Northern District Of Texas Rejects Walker Process And Sham Patent Litigation Antitrust Claims For Lack Of Standing Based On Failure To Show Causation
On April 13, 2020, Judge Reed O’Connor of the United States District Court for the Northern District of Texas granted defendants’ motion for summary judgment on plaintiffs’ monopolization claim based on plaintiffs’ failure to present substantial evidence that fraud on the Patent Office and subsequent sham litigation were a material cause of plaintiffs’ alleged lost profits. Chandler et al v. Phoenix Services LLC, 19-cv-00014 (N.D. Tex. April 13, 2020). With regard to plaintiffs’ claims for fees and costs expended in defending the sham litigation, the Court found that these claims were barred by the statute of limitations.
Plaintiffs, providers of water heating services to fracking projects, alleged that in 2006 the founder of one of the defendant-affiliated entities developed a fracking process to heat water on demand. Three years later, he filed an application with the United States Patent and Trademark Office (“USPTO”) to patent the heating process, without disclosing either the date of the invention or the many projects the founder had completed using the patented process more than a year before he filed the patent application, facts that, if known, would have prevented the issuance of the patent. The USPTO then issued United States Patent No. 8,171,993 (the “993 Patent”). Based on this patent, in the fall of 2013, defendants sent a barrage of cease-and-desist letters alleging improper infringement of the patent.
Among the companies to receive a cease-and-desist letter was one of plaintiffs’ largest customers. After receiving the letter, the customer gradually decreased its work with plaintiffs, although it continued to hire other vendors that used the same process without a license from defendants and never hired defendants or their licensees. Meanwhile, in 2014, one defendant sued plaintiffs for infringement of the ‘993 patent. In May 2016, plaintiff went out of business, citing a general decline in business. Also in 2016, in a separate case against a different alleged infringer, a district court found the 993 Patent was unenforceable due to defendants’ inequitable conduct, a decision the Federal Circuit affirmed in 2018.
After the Federal Circuit decision, plaintiffs filed suit, alleging that defendants had put plaintiffs out of business by prosecuting baseless patent litigation based on a patent procured by fraud in violation of Section 2 of the Sherman Act, claiming both lost profits damages and the damages based on legal fees and costs in defending the baseless patent litigation. Defendants moved for summary judgment, arguing that plaintiffs lacked standing because they could not establish that their harm was caused by defendants’ conduct, and their claims were barred by the statute of limitations.
In reviewing the record, the court determined that plaintiffs had failed to present substantial evidence that defendants’ alleged antitrust violations were a material cause of plaintiffs’ business losses. This issue turned in large part on whether defendants’ baseless infringement claims and subsequent litigation caused plaintiffs to lose business from its largest customer and eventually go out of business. The court pointed to several facts that contradicted the claim of causation, including that, although plaintiffs’ work for its largest customer decreased after the customer’s receipt of defendants’ cease-and-desist letter, the customer shifted its business to other vendors without a patent license from defendants and never hired defendants or their licensees. Further, plaintiffs had not asked the customer for more work after the ‘993 Patent was held to be unenforceable in 2016. Based on these facts, and other market conditions that affected plaintiffs’ business, including the fluctuating oil market and increased competition among non-licensed vendors, the court determined that plaintiffs had not met their burden to demonstrate a causal connection between the challenged conduct and their injury. Accordingly, the court held that plaintiffs lacked standing to pursue their Section 2 claims.
The court also considered whether plaintiffs’ claims were within the Clayton Act’s four-year statute of limitations. Plaintiffs needed to present evidence to prove either that a specific injurious act occurred within four years of the suit’s inception or that an exception applied to toll the limitations period. The court found that two of the three allegations of wrongful conduct, sending the cease-and-desist letter and filing the patent-infringement suit against plaintiffs, occurred outside of the limitations period, and that the third allegation, modifying its website to falsely claim that a patent license was required to use the process, was not actionable because it did not injure plaintiffs. The court then turned to plaintiffs’ tolling arguments: (1) fraudulent concealment; (2) damages not initially ascertainable; and (3) continuing violation. The court determined that there was no fraudulent concealment because plaintiffs did not show that they could not have discovered the conduct through due diligence. The court held that plaintiffs also could not prove that both the existence and the amount of damages were uncertain to toll the statute of limitations. Indeed, the court concluded that plaintiffs knew of the conduct since 2015. Finally, the court concluded that the continuing-violation exception did not apply because plaintiffs could not use the exception to revive damages occurring before the limitations period. Based on these findings, the court granted defendants’ motion for summary judgment.
This case is a good illustration that, although causation is generally a matter of fact for the jury, it can be resolved on summary judgment with an effective presentation of the case record. It is not enough to show a violation and a subsequent loss without some substantial evidence that the violation was a material cause of the loss. This is especially true where, as here, there is persuasive evidence that both contradicts the conclusion of causation and points to other causes for plaintiffs’ lost profits.