United States: EDTX & WDTX Monthly Wrap-Up – June 2019

Last Updated: July 9 2019
Article by Noel F. Chakkalakal

This post summarizes some of the significant developments in the Eastern District of Texas and the Western District of Texas for the month of June 2019. One recent order from the Eastern District of Texas, issued by Judge Payne, addresses whether a law firm may be held responsible for attorney's fees awarded after a finding of an exceptional case under § 285, while another decision by Judge Payne clarifies when supplemental infringement contentions are due in light of the source code provision colloquially known as Local Patent Rule 3-1(g). In Waco, Judge Albright recently issued an order denying a defendant's motion to transfer, and in doing so, provided a framework as to how such issues will be adjudicated moving forward. These orders are discussed below.

My Health, Inc., v. ALR Technologies, Inc., et al.: Can a firm be held liable for its clients obligation to pay fees under § 285?

In My Health, Inc., v. ALR Technologies, Inc. et al, Judge Payne analyzed a firm's liability fees awarded under § 285 against its client. Civil Action No. 2:16-cv-00535-RWS-RSP, Mem. Op. and Order, ECF 236 (E.D. Tex. June 5, 2019). Plaintiff My Health, Inc. had its asserted patent invalidated via a 35 U.S.C. § 101 motion to dismiss, and defendants sought attorneys' fees under 35 U.S.C. § 285. My Health appealed the § 101 decision and requested the court to stay defendants' § 285 motion pending the appeal. The court declined My Health's request, declared the case exceptional under § 285, and awarded attorney fees ("the § 285 Order").

Defendants sought to collect their fees from My Health's law firm, Pia Anderson Moss Hoyt LLC ("PAMH"), and Dr. Michael Eiffert, sole officer for My Health. PAMH sought to withdraw as counsel for My Health due to My Health's failure to pay PAMH's fees. Defendants opposed the withdrawal, moved to join PAMH and Dr. Eiffert (alleging both were aware and responsible for the conduct cited in the § 285 Order), and sought an order to show cause as to why My Health should not be held in contempt of court.

The court first addressed the joinder issue and found that neither PAMH nor Dr. Eiffert could be joined, as defendants' request failed both procedurally and on the merits. Id.  at 4. Procedurally, the court found defendants did not analyze (1) the propriety of adding PAMH or Dr. Eiffert under Federal Rule of Civil Procedure 19, or (2) the propriety of altering the court's judgment, as required. Id.  The court also found that defendants did not appeal the § 285 Order, which did not award fees against anyone but the patent assertion entity, and thus waived the issue. Id.

On the merits, the court found that defendants provided no legal basis for a fee award against counsel under § 285 and did not show an abuse of the corporate structure under Texas law to justify an award against Dr. Eiffert. Id.  at 5. The court found that defendants did show constructive fraud, which would have justified a decision to pierce the corporate veil. Id.  Nonetheless, the court distinguished the case from Iris Connex, LLC v. Dell, Inc., 235 F. Supp. 3d 826. (E.D. Tex. 2017), because declarations showed that My Health was created to "foster medical technologies," not file meritless lawsuits, unlike the entities in Iris Connex, and because My Health's general counsel and PAMH directed the litigation, not Dr. Eiffert. Id.  at 6. Defendants did not refute the declarations or show that the corporate structure had been abused. Id. at 7.

The court next analyzed and declined defendants' request for sanctions against Joseph Pia under Fed. R. Civ. Proc. 11, 28 U.S.C. § 1927 ("§ 1927"), and the court's inherent powers. Id.  The court noted that although attorneys have a responsibility to conduct a reasonable inquiry prior to filing suit, a Rule 11 sanctions motion had to be filed separately, and instead, defendants included it in their motion for joinder. Id.  at 7, 9. Defendants also failed to serve PAMH with an advance copy of the motion, as required under Rule 11's safe harbor provision. Id.  The court found that § 1927 sanctions were not available because defendants failed to present clear and convincing evidence that the litigation was patently meritless. Id at 9, 10. Finally, the court refused to use its inherent powers because there was no finding of fraud or abuse beyond the misconduct underlying the § 285 Order. Id at 10.

The court then turned to defendants' contempt motion and PAMH's motion to withdraw. Id.  at 11, 12. Although a district court has the power to hold a party in contempt under 28 U.S.C. § 401, the court found such an order inappropriate to enforce the § 285 Order because an attorneys' fees award is a money judgment enforceable through other methods. Id.  at 11. With respect to PAMH's motion to withdraw, the court found that although PAMH had shown good cause for withdrawal, My Health still needed representation with respect to its obligation to satisfy the § 285 Order. Id.  Thus, PAMH could not withdraw until My Health had secured new counsel. Id.

CXT v. Academy et al: What triggers the deadline for a plaintiff to serve supplemental infringement contentions when that plaintiff invokes P.R. 3-1(g) for alleged software limitations in its initial infringement contentions?

In CXT v. Academy et al., Judge Payne issued an order denying defendant Academy's motion to strike plaintiff's supplemental infringement contentions. Civil Action No. 2:18-cv-00171, Order, ECF 170 (E.D. Tex. June 5, 2019). The court found that in the context of P.R. 3-1(g), without evidence of unreasonable delay, a plaintiff may supplement its infringement contentions 30 days after it inspects source code produced by a defendant, not 30 days from when the defendant makes the source code available.

The deadline for serving infringement contentions is governed by the discovery order. In CXT v. Academy, Section 3(a)(i) of the Discovery Order, which many recognize and refer to as P.R. 3-1(g),states, "If a party claiming patent infringement asserts that a claim element is a software limitation, the party need not comply with P.R. 3-1 for those claim elements until 30 days after source code for each Accused Instrumentality is produced by the opposing party." Id.  at 1, 2. The parties did not dispute that CXT invoked section 3(a)(i) in its infringement contentions. However, the parties did dispute the day on which the source code was considered produced, and thus when the 30 day deadline was triggered.

Academy notified CXT on January 9, 2019, that Academy's source code was available for inspection. Id.  at 1. CXT's reviewer inspected Academy's source code and requested printouts of relevant sections on January 30, 2019. Id.  Academy mailed the requested printouts on February 4, 2019. Id.  CXT then supplemented its infringement contentions on February 21, 2019. Id.

Academy took the position that since the source code was made available on January 9, 2019, it was produced on that day. Id.  Therefore, CXT should have served its supplemental infringement contentions on February 8, 2019, in order to satisfy the deadline imposed by the court's discovery order. Id.  CXT took the position that its duty to amend was only triggered by the date on which it received printouts of the source code, which was February 4, 2019. Id.  at 2.

The court focused on the fact that Academy did not argue that CXT was dilatory in scheduling a source code inspection. Id.  The court then noted that once CXT's source code reviewer was cleared pursuant to the court's Protective Order, CXT's counsel contacted Academy's counsel to schedule a source code inspection, after which Academy's counsel scheduled the source code review on January 30, 2019. Id.  The court found no evidence of unreasonable delay on CXT's part. Id. Absent that delay, the court found no basis to strike the infringement contentions, explaining that the 30-day deadline for supplementing infringement contentions was keyed off when the plaintiff inspected the source code, not when the defendant made the code available.

MV3 LLC v. Roku, Inc.: What justifies a transfer away from the Western District of Texas?

In MV3 LLC v. Roku, Inc., .Judge Albright of the Western District of Texas denied a defendant's motion to transfer from the Western District of Texas to the Northern District of California. Civil Action No 6:18-CV-00308-ADA, Order Denying Defs. Mot. to Transfer Venue, ECF 74 (W.D. Tex. June 36, 2019). MV3 asserted U.S. Patent No. 8,863,223 (which discloses a set top box that provides functionality that enables a connected display device to render a television signal and enables an upconversion/upscaling process from a mobile computing device where media content residing on or being streamed to the mobile computing device is forwarded to a display device), against Roku, Inc. Id.  at 1. Roku moved to transfer venue alleging that Waco is an inconvenient forum. Id.

The court first discussed relevant aspects of Roku and MV3 with respect to the Western District of Texas. Id.  at 1, 2. Roku is a Delaware corporation with offices around the world. Id.  Roku does have a research and development facility in Austin, TX, but most of the relevant witness-employees and engineering documents reside primarily in Roku's headquarters in Las Gatos, California. Id.  MV3 is based in the Eastern District of Texas, but has witnesses with relevant knowledge in Florida, Maryland, and Illinois. Id.  at 2.

The court then addressed the legal standards applicable to a request to transfer venue. Id.  The court first cited to Section 1404(a) and noted that the initial question is whether MV3 could have filed its claim in the requested forum. Id.  The court then marched through the public and private factors that it must analyze under relevant 5th Circuit and Federal Circuit precedent. Id.  at 2, 3. Importantly, the court noted that although a plaintiff's choice of venue is not an express factor for the court to consider, "appropriate deference" is given to the plaintiff's choice because the defendant must show that another venue is "clearly more convenient." Id.  at 3.

The court began its analysis by finding that MV3's claims could have been brought in the Northern District of California, before quickly moving onto to analyzing the private factors. Id.  at 4. The court found that the first private factor, relative ease of access to sources of proof, weighed against the transfer. Id.  Although Roku is based in Los Gatos, and most of its documents reside there, the court noted electronic copies may be accessed from anywhere with relative ease (e.g., "at the click of a mouse"). Id.  at 4. Furthermore, MV3 represented to the court that it intended to seek testimony from Roku's Austin employees. Id.  at 5.

The court found none of the remaining private factors favored venue transfer. Id.  at 5-8. The court found that its ability to compel witnesses weighed against transfer because Roku had not identified any specific third-party witnesses whose attendance the court would need to compel. Id.  at 5, 6. The court found that the cost of attendance was a neutral factor because the court primarily considers costs associated with third parties, not of parties to the case. Id.  at 6, 7. Although Roku represented that its witnesses would have to travel from California, all those witnesses were Roku employees, and MV3's witnesses would likewise have to travel from out of state. Id.  at 7, 8. Finally, Roku contended, and the court agreed, that the remaining factor, other practical concerns, was neutral. Id.  at 8.

The court then turned to the public factors, and found two of the three public factors were neutral, while a third favored venue transfer. Id.  at 8, 9. The neutral factors were administrative difficulties flowing from court congestion, and the forums' familiarity with the law governing the case and avoiding unnecessary conflicts of interest. Id.  The court found that there was no court congestion issue and found that both forums were familiar with patent law. Id.  The court did find, however, that the "local interest in having localized interest decided at home" favored transfer because most of the relevant information resided in Los Gatos.

Although the court found at least one factor in favor of the defendant's motion to transfer venue, and most of the remaining factors neutral, the remaining factors led the court to deny the defendant's motion. The court found that the defendant had not overcome the "significant burden" to show good cause as to why transfer was appropriate. Id. at 9, 10.

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