January 25, 2017

Are All Troll Cases Exceptional?

By Bryan K. Wheelock, Principal

In Iris Connex, LLC, v. Dell, Inc., [2:15-cv-1915-JRG] (January 25, 2016), District Judge Gilstrap, after granting summary judgment to Dell, awarded attorneys fees, noting Dell’s arguments that Iris Connex’s claim construction position was unsupportable, that its infringement position was not plausible, that its litigation was primarily settlement driven; and Iris Connex was an intentionally empty shell company and, as a consequence, had no capacity to pay such fees even if the case were ultimately declared to be exceptional.

Judge Gilstrap took the extraordinary step of ordering further discovery into the extended identity of Iris Connex, because the court was concerned that the structure would effectively avoid any deterrence from an award of attorneys fees.  In Judge Gilstrap’s words “[a]s the post-judgment discovery progressed, it became obvious that Iris Connex was not simply a non-practicing entity seeking to vindicate its patent rights — albeit with an exceptionally bad infringement case.”  Judge Gilstrap found that Iris Connex is the first level of two shell corporations which were intended to shield the real actor, Mr. Brian Yates, from personal liability.  The Court found that Mr. Yates and those in active concert with him exploited the corporate form to operate largely in secret and to insulate the true party in interest from the risk associated with dubious infringement suits — that risk being fee shifting under Section 285.

Judge Gilstrap made 28 specific findings, including:

  • Iris Connex has no assets except for the ’950 patent and it holds no working capital
  • Iris Connex has no employees
  • Iris Connex was formed for the sole purpose of enforcing its lone asset
  • Iris Connex paid no cash value for the ’950 patent
  • Iris Connex pays no rent and shares its office with 15 to 20 other entities owned directly or indirectly by Brian Yates
  • There is no sign for Suite 600-A displayed on any door in the building
    identifying Iris Connex as an occupant

After a detailed analysis of the law, Judge Gilstrap identified a general and uncontroversial principle: that the corporate form cannot be used as a shield to insulate officers and parent corporations against liability for their own tortious conduct or tortious conduct they control.  Judge Gilstrap rejected a narrow view of his authority to award fees under Section 285.

Judge Gilstrap noted that the case “crossed the Rubicon of exceptionality” when the Court concluded that Iris Connex’s case was so weak from the outset that it lacked any real merit.  Judge Gilstrap has “its fair share of claim construction arguments” and found that Iris Connex’s “clearly stand out.”

Moreover Judge Gilstrap’s finding of exceptionality was not based solely on the weak merits of the case or litigation conduct.  Judge Gilstrap found two additional factors supported the finding:  First, that Mr. Yates made an intentional decision to create and undercapitalize Iris Connex as an empty shell; and second, the admitted sloppiness in prosecuting this case, brought about predominantly by Mr. Yates.  Judge Gilstrap found and held Iris Connex and Mr. Yates are jointly and severally liable for $355,000 of fees pursuant to 35 U.S.C. § 285.

Not finished dispensing Eastern District of Texas justice, Judge Gilstrap also sanctioned one of the more culpable counsel $25,000, and Mr. Yates an additional $152,000.