IP Law Daily Denial of attorney fees to security company ADS sets off alarm at Federal Circuit
Monday, June 5, 2017

Denial of attorney fees to security company ADS sets off alarm at Federal Circuit

By Peter Reap, J.D., LL.M.

The federal district court in Marshall, Texas, erred in failing to award attorney fees to home security company ADS Security from plaintiff Rothschild Connected Devices Innovations, the U.S. Court of Appeals for the Federal Circuit has ruled. In finding that Rothschild’s patent infringement claims, which were withdrawn before the expiration of the Rule 11 safe harbor provision, were not so frivolous or exceptional as to warrant an award of attorney fees, the district court misjudged the strength of Rothschild’s litigation provision. Further, the lower court misjudged Rothschild’s conduct in the numerous other patent infringement suits it had asserted, and it improperly conflated Rule 11 with 35 U.S.C. § 285. The ruling of the district court was reversed and the case remanded (Rothschild Connected Devices Innovations, LLC v. Guardian Protection Services, Inc., June 5, 2017, Wallach, E.).

Rothschild’s alleged that ADS’s home security system infringes U.S. Patent No. 8,788,090 ("the ’090 patent"). The ’090 patent generally recites "[a] system and method for creating a personalized consumer product," where the system and method "enable a user to customize products containing solids and fluids by allowing a server on the global computer network, e.g., the Internet, to instruct the hardware mixing the solids and fluids of the user’s preferences for the final mix."

Rothschild filed a complaint against ADS alleging infringement of claim 1 of the ’090 patent. ADS subsequently sent an email to Rothschild alleging that the ’090 patent covers patent-ineligible subject matter under 35 U.S.C. § 101 and that prior art anticipates claim 1 of the ’090 patent under 35 U.S.C. § 102(a)(1). ADS also sent Rothschild a notice pursuant to Federal Rule of Civil Procedure 11(c)(2) ("Safe Harbor Notice"), which included copies of a proposed Rule 11(b) motion for sanctions and prior art that purportedly anticipates claim 1.

In light of the Safe Harbor Notice, Rothschild voluntarily moved to dismiss its action. ADS opposed and filed a cross-motion for attorney fees pursuant to § 285, based on its view that Rothschild’s suit was objectively unreasonable because Rothschild knew or should have known that claim 1 covers patent-ineligible subject matter under § 101 and is anticipated by prior art under § 102(a)(1). ADS also argued that Rothschild did not intend to test the merits of its claim and instead filed this and over 50 other lawsuits in the district court to "‘exploit[] the high cost to defend complex litigation to extract nuisance value settlements’" from various defendants.

The district court ultimately granted Rothschild’s motion to dismiss and denied ADS’s cross-motion for attorney fees. As to the latter, the district court found that Rothschild did not engage in conduct sufficient to make the action "exceptional" under § 285. ADS appealed.

The strength of Rothschild’s position. ADS argued that "the District Court failed to consider Rothschild’s willful ignorance of the prior art," which further demonstrated the weakness of Rothschild’s litigating position.

The district court clearly erred by failing to consider Rothschild’s willful ignorance of the prior art, the Federal Circuit held. In its safe harbor notice and cross-motion for attorney fees, ADS included prior art that purportedly anticipates claim 1 of the ’090 patent. In response to ADS’s cross-motion for attorney fees, Rothschild submitted two affidavits. In the first, Rothschild’s counsel stated that he had "not conducted an analysis of any of the prior art asserted in [the] Cross[-]Motion to form a belief as to whether that prior art would invalidate" the ’090 patent. In the second, Rothschild’s founder echoed these statements. However, in the same affidavits, Rothschild’s counsel and founder both asserted that they possessed a "good faith" belief that the ’090 patent "is valid."

It was unclear how Rothschild’s counsel and founder could reasonably believe that claim 1 is valid if neither analyzed the purportedly invalidating prior art provided by ADS, the Federal Circuit observed. More problematic, the district court did not address these incongruent statements in its analysis. Other aspects of the relevant affidavits revealed additional problems with the district court’s analysis, the appellate court explained.

Conduct in other litigation. ADS contended that Rothschild engaged in vexatious litigation by bringing suit solely to extract a nuisance payment, citing the numerous lawsuits that Rothschild has filed regarding the ’090 patent. According to ADS, Rothschild asserted claim 1 of the ’090 patent in 58 cases against technologies ranging from video cameras to coffeemakers to heat pumps. The district court found "the fact that a patentee has asserted a patent against a wide variety of defendants and settled many of those cases . . . does not alone show bad faith."

The district court based this aspect of its analysis on a clearly erroneous assessment of the evidence, the appellate court reasoned. The district court predicated its finding on "the absence of any showing that [Rothschild] acted unreasonably or in bad faith in the context of this suit." However, as explained above, that ancillary finding improperly rested upon statements from Rothschild’s counsel and founder that had no evidentiary value. Therefore, in the absence of evidence demonstrating that Rothschild engaged in reasonable conduct before the district court, the undisputed evidence regarding Rothschild’s vexatious litigation warranted an affirmative exceptional case finding here.

Rule 11 and 35 U.S.C. § 285. ADS also argued that the district court "improperly conflat[ed] the provisions of Rule 11 and relief under [§] 285." The district court held that "§ 285 should [not] be applied in a manner that contravenes the aims of Rule 11—[Rothschild]’s decision to voluntarily withdraw its complaint within the safe harbor period is the type of reasonable conduct [that] Rule 11 is designed to encourage."

The district court erred as a matter of law when, as part of its analysis, it stated that an attorney fee award under § 285 would "contravene[] the aims of Rule 11[’s]" safe-harbor provision, according to the Federal Circuit. Whether a party avoids or engages in sanctionable conduct under Rule 11(b) "is not the appropriate benchmark"; indeed, "a district court may award fees in the rare case in which a party’s unreasonable conduct—while not necessarily independently sanctionable—is nonetheless so ‘exceptional’ as to justify an award of fees." Octane Fitness, LLC v. ICON Health & Fitness, Inc., – U.S. –, 134 S. Ct. 1749, 1756 (2014).

Concurring opinion. Circuit Judge Mayer, in a concurring opinion, wrote separately to point out that, because the infringement complaint filed by Rothschild was frivolous on its face, the district court abused its discretion in refusing to award attorney fees under 35 U.S.C. § 285.

The case is No. 2016-2521.

Attorneys: Jay B. Johnson (Kizzia Johnson PLLC) for Rothschild Connected Devices Innovations, LLC. Nathan Bailey (Waller Lansden Dortch & Davis, LLP) for Guardian Protection Services, Inc., Alarm Security Group, LLC, Central Security Group - Nationwide, Inc. and ADS Security, L.P.

Companies: Rothschild Connected Devices Innovations, LLC; Guardian Protection Services, Inc.; Alarm Security Group, LLC; Central Security Group - Nationwide, Inc.; ADS Security, L.P.

MainStory: TopStory Patent FedCirNews

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