CAFC tackles patent prosecution malpractice in Landmark Screens

The CAFC laid out the problematic underlying facts of the case Landmark Screens vs. Morgan, Lewis and Thomas Kohler: On August 13, 2003, [patent attorney] Kohler submitted a divisional application to the PTO, and it was assigned Application No. 10/640,916 (“the ’916 divisional application”). However, in filing the ’916 divisional application, Kohler made two mistakes that left the application incomplete: (1) he failed to include copies of required drawings and specifications, and (2) his transmittal letter failed to incorporate by reference materials filed earlier with the original ’096 application. Kohler also did not use the PTO’s “postcard receipt” method, which would have enabled prompt notification when the PTO noticed deficiencies in the application. (...) It was not until June 22, 2004, that the PTO issued a Notice of Incomplete Nonprovisional Application, stating that the ’916 divisional application was missing the required specification and therefore had not yet been granted a filing date. By this time, Kohler had left Pennie and was practicing law at MLB, with Landmark as a client of the firm. Neither Kohler nor any other MLB attorney took action for several weeks, and the one-year anniversary of the ’096 application’s publication passed on July 10, 2004. As a result, Landmark’s own ’096 application became prior art against the ’916 divisional application under 35 U.S.C. § 102(b). Unless the PTO could be convinced to give the ’916 divisional application the benefit of an earlier filing date, all claims in the ’916 divisional application would be lost. ********************************************************************************* The legal issue and outcome: Granting summary judgment to the defendants, the district court dismissed Landmark’s complaint on the grounds that it was filed out of time under the relevant California statute of limitations and that Landmark’s timeliness error was not correctible in equity. In addition, the court issued a partial summary judgment order, the effect of which would have been to limit damages available to Landmark had its complaint been both timely and successful. Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP, No. 5:08-cv-2581, 2010 WL 3629816 (N.D. Cal. Sept. 14, 2010) (hereafter “Damages Order”). For the reasons set forth below, we reverse the judgment dismissing the complaint because under California equitable tolling law, the state law fraud claim was timely filed in the United States district court. Further, because the record does not support the district court’s manner of summarily limiting damages, we vacate the Damages Order and remand the case for trial on the fraud claim. ********************************************************************************* Of the fraud claim: As to the fraud claim, the parties continued to litigate. Under California law, the elements of fraud are: “(1) a misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (or scienter); (3) intent to defraud, i.e., to induce reliance; (4) justifiable reliance; and (5) resulting damage.” Robinson Helicopter Co., Inc. v. Dana Corp., 102 P.3d 268, 274 (Cal. 2004). Landmark asserted that the following conduct by Kohler and MLB constituted fraud: concealment of the June 22, 2004, notice from the PTO rejecting the ’916 divisional application, malpractice committed in filing the ’916 divisional application, and defendants’ improper course of action in seeking correction of its malpractice. Dismissal Order at 4. Landmark alleged that such fraud damaged it because, absent the fraud, competent counsel could have prosecuted a divisional application in time to avoid the adverse prior art effect of 35 U.S.C. § 102(b). On Septem- ber 14, 2010, the district court entered partial summary judgment as to damages on the fraud claim, limiting the possible recovery that Landmark might obtain at trial were it to succeed on the merits of its fraud claim. Damages Order at 10. AND Landmark sought relief from the statute of limitations by way of two equitable doctrines: equitable estoppel and equitable tolling. Landmark’s estoppel theory focused on the conduct of Kohler and MLB after the mistakes in prosecution of the ’916 divisional application came to light, when Landmark’s counsel gave assurances that its mistakes could be cured. According to Landmark, those assurances led it to rely on counsel to the detriment of timely pursuit of legal remedies against counsel. Thus, Landmark argued that the defendants should be equitably estopped from invoking the statute of limitations. The district court rejected Landmark’s estoppel theory but did not address Landmark’s equitable tolling argument, which was based on the California equitable tolling law discussed in the following paragraph. ********************************************************************************* Of equitable tolling Under California law, courts consider three factors in determining whether equitable tolling should apply when a litigant timely 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 preju- dice to the defendant in gathering evidence to defend against the second claim; and (3) good faith and reason- able 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)). AND With this understanding of California law, we conclude that the district court erred in not tolling the three-year statute of limitations for fraud claims during the time the case was pending in the state courts. This conclusion means that Landmark’s fraud claim was timely filed in the district court. Our conclusion is mandated by the factors laid out in Daviton. As to the first Daviton factor, Landmark gave timely notice to MLB and Kohler by filing the state court lawsuit in November 2005, less than a year after Kohler first mentioned any problem with the ’916 divisional application in late December 2004 and well within the statutes of limitation for malpractice (one year) and fraud (three years). The facts alleged in the state court com- plaint included the allegations of deception by the defen- dants about the nature of the defendants’ conduct and adequately provided notice to MLB and Kohler of the claims brought in the federal action. As to the second Daviton factor, the appellees have suffered no prejudice in their ability to gather evidence and prepare a defense since they were on notice of all key facts underlying Landmark’s claims from the start of the state court ac- tion. As to the third Daviton factor, Landmark acted reasonably and in good faith in filing the federal lawsuit after the state court dismissed its claims for lack of sub- ject matter jurisdiction. At the time that Landmark filed the state court suit, there was ambiguity as to whether the suit belonged in state or federal court, as this court had not yet decided Immunocept, 504 F.3d 1281, and Air Measurement Technologies, 504 F.3d 1262. The Ninth Circuit has expressly stated that when the law is unclear whether state or federal court is the proper forum for suit, a plaintiff “should not be denied a chance to present his case because he chose the wrong line of precedent.” Valenzuela, 801 F.2d at 1175. An issue: Kohler and MLB view the wrong of malpractice as fundamentally different from the wrong of fraud. Thus, they see Landmark’s pursuit of a remedy for the alleged malpractice as a bar under Aerojet to a later claim for remedy from the harm caused by the alleged fraud. Kohler and MLB misunderstand the gist of Landmark’s grievance. From the start, Landmark has asserted a single harm to it, the loss of its patent rights. The defendants have even admitted as much. In their motion to dismiss the fraud claim, they stated that “Landmark complains of a single harm arising from a single course of conduct—loss of patent rights.” J.A. 1164. For that single harm, Land- mark has multiple legal remedies. As discussed above, Landmark reasonably and in good faith pursued a remedy in the state courts, only to learn that the state courts lacked jurisdiction over its legal remedy. Landmark thus qualifies for equitable tolling under California law, and the negative test of Aerojet does not stand in Landmark’s way. The CAFC did NOT address the equitable estoppel issue: Since we hold that the district court should have equitably tolled the statute of limitations on Landmark’s fraud claim during the time the case was pending in the state courts, we need not decide whether the district court abused its discretion in denying Landmark’s request for the application of equitable estoppel.