Motion to Substitute New Entity as Plaintiff and Dismiss Original Plaintiff Denied Where Defendant Was Entitled to Direct Discovery Against Original Plaintiff

January 2, 2013

Klausner Technologies, Inc. ("Klausner Technologies") filed a patent infringement action against Interactive Intelligence Group, Inc. ("Interactive Intelligence" or "IIG"). After the action was filed, Klausner Technologies assigned all of its interest in the patent-in-suit to IPVX Patent Holdings, Inc. ("IPVX"), including the rights to enforce the patent and to recover for past infringement of the patent. IPVX was incorporated only three days before the assignment. As a result of the assignment, Klausner Technologies moved to substitute IPVX for Klausner Technologies as the plaintiff and counter-defendant in the patent infringement action.

Interactive Intelligence agreed that IPVX should be joined as a plaintiff but opposed the dismissal of Klausner Technologies from the action. Interactive Intelligence asserted that because virtually all of the discovery would come from Klausner Technologies and its officers and employees, dismissing Klausner Technologies would cause added expense and delay as discovery would be needed from a third party. Klausner Technologies responded by arguing that it had agreed to provide all information regarding the patent to IPVX. Klausner Technologies also argued that it had to be dismissed because it no longer had standing to participate in the litigation as a result of the assignment of the patent.

To analyze the motion, the district court began by focusing on Fed.R.Civ.P. 25(c), which addresses transfer of a party's interest in the subject matter of a suit. Rule 25(c) provides that "If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party. The motion must be served as provided in Rule 25(a)(3)."

The district court particularly noted that a motion to substitute a party after the transfer of that party's interest is addressed to the court's discretion and concluded that "[u]nder Rule 25(c), this Cause may legally continue in the name of Klausner Technologies, despite the assignment of all of its interests in the '576 patent to IPVX. Therefore, Klausner's standing argument is without merit."

The district court then rejected Klausner Technologies' motion for several reasons. "First, the Court notes that the motion must be denied for a procedural deficiency. Klausner's motion for substitution has two parts: joinder of IPVX and dismissal of Klausner. Rule 25(c) required that Klausner's motion for substitution be served on IPVX in the same manner as service of a complaint and summons under Rule 4 but there is no indication that such service has been made. The motion's certificate of service indicates that such service has not been made, [doc. 29, p. 6], and there is no return of service on the
docket. Service is essential because Klausner's motion seeks to add IPVX -- 'a completely separate entity' -- as the sole plaintiff, but IPVX's position has not been heard. The Court cannot make IPVX a party plaintiff or release Klausner without service of process and hearing from IPVX."

Second, the district court exercised its discretion to retain Klausner Technologies as a plaintiff in the action because of the discovery that would be needed by Klausner Technologies. "While the presence of IPVX as a party will likely facilitate the conduct of this litigation, it has not been shown that Klausner's dismissal will. IIG will be faced with pursuing non-party discovery against Klausner, its officers, and/or employees, who possess the documents and information that will be relevant. That will increase the costs of IIG's discovery efforts and delays in getting responses. Klausner's contractual agreement with IPVX requiring it to cooperate with IPVX in litigation regarding the '576 patent is not a sufficient substitute for IIG's ability to seek and enforce discovery directly from Klausner."

Klausner Technologies, Inc. v. Interactive Intelligence Group, Inc., Case No. 1:12-cv-1537-SEB-DKL (S.D. Ind. Dec. 19, 2012)

The authors of www.PatentLawyerBlog.com are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. We represent inventors, patent owners and technology companies in patent licensing and litigation. Whether pursuing patent violations or defending infringement claims, we are aggressive and effective advocates for our clients. For more information contact Stan Gibson at 310.201.3548 or SGibson@jmbm.com.