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

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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.

Filed Under: Law Practice Risk Management, Legal Malpractice Tagged With: ,

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

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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 II. Part I  Part III

Trial

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

Two days before the trial ended, ATS&K dropped its third-party claims against Kathy Worthington, and D&S and John Ginley.

On August 14, the jury awarded Protostorm $6,975,000 in compensatory damages, apportioning the fault among ATS&K (75%), Brundidge (15%), Bailey (6%), and Protostorm (4%). It also awarded Protostorm $900,000 in punitive damages against ATS&K, and $100,000 against Brundidge. 

Post-Trial Activity
2014

October: ATS&K, Bailey, and Brundidge notified the Court that they intended to file a motion to set aside the jury verdict, pursuant to Federal Rule of Civil Procedure 50(b).

Oct. 8: Following motions on whether or not the damages apportioned to ATS&K attorneys Brundidge (15%) and Bailey (6%) should be assigned to ATS&K, the Court ruled that they should be.

Oct. 29: with Protostorm concerned about its ability to collect its jury award, the Court issued an order prohibiting ATS&K from paying expenses beyond “operating expenses incurred in the ordinary course of business…as well as a draw for each equity partner in the amount of $12,000.00 per month.”

2015

February 5th: the Court entered an amended judgment for Protostorm against ATS&K, for $6,696,000 in compensatory damages, $900,000 in punitive damages, $1,050,720.60 in pre-judgment interest, and post-judgment interest as applicable, and against Brundidge for $100,000 in punitive damages. The compensatory damages award was 4% less than the amount awarded at trial, because the jury had found Protostorm 4% at fault.

The Court stayed enforcement of the judgment, pending its ruling on defendants’ 50(b) motion.

June 1st: ATS&K informed Protostorm that it had “ceased performing legal services as of April 30, 2015”, although it maintained limited operations.

 Post-Trial Motion to Set Aside the Verdict

Defendants 50(b) motion argued that Protostorm couldn’t show patentability under 35 U.S.C. §§ 101 and 103, which it had to do to establish proximate cause, and it failed to prove its damages.

Under Section 101 “[w]hoever invents or discovers any new and useful process, machine”, etc., “may obtain a patent therefore…” However, defendants claimed that Protostorm’s invention – selecting advertising based on a customer’s interaction with an advertiser’s content – was an abstract concept that was unpatentable, because the U.S. Supreme Court had ruled in Alice Corp. Pty, Ltd. v. CLS Bank International, 134 S.Ct. 2347 (2014), that “an abstract idea…that merely (requires) generic computer implementation” wasn’t a patent-eligible invention.

Defendants also contended that Protostorm failed to establish that its invention wasn’t “obvious”, as required under § 103.

Ruling on Motion

The Court ruled on defendants’ 50(b) motion on June 5, 2015.

Judge Chen ruled that ATS&K was “procedurally barred” from arguing that Protostorm couldn’t show patentability under 35 U.S.C. §§ 101 and 103, and that it failed to prove its damages, because the firm didn’t raise those arguments in its Rule 50(a) motion.

“Although Defendants’ oral Rule 50(a) motions at trial challenged the patentability of   the Protostorm invention, the grounds stated by their trial counsel were altogether dif-  ferent from the Section 101 and 103 arguments raised in the Rule 50(b) motion…Accordingly, the Court holds that Defendants’ Rule 50(a) motions…did not supply a   sufficient predicate for (their) Rule 50(b) motions”.

She also ruled that “Defendants (forfeited) the arguments” that they failed to raise in their Rule 50(a) motions:

Their Section 101 Non−Patentability Argument

Defendants claim that Protostorm’s invention “is directed at an ‘unpatentable market-ing concept’ under post-Alice case law”, but fail to explain why they didn’t raise the Alice argument before or during trial.

“Furthermore, Alice did not, as ATS&K (claims), announce a previously unknown   framework for analyzing patent eligibility under Section 101. The Supreme Court’s   analysis in Alice builds on prior (cases), including Bilski… in which the Court held that  a method for hedging the risk of changing energy prices was too abstract a concept to   be patentable, and Mayo… in which the Court decided that a patent claim to a method   of medical diagnosis was directed at ‘natural law’ and that a step that merely said   ‘apply it’ was, without ‘significantly more’, ineligible for a patent…Bilski and Mayo were decided in 2010 and 2012, respectively, and Alice was decided a month before trial, (so) there was no reason that Defendants could not have raised its Section 101 argument before the case was submitted to the jury.”

ATS&K also argued that “because patent eligibility is a pure question of law”, i.e., it can be decided by referring to the language of the hypothetical claims alone, “there were no additional facts that Protostorm could have presented at trial to remedy deficiencies in its proof on causation and patent eligibility, and therefore Protostorm is not prejudiced” by ATS&K raising it for the first time in its Rule 50(b) motion.

The judge rejected that argument, ruling that:

“While the question of whether a claim is directed at patent−eligible subject matter is   one of law, that determination will often entail the resolution of underlying factual questions…Here, the parties disputed (via experts) how Protostorm’s claims should have been formulated in its patent application and how (they) might have evolved during the patent examination process…(Further), because the jury returned a verdict in Protostorm’s favor, the Court assumes that at least one valid and enforceable patent would have been issued based on the hypothetical claims drafted by Protostorm’s expert…Thus, the question (now) is whether the Court can decide, as a matter of law based on the evidence adduced at trial, that none of Protostorm’s hypothetical claims would survive the Mayo/Alice patentability test…”

She stated that the trial record was insufficient for the Court to decide the issue, and expert testimony was needed to determine if “the computer interactions described in the Protostorm claims were considered ‘well−understood, routine, conventional activity’” from 2001 – 2006, when the PTO would’ve examined them. “Protostorm would be prejudiced by not having had the opportunity to adduce additional evidence in response to Defendants’ belated patent eligibility argument.” Since patent eligibility isn’t “a purely legal matter, Defendants’ failure to raise it in a pre−trial motion prevents them from raising it in this Rule 50(b) motion.”

In a footnote, she added that even if the Court ruled that Defendants didn’t forfeit their patent-eligibility argument, applying Alice “to the time of the patent examination, i.e., 2001-2006, is problematic”. ATS&K cited cases noting that judicial interpretations of federal law must be applied retroactively, and thus contended that Alice would have applied during that time period, but:

“…the Court reiterates…that patentability is assessed with the criteria applied during    examination…Indeed, the Federal Circuit has recognized that prior to Mayo and Alice,  ‘a computer−implemented invention was considered patent−eligible (if) it produced a   useful, concrete and tangible result.’…Unlike a patent infringement case, in which an   alleged infringer may challenge the patent as now ineligible under Alice… Protostorm   claimed that but for Defendants’ malpractice, (its) invention would have been examined by a PTO patent examiner between 2001 and 2006, and that one patent would have issued by June 2006—well before Bilski, Mayo, Alice… were decided… Even if the patent (was) invalidated in a later infringement action under Alice…Protostorm would still be entitled to any royalty income (it) earned until then…”

Their Section 103 Non−Patentability Argument

“Defendants’ oral Rule 50(a) motions failed to specifically raise, and therefore preserve, (their) Rule 50(b) argument” that Protostorm failed to establish patentability, because its expert’s testimony concerning non-obviousness under Section 103 was “conclusory and without detail”, i.e., insufficient.

“Although ATS&K contends that its Rule 50(a) motion raised the issue, (it) only argued  that prior art anticipated the hypothetical claims… (However) anticipation and obviousness are distinct issues that require separate analyses, and raising one issue in a pre−verdict Rule 50 motion is insufficient to preserve the other for a post−trial motion.”

If ATS&K had presented the “obviousness” argument at trial, Protostorm would’ve had a chance to rebut it. “ATS&K’s failure to do so thus prejudiced Protostorm. Accordingly, the Court cannot consider” the argument.

These aspects of ATS&K’s 50(b) motion weren’t procedurally barred:

  • Protostorm failed to meet its burden to show patentability under Section 102, because its expert’s testimony failed to rebut the testimony of Defendants’ expert that Protostorm’s invention was anticipated by prior art.
  • The evidence didn’t prove that ATS&K was responsible for drafting the final patent application, i.e., it had no duty to draft the hypothetical claims put forth by plaintiff’s expert, the firm filed the patent application, but wasn’t responsible for prosecuting it, and its attorney-client relationship with Protostorm ended in late 2001.
  • It was entitled to judgment as a matter of law on the statute of limitations defense, because there was no evidence that Protostorm had a reasonable expectation of representation after 2001, i.e., there was no continuous representation.
  • The award of punitive damages was improper, because there was no showing of malicious or willful intent.

Judge Chen ruled:

“…the Court is compelled to deny the motions unless, when viewing all of the evidence in the light most favorable to the plaintiff, there is ‘such a complete absence of evidence   supporting the verdict,…or the evidence in favor of the movant is so overwhelming that reasonable and fair−minded persons could not arrive at a verdict against it.’ This stringent standard has not been met here.”

She thus denied ATS&K’s request to set aside the verdict, and refused to hear any mo-tion to reconsider her order.

Shortly thereafter, the Court also vacated its stay on enforcing the judgment.

Further Activity
2015

July: ATS&K filed a Notice of Appeal.

Continued in Part III.

Filed Under: Legal Malpractice Tagged With: ,

Legal Malpractice: Court Upholds $9M Award Against IP Firm Over Abandoned Patent

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IP 12%

The New York Law Journal (reg. req’d.) reported that a federal judge refused to overturn a nearly $9 million patent malpractice verdict against an IP law firm, and lifted a stay on enforcing it.

In Protostorm v. Antonelli, Terry, Stout & Kraus, 08-cv-931, Eastern District Judge Pamela Chen said that jurors had “more than adequate evidence in the record” to support a finding that the law firm had a duty to prosecute Protostorm’s patent application.

She also ruled that the law firm didn’t preserve a non-patentability argument tied to the recent U.S. Supreme Court decision in Alice Corp. Pty, Ltd. v. CLS Bank International, 134 S.Ct. 2347 (2014).

Lawsuit
According to its complaint, Protostorm, which was created to develop and market an invention to track online gaming activity and target advertising, retained Antonelli, Terry to submit a provisional patent application to the U.S. Patent Office in June, 2000.

To get the benefit of a priority date, the company had one year to file a non-provisional application that discussed the subject matters the invention claimed to be patenting.

Protostorm claimed that: *Antonelli, Terry filed an international application two days before the deadline, which listed about 86 countries and regions where Protostorm could seek patent protection, but failed to check the box designating the United States as one of those places.

*The law firm concealed its mistake, said the application likely would take years before getting an initial review, and didn’t inform Protostorm that it had lost its patent rights until shortly before the 2008 malpractice action was filed.

Defense
Antonelli, Terry filed a motion for summary judgment, arguing that its attorney-client relationship with Protostorm ended in 2001. Carl Brundidge, who had been a partner at the firm, said he sent a letter to Protostorm that October, saying that Antonelli, Terry wouldn’t take any further action on the application until Protostorm paid part of its outstanding balance.

Peter Faulisi, an inventor and cofounder of Protostorm, said he didn’t get the letter until after he spoke with an attorney at the firm in 2007.

The court denied the firm’s motion for summary judgment.

Trial
The case was tried in July, 2014. The jury awarded Protostorm $6.9 million in compen-satory damages, and $1M in punitive damages: $900,000 against the firm, and $100,000 against Brundidge.

After post-trial litigation on damages allocation, Judge Chen assigned all compensatory damages to the firm for the acts of its attorneys, but reduced them by 4%, because the jury had found that Protostorm was 4% at fault.

She thus entered a judgment for Protostorm of $6.7 million in compensatory damages, just over $1 million in pre-judgment interest, plus the $900,000 punitive damages award against the firm, and the $100,000 punitive damages award against Brundidge

Request to Set Aside the Verdict
Antonelli, Terry; attorney Brundidge; and Frederick Bailey, an attorney at the firm, moved to set aside the verdict pursuant to Federal Rule of Civil Procedure 50(b).

Among the grounds that it cited in its 50(b) motion was the 2014 U.S. Supreme Court decision in Alice Corp. Pty, Ltd. v. CLS Bank International, 134 S. Ct. 2347, in which the Court said that a computer-implemented method to weigh certain risks between parties in foreign currency transactions was not a patent-eligible invention.

According to the firm, an “avalanche of precedent” now examining Alice, said creations like Protostorm’s were “unpatentable abstract ideas”, i.e., ineligible for a patent, thus rendering a patent malpractice action defective.

Ruling
 Judge Chen ruled that Antonelli, Terry was “procedurally barred” from arguing that “(1) Protostorm cannot show patentability under 35 U.S.C. §§ 101 and 103, which is nec-essary to establish proximate cause, and (2) Protostorm failed to prove damages”, because it didn’t raise these arguments in its Rule 50(a) motion.

“ATS&K’s Rule 50(b) motion contends that Protostorm did not carry its burden to show proximate cause because it offered insufficient proof on two requirements for patent-ability. Under Point I of its motion, ATS&K asserts that as a matter of law, the hypo-thetical claims drafted by Protostorm’s expert…were directed to an unpatentable ab-stract concept under Section 101, as recently discussed by the Supreme Court in Alice Corp. Pty, Ltd. v. CLS Bank International, 134 S.Ct. 2347 (2014)… Although Defend-ants’ oral Rule 50(a) motions at trial challenged the patentability of the Protostorm invention, the grounds stated by their trial counsel were altogether different from the Section 101 and 103 arguments raised in the Rule 50(b) motion.”

Further, “ATS&K acknowledges that it didn’t “press an argument under Alice and its progeny until after trial.” None of the Defendants offers any explanation for why they did not raise the Alice argument at any point prior to or during the trial, given that Alice was decided a month before trial commenced…The fact plaintiffs might have been aware of a potential Alice issue before trial does not absolve defendants of their responsibility to raise the issue and thereby put plaintiffs on notice,” Chen ruled.

The firm also argued that “because patent eligibility is a pure question of law, it may be raised for the first time in a Rule 50(b) motion…the question of patent eligibility can be answered by reference to the language of the hypothetical claims alone, (so) there were no additional facts that Protostorm could have presented at trial to remedy deficiencies in its proof on causation and patent eligibility, and therefore Protostorm is not prejudiced by the Court addressing the issue at this late stage.”

However, Chen ruled that “the resolution of the patent eligibility issue requires additional facts or expert testimony that is absent from the trial record, and that Protostorm would be prejudiced by not having had the opportunity to adduce additional evidence in re-sponse to Defendants’ belated patent eligibility argument. Since the patent eligibility causation issue is not a purely legal matter, Defendants’ failure to raise it in a pre-trial motion prevents it from raising it in this Rule 50(b) motion”.

Chen then ruled on the parts of Antonelli, Terry’s 50(b) motion that weren’t procedurally barred:

*The evidence failed to demonstrate that the firm was responsible for drafting the final patent application;

*The firm was entitled to judgment as a matter of law on its statute of limitations defense, because there was no evidence that it concealed malpractice or that Protostorm had a reasonable expectation of representation after 2001;

*There was no showing of malicious or willful intent to warrant an award of punitive damages;

*Protostorm’s proof on patentability was deficient because prior art anticipated the Protostorm invention.

Chen ruled that “the Court is compelled to deny the motions unless, when viewing all of the evidence in the light most favorable to the plaintiff, there is “such a complete ab-sence of evidence supporting the verdict. . . ., or the evidence in favor of the movant is so overwhelming that reasonable and fair-minded persons could not arrive at a verdict against it.” This stringent standard has not been met here.”

Chen thus denied the firm’s request to set aside the verdict, and stated that the Court wouldn’t hear any motion to reconsider its order.

Lessons

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.

Attorney Paul Swanson provides a compelling behind-the-scenes analysis of this case, and also offers these risk management tips:

  1. “Obtain written retainer agreements that include “scope of representation” and “with-drawal from representation” provisions.  Had ATS&K entered into a formal retainer ag-reement, it might have had an opportunity to limit the scope of its representation… according to plaintiff’s expert witness and the revisionist history that often characterizes patent legal malpractice allegations, ATS&K was supposed to have closely inspected the application and discovered its various flaws.  In actuality, ATS&K (wasn’t) involved in any substantive patent application drafting.  Had a written retainer agreement been drafted, the firm may well have been able to limit its representation explicitly.  It could also have included a provision that the firm may withdraw for non-payment of fees or costs reasons.”
  2. *“Send letters confirming the closure of case files and cessation of representation.  Despite the passage of years that could have supported a viable statute of limitations defense in this case, the court could not grant a motion for summary judgment on that ground because of the “continuing representation” rule…(whereby) the statute of lim-itations is tolled for as a long as there is a mutual understanding between the attorney and client of the need for further representation regarding the specific subject matter un-derlying the malpractice litigation.  The continuous representation rule is especially pointed in patent matters because patent prosecution activities take place over long periods of time with sequential periods of inactivity.

Protostorm’s principals were never unequivocally told that ATS&K and Hogue would no longer represent Protostorm.  Rather, the attorneys’ oral conversations with Proto-storm’s principals left them with the impression that their attorneys would be taking care of PCT procedural requirements and that Protostorm should expect nothing to happen with re-spect to patent prosecution for an extended period of time.

Faced with these mixed factual messages, the Court could not grant summary judgment in patent counsel’s favor on statute of limitations grounds.  Had a closing letter been written, however, a statute of limitations defense may well have been a dunk shot for dismissal of Protostorm’s malpractice claims…”

  1. “Do not assist non-practitioners or non-lawyers in preparing and filing patent ap-plications;…you should know the USPTO credentials of those with whom you are col-laborating on patent matters in order to protect yourself from aiding and abetting the unauthorized practice of patent law. 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.  While it may be tempting to work with a client’s slicing and dicing arrangements re-garding patent application preparation, doing so can lead to the untoward facts that characterize this case.  According to ATS&K’s ethics expert witness…(the) unauthorized filing of a second provisional patent “by itself, would have severely reduced if not elim-inated the likelihood that any patent would have been ever been enforced in litigation or otherwise.”

Legal Malpractice Insurance
 There are two lessons here:
*You can’t predict when you’ll be sued for malpractice, so the only way you’ll always be covered is to buy malpractice insurance when you first open your practice, and renew it every year that your practice remains open.

As long as you do this, your coverage will be retroactive to the inception date of your first policy, i.e., you’ll get another year of Prior Acts coverage with each renewal. Then, if you’re sued for work that you did on or after the inception date of your first policy and before the inception date of your current policy, your Prior Acts coverage will obligate your insurer to protect you (subject to the policy’s exclusions, etc.)

Conversely, if you don’t renew your policy one year, then you’ll lose all of your Prior Acts coverage; the next policy that you buy will provide coverage for any errors or omissions that you commit only on or after the inception date and on or before the expiration date.

In this case, the work was done in 2000 and 2001, and the suit was filed in 2007, so the firm would’ve been covered only if it had coverage in effect on both dates, and had re-newed it every year in between.

*Make sure your policy limits are adequate. Even small firms in practice areas that generate high-value malpractice claims, i.e., Patent/IP, Securities, and Plaintiff’s Med. Mal., need policies with multi-million dollar limits. This is partly because the malpractice policies available to them have “eroding limits”, whereby the insurer deducts legal fees and costs from the policy’s per claim limit as it pays them, which reduces the amount available to pay any settlement or judgment. If the per claim limit is used up before the claim is resolved, then the firm must pay all additional defense costs and any judgment or settlement out-of-pocket.

Of the damages awarded in this case, the $6.7M in compensatory damages and $1M+ in pre-judgment interest would generally be covered by malpractice insurance, if the policy limit was sufficient, and for that to be the case, the limit would had to have been $7.7M plus legal fees, which were likely over $1M, given that the litigation lasted for seven years and the case was tried to a verdict.

In other words, the firm would have needed a policy with a per claim limit of at least $9M, and more likely $10M to be fully covered for this claim. That’s a high limit for what appears to be a small firm, and would carry a high premium, but the alternative is to fund a multi-million dollar judgment out-of-pocket.

Filed Under: Law Practice Risk Management, Legal Malpractice, Legal Malpractice Insurance Tagged With: ,

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