoided by mere disagreement or unsupported assertions. If the moving party bears the burden of proof, they must provide affirmative, admissible evidence, as unauthenticated documents are not permissible. Declarations must be based on personal knowledge and admissible at trial, while assertions based solely on "information and belief" are insufficient.

Ulead's Motion No. 1 for Summary Judgment is granted based on claims that the '188 Patent is unenforceable and invalid due to Lex's inequitable conduct, including misrepresentations to the Patent and Trademark Office (PTO). Ulead contends that the patent expired on August 27, 1993, due to Lex's failure to pay required maintenance fees. Each patent holder is required to pay maintenance fees at specified intervals, with a reduced fee option for "small entities," defined as having fewer than 500 employees. Ulead alleges that Lex falsely represented itself as a small entity to pay reduced fees, despite having licensed the patent to companies with more than 500 employees. Ulead argues that Lex's actions constitute fraud against the PTO, warranting the patent's unenforceability or invalidity.

Ulead asserts that Lex's '188 Patent expired on August 23, 1993, due to Lex's failure to pay the required maintenance fee, rendering the patent unenforceable against Ulead. The court granted a Joint Motion for Summary Judgment on the issue of inequitable conduct, determining that Lex's actions—including misrepresenting 'small entity' status and improperly paying reduced fees—constitute inequitable conduct under 37 C.F.R. 1.28. The definition of inequitable conduct includes deliberate misrepresentation or omission of material facts intended to deceive the PTO.

To prove inequitable conduct, a two-step analysis is required: first, establishing the materiality of withheld information, and second, demonstrating intent to mislead the PTO. If both thresholds are met, the court weighs materiality against intent. The greater the materiality of the omission, the less intent is required to establish inequitable conduct. The party claiming inequitable conduct must provide clear and convincing evidence.

The court determined that Lex's false declaration was materially significant as a reasonable examiner would find such information critical in deciding whether to grant the patent. Ulead argued that Lex's false statements led the PTO to accept improper maintenance fee payments and revive the patent, a claim the court supported. Lex, however, contended that Ulead failed to demonstrate that its 'small entity' claim influenced the PTO's decisions regarding fee acceptance and patent revival. The court rejected this argument, affirming that Lex's claim was indeed material to the PTO's actions.

Intentional false statements can be deemed material regardless of the claims of a patent. In key cases, such as Gen'l Electro Music Corp. v. Samick Music Corp., the Federal Circuit found that false statements, including claims of conducting prior art searches, were material. Similarly, in Rohm. Haas Co. v. Crystal Chem. Co., the court ruled that submitting false affidavits concerning prior art was undeniably material. In Paragon Podiatry, false affidavits regarding sales information, which was exclusively controlled by the applicant, led to a finding of inequitable conduct. The court emphasized that such concealment prevents the patent examiner from accessing critical information, making it particularly egregious.

Moreover, the Manual of Patent Examining Procedure and relevant regulations treat improper claims of small entity status as fraud against the PTO. Evidence indicated a connection between Lex's misrepresentation and the PTO's patent decisions, leading the court to conclude that Lex's claims of small entity status were material as a matter of law.

Circumstantial evidence can imply intent to deceive when accompanied by knowledge of falsity. A finding of gross negligence alone does not suffice for inferring intent; the totality of the conduct must support a conclusion of culpability. The court's assessment of inequitable conduct is discretionary and must consider all evidence. Intent to deceive does not require direct proof and can be inferred from surrounding circumstances and actions, which are typically understood to reflect the actor's intentions.

In inequitable conduct cases, direct evidence of deceit is rarely present; instead, intent is typically inferred from circumstantial evidence. Mere gross negligence does not suffice to imply intent to deceive the Patent and Trademark Office (PTO). In the case at hand, Lex acknowledged being a 'large entity' while paying 'small entity' maintenance fees in 1993 and 1997 but argued it lacked intent to deceive due to Mr. Haberman's ignorance of the law and his attorney's lack of knowledge regarding Lex's licensing situation. Despite Mr. Haberman's legal background and prior education, his claim of misunderstanding the implications of the small entity declaration is questioned, especially given his later admissions about the rights of Lex’s licensees. Mr. Weiner, Lex’s attorney, claimed ignorance of relevant facts despite the nature of Lex's business. Ulead contended that either Mr. Weiner failed to seek necessary information or did not receive it. Lex did not adequately address inconsistencies in Mr. Weiner's statements to the PTO, which further raised doubts about his claims. The court referenced previous cases indicating that separating the knowledge of the inventor from that of the attorney lacks evidentiary support, and found Lex's declarations self-serving and inconsistent with documentary evidence. Simply denying intent to mislead does not negate circumstantial evidence of deception, as a lack of intent cannot raise genuine issues that would prevent summary judgment.

Good faith is a critical factor in determining intent to deceive, but it must be evaluated alongside all available evidence. The court references Baxter and Kingsdown cases to emphasize that good faith actions must be viewed in context, suggesting that Mr. Haberman's late notification to correct Lex's small entity status undermines claims of good faith. Despite Lex's argument that they corrected the status after realizing an error, the timing—after litigation commenced—casts doubt on their intentions. Citing Fox Industries, the court reiterates that amendments related to inequitable conduct do not absolve prior failures to disclose critical information. The court finds sufficient evidence to infer Lex's intent to deceive the PTO, leading to the granting of summary judgment.

The status of the '188 Patent is contested, particularly regarding maintenance fees, with Ulead asserting that it expired due to non-payment. While Lex's patent was reinstated, it must demonstrate that its claim to small entity status was established in good faith to avoid expiration consequences. Lex claims to have taken prompt corrective action upon discovering the error; however, the court notes that this occurred only post-litigation, suggesting a lack of genuine good faith. Ulead has presented circumstantial evidence of willful blindness on the part of Lex's representatives, further undermining their assertions of good faith. The court concludes that Lex's attempts to rectify its small entity status do not negate the earlier inequitable conduct.

Ulead's Joint Motion No. 1 for Summary Judgment is granted, resulting in the '188 Patent being deemed invalid, unenforceable, and expired. The Court finds sufficient evidence indicating that Lex acted in bad faith, thus negating any genuine issues regarding good faith. The decision is based on the failure of Lex to demonstrate good faith, despite arguments regarding the Patent and Trademark Office (PTO) accepting late payment fees. The Court clarifies that such acceptance does not imply good faith or affect its judgment. Additionally, all relevant undisputed facts related to the motion are acknowledged, although not exhaustively listed. The ruling applies to both Ulead-California and Ulead-Taiwan. The Court emphasizes the historical context of fee deadlines for the '188 Patent, which had specific due dates from 1989 to 1997.