Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., No. 2009-1454 (Fed. Cir. 6/16/2010), 2009-1454.

• Decision Date: 16 June 2010
• Docket Number: No. 2009-1454.,2009-1454.
• Parties: WORDTECH SYSTEMS, INC., Plaintiff-Appellee, v. INTEGRATED NETWORKS SOLUTIONS, INC., (DOING BUSINESS AS INTEGRATED NETWORK SOLUTIONS CORP., ALSO KNOWN AS INTEGRATED NETWORK SOLUTIONS, INTEGRATED SYSTEMS, INTERNET NETWORK STORAGE COMPANY AND INSC), NASSER KHATEMI, AND HAMID ASSADIAN, Defendants-Appellants, and EHTERAM GHODSIAN, SHOHREH JAVADI, MICHAEL F. ELLSWORTH, AND BRIAN J. DEAN, Defendants.
• Court: U.S. Court of Appeals — Federal Circuit

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WORDTECH SYSTEMS, INC., Plaintiff-Appellee, v. INTEGRATED NETWORKS SOLUTIONS, INC., (DOING BUSINESS AS INTEGRATED NETWORK SOLUTIONS CORP., ALSO KNOWN AS INTEGRATED NETWORK SOLUTIONS, INTEGRATED SYSTEMS, INTERNET NETWORK STORAGE COMPANY AND INSC), NASSER KHATEMI, AND HAMID ASSADIAN, Defendants-Appellants, and EHTERAM GHODSIAN, SHOHREH JAVADI, MICHAEL F. ELLSWORTH, AND BRIAN J. DEAN, Defendants.

No. 2009-1454.

United States Court of Appeals, Federal Circuit.

Decided: June 16, 2010.

Appeal from the United States District Court for the Eastern District of California in case No. 04-CV-1971, Judge Morrison C. England, Jr.

CHRISTIAN J. MARTINEZ, General Counsel, Wordtech Systems, Inc., of Concord, California, argued for plaintiff-appellee. With him on the brief was RICHARD ESTY PETERSON, Richard Esty Peterson, Patent Attorney, of Pacifica, California.

CHRIS GIBSON, Boutin, Gibson Di Gusto Hodell Inc., of Sacramento, California, argued for defendants-appellants. With him on the brief was MICHAEL E. CHASE.

Before MAYER, GAJARSA, and LINN, Circuit Judges.

LINN, Circuit Judge.

This is a patent infringement case involving technology for automated duplication of compact discs. Wordtech Systems, Inc. ("Wordtech") sued Integrated Networks Solutions, Inc. ("INSC") and its employees Nasser Khatemi and Hamid Assadian (collectively "Defendants") in the District Court for the Eastern District of California for infringement of U.S. Patents No. 6,141,298 ("`298 patent"), No. 6,532,198 ("`198 patent"), and No. 6,822,932 ("`932 patent"). A jury found INSC, Khatemi, and Assadian each liable for direct infringement, contributory infringement, and inducement of infringement, and awarded damages. Khatemi and Assadian appeal the liability verdicts against them as individuals; all three defendants appeal damages and the district court's denial of their motion for leave to amend their answer to allege invalidity defenses. Because the jury instructions lacked legal tests necessary to determine Khatemi and Assadian's individual liability, and because the damages verdict conflicts with the clear weight of the evidence, we reverse the district court's denial of Defendants' motion for new trial and remand. Because the district court did not abuse its discretion by denying Defendants' motion for leave to amend, we affirm that ruling.

BACKGROUND

The three asserted patents share a common parent application and cover "Programmable Self-Operating Compact Disk Duplication Systems." Wordtech alleged that Defendants infringed the patents by modifying and selling disk duplication devices called "Robocopiers," model numbers 600 and 8000. The accused devices copy video files from computer memory to multiple discs. Wordtech also alleged that INSC, Khatemi, Assadian, and other "INSC personnel" contributorily infringed and induced third parties to infringe "by selling infringing products to them." First Am. Compl. ¶ 27.

INSC was founded by Khatemi's mother, Ehteram Ghodsian, and incorporated in Nevada on March 17, 1994. Nevada law requires corporations to file annual forms that include the names and addresses of officers and directors. See Nev. Rev. Stat. § 78.150 (2009). Failure to file the annual forms results in revocation of the corporate charter, which cannot be reinstated after five consecutive years of noncompliance. Id. §§ 78.175, 78.180. INSC filed annual lists of corporate officers in 1994 and 1995, identifying Khatemi as President and as a Director, respectively.¹ However, after 1995, INSC did not file the mandatory annual statements in Nevada. On November 3, 2006, after Wordtech filed suit (on September 22, 2004) INSC filed a "Certificate for Revival for a Nevada Corporation."

Khatemi and Assadian worked for INSC but denied that they served as officers. Khatemi testified that he was a "salesman," that his "specialty is software and software solution," and that he sold Robocopier 600 and 8000 models. Reporter's Tr., Trial Proceedings, Nov. 4, 2008, 144:20-146:21. Assadian described himself as an engineer responsible for INSC "product development." Id., Nov. 5, 2008, 109:13-19; id., Nov. 10, 2008, 46:6-23. Khatemi said, "We generally never had titles at the company," but identified Assadian as the company representative at the time of trial. Id., Nov. 4, 2008, 151:20-25, 136:19-24. According to Assadian, INSC had at most "20 and maybe 15" employees between 2000 and 2005, and only two full-time employees—himself and Khatemi—at the time of trial. Id., Nov. 10, 2008, 11:6-12, 22:14-18. Assadian also testified that "mostly Mr. Khatemi and myself" were responsible for the company, but neither held an office. J.A. 537.

Wordtech named the San Juan Unified School District ("School District") of Carmichael, California as a co-defendant for allegedly purchasing and using INSC Robocopiers. First Am. Compl. ¶ 28. In response, the School District pleaded "Patent Invalidity" as an affirmative defense. San Juan Unified Sch. Dist.'s Answer to First Am. Compl. 10. However, INSC, Khatemi, and Assadian did not plead invalidity defenses or counter-claims. The School District later settled with Wordtech and left the lawsuit. The remaining defendants learned of this settlement on January 23, 2007 and moved to amend their answer to allege invalidity defenses on February 13, 2007. The district court denied this motion. Wordtech Sys., Inc. v. Integrated Network Solutions, Inc., No. 04-CV-1971 (E.D. Cal. Mar. 22, 2007) (order denying motion).

The district court conducted a jury trial on Wordtech's infringement theories. The jury answered questions involving infringement on a sixteen-page verdict form. Part I of the verdict form, "INFRINGEMENT," asked as to each defendant whether Wordtech proved that the Robocopier 600 and 8000 infringed each of the asserted claims of the three patents, but only displayed check boxes for "(A) Inducing Infringement in the U.S." and "(B) Contributing to infringement in the U.S." Joint Verdict Form 2-14. Part II, "Infringement Detail," asked whether Wordtech proved that "any valid claim of these patents" was infringed by INSC, Assadian, and Khatemi. Id. 14-15. The jury checked "Yes" for all infringement questions in Parts I and II. It also awarded damages of $150,000 for infringement of the '298 patent and $50,000 for infringement of each of the '198 and '932 patents, for a total of $250,000. Finally, the jury found that all defendants infringed all three patents willfully. After trial, the district court found the case "exceptional" under 35 U.S.C. § 285 and awarded treble damages, attorneys' fees, interest, and costs to Wordtech. Wordtech Sys., Inc. v. Integrated Network Solutions, Inc., No. 04-CV-1971 (E.D. Cal. Jan. 15, 2009) (memorandum and order). Defendants filed pre- and post-verdict motions for judgment as a matter of law ("JMOL") under Rule 50 of the Federal Rules of Civil Procedure, and a motion for new trial under Rule 59(a), all of which the district court denied. Wordtech Sys., Inc. v. Integrated Network Solutions, Inc., No. 04-CV-1971 (E.D. Cal. May 26, 2009) ("Order").

Defendants do not appeal the verdicts of infringement against INSC, the verdicts of willfulness, or the court's exceptional case determinations. They challenge only the liability verdicts against Khatemi and Assadian, the $250,000 damages award, and the court's denial of their motion to amend their answer. We have jurisdiction under 28 U.S.C. § 1295(a)(1).

DISCUSSION

I. Individual Liability for Infringement

Khatemi and Assadian appeal the district court's denial of their motions for JMOL and new trial, arguing that they cannot be individually liable for direct infringement, contributory infringement, or inducement.

We review denial of post-trial motions for JMOL and new trial under regional circuit law. Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., 563 F.3d 1358, 1370 (Fed. Cir. 2009). The Ninth Circuit reviews "a jury's verdict for substantial evidence in ruling on a properly made motion under Rule 50(b)." Equal Employment Opportunity Comm'n v. Go Daddy Software, Inc., 581 F.3d 951, 961 (9th Cir. 2009). "However, in ruling on a Rule 50(b) motion based on grounds not previously asserted in a Rule 50(a) motion, we are limited to reviewing the jury's verdict for plain error, and should reverse only if such plain error would result in a manifest miscarriage of justice." Id. (quotation and citation omitted). "Under Rule 50, a party must make a Rule 50(a) motion for judgment as a matter of law before a case is submitted to the jury." Id. Rule 50(a) requires that a pre-verdict JMOL motion "specify the judgment sought and the law and facts that entitle the movant to the judgment." See Tortu v. Las Vegas Metro. Police Dep't, 556 F.3d 1075, 1082-83 (9th Cir. 2009) (quoting Fed. R. Civ. P. 50(a)(2)).

The Ninth Circuit reviews a "ruling on a motion for a new trial under Rule 59(a) for an abuse of discretion." Go Daddy, 581 F.3d at 962. "The trial court may grant a new trial, even though the verdict is supported by substantial evidence, if `the verdict is contrary to the clear weight of the evidence, or is based upon evidence which is false, or to prevent, in the sound discretion of the trial court, a miscarriage of justice.'" United States v. 4.0 Acres of Land, 175 F.3d 1133, 1139 (9th Cir. 1999) (citation omitted). We may reverse the denial of a Rule 59(a) motion "where the District Court has made a mistake of law." Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (quotation omitted).

A. Direct Infringement

According to Khatemi and Assadian, INSC's corporate veil shielded them from direct infringement liability under 35 U.S.C. § 271(a) because they acted as company employees, and INSC was a valid corporation during all periods of alleged infringement. They insist that the validity of "INSC's corporate status was not an issue at trial" and that Wordtech introduced insufficient evidence to justify piercing INSC's corporate veil....