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Mantissa Corporation v. Old Second Bancorp, Inc.

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

June 20, 2018

MANTISSA CORPORATION, Plaintiff,
v.
OLD SECOND BANCORP, INC. et al, Defendants.

          MEMORANDUM OPINION AND ORDER

          RUBEN CASTILLO, UNITED STATES DISTRICT CHIEF JUDGE

         Mantissa Corporation ("Plaintiff) filed this action against Old Second Bancorp, Inc. and Old Second National Bank (collectively "Defendants") for alleged patent infringement. (R. 1, Compl.) Defendants presently move to stay this case pending resolution of Ondot Systems, Inc. v. Mantissa Corp., No. 3:18-cv-00207 ("Ondot Litigation"), currently pending in the U.S. District Court for the Northern District of California. (R. 19, Mot. to Stay.) For the reasons stated below, the Court grants the motion and stays this case.

         BACKGROUND

         Plaintiff is an enterprise software company founded in 1980 that develops identity protection software and technology. (R. 1, Compl. ¶ 10.) It is also the exclusive licensee of U.S. Patent No. 9, 361, 658 ("the '658 Patent"), which was issued by the U.S. Patent & Trademark Office on June 7, 2016, to Gary and Sharon Dennis. (Id. ¶¶ 1243; R. 1-1, '658 Patent at [71].) The '658 Patent is titled "System and Method for Enhanced Protection and Control Over the Use of Identity" and, in general terms, claims methods for protecting and controlling the use of a financial account that are executed on computer hardware in combination with software. (R. 1, Compl. ¶¶l 1, 14.)

         Defendant Old Second National Bank is a bank with 25 branches in Illinois and its main office in Aurora, Illinois. (Id. ¶¶ 4-5.) Defendant Old Second Bancorp, Inc. is the bank holding company for Old Second National Bank, (Id. ¶¶ 3-4.) On December 20, 2017, Plaintiff filed this suit alleging that Defendants' systems and services for debit and/or credit card control, monitoring, and management that incorporate the "SecurLOCK Equip" mobile application for Apple and Android smartphones, "or similar products, systems, and services, " infringe the '658 Patent. (Id. ¶¶ 23-26.) The complaint asserts claims 1-16 of the '658 Patent, which are all method claims, [1] and alleges that Defendants are liable for direct, induced, and contributory infringement.[2] (Id. ¶¶ 25-26, 31-35.) In their answer, Defendants deny infringement and assert an affirmative defense of invalidity. (R. 16, Answer ¶¶ 23-38, 39.)

         According to a declaration filed by Defendants in support of their motion to stay, Defendants indirectly licensed SecurLOCK Equip from a vendor, Ondot Systems, Inc. ("Ondot").[3] (R. 19-2, Lesher Decl. ¶ 3.) Ondot is a software development company based in Santa Clara, California. (Id. ¶ 2.) One of its primary products is "CardControl, " which, in general terms, allows holders of a credit or debit card account to switch the status of the credit or debit card "on" or "off using a mobile application for Apple and Android smartphones. (Id.) CardControl also lets cardholders impose other security restrictions on a given card, such as geographic or proximity controls. (Id.) Ondot licenses CardControl directly to banks, as well as to card-processing partners who, in turn, sometimes rebrand CardControl and resell the software to banks. (Id. ¶ 3.) For example, card-processor Fiserv rebranded CardControl as "CardValet" for its bank clients, and card-processor Vantiv rebranded CardControl as "CardGuard." (Id.) As relevant here, card-processor FIS rebranded CardControl as SecurLOCK. Equip and licensed it to Defendants. (Id.)

         Ondot has written agreements with its processing partners that require it to indemnify them for any allegations of patent infringement against CardControl, including paying the legal fees and costs for any lawsuit and any judgment for patent infringement. (Id. ¶ 4.) Ondot's processing partners, in turn, have similar indemnification and defense obligations to their bank clients. (Id.) Ondot has therefore indirectly agreed to indemnify banks, such as Defendants, who use CardControl. (Id.)

         On January 9, 2018, Ondot filed suit against Plaintiff in the Northern District of California for declaratory judgment and for unfair business practices under California law. (R. 19-1, Smith Decl. ¶ 2; R. 19-1 at 6, Ondot Litigation Compl. ¶ 1.) Ondot seeks a declaratory judgment that its card control products do not infringe the '658 Patent. (R, 19-1 at 6, Ondot Litigation Compl. ¶ 39.) Ondot subsequently amended its complaint to also seek a declaratory judgment that the '658 Patent is invalid. (R. 25-1 at 23, Ondot Litigation First Am. Compl. ¶¶ 53-59.)

         In the Ondot Litigation, Ondot alleges that Plaintiff had contacted Ondot, accused its card control products of infringing the '658 Patent, and sought to have Ondot take a license. (Id. ¶¶ 30, 32, 38.) Plaintiff also allegedly sent letters to customers of Ondot-specifically, banks who used Ondot's card control products-asserting that they infringed the '658 Patent. (Id. ¶¶ 36-37.) Then, in December 2017, Plaintiff filed four suits in this District against Ondot's bank customers-including this suit against Defendants-for infringement of the '658 Patent based on the banks' use of Ondot's card control technology, (Id. ¶¶ 39-40.) On multiple occasions during this period, Plaintiff stated that Ondot needed a license to the '658 Patent to continue selling CardControl and made clear to Ondot's counsel that Plaintiff would "not sue Ondot directly, but [would] instead sue the customers of Ondot's technology." (R. 19-1, Smith Decl. ¶ 6.) In two phone calls with Ondot's counsel in January 2018, Plaintiffs counsel asserted that Plaintiff would "use the lawsuits against Ondot's customers to 'pressure' Ondot into licensing ... the '658 patent." (Id. ¶ 7.) Plaintiff also proposed a settlement to Ondot that would have "resolve[d] the lawsuits filed against Ondot's customers as well as others using Ondot's CardControl technology." (Id.)

         The Ondot Litigation is still pending and in its early stages, with a case management conference scheduled for June 28, 2018. (Id. ¶ 8; Ondot Litigation, R. 37, Clerk's Notice.)

         LEGAL STANDARD

         A district court's power to stay proceedings is well-established and "incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. N. Am. Co., 299 U.S. 248, 254 (1936); see also In re Groupon Derivative Litig., 882 F.Supp.2d 1043, 1045 (N.D. Ill. 2012) (quoting Landis). The Court has "broad discretion" to decide whether a stay is warranted. Clinton v. Jones, 520 U.S. 681, 706 (1997). When deciding whether to grant a stay, a court should "balance the competing interests of the parties and the interest of the judicial system" by considering the following three factors: (1) whether a stay will simplify the issues in question and streamline the trial; (2) whether a stay will reduce the burden of litigation on the parties and on the court; and (3) whether a stay will unduly prejudice or tactically disadvantage the non-moving party. In re Groupon Derivative Litig., 882 F.Supp.2d at 1045 (citation omitted).

         ANALYSIS

         Defendants seek a stay based on the "customer-suit" exception to the first-to-file rule.[4](R. 19, Mot. to Stay at 5-7.) Under this exception, "[w]hen a patent owner files an infringement suit against a manufacturer's customer and the manufacturer then files an action of non infringement or patent invalidity, the suit by the manufacturer generally take[s] precedence." In re Nintendo of Am., Inc., 756 F.3d 1363, 1365 (Fed. Cir. 2014). In practice, this means courts will "stay earlier-filed litigation against a customer while a later-filed case involving the manufacturer proceeds in another forum." Spread Spectrum Screening LLC v. Eastman Kodak Co., 657 F.3d 1349, 1357 (Fed. Cir. 2011). The purpose of staying the customer suit is "to avoid, if possible, imposing the burdens of Mai on the customer, for it is the manufacturer who is generally the 'true defendant' in the dispute, " while the customer is simply a downstream retailer or end user of the allegedly infringing product. In re Nintendo of Am., Inc., 756 F.3d at 1365 (citation omitted); see also Codex Corp. v. Milgo Elec. Corp., 553 F.2d 735, 737-38 (1st Cir. 1977) ("At the root of the preference for a manufacturer's declaratory judgment action is the recognition that, in reality, the manufacturer is the true defendant in the customer suit.")- The "guiding principles" underlying the customer-suit exception are efficiency and judicial economy. Spread Spectrum Screening LLC, 657 F.3d at 1357 (citation omitted).

         District courts, including courts in this District, have routinely applied this doctrine to stay patent infringement claims against customers in favor of resolving the patentee's claims against the upstream manufacturer first. See, e.g., Select Retrieval, LLC v. ABT Elecs., No. 11 C 03752, 2013 WL 6576861, at *1 (N.D. Ill.Dec. 13, 2013) (relying on customer-suit exception to grant stay of infringement claims against customers who were "end users" of allegedly infringing software, pending outcome of later-filed declaratory judgment action by developer of software); Spread Spectrum Screening, LLC v. Eastman Kodak Co., No. 10 C 1101, 2010 WL 3516106, at *1 (N.D. Ill. Sept. 1, 2010) (granting motion to sever and stay claims against customers who "merely use" allegedly infringing product pending the outcome of patentee's suit against manufacturer of product), appeal dismissed,657 F.3d 1349 (Fed. Cir. 2011); Card Activation Techs, v. Pier 1 Imps., Inc., No. 09 C 2021, 2009 ...


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