E-Alert Case Updates

Delaware Federal Court Examines Standing Requirements

Ioengine, LLC v. Imation Corp., et al.
Case No. 14-1572-GMS (United States District Court for the District of Delaware, January 4, 2017)
by Richard J. Medoff, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at
http://www.ded.uscourts.gov/sites/default/files/opinions/gms/2017/january/14-1571_0.pdf

Ioengine LLC v. Imation Corp., et al. involved a Defendant’s motion to dismiss the Plaintiff’s patent infringement lawsuit for lack of standing, pursuant to Fed. R. Civ. P. 12(c) and 12(b)(l), because the Plaintiff, a Delaware Limited Liability Company, did not exist at the time that the rights to the patent at issue were purportedly assigned to it. The U.S. District Court for the District of Delaware (“the Court”) found that because the Plaintiff did not “formally exist on the date of the purported assignment, it could not, as a dejure entity, have obtained ownership” of the patent at issue. The Court concluded, however, that regardless of technical non-compliance with the Delaware Limited Liability Company Act’s formation requirements, Delaware law would recognize the Plaintiff “as a de facto limited liability company as of the date of the purported assignment,” and thus, that the assignment was valid and the Plaintiff had standing to bring suit. Accordingly, the Court denied the Defendant’s motion to dismiss for lack of standing.

By way of factual background, on December 31, 2014, Plaintiff Ioengine, LLC (“Ioengine” or “Plaintiff”), a Delaware Limited Liability Company, filed a patent infringement lawsuit against Defendants, Imation Corp. (“Imation”) and Interactive Media Corp. (“IMC”) (collectively, “Defendants”), alleging infringement of United States Patent No. 8,539,047 (“the ‘047 patent”). The ‘047 patent was issued to the inventor, Scott McNulty (“McNulty”), who also founded Ioengine. Subsequently, Imation and IMC answered the Complaint.

On October 7, 2014, a Patent Assignment has been executed between Mr. McNulty and Ioengine. The assignment purported to “assign, transfer, convey, sell and deliver to [Ioengine, LLC] all right, title and interest in, to and under the [‘047 patent].” Also on October 7, 2014, Mr. McNulty executed a Certificate of Formation of Ioengine, LLC. On October 8, 2014, the Certificate of Formation was filed with the office of the Secretary of State of Delaware.

On December 1, 2016, Imation filed a Motion to Dismiss Plaintiff's Complaint for Lack of Standing, pursuant to Fed. R. Civ. P. 12(c) and 12(b)(l), arguing that “the undisputed facts show that on December 31, 2014, Ioengine did not own the patent-in-suit and thus lacked standing to bring the lawsuit.” In support of its standing challenge, Imation contended that Mr. McNulty’s attempted assignment of the rights in the ‘047 patent to Ioengine was invalid, because Ioengine LLC did not exist at the time of the proffered assignment and, therefore, could not have received any rights in the ‘047 patent. To support its position, Imation relied on the Delaware Secretary of State record of “incorporation/formation,” which indicated that Ioengine, LLC was not formed until October 8, 2014, one (1) day after the purported assignment. In response, Ioengine argued that the ‘047 patent was validly assigned to Ioengine, LLC on October 7, 2014, and contended that it was Mr. McNulty’s intention to assign the ‘047 patent to Ioengine LLC on that date.

The Court began its analysis by noting that “a motion to dismiss for want of standing is properly brought pursuant to Rule 12(b)(1) because standing is a jurisdictional matter,” and that pursuant to Rule 12(c), “a party may move for judgment on the pleadings after pleadings are closed-but early enough not to delay trial, but a Rule 12(c) motion will not be granted unless the movant clearly establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law.” See Ballentine v. U.S., 486 F.3d 810 (3d Cir. 2007); Rosenau v. Unifund Corp., 539 F.3d 218, 221 (3d Cir. 2008). The Court explained that “only the party who holds all legal rights to the patent as patentee or assignee of all patent rights can sue in their own name,” and that “because Ioengine was formed in Delaware, Delaware law controlled the issue of its formation.” See Morrow v. Microsoft, 499 F.3d 1332, 1339 (Fed. Cir. 2007); Del. Code Ann. tit. 6, § 18-111. The Court further explained that Delaware law provides that “a limited liability company is formed at the time of filing of the initial certificate of formation in the office of the Secretary of State.” See Del. Code Ann. tit. 6, § 18-201(b). According to the Court, Mr. McNulty’s intent to form Ioengine on October 7, 2014 could not overcome the requirements of the Delaware statute and the fact that the certificate of formation was not filed until October 8, 2014. Thus, the Court concluded that Ioengine “did not formally exist and could not, as a dejure entity, have obtained ownership of the ‘047 patent on October 7, 2014.”

Ioengine next contended that, “regardless of technical non-compliance, Delaware law would recognize Ioengine as a de facto LLC as of October 7, 2014.” Imation responded that Ioengine had not adduced facts that would establish its de facto LLC status. On this issue, the Court noted while there was a lack of case law wherein “a de facto limited liability company has been recognized,” where case law “may be deficient in the LLC context, the Court can take guidance from the rules of law and equity, particularly the more developed Delaware corporation law.” See Del. Code Ann. tit. 6, § 18-1104; Grunstein v. Silva, 2009 WL 4698541, at *18 (Del. Ch. Dec. 8, 2009). The Court explained that under Delaware law, the existence of a de facto corporation requires: (1) “a special act or general law under which a corporation may lawfully exist,” (2) “a bona fide attempt to organize under the law and colorable compliance with the statutory requirements,” and (3) “actual use or exercise of corporate powers in pursuance of such law or attempted organization.” See Trustees of Peninsula Annual Conference of the Methodist Church, Inc. v. Spencer, 183 A.2d 588, 592 (Del. Ch. 1962).

Turning to the facts of the case, the Court found that all three (3) elements were satisfied with regard to Ioengine. First, the Court noted that “the Delaware Limited Liability Company Act provided a general law under which Ioengine, LLC may lawfully exist.” See Del. Code Ann. tit. 6 § 18-201. Second, the Court found that Mr. McNulty “made a bona fide attempt to organize Ioengine under the Act and to effect colorable compliance with its requirements,” because on October 7, 2014: (1) Mr. McNulty “signed and had notarized the formation document for Ioengine, LLC, pursuant to the Delaware Limited Liability Company Act,” (2) “Ioengine designated United Corporate Services, Inc. as its registered agent in Delaware, as required by the Delaware LLC Act,” and (3) Mr. McNulty “provided funds with which to pay United Corporate Services and open a bank account in the name ‘Ioengine.’” Finally, the Court noted that “the execution of a patent assignment to obtain property on behalf of Ioengine appeared to have been an exercise of corporate powers on October 7, 2014.” Accordingly, the Court concluded that it would “recognize Ioengine as a de facto LLC at the time of the Patent Assignment” and, therefore, that Ioengine had standing to bring suit. For the foregoing reasons, the Court denied Imation’s Motion to Dismiss Plaintiff's Complaint for Lack of Standing.