Federal Circuit Reverses Award Of Attorneys’ Fees In NPE Patent Case
On September 28, 2018, the Court of Appeals for the Federal Circuit (CAFC) issued an opinion reversing a decision by the United States District Court for the Southern District of New York in which the District Court had sanctioned plaintiff’s counsel with an award of attorneys’ fees pursuant to 28 U.S.C. § 1927. Gust, Inc. v. AlphaCap Ventures, LLC, —F.3d— (Fed. Cir. September 28, 2018). Applying an “exacting” abuse-of-discretion standard, the CAFC ruled that the District Court erred in finding plaintiff’s lawyers to have litigated in bad faith, and therefore reversed the award of attorneys’ fees.
Plaintiff AlphaCap is a “non-capitalized non-practicing entity” (NPE) based in California. It retained counsel on a contingency basis and in January 2015 filed a patent-infringement suit against Gust, Inc., a crowdfunding business, in the United States District Court for the Eastern District of Texas. Gust is based in New York and incorporated in Delaware, with little or no connection to the Eastern District of Texas. The suit against Gust was one of ten that AlphaCap filed against crowdfunding companies in Texas, and Gust quickly settled with each of the other defendants for less than $50,000 each.
Defendant Gust did not settle, and instead filed a motion to transfer the case to New York. Days later, plaintiff’s counsel told Gust that “the case is not worth litigating” and offered to dismiss the case with prejudice. Gust refused the proffered dismissal, insisting that plaintiff AlphaCap must assign all of its patents to Gust as part of any settlement. Several times thereafter plaintiff offered a walkaway settlement, and each time defendant refused, seeking to recover fees and to obtain the patents-in-suit in settlement. In March 2016, the Texas court transferred the case to the United States District Court for the District of New York.
In May 2016, sixteen months after filing the lawsuit, plaintiff gave defendant a covenant not to sue on the patents at issue. And in July, the New York court dismissed all the parties’ claims and counterclaims.
Defendant Gust filed a motion to recover attorneys’ fees from plaintiff under the exceptional-patent-case provision of 35 U.S.C. § 285, and from plaintiff’s counsel under the vexatious-litigation provision of 28 U.S.C. § 1927. The New York court granted the motion on both grounds. The court found the case exceptional because it was filed “to extract a nuisance settlement” and because an award of fees was necessary to deter the plaintiff from further “predatory” litigation. The court also found the litigation to have been unreasonable and vexatious because it was undertaken and continued in bad faith; in particular, the court pointed to what it saw as the clearly unpatentable subject matter of the claims at issue pursuant to 35 U.S.C. § 101, as well as counsel’s statement that the case was not worth litigating and plaintiff’s opposition to transferring the case from Texas to New York.
The “non-capitalized” plaintiff did not appeal the “exceptional case” fee award (as the CAFC observed, such plaintiffs are “not subject to the deterrent effect of § 285”). However, its counsel did appeal the § 1927 award against counsel. The CAFC reversed the § 1927 award.
The CAFC reasoned that sanctions under § 1927 must be reviewed under a standard “more exacting” than the basic abuse-of-discretion standard. The CAFC majority went on to determine that during the underlying litigation the state of § 101 jurisprudence was sufficiently “unsettled” that plaintiff’s argument for patentability was at least “colorable.” (One CAFC judge dissented from this finding, pointing to the numerous contemporaneous opinions finding similar computer-implemented business-method claims to be unpatentable, and noting “there is no example of our court endorsing the patent-eligibility of similar claims.”) The CAFC majority further found that while Texas may have been an inconvenient venue, it was a proper venue, and thus it was permissible for plaintiff to file and maintain the case in Texas. And despite the contingency-fee-based attorney-client relationship, it did not hold plaintiff’s counsel responsible for plaintiff’s decision to bring suit in the first place, its decision to accept low-value settlements, or its failure to grant a covenant not to sue earlier in the litigation, reasoning that such decisions are up to the client, not counsel. “Such client decision-making is a poor evidentiary basis on which to infer attorney bad faith in multiplying proceedings.”
NPE plaintiffs and their counsel should not, however, take too much comfort in the CAFC’s decision. The District Court’s decision to sanction plaintiff with an award of attorneys’ fees was not the subject of the appeal. And it may be that the state of § 101 jurisprudence is now sufficiently settled with respect to computer-implemented inventions that the CAFC would reach a different decision on § 1927 in a case filed more recently.