Gust, Inc. v. Alphacap Ventures, LLC

• Decision Date: 28 September 2018
• Docket Number: 2017-2414
• Citation: 905 F.3d 1321
• Parties: GUST, INC., Plaintiff-Appellee v. ALPHACAP VENTURES, LLC, Richard Juarez, Defendants Gutride Safier LLP, Movant-Appellant
• Court: U.S. Court of Appeals — Federal Circuit

905 F.3d 1321

GUST, INC., Plaintiff-Appellee

v. ALPHACAP VENTURES, LLC, Richard Juarez, DefendantsGutride Safier LLP, Movant-Appellant

2017-2414

United States Court of Appeals, Federal Circuit.

Decided: September 28, 2018

FRANK A. BRUNO, White & Williams LLP, Philadelphia, PA, argued for plaintiff-appellee. Also represented by SIOBHAN K. COLE.

DARALYN JEANNINE DURIE, Durie Tangri LLP, San Francisco, CA, argued for movant-appellant.

DANIEL K. NAZER, Electronic Frontier Foundation, San Francisco, CA, for amicus curiae Electronic Frontier Foundation.

PETER J. BRANN, Brann & Isaacson, Lewiston, ME, for amici curiae Acushnet Company, Garmin International, Inc., Red Hat, Inc., SAP, Inc., SAS Institute, Inc., Symmetry LLC, Vizio, Inc. Also represented by STACY O. STITHAM, DAVID SWETNAM-BURLAND.

Before WALLACH, LINN, and HUGHES, Circuit Judges.

LINN, Circuit Judge.

Movant Gutride Safier LLP ("Gutride"), a law firm representing AlphaCap Ventures, LLC ("AlphaCap") in the district court litigation here, appeals the award of fees under 28 U.S.C. § 1927, making Gutride jointly and severally liable for all expenses incurred by Gust, Inc. in defending the instant lawsuit, including attorneys’ fees and costs. Gust, Inc. v. AlphaCap Ventures, LLC , 226 F.Supp.3d 232 (" Fees Op. "); Gust, Inc. v. AlphaCap Ventures, LLC , No. 15-cv-06192, 2017 WL 2875642 (S.D.N.Y. July 6, 2017) (" Reconsideration Op. "). Because the district court abused its discretion by awarding fees and costs under 28 U.S.C. § 1927, we reverse.

I. BACKGROUND

AlphaCap is a non-capitalized non-practicing entity based in California. In January 2015, AlphaCap hired Gutride on a contingency basis, and sued ten internet crowdfunding companies for patent infringement of AlphaCap's U.S. Patents No. 7,848,976 ("’976 patent") ; No. 7,908,208 ("’208 patent") ; No. 8,433, 630 ("’630 patent") (collectively, "patents at issue") in the Eastern District of Texas. Nine of the defendants settled for less than $50,000 each, leaving only Gust contesting infringement and validity. A timeline of relevant events in the ensuing litigation is as follows:

Timeline of Relevant Events

June 19, Supreme Court issues Alice Corp. Pty. Ltd. v. 2014 CLS Bank Int’l , 573 U.S. 208, 134 S.Ct. 2347, 189 L.Ed.2d 296 (2014) Jan. 2015 AlphaCap sues Gust in the Eastern District of Texas June 19 AlphaCap proposes to dismiss and settle and Gust rejects the offer June 22 Gust files a motion to transfer under 28 U.S.C. §§ 1404, 1406 June 29 The Southern District of New York decides Kickstarter, Inc. v. Fan Funded, LLC , No. 11-cv-6909, 2015 WL 3947178 (S.D.N.Y. June 29, 2015), aff’d 654 F. App'x 481 (Fed. Cir. 2016), applying Alice to find certain unrelated claims directed to crowdfunding invalid under § 101 July 2 Gutride tells Gust's counsel that the case is "not worth litigating," and AlphaCap offers to dismiss its complaint with prejudice as a walkaway settlement; Gust refuses unless AlphaCap assigns all patents to Gust July 2 AlphaCap files a motion for venue discovery; Gust agrees to venue discovery and the district court issues a discovery order Venue discovery runs through September 1 July 9 Gust sends AlphaCap a formal settlement offer, explaining its § 101 invalidity position in view of Alice , and proposes that AlphaCap dismiss its complaint with prejudice and either pay Gust's attorneys’ fees or assign full ownership of all AlphaCap patents to Gust. Under its terms, AlphaCap would keep all prior licensing revenue July 28 AlphaCap offers walkaway settlement; Gust refuses August 6 Gust files for Declaratory Judgment of no infringement, invalidity, abuse of process, tortious interference, and antitrust in the Southern District of New York August 17 Gust offers to dismiss it's action in the Southern District of New York if AlphaCap dismisses its action with prejudice, pays all of Gust's attorneys’ fees—totaling $175,000 up to that point—and assigns ownership of all patents to Gust; AlphaCap refuses August 24 AlphaCap threatens to move for sanctions under Federal Rules of Civil Procedure 11 (" Rule 11") unless Gust dismisses its declaratory judgment action in the Southern District of New York November AlphaCap moves for sanctions under Rule 11 6 and moves to dismiss Gust's claims in the Southern District of New York. August Claim construction discovery period 2015 until February 2016 March 2 Eastern District of Texas transfers AlphaCap's case to the Southern District of New York May 18 AlphaCap provides Gust with covenant not to sue on the patents at issue July 28 The Southern District of New York dismisses both AlphaCap's and Gust's claims August 19 Gust moves for attorneys’ fees under 35 U.S.C. § 285 and 28 U.S.C. § 1927 December The Southern District of New York awards fees 8 to Gust under § 285 and § 1927 July 6, The Southern District of New York denies 2017 AlphaCap's motion for reconsideration.

In its December 8, 2016 decision, the district court first concluded that this case was "exceptional" under § 285. The district court explained that Alice "gave AlphaCap clear notice that the AlphaCap Patents could not survive scrutiny under 35 U.S.C. § 101." Fees Op. , 226 F.Supp.3d at 241. The district court concluded that the claims were directed to crowdfunding, a fundamental economic concept and way of organizing human activity, and that this was an abstract idea. Id. at 241–44. The district court rejected AlphaCap's argument that the claims were directed to improvements in computer functionality, because the claimed computer components were routine and conventional in the industry. Fees Op. , 226 F.Supp.3d at 243–44 (distinguishing Enfish LLC v. Microsoft Corp. , 822 F.3d 1327, 1335 (Fed. Cir. 2016) ). The district court then found that the claims did not include an inventive concept sufficient to render the abstract ideas patent eligible under Alice Step 2. Id. at 240.

The district court further concluded that the case was exceptional because: (1) AlphaCap brought the case "to extract a nuisance settlement from Gust," as confirmed by the "paltry settlements" to which AlphaCap agreed with the other nine defendants and AlphaCap's decision to file in the Eastern District of Texas, a venue distant from Gust's Delaware home, id. at 245 ; and (2) an award is necessary to deter AlphaCap's predatory patent enforcement practice, id. AlphaCap does not appeal the district court's exceptional case determination or the award of attorney's fees.

This appeal only raises Gutride's joint and several liability for Gust's attorneys’ fees under § 1927. The district court concluded that Gutride's litigation conduct justified an award under § 1927 because its actions were unreasonable and taken in bad faith. Specifically, the district court focused on Gutride's unwillingness to settle pursuant to Gust's terms despite knowing that Alice doomed the claims and stating that the case was "not worth litigating" and resisting Gust's motion to transfer out of the Eastern District of Texas. The court awarded all expenses incurred by Gust in the amount of $492,420 in fees and $15,923 in costs, jointly and severally against AlphaCap and Gutride. The district court also awarded prejudgment interest at a New York State rate of 9%. Id. at 254.

On reconsideration, the district court noted that "Fees under Section 1927 were not awarded based on the filing of the litigation." Reconsideration Op. at *16. But, the district court explained that the filing of what it considered to be frivolous litigation was nevertheless "not irrelevant to the decision to impose fees," because it "supported [the district court's earlier] finding that counsel acted in bad faith when it unreasonably and vexatiously multiplied the proceedings." Id. The district court also rejected Gutride's argument that AlphaCap, as the client, was responsible for the delay in issuing a covenant not to sue to Gust, rather than Gutride, but did not directly address the role of the client and the counsel in creating delay due to the failure to issue a covenant not to sue.

Gutride, as movant, timely appeals. We have jurisdiction under 28 U.S.C. § 1295(a)(1).

II. STANDARD OF REVIEW

We review § 1927 awards under the law of the regional circuit. Phonometrics, Inc. v. Westin Hotel Co. , 350 F.3d 1242, 1246 (Fed. Cir. 2003). The Second Circuit reviews the imposition of sanctions for an abuse of discretion. Wolters Kluwer Fin. Servs., Inc. v. Scivantage , 564 F.3d 110, 113 (2d Cir. 2009). When a district court acts as "accuser, fact finder and sentencing judge all in one, [the Second Circuit reviews under a] more exacting [standard] than under the ordinary abuse-of-discretion standard." Id. at 113–14 (internal quotes and citation omitted). This more exacting standard requires the appeals court to "ensure that any such [award] is made with restraint and discretion" by requiring "sufficiently specific factual findings" to avoid conclusory determinations by the district court. Eisemann v. Greene , 204 F.3d 393, 396 (2d Cir. 2000) (internal quotes and citation omitted). Just as when a district court imposes sanctions under Rule 11, "the court is to avoid hindsight and resolve all doubts in favor" of the non-movant. See Oliveri v. Thompson , 803 F.2d 1265, 1275 (2d Cir. 1986).

III. 28 U.S.C. § 1927

Section 1927 of Title 28 allows a district court to award fees directly against a party's attorney under certain circumstances.

Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.

In the Second Circuit, an award under § 1927 requires: (1) that claims were "entirely without color," and (2) "were brought in bad faith—that is, motivated by improper purposes such as harassment or delay." Advanced Magnetic Closures, Inc. v. Rome...