-- Cylink's complaint against RSA ------------------------------------------ Jon Michaelson, Esq., (State Bar No. 083815) Kurt H. Taylor, Esq., (State Bar No. 127077) Robert W. Ricketson, Esq., (State Bar No. 148481) HOPKINS & CARLEY A Law Corporation 150 Almaden Boulevard, Fifleenth Floor San Jose, California 95113-2089 Telephone: (408) 286-9800 Attorneys for Plaintiff CYLINK CORPORATION IN THE UNITED STATES DISTRICT COURT IN AND FOR THE NORTHERN DISTRICT OF CALIFORNIA CYLINK CORPORATION, Plaintiff, v. RSA DATA SECURITY, INC., Defendants. COMPLAINT FOR DECLARATORY JUDGMENT AND INJUNCTIVE RELIEF AND DEMAND FOR JURY TRIAL I . Plaintiff Cylink Corporation is incorporated under the laws of the State of California, and has its principal place of business therein. 2. Defendant RSA Data Security, Inc. ("RSADSI") is a corporation incorporated under the laws of the State of Delaware, and has its principal and a regular and established place of business a 100 Marine Boulevard, Redwood City, CA 94065. 3. Jurisdiction of this Court arises under the Federal Declaratory Judgments Act, Title 28, United States Code, Sections 2201 and 2202, and under the laws of the United States concerning actions relating to patents, Title 28, United States Code, Section 1338(a), as shown by the facts alleged below. 4. On September 20, 1983, U.S. Letter Patent No. 4,405,829 entitled "Cryptographic Communications System and Method" was issued to inventors and assignors R. Rivest, A. Shamir and L. Adleman ("the Patent"). 5. Cylink is informed and believes and on that basis alleges that in or about 1984 defendant RSADSI obtained an exclusive license to the Patent. 6. Cylink has made and/or offered for sale within the past six years and since the issuance of the said Letters Patent, certain encryption products. 7. Beginning in or about December 1993, RSADSI has charged that Cylink's manufacture and sale of said encryption products infringes the Patent and all claims thereof. On June 28, 1993, RSADSI delivered to Cylink's wholly- owned subsidiary, in this judicial district, a letter expressly stating RSADSI's intent to bring an infringement action against Cylink. A true and correct copy of RSADSI 's letter to Cylink dated June 29, 1994 is attached hereto as Exhibit A. 8. There is a substantial and continuing justiciable controversy between Cylink and RSADSI as to RSADSIs right to threaten or maintain suit for infringement of the Patent, and as to the validity, scope, and enforceability thereof, and as to whether any of Cylink's products infringes any valid claim thereof. 9. Cylink is informed and believes and on that basis alleges that the Patent is invalid unenforceable, and void, for one or more of the following reasons: (a) The alleged invention was not novel; (b) The differences (if any) between the alleged invention and the prior art were such that the alleged invention would have been obvious at the time made to a person having ordinary skill in the art; (c) The claims of the Patent, and/or the Patent as a whole, fails to meet one or more of the requirements of 35 U.S.C. section 1 12. (d) If there is any invention in the subject matter of the Patent, which is denied, the Patent nevertheless was not obtained in a manner consistent with the provisions of Title 35 of the United States Code. (e) The claims of the Patent are functional, indefinite, and are broader than the alleged invention as set forth in the specification of the Patent. 10. Cylink will seek leave of court to amend this complaint to assert such additional grounds for invalidity as may be ascertained and shall give such notice prior to trial as may be required by 35 U.S.C. section 282 of the matters specified therein. 11. Cylink is informed and believes and on that basis alleges that its encryption products do not infringe on the Patent or its claims. 12. Cylink is informed and believes and on that basis alleges that the Patent is unenforceable for reasons including, but not necessarily limited to the following: (a) RSADSI, with full knowledge of the activities of Cylink, has failed to assert the Patent for a period of 3 years while Cylink invested time and money in building its business and goodwill, and RSADSI is now guilty of laches and cannot maintain any cause of action against plaintiff under the Patent. (b) Pursuant to certain written agreements, RSADSI has obligated itself to license Cylink to make, use, and sell products employing all inventions claimed in the patent, and is therefore estopped from asserting the Patent against Cylink. True and correct copies of these agreements are attached hereto and incorporated in this complaint as Exhibits B and C. 13. RSADSI has denied that it is obligated to license Cylink as alleged in paragraph 12(b) above. Cylink and its wholly owned subsidiary have initiated an arbitration proceeding against RSADSI pursuant to the written agreements between the parties. By bringing this suit, as it has been forced to do in order to protect itself against the threat of litigation by RSADSI, Cylink does not waive its right to a determination through contractually mandated arbitration that RSADSI is obligated to grant to Cylink a license to the Patent according to the terms of the parties' agreements. WHEREFORE, plaintiff demands: (a) Entry of judgment that RSADSI is without right or authority to threaten or to maintain suit against plaintiff or its customers for alleged infringement of Letters Patent No. 4,405,829; that the Patent is invalid, unenforceable, and void in law; and that the Patent is not infringed by Cylink because of the making, selling, or using of any products made, sold, or used by Cylink. (b) Entry of a preliminary injunction enjoining RSADSI, its officers, agents, servants. employees, and attorneys, and those persons in active concert or participation with it who receive actual notice thereof from initiating infringement litigation and from threatening Cylink or any of its customers, dealers, agents, servants, or employees, or any prospective or present seller, dealer, or use of Cylink's products, with infringement litigation or charging any of them either verbally or in written with infringement of Letters Patent No. 4,405,829 because of the manufacture, use, sale, or offering for sale of products made by Cylink, to be made permanent following trial. (c) Entry of judgment for its costs and reasonable attorney fees incurred by Cylink herein. (d) Such other and further relief as the Court may deem appropriate. DATED: June 30, 1994 HOPKINS & CARLEY A Law Corporation BY: Kurt H. Taylor, Esq. Attorneys for Plaintiff CYLINK CORPORATION DEMAND FOR JURY TRIAL Cylink hereby demands trial by jury of all issues triable of right by jury. DATED: June 30, 1994 HOPKINS & CARLEY A Law Corporation By Kurt H. Taylor, Esq. Attorneys for Plaintiff CYLINK CORPORATION -- End --------------------------------------------------------------------- -- RSA's motion to dismiss the Cylink complaint ------------------------------ JAMES R. BUSSELLE (SBN 75980) THOMAS E. MOORE III (SBN 115107) MARY O'BYRNE, (SBN 121067) TOMLINSON, ZISKO, MOROSOLI & MASER 200 Page Mill Road, Second Floor Palo Alto, California 94306 Telephone: (415) 325-8666 Attorneys for Defendant RSA Data Security, Inc. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA CYLINK CORPORATION, Plaintiff, vs . RSA DATA SECURITY, INC., Defendant. CASE NO.: C 94 02332 CW NOTICE OF MOTION TO DISMISS UNDER RULE 12(b)(7) DATE: September 9, 1994 TIME: 10:30 a.m. BEFORE: Hon. Claudia Wilken TO THE PLAINTIFF AND ITS COUNSEL OF RECORD: PLEASE TAKE NOTICE that on September 9, 1994 at 10:30 a.m., or as soon thereafter as counsel may be heard by the above entitled Court, located at 450 Golden Gate Avenue, San Francisco, California, defendant RSA Data Security, Inc. will and hereby does move the Court to dismiss the action pursuant to Federal Rule of Civil Procedure 12(b)(7) for failure to join parties under Federal Rule of Civil Procedure 19. Such motion will be made on the grounds that Caro-Kann Corporation, Public Key Partners, the Massachusetts Institute of Technology and Stanford University are necessary parties to the action within the meaning of Rule l9(a). This motion is based on this Notice of Motion, the accompanying Memorandum of Points and Authorities, the Declaration of D. James Bidzos, all pleadings and papers on file in this action, and other such other matters as may be presented to the Court at the time of the hearing. Dated: July 25, 1994 TOMLINSON, ZISKO, MOROSOLI & MASER By Thomas E. Moore III Attorneys for Defendant RSA Data Security, Inc. -- Arguments supporting RSA's move for dismissal --------------------------- JAMES R. BUSSELLE (SBN 75980) THOMAS E. MOORE III (SBN 115107) MARY O'BYRNE, (SBN 121067) TOMLINSON, ZISKO, MOROSOLI & MASER 200 Page Mill Road, Second Floor Palo Alto, California 94306 Telephone: (415) 325-8666 Attorneys for Defendant RSA Data Security, Inc. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA CYLINK CORPORATION, Plaintiff, vs. RSA DATA SECURITY, INC., Defendant. CASE NO.: C 94 02332 CW MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS UNDER RULE 12(b)(7) DATE: September 9, 1994 TIME: 10:30 a.m. BEFORE: Hon. Claudia Wilken TABLE OF CONTENTS I. INTRODUCTION AND ISSUES PRESENTED II. STATEMENT OF FACTS III. ARGUMENT A. Rule 19 is Designed to Protect the Interests of Absent Parties Whose Rights May be Impaired If the Action were to go Forward Without them B. MIT and PKP are Necessary Parties Because They Each Hold Substantial Rights to the MIT Patent, Including the Right to Bring an Infringement Action Against Cylink C. CKC and Stanford are Necessary Parties Because Each has an Interest that Would be Impaired if the MIT Patent were Held Invalid, and Their Relationship to Cylink is Such that RSA Could Not Adequately Represent Their Interests IV. CONCLUSION TABLE OF AUTHORITIES CASES CP National Corp. v. Bonneville Power Admin., 928 F.2d 905 (9th Cir. 1991) Caldwell Manufacturing Co. v. Unique Balance Co.. Inc., 18 F.R.D. 258, 108 U.S.P.Q. 7 (S.D.N.Y. 1955) Channel Master Corp. v. JFD Electronics Corp., 260 F. Supp. 568, 152 U.S.P.Q. 687 (E.D.N.Y. 1967) Classic Golf Co. v. Karsten Manufacturing Co., 231 U.S.P.Q. 884 (N.D. Ill. 1986) Dentsply International Inc. v. Centrex. Inc., 553 F. Supp. 289, 220 U.S.P.Q. 948 (D.-Del. 1982) Diamond Scientific Co. v. Amico. Inc., 848 F.2d 1220 (Fed. Cir. 1988) Lear. Inc. v. Adkins, 395 U.S. 653 (1969) Messerschmitt-Boelkow-Blohm GmbH. v. Huqhes Aircraft Co., 483 F. Supp. 49, 208 U.S.P.Q. 643 (S.D.N.Y. 1979) Micro-Acoustics Corp. v, Bose Corp., 493 F. Supp. 356, 207 U.S.P.Q. 378 (S.D.N.Y. 1980) Shermoen v. United States. 982 F.2d 1312 (9th Cir. 1992) United Mine Workers of America v. Gibbs, 383 U.S. 715 (1966) Waterman v, MacKenzie, 138 U.S. 252 (1891) STATUTES AND RULES Federal Rule of Civil Procedure 12(b)(7) Federal Rule of Civil Procedure l9(a) Federal Rule of Civil Procedure l9(b) MISCELLANEOUS 6 Chisum, Patents, u 21.03[4], pp. 21-300 21-301 (1993) 3A Moore, Moore's Federal Practice, 119.05[2], p. 19.78 (2d ed. 1993) 3A Moore, Moore's Federal Practice, 119.07-1, p. 19.90-1 (2d ed. 1993) 3A Moore, Moore's Federal Practice, 1 19.07[2.--1], p. 19.103 (2d ed. 1993) I. INTRODUCTION AND ISSUES PRESENTED This is a declaratory relief action to invalidate a patent that permits the coding or "encryption" of computer data transmissions. Prior to 1990, the plaintiff, Cylink Corporation ("Cylink") was in the data encryption market as a manufacturer of computer hardware, operating under a license to the so-called "Stanford Patents." The defendant, RSA Data Security, Inc. ("RSA"), was in the data encryption market as a software manufacturer, operating under a license to the so-called "MIT Patent." The MIT Patent is the subject of this invalidation action. In 1990, at Cylink's instigation, Cylink and RSA created complex inter- relationships between each other, Stanford University ("Stanford") and the Massachusetts Institute of Technology ("MIT") to exploit the licensing potential of both sets of patents. Two new entities were created: Caro-Kann Corporation ("CKC"), a wholly-owned subsidiary of Cylink; and Public Key Partners ("PKP"), a partnership between Cylink/CKC and RSA, whose sole assets consist of the licensing rights to both sets of patents. By filing this action, Cylink not only seeks to pull the thread that unravels these inter-relationships but also hopes to do so in the absence of PKP, CKC, MIT and Stanford. Because (i) PKP and MIT hold significant rights to the MIT Patent, including the right to bring infringement actions and (ii) the action stands to impair the interests of CKC and Stanford, the action must be dismissed under Federal Rule of Civil Procedure 12(b)(7), subject to the joinder of those parties as necessary parties under Rule l9(a).[1] II. STATEMENT OF FACTS RSA is a local company operating out of Redwood City, California. RSA develops, markets and distributes encryption software. Encryption software utilizes complex mathematical formulas or algorithms to create unbreakable codes for securing computer communications, such as data transmissions over telephone lines via modems, from eavesdropping. [2] RSA has been a pioneer in the field of developing encryption software and has worked in this field since 1982, when it was first formed. (Bidzos Decl. 11 2, 3). The founders of RSA were three scientists from MIT, Ronald L. Rivest, Adi Shamir, and Leonard M. Adleman (the letters "RSA" are the initials of those three men). Together, they invented an algorithm which makes it possible to secure data transmissions. This algorithm was patented on September 20, 1983 as U.S. Letter Patent No. 4,405,829 and entitled "Cryptographic Communications System and Method" (the "MIT Patent"). Rivest, Shamir and Adleman assigned the patent to MIT. MIT owned, and continues to own, the MIT Patent. (Bidzos Decl., 1 4) Rivest, Shamir and Adleman formed RSA, and MIT granted RSA an exclusive license to the MIT Patent. RSA has paid royalties to MIT ever since. (Bidzos Decl., 1 5) After an initial slow period, RSA grew to be successful. It developed and marketed an "end user" product called "MailSafe in 1986 and sold thousands of copies. It also developed a software tool kit which was first sold to Lotus Corporation in 1986 and has since been sold to many other companies who have acted as original equipment manufacturers or "OEM's." RSA also sold patent licenses for use of the MIT Patent to a modem company called Racal and also to Motorola and Digital Equipment. (Bidzos Decl., 1 6). During 1987 and 1988, representatives from Stanford began to claim that RSA's MIT Patent rights could not be used by RSA or anyone else without infringing patent rights owned by Stanford (the "Stanford Patents). This dispute was resolved when Stanford licensed rights to its patents to MIT, and MIT in turn passed on those rights to RSA. In exchange for those rights, Stanford received from MIT a portion of the royalty payments that RSA had been paying to MIT for RSA's use of the MIT Patent. (Bidzos Decl., 1 7) It was at this point that plaintiff Cylink appeared on the scene. Cylink is primarily a hardware manufacturer -- it builds computer chips that are used in the data encryption process and markets them to others for incorporation in hardware products eventually sold to the end user customers. Before Stanford agreed to license rights to the Stanford Patents to MIT, Cylink and only a very few other companies had license rights to the Stanford Patents. (Bidzos Decl., 1 8). Cylink was very concerned when it discovered that RSA had acquired rights to the Stanford Patents through MIT. On or about October 17, 1989, Cylink's Chief Executive Officer, Lew Morris ("Morris"), first approached RSA by calling Bidzos on the telephone. Morris threatened to sue RSA unless a deal could be reached by which Cylink would purchase RSA. From this inauspicious beginning, the discussions eventually lead to how RSA and Cylink might work together. (Bidzos Decl., 1 9) The parties' discussions culminated in an Agreement of Intent entered into on April 6, 1990. Under that Agreement, Cylink and RSA each agreed to give up the rights to license and sublicense their respective patent rights in the MIT and Stanford Patents and vest those rights in a new partnership, PKP, exclusively. (Bidzos Decl., 1 10, Ex. A). The two partners in PKP are RSA and CKC, a wholly-owned subsidiary of Cylink. The sole assets of PKP are the licensing rights to the MIT and Stanford Patents. [3] (Bidzos Decl., 1 11). As part of the formation of PKP, the royalty payments owed to Stanford and MIT were simplified. To accomplish this, RSA and Cylink entered into amendments to their respective license agreements with MIT and Stanford. Under the terms of those amendments, first, the direct license arrangement between Stanford and MIT was essentially nullified. Second, while RSA remained obligated to pay royalties to MIT, and Cylink/CKC remained obligated to pay royalties to Stanford, the royalties owed to each university were based on PKP's unsegregated revenues from both the Stanford and MIT Patents: RSA pays MIT a percentage of PKP's distributions to RSA, and Cylink/CKC pays Stanford a percentage of PKP's distributions to Cylink/CKC.4 (Bidzos Decl., 11 12, 13, Exs. B, C). The-amendment to the MIT Patent license governs the various parties' rights to sue for patent infringement of the MIT Patent. Under Section 8 of that amendment: (a) PKP may institute an infringement action and join RSA and MIT (costs borne by PKP); (b) PKP and MIT may jointly bring such an action and join RSA (costs shared by PKP and MIT); (c) PKP and RSA may jointly bring such an action and join MIT (costs shared by PKP and RSA); (d) MIT may institute such an action with PKP's consent; and (e) RSA may institute such an action and join PKP and MIT (costs borne by RSA). (Bidzos Decl., Ex. B, pp. 13-14). Footnotes: [1] Under Rule 12(b)(7), an objection to a plaintiff's failure to join a party under Rule 19 may be made by motion before pleading. 3A Moore, Moore's Federal Practice, 119-05[2]. p. 19.78 (2d ed. 1993). [2] To explain the function of RSA's software, RSA's President, D. James Bidzos ("Bidzos"), describes unprotected computer communications as the electronic equivalent of typewritten postcards -- such communications can be read by anybody, and no one can be sure who wrote them. RSA sells the equivalent of signatures, so that the writer can be verified, and the equivalent of envelopes, so the messages cannot be read except by those to whom they are addressed. (Bidzos Decl., 1 2). [3] RSA and Cylink did not part with all of their rights to their respective patents. RSA and Cylink retained their right to continue to conduct business as they had done previously. RSA continued to market encryption software, and Cylink continued to market hardware incorporating data encryption technology. (Bidzos Decl., 1 11). [4] RSA, PKP, Cylink, CKC, MIT and Stanford are the principal parties with a vested interest in the validity of the MIT Patent because of the royalty revenue that such Patent generates for them. In addition, two other absent parties, David P. Newman, a Washington D.C. patent lawyer, and Prof. Martin E. Hellman, a Stanford professor, also receive royalties based on the MIT Patent and also have a vested interest in the validity of the MIT Patent. Because of uncertainty about the exact arrangement regarding their receipt of royalties, RSA is not seeking their joinder at this time. (Bidzos Decl., 1 14). III. ARGUMENT A. Rule 19 is Designed to Protect the Interests of Absent Parties Whose Riqhts May be Impaired If the Action were to Go Forward Without them. Federal Rule of Civil Procedure 19(a) authorizes joinder of "necessary" parties to the action. [5] Rule l9(a) states in pertinent part: (a) Persons to be Joined if Feasible. A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the persons ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations . . . . Thus, Rule 19 is designed to protect the interests of absent parties, as well as those already before the court, from multiple litigation, inconsistent judicial determinations or the impairment of interests or rights. CP National Corp. v. Bonneville Power Admin., 928 F.2d 90S, 911 (9th Cir. 1991). A persons status as a necessary party is not judged by any precise formula, but depends on the context of the particular litigation. CP National, 928 F.2d at 912. However, "Under the Rules, the impulse is toward entertaining the broadest possible scope of action consistent with fairness to the parties; joinder of claims, parties and remedies is strongly encouraged." United Mine Workers of America v. Gibbs, 383 U.S. 715, 724 (1966). Necessary-parties have therefore been described as: [T]hose `[p]ersons having an interest in the controversy, and who ought to be made parties, in order that the court may act on that rule which requires it to decide on, and finally determine the entire controversy, and do complete justice, by adjusting all the rights involved in it.' CP National, 928 F.2d at 912 (quoting Shields v. Barrow, 58 U.S. 130, 139 (1855)). The context of this particular litigation requires joinder of PKP, CKC, MIT and Stanford as defendants. PKP and MIT are holders of substantial rights to the MIT Patent, including the right to bring infringement actions. CKC and Stanford receive significant revenues from the MIT Patent which would be lost if the patent were to be invalidated. Moreover, CKC and Stanford's relationship to Cylink is unique to them and cannot be adequately represented by RSA. B. MIT and PKP are Necessary Parties Because They Each Hold Substantial Riqhts to the MIT Patent. Including the Right to Bring an Infringement Action Against Cylink. MIT and PKP are necessary parties. MIT is the patent owner. MIT, PKP and RSA have substantial rights to the MIT Patent, including the significant right to bring infringement actions, subject to the other parties' right to join and share the costs of suit. "Generally, the patent owner is an indispensable party to a declaratory judgment action." Classic Golf Co. v. Karsten Manufacturing Co., 231 U.S.P.Q. 884, 886 (N.D. Ill. 1986). The issue becomes more complex, however, when the patent owner transfers some kind of interest to a third party, who is then sued to invalidate the patent. Dentsply International Inc. v. Centrex. Inc., 553 F. Supp. 289, 293-4, 220 U.S.P.Q. 948 (D. Del. 1982). At one extreme, the interest that the patent owner transferred is deemed to be a license, and the patent owner is deemed to be a necessary party to the invalidation action. Id. At the other extreme, the interest transferred is deemed to be an assignment, and the patent holder is not considered to be a necessary party. Dentsply, 553 F. Supp. at 294; see generally Waterman v. MacKenzie, 138 U.S. 252, 255 (1891). The rationale of the latter situation is that the patent owner suffers no prejudice from a judgment of invalidity in its absence, if the patent owner has entrusted the assignee with the right to protect its interests by suing for infringement. Messerschmitt-BoelRow-Blohm GmbH. v. Hughes Aircraft Co., 483 P. Supp. 49, 52, 208 U.S.P.Q. 643 (S.D.N.Y. 1979). As the Dentsply court acknowledged, many cases, such as the present one, fall between the two extremes. DentsDly, 553 F. Supp. at 294. The Dentsdlv court added, however, that the court's task is simplified if the agreement between the parties allocates the right to sue and be sued on the patent. Id. The allocation of the right to sue for infringement under the parties' agreement is the "true test" that determines the identities of the necessary parties. Channel Master Corws. v. CFD Electronics CorD., 260 F. Supp. 568, 572, 152 U.S.P.Q. 687 (E.D.N.Y.-1967)(action dismissed for lack of an indispensable party because defendant licensee could not bring suit for infringement until after the absent patent owner had declined to do so); Caldwell Manufacturing Co. v. Unique Balance Co.. Inc., 18 F.R.D. 258, 263-4, 108 U.S.P.Q. 7 (S.D.N.Y. 1955); 6 Chisum, Patents, u 21.03[4], pp. 21-300 - 21-301 (1993)("Thus, a person is a proper party defendant if but only if that person had standing to sue the plaintiff for infringement"). In this case, none of the parties had an independent, unconditional right to instigate litigation without offering the others the opportunity to join and share the expenses of litigation. PKP, RSA and MIT each retained the right to join and take part. Because of these mutual rights, each is a necessary party in this action to invalidate the MIT Patent. [6] C. CKC and Stanford are Necessary Parties Because Each has an Interest that Would be Impaired if the MIT Patent were Held Invalid. and Their Relationship; to Cylink is Such that RSA Could Not Adequately represent Their Interests. CKC and Stanford are also necessary parties. [7] CKC and Stanford admittedly lack standing to bring a patent infringement action against Cylink. Nevertheless, both have important interests that would be impaired by this action, and RSA could not adequately represent those interests. In addition, as a practical matter, the inter-relationship of the various parties in this case counsels in favor of CKC's and Stanford's joinder. The issue of whether a person is a necessary party under Rule l9(a) depends first, on whether such person has an interest that is impaired by the suit and second, on whether such impairment may be minimized if the absent party is adequately represented in the suit. Shermoen v. United States, 982 F.2d 1312, 1318 (9th Cir. 1992). In determining whether a persons interest is impaired, it is not necessary that the judgment be binding on that person in a technical sense; it is enough that as a practical matter that person's rights will be affected. 3A Moore, Moore's Federal Practice, 1 19.07[2.-- 1], p. 19.103. CKC and Stanford's rights would be impaired if this action were to go forward in their absence. Both CKC and Stanford are the beneficiaries Cylink's entry into the Agreement of Intent and transfer of the Stanford Patents to PKP. (Bidzos Decl., Ex. A). Both CKC and Stanford derive significant royalty income from PKP's rights to the MIT Patent. Both CKC and Stanford would lose those royalties if Cylink prevails and invalidates the MIT Patent. RSA cannot adequately represent the interests of CKC and Stanford. CKC and Stanford's relationship to Cylink is unique. Implicit in Cylink's formation of PKP to exploit the MIT Patent were Cylink's representations to CKC and Stanford that the MIT Patent was-valid and that Cylink would protect, not defeat, its validity. Stanford in particular relied to its detriment on Cylink's formation of PKP by waiving its independent right to royalties directly from MIT. (Bidzos Decl., 11 7, 13). Thus, Stanford and CKC may have their own unique estoppel defense to the present action.[8] Finally, as a practical matter, the inter-relationships among the parties make this more than a simple patent case. If this case is to be resolved in a reasonable length of time, then all the parties and all the issues should be before this Court. Because of this, RSA urges the Court to err in favor of joinder with respect to CKC and Stanford. Footnotes: [5] Rule 19 distinguishes between necessary" parties under subdivision (a) and "indispensable" parties under subdivision (b). The court must first determine whether an absent person is a "person to be joined if feasible" pursuant to subdivision (a). If joinder is feasible, a ruling as to the person's indispensability under subdivision (b) is not required, since subdivision (b) comes into play only where joinder is not feasible. 3A Moore, Moore's Federal Practice, 119.07-1, p. 19.90-1 (2d ed. 1993). RSA is not aware of any reason why joinder of CKC, PKP, MIT and Stanford would not be feasible. It is therefore unnecessary to analyze whether any of those parties are indispensable under Rule l9(b). [6] This express allocation of the right to sue for infringement distinguishes this case from cases such as Micro-Acoustics Corp. v. Bose CorD., 493 F. Supp. 356, 207 U.S.P.Q. 378 (S.D.N.Y. 1980), in which the patent owner retained no right, conditional or otherwise, to institute an action for infringement. [7] RSA intends through its answer and counter-claim to assert that CKC and Cylink are alter-egos of each other. RSA is not, by this motion, asserting that Cylink is under any obligation to sue itself. This motion only requires Cylink to be consistent. If Cylink believes that CKC is an independent party, then Cylink should join CKC as a party defendant. If Cylink concedes that CKC is not an independent party, then RSA is willing to accept such concession and drop its request that CKC be joined. [8] The use of estoppel as a defense to an action to invalidate a patent is complex and involves a balancing between private contractual rights and the public interest in freeing the use of ideas from the monopoly of invalid patents. Lear. Inc. v. Adkins, 395 U.S. 653 (1969)(invalidating "licensee estoppel"); Diamond Scientific Co. v. Amico, Inc., 848 F.2d 1220 (Fed. Cir. 1988)(upholding "assignor estoppel"). Stanford and CKC's potential estoppel defense does not fall neatly within the doctrines examined in either Lear or Diamond Scientific. The legitimacy of that defense cannot be properly raised and considered unless Stanford and CKC are made party defendants. IV. CONCLUSION Joinder of parties is strongly encouraged. Joinder of the absent parties in this case i9 feasible. MIT and PKP should be joined because of their substantial rights in the MIT Patent. CKC and Stanford should be joined because of the potential impairment of their rights and the inability of RSA to protect those rights adequately. For these reasons and those set forth above, RSA respectfully urges the Court to grant this motion. Dated: July 25, 1994 TOMLINSON, ZISKO, MOROSOLI & MASER Attorneys for Defendant RSA Data Security, Inc. PROOF OF SERVICE CYLINK CORPORATION V. RSA DATA SECURITY, INC. UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF CALIFORNIA CASE NO: C 94 02332 CW STATE OF CALIFORNIA, COUNTY OF SANTA CLARA I am employed in the County of Santa Clara, State of California. I am over the age of 18 and not a party to the within action. My business address is 200 Page Mill Road, Second Floor, Palo Alto, California 94306. On July 25, 1994, I served the following documents: MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS UNDER Rule 12(b)(7) to the following: Liza X. Toth, Esq. Jon Micha-lson, Esq. Hopkins & Carley 150 klmaden Boulevard, 15th Fl. San Jose, California 95113-2089 [X] BY MAIL [ ] I deposited such envelope in the mail at Palo Alto, California. The envelope was mailed with postage thereon fully prepaid. [X] As follows: I am readily familiar with the firm's practice of collection and processing correspondence for mailing. Under that practice it would be deposited with the U.S. postal service on that same day with postage thereon fully prepaid at Palo Alto, California in the ordinary course of business. I am aware that on motion of the party served, service is presumed invalid if postal cancellation date or postage meter date is more than one day after date of deposit for mailing in affidavit. Executed on July 25, 1994, at Palo Alto, California. [X] STATE: I declare under penalty of perjury under the laws of the State of California that the above is true and correct. [ ] FEDERAL: I declare that I am employed in the office of a member of the bar of this Court at whose direction the service was made. Sharon L. Sotelo -- End --------------------------------------------------------------------- -- Schlafly's complaint against PKP and RSA -------------------------------- Roger Schlafly, Pro Se PO Box 1680 Soquel, CA 95073 telephone: (408) 476-3550 In the United States District Court for the Northern District of California Civil Action File No. C-94 20512 Assigned to Judge Category 410, Antitrust ROGER SCHLAFLY, an individual, Plaintiff v. PUBLIC KEY PARTNERS, and RSA DATA SECURITY INC., Defendants. Complaint Against Unfair Business Practices Plaintiff makes complaint against defendants for unfair business practices, including libel, interference with contractual relationships, patent misuse, fraud, monopolization, and racketeering, and demands remedies available under federal law, including jury trial, declaratory judgment, monetary damages, and injunctive relief. Jurisdiction. The Federal Court has jurisdiction because it is based on Federal law, including antitrust and patent law. Venue is proper because defendants and plaintiff reside in this Judicial District. For its complaint against defendants, plaintiff alleges as follows: 1. This is an action for unfair business practices, libel, fraud, monopolization, and racketeering by Public Key Partners ("PKP"), which is managed by Mr. Robert Fougner, Director of Licensing, 310 North Mary Avenue, Sunnyvale, CA 94086 and by RSA Data Security Inc. ("RSADSI"), which does business at 100 Marine Parkway, Redwood City, CA 94065. 2. Plaintiff Roger Schlafly is a resident of the County of Santa Cruz, State of California. 3. Plaintiff is in the cryptography business, and develops computer software for customers. He is also a member of the IEEE Pl363 working group, a committee charged with adopting a public key standard. 4. Defendant PKP is a partnership between Defendant RSA and Caro-Kann Corp. of Sunnyvale. Their partnership agreement is attached as Exhibit A. Mr. Jim Bidzos is the president of both RSADSI and PKP. Cylink Corp. of Sunnyvale was also a partner in the formation of PKP. 5. Federal jurisdiction is based on antitrust law (title 15), patent law (title 35), and racketeering law (18 USC 1341, 1951, 1961-1965). Request for relief is also based on 28 USC 1331, 1337(a), 1338(a), 1338(b), 2201, and 2202. 6. Defendant RSADSI is the dominant U.S. vendor of cryptography software, and has monopoly power in that market. It is engaged in a significant amount of interstate commerce, totaling at least 55 million per year. 7. Defendants have engaged in tortious interference with business relationships between plaintiff and plaintiff's clients, including Information Security Corp. ("ISC") and AT&T. 8. Defendants claim to control certain patents related to public key cryptography. These are the following U.S. patents and their foreign equivalents. Diffie-Hellman 4,200,770 Hellman-Merkle 4,218,582 RSA 4,405,829 Hellman-Pohlig 4,424,414 Schnorr 4,995,082 These PKP patents, as issued in the U.S., are attached as Exhibit B. (There may also be foreign patents for Hellman Merkle and Schnorr.) 9. There is a substantial and continuing justiciable controversy between plaintiff and defendant PKP as to PKP's right to threaten or maintain suit for infringement of the PKP patents, and as to the validity, scope, and enforce ability thereof, and as to whether any of plaintiff's work infringes any valid claim thereof. 10. Plaintiff has not infringed these patents. 11. Plaintiff has signed a consent agreement with defendant RSADSI, attached as Exhibit C. He agreed not to sell a product infringing the RSA patent, except under license from RSADSI or the U.S. Government. (The U.S. Government funded the RSA invention, and retains certain rights.) The agreement also allows plaintiff to design and manufacture products using the RSA patent. 12. Defendant PKP sent a letter dated Jan. 12, 1994 to plaintiff's client, AT&T, alleging that Digital Signature, of which plaintiff is a partner, has breached the above consent agreement. The letter is attached as Exhibit D. In fact, no such breach has taken place. This letter was written without any notification to plaintiff or Digital Signature. 13. Defendant PKP's letter to AT&T stated: ... to the extent any of AT&T's products are tainted by ISC's violation of this injunction, we hereby demand that AT&T cease their further distribution and sale. The alleged violation is based on ISC's use of Digital Signature software. This is a tort for PKP to send such a letter, as no violation has taken place. PKP knew that there was no violation because AT&T has the appropriate patent licenses. Evidence that AT&T already had a license is in Exhibit E, a letter from Jim Bidzos to the editor of Scientific American. 14. Defendants' allegations have damaged plaintiff's reputation, hindered his ability to sell his services, and interfered with his business relationships. 15. Defendant PKP has mailed a letter dated April 4, 1994 to ISC referring to the "apparent breach of the November 15, 1988, Consent Judgment [sic]". The letter is attached as Exhibit F. Plaintiff denies any such breach. 16. Plaintiff sent a letter to PKP protesting its libelous actions and demanding a retraction. The letter was sent on April 4, 1994 and attached as Exhibit G. 17. In a letter from PKP dated April 18, 1994 and attached as Exhibit H, PKP refused to retract its earlier libel. The letter also states that: The practice of the DSA is described in the Hellman-Diffie, Hellman- Merkle and Schnorr patents ... This statement is obviously false, since the DSA patent application was filed after all of those other patents issued. Plaintiff's response is attached as Exhibit I. 18. Defendants have negotiated in bad faith, claiming to offer licenses but giving the run-around on terms and details. Plaintiff relied on defendants' promises that patent licenses would be available, and then lost business when PKP reneged on those promises. Copies of some correspondence with PKP on licensing is attached as Exhibit J. Plaintiff has never able to determine even what the PKP licensing policy is. 19. Defendants have fraudulently induced standards-making bodies, including American National Standards Institute ("ANSI") and Institute of Electrical and Electronics Engineers ("IEEE"), to draft standards based on the RSA and Diffie-Hellman patents by promising a reasonable and nondiscriminatory licensing policy, when in fact no such policy exists. ANSI and IEEE require such a policy, and would not have drafted RSA standards if PKP had not misrepresented its intentions. 20. Defendant PKP sent a letter dated March 15, 1991 to the American Bankers Association (in affiliation with ANSI) stating that "PKP has not denied a license to any party." A copy is attached as Exhibit K. Plaintiff was denied a license in 1990. 21. Plaintiff is informed and believes and on that basis alleges that ISC and other parties were also denied PKP licenses. Numerous users of Pretty Good Privacy ("PGP"), a widely used cryptography program, have complained about being denied PKP licenses. 22. A letter from PKP to ISC denying it an RSA license is attached as Exhibit F. 23. Plaintiff is informed and believes and on that basis alleges that defendant RSADSI attempted to rescind licenses granted for use of RSAREF, one of its products, even though the license agreement clearly states that the license is perpetual. 24. By getting their technology to be declared a draft standard, RSADSI has unfairly monopolized the cryptography market. Plaintiff has been damaged because competing technologies are regarded as nonstandard by the public. 25. Defendants' patent threats and fraudulent promises have prevented ANSI and IEEE from adopting public key standards, to the detriment of all others in the industry, including plaintiff. 26. Plaintiff and others on standards committees have invested valuable time and effort to develop a public Key standard, but have been thwarted by defendant PKP's patent threats and fraudulent promises. 27. Plaintiff is informed and believes and on that basis alleges that defendants have made hostile and unwarranted threats against potential customers and clients of plaintiff, including representatives of the U.S. Army. These threats have included false assertions that ISC software is illegal because of patent problems. (Even if the defendants' patent claims were valid, the U.S. Army has a license to use the patents anyway.) 28. Plaintiff is informed and believes and on that basis alleges that defendants have vindictively harassed competitors, including trying to promote a federal criminal investigation of the author of PGP. 29. The U.S. Dept. of Commerce has made a determination that practice of the Digital Signature Algorithm ("DSA") does not infringe PKP patents. Public notice to that effect has appeared in Federal Register vol. 56, no. 169, August 30, 1991, pp. 42980-42982, and Federal Register vol. 59, no. 96, May 19, 1994, pp. 26208-26211. Copies are attached as Exhibits L and M. A copy of the DSA patent is attached as Exhibit N. 30. Defendant PKP wrote a letter to the National Institute of Standards of Technology ("NIST") claiming that the DSA infringes PKP patents. The letter was dated Nov. 20, 1991 and attached as Exhibit 0. No PKP argument regarding the nature of the infringement was ever made public. U.S. patent 5,231,668 was issued and assigned to the United States on July 27, 1993. 31. When the DSA was adopted by NIST as the federal Digital Signature Standard, defendants publicly threatened to sue anyone who uses it. These threats were conveyed to the news media for the purpose of intimidating competitors, and the threats were widely disseminated. A copy of a typical story in the trade press is attached as Exhibit P. 32. Defendants have attempted to intimidate ANSI and IEEE not to adopt a DSA standard, based on patent claims they know to be invalid. A copy of a PKP letter is attached as Exhibit Q. They hoped to kill a DSA standard in order to monopolize the market with an RSA standard. 33. Defendant PKP has pooled patents in an attempt to monopolize public key technologies. The Hellman patents were originally issued to Stanford University and exclusively licensed to Cylink. Cylink apparently controls Caro-Kann Corp., a partner in defendant PKP. The RSA patent was originally issued to Massachusetts Institute of Technology and exclusively licensed to RSADSI. The Schnorr patent was issued to Klaus Schnorr, a German citizen who had no connection with PKP. The patents are not blocking. All are now under the exclusive licensing control of PKP. 34. Defendants have exaggerated the scope of their patents. In a publicly distributed letter dated April 20, 1990, PKP claimed: These patents cover all known methods of practicing the art of Public Key, including the variations collectively known as E1 Gamal [sic]. The letter is attached as Exhibit R. PKP knows that this claim is false, but makes it anyway to intimidate competitors. 35. Defendant PKP sent a threatening letter, attached as Exhibit S, to ISC claiming that any use of public key technology must necessarily infringe PKP patents. 36. The idea of public key cryptography and digital signatures is disclosed in a paper titled "Multiuser cryptographic techniques" by Whitfield Diffie and Martin E Hellman, National Computer Conference, vol. 45, 1976. The paper was presented at a public conference in mid-June 1976, and published as part of the conference proceedings shortly thereafter. This was more than one year before any patents were filed, and therefore in the public domain according to 35 USC 102(b). A copy of the paper is attached as Exhibit T. 37. Another paper by Diffie and Hellman, "New Directions in Cryptography", IEEE Transactions on Information Theory, vol. IT-22, no. 6, Nov. 1976, was submitted on June 3, 1976. It discloses the public key distribution system of the DiffieHellman patent. A copy of the paper is attached as Exhibit U. 38. A survey paper, "The First Ten Years of Public-Key Cryptography", was published by Diffie in Proceedings of the IEEE, vol. 76, no. 5, May 1988. A copy of the paper is attached as Exhibit V. It states on p. 563 that Exhibit U was publicly distributed in June 1976 and publicly disclosed at the National Computer Conference, also in June 1976. The Diffie-Hellman patent was filed on Sept. 6, 1977. This was more than one year later, and hence the patent is invalid and unenforceable according to 35 USC 102(b). 39. The Hellman-Merkle patent is invalid and unenforceable because it is inoperative as disclosed. Claims 1-6 and 1417 require a quantity computationally infeasible to generate from a public key. Claims 1-3 and 6- 17 require secure communication over an insecure channel. There are no other claims. While the inventors probably believed that their invention met these requirements at the time they filed their patent application, it was later proved that the invention does not meet the requirements. According to Exhibit V pp. 565-566, it turned out to be feasible to compute the secret key from the public key. It follows that the claimed computational infeasibility is not achieved, and the communication is not secure. In fact, according to Exhibit V, the inventor had to pay a $100 bet when the invention was proved to be useless. 40. RSADSI has known the Hellman-Merkle invention to be worthless since at least 1985, and have not used it in its commercial products for that reason. 41. The Hellman-Merkle invention is not useful because of the flaws cited in Exhibit V, and therefore fails to satisfy the 35 USC 101 requirements for patent protection. 42. The Hellman-Pohlig patent is not even a public key patent. PKP deceptively cites it to bolster their claim to own all public key technology. 43. Defendants have claimed that ElGamal encryption, as described in T. ElGamal, A Public Key Cryptosystem and a Signature Scheme 8ased on Discrete Logarithm, IEEE Transactions on Information Theory, IT-31 (no. 4, July 1985) pp. 469-472, or as implemented in SecretAgent (a product of ISC which uses software licensed from plaintiff), or as currently being considered by the IEEE P1363 committee, infringes PKP patents. Plaintiff asserts that there is no infringement, even if the PKP patents are valid. 44. ISC had kept SecretAgent out of the commercial (non-government) market for a couple of years because of PKP patent claims on ElGamal encryption. 45. Plaintiff has suffered lost royalties as a result of defendants claiming that SecretAgent infringes PKP patents. 46. The RSA patent claims preempt a mathematical formula, and hence fail to pass the Freeman-Walter-Abele two-step test for statutory subject matter under 35 USC 101. While such a rejection had been made by the examiner, it was traversed with the disingenuous argument that the apparent formula is not a mathematical formula because it uses an equivalence relation. The argument from the RSA patent file wrapper is attached as Exhibit W. Plaintiff alleges that this argument is mathematically incorrect. 47. Defendants have demanded licenses for use of the "RSA algorithm" even though such a demand is prohibited by the doctrine of file wrapper estoppel. Exhibit W emphatically says, However, there are no mathematical algorithms in the applicants' claims. An example of a statement that the RSA algorithm is patented can be found in Bidzos's letter of Sept. 16, 1986, included in Exhibit J. 48. Cylink has filed court papers, attached as Exhibit X, stating that it believes the RSA patent to be invalid. If so, PKP has knowingly extracted license fees and sued competitors based on an invalid patent. 49. According to item 13 of Exhibit X, it appears that RSADSI has denied an RSA license to Cylink. 50. Plaintiff will seek leave of court to amend this complaint to assert such additional grounds for invalidity as may be ascertained and shall give notice prior to trial as may be required by 35 USC 282 of the matters specified herein. 51. Defendant PKP acquired the Schnorr patent in a willful attempt to maintain its monopoly over public key technology. When use of the DSA appeared to be a non-infringing use of public key, RSADSI publicly attacked DSA technology as inferior, showed little interest in marketing DSA products, but acquired the Schnorr patent anyway in a predatory attempt to deter others from using the DSA. An example of Bidzos's public disparagement of the DSA (where it is referred to as the DSS) is attached as Exhibit Y. 52. Plaintiff is informed and believes and on that basis alleges that PKP ties licensing of its patents to the purchase of software and services from RSADSI, in an attempt to broaden the scope of its patents and monopolize the market for certain related software and services. 53. Defendants have organized an illegal secondary boycott of competitors. RSADSI has publicly distributed a "Sink Clipper" poster which urges people to boycott companies selling products based on a cryptographic technology other than that sold by RSADSI. It says: What you can do ... Boycott Clipper devices and the companies which make them exclusively: Don't buy anything with a Clipper chip in it. A copy of the text on the poster is attached as Exhibit Z. 54. Plaintiff has been developing software for the Tessera card, a device with Clipper chip technology. Plaintiff stands to suffer injury from RSADSI's secondary boycott if it kills the market for Tessera cards. 55. Defendants' conduct and tactics with regard to the PKP patents constitute patent misuse. 56. Plaintiff is informed and believes and on that basis alleges that defendants charge different royalties to different licensees, and use price discrimination to bolster their monopoly. 57. Defendants are in violation of antitrust laws with their monopolization tactics. 58. Defendants have defamed plaintiff by making allegations of patent infringement to third parties, in violation of libel laws and laws against unfair business practices. 59. Defendants concocted a joint scheme to fraudulently exaggerate the scope of their patents and deceive standards making bodies into drafting an RSA standard on or about April 6, 1990, the day the PKP partnership agreement in Exhibit A was consummated. Defendants formed an association - in-fact that constituted an "enterprise" within the meaning of 18 USC 1961(4). 60. Defendants intended to use the exaggerated patents and phony license promises to monopolize the public key cryptography market, with full knowledge of the ANSI and IEEE patent policies-and of the invalidity of the Hellman-Merkle patent. 61. Several of defendants' threats and fraudulent patent claims and threats were transmitted through the U.S. Mail, thus constituting mail fraud in violation of 18 USC 1341. One such letter, Exhibit R, was sent by registered mail on or about April 20, 1990. 62. PKP also sent Exhibits K and Q through the U.S. mail system. 63. Defendants have interfered with commerce, in violation of 18 USC 1951, with their predatory tactics, unwarranted threats, and other unfair business practices. 64. Plaintiff is informed and believes and on that basis alleges that defendants have engaged in extortion by using the threat of lawsuit to extract patent licensing fees, when in fact they knew the patent to be invalid. 65. Plaintiff has been damaged, as have others, by defendants' fraud, extortion, and interference with commerce. 66. Defendant PKP has conspired with defendant RSADSI to engage in a pattern of racketeering, in violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. 67. Plaintiff damages, in lost sales, contracts, and royalties, are estimated at $2 million. Much of this would have been interstate commerce, including royalties from ISC in Illinois. WHEREFORE, plaintiff prays for judgment as follows: 1. That defendants, defendants' agents, partners, servants, employees, and all others acting in concert or participating with them, be enjoined during the pendency of this action and permanently from further interference with plaintiff's business. 2. That defendants pay plaintiff $2 million in real and punitive damages, and that damages be trebled according to antitrust and RICO laws. 3. That defendants be required to comply with the ANSI and IEEE patent policies. 4. That defendants' patent claim on all public key technology be declared invalid. 5. That practice of ElGamal encryption does not infringe any PKP patents, whether those patents are valid or not. 6. That practice of the DSA does not infringe any PKP patents, whether those patents are valid or not. 7. That the Diffie-Hellman patent be declared invalid and unenforceable. 8. That the Hellman-Merkle patent be declared invalid and unenforceable. 9. That defendants be estopped from enforcing the RSA patent. 10. That defendants be enjoined from further libeling plaintiff. 11. That defendants supply a complete list of persons and businesses that they have given false or libelous information, and that they send written retractions to each party. 12. That defendant partnership PKP be dissolved, and its patent pool be divided and returned to each patent's rightful owner. 13. That plaintiff be compensated for court costs and legal fees. 14. That plaintiff have such other and further relief as is just and proper. Dated: July 26, 1994 By: Plaintiff, Roger Schlafly, Pro Se Roger Schlafly P0 Box 1680 Soquel, CA 95073 telephone: (408) 476-3550 -- End ---------------------------------------------------------------------