Chandler v. Phx. Servs.

419 F.Supp.3d 972

Ronald CHANDLER, et al., Plaintiffs,

v.PHOENIX SERVICES, et al., Defendants.

Civil Action No. 7:19-cv-00014-O

United States District Court, N.D. Texas, Wichita Falls Division.

Signed December 17, 2019

Theodore G. Baroody, Carstens & Cahoon, LLP, Dallas, TX, Don Ross Malone, Malone Law Firm, Vernon, TX, for Plaintiffs.

Devan V. Padmanabhan, Padmanabhan & Dawson P.L.L.C., Minneapolis, MN, for Defendants.

MEMORANDUM OPINION AND ORDER

Reed O'Connor, UNITED STATES DISTRICT JUDGE

Before the Court are Defendants Phoenix Services, LLC's and Mark H. Fisher's Motion to Dismiss (ECF No. 25), filed August 5, 2019; Plaintiffs Ronald Chandler's, Chandler Manufacturing, LLC's, Newco Enterprises, LLC's, and Supertherm Heating Services, LLC's Response (ECF No. 26), filed August 14, 2019; and Defendants' Reply (ECF No. 27), filed August 28, 2019. Having reviewed the motion, briefing, and applicable law, the Court finds that Defendants' motion should be and is hereby GRANTED in part and DENIED in part .

I. FACTUAL BACKGROUND¹

The enforcement of United States Patent No. 8,171,993 (the " '993 Patent") is "at the heart" of both this antitrust litigation brought by Ronald Chandler, Chandler Manufacturing, LLC, Newco Enterprises, LLC, and Supertherm Heating Services, LLC (collectively, the "Chandler Plaintiffs") against Phoenix Services, LLC ("Phoenix") and Phoenix CEO Mark H. Fisher ("Fisher") and several related patent-infringement suits initiated by Heat On-The-Fly, LLC ("HOTF"), a Phoenix subsidiary. First Am. Compl. ¶ 11, ECF No. 23. After years of patent-infringement litigation, the Federal Circuit held that HOTF asserted its '993 Patent in bad faith and the '993 Patent is unenforceable due to inequitable conduct. Id. at ¶¶ 1, 18. The question now before this Court is whether the Chandler Plaintiffs have pleaded facts sufficient to state claims against the Phoenix Defendants for antitrust liability on the basis of (1) Walker Process patent fraud or (2) sham patent litigation.

A. Patent Litigation

Heat On-The-Fly founder Ransom Mark Hefley invented the '993 Patent —entitled "Water Heating Apparatus for Continuous Heated Water Flow and Method for Use in Hydraulic Fracturing"—to heat water "on demand or inline during the fracing process, instead of using preheated water in large standing tanks," or, as HOTF puts it, to heat water "on-the-fly." Id. at ¶ 11; see also id. at ¶ 25. Prior to filing a patent application on September 18, 2009, "Hefley and his companies performed on-the-fly heating of water on at least 61 frac jobs using the system described in the '993 Patent application" and "collected over $1.8 million for those heat-on-the-fly services." Id. at ¶ 12. Hefley did not disclose any of these 61 prior frac jobs to the Patent and Trademark Office ("PTO"), despite knowing that the PTO's "on-sale bar" required him to do so. Id. On May 8, 2012, the PTO approved the '993 Patent. Id.

Once the '993 Patent was approved, HOTF began to enforce it against the Chandler Plaintiffs and other competitors. See id. at ¶¶ 13–14. One non-party competitor alleged that HOTF interfered with its prospective business relationship by calling that competitor's customer, claiming the competitor's water heaters infringed the '993 Patent, and suggesting an infringement suit. Id. at ¶ 13. On another occasion, HOTF threatened Plaintiff Supertherm Heating Services, LLC's customers with patent-infringement allegations, which led its largest customer to "greatly reduce[ ] the number of in-line frac water heating jobs awarded." Id. at ¶ 14. "Ultimately, Supertherm's business was harmed to the point where it suspended operations...." Id.

HOTF eventually brought its claims to court. See id. In an earlier suit before the Northern District of Texas, HOTF sued the Chandler Plaintiffs for infringing the '993 Patent. Id. at ¶ 1. The Northern District stayed litigation pending the outcome of an earlier-filed suit in the District of North Dakota, in which HOTF alleged a competitor and the competitor's contractor also infringed the '993 Patent. Id. at ¶¶ 1, 15. "The jury in the North Dakota litigation found that HOTF asserted the '993 Patent in ‘bad faith[,’] and the district court in North Dakota found the '993 Patent unenforceable due to inequitable conduct." Id. at ¶ 1; see also id. at ¶¶ 16–17. On appeal, the Federal Circuit affirmed the North Dakota district court's declaratory judgment on both issues. Id. at ¶¶ 1, 18 (citing Energy Heating LLC v. Heat On-The-Fly, LLC , 889 F.3d 1291, 1296, 1304 (Fed. Cir. 2018) ).

B. Antitrust Litigation

Following the Federal Circuit's ruling in the patent litigation, the Chandler Plaintiffs filed this antitrust suit against Phoenix, the owner and parent company of HOTF. Compl. ¶ 2, ECF No. 1. The Chandler Plaintiffs later amended their complaint to also assert antitrust claims against Fisher, the Phoenix CEO and sole employee of HOTF. First Am. Compl. ¶ 1, ECF No. 23. In light of the Federal Circuit's affirmance that, as a matter of patent law, the '993 Patent was submitted in bad faith and unenforceable due to inequitable conduct, the Chandler Plaintiffs submit that Phoenix is liable for attempted monopolization due to its own "act[s] to encourage the anticompetitive acts of HOTF with respect to the '993 Patent" and for "the anticompetitive conduct of its subsidiary, HOTF, pursuant to the Sherman Act, 15 U.S.C. § 2." Id. at ¶ 21. They submit that Fisher, as an officer of a defendant company, is also individually liable for his involvement in the patent litigation and knowledge of Phoenix's anticompetitive acts. See id. at ¶¶ 1, 25.

1. Alleged Anticompetitive Conduct

Since the '993 Patent was approved in 2012, HOTF has "made infringement claims as to the '993 Patent in litigation against many participants in th[e] relevant market [for in-line frac water heating,] including, but not limited to: Energy Heating, LLC, Rocky Mountain Oilfield Services, LLC, Marathon Oil Corp., Enservco, and the Chandler P[laintiffs]." Id. at ¶ 18. These claims have included informal communications with its competitors' customers, as well as several lawsuits. See id. at ¶¶ 13–15.

Additionally, "while the inequitable conduct finding as to the '993 Patent was on appeal to the Federal Circuit,...[Phoenix] directly encourage[ed] HOTF in fraudulently asserting the '993 Patent against the ‘on the fly’ frac water heating market." Id. at ¶ 19. Specifically, Phoenix "modified its website in early 2018 to threaten the market by stating that a patent license is required to practice the method of heating ‘on-the-fly[,’] and referencing the '993 Patent." Id. The statements remained on Phoenix's website following both the Federal Circuit's affirmance of the district court's declaratory judgment against HOTF and the passing of the deadline to petition the Supreme Court for certiorari. Id. Further, Phoenix has continued to "seek[ ] licenses from the ‘on the fly’ frac water heating market participants knowing the '993 Patent has been adjudicated as unenforceable pursuant to a final and non-appealable judgment." Id.

As HOTF's sole employee, Fisher "has been in daily control" of the stayed patent-infringement suit HOTF filed in this Court against the Chandler parties. Id. at ¶ 25; see also id. at ¶ 1. When asked who was responsible for "enforcing the licenses, the patent license, the trademark, the patent, the technology stuff" during the North Dakota patent-infringement litigation, Hefley answered that "[a]s far as [he] kn[ew,] Mark Fisher [wa]s in charge of everything that has to do with Heat On-The-Fly." Id. at ¶ 25. Hefley also said he spoke to Fisher about once per week. Id. As Phoenix CEO, Fisher "would also have been aware of the licensing offers for the '993 Patent" posted on Phoenix's website. Id.

2. Alleged Market Share

Throughout the patent litigation, HOTF maintained that most in-line frac water heating nationwide was performed using HOTF's patented invention. Id. at ¶ 18. In 2015, for purposes of the PTO's reexamination of the '993 Patent, HOTF submitted two declarations regarding its coverage. Id. Declarant James D. Cole provided an analysis of the "in-line frac water heating market" as of 2013, which included the following:

19) I, with the assistance of the licensees of the patent in 2013, broke up the 2013 US market for water heating for use in horizontal fracing of shale formations into 7 major markets, as follows:

20) Appalachian...

21) Mid-Continent...

22) East Texas, North Louisiana market...

23) Kansas...

24) Colorado...

25) Wyoming...

26) North Dakota and Montana...

27) By my calculations, about $355-365 million was spent on frac water heating in these 7 major markets, and of this about $225-235 million was performed using the invention claimed in claim 1 of US Patent No, 8,171,993. Thus, an estimated 62-66% of all frac water heating (by dollar volume) in these 7 major markets in the US was performed in 2013 using the invention claimed in claim 1 ofUS Patent No. 8,171,993 . Of this, about 23-24% (about $53 million) was performed by licensees of US Patent No. 8,171,993 and the majority was performed by non-licensed heating companies. In 2013, the about $53 million in frac water heating using the invention claimed in claim 1 of US Patent No. 8,171,993 performed by licensees of US Patent No. 8,171,993 represented about 15% of the total revenue for frac water heating in these 7 major markets.

Id. (emphasis added). But speaking of the then-current April 2015 market, Cole testified that he was "unaware of any water heating process currently in use for heating water continuously and on demand in fracing operations which is not covered by claim 1 of US Patent No. 8,171,993." Id. In a second declaration dated April 2015, declarant James Kirk Plumlee testified, "[t]here is simply no practical way to frack the larger jobs nowadays without using the patented method....I see other companies heating water for use in fracking in our market area (primarily...