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…”

3. “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.