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November 1, 2007

Back from the Dead

Microtome was granted 5,734,823, claiming encrypted storage. The patent was then acquired by IPDN, who went bankrupt. Diego bought the patent, "as is," at the bankruptcy estate sale. The appeals court was riveted: "The facts of this case read like a novel in that they involve the resurrection of an inventor thought to be deceased." Ultimately a tale of 35 U.S.C. § 285, granting attorneys fees for exceptional cases.

Diego v. Audible (CAFC 2007-1133)

Chief Judge Michel continues the story -

Michael Saigh, Douglas Brockhouse, Edward Chang, and Hsiao-Shih Chang [were] listed as the inventors. Hsiao-Shih Chang is Edward Chang’s brother and goes by the informal name Oliver Chang.

Shortly prior to the bankruptcy estate sale, Digeo obtained the file history for the ’823 patent, which contains riveting facts. A Power of Attorney (“POA”) was filed with the United States Patent and Trademark Office (“USPTO”) on July 25, 1996,1 allegedly signed by Oliver Chang as the executor of the estate of his deceased brother, Edward Chang. Also filed on the same day was a separate POA by Oliver Chang, Saigh, and Brockhouse. The file history contains no document demonstrating that Edward Chang was deceased.

[T]here are July 1996 assignments to Microtome by Oliver Chang, Saigh, and Brockhouse, and (2) Oliver Chang on behalf of Edward Chang. All assignments were notarized in July 1996, predating the issuance of the ’823 patent, but were not filed with the USPTO until a few weeks before the bankruptcy estate sale.

Diego sued Audible two and half years after purchasing the patent.

In its complaint, Digeo alleges that it is “the owner of all right, title, and interest in the ’823 patent, including the right to sue for infringement of that patent.”

But Oliver Chang wasn't executor of an estate that didn't exist, because Edward Chang was alive.

About a year into the litigation, Audible deposed the Changs on May 19, 2006 and discovered that Edward Chang was alive and residing in Los Angeles, CA and that Oliver Chang did not sign the documents purported to be the POAs and assignments. Audible also secured a license from Edward Chang to the ’823 patent retroactive to the date of issuance. As a result, Audible moved for summary judgment (“MSJ”) and alternatively for dismissal on May 25, 2006, on the grounds that Digeo lacked standing because it did not possess complete ownership of the ’823 patent and that Audible had a license under the ’823 patent. In the MSJ, Audible also moved for attorney fees under § 285.

The district court pitched the case.

The district court concluded that because the assignments were forgeries, they did not convey legal title to Digeo... The district court also denied Audible’s § 285 motion because there was no evidence that Digeo knew or should have known about the forged documents.

On applying § 285, which allows granting attorney's fees for exceptional cases -

We apply Federal Circuit caselaw to the § 285 analysis, as it is unique to patent law. Pharmacia & Upjohn Co. v. Mylan Pharms., Inc., 182 F.3d 1356, 1359 (Fed. Cir. 1999). The determination of whether a case is exceptional and, thus, eligible for and warranting an award of attorney fees under § 285 is a two-step process in which the district court must (1) determine whether there is clear and convincing evidence that a case is exceptional, a factual determination reviewed for clear error, and (2) if so, then determine in its discretion whether an award of attorney fees is justified, a determination that we review for an abuse of discretion. Cybor Corp. v. FAS Techs., 138 F.3d 1448, 1460 (Fed. Cir. 1998) (en banc); see also 35 U.S.C. § 285 (“The court in exceptional cases may award reasonable attorney fees to the prevailing party.”). Because the district court denied the § 285 motion solely on the basis that it found that the case was not exceptional, we merely analyze whether that fact-finding was clearly erroneous. A finding is clearly erroneous when “although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948).

If there is clear and convincing evidence that a plaintiff has brought a baseless or frivolous suit against an accused infringer, that is a sufficient basis to require a district court to deem the case exceptional under § 285. See Forest Labs., Inc. v. Abbott Labs., 339 F.3d 1324, 1329-30 (Fed. Cir. 2003) (“Although a lawsuit pursued in bad faith is a sufficient basis for imposing attorney fees under § 285, such bad faith requires not misleading pre-litigation conduct, but vexatious, unjustified, or frivolous litigation.”).

It's easy to say "due diligence," as Dennis Crouch did (with all due respect, Dennis), but that's hindsight talking. There didn't seem that much amiss; certainly not a resurrected inventor.

After the district court considered the circumstances of this case and all the evidence, it observed that (1) the lack of an assignment in the file history is immaterial because there is no evidence suggesting one should expect to find an assignment in the file history; (2) just before the ’823 patent issued, Microtome indicated that it was the sole assignee; (3) the later-recorded assignments, bearing dates prior to the issuance of the ’823 patent, suggest sloppy paperwork but not a defective title; and (4) the ’823 patent, recorded assignments, and file history are consistent with a finding that Digeo purchased a patent that appeared to have been assigned to Microtome. In response to Audible’s argument that the defect in title would have been discovered through ordinary diligence, the court found that no one else (including the prior litigants that had settled their suit with Digeo) discovered the defect prior to Audible, that it took Audible at least a year of litigation to discover the problem, and that Audible offered no evidence as to what steps it took to discover the defect. Therefore, the district court concluded that there was no clear and convincing evidence that Digeo knew or should have known of the defect in its title to the ’823 patent. The district court’s findings and inferences therefrom are not clearly erroneous. Therefore, its ultimate finding that the case is not exceptional cannot be clearly erroneous, either.

The legal issue is one of a case being acceptable. Rule 11 covers sanctions for failing to perform due diligence, and can provide an argument for applying § 285, but...

Motions under Rule 11 and § 285 are different. Cf. Fed. R. Civ. P. 11 (providing for sanctions for failure to conduct a reasonable inquiry into the legal and factual bases of claims) and 35 U.S.C. § 285 (granting district courts discretion to award reasonable attorney fees to the prevailing party in exceptional cases). We apply the law of the regional circuit... to Rule 11 cases,... whereas we apply the law of our circuit to § 285 cases.

The burden of proof shifts for Rule 11 sanction to non-movant once a movant has filed a non-frivolous allegation, but stays with the movant throughout consideration of a § 285 motion.

Once a litigant moves based upon non-frivolous allegations for a Rule 11 sanction, the burden of proof shifts to the non-movant to show it made a reasonable pre-suit inquiry into its claim. View Eng’g, 208 F.3d at 986 (“In bringing a claim of infringement, the patent holder, if challenged, must be prepared to demonstrate to both the court and the alleged infringer exactly why it believed before filing the claim that it had a reasonable chance of proving infringement.”). However, the burden of proof for § 285 motions remains with the movant to show by clear and convincing evidence that the case is exceptional. See Carroll Touch, Inc. v. Electro Mech. Sys., Inc., 15 F.3d 1573, 1584 (Fed. Cir. 1993) (“As the party moving for attorney fees, the burden was on [movant] to prove the exceptional nature of the case by clear and convincing evidence.”); Reactive Metals & Alloys Corp. v. ESM, Inc., 769 F.2d 1578, 1582 (Fed. Cir. 1985) (“At the trial level, a prevailing party who seeks an award of attorney fees has the burden of proof of facts which establish the exceptional character of the case.”). Although a Rule 11 violation can serve as the basis for finding a case exceptional, there was no Rule 11 motion or finding by the district court below upon which to base a finding of exceptionality. See Brooks Furniture Mfg. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005) (“A case may be deemed exceptional when there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.” (citations omitted) (emphasis added)). Thus, had Audible brought a successful Rule 11 motion against Digeo, the burden would have shifted to Digeo to show it did conduct a reasonable pre-suit investigation. That Rule 11 conduct, if so found by the district court, could have served as the basis for a separate, § 285 motion in which Audible would have to show the exceptionality of the case by clear and convincing evidence. However, as noted above, there was no such finding in this case.

That leaves the burden on Audible; so, the district had applied the right legal standard for its denial of the § 285 motion.

Audible argued, without legal support, that there was "a heightened standard of pre-suit investigation when a patent holder purchases a patent “as is.”" Not so.

[M]erely negligent conduct does not suffice to establish that a case is exceptional. See Mach. Corp. of Am. v. Gullfiber AB, 774 F.2d 467, 473 (Fed. Cir. 1985) (stating that in order to show case is exceptional, movant must prove actual wrongful intent or gross negligence, i.e., conduct short of fraud but in excess of simple negligence); see also Aptix Corp. v. Quickturn Design Sys., 269 F.3d 1369, 1374-75 (Fed. Cir. 2001) (holding that an inventor’s fraud in the form of falsified lab notebooks and litigation misconduct made the case exceptional under § 285); Eltech Sys. Corp. v. PPG Indus., Inc., 903 F.2d 805, 810 (Fed. Cir. 1990). The district found that Audible adduced no evidence suggesting Digeo’s negligence, much less a higher degree of culpability, in not learning of the title defect. We see no clear error in that result.

This is a unique case involving an unusual set of facts—a not-so-dead inventor, forged documents, no evidence of culpability, and a late discovery request. Although the facts of this case are unusual, the case is not exceptional under § 285.

So, Diego didn't have to pay attorneys' fees, but ended up with an unenforceable patent owing to the faulty title.

Posted by Patent Hawk at November 1, 2007 10:09 PM | Case Law

Comments

Hawkie,
What about the cool picture you used when the continuation rules were "undead."
Stick up the cool picture in this "halloween season."
Love your blog

Posted by: anonAnonAnon at November 1, 2007 11:05 PM