Summary
In Verve, L.L.C. v. Hypercom Corp., 2006 WL 2390505 (D. Ariz. Aug. 16, 2006), the court was applying Arizona law, not California law.
Summary of this case from Travelers Prop. Cas. v. KFx Med. Corp.Opinion
No. CV-05-0365-PHX-FJM.
August 16, 2006
ORDER
The court has before it Hypercom Corporation's ("Hypercom") motion for summary judgment (doc. 243), Verve, L.L.C.'s ("Verve") response (doc. 260), and Hypercom's reply (doc. 274); Verve's motion for summary judgment (doc. 240), Hypercom's response (doc. 261), and Verve's reply (doc. 273). We also have before us Gabroy, Rollman Bossé, P.C.'s motion to withdraw (doc. 275) and Hypercom's response (doc. 278).
Verve submits each of its pleadings in its name only, notwithstanding the fact that Hypercom seeks summary judgment against all counter-defendants. Nevertheless, arguments on behalf of individual counter-defendants are set forth throughout Verve's documents. Therefore, we construe Verve's pleadings as submitted on behalf of each counter-defendant.
I. Background
Hypercom alleges that Verve, Raymond Galasso, Kevin Imes and the law firm of Simon, Galasso Frantz P.L.C. ("SGF Firm") (collectively "counter-defendants") engaged in a harassment campaign against Hypercom and others by instituting costly, inconvenient, and groundless patent infringement lawsuits for the sole purpose of extorting "settlements" of these claims. Verve contends that it is a patent holding company that acquires patent rights in order to generate revenue from those patents, either through licensing agreements or infringement litigation. Omron Corporation ("Omron") purported to assign several of its patents to Verve in exchange for a percentage of the revenue generated by Verve. Raymond Galasso is the founder and 50% owner of Verve, and is the head of the intellectual property practice at the SGF Firm. Kevin Imes is a patent agent, registered to practice before the U.S. Patent and Trademark Office, and a 50% owner of Verve.
In order to evaluate the cross-motions for summary judgment, we first examine the parties' extensive litigation history. On September 11, 2003, Verve filed an action in the Eastern District of Michigan against Hypercom and other unrelated companies, alleging infringement of U.S. Patent No. 4,678,895 ("895 patent") (the "Michigan action"). In June 2004, one month after Hypercom succeeded in severing and transferring the Michigan action to the District of Arizona, Verve voluntarily dismissed the action.
On February 4, 2004, Verve filed a second patent infringement complaint against Hypercom and seven other companies in the Western District of Texas, alleging infringement of U.S. Patent No. 4,562,341 ("341 patent"). On December 29, 2004, the Texas action was transferred to this court and is the case presently before us. Hypercom filed its counterclaims on November 16, 2005, against Verve, Galasso, Imes and the SGF Firm, alleging (1) malicious prosecution, (2) abuse of process, and (3) violation of 28 U.S.C. § 1927. On December 13, 2005, Verve's claims against Hypercom were dismissed when Verve failed to comply with our order to retain counsel (doc. 172). All that remains in this case are Hypercom's counterclaims.
Both the Texas and Arizona phases of this action are referred to herein as "the Texas action."
Verve next filed a complaint with the International Trade Commission ("ITC") in Washington, D.C., on August 2, 2004, alleging that Hypercom and others had infringed U.S. Patent No. 5,012,077 ("077 patent") ("ITC action"). The ALJ determined that Verve did not have standing to independently assert patent rights; concluded that Verve's actions amounted to bad faith and abuse of process; and issued an order imposing sanctions in the amount of $1,000,000 against Verve, Galasso, Imes and the SGF Firm payable to the United States Treasury. The Commission reviewed the sanctions order on appeal and concluded that the ALJ had improperly applied a bad faith, rather than an objectively unreasonable standard, and remanded the case to the ALJ for application of the appropriate standard. That action remains pending.
On August 30, 2004, Verve filed another complaint against Hypercom and others in the Northern District of California ("California action"), again alleging infringement of the 077 patent. After Hypercom threatened to seek Rule 11 sanctions against Verve, Verve dismissed the complaint.
II. Federal Preemption
Verve first contends that Hypercom's state law claims are preempted by federal law. It asserts that by virtue of 35 U.S.C. § 285, which provides that a "court in exceptional cases may award reasonable attorney fees to the prevailing party" in patent cases, Congress has occupied the field, and accordingly state law claims for malicious prosecution and abuse of process are preempted. This argument is without merit. In U.S. Aluminum Corp. v. Alumax, Inc., 831 F.2d 878, 881 (9th Cir. 1987), the court stated that "[w]hile we do not deny that conflict is possible between state malicious prosecutions laws and federal patent laws, the policies underlying each are not inherently antithetical. Patents do not create an exemption from state malicious prosecutions laws." Id. (citing Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986, 998 n. 17 (9th Cir. 1979)). See also Hydranautics v. FilmTec Corp., 204 F.3d 880, 886 (9th Cir. 2000) (approving a state law malicious prosecution claim arising from patent infringement action). Federal law does not preempt Hypercom's state law claims.
III. Hypercom's State Law Claims A. Malicious Prosecution
Under Arizona law, a malicious prosecution claim exists where a defendant "(1) instituted a civil action which was (2) motivated by malice, (3) begun without probable cause, (4) terminated in plaintiff's favor and (5) damaged plaintiff." Bradshaw v. State Farm Mut. Auto. Ins. Co., 157 Ariz. 411, 417, 758 P.2d 1313, 1319 (1988). Hypercom's malicious prosecution claim is based on Verve's allegedly tortious conduct in filing patent infringement lawsuits in Michigan, Texas, California, and the ITC.
Hypercom contends that counter-defendants conducted virtually no pre-filing investigation prior to filing the infringement claims and therefore the actions were instituted without probable cause. The existence of probable cause is measured by the objective standard of Rule 11, Fed.R.Civ.P. See Wolfinger v. Cheche, 206 Ariz. 504, 509-10, 80 P.3d 783, 788-89 (Ct.App. 2003). Under Rule 11, a lawyer "must possess a good faith belief, formed on the basis of a reasonable investigation, that a colorable claim or defense exists." Id. at 510, 80 P.3d at 789. In the patent litigation context, probable cause requires a reasonable pre-filing investigation of the accused product in comparison to the patent claims. See e.g., Judin v. United States, 110 F.3d 780, 784 (Fed. Cir. 1997) (finding a Rule 11 violation where neither patentee nor his attorney compared the accused devices with the patent claims or otherwise made a reasonable inquiry to determine that the complaint was well grounded in law and fact). "In bringing a claim of infringement, the patent holder, if challenged, must be prepared to demonstrate to the court . . . exactly why it believed before filing the claim that it had a reasonable chance of proving infringement. Failure to do so . . . should ordinarily result in . . . sanctions." View Eng'g, Inc. v. Robotic Vision Sys., Inc., 208 F.3d 981, 986 (Fed. Cir. 2000) (imposing Rule 11 sanctions where patent holder performed no independent claim construction or written infringement analysis).
Hypercom relies on the testimony of its expert, Laurence Pretty, who concluded, in part, that (1) counter-defendants filed each action without a reasonable pre-filing investigation; (2) there was no infringement of any of the patents; (3) counter-defendants improperly prolonged the ITC action after Hypercom conclusively established that its terminals did not infringe the 077 patent; (4) Verve lacked probable cause to file the actions in its own name when Omron retained substantial rights to the patents; (5) Verve's service of a complaint for infringement of the 341 patent three months after the patent had expired demonstrated an improper purpose in bringing the action; and (6) Verve's overall actions in filing multiple lawsuits, in multiple jurisdictions against Hypercom, without any reasonable explanation, demonstrated an improper purpose.
Hypercom also contends that lack of probable cause is evidenced by the ALJ's conclusion in the ITC action that "Verve's filing of the complaint in the face of virtually no pre-filing investigation of Hypercom's accused products demonstrates an abuse of process and bad faith." ALJ Order No. 48 at 17. Because Verve asserted the same allegations in the California Action only weeks later, and counter-defendants fail to show any interim investigation, Hypercom contends that the ALJ's finding of lack of probable cause applies equally to the California Action.
Although the Commission subsequently remanded the ITC action to the ALJ, it left undisturbed the ALJ's findings related to the lack of pre-filing investigation, abuse of process, and bad faith.
Hypercom further asserts that the lack of probable cause, bad faith, and malice is evidenced by counter-defendants' intentional misrepresentation of the relationship between Verve and Omron during the ITC action. Verve represented that it was "the owner" of the 077 patent, notwithstanding that the Omron-Verve assignment agreement left Omron with substantial rights in the patents, thereby depriving Verve of standing to sue. Pretty Report at 23-24. Hypercom alleges that counter-defendants affirmatively concealed from Hypercom, the ITC, and its own counsel, Dewey Ballantine, L.L.C., the existence of an April 2004 addendum to the assignment agreement, which revealed that Verve lacked standing to bring the ITC action. Only after Verve and Dewey Ballantine verified in interrogatories that "Omron did not retain any right, title or interest in the '077 patent," did Verve finally disclose the April 2004 addendum to Dewey Ballantine. Shortly thereafter, Dewey Ballantine withdrew from representation of Verve. HSOF ¶¶ 69-72.
Notwithstanding these rather suspect facts, the ALJ declined to sanction counter-defendants based on Verve's erroneous assertions that it was the "owner" of the patents and had standing to assert the claims. ALJ Order No. 40 at 22.
In opposition to Hypercom's motion for summary judgment on the malicious prosecution claim, Verve only discusses its alleged pre-filing investigation of the ITC action. It fails to discuss what evidence, if any, established that it performed a pre-filing investigation of the Michigan, Texas or California actions.Verve Response at 4-7. With respect to the ITC action, Verve relies solely on the testimony of Kevin Imes and SGF attorney Christopher Walton. In his declaration, Walton broadly stated that he reviewed the language of the 077 claims and the "product specification literature for each of the accused products," and "conducted an infringement analysis." VSOF, Ex. E ¶¶ 3, 6. Walton's declaration, however, fails to identify what literature he reviewed or how this review led to the infringement determination. He simply states that he reviewed unspecified literature and made a comparison. This type of vague, conclusory testimony is insufficient to raise a genuine issue of fact regarding probable cause.
This is a separate and independent reason to accept as true Hypercom's assertion that counter-defendants failed to perform a pre-filing investigation of these claims and therefore lacked probable cause. See LRCiv 7.2(i), and Rule 56(e), Fed.R.Civ.P.
Imes testified that he read the claims and specifications of the 077 patent, but he only compared those specifications to products of another company, not Hypercom. VSOF, Ex. C at 131-40, 150-52. Imes also refers to "testing" he conducted between May and July of 2004, which consisted of "observing" terminals, including Hypercom models. VSOF, Ex. D at 58-61. But there is no indication whether these models were the accused products in the infringement actions; Imes has no record of this testing; and there is no information whatsoever regarding the test results.
A further review of the record reveals that Imes never obtained a sample of any Hypercom product and he was unsure whether he used or observed the use of any Hypercom product before the Michigan Action was filed. HSOF, Ex. E at 36-39, 58. Although he and the SGF Firm were "primarily" responsible for the investigation, HSOF, Ex. D at 28-29, he testified that he did not know what investigation or information formed the basis for filing the Michigan lawsuit. HSOF, Ex. E at 38, 58-60. Moreover, he had no knowledge of anyone preparing a comparison of any accused Hypercom product to the 341 patent before the Texas action was filed, beyond asserting that a comparison "would have been done." Id. at 73-75. Although Imes testified that he believed that written comparisons were made and that the SGF Firm would have copies of them, Id. at 73-74, no such documents were produced. In fact, counter-defendants failed to produce any written documentation of any infringement study conducted prior to filing any of the Hypercom infringement actions. The record is simply devoid of any evidence supporting Verve's claim that an adequate pre-filing investigation was conducted in any action.
We reject counter-defendants' argument that they acted on the advice of counsel before instituting legal action and therefore probable cause is established as a matter of law. The only outside counsel involved in any action denied that it conducted any pre-filing investigation into any matter. HSOF, Ex. G at 2. Furthermore, counter-defendants cannot simply rely on the representation by the SGF Firm, which is itself a counter-defendant alleged to have maliciously prosecuted these claims.
Based on the undisputed facts, we conclude that counter-defendants fail to raise an issue of material fact on whether probable cause existed to support the filing of the Michigan, Texas, California and ITC actions.
As to the remaining elements of the malicious prosecution claim, there is no dispute that civil actions were instituted and that they caused damage to Hypercom. Galasso, Imes and the SGF Firm, as instigators of the litigation, can be held liable even if the actions were not filed in their names. See Bradshaw, 157 Ariz. at 417, 758 P.2d at 1319.
The element of malice can be proven by showing that the plaintiff filed the action for an improper purpose, such as "forc[ing] a settlement upon an unwilling opponent." Id. at 418-19, 758 P.2d at 1320-21. Here, malice is established by the counter-defendants' wholly insufficient pre-filing investigation of the infringement claims; representing Verve as the proper patent owner knowing Omron held substantial rights in the patents; continuing to pursue claims in various jurisdictions once it was established that it lacked standing; and the tactic of filing multiple lawsuits in multiple jurisdictions without a reasonable explanation for doing so.
Finally, with respect to the element of favorable termination, because the ITC action and this court's December 13, 2005 order (doc. 172) are on appeal, there has been no final judgment in favor of Hypercom, and these actions cannot yet form the basis of a malicious prosecution claim. See Frey v. Stoneman, 150 Ariz. 106, 109-10, 722 P.2d 274, 277-78 (1986) (stating that "if an appeal is pending, a malicious prosecution action is premature).
Therefore, based on the foregoing, we grant in part Hypercom's motion for summary judgment on the malicious prosecution claim as to the Michigan and California actions and deny the motion as to the ITC and Texas actions. Conversely, we deny Verve's motion regarding the Michigan and California actions, and grant the motion as to the ITC and Texas actions without prejudice to Hypercom's right to reassert the claims in another action in the event of favorable determinations on appeal.
B. Abuse of Process
Abuse of process is established by showing that "the defendant has (1) used a legal process against the plaintiff; (2) primarily to accomplish a purpose for which the process was not designed; and, (3) harm has been caused to the plaintiff by such misuse of process." Nienstedt v. Wetzel, 133 Ariz. 348, 353, 651 P.2d 876, 881 (Ct.App. 1982). Counter-defendant's only argument in opposition to Hypercom's motion for summary judgment is that an administrative proceeding before the ITC cannot serve as a basis for an abuse of process claim. Verve's Response at 13-14. "Process" is broadly defined as "encompassing the entire range of court procedures incident to the litigation process."Nienstedt, 133 Ariz. at 353, 651 P.2d at 881. Therefore, while "process" is broadly defined, it is nevertheless limited to "court procedures." Id.; accord Competitive Techs. v. Fijitsu Ltd., 286 F. Supp. 2d 1118, 1155 (N.D. Cal. 2003) (holding that the "process that is alleged to have been abused must be a judicial process, and courts have rejected claims based on administrative proceedings"). Accordingly, we conclude that counter-defendants' actions related to the ITC administrative proceedings cannot form the basis of an abuse of process claim.Because counter-defendants do not otherwise challenge the abuse of process claim, and based on our previous rulings, we conclude that counter-defendants's litigation scheme amounted to an abuse of process and accordingly grant Hypercom's motion for summary judgment with respect to the Michigan, Texas, and California actions, but deny the motion as to the ITC action.
We note that, unlike the tort of malicious prosecution, termination of the action in the claimant's favor is not a requisite element of an abuse of process claim.
IV. Joint Liability
Hypercom relies on a conspiracy theory to support its state law claims against each of the counter-defendants. Although there is no civil action for conspiracy, "there is an action for damages caused by acts committed pursuant to a conspiracy." Estate of Hernandez v. Flavio, 187 Ariz. 506, 510, 930 P.2d 1309, 1313 (1997). The purpose of a civil conspiracy is not to impose additional liability, but to identify joint tortfeasors. See Pankratz v. Willis, 155 Ariz. 8, 12, 744 P.2d 1182, 1186 (Ct.App. 1987). "When a civil wrong occurs as the result of concerted action, the participants in the common plan are equally liable." McElhanon, Jr. v. Hing, 151 Ariz. 386, 392, 728 P.2d 256, 262 (Ct.App. 1985).
Here, Imes identified litigation targets, verified complaints, and, along with the SGF Firm, was "primarily" responsible for conducting the pre-filing investigation. Galasso signed the complaint and entered an appearance as counsel for Verve in the Michigan action. He was manager of Verve, the head of the intellectual property practice at the SGF Firm, and had control over the several SGF lawyers assigned to work on the cases.
Verve argues that a conspiracy claim cannot stand because Galasso and Imes were working as agents for Verve and an entity cannot conspire with itself. However, the undisputed evidence shows that Verve, Galasso, Imes, and the SGF Firm also worked in concert with Omron in furtherance of the litigation harassment scheme. Pursuant to a written agreement, Omron assigned patent rights to Verve and was entitled to receive a substantial percentage of the revenue resulting from the litigation. HSSOF ¶ 4. Omron was aware of and consented to the counter-defendants' plan to sue Hypercom. Id. ¶ 5. Omron employees and attorneys provided substantial assistance in preparation for the ITC proceeding, including traveling to Japan to prepare a potential witness, and contacting a Japanese lawyer to provide assistance to Verve. Id. ¶¶ 16-23. Omron insisted that Verve be the named party in the infringement lawsuits so that Omron would have "zero risk." Id. at 24. This is clear and convincing evidence of an agreement between counter-defendants and Omron. Wells Fargo Bank v. Arizona Laborers, Teamsters Cement Masons, 201 Ariz. 474, 499, 38 P.3d 12, 37 (2002) (stating that claim for civil conspiracy must include an actual agreement, proven by clear and convincing evidence). The uncontroverted evidence establishes that each counter-defendant participated in the underlying scheme, rendering each a joint tortfeasor liable for damages resulting from both the malicious prosecution and the abuse of process claims.
We do not consider Verve's argument, raised for the first time in its reply, that Galasso and Imes are not proper counter-defendants without first piercing the corporate veil.
V. 28 U.S.C. § 1927
As an alternative theory of recovery, Hypercom alleges in count III that the counter-defendants violated 28 U.S.C. § 1927, which provides that "[a]ny attorney or other person admitted to conduct cases in any court of the United States . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." We have previously dismissed Verve from this claim because it is not an "attorney or other person admitted to conduct cases in any court." (doc. 172). For the same reason, we also conclude that Imes is not subject to § 1927 liability.
Counter-defendants now argue that Galasso and the SGF Firm should also be dismissed from this claim. The SGF Firm is not, strictly speaking, an "attorney or otherwise admitted to conduct cases." Although there may be other avenues of authority to sanction a law firm, see Lockary v. Kayfetz, 974 F.2d 1166, 1170 (9th Cir. 1992), such authority does not lie under § 1927.F.T.C. v. Alaska Land Leasing, Inc., 799 F.2d 507, 510 (9th Cir. 1986). Galasso, on the other hand, is an attorney and has participated as an attorney at various stages of the relevant proceedings. As owner and managing partner of Verve, as well as head of the intellectual property practice at the SGF Firm, he was directly involved in unreasonably and vexatiously multiplying the proceedings against Hypercom.
Galasso's only argument in opposition to Hypercom's motion for summary judgment is that § 1927 is intended to apply only to the case presently before the court and therefore cannot be used to impose upon him fees and costs incurred in the Michigan, ITC or California actions. Galasso cites no legal authority to support this contention and Hypercom does not respond. Although we have found no case directly addressing the issue, those courts finding § 1927 liability based on the filing of multiple lawsuits have imposed sanctions in the form of costs and attorneys' fees associated with the instant action only. See, e.g., Stone v. Baum, 409 F. Supp. 2d 1164, 1172 (D. Ariz. 2005); Pentagen Tech. Int'l Ltd. v. United States, 172 F. Supp. 2d 464, 474 (S.D.N.Y. 2001). We follow this lead and conclude that sanctions against Galasso in the form of attorneys' fees and costs incurred in defending the Texas action are warranted.
VI. Motion to Withdraw
Counter-defendants' lawyers filed a motion to withdraw as counsel citing a conflict among the counter-defendants (doc. 275). Substitute counsel entered appearances on behalf of Verve, Galasso and the SGF firm, but stated that they were not appearing for Imes. We grant the motion to withdraw with respect to Verve, Galasso and the SGF firm because substitute counsel has confirmed, in accordance with LRCiv 83.3(b)(3), that they will be prepared for trial on October 12, 2006. We deny the motion with respect to Imes, however, because there is no indication that he can obtain substitute counsel or will otherwise be prepared for trial. Under ER 1.16(c), Arizona Rules of Professional Conduct, a lawyer shall continue to represent a client, notwithstanding good cause for termination of the representation, upon order of the court. Here, we are too close to trial to permit withdrawal of counsel that will leave a party unrepresented. In any event, having ruled on the issues of liability, it is doubtful whether any conflict of interest remains in this case.
VII. Conclusion
Based on the foregoing, IT IS ORDERED GRANTING Hypercom's motion for summary judgment on count I against all counter-defendants with respect to the Michigan and California actions, and DENYING the motion as to the Texas and ITC actions (doc. 243).
IT IS FURTHER ORDERED GRANTING Hypercom's motion for summary judgment on count II against all counter-defendants as to the Texas, Michigan and California actions and DENYING the motion as to the ITC action (doc. 243).
IT IS FURTHER ORDERED GRANTING Hypercom's motion for summary judgment on Count III against Galasso only and DENYING the motion as to Imes and the SGF firm (doc. 243). IT IS FURTHER ORDERED GRANTING Verve's motion to dismiss count II as to the Texas and ITC actions without prejudice, and GRANTING Verve's motion on count III of the complaint with respect to Imes and the SGF Firm (doc. 240).
IT IS FURTHER ORDERED DENYING Verve's motion for summary judgment on all other counts (doc. 240).
IT IS FURTHER ORDERED GRANTING IN PART AND DENYING IN PART
counsels' motion to withdraw (doc. 275).