IP Firm’s Appeal of $9M Malpractice Verdict is Denied, Part III of III

Editor’s note: this post was originally published on 10/26/2015. It has been updated to reflect recent developments, and divided into three parts for easier reading. This is part III. Part I  Part II  

Further Activity
2015

July: ATS&K filed a Notice of Appeal.

October 13th: The Court approved Protostorm’s motion to register the Amended Judg-ment in federal district courts, state courts in California, Florida, Texas, etc., “and in such other jurisdictions as Protostorm may determine…that the judgment debtors’ assets have been or may be found”. It subsequently registered the judgment in Minnesota.

October 14th: The court granted Protostorm’s motion to hold ATS&K, its managing part-ner Schiavelli, and its equity partners in contempt for violating the Court’s December, 2014 order, which limited “ATS&K’s ability to transfer monies.” Those limitations were imposed “to provide additional security to Protostorm regarding its ability to recover on the judgment”, and were in lieu of ATS&K posting a bond to stay enforcement of the judgment while its post-trial motion was pending.

The Court Order prohibited ATS&K from “paying expenses beyond ‘operating expenses incurred in the ordinary course of business[.]’” However:

“…it is undisputed that, after informing Protostorm that it had ceased providing legal   services as of April 30, 2015, ATS&K made payments to firm members and various      third parties totaling $118,033 in May 2015.

 (Further), ATS&K unreasonably failed to inform the Court that it had ceased perform-  ing legal services in April or seek guidance from the Court on whether it was permitted to make payments for expenses that logically could be deemed non-operating.”

As a remedy, the Court ruled that the “surplus in ATS&K’s accounts at the close of April 2015 ($60,209.00), plus ATS&K’s total revenues in May 2015 ($163,970.00) compensates Protostorm for ATS&K’s contempt of the December 24 Order…”

The total sanction against ATS&K and Schiavelli was thus $224,179.00, which “shall be enforceable against ATS&K’s assets and Schiavelli’s personal assets.”

October 20th: In a letter (PACER reg. req’d.; document #725) to Judge Chen, ATS&K’s counsel foretold its appeal strategy, stating that since the briefing on the post-trial motions in June:

“there have been numerous additional decisions demonstrating that (i) Protostorm’s   invention is unpatentable under Alice…; (ii) patentability under Alice is to be decided  as a matter of law and thus not waived; (iii) patentability of that alleged invention is  judged under the Alice standard, which applies retroactively; and (iv) a patent prose-  cution malpractice claim fails in the absence of a patentable invention.”

The attorney cited Encyclopedia Britannica v. Dickstein Shapiro LLP, in which “the Court rejected the exact arguments that Protostorm has made here”, Kroy IP Holdings, LLC v. Safeway, Inc., and OIP Technologies v. Amazon.com, Inc.

The attorney concluded “there are significant questions whether (Protostorm) will be able to prevail on appeal.”

October 27th: ATS&K appealed the Contempt Order.

November, 2015 – ATS&K filed its opening brief with the Second Circuit appellate court, reiterating its claim that Protostorm’s invention isn’t patentable under Alice, and without a patentable invention, Protostorm LLC can’t sustain a claim for malpractice. “Because Protostorm had no patentable invention, any alleged malpractice by ATSK did not result in a cognizable harm.”

The firm argued that Alice and similar decisions have held that abstract computerized ideas like Protostorm’s method for providing advertising in the context of Internet video games, cannot be patented under Section 101 of the Patent Act. “Rarely has there been such an abundance of directly applicable, uniformly-decided precedent on the critical question at issue.”

ATS&K also contested District Court Judge Chen’s refusal to set aside the jury verdict, because it didn’t raise these defenses until after the trial, when it filed its 50(a) motion. The firm argued that it “preserved its Section 101 argument by raising it in its post-trial motion…(Further), even if ATSK had not asserted the defense in its post-trial motion…a party can raise a pure question of law such as ATSK’s Section 101 argument for the first time on appeal.”

ATS&K also argued that even if Protostorm’s invention wasn’t fatally flawed, it failed to prove damages, which is an essential part of a New York legal malpractice case. Finally, it claimed that Judge Chen’s order that it pay nearly $225,000 in sanctions was “plainly contrary to law…The order must have been ‘specific and unambiguous,’” the firm said, contending it was not.

2016

March – Protostorm filed a cross-appeal challenging Judge Chen’s ruling that the damages apportioned to ATS&K attorneys Brundidge (15%) and Bailey (6%) should be assigned to ATS&K.

June – former ATS&K attorney Carl Brundidge urged the Second Circuit to deny Protostorm’s cross-appeal, arguing that it agreed to let Judge Chen determine the apportionment of compensatory damages among the defendants, but after final judgment was entered holding ATS&K solely responsible, it tried to change its theory on the apportionment of damages and have Brundidge held jointly and severally liable.

Brundidge argued that Judge Chen was correct to deny Protostorm’s attempt to change the damages apportionment. Further, “Mr. Brundidge would be substantially prejudiced by now applying joint and several liability to hold him liable for $6.696 million in compensatory damages, plus over $1 million in prejudgment interest. It is necessary and appropriate to find waiver here because Mr. Brundidge was deprived of an opportunity to offer evidence relevant to the issue of joint and several liability at trial.”

He concluded that Protostorm must be held to its decisions, and since the apportionment of damages was consistent with Protostorm’s trial strategy, the Second Circuit should affirm the district court’s apportionment decision.

August – ATS&K filed a brief with the Second Circuit reiterating its earlier argument that Protostorm’s patent would be considered an abstract computer idea under Alice, and a patent prosecution malpractice claim can’t be sustained with regard to an unpatentable invention. “When the law is properly applied, Protostorm’s claim crumbles and the judgment against ATSK must be set aside.” It also argued that Protostorm misstated the law when it claimed that Alice cannot be applied retroactively, and wrongly claimed that its invention was more than an abstract computer idea.

Protostorm also filed a brief, which opposed the argument of ATS&K attorneys Brundidge and Bailey that Judge Chen correctly absolved them of individual liability. The company said as agents of ATS&K at the time the patent application was allegedly mishandled, the attorneys are “jointly and severally liable” for the damages and interest awarded to Protostorm. “Under the case law cited in Protostorm’s opening brief, nothing could be clearer than the applicable tort law principles that a principal is liable for the negligent actions of its agent under the doctrine of respondeat superior and the agent, in this case Brundidge and Bailey, remains liable for the agent’s negligent acts,”

Brundidge also filed a brief, which sought to revive the Statute of Limitations defense that had been rejected by the lower court in 2011, via denial of defendants’ MSJ. He claimed that “there is no dispute” that Protostorm filed its malpractice claims against him “many years” after New York’s three-year statute of limitations for such claims had expired.

He also sought to have the $100,000 judgment against him for punitive damages overturned, arguing that Protostorm failed to show that his alleged errors in handling the patent application “were intentional, wanton or malicious”, and that the record demonstrated that he warned Protostorm that its patent would be abandoned by the firm unless it took further action, according to his brief.

November – Oral argument took place before a panel of Second Circuit court judges.

ATS&K, Bailey, Schiavelli, and Brundidge urged the panel to reverse the judgment for Protostorm LLC, because its invention wasn’t patentable, even though they failed to raise the patentability defense at trial.

They relied primarily on Encyclopedia Britannica v. Dickstein Shapiro LLP, (see Part II), which their attorney argued “is on all fours with this present case”.

Protostorm’s counsel countered that the defendants were trying to “undermine” the jury’s findings by making the appeal about patent law instead of legal malpractice. “This is not a patent-law case…We can’t pretend that there was not an actual trial here.”

The sides also argued over what portion of damages each defendant could be held responsible for, and over whether a Judge Chen’s contempt order and sanctions against ATS&K and attorney Schiavelli were proper.

The judges raised the possibility that defendants had waived their Alice defense by not bringing it up before trial, and asked if there weren’t also factual issues to consider, which would preclude a ruling on patentability based solely on the law.

December – The Second Circuit upheld the District Court’s judgment against ATS&K.

The panel ruled that defendants couldn’t raise the argument that Protostorm’s invention was unpatentable on appeal based on Alice, because they failed to preserve the argument in their motions for judgment as a matter of law during trial.

The panel also found that the jury’s verdict was supported by Protostorm’s damages model offered at trial.

Wrapping up the other outstanding issues, the panel:

  • Rejected attorney Brundidge’s arguments that Protostorm’s suit against him was time-barred as a matter of law, ruling “the jury’s verdict on the statute of limitations was legally proper and was supported by sufficient evidence.” Brundidge is thus responsible for the judgment against him of $100,000 in punitive damages, as awarded to Protostorm by the District Court.
  • Reversed Judge Chen’s contempt ruling against former ATS&K Managing Partner Alan Schiavelli for violating the terms of a December 2014 court order barring the firm from making payments outside of normal operating expenses, because he was no longer the managing partner when those payments were made.However, the panel upheld Judge Chen’s contempt ruling against ATS&K itself (and presumably, the sanctions of $224,179.00).
  • Denied Protostorm’s cross-appeal seeking to hold attorneys Brundidge and Bailey jointly and severally liable with ATS&K for the judgment, ruling that its counsel had waived the issue at trial.

III. Next Steps

A. Defendants can request that the Second Circuit rehear the panel’s decision en banc, but this case doesn’t appear to be complex or important enough for the request to be granted.

B. It’s bitterly ironic that the seeming conclusion of this nearly nine year-old legal malpractice claim may spawn further legal malpractice claims:

    • ATS&K may have a viable malpractice claim against its trial counsel for failing to preserve during the trial the argument that Protostorm’s invention was unpatentable, based on Alice. As noted, the appeals court ruled that this omission prevented defendants from raising that argument on appeal.
    • Protostorm may have viable malpractice claim against its trial counsel for waiving its right to seek to hold attorneys Brundidge and Bailey jointly and severally liable with ATS&K for the judgment.

      As mentioned above, Protostorm moved to register the judgment in other jurisdictions where defendants may have assets, a clear sign that it was concerned about its ability to collect. As mentioned in Part II, ATS&K essentially shut down in April, 2015, so it doesn’t have ongoing cash flow. Further, its assets have likely been removed, and Protostorm has no recourse against its former equity partners. Therefore, having Brundidge and Bailey declared jointly liable for the verdict would’ve given Protostorm additional leverage, although it’s unclear if they have sufficient assets to satisfy the balance of the judgment, after ATS&K’s malpractice insurance policy is exhausted.

IV. Lessons

A. Law Practice Risk Management

This case stemmed from the simplest of errors – the failure to check a box on a patent application.

A logical way to prevent such errors is to have a second set of eyes review every patent application before it’s filed; a competent paralegal would’ve easily caught the error.

ATS&K was also undone by failing to utilize two essential law practice risk management techniques:

  1. Engagement letter – one of its main purposes is to specify the scope of services that a firm will provide. If ATS&K and Protostorm had signed an engagement letter stating that the firm would only file the patent application, i.e., not prosecute it, then the court may well have granted its motion for summary judgment. And if the engagement letter stated that the firm would both file and prosecute the patent, then perhaps it would’ve felt compelled to do so, rather than ceasing work on it.

Further, a well-drafted engagement letter includes a fee agreement that specifies the rate the firm will be paid, and the billing and payment cycle, and provides that the firm may withdraw from representation for non-payment of fees.

Having this in writing may have motivated Protostorm to pay ATS&K’s bill, which in turn would’ve motivated the firm to continue handling the matter after 2001. Conversely, it would’ve given the firm solid grounds to withdraw, if Protostorm didn’t pay its bill.

  1. Termination letter – ATS&K’s failure to send one to Protostorm in late 2001 for non-payment of fees (assuming they were still owed), tolled the Statute of Limitations, which in turn led the court to deny the firm’s Motion for Summary Judgment based on the SOL having expired before the complaint was filed.

Instead, the court found that there was a question of fact as to whether or not the attorney-client relationship was terminated before June, 2007, when the firm told Peter Faulisi that the patent application had been abandoned.

Another error that was made didn’t affect the outcome of the case, but is a ‘red flag’ for IP practitioners: ATS&K didn’t object to attorney Worthington, a non-IP practitioner, filing a second provisional patent application that covered new features of Protostorm’s invention.

IP litigator Paul Swanson states:

“The involvement of unsupervised, non-patent practitioners in the preparation and filing of the second provisional patent application cast a large dark cloud of legal uncertainty over Protostorm’s PCT patent application…According to ATS&K’s ethics expert witness…(that) unauthorized filing ‘by itself, would have severely reduced if not eliminated the likelihood that any patent would have ever been enforced in litigation or otherwise.’” 

That in turn would’ve likely led to a malpractice claim.

V. Conclusion

After nine years of litigation, a trial, and an appeal, this case still isn’t over: the parties are involved in ongoing litigation with Minnesota Lawyers Mutual, ATSK’s malpractice insurer.

We’ve covered that in this post.

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About Curtis Cooper

Curtis Cooper is principal of Lawyers Insurance Group – Broker For Great Law Firms, which helps attorneys optimize their malpractice coverage. Contact him by phone: (202) 802-6415, or email: ccooper “at” lawyersinsurer.com.