Motivating Suppliers to Take a License by Suing Several Customers Was Not Improper and Did Not Justify Awarding Attorney Fees

Abstract

A Delaware court recently found that, absent other aggravating factors, a patent owner’s strategy of filing multiple patent infringement suits against customers to get suppliers of an accused product to take licenses was not an improper motivation meriting the patent owner to pay the attorney fees of the customers it sued.

In "exceptional" cases, courts may require the losing party to pay the attorney fees of the winning party. Such exceptional cases stand out from other cases as to either "the unreasonable manner in which the case was litigated" or "the substantive strength of [the losing] party’s litigating position."

In Pragmatus Telecom LLC v. Newegg Inc.¹, a Delaware court rejected a motion for attorney fees, recognizing that while a pattern of filing lawsuits in order to force settlements can render a case exceptional, the accused infringer had failed to provide facts sufficient to prove the patent owner’s motives were exceptionally improper. The court also held that because the accused infringer failed to provide sufficient evidence to support its non-infringement and invalidity arguments, it could not find the patent owner’s litigating positions exceptionally meritless.

Background

Pragmatus sued 70 companies, including Newegg for using its patented live chat technology on their websites. Suppliers of the accused live chat technology intervened in the dispute by asking for the court to declare the patents invalid and not infringed. Ultimately, the suppliers settled, taking licenses to Pragmatus' patent. Because Newegg was licensed as a result of Pragmatus' settlements with the suppliers, the court agreed to dismiss the case against Newegg.
Newegg then asked the court to award attorney fees and costs available to "prevailing" parties in exceptional cases. While the trial court initially found that Newegg was not a prevailing party, the Federal Circuit on appeal reversed the trial court, holding that Newegg was a prevailing party, and it remanded the case to the trial court to determine whether the case was "exceptional," entitling Newegg to reimbursement for attorney fees.

In determining whether the case was "exceptional" the trial court considered Pragmatus' litigation behavior and strategy and its legal arguments and positions.

Pragmatus' Litigation Behavior and Strategy

Newegg argued that Pragmatus engaged in vexatious litigation tactics and strategy that demonstrated Pragmatus' lack of intent to ever pursue the case on the merits. Newegg's central argument was that, rather than pursuing meritorious claims for patent infringement against suppliers of the live chat technology, Pragmatus brought lawsuits against 70 customers of those suppliers to force the suppliers to take licenses to the Pragmatus patents. Newegg claimed that Pragmatus' lack of diligence in discovery and deficient infringement contentions demonstrated that Pragmatus never intended to pursue the cases against customers on their merits. Newegg also claimed that Pragmatus' initial opposition to Newegg's motion to transfer the case to the District of Delaware, followed by its later stipulation to the transfer, demonstrated Pragmatus’ intent to delay the case unreasonably.
Pragmatus responded that it received core technical documents from Newegg under the local rules of the court, and therefore had no need to serve additional discovery on Newegg. Pragmatus claimed that it didn't need to pursue the litigations against customers once settlements with Newegg's suppliers were imminent, and that it only stipulated to the transfer because the District of Delaware lifted an earlier stay of the case.

The court found that the patent laws expressly allowed Pragmatus to bring suits against customers, rather than the suppliers, of the live chat technology. And it distinguished cases awarding attorney fees based on a pattern of litigation abuses when a plaintiff repeatedly sued the same accused infringer’s customers in order to motivate or force the supplier to get involved and settle cases. Newegg did not persuasively point to any recurring patterns in Pragmatus' litigation conduct, or to any other aggravating behaviors by Pragmatus (e.g. as false testimony, destruction of evidence, or other offensive conduct), and so, the court declined to second-guess Pragmatus' motivation.

The court also pointed to the nearly $6 million settlement between Pragmatus and three of the suppliers as evidence that Pragmatus was not abusing the litigation process by seeking mere nuisance settlements. Newegg alleged that when the large settlement amount was distributed among the numerous underlying customer suits, each customer case was only settled for nuisance amounts. But the court noted that Newegg did not specifically quantify the value of the settlements by customer defendant, elaborate on how many customer suits were terminated as a result of the supplier settlements, or provide any other evidence or expert testimony to substantiate its claims. Without such information, the court would not accept Newegg’s assertion that Pragmatus sued the customers solely for the purpose of extracting nuisance settlements.

The court also disagreed with Newegg's criticism of Pragmatus' behavior in discovery. The court found that Pragmatus' behavior was not unusual for the early stages of discovery, especially in light of the ongoing settlement talks between Pragmatus and the suppliers. The court found that Newegg had not presented sufficient facts to support its position that Pragmatus' behavior was exceptional compared to other cases. Similarly, as to Newegg's argument that Pragmatus' intention to delay the case was clear from its opposition and then later stipulation to transfer venues, the court found Pragmatus' explanation of its decision plausible and therefore declined to speculate that Pragmatus' intentions were inappropriate.

In summary, although suing 70 customers and then reaching settlements with the suppliers might suggest that Pragmatus possessed a bad motive, the facts presented by Newegg, including the discovery, infringement contention, and transfer, did not substantiate this assertion.

Pragmatus' Legal Arguments and Positions

Newegg also argued that Pragmatus' claims were exceptionally meritless because there is no reasonable basis for infringement and all the patents at issue are invalid. The court disagreed, finding Newegg's arguments cursory and failing to demonstrate that Pragmatus' position was exceptionally meritless, and noting that without full-blown litigation including claim construction and expert testimony, Newegg was facing an up-hill battle to prove that Pragmatus' position was exceptional and without merit based on invalidity and infringement positions.

Strategy and Conclusion

This decision illustrates the challenges of adequately supporting arguments for allegations of bad faith or improper motivation in pursuing an award of attorney fees. It also points out the difficulty of demonstrating that a lawsuit was meritless before claim construction and expert testimony. Finally, it confirms the ability of a patent owner to seek damages from either customers or suppliers of infringing technology absent inappropriate repeated patterns of behavior or other extenuating circumstances.

Endnotes
¹ The Pragmatus Telecom LLC v. Newegg Inc. opinion may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2016/ded-1-12-cv-01533-523.pdf.