Fed Circuit Upholds Verdict and Sanctions Against NPE

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. (Robert Wagner on G+)

The Federal Circuit issued an opinion in Taurus IP, LLC v. DaimlerChrysler Corp. (No. 2008-1462), upholding a verdict in favor of a technology user in the continuing patent wars between non-practicing entities (NPEs) and companies. Judge Schall delivered the opinion of the Court, joined by Judges Prost and Reyna.

The case involved two separate actions—one for patent infringement and one for a breach of warranty involving a prior settlement agreement between the parties. In the patent action, the Federal Circuit affirmed the district court’s determination that Taurus’s patent was invalid, that defendants did not infringe, and that the case was exceptional because plaintiff failed to conduct proper due diligence and filed a frivolous lawsuit. In the breach of warranty action, the Court affirmed the finding that the court had jurisdiction over the parties, that plaintiff and related third parties (Orion IP, LLC and Erich Spangenberg) breached the warranty provisions, and that two of the third parties engaged in witness tampering. The Court affirmed-in-part and reversed-in-part the damage awards relating to defendants’ attorneys’ fees.

Background

The case has a rather long and convoluted history, starting with a different lawsuit back in 2004.

Orion (an NPE owned by Spangenberg) sued DaimlerChrysler and Mercedes in 2004. Prior to filing suit, it acquired the rights to a patent (the ‘658 Patent) that would be at issue in the later lawsuit. To resolve the 2004 case (which involved different patents), the parties entered into a settlement agreement in 2006. Under that agreement, Orion warranted that had not assigned any patent rights relating to the 2004 litigation. However, five days after filing the 2004 lawsuit, Orion assigned the ‘658 Patent to another of Spangenberg’s companies and did not disclose that fact.

In 2007, Taurus (another NPE) acquired the rights to the ‘658 Patent from one of the many Spangenberg companies. Taurus then filed suit against DaimlerChrysler and Mercedes 10 days later. This is the case that was on appeal before the Federal Circuit.

The ‘658 Patent involved a “a computer system for managing product knowledge related to products offered for sale by a selling entity.” Taurus alleged that defendants infringed the patent through their internal and external web sites that allowed customers to select various options on different car models and then see if any dealers had that configuration available for sale in the area.

The District Court’s Rulings

The district court issued a claim construction that was unfavorable to Taurus. The court then granted summary judgment in favor of defendants, finding that defendants did not infringe and that the asserted claims of the patent were invalid in light of prior art that pre-dated the earliest conception date that Taurus could prove. In addition, the court found that the case was an exceptional case that warranted an award of defendants’ attorneys’ fees.

The court found that Taurus failed to conduct a proper due diligence before filing suit, that there was no reasonable basis to believe that defendants infringed, and that Taurus needless prolonged the litigation in bad faith. The court then awarded over $1,600,000 in attorneys’ fees.

With respect to the breach of warranty claims, the court found that it had jurisdiction over all of the parties and denied Taurus and the third-party defendants’ attempts to dismiss the claims. A jury then found for DaimlerChrysler and Mercedes. On post-trial motions, the court found damages caused by the breach in the amount of almost $2,500,000 for the costs incurred to defend the patent infringement lawsuit and $ 1,300,000 in attorneys’ fees relating to the breach of warranty claims.

In addition, the court found that Erich Spangenberg and an attorney working with him attempted to tamper with a witness. The attorney used to represent DaimlerChrysler in prosecuting its patents, but left to work for one of Spangenberg’s companies during the course of the litigation. Spangenberg contacted the attorney and told him that he believed that one of DaimlerChrysler’s witnesses was going to commit perjury and that the attorney should take steps to deal with it. The attorney then called and sent the witness a letter “reminding” the witness of certain “facts.”  The attorney never indicated that he worked for Spangenberg.

When this contact came to light, the court conducted a closed hearing to address what happened and what should be done. The court ultimately concluded that (1) the communications were designed to intimidate the witness and influence his testimony, (2) that the attorney should have been screened from the case due to his prior employment with DaimlerChrysler, (3) that the “facts” were not supported by the record. As a sanction, the court prevented Spangenberg and his companies from evoking testimony refuting one of the elements to the breach of warranty claim.

The Federal Circuit Mostly Affirms

On appeal, the Federal Circuit affirmed all of the patent infringement-related issues in full. It upheld the claim construction, the non-infringement ruling, the invalidity ruling, and the award of attorneys’ fees.

With respect to the breach of warranty issues, the Federal Circuit largely affirmed, including the witness tampering sanctions, but did reverse on the issue of the damages for a lack of evidence presented at trial.

Conclusion

This was a fairly convoluted case before the Federal Circuit. While the lengthy opinion makes for an interesting read, there are some high-level take aways. First, Chief Judge Rader has repeatedly indicated that district courts should exercise their inherent and statutory powers to sanction NPEs and other litigants that bring frivolous patent infringement lawsuits. The district court apparently took that to heart and the Federal Circuit backed her up. Second, the failure to conduct appropriate pre-filing due diligence proved very costly to plaintiff. Finally, parties need to be very careful before communicating (or inducing another to communicate) with an opposing witness prior to testifying, as the sanctions can be devastating to a case.