GUST, INC. v. ALPHACAP VENTURES LLC

Before Wallach, Linn and Hughes. Appeal from the United States District Court for the Southern District of New York.

Summary: In determining whether to award sanctions under 28 U.S.C. § 1927, the domain of colorable claims is broader when the law is unsettled.

A non-practicing entity AlphaCap, represented by Gutride Safier LLP, sued ten internet crowd-funding companies for infringement of AlphaCap’s patents in the Eastern District of Texas. Nine of the defendants settled for less than $50,000, but Gust contested infringement and validity of AlphaCap’s patents. The case was transferred to the Southern District of New York, and the district court dismissed AlphaCap’s claims, finding the asserted patent claims were invalid under 35 U.S.C. § 101. The district court also awarded fees and costs to Gust under 35 U.S.C. § 285 and 28 U.S.C. § 1927, making Alphacap’s counsel, Gutride, jointly and severally liable for the award of approximately $500,000 of Gust’s attorneys’ fees and costs. The district court found that counsel unreasonably and vexatiously multiplied the proceedings. Gutride appealed.

The Federal Circuit found that the district court abused its discretion in awarding fees and costs under § 1927 and reversed. In the Second Circuit, an award under § 1927 requires that: (1) the claims were entirely without color; and (2) the claims were brought in bad faith. First, the Federal Circuit found that the district court abused its discretion in holding that Gutride’s patent eligibility position lacked “color.” Gutride argued that AlphaCap’s position that the patents-at-issue were valid was colorable given the unsettled state of the law regarding patent eligibility following the Supreme Court decision in Alice. The Federal Circuit agreed, and acknowledged that the infringement suit was filed only seven months after the Supreme Court decided Alice and that several Federal Circuit cases recognized the uncertainty in the application of Alice during that period. The Federal Circuit stated that the domain of colorable arguments is broader when the law is unsettled and emphasized that it is important to allow attorneys the latitude necessary to challenge and solidify the legal rules without the chilling effect of direct economic sanctions.

Next, the Federal Circuit addressed the district court’s conclusion that Gutride’s actions throughout the litigation constituted bad faith. The district court’s bad faith determination was based on its findings that Gutride: (1) knew AlphaCap’s patents were invalid, (2) filed the lawsuit expecting to obtain quick settlements, (3) chose a venue that was not convenient and then opposed a motion to transfer venue and (4) failed to end the case through settlement. The Federal Circuit found that the district court improperly relied on counsel’s statement during settlement discussions that the case “is not worth litigating” to show that Gutride knew AlphaCap’s patents were invalid. Also, for the reasons discussed above, AlphaCap’s position as to validity did not lack color. The Federal Circuit found that § 1927 is not the proper vehicle to address concerns regarding AlphaCap’s business/litigation model. Further, the Eastern District of Texas was a proper forum because there was personal jurisdiction over Gust and counsel is not obligated to file in the most convenient forum. Lastly, the decision to settle is wholly committed to clients, not the attorneys. Accordingly, the Federal Circuit reversed the award of fees under § 1927 against Gutride.

Judge Wallach dissented, and argued that the Federal Circuit improperly substituted its findings for that of the district court. He stated that the district court properly determined that Gutride lacked a colorable basis since the law of patent eligibility under § 101 was sufficiently settled after Alice. He also found that the district court properly determined Gutride’s bad faith when Gutride’s entire course of conduct was considered holistically.