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Rates Technology Inc v. Speakeasy

May 9, 2011

RATES TECHNOLOGY INC., PLAINTIFF,
v.
SPEAKEASY, INC., BEST BUY CO., INC., SPEAKEASY BROADBAND SERVICES, LLC, MEGAPATH INC., COVAD COMMUNICATIONS CO., COVAD COMMUNICATIONS GROUP, INC., CCGI HOLDING CORP., AND PLATINUM EQUITY LLC, DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge:

OPINION & ORDER

Plaintiff Rates Technology, Inc. ("RTI") brings this action for breach of an agreement between RTI and defendant Speakeasy, Inc. ("Speakeasy") which provided that in the event Speakeasy challenged the validity of certain telecommunication patents held by RTI, Speakeasy would pay $12 million in liquidated damages to RTI. Because this so-called "licensee estoppel" clause is invalid and unenforceable, the defendants' motions to dismiss are granted.

BACKGROUND

The first amended complaint (the "Complaint") asserts three causes of action for breach of contract at various points in time. The Complaint principally alleges that the defendants breached an agreement between RTI and Speakeasy by either filing or assisting in the filing of an action in the Northern District of California which sought a declaratory judgment that the patents encompassed by the agreement are invalid. The Complaint seeks to collect liquidated damages of $12 million from the defendants as provided for in the agreement.

RTI, a Delaware company, retains ownership rights to many patents in the telecommunications field. According to the Complaint, RTI is highly regarded "for its policy of settling patent infringement claims in accordance with a one-time payment tiered pricing structure based on the size of the accused infringer measured by its annual sales."

RTI owns the rights to the two telecommunications patents at issue here, United States Patent No. 5,425,085 (the "'085 Patent") and United States Patent No. 5,519,769 (the "'769 Patent"). Both patents cover inventions related to the automatic routing of telephone calls based on cost.

RTI became aware that Speakeasy was infringing on the '085 and '769 Patents in April of 2007. On April 30, 2007, RTI and Speakeasy entered into an agreement (the "Agreement") whereby RTI promised not to sue Speakeasy for infringement of the '085 and '769 Patents in exchange for a one-time payment of $475,000. The Agreement included a licensee estoppel clause providing that

Speakeasy hereby warrants and represents to RTI that on and after the execution date of this Covenant Speakeasy will not anywhere in the world challenge, or assist any other individual or entity to challenge, the validity of any of the claims of the Patents or their respective foreign counterpart patent applications, except in defense to a Patent infringement lawsuit brought under the Patents against Speakeasy, its Systems, and except as otherwise provided by law. In the event that the above representation is incorrect then Speakeasy agrees that it shall pay to RTI as liquidated damages the additional amount of Twelve Million U.S. ($12 Million) Dollars plus all legal expenses necessary to collect this added amount.

The Agreement defined "Speakeasy" to "mean Speakeasy, Inc. and Best Buy Co., Inc. and their current direct or indirect Affiliates" in anticipation of defendant Best Buy Co., Inc.'s ("Best Buy") acquisition of Speakeasy.

On June 10, 2010, Best Buy announced its intention to sell Speakeasy to defendant Covad Communications Group, Inc. ("Covad Communications Group"). Speakeasy then planned to merge with defendants MegaPath Inc. ("MegaPath") and Covad Communications Company, a wholly owned subsidiary of Covad Communications Group. To effect the sale of Speakeasy and the merger of Speakeasy with MegaPath and Covad Communication Company, Best Buy transferred all of Speakeasy's assets to defendant Speakeasy Broadband Services, LLC ("Speakeasy Broadband"). Best Buy later sold Speakeasy Broadband to Covad Communications Group.

The Complaint alleges that as part of the due diligence conducted in preparation for the merger, Best Buy and Speakeasy provided information concerning the Agreement and the '769 and '085 Patents encompassed by the Agreement to Covad Communications Company. In June of 2010, RTI became aware that the products and services of Covad Communications Company were infringing on the '769 and '085 Patents and on June 25, RTI notified Covad Communications Company of this alleged infringement and offered to enter into an agreement with the company. Covad Communications Company subsequently brought suit in the Northern District of California on July 23, 2010; it sought a declaratory judgment that the '085 and '769 Patents were invalid.

RTI filed its original complaint on August 31, 2010. The original complaint named only Speakeasy and Best Buy as defendants. RTI amended its complaint to add Speakeasy Broadband, Covad Communications Company, Covad Communications Group, and MegaPath as defendants on December 3. Speakeasy and Best Buy filed a motion to dismiss on January 14, 2011; Speakeasy Broadband, Covad Communications Company, Covad Communications Group, and MegaPath filed a separate motion to dismiss on the same day. The motions were fully submitted on March 4.

DISCUSSION

The defendants have moved to dismiss on three principal grounds. First, they assert that the licensee estoppel clause in the Agreement is invalid and unenforceable. Second, Best Buy and Speakeasy assert that RTI's claim that they "assisted" in the filing of the declaratory judgment action in California fails the plausibility standard under Twombly. Finally, the Covad entities, MegaPath, and Broadband allege that they are not bound by the Agreement and thus are not responsible for any breach. Because the licensee estoppel ...


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