IP Law Daily, PATENT—Fed. Cir.: Netflix properly awarded attorney fees for patent owner’s impermissible forum shopping, (Jul 27, 2022)

By Robert Margolis, J.D.

The patent owner had initially filed its case in Delaware, voluntarily dismissed the case on the heels of an unfavorable magistrate report and recommendation, then refiled in a California forum after earlier claiming California was inconvenient.

A California federal district court was well within its discretion in awarding attorney fees under the court’s inherent powers to Netflix, Inc. for bad faith “forum shopping” litigation tactics employed by Realtime Adaptive Streaming LLC in patent litigation that travelled from Delaware to California before Realtime sought to dismiss the case voluntarily (for the second time), the United States Court of Appeals for the Federal Circuit has held (Realtime Adaptive Streaming LLC v. Netflix, Inc., July 27, 2022, Chen, R.).

Prior proceedings. Realtime filed three separate patent infringement actions against Netflix, Inc. and Netflix Streaming Services, Inc. (collectively, “Netflix”) in the Federal District Court in Delaware, in which it asserted six patents. While that case was pending, Netflix filed seven inter partes review petitions before the Patent Trial and Appeal Board, seeking the Board’s determination that several of the claims asserted in the Delaware case were unpatentable. Netflix also moved to dismiss the Delaware case, on the grounds that four of the six asserted patents were ineligible under 35 U.S.C. § 101. After the magistrate judge in Delaware issued a report and recommendation finding that claims of four of the patents to be ineligible, Realtime voluntarily dismissed the Delaware action before the district court could rule on the magistrate judge’s findings.

The next day, Realtime refiled its claims related to the same six patents in the federal district court in the Central District of California, even though it previously told the Delaware court that transferring the case to the Northern District of California would be inconvenient and an unfair burden. Netflix moved for attorney fees and to transfer the California cases back to Delaware. Before those motions could be decided, Realtime again voluntarily dismissed its case. Netflix then renewed its motion for attorney fees for the California cases as well as the Delaware case and inter partes review proceedings. The California court awarded fees for the California actions pursuant to Section 285 of the Patent Act, which permits a court to grant attorney fees to prevailing parties in exceptional cases, as well as pursuant to the district court’s inherent equitable powers. The court denied fees related to the Delaware case or inter partes proceedings. The parties cross-appealed the district court’s decision.

Bad faith. The appellate court first described the circumstances facing Realtime at the time it voluntarily dismissed the Delaware case—the magistrate had issued a report and recommendation finding that four of Realtime’s six asserted patents were ineligible under § 101, which the district court had not yet ruled on, and the Board was conducting inter partes review of the patents. The appellate court noted that for most plaintiffs, these circumstances would signal the end of litigation, but that was not the case for Realtime. Instead, Realtime refiled its case in what it perceived to be a more friendly forum in California (since that court had already reached a more favorable conclusion on patent-eligibility on some of the claims), even though Realtime had previously told the Delaware court that transfer to California would be an unfair burden. Then, when Netflix moved to transfer the California cases back to Delaware, on the day before oral argument on the transfer motion, Realtime again voluntarily dismissed the lawsuits.

This conduct by Realtime met the standard of “bad faith” that the Ninth Circuit has adopted to govern the imposition of attorney fees when the interests of justice so require. (The Federal Circuit applied Ninth Circuit law, since the issue was not one of substantive patent law.) “Willful actions” with “an improper purpose” can qualify as bad faith under Ninth Circuit law, Fink v. Gomez, 239 F.3d 989, 983-84 (9th Cir. 2001), and those actions can include abusive litigation tactics. The appellate court applied an “abuse of discretion” standard in reviewing the district court’s orders, and found that court to have acted within its discretion both in awarding fees under its equitable powers for the California cases, and denying fees and costs under Section 285 and Federal Rule of Civil Procedure 41(d) for the Delaware and inter partes proceedings.

According to the appellate court, the district court “reasonably” found that Realtime’s litigation conduct in the California actions was “improper,” “exceptional,” and “totally unjustified.” Realtime knew of the Delaware magistrate judge’s patent-ineligibility findings and that the California district court had recently reached a more favorable ruling, so Realtime made the tactical maneuver it thought could “effectively erase” the magistrate’s ruling. Not only did Realtime seek to avoid an adverse ruling in Delaware, it later opposed transfer back from California to the Delaware forum it originally chose. The district court had correctly highlighted the contradictions in Realtime’s opposition to transfer—Realtime first asserted that Delaware was the more convenient forum when faced with the prospect of the district court transferring the case to California, then made the opposite argument about the convenience of California vis a vis Delaware when Netflix sought to transfer the litigation back to its original forum. This conduct supported the district court’s finding of “impermissible forum shopping,” the appellate court held. And that finding supported the imposition of attorney fees for the costs of the California litigation under the district court’s equitable powers, according to the appellate court.

The appellate court rejected Realtime’s argument that it is generally permissible to voluntarily dismiss a lawsuit under Federal Rule of Civil Procedure 41 and refile in another forum. While that is true as a general statement, it “is a woefully incomplete description of the circumstances of this case,” the appellate court pointed out.

Fee denial. Similar to its finding that the district court did not abuse its discretion in awarding fees for the California litigation, the appellate court held that the district court did not abuse its discretion in denying fees for the Delaware action. There was no evidence that the initial filing of that case was untenable at the time it was filed, or that Realtime knew its claims to be weak. The appellate court also did not address the district court’s denial of fees under Section 285 of the Patent Act.

Concurring, dissenting opinion. Circuit Judge Jimmie Reyna filed an opinion concurring-in-part and dissenting-in-part. Judge Reyna agreed that the district court properly awarded attorney fees under its inherent powers, but he also would have held that the district court did not err in determining that Realtime’s two voluntary dismissals without prejudice sufficed to confer prevailing party status on Netflix under Section 285 of the Patent Act. Judge Reyna noted that a second voluntary dismissal under Federal Rule of Evidence 41(a) operates as an adjudication on the merits, which changes the legal relationship of the parties. Requiring an affirmative order of the court as to the merits of the claims “puts form over substance,” Judge Reyna wrote.

The Case is No. 21-1484.

Attorneys: Reza Mirzaie (Russ August And Kabat) for Realtime Adaptive Streaming LLC. J. David Hadden (Fenwick & West, LLP) for Netflix, Inc.

Companies: Realtime Adaptive Streaming LLC; Netflix, Inc.; Netflix Streaming Services, Inc.

Cases: Patent FedCirNews GCNNews