United States District Court, N.D. Illinois
March 30, 2004.
DAVID H. SITRICK, Plaintiff,
FREEHAND SYSTEMS, INC., Defendant
The opinion of the court was delivered by: RONALD GUZMAN, District Judge
MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiff David H. Sitrick's Motion for Leave to
Amend the Complaint to Add Theodore L. Schroeder as a Defendant [doc. no.
41-1]. For the reasons set forth below, Plaintiffs motion is granted.
Plaintiff filed this patent infringement suit against Defendant
FreeHand Systems, Inc. ("FreeHand") on March 5, 2002. The complaint
alleges that electronic music display systems sold by FreeHand infringe
two of Sitrick's patents that cover systems for electronically displaying
music scores. FreeHand moved to dismiss for lack of `personal
jurisdiction on June 6, 2002, and the Court allowed Sitrick to conduct
discovery on the issue of jurisdiction alone.*fn1 The motion to dismiss
was denied on October 29, 2002, On November 12, 2002, FreeHand answered
the complaint and moved
to transfer the case to the Northern District of California.
FreeHand's motion to transfer venue was denied on March 24, 2003,
The parties engaged in settlement discussions in early to mid-2003, and
they began the process of merits discovery al around the same time. Due
to various disputes, the merits of which the Court need not decide here,
FreeHand did not begin to produce documents related to discovery on the
merits until June 2003.
On August 12, 2003, one day before the close of discovery, Sitrick took
the deposition of Theodore Schroeder, whom FreeHand had designated as its
corporate representative pursuant to Federal Rule of Civil Procedure
30(b)(6), Schroeder was Freehand's Vice President of Engineering and a
member of its board of directors. The following day, Sitrick took the
deposition of Kim Lorz, Freehand's Chief Executive Officer.
According to Sitrick, he discovered in the course of these two
depositions that Schroeder exerted substantial control over FreeHand; he
was a majority owner of FreeHand and was essentially the only source of
FreeHand's funding; after he was informed about the Sitrick patents and
FreeHand's alleged infringement thereof, Schroeder determined that
FreeHand's systems were not infringing and/or that Sitrick's patent
claims would he invalid based on prior art; he was responsible for the
development and production of the hardware and software used in the
accused systems; and he was in charge of the development of the user's
guide for the systems. In addition, Sitrick claims to have learned that
Lorz did not have nearly as much control over FreeHand as Schroeder did.
Sitrick now seeks to amend the complaint to add Schroeder as a
defendant in the case, alleging that he induced FreeHand to commit
infringement, in violation of 35 U.S.C. § 271 (b), which provides
that: "[W]hoever actively induces infringement of a patent shall be
liable as an infringer,"
For procedural issues in a patent case that are not unique to patent
law, such as a motion to amend, courts are directed to apply the law of
the regional circuit. See Datascope Corp, v. SMEC, Inc.,
962 F.2d 1043, 1045 (Fed. Cir. 1992), To the extent that analysis of the
motion involves substantive patent law, however, the law of the Federal
Circuit controls. See In re Spalding Sports Worldwide, Inc.,
203 F.3d 800, 803 (Fed. Cir. 2000).
Federal Rule of Civil Procedure ("Rule") 15(a) provides that leave to
amend a pleading "shall be freely given when justice so requires, "*fn2
Fed.R.Civ.P. 15(a); see Foman v. Davis, 371 U.S. 178, 182
(1962) ("If the underlying facts or circumstances relied upon by a
plaintiff may be a proper subject of relief, he ought to be afforded an
opportunity to test his claim on the merits."). Whether to grant a motion
to amend is within the discretion of the trial court, Foman, 371
U.S. at 182, and the Seventh Circuit "has adopted a liberal policy
respecting amendments to pleadings so that cases may be decided on the
merits and not on the basis of technicalities." Stern v. U.S. Gypsum,
Inc., 547 F.2d 1329, 1334 (7th Cir. 1977) (citations omitted);
see also Nebraska v. Wyoming, 515 U.S. 1, 8 (1995) (noting "the
solicitude for liberal amendment of pleadings animating" Rule 15(a)).
Courts are instructed that leave to amend should be "freely given"
under Rule 15(a) "[i]n the absence of any apparent or declared reason
such as undue delay, bad faith or dilatory motive on
the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by
virtue of allowance of the amendment, futility of amendment, etc."
Foman, 371 U.S. at 182; see Textor v. Bd. of Regents of N.
III. Univ., 711 F.2d 1387, 1391 (7th Cir. 1983). Undue prejudice
"is the most important factor in determining whether to allow an
amendment to a complaint." Ameritech Mobile. Communications, Inc. v.
Computer Sys. Solutions, Inc. (In re Ameritech Corp.),
188 F.R.D. 280, 283 (N.D. Ill. 1999) (citing Zenith Radio Corp. v. Hazeltine
Research, Inc., 401 U.S. 321, 330-31 (1971)); see also Tragarz
v. Keene Corp., 980 F.2d 411, 432 (7th Cir. 1992) ("[D]elay is an
insufficient basis for denying a motion to amend unless this delay
results in undue prejudice to the opposing party.").
Freehand argues Sitrick's motion for leave to amend should be denied
because it was not timely filed, Freehand will be prejudiced if the
complaint is amended, and the amendment is fufile,
I. UNDUE DELAY
Sitrick contends that it was delayed in filing the motion to amend
because it was prevented from knowing the facts underlying Schroeder's
alleged personal liability until the end of discovery due to FreeHand's
dilatory discovery tactics. FreeHand responds that Sitrick knew or should
have known about Schroeder's involvement with FreeHand well before the
end of merits discovery. See In re Ameritech, 188 F.R.D. at 284
("Where the party seeking an untimely amendment knows or should have
known of the facts upon which the proposed amendment is based, but fails
to assert them in a timely fashion, the amendment will be denied.").
First, Freehand states that Sitrick knew FreeHand was a small start-up
company and that Sitrick could have learned Schroeder was a board member
because the information was posted on
FreeHand's website. Second, during discovery on the motion to
dismiss conducted in August 2002, Sitrick could have inquired further to
elicit facts relating to FreeHand's investors and Schroeder's involvement
with the company, Furthermore, according to FreeHand, Sitrick knew of
Schroeder's existence during jurisdictional discovery because he inquired
in a deposition whether Schroeder had attended a meeting in Chicago.
Finally, FreeHand states that Sitrick wrongfully waited to file the
present motion until over three months after the close of discovery.
FreeHand argues that Sitrick strategically waited to file this motion
until after FreeHand's opening Markman brief in an effort to
discredit Schroeder, who had offered a declaration in support of
FreeHand's arguments are unavailing. First, even if Sitrick had
knowledge of Schroeder's status as a board member or investor in
FreeHand, those facts alone would not have been sufficient to justify a
claim for personal liability under Section 271(b), because "`it must be
established that the defendant possessed specific intent to encourage
another's infringement and not merely that the defendant had knowledge of
the acts alleged to constitute infringement,'" See Ferguson
Beauregard/Logic Controls, Div. of Dover Res., Inc. v. Mega Sys.,
LLC, 350 F.3d 1327, 1342 (Fed. Cir. 2003) (quoting Manville
Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544, 553 (Fed. Cir.
1990)); Hoover Group, Inc. v. Custom Metalcraft, Inc.,
84 F.3d 1408, 1412 (Fed. Cir. 1996) (holding that personal liability for
inducement "must be supported by personal culpability").
Second, Sitrick could not reasonably have discovered facts relating to
Schroeder's personal liability during the August 2002 depositions. This
Court granted Sitrick leave to conduct discovery limited to the issue of
personal jurisdiction alone. Indeed, when Shriek's questions ventured
away from the issue of jurisdiction, FreeHand's attorney objected and/or
directed his client not to answer.
For example, FreeHand's attorney stated during the deposition of
Michael Hamilton, who was apparently the CEO of FreeHand al the time:
[T]he issue that has been
raised . . . is . . . whether FreeHand is a
fledgling company. And there's a disagreement
between counsel as to how far [Sitrick's attorney]
is allowed to explore that issue. My concern is
that this is a very marginally related issue to the
issue of jurisdiction. . . . Whether or not
[Sitrick's attorney] is allowed to explore the
sources and amounts of funding is one that I am
concerned that we are . . . crossing the line
between what the court is allowing.
(Hamilton Dep., Pl.'s Reply, Ex. G at 11.)
When Sitrick's attorney offered to hold the information on an
"attorneys' eyes only" basis, FreeHand's attorney responded: "I'm just
going to instruct him not to answer right now and you can circle around
it as much as you want, but the amount of money that they have received
from its equity [investor] is not relevant. You're not entitled to it.
That's our position." (Id. at 13.) FreeHand's attorney also
instructed the other jurisdictional deponent, Lorz, not to answer similar
lines of questioning. (See Lorz Dep., Pl.'s Reply, Ex. H at
While FreeHand's objections may have been proper under the
circumstances, it is at the very least disingenuous for FreeHand now to
argue that Sitrick has known "[s]ince the inception of this litigation"
that FreeHand was a "relatively small," "fledgling, privately held
start-up company," and further to fault Sitrick for not inquiring into
the merits of his substantive claims at the jurisdictional depositions.
Moreover, even if FreeHand were correct that the Facts regarding
Schroeder's involvement were already known to Sitrick, that argument is
"something of a double-edged sword." Serfecz v. Jewel Food Stores,
Inc., No. 92 C 4171, 1997 WL 543116, at *4 (N.D. Ill. Sept. 2,
1997). Because those facts were also known to FreeHand, "the proposed
amendment should hardly catch
[Freehand] by surprise, and "`[w]here the facts on which a
previously unasserted claim is based are all known or available to all
parties, no prejudice exists,'" Id. (citation omitted).
Similarly, the Federal Circuit held there was no prejudice in the context
of Rule 15(c)'s "relation back" provision where the identity of interests
of the corporate and proposed individual defendant was "virtually
complete" such that the individual should have been aware joinder was a
possibility, and where the individual defendant conceived and developed
the infringing product. Fromson v. Citiplate, Inc.,
886 F.2d 1300, 1304 (Fed. Cir. 1989),
Third, FreeHand provides no support for its contention that three
months is per se too long to wait to file an amended complaint.
Of course, "when extreme, delay itself may be considered prejudicial,"
Tamari v. Bache & Co. (Lebanon) S.A.L., 838 F.2d 904, 909
(7th Cir. 1988). FreeHand, however, has not asserted that the three-month
delay was "extreme," nor has it shown that granting the motion "would
inordinately impede [Freehand's] efforts to prepare a defense or would
unjustifiably prolong the litigation." Serfecz, 1997 WL 543116,
Finally, the Court finds no merit in FreeHand's allegation that this
motion was strategically delayed in order to discredit Schroeder's
declaration in support of FreeHand's Markman brief. The case
FreeHand cites in support, Cresswell v. Sullivan & Cromwell,
922 F.2d 60 (2d Cir. 1990), is inapposite. In Cresswell, the
Second Circuit agreed that a plaintiff's delay in filing its motion to
amend to assert an additional claim was prejudicial where it was filed
more than a month after the plaintiff had responded to a motion for
summary judgment. Id. at 72. Contrary to FreeHand's argument,
Cresswell does not hold that "attempting to add parties in
response to pleadings that have been filed, by itself is reason
sufficient to deny the attempt." (Def.'s Mem. Opp'n at 5.) Moreover,
the Court agrees with Sitrick that adding Schroeder as a defendant
in this case will not serve to discredit his declaration in support of
the Markman brief.
II. UNDUE PREJUDICE
Sitrick has the burden of proving that the amendment will not unduly
prejudice FreeHand. See King v. Cooke, 26 F.3d 720, 724 (7th
Cir. 1994), An amendment will almost always result in some level of
prejudice, so the relevant inquiry is "whether undue prejudice
will result from amending a complaint." Grun v. Pneumo Abex
Corp., No. 90 C 5273, 1993 WL 13411, at *3 (N.D. Ill. Jan. 21, 1993)
(citing Hess v. Gray, 85 F.R.D. 15, 20 (N.D. Ill. 1979))
(emphasis in original). In determining whether undue prejudice exists,
courts must balance each party's interests: "This balancing `entails an
inquiry into the hardship to the moving party if leave to amend is
denied, the reasons for the moving party failing to include the material
to be added in the original pleading, and the injustice resulting to the
party opposing the motion should it be granted.'" In re Ameritech
Corp., 188 F.R.D. al 283 (quoting Wright, Miller & Kane,
Fed Practice & Procedure § 1487 at 621-23(1990)).
Sitrick avers that adding Schroeder as a defendant will not unduly
prejudice either Schroeder or FreeHand, First, Schroeder is already very
involved in the defense of this lawsuit, given that he was FreeHand's
Rule 30(b)(6) witness and filed a declaration along with FreeHand's
Markman brief. Second, Schroeder's and FreeHand's interest in
the litigation is the same because Schroeder cannot be liable for
inducement unless FreeHand's systems are found to be infringing. In
addition, Sitrick argues that it will be prejudiced if Schroeder is not
added as a defendant because it appears that
FreeHand may not be able to pay a full damage award if Sitrick is
successful in proving infringement.
FreeHand responds that it will be prejudiced by the amendment for three
reasons: (1) the amendment would prejudice FreeHand's efforts to attract
new investors by prolonging the "dark cloud" of litigation and implying
that FreeHand is merely Schroeder's alter ego; (2) Schroeder will have a
conflict between his personal interests and FreeHand's interests; and (3)
the amendment would prolong discovery and litigation.
A. FreeHand's Ability to Attract Investors
FreeHand alleges that the amendment will prejudice its ability to
attract additional investors for two reasons. First, litigation hurts the
reputation of a small company such as FreeHand in the investment
community., and the amendment will prolong the case and thus the length
of time the "dark cloud" of litigation will hang over FreeHand. Second,
FreeHand claims that if the amendment is allowed, potential investors
will consider FreeHand to be the "mere instrumentality" of Schroeder, and
Sitrick has not alleged facts demonstrating that the company is in fact
Schroeder's alter ego.
First, FreeHand's argument demonstrates a fundamental misunderstanding
of the basis of the proposed claim against Schroeder. Section 271(a)
provides that a corporate officer or director may be personally liable
for the corporation's direct infringement if there is "evidence
to justify piercing the corporate veil," Hoover Group, 84 F.3d
at 1412 (internal quotation and citation omitted); see. also Tegal
Corp, v, Tokyo Electron Co., 248 F.3d 1376, 1379 (Fed. Cir. 2001)
("In the absence of evidence showing that the parent company either was
an alter ego of the subsidiary or controlled the conduct of the
subsidiary, we refused to find direct infringement,"),
In this case, however, Sitrick alleges liability for
inducement under Section 271(b), which does not require a
finding that FreeHand is Schroeder's alter ego. See Manville
Sales, 917 F.2d at 553 ("Under [Section 271(b)], corporate officers
who actively assist with their corporation's infringement may be
personally liable for inducing infringement regardless of
whether the circumstances are such that a court should disregard the
corporate entity and pierce the corporate veil.") (emphasis in original);
Hoover Group., 84 F.3d at 1412 (same).
In any event, FreeHand has offered no support for its argument that the
impression of potential investors is prejudicial to its ability to defend
the litigation. Furthermore, delayed litigation and increased exposure to
potential liability are not sufficient for a finding of prejudice.
See King v. Cooke, 26 F.3d 720, 724 (7th Cir. 1994);
Serfecz, 1997 WL 543116, at *6.
B. Conflict of Interest
FreeHand argues that Schroeder's and Freehand's interests will be in
conflict, but it fails to offer a single example of an actual or
potential conflict. It merely discusses the difficulty to Schroeder of
assisting in his own defense as well as helping Freehand's defense, which
does not amount to a conflict of interest at all, let alone a conflict
that rises to the level of undue prejudice.
Moreover, the Court does not see how Schroeder's and Freehand's
interests would be in conflict. Both parties have an interest in proving
the accused devices did not infringe. See Insituform Techs., Inc. v.
CAT Contracting, Inc., 161 F.3d 688, 695 (Fed. Cir. 1998)
("Liability for inducement under § 271(b) is dependent on showing
that the conduct being induced constitutes direct infringement."). And if
infringement is found, Freehand's interests will not conflict with
Schroeder's defense against the claim of inducement,
C. Need for Additional Discovery and Delayed Litigation
FreeHand claims that it will be prejudiced due to the need for
additional discovery and further delay in litigation. FreeHand argues
that because Schroeder now has personal exposure, he "will likely insist"
on additional discovery, including depositions that FreeHand "will then
have to attend," thus prolonging the litigation and increasing FreeHand's
legal fees. FreeHand, however, gives no examples of additional discovery
that "will likely" be taken by Schroeder, and it is far from apparent
that any more discovery will be necessary.*fn3 Sitrick has not indicated
that he will require additional discovery on the new claim. The new claim
is closely aligned factually with the original infringement claim.
Discovery on infringement has already been completed, and the only
element added by the proposed amendment is Schroeder's personal
involvement in the alleged infringement, the facts of which should be
known to Schroeder,
Moreover, even if some additional discovery must be taken, FreeHand has
not given the Court any reason to believe it would be so prejudicial to
FreeHand that the amendment should be denied. See Serfecz, 1997
WL 543116, at *5 ("The inconvenience created by . . . minimal
discovery is insufficient to deny [plaintiff's] request for leave to
amend."); Grun, 1993 WL 13411, at *3 (noting that "any prejudice
to the defendants can be controlled by imposing limitations on the
parties' ability to conduct additional discovery"). In sum, FreeHand has
failed to support its claims
of undue prejudice, and the balance therefore tips in favor of
allowing Sitrick to "test his claim on the merits." See Grun,
1993 WL 13411, at *3.
Next, FreeHand argues that Schroeder's review of the patents in suit
was performed as a corporate employee and does not prove inducement. In
addition, FreeHand asserts that it relied on its attorney's advice to
show that the alleged infringement was not willful. While it is not
labeled as such, FreeHand is apparently claiming that the proposed
amendment is fufile.
FreeHand's arguments, however, relate to the factual bases of Sitrick's
claims and FreeHand's affirmative defenses, which are beyond the scope of
the present motion. The only issue here is whether Sitrick's claim
against Schroeder is fufile, i.e., it would not survive a motion
to dismiss pursuant to Rule 12(b)(6). Sue Peoples v. Sebring Capital
Corp., 209 F.R.D. 428, 43 0 (N.D. Ill. 2002). FreeHand does not
argue that the proposed amendment fails to state a claim, and the Court
finds that the inducement claim was sufficiently pleaded to survive a
motion to dismiss.
To prove infringement under Section 271(b), "[t]he plaintiff has the
burden of showing that the alleged infringer's actions induced infringing
acts and that he knew or should have known his actions would
induce actual infringements." Manville Sales, 917 F.2d at 553
(emphasis in original); see Minn. Mining & Mfg., 303 F.3d at
1305; see also Insituform, 161 F.3d at 695 (holding that "the
inducer must have actual or constructive knowledge of the patent").
Inducement requires proof of "active steps knowingly taken
knowingly at least in the sense of purposeful, intentional as
distinguished from accidental or inadvertent. But with that qualifying
approach, the term is as broad as the range of actions by which one in
fact causes, or urges, or encourages, or aids another to
infringe a patent," Tegal Corp., 248 F.3d at 1378-79
(internal quotation and citation omitted) (emphasis in original); see
also Power Lift, Inc. v. Lang Tools, Inc., 774 F.2d 478, 481 (Fed.
Cir. 1985) (noting that statutory history "suggest[s] a `broad' reading
of § 271(b)"),
Liability for inducement has been found where the individual defendants
"were directly responsible for the design and production of the
infringing [product] and . . . they were the only ones who stood to
benefit from sales of [the product]," see Orthokinetics, Inc. v.
Safety Travel Chairs, Inc., 806 F.2d 1565, 1579 (Fed. Cir. 1986);
where the defendant supplied infringing products to customers with
instructions that, if followed, would lead to infringement, see Minn.
Mining & Mfg., 303 F.3d at 1304-05; or where the defendant
exerted personal control over the manufacture of infringing products,
see Sensonics, Inc. v. Aerosonic Corp., 81 F.3d 1566, 1575 (Fed.
In this case, the proposed amended complaint sufficiently alleges that
Schroeder had actual knowledge of the patents in suit; he actively
induced infringement through design, production, and control over the
manufacture of the accused devices; and he knew his actions would induce
infringement. The proposed claim would therefore survive a motion to
dismiss under Rule 12(b)(6) and is not clearly fufile.
For the reasons set forth above, Plaintiff David II. Sitrick's Motion
for Leave to Amend the Complaint to Add Theodore L, Schroeder as a
Defendant [doc. no, 41-1] is granted.