Thursday, June 9, 2011

Parrallel Networks – Recognition of a Patent Defendant’s “Hobson’s Choice” in the E.D. Texas

And the Start of a Trend to Help Defendants Deal With It?

Two (fairly) recent procedural orders from the Tyler Division of the Eastern District of Texas reflect a new approach to case management in patent cases, where defendant’s often face the no-win dilemma of settling a claim that they believe has little or no merit, or spending more than the settlement demand in defense costs to prove that it was not liable.

Imagine you’re a defendant in a “typical” multi-defendant patent case brought by a non-practicing entity. You look at the patent and the file history and try to make sense of the infringement allegation, but you can’t – no matter how you look at it, the claim is meritless. The plaintiff contacts you and offers to resolve the case with you for only $500K if you settle early, before both sides are forced to expend resources litigating the case. You know that it will cost over $1 Million to get through the discovery phase and claim construction proceedings and another million or more to get through summary judgment and trial. Given the ominous possibility of spending millions in legal fees to prove that your company did not infringe the plaintiff’s patent (and still have some risk that the judge or jury won’t agree), the $500K offer starts looking like a “reasonable” business resolution to the dispute, even though you are sure that the claim has no merit.

This scenario plays out on a regular basis in cases brought by non-practicing entities. The problem has been particularly acute in the Eastern District of Texas, a forum known to favor trials over summary judgment as the best tool for resolving disputes. The Local Patent rules, intended to efficiently and fairly move cases to trial simply do not provide a built in mechanism for a defendant to dispose of a weak case without spending hundreds of thousands or millions of dollars in defense costs. Plaintiff’s recognize and exploit this dilemma – filing suit against dozens, sometimes over a hundred, defendants, knowing full well that most, if not all, will settle for substantial amounts regardless of the merits of the claim.

Thus, the Hobson’s choice – pay the plaintiff and remove the risk, or pay defense counsel (maybe more than the settlement offer) and accept the risk of success.

Judge Davis faced this dilemma head-on in Parallel Networks v. Abercrombie & Fitch, et (6:10-cv-111) and to his credit, fashioned a procedural remedy to address this problem.  (See Memorandum Opinion and Order, D.I. 338, March 15, 2011).  In Parallel Networks, the plaintiff (a NPE) filed suit against 124 defendants in four related cases. In response to J. Davis’ inquiry, plaintiff’s counsel admitted that its litigation strategy involved offering defendants a substantial discount on potential liability to entice early settlement. The magnitude of the settlement offer was based less on a risk-based assessment of potential damages, but on the certainty of incurring significant defense costs.  J. Davis noted that “[p]laintiff’s strategy presents Defendants with a Hobson’s choice: spend more than the settlement range on discovery, or settle for what amounts to cost of defense, regardless of whether a defendant believes it has a legitimate defense.” Defendants’ counsel argued for a limited claim construction/summary judgment proceeding in which the parties would only address three (3) claim limitations that defendants’ argued as being case dispositive. J. Davis granted this request and significantly limited discovery until this motion is resolved. (A hearing is set for June 21, 2011).  The parties will be bound by the court’s construction of the three claim terms, but will not otherwise be prejudiced by this early summary judgment motion.

A month later, in Whetstone Electronics, LLC v. Xerox Corp., (6:10-cv-278) Magistrate J. Love, also in Tyler, followed suit and granted a similar order. (See Order, D.I. 156, April 7, 2011).  A Markman hearing on the three selected terms in this case is scheduled for July 13, 2011.

If these summary procedures successfully resolve these cases (in other words, if the defendants’ cases are as strong as they have suggested to the court) Parallel Networks may signal the start of a trend towards case management of multi-defendant cases in which the defendants have a meaningful procedure available to dispose of meritless cases without being driven to resolution solely by the cost to defend the case, regardless of the merits. To insure that this happens, however, defendants have an obligation to the court to deliver the goods. If, in every case, the defendants call for an expedited summary proceeding and fail to deliver clear positions where no questions of fact preclude summary judgment, it would not be surprising for the court to conclude that these procedures are not justified and revert to more traditional case management.

*** I started this post back in April, after the Whetsone order, but didn't get around to finishing it then.  Its not "hot news" anymore, but its still important so I thought it was worth posting now, even if its a bit late.


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