Much Ado About Nothing: Tribal Sovereign Immunity In Inter Partes Reviews

I predict that tribal sovereign immunity will have little, if any, effect on inter partes reviews (IPRs). But if I’m wrong (and I’ve *occasionally* been wrong before), tribal sovereign immunity will lead to the death of IPRs, absent Congressional action. This is because, if my analysis is wrong, and absent abrogation of tribal sovereign immunity by Congress, anyone who can scrape together enough money to buy a Tribe’s sovereign immunity can put an end to an IPR.

Last month, Allergen announced that it would pay a Native American Tribe (Saint Regis Mohawk Tribe) $13.75 million for the Tribe to become the owner of a portfolio of Allergen’s patents—with the patents then being exclusively licensed back to Allergen. (The Tribe is also eligible to receive $15 million in additional annual royalties from Allergen.)

Why would Allergen pay the Tribe to take ownership of Allergen’s patents? So that the patents would hopefully be immune (based on the Tribe’s sovereign immunity) from inter partes review proceedings. Allergen had asserted the patents-at-issue in a lawsuit filed in the Eastern District of Texas against defendants Mylan, Teva, and Akorn in 2015. The defendants then placed the patents into an IPR before the PTAB.

After the announcement of the Allergen-Tribe deal, the Tribe immediately filed a motion to dismiss currently pending IPR proceedings based on Tribal sovereign immunity. (The motion to dismiss is available here). The Tribe argues in the motion that Congress has not unequivocally waived its sovereign immunity, and neither has the Tribe. Further, the Tribe asserts that the IPR cannot proceed without the Tribe (as it claims to be an indispensable party).

It appears as if three prior PTAB decisions involving state universities served as the impetus for the deal and the Tribe’s subsequent motion to dismiss:

  • Covidien LP v. University of Florida Research Foundation Inc., IPR2016-01274 (PTAB, Jan. 25, 2017) (available here): The PTAB determined that the University of Florida, as an arm of the State of Florida, was entitled to a sovereign-immunity defense to the institution of an IPR of the challenged patent. Accordingly, the petition was dismissed. (The University of Florida had filed an action against the petitioner in Florida state court alleging breach of a license contract between the parties. Petitioner then filed three petitions requesting IPRs of the relevant patent.)
  • Neochord, Inc. v. University of Maryland, IPR2016-00208 (PTAB, May 23, 2017) (available here): The PTAB granted the University of Maryland’s motion to dismiss and terminated the IPR. The University had exclusively licensed its patent to Harpoon Medical. Although the petitioner argued that the IPR could proceed solely against Harpoon Medical, the PTAB disagreed: “the University remains a necessary and indispensable party to this proceeding, and we cannot proceed without the University” because the “University has retained rights under the license agreement, and transferred less than ‘substantially all’ rights to Harpoon Medical.”
  • Reactive Surfaces Ltd. v. Toyota Motor Corp., IPR2016-01914 (PTAB, July 13, 2017) (available here): The PTAB found that, due to sovereign immunity, the Regents of the University of Minnesota could not be compelled to join the IPR against their will, but nevertheless held that the proceeding could continue in their absence against co-patent owner Toyota.

With respect to the Allergen-Tribe deal, I believe that what will eventually result in the rejection of the Tribe’s sovereign-immunity defense will be the fact that it must become a party to the district-court litigation proceedings (as it is now the owner of the patents) and will affirmatively assert patent infringement against the defendants in that litigation. Accordingly, I believe that the PTAB and (subsequently) the courts will find that, by becoming a party to federal district court litigation and accusing defendants of infringement, the Tribe has waived its sovereign immunity in the corresponding IPRs.

For example, in Covidien, the panel intimated that a state that owned a patent could waive its sovereign-immunity defense by bringing a “related federal district court patent infringement (or declaratory judgment of validity) case.” In Neochord, the panel stated that “mere participation in judicial proceedings does not create a waiver unless the State has taken affirmative steps to invoke federal jurisdiction, such as filing suit as a plaintiff or seeking removal of a proceeding to federal court.” In support, the panel cited Lapides v. Bd. of Regents of Univ. Sys. Of Ga., 535 U.S. 613 (2002) and Vas-Cath, Inc. v. Curators of University of Missouri, 473 F.3d 1367 (Fed. Cir. 2007). In Lapides, the Supreme Court held that a state waived sovereign immunity by removing a lawsuit from state court to federal court. In Vas-Cath, the Federal Circuit determined that the University of Missouri waived its Eleventh Amendment defense to an interference appeal to federal district court by affirmatively seeking the interference in the first instance.

All of this said, I’m guessing Allergen has some pretty smart attorneys on its payroll, and it wouldn’t shell out over $13 million to purchase sovereign immunity if it didn’t think the Tribe’s sovereign-immunity defense had a very good chance of succeeding. But the deal strikes me as too cute by half—and these types of “schemes” rarely hold up in court. My prediction is that they certainly won’t hold up before the PTAB, where salaries of ALJs are on the line if purchasing tribal sovereign immunity can end an IPR.

If I’m wrong on waiver, I believe Congress will step in with a waiver-of-sovereign-immunity-fix. Or perhaps the Supreme Court, in Oil States, will strike down IPRs altogether. We shall see.

Of note, Judge Bryson of the Federal Circuit, sitting by designation in the Eastern District of Texas, has suggested that private parties cannot purchase tribal sovereign immunity. In Judge Bryson’s opinion concerning the Tribe’s intervention in Allergen’s district-court case (available here), he noted that he had previously directed the parties in the district-court litigation to “file briefs addressing the question whether the Tribe should be added as a co-plaintiff [with Allergen] or whether the assignment transaction should be disregarded as a sham.” In connection with the Court directing Allergen to disclose what consideration it received in exchange for the purported assignment of the patents-in-suit to the Tribe, Allergen “stat[ed] that the consideration for the assignment of the patents to the Tribe was the Tribe’s promise not to waive its sovereign immunity with respect to any IPR or other administrative action in the PTO related to the patents.” Judge Bryson wrote:

[I]t is clear that Allergan’s motivation for the assignment was to attempt to avoid the IPR proceedings that are currently pending in the PTO by invoking the Tribe’s sovereign immunity as a bar to those proceedings. The Court has serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed. The essence of the matter is this: Allergan purports to have sold the patents to the Tribe, but in reality it has paid the Tribe to allow Allergan to purchase—or perhaps more precisely, to rent—the Tribe’s sovereign immunity in order to defeat the pending IPR proceedings in the PTO. This is not a situation in which the patentee was entitled to sovereign immunity in the first instance. Rather, Allergan, which does not enjoy sovereign immunity, has invoked the benefits of the patent system and has obtained valuable patent protection for its product, Restasis.

But when faced with the possibility that the PTO would determine that those patents should not have been issued, Allergan has sought to prevent the PTO from reconsidering its original issuance decision. What Allergan seeks is the right to continue to enjoy the considerable benefits of the U.S. patent system without accepting the limits that Congress has placed on those benefits through the administrative mechanism for canceling invalid patents.

If that ploy succeeds, any patentee facing IPR proceedings would presumably be able to defeat those proceedings by employing the same artifice. In short, Allergan’s tactic, if successful, could spell the end of the PTO’s IPR program, which was a central component of the America Invents Act of 2011. In its brief, Allergan is conspicuously silent about the broader consequences of the course it has chosen, but it does not suggest that there is anything unusual about its situation that would make Allergan’s tactic “a restricted railroad ticket, good for this day and train only.” Smith v. Allwright, 321 U.S. 649, 669 (1944) (Roberts, J., dissenting).

Although sovereign immunity has been tempered over the years by statute and court decisions, it survives because there are sound reasons that sovereigns should be protected from at least some kinds of lawsuits. But sovereign immunity should not be treated as a monetizable commodity that can be purchased by private entities as part of a scheme to evade their legal responsibilities. It is not an inexhaustible asset that can be sold to any party that might find it convenient to purchase immunity from suit. Because that is in essence is what the agreement between Allergan and the Tribe does, the Court has serious reservations about whether the contract between Allergan and the Tribe should be recognized as valid, rather than being held void as being contrary to public policy. See generally Restatement of the Law (Second) Contracts §§ 178-179, 186.

Judge Bryson compared the Allergan-Tribe deal to sham transactions found in certain tax situations:

The defendants point out that the assignment-and-licensing transaction in this case is similar in some respects to other transactions that have been held ineffective, such as abusive tax shelter transactions, in which courts have looked behind the face of the transactions to determine whether the transactions have economic substance or are simply a method of gaming the tax system to generate benefits that were not intended to be available. See, e.g., Salem Fin., Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015); Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006).

Allergan argues that the transactions are legitimate because the Tribe has offered consideration in the form of its agreement not to waive its sovereign immunity before the PTO and in exchange has received much-needed revenue from Allergan. But such circumstances are frequently encountered in sham transactions, such as abusive tax shelters. The straw parties who perform the service of making the transaction appear to have economic substance, when it actually does not, are providing a service, for which they are ordinarily well compensated. Nonetheless, the transaction is disregarded if it is contrary to the policies underlying the relevant laws.

And Judge Bryson found that this was not the first time a tribe had essentially tried to sell its sovereign immunity:

Another roughly analogous example cited by the defendants is People ex rel. Owen v. Miami Nation Enterprises, 386 P.3d 357 (Cal. 2016). In that case, two tribal entities ran payday loan businesses. When the lending entities were sued by the State for improper lending practices, the entities asserted sovereign immunity. The California Supreme Court determined that, despite the formal agreements between the lending entities and the tribes, the tribes had no operational control over the businesses and received only a small percentage of the profits of the businesses. After examining all of the circumstances, the court concluded that the arrangement between the lenders and the Tribes was such that the businesses were not entitled to assert the tribes’ sovereign immunity.

According to Judge Bryson,

The concern of the courts in both of those examples is the same: whether the party invoking a particular legal protection has engaged in a bona fide transaction of the sort for which that legal protection was intended. In both the abusive tax shelter cases and the Owen case, the answer was no. In this case, as indicated, the Court has serious doubts that the transaction in which Allergan has sought to obtain immunity from inter partes review by the PTO in exchange for payments to the Tribe is the kind of transaction to which the Tribe’s sovereign immunity was meant to extend.

In the end, Judge Bryson added the Tribe as a co-plaintiff, “while leaving the question of the validity of the assignment to be decided in the IPR proceedings, where it is directly presented” to ensure that “any judgment in this case will not be subject to challenge based on the omission of a necessary party[.]” (Judge Bryson had invalidated the patents that were subject to the Allergen-Tribe deal.) “Importantly, the Court’s decision to permit joinder of the Tribe does not constitute a ruling on the validity of the assignment of the Restasis patents or the Tribe’s status as a ‘patentee’ for purposes of the Patent Act, 35 U.S.C. § 281. Instead, it is merely a discretionary determination by the trial court that the transferee’s presence would facilitate the conduct of the litigation.”

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Magistrate Judge Stickney Grants Motion For Costs, Finds $350/Hour Attorney-Fee Rate Reasonable

On September 11, 2017, Magistrate Judge Stickney entered an Order (available here) in The Sugar Art v. Confectionary Arts International. In the case, the plaintiff previously brought suit against the defendant in the Western District of Texas, and, in response to the defendant’s motion to dismiss, filed a notice of voluntary dismissal. On the same day that the plaintiff filed a notice of voluntary dismissal, the plaintiff filed an identical complaint in the Northern District of Texas. The defendant again filed a motion to dismiss (or, in the alternative, transfer to Connecticut). Defendant also file a motion for costs, requesting that the plaintiff pay for costs incurred in defending the Western District of Texas suit. Defendant’s fees and expenses from that suit totaled $8,142.37.

Under Rule 41(d),

[if] a plaintiff who previously dismissed an action in any court files an action based on or including the same claim against the same defendant, the court (1) may order the plaintiff to pay all or part of the costs of that previous action; and (2) may stay the proceeding until the plaintiff has complied.

Judge Stickney found that:

The award of costs under Rule 41(d) is at the Court’s discretion. Although a showing of bad faith is not required for the Court to impose costs, a showing of good faith may be a factor in the Court’s decision not to impose costs. Rule 41(d) serves as a deterrent to forum shopping and does not distinguish between voluntary and involuntary dismissals. Thus, this Court retains the authority to award attorneys’ fees as a condition to bringing the new action.

Plaintiff emphasizes that because it filed the Western District Suit based on a good faith belief that Defendant sold its products to distributors in the Western District, the Court should deny Defendant’s Motion for Costs. Plaintiff further contends that it dismissed the Western District Suit in order to ensure proper service. However, when refiling the case in the Northern District, Plaintiff committed the same defect of service as it did in the Western District Suit. Plaintiff does not dispute that the claims brought in the Northern District are the same as those in the Western District Suit. Therefore, the Court may award attorney’s fees incurred by Defendant in the Western District Suit if it deems such award appropriate.

Upon consideration of the parties’ briefs, the evidence produced at the hearing, and the applicable law, the Court finds that Plaintiff’s actions were not taken in bad faith, however, attorney’s fees are still appropriate given the circumstances. Defendant’s attorney asserts that he worked 22.75 hours on the Western District Suit at the rate of $350 an hour. The Court finds this rate is reasonable under the circumstances. Defendants also incurred $179.87 in expenses. Plaintiff did not contest the rate or amount of hours. Therefore, the Court awards Defendants $7,962.50 in attorney’s fees and $179.87 in costs relating to the Western District Suit.

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Judge Kinkeade Refuses To Disqualify Sterne Kessler from Representing Global Tel*Link

On September 18, 2017, Judge Kinkeade entered an Order (available here) in Securus v. Global Tel*Link. Securus had moved to disqualify Sterne Kessler from representing Global Tel. Before January 2017, Global Tel was represented by Kellogg Huber. Two Kellogg attorneys of record then left Kellogg and joined Sterne Kessler. Sterne Kessler and Kellogg presently represent Global Tel.

Securus moved to disqualify Sterne Kessler because it has some attorneys representing Global Tel against Securus in the instant litigation and other attorneys representing Global Tel in prosecuting Global Tel’s patents before the U.S. Patent & Trademark Office. Securus was concerned that GTL’s litigation counsel in this case has access to Securus’ confidential information, and that this confidential information might be transferred from such litigation attorneys to those working on USPTO proceedings and used to Securus’ detriment—e.g., used to draft claims on Securus’ products.

Global Tel, in response, asserted that Sterne Kessler need not be disqualified because neither Sterne Kessler nor the two Kellogg attorneys who left Kellogg to join Sterne Kessler had ever represented Securus, so none of them has any obligation under the ethical rules related to confidential information of a former client (since Securus was never a client in the first place). Global Tel further asserted that the case’s protective order and an ethical wall will be sufficient to prevent unauthorized access and use of Securus’ confidential information.

Judge Kinkeade found:

The Court agrees with GTL’s argument that [the two attorneys] do not technically have any duty to Securus as they would to a former client because they have never represented Securus. But the Court also recognizes the validity of Securus’ concerns regarding the safe-keeping and proper use of Securus’ confidential information obtained by GTL’s litigation counsel. [The two attorneys] have access to Securus’ confidential information through discovery in this matter; information GTL’s attorneys working on its patents and USPTO proceedings would not have. Certainly, the improper use of this information could harm Securus; however, access to an opposing party’s confidential information through litigation discovery is not an unusual situation, especially in patent litigation.

Protections for access and distribution of a party’s confidential information are controlled through the use of protective orders. . . . Th[e] [case’s] Agreed Protective Order places safeguarding restrictions on the dissemination and use of Securus’ confidential information disclosed in this litigation, including: (1) restrictions on who can access the information; (2) restriction requiring that the confidential material be used only in this litigation and in the other cases between these parties that are pending in this district; (3) restriction specifically preventing use of the information in any patent prosecution, reexamination, reissue, or review proceeding concerning any application or issue patent; (4) a patent prosecution bar preventing attorneys who have accessed confidential information from participating in GTL patent prosecution; and (5) a bar preventing attorneys who have accessed confidential information from participating in other patent review proceedings in which GTL would be able to amend claim language.

In addition to the protection already in place through the Agreed Protective Order, Sterne acknowledges that it has a duty to maintain the confidentiality of Securus’ information. Sterne also acknowledges a concern may be raised about its ability to comply with its duty because Sterne has some lawyers working on this GTL litigation and other Sterne lawyers working on other GTL matters. Sterne has already established an ethical wall to separate its litigation section from its prosecution and USPTO sections. The Court agrees with Sterne and GTL that this is a prudent practice that Sterne shall continue to use to protect Securus’ confidential information. The need to create and maintain this wall, however, does not come from an ethical rule that would disqualify Sterne. Sterne’s duty to do this comes from the Miscellaneous Order and Agreed Protective Order issued by this Court.

Accordingly, the Court denied the disqualification request but ordered Sterne Kessler to maintain its ethical wall to prevent unauthorized access to and use of Securus’ confidential information.

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Judge Kinkeade Grants Motion to Compel in Securus Technologies v. Global Tel*Link Corporation

On September 13, 2017, Judge Kinkeade granted, in part, a motion to compel filed in Securus v. Global Tel*Link (order available here). Plaintiff asserted, in its motion to compel, that defendant failed to comply with certain requests for production (e.g., requests seeking documents relating to how the defendant detects three-way calls, and relating to revenue earned by the defendant in connection with its accused products).

Per the Court,

Regarding GTL’s effort to locate and produce responsive documents, the Court agrees with Securus that GTL’s failure to produce a substantial number of documents responsive to these requests until after Securus filed a motion to compel is indicative that GTL did not put substantial effort into locating and producing responsive documents. But, it may be the case that GTL did put reasonable effort into responding to these discovery requests but was unable to determine exactly what types of documents Securus was seeking until it alerted GTL of these issues in its motion to compel production. . . .

The Court is not persuaded by GTL’s argument regarding its lack of documents because it purchased the invention from another company. As Securus points out, GTL actually acquired that entire company, which would likely include possession, custody, and control of these records.

So, the Court specifically ORDERS GTL to conduct a diligent search for and to produce the following types of documents that are responsive to Requests for Productions Nos. 22-24, 32-34, 40, 49: engineering design documents, release notes, network diagrams for facilities served by GTL and GTL’s data centers, database schema, and source code showing how each of the accused features and functionality are implemented in GTL’s accused systems. Such search and production shall include all documents obtained by GTL through its purchase of the company that GTL purchased in order to acquire the invention.

Similarly,

[T]he Court ORDERS GTL to conduct a diligent search for and to produce the following types of documents that are responsive to Requests for Productions Nos. 36-39: engineering design documents, release notes, network diagrams for facilities served by GTL and GTL’s data centers, database schema, and source code. . . .

[T]he Court ORDERS GTL to conduct a diligent search for and to produce documents that are responsive to Requests for Productions Nos. 57, 59, and 60 including any responsive documents that indicate revenue received on a per facility basis.

If GTL, after diligently searching for any the above specific responsive document types, GTL is unable to locate any responsive documents that have not already been produced, GTL shall certify that it has conducted a diligent search and has not located any documents that are not previously produced.

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In Re Cray—Another Blow To East Texas’ Patent Docket: Employees Working From Home Are Generally Not Enough To Confer Venue Upon A District In Patent Cases

On September 21, 2017, the Federal Circuit issued its decision in In re Cray Inc. (available here). As I noted in an earlier post, after the Supreme Court’s TC Heartland decision, the only proper venue for a patent-infringement case against a domestic defendant is (i) where the defendant resides (which, per the Supreme Court, is the defendant’s state of incorporation), or (ii) where the defendant both (a) has a regular and established place of business and (b) has committed acts of infringement. See 28 U. S. C. § 1400(b).

Because there is no dispute about where a defendant’s state of incorporation is, the real focus is on where a defendant has “a regular and established place of business.” In In re Cray, East Texas’ Judge Gilstrap had taken an expansive view of the phrase “a regular and established place of business,” finding that an employee who worked from home in East Texas constituted “a regular and established place of business” of the defendant. In In re Cray, the Federal Circuit reversed, finding that the district court had abused its discretion and ordered the district court to grant the motion to dismiss and transfer the case to an appropriate venue.

The Federal Circuit first articulated the relevant venue test with respect to “a regular and established place of business”:

[There are] three general requirements relevant to the inquiry: (1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant. If any statutory requirement is not satisfied, venue is improper under § 1400(b).

The district court’s opinion had set forth “four factors” to consider in the inquiry—i.e., (i) physical presence, defendant’s representations, benefits received, and targeted interactions with the district. The Federal Circuit found that “[t]he district court’s four-factor test is not sufficiently tethered to this statutory language and thus it fails to inform each of the necessary requirements of the statute.”

Instead, per the Federal Circuit:

  • “The regular and established place of business standard requires more than the minimum contacts necessary for establishing personal jurisdiction or for satisfying the doing business standard of the general venue provision.”
  • “When determining venue, the first requirement is that there must be a physical place in the district. The district court erred as a matter of law in holding that a fixed physical location in the district is not a prerequisite to proper venue. This interpretation impermissibly expands the statute. The statute requires a ‘place,’ i.e., ‘[a] building or a part of a building set apart for any purpose’ or ‘quarters of any kind’ from which business is conducted. The statute thus cannot be read to refer merely to a virtual space or to electronic communications from one person to another. . . . While the ‘place’ need not be a ‘fixed physical presence in the sense of a formal office or store,’ there must still be a physical, geographical location in the district from which the business of the defendant is carried out.”
  • “The second requirement for determining venue is that the place ‘must be a regular and established place of business.’ The district court’s test fails to recognize that the place of business must be ‘regular.’ A business may be ‘regular,’ for example, if it operates in a ‘steady[,] uniform[,] orderly[, and] methodical’ manner.”
  • “[W]hile a business can certainly move its location, it must for a meaningful time period be stable, established. On the other hand, if an employee can move his or her home out of the district at his or her own instigation, without the approval of the defendant, that would cut against the employee’s home being considered a place of business of the defendant.”
  • “[T]he third requirement when determining venue is that ‘the regular and established place of business’ must be ‘the place of the defendant.’ As the statute indicates, it must be a place of the defendant, not solely a place of the defendant’s employee. Employees change jobs. Thus, the defendant must establish or ratify the place of business. It is not enough that the employee does so on his or her own. Relevant considerations include whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place. One can also recognize that a small business might operate from a home; if that is a place of business of the defendant, that can be a place of business satisfying the requirement of the statute. Another consideration might be whether the defendant conditioned employment on an employee’s continued residence in the district or the storing of materials at a place in the district so that they can be distributed or sold from that place. Marketing or advertisements also may be relevant, but only to the extent they indicate that the defendant itself holds out a place for its business.”
  • “The district court is correct that a defendant’s representations that it has a place of business in the district are relevant to the inquiry. Potentially relevant inquiries include whether the defendant lists the alleged place of business on a website, or in a telephone or other directory; or places its name on a sign associated with or on the building itself. But the mere fact that a defendant has advertised that it has a place of business or has even set up an office is not sufficient; the defendant must actually engage in business from that location.”
  • “In the final analysis, the court must identify a physical place, of business, of the defendant. A further consideration for this requirement might be the nature and activity of the alleged place of business of the defendant in the district in comparison with that of other places of business of the defendant in other venues. Such a comparison might reveal that the alleged place of business is not really a place of business at all.”

(citations and quotations omitted).

In the instant case, the Federal Circuit found that the district court erred in finding that an employee’s home, located in East Texas, constituted “a regular and established place of business” of the defendant:

The fact that Cray allowed its employees to work from the Eastern District of Texas is insufficient. There is no indication that Cray owns, leases, or rents any portion of Mr. Harless’s home in the Eastern District of Texas. No evidence indicates that Cray played a part in selecting the place’s location, stored inventory or conducted demonstrations there, or conditioned Mr. Harless or Mr. Testa’s employment or support on the maintenance of an Eastern District of Texas location. No evidence shows that Cray believed a location within the Eastern District of Texas to be important to the business performed, or that it had any intention to maintain some place of business in that district in the event Mr. Harless or Mr. Testa decided to terminate their residences as a place where they conducted business. . . .

The statute clearly requires that venue be laid where ‘the defendant has a regular and established place of business,’ not where the defendant’s employee owns a home in which he carries on some of the work that he does for the defendant.

(citations and quotations omitted).

The Federal Circuit did note, however, that a defendant may have a business model “whereby many employees’ homes are used by the business as a place of business of the defendant.” But, in the run-of-the-mill situation where a one-off employee is working from home for the employee’s convenience, that is clearly not sufficient to constitute “a regular and established place of business” for venue purposes under In re Cray.

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Judge Kinkeade Awards Attorney’s Fees To SAP In Patent Case Brought By Investpic, Finding Case Exceptional In SAP’s Favor

On September 7, 2017, Judge Kinkeade issued an Order (available here) in SAP America v. Investpic. The Order granted SAP’s Motion to Find Case Exceptional and Award Fees. Under the Patent Act, the Court may award attorney’s fees to the prevailing party in exceptional cases. 35 U.S.C. § 285. “A case is exceptional if it stands out from other cases with respect to the substantive strength of a party’s litigating position considering both the governing law and the facts of the case or if the case stands out in the unreasonable manner in which the case was litigated.”

In the instant case, Judge Kinkeade found that the case was exceptional considering both Investpic’s litigation position and the manner in which Investpic litigated the case. As to Investpic’s litigation position:

[T]his case does stand out from the typical case in which claims of a patent were invalidated by a court. That is because Investpic was specifically warned by the USPTO, in an opinion issued in connection with a post grant review, that it looked very unlikely that these claims were directed toward patentable subject matter and very likely that the claims were invalid. The USPTO did not directly address this subject matter eligibility issue in that opinion because doing so would have been outside the authority of the USPTO for that particular proceeding. Instead the USPTO specifically invited Investpic to address this issue in another post grant review proceeding of the patent being conducted by the USPTO in which there was authority for the subject matter eligibility issue to be addressed. Instead of addressing this issue, after the USPTO created a serious cloud on the of the claims, Investpic ignored it and continued to assert its patent against companies like SAP. Which, eventually lead to the current lawsuit in which SAP sought and received a declaration that the claims of the asserted patent are invalid because they did not address patentable subject matter.

The Court also found that the case was exceptional with respect to the manner in which Investpic litigated–i.e., that it was not proper for Investpic’s owners to contact SAP’s sales people and pretend to be interested in purchasing SAP’s product to gather information thought to be useful in the lawsuit:

The Court also agrees that this case is exceptional in regards to the manner in which Investpic litigated this matter. While this litigation was on going, Mr. Lee Miller and Dr. Samir Varma, who are both owners of Investpic, reached out to SAP sales people and pretended to be potential purchasers of SAP’s product that is in contention in this matter. This was done under the guise of another company, Regulus International Capital Corp. (“Regulus”) which was operated by Mr. Miller. These two engaged in email and phone meetings with SAP’s sales people in which they inquired about SAP’s product. Those inquires directly related to the infringement contentions at issue in this matter. At the same time, Mr. Miller and Mr. Varma held themselves out to be only employees of Regulus and failed to disclose their relationship with Investpic and their interest in the outcome of this lawsuit. This interaction and pretense continued for at least three months in which Mr. Miller and Mr. Varma continued to gather infringement information about SAP’s product for the purpose of using this information in this litigation.

SAP’s counsel not aware of that this was going on until they were informed about this by Investpic’s counsel. In this conversation, Investpic’s counsel informed SAP’s counsel of the interactions between Invetpic’s owners and SAP sales representatives. Investpic’s counsel also asserted that Investpic intended to use the information in Investpic’s motion practice in this case. SAP argues that this amounts to an unreasonable manner of litigating this case, which makes the case exceptional. Investpic argues that this behavior does not make the case exceptional.

The Court is not persuaded by Investpic’s arguments that this behavior does not make this case exceptional. Investpic first appears to argue that the because of the ongoing litigation, SAP sales people should have been aware of Mr. Miller’s and Mr. Varma’s connection to and interest in this case. But, as pointed out by Investpic in other argument, the people being contacted at SAP were sales people. They were not people at SAP that would be expected to understand the details and nature of this case or of the patent asserted in this case. On the other hand, Mr. Miller and Mr. Varma, clearly knew about these issues and details because their inquiries were directed related to the infringement contentions that Investpic asserted in this case. They also clearly knew about these details and issues because of their connection to Investpic. They are both owners of Investpic; Mr. Miller is the operating manager of Investpic; and Dr. Varma is the inventor listed on the patent in suit in this matter. . . .

Considering the totality of the circumstances, the Court finds that the manner in which Investpic litigated this case and in particular the manner in which Mr. Miller and Mr. Varma conducted self help discovery under a pretense is sufficient to support a finding that this case is exceptional.

Of note, the Court declined to impose the attorney’s fees on Investpic’s principals:

SAP argues that the Court should not only hold Investpic liable for attorney’s fees but should also join Mr. Miller, Mr. Varma, and Regulus in this matter and hold each of these liable for attorney’s fees also. SAP argues that 35 U.S.C § 285 does not limit a court to awarding attorney fees against parties to the litigation but that a court may award those fees against any person or entity that caused the case to be exceptional. According to SAP this means that Mr. Miller, Mr. Varma, and Regulus should all be made parties and the Court should award attorney fees against these two people and the entity jointly with Investpic.

The Court denies SAP’s request to join Mr. Miller, Mr. Varma, and Regulus in this matter to hold each individually liable for attorney fees in this matter. While the Court agrees with SAP that 35 U.S.C. § 285 does not limit the award of attorney fees against parties and that the Court may join these additional people and the entity for the purposes of determining fee liability, the Court declines to do so. The Court believes that, considering Mr. Miller’s and Mr. Varma’s interest in Investpic, an award of attorney’s fees against Investpic alone is sufficient.

The Court concluded by allowing SAP to file a motion for recovery of its attorney’s fees within 14 days.

SAP noted in its motion that it had incurred about $540,000 in litigating the case—a case resolved within about seven months after the case was filed via a motion for judgment on the pleadings filed about five months after SAP answered. This is one reason (i.e., the significant attorney’s fees in patent-infringement litigation) why they say patent litigation is the sport of kings. It will be interesting to see how much Judge Kinkeade ultimately awards.

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Judge Kinkeade Denies Special Master Costs in SAP v. InvestPic

On September 11, 2017, Judge Kinkeade entered an Order in SAP v. InvestPic (available here). The Order denied SAP’s request to include in the Court’s award of costs the costs incurred by SAP related to the appointment of the case’s Special Master.

The Court denied the request because the recovery of special master costs is not authorized by statute, rule, or otherwise:

A court may only award costs of court expressly set out in 28 U.S.C. §§ 1821 and 1920. These sections do not authorize taxation of Special Master fees as costs.

Additionally, the agreed order appointing the Special Master in the case does not state anything regarding whether the Special Master’s fees will ultimately be taxed as costs against a losing party.

There’s a good lesson here—if you want a special master’s costs to be taxed in favor of the prevailing party, make sure that the court’s order appointing the special master explicitly so provides.

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Judge Kinkeade Denies Motion to Stay Pending IPR Review

On September 11, 2017, Judge Kinkeade denied (in an electronic order available here) a motion to stay pending inter partes review. Judge Kinkeade found that the “reasons supporting a stay of this case are speculative and that [the moving party] has not shown that a stay will increase judicial economy.” Despite the relatively brief order, one can’t help but wonder whether it was motivated by the Supreme Court’s decision to grant certiorari in the Oil States case—a case where the Supreme Court will determine whether the inter partes review process for challenging patents is constitutional.

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Impression Products v. Lexmark: Supreme Court (Again) Cuts Back Patent Rights

On May 30, 2017, the Supreme Court issued its decision in Impression Products v. Lexmark (available here). The Court decided two issues. First, if a patentee sells an item under an express restriction on the purchaser’s right to reuse or resell the product, the patentee cannot enforce that restriction through an infringement lawsuit. Second, a patentee exhausts its patent rights by selling its products outside of the United States, where American patent laws do not apply. The Court concluded that “a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.”

In the case, Lexmark sold its toner cartridges for “full price” (which allowed the purchaser to do as it wished with the cartridges) and at 20% off through Lexmark’s “Return Program” (which required the purchaser to refrain from transferring the empty cartridge to anyone but Lexmark). To enforce this restriction, Lexmark installed a microchip on each Return Program cartridge that prevents reuse once the toner in the cartridge runs out.

Toner remanufacturers acquired Return Program cartridges and figured out a way around the microchips. The remanufacturers then sold the used cartridges to purchasers. Lexmark’s contracts, of course, were not with the remanufacturers, but with the original purchasers.

Lexmark sued remanufacturer Impression Products for patent infringement with respect to two groups of cartridges – one group concerning Return Program cartridges sold by Lexmark within the United States, and the second group concerned Return Cartridges that Lexmark sold overseas (and that Impression subsequently imported into the United States). Impression asserted exhaustion as a defense—according to Impression, Lexmark’s sales inside and outside of the United States exhausted Lexmark’s patent rights in the cartridges, so Impression could refurbish, resell and import them.

The Federal Circuit, sitting en banc, ruled for Lexmark with respect to both groups of products. The Supreme Court reversed, ruling against Lexmark with respect to both groups.

With respect to the United States cartridges, “The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.” “Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.”

The Court noted that patentees may still impose restriction on licensees:

A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.

In the end, “[o]nce a patentee decides to sell—whether on its own or through a licensee—that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license.”

With respect to the second question – overseas sales – the Court found that “[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.”

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Former Magistrate Judge Kaplan Issues Order On Privilege Dispute In Nerium Case

On September 5, 2017, former Magistrate Judge Kaplan, acting as special master in Nerium Skincare v. Nerium Biotechnology, issued Special Master Order No. 13 (available here) dealing with a privilege objection concerning plaintiffs’ communications with a public relations firm. In support of their objection, plaintiffs submitted a privilege log identifying eight e-mails withheld from production, an affidavit, and about 1,400 pages of documents to Judge Kaplan for his in camera review.

Judge Kaplan noted, among other things, that the party asserting privilege must provide “a detailed description of the materials in dispute and state specific and precise reasons for their claim of protection from disclosure.” In camera inspection “is appropriate only after the burdened party has submitted detailed affidavits and other evidence to the extent possible.” (emphasis in original).

Judge Kaplan concluded that plaintiffs failed to adduce sufficient evidence to establish that the relevant communications were protected by the attorney-client privilege:

Other than a privilege log and the documents themselves, the only evidence submitted by Plaintiffs is the affidavit of one of its lawyers, Alexander Toney, who states: “My communications with Levick Strategic Communications, LLC have been for the purpose of gathering evidence from the Internet for use in briefing and giving legal advice to the client. These communications were and remain confidential. I have directed Levick not to perform any public relations work.”

As an initial matter, the Special Master observes that Toney addresses only his communications with Levick. Most of the emails withheld from production are neither to nor from Toney. More importantly, the Toney affidavit fails to show how each document, or category of documents, falls within the scope of the attorney-client privilege.

Notwithstanding this failure of proof, the Special Master has reviewed a sampling of the 1,386 pages of documents submitted by Plaintiffs in an attempt to glean information that might shed additional light on the privilege issue. Some of the documents and attachments, such as court filings and public relations materials, clearly are not privileged. However, in most instances, the Special Master has been left to speculation and guess-work in interpreting the documents. Without evidence explaining these documents and the information contained therein, Plaintiffs cannot establish their claim of privilege.

As such, Judge Kaplan ordered the production of the requested documents.

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