Federal Circuit Reverses Texas Judge in Rothschild Attorney Fee Dispute

June 15, 2017

The Federal Circuit has overturned a Texas judge’s decision to deny attorney fees in a case brought against ADS Security (2:15-cv-01431) by Rothschild Connected Devices Innovations, LLC (RCDI), an NPE controlled by inventor Leigh M. Rothschild. In an opinion issued on June 5, the Federal Circuit ruled that Magistrate Judge Roy S. Payne had erred by holding that RCDI’s litigation conduct was not “exceptional” under Octane. Rather, the Federal Circuit found that the district court had improperly relied on affidavits filed by Rothschild and RCDI’s counsel regarding the plaintiff’s “good faith” belief in the validity of the asserted patent (8,788,090), had “misjudged” Rothschild’s broader litigation conduct, and had “conflated” 35 U.S.C. Section 285 with Rule 11 (governing sanctions) in its analysis (2016-2521).

RCDI began its campaign in February 2015 with the filing of 19 lawsuits asserting the ‘090 patent, which generally relates to remotely customizing a consumer product based on user preferences. The campaign eventually hit more than 60 consumer product manufacturers, including providers of home security systems (ADS Security, AT&T, Brickhouse Electronics, Cisco, CPI Security, D-Link, Icon Security, Netgear, Panasonic, Toshiba, Tyco Integrated Security, Uniden, Verizon) and connected home electronics (Belkin, Carrier, GE, Honeywell, LG Electronics, Logitech, Sharp, Vivint, Whirlpool), as well as various automakers (BMW, Ford, Hyundai, Mazda, Mercedes-Benz, Subaru, Toyota, Volvo). Nearly all but two of those lawsuits have since concluded, with many cases dismissed without prejudice despite the filing of documents indicating settlements. Only a case against Coca-Cola (1:16-cv-01241) remains in active litigation, with a Markman hearing currently scheduled for August 29, while a suit against GoPro (2:16-cv-01444) has been stayed to give the parties time to finalize a settlement.

Later cases in the RCDI campaign asserted both the ‘090 patent and its earliest-issuing relative (7,899,713) in an apparent reaction to two inter partes reviews (IPRs) brought against the ‘090 patent in early 2016: one filed by RPX (IPR2016-00443) in January and another by Unified Patents (IPR2016-00535) in February. The Patent Trial and Appeal Board (PTAB) instituted trial for both IPRs in July and August, respectively, with the Unified IPR subsequently dismissed in November in light of settlement. Trial is ongoing in RPX’s IPR, with the PTAB due to make a final decision by July 7, 2017. A third Rothschild patent (8,417,377) has also been at issue in the campaign.

RCDI filed its suit against ADS Security in August 2015 in the Eastern District of Texas (2:15-cv-01463, later consolidated with the lead -1431 action against Guardian Protection Services), alleging the infringement of the ‘090 patent through the company’s home automation and security products. After ADS filed its answer, the company emailed RCDI, notifying the plaintiff that it believed the ‘090 patent ­is invalid under Alice and is anticipated by prior art. The company then made an offer to settle the litigation, which RCDI declined. In late November, ADS filed a motion for judgment on the pleadings, asserting that the ‘090 patent is invalid as directed to the abstract idea of “product configuration” without the addition of an inventive concept. ADS also sent RCDI a Rule 11 (“safe harbor”) notice, including both a proposed motion for sanctions and purportedly invalidating prior art. In late January 2016, RCDI moved to dismiss the case in light of that notice. The following day, ADS opposed the dismissal and filed a cross-motion for attorney fees under Octane, arguing that RCDI’s litigation conduct had been objectively unreasonable because it knew, or should have known, that the ‘090 patent is invalid under Sections 101 and 102. Judge Payne then granted the dismissal in April and denied ADS’s fee motion in July. In the latter order, Judge Payne held that RCDI’s decision to dismiss the case within the Rule 11 safe harbor period was the “the type of reasonable conduct Rule 11 is designed to encourage” and that Rothschild had relied on “non-conclusory and facially plausible arguments supporting patent eligibility”. Judge Payne further noted that ADS had not filed a motion to dismiss under Section 102 and had failed to prove that RCDI had not conducted an adequate pre-filing investigation.

In its June 5 opinion, the Federal Circuit first noted that Judge Payne had improperly relied on RCDI’s affidavits in which the NPE had tried to establish that it had a good-faith belief as to the validity of the patents over prior art. Indeed, the Federal Circuit held that Judge Payne had “clearly erred by failing to consider Rothschild’s willful ignorance of the prior art”, since those affidavits explicitly stated that the plaintiff had not analyzed the prior art submitted in ADS’s cross-motion yet still asserted that RCDI had a good-faith belief in the patent’s validity. Also “problematic” was the fact that the district court “did not address these incongruent statements in its analysis”. The Federal Circuit further noted that the affidavits asserted that ADS’s motion was “meritless” while failing to provide any justification for such statements.

The Federal Circuit then turned to the district court’s determination that RCDI had not engaged in a pattern of vexatious litigation, with Judge Payne having found an “absence of any showing that RCDI acted unreasonably or in bad faith in the context of this suit” and that “RCDI’s prior settlements alone [do not] justify a finding that this case is exceptional”. Here, the Federal Circuit found that Judge Payne had again improperly based his finding as to a showing of bad faith on statements by Leigh Rothschild and RDCI’s counsel “that have no evidentiary value”. The Federal Circuit also rejected Judge Payne’s determination as to the weight of RCDI’s repeated settlements, finding that “the undisputed evidence regarding Rothschild’s vexatious litigation warrants an affirmative exceptional case finding here”.

Lastly, the Federal Circuit held that Judge Payne had failed to account for the “totality of the circumstances”, as required under Octane, “by equating Rule 11 to § 285”. Judge Payne had erred as a matter of law, the court ruled, by determining that a fee award in this case would “‘contravene[] the aims of Rule 11[’s]’ safe-harbor provision”. Indeed, the court noted that Octane explicitly holds that sanctionable conduct under Rule 11 “is not the appropriate benchmark”, and that “a district court may award fees in the rare case in which a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so ‘exceptional’ as to justify an award of fees”. The Federal Circuit then concluded by reversing and remanding to the district court.


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