Patent Claims Drawing Derivative Suits

Patent Claims Drawing Derivative Suits Christine Jegan / The Recorder James Kramer, Orrick partner

SAN FRANCISCO — A $1.5 billion patent judgment finalized against Marvell Technology Group Ltd. this year is so juicy, plaintiffs securities lawyers can’t seem to stay away.

A Pennsylvania jury found Marvell willfully infringed two Carnegie Mellon University patents for hard-drive technology in 2012 and awarded the university $1.17 billion in damages. In March, U.S. District Judge Nora Barry Fischer of the Western District of Pennsylvania upped the award.

Plaintiffs lawyers began filing derivative suits soon after, and so far three are pending before U.S. District Judge Lucy Koh in San Jose. Francis Bottini Jr., a securities attorney out of La Jolla, is leading two of the cases. The other is led by Kip Shuman of The Shuman Law Firm in Colorado. Marvell has tapped Quinn Emanuel Urquhart & Sullivan partner Harry Olivar Jr. in Los Angeles.

Patent judgments don’t usually spawn shareholder derivative litigation. Typically, attorneys launch a derivative suit to go after a company’s executives and board members following a securities fraud case. But securities experts say plaintiffs’ interest in companies’ patent losses, such as Marvell’s, is on the rise. As securities fraud suits dwindle, patent and antitrust judgments could be the next frontier for derivative litigation.

“Plaintiffs lawyers will look for opportunities to think outside the box as a way of bringing shareholder derivative cases,” said Winston & Strawn partner Neal Marder of Los Angeles. “And I think this is an example of that.”

The sheer size of the Marvell patent judgment, as well as the damning evidence that came out against the company during trial, made the case too attractive for Bottini to pass up.

“This patent that they in essence misappropriated … was essential to their business, to the chips that they make. They made a conscious decision—the highest-level employees—to use that technology that they knew was owned by Carnegie Mellon without paying a royalty,” Bottini said. “And they obtained over a billion dollars from sales of their chips that violated the patent.”

Witness testimony, depositions and documents presented during trial support those allegations, Bottini said. In particular, plaintiffs lawyers uncovered emails in which Carnegie Mellon told top Marvell executives about their patents and offered to sell them a license, an offer the Marvell executives declined.

More attorneys are following Bottini’s lead as it grows more difficult to file traditional securities fraud-driven derivatives, according to experts in the field. Many say securities fraud cases are no longer as numerous or as lucrative as they once were. Since 2008, the number of federal securities cases initiated each year has remained below a 15-year average, according to a 2014 Cornerstone Research report. On the other hand, the number of federal patent cases filed in 2013 grew by 25 percent compared with the previous year, reaching a record high of 6,500, according to a 2014 report by PricewaterhouseCoopers.

High-publicity megasettlements or verdicts are more likely to spawn derivative litigation, attorneys say. A prime example is the widely watched “no-poach” antitrust case, in which plaintiffs accused Silicon Valley tech companies’ top CEOs of forming illegal agreements not to recruit each others’ employees. The two sides reached a tentative $324 million settlement earlier this year, and the case has since inspired derivative suits against board members of Google Inc., Apple Inc., Intel Corp. and Adobe Systems Inc.

A $1 billion patent infringement verdict against GMO company E.I. du Pont de Nemours & Co. also has spawned derivative litigation. A Missouri jury ruled in favor of rival Monsanto Co. over herbicide-resistant soybeans in 2012, and DuPont shareholders took action six months later. The two companies made amends in 2013 and Monsanto dismissed its claims, rendering the $1 billion jury verdict moot. But the derivative litigation is proceeding in Delaware federal court, pending the court’s ruling on DuPont’s recent motion to dismiss.

Those cases, which break the traditional securities litigation mold, pose challenges for plaintiffs attorneys.

“Every patent case is not a case where you can have a claim against the board for breaching its fiduciary duty,” said James Kramer, a securities litigation partner with Orrick, Herrington & Sutcliffe.

To be successful in a derivative case, attorneys must be able to hold board members and executives responsible for the alleged wrongdoing. They must also get over the demand hurdle by proving the board is so involved in the wrongdoing that it would be futile to ask the company to launch its own investigation into the problem. That’s easier in a securities fraud case, where a company’s finances are an integral part of its business and board members are expected to keep track of gains and losses. It’s harder to prove board members kept a close eye on their company’s patents.

Bottini and his team are fighting an uphill battle, according to Kaufhold Gaskin partner Steven Kaufhold, who serves as cochairman of an American Bar Association securities subcommittee.

“The types of claims that they make are extremely hard to prove, legally or factually,” he said. “I think it will be very challenging for the plaintiffs to recover on it.”

Marvell also has appealed the $1.5 billion judgment, which could further complicate Bottini’s case. It seems premature to have filed a derivative suit without waiting to see how the appeal will turn out, Kaufhold said.

“To me, it would make sense to stay it,” he said, “because you don’t know that the company is going to not be successful.”

Marvell’s legal team also cites its pending appeal in its defense against the derivative litigation.

“Marvell believes the evidence and the law do not support the jury’s findings or judgment in that case, and that it has strong grounds for appeal,” Marvell attorney Olivar wrote in a statement.

Bottini brushed off the appeal. Marvell’s motions to set aside the verdict have failed so far, he said, adding, “the damage is done right now.”

Despite the obstacles Bottini faces in this suit, few are surprised he undertook the challenge.

“If a judgment of over a billion dollars was rendered against a company,” Marder said, “they should expect to get hit with other types of cases, like securities cases or shareholder derivative cases.”

PricewaterhouseCoopers ranked the original $1.17 billion Marvell verdict as the third-largest federal patent judgment awarded between 1995 and 2013. Tacking on the increased judgment, it would rank second. In addition, Marvell’s expenses increased by $7.9 million in 2012, primarily because of legal costs, Bottini’s complaint states. The loss of the Carnegie Mellon patent could result in a 25 percent reduction in the company’s net earnings going forward, he added.

Derivative suits following patent judgments are still rare, mostly only popping up after those once-in-a-blue-moon megaverdicts, according to Kilpatrick Townsend & Stockton partner Robert Artuz, a Silicon Valley patent litigator. But that doesn’t mean the suits shouldn’t be a worry for companies facing patent litigation.

“It’s certainly something that large companies have to keep in mind when they’re dealing with high-stakes litigation,” Artuz added.

Contact the reporter at mkendall@alm.com.

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