Strategies Against Nuisance Patent Suits Part II – Cases on California Civil Procedure Code 1030

By: Christopher J. Dugger

This is the next part of our series of posts on utilizing California Code of Civil Procedure, Section 1030, in patent cases, particularly as a strategy against nuisance suits. Section 1030 provides that a defendant may move the court to require an out-of-state plaintiff to file an undertaking to secure an award of costs and attorneys' fees upon showing a reasonable possibility of success on the merits. Part one of our series, discussing the requirements of Section 1030, can be found here.

Although Section 1030 is raised relatively frequently in civil litigation in California, its use in federal lawsuits is more rare. Rarer still is its use in patent litigation. Nevertheless, there are a handful of cases that, when read together, provide some guidance on how Section 1030 is applied to patent cases.

A threshold question is whether or not a state civil procedure code, like Section 1030, can be applied in a federal patent case. This question was answered in the affirmative by the Court of Appeals for the Ninth Circuit. “[F]ederal district courts have inherent power to require plaintiffs to post security for costs.” Simulnet East Assoc. v. Ramada Hotel Operating Co., 37 F.3d 573, 574 (9th Cir. 1994). “Typically federal courts, either by rule or by case-to-case determination, follow the forum state’s practice with regard to security for costs, as they did prior to the federal rules; this is especially common when a non-resident party is involved.” Id. (quoting 10 Wright, Miller & Kane, Federal Practice and Procedure: Civil 2nd § 2671). In Pittman ex rel. L.P. v. Avish P'ship, the Ninth Circuit specifically confirmed that a federal court may apply Section 1030. 525 F. App'x 591, 593 (9th Cir. 2013); see e.g., Code Rebel v. Aqua Connect, 2014 WL 2890242 at *2 (exercising discretion because defendant had provided reasonable evidence the claims were barred by the statute of limitations); but see Alzheimer’s Institute of America v. Eli Lilly & Company, et al. 128 F.Supp.3d 1249, 1257 (N. Dist. Cal., 2015) (affirming that court has discretion to apply Section 1030, but refusing to do so because defendant had already won summary judgment.).

On the merits, Section 1030 requires establishing a “reasonable possibility” of obtaining “judgment.” One ambiguity that has arisen with this language is whether or not a defendant must show a reasonable possibility as to judgment on the underlying action or on an award of fees and costs. In patent cases, fee awards are statutory, pursuant 35 U.S.C. § 285. To obtain an award of fees, a prevailing party must show that the case is exceptional, an issue that was recently the subject of the Supreme Court’s decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014). Therefore, if “judgment” includes both the underlying action and the fee award, then a defendant would have a higher burden given the exceptionality requirement.

Courts appear to have addressed this issue by dividing it up. To order an undertaking for costs, courts only require that the defendant establish a reasonable possibility of obtaining judgment in the underlying action. This is a relatively easy standard to meet. See e.g., AF Holdings, 2013 WL 1120771 at *1 (“This is a relatively low bar.”); see also Metal Jeans v. Lululemon USA, 2015 WL 3533199 at *2 (“[T]he reasonable possibility standard is relatively low.”) (internal quotations and citations omitted)[1].

However, to order an undertaking for fees, courts require the defendant to show a reasonable possibility of obtaining the fee award. In a patent case, that means showing a reasonable possibility of establishing that the case is exceptional. While the Supreme Court has broadened the scope of what constitutes an exceptional case, this is still considered a relatively high standard.

Fortunately for defendants, the courts are also clear that a defendant need not show that the plaintiff cannot win. IPVX Patent Holdings v. Voxernet, 2014 WL 2772297at *2. The Ninth Circuit has devised a three-part balancing test to determine whether an undertaking should be ordered: “(i) the degree of probability/improbability of success on the merits, and the background and purpose of the suit; (ii) the reasonable extent of the security to be posted, if any, viewed from the defendant's perspective; and (iii) the reasonable extent of the security to be posted, if any, viewed from the nondomiciliary plaintiff's perspective.” Gabriel Tech. v. Qualcomm, 2010 WL 3718848 at *2. Further, any bond requirement must be fair considering the case, the “exigencies” of the defendant, and the financial situation of the plaintiff. Simulnet E. Assocs. v. Ramada Hotel Operating Co., 37 F.3d 573, 576 (9th Cir. 1994).

Geotag v. Zoosk, 2014 WL 793526 is one relatively recent illustration. In that case, Zoosk argued it need only show a reasonable possibility of prevailing in the underlying action. GeoTag argued that Zoosk must prove it had a reasonable possibility of obtaining attorneys’ fees. Citing to Pittman ex rel. L.P. v. Avish Partnership, 525 Fed.Appx. 591, 593 (9th Cir. 2013), the court imposed the “exceptional case” standard on Zoosk for fees, and found that Zoosk had not met the standard. Geotag v. Zoosk at *3. The court went on to separately analyze Zoosk’s request for a bond to cover its costs under the “reasonable possibility of prevailing” standard. Ultimately, the court found Zoosk had satisfied this lower standard, but declined to order a bond because Zoosk had not provided a way for the court to determine if $750,000 was a reasonable bond for costs. Id. at *4.

Gabriel Tech. v. Qualcomm, 2010 WL 3718848 is another helpful illustration. In this case, the plaintiffs were a non-practicing entity. They had solicited approximately six million dollars from investors to finance the case, but that money was nearly gone by the time defendants brought their motion. Furthermore, defendants had defeated seven of plaintiffs’ ten claims on motions to dismiss, and plaintiffs had not produced any facts in discovery to support their claims.

Defendants raised affirmative defenses and provided affirmative evidence to support each defense in their Section 1030 motion. Because this was sufficient to show a “reasonable possibility of prevailing” on the three remaining claims, the court required an undertaking for costs. The court considered the reasonableness of the bond from both the Defendants’ and Plaintiffs’ perspectives. Id. at *10. The court found approximately $290,000 of Defendants’ costs reasonable, in large part related to the cost of translation of the numerous foreign patents that were the subject of the lawsuit.

The court next decided whether to require an undertaking for defendants’ attorneys’ fees. It found that Defendants had demonstrated a reasonable possibility of showing that the litigation was an exceptional case. Id. at *14. Plaintiffs had not identified any evidence to support their claims in discovery and insider emails tended to show that Plaintiffs knew their claims were frivolous. The court found an undertaking for $1 million for defendants’ attorney fees was reasonable. Thus the total reasonable undertaking was $1.29 million, including costs. Nevertheless, the court considered plaintiffs’ testimony that a bond of even $150,000 “would be extremely detrimental and maybe kill this case.”[2] Id. Ultimately, the court ordered plaintiffs to supply a bond of $800,000.

[1] Although this is a trademark case, attorneys’ fees in trademark cases are governed by the same “exceptional case” standard as patent cases. 15 U.S.C. § 1117; SunEarth, Inc. v. Sun Earth Solar Power Co., 839 F.3d 1179, 1180 (9th Cir. 2016).

[2] Interestingly, the ordered undertaking did not “kill this case.” Apparently, the plaintiff supplied the undertaking and the case proceeded. Nearly 18 months later, Defendants’ obtained summary judgment over the remaining claims. See Gabriel Tech. v. Qualcomm, 2013 WL 410103 at *2 and Dkt. 121. The court awarded Defendants over $12 million in fees. Id. at *14.