Federal Circuit Reverses Award of Attorneys’ Fees Finding District Court Misapprehended the Law

The U.S. Court of Appeals for the Federal Circuit reversed a district court’s award of attorneys’ fees imposed on plaintiffs for pursuing claims that, according to the district court, presented "no basis for recovery." The Federal Circuit found the district court sanctioned the plaintiffs based on its own misunderstanding of the governing law. Waymark Corp. et al v. Porta Systems Corp., Case No. 03-1012 (Fed. Cir. July 10, 2003).

Waymark and the Caravello Family Limited Partnership sued Porta Systems Corp. for the infringement of U.S. Pat. No. 5,705,929 (the `929 patent) as well as for the infringement of the trademark "Battscan." The complaint alleged the partnership was the owner of the `929 patent, and Waymark was the exclusive licensee. The district court granted summary judgment of non-infringement for Porta Systems on the patent count and dismissed the trademark and trade dress count for lack of standing. While that decision was on appeal to the Federal Circuit, the district court granted a motion by Porta Systems for attorneys’ fees. The Court based its sanction on its finding that there was no basis for the plaintiffs’ trademark infringement claim due to the fact the plaintiffs’ trademark had not been registered until more than a year after suit was filed. The district court further found that there was no written exclusive patent license agreement from the partnership to Waymark and, thus, Waymark did not have standing to file suit for patent infringement. Finally, the Court found the plaintiffs "provided a misleading response" to Porta Systems’ discovery request for and a copy of the written patent assignment to Waymark and the district court’s order to show cause as to the legal sufficiency of the oral license agreement. The district court found the case "exceptional" and held that "had [the p]laintiffs conducted a proper pre-filing investigation, [the d]efendant would not have incurred the substantial attorney[s’] fees and costs it now claims." The district court also based its sanction on 28 U.S.C. § 1927.

The Federal Circuit reversed, applying the law of the Eleventh Circuit to the sanction order. The Federal Circuit found that the district court erred in basing its sanction order on the fact the plaintiffs’ trademark was not registered at the time the action was filed. The Court explained that because the complaint sought relief under section 43(a) of the Lanham Act, which provides a remedy for infringement of both registered and unregistered trademarks, the district court’s award of sanctions was based on a misunderstanding of the governing law.

The Federal Circuit also found that the district court did not correctly state the law relating to the plaintiffs’ standing to bring their patent infringement claims, explaining that only assignments need be in writing; licenses may be oral. While a holder of an oral license can sue for patent infringement "only in extremely limited circumstances," the Court noted that one of the plaintiffs here claimed a written assignment of the patent and clearly had standing to sue.

Finally, the Court reversed the imposition of sanctions under 28 U.S.C. § 1927, explaining that § 1927 must be strictly construed, and sanctions under that statute are to only be assessed against counsel "who willfully abuse the judicial process by conduct tantamount to bad faith." The Court held that Porta Systems was required to show more than lack of merit to the plaintiffs’ claims to serve as a basis for sanctions under § 1927. The Court noted that the "defendant would have better spent its time in addressing the merits of the suit rather than pursuing an award of sanctions on untenable theories."