Cross-posted by Forbes.com at its “On the Docket” site
Two prominent governors, Rick Perry of Texas (here, subscrip. requir.) and Mitch Daniels of Indiana (here) recently expressed their support for making the losing party to litigation pay the winner’s legal costs. Nations around the world rely on this “English rule” (a.k.a. “loser pays” or as some have accurately called it, “the everywhere but here rule”) to deter frivolous litigation. America and its economy could no doubt use more tools to stop profit-seeking plaintiffs’ lawyers from gaming the civil justice system, especially at the state level. Lawsuit abuse persists in many areas of the U.S., a reality the American Tort Reform Association reminds us of at this time each year with its irreplaceable Judicial Hellholes® report. The 2010 edition is online now.
As WLF has argued for several decades, however, since anti-lawsuit abuse tools like loser pays must be legislatively enacted, an active and vigilant judiciary, for better or worse, must continue to be a consistent watchdog against the litigation industry’s excesses.
Judges can police lawsuit abuse. U.S. Supreme Court precedents Iqbal and Twombly have effectively encouraged judges to require greater particularity in plaintiffs’ complaints. A properly higher pleading standard has broadly impacted civil litigation, ranging from personal injury to patent infringement matters. For instance, just last week, a federal judge relied upon these precedents to throw out patent troll Interval Licensing’s barebones infringement complaint against Google, Facebook, Yahoo, Netflix, and others. Also, judges can deny certification to abusive class actions, a vehicle which will gain added force if the U.S. Supreme Court reverses the of the Ninth Circuit’s ruling in Dukes v. Wal-Mart next year. And as the Seventh Circuit recently demonstrated in Thorogood v. Sears, judges can use devices like the All Writs Act to slow the spread of copycat class actions. That ruling by Judge Richard Posner so infuriated Thorogood’s counsel that he penned an acerbic motion for rehearing, which the Posner-led panel denied with its own rhetorical flair.
As Judge Posner wrote in that rehearing denial, it is “the right and indeed the duty of judges to criticize lawyers who try the patience of the members of the bar, and the courts.” Federal and state civil procedure rules and the judiciary’s inherent authority allow judges to go beyond criticism when necessary and punish lawyers and litigants. Judges can impose sanctions and issue orders that defendants’ (or plaintiffs’) must pay the attorneys’ fees of its opponent.
The world of patent trolling offers us a potent example of judicial sanction authority and the financial discomfort it can create for plaintiffs (and their lawyers) who step over the line.
A Case Study in Judicial Sanctioning: Eon-Net v. Flagstar. This past November, the U.S. Court of Appeals for the Federal Circuit denied an attorney’s claim of irreparable harm (the attorney’s declaration was “unsworn and was unaccompanied by any documentary evidence”) in Eon-Net L.P. v. Flagstar Bancorp, upholding a Rule 11 sanction against the attorney of $141,984 and an order that Eon-Net pay Flagstar’s $489,150 attorneys’ fees. This ruling brings four years of judicial orders and appeals closer to an end (the Federal Circuit’s order rejected a stay of enforcement of the sanction while Eon-Net and its lawyer’s appeal goes on) in a lawsuit where the patent troll plaintiff (a limited partnership with a PO box in the British Virgin Islands) essentially claimed that any Internet website using HTML technology to conduct e-commerce infringed its patent.
Flagstar takes loan applications online using licensed software sold to it by another company, Kofax. Kofax’s software utilized the Eon-Net patented technology, which Eon-Net had licensed to Kofax. After Eon-Net sued, Flagstar subpoenaed the licensing agreement between Eon-Net and Kofax, and Eon-Net instructed Kofak to ignore the subpoena, and eveb threatened to sue Kofak if it complied. Flagstar tried to work with Eon-Net for over a year to help it understand how Flagstar used the software and why it wasn’t infringing Eon-Net’s patent. Incredibly, once Eon-Net realized its original allegation of infringement had no basis, instead of dropping the suit, Eon-Net came up with a new theory of infringement. Eon-Net also proceeded to file copycat infringement lawsuits against 15 other online merchants, offering to settle each at a fraction of litigation costs. Eon-Net offered Flagstar the same nuisance value settlement, but it refused.
Flagstar moved to dismiss the suit and sought attorneys’ fees and sanctions under Civil Procedure Rule 11, alleging that Eon-Net’s counsel failed to perform any pre-filing investigation of how Flagstar infringed Eon-Net’s claimed patent. As Judge Ricardo Martinez of the Western District of Washington explained in his October 4, 2006 ruling, Eon-Net’s counsel did little more than look at Flagstar’s website and note that it collected and extracted information from customers. The lawyer consulted no experts, nor did he even review the commercially available Kofax software. Such an approach, the court wrote, was apparently Eon-Net’s modus operandi:
Eon-Net has made the failure to investigate or identify infringing technology the hallmark of its litigation plan. Possible repercussions for failure to investigate are balanced against an economy of scale effected by filing numerous lawsuits which will cheaply settle. Here, it appears that Eon-Net began its investigation of Flagstar only after it realized that Flagstar would not pay the ‘inexpensive’ settlement. Such litigation conduct is unacceptable. (Emphasis added)
Judge Martinez didn’t stop at imposing sanctions on Eon-Net’s lawyer and ordering the plaintiff to pay Flagstar’s fees. Noting that he was “shocked” by Eon-Net’s filing of eleven more copycat lawsuits while Flagstar’s motion for fees and sanctions were pending, the judge wrote he found “that indicia of extortion are present in this case.” He added:
Eon-Net offers a nuisance settlement at the outset to avoid a hard look at the merits of its infringement claims. Given the extraordinary cost of patent litigation, even the finest patent attorney would need to think carefully before advising a client to spend hundreds of thousands of dollars in litigation when a [cheap] settlement was on the table.
So the judge then did something quite remarkable, an action which we hope other judges consider. He ordered Eon-Net to provide a copy of his sanctions and fees order to every defendant it had sued on claims identical to those brought against Flagstar.
Beware of the Boot. The Eon-Net litigation has gone up and down on appeal and remand for four years leading up to the November Federal Circuit ruling. Judge Martinez’s comments about the crushing costs of patent litigation, and the steps he took to end the plaintiff’s extortionist behavior, are just as timely and appropriate now as they were when he took action four years ago. We hope that defendants see the Federal Circuit’s most recent action allowing the sanctions to be imposed while Eon-Net’s appeal is still pending as a signal that fighting frivolous litigation can pay dividends. The ruling should also send a message to plaintiffs that when one goes trolling for easy money in America’s civil justice system, there is always a real risk you will dredge up a (very costly) boot instead.