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Induction Innovations, Inc. v. Pacholok

United States District Court, N.D. Illinois, Eastern Division

September 30, 2014

INDUCTION INNOVATIONS, INC., and SARGE HOLDINGS COMPANY, LLC, Plaintiffs,
v.
DAVID PACHOLOK, Defendant.

MEMORANDUM OPINION AND ORDER

MANISH S. SHAH, District Judge.

David Pacholok and Thomas Gough are the named inventors on two U.S. patents relating to heating devices for use in automotive repair. Pacholok and Gough also co-founded Induction Innovations, an Illinois corporation that manufactures and sells products practicing some of the patented inventions. Several years after creating Induction, Pacholok and Gough decided to part ways. Pacholok resigned from his position as corporate officer and sold his stock in Induction, receiving in exchange a promise by Induction to pay him royalties on the sale of goods embodying the patented inventions. Following his departure from Induction, Pacholok made contact with one of the company's competitors, Lace Technologies, and began to license the patents to Lace. In 2013, Induction-along with Sarge Holdings, the assignee of Gough's ownership share in the two patents- filed in federal court a breach-of-fiduciary-duty claim against Pacholok. Plaintiffs' second amended complaint also included four additional claims: patent infringement; interference with business relations; and two requests for declaratory judgment (one a declaration of inventorship for the two patents-in-suit, the other a declaration that no money is owed Pacholok under his Stock Purchase Agreement). Pacholok now movies to dismiss plaintiffs' claims pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure. For the reasons discussed below, I grant in part and deny in part Pacholok's motion.

I. Legal Standard

In evaluating a motion to dismiss brought under Rule 12(b)(1), I accept as true all well-pleaded factual allegations and draw all reasonable inferences in the plaintiff's favor. See G & S Holdings LLC v. Cont'l Cas. Co., 697 F.3d 534, 539 (7th Cir. 2012) (citing Scanlan v. Eisenberg, 669 F.3d 838, 841 (7th Cir. 2012)). Where the jurisdictional challenge is based on facts extrinsic to the complaint, however, I may look beyond the complaint's allegations and view whatever evidence has been submitted on the issue. See Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009).

II. Facts

In 2000, David Pacholok and Thomas Gough co-founded Induction Innovations, Inc., a company that manufactured and sold (and continues to manufacture and sell) induction heaters for use in the automotive aftermarket. [139][1] ¶¶ 4, 6. Upon incorporation, Pacholok and Gough each owned 50 percent of Induction's issued stock. See id. ¶¶ 2-3. Pacholok and Gough are also the named co-inventors of U.S. Patent Nos. 6, 563, 096 and 6, 670, 590, id. ¶ 5, which issued in 2003, see [139-1] at 3, 11. The patents recite method- and apparatus-type claims relating to heating devices to be used in automotive repair. See id.; see also [139] ¶ 26.

In 2006, Gough and Pacholok decided to part ways, and Pacholok resigned from his position as an officer and director of Induction. See [139] ¶¶ 2, 19. Pursuant to a "Stock Purchase Agreement, " Pacholok also agreed to relinquish his shares in the company, see id., in exchange for which Induction agreed, inter alia, to pay Pacholok an annual royalty on sales by Induction of any products practicing the '096 or '590 patent (if, within the calendar year, such sales exceeded one million dollars). See id. ¶ 56. Gough formally assigned his ownership rights in both patents to Sarge Holdings, LLC, which then licensed to Induction the right to practice and enforce the patents; Pacholok, however, refused to do the same. See id. ¶¶ 11, 22, 43.[2]

Five years after Pacholok's departure from Induction, Pacholok entered a series of agreements with Lace Technologies, Inc., a company that formerly had manufactured heating units for Induction, see id. ¶ 9. Through these agreements, Pacholok granted (or purported to grant) to Lace a license to manufacture and sell products practicing the '096 and '590 patents. See id. ¶¶ 13-14. Pursuant to the (purported) license, Lace began to produce and sell items embodying the patented technology-items that competed directly with Induction's own heating products. See id. ¶¶ 15-16.

In July 2013, Induction and Sarge filed suit against Pacholok in federal court, alleging that Pacholok's failure to formally assign to Induction his legal title to the patents-coupled with his attempt to license his interest in those patents to Induction's competitor-constituted a breach of Pacholok's fiduciary duty to the corporation. See [1] ¶¶ 22-39. In his answer to the original complaint, [20], Pacholok included two counterclaims: the first alleging that Pacholok, not Gough, was the true (and only) inventor of the '096 and '590 patent (and requesting a corresponding correction of the named inventors pursuant to 35 U.S.C. § 256), see id. ¶¶ 30-37; the second alleging a breach of contract by Induction based on Induction's purported failure to pay Pacholok royalties owed under the 2006 Stock Purchase Agreement, see id. ¶¶ 45. Plaintiffs subsequently amended their complaint (twice), ultimately including with their fiduciary-breach claim (now Count II), see [139] ¶¶ 31-49, four additional counts: declaratory judgment of patent inventorship (Count I), id. ¶¶ 25-30; patent infringement (Count III[3]), id. ¶¶ 50-52; interference with business relations (Count IV), id. ¶¶ 53-54; and a declaratory judgment that Induction owes nothing to Pacholok under the 2006 Stock Purchase Agreement (Count V), id. ¶¶ 55-58.

Pacholok filed a motion to dismiss plaintiffs' second amended complaint for lack of subject-matter jurisdiction. [144]. Attached to this motion was a covenant by Pacholok not to re-plead or file against plaintiffs any counterclaim or action seeking correction of inventorship. See id. at 62-63. But the covenant included an exception: should a third party challenge the validity of either the '096 or '590 patent, and base that challenge on the inventorship of the patent(s), Pacholok reserved the right to pursue his correction-of-inventorship claim. See id. at 62 ¶ 4.

III. Analysis

In his motion to dismiss for lack of federal jurisdiction, Pacholok asserts that only two of plaintiffs' five claims-inventorship (Count I) and patent infringement (Count III)-arise under the patent laws and therefore fall, at least ostensibly, within the Court's original jurisdiction. See id. at 2. But, says Pacholok, the Court nonetheless does not have jurisdiction over these claims, because plaintiffs do not have standing to bring them. See id. at 2-3, 5-7. Pacholok further contends that the remaining three claims-fiduciary breach (Count II), interference with business relations (Count IV), and construction of the Stock Purchase Agreement (Count V)-are state-law claims, and urges that these claims, too, must be dismissed since: (1) without jurisdiction over the patent-based claims, the Court cannot exercise supplemental jurisdiction over any state-law claims; and (2) regardless, supplemental jurisdiction is inappropriate because the state-law claims do not stem from the same "nucleus of facts" as the federal claims. See id. at 3-4, 14-15.

A. The Infringement and Inventorship Claims

1. Patent Infringement (Count III)

Plaintiffs assert that Pacholok both has infringed the patents-in-suit and has induced infringement of those patents by plaintiffs' competitor, Lace Technologies. See [139] ¶ 52. Plaintiffs seek as remedy both monetary and injunctive relief. See id. at 8-9.

a. Infringement Damages

Article III of the Constitution limits federal judicial power by requiring that courts resolve only true "cases" or "controversies." U.S. Const. art. III, § 2. The requirement of "standing"-that the plaintiff has "a right to judicial relief"-ensures that a suit involves a case or controversy. Morrow v. Microsoft Corp., 499 F.3d 1332, 1338-39 (Fed. Cir. 2007) (quoting Warth v. Seldin, 244 U.S. 490, 500 (1975)).[4] Under federal patent law, only a "patentee" has a right to legal relief for infringement. See id. at 1339 (citing 35 U.S.C. § 281).

Congress has defined "patentee" to include not just the individual to whom the patent originally issued, but also that individual's "successors in title." Id. (citing 35 U.S.C. § 100(d)). Successors in title are those who possess legal title to the patent. See id. (citing Enzo Apa & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093 (Fed. Cir. 1998); Prima Tek II LLC v. A-Roo Co., 222 F.3d 1372, 1377 (Fed. Cir. 2000)). Here, plaintiffs allege that Pacholok's co-inventor, Thomas Gough (who is not a party to this action), formally assigned his ownership rights to Sarge Holdings, which then licensed those rights to Induction. Thus, according to plaintiffs, they collectively possess legal title to the patents-in-suit to the extent that Thomas Gough held title prior to this assignment. See [139] ¶ 43; see also id. ¶ 8 (alleging that plaintiffs own legal title "as to Thomas Gough").[5]

Plaintiffs are correct that, as an inventor of the patents-in-suit, Gough "presumptively own[ed] a pro rata undivided interest" in the patents. Univ. of Utah v. Max-Planck-Gesellschaft Zur Forderung Der Wissenschaften E.V., 734 F.3d 1315, 1324 (Fed. Cir. 2013) (citing Ethicon, Inc. v. U.S. Surgical Corp., 135 F.3d 1456, 1465 (Fed. Cir. 1998)). Consequently, when Gough assigned that interest to Sarge Holdings, Sarge acquired the same ( pro rata ) rights-including Gough's right to exclude others from practicing the patented inventions, see Morrow, 499 F.3d at 1339 ("A patent grant bestows the legal right to exclude others from making, using, selling, or offering to sell the patented invention...." (citing 35 U.S.C. §§ 154, 271)). But a pro rata ownership interest-even if undivided-is not enough to confer upon plaintiffs standing to sue Pacholok for infringement because, according to plaintiffs' complaint, Pacholok still holds that same interest.

Plaintiffs admit that Pacholok did not formally assign to Induction or Sarge any of his ownership rights in the patents-in-suit. See, e.g., [139] ¶ 11 (stating that "Pacholok has refused to formally assign any ownership rights" to the patents); id. ¶ 44 (similar); see also id. ¶ 8 (stating that plaintiffs own legal title "as to Thomas Gough but not as to David Pacholok ") (emphasis added).[6] And there is no allegation that Pacholok has assigned those rights to any other entity. Plaintiffs therefore concede that the pro rata interest Pacholok presumptively acquired as co-inventor of the patents remains with him, and that, consequently, he retains the same "exclusionary" rights as plaintiffs. Pacholok, too, has the legal authority to make, use, or sell the patented inventions to the exclusion of others who do not possess such rights. Plaintiffs therefore lack standing to sue Pacholok for infringement because, as the Federal Circuit has made clear, plaintiffs who hold the exclusionary rights to a patent suffer a legally cognizable injury-and thus have standing to sue-only "when an unauthorized party encroaches upon those rights." WiAV Solutions LLC v. Motorola, Inc., 631 F.3d 1257, 1264-65 (Fed. Cir. 2010) (citing Morrow, 499 F.3d at 1340) (emphasis added); see also Jim Arnold Corp. v. Hydrotech Sys., Inc., 109 F.3d 1567, 1571-72 (Fed. Cir. 1997) (observing that a plaintiff seeking relief for patent infringement must allege ...


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