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

Patent MalpracticeEditor’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 I. Part II  Part III

In what may be the final chapter in a saga that has spanned more than 16 years and courts from New York to Minnesota, a Second Circuit appellate panel upheld a start-up’s $9 million legal malpractice verdict against an IP law firm, for failing to obtain a patent for the start-up’s ad-targeting technology.

I. Background

A. The Inventors

Peter Faulisi and Courtland Shakespeare, co-founders and principals of Protostorm, LLC, in New York City.

B. The Invention

An online game that required players to interact with simulated pages of advertisers’ websites that were placed in the game, in order to advance in game play. Players had to complete tasks, i.e., use tools to uncover hidden messages and “clean up” the pages, in return for which the advertiser would send them coupons or gifts.

The game enabled dynamic tracking of player activity, real-time delivery of targeted ads based on a player’s interaction with an advertiser’s simulated web pages, and tracking and reporting of those ads’ effectiveness.

By having players interact with sponsor content during game play, the game sought to overcome banner and static ads’ low click-through rates, and the fact that when players did click on ads, they left the host site.

C. The Attorneys 

  • Duval & Stachenfeld (D&S) LLP, and John Ginley, corporate counsel to Protostorm.
  • Kathy Worthington, a non-patent attorney said to be knowledgeable about IP matters.
  • Antonelli, Terry, Stout & Krauss, LLP (ATS&K), an Arlington, VA IP law firm.
  • Dale Hogue, Of Counsel to ATS&K, and later, a solo practitioner.

 D.  The Patent Application

Timeline

2000

February-March: Protostorm’s principals told D&S that they wanted to obtain a patent for their invention. John Ginley advised them to retain patent counsel, and referred them to Worthington, who they retained.

May: following an introduction by Worthington, the principals retained ATS&K and Dale Hogue. According to Peter Faulisi, “[n]o specific limits” on their roles were discussed. “We understood that…we would be relying primarily on Mr. Hogue and…ATS&K to prepare and file any patent applications and to oversee the process to completion”.

June 27th: Fred Bailey, associate at ATS&K, submitted the first provisional patent ap-plication to the USPTO. This enabled the principals to secure their priority as inventors, and gave them until 6/27/01 to submit a final application.

2001

April: attorney Worthington filed a second provisional patent application that covered new features of the invention.

May 8: she advised the principals and D&S that the final application was due on 6/27/01, and they would lose their 6/27/00 priority date if they missed it.

May 17: Hogue, who was no longer ‘of counsel’ to ATS&K, and had opened a solo prac-tice, signed a retainer with Protostorm stating that he would “perform the work necessary to prepare and file the application”, but “the application may be physically filed by” ATS&K.

Peter Faulisi testified that the retainer “simply reaffirmed (Protostorm’s) prior working relationship with Hogue and ATS&K”, with no change in ATS&K’s role.

June 20: Hogue emailed ATS&K the documents necessary to prepare the final patent application, and stated that Worthington would instruct ATS&K “separately on foreign filing”. He testified that he expected ATS&K to “prepare and file the application and prosecute it”, and believed that he had no further responsibilities.

June 21-22, 25: Worthington, upon instruction from D&S, told ATS&K to file an inter-national patent application under the Patent Cooperation Treaty (PCT), instead of a do-mestic application, and to designate every PCT signatory country for patent protection.

June 25: Attorney Bailey of ATS&K filed the final PCT patent application. The box next to every signatory country was checked, i.e., designated for patent protection, except for Mongolia, Zimbabwe, and the United States.

Bailey testified that he knew the US was meant to be included as one of the designated PCT jurisdictions, but didn’t recall whether he had checked if that had been done.

June 27: Bailey sent a copy of the completed PCT application “as filed” to attorneys Worthington, Hogue, and Ginley, and wrote “if any amendments are necessary, we’ll make them”. (Plaintiffs, Worthington, and D&S all stated that the application was missing the page that showed that the box for the United States had not been checked.)

July 2: Worthington emailed Protostorm’s principals that a filing for patent protection in Europe was due on 2/27/02, so they should decide which countries they want protection in.

July 23: the US Receiving Office, to which the patent application had been sent, notified ATS&K of two defects in it. One involved page numbers, which Bailey fixed. The other was that Protostorm hadn’t submitted a Power of Attorney (POA) form, appointing Fred Bailey or partner Carl Brundidge of ATS&K as its representative. Bailey obtained a 30-day extension for it to do so.

August 21-22: ATS&K sent the POA to Kathy Worthington, and she advised Protostorm’s principals and D&S of it, but said she wouldn’t do any more work on the matter until they paid her bill.

August 27: one of Protostorm’s principals signed the POA, and returned it to ATS&K, although the firm claimed that it never received it.

September 25: attorney Brundidge of ATS&K emailed Worthington “we can not perform any further work for Protostorm” until it pays its bill.

October 1: Brundidge wrote to Protostorm’s principals and D&S that the POA was “now due”, and if it wasn’t provided, the “application will become ABANDONED”. Further, be-cause ATS&K hadn’t received the POA and hadn’t been paid, “no further action will be taken” on the matter. Peter Faulisi testified that he didn’t see the letter until June, 2007.

December 11-12: Protostorm’s principals called Brundidge and Hogue, and sent a second POA to ATS&K. They testified that they were told their application was fine otherwise, and the attorneys would handle any further administrative details that arose. ATS&K later claimed that it never received the POA.

Late December: the principals ceased operations and closed Protostorm’s office, pend-ing further developments with their patent application, which their attorneys had said would take several years to process. However, they didn’t disband the company, and continued to seek capital.

2006
Early in the year, Faulisi learned that Google was beginning to test ads targeted to Gmail users based on the content of their messages, and thought that infringed on Protostorm’s invention.

He tried to contact the attorneys several times during the year, but couldn’t find Hogue, and never got a reply from ATS&K.

2007
June: Faulisi was told by Schiavelli, ATS&K’s managing partner, that the patent appli-cation had been deemed “withdrawn”, because no POA or “national stage” submissions had been filed.

He then hired attorney Jonathan Moskin to investigate.

Moskin exchanged emails and letters with Schiavelli, who eventually stated that ATS&K  had abandoned Protostorm’s application in September, 2001. 

2008
January 25: Schiavelli wrote to Moskin, revealing for the first time that the ATS&K had failed to designate the United States in the application.

II. Litigation
Complaint

On March 4th, 2008, Protostorm and Faulisi filed a complaint (PACER reg. req’d.; document #1) in US District Court, Eastern District of NY, alleging legal malpractice, breach of contract, and breach of fiduciary duty against ATS&K, its attorneys Bailey, Brundidge, and Schiavelli, and Hogue, the solo.

ATS&K filed a third-party complaint for indemnification and contribution against attorney Worthington, and D&S and its attorney, John Ginley. Worthington and Hogue then each filed a cross-claim against D&S and Ginley, seeking indemnification and contribution.

Protostorm’s claim against Hogue was stayed, due to an arbitration clause in their re-tainer agreement, and Hogue dismissed his cross-claim against D&S and Ginley.

Motion for Summary Judgment

All parties except Hogue filed for summary judgment.

US District Court Judge Garaufis issued his ruling in November, 2011.

He dismissed plaintiffs’ breach of fiduciary duty claim, because it was “duplicative of the) claim for legal malpractice”, and their breach of contract claim, because they didn’t argue for it in their briefs or refer to it in their motion, and thus “abandoned” it.

The primary remaining issues were:

Statute of Limitations (SOL)

ATS&K asserted that the SOL had expired before the complaint was filed, which was more than six years after the final patent application was filed.

The applicable SOL in New York State is three years, and starts to run on “the day an actionable injury occurs”, not the date the plaintiff discovers it; however, under the “continuous representation doctrine,” the SOL is tolled as long as “there is a mutual understanding” between attorney and client “of the need for further representation on the specific subject matter underlying the malpractice claim.”

The court denied the MSJ on SOL grounds, because there was a question of fact as to whether ATS&K was retained to both file and prosecute Protostorm’s patent application, and whether or not the attorney-client relationship was ever terminated.

“A jury could find (it) reasonable”, the court ruled, that Protostorm “relied on ATS&K to shepherd the application to its conclusion”, i.e., continuously represent it, until June, 2007, when the firm told Faulisi that the patent application had been abandoned. The complaint was filed nine months later.

The Merits of the Malpractice Claim

The Court ruled that if a jury were to resolve in Protostorm’s favor the questions of fact regarding whether ATS&K was retained to prosecute the patent application to completion, and whether the attorney-client relationship persisted after September 2001, then

“it would necessarily find that ATS&K failed to exercise ‘ordinary skill’…Plaintiffs’ motion  for summary  judgment on this limited point…insufficient by itself to establish Defendants’ liability—is therefore granted.

 (However), under New York law, ‘it is for the finder of fact to determine’ the existence   of proximate cause, ‘once the court has been satisfied that a prima facie case has been established’…(Further,) the parties…have also created a question of fact as to whether the application would have led to a valid, and valuable, patent.”

Trial

After almost three more years of litigation, a jury trial was held in July and August, 2014.

Continued in Part II

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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.