Infringement Complaint Based Solely on Continued Production of a Previously Licensed Product Fails to Meet Minimum Pleading Standards

Authored by D. Brian Kacedon, John C. Paul, and Robert D. Wells

Abstract

Complaints for patent infringement must allege enough facts about the infringement of patent claims by an accused product to plausibly show the patent owner may be entitled to the relief it seeks for patent infringement. In Deetz Family, a district court dismissed a complaint that based its allegations of infringement on continued production of a previously licensed product, finding the complaint did not provide sufficient facts to show the patent owner may be entitled to relief for patent infringement. In addition, to establish a breach of the duty of good faith and fair dealing, the complaining party must show that a license agreement vested the opposing party with discretion in performing an obligation under the contract and that the opposing party exercised that discretion in bad faith, unreasonably, or in a manner inconsistent with the reasonable expectations of the parties.

To meet the minimum standards for pleading a complaint must provide sufficient notice of the claims being alleged. In particular, a patent infringement complaint must allege a claim that plausibly entitles the plaintiff to relief, identifying the accused products and the patent claims being infringed.

In Deetz Family, LLC v. Rust-Oleum Corp., rather than alleging such facts, the patent owner asked the court to draw inferences of such allegations from the fact that Rust-Oleum licensed the patents and continued manufacturing accused products after the license agreement was terminated. Finding this insufficient, a Massachusetts court concluded that Deetz's complaint should be dismissed as insufficiently pleading a claim for patent infringement.

Background

Deetz and Rust-Oleum entered into a license agreement granting Rust-Oleum non-exclusive rights to Deetz's patents for magnetic paint additives. Under the terms of the license agreement, Rust-Oleum paid an upfront fee and royalties based on a percentage of net sales each year. The license also required Rust-Oleum to pay minimum royalties in the event that its actual royalties fell below certain thresholds. Rust-Oleum made the upfront payment and paid part of the actual royalties due from 2006 to 2009, but the payments made didn’t meet the minimum royalties required under the license. In 2010, Rust-Oleum stopped making any royalty payments under the license agreement.

Deetz subsequently terminated the license agreement and filed a complaint against Rust-Oleum for breach of contract, breach of the implied covenant of good faith and fair dealing, and patent infringement, seeking the remainder of minimum royalty payments due under the agreement and to enforce the terms of the agreement.

For the breach of the implied covenant of good faith and fair dealing, the complaint alleged that Rust-Oleum’s failure to pay fees due under the license agreement and its continued use of the patented technology violates Deetz's "reasonable expectations of performance" and breaches the implied covenant of good faith and fair dealing that is inherent to all contracts.

For patent infringement, the complaint alleged that Rust-Oleum infringed Deetz's patents based on the license agreement and a YouTube video posted by Rust-Oleum purportedly showing that Rust-Oleum still manufactured an alleged infringing product.

Deetz also claimed to have additional facts to support its claims, which it did not include in its complaint to avoid disclosing trade secret paint formulations—Rust-Oleum and Deetz both acknowledged that they were negotiating the terms of a protective order that would keep those trade secrets confidential.

Rust-Oleum filed a motion asking the court to dismiss Deetz's claims for breach of the implied covenant of good faith and fair dealing, and claims for patent infringement. Rust-Oleum argued that by failing to identify the accused products, which patent claims those products infringed, and how the allegedly infringing products practiced the claims, Deetz’s complaint failed to provide enough facts to meet established minimum pleading standards.

The Deetz Family Decision

The district court examined whether Deetz's complaint included sufficient facts to plausibly support its allegation that Rust-Oleum breached its implied covenant of good faith and fair dealing, and its allegation that Rust-Oleum infringed Deetz's patents. In its evaluation, the court separated conclusory legal statements from factual allegations in the complaint and considered whether the factual conclusions alone supported a plausible claim to relief.

For the claim related to the implied covenant, the court stated: "To establish a breach of the duty of good faith and fair dealing, the complaining party must show that the contract vested the opposing party with discretion in performing an obligation under the contract and the opposing party exercised that discretion in bad faith, unreasonably, or in a manner inconsistent with the reasonable expectations of the parties." The court concluded that the complaint "failed to allege what, if any, terms of the license agreement required Rust-Oleum to exercise its discretion, or how it abused that discretion. Even the proposed amendment makes the conclusory assertion that Rust-Oleum’s actions violated Deetz’s "reasonable expectation of performance." A mere failure to perform is simply a breach of contract, not a breach of the implied duty of good faith."

For the claim of patent infringement, Rust-Oleum argued that Deetz’s complaint failed to identify the accused products, which claims they are infringing, how the allegedly infringed claims read on the accused products, or the composition of the accused products. Instead, Deetz asked the asked the court to infer direct infringement from the fact that Rust-Oleum licensed the patents and then continued making magnetic primer products after the License Agreement was terminated. The court, however, found this insufficient. In the court’s view, by seeking to draw inferences from the existence and content of a license agreement from a time period before the alleged infringement occurred, Deetz only further confused which actions or products made by Rust-Oleum infringed which claims of Deetz’s patents.

The court held that the failure to provide any facts to support the claims in the complaint for breach of the implied covenant and patent infringement warranted dismissal of those claims. However, because Deetz argued that it did have facts to support its claims, the court granted Deetz an opportunity to amend the complaint to allege facts sufficient to show an abuse of discretion by Rust-Oleum and to allege facts connecting Rust-Oleum’s potentially infringing products with specific patent claims.

Strategy and Conclusion

This case shows a variety of claims and the varying range in detail required in alleging claims to obtain relief from a former licensee who failed to pay under a license agreement and is believed to continue to produce products after the license is terminated. The allegation of breach of contract was relatively simple and was not challenged by the former licensee. However, the allegation of breach of an implied duty of good faith and fair dealing, and the allegation of patent infringement required more detail, and they were successfully challenged by the former licensee.

As well, this case shows the value in considering the various claims that can be asserted and the elements that are required to be pled in the complaint, and it demonstrates the value of explicitly alleging the facts needed to support a claim of patent infringement rather than relying on inferences of infringement to be drawn by the court from alleging that the defendant continued to produce a previously licensed product.

Further Information

The Deetz Family opinion can be found here.