Are All Troll Cases Exceptional?

In Iris Connex, LLC, v. Dell, Inc., [2:15-cv-1915-JRG] (January 25, 2016), district judge Gilstrap, after granting summary judgment to Dell, awarded attorneys fees, noting Dell’s arguments that Iris Connex’s claim construction position was unsupportable, that its infringement position was not plausible, that its litigation was primarily settlement driven; and Iris Connex was an intentionally empty shell company and, as a consequence, had no capacity to pay such fees even if the case were ultimately declared to be exceptional.

Judge Gilstrap took the extraordinary step of ordering further discovery into the extended identity of Iris Connex, because the court was concerned that the structure would effectively avoid any deterrence from an award of attorneys fees.  In Judge Gilstrap’s words “[a]s the post-judgment discovery progressed, it became obvious that Iris Connex was not simply a non-practicing entity seeking to vindicate its patent rights—albeit with an
exceptionally bad infringement case.”  Judge Gilstrap found that Iris Connex is the first level of two shell corporations which were intended to shield the real actor, Mr. Brian Yates, from personal liability. Judge Gilstrap found that Mr. Yates and those in active concert with him exploited the corporate form to operate largely in secret and to insulate the true party in interest from the risk associated with dubious infringement suits—that risk being fee shifting under Section 285.

Judge Gilstrap made 28 specific findings, including:

  • Iris Connex has no assets except for the ’950 patent and it holds no working capital.
  • Iris Connex has no employees.
  • Iris Connex was formed for the sole purpose of enforcing its lone asset.
  • Iris Connex paid no cash value for the ’950 patent.
  • Iris Connex pays no rent, (and shares its office with 15 to 20 other entities owned directly or indirectly by Brian Yates,
  • There is no sign for Suite 600-A displayed on any door in the building
    identifying Iris Connex as an occupant.

After a detailed analysis of the law, Judge Gilstrap identified 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.  Judge Gilstrap rejected a narrow view of his authority to award fees under Section 285.

Judge Gilstrap noted said that the case “crossed the Rubicon of exceptionality” when the Court concluded that Iris Connex’s case was so weak from the outset that it lacked any real merit. Judge Gilstrap has “its fair share of claim construction arguments” and found that Iris Connex’s “clearly stand out.”

Moreover Judge Gilstrap’s finding of exceptionality was not based solely on the weak merits of the case, or litigation conduct.  Judge Gilstrap found two additional factors supported the finding:  First, that Mr. Yates made an intentional decision to create and undercapitalize Iris Connex as an empty shell, and second, the admitted sloppiness in prosecuting this case, brought about predominantly by Mr. Yates.  Judge Gilstrap found and held Iris Connex and Mr. Yates are jointly and severally liable for $355,000 of fees pursuant to 35 U.S.C. § 285.

Not finished dispensing Eastern District of Texas justice, Judge Gilstrap also sanctioned one of the more culpable counsel $25,000, and Mr. Yates an additional $152,000.


When it’s Over, it’s Over

In Walker v. Health International Corp., [2015-1676] (January 6, 2017), the Federal Circuit affirmed the district court’s award of sanctions for vexatious actions in continuing to litigate after the parties settled all claims, and further found the appeal to be frivolous, both as filed and as argued, and granted further sanctions.

The district court dismissed all claims and found “that Plaintiff’s actions have unnecessarily multiplied the proceedings at a time when the underlying claims have admittedly been resolved.  The district court entered final judgment awarding HSN $20,511.50 in attorneys’ fees because Walker’s “litigation conduct after entering into the Agreement was vexatious and had unnecessarily multiplied the proceedings.”

Applying the Tenth Circuit’s test for the award of attorneys fees, where an award will be reversed only in circumstances which do not show a reasonable ground for the conclusion that vexatiousness existed, the Federal Circuit affirmed the district court’s award, finding ample support in the record for the district court’s conclusion of vexatiousness.  The Federal Circuit said that district court correctly concluded that there remained no legitimate reason to continue litigation once the parties entered into a comprehensive settlement of all claims.

The Federal Circuit also examined appellant’s conduct on appeal, noting that it continued to press frivolous arguments and raise new arguments in its Reply amounting to baseless accusations against opposing counsel.  The Federal Circuit concluded that the positions taken by Walker on appeal in the briefs and at oral argument were frivolous.  Noting that it has “has long disdained” frivolous appeals, the Federal Circuit awarded an additional $51,801.88 in additional attorneys fees and double costs.

Let the Punishment Fit the Crime

In Drone Technologies, Inc. v. Parrot S.A., [2015-1892, 2015-1955] (September 29, 2016), the Federal Circuit vacated the final judgment and the awards of damages ($7.8 millon) and attorney fees ($1.7 million), finding that the district court abused its discretion in issuing the two discovery orders and in entering a default judgment against Parrot for its failure to comply with those orders.

Parrot first contested jurisdiction, arguing that Drone did not have standing to bring suit. Relying on the presumption that the named inventors  are the true and only inventors, the Federal Circuit saw no reason why Parrot should be allowed to reassert an invalidity challenge under the guise of a motion to dismiss for lack of standing.

Parrot’s main argument on appeal is that the district court twice abused its discretion: first, when it directed Parrot to turn over its on-board source code; and, second, when it sanctioned Parrot by entering a default judgment against it after it failed to produce the source code.  Parrot contended that it produced documents sufficient to show the operation of the accused products as required by LPR 3.1, while Drone argued, and the Court agreed, that Parrot had to produce its source code.   Parrot failed to produce the Source Code, the district court rejecting Parrots attempts to avoid having to disclose its source code.  The district concluded that “lesser sanctions” would have been inadequate, and entered a default judgment against Parrot as to liability and struck its
answer and counterclaims.  The Federal Circuit denied Parrot’s petitions for mandamus, and the case went to trial on the issue of damages.

The Federal Circuit found that the district court twice abused its discretion: first, when it issued the July 1 and July 25 Orders; and second, when it imposed a default sanction on Parrot for not complying with those orders. Regarding the discovery orders, the Federal Circuit said found that the district court failed to follow its local patent rules (as well as the Federal Rules) and also failed to provide any explanation for its deviation from those rules. The Federal Circuit noted that there was no finding that Parrot did not comply with LPR 3.1.  The  Federal Circuit also found no explanation why the source code had to be produced, instead of the inspection and copying mentioned in the rule. was not sufficient.  The Federal Circuit also found no explanation why the orders were not limited to the products “identified in the claims pled.”  Finally the Federal Circuit noted the absence of any showing of relevance or need for the source code.

The Federal Circuit observed district court should have compared the needs of the case with both the burden placed on Parrot to produce “all source code” and the significant
consequences that might result from unauthorized or inadvertent disclosure, noting that protective orders are not fool -proof.

Turning to the propriety of the sanctions, the Federal Circuit reviewed the Poulis factors applied by the Third Circuit:

(1) the extent of the party’s personal responsibility; (2) whether the party had a history of dilatoriness; (3) whether the conduct of the party or the attorney was willful or in bad faith; (4) the meritoriousness of claims or defenses; (5) the prejudice to the adversary caused by the party’s conduct; and (6) the effectiveness of sanctions other than dismissal or default.

Because the apparent prejudice to Drone is unsubstantiated, the Federal Circuit said that the fifth factor disfavors a severe sanction.Turning to the effectiveness of the sanctions, the Federal Circuit said that the district court’s analysis suggests it did not seriously consider alternative sanctions, observing:

Notwithstanding the “strong presumption” against a “drastic” sanction like default, the court rejected all alternatives without explanation.

The Federal Circuit found that Parrot’s offers of alternative production were not indicative of a party trying to hide a smoking gun. Accordingly, it found that the district court abused its discretion in concluding that default was the only available remedy.

The Federal Circuit did not find Parrot blameless, however, and noted that if Drone should bring a further motion for actions, the Court was free to consider whether lesser sanctions were warranted.