DCT

2:18-cv-07932

PNY Tech Inc v. Netac Technology Co Ltd

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I. Executive Summary and Procedural Information

  • Parties & Counsel:
  • Case Identification: 1:16-cv-00657, D. Haw., 02/22/2017
  • Venue Allegations: Venue is alleged to be proper in the District of Hawaiʻi because a substantial part of the events giving rise to the dispute, specifically the negotiation and execution of a settlement and patent licensing agreement during an in-person mediation, occurred in the district.
  • Core Dispute: Plaintiff seeks to invalidate a 2008 patent license agreement on grounds of fraudulent inducement and mistake, and further seeks a declaratory judgment that Defendant's patents covering external flash memory devices are invalid and unenforceable.
  • Technical Context: The technology relates to portable, non-volatile memory storage devices, commonly known as USB flash drives, which have largely replaced magnetic floppy disks for data transfer and storage.
  • Key Procedural History: The complaint alleges that a 2008 settlement agreement, resolving litigation over U.S. Patent 6,829,672 ('672 Patent), was procured by fraud. Plaintiff asserts Defendant represented the '672 Patent as "bulletproof" while knowing, or failing to disclose, that a third party intended to challenge its validity. The '672 Patent and a related patent were subsequently invalidated in inter partes reexaminations. Plaintiff alleges that Defendant then committed inequitable conduct by failing to disclose these reexamination proceedings and the invalidating prior art to the USPTO during the prosecution of the patents-in-suit, which are continuations of the invalidated patents. The parties are also involved in related arbitration and district court proceedings in New Jersey concerning royalty obligations under the settlement agreement.

Case Timeline

Date Event
2000-10-13 Priority Date for '024 and '585 Patents
2004-12-07 U.S. Patent 6,829,672 ('672 Patent) Issued
2006-02-10 Netac files infringement suit against PNY on '672 Patent in E.D. Tex.
2008-02-11 Parties execute Settlement Agreement in Hawaiʻi
2008-07-09 SanDisk initiates inter partes reexamination of '672 Patent
2009-05-06 Application for '024 Patent filed
2010-09-07 USPTO enters final office action rejecting all claims of '672 Patent
2010-09-07 SanDisk initiates inter partes reexamination of related '447 Patent
2011-10-27 Application for '585 Patent filed
2011-12-06 U.S. Patent 8,074,024 ('024 Patent) Issued
2012-12-11 U.S. Patent 8,332,585 ('585 Patent) Issued
2013-10-01 PNY alleges it first became aware of the '672 Patent reexamination (approx. date)
2016-03-17 Federal Circuit issues mandate affirming invalidation of all '672 Patent claims
2017-02-22 PNY files Amended Complaint for Declaratory Judgment in D. Haw.

II. Technology and Patent(s)-in-Suit Analysis

U.S. Patent No. 8,074,024 - "Electronic Flash Memory External Storage Method and Device," issued December 6, 2011

The Invention Explained

  • Problem Addressed: The patent’s background describes prior art removable storage like floppy disks as having significant disadvantages, including small capacity, low speed, poor reliability, and requiring large, heavy physical drives, making them unsuitable for increasingly popular portable computers. ('024 Patent, col. 1:20-44).
  • The Patented Solution: The invention is a portable, monolithic external storage device that uses flash memory and a standard interface, such as USB, to connect to a host computer. The system relies on a combination of firmware within the device and a software driver on the host computer's operating system to manage data access. This software-based approach eliminates the need for a physical drive mechanism and allows the device to be treated by the operating system like a standard disk drive, enabling "plug-and-play" functionality. ('024 Patent, Abstract; Fig. 5; col. 2:18-32).
  • Technical Importance: The technology provided a compact, high-capacity, and convenient method for data storage and transfer that was well-suited for the rise of portable computing and the adoption of the USB standard. ('024 Patent, col. 2:1-6).

Key Claims at a Glance

  • The complaint seeks a declaratory judgment that all claims are invalid and unenforceable (Compl. ¶¶ 180, 188). Independent claim 1 is representative.
  • Claim 1 of the ’024 Patent requires:
    • A computer system with memory storing an operating system and having a Universal Serial Bus (USB) port.
    • A flash memory storage device (FMSD) comprising a monolithic circuit with a USB connector, a microprocessor, and a flash memory module.
    • The operating system assigning and displaying a device symbol for the FMSD when it is plugged into the USB port.
    • The system processing operation requests from a user to access the FMSD "without converting between the USB protocol and another communication protocol."
  • The complaint reserves the right to challenge any and all claims.

U.S. Patent No. 8,332,585 - "Electronic Flash Memory External Storage Method and Device," issued December 11, 2012

The Invention Explained

  • Problem Addressed: The '585 Patent addresses the same technical problems as the '024 Patent, namely the shortcomings of legacy removable storage like floppy disks for portable computing. ('585 Patent, col. 1:20-44).
  • The Patented Solution: The solution described is functionally identical to that of the '024 Patent: a monolithic, plug-and-play flash memory device using a standard interface (USB or IEEE 1394). It also employs a driver/firmware architecture to manage data operations and present the device as a standard drive to the host operating system. ('585 Patent, Abstract; Fig. 3; col. 4:32-54).
  • Technical Importance: The technical contribution is the same as described for the '024 Patent.

Key Claims at a Glance

  • The complaint seeks a declaratory judgment that all claims are invalid and unenforceable (Compl. ¶¶ 192, 200). Independent claim 1 is representative.
  • Claim 1 of the ’585 Patent requires:
    • A portable flash memory storage device.
    • At least one flash memory module built into the device.
    • A USB or IEEE 1394 connector.
    • A microprocessor for processing commands to directly access data in the flash memory module "without communication protocol conversions."
    • A circuit providing DC power from a host computer via the connector, with the device acquiring power only from the host.
    • The microprocessor coordinating with a host computer's driver to assign and display a device symbol.
  • The complaint reserves the right to challenge any and all claims.

III. The Accused Instrumentality

Product Identification

The products at issue under the disputed license agreement are PNY's flash drives. The complaint distinguishes between two manufacturing technologies for these drives: "Printed Circuit Board Assembly" (PCBA) and "Chip-on-Board" (COB) products (Compl. ¶¶ 19, 107).

Functionality and Market Context

  • PCBA products are described as involving the attachment of finished, encapsulated flash memory chips onto a printed circuit board (Compl. ¶20). This was the technology of the products accused in the original 2006 litigation (Compl. ¶19).
  • COB technology is described as a later-developed process where a raw, un-encapsulated memory die is attached directly to a substrate, and the entire system is then encapsulated (Compl. ¶21).
  • The complaint alleges that at the time of the 2008 settlement, PNY only sold PCBA products and that the license was understood by PNY to cover only that technology (Compl. ¶¶ 23, 148, 150). Defendant now asserts that the license also covers PNY's COB products, which the complaint notes "greatly multiplies the quantity of royalty-bearing units" (Compl. ¶¶ 107, 152).

IV. Analysis of Invalidity and Unenforceability Allegations

The complaint is a declaratory judgment action and does not contain traditional infringement allegations or claim charts mapping product features to patent claims. Instead, the central patent-related allegations are that the '024 and '585 patents are invalid and unenforceable.

'024 Patent and '585 Patent Invalidity Allegations

The complaint alleges that all claims of both the '024 and '585 Patents are invalid under 35 U.S.C. §§ 102 and/or 103 as being anticipated or rendered obvious by prior art (Compl. ¶¶ 180, 192). The specific references cited include the Ban, Terasaki, Sartore, and Margalit patents (Compl. ¶¶ 180, 192). These are the same references that the complaint states were successfully used in inter partes reexaminations to invalidate all claims of the parent '672 Patent and related '447 Patent (Compl. ¶¶ 44-49, 57-62). The core of the invalidity argument is that the claims of the patents-in-suit are "similar to the now-invalid claims of the '447 and '672 Patents" and thus are invalid for the same reasons (Compl. ¶74).

'024 Patent and '585 Patent Unenforceability Allegations

The complaint alleges that both patents are unenforceable due to inequitable conduct committed by Defendant during their prosecution (Compl. ¶¶ 188, 200). The specific basis for this allegation is that Defendant, with intent to deceive the USPTO, knowingly failed to disclose material information (Compl. ¶¶ 186, 198). This allegedly material information includes:

  1. The prior art references (Ban, Terasaki, etc.) that were being used to challenge the parent patents (Compl. ¶¶ 70-73, 184, 196).
  2. The "status and outcome of the ongoing reexaminations" of the parent '672 and '447 patents, in which the USPTO had already rejected claims similar to those being prosecuted (Compl. ¶¶ 69, 81, 185, 197).

The complaint asserts that had this information been properly disclosed, neither the '024 Patent nor the '585 Patent would have issued (Compl. ¶¶ 187, 199).

No probative visual evidence provided in complaint.

V. Key Claim Terms for Construction

For the '024 Patent:

  • The Term: "without converting between the USB protocol and another communication protocol" (Claim 1).
  • Context and Importance: This limitation appears central to defining the novelty of the claimed system. Practitioners may focus on this term because its scope determines whether any intermediate processing between the USB interface and the flash memory controller constitutes a prohibited "conversion." A dispute could arise over whether this language forbids only conversions to legacy external protocols (like serial or parallel) or if it also forbids conversions to internal bus protocols used on the device's circuit board.
  • Intrinsic Evidence for a Broader Interpretation: The patent’s background focuses on replacing legacy "serial port, parallel port and keyboard port etc." ('024 Patent, col. 2:4-5). This context may support an interpretation that "another communication protocol" refers to these external, legacy standards, not necessarily internal chip-to-chip communication protocols.
  • Intrinsic Evidence for a Narrower Interpretation: The plain language of the claim is absolute ("without converting"). This could support a stricter interpretation where any protocol translation step between the USB data stream and the commands sent to the flash memory module falls outside the claim scope.

For the '585 Patent:

  • The Term: "microprocessor for processing commands to directly access data... without communication protocol conversions" (Claim 1).
  • Context and Importance: This phrase combines two potentially limiting concepts: "directly access" and "without... conversions." The interplay between these terms will be critical for determining the scope of infringement. A key question is what level of indirection or translation is permissible before access is no longer "direct" and involves a "conversion."
  • Intrinsic Evidence for a Broader Interpretation: The specification describes a system where a driver "converts" standard magnetic disk requests into "special instructions for the external storage device" ('585 Patent, col. 2:60-63). This suggests that "conversions" at the software/driver level are contemplated, which may imply the "without... conversions" limitation in the hardware claim is meant to be construed in the context of avoiding legacy hardware protocols.
  • Intrinsic Evidence for a Narrower Interpretation: The block diagram in Figure 3 shows the "Microprocessor" (21) as a distinct block from the "USB Interface Controller" (221), with connections to both the controller and the "Flash Memory" (1). This architecture could be used to argue for a narrow construction where "directly access" means the microprocessor itself, not an intervening controller, executes the memory access commands.

VI. Allegations of Willful or Egregious Conduct

While the complaint does not allege willful infringement by PNY, it contains extensive allegations of bad-faith conduct by Defendant Netac, forming the basis for its claims of fraud, inequitable conduct, and a request for exceptional case status under 35 U.S.C. § 285 (Compl., Prayer for Relief ¶9).

Allegations of Fraudulent Inducement

The complaint alleges that during the 2008 mediation, Defendant knew that the validity of the foundational '672 Patent was "in serious jeopardy" and that a reexamination challenge by SanDisk was imminent (Compl. ¶¶ 50, 114). Despite this alleged knowledge, Defendant is accused of having represented to PNY that the patent was "bulletproof" in order to induce PNY to sign the settlement and license agreement (Compl. ¶¶ 28, 52, 137).

Allegations of Inequitable Conduct

As detailed in Section IV, the complaint alleges that Defendant, with intent to deceive, withheld highly material information from the USPTO during the prosecution of the '024 and '585 patents. This includes the prior art and adverse outcomes from the reexaminations of the parent patents (Compl. ¶¶ 186, 198). The complaint characterizes this as "deceptive behavior" (Compl. ¶79) and an attempt to "deceive the USPTO Examiner" (Compl. ¶82).

VII. Analyst’s Conclusion: Key Questions for the Case

  1. A central issue will be one of fraudulent inducement: as a matter of fact, what did Defendant Netac know about the vulnerability of its '672 patent portfolio at the time of the 2008 mediation, and did its representations or omissions rise to the level of fraud sufficient to rescind the settlement agreement?
  2. A dispositive patent law question will be one of inequitable conduct: does the evidence show that Defendant, with deceptive intent, withheld material information from the USPTO regarding the co-pending reexaminations of parent patents during the prosecution of the '024 and '585 patents? An affirmative finding could render both patents unenforceable, mooting any validity analysis.
  3. Should the patents survive the unenforceability challenge, a key validity question will be one of obviousness: are the claims of the '024 and '585 patents patentably distinct from the combination of prior art that led to the invalidation of their parent patents, or do they represent an impermissible attempt to reclaim subject matter already found to be unpatentable?