Parus Holdings, Inc. v. Banner & Witcoff, Ltd.

• Decision Date: 09 October 2008
• Docket Number: No. 08 C 1535.,08 C 1535.
• Court: U.S. District Court — Northern District of Illinois
• Parties: PARUS HOLDINGS, INC., Plaintiff, v. BANNER & WITCOFF, LTD., Charles Call, and Eugene Nelson, Defendants.

585 F.Supp.2d 995

PARUS HOLDINGS, INC., Plaintiff, v. BANNER & WITCOFF, LTD., Charles Call, and Eugene Nelson, Defendants.

No. 08 C 1535.

United States District Court, N.D. Illinois, Eastern Division.

October 9, 2008.

James John Stamos, Matthew John Mcdonald, Stamos & Trucio, Chicago, IL, for Plaintiff.

Pamela A. Bresnahan, Steven R. Becker, Vorys Sater Seymour and Pease LLP, Brian E. Martin, Bell, Boyd & Lloyd, PLLC, Washington, DC, Jeffrey T. Petersen, Bell Boyd & Lloyd LLC, Thomas P. McGarry, Hinshaw & Culbertson LLP, Terrence Patrick Mcavoy, Hinshaw & Culbertson, Chicago, IL, for Defendants.

OPINION AND ORDER

WILLIAM T. HART, District Judge.

Plaintiff Parus Holdings, Inc. (as the alleged successor-in-interest to Vail Inc.) alleges that defendants Banner & Witcoff, Ltd. ("Banner"), Charles Call, and Eugene Nelson committed legal malpractice, breached their fiduciary duties, and committed trade secret violations by providing non-defendant Robert Swartz with confidential information about Vail's application for a patent on which Vail was being represented by defendants. Swartz allegedly used this information to submit his own patent application for a similar invention. Plaintiff alleges that Swartz's patent application decreased the value of Vail's provisional patent application, the rights to which belonged to plaintiff. It is also alleged that, as a result of defendants' misconduct, plaintiff incurred legal expenses challenging Swartz's application. Plaintiff filed this action in the Circuit Court of Cook County, Illinois. Defendant Banner removed the case¹ on the ground that resolution of certain of plaintiff's claims will require construing Vail's and Swartz's patents and therefore the case falls within federal patent jurisdiction, 28 U.S.C. § 1338. See generally Air Measurement Tech., Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262, 1267-72 (Fed.Cir.2007); Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281, 1284-85 (Fed.Cir.2007). There is proper jurisdiction over plaintiff's claims. See Order dated May 29, 2008[25]. Presently pending is defendant Banner's motion to dismiss most of the counts brought against it.²

The following facts are alleged in the Complaint. Vail was in the web telephony business, which involves transmitting fax and telephone communications via the Internet. From 1994 to 1996, Vail developed a unique computer controlled telephony system which the Complaint refers to as the "System." Vail's primary innovator and inventor for the System was Alex Kurganov. In 1996, Vail hired Swartz. During his employment with Vail, Swartz's job titles included Vice-President of Marketing and President of VE Systems. One task assigned to Swartz was retaining counsel to advise Vail regarding obtaining patent rights for the System.

In February 1997, Swartz retained defendants. The engagement letter and other documents referred to Vail as the client and referred to submitting a provisional patent application for the System. Invoices for the legal work were submitted to and paid by Vail, On March 3, 1997, Banner filed a provisional patent application for the System on behalf of Vail (the "Vail Provisional"). Defendants did not advise Vail to obtain the assignment of rights in the patent from the System's inventor or inventors. Also, although Kurganov was the sole inventor, both Kurganov and Swartz were listed in the Vail Provisional as the inventors. Neither Vail nor Kurganov consented to listing Swartz as an inventor. There is no allegation that defendants performed any legal work for Vail other than regarding the System.

During summer 1997, a dispute developed between Vail and Swartz after Vail determined Swartz lacked the qualifications and skills for his position with Vail. Call was aware of this dispute and despite the fact that Vail was Call's client, Call advised Swartz regarding the dispute and also regarding claiming rights to the patent. Vail was not informed that Call was advising Swartz. In December 1997, Vail retained new patent counsel to handle patent applications for the System and new counsel so informed Nelson, also advising him that Swartz was not an inventor of the System nor someone with any property right in the System and that Nelson should not follow any instructions from Swartz regarding the Vail Provisional.

At the end of 1997, Call left Banner, Call continued to represent Swartz and advise him regarding how to obtain patent rights for the System, including rights that would have a priority over Vail's rights. In February 1998, on Call's advice, Swartz requested that Nelson send Swartz Banner's Vail Provisional file. Despite Vail's prior instructions to the contrary, Nelson complied with Swartz's request. Defendants did not inform Vail that the file had been forwarded to Swartz.

On March 2, 1996 and August 10, 1999, Vail filed non-provisional patent applications based on inventions disclosed in the Vail Provisional. These patents issued in 2004 (the "Parus Patents"). On March 2, 1998, Call filed a non-provisional patent application on behalf of Swartz that claimed priority over the Vail Provisional. In order to claim the priority, Swartz had to specifically reference the Vail Provisional and trade secret data from that application which Swartz had learned from receiving the Vail Provisional file of Banner.³ Swartz filed a second patent application in 2002. The two "Swartz Patents" issued in 2002 and 2004. Parus was unaware of the Swartz Patents until February 2006 when Kurganov was served with a subpoena by a defendant in a declaratory judgment action filed by Swartz to enforce his patents.

Parus expended $474,000 developing a marketing and licensing plan for the Parus Patents. When it was about to initiate this plan, it discovered the existence of the Swartz Patents. Regardless of whether the Swartz patents were meritorious or infringed on the Parus Patents, their existence and Swartz's pending lawsuit to enforce them placed a cloud on Parus's title to the Parus Patents. The Swartz Patents also rendered implementation of the marketing and licensing plan impossible since no one would be willing to undertake a license with the pending cloud over the Parus Patents.

Within a month after learning of the Swartz Patents, Parus brought a federal suit against Swartz and his company, Web Telephony, LLC, seeking a declaration that Parus was the rightful owner of the System and related patents, to establish priority of the invention, and to recover damages for misappropriation of trade secrets (the "Federal Suit").⁴ Banner filed an appearance on behalf of Swartz in that litigation.⁵ Parus informally requested that Banner withdraw because of a conflict of interest, but Banner declined, Parus then filed a motion to disqualify which resulted in a "lengthy and costly briefing process .... When it became apparent that Parus' motion to disqualify would be granted, Banner reluctantly withdrew from the federal litigation on the morning of the scheduled decision ...." Compl. ¶ 28. Several months after Banner withdrew, the case settled. Plaintiff does not allege anything regarding the terms of the settlement,⁶ Parus incurred more than $1.3 million in legal fees in the case.

Plaintiff's complaint denominates five counts, though there appears to be overlap between counts. The parties agree that the substantive law of Illinois applies to each claim. Count I is labeled as a breach of fiduciary duty claim against Banner for representing Swartz in the Federal Suit. Banner allegedly violated Illinois Rules of Professional Conduct ("IRPC") 1.6 and 1.9 by disclosing confidences of Vail/Parus, by representing an opponent of a former client in a matter related to the representation of the former client, and by using information from the prior representation to the disadvantage of the former client. Count I focuses on the Federal Suit. Allegedly, "Banner's assisting Swartz in developing and pleading defenses to Parus' claims made the case more difficult to prosecute and caused Parus to enter into a less favorable settlement agreement with Swartz than would otherwise have been possible and caused it to forfeit its ability to proceed to trial and prevail. Moreover, Banner's refusal to withdraw as counsel for Swartz, despite the self-evident conflict of interest, and Parus' demand that it do so, obliged Parus to engage in a lengthy and costly effort to have Banner disqualified as Swartz's counsel. Banner's resistance to this effort at every step was a substantial impediment to Parus' ability to litigate its claim against Swartz because it caused Parus to consume resources and incur additional attorneys fees." Id. ¶ 36. It is also alleged that Banner "[d]epriv[ed] Parus of the assistance of its former counsel in its effort to defend and protect its patent rights in the System." Plaintiff prays for compensatory and punitive damages. As compensatory damages, plaintiff seeks the attorney fees incurred in the Federal Suit and an amount representing the loss of licensing royalties and other compensation that could not be pursued until the cloud over plaintiff's patent rights were cleared up through litigation.

Count II, against Banner and Call, is labeled legal malpractice and breach of fiduciary duty. This Count is based on a violation of IRPC 1.7 in that defendants represented a client whose interests were directly adverse to those of another client. It is alleged: "But for Call's and Banner's negligence, Swartz would not have wrongfully secured patent rights that were in direct competition with and in violation of those owned by Parus. Further, Parus would not have had to expend $1.3 million in legal fees to defend its rights against Swartz and the licensing program for which Parus expended some $474,000 to implement would not have been rendered valueless by Swartz's competing claim." Compl. ¶ 42. Plaintiff prays "for damages suffered as a result of Call's and Banner's...