Sidense and Kilopass compete in “the emerging market for ‘1T’ one-time programmable embedded non-volatile memory (‘eNVM’),” which allows permanent data storage inside integrated circuits by creating a breakdown in the transistor. Kilopass separately sued Sidense for patent infringement as well as some business torts.
Sidense alleged that Kilopass and individual defendant Cheng embarked on a campaign of false claims in order to harm Sidense. Sidense alleged that these statements variously constituted defamation, false advertising, intentional interference with contractual relations/prospective economic advantage, and violations of California’s UCL.
Defamation: Sidense first challenged a statement to a Sidense potential customer that, based on Kilopass' own tests, Sidense's 1T technology was not commercially viable. The court expressed uncertainty about whether the statement referred to Sidense. Sidense’s argument was that, though Kilopass claimed to have patents covering 1T, it was trying to sell the recipient, Samsung, on its 2T technology, and both Samsung and Kilopass knew that Kilopass was competing against Sidense’s 1T technology. The statement began with a statement that “reliability and manufacturability should be compared with our competitors.” Indeed, Kilopass sent another message to Samsung the next day about Sidense’s patent application. Kilopass, though, argued that it was talking about its own 1T technology.
Kilopass also argued truth: its own testing of 1T cells showed manufacturability and reliability issues. Sidense presented contrary evidence.
The court found that the statement wasn’t defamatory. It was evaluative, not a false statement of fact: “The statement that a type of technology is not reliable or manufacturable in high volume production, as drawn from a company's evaluation of that technology, is too subjective and vague to be subject to a defamation claim.” Plus, Sidense’s evidence of truth was its success in the years after the message was sent, which wasn’t available to Kilopass at the time.
The next claim involved the statement “Sidense continues to offer for license even after May, '08, knowing substantial portion of its patent claims have been rejected. Sidense argued that, seven months before this claim was distributed, the PTO affirmed all the claims in its patent and allowed new claims to be added during inter partes reexamination initiated by Kilopass. Kilopass argued truth because the original application had 29 claims, the majority of which were rejected. The court agreed that this was subject to a defamatory meaning, since it was in the present tense: “The most credible inference to be drawn from the statement is that Sidense continues to market and license technology to which it holds no patent.” It wasn’t libel per se (an accusation of fraud on customers), because the “innuendo” that Sidense continued to license products based on rejected claims was “subject to the reader's interpretation,” requiring Sidense to show special damages. (It seems to me that the court is importing the explicit/implicit distinction from false advertising law; this doesn’t seem consistent with the business defamation cases I’ve read, though admittedly I haven't made a detailed study.)
Next, Kilopass threatened to sue Sidense’s customers and potential customers as patent infringers or respondents before the ITC, including threats to Fujitsu and Sony. Kilopass argued truth: in reponse to the patent suit, Sidense disclaimed direct infringement since all it does is license its technology. Thus, Kilopass reached out to alleged direct infringers, and contended that it had made preparations to file potential lawsuits against Sidense’s customers, including testing chips from customers. The court agreed that these statements weren’t subject to a defamatory meaning: whether Kilopass ultimately sues likely depends on the outcome of its current suit against Sidense, and Sidense didn’t raise a question of fact as to Kilopass’ intentions.
Matters were different with respect to the next set of statements, from an email sent to several Sidense customers stating that Sidense “has refused to take responsibility for its customers' chips that contain the embedded Sidense OTP.” This email was sent after Kilopass subpoenaed 52 of Sidense' customers in order to obtain evidence of direct infringement. It continued: “With Sidense indicating to the court that it is its licensees who should be charged as direct infringers, Kilopass had no choice but to send out the subpoena to all Sidense licensees.”
Kilopass argued that this was true, or at least opinion: because Sidense hadn’t stipulated to direct infringement by its customers if the products are found infringing, it was “refus[ing] to take responsibility,” and “Sidense [is] indicating to the court that it is its licensees who should be charged with direct infringement,” was a fair and reasonable interpretation of Sidense's posture in the patent litigation.
The court wasn’t having it. Arguing that one isn’t a direct infringer isn’t the same as refusing to take responsibility for customers’ use of the licensed technology, and certainly doesn’t suggest that licensees should be charged with direct infringement. Even more so here, where Sidense offers indemnification to customers (which Kilopass recognized elsewhere, using it as evidence of Sidense’s financial troubles). The defamatory sting was that “Sidense abandoned its customers in the face of a patent infringement suit.” But the court found that it wasn’t libelous per se; an understanding of the defamatory nature of the statement, specifically what “taking responsibility” means in this context, “requires at least some understanding of extrinsic facts, including the nature of direct versus indirect patent infringement lawsuits.”
The next set of statements charged that Sidense was not financially stable, that it would soon be bankrupt, etc. For example, in an email to a potential customer, Kilopass stated that “Sidense has also alleged that its licensees are the direct infringers (if/when proven). When coupled with its possible bankruptcy filing, it has motivated us to seek direct resolution with licensees now ...”
Kilopass argued truth, with evidence that Sidense has operated at a loss every year since 2006, bolstered by Sidense’s unlimited indemnification against claims of infringement for use of its technology, which allegedly “create[s] a high-risk profile for any business.” (It’s true because I made it true, your honor!) In the alternative, Kilopass argued that this was just opinion.
The court disagreed. Kilopass had no personal knowledge of Sidense’s finances, and the fact that a startup operates at a loss doesn’t mean it’s facing bankruptcy. And, while generalized statements about a competitor's future financial conditions are not actionable, statements insinuating imminent financial collapse are.
Sidense alleged false advertising under the Lanham Act with respect to two statements: first, the white paper allegedly depicting Sidense’s product as if it were Kilopass’. The paper stated, “Kilopass was the first to pioneer [technobabble]. Kilopass holds patents for several flavors of the cells, including the 1T and 2T,” followed by two illustrations labeled “Antifuse Bit Cell–2T” and “Antifuse Bit Cell–1T.” Sidense alleged that, though this statement implied that the bit cells were both Kilopass' patents, the 1T illustration actually depicted Sidense's 1T bit cell. Thus, people familiar with the Sidense product allegedly would have thought that Sidense's bit cell was merely a copy of the Kilopass bit cell and was an infringer.
Kilopass argued that the illustration was, in fact, one of its own bit cells. The court found that Sidense raised a question of fact as to what product was shown. But there was no evidence that this actually deceived or had the tendency to deceive a substantial segment of the audience or that it was likely to influence a purchasing decision, and thus no evidence of injury. It was not reasonable, absent other evidence, to infer that people looking to select a vendor would (1) read the white paper off of Kilopass’ website, (2) think that Sidense’s bit cell was covered by Kilopass patents, and (3) therefore hesitate to choose Sidense. Without evidence, the court wasn’t willing to infer that customers would recognize Sidense’s technology from the image, think that Kilopass had a patent that covered Sidense’s technology, and decline to license Sidense’s technology based on that belief.
Sidense also argued that the “Sidense continues to offer licensing despite rejected claims” statement was false advertising. Kilopass argued that the PowerPoint in which the statement appeared wasn’t commercial advertising, but instead an internal education document used to “educate Kilopass' internal sales and marketing team and inform a few select customers on the status of the litigation so that they could be better equipped to handle questions from their customers.” It also argued that the statement hadn’t been shown to be deceptive or material. The court rejected these arguments: the relevant market is small enough that statements to a few are enough to constitute commercial advertisement. Also, Sidense created a fact issue on deceptiveness and materiality. It provided an email who saw the presentation and was concerned
that Sidense is “still selling their IP ever [sic] after knowing substantial portion of its patent claims have been rejected.” The email asked “Would you please confirm whether there is still on-going or close to be done issue with Sidense? If they are going out of business, we all need to be careful.” While the statement wasn’t libelous per se, it had a “tendency to deceive and lessen goodwill, as it may suggest that Sidense is licensing technology it does not have ownership in.”
Some of the same allegations—the “still licensing despite rejected claims,” “going out of business/facing bankruptcy,” and “not taking responsibility/told the court that its customers should be sued” ones—also formed the basis of Sidense’s claim for intentional interference with contractual relations.
The Kilopass email to Sidense’s customers about Sidense’s financial viability also discussed “converting” the licensees to Kilopass customers. The email asked for an official letter stating that the recipient wasn’t using its Sidense license, because “unfortunately we are likely to initiate litigation against Sidense licensees, and we like to get this clarification so we can close the matter with you.” Further, it said, “Sidense is attempting to name its licensees as ‘direct infringers' as it only licenses the GDS database.… Recently, due to concerns over Sidense viability, we have no choice to [sic] turn our attention to the licensees. It's been a difficult process and I am looking forward to finishing the conversion of licensees. Fortunately, we've done three and several others in discussion. It's a long road though.” This was enough to create a question of fact precluding summary judgment. Sidense also submitted evidence that three customers renegotiated their contracts to require limitless indemnification; this also created a question of whether Kilopass actually disrupted the licensing agreements.
However, statements made to Samsung while the parties competed for Samsung’s business didn’t constitute intentional interference with prospective economic advantage—these were the statements discussed above that the 1T tech wasn’t reliable or suitable for high-volume manufacturing, and since they weren’t defamatory they also couldn’t support an intentional interference claim.