Another recently unsealed opinion from August 15, 2018 revealed a decision of the Court of Appeals for the Federal Circuit involving inequitable conduct and fee award. In the opinion dated July 28, 2018, in In re Rembrandt Techs., LP Patent Litigation,[1] the Fed Circuit held that while the district court did not abuse its discretion, it found that the district court’s ruling for attorney’s fees for Rembrandt’s litigation misconduct were not causally analyzed. This case represents a growing line of inequitable conduct case law which has begun to connect the dots from the Therasense case to current cases.
The facts are as follows.
Rembrandt Technologies, LLC and Rembrandt Technologies LP (collectively “Rembrandt”) filed numerous patent infringement suits against several cable network companies and cable equipment manufacturers in the mid-2000s. All of the cases were consolidated by the federal court in the District of Delaware, and after the full litigation had run its course, the district court entered judgment against Rembrandt. The defendants then moved to request attorneys fees under 35 U.S.C. §285, which both the district court determined that this case was “exceptional” for purposes §285, and, as such, granted the motion in the amount of $51 million. Rembrandt appealed both the exceptional determination and the attorney fees award.
The case that set the current inequitable conduct standard, Therasense v. Becton, Dickinson & Co.,[2] held that an inequitable conduct defense can be asserted in cases where the 1) patent owners acts’ are materially related to the patent (“materiality”), and 2) the patent owner engaged in deceptive intent (“intent”).[3]
35 U.S.C. §285 states: “the court in exceptional cases may award reasonable attorney fees to the prevailing party.” The underlying litigation involved nine Rembrandt patents: U.S. Patent Nos. 4,937,819 (’819), 5,008,903 (‘903), 5,710,761 (‘761), 5,719,858 (‘858), 5,778,234 (‘234), 6,950,444 (‘444), and 5,243,627 (‘627). All nine were previously owned by Paradyne Networks, Inc., The alleged misconduct occurred during the post-grant period of the ‘819 and ‘858 patents. Being not profitable to maintain, Paradyne allowed the ‘819 and ‘858 patents to lapse by not paying the maintenance fees (MPEP 2506; 37 C.F.R. §1.362(e)). However, third-party acquisition interest in these patents forced Paradyne to reconsider its decision to allow these patents to lapse, and it filed a petition to revive for unintentional delay in payment of maintenance fee (MPEP 2590). Paradyne and Rembrandt later entered into a patent sale agreement for these, and other, patents in the Paradyne portfolio. Rembrandt requested all documents related to these patents from Paradyne to be preserved. However, Paradyne was subsequently acquired by Zhone Technologies, which then destroyed Paradyne’s stored documents, including those relevant to these above-mentioned patents in a cost-savings strategy. During the litigation, Rembrandt retained consultants who obtained payments in addition to an annual flat fee contingent upon a successful litigation result.
The substantive underlying litigation was resolved when noninfringement judgments were entered, the defendants argued the case was “exceptional” under §285 based primarily on 1) Rembrandt’s improper revival of two patents; 2) Rembrandt’s allowance of Zhone’s spoliation of evidence; and 3) improper contingency fee based on certain litigation outcome.
The Fed Circuit panel, composed of Judges O’Malley, Mayer, and Reyna, with Judge O’Malley writing for an unanimous court, found the district court’s finding that this was an exceptional case to be without error. First, as to the improper witness fee contingent on a certain litigation result, Judge O’Malley took issue to Rembrandt’s use of the Fed Circuit’s own Ethicon case to support its unethical position. In Ethicon, Inc. v. U.S. Surgical Corp.,[4] a license agreement between an omitted co-inventor of patents at-issue and the defendant, U.S. Surgical, requiring the inventor to testify on its behalf in exchange for an initial fee and an additional fee in the event U.S. Surgical prevailed at suit. The Fed Circuit upheld the testimony of the inventor.[5] Judge O’Malley wrote:
The agreement in Ethicon involved the assignment of patent rights. In allowing the assignor to testify, we noted that “[a] patent license agreement that binds the inventor to participate in subsequent litigation is very common,” because it “simply assures the licensee that it will be able to defend the property in which it has purchased an interest.” . . . Rembrandt [here has] identified no comparable agreements to the one here, [] where the contingent interest was given to likely witnesses only for their help with a licensing or litigation campaign.[6]
She noted Rembrandt’s agreement with the consultants was only to serve its defensive interests in litigation rather than support any substantive patent issue that the Ethicon inventor was needed for in that case.
Second, as to the spoliation issue, Judge O’Malley also did not find any error. She noted Rembrandt never disputed that Zhone destroyed “thousands of boxes of documents,” at a time when litigation was reasonably foreseeable and it should have known to preserve relevant patent documents for evidentiary purposes. While Zhone did not act with fraudulent intent, she pointed out that Rembrandt’s bad faith is at-issue, and not Zhone’s. Rembrandt officials, when on tour of Paradyne’s former offices (now Zhone’s), and Zhone’s active downsizing of the former Paradyne office and workforce, which included the shredding of all Paradyne documents, should have known to request a stop to the document destruction at that point, especially since litigation had already commenced on the patents at-issue.
Third, as to the inequitable conduct issue, Judge O’Malley pointed to the USPTO’s definition of ”unintentional delay,” which occurs:
Where the applicant[/patent owner] deliberately permits an application[/patent] to become abandoned, the abandonment is considered to be a deliberately chosen course of action, and the resulting delay cannot be considered as “unintentional” within the meaning of 37 CFR 1.137(b).[7]
She further noted:
[A]n applicant’s[/patent owner’s] decision to abandon an application[/patent] for lack of “sufficient commercial value to justify continued prosecution”[/maintenance] is a “deliberately chosen course of action” . . . . It is clear, therefore, that the PTO would not have revived the patents if it had known that Paradyne consciously allowed them to expire.[8]
No deceptive intent may be inferred where there are multiple reasonable inferences that can be drawn from the facts of the case, as per Therasense, and Judge O’Malley noted multiple conflicting factual issues with Paradyne’s decision to, first, not pay the maintenance fees, which could be entirely explained innocently as ignorance of patent revival rules or specially designed to deceptively intend to use the rules to change course when a commercial opportunity presented itself involving the patents at-issue. This ambiguity, especially read in light of the “unintentional” definition established by the USPTO, led her to determine that the finding of inequitable conduct was not clearly erroneous. As such, as to finding the case “exceptional” under §285, Judge O’Malley did not find the district court’s decision erroneous, and therefore, affirmed the district court’s ruling on case “exceptional.”
As to the awarding of attorney fees, Judge O’Malley, however, took issue to the district court’s lack of establishing a causal link between the misconduct and the award amount:
The district court, by and large, did not even attempt to assess which issues the claimed misconduct affected. It specifically addressed the fees Appellees incurred relating to the ‘627 patent, [b]ut the district court did not establish a causal connection between the misconduct and those fees, and it did not offer any other reason for its fee award . . . Nowhere did the district court address the requisite “causal connection” it was required to find between the misconduct and the fees it awarded.[9]
An award of attorney fees, like under §285, are compensatory meant to compensate for damages resulting from the misconduct, and not merely punitive in nature. As such, the Fed Circuit vacated the fee award, and remanded for further proceedings to perform a proper analysis on the causal connection between Rembrandt’s misconduct and the award.
[1] ___F.3d___ (Fed. Cir. 2018) (slip op.), affirming Case No. 1:07-md-01848-GMS (D. Del. Aug. 20, 2015) (ECF No. 951), vacating and remanding Case No. 1:07-md-01848-GMS (D. Del. Mar. 2, 2017) (ECF Nos. 1013 and 1044).
[2] 649 F.3d 1276 (Fed. Cir. 2011) (en banc).
[3] Id. at 1290-91.
[4] See 135 F.3d 1456 (Fed. Cir. 1998).
[5] Id. at 1465.
[6] See Rembrandt Techs., supra (slip op. at 19-20).
[7] Id. (slip op. at 28).
[8] Id. (slip op. at 28-29). See also MPEP 711.03(c)(II)(C).
[9] Id. (slip op. at 41-42).