Sue-And-Settle NPE Patent Litigation Tactics May Violate USPTO Ethics Rules

Non-practicing entities who engage in a pattern of filing numerous lawsuits without any intention of testing the merits, solely to extract low ball settlements, should take note that the USPTO’s Office of Enrollment and Discipline (OED) takes a keen interest in such conduct.  A recent “exceptional case” decision in a patent case from federal court in California should give pause to all IP litigators regarding the intersection of patent law, court decisions, and the ethics rules of the USPTO.

The S&T Litigation

In Shipping and Transit, LLC v. Hall Enterprises, Inc. 16-cv-16535-AG-AFM (C.D. Cal. July 5, 2017), plaintiff (“S&T”), a non-practicing entity, sued Hall Enterprises, Inc., a Minnesota corporation d/b/a Logistics Planning Services (“Hall”).  The complaint alleged that Hall’s “Transportation Management System” infringed claims of three of S&T’s patents.

On November 2, 2016, Hall moved for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c) on the ground that all three of plaintiff’s patents were ineligible under 35 U.S.C. Section 101 because they each claimed the abstract idea of tracking vehicles and notifying customers regarding the location of the vehicles.  In its motion, Hall also took a shot at S&T’s business model, alleging that plaintiff:

is a notorious patent assertion entity whose business model involves filing hundreds of patent infringement lawsuits to extract nuisance value settlements. The patents asserted in this case have been asserted in more than 650 other cases. Yet no court has had an opportunity to judge the validity of S&T’s patents. S&T avoids such judgment by promptly settling or voluntarily dismissing its complaints whenever challenged.

One week later, S&T filed a motion voluntarily to dismiss the action with prejudice pursuant to Fed. R. Civ. P. 41(a)(2), which requires leave of court.  S&T also filed an opposition to Hall’s Rule 12(c) motion.  With regard to its own motion for voluntary dismissal, S&T alleged that Hall would suffer no legal prejudice and that its voluntary dismissal motion was not an attempt to avoid a “near-certain adverse ruling” regarding Hall’s Rule 12(c) motion.

The district court granted S&T’s motion and ordered the action dismissed with prejudice.

The Fee Petition And Exceptional Case Determination

On December 1, 2016, Hall filed a motion pursuant to 35 U.S.C. Section 285 to have the court declare the case exceptional and to award its defense costs, including attorneys’ fees, as the prevailing party.  Hall reiterated its argument that S&T “is a notorious patent assertion entity” and it claimed that S&T files patent suits “mostly against small companies, and exploits the high cost of litigation to extract unwarranted settlements for amounts less than $50,000.”  According to Hall:

S&T’s patents are directed to the idea of monitoring and reporting the location of a vehicle.  The three patents asserted in this case have been asserted by S&T and its predecessor ArrivalStar in hundreds of other cases.  One of these patents is the most asserted patent since 2010; the other two patents are in the top 25.  Yet no court has had an opportunity to judge the validity of S&T’s patent claims. S&T avoids such judgment by promptly settling or voluntarily dismissing its complaints whenever challenged.

Hall accused S&T of filing a “boilerplate” complaint which failed to specify how Hall was allegedly infringing the asserted patents.  It further stated that the day after it filed the lawsuit, S&T’s counsel requested a meeting with Hall to attempt to settle the case at an amount substantially below the cost of litigation.  Hall rejected the settlement demand and filed its Rule 12(c) motion.

In the main, Hall argued that attorneys’ fees were warranted because: (1) S&T’s Section 101 position was “objectively unreasonable”; and (2) the case was litigated in an unreasonable manner.  As for the latter point, Hall asserted that this case followed a pattern of litigation abuses characterized by repeated filings for the sole purpose of forcing settlements.  See SFA Sys., LLC v. Newegg, Inc., 793 F.3d 1344, 1349 (Fed. Cir. 2015) (holding that patent plaintiff’s sue-and-settle litigation business model relevant to determining whether case is “exceptional” under Section 285).

In opposition, S&T asserted that its patents were presumed valid and that it took no objectively unreasonable position under 35 U.S.C. Section 101.  In addition, S&T asserted that its settlement offers in other cases were reasonable given the uncertainties underlying Section 101 jurisprudence and the value of licenses granted to “similarly situated entities.”

On July 5, 2017, the district court agreed with Hall and entered an Order Granting Motion for Fees and Costs.

First, the Court considered whether the plaintiff’s litigation position was objectively unreasonable.  To that end, the court provided a rather extensive analysis of the two-part test for patent eligibility under Alice and its progeny with respect to each of the three patents asserted by S&T.  The Court concluded that S&T’s Section 101 arguments were “objectively unreasonable in light of the Supreme Court’s Alice decision” and that the “weakness” of plaintiff’s Section 101 position was “a significant factor” weighing in favor of an attorney’s fee award under the Octane Fitness standard.

Second, the Court considered whether the case was litigated in an “unreasonable manner.”  The court found “troubling” plaintiff’s repeated dismissal of its own lawsuits “to evade a ruling on the merits” and persistence in filing new lawsuits advancing the same patents that had been the subject of prior voluntary dismissals.   The court noted that, “[p]atent litigation is expensive, so it is unsurprising that the vast majority of accused infringers choose to settle early rather than expend the resources required to show a court that the Patents-in-Suit fail under § 101. When the few challenges do occur, however, they are promptly met with voluntary dismissals with prejudice, as in this case.”

In weighing the totality of the circumstances, the court acknowledged, with respect to whether fees were warranted based on an objectively unreasonable litigation position, it was “difficult” to determine if the plaintiff’s position was “so baseless as to make this case exceptional.”

What tipped the balance, however, was the plaintiff’s pattern of filing many lawsuits, settling (or attempting to settle) for relatively low values, and voluntarily dismissing its cases when challenged to avoid a merits decision.  The court reasoned that “[t]hese tactics present a compelling need for deterrence and to discourage exploitative litigation by patentees who have no intention of testing the merits of their claims.”  The court awarded Hall its attorneys’ fees and costs.

Ethics Implications of District Court Decision

The USPTO’s OED has disciplinary jurisdiction over all members of the patent bar as well as attorneys who represent others in trademark matters.  See 37 C.F.R. Section 11.19.  Under 37 C.F.R. Section 11.22, the OED generally has the authority to investigate possible violations of the USPTO’s ethics rules based on the conduct of anyone falling within its disciplinary jurisdiction.   Notably, the OED is not limited to investigating misconduct arising in practice before the Office.  Indeed, purely “personal” misconduct having nothing to do with the practice of law may fall within the disciplinary rules and jurisdiction of the OED.  As well, conduct arising in litigation may be fodder for an OED ethics investigation.

A number of USPTO ethics rules are potentially implicated by an award of attorneys’ fees under the exceptional case standard.

For example, under 37 C.F.R. Section 11.301, a practitioner “shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous.”  This rule is essentially an ethical codification of Rule 11 of the Federal Rules of Civil Procedure.  A judicial determination that a party took an objectively “unreasonable” position in litigation for purposes of justifying a fee award under 35 U.S.C. Section 285 may be of concern to the OED, which could consider a litigator’s objectively unreasonable litigation position to fall within the scope of 37 C.F.R. Section 11.301.

The manner in which a case was litigated–which is frequently cited as grounds for an attorneys’ fee award under Octane Fitness–can implicate a number of different USPTO ethics rules.  The following ethics rules could be triggered by an exceptional case finding predicated upon the unreasonableness of the way in which a patent case was litigated:

37 C.F.R. Section 11.302 – Proscribing undue delay in proceedings before a tribunal;

37 C.F.R. Section 11.303(a) – Prohibiting a practitioner from making false statements of fact or law to a tribunal; failing to disclose to a tribunal legal authority in the controlling jurisdiction known to the practitioner to be directly adverse to the position of the client and not disclosed by opposing counsel; and knowingly offering false evidence.

37 C.F.R. Section 11.304(a)-(f) – Requiring fairness to opposing counsel and an opposing party, including prohibiting a practitioner from obstructing access to evidence, offering false testimony, knowingly disobeying a rule of the tribunal, making a frivolous discovery request, and failing to make a reasonably diligent effort to comply with a discovery request.

In addition to these fairly specific rules, the ethics rules include a host of broadly phrased general rules–so broad, in fact, they are often referred to as “catch all” rules because they can literally apply to just about all forms of practitioner misconduct.  The three broadest of the “catch all” rules are:

37 C.F.R. Section 11.804(c) – Prohibiting a practitioner from engaging in conduct “involving dishonesty, fraud, deceit, or misrepresentation.”  Query the breadth of a rule of ethics prohibiting “dishonesty.”  By definition, “dishonesty” simply means behaving in an untrustworthy way.  The term “dishonesty” thus encompasses behavior that is less than actual fraud, deceit, or misrepresentation.  While some cases of “dishonesty” are more clear cut than others, there is certainly no “one size fits all” to this term that is, by its nature, is subjective.  In practice, a charge of “dishonesty” can be a nice fall-back position for Bar Counsel to allege when they are unable to prove a practitioner engaged in conduct involving fraud, deceit, or misrepresentation.

37 C.F.R. Section 11.804(d) – Prohibiting a practitioner from engaging in conduct that is “prejudicial to the administration of justice.”  This rule almost has no bounds and is broadly applied, both in theory and in practice, to just about any conduct that involves a tribunal.  And by definition (37 C.F.R. Section 11.1), the term “tribunal” includes (but is certainly not limited to) the USPTO.

Finally, there is the broadest of all “catch all” ethics rules: 37 C.F.R. Section 11.804(i).  This rule prohibits a practitioner from engaging in “other conduct that adversely reflects on the practitioner’s fitness to practice before the Office.”  There is not much more that can be said about the breadth of the “fitness to practice rule.”  One can always say that a person’s conduct “adversely reflects” on the person’s “fitness to practice.”  Because this rule is so broad, it is alleged by the OED as a matter of course in just about every USPTO ethics investigation and disciplinary complaint.


Just because a court finds that a case is exceptional, that does not ipso facto mean that the OED will find that one or more of the USPTO’s ethics rules were violated.  As with every case, a fact specific inquiry is required.  Moreover, ethics rules apply to the conduct of individual practitioners.  So whereas a court may find that a particular party conducted itself in a particular way, for ethics and professional discipline purposes, the issue is going to be what involvement did the practitioner have in that conduct?  Were they actually actively litigating the case?  Did they sign off on the pleadings?  Or was his or her name added to the case as “window dressing” but he or she was not substantively involved?  These are issues that are often the subject of an OED ethics investigation.

Also, one should take note of the differing standards of proof between a district court exceptional case determination and a USPTO ethics violation.  Under Octane Fitness, the burden of proof is the preponderance of evidence standard.  To be found liable for violating a USPTO ethics rule, on the other hand, requires proof by clear and convincing evidence.

Practitioners should be mindful that a “bad” decision involving an exceptional case finding may spawn a USPTO ethics inquiry.  Such an inquiry does not necessarily mean that the OED Director will find that professional discipline necessarily is warranted.  Depending upon the facts and circumstances, including how the practitioner conducts himself or herself in the USPTO ethics investigation, a practitioner who was on the losing side of an exceptional case determination may be able to avoid professional discipline.



5 thoughts on “Sue-And-Settle NPE Patent Litigation Tactics May Violate USPTO Ethics Rules”

  1. My dictionary defines dishonest as not honest lying cheating. This seems significantly more specific than untrustworthy (which isn’t given a specific dictionary definition in my Webster’s dictionary) has there been a USPTO ethics case that defines it this way?

    This is not to say I find the behavior here ethical – I do not. What tips it for me is the withdrawal and then suing someone else using the same patent. I just think word definitions are incredibly important and defining things particularly is critical. Call it the Scalia federalist in me.

    1. Michael E. McCabe, Jr.

      Daniel, Here is one for the federalist in you (me too): Just simply call it “conduct prejudicial to the administration of justice.” That is an ethics rule violation.
      Essentially, it is applied by Bar Counsel whenever someone does anything that Bar Counsel does not like and it somehow involves a tribunal (which, according to the USPTO Rules, includes the USPTO within the definition of a “tribunal”). You will find bar cases that apply terms like “dishonest” or “prejudicial to the administration of justice” very loosely–these are called “catch-all” rules for a reason: They pretty much can apply to any kind of conduct.

      1. Daniel Walker Cole

        Oh I agree they could catch it under that rule if they want to yes. Example perhaps of how catch all rules are way to open ended and way to open to abuse. Rules like these make ethics largely an exercise in opinion which is dangerous.

  2. Ah, authority. When the OED was drafting its rules it repeatedly said it would never go after conduct not before the Office…. Repeatedly… and what power did Congress grant it? Ah, and the problems that arise when 285 violations — which are based on standards far lower than Rule 11 — can be used to discipline lawyers. Bye bye zeal, hello conflicts!

    1. Michael E. McCabe, Jr.

      Yup. And as you well know as much as probably anyone in the world, many OED disciplinary matters have nothing at all to do with “practice before the Office.” So civil cases, DQ motions, Section 285 rulings, Rule 11 rulings, Rule 37 rulings, and all manner of sanctions have been fodder at least for investigations.

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