United States: Missed Connection: Seeking Causal Relationship Between Misconduct And Fee Award

Addressing an award of attorneys' fees under 35 USC § 285, the US Court of Appeals for the Federal Circuit upheld a district court finding that the case was exceptional, but found that the district court failed to articulate a causal relationship between misconduct and the fee award. In Re: Rembrandt Technologies LP Patent Litigation, Case No. 17-1784 (Fed. Cir. Aug. 15, 2018) (O'Malley, J). The Federal Circuit vacated the district court's fee award and remanded for the district court to conduct the appropriate analysis.

The appeal derived from a multitude of patent infringement actions that Rembrandt Technologies, LLC, and Rembrandt Technologies, L.P., filed in the mid-2000s against dozens of cable companies, cable equipment manufacturers and broadcast networks. Ultimately the district court found that the defendants did not infringe the patents-in-suit, and subsequently most of the defendants filed a motion requesting attorneys' fees under § 285.

The litigation involved nine patents—eight of which address cable modem technologies and one of which involves over-the-air signals. Six of the asserted patents were obtained by Rembrandt from Paradyne. Prior to the sale of these patents to Rembrandt, Paradyne had allowed two of the patents to lapse by failing to pay the maintenance fees. Once a commercial interest was expressed in these patents, Paradyne revived both of the patents, arguing that the delay in payment of the maintenance fees of these patents was unintentional.

After the sale of these patents to Rembrandt, three former Paradyne employees—Horstemeyer, Murphy and Bremer—formed an IP consulting company called Attic IP. Rembrandt hired Attic IP to assist with the "patent portfolio analysis and ongoing patent assertion programs." The Attic IP consultants eventually gained a financial stake in the outcome of Rembrandt's litigation.

Paradyne was then acquired by Zhone Technologies, which began to destroy Paradyne's documents, including documents relating to the asserted patents. While no direct evidence indicated that anyone at Rembrandt was aware of the destruction, Rembrandt's in-house counsel repeatedly visited Paradyne's offices to review and copy documents around the time of the sale to Zhone and did not send any formal document retention notices until several years later. Further, Rembrandt arranged for Bremer from Attic IP to review 30 boxes marked for destruction that contained sales documents relating to the asserted patents. Rembrandt subsequently entered into a patent sale agreement with Zhone, including sale of two of the asserted patents. Like the sale agreement with Paradyne, the agreement provided that Zhone would give Rembrandt access to documents relating to the assigned patents.

At trial, two former Paradyne employees, Horstemeyer and Murphy, testified as fact witnesses that they thought that Paradyne would be able to revive the abandoned patent applications if it wanted to, and that this was why the delay in payment of the maintenance fee was unintentional. Bremer also testified about his involvement in patenting and licensing, and the decision to abandon the patents.

The district court found that this case was "exceptional" for the purposes of awarding attorneys' fees under § 285, because Rembrandt (1) wrongfully gave fact witnesses payments contingent on the outcome of the litigation, (2) engaged in or failed to prevent widespread document spoliation, and (3) should have known that the revived patents were unenforceable. Rembrandt appealed.

The Federal Circuit found no error in the district court's factual findings, nor any error in the district court's determination that this case was exceptional based on these findings. The totality of the circumstances—the wrongful inducements, the spoliation and the assertion of fraudulently revived patents—supported the defendant's argument that the case was exceptional.

The Federal Circuit did take issue with how the fee award was determined, however. The Court explained that the district court failed to establish a causal connection between the claimed misconduct and the fees awarded, finding that the court had awarded $51 million in fees, but did not explain why an award of almost all fees requested by the defendants was warranted. The district court said only that the inducements to witnesses

g[ave] rise to a considerable risk of tainted testimony, that the destruction of documents "was prejudicial" to [the defendants] because it prevented them from conducting "full discovery of relevant documents," and that "Rembrandt should have known that the 'revived patents . . . were unenforceable.'" 

The Federal Circuit also noted that this case involved nine patents and dozens of defendants, and thus the claimed misconduct affected only some patents asserted against some defendants. Even if Rembrandt's misconduct, taken as a whole, rendered the case exceptional, the district court was required to establish at least some "causal connection" between the misconduct and the fee award. The Court therefore vacated the district court's award and remanded the case with instructions for the district court to conduct the appropriate analysis.

Missed Connection: Seeking Causal Relationship Between Misconduct And Fee Award

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