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Lite-ON IT Corp. v. Toshiba Corp.

January 7, 2009


The opinion of the court was delivered by: Stephen G. Larson United States District Judge


The present motion for summary judgment raises the issue of whether the instant claim for unfair competition is essentially a renewed counterclaim that was settled in a prior lawsuit between the parties. In the end the Court finds that, although the present unfair competition claim seeks to add one more underlying act (or perhaps, better stated, update the prior counterclaim to include a post-settlement agreement act), at its base it advances essentially the same legal claim as that settled in the prior lawsuit. Even though the settlement agreement reached between the parties in the prior lawsuit contained a broad release that would cover such an attempted "update" of the counterclaim from the prior lawsuit, there remains an additional complicating wrinkle: Whether the Settlement Agreement (and thus by extension application of the release provision contained therein) was procured by fraud on Toshiba's part, thereby blocking the agreement's terms from barring the present claim. Towards that end, when plaintiff knew or should have known of that fraud assumes paramount importance to the resolution of the instant motion due to the fact that, subsequent thereto, the plaintiff re-affirmed the Settlement Agreement by invoking its arbitration provisions. Finding that issues of fact on this point remain, Toshiba's motion for summary judgment on the unfair competition claim is DENIED.


Toshiba Corporation is the owner of a number of patents covering DVD-ROM & CD-R/RW drives used in personal computers and other media. As part of its sale of such devices, in 1995 Toshiba was a founding member of the "DVD Forum," an international association of companies engaged in research, development, manufacturing and/or sales of DVDs. The DVD Forum agreed on the creation of a specification applicable to the recording, production, replication or use of DVDs and related equipment (the "DVD Specifications"). These specifications soon became a technological and commercial necessity for any firm to incorporate into its DVD products if it wished to participate in the DVD market.

It is alleged that those members of the DVD Forum with patented technologies relevant to DVDs, including Toshiba, structured the DVD Specifications in such a way as to render compliance with the specifications as resulting in the infringement of one or more of the patents owned by a DVD Forum member. Towards that end it is claimed that, in 1999, six members of the DVD Forum, including Toshiba, created a joint licensing program, DVD6C, with each contributing their DVD-related patents utilized in the Forum's DVD Specifications to create a pool of patents which were essential to the design, manufacture, and use of products that incorporate DVD technology. Any firm wishing to compete in the DVD market were therefore required to secure a license from DVD6C.*fn1

To assuage any anti-trust issues, Toshiba, on behalf of the DVD6C pool, sent a business review letter to the Antitrust Division of the United States Department of Justice ("DOJ") wherein it promised that DVD6C would "license on a non-discriminatory basis to all interested parties" and would "not impose disadvantageous terms on competitors, let alone refuse to license to them altogether." The DOJ, purportedly based on this promise, deferred on ruling on any anti-trust aspect of the business arrangement.

On June 18, 2002, Toshiba filed a complaint against Lite-ON IT Corporation and its United States subsidiary Lite-ON (USA) International, Inc. (collectively "LOIT"), Toshiba Corporation v. Ultima Electronics Corp., et al., CV-02-4825-SJO (PLAx), Judge Otero presiding, alleging that DVD drives made and sold by LOIT infringed five DVD patents owned by Toshiba.

During the course of the litigation, LOIT made it known to Toshiba that it was intending to file a counterclaim against Toshiba based on the alleged anti-trust nature of the DVD6C licensing arrangement. In a letter sent to Toshiba's counsel on March 14, 2003, LOIT submitted "a revised draft of a proposed Second Amended Answer, Affirmative Defenses, and Counterclaim," the counterclaim in question being one for "antitrust." In the proposed counterclaim LOIT attempted to assert a litany of anti-trust type claims, namely, for conspiracy in restraint of trade, monopolization, conspiracy to monopolize, and attempted monopolization. The gist of the anti-trust allegation was summed up in the introduction to the proposed counterclaim:

This action arises from . . . Toshiba's participation in unlawful and anti-competitive agreements to establish technical specifications that control the design, manufacture, replication and use of Digital Versatile Discs ("DVDs") and related equipment, and from its conspiracy to eliminate and foreclose competition by . . . forming patent pools charging independent producers of products for playing DVDs . . . substantial and discriminatory royalties for licenses to DVD technology required to implement those specifications.

The proposed counterclaim then recited the history of the DVD Forum, the creation of the DVD Specifications, the subsequent formation of the DVD6C, and the business review letter request before the DOJ.

The parties thereafter filed a series of stipulations to extend the time for either party to add parties or claims to the suit. When the parties filed a third stipulation seeking to extend the time to add parties or claims to April 23, 2003, (the original date set in the court's scheduling order being March 31, 2003), the stipulation was denied by the court. Thereafter, LOIT filed a motion to modify the scheduling order, seeking an extension of the deadline to add parties and claims. LOIT filed its motion to modify the scheduling order so that it would be allowed to file a motion seeking leave to file its proposed Second Amended Answer, Affirmative Defenses and Counterclaims that it had earlier submitted a rough draft of in mid-March to Toshiba's counsel.

On June 10, 2003, the court denied LOIT's request to modify the scheduling order to extend the deadline for the parties to add claims and parties, finding that "good cause" did not exist to allow LOIT to modify the scheduling order. The court concluded that LOIT's reliance on the parties' mutual assent to hold off on filing their motion to amend their pleadings and add parties before the deadline's passage to focus on the ongoing "settlement discussions" was of no moment because admittedly LOIT "could have met the Scheduling Order's timetable" by violating this understanding of counsel and filing the motions before the deadline (considerations of professionalism notwithstanding). The court next observed that LOIT's subsequent reliance on the stipulation of counsel to further extend the deadline in lieu of filing the motion to amend was not "good cause" because there was always the possibility that the court could deny any stipulation to extend the deadlines, which in fact had happened. Finally, the court found that allowing LOIT to bring new counterclaims and parties in a complex patent infringement case that had been on its docket for less than a year would prejudice Toshiba and necessitate additional discovery.

On July 25, 2003, LOIT and Toshiba executed a Settlement Agreement resolving the suit. The Settlement Agreement established that LOIT would pay "Toshiba a per unit royalty of the greater of 1.7% of Net Sales and U.S. $1,70" for the use of Toshiba's essential DVD patents. The Settlement Agreement also provided that, if LOIT entered into a pooled license for essential DVD patents with DVD6C, then LOIT would be entitled to a credit from DVD6C for Toshiba's portion of the DVD6C royalties paid by LOIT. (Decl. Evan Finkel, Ex. M § 4.3 ("If after the Effective Date LOIT enters a license with the DVD6C Group . . ., LOIT will be entitled to receive a credit for Toshiba's portion of the DVD6C Group royalty amount [that it pays directly to Toshiba pursuant to the terms of the Settlement Agreement]")).

This Credit Provision has taken a central role in the present litigation. LOIT's position is that, during the negotiations leading up to the execution of the Settlement Agreement, Toshiba either expressly or implicitly represented to LOIT that the $1.70 per unit royalty rate was the same rate Toshiba received under the terms of a standard DVD6C license. (Decl. Wei-Chen Chiu ¶ 5 ("During the [July 14, 2003, Tokyo] meeting, LOIT's counsel specifically advised Mr. Saga[, Toshiba's corporate representative,] that LOIT understood that $1.70 represents Toshiba's share of the royalties that Toshiba was entitled to receive as a member of DVD6C for a standard DVD license. Mr. Saga said nothing to disabuse us of that understanding. To the contrary, Mr. Saga remained silent except to announce that the $1.70 figure was non-negotiable" ); Decl. Daniel McClure ¶ 4 ("In the course of negotiations, Mr. Finkel[, counsel for Toshiba,] advised me that under the settlement proposed by Toshiba (a) royalty payments to be paid by LOIT for Toshiba's essential patents represented the share of royalties that Toshiba was entitled to receive as a member of the DVD6C Group . . . . Mr. Finkel explained that it didn't matter to Toshiba whether it received the royalty payments directly from LOIT under the settlement agreement or as a member ...

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