Pattern of Nuisance-Value Settlements, Failure to Disclose Material Prior Art, and Uncooperativeness in Settlement Results in Award of Attorney's Fees

Authored by Laith Abu-Taleb, D. Brian Kacedon, and John C. Paul

Abstract

In considering the totality of the circumstances, a Maryland court recently deemed a case "exceptional" and awarded attorney's fees against a company that displayed a pattern of threatening or instituting litigation to induce nuisance-value licenses or settlements, delayed disclosure to the USPTO of material prior art in its possession, and exhibited questionable litigation conduct, including being uncommunicative and uncooperative in the face of its opponent's reasonable attempts to conclude the dispute and making spurious arguments to avoid paying costs or fees. The court also found that the patent owner's dissolution did not shield it from paying the award of attorney fees, noting that the terminated entity continues to survive for purposes of the action until all judgments, orders, and decrees have been fully executed.

In United States patent-infringement cases, a fee-shifting provision enables courts to award attorney's fees to prevailing parties in "exceptional cases." District courts use their discretion to determine when a case is exceptional by analyzing the totality of the circumstances surrounding a case.

Recently, in Novartis Corp. v. Webvention Holdings LLC,¹ the U.S. District Court for the District of Maryland deemed the case "exceptional" and awarded attorney's fees to Novartis Corp., concluding that Webvention LLC's conduct created inferences of improper motivation, litigation misconduct, and a need for deterrence. The court looked to the totality of the circumstances and found that Webvention: 1) threatened or instituted litigation to induce nuisance-value licenses or settlements; 2) delayed disclosure to the United States Patent and Trademark Office (USPTO) of material prior art in its possession during a patent reexamination; and 3) was uncooperative and unresponsive toward Novartis during the course of the litigation.

Background

After acquiring a patent covering webpage "mouse-over" functionality—where an image or graphic changes once a user places the mouse-pointer in a specific location—non-practicing entity Webvention began demanding five-figure licensing fees from companies it said were infringing the patent. Within two years, Webvention claimed to have licensed the technology to over 350 companies. When companies refused to pay the licensing fee, Webvention would file suit and eventually sued 88 defendants in 21 different lawsuits. Many cases settled before reaching the expensive discovery phase of litigation.

After receiving a demand letter from Webvention offering it a license to use the patented technology for $80,000, Novartis filed a declaratory judgment action asking the court to declare that Novartis did not infringe and that the patent was invalid.

During the litigation, the USPTO reexamined the patentability of Webvention's invention based on requests from anonymous third parties. The reexamination triggered a duty on Webvention to disclose all information to the USPTO known to be material to patentability. Only after the substantive portion of the reexamination had concluded in Webvention's favor, however, did Webvention disclose to the USPTO material prior art that an alleged infringer had provided to Webvention about one year earlier. Upon request, a new reexamination was instituted based on the newly disclosed prior art. The USPTO subsequently issued a final rejection of the patent claims that Webvention had asserted against Novartis.

In turn, Novartis filed for judgment in its favor and asked the court to find the case "exceptional" and award Novartis its attorney's fees. Webvention quickly followed by filing a covenant not to sue Novartis and asking the court to dismiss the case. The court dismissed the case, declared Novartis the "prevailing party," and decided the issue of attorney's fees.

The Novartis Decision

The court held that the case was "exceptional" and awarded Novartis its attorney's fees. To support its holding, the court pointed to Webvention's practice of sending hundreds of demand letters to companies offering licenses and threatening or instituting expensive litigation to induce nuisance-value licenses or settlements. Those licensing offers, the court noted, were at prices far lower than the cost to defend a patent-infringement lawsuit, thus inducing companies to settle rather than litigate, which the court characterized as "nuisance settlements." According to the court, Webvention's sole business purpose was to extract licensing fees from as many companies as possible by exploiting the high cost to defend complex patent-infringement litigation.

Additionally, the court highlighted that Webvention was in possession of dispositive prior art but failed to promptly disclose the art to the USPTO during reexamination, and that Webvention continued to threaten or institute litigation to induce licenses or settlements while in possession of the prior art. The court also considered Webvention's uncooperativeness and unresponsiveness toward Novartis in the face of what the court called reasonable attempts by Novartis to conclude the dispute after the USPTO's rejection of Webvention's patent claims.

In total, the court reasoned the evidence justified an inference of improper motives, litigation misconduct, and subjective bad faith on the part of Webvention, resulting in an award of attorney's fees to Novartis to deter such litigation behavior.

Webvention argued that because it is no longer a legal entity, Novartis cannot recover fees from it or its counsel. The court rejected that argument, stating that under Texas law, a terminated entity continues for three years from termination for purposes of "prosecuting or defending in the terminated filing entity's name an action or proceeding brought by or against the terminated entity," "permitting the survival of an existing claim by or against the terminated filing entity," or "settling affairs not completed before termination." If an action on an existing claim against a terminated filing entity has been brought before the expiration of the three-year period, the terminated filing entity continues to survive for purposes of the action "until all judgments, orders, and decrees have been fully executed . . . ." and Novartis's motion for attorney's fees was an action on an existing claim that was brought well within three years of Webvention's dissolution.

Strategy and Conclusion

This case shows a number of factors that a court may consider in reviewing the totality of the circumstances in whether to award attorney's fees: 1) threatening or instituting litigation with the motive of inducing nuisance-value licenses or settlements; 2) failing to disclose material prior art to the USPTO; 3) being uncommunicative and uncooperative with an opponent, particularly after the USPTO finds the asserted patent claims invalid in the face of the opponent's reasonable attempts to conclude the dispute; and 4) making spurious arguments to avoid paying costs or fees. These factors are useful to consider in developing a litigation strategy regardless of whether any one or combination of factors would be enough to create a sufficient basis for awarding attorney fees.

Endnotes

¹ The Novartis decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/Novartis_v_Webvention-1-11-cv-03620-97_2015-10-28.pdf.

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