Complaints: RSA's motion to dismiss Cylink complaint

-- RSA's motion to dismiss the Cylink complaint ------------------------------ JAMES R. BUSSELLE (SBN 75980) THOMAS E. MOORE III (SBN 115107) MARY O'BYRNE, (SBN 121067) TOMLINSON, ZISKO, MOROSOLI & MASER 200 Page Mill Road, Second Floor Palo Alto, California 94306 Telephone: (415) 325-8666 Attorneys for Defendant RSA Data Security, Inc. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA CYLINK CORPORATION, Plaintiff, vs . RSA DATA SECURITY, INC., Defendant. CASE NO.: C 94 02332 CW NOTICE OF MOTION TO DISMISS UNDER RULE 12(b)(7) DATE: September 9, 1994 TIME: 10:30 a.m. BEFORE: Hon. Claudia Wilken TO THE PLAINTIFF AND ITS COUNSEL OF RECORD: PLEASE TAKE NOTICE that on September 9, 1994 at 10:30 a.m., or as soon thereafter as counsel may be heard by the above entitled Court, located at 450 Golden Gate Avenue, San Francisco, California, defendant RSA Data Security, Inc. will and hereby does move the Court to dismiss the action pursuant to Federal Rule of Civil Procedure 12(b)(7) for failure to join parties under Federal Rule of Civil Procedure 19. Such motion will be made on the grounds that Caro-Kann Corporation, Public Key Partners, the Massachusetts Institute of Technology and Stanford University are necessary parties to the action within the meaning of Rule l9(a). This motion is based on this Notice of Motion, the accompanying Memorandum of Points and Authorities, the Declaration of D. James Bidzos, all pleadings and papers on file in this action, and other such other matters as may be presented to the Court at the time of the hearing. Dated: July 25, 1994 TOMLINSON, ZISKO, MOROSOLI & MASER By Thomas E. Moore III Attorneys for Defendant RSA Data Security, Inc. -- Arguments supporting RSA's move for dismissal --------------------------- JAMES R. BUSSELLE (SBN 75980) THOMAS E. MOORE III (SBN 115107) MARY O'BYRNE, (SBN 121067) TOMLINSON, ZISKO, MOROSOLI & MASER 200 Page Mill Road, Second Floor Palo Alto, California 94306 Telephone: (415) 325-8666 Attorneys for Defendant RSA Data Security, Inc. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA CYLINK CORPORATION, Plaintiff, vs. RSA DATA SECURITY, INC., Defendant. CASE NO.: C 94 02332 CW MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS UNDER RULE 12(b)(7) DATE: September 9, 1994 TIME: 10:30 a.m. BEFORE: Hon. Claudia Wilken TABLE OF CONTENTS I. INTRODUCTION AND ISSUES PRESENTED II. STATEMENT OF FACTS III. ARGUMENT A. Rule 19 is Designed to Protect the Interests of Absent Parties Whose Rights May be Impaired If the Action were to go Forward Without them B. MIT and PKP are Necessary Parties Because They Each Hold Substantial Rights to the MIT Patent, Including the Right to Bring an Infringement Action Against Cylink C. CKC and Stanford are Necessary Parties Because Each has an Interest that Would be Impaired if the MIT Patent were Held Invalid, and Their Relationship to Cylink is Such that RSA Could Not Adequately Represent Their Interests IV. CONCLUSION TABLE OF AUTHORITIES CASES CP National Corp. v. Bonneville Power Admin., 928 F.2d 905 (9th Cir. 1991) Caldwell Manufacturing Co. v. Unique Balance Co.. Inc., 18 F.R.D. 258, 108 U.S.P.Q. 7 (S.D.N.Y. 1955) Channel Master Corp. v. JFD Electronics Corp., 260 F. Supp. 568, 152 U.S.P.Q. 687 (E.D.N.Y. 1967) Classic Golf Co. v. Karsten Manufacturing Co., 231 U.S.P.Q. 884 (N.D. Ill. 1986) Dentsply International Inc. v. Centrex. Inc., 553 F. Supp. 289, 220 U.S.P.Q. 948 (D.-Del. 1982) Diamond Scientific Co. v. Amico. Inc., 848 F.2d 1220 (Fed. Cir. 1988) Lear. Inc. v. Adkins, 395 U.S. 653 (1969) Messerschmitt-Boelkow-Blohm GmbH. v. Huqhes Aircraft Co., 483 F. Supp. 49, 208 U.S.P.Q. 643 (S.D.N.Y. 1979) Micro-Acoustics Corp. v, Bose Corp., 493 F. Supp. 356, 207 U.S.P.Q. 378 (S.D.N.Y. 1980) Shermoen v. United States. 982 F.2d 1312 (9th Cir. 1992) United Mine Workers of America v. Gibbs, 383 U.S. 715 (1966) Waterman v, MacKenzie, 138 U.S. 252 (1891) STATUTES AND RULES Federal Rule of Civil Procedure 12(b)(7) Federal Rule of Civil Procedure l9(a) Federal Rule of Civil Procedure l9(b) MISCELLANEOUS 6 Chisum, Patents, õ 21.03[4], pp. 21-300 21-301 (1993) 3A Moore, Moore's Federal Practice, 119.05[2], p. 19.78 (2d ed. 1993) 3A Moore, Moore's Federal Practice, 119.07-1, p. 19.90-1 (2d ed. 1993) 3A Moore, Moore's Federal Practice, 1 19.07[2.--1], p. 19.103 (2d ed. 1993) I. INTRODUCTION AND ISSUES PRESENTED This is a declaratory relief action to invalidate a patent that permits the coding or "encryption" of computer data transmissions. Prior to 1990, the plaintiff, Cylink Corporation ("Cylink") was in the data encryption market as a manufacturer of computer hardware, operating under a license to the so-called "Stanford Patents." The defendant, RSA Data Security, Inc. ("RSA"), was in the data encryption market as a software manufacturer, operating under a license to the so-called "MIT Patent." The MIT Patent is the subject of this invalidation action. In 1990, at Cylink's instigation, Cylink and RSA created complex inter- relationships between each other, Stanford University ("Stanford") and the Massachusetts Institute of Technology ("MIT") to exploit the licensing potential of both sets of patents. Two new entities were created: Caro-Kann Corporation ("CKC"), a wholly-owned subsidiary of Cylink; and Public Key Partners ("PKP"), a partnership between Cylink/CKC and RSA, whose sole assets consist of the licensing rights to both sets of patents. By filing this action, Cylink not only seeks to pull the thread that unravels these inter-relationships but also hopes to do so in the absence of PKP, CKC, MIT and Stanford. Because (i) PKP and MIT hold significant rights to the MIT Patent, including the right to bring infringement actions and (ii) the action stands to impair the interests of CKC and Stanford, the action must be dismissed under Federal Rule of Civil Procedure 12(b)(7), subject to the joinder of those parties as necessary parties under Rule l9(a).[1] II. STATEMENT OF FACTS RSA is a local company operating out of Redwood City, California. RSA develops, markets and distributes encryption software. Encryption software utilizes complex mathematical formulas or algorithms to create unbreakable codes for securing computer communications, such as data transmissions over telephone lines via modems, from eavesdropping. [2] RSA has been a pioneer in the field of developing encryption software and has worked in this field since 1982, when it was first formed. (Bidzos Decl. 11 2, 3). The founders of RSA were three scientists from MIT, Ronald L. Rivest, Adi Shamir, and Leonard M. Adleman (the letters "RSA" are the initials of those three men). Together, they invented an algorithm which makes it possible to secure data transmissions. This algorithm was patented on September 20, 1983 as U.S. Letter Patent No. 4,405,829 and entitled "Cryptographic Communications System and Method" (the "MIT Patent"). Rivest, Shamir and Adleman assigned the patent to MIT. MIT owned, and continues to own, the MIT Patent. (Bidzos Decl., 1 4) Rivest, Shamir and Adleman formed RSA, and MIT granted RSA an exclusive license to the MIT Patent. RSA has paid royalties to MIT ever since. (Bidzos Decl., 1 5) After an initial slow period, RSA grew to be successful. It developed and marketed an "end user" product called "MailSafe in 1986 and sold thousands of copies. It also developed a software tool kit which was first sold to Lotus Corporation in 1986 and has since been sold to many other companies who have acted as original equipment manufacturers or "OEM's." RSA also sold patent licenses for use of the MIT Patent to a modem company called Racal and also to Motorola and Digital Equipment. (Bidzos Decl., 1 6). During 1987 and 1988, representatives from Stanford began to claim that RSA's MIT Patent rights could not be used by RSA or anyone else without infringing patent rights owned by Stanford (the "Stanford Patents). This dispute was resolved when Stanford licensed rights to its patents to MIT, and MIT in turn passed on those rights to RSA. In exchange for those rights, Stanford received from MIT a portion of the royalty payments that RSA had been paying to MIT for RSA's use of the MIT Patent. (Bidzos Decl., 1 7) It was at this point that plaintiff Cylink appeared on the scene. Cylink is primarily a hardware manufacturer -- it builds computer chips that are used in the data encryption process and markets them to others for incorporation in hardware products eventually sold to the end user customers. Before Stanford agreed to license rights to the Stanford Patents to MIT, Cylink and only a very few other companies had license rights to the Stanford Patents. (Bidzos Decl., 1 8). Cylink was very concerned when it discovered that RSA had acquired rights to the Stanford Patents through MIT. On or about October 17, 1989, Cylink's Chief Executive Officer, Lew Morris ("Morris"), first approached RSA by calling Bidzos on the telephone. Morris threatened to sue RSA unless a deal could be reached by which Cylink would purchase RSA. From this inauspicious beginning, the discussions eventually lead to how RSA and Cylink might work together. (Bidzos Decl., 1 9) The parties' discussions culminated in an Agreement of Intent entered into on April 6, 1990. Under that Agreement, Cylink and RSA each agreed to give up the rights to license and sublicense their respective patent rights in the MIT and Stanford Patents and vest those rights in a new partnership, PKP, exclusively. (Bidzos Decl., 1 10, Ex. A). The two partners in PKP are RSA and CKC, a wholly-owned subsidiary of Cylink. The sole assets of PKP are the licensing rights to the MIT and Stanford Patents. [3] (Bidzos Decl., 1 11). As part of the formation of PKP, the royalty payments owed to Stanford and MIT were simplified. To accomplish this, RSA and Cylink entered into amendments to their respective license agreements with MIT and Stanford. Under the terms of those amendments, first, the direct license arrangement between Stanford and MIT was essentially nullified. Second, while RSA remained obligated to pay royalties to MIT, and Cylink/CKC remained obligated to pay royalties to Stanford, the royalties owed to each university were based on PKP's unsegregated revenues from both the Stanford and MIT Patents: RSA pays MIT a percentage of PKP's distributions to RSA, and Cylink/CKC pays Stanford a percentage of PKP's distributions to Cylink/CKC.4 (Bidzos Decl., 11 12, 13, Exs. B, C). The-amendment to the MIT Patent license governs the various parties' rights to sue for patent infringement of the MIT Patent. Under Section 8 of that amendment: (a) PKP may institute an infringement action and join RSA and MIT (costs borne by PKP); (b) PKP and MIT may jointly bring such an action and join RSA (costs shared by PKP and MIT); (c) PKP and RSA may jointly bring such an action and join MIT (costs shared by PKP and RSA); (d) MIT may institute such an action with PKP's consent; and (e) RSA may institute such an action and join PKP and MIT (costs borne by RSA). (Bidzos Decl., Ex. B, pp. 13-14). Footnotes: [1] Under Rule 12(b)(7), an objection to a plaintiff's failure to join a party under Rule 19 may be made by motion before pleading. 3A Moore, Moore's Federal Practice, 119-05[2]. p. 19.78 (2d ed. 1993). [2] To explain the function of RSA's software, RSA's President, D. James Bidzos ("Bidzos"), describes unprotected computer communications as the electronic equivalent of typewritten postcards -- such communications can be read by anybody, and no one can be sure who wrote them. RSA sells the equivalent of signatures, so that the writer can be verified, and the equivalent of envelopes, so the messages cannot be read except by those to whom they are addressed. (Bidzos Decl., 1 2). [3] RSA and Cylink did not part with all of their rights to their respective patents. RSA and Cylink retained their right to continue to conduct business as they had done previously. RSA continued to market encryption software, and Cylink continued to market hardware incorporating data encryption technology. (Bidzos Decl., 1 11). [4] RSA, PKP, Cylink, CKC, MIT and Stanford are the principal parties with a vested interest in the validity of the MIT Patent because of the royalty revenue that such Patent generates for them. In addition, two other absent parties, David P. Newman, a Washington D.C. patent lawyer, and Prof. Martin E. Hellman, a Stanford professor, also receive royalties based on the MIT Patent and also have a vested interest in the validity of the MIT Patent. Because of uncertainty about the exact arrangement regarding their receipt of royalties, RSA is not seeking their joinder at this time. (Bidzos Decl., 1 14). III. ARGUMENT A. Rule 19 is Designed to Protect the Interests of Absent Parties Whose Riqhts May be Impaired If the Action were to Go Forward Without them. Federal Rule of Civil Procedure 19(a) authorizes joinder of "necessary" parties to the action. [5] Rule l9(a) states in pertinent part: (a) Persons to be Joined if Feasible. A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the persons ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations . . . . Thus, Rule 19 is designed to protect the interests of absent parties, as well as those already before the court, from multiple litigation, inconsistent judicial determinations or the impairment of interests or rights. CP National Corp. v. Bonneville Power Admin., 928 F.2d 90S, 911 (9th Cir. 1991). A persons status as a necessary party is not judged by any precise formula, but depends on the context of the particular litigation. CP National, 928 F.2d at 912. However, "Under the Rules, the impulse is toward entertaining the broadest possible scope of action consistent with fairness to the parties; joinder of claims, parties and remedies is strongly encouraged." United Mine Workers of America v. Gibbs, 383 U.S. 715, 724 (1966). Necessary-parties have therefore been described as: [T]hose `[p]ersons having an interest in the controversy, and who ought to be made parties, in order that the court may act on that rule which requires it to decide on, and finally determine the entire controversy, and do complete justice, by adjusting all the rights involved in it.' CP National, 928 F.2d at 912 (quoting Shields v. Barrow, 58 U.S. 130, 139 (1855)). The context of this particular litigation requires joinder of PKP, CKC, MIT and Stanford as defendants. PKP and MIT are holders of substantial rights to the MIT Patent, including the right to bring infringement actions. CKC and Stanford receive significant revenues from the MIT Patent which would be lost if the patent were to be invalidated. Moreover, CKC and Stanford's relationship to Cylink is unique to them and cannot be adequately represented by RSA. B. MIT and PKP are Necessary Parties Because They Each Hold Substantial Riqhts to the MIT Patent. Including the Right to Bring an Infringement Action Against Cylink. MIT and PKP are necessary parties. MIT is the patent owner. MIT, PKP and RSA have substantial rights to the MIT Patent, including the significant right to bring infringement actions, subject to the other parties' right to join and share the costs of suit. "Generally, the patent owner is an indispensable party to a declaratory judgment action." Classic Golf Co. v. Karsten Manufacturing Co., 231 U.S.P.Q. 884, 886 (N.D. Ill. 1986). The issue becomes more complex, however, when the patent owner transfers some kind of interest to a third party, who is then sued to invalidate the patent. Dentsply International Inc. v. Centrex. Inc., 553 F. Supp. 289, 293-4, 220 U.S.P.Q. 948 (D. Del. 1982). At one extreme, the interest that the patent owner transferred is deemed to be a license, and the patent owner is deemed to be a necessary party to the invalidation action. Id. At the other extreme, the interest transferred is deemed to be an assignment, and the patent holder is not considered to be a necessary party. Dentsply, 553 F. Supp. at 294; see generally Waterman v. MacKenzie, 138 U.S. 252, 255 (1891). The rationale of the latter situation is that the patent owner suffers no prejudice from a judgment of invalidity in its absence, if the patent owner has entrusted the assignee with the right to protect its interests by suing for infringement. Messerschmitt-BoelRow-Blohm GmbH. v. Hughes Aircraft Co., 483 P. Supp. 49, 52, 208 U.S.P.Q. 643 (S.D.N.Y. 1979). As the Dentsply court acknowledged, many cases, such as the present one, fall between the two extremes. DentsDly, 553 F. Supp. at 294. The Dentsdlv court added, however, that the court's task is simplified if the agreement between the parties allocates the right to sue and be sued on the patent. Id. The allocation of the right to sue for infringement under the parties' agreement is the "true test" that determines the identities of the necessary parties. Channel Master Corws. v. CFD Electronics CorD., 260 F. Supp. 568, 572, 152 U.S.P.Q. 687 (E.D.N.Y.-1967)(action dismissed for lack of an indispensable party because defendant licensee could not bring suit for infringement until after the absent patent owner had declined to do so); Caldwell Manufacturing Co. v. Unique Balance Co.. Inc., 18 F.R.D. 258, 263-4, 108 U.S.P.Q. 7 (S.D.N.Y. 1955); 6 Chisum, Patents, õ 21.03[4], pp. 21-300 - 21-301 (1993)("Thus, a person is a proper party defendant if but only if that person had standing to sue the plaintiff for infringement"). In this case, none of the parties had an independent, unconditional right to instigate litigation without offering the others the opportunity to join and share the expenses of litigation. PKP, RSA and MIT each retained the right to join and take part. Because of these mutual rights, each is a necessary party in this action to invalidate the MIT Patent. [6] C. CKC and Stanford are Necessary Parties Because Each has an Interest that Would be Impaired if the MIT Patent were Held Invalid. and Their Relationship; to Cylink is Such that RSA Could Not Adequately represent Their Interests. CKC and Stanford are also necessary parties. [7] CKC and Stanford admittedly lack standing to bring a patent infringement action against Cylink. Nevertheless, both have important interests that would be impaired by this action, and RSA could not adequately represent those interests. In addition, as a practical matter, the inter-relationship of the various parties in this case counsels in favor of CKC's and Stanford's joinder. The issue of whether a person is a necessary party under Rule l9(a) depends first, on whether such person has an interest that is impaired by the suit and second, on whether such impairment may be minimized if the absent party is adequately represented in the suit. Shermoen v. United States, 982 F.2d 1312, 1318 (9th Cir. 1992). In determining whether a persons interest is impaired, it is not necessary that the judgment be binding on that person in a technical sense; it is enough that as a practical matter that person's rights will be affected. 3A Moore, Moore's Federal Practice, 1 19.07[2.-- 1], p. 19.103. CKC and Stanford's rights would be impaired if this action were to go forward in their absence. Both CKC and Stanford are the beneficiaries Cylink's entry into the Agreement of Intent and transfer of the Stanford Patents to PKP. (Bidzos Decl., Ex. A). Both CKC and Stanford derive significant royalty income from PKP's rights to the MIT Patent. Both CKC and Stanford would lose those royalties if Cylink prevails and invalidates the MIT Patent. RSA cannot adequately represent the interests of CKC and Stanford. CKC and Stanford's relationship to Cylink is unique. Implicit in Cylink's formation of PKP to exploit the MIT Patent were Cylink's representations to CKC and Stanford that the MIT Patent was-valid and that Cylink would protect, not defeat, its validity. Stanford in particular relied to its detriment on Cylink's formation of PKP by waiving its independent right to royalties directly from MIT. (Bidzos Decl., 11 7, 13). Thus, Stanford and CKC may have their own unique estoppel defense to the present action.[8] Finally, as a practical matter, the inter-relationships among the parties make this more than a simple patent case. If this case is to be resolved in a reasonable length of time, then all the parties and all the issues should be before this Court. Because of this, RSA urges the Court to err in favor of joinder with respect to CKC and Stanford. Footnotes: [5] Rule 19 distinguishes between necessary" parties under subdivision (a) and "indispensable" parties under subdivision (b). The court must first determine whether an absent person is a "person to be joined if feasible" pursuant to subdivision (a). If joinder is feasible, a ruling as to the person's indispensability under subdivision (b) is not required, since subdivision (b) comes into play only where joinder is not feasible. 3A Moore, Moore's Federal Practice, 119.07-1, p. 19.90-1 (2d ed. 1993). RSA is not aware of any reason why joinder of CKC, PKP, MIT and Stanford would not be feasible. It is therefore unnecessary to analyze whether any of those parties are indispensable under Rule l9(b). [6] This express allocation of the right to sue for infringement distinguishes this case from cases such as Micro-Acoustics Corp. v. Bose CorD., 493 F. Supp. 356, 207 U.S.P.Q. 378 (S.D.N.Y. 1980), in which the patent owner retained no right, conditional or otherwise, to institute an action for infringement. [7] RSA intends through its answer and counter-claim to assert that CKC and Cylink are alter-egos of each other. RSA is not, by this motion, asserting that Cylink is under any obligation to sue itself. This motion only requires Cylink to be consistent. If Cylink believes that CKC is an independent party, then Cylink should join CKC as a party defendant. If Cylink concedes that CKC is not an independent party, then RSA is willing to accept such concession and drop its request that CKC be joined. [8] The use of estoppel as a defense to an action to invalidate a patent is complex and involves a balancing between private contractual rights and the public interest in freeing the use of ideas from the monopoly of invalid patents. Lear. Inc. v. Adkins, 395 U.S. 653 (1969)(invalidating "licensee estoppel"); Diamond Scientific Co. v. Amico, Inc., 848 F.2d 1220 (Fed. Cir. 1988)(upholding "assignor estoppel"). Stanford and CKC's potential estoppel defense does not fall neatly within the doctrines examined in either Lear or Diamond Scientific. The legitimacy of that defense cannot be properly raised and considered unless Stanford and CKC are made party defendants. IV. CONCLUSION Joinder of parties is strongly encouraged. Joinder of the absent parties in this case i9 feasible. MIT and PKP should be joined because of their substantial rights in the MIT Patent. CKC and Stanford should be joined because of the potential impairment of their rights and the inability of RSA to protect those rights adequately. For these reasons and those set forth above, RSA respectfully urges the Court to grant this motion. Dated: July 25, 1994 TOMLINSON, ZISKO, MOROSOLI & MASER Attorneys for Defendant RSA Data Security, Inc. PROOF OF SERVICE CYLINK CORPORATION V. RSA DATA SECURITY, INC. UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF CALIFORNIA CASE NO: C 94 02332 CW STATE OF CALIFORNIA, COUNTY OF SANTA CLARA I am employed in the County of Santa Clara, State of California. I am over the age of 18 and not a party to the within action. My business address is 200 Page Mill Road, Second Floor, Palo Alto, California 94306. On July 25, 1994, I served the following documents: MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS UNDER Rule 12(b)(7) to the following: Liza X. Toth, Esq. Jon Micha-lson, Esq. Hopkins & Carley 150 klmaden Boulevard, 15th Fl. San Jose, California 95113-2089 [X] BY MAIL [ ] I deposited such envelope in the mail at Palo Alto, California. The envelope was mailed with postage thereon fully prepaid. [X] As follows: I am readily familiar with the firm's practice of collection and processing correspondence for mailing. Under that practice it would be deposited with the U.S. postal service on that same day with postage thereon fully prepaid at Palo Alto, California in the ordinary course of business. I am aware that on motion of the party served, service is presumed invalid if postal cancellation date or postage meter date is more than one day after date of deposit for mailing in affidavit. Executed on July 25, 1994, at Palo Alto, California. [X] STATE: I declare under penalty of perjury under the laws of the State of California that the above is true and correct. [ ] FEDERAL: I declare that I am employed in the office of a member of the bar of this Court at whose direction the service was made. Sharon L. Sotelo -- End ---------------------------------------------------------------------