Judge Takes On Patent Troll With 'Sham Employee'; Forces Troll To Defend Practice Before A Jury

from the go-get-'em dept

One of the best “scenes” in This American Life’s awesome “When Patents Attack” episode from a couple of years ago, was when the reporters went to a building in East Texas that was “home” to a bunch of patent trolls, and tried knocking on doors, noting that there appeared to be no lights on in any “office” nor any indication that anyone ever actually came to those offices. It would appear that at least one judge is recognizing that setting up sham companies to shake others down via patents may have some legal issues. Judge William Alsup is no stranger to getting a detailed understanding of what’s really going on in intellectual property cases. After all he’s the same judge who has experience writing code who handled the massive Oracle v. Google patent and copyright case, in which he showed a thorough understanding of the underlying issues.

So it’s not surprising to find out that he’s taking on a patent trolling operation, in part calling attention to their “sham” operation and “sham” employee. Alsup was clearly influenced by the NY Times op-ed that the chief judge of the Court of Appeals for the Federal Circuit (CAFC), Randall Rader co-wrote a few months ago, arguing that district court judges should look for patent trolls that are abusing the system. Judge Alsup quotes that op-ed at length, and then digs in to show exactly how the patent trolling operation Network Protection Sciences works, along with various related patent troll shell companies set up by “Innovation Management Sciences LLC.” These were all put together (like so many patent trolling firms) by some patent lawyers who realized it was more lucrative to become patent trolls themselves. In this case, the lawyers are California-based Rakesh Ramde and Wilfred Lam. As Alsup notes, they’ve filed at least a dozen lawsuits against at least 40 companies.

The whole ruling is well worth reading (it’s only 14 pages), as it details the basic sham setup of one of those “empty offices” in east Texas. In this case, the legal issue concerns the timing of the transfer of the patent being used in this case (against security firm Fortinet) between different trolling entities (all under the IMS banner). And one of the things that comes out is that the “single employee” of NPS is listed as Gregory Cuke, who is described as the “director of business development.” Back in reality, Alsup points out that in Cuke’s deposition, he admits that he’s not actually the director of business development, but is actually a real estate broker for various office buildings — and is the landlord for the nearly empty one-room “office” that NPS claims is its home base. But, every so often, he’s asked to sign various legal documents and he does so.

NPS has repeatedly represented to the Court that it has a single employee, Gregory Cuke, its “director of business development” (see, Dkt. No. 65 at 1). The record, however, shows that this individual has no actual involvement with NPS day-to-day business, even assuming that any such business takes place. Although Cuke agrees he has performed a few token hours of work for NPS, he denies being its “director of business development,” denies having any knowledge of what NPS’s day-to-day business is, and denies being an NPS employee (Cuke Dep. 11, 20-21, 38, 56-57). Aside from his alleged employment, Cuke is simply NPS’s landlord: Cuke is a real estate broker for commercial properties in east Texas and nuns a company that subleases a one-room office to NPS (Cuke Dep. 31).

NPS has repeatedly represented that it is ”headquartered” in Suite 302 at 3301 West Marshall Avenue in Longview, Texas. According to Cuke, however, this “headquarters” office is a tiny, windowless, file-cabinet room, without a phone or even chairs (Cuke Dep. 62, 66). There are no on-site employees. The rent for the office space is $325 per month; NPS subleases the space for $100 per month from another entity owned by Ramde and Lam that appears to share the same address (id. at 64; Ramde Decl. Exh. 2). The office contains a single computer which Cuke has never seen turned on (Cuke Dep. at 62).

While Alsup agrees to hold a trial concerning the key issue of whether or not NPS actually owned the patent at the date of the lawsuit (because Cuke hadn’t yet signed the sale-and-assignment agreement finalizing the deal at the time of the filing), he does start to ask some significant questions about NPS and what Ramde and Lam are up to, exploring whether or not NPS is engaged in litigation misconduct. First, Alsup dings NPS (and specifically Ramde and Lam) for “stonewalling and obfuscation” in basically trying to do everything possible to avoid handing over the sale-and-assignment agreement which was signed too late. Alsup details numerous steps that were taken to avoid revealing what happened and concludes “NPS, Ramde and Lam engaged in an extensive cover-up.”

Then we get to the problem of the sham company:

Second, this order finds that NPS manufactured venue in Texas via a sham. Ramde and Lam rented a windowless 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 Cuke as its “director of business development” but this too was a sham, a contrivance to manufacture venue in the Eastern District of Texas.

To create the impression that NPS is something other than a patent troll, NPS and its principals have repeatedly made misleading statements to Fortinet and to the Court. For example, in an (unsworn) declaration filed while the action was still in Texas, Ramde stated that “[i]n the business judgment of Network Protection Sciences . . . its relationship with Greg Cuke [is an] important asset[] of the company . . . [that is] facilitated by its presence in Texas” (Dkt. No. 65-36 1] 10). Yet alleged director Cuke later admitted in his deposition that he was only NPS’s “director of business development” for litigation purposes and had no knowledge of the day-to-day activities of the entity (Cuke Dep. 38-39, 56-5 7). No such “important asset” ever existed. It was a sham.

But, then he goes further in noting that it appeared that Ramde and Lam were abusing the court system with their trolling:

Third, two prior orders herein have already found that NPS has engaged in unreasonable and improper litigation behavior. One found that NPS asserted an unreasonable number of patent claims with the effect of multiplying the burden of litigation. It held that asserting more than fifty patent claims against Fortinet was “an unreasonable burden for NPS to place on its adversary” (Dkt. No.197 at 3). Despite this admonition, this behavior by NPS has continued in the form of sandbagging with newly-produced documents and infringement contentions that attack over 70 Fortinet products without supplying claim charts. The other order found that NPS’s counsel have played fast and loose with the rules for being admitted to practice pro hac vice in this district. It held that an attorney for NPS had violated our local rules 11-1 and 11-3 by appearing i11 three depositions prior to filing his pro hac vice application and denied his application (Dkt. No. 211).

Alsup notes that dismissing a case for litigation misconduct is a “severe sanction” which he’s not yet ready to take, even though “this is a close case.” However, he notes that “attorney’s fees caused by and traceable to the misconduct are likely to be imposed but that remedy will be held in abeyance to see how well both sides behave from here on out.” In other words, the lawyers are on very thin ice. Alsup then hints at letting the jury hear about the “sham venue, shame employees, and the cover-up” as the case goes to trial. However, as noted at the link above, at the hearing, Alsup made it quite clear that since this case is going to trial, NPS is going to have to show how their actions were a legitimate business practice — something they may have difficulty doing.

In other words, while you might consider it a “victory” for NPS that the case wasn’t dismissed outright by Judge Alsup, it would appear that he’s actually just handing NPS a pretty long rope with which to hang itself, and making it clear that they better be straight with the court (i.e., start making that noose) or he’ll make them pay attorney’s fees (which may need to be paid anyway). It would appear that Ramde and Lam are between a rock and a hard place, where, as of right now they’re going to need to defend the whole sham setup and the coverup to a jury and try to make it sound like a legitimate practice.

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.

Mr. Sham? Ouch. I imagine the actual trial on this will be worth watching.

Filed Under: , , , , , ,
Companies: fortinet, innovation management sciences, network proteciton sciences

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Comments on “Judge Takes On Patent Troll With 'Sham Employee'; Forces Troll To Defend Practice Before A Jury”

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out_of_the_blue says:

THE WHOLE RULING? All l need to know it's an empty office.

“The whole ruling is well worth reading (it’s only 14 pages), as it details the basic sham setup of one of those “empty offices” in east Texas.”

You sure do spend a lot of time on useless details. Perhaps that’s why you never get to really important items.

Bergman (profile) says:

Re: THE WHOLE RULING? All l need to know it's an empty office.

That second sentence is why the community reported your post, blue.

This site EXISTS for commentary on news, why does commentary on news shock you so badly that you feel the need to attack people on the site? Nobody forces you to read any article, or even to finish reading an article.

I’m starting to think you take some sort of perverse pride in being reported, as if being justly silenced for disruptive behavior somehow validates the behavior and you with it.

It doesn’t for you any more than it does for little kids.

Xploding_Cobra (profile) says:

Re: Re: THE WHOLE RULING? All l need to know it's an empty office.

Agreed 100%. While I enjoy ridiculing OOTB regarding their infatuation with being contrary about every single thing that Masnick reports, I tend to think also that OOTB is one of those individuals that just can’t stand not being talked about in some way be it good, bad or indifferent. Considering the fact that I have yet to see even one instance of OOTB agreeing with anything posted by Masnick, I seriously wonder why they bother to post here. Granted, it is the way of the troll to be as controversial as possible but this is just pathetic. If you KNOW that you’re going to be reported every time you post, then the whole reason for trolling in the first place becomes negated.

Scote (profile) says:

Not such a great ruling...

The judge chronicled all the misdeeds of the patent trolls, but they still get a trial and they get no sanctions, in spite of numerous instances of sanctionable conduct.

As with the Prenda cases, this is yet another example of a Judge giving lawyers who commit sanctionable legal gamesmanship benefit of the doubt. Until judges start holding lawyers *personally* responsible, this kind of thing will continue.


Mike Masnick (profile) says:

Re: Not such a great ruling...

The judge chronicled all the misdeeds of the patent trolls, but they still get a trial and they get no sanctions, in spite of numerous instances of sanctionable conduct.

Not so sure of that. If you read through the whole thing, you see that the judge is basically forcing them to defend the practice before sanctioning them. They will almost certainly get sanctioned, but the judge is making sure that they have to try to explain their actions first.

Scote (profile) says:

Re: Re: OSC

IANAL, so I don’t know the full range the judge has open to him. Seems to me that he isn’t “forcing” the troll to do anything, instead he is denying the defendant’s motion to dismiss.

Yes, Judge Alsup writes a lot of stuff that sounds like he might come down hard on trolls, but he doesn’t actually do any of that. Where is the Order to Show Cause for sanctions? The same attorneys who’s conduct was likely sanctionable are being allowed to continue to litigate in his court. He specifically declined to throw out the case based on their well documented gamesmanship:

A dismissal for litigation misconduct is a severe sanction. As a lesser sanction, a district court may award attomey’s fees. Another available remedy is instructing the that they may draw an adverse inference from such misconduct. The litigation misconduct is most troubling. But does it warrant outright dismissal? This is a close case. At this stage, the Court is unwilling to impose a terminating sanction but may be willing to do so if the abuse continues.”

Kind of like “Hey you kids! I saw you setting fire to all those cars! If you keep doing that I may have to do something. Maybe. But probably a fine for your employers or something, nothing that will affect you personally.” :-p

This ruling is not the big win you make it out to be. It is a win only relative to other cases because so many judges give so much deference to troll plantiffs and their lawyers that not giving them everything they want seems like a win.

Mike Masnick (profile) says:

Re: Re: Re: OSC

Yes, Judge Alsup writes a lot of stuff that sounds like he might come down hard on trolls, but he doesn’t actually do any of that. Where is the Order to Show Cause for sanctions?

Again, read the transcript of the hearing. He’s handing them a rope and basically telling them to hang themselves. They either have to admit to what they’re doing in front of a jury (which could be disastrous) OR he’ll come back with sanctions. He made it clear that the sanctions would be based on their further attempts to play games… but then also made it clear they need to reveal what they’ve done to the jury.

I think people are misreading what’s being done here. It is a big deal and those guys are in trouble.

Scote (profile) says:

Re: Re: Re:2 I'm not sure the defense would agree with you just yet...

Again, this is a denial of a defendant’s motion to dismiss, not a victory for the defense. And there is no language that shows that any of the lawyers or actual plaintiffs will be held personally responsible, no talk of individual sanctions, nor of piercing the corporate veil. If a troll’s shell company takes a hit, that is not a big deal in the long term.

I think we’ll have to disagree on how big a victory a denial of a motion to dismiss is for the defendant until the close of the case, when we can see if any of the lawyers or actual plaintiffs are held personalty accountable, and whether this one case will affect the others. Many of the complaints in the defendants motion to dismiss, such as the date of the patent transfer, choice of venue, etc. are not matters of fact that will affect the troll in other cases where they correct those defects – unless the attorneys are personally sanctioned and the actual owners, not the shell company, are held personally accountable in this case.

James Burkhardt (profile) says:

Re: Re: Re:3 I'm not sure the defense would agree with you just yet...

The judge feels that dismissing a case would be too severe a sanction at this time (read: it will get overturned on appeal). There isn’t enough evidence of real fraud for such a sanction to stick. Fraud is only a small part of the troll playbook remember. Most of it is 100% legal, if morally iffy. And so it needs to go to Trial for a jury to see the iffy parts. If I am reading this ruling correctly, the merits of the motion itself is going to be directly considered by the jury:

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.

As in, the judge has ruled that the sham nature of the holding company, as determined by a jury is reason enough to invalidate an assignment. He has allowed a Jury to decide He wants a jury deciding this so an appeal won’t have an easy affect. What do I mean by that?

One of the biggest problems with the Wright ruling is that a Judge decided it, not a jury. By making a jury make the decision, it becomes incredibly difficult to appeal. Namely, Appeals courts normally assume that juries have made accurate statements of fact., and so Appeals are concered with application law. If a jury decides that the facts do not support a valid copyright assignment or that the facts show a pattern of imprudence and fraud, those finding are very hard to dismiss. The appeal can then only be argued over how the judge handles those rulings.

Alien Rebel (profile) says:

Great Timing

Crap, we’ll rein in patent trolls just when they’re on the verge of doing great things for humanity; Bill Gates and Nathan Myrvold teaming up on nuclear power, guarantees we’ll all be on renewables once Intellectual Ventures locks up nukes with patent suits.

See NYTimes: http://www.nytimes.com/2013/09/25/business/energy-environment/atomic-goal-800-years-of-power-from-waste.html?_r=0

Jay Are says:

first steps

It is a little discouraging that the lawyers do get the freedoms they do, but hopefully them having to actually explain all their actions and present such bogus facts to less-than-impressed juries will begin paving the way for choking out the practice. It takes time. Plus, it’s nice to see that at least someone out there in the legal system is not catering to the practices of the trolls. It sounds really cliche to say it, but genuinely it distresses me because them doing what they do seriously does hurt the country. They’re genuinely, really robbing our future for some temporary cash.

Anon E. Mous (profile) says:

Was John Steele of Prenda Law a consultant to these guys? Cause from having their ass handed to them by this Judge it sure seems like it.

Hmmmm so these Guy had one sham employee supposedly as the head of the company. Is it just me or does this seem similar to what Prenda has with it’s so called client AF Holdings and it’s sole CEO/employee Mark Lutz.

I loved the part where the Judge told the lawyer that “the sham employee, and sham office” were going to be part of the Jury trial.

It’s good to see the Judge is making these guys take it to trial after refusing to dismiss it. This Judge is definitely holding this troll’s feet to the fire.

I still have to wonder if the troll who brought this up isn’t related to John Steele, cause man it seems damn close by the shenanigans going on in this case.

don't feed the trolls says:

troll the trolls

I feel the judge is going to make this an uphill battle for the trolls and he may have caught them on a technicality to resolve ownership by jury. It feels like he’s bluffing a little because he hasn’t specified what sanctions he’d enforce. Wouldn’t he want to avoid specifying sanctions because it then puts him in a defensive position, ie the trolls would have something to argue against those sanctions? He’d stay in control by painting the trolls into a corner by coaxing them to prove ownership in front of a jury, and he’s hedging the jury will see the sham for what it is and make the right call.

Time will tell, hope the judge sticks it to the trolls. They’re not helping our country, our economy, our lives.

Don’t settle. Settling feeds trolls.

ididn'tdoit says:

Good for him, but...

“a contrivance to manufacture venue in the Eastern District of Texas.”

So, why didn’t he ever ask the obvious questions? Why do the patent companies want to litigate in that district so badly? Why does that district side much more often with the patent holders, when compared to every other district in the country? If unscrupulous and very lazy people are working this hard to create a completely fabricated presence there and cover it up, there must be a reason.

What’s that reason?

Close, but no cigar, Judge.

Anonymous Coward says:

The one thing I’m not clear on in all these cases is, why is east Texas the preferred jurisdiction for patent trolls?

Is it just a matter of favorable ruling statistics? Even statistics have a reason behind them, but I’ve never seen a story that goes in depth on what factor or combination of factors that make it the preferable venue.

Everyone just complains about the jurisdiction but no one seems to tackle the reason(s) behind it. That so many want east Texas seems to point to a fairly serious problem there.

Dave (profile) says:

Whence Trolls?

Mike: one thing has always bothered me. Why do people like Prenda, Righthaven, and these guys get away with the crap they pull for so long (years even)? I’m sure you’ll agree that, if we common citizens tried this stuff in court, even once, we wouldn’t see daylight for years. We’d get slapped with contempt charges and jail time till Hell froze over. Why do they get away with it?

staff (user link) says:

more dissembling by Masnick

‘nor any indication that anyone ever actually came to those offices’

You are dissembling again. Surely you realize American companies have been registering in one locale and operating from one or more others for ages. There can be many reasons. That’s why so many companies register or incorporate in Delaware.

?patent troll?

infringers and their paid puppets? definition of ?patent troll?:

anyone who has the nerve to sue us for stealing their invention

This is just spin control by large infringers to cover up their theft.

The patent system now teeters on the brink of lawlessness. Call it what you will…patent hoarder, patent troll, non-practicing entity, shell company, etc. It all means one thing: ?we?re using your invention and we?re not going to stop or pay?. It?s a pure red herring by large invention thieves and their paid puppets to kill any inventor support system. Their goal is to legalize theft. The fact is, many of the large multinationals and their puppets who defame inventors in this way themselves make no products in the US or create any American jobs and it is their continued blatant theft which makes it impossible for the true creators to do so. To them the only patents that are legitimate are their own -if they have any. Meanwhile, the huge multinationals ship more and more US jobs overseas.

It?s about property rights. They should not only be for the rich and powerful -campaign contributors. Our founders: Jefferson, Franklin, Madison and others felt so strongly about the rights of inventors that they included inventors rights to their creations and discoveries in the Constitution. They understood the trade off. Inventors are given a limited monopoly and in turn society gets the benefits of their inventions (telephone, computer, airplane, automobile, lighting, etc) into perpetuity and the jobs the commercialization of those inventions bring. For 200 years the patent system has not only fueled the US economy, but the world?s. If we weaken the patent system, we force inventors underground like Stradivarius (anyone know how to make a Stradivarius violin?) and in turn weaken our economy and job creation. Worse yet, we destroy the American dream -the ability to prosper from our ingenuity for the benefit of our families and communities. To kill or weaken the patent system is to kill their futures. Show me a country with weak or ineffective property rights and I?ll show you a weak economy with high unemployment. If we cannot own the product of our minds or labors, what can we be said to truly own. Life and liberty are fundamentally tied to and in fact based on property rights. Our very lives are inseparably tied to our property.

Prior to the Supreme Court case eBay v Mercexchange, small entities had a viable chance at commercializing their inventions. If the defendant was found guilty, an injunction was most always issued. Then the inventor small entity could enjoy the exclusive use of his invention in commercializing it. Unfortunately, injunctions are often no longer available to small entity inventors because of the eBay decision so we have no fair chance to compete with much larger entities who are now free to use our inventions. Essentially, large infringers now have your gun and all the bullets. Worse yet, inability to commercialize means those same small entities will not be hiring new employees to roll out their products and services. And now those same parties who killed injunctions for small entities and thus blocked their chance at commercializing now complain that small entity inventors are not commercializing. They created the problem and now they want to blame small entities for it. What dissembling! If you don?t like this state of affairs (your unemployment is running out), tell your Congress member. Then maybe we can get some sense back into the patent system with injunctions fully enforceable on all infringers by all patentees, large and small.

Those wishing to help fight big business giveaways should contact us as below and join the fight as we are building a network of inventors and other stakeholders to lobby Congress to restore property rights for all patent owners -large and small.

For the truth about trolls, please see http://truereform.piausa.org/default.html#pt.

Anonymous Coward says:

Re: more dissembling by Masnick

‘nor any indication that anyone ever actually came to those offices’

You are dissembling again. Surely you realize American companies have been registering in one locale and operating from one or more others for ages. There can be many reasons. That’s why so many companies register or incorporate in Delaware.

You accuse Mike of dissembling, but you are even more guilty of dissembling in your “defense” of blatant patent trolls. Don’t you think the NPS lawyers would have pointed to other operating offices or business locations if they actually existed?

Jack says:

One sided

It’s important to understand who owns the patent and weather it was infringed upon.

If that’s what the case is then that is what needs to be looked at.

In this case the judgement is biased n completely one sided. The main issue was completely ignored.

The blog post should also give a wholistic view rather than behave like Fox News channel

That One Guy (profile) says:

Re: Re: One sided

I think my favorite part is the snowflakes reveal that the comments came from different IP addresses, but the names and arguments are identical and nearly identical respectively.

When trying to make it look like several people are in support of, or in opposition against something, when in reality it’s just one person posting under several aliases, kinda helps to avoid such blatant giveaways.

Alsup trolls for companies says:

Alsup Trolling for Companies & Infringers

Judge Alsup has never chastised a white attorney. He took his moral umbrage against two minority attorneys. That is the most important issue here. While in private practice he represented only large companies (Latham & Watkins) because his $1000 an hour fee is beyond reach of those small companies and innovators he claims to root for now. If he had the guts to do something, he should ask the infringer to explain infringement, which is the only issue in the patent case. But he is being a showman when he took a newspaper article as law, and goes full barrell against two minority lawyers. He wants to sanction them for what? The case is already transferred from Texas to N.D. Cal. So why is the incorporation in Texas relevant at trial?
If buying a key parcel of land to collect money from passers-by is illegal, then every property transfer is illegal. What nonsense in this so called moral outrage?

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