Energy Recovery, Inc. v. Hauge

• Decision Date: 01 December 2000
• Docket Number: Civ.A. No. 2:00CV431.
• Citation: 133 F.Supp.2d 814
• Court: U.S. District Court — Eastern District of Virginia
• Parties: ENERGY RECOVERY, INC., Plaintiff, v. Leif J. HAUGE and Energy Recovery International, Inc., Defendants.

Page 814

133 F.Supp.2d 814

ENERGY RECOVERY, INC., Plaintiff, v. Leif J. HAUGE and Energy Recovery International, Inc., Defendants.

Civ.A. No. 2:00CV431.

United States District Court, E.D. Virginia, Norfolk Division.

December 1, 2000.

MEMORANDUM OPINION AND ORDER

JACKSON, District Judge.

This matter comes before the Court on Defendants' Motion to Dismiss, or in the alternative, to Stay Count I of Plaintiff's Complaint. Defendants contend that Plaintiff's Complaint lacks subject matter jurisdiction and fails to state a claim upon which relief can be granted. The Court conducted a hearing on Defendants' Motion on October 31, 2000. For the reasons outlined below, Defendants' Motion to Dismiss, or in the alternative, to Stay Count I of Plaintiff's Complaint is DENIED

I. FACTUAL AND PROCEDURAL HISTORY

Plaintiff Energy Recovery, Inc., ("Plaintiff"), manufactures and sells a device known as the "pressure exchanger." The pressure exchanger was invented in 1986 by Defendant Leif J. Hauge ("Hauge") and is used to desalinate water. Various improvements have been made to the pressure exchanger since 1986, resulting in four patents and several pending patent applications for the product.

Patent rights for the pressure exchanger were previously owned by Hauge International, a Norwegian company for which Defendant Hauge was the principal shareholder and founder. When continued financing became difficult in Norway, Defendant Hauge sought opportunities in the United States to finance continued pressure exchanger improvements. To facilitate this goal, Defendant Hauge agreed to assign to Plaintiff all existing patent rights and any "future changes, adaptions and developments," in a written agreement dated December 15, 1993.

As the initial President, Chief Executive Officer, and Chairman of the Board of Plaintiff Energy Recovery, Inc., Defendant Hauge and Plaintiff made additional improvements to the pressure exchanger, but not without operational and financial difficulties. As a result, on January 29, 2000, Plaintiff's Board of Directors removed Defendant Hauge from his official position. Defendant Hauge then resigned from Plaintiff's Board of Directors and sometime in February 2000 formed a new company, Defendant Energy Recovery International, Inc.

Alleging that a final transfer of pressure exchanger patent rights had never occurred between himself and Plaintiff, Defendant Hauge claimed that it had always been understood that he would "retain control of [Plaintiff] as well as the various patents." Defendant Hauge thereafter registered all pressure exchanger patents with the U.S.Patent and Trademark Office, and by written agreement dated March 3, 2000, assigned all pressure exchanger patent rights to his new company, Defendant Energy Recovery International, Inc. Defendant Hauge's actions were possible because Plaintiff had never registered the pressure exchanger patents in its name.

Defendant Hauge took additional measures to communicate his claim of sole ownership over the pressure exchanger patent rights. By letter dated March 25, 2000, Defendant Hauge allegedly notified two hundred (200) of Plaintiff's customers that all pressure exchanger patent rights were assigned to his new company, Defendant Energy Recovery International, Inc., and Defendant Hauge threatened legal action against any unauthorized use of the pressure exchanger. In addition, by letter dated April 23, 2000, Defendant Hauge informed Plaintiff's shareholders that Plaintiff was "being sued by myself for patent infringement," and alleged that a final transfer of pressure exchanger patent rights had never occurred between Defendant Hauge and Plaintiff. Defendant Hauge's letters notwithstanding, the pleadings do not indicate that Defendant Hauge has initiated any legal actions against Plaintiff or Plaintiff's customers for patent infringement.

On or about March 24, 2000, Plaintiff filed an action in Virginia state court claiming tortious business interference, misappropriation of trade secrets, detinue, and common law and statutory conspiracy. On June 12, 2000, with its state court action still pending, Plaintiff filed a three count complaint in the United States District Court for the Eastern District of Virginia. In its federal complaint, Plaintiff alleges, inter alia, unfair competition and cyber piracy by Defendants under the Lanham Act, 15 U.S.C. § 1125, and Plaintiff seeks a declaration of patent non-infringement in Count I of its complaint under the Declaratory Judgment Act, 28 U.S.C. §§ 2201, 2202. Defendants filed a motion on July 19, 2000, to dismiss Count I of Plaintiff's complaint for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted, or in the alternative, to stay Count I of Plaintiff's complaint. On October 31, 2000, the Court conducted a hearing on Defendants' motion.

II. LEGAL STANDARDS

As Defendant has raised two alternative grounds in it Motion to Dismiss, the Court is governed by two distinct legal standards. First, in the context of a Rule 12(b)(1) motion to dismiss, the Court assumes that all factual allegations in the complaint are true, see Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir.1982), but the plaintiff has the burden of proving subject matter jurisdiction. See Richmond, Fredericksburg & Potomac R.R. Co. v. United States, 945 F.2d 765, 768 (4th Cir.1991). While the Court may consider evidence outside the pleadings to determine whether subject matter jurisdiction exists, "the moving party should prevail only if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law." Id.

Alternatively, under Federal Rule of Civil Procedure 12(b)(6), a complaint should be dismissed when it fails "to state a claim upon which relief can be granted." However, a motion to dismiss should not be granted unless it is beyond doubt that a plaintiff can prove no set of facts which would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Similar to a 12(b)(1) motion to dismiss, the Court must accept as true the allegations in a complaint and draw all reasonable inferences in favor of a plaintiff. See Hughes v. Rowe, 449 U.S. 5, 10, 101 S.Ct. 173, 66 L.Ed.2d 163 (1980); Boring v. Buncombe County Bd. Educ., 136 F.3d 364, 367 (4th Cir.1998). Thus, the standard for granting a motion to dismiss pursuant to Rule 12(b)(6) is strict. See Loe v. Armistead, 582 F.2d 1291, 1295 (4th Cir.1978).

III. DISCUSSION

Defendants first claim that Plaintiff's declaratory judgment action, for which diversity of citizenship is not alleged, lacks subject matter jurisdiction and fails to state a claim upon which relief can be granted. Second, Defendants claim that the instant action is essentially a contract dispute over patent ownership governed by state contract law, thus precluding federal question jurisdiction. Although patent ownership is an issue of contention in the instant action, Plaintiff argues that federal question jurisdiction is still present because its well-pleaded complaint properly states a claim under federal laws. Plaintiff also contends that even if the patent ownership issue must be resolved at some point during this action, its well-pleaded complaint will still provide a basis for federal question jurisdiction.

a. Declaratory Judgment Act

The federal Declaratory Judgment Act allows district courts to "declare the rights and other legal relations of any interested party seeking such declaration whether or not further relief is or c[an] be sought." 28 U.S.C.A. § 2201(a) (1994 & Supp. IV 1999). The Court's power to grant declaratory relief is discretionary, and should be invoked for appropriate cases only. See Centennial Life Insurance Co. v. Poston, 88 F.3d 255, 256 (4th Cir.1996); Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239-40, 57 S.Ct. 461, 81 L.Ed. 617. An appropriate case is one where a plaintiff has an objective and reasonable apprehension of future litigation, which is of sufficient immediacy and reality, that a declaration of legal rights "will terminate and afford relief from the uncertainty, insecurity and controversy giving rise to the proceeding." Id. at 256-57 (quoting Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir.1937)). The plaintiff in a declaratory judgment action has the burden of proving by a preponderance of the evidence that an actual controversy existed from the time of filing throughout the pendency of the suit. See CAE Screenplates, Inc. v. Beloit Corp., 957 F.Supp. 784, 788 (E.D.Va.1997) citing Spectronics Corp. v. H.B. Fuller Co., Inc., 940 F.2d 631, 635 (Fed.Cir.).

As parties must switch their plaintiff and defendant roles in a declaratory judgment action, subject matter jurisdiction is based upon whether a defendant could have initially brought the threatened litigation action for which declaratory relief is sought. See Franchise Tax Board of California v. Construction Laborers Vacation Trust, 463 U.S. 1, 16-17 n. 14, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). However, the Declaratory Judgment Act does not operate as "a source of jurisdiction which is independent of substantive federal law." Gibraltar, P.R., Inc. v. Otoki Group, Inc., 104 F.3d 616, 619 (4th Cir.1997) (citing Franchise Tax Board of California, 463 U.S. at 16-17 n. 14, 103 S.Ct. 2841). "The Act ... merely provides an additional remedy in cases with an independent basis of jurisdiction." Microstrategy, Inc. v. Convisser, et al., 2000 WL 554264 (E.D.Va. 2000) (citing Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876, 94 L.Ed. 1194 (1950)).

In the instant action, because diversity of citizenship is not alleged to exist between Plaintiff and Defendants, a federal question is required. Therefore, as an initial matter, the Court must determine if federal question jurisdiction is present.

b. Subject Matter Jurisdiction

Plaintiff relies upon 28 U.S.C. § 1338(a) of the...