Property, intangible

The court:

Exploiting the patent-in-suit in these cases, U.S. Patent No. 5,781,788 (the ‘788 patent), was AVT’s sole reason for being. The only precondition to Plaintiff’s fulfilling its singular purpose was its acquisition of title to the ‘788 patent. Obtaining ownership of the patent was AVT’s sine qua non, the only thing Plaintiff absolutely had to accomplish in order to fulfill its destiny.

At this simple task it proved an abysmal failure.

I previously blogged on the title problem in Advanced Video Techs. LLC v. HTC Corp. In short, one of the transactions in the chain of title was missing; plaintiff AVT recorded a “Purchase Offer Agreement” but the transaction described in it never happened. The plaintiff filed several patent infringement suits, which were heavily litigated, before the title problem was discovered. The defendants moved to dismiss, which the court did.

“The motions for sanctions followed as the night the day.” Four bases were alleged: Section 285 of the Patent Act, which allows a court to award attorneys’ fees when it is an “exceptional case”; 28 U.S.C. § 1927 when one “multiplies the proceedings in any case unreasonably and vexatiously”; the court’s inherent power to sanction, and Federal Rule of Civil Procedure 11 for an improper pleading. Section 285 can only be awarded against a party, but a court can sanction the attorneys under § 1927, its inherent power, or Rule 11.

AVT was sanctioned under § 285. It claimed it had objectively reasonable bases for believing it had good title, but the court disagreed. AVT knew that the seller didn’t observe corporate formalities and yet never bothered to see whether the merger promised in the Purchase Offer Agreement actually happened.

A claim that the purchase included a warranty didn’t go far either:

As for the warranty and representation in the Intellectual Property Purchase Agreement: in ordinary circumstances, it might have been sufficient to create an objective belief in the average purchaser of intellectual property. But these were not ordinary circumstances. Epogy’s liability for breach of that warranty was limited to a refund of the sum that Gross paid for the ‘788 patent — a whopping $1,000, the price dictated by the fact that the patent had been allowed to expire prematurely. The very fact that liability for breach of the warranty was limited to a paltry sum suggests that Gross placed little faith in Chang’s representation. Furthermore, as Epogy was dissolving simultaneously with the transfer of its assets to Gross, there would be no viable way for Gross to obtain even that modest recompense.

Several other theories were offered but the court didn’t buy any of them:

To be perfectly frank, the only conclusion that can reasonably be drawn from everything that happened between May 2003 and November 2014 is that sometimes bluffing is a perfectly reasonable business decision. Bluffing is what AVT did: it bluffed by confidently asserting that it owned the patent, knowing that no one was likely to call its bluff and force it to prove what it knew it could not really prove. That cannot be equated with having an objectively reasonable belief that there was no defect in AVT’s title to the ‘788 patent.

AVT tries to escape liability with its blame-shifting tua culpa, asserting that “AVT is the victim of another unrelated party’s inadvertent mistake.” On the contrary: AVT had a duty to investigate its chain of title before initiating this suit. And AVT failed to follow up on what turned out to be its well-founded concerns that it would not be able to prove title if ever put to the task. By failing to do that, AVT’s assertion of ownership of the ‘788 patent was objectively unreasonable.

The attorneys escaped, though. The court was sympathetic:

AVT’s counsel have represented that they did not possess the Gross-Cohen email until March 2014, and there is no evidence to suggest they were otherwise aware of the defect in title. I was once a practicing lawyer, and if my client came to me and told me he owned a patent, and showed me that the patent was registered to him at the PTO, I doubt very much whether I would have undertaken an extensive title search; lawyers are entitled to rely on their clients in such matters.

After the original cases were dismissed AVT applied in the Delaware Court of Chancery for the appointment of a Receiver, who executed an assignment of the patent and claims to AVT. AVT then filed new infringement suits, which are pending.

Advanced Video Techs. LLC v. HTC Corp., No. 1:11 Civ. 06604 (CM); No. 1:11 Civ. 08908 (CM); No. 1:12 Civ. 00918 (CM) (S.D.N.Y. Aug. 28, 2015)

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