Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-03257/USCOURTS-cand-3_07-cv-03257-3/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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 The following background facts are taken from the allegations of plaintiff’s First Amended

Complaint, which for purposes of this motion, must be taken as true.

United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

PRIVASYS, INC,

Plaintiff,

 v.

VISA INTERNATIONAL, et al.,

Defendants. /

No. C 07-03257 SI

ORDER GRANTING PLAINTIFF’S

MOTION FOR LEAVE TO FILE AN

AMEND COMPLAINT AND DENYING

DEFENDANTS’ MOTION TO STAY

PROCEEDINGS

Plaintiff has filed a motion for leave to file an amended complaint, and defendants ask the Court

to stay the proceedings against certain defendants. The motions are scheduled for hearing on November

16, 2007. Pursuant to Civil Local Rule 7-1(b), the Court determines that the matter is appropriate for

resolution without oral argument, and VACATES the hearing. Having considered the arguments of the

parties and the papers submitted, the Court hereby GRANTS plaintiff’s motion for leave to file an

amended complaint and DENIES defendants’ motion to stay the proceedings.

BACKGROUND1

On June 20, 2007, plaintiff PrivaSys filed a complaint against defendants Visa U.S.A. and Visa

International Service Association (“Visa”), alleging that defendants infringed plaintiff’s patent by

incorporating and using plaintiff’s patented technology in defendants’ “payWave” credit and debit cards.

Plaintiff’s complaint states that in response to the problem of credit card fraud, it developed a system

wherein a credit card uses a cryptographic algorithm to create an authentication code, unique to each

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For the Northern District of California

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card and transaction, which is transmitted to a merchant’s credit card reader and then compared with

the authentication code generated by the bank that issued the credit card. If the two codes are the same,

the credit card is deemed authentic because a counterfeit card would not have the ability to create the

unique authentication code. Plaintiff’s system does all this using existing magnetic stripe technology,

i.e. the credit card swipe, that most U.S. merchants currently use, but can also be adapted to radio

frequency, wireless, infrared, and other methods of transmitting information from a credit card to a

merchant and, ultimately, the issuing bank. 

Plaintiff owns U.S. Patent No. 7,195,154 (“the ‘154 patent”), which was issued on March 27,

2007. As plaintiff explained in its complaint, this patent “discloses a method that uses an encrypted and

compressed authentication code that is dynamically calculated with each transaction and transmitted via

the discretionary data field through the legacy payment card processing system and which was validated

by duplicating the calculation in the issuing bank’s data processing systems and comparing the two

values for a match.” First Amended Complaint at ¶ 25. Plaintiff has licensed this technology to

MasterCard and other Visa competitors, but defendants have not purchased a license for their payWave

card. According to plaintiff, the payWave card infringes the ‘154 patent because it uses a dynamic

authentication code in much the same way as plaintiff’s system. Plaintiff now seeks leave to amend its

complaint to add Chase Bank and Wells Fargo Bank as defendants. Chase and Wells Fargo are

members of Visa, and both issue Visa credit cards using the payWave technology. 

LEGAL STANDARD

Federal Rule of Civil Procedure 15(a) permits a party to amend its pleading “only by leave of

court or by written consent of the adverse party; and leave shall be freely given when justice so

requires.” Fed. R. Civ. Pro. 15(a). Leave to amend should be granted “with extreme liberality,”

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003), so long as factors “such

as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure

deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the

amendment, [or] futility of amendment” are not present, id. at 1052 (quoting Forman v. Davis, 371 U.S.

178, 182 (1962)).

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Courts do not ordinarily consider the validity of a proposed amended pleading in deciding

whether to grant leave to amend, but leave may be denied if the proposed amendment is futile or would

be subject to dismissal. Saul v. United States, 928 F.2d 829, 843 (9th Cir. 1991). A proposed

amendment is “futile” only if no set of facts can be proved under the amendment which would constitute

a valid claim or defense. Miller v. Rykoff -Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988).

Permissive joinder of parties is governed by Federal Rules of Civil Procedure 20 and 21. Rule

21 states: “Parties may be dropped or added by order of the court on motion of any party or of its own

initiative at any stage of the action and on such terms as are just.” Fed. R. Civ. P. 21. Rule 20,

governing permissive joinder of parties, states: 

All persons . . . may be joined in one action as defendants if there is asserted against them jointly,

severally, or in the alternative, any right to relief in respect of or arising out of the same

transaction, occurrence, or series of transactions or occurrences and if any question of law or fact

common to all defendants will arise in the action. 

Fed. R. Civ. P. 20(a). Although amendments seeking to add parties are granted less freely than those

seeking to add claims, the requirements governing permissive joinder are construed so as to promote

trial convenience and to expedite the final determination of disputes. Union Pac. R.R. Co. v. Nev. Power

Co., 950 F.2d 1429, 1432 (9th Cir. 1991); United Mine Workers v. Gibbs, 383 U.S. 715, 724 (1966).

DISCUSSION

1. Plaintiff’s motion for leave to file an amended complaint

Plaintiff moves for leave to amend its complaint to add Chase Bank and Wells Fargo Bank as

defendants. Defendants argue that leave to amend should be denied because the proposed amendment

would be futile. That is, defendants argue that plaintiff cannot state a claim for infringement against

Chase and Wells Fargo because these banks do not practice each step or element of any of the claims

of plaintiff’s ‘154 patent. Defendants are correct that “[d]irect infringement requires a party to perform

or use each and every step or element of a claimed method or product.” BMC Resources, Inc. v.

Paymentech, L.P., 498 F.3d 1373, 1378 (Fed. Cir. 2007). Where some of the steps are carried out by

a third party, this requirement may be met by showing that the infringing party “controlled the conduct

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of the acting party.” Id. at 1379; see also id. at 1382 (stating that the infringing party must direct or

control the activities of third parties). In addition, indirect infringement – in which a defendant

“participates in or encourages infringement but does not directly infringe a patent,” id. at 1379 –

requires “a finding that some party amongst the accused actors has committed the entire act of direct

infringement,” id. 

Here, defendants do not argue that joinder is improper, and the Court finds that joinder is

appropriate under Federal Rule of Civil Procedure 20 because the claims arise out of the same

transaction or occurrence and common questions of law and fact will arise. The Court does not agree

with defendants that plaintiff’s proposed amendment is futile because defendants have not shown that

plaintiff can present no set of facts that would constitute a valid claim against Chase and Wells Fargo.

See Miller, 845 F.2d at 214. To the contrary, plaintiff may well be able to put forth facts showing that

defendant and the issuing banks directed or controlled the conduct of other parties, such that direct

infringement may be proven. BMC Resources, 498 F.3d at 1379, 1382. Plaintiff may also be able to

put forth facts showing that Visa directly infringed the ‘154 patent while Chase and Wells Fargo

participated in the infringement but did not directly infringe the patent. Id. at 1379. Indeed, in response

to defendants’ motion, plaintiff has already indicated that it can produce precisely the type of evidence

that had been absent in BMC Resources, i.e. that Visa “provides instructions or directions regarding the

use of” its payWave card to the merchants and banks involved in the process, id. at 1381, and also that

Visa has a “contractual relationship” with “the financial institutions,” id. at 1382. Both pieces of

evidence tend to show that Visa exercised “direction or control” over the customer-merchant interaction

as well as over the banks, and thus “perform[ed] or cause[d] to be performed each and every element

of the claims,” id., such that Chase and Wells Fargo could be liable, at the very least, as indirect

infringers. For these reasons, plaintiff’s proposed amendment is not futile and the Court GRANTS

plaintiff’s motion for leave to file an amended complaint.

2. Defendants’ motion to stay proceedings against the banks

In the event the Court grants plaintiff’s motion for leave to file an amended complaint,

defendants ask the Court to stay the proceedings against Chase, Wells Fargo, and any other banks

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issuing credit cards that use Visa’s payWave technology. Defendants argue that the “customer suit”

exception of patent litigation should apply here to stay infringement suits against Visa’s customers while

the suit against Visa is pending. The Court agrees with plaintiff, however, that this exception is not

applicable in these circumstances. Early case law, as well as subsequent applications by various district

courts, makes clear that the “customer suit” exception is an exception to the venue rule that when two

or more patent infringement suits, involving the same or similar parties and issues, are filed, courts

normally grant priority to the first-filed suit and enjoin or stay the other suits. See Katz v. Lear Siegler,

Inc., 909 F.2d 1459, 1463 (Fed. Cir. 1990). The exception comes into play when the first-filed suit in

one district court is against customers of the infringing manufacturer, while a subsequent suit in another

district court is against the manufacturer itself. In these circumstances, there is “a rebuttable

presumption that a manufacturer’s declaratory judgment action, in its home forum, at least if brought

no later than promptly after a customer action, should take precedence over a mere customer action in

a jurisdiction in which the manufacturer could not be sued.” Codex Corp. v. Milgo Elec. Corp., 553

F.2d 735, 738 (1st Cir. 1977). 

Where, as here, plaintiff has brought suit against both the supplier and its customers in the same

suit and in the same district, the “customer suit” exception does not apply. See, e.g., Lifelink Pharm.,

Inc. v. NDA Consulting, Inc., 2007 WL 2459879 *3 (N.D. Ohio Aug. 24, 2007) (“granting a stay in such

a situation would run counter to the goal of fostering judicial economy without enhancing the product

source defendant’s ability to litigate the issue of patent infringement”); Alloc, Inc., v. Unilin Decor N.V.,

2005 WL 3448060 *3 (E.D. Wis. Dec. 15, 2005) (where manufacturer and customer “are defending

claims of infringement in the same consolidated suit in the same jurisdiction . . . there is no issue of

which jurisdiction should be granted priority and therefore the exception to the typical priority rule is

inapposite”); Naxon Telesign Corp. v. GTE Info. Sys., 89 F.R.D. 333, 339 (N.D. Ill. 1980) (“In this

action, where the suit against the manufacturer and customer would take place simultaneously . . . the

problem addressed in Codex and Gluckin & Co. is not presented.”). The case of Refac Int’l, Ltd. v. IBM,

790 F.2d 79 (Fed. Cir. 1986), is not to the contrary. There, the Federal Circuit approved, as a matter of

case management, the district court’s stay of proceedings against 31 customer defendants pending suit

against six manufacturer defendants, where the customer defendants had agreed to be bound by the

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district court’s decision with regard to the manufacturers. Id. at 81. Here, by contrast, the number of

defendants do not pose case management issues, and neither Chase nor Wells Fargo has agreed to be

bound by the Court’s decision with regard to Visa. Moreover, “[s]ubsequent decisions have held that

the stay fashioned in Refac was a product of the rare circumstances presented and have limited its

application.” Alloc, 2005 WL 3448060 at *4 (citing other cases). 

Finally, the Codex court explained that “[t]here may be situations, due to the prospects of

recovery of damages or other reasons, in which the patentee has a special interest in proceeding against

a customer himself, rather than solely as a shadow of the manufacturer, and therefore less weight should

be given to the manufacturer’s forum.” Codex, 553 F.2d at 738 n.6. This may be such a situation.

Plaintiff argues that Chase and Wells Fargo are not mere customers because they manufacture and issue

payWave cards themselves, and are involved in carrying out the infringement of the patented method.

Plaintiff also argues that it has special reasons to pursue claims against Visa’s customer banks because

it has significant damages claims against them. Thus, even if the “customer suit” exception to the forum

rule applied here, the Court would not be inclined to stay the proceedings against Chase and Wells

Fargo. See id.; Emerson Elec. Co. v. Black & Decker Mfg. Co., 606 F.2d 234, 241 (8th Cir. 1979). For

all of these reasons, the Court DENIES defendants’ motion to stay the proceedings against the customer

banks.

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby GRANTS plaintiff’s

motion for leave to amend the complaint [Docket No. 27] and DENIES defendants’ motion to stay the

proceedings against the customer defendants [Docket No. 39].

IT IS SO ORDERED.

Dated: November 14, 2007 

SUSAN ILLSTON

United States District Judge

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