It says a lot when the busiest patent judge in the United States calls a patent lawsuit “the clearest example of an exceptional case” he has ever seen. That is precisely what happened earlier this week, when Judge Rodney Gilstrap of the Eastern District of Texas, who personally handles one-quarter of all patent cases filed nationwide, awarded a defendant nearly $500,000 in attorneys’ fees and sanctions against plaintiff and their counsel. See Iris Connex, LLC v. Dell Inc., No. 2:15-cv-01915 (E.D. Tex. Jan. 25, 2017) (Doc. 149) (click here for Gilstrap Memorandum Opinion).
This action arose from a lawsuit filed against eighteen manufacturers of smartphones and tablets for allegedly infringing U.S. Patent No. 6,177,950, entitled, “Multifunctional Portable Telephone.” Dell, one of the defendants, moved to dismiss under Rule 12(b)(6) on the grounds that one disputed claim term (“multi-position . . . . reading head”) could not plausibly be interpreted to cover any of the accused products, all of which included a “fixed” camera.
The Court ordered an early claim construction to resolve this one narrow and potentially case-dispositive issue. The Court subsequently interpreted the disputed phrase “an internal multi-position and multi-function reading head” to mean “a single internal multi-function reading head that is physically moveable.”
Since all of the accused products included a fixed (or non-movable camera), the Court ruled as a matter of law that “no reasonable juror could conclude that a fixed camera was ‘physically moveable’ or equivalent to a physically moveable camera.” The Court entered summary judgment of non-infringement in favor of all defendants.
Soon after summary judgment was granted, seventeen of the eighteen defendants were dismissed with prejudice. According to the Court, many of these defendants were “affirmatively compensated” by the corporate owner to secure such dismissals before they moved for fees.
Dell was the sole hold out—it moved for attorneys’ fees under Octane Fitness, LLC v. ICON Health and Fitness, Inc., 134 S. Ct. 1749, 1756 (2014) and Title 35, Section 285. Dell argued that fees and sanctions were appropriate against Iris Connex and its counsel because, in spite of being placed on notice, Iris Connex persisted in prosecuting an objectively unreasonable case and that plaintiff’s real purpose in filing the litigation was to procure settlements in amounts less than the defense costs that Dell and other defendants would incur.
Dell asserted, and ultimately established, that the plaintiff was intentionally an empty shell company and, consequently, could not pay fees even if the case were declared exceptional. Indeed, Dell proved that plaintiff was not “simply a non-practicing entity seeking to vindicate its patent rights—albeit with an exceptionally bad infringement case.” The Court found that the plaintiff was the first of two levels of shell corporations intended to shield its owner from the risk associated with a fee-shifting award.
Interestingly, in an effort to avoid post-judgment discovery to unravel the corporate “onion” that was the nominal plaintiff, the various intermediate shell entities filed for bankruptcy. The plaintiff’s efforts to avoid discovery, and their counsels’ efforts to withdraw, were all denied.
The Court further determined that Section 285 liability may be imposed against non-parties, so long as: (1) the actor is responsible for the conduct that makes the case exceptional; (2) the actor is afforded due process; and (3) it is equitable to do so. In extending liability to others who were involved in the operation of the putative plaintiff, the Court followed a “general and uncontroversial principle: that the corporate form cannot be used as a shield to insulate officers and parent corporations against liability for their own tortious conduct or tortious conduct they control.”
The Court found multiple reasons why the case was exceptional under Section 285.
First, the Court found that the plaintiff’s proposed claim construction was “not only implausible but nonsensical.”
Second, the Court determined that plaintiff’s doctrine of equivalents argument was both “nonsensical” and foreclosed by prosecution history estoppel.
Third, plaintiff’s conduct during the litigation supported an exceptional case finding, including the fact that, as the Court found, the plaintiff was seeking nuisance settlements.
Fourth, the Court noted that the plaintiff or those who controlled it had filed hundreds of patent infringement suits in the Eastern District of Texas, and only one of those cases had ever made it to claim construction, while none had ever gone to trial.
Fifth, one of the controllers of the plaintiff entity made an intentional decision to create an undercapitalized entity, and that the plaintiff was part of a pattern of setting up shell companies.
Sixth, many of the decisions made by the plaintiff’s counsel during litigation were “sloppy” at best.
In addition to awarding sanctions under Section 285, the Court concluded that additional sanctions were warranted pursuant to Rule 11 and the Court’s inherent power. The Court noted that “the decision to create an empty shell and then hide its corporate parent until the eleventh hour (while at all times being sure any resulting monetary gains would flow to [the owner] unimpeded) led to the judicial inefficiencies and delays recounted herein, which far exceed those present in an ordinary case.” This was, the Court held, an “abuse of the judicial system.”
This case presents a lesson to those lawyers who often like to fall back on their ethical duty to represent their clients zealously. The duty of “zealous advocacy” is not without limits. And it is not a free pass to litigate frivolously. In patent cases, courts have a wide range of tools, including 35 U.S.C. § 285, Fed. R. Civ. P. 11, and the court’s inherent power, to award attorney’s fees and monetary sanctions against counsel or parties who litigate in bad faith.