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.