Recently the United States Court of Appeals for the Federal Circuit upheld Nintendo’s victory in a patent-infringement case brought against Nintendo by IA Labs CA, LLC. See IA Labs CA v. Nintendo Co., LTD. The Federal Circuit agreed with the the United States Federal District Court for the District of Maryland, issuing what is called a Rule 36 Judgment. A Rule 36 Judgement is one a judgment of affirmance without an opinion. See Rule 36 of the Federal Rules of Appellate Procedure, Federal Circuit Rules.
We do not have any recitation of facts or reasoning explaining the Federal Circuit panel decision because the Per Curiam decision of the panel, which was made up of Circuit Judges Newman, O’Malley and Wallach, merely read: “AFFIRMED. See Fed. Cir. R. 36.” Thus, we must look to the underlying district court proceeding.
At trial it was determined by United States District Judge Peter J. Messitte that Nintendo did not infringe IA Labs’ patent (U.S. Patent No. 7,121,982). Further, Judge Messitte ordered IA Labs to pay Nintendo more than $236,000 in attorneys’ fees because it was an exceptional case due to the fact that the claims were objectively baseless. Also of interest is the fact that IA Labs sought to not post a bond to appeal, which was denied at least in part because the litigation was being funded by a third-party financier.
Attorneys’ Fees for Bad Faith
At trial Nintendo argued that attorneys’ fees were warranted because IA Labs brought the litigation in bad faith and that the litigation was objectively baseless. Nintendo based this argument on the fact that the invention was beyond any dispute publicly demonstrated and on sale for more than one year before the patent application was filed, which rendered the subject matter embodied in that invention statutorily bared from ever being patented pursuant to pre-AIA 35 USC 102(b). IA Labs essentially argued that because patents are presumed valid the litigation could not be deemed objectively baseless. A rather poor argument given that they were found to know that the invention was barred from ever receiving a patent under 102(b).
In a Memorandum Opinion dated April 30, 2012, Judge Messitte wrote:
[T]his is an exceptional case; IA Labs brought an objectively baseless claim, which the Court finds was brought in bad faith. Interaction Laboratories, Inc. — the original ‘226 patent holder — developed a product known as the Kilowatt that embodied the invention of the ‘226 patent. It was sharply apparent that the Kilowatt had been publicly demonstrated at trade shows, disclosed in numerous publications, and offered for sale more than one year prior to the filing of the patent application. Thus, the ‘226 patent was, without question, statutorily invalid pursuant to the on-sale bar. Since IA Labs knew of these invalidating activities before it sued Ninetendo for infringement, the Court can only conclude that it sued on the ‘226 patent in bad faith…
… Further, IA Labs does not and cannot dispute that it was aware of the on-sale bar activities. Instead, it argues that certain features of the ‘226 patent were missing from the Kilowatt. This argument is disingenuous. IA Labs does not actually argue that the ‘226 patent is valid. In fact, IA Labs took the extraordinary step of disclaiming the patent, implicitly acknowledging its invalidity. For these reasons, the Court finds that IA Labs clearly knew that the patent was invalid when it commenced the litigation.
Why does it matter that this is an exceptional case? When a case is designated “exceptional” that allows the District Court to award attorneys’ fees to the prevailing party. The relevant statute is 35 U.S.C. 285, which succinctly states: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” Exceptional cases are historically rare, but are becoming more commonplace now as more and more Judges become clued into the fact that there are some bad actors misusing patents as part of a litigation abuse strategy that seeks quick, extremely low patent settlements for nuisance value when cases lack any and all merit.
Additionally, after Nintendo asserted counterclaims of invalidity and showed that the ‘226 patent was clearly invalid, it took IA Labs two months to notify Nintendo that it would abandon its claim under the ‘226 patent and then an additional four months from that point to actually abandon the claims to the ‘226 patent. Judge Messitte found this to be further evidence of bad faith.
IA Labs Required to Post Bond
Also perhaps of interest is the fact that IA Labs attempted to get out from the standard requirement that the party appealing must post a bond. In a Memorandum Opinion dated April 19, 2013, Judge Messitte explained the rationale for requiring a bond, saying:
The requirement of posting bond performs two functions: first, it protects the prevailing party against any loss sustained as a result of being forced to forgo execution on a judgment during the course of an ineffectual appeal; and second, it gives the losing party the option of avoiding the risk of satisfying the judgment only to find that restitution is impossible after reversal on appeal.
Rather than post a bond consistent with the requirements of Federal Rule of Civil Procedure 62, IA Labs argued that if it were required to post the full bond it would become insolvent, which is grounds for the district court to waive the bond requirement. Judge Messitte rejected this argument for two reasons: (1) No Fourth Circuit case has ever recognized undue financial burden as grounds for waiving the bond requirement; and (2) IA Labs’ patent litigation against Nintendo was being funded by a private equity fund.
In a breathtaking move, long after the patent was disclaimed by IA Labs the defendant offered the patent in lieu of posting bond, which was rejected by the Court. Judge Messitte wrote: “Although there are certainly extraordinary cases where courts have permitted posting some alternative security as bond, IA Labs’ patents are far too speculative in value to secure Nintendo’s interest as the prevailing party.”
Moral of the Story
There are certainly bad actors out there in the patent space that use abusive litigation tactics. No one seriously disputes that claim. Of course, typically when someone is sued they believe the case is bad and the defendant evil. Not all patent plaintiffs are pursuing frivolous claims, but this case is a good example of abusive litigation tactics. Once identified the District Court did the appropriate thing, which is to level the ultimate sanction against the losing party; namely to have them pay the attorneys fees of the prevailing party that was unjustly wronged.
To all those companies that think they have to settle when they believe they are being sued on an obviously bad patent that is not infringed, that simply isn’t true. As evidenced by this case, District Court Judges are now more than ever willing to notice that some bad actors are engaging in abusive litigation tactics. This is not the only such case where bad actors have been uncovered and appropriately punished. See Troll Turning Point and Court Slams Frivolous & Vexatious Litigation and Indicia of Extortion and Bad Day for Patent Troll.
You really cannot pretend any longer that you are unable to fight bad lawsuits, at least not with a straight face. The Federal Circuit is increasingly affirming District Courts that are taking appropriate measures to issue sanctions and award attorneys fees where there is litigation abuse. So if you are really being sued on an obviously bad patent that is obviously not infringed there are ways to turn the tables on the bad actors.
If you have questions or need representation feel free to contact me.