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An accused infringer did not commit mail or wire fraud by not informing its customers that its products may infringe patents because it had no duty to disclose this information and because run-of-the-mill patent infringement is not “sufficiently deceptive” to constitute fraud, the U.S. District Court for the Southern District of New York held May 31 ( Johnson Electric North America Inc. v. Mabuchi Motor America Corp., S.D.N.Y., No. 88 Civ. 7377 (WCC), 5/31/00). Johnson Electric North America Inc. and Mabuchi Motor America Corp. are competitors in the small electric motor market. Mabuchi owns U.S. Patent Nos. 4,431,933 and 4,574,215, which teach the use of a two-piece brush gear to improve the performance of a flat case motor. After Mabuchi accused Johnson of patent infringement, Johnson brought this action seeking a declaratory judgment that the patents were invalid or unenforceable. RACKETEERING In its answer, Mabuchi counterclaimed alleging that Johnson’s infringement-related activities violated 18 U.S.C. �1962, the civil Racketeer Influenced and Corrupt Organizations statute. Mabuchi alleged that Johnson’s conduct
was undertaken as part of a fraudulent scheme and plan to enrich Johnson at the expense of Mabuchi. The purpose of the scheme and plan � was to defraud Mabuchi, including proprietary rights in its inventions and designs, and patent rights therein, to enable Johnson to manufacture, use and sell competing motors without disclosing that the motors were copied and imitated from Mabuchi’s patented and otherwise proprietary designs.

Johnson moved for summary judgment against Mabuchi’s RICO counterclaim. MATERIAL OMISSION? A RICO violation requires proof of at least two “predicate acts” of racketeering activity, said Senior Judge William C. Conner, writing for the court. By itself, however, patent infringement is not a predicate act because it is not enumerated as such in RICO. Mabuchi argued that it was not relying on patent infringement per se, but rather on “Johnson’s use of the mail and wires in the context of the pattern of willful activity alleged.” This use constituted mail and wire fraud — two of RICO’s enumerated predicate acts. Specifically, Mabuchi alleged that the scheme to defraud was carried out by mailing invoices and the like to buyers of the infringing motors and by communicating with buyers of the infringing motors over the phone. Instead of arguing that Johnson defrauded Mabuchi, however, Mabuchi argued that Johnson defrauded its own customers. (The court held that Mabuchi had standing to assert this claim as long as it suffered some injury by virtue of Johnson’s defrauding its own customers.) More specifically, Johnson’s sales violated Section 2-312(3) of the Uniform Commercial Code, which creates a warranty of non-infringement by a merchant. By failing to disclose to its customers that the motors infringed the patents, Mabuchi contended, Johnson participated in a scheme to defraud. Fraud, the court said, requires affirmative misrepresentations or omissions of material information that the defendant had a duty to disclose. Johnson indeed omitted mention of any potential patent infringement, but it had no duty to disclose this information. Section 2-312(3) states: “Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be free of the rightful claim of any third person by way of infringement or the like.” Courts have interpreted this section to entitle the buyer to indemnification from the seller for any claims of infringement by a third party, the court said. But the duty to indemnify does not create a duty to disclose. In sum, “Mabuchi cannot show that Johnson made a material omission as required by the mail and wire fraud statutes.” INTENT TO DEFRAUD? Even if Mabuchi could show a material omission, the court said, Mabuchi cannot prove intent to defraud. “As this Court reads them, Mabuchi’s accusations are nothing more than claims of knowing and deliberate patent infringement. Mabuchi bases their RICO claims on the same activity alleged in their patent infringement claims.” For instance, the court continued, in Naso v. Park, 850 F. Supp. 264 (S.D.N.Y. 1994), this court held that

such patent infringement is not fraud because it contains no deceptive element. There are no allegations that defendants represented to customers that their [microfilm] reels did not infringe valid patent or trademark rights of plaintiffs. Nor is there any allegation that the purchasers of the reels sold by defendants were deceived to their detriment, that is, that they preferred reels made by plaintiffs and were deceived into accepting inferior reels made by someone else. � Nor are there allegations that defendants somehow perpetrated a fraud on the Patent and Trademark Office by, for example, obtaining its own patent through material false representations or non-disclosures.

Courts have held that misappropriation of trade secrets may entail mail and wire fraud, but in those cases a confidential relationship was violated, the court said. In this case, no confidential relationship existed between Johnson and Mabuchi — they are direct competitors. “Johnson’s alleged infringement of a competitor’s patent is not sufficiently deceptive to be part of a scheme to defraud. … Mabuchi’s RICO counterclaims must be dismissed because patent infringement alone cannot be the basis for mail or wire fraud.” The court added: “We are mindful of the Supreme Court’s direction that ‘RICO is to be read broadly.’ … [But] this Court declines to be the first to extend the reach of RICO to claims based upon patent infringement.”

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