Appeals Court Rejects Belated Alice Defense, Affirms $8 Million Patent Malpractice Award

Michael E. McCabe, Jr.Malpractice, Patent Malpractice1 Comment

The United States Court of Appeals for the Second Circuit rejected yesterday a now defunct Virginia IP firm’s attempt to rely on 35 U.S.C. § 101 and the Supreme Court’s Alice decision as a defense to an $8 million damages award arising from the firm’s negligence in handling a client’s patent application. Protostorm, LLC v. Antonelli, Terry, Stout & Kraus LLP et al.15-2084 (L) (2d Cir. Dec. 21, 2016).  On appeal, the firm had argued that the client’s invention was unpatentable under Section 101 in light of the Supreme Court’s decision in Alice Corp. Pty. v. CLS Bank Int’l et al., 134 S. Ct. 2347 (2014).  The Second Circuit refused to consider the merits of this argument, however, because the law firm failed to raise the Section 101 issue during trial in a Fed. R. Civ. P. 50(a) motion for judgment as a matter of law.  Accordingly, the malpractice judgment was affirmed.

Background

As we discussed in our previous posts here, here and here, this dispute started in 2001 after counsel from the Antonelli firm filed a PCT patent application on behalf of its startup client, Protostorm, LLC (“Protostorm”.  Under the Patent Cooperation Treaty (PCT), a U.S. applicant may file one application, “an international application,” in a standardized format in English in the USPTO, and have that application acknowledged as a regular national or regional filing in as many Contracting States to the PCT as the applicant “designates” or “elects,” that is, names, as countries or regions in which patent protection is desired. Upon payment of national fees and the furnishing of any required translation, usually 30 months after the effective filing date, the application will be subjected to national procedures.

In Protostorm’s international application, Antonelli failed to designate the United States as a country where patent protection was desired. Later, a firm internal note stated that Antonelli should cease work for Protostorm, apparantly because of unpaid legal fees. Protostorm nevertheless believed “all was well” with regard to its patent application. No communications took place between the law firm and its client for several years.

In 2006, Protostorm learned that Google might be infringing what it regarded as its invention.  In 2007, the Antonelli firm advised Protostorm that an international application had been filed but had been deemed “withdrawn” because no “national stage” submissions were ever filed.  In other words, Protostorm had no patent rights to assert against Google or anyone else.

stormThe Malpractice Litigation

In 2008, Protostorm sued the Antonelli firm and others for malpractice.  The case was tried to a jury in 2014, which returned a verdict in favor of Protostorm.  Including compensatory damages, punitive damages, and interest, the total judgment amounted to approximately $8 million.  The district court stayed enforcement of the judgment pending resolution of defendants’ post-trial motions.

In January 2015, the firm filed motions asking the district court to set aside the jury verdict pursuant to Federal Rule of Civil Procedure 50(b).  The district court denied the motions.

Antonelli argued Protostorm had failed to establish proximate causation because the patent application claimed unpatentable subject matter pursuant to 35 U.S.C. § 101 and was obvious under 35 U.S.C. § 103. The district court rejected both arguments.

As for Section 101, Antonelli argued the hypothetical claims drafted by Protostorm’s expert were directed to an unpatentable “abstract concept of selecting advertising based on a customer’s interaction with an advertiser’s content” and, thus, was ineligible under the Alice decision.  Antonelli further argued that the hypothetical claim at issue in trial was obvious and thus not patentable under Section 103.

The district court rejected both arguments because counsel for Antonelli failed to move for judgment under Section 101 or Section 103 at trial, pursuant to Fed. R. Civ. P. 50(a).  The district court held that, “Although Defendants’ oral Rule 50(a) motions at trial challenged the patentability of the Protostorm invention, the grounds stated by their trial counsel were altogether different from the Section 101 and 103 arguments raised in the Rule 50(b) motion.”  Because Antonelli’s counsel failed to preserve these issues at trial, its request for post-trial judgment was “forfeited.”

The district court further found no ground existed to excuse Antonelli’s failure to raise these issues during trial.  As for the Section 101 motion, the court noted that Antonelli was on notice of Alice since the case was decided approximately one month before trial.

In its decision yesterday, the appellate court agreed.  Protostorm, LLC v. Antonelli, Terry, Stout & Kraus LLP et al.15-2084 (L) (2d Cir. Dec. 21, 2016).  The circuit court held:

ATS&K did not raise the Section 101 issue in its motions for judgment as a matter of law made during trial pursuant to Fed. R. Civ. P. 50(a). Therefore, ATS&K has not preserved its Section 101 challenge to the patentability of Protostorm’s invention.  In particular, because resolution of the Alice issue in this particular case would require “additional fact-finding,” ATS&K’s argument about patentability under Section 101 is not a “purely legal argument.”

The Second Circuit also upheld the district court’s rejection of the law firm’s obviousness arguments on the same ground as it did the Section 101 issue.

Conclusion

This case provides important takeaways for both patent prosecutors as well as litigators.  For prosecutors, the case ultimately is about how a relatively simple error could have been avoided with appropriate oversight, such as a second set of trained eyes to review the filing.  And while the law firm may very well have had a winning Section 101 defense, unfortunately its litigation counsel failed to raise the issue in its motion for judgment as a matter of law during trial.  The case also illustrates the importance for litigation counsel to be aware of important changes in the law.  In this case, as the district court noted, the Alice decision was issued one month before trial.

 

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