Non-practicing entities often pursue a common strategy to obtain payments for their patents: obtain a low-cost patent with wide exposure, hire a law firm on a contingency fee basis, sue a large number of companies in a favorable venue, and accept low and early settlements. In Gust, Inc., v. Alphacap Ventures, LLC, the Federal Circuit in effect considers whether attorneys for a non-practicing entity took this strategy too far. Specifically, the court determines whether the claims advanced by the attorneys were “without color” and made in bad faith such that the attorneys themselves should be held liable under 28 U.S.C. § 1927 for costs incurred by the sued company. In holding that the attorneys were not liable, the Federal Circuit sheds light on the application of 28 U.S.C. § 1927 for patent suits.
Non-practicing entity AlphaCap Ventures, LLC (“AlphaCap”) was represented on a contingency fee basis by law firm Gutride Safier LLP (“Gutride”) and sued ten crowdfunding companies in the Eastern District of Texas in January 2015.1 Just seven months before AlphaCap filed suit, the Supreme Court issued its landmark Alice decision, changing the criteria for evaluating whether a patent is invalid as an “abstract idea” under 35 U.S.C. § 101.1 Nine of the defendants settled for less than $50,000 each, leaving Gust, Inc. (“Gust”) as the sole remaining defendant.3
Over several months, AlphaCap and Gust exchanged settlement offers, with AlphaCap offering a walkaway settlement, stating that “the case is not worth litigating.”4 Gust made multiple stern counter offers as the case advanced, including offering to accept a walkaway settlement if AlphaCap additionally assigned all its patents to Gust.5 AlphaCap did not accept.6 Gust filed a motion to transfer to the Southern District of New York, which AlphaCap opposed. 7 The Eastern District of Texas then transferred AlphaCap’s infringement case to the Southern District of New York. 8 AlphaCap thereafter provided Gust with a covenant not to sue on the patents at issue.9 The Southern District of New York ultimately dismissed both AlphaCap’s claims.10 Gust filed a motion for attorneys’ fees under 35 U.S.C. § 285 and to recover attorneys’ fees directly from Gutride under 28 U.S.C. § 1927.11 The district court granted Gust’s motion. 12 Gutride appealed to the Federal Circuit the district court’s § 1927 award of attorneys’ fees against it. 13
28 U.S.C. § 1927
Under 28 U.S.C. § 1927, an attorney “who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” The district court held that Gutride was jointly and severally liable for Gust’s attorneys’ fees under § 1927 because: (1) Gutride frivolously resisted Gust’s motion to transfer, and (2) Gutride knew that Alice invalidated the asserted patents and was unwilling to end the case.14
The Federal Circuit reviewed the district court’s § 1927 award under the Second Circuit’s abuse of discretion standard, which is a “more exacting standard” when “a district court acts as accuser, fact finder and sentencing judge all in one.”15 The Federal Circuit applied the Second Circuit’s test for awards under § 1927, which requires: “(1) that claims were entirely without color and (2) were brought in bad faith—that is, motivated by improper purposes such as harassment or delay.”16
a. Claims Entirely Without Color
First, the Federal Circuit concluded the district court had abused its discretion when it concluded that Gutride’s claims were without color.17 On its face, § 1927 applies only to unreasonable multiplications of proceedings and not merely the filing of baseless cases.18 Instead, Rule 11 is the appropriate avenue for sanctions for an attorney’s improper complaint filing.19 The district court’s conclusion that Gutride’s claims were without color, then, rested on Gutride’s continued contention that AlphaCap’s claims were patent eligible in light of the post-Alice § 101 framework.20 Given that the suit was filed only seven months after the Alice decision, and that “abstract idea law was unsettled” during the case, the Federal Circuit found that the district court had abused its discretion “in concluding that ‘the AlphaCap Patents do not fall in that interstitial area where doubt may reasonably exist about their eligibility.”21 Despite finding some of Gutride’s validity arguments “somewhat dubious,” the Federal Circuit nonetheless found that Gutride’s arguments “were not so lacking in color to support such a conclusion” as to validity.22
b. Bad Faith
Next, the Federal Circuit concluded the district court had abused its discretion when it concluded that Gutride’s claims were brought in bad faith.23 Relying in part on Gutride’s statement that the case was “not worth litigating,” the district court had found that Gutride knew of the patents’ invalidity and therefore acted in bad faith at each stage in the case.24 The Federal Circuit disagreed, concluding that Gutride’s statement was “an inoffensive assertion that the calculus favors settlement, not an admission that the patents were invalid.”25
The district court had also supported its contention that AlphaCap had acted in bad faith by pointing to AlphaCap’s filing of ten lawsuits in expectation of quick settlements in small amounts.26 While the Federal Circuit “appreciate[d] the district court’s concern with AlphaCap’s business/litigation model,” it held that Rule 11 is the proper avenue for addressing attorneys’ complicity in the filing of frivolous litigation.”27 The Federal Circuit noted that the client generally possesses the decision-making power with respect to settlement, not the attorneys, even when the attorney is compensated on a continency basis.28
Additionally, Gutride’s opposition to a motion to transfer was not evidence of bad faith.29 According to the district court, Gutride’s position that New York was not clearly more convenient was frivolous because Gust never resided in the Eastern District of Texas, Gust’s business and employees were in New York, and the allegedly infringing website was developed and administered in New York.30 The Federal Circuit found that, under the law at the relevant time, the Eastern District of Texas was a proper forum because Gust was subject to personal jurisdiction in Texas.31 Thus, it found that Gutride did not oppose transfer in bad faith since an attorney need only bring a case in a proper forum, and not the most convenient forum.32
Lastly, the Federal Circuit concluded that AlphaCap’s decision not to grant a covenant not to sue until nearly a year after filing suit was not evidence of Gutride’s bad faith.33 Such a determination was in the domain of the client, not the attorneys.34 In making this conclusion, the Federal Circuit notably did not mention that Gust had indeed offered a walkaway settlement and was simply unwilling to, for example, assign all its patents to AlphaCap.35
The district court sent a stern warning to counsel representing non-practicing entities, holding attorneys liable for behavior that is sometimes common for non-practicing entities. However, the Federal Circuit found that the behavior of the attorneys in this case did not amount to assertion of bad faith claims without “color,” especially in light of the changing state of the law at the time of the suit. The Federal Circuit also found that that bringing or continuing frivolous litigation should be addressed under Rule 11, which does not expose attorneys to liability. Thus, while defendants that find themselves battling frivolous litigation against certain non-practicing entities can address such matters under Rule 11, tactics typical of such entities, without more, may be insufficient to hold their attorneys personally liable for the costs of such litigation.
1 Gust, Inc., v. Alphacap Ventures, LLC, No. 2017-2414, 2018 WL 4653696, at *1 (Fed. Cir. Sept. 28, 2018).
2 See generally Alice Corp. Pty. v. CLS Bank Int’l, 573 U.S. 208, 134 S. Ct. 2347, 189 L. Ed. 2d 296 (2014).
3 Id. at *1.
4 Id. at *1.
5 Id. at *1.
6 Id. at *1.
7 Id. at *7.
8 Id. at *1.
9 Id. at *1.
10 Id. at *1.
11 Id. at *1.
12 Id. at *1.
13 Id. at *1.
14 See generally Gust, Inc. v. AlphaCap Ventures, LLC, 226 F. Supp. 3d 232 (S.D.N.Y. 2016), reconsideration denied, No. 15CV6192 (DLC), 2017 WL 2875642 (S.D.N.Y. July 6, 2017), and rev’d, No. 2017-2414, 2018 WL 4653696 (Fed. Cir. Sept. 28, 2018).
15 Gust, Inc., 2018 WL 4653696 at *2 (internal marks omitted).
16 Id. at *3; cf. LaSalle Nat. Bank v. First Connecticut Holding Grp., LLC., 287 F.3d 279, 288 (3d Cir. 2002) (applying the Third Circuit test for sanctions under § 1927, concluding that “[t]he statute . . . limits attorney sanctions imposed thereunder to those situations where an attorney has: (1) multiplied proceedings; (2) unreasonably and vexatiously; (3) thereby increasing the cost of the proceedings; (4) with bad faith or with intentional misconduct.”).
17 Id. at *6.
18 Id. at *4.
19 Id. at *7.
20 Id. at *3.
21 Id. at *5 (internal marks omitted).
22 Id. at *5.
23 Id. at *6.
24 Id. at *6.
25 Id. at *6.
26 Id. at *7.
27 Id. at *7.
28 Id. at *7.
29 Id. at *7.
30 Id. at *7.
31 Id. at *8; see also VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990), abrogated by TC Heartland LLC v. Kraft Foods Grp. Brands LLC, S.Ct. 1514, 197 L.Ed.2d 816 (2017).
32 Id. at *8.
33 Id. at *9.
34 Id. at *9.
35 See id. at *1.
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