Stephen G. Adrian | April 25, 2012
Landmark Screens, LLC, v. Morgan Lewis & Bockius, LLP, and Thomas D. Kohler
April 23, 2012
Panel: Bryson, Clevenger and O’Malley. Opinion by Clevenger. Concurring opinion by O’Malley.
Patent prosecution can be forgiving when a mistake is made. However, given the right set of circumstances, a simple mistake can turn into a nightmare for both the client and attorney. This decision illustrates that a given set of circumstances can lead to a mistake which cannot be fully corrected, which leads to charges of malpractice and fraud against the prosecuting attorney as well as loss of a client. This decision also illustrates that full claim scope can be lost as a result of the mistake.
Landmark appeals from the final decision of the US District Court for the Northern District of California (1) dismissing its state law fraud claim as being filed outside the statute of limitations, and (2) issuing a partial summary judgment effectively limiting Landmark’s damages claim had its complaint been timely and successful. The CAFC reverses the judgment dismissing the complaint, vacates the damages award, and remands the case for trial on the fraud claim.
The case stems from an application which had been subject to a four-way restriction requirement. The elected group of claims received a Notice of Allowance. As is somewhat customary, the prosecuting attorney paid the issue fee on August 7, 2003, and shortly thereafter filed a divisional application on August 13, 2003 (the foregoing and following dates are not given in the decision, but located through public PAIR records). The parent patent issued on October 28, 2003. Around the same time, the prosecuting attorney changed law firms. A power of attorney was filed on May 10, 2004, so as to associate the divisional application with the new law firm. Shortly thereafter, the PTO issued a Notice of Incomplete Nonprovisional Application on June 22, 2004, noting that the specification, drawings and claims were not received, and thus the application was not accorded a filing date. (This type of omission could be corrected if there was proof, for example, a stamped PTO postcard receipt, indicating that the papers were received, or if the transmittal of the divisional application had indicated incorporation by reference to the parent application. Unfortunately for the prosecuting attorney, there was no postcard used and no incorporation by reference made.)
Kohler, the prosecuting attorney, discussed this matter with his new partners in mid-July 2004, and a petition to be accorded the original filing date was filed on August 13, 2004. The PTO dismissed the petition for failure to exercise due care, and accorded a filing date of August 23, 2004. This was a devastating result as priority under 35 USC 120 was lost, and the parent U.S Application Publication constituted 35 USC 102(b) prior art. In spite of this decision, Kohler did not report to the client the true nature and seriousness of the problem for another six months.
A reissue application adding new claims was filed October 28, 2005 by Landmark’s new counsel. On November 30, 2005, Landmark filed suit against Kohler and MLB in the Superior Court for Santa Clara, California, alleging legal malpractice, negligence and breach of fiduciary duty. On May 21, 2008, the California state court dismissed Landmark’s claims for lack of subject matter jurisdiction. That same day, Landmark filed a complaint in the US District Court for the Northern District of California, making the same claims and adding a cause of action for breach of contract. On June 11, 2008, Landmark filed an amended complaint adding a claim for actual fraud. Over the next two years, all of Landmark’s claims were dismissed, except its fraud claim, as barred by California’s one-year statute of limitations.
On February 7, 2011, the district court granted summary judgment to defendants, ruling that Landmark had notice of its fraud claim more than three years before filing its federal lawsuit, thus barring the claim by the statute of limitations.
(1) Equitable Tolling
Landmark’s fraud claim is governed by a three-year statute of limitations which does not accrue until discovery by the aggrieved party of the facts constituting the fraud. Since the instant action was filed on May 21, 2008, the district court considered whether Landmark had actual or inquiry notice prior to May 21, 2005. The district court found that Landmark had notice in late March 2005. In view of this, Landmark sought relief from the statute of limitations by arguing the doctrine of equitable estoppel (which was based on assurances that the mistakes could be cured) and the doctrine of equitable tolling. The district court rejected the argument of equitable estoppel. The theory of equitable tolling was not addressed.
Under California law, courts consider three factors in determining whether equitable tolling should apply when a litigant files a second suit in another forum based on the same facts: “(1) timely notice to the defendant in filing the first claim; (2) lack of prejudice to the defendant in gathering evidence to defend against the second claim; and (3) good faith and reasonable conduct by the plaintiff in filing the second claim.” Azer v. Connell, 306 F.3d 930, 936 (9th Cir. 2002) (citing Daviton v. Columbia/HCA Healthcare Corp., 241 F.3d 1131, 1137-38 (9th Cir. 2001) (en banc)). It should be noted that at the time of filing the complaint there was ambiguity as to whether the suit belonged in federal or state court. The CAFC concluded that the district court erred in not tolling the three-year statute of limitations because each of the factors was satisfied. The defendants do not challenge this conclusion, but argue the decision of Aerojet Gen. Corp. v. Superior Court, 177 Cal. App. 3d 950, 956 (Cal. Ct. App. 1986) (citing Loehr v. Ventura Cnty. Cmty. Coll. Dist., 147 Cal. App. 3d 1071, 1086 (Cal. Ct. App. 1983)), holding “[t]hough equity will toll the statute of limitations while a plaintiff, who possesses different legal remedies for the same harm, reasonably and in good faith pursues one, it will not toll the statute while a plaintiff who has allegedly suffered several different wrongs, pursues only one remedy as to one of those wrongs.” This argument is rejected because Landmark had asserted a single harm, loss of patent rights.
(2) Damages Order
As noted above, a reissue application was filed adding claims on the ground of error without deceptive intent. Reissue is properly invoked as long as the new claims are not substantially identical to previously non-elected claims. The district court concluded that the reissue claims were broader than the claims of the lost divisional application, thus cutting off damages as of the date of the reissue patent. Landmark disputes the conclusion that reissue claims 43 and 58 are broader than claims of the failed divisional application. The district court reasoned that the claims were broader because they did not contain some limitations which were in the divisional claims. The district court, however, overlooked that the reissue claims were narrower in other respects. The district court erred by simply concluding that the claims were broader and failed to analyze the differences in language which may affect the scope of the claims. Thus, it was error to hold that Landmark could suffer no harm after issuance of the reissue patent. Thus, the damages order is vacated.
Concurring opinion by O’Malley:
Judge O’Malley writes separately because she believes the case law upon which jurisdiction is based should be reconsidered en banc. Judge O’Malley further believes the damages order can be vacated for additional reasons. In regard to the damages order, Judge O’Malley notes the claims in the reissue patent remain subject to challenge if and when Landmark attempts to enforce them, noting the prohibition to recapture claims previously lost in the improperly prosecuted divisional application.
In regard to jurisdiction, Judge O’Malley noted that it was commonly understood that state law malpractice claims arising out of legal representation involving federal matters were properly lodged in state courts. In 2007, the Court of Appeals for the Federal Circuit announced its assertion of jurisdiction over these claims. See Air Measurement Techs., Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. 2007); Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281 (Fed. Cir. 2007). “Thus, although Landmark filed its federal action on the same day the state court dismissed it, Landmark could no longer assert a malpractice claim against Kohler and MLB. In other words, a cause of action which—given the undisputed facts—was far from frivolous, which arises under and was governed by state law, and which all parties agreed for years had been properly asserted in California state court, was irretrievably lost by our disruption of the parties’ well-settled expectations in this area. “
Take Aways for Patent Practitioners and Applicants:
With the right safeguards in place, this type of problem can be avoided. Fortunately, the PTO has become much more forgiving in the years since the failed divisional filing. For example, 37 CFR 1.57 was amended in 2007 to provide for an automatic incorporation by reference if the application contains a claim under 37 CFR 1.55 or 1.78, which claim can be provided in an Application Data Sheet. Furthermore, with the use of electronic filing and public PAIR, applicants can quickly confirm the contents of the application immediately, rather than waiting for the PTO to issue a Notice indicating a defect. Yet further, the PTO currently seems to notify applicants of defects more quickly. In the best of situations, any possible divisional applications should be filed as soon as possible, preferably before the issue fee has been paid in the parent application. Had the same mistake been made today, it is likely that the same devastating results would not occur.