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Lodsys - DriveTime Says It Suspects Lodsys is an "alter ego" of Intellectual Ventures, Asks to Do Discovery
Wednesday, August 17 2011 @ 01:18 PM EDT

DriveTime Automotive Group has filed a motion, Motion For Leave To Conduct Jurisdictional Discovery And To Stay Response To Motion To Dismiss, in its Arizona declaratory judgment action against Lodsys. That is a mouthful for saying they believe Lodsys does, in fact, have jurisdictional ties to Arizona (where DriveTime is located) and that they should be allowed the opportunity to conduct limited discovery against Lodsys for the purpose of proving that point before the court simply grants Lodsys' motion to dismiss for lack of jurisdiction

DriveTime is asking the Arizona federal district court to let it do discovery to flush out any Intellectual Ventures ties to Lodsys. DriveTimes says they "strongly suspect, as do others, that Lodsys is a spin-off and the alter ego of a company called Intellectual Ventures (“IV”), known as “patent troll public enemy #1.”

It quotes from the recent NPR article implying such a connection, and attaches it as an exhibit [PDF], and it describes how patent trolling works, saying that trolls often assert baseless claims, and it says that Lodsys's claims against it are precisely that, baseless. So it would like to do discovery to flush out all the secret corners of the claim against it:

DriveTime seeks leave to conduct jurisdictional discovery because much of Lodsys’s licensing and enforcement efforts, and certainly its relationship with IV, are not a matter of public record. Specifically, DriveTime seeks permission to take written discovery and depositions on the following:
  • (i) Lodsys’s licensing and enforcement activities in Arizona and/or with companies residing and/or doing substantial business in Arizona, including the nature of those licenses and whether they include any affirmative obligations on the part of Lodsys;
  • (ii) Lodsys’s qualification as a patent troll that has attempted to manufacture jurisdiction in the Eastern District;
  • (iii) the relationship between Lodsys and IV, and IV’s contacts with Arizona; and
  • (iv) the baseless nature of Lodsys’s infringement claims in its cease and desist letters.
Such discovery will uncover facts to demonstrate this Court has jurisdiction over Lodsys.
If the judge agrees, it looks like we'll finally get evidence one way or the other regarding the Intellectual Ventures' connection.

The filing, with all the exhibits:
10 - Filed & Entered: 08/15/2011
Motion for Miscellaneous Relief Docket Text: *RESPONSE to Motion re [8] MOTION to Dismiss for Lack of Jurisdiction and Motion for Leave to Conduct Jurisdictional Discovery and Motion to Stay Response to Motion to Dismiss filed by DriveTime Automotive Group Incorporated. (Attachments: # (1) Exhibit 1, # (2) Exhibit 2, # (3) Exhibit 3, # (4) Exhibit 4, # (5) Exhibit 5, # (6) Exhibit 6, # (7) Exhibit 7, # (8) Exhibit 8, # (9) Exhibit 9, # (10) Exhibit 10, # (11) Exhibit 11, # (12) Exhibit 12, # (13) Exhibit 13, # (14) Exhibit 14, # (15) Exhibit 15)(LaCorte, Brian) *Modified on 8/16/2011 to add Motion, (LSP).*
If the court says no, DriveTime asks that the case be stayed pending the outcome of the discovery going on in Illinois and the case transferred there:
A patent troll’s singular activity is to extract pre-litigation settlements – it sends demand letters, engages in license negotiations, and enters into nonexclusive licenses in exchange for a fee. For those who stand their ground, the patent troll sues for infringement. But if these activities are irrelevant for jurisdictional purposes, then what are? Conceivably, no activities can subject a patent troll to jurisdiction outside its home forum. This is particularly troubling where, as here, the troll sets up a sham office in the Eastern District to permit a litigation mill to occur there. Whatever can be said about this practice, it is most definitely not fair….

DriveTime should also be allowed to gather evidence to prove that Lodsys is the alter ego or agent of IV. Generally, the jurisdictional contacts of a parent are irrelevant to its subsidiary. However, there are two well-established exceptions where the contacts of one may be imputed to other. Those are: (1) if one company is merely an alter ego of the other created solely to shield the company from litigation in an unfavorable forum; and (2) if one company is the general agent of the other in the forum. MMI, Inc. v. Baja, Inc., 743 F. Supp. 2d 1101, 1110 (D. Ariz. 2010).11

As discussed above, the evidence known to date suggests that one or both of these theories apply to the present case. DriveTime should be permitted to conduct discovery on whether there is common ownership between Lodsys and IV, whether IV monitors Lodsys’s performance, whether IV supervises Lodsys’ finance and capital budget decisions, whether IV articulates Lodsys’s general policies and procedures, and the level of IV’s involvement in Lodsys’s operations. See MMI, 743 F. Supp. 2d at 1111. Any combination of these facts would establish what has long been believed in the industry – that Lodsys and IV are really the same entity. DriveTime should also be permitted to conduct discovery on those facts sufficient to establish that Lodsys acts as IV’s general agent. Finally, DriveTime should be permitted to conduct discovery on IV’s contacts with this forum, which under either the alter ego or agent theory, should be imputed to Lodsys. As noted above, those contacts are believed to be extensive….

C. Baseless Nature of Lodsys’s Infringement Claims.

Patent trolls are known for making baseless infringement claims. See Eon-Net, 2011 WL 3211512, at *10. So it is no surprise that Lodsys’s claims against DriveTime lack merit.12

DriveTime should be permitted to conduct discovery on the frivolous nature of Lodsys’ infringement claims because proof of bad faith activities directed toward businesses that reside in or are headquartered in Arizona would support jurisdiction. See, e.g., International Electronics, Inc. v. Human Electronics, Inc., 320 F. Supp. 2d 1085, 1089 (W.D. Wash. 2004).

___________

11 This Court previously held that piercing the corporate veil is not “intimately involved in the substance of enforcement of the patent right,” and thus, Ninth Circuit precedent should be applied. MMI, 743 F. Supp. 2d at 1110.

12 For example, Lodsys alleges that the “units of commodity” that are the subject of the Asserted Patents are web sites – an allegation that turns ordinary meaning on its head.

Should the court not grant the request, DriveTime has a further suggestion:
D. Staying the Response to Lodsys’s Motion or Transferring the Case
to the Jurisdiction of the First-Filed Illinois Actions is the
Appropriate Remedy Over Dismissal.

In the event this Court is not inclined to grant leave for jurisdictional discovery, dismissal is not the appropriate remedy. Rather, the case should be stayed pending the outcome of discovery in the Illinois Actions. Once jurisdiction is established in Illinois (or, alternatively, Wisconsin), pursuant to 28 U.S.C. §1406(a), and if the Court is inclined to dismiss, this case should instead be transferred to that venue. According to the Supreme Court, “[t]he language of §1406(a) is amply broad enough to authorize the transfer of cases, however wrong the plaintiff may have been in filing his case as to venue, whether the court in which it was filed had personal jurisdiction or not.” Goldlawyr v. Heiman, 369 U.S. 463, 466, 82 S.Ct. 913, 916 (1962) (“[t]he problem which gave rise to the enactment of the section was that of avoiding the injustice which had often resulted to plaintiffs from dismissal of their actions merely because they had made an erroneous guess with regard to the existence of some elusive fact”). Here, dismissal of the action would cause DriveTime to lose the benefits of being first in time, precisely the type of injustice Congress sought to avoid by enacting §1406(a). Id. Transfer to the Illinois forum would be more appropriate than dismissal because it would allow the merits to be heard in a first-filed action.

However, apart from the Intellectual Venture angle, DriveTime makes a reasonable argument that Lodsys has entered the state of Arizona for the purpose of soliciting licensing transactions and, thus, should be subject to Arizona courts.

At the same time, DriveTime believes Lodsys will find it difficult to establish that it has any true ties to Texas, given that there is simply a vacant office there in a building complex that appears to cater to such shell companies.

This one is definitely worth a read.

************

DriveTime Motion

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA

DRIVETIME AUTOMOTIVE GROUP,
INC., a Delaware corporation,
Plaintiff,
v.
LODSYS, LLC, a Texas limited liability company,
Defendant.

NO.: CV11-01307


MOTION FOR LEAVE TO CONDUCT JURISDICTIONAL DISCOVERY AND TO STAY RESPONSE TO MOTION TO DISMISS

I. INTRODUCTION.

In response to Lodsys, LLC’s (“Lodsys”) Motion to Dismiss (Doc. 8) (the “Motion”), DriveTime Automotive Group, Inc. (“DriveTime”) moves for leave to conduct jurisdictional discovery and to stay a substantive response to the Motion until discovery is completed. Discovery will demonstrate Lodsys has sufficient minimum contacts with Arizona and the exercise of jurisdiction is fair and reasonable.

II. BACKGROUND.

A. Lodsys.

Lodsys purports to be a Texas company headquartered in Marshall, Texas, and the owner of U.S. Patent Nos. 5,999,908 (“the ‘908 Patent”); 7,133,834 (“the ‘834 Patent”); 7,222,078 (“the ‘078 Patent”); and 7,620,565 (“the ‘565 Patent”) (collectively, the “Asserted Patents”). Lodsys has alleged that a wide variety of products and services infringe the Asserted Patents, from cell phone applications that allow in-app payment to online customer satisfaction surveys. Even the ever popular but unassuming application “Angry Birds” is not immune from Lodsys’s wide net. And now Lodsys has alleged that DriveTime’s live web chat infringes the same Asserted Patents.

Lodsys is a well-known, if not notorious patent troll. The Supreme Court has defined patent trolls as companies that “use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 396 (2006) (concurring opinion). Lodsys’s web site prominently displays this message on its home page: “The patented technologies of Lodsys, LLC are available for licensing[.]” See Exhibit 1. The only other content found on Lodsys’s web site is a description of its patents, information about the inventor and a blog. Clearly, Lodsys is in the business of licensing patents and nothing more. It does not make or sell any products. The outcry over Lodsys and its litigation tactics is well documented in widespread media accounts concerning numerous actions involving Lodsys throughout the United States. See, e.g., Exhibits 2, 4, 7 and 15.

2

Because the cost of defending a patent infringement lawsuit is so high,1 many of those targeted by patent trolls are willing to settle even frivolous patent infringement claims to avoid the substantial cost of defense. For those not willing to settle, infringement cases are being filed almost every day in the Eastern District of Texas (the “Eastern District”), because that forum has proven advantageous to patent trolls.2 Thus, it is common for patent trolls to form shell companies that are “headquartered” in the Eastern District. Like Lodsys has in its Motion, these entities then advocate for an application of law that would make it impossible for those targeted by patent trolls to litigate anywhere other than the Eastern District – giving the patent troll unfair leverage.

See, e.g., IPWatchdog, Intellectual Ventures Becomes Patent Troll Public Enemy #1, Exhibit 2. By its own account, IV has accumulated an extraordinarily large patent portfolio. However, until recently, IV engaged only in licensing and did not file patent

_____________________
1 In 2010, it cost on average $1.5 million to defend a patent infringement suit through the end of discovery, and $2.5 million for a complete defense through trial. AIPLA Report of the Economic Survey 2011, AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION, July 2011, at 35.

1 As of 2009, statistics showed that patent owners succeed at trial in the Eastern District almost 72 percent of the time, while the national average is 57 percent. See PricewaterhouseCoopers LLP, 2008 Patent Litigation Study: Damages awards, success rates and time-to-trial, Exhibit 3. Moreover, Eastern District juries hardly ever find a patent invalid. See, Yan Leychkis, Of Fire Ants and Claim Construction: An Empirical Study of the Meteoric Rose of the Eastern District of Texas as a Preeminent Forum for Patent Litigation, 9 Yale J. L. & Tech 193, 211 (2007) (“It has taken eighteen years . . . for an Eastern District jury to find a patent invalid; it happened for the first time ever in the 2006 case Hyperion Solutions Corp. v. OutlookSoft Corp.”).

3

infringement suits. IV generally relies upon a host of spin-off companies to do the dirty work.

Evidence suggests Lodsys is one of these spin-off companies:

  • National Public Radio (“NPR”) recently conducted an investigation into IV and what is believed to be one such spin-off company, Oasis Research, LLC (“Oasis”). When the NPR team visited Oasis’s Eastern District address, it found the doors locked, no lights on and no signs of life inside. The office suite was located in a silent, empty corridor with nothing but nameplates over the doors of darkened offices. And notably, the address listed for Oasis is identical – down to the suite number – as that listed for Lodsys at the time of the investigation. See NPR, When Patents Attack, Exhibit 4.
  • In a case filed by Oasis in the Eastern District, Oasis listed IV as an interested party in a certification required by the court. See Certificate, Exhibit 5. Thus, Oasis admitted that IV has a financial interest in the outcome of that case. Given the clear connection between Oasis and Lodsys, it is only reasonable to presume the same is true here.
  • At Lodsys’s own blog, a user recently asked if IV was behind Lodsys. Lodsys claimed that IV has no investment, control or knowledge of the “specific” licensing activities of Lodsys. However, Lodsys did not deny that it has a back-end deal with IV or that IV reaps some financial benefit from Lodsys’s actions. And Lodsys did not say that IV has no control over Lodsys’s general licensing policies and litigation strategies. See Exhibit 6.
  • A reporter from the United Kingdom recently asked IV about its relationship with Oasis and Lodsys. IV responded that it sells patents to other companies and “[s]ometimes based on the structure of the sale we have a financial interest in the outcome of those efforts, but we never have control over, or are involved in, the path to monetization that the companies pursue once we sell the patent.” See Guardian.co.uk, Why Won’t Intellectual Ventures Answer Questions About Its Relationship With Lodsys?, Exhibit 7. But again, IV failed to answer questions about the financial arrangement between Lodsys and IV, and about whether any of the staff or owners of Lodsys are present or former staff or owners of IV.

Everything but IV’s and Lodsys’s own self-serving and unsworn statements evidences that Lodsys is the alter ego or agent of IV.

4

And let there be no doubt as to the significance of IV’s possible contacts with this forum. IV touts that it collaborates “with over 3,000 inventors at more than 400 universities, research institutions and seven countries worldwide.” See Exhibit 8. It boasts $2 billion in licensing revenue, and licensees that include many Fortune 500 companies. Id. It is reasonable to conclude IV has significant ties to Arizona. In fact, a quick Internet search revealed IV has at least one employee in Arizona. See Exhibit 9.

B. The Present Action.

On or about June 14, 2011, Lodsys sent DriveTime a demand letter alleging infringement of the Asserted Patents. Lodsys stated it was “interested in reaching a negotiated non-litigation licensing arrangement” with DriveTime, but reserved all right to seek damages. By the time DriveTime received this letter, Lodsys had filed three lawsuits alleging infringement of the Asserted Patents in the Eastern District. See Complaint, ¶¶ 17-19. Additionally, four separate declaratory judgment actions had been filed against Lodsys in the Northern District of Illinois (the “Illinois Actions”). See Complaint, ¶¶ 21-25. Viewing Lodsys’s claims as frivolous, DriveTime had no interest in negotiating a license. Rather than wait for the inevitable lawsuit to be filed in the Eastern District, DriveTime took matters into its own hands and filed the present action. Lodsys subsequently filed suit against DriveTime in the Eastern District.

C. The Related Illinois Actions.

Just as it did with DriveTime, Lodsys filed suit in the Eastern District against each of the plaintiffs in the Illinois Actions. And as it did here, Lodsys moved to dismiss each of the first-filed actions for lack of personal jurisdiction. The plaintiffs

5

moved for leave to conduct jurisdictional discovery, and the Illinois district court granted the motions. The court granted plaintiffs sixty (60) days to take jurisdictional discovery, including written discovery and depositions. See Notification of Docket Entry, Exhibit 10. We expect this discovery to be relevant to the present jurisdictional dispute. Because Lodsys is a shell with no real business operations, its only principal is Mark Small. Mr. Small will be deposed and his testimony concerning the lack of any presence in Texas and the activity by Lodsys outside that state will be revealing.

D. Lodsys’s Licensing and Enforcement Activities in Arizona.

On June 10, 2011, Lodsys filed suit against Best Western International, Inc. in the Eastern District for alleged infringement of the same Asserted Patents. See Best Western Complaint, Exhibit 11. Notably, Best Western is an Arizona corporation with its principal place of business in Phoenix. See Exhibit 12. Unquestionably, Lodsys engaged in pre-litigation licensing demands and negotiations with Best Western concerning the same patents at issue here. Other similar activity by Lodsys and its agents or alter egos are worthy subjects of jurisdictional discovery. Additionally, Lodsys claims the Internal Revenue Service (the “IRS”) is a representative licensee. See Exhibit 13. The IRS has a substantial presence in Arizona and presumably practices the subject patent in Arizona under this license. See Exhibit 14.

III. ARGUMENT.

It is well established that jurisdictional discovery will be allowed if it will help determine the existence of personal jurisdiction. Success Is Yours, Inc. v. LifeSuccess Publ., LLC, No. CV10-0758-PHX DGC, 2010 WL 4225880, at *5 (D. Ariz. Oct. 21,

6

2010) (district court has broad discretion to “permit discovery to aid in determining whether it has in personam jurisdiction”).3 Specifically, “a court should allow a party to conduct discovery ‘where pertinent facts bearing on the question of jurisdiction are controverted or where a more satisfactory showing of the facts is necessary.’” Id. (citing Wells Fargo & Co. v. Wells Fargo Express Co., 556 F.2d 406, 430 n.24 (9th Cir. 1977)). “[D]enying jurisdictional discovery where further discovery might demonstrate a basis for jurisdiction is an abuse of discretion.” Id. (quoting Harris Rutsky & Co. Ins. Servs., Inc. v. Bell & Clements Ltd., 328 F.3d 1122, 1135 (9th Cir. 2003)).

The moving party should identify reasons for its request and the particular areas to which discovery will be directed. The moving party should also show that this discovery is likely to elucidate sufficient facts to establish jurisdiction. Cf. Autogenomics, Inc. v. Oxford Gene Tech., Ltd., 566 F.3d 1012, 1022 (Fed. Cir. 2009) (citing Wells Fargo, 556 F.2d at 430 n. 24).

DriveTime seeks leave to conduct jurisdictional discovery because much of Lodsys’s licensing and enforcement efforts, and certainly its relationship with IV, are not a matter of public record. Specifically, DriveTime seeks permission to take written discovery and depositions on the following: (i) Lodsys’s licensing and enforcement activities in Arizona and/or with companies residing and/or doing substantial business in Arizona, including the nature of those licenses and whether they include any

___________________
3 Whether to allow jurisdictional discovery in a patent case is not an issue unique to patent law. Therefore, courts apply the law of the regional circuit. Autogenomics, Inc. v. Oxford Gene Tech., Ltd., 566 F.3d 1012, 1021 (Fed. Cir. 2009).

7

affirmative obligations on the part of Lodsys; (ii) Lodsys’s qualification as a patent troll that has attempted to manufacture jurisdiction in the Eastern District; (iii) the relationship between Lodsys and IV, and IV’s contacts with Arizona; and (iv) the baseless nature of Lodsys’s infringement claims in its cease and desist letters. Such discovery will uncover facts to demonstrate this Court has jurisdiction over Lodsys.

A. Discovery Will Demonstrate Sufficient Licensing and Enforcement Activity in Arizona to Establish Personal Jurisdiction.

Lodsys attempts to cast this case as one where it sent a single demand letter to Arizona and nothing more. But Lodsys’s contacts with this forum go well beyond that. As generally alleged in paragraph 11 of the Complaint, and detailed above, at a minimum Lodsys has engaged in relevant licensing and enforcement activities against Best Western and IRS for the same patents in this jurisdiction. And given Lodsys’s extensive licensing campaign, it is reasonable to believe that numerous other Arizona companies and companies with a large presence in Arizona have been targeted by Lodsys. Like Best Western and the IRS, these companies are likely to have conducted significant negotiations with Lodsys in Arizona, and some have likely given in to Lodsys’s demands and taken a license. Jurisdictional discovery will reveal the true extent of Lodsys’ licensing and enforcement activities in Arizona.

Such contacts are sharply relevant to personal jurisdiction. First, these types of contacts have been found sufficient to establish personal jurisdiction in a declaratory judgment action. Second, the Federal Circuit law relied upon by Lodsys in its Motion has largely been applied to patent owners that are legitimate practicing entities. Some

8

courts have recognized that the law allows for, and should provide for, an exception when the declaratory judgment defendant is a patent troll. We address each body of law separately below.

1. Lodsys’s Contacts in this Forum are Sufficient.

The Federal Circuit has held that infringement demand letters by themselves are insufficient to establish personal jurisdiction. Red Wing Shoe Co. v. Hockerson- Halberstadt, Inc., 148 F.3d 1355, 1361 (Fed. Cir. 1998). And while limited attempts to negotiate a license, Hildebrand v. Steck Manufacturing Co., 279 F.3d 1351 (Fed. Cir. 2002), or nonexclusive licenses with companies not headquartered in the forum may be insufficient for jurisdiction, Red Wing, 148 F.3d at 1361-62, certain contacts and a combination of activities aimed at the forum are in fact sufficient. For example, license agreements with forum residents that include binding obligations on the patentee, such as the obligation to enforce or defend the patent in the jurisdiction, are relevant. Brecekenridge Pharm., Inc. v. Metabolite Labs, Inc., 444 F.3d 1356, 1366 (Fed. Cir. 2006). Red Wing suggests nonexclusive licenses with companies headquartered in the forum are relevant. Red Wing, 148 F.3d at 1358, 1361-62. And some efforts to negotiate a license – such as travel to the forum – are relevant. Deprenyl Animal Health, Inc. v. Univ. of Toronto Innovations Foundation, 297 F.3d 1343, 1351-52 (Fed. Cir. 2002) (finding jurisdiction where patentee negotiated four licenses agreements via telephone and mail with forum residents and traveled once to the forum to discuss these agreements).

Several district courts that have applied Federal Circuit law provide additional

9

examples of “other activities” sufficient to establish jurisdiction. In Pharmanet, Inc. v. DataSci LLC Co., No. 08-2965 (GEB), 2009 WL 396180 (D.N.J. Feb. 17, 2009), defendant DataSci moved to dismiss a New Jersey declaratory judgment action for lack of personal jurisdiction. Notably, DataSci had also filed a patent infringement lawsuit in Maryland against another New Jersey company. Id. The district court found that DataSci’s preparation and filing of a lawsuit against the New Jersey company constituted “purposefully directed” activities at New Jersey residents and denied DataSci’s motion on this basis alone. Id.4

These cases demonstrate that the contacts already identified above support the exercise of jurisdiction. Discovery will likely reveal numerous other contacts Lodsys has with Arizona, such as licenses with binding obligations for Lodsys,5 lawsuits filed against other Arizona-based entities,6 visits to the forum to negotiate licenses, and

___________________
4 Lodsys cites the Northern District of California’s decision in Juniper and claims lawsuits filed outside the forum are irrelevant. Juniper Networks, Inc. v. SSL Servs., LLC, 2009 WL 3837266 (N.D. Cal. Nov. 16, 2009). However, the jurisdictional contacts as a whole in Juniper were very different from those in Pharmanet, and the court did not address Pharmanet. Moreover, in a more recent case, the Northern District of California relied on lawsuits filed against California companies in other jurisdictions, apparently overruling Juniper. Wistron Corporation v. Phillip M. Adams & Assocs., LLC, 2011 WL 1654466 (N.D. Cal. Apr. 28, 2011).

5 Mark Small affirmatively states that Lodsys has not entered into any exclusive licenses, but does not assert that Lodsys lacks any binding obligations to its licensees. See Declaration of Mark Small in Support of Defendant’s Motion to Dismiss (“Small Dec.), ¶ 5.

6 Mark Small states that Lodsys has not filed lawsuits in Arizona, but makes no affirmative allegation as to the lawsuits Lodsys has filed against Arizona-based companies in other jurisdictions. See Small Dec., ¶ 5.

10

licenses with other companies headquartered in Arizona,7 among other contacts. These additional contacts will only strengthen the case for jurisdiction.

2. Application of Federal Circuit Law to Patent Trolls.

In Red Wing, the Federal Circuit set the rule that sending a demand letter, without more, cannot establish jurisdiction over an out-of-state defendant. Importantly, the court found this amounted to sufficient minimum contacts, but concluded for policy reasons that the exercise of jurisdiction would be unreasonable and unfair.8 The court found it unfair for a patent-holder to subject itself to jurisdiction in a forum by doing nothing more than informing another of its rights. The question before the Court then is one involving fairness – a balancing of the equities. And on these facts, that balance will, and indeed should, tip away from a patent troll like Lodsys.

Certainly, the concerns for fairness are very different where a patent troll is involved. At least one other district court has recognized as much. In Ivoclar, the court held that the unique business of patent trolls subject them to a different standard for finding jurisdiction in the alleged infringer’s forum state. Ivoclar Vivadent, Inc. v. Hasel and ABCO, No. 02-CV-0316E(F), 2003 WL 31730520 (W.D.N.Y. June 20, 2003). The district court’s reasoning is illuminating:

Initially, it is important to note that ABCO’s sole function is to manage,

_____________________
7 Mark Small is noticeably silent on these issues in his declaration. See Small Dec.

8 The three-part test for establishing personal jurisdiction in patent cases is: “(1) whether the defendant purposefully directed its activities at residents in the forum; (2) whether the claim arises out of or relates to defendant’s activities in the forum; and (3) whether assertion of personal jurisdiction is reasonable and fair.” Akro Corp. v. Luker, 45 F.3d 1541, 1548 (Fed. Cir. 1995).

11

enforce and license its patents and that it lacks the “traditional indicia of doing business because it does not manufacture or sell tangible goods.” Accordingly, the frequency and nature of ABCO’s New York business activities must be analyzed within such a context in determining whether such contacts demonstrate the requisite degree of permanence. . . . while the Court recognizes that, without more, the two letters that ABCO had sent to Ivoclar would be insufficient for this Court to exercise jurisdiction over defendants, defendants’ other activities in not only protecting its patents but soliciting licensing fees in New York, when combined with their two ‘cease and desist” letters, evince the requisite permanence – i.e., systemic and continuous activity – to satisfy New York’s “doing business” test.9 Thus, although ABCO has no offices, employees, assets or telephone listings in New York, it is subject to the personal jurisdiction of this Court because it has extensively engaged in its primary business activity – to wit, enforcing and licensing its patents – in New York.

Id. at *4 (finding general jurisdiction).

The New York district court’s analysis is the correct one. A patent troll’s singular activity is to extract pre-litigation settlements – it sends demand letters, engages in license negotiations, and enters into nonexclusive licenses in exchange for a fee. For those who stand their ground, the patent troll sues for infringement. But if these activities are irrelevant for jurisdictional purposes, then what are? Conceivably, no activities can subject a patent troll to jurisdiction outside its home forum. This is particularly troubling where, as here, the troll sets up a sham office in the Eastern District to permit a litigation mill to occur there. Whatever can be said about this practice, it is most definitely not fair.

The lesson of the Supreme Court’s decision in eBay Inc. v. MercExchange,

_____________________
9 Arizona’s long-arm statute permits the exercise of jurisdiction to the maximum extent permitted by the U.S. Constitution, which would include “doing business” in the state. Ariz. R. Civ. P. 4.2(a).

12

L.L.C., 547 U.S. 388 (2006) is instructive on this point. MercExchange – a patent troll – won at trial on the issues of patent validity and infringement. However, the trial court denied MercExchange’s motion for permanent injunction. The Federal Circuit reversed by applying a general rule that courts should issue permanent injunctions against patent infringement “absent exceptional circumstances.” The Supreme Court granted certiorari to determine the appropriateness of this general rule. Id. at 391.

The Supreme Court noted that the traditional test applied to requests for equitable relief, including permanent injunctions, was a four-factor test. The question before the Supreme Court was whether there was any basis to treat patent cases differently. The Supreme Court held there was not. Id. (“These familiar principles apply with equal force to disputes arising under the Patent Act.”). In other words, the Supreme Court found that it was inappropriate to adopt categorical rules in patent cases where the standard is traditionally fact specific. See New York Law Journal, Controlling Patent Trolls, Exhibit 15.

This same principle applies to personal jurisdiction. Analysis of personal jurisdiction is highly dependent on the unique facts of each case. For courts to adopt a categorical rule that certain licensing activities in a forum can never establish jurisdiction is at odds with the Supreme Court’s decision in eBay. This is especially true when patent trolls only engage in licensing and enforcement activities.

Four Supreme Court Justices made this point in a concurring opinion. They stated that the recent rise of the patent troll industry should be expressly considered in this type of fact-specific analysis:

13

In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing or selling goods but, instead, primarily for obtaining licensing fees. . . . The equitable discretion over injunctions, granted by the Patent Act, is well suited to allow courts to adapt to the rapid technological and legal developments in the patent system. For these reasons it should be recognized that district courts must determine whether past practice fits the circumstances of the bases before them.

Id. at 396-97. The Justices expressed particular concern about business method patents, like those in this case. “The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.” Id. at 397.

And just recently, the Federal Circuit relied heavily on the fact that a patentee was a patent troll to affirm the district court’s exercise of discretion to award fees and sanctions. In Eon-Net, the court found the patent troll’s practice of “exploiting the high cost to defend complex litigation to extract a nuisance value settlement” constituted bad faith. There, the patent troll offered to settle the case for as little as $25,000. In comparison, the defendant spent over $600,000 to litigate the case through claim construction. Eon-Net, LP v. Flagstar Bancorp., __ F.3d __, 2011 WL 3211512, at *10 (Fed. Cir. July 29, 2011).

At the early stage of this case, Lodsys has yet to make a specific settlement demand. However, its web site states that for at least one accused system, Lodsys is seeking 0.575% of revenue over the period of the notice letter to patent expiration, or in the case of $1 million in sales, only $5,750 per year. See Exhibit 6. Lodsys’s litigation conduct virtually mirrors that of the patent troll in Eon-Net.

14

So while courts may not have equitable discretion to determine if a defendant has sufficient minimum contacts with a given forum, they do have discretion when it comes to determining if the exercise of jurisdiction is reasonable and fair under the third prong of the jurisdictional test.10 Because it is this latter prong at issue here, jurisdictional discovery is warranted. This Court should have a full account of the jurisdictional picture when deciding the fairness issue in the context of Lodsys’s activities.

B. Alter Ego/Agency.

DriveTime should also be allowed to gather evidence to prove that Lodsys is the alter ego or agent of IV. Generally, the jurisdictional contacts of a parent are irrelevant to its subsidiary. However, there are two well-established exceptions where the contacts of one may be imputed to other. Those are: (1) if one company is merely an alter ego of the other created solely to shield the company from litigation in an unfavorable forum; and (2) if one company is the general agent of the other in the forum. MMI, Inc. v. Baja, Inc., 743 F. Supp. 2d 1101, 1110 (D. Ariz. 2010).11

As discussed above, the evidence known to date suggests that one or both of these theories apply to the present case. DriveTime should be permitted to conduct discovery on whether there is common ownership between Lodsys and IV, whether IV

______________________
10 The nature of Lodsys’s activities would also be relevant to considering Lodsys’s request that the Court exercise discretion to decline to hear this declaratory judgment action. See Motion, pp. 13-14. DriveTime will respond fully and substantively to this request and the Motion in its entirety once discovery is completed.

11 This Court previously held that piercing the corporate veil is not “intimately involved in the substance of enforcement of the patent right,” and thus, Ninth Circuit precedent should be applied. MMI, 743 F. Supp. 2d at 1110.

15

monitors Lodsys’s performance, whether IV supervises Lodsys’ finance and capital budget decisions, whether IV articulates Lodsys’s general policies and procedures, and the level of IV’s involvement in Lodsys’s operations. See MMI, 743 F. Supp. 2d at 1111. Any combination of these facts would establish what has long been believed in the industry – that Lodsys and IV are really the same entity. DriveTime should also be permitted to conduct discovery on those facts sufficient to establish that Lodsys acts as IV’s general agent. Finally, DriveTime should be permitted to conduct discovery on IV’s contacts with this forum, which under either the alter ego or agent theory, should be imputed to Lodsys. As noted above, those contacts are believed to be extensive.

C. Baseless Nature of Lodsys’s Infringement Claims.
Patent trolls are known for making baseless infringement claims. See Eon-Net, 2011 WL 3211512, at *10. So it is no surprise that Lodsys’s claims against DriveTime lack merit.12 DriveTime should be permitted to conduct discovery on the frivolous nature of Lodsys’ infringement claims because proof of bad faith activities directed toward businesses that reside in or are headquartered in Arizona would support jurisdiction. See, e.g., International Electronics, Inc. v. Human Electronics, Inc., 320 F. Supp. 2d 1085, 1089 (W.D. Wash. 2004).

. . .

. . .

______________________

12 For example, Lodsys alleges that the “units of commodity” that are the subject of the Asserted Patents are web sites – an allegation that turns ordinary meaning on its head.

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D. Staying the Response to Lodsys’s Motion or Transferring the Case to the Jurisdiction of the First-Filed Illinois Actions is the Appropriate Remedy Over Dismissal.

In the event this Court is not inclined to grant leave for jurisdictional discovery, dismissal is not the appropriate remedy. Rather, the case should be stayed pending the outcome of discovery in the Illinois Actions. Once jurisdiction is established in Illinois (or, alternatively, Wisconsin), pursuant to 28 U.S.C. §1406(a), and if the Court is inclined to dismiss, this case should instead be transferred to that venue. According to the Supreme Court, “[t]he language of §1406(a) is amply broad enough to authorize the transfer of cases, however wrong the plaintiff may have been in filing his case as to venue, whether the court in which it was filed had personal jurisdiction or not.” Goldlawyr v. Heiman, 369 U.S. 463, 466, 82 S.Ct. 913, 916 (1962) (“[t]he problem which gave rise to the enactment of the section was that of avoiding the injustice which had often resulted to plaintiffs from dismissal of their actions merely because they had made an erroneous guess with regard to the existence of some elusive fact”). Here, dismissal of the action would cause DriveTime to lose the benefits of being first in time, precisely the type of injustice Congress sought to avoid by enacting §1406(a). Id. Transfer to the Illinois forum would be more appropriate than dismissal because it would allow the merits to be heard in a first-filed action.

III. CONCLUSION.

For the foregoing reasons, DriveTime respectfully requests that the Court grant this motion and allow jurisdictional discovery.

RESPECTFULLY SUBMITTED this 15th day of August, 2011.

17

BALLARD SPAHR LLP

By: /s/Brian W. LaCorte Brian W. LaCorte (012237)
Donna H. Catalfio (021827)
Andrea L. Stone (026520)

1 East Washington Street
Suite 2300
Phoenix, AZ 85004-2555

Attorneys for Plaintiff


The exhibits:

  • Exhibit 1 is the Lodsys website.
  • Exhibit 2 is "Intellectual Ventures Becomes Patent Troll Public Enemy #1", by Gene Quinn, IP Watchdog
  • Exhibit 3 is Price WaterhouseCoopers' 2008 patent litigation study, A Closer Look
  • Exhibit 4 is NPR's When Patents Attack
  • Exhibit 5 is Oasis Research's filing in Oasis Research v. ADrive, PLAINTIFF OASIS RESEARCH, LLC’S DISCLOSURE PURSUANT TO THE COURT’S ORDER TO MEET, REPORT AND APPEAR AT SCHEDULING CONFERENCE
  • Exhibit 6 is Lodsys' About Lodsys web page
  • Exhibit 7 is the Guardian's July 27, 2011 article, "Why won't Intellectual Ventures answer questions about its relationship with Lodsys?"
  • Exhibit 8 is Intellectual Ventures' Worldwide web page.
  • Exhibit 9 is a printout of a LinkedIn page of an IV employee in Arizona.
  • Exhibit 10 is a Notification of Docket Entry from LivePerson v. Lodsys, an Illinois case.
  • Exhibit 11 is Lodsys' Complaint in Lodsys v. LivePerson, an Illinois case.
  • Exhibit 12 is a printout of a search of the Arizona Corporation Commission State of Arizona Public Access System, showing BestWestern is located in Arizona.
  • Exhibit 13 is a printout of a Lodsys webpage claiming the IRS as a "client".
  • Exhibit 14 is a printout of an IRS.gov webpage showing a presence in Arizona.
  • Exhibit 15 is a printout of a New York Law Journal article on jurisdiction in patent infringement cases.

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