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Droplets, Inc. v. E*Trade Fin. Corp.

United States District Court, S.D. New York

April 4, 2013

DROPLETS, INC., Plaintiff,
v.
E*TRADE FINANCIAL CORPORATION, et al., Defendants

Page 337

[Copyrighted Material Omitted]

Page 338

For Droplets, Inc., Plaintiff, Counter Defendant: Brandon M Jordan, McKool Smith PC - Washington, Washington, DC; Brett E. Cooper, McKool Smith, New York, NY; James Andrew Holmes, The Law Office of James Holmes, PC, Henderson, TX; James E Quigley, Joshua Wright Budwin, PRO HAC VICE, McKool Smith, PC - Austin, Austin, TX; Samuel Franklin Baxter, PRO HAC VICE, McKool Smith, PC, Dallas, TX; Theodore Stevenson, III, PRO HAC VICE, McKool Smith, Dallas, TX.

For E*Trade Financial Corporation, E*Trade Securities, LLC, E*Trade Bank, Scottrade, Inc., Scottrade Financial Services, Inc., TD Ameritrade Holding Corporation, TD Ameritrade, Inc., The Charles Schwab Corporation, Charles Schwab & Co., Inc., Charles Schwab Bank, Schwab Holdings, Inc., Scottrade, Inc., TD Ameritrade, Inc., ETrade Financial Corporation, ETrade Securities, LLC, Scottrade Financial Services, Inc., TD Ameritrade Holding Corporation, ETrade Bank, Charles Schwab Bank, Charles Schwab & Co., Inc., Schwab Holdings, Inc., The Charles Schwab Corporation, Defendants: Lucy Yen, LEAD ATTORNEY, Wilson Sonsini Goodrich & Rosati(1301 Ave. of the Americas), New York, NY; Abraham DeLaO, Brian David Range, Wilson Sonsini Goodrich & Rosati, Austin, TX; Jessica Leigh Margolis, Wilson Sonsini Goodrich & Rosati (NYC), New York, NY; Larry L. Shatzer, PRO HAC VICE, Wilson Sonsini Goodrich & Rosati, P.C., Washington, DC; Michael Brett Levin, Wilson Sonsini Goodrich & Rosati (CA), Palo Alto, CA.

For OptionsHouse, LLC, PEAK6 Investments, L.P., Defendants: Richard Alan Sayles, LEAD ATTORNEY, Mark Daniel Strachan, Sayles Werbner, Dallas, TX; Jeffrey J. Bushofsky, Louis E Fogel, Marc A Cavan, PRO HAC VICE, Ropes & Gray LLP - Chicago, Chicago, IL.

For ETrade Financial Corporation, E*Trade Securities, LLC, Scottrade Financial Services, Inc., TD Ameritrade, Inc., Charles Schwab Bank, Charles Schwab & Co., Inc., Schwab Holdings, Inc., Counter Claimants: Abraham DeLaO, Brian David Range, Wilson Sonsini Goodrich & Rosati, Austin, TX; Jessica Leigh Margolis, Wilson Sonsini Goodrich & Rosati (NYC), New York, NY; Larry L. Shatzer, PRO HAC VICE, Wilson Sonsini Goodrich & Rosati, P.C., Washington, DC; Michael Brett Levin, Wilson Sonsini Goodrich & Rosati (CA), Palo Alto, CA.

For ETRADE Bank, Counter Claimant: Abraham DeLaO, Brian David Range, Wilson Sonsini Goodrich & Rosati, Austin, TX; Jeffrey J. Bushofsky, PRO HAC VICE, Ropes & Gray LLP, Chicago, IL; Jessica Leigh Margolis, Wilson Sonsini Goodrich & Rosati (NYC), New York, NY; Larry L. Shatzer, PRO HAC VICE, Wilson Sonsini Goodrich & Rosati, P.C., Washington, DC; Michael Brett Levin, Wilson Sonsini Goodrich & Rosati (CA), Palo Alto, CA.

For Scottrade, Inc., TD Ameritrade Holding Corporation, The Charles Schwab Corporation, Counter Claimants: Abraham DeLaO, Brian David Range, Wilson Sonsini Goodrich & Rosati, Austin, TX; Jessica Leigh Margolis, Wilson Sonsini Goodrich & Rosati (NYC), New York, NY; Larry L. Shatzer, PRO HAC VICE, Wilson Sonsini Goodrich & Rosati, P.C., Washington, DC; Michael Brett Levin, Wilson Sonsini Goodrich & Rosati (CA), Palo Alto, CA.

For OptionsHouse, LLC, PEAK6 Investments, L.P., Counter Claimants: Richard Alan Sayles, LEAD ATTORNEY, Sayles Werbner, Dallas, TX; Louis E Fogel, PRO HAC VICE, Jeffrey J. Bushofsky, Marc A Cavan, Ropes & Gray LLP - Chicago, Chicago, IL; Mark Daniel Strachan, Sayles Webner, Dallas, TX.

OPINION

Colleen McMahon, U.S.D.J.

Page 339

DECISION AND ORDER DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT AND PLAINTIFF'S MOTION TO DISMISS COUNTERCLAIM

Before the Court in this patent infringement case are cross motions: Plaintiff's motion to dismiss Defendants' counterclaim for breach of contract on the ground that Defendants lack standing to pursue it; and Defendants' motion for summary judgment, on the ground that they are third party beneficiaries of a settlement agreement that bars Plaintiff from suing them for patent infringement.

The parties present the issues as straightforward issues of contract construction involving an unambiguous contract. I agree that some clauses in the contract on which the parties focus are unambiguous and can be construed by the Court; I also agree that Defendants are third-party beneficiaries of a covenant not to sue that is explicitly contained in the contract.

However, I cannot yet conclude whether Defendants are immune from suit. That question depends on whether Defendants' web sites are appropriately considered " software" or " applications" so as to qualify for " Licensed Product" protection under one section of the Agreement; or alternatively, whether they are appropriately considered " Adobe Products," as that term is defined in the Agreement, in order to fall under another definition of " Licensed Products." The parties' briefs fail to clash on these issues, and the parties have not submitted evidence from which I could determine the matter -- or, to the extent they have, the evidence raises a genuine issue of material fact.

Both motions are, therefore, denied -- both Plaintiff's motion to dismiss the counterclaim for lack of standing and Defendants' motion for summary judgment, which invokes the covenant not to sue.

BACKGROUND

I. Statement of Facts

Virtually all the facts are undisputed.

A. The Droplets/Adobe Litigation

Droplets holds U.S. Patent 6,687,745 (the " '745 Patent" ), covering a " System or method for delivering a graphical user interface of remote applications over a thin bandwidth connection." It has also obtained U.S. Patent 7,502,838 (the " '838 Patent" ), which is a daughter patent covering related technology. These are referred to as the " Licensed Patents."

On July 31, 2006, Droplets filed suit against, inter alia, Adobe Systems Incorporated (Adobe), alleging infringement of the '745 Patent.

The lawsuit was settled as of October 7, 2008, when the parties thereto executed a Settlement and License Agreement (the Agreement). The Agreement is to be construed under the law of the State of Texas.

B. The Settlement and License Agreement

The Agreement contains the following relevant definitions:

" Adobe Customer/User" means any licensed customer, licensed user, developer, distributor, reseller, original equipment manufacturer, or retailer of any Licensed Product. (Sec. 1.2)
" Licensed Product(s)" shall mean

Page 340

(i) Any and all past, present and future Adobe products, processes, components, software, hardware, technology, data, methods, services, or activities or instructions of any kind singly or in combination with any other products, processes, components, software, hardware, technology, data, methods, services, or activities or instructions (collectively, " Adobe Products" ) and
(ii) Any and all past, present and future third party software or applications either
(a) that are developed or written using any Adobe Products or
(b) not in limitation of the foregoing, to the extent such software or applications use any Adobe Product to practice any invention claimed in the Licensed Patents. (Sec. 1.3)

The Agreement contains the following Releases:

Subject to full payment as contemplated herein . . . Droplets and its officers, directors, and employees hereby voluntarily, fully and forever, irrevocably and unconditionally, release, acquit, and discharge:
(a) all Claims brought or that could have been brought in the Lawsuit against the
(i) Adobe Customers/Users with respect to any and all Licensed Products and
(ii) Adobe Parties, and
(b) all other past, present or future Claims arising in whole or in part as of or prior to the Effective Date against the
(i) Adobe Customers/Users with respect to any and all Licensed Products and
(ii) Adobe Parties, including Claims relating to the Licensed Patent(s), other intellectual property, trade secrets or breach of contra ct. . . (Sec. 2.1)

The Agreement contains the following Licenses:

Subject to full payment as contemplated herein . . . Droplets hereby voluntarily, fully and forever, and unconditionally, grants to Adobe a worldwide, irrevocable, unrestricted, nonexclusive, fully paid-up, royalty-free, perpetual license under the Licensed Patent(s) to make, have made, use, sell, offer for sale, import or otherwise exploit the Licensed Products. Droplets hereby grants to Adobe Customers a worldwide, irrevocable, fully paid-up, royalty-free, perpetual, limited to the Licensed Products, nonexclusive, nontransferable license under the Licensed Patents to make, have made, use, sell, offer for sale, import or otherwise exploit the Licensed Products. No Claim of direct or indirect infringement or misappropriation of any patent or other intellectual property right may be based in whole or in part on any evidence of the existence, operation, or effect of a Licensed Product. (Sec. 3.3)

The Agreement contains the following Covenant Not to Sue:

Subject to full payment as contemplated herein . . . . Droplets hereby voluntarily, fully and forever, and unconditionally, grants to Adobe an irrevocable, unrestricted, fully paid-up, perpetual covenant not to sue (i) Adobe Customers/Users with respect to any and all Licensed Products and (ii) Adobe with respect to any and all Claims against Adobe, including Claims relating to the Licensed Products or based on the Licensed Patent(s) and any other intellectual property of Droplets, breach of contract claims, tort claims and trade secret misappropriation claims. (Sec. 3.1)

The Agreement contains the following additional sections of potential relevance:

No claim of direct or indirect infringement or misappropriation of any patent

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or other intellectual property right may be based in whole or in part on any evidence of the existence, operation, or effect of a Licensed Product. (Secs. 2.1(b) and 3.3)
The covenants and licenses in this Section 3 shall fully exhaust all Claims covered by this Section 3 as to each Licensed Product, regardless of whether it has any reasonable or intended use other than the practice of the Licensed Patent(s) or embodiment of essential features. (Sec. 3.4)
No license is granted by Droplets either directly or by implication, estoppel, or otherwise other than under the Licensed Patent(s) nor with respect to anything other than the Licensed Product. No right to sublicense (other than as provided by Section 3.3) is granted hereunder except as may occur by operation of law as a result of the express grants set forth herein. (Sec 3.5)

C. The Settlement Negotiations

Certain aspects of the settlement negotiations that led to the terms of the Agreement are important to understand the arguments made by the parties about what the Agreement means.

The Agreement went through a number of drafts. The Court has been provided with five drafts and one mark-up of a draft that preceded the final executed Agreement. These drafts show how the provisions quoted evolved from the form in which they were initially proposed into their final form.[1]

In particular:

The earliest draft (Ex. 15) was circulated by Adobe.[2] The term " Adobe Products" is defined using exactly the language that appears in the final Agreement, which is to say, the language of Sec. 1.3(i). (Ex. 15, Sec. 1.3) The term " Licensed Products" does not appear in the draft. Neither is there any language granting any sort of License to customers of Adobe, or agreeing not to sue them. In fact, the phrase " Adobe Customers" or " Adobe Customers/Users" does not appear in this draft.

Droplets redlined Ex. 15. (Exs. 16/17[3] Plaintiff included a number of new provisions that were designed to limit the scope of " Adobe Products" to products that were made or sold by Adobe, and not third party products that incorporated Adobe technology. So, for example, Droplets altered the definition of " Adobe Products" by adding the following language to Sec. 1.3:

Adobe Products shall not include any product, technology or service developed by and for an entity other than Adobe and which is sold by third parties.

Additionally, Droplets added the term " Adobe Customers," which it defined as " any licensed customer or licensed user of Adobe Product" (Sec 1.2), and inserted language by which it granted to Adobe " the right to grant to Adobe Customers" a:

. . . written sublicense under Adobe's right and license under the Licensed Patents solely to purchase and use any Adobe Product in any territory worldwide for such Adobe Customer's internal use and subject to Adobe's standard

Page 342

terms and conditions. For the avoidance of doubt, Adobe cannot grant to any third parties including without limitation any Adobe Customer any other rights under the Licensed Patent including without limitation any right or license to make, use or sell any product, technology or services used together or combined with any Adobe Product.

This proposal obviously did not fly with Adobe. It sent back a rather different document, which Droplets then redlined (Ex. 18). One can see how Adobe altered Droplets' proposed draft by looking at Exhibit 18 and ignoring Droplets' subsequently inserted redlinings.

Adobe's principal reaction to Droplets' Exhibit 17 was to reject every one of the caveats and limitations that were inserted by Droplets to limit the rights of Adobe's customers -- including the one that began " for the avoidance of doubt." Adobe took the opposite approach from Droplets, leaving little or no wiggle room for Droplets to sue its customers -- a perfectly understandable position, since the prospect that a customer might be used for using an Adobe product would negatively impact Adobe sales.

First and foremost, Adobe introduced a new term into the Agreement: " Licensed Product." Adobe defined it to mean:

(i) Any and all past, present and future Adobe products, processes, components, software, hardware, technology, data, methods, services, or activities or instructions of any kind singly or in combination with any other products, processes, components, software, hardware, technology, data, methods, services or activities or instructions, or otherwise (collectively " the Adobe Products" ); and
(ii) Any and all third party software or applications developed based on or for use with any of the foregoing Adobe Products (including, without limitation, any Adobe Flex or Flash software or application that runs with or on an Adobe Flash Lite and/or Adobe Air runtime environment) singly or in combination with any Adobe Product or any other products, processes, components, software, hardware, technology, data, methods, services, or activities or instructions (collectively, " Third Party Products" ). Licensed Products shall not extend to any other product or service of an Adobe Customer/User that is not a Licensed Product.

The term " Adobe Customer" becomes " Adobe Customer/User," redefined by Adobe as:

any licensed customer, licensed user, developer, distributor or retailer of Adobe or any Licensed Product.

In its draft, Adobe suggested that Droplets grant a license for the use and exploitation of " Licensed Products" both to Adobe and to Adobe Customers/Users. (Sec. 3.3)

Adobe's new approach was not satisfactory to Droplets. Exhibit 18 is Droplets' red-line markup of Adobe's ...


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