Patent Troll Required to Explain "Sham Venue" and "Sham Employees" to the Jury

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Judge Alsup of the ND California clearly embraces the concept that "judges already have the authority to curtail [non-practicing entity patent litigation] practices: they can make trolls pay for abusive litigation." Randall R. Rader, Colleen V. Chien & David Hricik, Make Trolls Pay in Court, NY Times, June 5, 2013.

In his order leading up to trial later this month of the patent infringement claims brought by non-practicing entity ("NPE" or "patent troll") Network Protection Services, LLC ("NPS"), Judge Alsup suggested he'd allow the jury to hear evidence of how:

NPS manufactured venue in Texas via a sham. [NPS founders] Ramde and Lam rented a windlowless file-cabinet room with no employees in Texas and held it out as an ongoing business concern to the Texas judge. They also held out [alleged employee] Cuke as its 'director of business development' but this too was a sham, a contrivance to manufacture venue in the Eastern District of Texas.

Order dated Aug. 20, 2013, NPS v. Fortinet [PDF].

The story of how the Judge came to threaten to admit evidence of sham offices and employees is best understood as Judge Alsup seizing an opening on an otherwise innocuous standing issue to "curtail" abusive NPE litigation. Any doubt in this regard is dispelled by Judge Alsup's lengthy citation to Make Trolls Pay in Court at the outset of his order.

Defendant moved to dismiss because assignment of the patent to NPS did not occur until after NPS filed suit, such that NPS lacked standing to bring the lawsuit. Judge Alsup denied the motion, finding that there was a disputed factual issue whether NPS's conduct in filing the lawsuit was a sufficient substitute under Texas law for the tardy signature of the assignment.

Key exercise of judicial discretion point #1 - although there is no right to jury trial on the issue of standing, Judge Alsup ruled that the underlying factual dispute whether NPS by its conduct accepted the assignment could be given to the jury for "advisory finding of fact."  In practical terms, NPS, in the middle of its case in chief, will have to spend time and evidence proving up that it is the true owner of the patent.  The practical significance of the NPS spending limited in-court time on an issue that is both distracting from core patent infringement issues and also reflects poorly on NPS ("You filed suit as the alleged owner of the patent but did not sign anything until later? Can you do that? And why would you do that?" - well, you get the idea).

But it gets worse for the NPE. Much worse. . .

Key exercise of judicial discretion point #2 - as part of his order, Judge Alsup also addressed defendant's motion to dismiss due to litigation misconduct, finding among other things, that there was litigation misconduct based on NPS having manufactured venue in Texas (NPS originally filed in Texas, only to have the district court in Texas transfer venue to the ND Cal). Judge Alsup was unwilling to find that this misconduct warranted terminating sanctions -- but NPS may wish that he had. Judge Alsup made it clear that the alternative of giving the jury an adverse inference instruction was, in his mind, "bound up in the extent to which the jury hears evidence concerning sham venue, sham employees, and the cover-up, as, for example, may be the case if the advisory verdict is requested on the standing issue."

In other words, in the exercise of his discretion, and in connection with asking the jury for an advisory verdict on standing, Judge Alsup is seriously considering letting the jury hear the evidence of how hard NPS tried to cover up the fact "that it was nothing more than a troll."

In fact, as clarified by the court during oral argument, NPS not only was going to have to justify a sham employees and a sham file-cabinet office to the jury, it was going to have to bring in expert testimony that this was a legitimate business practice under Texas law! Consider the relevant excerpts from the hearing:

THE COURT: You're on the verge of losing this entire motion, and going to the Federal Circuit, with a lot of money against you. So if you want this to live to fight another day, you ought to listen to me for a moment. The best you can hope for is that the jury's going to decide this; but for the jury to decide the sham nature of this closet in Texas, they're going to have to understand why somebody would want to do this. So an expert is somebody you need to have explain it. This is going to be part of your case.

[COUNSEL]: No, Your Honor, it's not.

THE COURT: Well, then, it will be part of their case.

[COUNSEL]: Why is that relevant to the issue of patent infringement?

THE COURT: If we're going to try ownership here, and all of these issues about whether or not this guy was a sham, or not, the jury's got to understand the background of why it was or was not a sham.

[COUNSEL]: Well, Your Honor --

THE COURT: You're not going to be able to skate by, with -- beat this motion, and then get it somehow excluded at trial. For goodness' sakes.

[COUNSEL]: Well, how is it relevant to the issues that are at trial?

THE COURT: You've got to prove ownership. It's your burden.

[COUNSEL]: And you prove ownership by an assignment; not by -- not by showing --

THE COURT: It may not be valid, Counsel.

[COUNSEL]: But that will be resolved.

THE COURT: No, it's not going to be resolved. You're asking that it be resolved by the jury. I heard you say it a moment ago.

[COUNSEL]: No, Your Honor. I'm sorry.

THE COURT: Well, maybe now you're taking it back. It's on the record. I heard it. So on appeal you can make that point; but this jury is going to hear all of this stuff about the closet. And you're going to have to explain why "Mr. Sham" was signing these documents.

Invitation to use discretion over trial to curtail NPE abuse: clearly, resoundingly, accepted.

Topics:  Jury Trial, Patent Trolls, Patents

Published In: Civil Procedure Updates, Intellectual Property Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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