Failure to Conduct Pre-Suit Investigation of Title Does Not Create Exceptional Case

Digeo v. Audible (Fed. Cir. 2007)

Digeo bought its patent out of bankruptcy and sued Audible for infringement. A bit of background on the patent: Two of the named inventors are brothers – Edward and Oliver Chang. Oliver signed the assignment and power of attorney forms on behalf of the estate of his “deceased brother Edward.” During litigation, the facts revealed that Edward is alive and thus, not deceased.  Digeo's case was therefore dismissed for lack of title. (The bankruptcy purchase did not convey legal title because the assignment was forged.)

The appeal here focuses on the sole question of whether the district court properly denied Audible its attorney fees. Under Section 285 of the Patent Act, attorney fees may be awarded in exceptional cases. The CAFC has limited those exceptional cases to “bad faith” litigation that is “vexatious, unjustified, or frivolous.” 

Rule 11 Sanctions and Exceptional Case: FRCP Rule 11 has an interesting burden shifting procedure. Once a movant establishes non-frivolous allegations of Rule 11 violations, the burden shifts the the accused violator to show the reasonableness of its actions. Section 285 operates differently — there is no burden shifting and the exceptional case must be proven by clear and convincing evidence.  The two rules are linked in that a court’s finding of a Rule 11 violation can be then used to prove that the case is exceptional.  Here, there was no finding of a Rule 11 violation and Audible’s plea for a burden shifting procedure were denied.

“Therefore, the burden here is not on Digeo to show it conducted a reasonable pre-suit investigation into … its legal title…. Instead, the burden is on Audible to prove by clear and convincing evidence that the case is exceptional by showing that Digeo brought a frivolous lawsuit because it knew or should have known that it lacked legal title.”

No Heightened Standard for Bankruptcy Purchases: When you buy something “as is,” a smart buyer conducts a more thorough pre-purchase check. Audible here argued that plaintiffs who purchase patents “as is” should also live under heightened pre-filing investigation requirements because of the greater likelihood that the patent is faulty. The court disagreed with that argument — noting that even “negligent conduct does not suffice to establish that a case is exceptional.”

Walking away, the rule is that a patentee has no duty to conduct a pre-litigation title search unless he “knew or should have known its legal title was defective.”  Of course, Digeo won this battle, but lost the overall case because of the faulty title.

The court also denied Audible’s motion for additional discovery to examine any pre-filing misconduct by Digeo. Audible was unable to establish the requisite “reasonable probability that the outcome [of its Section 285 motion] would have been different had discovery been allowed.”

Comments

[Jim H.]

Dennis,

I disagree! How can you title this “Failure to Conduct Pre-Suit Investigation of Title Does Not Create Exceptional Case”? How can you state “[h]ere, there was no finding of a Rule 11 violation and Audible’s plea for a burden shifting procedure were denied”?

Dennis, there was never a Rule 11 motion filed by Audible for a finding to be made! The CAFC states that “[a]lthough a Rule 11 violation can serve as the basis for finding a case exceptional, there was no Rule 11 motion or finding by the district court below upon which to base a finding of exceptionality. . . . Thus, had Audible brought a successful Rule 11 motion against Digeo, the burden would have shifted to Digeo to show it did conduct a reasonable pre-suit investigation.”

Note the language in the opinion stating that "a Rule 11 violation can serve as the basis for finding a case exceptional[.]"

On the lighter side, I find it slightly amusing of the court’s use of “resurrection." The CAFC states “[t]he facts of this case read like a novel in that they involve the resurrection of an inventor thought to be deceased.” Later, when presenting the “clear error” standard of review, the CAFC quotes the 1948 Supreme Court case of United States v. United States Gypsum Co.! Talk about a resurrection! Isn’t there a more recent case to present the clear error standard, or did United States Gypsum provide the right language the judges were looking for?

[Jim H.]

In my opinion, the lesson to be learned is that Audible tried to equate a failure to perform a title search as vexatious, unjustified, or frivolous litigation (to show an exceptional case) by invoking the "pre-suit investigation" language of Rule 11. To establish this as law, however, it might have helped to have filed the dog-gone Rule 11.

[Robert]

Jim,

How are you disagreeing with Dennis? He reported (accurately) that "there was no finding of a Rule 11 violation." This is consistent with the fact that Audible never moved under Rule 11. No Rule 11 motion means no Rule 11 finding.

Dennis could have been more complete by saying that Audible failed to move under Rule 11, but that's not a reason for jumping all over him. He's just providing a short synopsis.

I agree that this was bad lawyering on Audible's part (with the benefit of hindsight). My guess is that Audible's trial attorneys decided not to pursue Rule 11 sanctions because judges tend to hate Rule 11 motions. They may have thought Section 285 was a more diplomatic route to seek attorneys fees.

[Jim H.]

Robert,

While Dennis may be technically correct, a statement like "there was no finding of a Rule 11 violation" implies a Rule 11 motion had been filed and that court did not find a violation.

In future postings, I will attempt to tone down my passion.

[Paul F. Morgan]

While I understand that bringing belated FRCP 11 motions [after unconvering the fatal facts] may not win any popularity contests with judges, the really interesting question to me is whether or not a failure to even attempt to contact, much less interview, the inventors or prosecuting attorneys of the patent before bringing an infringement suit on that patent should itself be reasonable grounds for Rule 11 sanctions?

[Robert]

Interesting thought, Paul. The Federal Circuit had a helpful observation that it took the defendant more than a year to uncover this issue itself. There weren't alarm bells going off at the start of this case, no matter how much the defendant attempted to suggest otherwise. Also, since the inventors apparently were unrepresented parties, the defendant could have contacted them itself just as easily after it received the complaint.

As a litigation attorney, I sure hope that I don't have a duty to track down the inventors before filing suit (absent some cause for alarm, like legitimate concerns about inequitable conduct) and engaging in extensive interviews. That doesn't seem reasonable.

My practice is certainly to do enough due diligence before filing suit to satisfy myself that the plaintiff actually has enforceable rights. However, if I look at an assignment that appears to be legitimate on its face, I wouldn't think otherwise.

There could be any number of "bad facts" that could cause a case to blow up later, but it would be onerous to say that the attorney has to anticipate each theoretical possibility and investigate before filing suit. This case was just a very weird set of facts.