Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-02361/USCOURTS-cand-3_06-cv-02361-2/pdf.json

Nature of Suit Code: 830
Nature of Suit: Patent
Cause of Action: 35:271 Patent Infringement

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

NETFLIX, INC.,

Plaintiff,

 v.

BLOCKBUSTER, INC.,

Defendant. /

No. C 06-02361 WHA

ORDER DENYING NETFLIX’S

MOTION TO DISMISS; 

MOTION TO STRIKE; AND

MOTION TO BIFURCATE

INTRODUCTION

In this patent-infringement action, plaintiff Netflix, Inc. moves to dismiss antitrust

counterclaims by defendant Blockbuster, Inc., and moves to strike Blockbuster’s affirmative

defenses of inequitable conduct and patent misuse. In the alternative, Netflix moves to

bifurcate proceedings on Blockbuster’s counterclaims and to stay discovery on the

counterclaims pending resolution of Netflix’s patent-infringement claims. This order holds that

Blockbuster adequately pled its antitrust counterclaims and affirmative defenses for purposes of

surviving dismissal and striking. Furthermore, given the relationship between the issues

presented by Netflix’s claims and Blockbuster’s counterclaims, this order finds that neither

bifurcation nor a discovery stay is warranted at this time. Accordingly, Netflix’s motions are

DENIED.

STATEMENT

Netflix is the holder of the two patents in suit, which described methods for renting

items, in particular for ordering digital video discs via the Internet (but not transmitting them

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via the Internet). Netflix’s first patent, U.S. Patent No. 6,584,450 (“the ’450 patent”), issued on

June 23, 2003. Its second patent, U.S. Patent No. 7,024,381 (“the ’381 patent”), issued on April

4, 2006. The same inventors and prosecuting lawyers were involved with both patents, and

both patents were assigned to Netflix.

Since 1999, Netflix has rented movies on DVDs on a subscription basis through its

website, www.netflix.com. Blockbuster has also rented DVDs for many years. Until 2004,

Blockbuster’s rentals were conducted in traditional brick-and-mortar stores. On August 11,

2004, Blockbuster launched “Blockbuster Online,” which provided for the rental of DVDs over

the Internet through its website www.blockbuster.com (Answer ¶ 30).

Netflix filed its application for the ’450 patent on April 28, 2000. According to

Blockbuster, Netflix did not disclose any prior art in conjunction with the application

(Answer ¶ 39(b)). On May 14, 2003, while the ’450 application was still pending, Netflix filed

a continuation application that ultimately became the ’381 patent. At first, Netflix allegedly

still did not disclose any prior art in conjunction with the ’381 application.

On June 14, 2003, the ’450 patent issued. The ’450 patent described a “method and

apparatus for inventing items.” The patent stated 100 claims. Claim 1 of the patent described

(col. 14, lines 43–55):

A method for renting items to customers, the method

comprising the computer-implemented steps of: 

receiving one or more item selection criteria that indicates

one or more items that a customer desires to rent; 

providing to the customer up to a specified number of the 

one or more items indicated by the one or more item

selection criteria; and 

in response to receiving any of the items provided to the

customer, providing to the customer one or more

other items indicated by the one or more item

selection criteria, wherein a total current number of

items pro-vided to the customer does not exceed the

specified number.

Claims 14, 29, 49, 65, 79, 94, and 96 of the ’450 patent all described iterations of the claimed

method adjusted to the rental of movies.

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 This order takes judicial notice of the nine NCR patents submitted by Netflix (RJN Exhs. A–I). 

See Fed. R. Evid. 201.

3

After the’450 patent issued, Netflix allegedly flooded the PTO with over 100 prior-art

references in support of the ’381 application, none of which had been disclosed during the

prosecution of the ’450 patent (Answer ¶¶ 39(d), 44).

Moreover, according to Blockbuster, Netflix omitted certain material references in

conjunction with both patent applications (id. at ¶¶ 44–45). Most notably, Netflix purportedly

omitted reference to certain patents owned by NCR Corporation, four of which were issued

before the ’450 application, describing methods on topics such as “Ordering and Downloading

Resources from Computerized Repositories” (id. ¶ 45).*

 These NCR patents were not included

in the one hundred prior art references submitted with the ’450 application. Netflix has initiated

litigation against NCR in this district court, seeking a declaratory judgment for

non-infringement of NCR’s patents. Netflix, Inc. v. NCR Corp., CV No. 06-1892 EDL. 

According to Blockbuster, the pleadings in that litigation show that Netflix was on notice of the

existence of NCR’s patents since at least 2003, when NCR sent Netflix a request to cease

infringement (Answer ¶ 48) (citing complaint in Netflix v. NCR).

As stated, Blockbuster launched its own online-movie-rental service in August 2004,

after the issuance of the ’450 patent but during the pendency of the ’381 application. 

Thereafter, in January 2005, Netflix’s chief executive officer Reed Hastings and Blockbuster’s

then executive vice president Edward Stead purportedly met (Answer ¶ 40). During that

meeting, Hastings allegedly “praised Blockbuster’s competitive position in the online rental

business and asked Stead when he had figured out that Netflix’s ’450 patent was a ‘joke’”

(ibid.).

On April 4, 2006, the ’381 patent issued. This second patent described “approach for

renting items to customers.” Claim 1 of 51 claims described (col. 13, lines 6–23):

A computer-implemented method for renting movies to

customers, the method comprising: 

providing electronic digital information that causes one or

more attributes of movies to be displayed; 

establishing, in electronic digital form, from electronic

digital information received over the Internet, a

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movie rental queue associated with a customer

comprising an ordered list indicating two or more

movies for renting to the customer; 

causing to be delivered to the customer up to a specified

number of movies based upon the order of the list; 

in response to one or more delivery criteria being satisfied, selecting another movie based upon the order of

the list and causing the selected movie to be delivered

to the customer; and 

in response to other electronic digital information 

received from the customer over the Internet, electronically updating the movie rental queue.

On the very day that the ’381 patent issued, April 4, 2006, Netflix filed the instant

lawsuit alleging infringement by Blockbuster of the two patents in issue. On June 13,

Blockbuster filed its answer and counterclaims. Blockbuster counterclaimed that Netflix

violated Section 2 of the Sherman Antitrust Act by committing knowing willful fraud on the

Patent and Trademark Office when applying for the two patents in issue, and by asserting these

patents in bad faith in sham litigation. Among Blockbuster’s affirmative defenses, Blockbuster

listed the defenses of inequitable conduct and patent misuse.

ANALYSIS

Netflix now moves to dismiss Blockbuster’s counterclaims for violation of the Sherman

Act. Netflix also moves to strike Blockbuster’s affirmative defenses of inequitable conduct and

patent misuse. In the alternative, Netflix moves to bifurcate its patent claims from

Blockbuster’s antitrust counterclaims for all purposes including discovery and trial.

1. MOTION TO DISMISS.

A motion to dismiss under FRCP 12(b)(6) tests for legal sufficiency of the claims

alleged in the complaint. A complaint should not be dismissed “unless it appears beyond doubt

that the plaintiff can prove no set of facts in support of his claim which would entitle him to

relief.” Conley v. Gibson, 355 U.S. 41, 45–46 (1957). On the other hand, “conclusory

allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for

failure to state a claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996).

A. Walker Process Claim.

“As a general rule, behavior conforming to the patent laws oriented towards procuring

or enforcing a patent enjoys immunity from the antitrust laws.” Unitherm Food Sys., Inc. v.

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Swift Eckrich, Inc., 375 F.3d 1341, 1356 (Fed. Cir. 2004), rev’d in part on other grounds, 126

S. Ct. 980 (2006). “But this immunity is hardly absolute. Nearly forty years ago, the Supreme

Court recognized that an inventor who obtains a patent by defrauding the patent office deserves

no immunity.” Such antitrust claims are known as Walker Process claims, referring to the

Supreme Court’s decision in Walker Process Equipment, Inc. v. Food Machinery & Chemical

Corp., 382 U.S. 172, 176 (1965). In order to “‘achiev[e] a suitable accommodation in this area

between the differing policies of the patent and antitrust laws,’ a distinction must be maintained

between patents procured by ‘deliberate fraud’ and those rendered invalid or unenforceable for

other reasons.” Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1069 (Fed. Cir.

1998) (quoting Walker Process, 382 U.S. 178–79 (Harlan, J., concurring)).

In order to succeed on a claim of Walker Process fraud, the antitrust claimant must

demonstrate:

(1) obtained the patent by knowingly and willfully

misrepresenting facts to the PTO;

(2) the party enforcing the patent was aware of the fraud when

bringing suit;

(3) independent and clear evidence of deceptive intent;

(4) a clear showing of reliance, i.e., that the patent would not

have issued but for the misrepresentation or omission; and

(5) the necessary additional elements of an underlying violation

of the antitrust laws.

Nobelpharma, 141 F.3d at 1068–71.

“Like all fraud-based claims, Walker Process allegations are subject to the pleading

requirements of Fed. R. Civ. P. 9(b).” Medimmune, Inc. v. Genentech, Inc., 427 F.3d 958, 967

(Fed. Cir. 2005). “In all averments of fraud or mistake, the circumstances constituting fraud or

mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of

mind of a person may be averred generally.” Fed. R. Civ. Proc. 9(b); see also Vess v.

Ciba-Geigy Corp., 317 F.3d 1097, 1106 (9th Cir. 2003).

The parties dispute the standard for pleading materiality in the Walker Process context. 

It is clear from the Federal Circuit’s precedent, however, that a party claiming Walker Process

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fraud, must plead with particularity the materiality of the references which the patent applicant

omitted, by presenting particularized allegations that “but for” the omissions, the PTO would

not have granted the patent.

Netflix cites Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006),

for the proposition that materiality must be pled with exacting particularity. Makor is neither

controlling nor persuasive. That opinion addressed the pleading requirements under the Private

Securities Litigation Reform Act of 1995, not under FRCP 9(b). As Makor made clear, “the

PSLRA essentially returns the class of cases it covers to a very specific version of fact

pleading — one that exceeds even the particularity requirement of Federal Rule of Civil

Procedure 9(b).” Id. at 594.

In contrast, as the Federal Circuit noted, “[w]e have consistently explained that Walker

Process fraud is a variant of common law fraud.” Unitherm, 375 F.3d at 1358. What Walker

Process and FRCP 9(b) require, accordingly, is that Blockbuster identify with particularity the

reference or group of references that, but for their omission from Netflix’s patent applications,

the PTO would not have granted the applications. See, e.g., Grid Sys. Corp. v. Texas

Instruments Inc., 771 F. Supp. 1033, 1039 (N.D. Cal. 1991) (for Walker Process claim, party

must allege that “but for the fraud the affected patents would not have issued”).

A party need not plead the intent element of its Walker Process claim with particularity. 

Instead, “it is the ‘circumstances’ constituting the fraud that must be alleged with specificity.” 

Competitive Techs. v. Fujitsu Ltd., 286 F. Supp. 2d 1118, 1149 (N.D. Cal. 2003).

* * *

With these principles in mind, this order holds that Blockbuster sufficiently pled its

Walker Process claim for purposes of surviving the motion to dismiss. Blockbuster alleged

with particularity that Netflix knew of certain material prior-art references prior to its two patent

applications, but nevertheless failed to disclose the references. The circumstances allow for an

inference of fraudulent intent and that, but for these material omissions, the patents would not

have issued.

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First, Blockbuster adequately alleged that Netflix failed to identify the NCR patents

during the prosecution of either patent in suit. The misrepresentation underlying a Walker

Process claim may be “either a fraudulent misrepresentation or a fraudulent omission.” 

Nobelpharma, 141 F.3d at 1070.

Second, Blockbuster also properly pled, for purposes of this motion to dismiss, that

Netflix was aware of the existence of the NCR patents, but nevertheless failed to point the

references out to the PTO examiner. Three of these patents issued before the ’450 application. 

Netflix had a duty to investigate the relevant prior art for purposes of its applications. Beyond

this, Netflix’s statements during its currently pending litigation against NCR suggest that

Netflix knew of these NCR patents by 2003, before the ’450 patent issued.

Third, Blockbuster adequately alleged that but for the omission of the NCR patents from

Netflix’s patent applications, the patents in suit would not have issued.

Netflix tries to isolate one paragraph from Blockbuster’s counterclaims to conclude that

Blockbuster failed to meet the materiality requirement. In paragraph 53 of its answer,

Blockbuster alleged:

Blockbuster is informed and believes and thereon alleges that the

NCR Patents and all of the other prior art that Netflix’s

Applicants and Representatives knew about and failed to disclose

to the Patent Office, as described above was material to both the

’450 and ’381 patents.

Standing alone this allegation would be too pithy to satisfy FRCP 9(b). But this is only a

portion of the other detailed allegations contained in Blockbuster’s answer. In paragraph 45,

Blockbuster described in detail the subject matter of the nine NCR patents omitted from

Netflix’s applications for the two patents in suit. Blockbuster adequately identified the links

between the technology claimed in the NCR patents and the Netflix patents. As stated,

Netflix’s patents are directed to a computer-implemented method of renting items. Similarly,

NCR’s patents were directed to similar computer-implemented methods. For example, NCR’s

U.S. Patent No. 5,699,526, issued on December 16, 1997, summarized the invention as follows

(RJN Exh. A, col. 2, lines 55–67):

The present invention discloses a system for managing resources,

comprised of multiple servers and one or more PCs coupled to the

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servers. The servers are grouped into local servers and regional

servers, wherein each of the local servers stores resources, and

each of the regional servers stores profiles of the resources. The

profiles contain descriptive information about the resources stored

on the local servers. The local and regional servers are linked

together so that profiles and resources can electronically

transferred there between. A PC coupled to server can view

profiles stored in the regional servers, and then electronically

order delivery of any resource described in a profile viewed by

the PC.

Just as Netflix’s patents described methods for selecting preferred items (in particular DVDs) to

be delivered to a computer user, so too NCR’s above patent described a system of selecting

preferred resources that would then be delivered to a computer user. Accordingly, Blockbuster

has adequately identified, for purposes of this motion to dismiss, prior art that the PTO

examiner could have found to anticipate or render obvious the purported inventions disclosed in

Netflix’s patents.

Blockbuster also alleged that Netflix is currently seeking a declaratory judgment of

non-infringement with respect to the NCR patents articulated above, further suggesting that the

NCR patents were potentially invalidating references (Answer at ¶¶ 47, 48(c)–(d)). “[E]ven

after Netflix had sued NCR over the issue of whether the NCR Patents cover the same rental

service Netflix was engaged in patenting, Netflix and its Applicants and Representatives failed

to submit the NCR Patents to the Patent Office” (id. at ¶ 52). Although Netflix’s

declaratory-relief action against NCR does not automatically mean that the NCR patents are

invalidating-prior art, the controversy lends support for finding that NCR’s patents could have

rejected Netflix’s patent applications had the PTO examiner known about the NCR patents.

Moreover, Netflix disclosed absolutely no prior art in applying for the ’450 patent. 

Shortly after that patent issued, Netflix suddenly bombarded the PTO examiner with over one

hundred references in support of the ’381 patent (but not the NCR patents). This is so even

though the same law firm prosecuted both patent applications, and even though the same named

inventors were responsible for both applications. For Netflix’s later patent, the PTO examiner

would have needed to swim through a morass of references and then go beyond that morass to

find the NCR patents.

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Accordingly, Blockbuster concluded that “in issuing the ’450 and ’381 patents, the

Patent Office justifiably relied on the foregoing misrepresentations, concealment, and omissions

of material prior art and other material facts by Netflix’s Applicants and Representatives and

that the Office would not otherwise have issued those patents” (Answer at ¶ 100). The total

weight of these allegations cumulatively satisfies the requirement under FRCP 9(b) that

Blockbuster plead with particularity the “but for” causation underlying its Walker Process

claim.

Fourth, Blockbuster sufficiently alleged circumstances constituting Netflix’s fraudulent

intent, consistent with the dictates of FRCP 9(b). Blockbuster alleged, as a non-exhaustive list: 

That Netflix failed to disclose the NCR patents to the PTO examiner despite knowing of their

existence; that Netflix failed to disclose any prior-art materials until after the issuance of

the ’450 patent; that Netflix thereafter filed a barrage of prior-art references with the

’381 application only months later; and that Netflix’s own CEO referred to the ’450 patent as a

“joke.” This is more than sufficient particularity at this point in the litigation.

Netflix relies heavily on MedImmune Inc. v. Genentech Inc., CV 03-2567 MRP

(C.D. Cal. Dec. 24, 2003) (Br. Exh. A), in which our sister district found that MedImmune

failed to sufficiently plead fraudulent intent for its Walker Process claim. The Genentech

decision, of course, is not controlling. It is also not persuasive. At least for purposes of this

dismissal motion, Blockbuster has alleged independent facts giving rise to an inference of

Netflix’s fraudulent intent to omit and thereby deceive the PTO examiner. In contrast, in

Genentech, MedImmune simply alleged that there was an omission without other supporting

circumstances of fraud. Not so here.

Finally, there appears to be no contest that, having found that Blockbuster adequately

alleged the above elements, Blockbuster has also sufficiently alleged the components of an

underlying antitrust violation under Section 2 of the Sherman Act. A claim of monopolization

under Section 2 of the Sherman Act, requires that a plaintiff allege: “(1) [p]ossession of

monopoly power in the relevant submarket; (2) willful acquisition or maintenance of that

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power; and (3) causal antitrust injury.” Forsyth v. Humana, Inc., 114 F.3d 1467, 1475 (9th Cir.

1997).

Blockbuster alleged that “Netflix’s share of the relevant product and geographical

markets exceeds 65%” (Answer ¶ 90). Blockbuster also alleged that Netflix has sought to

maintain its market power by lowering its online DVD rental prices. Allegedly, “Netflix’s price

reduction was in response to Blockbuster Online’s own prices, which were lower than Netflix’s

prices” (id. at ¶ 91). As a result of Netflix’s purported monopolistic conduct, Blockbuster may

be forced out of the market, which would cede to Netflix virtually complete control of the

online-DVD market.

B. Sham Litigation.

Blockbuster also sufficiently pled “sham litigation” as an independent basis for its

antitrust counterclaims. “Conduct prohibited under antitrust law includes bringing suit to

enforce a patent with knowledge that the patent is invalid or not infringed, and the litigation is

conducted for anti-competitive purposes. In such events the antitrust immunity of

Noerr-Pennington . . . does not apply to those who seek redress through judicial process.” C.R.

Bard, Inc. v. M3 Systems, Inc., 157 F.3d 1340, 1368 (Fed. Cir. 1998) (internal citations

omitted). Where, as here, the alleged anti-competitive behavior consists of bringing a single

sham lawsuit, the two findings necessary are that: “(1) the lawsuit must be objectively meritless

such that ‘no reasonable litigant could expect success on the merits’ and (2) it must be found

that ‘the baseless lawsuit conceals an attempt to interfere directly with the business

relationships of a competitor.’” Ibid. (quoting Prof’l Real Estate Investors, Inc. v. Columbia

Pictures Indus., Inc., 508 U.S. 49, 60 (1993)); see also Kottle v. N.W. Kidney Centers, 146 F.3d

1056, 1060 (9th Cir. 1998); Cal. Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508,

512–13 (1972). “[T]o invoke ‘sham’ exception the claimant must show ‘some abuse of

process,’ and requiring clear and convincing evidence of bad faith[], sham litigation requires

more than a failed legal theory.” C.R. Bard, 157 F.3d at 1368 (quoting Handgards, Inc. v.

Ethicon, Inc., 743 F.2d 1282, 1288 (9th Cir. 1984)).

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The objective component of Blockbuster’s sham-litigation claim is that Netflix

purportedly brought this action on the basis of clearly invalid and overbroad patents. If the

above allegations about omitted prior-art references, flooding, and withholding prior art from

the PTO examiner are proven, plaintiff may demonstrate the requisite abuse of process to

succeed on a sham-litigation claim.

Moreover, Blockbuster has adequately identified potential bad faith on the part of

Netflix. Blockbuster alleged that Netflix’s own CEO considered the ’450 patent a “joke.” 

Blockbuster also identified with particularity material prior art in the NCR patents, which

Netflix apparently knew about but failed to disclose during either patent-application process. 

Again, if proven, these allegations could amount to an antitrust violation.

Blockbuster pled enough facts at this point to overcome dismissal on its Walker Process

and sham-litigation claims. Netflix will, of course, be entitled to raise its arguments again on

summary judgment. Resolution of the claims at this juncture, however, is premature.

2. MOTION TO STRIKE AFFIRMATIVE DEFENSES.

Netflix also moves to strike Blockbuster’s affirmative defenses of inequitable conduct

and patent misuse. Pursuant to a motion under FRCP 12(f), “the court may order stricken from

any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous

matter.” FRCP 12(f) is a vehicle by which to “avoid the expenditure of time and money that

must arise from litigating spurious issues by dispensing with those issues prior to trial.” 

Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983). Motions to strike are

viewed negatively because of the limited import of the pleadings under the Federal Rules. 

Accordingly, “motions to strike should not be granted unless it is clear that the matter to be

stricken could have no possible bearing on the subject matter of the litigation.” Colaprico v.

Sun Microsystems, Inc., 758 F. Supp. 1335, 1339 (N.D. Cal. 1991) (citations omitted).

A. Inequitable Conduct.

“Patent applicants are required to prosecute patent applications with candor, good faith,

and honesty.” Semiconductor Energy Lab. Co., Ltd. v. Samsung Elecs. Co., Ltd., 204 F.3d

1368, 1373 (Fed. Cir. 2000) (citing Molins PLC v. Textron, Inc., 48 F.3d 1172, 1178 (Fed. Cir.

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1995)). “[I]nequitable conduct includes affirmative misrepresentation of a material fact, failure

to disclose material information, or submission of false material information, coupled with an

intent to deceive.” Ibid. (internal citation omitted). “The alleged infringer, whether a defendant

in a patent infringement suit or a declaratory judgment plaintiff, must demonstrate by clear and

convincing evidence both that the information was material and that the conduct was intended

to deceive.”

The defense of inequitable conduct is subject to the heightened pleading requirements

for fraud claims under FRCP 9(b). See Ferguson Beauregard/Logic Controls v. Mega Sys.,

LLC, 350 F.3d 1327, 1344 (Fed. Cir. 2003) (“inequitable conduct, while a broader concept than

fraud, must be pled with particularity”).

As stated above, Blockbuster pled with sufficient particularity that Netflix withheld

material prior-art references from the PTO, despite being aware of the existence of those

references. Those allegations are also sufficient to support Blockbuster’s affirmative defense of

inequitable conduct. As Netflix concedes, Blockbuster need only plead fraudulent intent with

respect to the inequitable conduct claim generally. Blockbuster has done so.

B. Patent Misuse.

Likewise, Blockbuster adequately alleged patent misuse as an affirmative defense to

infringement. As the Federal Circuit has explained:

The defense of patent misuse arises from the equitable doctrine of

unclean hands, and relates generally to the use of patent rights to

obtain or to coerce an unfair commercial advantage. Patent

misuse relates primarily to a patentee’s actions that affect

competition in unpatented goods or that otherwise extend the

economic effect beyond the scope of the patent grant.

C.R. Bard, 157 F.3d at 1372 (citing Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703–04

(Fed. Cir. 1992)). “Patent misuse is viewed as a broader wrong than antitrust violation because

of the economic power that may be derived from the patentee’s right to exclude.” Accordingly,

“misuse may arise when the conditions of antitrust violation are not met.”

Given that Blockbuster adequately alleged Walker Process fraud and sham litigation for

purposes of surviving dismissal, it follows that Blockbuster has satisfied the lower standard for

pleading patent misuse. At this juncture, striking the defense is unwarranted.

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3. BIFURCATION AND DISCOVERY STAY.

Netflix argues that even if dismissal is inappropriate, the Court should bifurcate this

litigation into two phases. Netflix accordingly moves to proceed on its claims for patent

infringement and defer all proceedings on Blockbuster’s antitrust claims. Netflix argues the

Court should postpone not only trial on Blockbuster’s counterclaims, but also stay all discovery

on the antitrust counterclaims until resolution of the infringement claims. This order rejects

Netflix’s request to bifurcate and stay discovery.

Courts have broad discretion under FRCP 42(b) to bifurcate trials. The rule provides:

The court, in furtherance of convenience or to avoid prejudice, or

when separate trials will be conducive to expedition and

economy, may order a separate trial of any claim, cross-claim,

counterclaim, or third-party claim, or of any separate issue or of

any number of claims, cross-claims, counterclaims, third-party

claims, or issues, always preserving inviolate the right of trial by

jury as declared by the Seventh Amendment to the Constitution or

as given by a statute of the United States.

“One of the purposes of Rule 42(b) is to permit deferral of costly and possibly unnecessary

discovery proceedings pending resolution of potentially dispositive preliminary issues.” 

Ellingson Timber Co. v. Great N. Ry. Co., 424 F.2d 497, 499 (9th Cir. 1970). “It is the interest

of efficient judicial administration that is to be controlling under the rule, rather than the wishes

of the parties.” WRIGHT & MILLER, Federal Practice and Procedure, § 2388 (2d ed. pocket

part 2006). “With respect to both discovery and trial,” the moving party has the “burden of

proving that the bifurcation will promote judicial economy and avoid inconvenience or

prejudice to the parties.” Spectra-Physics Lasers, Inc. v. Uniphase Corp., 144 F.R.D. 99, 101

(N.D. Cal. 1992).

It will be more efficient in this action to conduct discovery and pretrial proceedings

together. The issues overlap greatly. A determination on Blockbuster’s Walker Process fraud

counterclaim is closely related to a determination as to the validity of the patents in suit. The

prosecution history and the omitted prior-art references will be relevant to both inquiries. The

same evidence will also be pertinent to Blockbuster’s affirmative defenses of inequitable

conduct and patent misuse.

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Netflix has not demonstrated that it will suffer prejudice if the proceedings go forward

together. Conducting discovery on overlapping issues in tandem will ultimately reduce the

expenses and time of this litigation for both parties. So will consolidating pretrial proceedings. 

Allowing both side’s cases to go forward now will preserve the option of both being tried

together. To rule the other way would foreclose this option.

Netflix relies on In re Innotron Diagnostics, 800 F.2d 1077, 1084 (Fed. Cir. 1986), for

the proposition that there is a “now-standard practice of separating for trial patent issues and

those raised in an antitrust counterclaim.” Of course, we are a long way from trial now. The

immediate task is discovery. By allowing both sides to develop their cases we will be in a

better position later to decide the extent to which both cases should be tried to a jury.

Although this order finds bifurcation unwarranted at this juncture, this ruling is without

prejudice to either side to seek bifurcation of the trial at the pretrial conference. It may be that

the evidence discovered ultimately justifies handling the trial by chapters. For purposes of

pretrial proceedings, however, Netflix’s claims and Blockbuster’s counterclaims are to proceed

in tandem.

CONCLUSION

For the foregoing reasons, Netflix’s motion to dismiss, motion to strike, and motion to

bifurcate are all DENIED.

IT IS SO ORDERED.

Dated: August 22, 2006. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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