Sightsound.Com Inc. v. N2K, Inc., Civ.A. 98-CV-118.

CourtUnited States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
Citation391 F.Supp.2d 321
Docket NumberNo. Civ.A. 98-CV-118.,Civ.A. 98-CV-118.
PartiesSIGHTSOUND.COM INCORPORATED, Plaintiff, v. N2K, INC., CDNow, Inc., and CDNow Online, Inc., Defendant.
Decision Date24 October 2003

Meyer Unkovic & Scott, Attn Richard F Rinaldo, Pittsburgh PA, Kenyon & Kenyon, Attn John Flock, New York NY, Kenyon & Kenyon, Attn William Wells, Washington DC, for Plaintiff's Counsel.

Edward C Flynn, Pittsburgh PA, Parcher Hayes & Snyder, Attn Steven M Hayes,

New York NY, Alston & Bird, Attn John Barnhardt III, Charlotte NC, for Defendant's Counsel.


AMBROSE, Chief Judge.

Pending before the Court is a Motion by Defendants N2K, Inc. ("N2K"), CDNow, Inc., and CDNowOnline, Inc. (collectively, "CDNow"), seeking summary judgment in this patent infringement case on the grounds that the patents-in-suit are invalid and that the method utilized by Plaintiff in calculating its damages is invalid as a matter of law. Also pending is a Motion by Plaintiff, Incorporated ("Sightsound"), seeking summary judgment with regard to the affirmative defense and counterclaims of inequitable conduct offered by Defendants. For the reasons discussed below, Defendants' Motion is denied and Plaintiff's Motion is granted.

A. Factual Background1

Plaintiff describes the "Eureka!" moment of inventor Arthur Hair as having occurred more than fifteen years ago when he was first shown a "digital audio compact disc." (Plaintiff's Brief in Opposition to the Motion for Summary Judgment, "Plf.'s Brief in Opp.," Docket No. 174, at 1.) Mr. Hair claims not to have been overly impressed by this device because he realized music was still being distributed on a physical medium even though it had been recorded in the same digital form that computers used to store and communicate information. Mr. Hair determined to eliminate the physical medium altogether and devise a method by which consumers could purchase and download music to their personal computers over telecommunications lines. (Id.)

Several years later, on March 2, 1993, the United States Patent and Trademark Office ("PTO") issued United States Patent No. 5,191,573 ("the '573 Patent") to Mr. Hair who later assigned all his rights, title and interest in the ' 573 Patent to a company he co-founded, known as Parsec Sight/Sound, Inc. ("Parsec.") He also assigned to Parsec two other patents, No. 5,675,734, issued on October 7, 1997 ("the '734 Patent"), and No. 5,966,440, issued on October 12, 1999 ("the '440 Patent"). The '734 and '440 Patents are claimed to be continuations of '573 Patent. (Amended Complaint, Docket No. 39, "Am. Compl.," ¶¶ 14 and 17.) All three patents ("the Sightsound Patents") relate to a method of selling digital audio and/or video signals from a host computer to a remotely located personal computer via telecommunications lines.

In 1995, Parsec became the first entity to sell a digital audio song for download over the internet, using the system developed by Mr. Hair, and in April 1999, sold its first digital movie via the Internet, again using Mr. Hair's patented technology. (Plf.'s Brief in Opp. at 2.) On April 1, 1999, Parsec and a sister corporation, Digital Sight/Sound, Inc., were merged and the surviving corporation renamed, Incorporated.

Plaintiff claims that in 1996, Defendant N2K began offering free downloads of digital audio music files. (Plf.'s Brief in Opp. at 2.) When Sightsound learned of this activity, it advised N2K of its patents and offered to provide download services for Defendant's customers. N2K rebuffed the offer and in July 1997 launched its own system, known as "" for selling music in digital download form over the Internet.

On March 31, 1999, a merger occurred between N2K and Defendant CDNow, Inc. CDNow became the parent of a new corporation known as CDNowOnline and of N2K. Subsequently, all the assets of N2K, including those related to its digital audio download business, were transferred to either CDNow or CDNowOnline. CDNow shut down and initiated "," even though CDNow was aware that Sightsound had sued N2K.

B. Procedural History

Sightsound filed suit against N2K in this Court on January 16, 1998, alleging that N2K had infringed its patent rights under the '573 and '734 Patents. While discovery was underway, the mergers discussed above took place and Plaintiff consequently filed an Amended Complaint on April 3, 2000, adding CDNow and CDNowOnline as additional defendants2 and changing the name of the plaintiff to Sightsound.

Plaintiff's Amended Complaint alleges that by making, selling, and/or offering to sell (or inducing others to make, sell or offer to sell) digital audio signals for use with processes and/or systems within the scope of the Sightsound Patents, Defendants have infringed on its valid and enforceable patents without authority. (Am.Compl., ¶¶ 21-28.) Plaintiff further claims that N2K and its successors had notice of these patents pursuant to U.S.C. § 287 prior to Plaintiff filing suit, but willfully and deliberately continued their infringing activities until at least May 1999 through their download service, (Id., ¶¶ 25-28.)

Similarly, in Count II of the Amended Complaint, Sightsound claims that beginning in February 2000, Defendants made, sold, and/or offered to sell (or induced others to make, sell or offer to sell) digital audio signals for use with processes and/or systems within the scope of the three patents via their service, (Am.Compl., ¶¶ 30-36.) As in Count I, Plaintiff claims that these actions are infringements carried out with notice and without authority.

As relief, Plaintiff seeks an injunction declaring that the patents-in-suit are valid and enforceable, that Defendants' actions have infringed the patents, and that further acts of infringement are prohibited. Further, because the infringements were wilful and deliberate, Plaintiff seeks not only compensatory damages but also treble damages pursuant to 35 U.S.C. § 284 and reasonable attorneys' fees pursuant to 35 U.S.C. § 285. (Am Compl., Prayer for Relief, ¶¶ H and I.)

In their Answer and Counterclaim, filed on April 27, 2000, Defendants CDNow and CDNowOnline alleged that the patents are invalid under 35 U.S.C. §§ 102, 103 and/or 112. (Docket No. 40, ¶¶ 37-39.) They also filed a counterclaim against Sightsound pursuant to the Federal Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202, seeking a declaratory judgment that neither Defendant infringed on the patents or induced infringement thereof.

On May 18, 2000, N2K filed its First Amended Answer, Affirmative Defenses and Counterclaims (Docket No. 45), in which it also claimed that the three Patents were invalid. N2K also offered as an affirmative defense the claim that Sightsound had failed to disclose to the PTO the fact that research into the prior art carried out during prosecution of the '573 and '734 Patents had identified "numerous materials relevant and material to the patentability of the claimed inventions." N2K claimed that the '573 and '734 Patents were unenforceable as a result of Plaintiff's inequitable conduct in failing to disclose this information. (Id., ¶¶ 40-43.)

Discovery was stayed for some twenty months while the parties attempted to settle their dispute. In February 2001, they filed their pleadings directed to the claim construction phase of the litigation. As part of this phase, a Markman hearing3 was held on April 18-20, and May 16, 2001, before Magistrate Judge Kenneth Benson who had been assigned the case by Judge Donald Lee.

Meanwhile, on March 1, 2001, Defendants CDNow and CDNowOnline filed a Motion for Leave for File an Amended Answer and Counterclaim (Docket No. 77), arguing that during discovery, they had come to believe that Mr. Hair had provided false or misleading information to the PTO during prosecution of the '440 Patent application. They sought leave to amend their Answer to include an affirmative defense of inequitable conduct and a counterclaim for a declaratory judgment of patent unenforceability based on that conduct. (Id. at 5; see also Declaration of Michael Barclay, Docket No. 78, Exhibit 1, Defendants CDNow and CDNowOnline's Amended Answer and Amended Counterclaims, "CDNow's Am. Ans.") Defendant N2K similarly amended its answer and counterclaim, seeking to extend the inequitable conduct defense it had previously stated its earlier Amended Answer to cover Mr. Hair's actions regarding prosecution of the '440 Patent as well. (See Docket No. 80, Exhibit A, Second Amended Answer, Affirmative Defenses and Counterclaims of N2K, Inc., "N2K's Sec. Am. Ans.")

Judge Benson entered his Report and Recommendation on the claims construction phase on February 8, 2002. ("Magistrate's Report," Docket No. 105,4 and amendment thereto at Docket No. 113.) Upon Judge Benson's resignation from the bench on August 16, 2002, and Judge Lee's recusal on October 18, 2002, the case was reassigned to me. On November 11, 2002, following a status conference, I issued a Memorandum Order of Court, adopting Judge Benson's Report and Recommendations as amended. (Docket No. 130.) At the same time, over objections by Plaintiff, I granted the Motions to Amend by CDNow and by N2K, setting out the inequitable conduct allegations. (Docket Nos. 131 and 132.)

On December 9, 2002, Plaintiff advised Defendants that the only claims remaining at issue are Claims 1, 2, 14, and 26 of the '734 Patent (against all Defendants) and Claims 6, 8, 11, and 12 of the '440 Patent (against CDNow and CDNowOnline) (these claims will be referred to collectively as the "Asserted Claims.") (Defendants' Exhibits to the Declaration of Steven M. Hayes in Support of Defendants' Motion for Summary Judgment, "Hayes Decl. Exhs.," Docket No. 162, at Exh. 14.) According to...

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