Pickholtz v. Rainbow Technologies, Inc.

Citations: 260 F. Supp. 2d 980; 2003 U.S. Dist. LEXIS 7664; 2003 WL 21038181Docket: C 98-2661 CRB

Court: District Court, N.D. California; May 1, 2003; Federal District Court

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Andrew Pickholtz filed a patent infringement suit against Rainbow Technologies, Inc. and Software Security, Inc., claiming they infringed U.S. Patent No. 4,593,353, which pertains to a device designed to prevent unauthorized access to computer software through a pseudorandom number (PRN) generator. This generator produces a second number from a first input, which is compared to a second authorization code to grant software access. Rainbow offers both software-only products and hardware products, including a dongle that connects to a computer.

Initially, the court granted Rainbow's motion for summary judgment on non-infringement and denied Pickholtz's cross-motion for summary judgment on infringement. However, the Federal Circuit reversed this decision, clarifying the definition of "computer" to include peripherals like Rainbow's dongles, which are connected directly to the CPU.

Rainbow subsequently filed a second motion for summary judgment of non-infringement. The memorandum outlines the summary judgment standard, indicating it is suitable when there are no genuine issues of material fact. The court must evaluate the evidence favorably for the nonmoving party and is tasked with identifying unsupported claims. The moving party must demonstrate there are no genuine issues of material fact based on the pleadings and evidence presented.

The moving party has the burden of proof at trial and must show that no reasonable fact-finder could rule against it. If successful, the non-moving party must provide specific evidence beyond pleadings to demonstrate a genuine issue for trial, identifying evidence with reasonable particularity. Failure to do so entitles the moving party to judgment as a matter of law. Mr. Pickholtz claims that Rainbow directly and indirectly infringes the '353 patent, which requires third-party users to directly infringe for indirect infringement to apply. Rainbow contests that its devices do not infringe the patent, arguing they lack the necessary computer components. However, evidence indicates that Rainbow's dongles are only functional when connected to a computer. Marketing materials and circuit board connections further support this assertion. The Federal Circuit has recognized that circumstantial evidence, like product sales and usage instructions, can establish third-party direct infringement. Mr. Pickholtz presents circumstantial evidence suggesting third-party users likely use Rainbow's products with computers meeting the patent's criteria, thus creating a genuine issue of material fact. For direct infringement claims against Rainbow, Mr. Pickholtz must prove that Rainbow made, used, or sold the claimed combination, but there is no evidence that Rainbow sells such a combination. Instead, Mr. Pickholtz argues that Rainbow uses the combination, supported by a declaration detailing how Rainbow's products connect to computers.

Photographs included in a declaration show Rainbow's products connected to a laptop, but Rainbow argues that this does not prove actual use of the combination of computer and dongle, as the computer could be off. Nonetheless, the images suggest that Rainbow created this combination. An expert's declaration by Mr. Pickholtz asserts that Rainbow’s products generally require computer use for research, development, or testing. Rainbow disputes this, stating that the expert's comments are based on typical practices rather than specific evidence of Rainbow's actions. There is a challenge to the assertion that Rainbow's products are designed to function without being tested or demonstrated with a computer.

Regarding the "pseudorandom number generator device," the court had previously defined it as hardware that produces a deterministic sequence of seemingly random numbers. Rainbow claims its accused products do not include such a device and categorizes them into four types: "constant response," "software only," "ASIC cipher," and "microprocessor cipher" devices. For the "constant response" devices, Rainbow asserts these lack a number generator, a claim contested by Mr. Pickholtz, who cites his expert's opinion that these devices contain microprocessors and generate a sequence of numbers that appears random. However, Rainbow argues that the expert's conclusions are speculative and lack factual support, failing to meet evidentiary standards under Federal Rules. The expert's declaration does not detail the testing or documentation that would substantiate his claims. Consequently, this expert testimony does not sufficiently establish a genuine issue regarding the presence of a pseudorandom number generator in the "constant response" devices. Despite this, Rainbow acknowledged that the firmware for the Unikey/S, classified as a "constant response" device, references a "pseudorandom number generator."

An admission has been made that raises a genuine issue regarding whether the Unikey/S device contains a PRN generator as defined by the Court. Rainbow claims that the Unikey/S PRN generator mode is inaccessible to customers, which only pertains to allegations of indirect infringement. Mr. Pickholtz has not contested this claim of inaccessibility, making summary judgment appropriate for the Unikey/S device concerning indirect infringement allegations. However, there is circumstantial evidence indicating that Rainbow has both made and used the Unikey/S device with a computer, suggesting that it may utilize the PRN generator outlined in the '353 patent.

Regarding Rainbow's "software only" products, the company asserts that these lack a hardware number generator as specified by the Court. Although Mr. Pickholtz and his expert suggest that the Sentinel LM product, part of Rainbow's "software only" offerings, interacts with the Sentinel SuperPro dongle (a hardware product), they fail to provide specific supporting facts or operational details. Consequently, Mr. Pickholtz has not established a genuine issue concerning the existence of a hardware PRN generator in the Sentinel LM or other "software only" products.

For the "ASIC cipher" and "microprocessor cipher" devices, Rainbow contends these utilize a "streaming cipher generator" rather than a PRN generator. However, this assertion is undermined by contradictory statements and evidence. Notably, deposition testimony indicates that the Sentinel SuperPro dongle does contain a PRN generator, producing outputs that appear random based on internal values. This suggests that the "streaming cipher generator" utilized by the Sentinel SuperPro may fulfill the criteria of a PRN generator, potentially extending this conclusion to other similar products. Therefore, a genuine dispute exists regarding whether the "ASIC cipher" and "microprocessor cipher" products possess a PRN generator.

Finally, Rainbow argues that its "ASIC cipher" and "microprocessor cipher" products do not conform to Claim 1 because they execute software prior to reading the first authorization code.

Rainbow's argument hinges on the assertion that security routines embedded in a protected software program are essential for its execution, particularly for reading the first authorization code. However, the Court clarified that Claim 1 requires the reading of this code before the execution of the protected "computer software," which is defined as a set of executable instructions and may reside within a larger program. The determination of infringement relies on whether the first authorization code is read from an external memory device before executing any instructions of the protected software. Rainbow’s failure to differentiate between the overall computer program and the protected software casts doubt on their claims regarding the execution sequence.

Regarding direct infringement under the doctrine of equivalents, Rainbow contends that their products do not infringe the '353 patent because they lack certain required claim elements, invoking the "all elements rule." To prove infringement, the plaintiff must demonstrate that every claim limitation is found in the accused product either literally or as a substantial equivalent. Mr. Pickholtz argues that Rainbow has not sufficiently addressed potential equivalents for the missing elements, placing the burden on him to show genuine issues of material fact. The Court noted that mere assertions of similarity are inadequate without supporting evidence.

Summary judgment of non-infringement is deemed appropriate for all "constant response" devices except the Unikey/S, as Mr. Pickholtz did not provide evidence for the presence of a PRN generator in these devices. However, a genuine issue of direct infringement exists for the Unikey/S by Rainbow, while summary judgment is also appropriate for all "software only" devices.

A hardware PRN generator is confirmed to exist in the devices, but there is a dispute regarding whether the "ASIC cipher" and "microprocessor cipher" devices include all claim elements, indicating potential direct infringement by Rainbow and its customers. Under 35 U.S.C. § 271(b), inducement to infringe requires the plaintiff to show that the defendant had specific intent to encourage infringement. Rainbow argues that Mr. Pickholtz must prove it intended for customers to infringe, asserting its reliance on counsel’s opinion that its products do not infringe. Citing *Manville Sales Corp. v. Paramount Systems, Inc.*, the court emphasizes that mere knowledge of potential infringement is insufficient; specific intent to encourage infringement must be established. Rainbow’s claim of good faith belief, based on an attorney's opinion, does not automatically grant it summary judgment on the inducement claim, as demonstrated in *Amersham Pharmacia Biotech, Inc. v. Perkin-Elmer Corp.*, which merely prevented the plaintiff's summary judgment motion, not granting the defendant judgment. Similar precedent in *Mentor H/S, Inc. v. Medical Device Alliance, Inc.* shows that an opinion letter does not shield a defendant from claims of willful infringement. Therefore, Rainbow's motion for summary judgment on inducement is denied. For contributory infringement under 35 U.S.C. § 271(c), Rainbow maintains that specific knowledge of its products infringing the patent is necessary for liability.

The non-infringement opinion obtained by Rainbow is argued to exempt it from liability for contributory infringement. Mr. Pickholtz asserts that the relevant knowledge pertains to understanding that customers' use of Rainbow's products constitutes infringement. Under 35 U.S.C. § 271(c), contributory infringement requires proof that the alleged infringer knew both that the combination was patented and that it constituted infringement, as established in Aro Mfg. Co. v. Convertible Top Replacement Co. Knowledge of the infringing activity and the relevant patent suffices for contributory infringement liability. Rainbow acknowledged awareness of the '353 patent upon receiving a demand letter, with circumstantial evidence suggesting it knew how its devices were used. Therefore, summary judgment dismissing contributory infringement based on this knowledge is not warranted.

Rainbow also claims its products qualify as "a staple article or commodity of commerce suitable for substantial noninfringing use." The functionality of the "ASIC cipher" and "microprocessor cipher" in a non-infringing mode is disputed by Mr. Pickholtz, who argues that the existence of non-infringing capabilities does not absolve liability unless such use is substantial. Case law outlines that "substantial" use is quantitatively assessed, with precedents indicating that a significant portion of non-infringing use (40-60%) can fulfill this criterion. The Supreme Court in Sony Corp. of America v. Universal Studios emphasized that substantial use must be common enough to be significant. The district court in Hoffmann-La Roche, Inc. v. Promega Corp. further clarified that qualitative significance is required for a use to be deemed "substantial," and denied a motion for summary judgment based on evidence that the products were primarily optimized for infringing use, rendering non-infringing uses commercially unviable. Similar conclusions were reached in Cordis Corp. v. Medtronic AVE, Inc., where non-infringing uses were determined to be insufficiently substantial despite indications of alternative uses.

In Anton/Bauer, Inc. v. PAG, Ltd., the court determined that "limited noninfringing use" of a product does not qualify it as a staple article of commerce. Mr. Pickholtz provided evidence showing that Rainbow views competitors' products generating a fixed response as inferior and easily compromised, contrasting with their own claims of "bulletproof security." This raises a material fact issue regarding the substantiality of any non-infringing use and the potential for contributory infringement.

Rainbow contends that a plaintiff cannot claim both direct infringement and indirect infringement based on the same act, citing several cases that support this position. However, since plaintiffs alleged direct infringement pertaining to product development and testing, and indirect infringement related to sales to customers, these claims derive from separate actions, making them not mutually exclusive.

Rainbow moved for partial summary judgment to limit Mr. Pickholtz's damages to a reasonable royalty, which both parties agreed upon, though there was a dispute over the language regarding enhancements like treble damages. The court clarified that Mr. Pickholtz remains entitled to seek these enhancements.

The court granted Rainbow's motion for summary judgment on non-infringement for several products while denying it for others, including direct infringement claims for certain products. Rainbow's motion regarding damages was granted, allowing Mr. Pickholtz to pursue available enhancements. The court emphasized that it is Rainbow's responsibility to prove the ownership of depicted products, as inferred from submitted photographs.