Patent 'Troll' Litigation Rich in Local Color

Patent 'Troll' Litigation Rich in Local Color Phil Wriggleworth

Hoping to strike it rich through litigation? Brace yourself: You could become a litigation magnet yourself.

Consider the tale of DataTreasury Corporation (DTC), a tiny Long Island company that has generated at least $400 million through patent litigation against deep-pocketed defendants—so-called patent trolling. Since DTC only has a few employees, that’s a huge sum of money.

For as long as the money has been pouring in, DTC has been fighting off former business associates who want a piece of the fortune. DTC’s former chief operating officer says he was wrongfully denied a stock option allegedly worth $100 million. And a purported investor in the company sued for an eye-popping $15 billion in damages, alleging he’s been unfairly left out in the cold. Both men are represented by Robert Del Col, the head of a small law firm in Smithtown, N.Y.

To say that the litigation has been acrimonious would be an understatement. Tempers really began to fly in 2010, when DTC’s legal team, led by Richard Friedman of McKenna Long & Aldridge and Scott Mollen of Herrick, Feinstein, accused Del Col of trying to extort a settlement check out of DTC. After reviewing the claim, the Nassau County District Attorney’s Office set up a sting operation and indicted Del Col in 2010.

But a judge dismissed the extortion charges on the grounds that the D.A.’s office improperly outsourced a grand jury proceeding to an attorney in private practice. Disappointed with that outcome, DTC’s lawyers have tried to discredit Del Col through a civil suit brought under New York Judiciary Law Section 487, an “attorney deceit statute” that makes it a misdemeanor for a lawyer to lie to a judge. In that case, DTC alleges that Del Col lied in order to win an uncontested restraining order freezing the company’s assets. (A judge refused to dismiss DTC’s claims on a preliminary motion, and the case is now in discovery.)

Del Col has made some bombshell allegations of his own. In a 2011 civil suit, he alleged that DTC bought his indictment by bribing Nassau County D.A. Kathleen Rice, now a candidate for U.S. Congress. Friedman and Rice are named as defendants in Del Col’s “pay-to-prosecute” suit, which seeks $370 million in damages. (Rice’s office denies the allegations.) The litigation has moved slowly, but the last year has brought good news for DTC’s executives. In May 2013, a judge dismissed Del Col’s client’s suit, which sought $15 billion in damages, on statute of limitations grounds. And in October 2013, after a 41-day bench trial, a different judge sent the former COO home empty-handed. Del Col has appealed in both cases.

The real question, at this point, is what happens to the lawyers. Will Del Col be able to back up his remarkable claim that DTC bribed Rice? Or will DTC discredit Del Col through the attorney deceit case?

Click here for rundown on the main players in the DataTreasury litigation. Click here for a timeline of key events in the case.

DTC was founded in 1998 by a software engineer named Claudio Ballard. The company sold equipment that allowed small businesses to process credit card transactions over the Internet, rather than through a phone line. Ballard also held patents on technology that would allow banks to store digital copies of personal checks. In its early years, DTC had about 100 employees and millions of dollars in funding from investors.

DTC never became profitable. By the mid-2000s, Ballard and the company’s other leaders had laid off staff and switched their primary business to patent licensing. DTC’s CEO since 2002, Keith Delucia, has overseen the changes.

It made sense to focus on wringing money from Ballard’s check imaging patents. Soon after the 9/11 terrorist attacks, when airplanes carrying checks were grounded, Congress had passed a law, known as “Check 21,” that encouraged banks to transfer digital copies of checks instead of the checks themselves.

DTC struggled to find patent lawyers willing to take its case. It was planning to sue some powerful financial institutions, including Bank of New York Mellon Corporation and Bank of America Corporation. Among plaintiffs lawyers, big banks were known for being stubborn litigants that don’t settle unless they absolutely have to.

A Texas firm, Nix Patterson & Roach, eventually agreed to take DTC’s case on a contingency basis. Nix Patterson was one of five firms that shared $3.3 billion in attorney fees from a $17 billion settlement with the tobacco industry in 1998, so it could afford to represent DTC for years without seeing a settlement or verdict.

The banks lived up to their hardnosed reputations, but by 2011 DTC had secured dozens of settlements. That year, The New York Times called Ballard, DTC’s founder, “the bank industry’s biggest patent foe.”

The Credit Union National Association was less charitable. In a 2013 press release, it called DTC one of the earliest “patent trolls”—those much-maligned entities that sue over patents rather than selling products and services. DTC’s lawyers dispute the characterization, calling Ballard a visionary whose innovations in check imaging technology were copied by the banking industry.

DTC’s few remaining employees have become very wealthy men. Delucia, the CEO, testified in a recent court proceeding that he received more than $20 million in dividends. By way of comparison, when he joined DTC in 2002, his annual salary was in the low six figures, he says.

Del Col’s lawsuits have dampened the victory celebrations. One plaintiff is Michael Trimarco, a graduate of Cornell University and Harvard Business School. He went to junior high school with Delucia, though they weren’t particularly friendly. While Trimarco was at Cornell, Delucia dropped out of high school.

Their lives crossed again in 2002. After obtaining a GED and building a business career, Delucia had just become DTC’s CEO. One of his first acts was to hire Trimarco. Delucia figured that Trimarco could use his Harvard connections to raise venture capital funding.

The partnership quickly soured. DTC puts the blame on Trimarco: About a year after joining DTC, it says, Trimarco tried to lure some of DTC’s employees to a competing business venture his family had invested in. A DTC sales representative alerted Delucia to the scheme and showed him emails about it. Trimarco later testified that he told the representative to keep the new venture “as much of a secret as possible because, again, I wanted to make a clean break from Keith Delucia for all the reasons that I said before, and I don’t think I have any obligation to have him necessarily completely in the know.” Delucia fired him on the spot in April 2003.

In court documents, Trimarco tells a different version of the events: He says he quit DTC after his attempts to help the company were rebuffed. He also argues that the salespeople he tried to hire didn’t constitute DTC employees, so there was nothing disloyal about his conduct.

As part of his employment contract, Trimarco had been promised the option to purchase 1.5 million shares of DTC common stock at 80 cents per share. After he left DTC, Trimarco tried to partially exercise the option. Delucia ignored the request, so Trimarco brought a breach of contract lawsuit in 2003 in New York state court in Riverhead. Trimarco retained Del Col in January 2009. (Del Col did not respond to multiple requests for comment.)

There’s nothing unusual about companies being sued by former employees. But things got weird in late 2009, when Del Col began pursuing a claim against DTC on behalf of another plaintiff: Ted Doukas, a real estate developer on Long Island. Doukas alleges that in 1995 he loaned $1 million to Ballard, DTC’s founder, so that he could research his check imaging patents. In exchange, Ballard allegedly agreed to give Doukas part ownership of the patents.

Before filing a lawsuit, Del Col wrote a letter to Friedman, DTC’s lawyer at McKenna Long. Del Col wrote that he wished to “discuss a precommencement settlement” and ended the letter with the following postscript: “Get back to me on this before he is compelled to testify in a way that could potentially harm [DTC] in its action against the various banks.” At the time, DTC had several pending infringement cases.

In DTC’s view, the letter constituted extortion. In a patent infringement case, the defendant has an absolute defense if it can prove that the ownership of the plaintiff’s patent is disputed. So DTC figured that Del Col was making a veiled threat: Cut Doukas a check, or he would tell the banks about how his investment agreement supposedly gives him rights to DTC’s patents.

“You’re allowed to attempt to settle litigation, but it crosses the line and becomes extortion when testimony depends on whether litigation has been settled or not,” says Mollen, DTC’s lawyer at Herrick. “The truth should not vary.”

DTC contacted the Nassau Country D.A.’s office. After reviewing the claim, prosecutors set up a sting operation. According to court filings, DTC representatives met Doukas and Del Col in February 2010 at a conference room in the Garden City Hotel on Long Island. With audio recording equipment rolling, the duo reiterated their position and left with a check for $75,000 and a promise for future payments. Police arrested them at the hotel.

In a 2011 complaint, Del Col alleges that he spent two nights in a “deplorable” cell, where “fecal-stained toilet paper [was] stuck to virtually every inch of the cell walls.” Del Col says his arrest has caused his family mental anguish.

When it came time to indict Del Col and Doukas, Rice’s office delegated the grand jury presentation to a former prosecutor who had recently gone into private practice, giving the lawyer the title “special assistant district attorney.”

A judge dismissed the indictment in 2011, ruling that Rice “improperly empowered [the attorney] with a position that does not exist” under New York criminal law. The judge gave Rice’s office the option of holding a new grand jury proceeding—this time with an assistant district attorney presenting the evidence—within 45 days. But Rice stuck to her guns and appealed. A three-judge appeals panel affirmed the dismissal, and Del Col and Doukas were off the hook.

Del Col says in his complaint that after his arrest, he began investigating contributions to the Rice campaign. He learned that Ballard and DTC’s general counsel had made at least $6,500 in contributions to Rice. Del Col also alleged he spotted another $143,500 that he believes came from friends and business partners of DTC and its patent counsel, Nix Patterson. Del Col alleges that DTC arranged for the contributions in exchange for Rice’s promise to find a way to discredit Del Col and his clients.

Mollen, DTC’s lawyer at Herrick, calls the bribery accusations “absurd.” He says that DTC’s founders donated the $6,500 because they saw Rice as an up-and-comer. The donations occurred several months before Del Col sent the allegedly extortionate letter, Mollen adds. In a court filing, DTC wrote that it is “implausible that District Attorney Rice would accept small, previously made contributions as a bribe.”

The Trimarco case culminated in a bench trial in 2013. The New York judge assigned to the case, Emily Pines, scheduled a 41-day trial over the course of 10 months.

According to Friedman, DTC’s lawyer at McKenna Long, Trimarco would occasionally scoff at the testimony from witnesses, speak directly to the judge, and demand that his lawyer ask a question.

“Trimarco always thinks he’s the smartest guy in the room.” says Friedman. “I think it always bothered him that Keith Delucia, who only obtained a GED after dropping out of high school, engineered the success of a company that generated hundreds of millions of dollars in licensing revenue, while Mr. Trimarco, not withstanding all of his impressive academic credentials, had not.”

Things got testy between the lawyers, trial transcripts show. At one point during the trial, Del Col angrily told Friedman not to stand near him. “He’s, like, breathing in my ear,” Del Col said, according to a court stenographer. “The last guy that did that to me got clipped.”

After Friedman lodged a series of objections to Del Col’s questioning of a witness, Del Col said: “Now we’ll go to the Rich Friedman School of Law. I don’t think so.”

In May 2013, while the Trimarco trial was unfolding, a different judge dismissed Doukas’ case on statute of limitations grounds.

Del Col sustained another setback in October 2013, when Judge Pines returned her verdict in the Trimarco case. Siding with Friedman and Mollen, Pines rejected Trimarco’s breach of contract claim. She concluded that DTC could avail itself of the so-called faithless servant doctrine, a seldom-invoked New York legal doctrine that holds that employees who try to undermine their employer aren’t entitled to promised compensation. “Trimarco became angry and secretly attempted to procure the business for himself,” Pines wrote. The contemporaneous emails “describe Trimarco’s plans in detail.” Del Col filed a notice of appeal in the Trimarco case on Jan. 18.

“I don’t agree with the court’s interpretation of the faithless servant doctrine,” Del Col told sibling publication the Litigation Daily in November. According to Del Col, Trimarco’s allegedly disloyal conduct occurred after his right to the stock split had vested, and the doctrine “can’t be used to retroactively deprive” someone of their compensation.

While the underlying ownership spat is likely coming to a close, Mollen and Friedman’s battle with Del Col is far from over. Del Col’s “pay-to-prosecute” case against DTC, Friedman, and District Attorney Rice survived a motion to dismiss in 2012, though a judge dismissed some of Del Col’s legal theories. The suit is now in discovery.

Mollen says that since all allegations are presumed true during the pleading stage, it’s no surprise that the judge kept the case alive. Del Col, however, told sibling publication New York Law Journal that “an overwhelming majority of cases like this do not survive” a motion to dismiss.

The “attorney deceit” case against Del Col is also pending. That case relates to a motion Del Col filed in January 2011, in which he affirmed under oath that DTC was fleeing the jurisdiction of New York and trying to shield its assets from Trimarco. The next day, a judge issued a so-called ex parte temporary restraining order (TRO) that prohibited DTC from disposing of assets.

DTC didn’t know about Del Col’s motion. Del Col used a rule that allows him not to notify his opponent if doing so would further obstruct and impair the ability to recover.

Mollen says he was astonished by Del Col’s conduct. According to Mollen, he had spoken with Del Col the night before Del Col filed the emergency motion. If a company is represented by counsel in New York, it’s hard to claim that it’s fleeing the jurisdiction, Mollen argues. In Mollen’s view, Del Col knew from his work in the Trimarco case that DTC had moved its headquarters to Plano, Texas, in 2006 but still maintained a presence in New York.

DTC got a boost in July 2012, when New York trial judge John Jones Jr. refused to grant Del Col’s motion for summary judgment. “Del Col has not established that at the time he filed the ex parte application for a TRO he had reason to believe DataTreasury had fled or was fleeing the jurisdiction. Instead, the admissible evidence establishes that DataTreasury was represented by counsel,” Jones wrote.

DTC’s lawyers say they’d like to see Del Col punished. “I think that lawyers that engage in misrepresentations to the court should be ordered to pay sanctions.” Friedman says.

No doubt, Del Col feels the same way about Friedman and Mollen. In his complaint in the civil case, he accused DTC and its lawyers of engaging in “shocking, disreputable and illegal practices.”

One wonders if DTC misses the days when its critics were content just to call it a patent troll.

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