United States: Finding Of Exceptionality Leaves Unsuccessful Infringement Plaintiff Liable For Over $50 Million In Attorney Fees And Costs

Needless to say, a finding of exceptionality under 35 U.S.C. § 285 can have crippling consequences. Just ask Rembrandt Technologies, LP, which recently was slapped with an order to pay the prevailing defendants in a consolidated infringement action roughly $46 million in attorney fees and nearly $5 million in costs.

The consolidated action arose from 14 different lawsuits that Rembrandt filed between 2005 and 2007 against many of America's biggest cable companies, including Time Warner, Comcast and Cablevision. Rembrandt accused the cable companies of infringing nine digital broadcasting and cable transmission patents that Rembrandt, a "non-practicing entity," had acquired from the patents' original owner. The cases were consolidated in the U.S. District Court for the District of Delaware, along with a 15th lawsuit that another cable company had filed against Rembrandt.

Following the consolidation, the parties engaged in extensive discovery spanning almost two years. The parties exchanged more than 15 million documents, and each side had 650 hours of deposition time. Rembrandt alone deposed 75 witnesses. Rembrandt also served reports from five different experts.

Rembrandt ultimately agreed to execute covenants-not-to-sue covering all of the asserted patents, and the court dismissed the case. The defendants then asked the court to find the case exceptional and award them their attorney fees and costs.

On August 20, 2015, U.S. District Judge Gregory M. Sleet granted the defendants' request. Judge Sleet began his analysis by noting the Supreme Court's recent observation (in Octane Fitness, LLC v. ICON Health & Fitness, Inc.) that, for purposes of § 285, "an 'exceptional' case is simply one that stands out from others with respect to the substantive strength of a party's litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated." As Judge Sleet further explained, "Octane Fitness also clarified that parties seeking fees under § 285 need only establish their entitlement by a preponderance of the evidence." Applying these standards, Judge Sleet held that a finding of exceptionality against Rembrandt was warranted for three reasons.

First, Judge Sleet found that Rembrandt had "improperly compensated its fact witnesses, in violation of ethical rules of conduct." Specifically, the evidence showed that Rembrandt had guaranteed three of its most important witnesses 3-5 percent contingent interests in the outcome of the litigation. The defendants argued that these arrangements incentivized the witnesses to assist Rembrandt, regardless of the actual facts, including by concealing and destroying evidence. In response, Rembrandt claimed that it merely had retained those witnesses as consultants, since they had exceptional knowledge of the relevant patent portfolio, and that it never paid any witness to give false testimony or destroy documents. Agreeing with the defendants, Judge Sleet found that "the fee structure for Rembrandt's fact witnesses was unreasonable and improperly linked to the outcome of the case, giving rise to a considerable risk of tainted testimony."

Second, Judge Sleet concluded that Rembrandt had engaged in—or at least had failed to prevent—widespread document spoliation throughout the litigation, thereby prejudicing the defendants' right to conduct full discovery. The evidence indicated that various key witnesses and companies with relevant knowledge and materials had destroyed or discarded thousands of boxes of discoverable records. Judge Sleet found that, even though Rembrandt itself may not have destroyed any documents, it had control over those who did, and that Rembrandt anticipated "forthcoming litigation such that it had a duty to preserve or instruct others to retain certain documents."

Third, Judge Sleet held that two of the asserted patents in the case had been fraudulently revived prior to the litigation and thus were unenforceable, which Rembrandt either knew or should have known when it filed suit. The two patents had expired after the original patent holder failed to pay the requisite maintenance fees. The original owner revived the patents before selling them to Rembrandt. Judge Sleet concluded that the delayed maintenance payments were deliberate and that the revival of the patents was therefore fraudulent. In turn, Judge Sleet ruled that Rembrandt, although it had no direct dealings with the PTO concerning the two patents, nevertheless "had sufficient knowledge to learn of the fraud" due to its relationship with the original patent holder and the employees who engaged in the inequitable conduct.

After Judge Sleet held that Rembrandt's litigation conduct warranted a finding of exceptionality, the defendants submitted evidence substantiating their claimed attorney fees and expenses, which totaled more than $51 million. On March 2, 2017, Judge Sleet issued an order rejecting Rembrandt's various objections to the defendants' evidence and requiring Rembrandt to pay the requested fees and costs, plus post judgment interest for every day it fails to do so.

In re: Rembrandt Technologies, Patent Litigation, No. 07-mdl-1848 (GMS) (D. Del. Mar. 2, 2017).

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