Opinion
Civil Action No. 2:06-2022-CWH.
December 27, 2006
ORDER
This matter is before the Court on the defendant's partial motion to dismiss three counts alleging the non-infringement of patents owned by the defendant from the complaint for the failure to present a justiciable controversy, motion to dismiss the entire action pursuant to Rule 13(a) of the Federal Rules of Civil Procedure, and motion to dismiss the entire action pursuant to the first-filed rule. In the alternative, the defendant moves, pursuant to 28 U.S.C. § 1404(a), to transfer venue to the United States District Court for the Northern District of California.
Facts
The plaintiff is a South Carolina corporation that operates in Hanahan, South Carolina and develops, manufactures, and sells fishing lures to other lure manufacturers. The defendant is a California corporation with its principal place of business in San Francisco, California. The defendant invents and patents certain chemical composites.
The plaintiff wanted to develop a soft gel fishing lure that was stronger, softer, and more buoyant than existing plastic lures. In 2001, Mike Shelton ("Shelton"), the plaintiff's vice-president of marketing and sales, was advised that the defendant purported to own patent rights to soft gels of the type that Shelton believed suitable for the new type of fishing lures. As a result, Shelton contacted the defendant's principal John Chen ("Chen").
Shelton provided Chen with the goals the plaintiff wanted the new fishing lure to accomplish. According to the plaintiff, Chen represented to Shelton that the defendant owned patents that claimed a soft gel that would accomplish those goals. Consequently, on July 24, 2001, the plaintiff and defendant executed a licensing agreement. The licensing agreement listed the soft gel compound intended for the development of the soft gel fishing lures, referred to as SEEPS gel, and the four patents that claimed the soft gel compound. Licensing Agreement, Schedules A and B. The defendant agreed to license the patent rights to the plaintiff for the production of fishing lures. Licensing Agreement, §§ 1.3 and 2.1(a). The licensing agreement obligated the plaintiff to pay the defendant minimum royalties for the license and running royalties based upon revenue generated by the sale of the soft gel fishing lures. Licensing Agreement, §§ 4.2 and 4.6(a).
The parties also executed a confidentiality agreement obligating each party to maintain the confidentiality of disclosed proprietary information. Confidentiality Agreement, page 1, effective date April 26, 2001.
After executing the licensing agreement, the plaintiff initiated efforts to manufacture the soft gel fishing lures. The plaintiff began selling the new lures in 2002. However, customers complained that heat caused the lures to deform, and the plaintiff pulled the lures off of the market. To correct the heat deformation problem, the plaintiff sought Chen's assistance and provided him with information the plaintiff alleges are its protected trade secrets.
In late 2002, the plaintiff began shipping the revised lures. However, the revised lures encountered problems of tacking, and customers complained that the lures were too soft. Consequently, the plaintiff stopped producing the revised lures.
In 2003, Chen offered to license to the plaintiff additional patent rights for soft gel composites that he believed would overcome the problems with the lures. However, the plaintiff believed that the new patent rights should have been licensed under the existing licensing agreement. In addition, the plaintiff complained that the defendant allowed other lure manufacturers to infringe the soft gel patents that were licensed exclusively to the plaintiff.
Also in 2003, Chen applied for four patents claiming soft gel fishing lures of the type the plaintiff was attempting to develop (hereinafter referred to as the "fishing lure patents"). The plaintiff alleges that Chen disclosed the plaintiff's trade secrets to complete the patent applications. The defendant argues that the information disclosed was known throughout the industry and is not a trade secret. In 2004, the plaintiff ceased making royalty payments.
The Patent and Trademark Office has approved two of the fishing lure patents. The two patents approved are patent application No. 10/199,364 which is now identified as US Patent No. 6,794,440 issued on September 21, 2004 and Patent Application No. 10/199,363 which is now identified as U.S. Patent No. 7,108,873 issued on September 19, 2006. The plaintiff alleges that the Patent and Trademark Office has approved the other two fishing lure patent applications, 10/199,361 and 10/199,362, and should issue patents soon.
The plaintiff did not abandon the development of the soft gel fishing lures, and on May 5, 2005, it completed the second revised soft gel fishing lures. The second revision, according to the plaintiff, does not use any technology claimed in patents owned by the defendant.
On April 7, 2006, the defendant filed a complaint in the United States District Court for the Northern District of California alleging that the plaintiff breached the licensing agreement by failing to pay royalties. The defendant also alleged that the plaintiff breached the implied covenant of good faith and fair dealing by claiming that the plaintiff owed no royalties. In the California action, the plaintiff moved to dismiss for the lack of personal jurisdiction. The California Court denied the motion.
On July 13, 2006, the plaintiff commenced this action. The plaintiff raises twenty-one claims. The claims can be classified as claims arising out of the formation and performance of the licensing agreement ("licensing agreement claims") and claims arising out of the defendant's disclosure of information alleged to be the plaintiff's trade secrets ("trade secret claims"). The licensing agreement claims consist of: (1) state law contract claims alleging that the defendant breached the licensing agreement, (2) fraud claims based on the defendant's alleged misrepresentation that it owned patent rights for soft gel compounds suitable for the soft gel fishing lures, and (3) claims that the plaintiff has not infringed the defendant's soft gel patents. The trade secret claims consist of: (1) state statutory and common law claims alleging that the defendant misappropriated the plaintiff's trade secrets, and (2) claims that the plaintiff has not infringed the defendant's fishing lure patents.
On August 10, 2006, the plaintiff filed an answer and counter-complaint in the California action. The counter-complaint raised the same licensing agreement claims raised in this action. Relying on the same factual allegations used to support the trade secret claims in this action, the counter-complaint also raised a claim that the defendant breached the implied covenant of good faith and fair dealing.
On September 1, 2006, the plaintiff filed a motion in the California action to transfer venue to South Carolina. On October 6, 2006, the California court denied the motion. The plaintiff then amended its counter-complaint and removed the allegations that the defendant misappropriated its trade secrets and the claim that the defendant breached the implied covenant of good faith and fair dealing.
I. 28 U.S.C. § 1404(a).
Section 1404(a) provides that "for the convenience of the parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." To decide a motion under section 1404, a court must weigh and balance a number of case specific factors relating to the interests of justice and convenience of the parties and witnesses to determine whether the factors balance in favor of transferring the action to another forum. Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 29-30 (1988).
The Court has considered the following factors:
A. Factors relating to the interests of justice:
1. Efficient judicial administration
The defendant argues that this case and the California case are similar and sound judicial administration dictates transferring the action to California. The plaintiff contends that the licensing agreement claims are the focus in the California case and the trade secret claims are the focus in this case.
The trade secret claims involve issues of whether the information disclosed in the patent applications was protected and whether the plaintiff's fishing lures infringe the resulting patents. The Court agrees that the legal and factual issues presented by the trade secret claims are not identical to those presented by the licensing agreement claims. However, the plaintiff does not dispute that the trade secret and licensing agreement claims arise out of the same nucleus of operative facts or that the claims share some commons issues of fact and law. Trying a controversy piecemeal or trying particular issues without settling the entire controversy makes no sense as a matter of judicial economy. See Mitcheson v. Harris, 955 F.2d 235, 239 (4th Cir. 1992) (deciding whether to dismiss declaratory judgment action).
For example, a common issue of fact between the licensing agreement and trade secret claims are how the defendant acquired the allegedly protected information, and common legal issues relate to the amount and existence of damages.
The California court has denied the plaintiff's motion to transfer venue to South Carolina, and it will proceed with the claims the parties have raised in the California action. The California court has also held that the claims before it and the claims raised in this action can be consolidated. This Court may only proceed with the trade secret claims. Therefore, the California court is the only court that will hear all of the claims arising out of this controversy. Transferring the action prevents the piecemeal resolution of the issues arising out of the controversy between the parties.
In addition, the parties' discovery disclosures reveal that the witnesses who will testify regarding the trade secret claims are the same witnesses who will testify regarding the licensing agreement claims. Transferring the action prevents two courts from hearing the same evidence. See Samsung Electronics Co. v. Rambus, Inc., 386 F.Supp.2d 708, 721-722 (E.D. Va. 2005) (one court litigating related claims facilitates efficient pre-trial proceedings and discovery). The weight of judicial efficiency balances in favor of transferring the action to California.
2. Choice of forum
A plaintiff's choice in venue is normally entitled to great weight, and the defendant bears a heavy burden of showing that the balance of interests favors transferring an action. Arabian v. Bowen, 966 F.2d 1441, * 1 (4th Cir. 1992) (unpublished disposition) (citing Supreme Court decisions Piper Aircraft Co. v. Reyno, 454 U.S. 235, 255 (1981) and Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947)). However, the Fourth Circuit Court of Appeals has approved of the first-filed rule. Ellicott Machine Corp. v. Modern Welding Co., 502 F.2d 178, 180 n. 2 (4th Cir. 1974); see also International Telephone and Telegraph Corp. v. General Telephone Electronics Corp., 527 F.2d 1162, 1164 (4th Cir. 1975) (judicial efficiency and economy suggest transferring action to forum in which claims were first-filed). The first-filed rule is a principle of judicial administration which provides that "the first suit should have priority, `absent the showing of balance of convenience in favor of the second action.'" Ellicott Machine Corp., 502 F.2d at 180 n. 2.
The defendant argues that the first-filed rule requires the Court to give its choice of forum priority over the plaintiff's choice of forum. The plaintiff contends that the first-filed rule is inapplicable in this case, or, if it is applicable, the rule favors retaining the action in South Carolina because the plaintiff first-filed all of the claims arising out of the controversy in South Carolina.
However, "whether the issues are to be tried in one place or the other is less important than that they are tried in a single proceeding from which a useful decree may emerge." Hammett v. Warner Brothers Pictures, Inc., 176 F.2d 145, 151 (2nd Cir. 1949); see also International Telephone and Telegraph Corp., 527 F.2d at 1164 ("[j]udicial efficiency and economy suggest a transfer so that, if a violation of the antitrust laws is found, all appropriate relief may be granted in one action."). The California court will hear most of the claims arising out of the facts in this case, and it has held that the claims raised in this action can be consolidated with the claims raised in the California action. The California court can issue a single decree resolving all of the issues between the parties. Consequently, the application of the first-filed rule in this case achieves the purpose underlying the rule. The first-filed rule provides priority to the California action. The weight of the preference for the defendant's choice of forum balances in favor of transferring the action to California.
In addition, the first-filed rule shifts the burden of persuasion to a plaintiff to demonstrate that the weight of the factors relating to the convenience of the witnesses and parties balances in favor of litigating the action in the second forum. See Ellicott Machine Corp., 502 F.2d at 180 (indicating that a party must demonstrate a balance of convenience in favor of the second filed action to overcome the preference for the forum of the first-filed suit). Therefore, the plaintiff must demonstrate that the weight of the convenience of the parties and witnesses overcomes the weight of the interests of justice factors balancing in favor of transferring the action to California.
3. South Carolina's interests in adjudicating the action
South Carolina and California have interests in resolving the disputes arising between the parties. Therefore, the weight of this factor is neutral.
4. Backlog of cases
The plaintiff argues that cases in the District of South Carolina proceed to trial faster than cases do in the Northern District of California. However, the Court agrees with the California court's assessment that the difference in case backlogs of each district is not sufficient to balance this factor against transferring the action to California.
B. Factors relating to the convenience of the parties and witnesses
1. Convenience of the witnesses
The plaintiffs argue that the convenience of the witnesses favor litigating the action in South Carolina. The plaintiff presents a total of twenty-four witness. Fourteen of the twenty-four witnesses are South Carolina residents. Seven of the fourteen South Carolina resident witnesses are the plaintiff's employees, and the Court gives these witnesses less consideration because the plaintiff can compel their appearance at a trial in California. 15 Wright-Miller-Cooper, § 3851, p. 423 (2d. Ed. 1986). The remaining seven of fourteen South Carolina resident witnesses are not the plaintiff's employees. The Court agrees with the California court that these witnesses' live testimony at trial is more likely in South Carolina than in California.
However, the California case will proceed, and litigating a duplicate action in this Court will require the witnesses to testify in two forums reducing the likelihood that the South Carolina resident witnesses will appear live in the California court and requiring some witnesses to appear for two trials. South Carolina is the more convenient forum, but the Court reduces the weight of this factor because two trials add an additional burden on the witnesses.
2. Costs of obtaining witnesses
The Court agrees with the California court that the cost of transporting witnesses to South Carolina is less expensive than transporting witnesses to California. However, if the Court retains the action in South Carolina, then the witnesses may have to appear in two forums. Therefore, the weight of this factor is neutral.
3. Location of the evidence
The plaintiff claims that it may produce manufacturing equipment currently located in South Carolina. Assuming that a view of the plaintiff's production equipment is necessary, the Court believes that the parties will arrive at a practical solution of viewing the equipment that does not involve transporting it. Therefore, the Court agrees with the California court that the weight of this factor is neutral.
C. Conclusion
The Court holds that the convenience to the witnesses gained by litigating this action in South Carolina is not sufficient to overcome the weight of the interests of justice factors balancing in favor of transferring the action to California.
The Court independently arrived at this holding. However, the holding is consistent with the California court's holding that the convenience gained by litigating the action in South Carolina was insufficient to overcome the weight of the interests of justice factors balancing in favor of retaining the action in California. Although the California court's decision regarding venue is not binding, a district court should respect a coordinate district court's interlocutory decision. Ellicott Machine Corp., 502 F.2d at 182.
Accordingly, the Court transfers this action, pursuant to section 1404(a), to the United States District Court for the Northern District of California. To prevent the piecemeal resolution of the issues in this case, the Court will not decide the defendant's motion to dismiss the plaintiff's non-infringement claims (Counts 17, 18, and 19).
The Court determines that the case should be transferred pursuant to section 1404(a), and it has not considered whether it should dismiss the action pursuant to the first-filed rule or Rule 13(a) of the Federal Rules of Civil Procedure.