EDTX closely scrutinizes nuisance value settlement strategy

Intellectual Property and Technology News

A trend is emerging in multi-defendant patent cases in the patent-heavy docket of the Eastern District of Texas – at least in the numerous cases assigned to Judge Leonard Davis in Tyler. Over the past several months, Judge Davis has repeatedly expressed concerns surrounding plaintiffs who assert questionable patents to extract “nuisance value” settlements. In a recent patent case brought by Raylon LLC, Judge Davis summarized his views:

[T]his Court has some concerns about plaintiffs who file cases with extremely weak infringement positions in order to settle for less than the cost of defense and have no intention of taking the case to trial. Such a practice is an abuse of the judicial system and threatens the integrity of and respect for the courts. Often in such cases, a plaintiff asserts an overly inflated damages model, seeking hundreds of millions of dollars, and settles for pennies on the dollar, which is far less than the cost of defense. Where it is clear that a case lacks any credible infringement theory and has been brought only to coerce a nuisance value settlement, Rule 11 sanctions are warranted.

Raylon LLC v. EZ Tag Corp., Case No. 6:09-cv-357, slip op. at 5 (E.D. Tex. Mar. 9, 2011) (order denying motion for sanctions).

Although Judge Davis found that Raylon’s claim construction positions did “stretch the bounds of reasonableness,” he ultimately concluded that Rule 11 sanctions were not warranted because counsel’s positions were not “objectively frivolous.” Id. at 4. However, Judge Davis made clear that he will consider imposing Rule 11 sanctions when plaintiffs attempt to extract nuisance value settlements with questionable patent claims. To that end, Judge Davis now may require the submission of settlement agreements in camera as part of the initial Scheduling Conference and will probe a plaintiff’s litigation and settlement strategy at the conference. See PacID Group, LLC v. Cisco Sys., Inc., Case No. 6:09-cv-324, slip op. at 3-4 (E.D. Tex. Mar. 16, 2011) (order consolidating cases).

In addition to raising the specter of Rule 11 sanctions, Judge Davis has in one instance modified the usual schedule under the patent local rules to quickly test the viability of patent claims through a targeted Markman hearing. Parallel Networks v. Abercrombie & Fitch Co., Case No. 6:10-cv-111 (E.D. Tex. Mar. 15, 2011) (order consolidating cases, denying motion to bifurcate). In Parallel Networks, Judge Davis used Patent Local Rule 1-2 to stay all discovery in favor of an expedited Markman hearing (only three months after the initial scheduling conference) on three claim terms the parties agreed were critical to the determination of liability. Id. at 6-7. The court recognized that proceeding under the Eastern District of Texas’s default patent rules was presenting 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.” Id. at 6. Clearly troubled by potential abuses of the system, Judge Davis departed from the typical case schedule to make a defense on the merits more economically feasible.

In examining these recent decisions, it is clear that serial litigation against large numbers of defendants is likely to attract increased scrutiny. In fact, the court noted in its recent decisions that 180 defendants had been sued by PacID in four separate suits and 124 defendants had been sued by Parallel Networks, also in four separate suits. The court also has recognized that in cases with numerous defendants, “even a simple joint proposed discovery order turns into hours of attorney communication.” Id. at 6.

Judge Davis is open to creative solutions in avoiding potentially unnecessary discovery expenses while focusing patent cases on the merits. This trend can benefit all involved by determining and then concentrating on substantive and potentially dispositive legal issues.

For more information about the EDTX, please contact John Guaragna and Brian Erickson.