SDNY: "Poor Legal Judgment" Is not a Basis for Rule 11 Sanctions

Capital Bridge Co. Ltd. v. IVL Technologies Ltd., S.D.N.Y. (Case No. 04-CV-4002), October 26, 2007

Capital Bridge (CB) obtained a patent on a wireless, portable, hand-held karaoke device, where users can select songs and musical accompaniment using a keypad on the device and to wirelessly broadcast their voices and music to multiple FM receivers that are tuned to the correct station. The patent was allowed at the PTO only when the claims were amended to include "wireless" transmission. Some of the dependent claims referred to transmission through an antenna. Capital attempted to broaden the claims through reissue, but was rebuked by the PTO for attempting to recapture surrendered subject matter.

The defendants manufacture various hand-held karaoke machines and sell them to national retailers and international distributors. However, the devices do not use wireless transmission. In order to operate, the devices are connected by wires to a television. Also, the devices only send signals to a single receiver.

Capital sent cease-and-desist letters to IVL and its customers. IVL responded (two times) by pointing out the apparent differences between the products and the patent claims. Capital sued, and promptly lost on Summary Judgment. IVL sought sanctions soon thereafter.

The court noted some of Capital's behavior during litigation

- Early in litigation, Capital argued the existence of a laboratory test, performed in Korea (and using Korean law), showing infringement by devices "believed to be" the defendants. Defendants responded by pointing out that the accused devices were already widely available for purchase for less than $100. The explicit findings of the test was not initially given to the court, and additional discovery was requested by Capital.

- When the test was finally produced, technical report explicitly stated that the “wirelessly transmitting” limitation of the ‘553 patent was not infringed by Defendants’ devices.

- During litigation, Capital's reissue application was rejected. Accordingly, Capital modified the infringement claim to state that wireless and wired transmissions were covered under the doctrine of equivalents. When asked how they arrived at this conclusion, Capital requested additional discovery.

- At a later judicial conference, Capital Bridge indicated that it had conducted no further inspection of Defendants’ devices other than the previously-disclosed Korean technical report, despite the fact that the Court’s previous Order required production of the allegedly infringing devices and their electrical schematics.

Despite all of this, the court found that sanctions were not warranted in this case. The plaintiff's litigating attorney (Wamsley) filed a declaration with the court, explaining that RF transmission through wire was thought to be "equivalent" to wireless transmission, and thus constituted sufficient pre-filing investigation to escape sanctions:

IVL bases its allegations that Capital Bridge failed to conduct a reasonable pre-filing assessment on the fact that the technical report written by Mr. Sang Mock Lee, in which he applied Korean patent law to compare the claims of the ‘553 patent against Defendants’ allegedly infringing devices, constituted the entirety of Capital Bridge’s pre-filing inquiry. While the Court would be inclined to agree with Defendant that such an inquiry alone would be insufficient to satisfy Plaintiff’s duty, the Court is not as willing as Defendant to disregard the Declaration of Brian L. Wamsley as a complete fabrication. Taking into account the Wamsley Declaration, in which Mr. Wamsley recounts in substantial detail his pre-filing inquiry and good faith basis for bringing the suit, Plaintiff establishes, albeit just barely, that it conducted a sufficient pre-filing investigation.

The court went on to chide the plaintiff over the investigation, but nevertheless concluded that "poor legal judgment" could not be a basis for sanctions:

Although the Court shares Defendant’s skepticism regarding the thoroughness of Mr. Wamsley’s purported pre-filing inquiry – especially in light of Mr. Wamsley’s inability to articulate a cognizable infringement theory at the August 2, 2005 conference, as well as the explicit finding in the Korean technical report that the “wirelessly transmitting” limitation of the ‘553 patent was not infringed by Defendants’ devices – it must be given considerable deference as a patentee asserting infringement is entitled to a presumption of good faith.

[F]urthermore, while the Court continues to view as “absurd” Plaintiff’s contention that the wired transmission of Defendants’ devices is functionally equivalent to the wireless transmission claimed by the ‘553 patent, . . . and while the Federal Circuit’s summary affirmance of summary judgment for Defendants is significant, the Court cannot conclude that Capital Bridge’s decision to continue its infringement action following the limited discovery granted by the Court was the result of anything other than poor legal judgment.

View the opinion here (link)