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Self-Dealing Lawyer Held Jointly and Severally Liable in Trade Secret Misappropriation

by Paul Devinsky | Mar 17, 2022 | Trade Secrets

The US Court of Appeals for the Fifth Circuit affirmed a judgment holding a lawyer jointly and severally liable for trade secret misappropriation and fraudulent transfer and enjoining any further use of the trade secrets until a money judgment against the lawyer-purchased client business was satisfied. Thomas v. Hughes, Case No. 20-50671 (5th Cir. Mar. 3, 2022) (Wilson, J.)

James Pearcy founded Performance Products, Inc., (PPI) to develop and sell probiotics for livestock. In 2006, Pearcy sold PPI to his lawyer, Lou Ann Hughes. Hughes paid cash for PPI’s stock and agreed that PPI would pay Pearcy a 14% licensing royalty for use of his proprietary formulations, up to $1.35 million over five years, at the end of which PPI would have the option to purchase Pearcy’s formulations for $100,000. When PPI did not fully pay the royalties, Pearcy brought a Texas state court action against Hughes and PPI for breach of contract, misappropriation of trade secrets and breach of fiduciary duty. The jury found for Pearcy, and the Texas court entered judgment against PPI in the amount of $1 million. Hughes and PPI appealed the Texas judgment and posted a supersedeas bond, but the appeal was unsuccessful. Pearcy received the supersedeas bond, but PPI never paid the balance of the judgment. Pearcy sought post-judgment discovery and set a hearing on a motion to compel. The day before the hearing, PPI filed for bankruptcy.

Earlier, in 2006, Hughes had formed a second entity called Performance Products International, LLC. At the time of the Texas judgment, the LLC had no assets. During pendency of the Texas appeal, Hughes changed the second entity’s name to Performance Probiotics, LLC, and obtained a license to sell and distribute commercial livestock feed. In January 2012, Hughes ceased selling products through PPI and began selling them through the LLC. Hughes also formed a third entity called Advance Probiotics International, LLC (API).

Shortly after PPI declared bankruptcy, Pearcy’s widow (also Pearcy) and PPI’s bankruptcy trustee (Thomas) sued Hughes, Performance Probiotics and API in federal court for misappropriation of trade secrets and fraudulent transfer of PPI’s assets in violation of the Texas Uniform Fraudulent Transfer Act (TUFTA). The plaintiffs sought to pierce the corporate veil of both Performance Probiotics and API, alleging that Hughes had used them to commit fraud. Thomas further alleged that Hughes had breached her fiduciary duty to PPI. At trial, the jury found for Pearcy and Thomas, awarding about $1.4 million plus interest in actual damages, which was derived from the amount then due under the Texas judgment. The jury further awarded $1.2 million in exemplary damages., The district court entered final judgment, further ordering Hughes to disgorge $860,000 in compensation from Performance Probiotics. The district court enjoined Hughes and Performance Probiotics from using Pearcy’s trade secrets until the judgment was fully satisfied and held Hughes and Performance Probiotics jointly and severally liable for “all relief granted” and “all amounts due” under the Texas judgment. The district court retained jurisdiction over API in case [...]

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This Case Is Both Hot and Exceptional—Attorneys’ Fees and Inequitable Conduct

by Paul Devinsky | Oct 28, 2021 | Patents

In a second visit to the US Court of Appeals for the Federal Circuit, after the Court affirmed a finding of unenforceability due to inequitable conduct based on “bad faith” non-disclosure of statutory bar prior sales on the first visit, the Court affirmed a remand award of attorneys’ fees based on a finding of exceptionality under 35 U.S.C. § 285. Energy Heating, LLC v. Heat On-The-Fly, LLC, Case No. 20-2038 (Fed. Cir. Oct. 14, 2021) (Prost, J.)

In its earlier decision, the Federal Circuit remanded the case after reversing a district court’s denial of attorneys’ fees, finding that while the district court correctly found that Heat On-The Fly (HOTF) committed inequitable conduct in failing to disclose to the US Patent & Trademark Office multiple instances of prior use of the claimed method, the district court failed to articulate a basis for denying attorneys’ fees other than that HOTF articulated substantial arguments (experimental use) against the finding of inequitable conduct.

On remand, the district court found the case “exceptional” because it “stands out from others within the meaning of § 285 considering recent case law, the nature and extent of HOTF’s inequitable conduct, and the jury’s findings of bad faith.” HOTF appealed.

HOTF contended that the district court abused its discretion by relying on the jury’s bad-faith finding because that finding “had nothing to do with the strength or weakness of HOTF’s litigation positions.” Citing the 2014 Supreme Court decision in Octane Fitness, the Federal Circuit rebuffed that argument, explaining that “HOTF made representations in bad faith that it held a valid patent [which] was within the district court’s ‘equitable discretion’ to consider as part of the totality of the circumstances of HOTF’s infringement case.”

HOTF also argued that the district court erroneously relied on the jury verdict in finding exceptionality because, since the jury found that HOTF did not commit the tort of deceit, it could not have engaged in inequitable conduct. The Federal Circuit rebuffed this argument as well, noting that inequitable conduct was tried to the district court—not the jury—resulting in a judgment of unenforceability that the Court affirmed in the prior appeal and that the jury’s finding of no state-law “deceit” had no bearing on inequitable conduct.

The Federal Circuit further explained that HOTF’s assertion that under the Court’s 2020 decision in Electronic Communication Technologies v. ShoppersChoice.com, the district court was not required to affirmatively weigh whether HOTF’s purported “lack of litigation misconduct” was incorrect. Rather, “the manner in which [patentee] litigated the case or its broader litigation conduct” is merely “a relevant consideration.” Under Octane, the test for whether a case is “exceptional” under § 285 is whether it is “one that stands out from others with respect to the substantive strength of a party’s litigating position . . . or the unreasonable manner in which the case was litigated.”

Finally, the Federal Circuit noted that the district court correctly explained that “[a] finding of inequitable conduct [...]

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Induced Infringement Finding May Support Willfulness Finding

by Yoshiko Ito | Oct 7, 2021 | Patents

In a redux visit, the US Court of Appeals for the Federal Circuit found that the record compelled reversal of a district court’s refusal to reinstate a jury’s willful infringement verdict and enhanced damages award but affirmed an attorneys’ fees award, taking into account the finding of willful infringement. SRI International, Inc. v Cisco Systems, Inc., Case Nos. 20-1685; -1704 (Fed. Cir. Sept. 28, 2021) (Stoll, J.)

This is the second appeal in the case. In the first appeal, the Federal Circuit found that the record was insufficient to establish that Cisco’s conduct before May 2012 (when Cisco became aware of the asserted patents) rose to the level of wanton, malicious and bad faith behavior required for willful infringement. In view of the finding, the Court concluded that Cisco could not have willfully infringed and therefore vacated the district court’s enhancement of damages for pre-May 2012 conduct. As for post-2012 conduct, the Court remanded the case to the district court to decide in the first instance whether the jury’s finding of willful infringement after May 8, 2012, (the date Cisco received notice) was supported by substantial evidence. The Court also vacated the district court’s decision to award SRI its attorneys’ fees and remanded for recalculation. On remand, the district court interpreted the original Federal Circuit opinion as requiring a more stringent standard willful infringement and concluded that substantial evidence did not support the jury verdict of willful infringement after May 8, 2012. SRI appealed.

In the second appeal, the Federal Circuit determined whether the record demonstrated that substantial evidence supported the jury’s verdict of willful infringement after May 2021. In analyzing willful infringement, the Court reviewed the instructions provided to the jury on induced infringement:

“Defendant is liable for active inducement only if plaintiff proves by a preponderance of the evidence” that, among other things, (1) “Defendant took some action intending to encourage or instruct its customers to perform acts that you, the jury, find would directly infringe”; and (2) “Defendant was aware of the asserted patents at the time of the alleged conduct and knew that its customer’s acts (if taken) would constitute infringement of an asserted patent.”

The Federal Circuit found that the jury considered the evidence provided by SRI in view of the instructions on induced infringement and that Cisco induced infringement of the asserted claims. Acknowledging that the standard for induced infringement is different than that for willful infringement, the Court nevertheless found that the jury’s unchallenged finding related to induced infringement (i.e., Cisco did not challenge the jury’s findings on appeal) and, combined with Cisco’s lack of reasonable defenses to infringement, was sufficient to support the jury’s verdict of post-2012 willful infringement. Since Cisco was found to have willfully infringed on the asserted patents, the Court determined that SRI was entitled to enhanced damages.

10th Circuit Falls into Line on Exceptionality Doctrine in Lanham Act Cases

by Paul Devinsky | Jun 17, 2021 | Trademarks

Addressing whether the term “exceptional case” in the Patent Act differs in meaning from the same term used in the Lanham Act, the US Court of Appeals for the 10th Circuit upheld an award of attorneys’ fees granted under a motion filed under 15 U.S.C. 1117(a) and clarified that the exceptional case standard in the Lanham Act parallels the standard in the Patent Act. Derma Pen, LLC v. 4EverYoung Limited, et al., Case No. 19-4114 (10th Cir. June 8, 2021) (Lucero, J.)

In 2013, Derma Pen sued several companies for infringement of the “DERMAPEN” mark. Four years later, Derma Pen was granted a permanent injunction prohibiting the companies and “their officers, agents, servants, employees, attorneys, licensees, and anyone in active concert or participation with, aiding, assisting, or enabling Defendants” from using the mark. A few months later, Derma Pen filed for an order of contempt against one of the defendants, Stene Marshall, alleging that Marshall, with the help of other actors (related parties), had been violating the earlier-issued injunction. During the subsequent proceedings, despite being the plaintiff, Derma Pen routinely failed to meet its discovery obligations, causing the related parties to file as many as six discovery motions and resulting in the imposition of sanctions on Derma Pen.

Following an evidentiary hearing, the district court found Marshall in contempt of the injunction, but concluded that the related parties took no part in Marshall’s violation. Subsequently, the related parties moved for attorneys’ fees incurred in the contempt proceeding under the Lanham Act, 15 U.S.C. 1117(a). The district court granted the motion and awarded more than $190,000 in fees based on application of the “exceptional case” standard set forth in the Supreme Court of the United States’ 2014 decision in Octane Fitness v. Icon Health & Fitness. Specifically, the district court decided that the case was “exceptional” because:

Derma Pen produced “no evidence of damages.”
“[T]he evidence showed [Derma Pen] had no right to enforce the injunction.”
“[T]he evidence showed that [the] trademark was abandoned.”
“[M]onetary sanctions were imposed on” Derma Pen for misconduct and delay during discovery.
Derma Pen was “entitled to no relief against the [related parties].”

Derma Pen appealed.

The 10th Circuit affirmed the district court’s holding and fees award for the related parties, noting Derma Pen’s misconduct and delay during discovery. In so doing, the Court adopted the Octane Fitness standard as applicable to cases brought under the Lanham Act.

Practice Note: The 10th Circuit noted that it was acting consistently with other circuits that have considered application of the Octane standard to fee disputes under the Lanham Act, citing LHO Chicago River, L.L.C. v. Perillo (7th Cir. 2019) (collecting cases); Xereas v. Heiss (DC Cir. 2021); and Safeway Transit LLC v. Disc. Party Bus, Inc. (8th Cir. 2020).

Blame the Lawyer: In Exceptional Case, Plaintiff’s Attorney Liable for Court and Appellate Fees

by Paul Devinsky | Apr 1, 2021 | Patents

The US Court of Appeals for the Federal Circuit affirmed an award of attorneys’ fees against a plaintiff and his counsel, and further granted defendants’ motion for appellate attorneys’ fees and double costs where plaintiff had brought baseless claims, engaged in litigation misconduct and brought a frivolous appeal. Pirri v. Cheek, Case No. 20-1959 (Fed. Cir. Mar. 22, 2021) (non-precedential) (per curiam).

When Plaintiff saw Defendant present her patented idea for “online dating in reverse” on the television show “Shark Tank,” he knew that she had gotten the idea from his therapist, Richards, who had betrayed his confidence. Through his counsel, Plaintiff sued Richards as well as Defendant, her company and her co-inventors (whom he never served) (collectively, Cheek) for joint inventorship of the patent (Richards was not a named inventor), and several state law claims, including breach of fiduciary duty, fraud, conversion and unjust enrichment. At the initial pretrial conference, Plaintiff voluntarily dismissed some of the state law claims and the joint inventorship claim against Richards. The district court dismissed the remaining state law claims as “obviously time-barred,” leaving only the joint inventorship claim against Cheek. Defendant moved for Rule 11 sanctions, which the district court denied.

Plaintiff sought leave to amend the complaint to add several new defendants and claims, but the district court denied the motion as futile. Notwithstanding the dismissal of Richards from the suit, Plaintiff subpoenaed Richards’s employment records, but withdrew the subpoena when Richards moved to quash. Plaintiff requested a discovery extension, which the Court denied as relating to irrelevant material. Just before the close of discovery, Plaintiff moved for voluntary dismissal with prejudice. Defendant opposed the dismissal motion in order to seek fees, and the district court denied the motion. Six days later, Plaintiff renewed the motion for dismissal, arguing that the previous denial of Rule 11 sanctions collaterally estopped a fees award. Again, Defendant opposed, and the Court denied the motion.

Two months later, the district court held a pre-summary-judgment conference, before which it ordered Plaintiff to file a letter indicating whether and why he would oppose summary judgment. After declining on several occasions to concede summary judgment or identify any evidence supporting his claims, Plaintiff finally consented to summary judgment for Defendants, which the district court granted.

The district court later granted Defendant’s motion for fees, finding that the case was exceptional. Because Plaintiffs’ counsel had prepared, signed and filed all the relevant submissions, the district court held counsel jointly and severally liable for the award.

Plaintiff appealed, and Defendant moved for appellate fees and double costs.

The Federal Circuit affirmed the fee award, finding no abuse of discretion, and further found that the appeal was frivolous as argued in part because Plaintiff’s counsel distorted the factual and legal bases for the fees award and “leveraged inapposite legal doctrines to make arguments that can only be described as baffling.” The Court concluded that “[w]hen an appeal is frivolous as argued, we may hold a party’s counsel jointly and severally liable.”

The Steep Price of Not Being Exceptional

by Paul Devinsky | Mar 11, 2021 | Trademarks

Addressing the appropriate standard for determining what makes a trademark case sufficiently exceptional to warrant an award of attorney fees, the US Court of Appeals for the Seventh Circuit upheld the denial of a renewed motion for attorneys’ fees under the Octane Fitness standard. LHO Chicago River, LLC v. Rosemoor Suites, LLC, Case No. 20-2506 (7th Cir. Feb.19, 2021 (Kanne, J.)

Some say that imitation is the highest form of flattery—but not in the world of trademarks. And certainly not according to LHO Chicago River. In 2014, LHO rebranded one of its Chicago hotels as “Hotel Chicago.” Two years later, Rosemoor did the same to its hotel on the west side of Chicago. LHO sued Rosemoor for trademark infringement (among other claims). Ultimately, LHO dropped the lawsuit after an unsuccessful motion for preliminary injunction. Rosemoor’s quest for attorneys’ fees, however, lived on.

Rosemoor’s initial request for attorneys’ fees amounted to $500,000. According to Rosemoor, the case was exceptional as defined by the Lanham Act and therefore justified reimbursement of its attorneys’ fees. Rosemoor’s first request was denied. Rosemoor appealed, arguing that the district court’s denial of attorneys’ fees was based on an incorrect standard as to what makes a trademark case exceptional. The renewed request for attorneys’ fees totaled $630,000. Once again Rosemoor was left to cover its own fees, and once again it appealed, but to no avail.

In denying Rosemoor’s initial request for attorneys’ fees, the district court used the “abuse-of-process” standard as explained in Burford v. Accounting Practice Sales. According to Rosemoor, the district court should have used the standard articulated in Octane Fitness v. ICON Health & Fitness to determine whether the case was exceptional. The Seventh Circuit agreed with Rosemoor regarding the appropriate standard, but did not agree that the case was exceptional.

Under Octane, “a case can be ‘exceptional’ if the court determines, under the totality of the circumstances, that it ‘stands out from others with respect to [1] the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or [2] the unreasonable manner in which the case was litigated.'” Relevant considerations for a party’s litigating position “include ‘frivolousness’ and ‘objective unreasonableness.'”

The Seventh Circuit determined that the district court did not abuse its discretion in deciding that the case was not exceptional and did not warrant fee shifting. The Court explained that LHO’s preliminary injunction pleading was not “frivolous or unreasonable,” LHO provided evidence of actual customer confusion, the disputed mark was “not plainly unworthy of protection,” LHO provided evidence of the mark’s secondary meaning, and Rosemoor failed to show that LHO engaged in exceptional litigation misconduct.

Practice Note: When the post-litigation dust settles, practitioners should help their clients evaluate whether their case truly is exceptional within the meaning of the Lanham Act and would thus warrant an award of attorneys’ fees. Appealing a disappointing judgment without strong “exceptional” grounds may end up costing more than it is worth.

More Than a Feeling: No Fees for Frivolous Claim Where “Perceived Wrongs Were Deeply Felt”

by Thomas DaMario | Jul 1, 2020 | Copyrights, Trademarks

Addressing the appropriateness of the district court’s decision to deny attorneys’ fees relating to a copyright claim it labeled “frivolous,” the US Court of Appeals for the Seventh Circuit affirmed the denial, despite the strong presumption in favor of awarding fees. Timothy B. O’Brien LLC v. Knott, Case No. 19-2138 (7th Cir. June 17, 2020) (Flaum, J).
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Supreme Court: PTO Not Entitled to Attorney’s Fees in District Court Appeals

by Paul Devinsky | Jan 2, 2020 | Patents

PATENTS / PTO ATTORNEY’S FEES

In a unanimous decision authored by Justice Sotomayor, the Supreme Court of the United States held that the US Patent and Trademark Office (PTO) is not entitled to recover its attorney’s fees in an appeal to a district court from an adverse decision of the Patent Trial and Appeal Board (PTAB) under 35 USC § 145. Peter v. NantKwest, Inc., Case No. 18-801 (Supr. Ct. Dec. 11, 2019) (Sotomayor, Justice).

The question posed in this case was:

[W]hether such “expenses” [in § 145 proceedings] include the salaries of attorney and paralegal employees of the United States Patent and Trademark Office (PTO).

The answer was a resounding “no.”

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Seventh Circuit Formally Adopts Octane Fitness Standard for Trademark Cases

by Katie Bukrinsky | Jan 2, 2020 | Trademarks

TRADEMARKS / ATTORNEY’S FEE AWARD

The US Court of Appeals for the Seventh Circuit officially joined its sister circuits in holding that the Supreme Court standard for awarding attorney’s fees in patent cases, set forth in Octane Fitness, LLC v. ICON Health & Fitness, Inc., was equally applicable to attorney’s fees claims under the Lanham Act. In doing so, the Seventh Circuit overruled its prior holding that a plaintiff’s claims were only “exceptional” under the Lanham Act if they constituted an abuse of process. LHO Chicago River, LLC v. Perillo, Case. No. 19-1848 (7th Cir. Nov. 8, 2019) (Manion, J).

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