Case 4:18-cv-07229-YGR Document 61 Filed 04/13/20 Page 1 of 7
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`UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF CALIFORNIA
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`FINJAN, INC.,
`Plaintiff,
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`vs.
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`QUALYS INC.,
`Defendant.
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`CASE NO. 4:18-cv-07229-YGR
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`ORDER GRANTING DEFENDANT QUALYS
`INC.’S MOTION FOR LEAVE TO AMEND
`ANSWER AND AFFIRMATIVE DEFENSES
`Re: Dkt. Nos. 43, 44, 51, 54
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`Plaintiff Finjan, Inc. (“Finjan”) brings this patent infringement action against defendant
`Qualys Inc. (“Qualys”) for direct and indirect infringement of six of its patents. (Dkt. No. 1
`(“Complaint”).) Now before the Court is Qualys’ motion for leave to amend its answer to add
`patent exhaustion, implied license, and preclusion as affirmative defenses. (Dkt. No. 44 (“Mot.”).)
`Having carefully considered the pleadings and the papers submitted,1 the Court GRANTS Qualys’
`motion for leave to amend.
`I.
`BACKGROUND
`Finjan initiated this action on November 29, 2018, accusing Qualys of infringing U.S.
`Patent Nos. 6,154,844 (the “’844 Patent”), 8,677,494 (the “’494 Patent”), 7,975,305 (the “’305
`Patent”), 8,225,408 (the “’408 Patent”),6,965,968 (the “’968 Patent”), 7,418,731 (the “’731
`Patent”), and 8,141,154 (the “’154 Patent”). (Complaint ¶¶ 57-233.) Qualys filed its answer on
`January 23, 2019 and filed an amended answer on March 6, 2019. (Dkt. Nos. 17 (“Answer”), 26
`(“FAA”).) According to the scheduling order adopted in this case, fact discovery is set to close
`two months after the claim construction order, briefing for which is currently pending before the
`Court. (Dkt. No. 39 (“Amended Joint Schedule”).)
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`1 The Court finds the motion appropriate for resolution without oral argument and the
`matter is deemed submitted. Fed. R. Civ. P. 78(b); Civ. L. R. 7-1(b).
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`II.
`LEGAL STANDARD
`Federal Rule of Civil Procedure 15(a)(2) permits a party to amend its pleading with leave
`from the court, which the court freely grants “when justice so requires.” The policy of granting
`leave to amend is “to be applied with extreme liberality.” Eminence Capital, LLC v. Aspeon, Inc.,
`316 F.3d 1048, 1051 (9th Cir. 2003) (quoting Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d
`708, 712 (9th Cir. 2001)). “In the absence of any apparent or declared reason” for denying leave,
`“the leave sought should, as the rules require, be ‘freely given.’” Id. at 1052 (quoting Foman v.
`Davis, 371 U.S. 178, 182 (1962)). All inferences are drawn “in favor of granting the motion”
`when deciding the motion. Griggs v. Pace Am. Grp., Inc., 170 F.3d 877, 880 (9th Cir. 1999).
`The Court considers five factors in ruling on a motion for leave to amend: (1) bad faith, (2)
`undue delay, (3) prejudice to the opposing party, (4) futility of the amendment, and (5) whether
`the movant has previously amended its pleadings. Johnson v. Buckley, 356 F.3d 1067, 1077 (9th
`Cir. 2004). “Not all factors merit equal weight.” Eminence Capital, 316 F.3d at 1052. Prejudice
`is the “touchstone of the inquiry under rule 15(a)” and merits denial where, for example,
`amendment would require the opposing party to enter into “an entire course of defense” at a “late
`hour.” Id.; Morongo Band of Mission Indians v. Rose, 893 F.2d 1074, 1079 (9th Cir. 1990). In
`addition, “[f]utility alone can justify the denial of a motion to amend.” Johnson, 356 F.3d at 1077
`(quoting Nunes v. Ashcroft, 348 F.3d 815, 818 (9th Cir. 2003)). In the absence of “strong
`evidence” of one or more of these factors, leave to amend must be granted. Sonoma Cty. Ass’n of
`Retired Emps. v. Sonoma Cty., 708 F.3d 1109, 1117 (9th Cir. 2013).
`III. MOTION FOR LEAVE TO AMEND
`Qualys seeks to add affirmative defenses of (1) patent exhaustion, (2) implied license, and
`(3) preclusion to its answer. All three defenses pertain to the ’305 Patent. The first two defenses
`stem from a license agreement Finjan produced in September 2019, which shows that Finjan had
`licensed Trend Micro Inc. (“Trend Micro”) the right to sell the ’305 Patent invention. (See Dkt.
`No. 44-5 (“Trend Micro License”).) As a customer of Trend Micro, Qualys claims that Finjan had
`exhausted its patent rights and granted Qualys an implied license in Trend Micro’s software.
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`The preclusion (or collateral estoppel) defense stems from reexamination proceedings
`before the U.S. Patent and Trademark Office (“PTO”) that cancelled as unpatentable unasserted
`claims 1, 2, 5, and 13 of the ’305 Patent. (See Dkt. No. 44-3 (“Reexamination Certificate”).)
`Qualys claims that the asserted claims of the ’305 Patent are immaterially different from the
`cancelled claims and therefore invalid. Notably, the litigation leading to the PTO’s decision did
`not involve Qualys.
`Finjan opposes Qualys’ motion on the grounds of futility, undue delay, and prejudice. The
`Court considers each of these factors in turn.2
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`A.
`Futility
`Finjan first argues that each of the proposed amendments would be futile. In connection
`with the exhaustion and license defenses, Finjan claims that the Trend Micro license expressly
`exempted Qualys from any license rights. With regards to preclusion, Finjan contends that the
`asserted claims are materially different from the cancelled claims and have been found valid in
`inter partes review (“IPR”). The Court analyzes the arguments below.
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`1.
`Patent Exhaustion
`Patent exhaustion limits the patentee’s right to exclude by providing “that the initial
`authorized sale of a patented item terminates all patent rights to that item.” Quanta Comp., Inc. v.
`LG Elecs., Inc., 553 U.S. 617, 625 (2008). Patent exhaustion extends to sales made by authorized
`licensees; “[s]o long as a licensee complies with the license when selling an item,” the “licensee’s
`sale is treated . . . as if the patentee made the sale itself” and the patent rights are exhausted.
`Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523, 1535 (2017); see Quanta Comp.,
`553 U.S. at 636 (finding that patentee exhausted rights in products having components sold
`pursuant to an unconditional license to sell); Tessera, Inc. v. Int’l Trade Comm’n, 646 F.3d 1357,
`1370 (Fed. Cir. 2011) (focusing on “whether the sales were authorized”).
`Here, the Trend Micro License provided Trend Micro and its affiliates with a right to sell
`“any products,” but conditioned that license to “no[t] apply to any Excluded Entity.” (Trend
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`2 Because Qualys does not raise bad faith or prior amendments in its motion, the Court
`does not consider those factors.
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`Micro License §§ 3.2, 3.5.) The list of excluded entities includes Qualys. (Id. Appx. A.) Finjan
`thus argues that the agreement did not license Qualys. However, a license is not required to use
`validly purchased products; indeed, the patentee has no rights left to license in those products. See
`Impression Prods., 137 S. Ct. at 1543 (after an authorized sale, “there is no exclusionary right left
`to enforce”). Finjan also argues that the Trend Micro license applies only to Trend Micro’s
`products, not to Qualys’ products, as the parties expressly noted. (See Trend Micro License § 3.6.)
`Again, that argument does not prohibit amendment. In Quanta Computer, the Supreme Court
`found patent exhaustion applied to products that combined licensed patented components with
`other components. 553 U.S. at 637. Although the license “disclaimed any license to third parties
`to practice the patents by combining licensed products with other components,” the restriction did
`not (and could not) extend to purchasers. Id.; see also Impression Prods., 137 S. Ct. at 1534-35
`(finding that the “patentee’s authority to limit licensees” does not allow it “to impose post-sale
`restrictions on purchasers” (emphasis in original)).
`The Court need not resolve these legal disputes at this juncture. Qualys’ interpretation that
`the Trend Micro License provides Trend Micro with an unconditional authorization to sell
`patented products appears to be plausible. The parties’ dispute centers primarily on contract
`interpretation—Finjan interprets the license agreement to restrict Trend Micro’s ability to sell to
`Qualys, and Qualys does not. Given the plausibility, Qualys’ amendment is not futile. See
`Foman, 371 U.S. at 182 (“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 claims on the
`merits.”); Novak v. U.S., 795 F.3d 1012, 1020-21 (9th Cir. 2015) (denying leave to amend only
`because amended claim would be subject to dismissal).
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`2.
`Implied License
`An implied license to practice a patent may arise “by virtue of legal estoppel.” TransCore,
`LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1278 (Fed. Cir. 2009). If a patentee
`has granted a definable property right in exchange for consideration “and then has attempted to
`derogate or detract from that right,” then the patentee is “estopped from taking back in any extent
`that for which he has already received consideration.” Id. at 1279 (quoting AMP Inc. v. U.S., 389
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`F.2d 448, 453 (Cl. Ct. 1968)). Thus, if a patentee has covenanted not to sue for infringement as
`part of a settlement agreement, it may not later derive the settlor of the benefit of the bargain by,
`for example, asserting other patents. See id.
`As part of the Trend Micro license, Finjan covenanted not to sue Trend Micro or its
`“affiliates or company partners” for patent infringement by licensed products combined with third
`party products. (Trend Micro License § 3.5.) “Company partners” is defined to include
`companies involved in the development, operation, use, provision, or distribution of Trend
`Micro’s products. (Id. § 1.12.) Although it is not clear how Qualys contends to be involved in
`any of those operations, the issue raises a possible defense. Accordingly, the argument does not
`support a finding of futile precluding amendment.
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`3.
`Preclusion
`Collateral estoppel or issue preclusion prevents relitigation of an issue that is (1) “identical
`to [] one alleged in [] prior litigation,” where it was (2) “actually litigated by the party against
`whom preclusion is asserted in the prior litigation” and (3) formed a “critical and necessary part of
`the judgment in the earlier action.” Trevino v. Gates, 99 F.3d 911, 923 (9th Cir. 1996). A patent
`reexamination that determines claims to be invalid may preclude relitigation of other claims that
`present identical validity issues. See Ohio Willow Wood Co. v. Alps S., LLC., 735 F.3d 1333, 1342
`(Fed. Cir. 2013). Here, claims 1, 2, 5, and 13 of the ’305 Patent were cancelled as invalid by the
`PTO. (Reexamination Certificate at 2.) Qualys contends that the asserted claims of the ’305
`Patent are immaterially different from the cancelled claims. (Compare ’345 Patent at Claim 2
`(cancelled dependent claim), with id. at Claim 14 (asserted claim reciting identical language but
`depending on claim 13).) Finjan disagrees and points out the PTO did not find the asserted claims
`invalid in an IPR. See Eset, LLC v. Finjan, Inc., IPR2017-01738, Paper 57 at 10 (P.T.A.B. Jan.
`24, 2019). In light of the similarity between claims 2 and 14—and the PTO’s finding that both
`independent claims 1 and 13 are invalid—Finjan fails to show “strong evidence” of futility for
`Qualys’ amendment. The IPR proceedings (for which Qualys was not named a party-in-interest)
`found only that the grounds raised in the IPR did not demonstrate unpatentability. See Eset,
`IPR2017-01738, Paper 57 at 10. Here, again, the Court need not decide the issue at this juncture
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`Case 4:18-cv-07229-YGR Document 61 Filed 04/13/20 Page 6 of 7
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`and deny the amendment. 3
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`B.
`Undue Delay
`Finjan next argues that Qualys unduly delayed bringing its amendment. Undue delay
`requires examination not only of the scheduling order, but also “whether the moving party knew
`or should have known the facts and theories raised by the amendment in the original pleading.”
`AmerisourceBergen Corp. v. Dialysist West, Inc., 465 F.3d 946, 953 (9th Cir. 2006). However,
`“undue delay by itself is insufficient to justify denying a motion to amend.” Owens, 244 F.3d at
`712-13. Here, Finjan argues that Qualys should have known about its license to Trend Micro
`based on publicity generated in July 2018. Finjan also argues that Qualys should have brought its
`preclusion defense earlier because the reexamination proceedings took place in 2018.
`Although Qualys could have conceivably acted more quickly, the Court finds that its delay
`is not undue. Even if Qualys had known of the Trend Micro licensing agreement from news
`publications, the precise content of that license—including the nature of Trend Micro’s right to
`sell—was not apparently known to Qualys until Finjan produced the license agreement under a
`protective order in this litigation. The six-month delay after the production of the license stems
`from the parties’ attempts to meet-and-confer. As to the reexamination proceedings, Qualys was
`not unjustified in waiting until the PTO finished its proceedings (including related appeals) and
`issued a reexamination certificate. Even if the preclusive effect begins immediately, raising a
`preclusion defense prematurely would have only wasted the Court’s and parties’ time if the
`Federal Circuit reversed the decision on appeal. Following the issuance of the certificate, Finjan
`brought its motion within two months. Thus, the delay in this case does not appear to be undue as
`to justify denial of leave for an amendment.
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`C.
`Prejudice
`Prejudice—the “touchstone of the inquiry” for leave to amend—fails to overcome the
`presumption that leave to amend is freely granted. Finjan’s only articulated prejudice is that it
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`3 The effect of the reexamination proceedings on the PTO’s findings is not clear. Although
`the final decision notes the existence of the reexamination, the IPR found all claims—including
`the cancelled ones—to be not unpatentable. See Eset, IPR2017-01738, Paper 57 at 10, 50.
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`Case 4:18-cv-07229-YGR Document 61 Filed 04/13/20 Page 7 of 7
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`would have elected different claims had it known of Qualys’ defenses. That argument is not
`plausible. Finjan already asserts all of the claims that the PTO did not find invalid during
`reexamination. (Compare Complaint ¶ 98 (asserting claims 3-4, 6-12, and 14-25 of the ’305
`Patent), with Reexamination Certificate at 2 (cancelling claims 1-2, 5, and 13).) Finjan fails to
`articulate any ways in which its infringement contentions would change in light of Qualys’
`defenses. The deadline for fact discovery has not passed and Finjan may still pursue investigation
`into Qualys’ products. Accordingly, Finjan fails to show “strong evidence” of prejudice.4
`IV. CONCLUSION
`For the foregoing reasons, the Court GRANTS Qualys’ motion for leave to amend its
`answer and affirmative defenses. The Court further GRANTS the parties’ motion to seal in
`relation to this motion. This Order terminates Docket Numbers 43, 44, 51, and 54.
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`IT IS SO ORDERED.
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`Dated: April 13, 2020
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`YVONNE GONZALEZ ROGERS
`UNITED STATES DISTRICT COURT JUDGE
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`4 The parties seek to seal certain narrowly-focused information related to confidential
`license agreements. See Dkt. Nos. 43, 51, 54. The Court applies the “good cause” standard for
`non-dispositive motions and GRANTS the motions to seal. See Digital Reg of Texas, LLC v.
`Adobe Sys., Inc., No. C 12-1971 CW, 2014 WL 6986068 (N.D. Cal. Dec. 10, 2014) (finding
`licensing information subject to sealing as harmful to competitive standing).
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