In Taurus IP, LLC v. DaimlerChrysler Corp., Nos. 08-1462, -1463, -1464, -1465 (Fed. Cir. Aug. 9, 2013), the Federal Circuit affirmed the district court's claim construction, judgment of invalidity, judgment of noninfringement, finding of an exceptional case, denial of a motion to dismiss for lack of personal jurisdiction over impleaded defendants, finding of liability for breach of contract, award of damages consisting of certain attorneys' fees, and imposition of evidentiary sanctions based on witness tampering, and reversed an award of damages for want of evidence at trial.
As a backdrop to the present case, licensing company Orion IP, LLC ("Orion"), managed by Erich Spangenberg, asserted a set of patents against a number of car manufacturers in the Eastern District of Texas. Some of the manufacturers, including DaimlerChrysler Corporation ("Chrysler"), entered into a settlement agreement with Orion. Meanwhile, just prior to the settlement, Orion assigned U.S. Patent No. 6,141,658 ("the '658 patent") to Taurus IP, LLC ("Taurus"), another company managed by Spangenberg. Taurus then asserted the '658 patent against Chrysler and other companies in the Western District of Wisconsin, alleging that the companies' websites, which allow configuration of a hypothetical vehicle, infringed the patent.
The district court decided on SJ that the '658 patent was anticipated by a prior art patent and further that the accused websites did not infringe the '658 patent. Additionally, the district court decided that the suit against Chrysler and others was exceptional under 35 U.S.C. § 285, and awarded attorneys' fees, as well as evidentiary sanctions against Spangenberg for tampering with a witness. Finally, after trial, the jury found that third-party defendants Orion and Spangenberg had breached the settlement agreement between Orion and Chrysler by asserting the '658 patent, and awarded the cost of defending against the Wisconsin lawsuit as damages for the breach.
On appeal, the Federal Circuit affirmed eight categories of findings and decisions at the district court, and partly reversed one award of damages.
"While an adverse claim construction generally cannot, alone, form the basis for an exceptional case finding, this court's decisions in DePuy Spine and Medtronic Navigation do not undermine the rule that a party cannot assert baseless infringement claims and must continually assess the soundness of pending infringement claims, especially after an adverse claim construction." Slip op. at 32.
First, the Court affirmed the district court's construction of two claim terms. The claims were generally directed to a system in which a user could create hierarchical relationships between objects within a data model. While Taurus argued that a "user" was "a person who uses the claimed computer system," the Court affirmed the district court's construction that a "user" is "a person who is capable of creating and editing user-defined relationship information." Slip op. at 16 (citations omitted). The Court reasoned that the text of the claims and the specification supported the district court's construction, noting that the language of the claims makes clear that the user must define the relationship information, and that "the written description firmly supports this construction, only disclosing 'users' with sufficient internal access to the data model to allow the creation and editing of relationship information." Id. at 17. The Court went on to affirm the district court's construction of the term "user-defined relationship information."
Second, the Court affirmed the district court's judgment of invalidity of claims 16 and 27 of the '658 patent. Specifically, the Court affirmed the district court's findings that (1) the claimed invention did not predate a prior art reference ("the Trilogy patent"); and (2) claims 16 and 27 were invalid as anticipated by the Trilogy patent. Regarding predating the Trilogy patent, Taurus offered a document and related testimony as evidence that the invention predated the Trilogy patent. But while the document showed a creation date prior to the Trilogy patent, nearly every page of the document showed a modification date more than three months after the filing date of the Trilogy patent. Furthermore, the testimony was "both limited and conclusory," consisting of a summary conclusion that the document had not been created before conception. Id. at 22. The Court found additional flaws in Taurus's position, observing that "[e]ven if this testimony were sufficient . . . , it lacks corroboration, which is required by this court's case law." Id. at 23 (citing Singh v. Brake, 222 F.3d 1362, 1367 (Fed. Cir. 2000)).
Regarding anticipation by the Trilogy patent, the Court noted that Taurus argued that there remained disputed issues of material fact that the district court improperly resolved on SJ. Noting that Taurus failed to set forth any specific facts precluding SJ, the Court held that "Taurus's assertion that unspecified factual disputes remain cannot preclude summary judgment." Id. at 25. The Court then agreed with the district court's conclusions on anticipation and affirmed the district court's SJ of invalidity.
Third, largely following its agreement with the district court's claim construction, the Court affirmed the district court's finding of noninfringement, noting that Taurus again failed to identify any specific factual issues that would preclude SJ, and instead "merely disagrees with the district court's legal conclusion" regarding noninfringement. Id. at 27.
Fourth, the Court held that there was sufficient basis in the district court's findings that Taurus improperly asserted and maintained its positions during litigation, amounting to an exceptional case under § 285. The Court primarily took issue with Taurus's proposed construction of the claim term "user," observing that "[w]hen patentees have sought unreasonable claim constructions divorced from the written description, this court has found infringement claims objectively baseless." Id. at 30 (citing MarcTec, LLC v. Johnson & Johnson, 664 F.3d 907, 919 (Fed. Cir. 2012)). While Taurus argued that the district court's claim construction was vague until issuance of the court's SJ decision, the Federal Circuit noted that Taurus's own briefing on appeal indicated that Taurus understood but merely disagreed with the construction. "While an adverse claim construction generally cannot, alone, form the basis for an exceptional case finding, this court's decisions in DePuy Spine and Medtronic Navigation do not undermine the rule that a party cannot assert baseless infringement claims and must continually assess the soundness of pending infringement claims, especially after an adverse claim construction." Id. at 32 (citing Medtronic Navigation, Inc. v. BrainLAB Medizinische Computersysteme GmbH, 603 F.3d 943, 954 (Fed. Cir. 2010)). The Court went on to conclude that the district court made sufficient factual findings to uphold an implicit finding of subjective bad faith, and then affirmed the ruling that the case was exceptional under § 285.
The Court next addressed the issues related to the breach of the settlement agreement. It considered the fifth issue of whether the district court properly found personal jurisdiction over impleaded defendants Orion and Spangenberg, a Texas corporation and a Texas resident, respectively. Considering Wisconsin law, the Court held that the district court properly pierced the corporate veil to decide that Taurus, a Wisconsin corporation, was Spangenberg's alter ego. The Court then affirmed the application of reverse veil-piercing to reach Orion through Spangenberg under Texas law. Thus, the Court concluded that the exercise of personal jurisdiction over Orion and Spangenberg was proper.
Sixth, Orion and Spangenberg argued that the district court erroneously denied JMOL to overturn the jury verdict finding breach of a provision in the settlement agreement. The provision stated that Orion warranted that "it has not assigned or otherwise transferred . . . any rights to any causes of action . . . relating to the [Texas] Litigation." Id. at 35-36 (citation omitted). The district court interpreted "relating to the [Texas] Litigation" as "arising from the same set of facts," and decided that although both suits concerned the same accused technology (e.g., Chrysler's website), there were triable issues of fact as to whether Orion's transfer of the '658 patent constituted breach. Id. at 37 (citation omitted). Subsequently, a jury found for Chrysler as to breach of warranty. The Federal Circuit agreed with the district court's interpretation of the provision—it observed that the record did not establish that Chrysler had assessed the scope of the '658 patent and understood that the '658 patent could be asserted against the same websites at issue in the Texas litigation, and affirmed the district court's denial of SJ of no liability for breach.
Seventh, the Court considered the fees and damages owed by Orion. The district court awarded $1.3 million in fees for defending against the claims related to the breach of warranty under a Texas statute based on prevailing on those claims. $2.5 million was awarded based on the jury's finding that Orion had breached a warranty by transferring the '658 patent to Taurus, and the expenses expended in defense of Taurus's infringement claims resulted from that breach. The Court characterized the $2.5 million as damages for the breach, as distinguished from the $1.3 million, which were properly considered post-trial attorneys' fees. The Court affirmed the fees awarded under the Texas statute, because, although "a party has a Seventh Amendment right to a jury trial on damages in a breach of contract case, a party is not entitled to a jury trial on attorney fees assessed after trial," and there were no other procedural errors in awarding the fees. Id. at 58. With respect to the damages award, however, Chrysler failed to meet its burden by submitting evidence on its damages resulting from the breach. Chrysler did not present such evidence at trial, because the parties had agreed to request a process of assessing the reasonableness of fees by filings after trial. Noting that Chrysler, who retained the burden of proof on damages, agreed to this improper procedure, the Court held that Chrysler did not set forth sufficient evidence at trial to support the award of damages, and reversed the award of $2.5 million corresponding to the cost of defending against the Wisconsin infringement suit.
Finally, the Court affirmed the imposition of evidentiary sanctions based on witness tampering. Following Seventh Circuit law, the Court decided that Orion and Spangenberg had received notice of the possible sanction and an opportunity to be heard. Considering the merits of the conduct, the Court chastised Spangenberg for his failure to impose an ethical wall that would have precluded access to Chrysler's confidential information via hiring of a recent Chrysler attorney, who possessed the confidential information based on his time spent as an attorney at Chrysler. Moreover, the Court was not persuaded by efforts to cloak the sanctioned conduct in the guise of compliance with applicable ethical obligations, finding that there was no obligation on the part of the newly hired attorney to make contact with the witness.
Accordingly, the Court affirmed the majority of the district court's conclusions, only reversing on the award of damages incurred by Chrysler in defending against the breach of contract.
Judges: Prost, Schall (author), Reyna
[Appealed from W.D. Wis., Chief Judge Crabb]
This article previously appeared in Last Month at the Federal Circuit, September 2013
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
