Motion for Sanctions Based on Threats of Counsel to Reexamine Patents and to Take Other Action Against Outside Counsel, Although at Best "Silly Posturing and at Worst Unprofessional," Insufficient to Justify Sanctions Because of First Amendment

March 27, 2013

Plaintiff Vasudevan Software, Inc. ("VSi") filed a motion for sanctions against defendant MicroStrategy ("MS"). The sanctions motion was based on statements that VSi characterized as threats against both VSi and its counsel by an outside counsel and a principal of MS, in conjunction with MS's filing of a request for reexamination of four of VSi's patents and another patent held by Zillow, a client of VSi's outside counsel. Rather than deny that the statements were made, MS asserted that even if the statements were made they could not be sanctioned for making them because of the First Amendment.

The district court explained the background facts as follows: "Sean Pak, a partner at Quinn, Emanuel, Urquhart & Sullivan, LLP, counsel for MS, contacted Brooke Taylor, a partner at Susman Godfrey, counsel for VSi. He requested a meeting include the principals of VSi and MS. Pak said MS was planning to be "aggressive" in defending against VSi's claims in this case and would take "initiatives" toward that end, including filing reexamination petitions with the USPTO to reexamine VSi's patents. Pak proposed flying to Seattle (where the Susman Godfrey office in which Taylor works is located) to discuss these "initiatives" with VSi and its counsel. Taylor agreed and Pak, Taylor and Jordan Conners (a Susman Godfrey associate also representing VSi) met in person at Susman Godfrey's Seattle offices on September 10, 2012. Additional VSi counsel Les Payne and Eric Enger of Heim, Payne, & Chorush, LLP, VSi principals Mark and Helen Vasudevan, and MS Executive Vice President and General Counsel Jonathan Klein participated in the meeting over the phone. Klein stated that he would not pay VSi anything to settle VSi's patent infringement claims against MS and, if VSi did not immediately dismiss the case, threatened to make the litigation as painful as possible for VSi, file reexamination petitions with the USPTO for all of VSi's patents in suit, and take action against Susman Godfrey. When Payne specifically asked Klein what he meant by taking action against Susman Godfrey, he refused to answer and suggested that Susman Godfrey would have to wait and see. "

After MS filed a series of reexamination requests against VSi's patents, MS also filed a petition for review of a patent held by Zillow, an unrelated Susman Godfrey client. VSi contended that this conduct was improper. "VSi contends that the only common thread between it and Zillow is that they share the same patent litigation counsel- Taylor and Conners of Susman Godfrey. VSi accuses MS of filing the Zillow reexamination petition for an improper purpose: to interfere with Susman Godfrey's representation of Zillow in a separate litigation matter by needlessly causing its client to incur legal fees supporting the Zillow patent. VSi's characterizes MS's attack on Susman Godfrey client uninvolved in this case as an implicit threat to attack similarly other Susman Godfrey clients in an effort to pressure Susman Godfrey to abandon VSi's case against MS and to deter Susman Godfrey, or any other law firm, from representing VSI against MS."

MS did not deny the allegations but instead asserted that its request for reexamination of the Zillow patent was meritorious. "While not specifically denying any of the factual allegations made by VSi, MS describes VSi's motion as meritless diversion from the real issues in this case. MS argues that the motion rests on the bizarre and novel proposition that a party may be sanctioned for filing a petition for patent reexamination." Rather than providing a good faith reason for its actions, MS states that it does not need one because its request for reexamination of the Zillow patent is meritorious. Essentially conceding that it has no legitimate business interest in the validity of the Zillow patent, MS notes that the patent reexamination statute does not have a standing requirement, as 'any person at any time may file a request for reexamination.' 35 U.S.C. ยง 302. MS further contends that VSi should raise its concerns over MS's reexamination request with the USPTO, rather than in this forum."

The district court analyzed the issue under the Noerr-Pennington doctrine for sham litigation. "Under Noerr-Pennington, a party may not be held liable for petitioning a federal court or agency unless the petition is shown to be a sham. BE & K Const. Co., v. NLRB, 536 U.S. 516, 525-26 (2202). The two-part definition of sham litigation originated in the antitrust context but is now broadly applied. See d. at 525. For litigation conduct to qualify as "sham," a two-prong test must be satisfied: "first, it must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits; second, the litigants subjective motivation must conceal an attempt to interfere directly with the business relationships of a competitor...through the use [of] governmental process - as opposed to the outcome of that process - as an anticompetitive weapon." Id. at 526 (internal quotation omitted.). A petition is objectively baseless if "no reasonable litigant could realistically expect success on the merits." Prof"l Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 60 (1993)."

The district court then found that there was strong evidence to satisfy the second prong of the test. "Turning first to the second prong, a strong inference can be drawn from the record that MS chose to mount an assault on VSi and Susman Godfrey by filing the patent reexaminations and id so precisely because they thought such conduct constituted petitioning activity, thereby shielding MS from sanctions for such acts. In its briefing, MS fancifully liken its reexamination petitions to those filed by non-profit groups whose stated mission is to improve our IP system, implying that MS acted altruistically out of an impulse to 'provide an important 'quality check' on patents that would allow the government to remove defective and erroneously granted patents." In re Swanson, 520 F.3d 1368, 1375 (Fed. Cir. 2008). Wisely, counsel for MS retreated from this unpalatable argument at oral argument. MS argues that its counsel's reference to making the litigation as painful as possible for VSi was unconnected to the requested Zillow patent reexamination. MS further suggests that Klein's pronounced intent to take action against Susman Godfrey constituted only harmless expression of its legitimate intent to seek attorneys' fees from VSi and its counsel for filing the current action and for subjecting it to bad faith motion practice. MS supplies no declarations to support such a theory. Indeed, MS failed to present declarations from either Pak or Klein clarifying their motives. Additionally MS has failed to advance any colorable good faith explanation for seeking reexamination of the Zillow patent."

But the district court concluded that the first prong could not be satisfied. "As for the first prong, MS argues that its petitions before the USPTO are not objectively baseless, and therefore it is immune from sanction under Noerr-Pennington. At this stage, in the USPTO proceedings, VSi presents no evidence as to the validity of the Zillow patent, or that the MS reexamination petition fails to raise a substantial question of patentability. As a result MS and its counsel at Quinn Emanuel cannot be subject to sanctions on this record. Should the reexamination request in the USPTO ultimately prove to be objectively baseless, VSi is free to move for sanctions based on the conduct at issue here. While MS and Quinn Emanuel appear to have engaged in sharp practice that falls far short of model professional conduct, given the First Amendment implications of sanctioning a party engaged in petitioning activity, the Constitution shields MS and its counsel from sanction at this time. That Zillow will have to incur costs defending the reexamination does not change this analysis. VSi remains free to raise its concerns about MS's behavior with the USPTO's office of Enrollment and Discipline."

Finally, the district court concluded that the events of the September meeting did not appear to be independently sanctionable. "Ultimately, the events at the September 10 meeting do not appear independently sanctionable when divorced from the USPTO filings. It is not uncommon for counsel to posture in settlement discussions and state they will take "initiatives" to be "aggressive" in the litigation should it continue. A Court must be wary of any attempt to police meetings between opposing counsel even where recounted statements, as this record reflects, were at best silly posturing or at worst unprofessional. "

Vasudevan Software, Inc. v. Microstrategy, Inc., Case No. C 11-06637 RS (N.D. Cal. March 11, 2013)

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