Diamonds.Net LLC v. Idex Online, Ltd., 1:04-cv-06626-RJH.

Decision Date18 December 2008
Docket NumberNo. 1:04-cv-06626-RJH.,1:04-cv-06626-RJH.
Citation590 F.Supp.2d 593
PartiesDIAMONDS.NET LLC, Internet Diamond Exchange, LLC, Martin Rapaport, & Rapaport USA, Plaintiffs, v. IDEX ONLINE, LTD., Idex Online Israel, Ltd., Idex Online S.A., John Does I-XX, & Roe Corporations I-XX, Defendants.
CourtU.S. District Court — Southern District of New York

Lawrence C. Hersh, Attorney at Law, Rutherford, NJ. Michael A. Charish, Wachtell, Lipton, Rosen & Katz, Ronald David Coleman, Coleman Law Firm, a Professional Corporation, New York, NY, for Plaintiffs.

Robert C. Kain, Jr., Fleit, Kain, Gibbons, Gutman, Bongini & Bianco P.L., Fort Lauderdale, FL, Stephen Wagner, Cohen Tauber Spievack & Wagner, P.C., Esther S. Trakinski, Esther S. Trakinski, Attorney at Law, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

RICHARD J. HOLWELL, District Judge:

In September 2005, plaintiffs Diamonds.net LLC, Internet Diamond Exchange, LLC, Martin Rapaport, and Rapaport USA (collectively, "Rapaport") filed suit against defendants (collectively, "Idex") asserting ten claims relating to defendants' alleged infringement of plaintiffs' intellectual property rights. Rapaport's tenth claim alleged that Idex was infringing U.S. Patent No. 5,950,178. Both Rapaport and Idex operate websites for buying and selling diamonds. The patent is directed at a system for facilitating transactions in precious stones.

Idex responded by filing a counterclaim which alleged that the patent was invalid. After discovery, Rapaport dismissed the infringement claim with prejudice and covenanted not to sue Idex under the patent for any of Idex's activities before February 20, 2008. Rapaport now moves to dismiss Idex's invalidity counterclaim, arguing that because there is no longer an actual controversy over infringement, the Court lacks jurisdiction to adjudicate the patent's validity. The Court finds, however, that in the particular circumstances of this case an actual controversy as to the patent's validity persists. Rapaport's motion must therefore be denied.

I. BACKGROUND

The parties to this action operate rival websites for buying and selling diamonds. Rapaport's properties include the "Internet Diamond Exchange," a full service exchange that guarantees payment to suppliers and delivery to buyers, and "RapNet," a dealer-to-dealer trading network. (See Index® [sic] Internet Diamond Exchange, http://www.diamonds.net/Info/AboutIndex. aspx (last visited Nov. 26, 2008); RapNet Diamond Trading Network, http://www. diamonds.net/Info/AboutRapnet.aspx (last visited Nov. 26, 2008).) Idex's property, "IDEX Online," bills itself as "[t]he world's only fully automated, wholesale, online trading service for industry professionals." (Idex Online, International Diamond and Jewelry EXchange [sic], https://www. idexonline.com/index.asp (last visited Nov. 26, 2008).)

On August 25, 2005, Rapaport filed a "Fifth Amended and Supplemented Complaint" ("Compl."). In its tenth claim for relief, the complaint alleged that Idex was infringing U.S. Patent No. 5,950,178 (the "Borgato" patent) by listing, selling, offering for sale, and facilitating the sale of diamonds on its website. (Compl. ¶¶ 138, 140.) The patent, which is controlled by Rapaport, is directed at "a data processing system and method for facilitating transactions in precious stones such as diamonds." (Borgato Patent at [57].) The complaint demanded disgorgement of profits, treble damages, attorneys fees, and costs. (Compl., at 33.)

On November 30, 2006, Idex filed a counterclaim challenging the validity and enforceability of the Borgato patent. (See Answer to Compl. & Counterclaim Against All Pls. ¶ 165 (Nov. 30, 2005).) Idex also denied that its website infringed the Borgato patent. (Id. ¶ 166.) As relief, Idex asked that the Court declare the Borgato patent invalid and unenforceable. (Id. at 21.)

On December 13, 2007, the parties submitted a proposed order that dismissed the infringement claim with prejudice. The order, however, purported not to impact the invalidity counterclaim. The Court entered the order on December 19, 2007.

Two months later, on February 19, 2008, Rapaport moved to dismiss the counterclaim, arguing that in the absence of a dispute over infringement, the Court lacks jurisdiction to adjudicate Idex's invalidity claim.1 With its motion, Rapaport submitted a covenant not to sue. In it, Rapaport "unconditionally and irrevocably covenant[ed] not to assert any claim of patent infringement ... against Idex ... under the Borgato Patent, as it currently reads, based on IDEX's website located at www. idexonline.com as it currently exist[ed] as of the date of this covenant, or previously existed." (Covenant Not To Sue (Feb. 19, 2008).)

Opposing Rapaport's motion, Idex contends there is still a live dispute over the validity of the patent, because Idex plans to launch an upgraded version of its website that will potentially practice the Borgato patent. (See Def.'s Surreply to Pl.'s Mot. to Dismiss Def.'s Fifth Counterclaim 2-8 (Apr. 21, 2008) ("Def.'s Second Mem.").) In support of this point, Idex submitted (1) screenshots of its upgraded website, (2) a patent application that describes a system Idex developed that potentially practices the Borgato patent, and (3) a declaration by Idex Online S.A.'s chief executive officer outlining Idex's future plans. (See Decl. of Abraham Stern in Supp. of Def.'s Opp. to Pl.'s Mot. to Dismiss Def.'s Fifth Counterclaim & Exs. A, B (Mar. 3, 2008) ("Stern Decl.").)

For its part, Rapaport principally contends that Idex's future plans are speculative and thus do not meet the "immediacy and reality" requirements of MedImmune, Inc. v. Genentech, 549 U.S. 118, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007). (See Pl.'s Reply Mem. in Supp. of Mot. to Dismiss Def.'s Fifth Counterclaim 2-10 (Mar. 20, 2008) ("Pl.'s Second Mem.").) Rapaport further contends that Benitec Australia, Ltd. v. Nucleonics, Inc., 495 F.3d 1340 (Fed.Cir.2007), precludes Idex from relying on the upgraded system to show a continuing controversy (see Pl.'s Mem. of Law in Resp. to Def.'s Surreply in Opp. to Pl.'s Mot. to Dismiss Def.'s Fifth Counterclaim 1-5 (June 3, 2008) ("Pl.'s Third Mem.")); that there is no continuing controversy because none of Idex's current or proposed products infringe the Borgato patent (id. at 7-8); and that the Court, in the exercise of its discretion, should decline to adjudicate the invalidity claim (id. at 9-10).

II. DISCUSSION

When a party attempts to strategically moot a case, two basic principles of federal jurisdiction come into conflict: first, that federal jurisdiction is limited to cases of actual controversy between the parties, see, e.g., United States v. Johnson, 319 U.S. 302, 305, 63 S.Ct. 1075, 87 L.Ed. 1413 (1943); Muskrat v. United States, 219 U.S. 346, 361, 31 S.Ct. 250, 55 L.Ed. 246 (1911); and second, that federal jurisdiction is not (or least should, not be) subject to manipulation by parties "who might contrive to moot cases that otherwise would be likely to produce unfavorable precedents." Richard J. Fallon et al., Hart and Wechsler's The Federal Courts and the Federal System 204 (5th ed. 2003); see, e.g., U.S. Bancorp Mortgage Co. v. Bonner Mall P'ship, 513 U.S. 18, 26, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994); Cardinal Chem. Co. v. Morton Int'l, Inc., 508 U.S. 83, 100, 113 S.Ct. 1967, 124 L.Ed.2d 1 (1993).

The conflict, however, is more apparent than real. While the second principle might suggest that a court should respond to jurisdictional gamesmanship by continuing to exercise jurisdiction, the first principle—an unwaivable constitutional limitation on the authority of the federal courts—precludes it from doing so unless the generally applicable elements of Article III jurisdiction are present. Thus, in spite of this case's unusual procedural history, the issue presented by Rapaport's motion is a familiar one: Is there an actual controversy over the validity of the Borgato patent capable of supporting a declaratory judgment action?

A. The "Actual Controversy" Requirement

The Declaratory Judgment Act provides that "[i]n a case of actual controversy within its jurisdiction ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration. ..." 28 U.S.C. § 2201. "The phrase `case of actual controversy' `refers to the type of `Cases' and `Controversies' that are justiciable under Article III [of the Constitution]." Sony Elecs., Inc. v. Guardian Media Techs., Ltd., 497 F.3d 1271, 1283 (Fed.Cir.2007). Among other things, this means that "a court may not adjudicate `a difference or dispute of a hypothetical or abstract character' or `one that is academic or moot.'" Cat Tech LLC v. TubeMaster, Inc., 528 F.3d 871, 879 (Fed.Cir.2008).

Soon after the Declaratory Judgment Act's passage, the Supreme Court held in Aetna Life Insurance Co. of Hartford, Connecticut v. Haworth, 300 U.S. 227, 57 S.Ct. 461, 81 L.Ed. 617 (1937), that to meet the actual controversy standard, a dispute must be "definite and concrete, touching the legal relations of parties having adverse legal interests." Id. 240-41, 57 S.Ct. 461. The dispute must be "real and substantial." Id. at 241, 57 S.Ct. 461. And it must "admi[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts." Id. See also MedImmune, 549 U.S. at 127, 127 S.Ct. 764 (quoting Aetna).

Four years later, the Court noted in Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941), that "[t]he difference between an abstract question and a `controversy' contemplated by the Declaratory Judgment Act is necessarily one of degree." Id. at 273, 61 S.Ct. 510. It then summarized the actual controversy requirement as follows: "Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a...

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