infringe a patent.” Tegal Corp., 248 F.3d at 1378-79 (internal quotation and citation omitted)
(cmphasis in original); see also Power Lift, Inc. v. Lang Tools, Inc., 774 F.2d 478, 481 (Fed. Cir.
1985) (noting that statutory history “suggest|s] a ‘broad’ reading of § 271(b)”).

Liability for inducement has been found where the individual defendants “were directly
responsible for the design and production of the infringing [product] and . . . they were the only ones
who stood to benefit from sales of (the product],” see Orthakinetics, Inc. v. Safety Travel Chairs,
Inc., 806 F.2d 1565, 1579 (Fed. Cir. 1986); where the defendant supplied infringing products to
customers with instructions that, if followed, would lead to infringement, see Minn. Mining & Mfz.,
303 F.3d at 1304-05; or where the defendant exerted personal control over the manufacture of
infringing products, see Sensonics, Inc. vy. Aerosonic Corp., 81 F.3d 1566, 1575 (Fed. Cir. 1996).

In this case, the proposed amended complaint sufficiently alleges that Schroeder had actual
knowledge of the patents in suit; he actively induced in{tingement through design, production, and
control over the manufacture of the accused devices; and he knew his actions would induce
infringement. The proposed claim would therefore survive a motion to dismiss under Rule 12(b)(6)

and is not clearly futile.

CONCLUSION
For the reasons set forth above, Plaintiff David II. Sitrick’s Motion for Leave to Amend the

Complaint to Add Theodore L. Schroeder as a Defendant [doc. no. 41-1] is granted.

SO ORDERED. ENTERED: .- t Ce
Ronald A. Guzman i)
United States Judge

13



the part of the movant, repcated failure to cure deficiencies by amendments previously allowed,
undue prejudice to the opposing party by virtue of allowance of the amendment, futility of
amendment, ete.” oman, 371 U.S. at 182; see Texter v, Bd. of Regents of N. ll. Univ., 711 F.2d
1387, 1391 (7th Cir. 1983). Undue prejudice “is the most important factor in determining whether
to allow an amendment to a complaint.” Ameritech Mobile Communications, Inc. v. Computer Sys.
Solutions, Inc. (In re Ameritech Corp.), 188 F.R.D, 280, 283 (N.D. Ll. 1999) (citing Zenith Radio
Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330-31 (1971)); see also Tragarz v. Keene Corp.,
980 F.2d 411, 432 (7th Cir, 1992) (“[DJelay is an insufficient basis for denying a motion to amend
unless this delay results in undue prejudice to the opposing party.”).

Freehand argues Sitrick’s motion for leave to amend should be denied because it was not

timely filed, Frechand will be prejudiced if the complaint is amended, and the amendment is futile.

L UNDUE DELAY

Sitrick contends that it was delayed in filing the motion to amend because it was prevented
{rom knowing the facts underlying Schroeder’s alleged personal liability until the end of discovery
due to FrecHand’s dilatory discovery tactics. FreeHand responds that Sitrick knew or should have
known about Schroeder’s involvement with Freel land well before the end of merits discovery. See
In re Ameritech, 188 F.R.D. at 284 (“Where the party seeking an untimely amendment knows or
should have known of the facts upon which the proposed amendment is based, but fails to assert
them in a timely fashion, the amendment will be denied.”).

First, Freehand states that Sitrick knew FreeHand was a small start-up company and that

Sitrick could have learned Schroeder was a board member because the information was posted on



FreeHand may not be able to pay a full damage award if Sitrick is successful in proving
infringement.

FreeHand responds that it will be prejudiced by the amendment for three reasons: (1) the
amendment would prejudice KreeHand’s efforts to attract new investors by prolonging the “dark
cloud” of litigation and implying that FreeHand is merely Schroeder’s alter ego; (2) Schroeder will
have a conflict between his personal interests and FreeHand’s interests; and (3) the amendment

would prolong discovery and litigation.

A, FreeHand’s Ability to Attract Investors

FreeHand alleges that the amendment will prejudice its ability to attract additional investors
for two reasons. Lirst, litigation hurts the reputation of a small company such as FreeHand in the
investment community, and the amendment will prolong the case and thus the length of time the
“dark cloud” of litigation will hang over FreeHand. Second, FreeHand claims that if the amendment
is allowed, potential investors will consider I'reeHand to be the “mere instrumentality” of Schroeder,
and Sitrick has not alleged facts demonstrating that the company is in fact Schroeder’s alter ego.

First, FreeHand’s argument demonstrates a fundamental misunderstanding of the basis of the
proposed claim against Schroeder. Section 271(a) provides that a corporate officer or director may
be personally liable for the corporation’s direct infringement if there is “evidence to justify piercing
the corporate veil.” Hoover Group, 84 F.3d at 1412 (internal quotation and citation omitted); see
also Tegal Corp, v. Tokyo Electron Co, , 248 F.3d 1376, 1379 (Fed. Cir. 2001) (“In the absence of
evidence showing that the parent company either was an alter ego of the subsidiary or controlled the

conduct of the subsidiary, we refused to find direct infringement.”).



For example, Freeland’s attorney stated during the deposition of Michael Hamilton, who
was apparently the CEO of FreeHand at the time:

[T]he issuc that has been raised ... is... whether I'reeTTand is a
fledgling company. And there’s a disagreement between counsel as
to how far [Sitrick’s attorney] is allowed to explore that issue. My
concern is that this is a very marginally related issue to the issue of
jurisdiction. . . . Whether or not [Sitrick’s attorney] is allowed to
explore the sources and amounts of funding is one that 1 am
concerned that we are... crossing the line between what the court is
allowing.
(Hamilton Dep., Pl.’s Reply, Ex. G at 11.)

When Sitrick’s attorney offered to hold the information on an “attorneys’ eyes only” basis,
FreeHand’s attorney responded: “I’m just going to instruct him not to answer right now and you can
circle around it as much as you want, but the amount of money that they have received from its
equity investor] is not relevant. You’re not entitled to it, That’s our position.” (Jd. at 13.)
Freelland's attorney also instructed the other jurisdictional deponent, Lorz, not to answer similar
lines of questioning. (See Lorz Dep., Pl.’s Reply, Ex. H at 9-16.)

While FrecHand’s objections may have been proper under the circumstances, it is at the very
least disingenuous for FreeEIand now to argue that Sitrick has known “[s]ince the inception of this
litigation” that FreeHand was a “rclatively small,” “fledgling, privately held start-up company,” and
further to fault Sitrick for not inquiring into the merits of his substantive claims at the jurisdictional
depositions. Moreover, even if I’reefland were correct that the facts regarding Schroeder’s

involvement were already known to Sitrick, that argument is “something of'a double-edged sword.”

Serfeez v. Jewel Food Stores, Inc., No. 92 C4171, 1997 WL 543116, at *4 (N.D. Tl. Sept. 2, 1997).

Because those facts were also known to FreeHand, “the proposed amendment should hardly catch



FreeHand’s website. Second, during discovery on the motion to dismiss conducted in August 2002,
Sitrick could have inquired further to elicit facts relating to FreeHand’s investors and Schrocder’s
involvement with the company. Furthermore, according to FreeHand, Sitrick knew of Schroeder’s
existence during jurisdictional discovery because he inquired in a deposition whether Schrocder had
attended 4 meeting in Chicago. Finally, Freeland states that Sitrick wrongfully waited to file the
present motion until over three months after the close of discovery. FrecHand argues that Sitrick
strategically waited to [ile this motion until after FreeHand’s opening Markman brief in an effort to
discredit Schroeder, who had offered a declaration in support of FreeHand’s brief.

FreeHand’s arguments are unavailing. First, even if Sitrick had knowledge of Schroeder’s
status as a board member or investor in Freefand, those facts alone would not have been sufficient
to justify a claim for personal liability under Section 271(b), because “‘it must be established that
the defendant possessed specific intent to encourage another’s infringement and not merely that the
defendant had knowledge of the acts alleged to constilute infringement.” See Ferguson
Bequregard/Logic Controls, Div. of Dover Res., Inc. v. Mega Sys., LLC, 350 F.3d 1327, 1342 (Fed.
Cir. 2003) (quoting Manville Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544, 553 (Fed. Cir.
1990); Hoover Group, Inc. v. Custom Metalcraft, Inc., 84F.34 1408, 1412 (Fed. Cir. 1996) (holding
that personal liability for inducement “must be supported by personal culpability”).

Second, Sitrick could not reasonably have discovered facts relating to Schroeder’s personal
liability during the August 2002 depositions. This Court granted Sitrick leave to conduct discovery
limited to the issue of personal jurisdiction alone. Indeed, when Sitrick’s questions ventured away

from the issue of jurisdiction, FreeHand’s attorney objected and/or directed his client not to answer.


the Court agrees with Sitrick that adding Schroeder as a defendant in this case will not serve to

discredit his declaration in support of the Markman brief.

IL. UNDUE PREJUDICE

Sitrick has the burden of proving that the amendment will not unduly prejudice Freel land.
See King v. Cooke, 26 F.3d 720, 724 (7th Cir. 1994), An amendment will almost always result in
some level of prejudice, so the relevant inquiry is “whether undue prejudice will result from
amending a complaint.” Grun v. Pneumo Abex Corp., No. 90 C 5273, 1993 WL 13411, at *3 (N.D,
Til. Jan. 21, 1993) (citing Hess v. Gray, 85 F.R.D. 15, 20 (N.D. Il. 1979)) (emphasis in original).
in determining whether undue prejudice exists, courts must balance each party’s interests: “his
balancing ‘cntails an inquiry into the hardship to the moving party if leave to amend is denied, the
reasons for the moving party failing to include the material to be added in the original pleading, and
the injustice resulting to the party opposing the motion should it be granted.” Jn re Ameritech
Corp,, 188 F.R.D, at 283 (quoting Wright, Miller & Kane, fed. Practice & Procedure § 1487 at 621-
23 (1990)).

Sitrick avers that adding Schroeder as a defendant will not unduly prejudice either Schroeder
or FrecHand, First, Schroeder is alrcady very involved in the defense of this lawsuit, given that he
was FreeHand’s Rule 30(b)(6) witness and filed a declaration along with FreeHand’s Markman brict.
Second, Schroeder’s and I'reeHand’s interest in the litigation is the same because Schroeder cannot
be liable for inducement unless FreeHand’s systems are found to be infringing. In addition, Sitrick

argues that it will be prejudiced if Schrocder is not added as a defendant because it appears that


Mite Orde Fon (96°97)

United States District Court, Northern District of Illinois

Name of Assigned Judge
or Magistrate Judge

Ronald A. Guzman

Sitting Judge if Other
than Assigned Judge

CASE NUMBER

02 C 1568

DATE

3/30/2004

CASE Sitrick vs. Freehand Systems, Inc.
TITLE
[In the following box (a) indicate the party filing the motion, ¢g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented]
DOCKET ENTRY:
(1) oO Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion duc
8 Oo Answer brief to motion duc. Reply to answer brief due
(4) oO Ruling/Hearing on set for at
(3) QO Status hearing[held/continued to] [set for/re-set for] on set for at
(6) Oo Pretrial conference{held/continued to] [sct for/re-set for] on__ set for at 7
(7) im Trial[set for/re-set for] on at
(8) aq [Bench/Jury trial] [Hearing] held/continucd to at
(9) ia} This case is dismissed [with/without] prejudice and without costs[by/agrecment/pursuant to]
OFRCP4(m) G Local Rule 41.1 OOFRCP41(a)(1) [ FRCP41(a)(2).
do) of (Other docket entry] ENTER MEMORANDUM OPINION AND ORDER. Motion for leave
to amend the complaint to add Theodore L. Schroeder as a defendant is granted.

q1)y oa [For further detail see order (on reverse side offattached to) the original minute order. ]

No notices required, advised in open court, Document

Number
‘No notices required.
umber of notices

Notices mailed by judge's staff.

Notified counsel by telephone. MAR 3 4 2004
¥ | Docketing to mail notices. * |

Mail AO 430 form, , ; iat 5

Copy to judge/magistrate judge. . a wat

courtroom
deputy's
initials

JD

Date/time received in
central Clerk’s Office

stating, deputy initials



CG Need for Additional Discovery and Delayed Litigation

FreeHand claims that it will be prejudiced duc to the need for additional discovery and
further delay in litigation. FreeHand argues that because Schroeder now has personal exposure, he
“will likely insist” on additional discovery, including depositions that FreeHand “will then have to
attend,” thus prolonging the litigation and increasing Free[and’s legal fecs. FreeHand, however,
gives no examples of additional discovery that “will likely” be taken by Schroeder, and it is far from
apparent that any more discovery will be necessary.’ Sitrick has not indicated that he will require
additional discovery on the new claim, The new claim is closely aligned factually with the original
infringement claim, Discovery on infringement has already been completed, and the only element
added by the proposed amendment is Schroeder’s personal involvement in the alleged infringement,
the facts of which should be known to Schroeder,

Moreover, even if some additional discovery must be taken, FreeHand has not given the
Court any reason to believe it would be so prejudicial to FreeHand that the amendment should be
denied. See Serfecz, 1997 WL 543116, at *5 (“The inconvenience created by... minimal discovery
is insufficient to deny [plaintiff's] request lor leave to amend.”); Grun, 1993 WL 1341], at *3
(noting that “any prejudice to the defendants can be controlled by imposing limitations on the

partics’ ability to conduct additional discovery”). In sum, FreeHand has failed to support its claims

> FreeHand contends that Sitrick’s deposition will have to be retaken because it cannot be
used against Schroeder pursuant to Rule 32(a), which provides that a deposition “may [only] be
used against any party who was present or represented at the taking of the deposition ....” Fed.
R. Civ. P. 32(a). FreeHand’s concern is misplaced, because there is no reason to believe that
Sitrick’s deposition will be used against any party in this case. Sitrick represents that he will be
able to testify at trial, and if his testimony is ever needed in support of a motion, he will provide a
new statement in the form of an affidavit.

11



In this case, however, Sitrick alleges liability for inducement under Section 271(b), which
does not require a finding that FreeHand is Schroeder’s alter ego. See Manville Sales, 917 F.2d at
553 (“Under [Section 271(b)], corporate officers who actively assist with their corporation’s
infringement may be personally liable for in ducing infringement regardless of whether the
circumstances are such that a court should disregard the corporate entity and pierce the corporate
veil.”) (emphasis in original); Hoover Group, 84 F.3d at 1412 (same).

In any event, FreeHand has offered no support for its argument that the impression of
potential investors is prejudicial to its ability to defend the litigation. Furthermore, delayed litigation
and increased exposure to potential liability are not sufficient for a finding of prejudice. See King

v. Cooke, 26 F.3d 720, 724 (7th Cir. 1994); Serfeez, 1997 WL 543116, at *6.

B Conflict of Interest

FreecHand argues that Schrocder’s and Frechand’s interests will be in conflict, but it fails to
offer a single example of an actual or potential conflict. It merely discusses the difficully to
Schroeder of assisting in his own defense as well as helping Freehand’s defense, which does not
amount to a conflict of interest at all, let alone a conflict that rises to the level of undue prejudice.

Moreover, the Court does not see how Schroeder’s and Freehand’s interests would be in
conflict. Both parties have an interest in proving the accused devices did not infringe. See
dasituform Techs., Ine. v. CAT Contracting, Inc., 16) F.3d 688, 695 (Fed. Cir. 1998) (“Liability for
inducement under § 271(b) is dependent on showing that the conduct being induced constitutes
direct infringement.”). And if infringement is found, Freehand’s interests will not conflict with

Schroeder’s defense against the claim of inducement.

10



[Freehand] by surprise, and ‘[w]hcre the facts on which a previously unasscrted claim is based are
all known or available to all partics, no prejudice exists.’” /d. (citation omitted). Similarly, the
Federal Circuit held there was no prejudice in the context of Rule 15(c)'s “relation back” provision
where the identity of interests of the corporate and proposed individual defendant was “virtually
complete” such that the individual should have been aware joinder was a possibility, and where the
individual defendant conceived and developed the infringing product. Fromson vy. Citiplate, Inc.,
886 F.2d 1300, 1304 (Fed. Cir. 1989).

Third, FreeHand provides no support for its contention that three months is per se too long
to wait to file an amended complaint. Of course, “when extreme, delay itself may be considered
prejudicial.” Tamari v. Bache & Co. (Lebanon) S.A.L., 838 F.2d 904, 909 (7th Cir. 1988).
Freel land, however, has not asserted that the three-month delay was “extreme,” nor has it shown that
granting the motion “would inordinately impede [Freehand’s] efforts to prepare a defense or would
unjustifiably prolong the litigation.” Serfeez, 1997 WL 543116, at *3.

Finally, the Court finds no merit in 'reeHand’s allegation that this motion was strategically
delayed in order to discredit Schroeder's declaration in support of FrecHand’s Markman brief. The
case FreeHand cites in support, Cresswell y. Sullivan & Cromwell, 922 F.2d 60 (2d Cir. 1990), is
inapposite. In Cresswell, the Second Circuit agreed that a plaintiff's delay in filing its motion to
amend to assert an additional claim was prejudicial where it was filed more than a month after the
plaintiff had responded to a motion for summary judgment. Jd. at 72, Contrary to FrecHand’s

argument, Cresswell does not hold that “attempting to add parties in response to pleadings that have

been filed, by itself'is reason sufficient to deny the attempt.” (Def.’s Mem. Opp’n at 5.) Moreover,



DISCUSSION

For procedural issues in a patent case that are not unique to patent law, such as a motion to
amend, courts are directed to apply the law of the regional circuit. See Datascope Corp, v. SMEC,
Ine., 962 F.2d 1043, 1045 (Fed. Cir. 1992). To the extent that analysis of the motion involves
substantive patent law, however, the law of the Federal Circuit controls. See In re Spalding Sports
Worldwide, Inc., 203 F.3d 800, 803 (ed. Cir. 2000).

federal Rule of Civil Procedure (“Rule”) | 5(a) provides that leave to amend a pleading “shall
be frecly given when justice so requires."” Fed. R, Civ. P. 15(a); see oman y, Davis, 371 U.S. 178,
182 (1962) (“If the underlying facts or circumstances relied upon by a plaintiff may be a proper
subject of relief, he ought to be afforded an opportunity to test his claim on the merits.”). Whether
to grant a motion to amend is within the discrction of the trial court, Foman, 371 U.S, at 182, and
the Seventh Circuit “has adopted a liberal policy respecting amendments to pleadings so that cases
may be decided on the merits and not on the basis of technicalities.” Stera v. U.S. Gypsum, Inc., 547
F.2d 1329, 1334 (7th Cir. 1977) (cilations omitted); see also Nebraska v. Wyoming, 515 U.S. 1, 8
(1995) (noting “the solicitude for liberal amendment of pleadings animating” Rule 15(a)).

Courts arc instructed that leave to amend should be “freely given” under Rule 15(a) “[i]n the

absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on

? Tn addition, pursuant to Rule 20: “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); see also Fed, R. Civ. P. 21 (“Parties may be dropped or added by order of
the court on motion of any party or of its own initiative al any stage of the action and on such
terms as are just.”).



to transfer the case to the Northem District of California. Freefland’s motion to transfer venue was
denied on March 24, 2003,

The parties engaged in scttlement discussions in early lo mid-2003, and they began the
process of merits discovery al around the same time. Due to various disputes, the merits of which
the Court need not decide here, FreeHand did not begin to produce documents related to discovery
on the merits until June 2003.

On August 12, 2003, one day before the close of discovery, Sitrick took the deposition of
Theodore Schroeder, whom Freeland had designated as its corporate representative pursuant to
Federal Rule of Civil Procedure 30(b)(6). Schroeder was Freehand’s Vice President of Engineering
and a member of its board of directors. The following day, Sitrick took (he deposition of Kim Lorz,
I'reehand’s Chief Executive Officer.

According to Sitrick, he discovered in the course of these two depositions that Schroeder
exerted substantial control over FreeHand; he was a majority owner of FreeHand and was esscntially
the only source of FreeHand’s funding; alter he was informed about the Sitrick patents and
Vreelland’s alleged infringement thereof, Schroeder determined that FreeHand’s systems were not
infringing and/or that Sitrick’s patent claims would be invalid based on prior art; he was responsible
for the development and production of the hardware and software used in the accused systems; and
he was in charge of the development of the user’s guide for the systems. In addition, Sitrick claims
to have learned that Lorz did not have nearly as much control over FrecHand as Schroeder did.

Sitrick now seeks to amend the complaint to add Schroeder as a defendant in the case,
alleging that he induced reel [and to commit infringement, in violation of 35 U.S.C. §271(b), which

provides that: “[W]hoever actively induces infringement of a patent shall be liable as an infringer.”



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOTS

EASTERN DIVISION DOCKETED

MAR 3 1 2004
DAVID H. SITRICK,

Plaintiff,
Case No. 02 C 1568
v.
Judge Ronald A. Guzman
FREEHAND SYSTEMS, INC.,

Defendant.

MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiff David H. Sitrick’s Motion for Leave to Amend the Complaint
to Add Theodore T.. Schroeder as a Defendant [doc. no. 41-1]. For the reasons sct forth below,

Plaintiff's motion is granted,

BACKGROUND
Plaintiff filed this patent infringement suit against Defendant FreeHand Systems, Inc.
(“FreeHand”) on March 5, 2002. The complaint alleges that electronic music display systems sold
by FrecHand infringe two of Sitrick’s patents that cover systems for electronically displaying music
scores. FrecHand moved to dismiss for lack of personal jurisdiction on June 6, 2002, and the Court
allowed Sitrick to conduct discovery on the issue of jurisdiction alone.’ The motion to dismiss was

denied on October 29, 2002, On November 12, 2002, Freel and answered the complaint and moved

| The discovery related to whether FreeHand’s marketing efforts in Mlinois, including a
meeting it had with the Chicago Symphony Orchestra and the Lyric Opera, constituted sufficient
minimum contacts with the state.



of undue prejudice, and the balance therefore tips in favor of allowing Sitrick to “test his claim on

the merits.” See Grun, 1993 WL 13411, at *3.

WI. FUTILITY

Next, FrecHand argues that Schroeder's revicw of the patents in suit was performed as a
corporate employee and does not prove inducement. In addition, FreeHand asserts that it relied on
its attorncy’s advice to show that the alleged infringement was not willful. While it is not labeled
as such, FreeHand is apparently claiming that the proposed amendment is futile.

Freelland’s arguments, however, relate to the factual bascs of Siwick’s claims and
FreeHand’s affirmative defenses, which are beyond the scope of the present motion. ‘The only issue
here is whether Sitrick’s claim against Schroeder is futile, i.¢., it would not survive a motion to
dismiss pursuant to Rule 12(b)(6), See Peoples v. Sebring Capital Corp., 209 F.R.D. 428, 430 (N.D.
Ill. 2002). FreeHand does not argue that the proposed amendment fails to state a claim, and the
Court finds that the inducement claim was sufficiently pleaded to survive a motion to dismiss,

To prove infringement under Section 271(b), “[t]he plaintiff has the burden of showing that
the alleged infringer’s actions induced infringing acts and that he knew or should have known his
actions would induce actual infringements.” Manville Sales, 917 F.2d at 553 (emphasis in original);
see Minn, Mining & Mfg., 303 F.3d at 1305; see also Insituform, 161 ¥'.3d at 695 (holding that “the
inducer must have actual or constructive knowledge of the patent”). Inducement requires proof of
“active steps knowingly taken — knowingly at least in the sense of purposeful, intentional as
distinguished from accidental or inadvertent. But with that qualifying approach, the term is as broad

as the range of actions by which one in fact causes, or urges, or encourages, or aids another to

12