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Judge Thynge recommends partial dismissal of plaintiff’s amended complaint

Magistrate Judge Mary Pat Thynge recently recommended that defendant First Midwest Bancorp’s (“FMBI”) motion to dismiss be granted in part. Strikeforce Technologies, Inc. v. Phonefactor, Inc., et al., C.A. No. 13-490-RGA-MPT, Report and Recommendation (D. Del. Nov. 13, 2013), amended, Report and Recommendation (Amended) (D. Del. Nov. 14, 2013) (minor corrections to original) (“Amended Report”).

Plaintiff argued that FMBI’s subsidiary, First Midwest Bank, infringed its patent and that FMBI was liable under both alter ego and agency theories. Amended Report at 3. The Court concluded that plaintiff had not sufficiently alleged facts to establish an alter ego theory of liability, but that it had alleged enough facts to support “pure agency liability.” Id. at 7.

As to alter ego, the Court explained that the

allegations regarding the relationship between FMBI and First Midwest Bank establish that the two entities are commingled. FMBI and First Midwest Bank have a nearly identical board of officers and directors; the majority of FMBI’s assets are attributable to First Midwest Bank; both corporations employ the same governance polices [sic] and procedures; both corporations operate from the same location in Illinois. While these allegations meet the first element [of alter ego liability], StrikeForce has not alleged any facts suggesting fraud or injustice in FMBI’s use of the corporate form [i.e., the required second element to establish alter ego liability].

Id. at 8. Plaintiff argued that fraud was not required to be pled under the alter ego theory and that the theory was “muddled, and the cases outside the realm of patent infringement cannot be applied wholesale.” Id. at 9. The Court recognized that, under Third Circuit law, a plaintiff need not prove actual fraud and may allege facts “suggest[ing] fraud or injustice,” but here, plaintiff did not address any factors that suggested “fraud or other similar injustice in the structure of FMBI and First Midwest Bank. Contrary to [plaintiff’s] first argument, fraud or some other similar injustice is a required element for finding alter ego liability.” Id. at 9-10. Plaintiff also “suggest[ed] that if allowed to conduct discovery, it would provide this court all the factors necessary to conduct a meaningful alter ago analysis,” but the Court found that the argument “undermin[ed] the purpose of the well-pled complaint requirement.” Id. at 10.

As to the agency theory, the Court concluded that plaintiff’s allegations “reasonably support the inference that FMBI directed First Midwest Bank’s act of infringement,” citing similar facts quoted above relating to the entities’ relationship to conclude that the allegations “suggest a close connection in the operations of the two companies, making it reasonable to infer FMBI authorized or directed” activities related to plaintiff’s infringement allegations. Id. at 11. The Court also explained that plaintiff need not allege facts supporting fraud or injustice under a “pure agency” theory; it would be required to do so under an “agency akin to an alter ego theory.” Id. at 12.

FMBI also argued that plaintiff did not allege “enough plausible facts to suggest that discovery would uncover sufficient evidence to support either alter ego or agency liability. FMBI urges the court dismiss the claims against it because having a regulated wholly-owned subsidiary should not subject a parent corporation to discovery expenses based on mere allegations of a typical corporate structure.” Id. at 13. While recognizing “the burden of litigation,” the Court concluded that plaintiff’s agency claim was plausible under Rule 12(b)(6) and should not be dismissed. Id. at 13-14.

Strikeforce Technologies, Inc. v. Phonefactor, Inc., et al., C.A. No. 13-490-RGA-MPT, Report and Recommenda…

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