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Plaintiff Who Won Inventorship Claims but Lost State Law Claims Is Not the Prevailing Party and Must Pay Defendants’ Costs

December 22, 2010

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Last Month at the Federal Circuit - January 2011

Judges: Newman (dissenting), Lourie, Prost (author)

[Appealed from: N.D. Cal., Senior Judge Jensen]

In Shum v. Intel Corp., No. 10-1109 (Fed. Cir. Dec. 22, 2010), the Federal Circuit held that plaintiff Frank T. Shum, victorious on his inventorship causes of action, must nonetheless pay the costs of the defendants under Fed. R. Civ. P. 54(d) as the defendants were the prevailing party. 

Shum and Jean-Marc Verdiell founded a company together called Radiance Design, Inc. (“Radiance”) that dissolved nine months later.  Radiance was formally dissolved pursuant to a Plan of Liquidation (“POL”) that gave both parties equal rights to independently exploit the IP developed by Radiance.  After the dissolution, Verdiell filed for and obtained the seven patents-in-suit.  The patents were subsequently assigned to Verdiell’s company, LightLogic, Inc. (“LightLogic”).  Intel Corporation (“Intel”) later purchased LightLogic, including all of its IP rights for $409 million.

Upon learning of the sale, Shum filed the instant suit, asserting that he should be named as sole or coinventor of the seven patents-in-suit.  Shum also alleged various claims for monetary damages under California state law.

This was the second time this case was before the Federal Circuit.  Before the first appeal, the district court dismissed some of Shum’s claims, held a bench trial on the inventorship issues, and granted SJ on the remaining state law claims.  On appeal, the Court reversed, vacating the judgment, reinstating the unjust enrichment claim, and holding that, because they had common factual issues, Shum was entitled to a jury trial on his state law claims before any court determination of his inventorship claims.

On remand, Shum obtained partial relief.  The jury found that Shum was the coinventor of some claims in five of the seven patents-in-suit, but was unable to reach a verdict on the remaining claims.  After declaring a mistrial, the district court entered judgment for Shum on his coinventorship claims on which the jury reached a verdict and entered JMOL for defendants on the remaining claims.  Following entry of judgment, both parties submitted bills of costs pursuant to Fed. R. Civ. P. 54.  When the parties’ competing costs were offset against each other, Shum owed costs to defendants.  Shum moved to deny defendants costs because, among other things, defendants were not the prevailing party within the meaning of Rule 54.  The district court upheld the award of costs, finding that both Shum and defendants were prevailing parties, because both had prevailed with respect to some claims.  The district court also held, in the alternative, that defendants were the prevailing party. 

On appeal, the Court held, under de novo review, that it was error to declare both parties the prevailing party.  The Court reasoned that although both parties won on certain claims and lost on others, just because a party “prevailed” on a claim does not necessarily make him a “prevailing party” as the term is used in Rule 54.  The plain language of the Rule—“the prevailing party”—unambiguously limits the number of prevailing parties to one.  The Court reasoned that had Congress intended for there to be multiple prevailing parties, it could have easily substituted “parties” for “party.”  The Court explained that this conclusion is reinforced by the use of the definite article “the” before “prevailing party.”  Moreover, the Court noted that Rule 54 has no special rule or exception for mixed judgment cases like this one.  To be a prevailing party, the party must have received at least some relief on the merits that materially alters the legal relationship between the parties by modifying one party’s behavior in a way that directly benefits the opposing party, but a party need not prevail on all claims to be named a prevailing party.

In this case, the Court held that the defendants are the prevailing party.  Defendants won on all of Shum’s state law claims and some of the inventorship claims.  As a result, defendants do not owe any of the $409 million in damages and restitution sought by Shum.  The Court noted that this judgment alters the legal relationship of the parties and, in addition to avoiding significant monetary liability, the judgment will have res judicata effect in any future action.  Conversely, the Court stated that Shum, on the other hand, obtained a property interest in five of the patents and the PTO must correct the inventorship and assignments of those five patents.  In sum, while Shum’s victories also alter the legal relationship of the parties, the Court held that it is not enough to make Shum the prevailing party.

The Court explained that not every alteration in the legal relationship between parties satisfies the Court’s prevailing party test.  The alteration must be (1) material and (2) modify the defendant’s behavior in a way that directly benefits the plaintiff.  In this case, Shum’s victories do not satisfy the second part of the test.  Inventorship was not the central issue in this case—it was about the money.  Thus, the victory has not modified defendants’ behavior in a way that significantly benefits Shum.  By example, the Court explained that with respect to Verdiell, Shum’s coinventorship status has not given Shum a competitive advantage or required Verdiell to change his behavior.  The POL granted each of them the right to pursue any and all activities without incurring any liability to the other.  Therefore, the declaration of coinventorship did not grant Shum any rights that he did not already possess under the POL.  Similarly, Shum’s coinventorship status does not give Shum a competitive advantage with respect to Intel or LightLogic, nor does it require either party to change its behavior because Intel, after purchasing Verdiell’s interest, is still an owner of the patents.

After determining that defendants were the prevailing party, the Court turned to the issue of the reasonableness of the cost award.  Under Ninth Circuit law, the reasonableness of a cost award is reviewed for abuse of discretion and the Ninth Circuit is hesitant to find an abuse of the trial court’s broad discretion over costs.  Nonetheless, the deferential review is guided by a presumption in favor of awarding costs to the prevailing party.  To overcome the presumption, the losing party must establish a reason to deny costs and the district court must give specific reasons for refusing to award costs.  Under the Ninth Circuit’s deferential standard of review, the Court affirmed the reasonableness of the cost award.

In dissent, Judge Newman did not agree that money was the main issue.  Instead, she thought the inventorship of the patents was the main issue and Shum prevailed on most of his inventorship claims.  Judge Newman also suggested that a defendant can only be a prevailing party when the plaintiff loses on all of its claims.  Judge Newman also disagreed that Shum did not gain any rights that he did not already have pursuant to the POL.  She noted that Verdiell made many assertions of exclusivity at trial and stated that “the issue of inventorship is at the heart of the case” and a “necessary element” of all of the other claims.  Judge Newman also disagreed with the reasonableness of offsetting the costs of the parties as a proper method to apportion the award.

Summary authored by Louis L. Campbell, Esq.