Iris Connex, LLC v. Dell Inc.
MEMORANDUM OPINION AND FINAL JUDGMENT. Signed by Judge Rodney Gilstrap on 1/25/2017. (ch, )
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IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
IRIS CONNEX, LLC,
Case No. 2:15-cv-1915-JRG
MEMORANDUM OPINION AND FINAL JUDGMENT
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Plaintiff Iris Connex filed suit against eighteen manufacturers of smartphones and tablets,
claiming each infringed the Plaintiff’s only asset, U.S. Patent No. 6,177,950, which is entitled
“Multifunctional portable telephone.” This type of litigation often ends before it begins. Early
disposition typically results from a settlement between the parties before there is any appearance
by counsel in open court. Often the first and last filing requiring the Court’s attention is the
submission of an agreed order of dismissal. This reality affords the Court limited opportunities
to provide oversight as to this part of its docket. However, this case took an unexpected turn of
events which made it stand out.
Early in this case, Dell filed a motion to dismiss arguing that Plaintiff Iris Connex’s
infringement allegations were completely implausible. As is the Court’s typical practice (and
unrelated to Dell’s motion), this case was consolidated with the other cases serially filed by Iris
Connex.1 After consolidation, most of the other defendants echoed Dell’s argument for dismissal.
Specifically, the parties argued that the fixed cameras in the accused smartphones and tablets could
not be considered a single “multi-position . . . reading head,” as required by the Plaintiff’s patent
Through the process of conducting an early review of these motions to dismiss, the Court
concluded that the entire dispute would turn on the Court’s construction of a single disputed term:
“multi-position . . . reading head.” The Court also concluded that resolving that dispute would
efficiently resolve the entire series of eighteen cases. Accordingly, the Court ordered expedited
The Smith-Leahy America Invents Act requires separate suits to be filed. Multiple suits by a common plaintiff are
often filed in sequence and are spoken of as being “serially filed.” This Court and many of its sister courts routinely
consolidate such cases for more efficient case management knowing that each case will ultimately be set for a
separate trial on its own merits.
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claim construction on this targeted term.2 After appropriate claim construction briefing and oral
argument, the Court applied established claim construction principles and determined that a
“multi-position” reading head must be “physically moveable” in accordance with the patent
specification. The Court then, sua sponte, converted the pending motions to dismiss into motions
for summary judgment and allowed additional briefing.
Next the Court entered summary
judgment of non-infringement in favor of all Defendants and against Iris Connex. This was based
on the conclusion that no reasonable juror could conclude that a fixed camera was “physically
moveable” or equivalent to a physically moveable camera.
Two weeks later, Dell filed a motion for attorney fees under 35 U.S.C. § 285. Section 285
provides that the Court may, in “exceptional” cases, award attorney fees to the prevailing party.
Dell argued that Iris Connex’s claim construction position was unsupportable, that its infringement
position was not plausible, and that its litigation was primarily settlement driven. Moreover, Dell
presented evidence that strongly implied that Iris Connex was an intentionally empty shell
company and, as a consequence, had no capacity to pay such fees even if the case were ultimately
declared to be exceptional. (Dkt. No. 25.)
The Court, having been presented with a prima facie showing of entitlement to attorney
fees and objective indicia of Plaintiff’s shell corporation status, ordered further discovery into the
extended identity of Iris Connex. Ordinarily, the Court does not scrutinize litigants’ business
decisions or their chosen structures. Courts and litigants often have limited resources, and such
scrutiny often fails to further the interests of judicial economy. However, the Court is mindful of
This is typically referred to as a “mini-Markman” and can be a valuable case management tool in the right
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its continuing duty to insure that statutes are carried out for their intended purpose and that
ultimately justice is served. As the Court stated at a status conference held shortly after Dell filed
its fees motion, “the entire thrust of Section 285 is to deter, and [the Court has] real concerns that
this entity is so structured that it would effectively avoid any deterrence by the simple granting of
the motion, without more.” (Dkt. No. 40 at 12:22–25.)
Given these circumstances, the Court found such post-judgment discovery to be
appropriate. As the post-judgment discovery progressed, it became obvious that Iris Connex was
not simply a non-practicing entity seeking to vindicate its patent rights—albeit with an
exceptionally bad infringement case. Rather, as explained hereinafter, Iris Connex is the first
level of two shell corporations which were intended to shield the real actor, Mr. Brian Yates, from
personal liability. The Court is persuaded that Mr. Yates and those in active concert with him
exploited the corporate form to operate largely in secret and to insulate the true party in interest
from the risk associated with dubious infringement suits—that risk being fee shifting under Section
Turning a blind eye to this type of conduct would run counter to the Court’s larger duty to
“do justice” and countenance an accelerating misuse of our judicial system, which occurs when
the resolution of dubious or nonsensical claims stands in the way of resolving bona fide disputes
between ordinary litigants.
The Court believes an overview of the various parties, their relationships, and the facts of
the case is helpful at this juncture. Unless otherwise stated, the following section constitutes
specific findings of fact by the Court:
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Iris Connex, LLC
Iris Connex, LLC (“Iris Connex”) is a Texas limited liability company with its stated
principal office at 211 East Tyler Street, Suite 600-A, Longview, Texas. (Dkt. No. 1 at ¶ 3) (“Suite
600-A”). Iris Connex purports to own by assignment United States Patent No. 6,177,950 (“the
’950 patent”) entitled “Multifunctional portable telephone,” (Dkt. No. 1 at ¶ 9), and it holds the
’950 patent as its only asset. Iris Connex is wholly owned by Q Patents, Inc. (Dkt. No. 33.)
Mr. Nicolas Labbit
Mr. Labbit is a 31-year-old Texas lawyer residing in Longview, Texas. He became
licensed to practice law in 2012. He is the designated Manager of Iris Connex as shown by the
Texas Secretary of State’s Office.
Q Patents, Inc.
Q Patents, Inc. (“Q Patents”) is a California corporation located at 35 Hugus Alley, Suite
210, Pasadena, California 91103. (Yates at 48:13–22.) 3 Q Patents is the sole member, 100
percent owner, and corporate parent of Iris Connex. Q Patents is a holding company for other
patent assertion entities. (Yates at 24:12–15.) The President and sole shareholder of Q Patents is
Mr. Brian L. Yates.
Citations to the November 1, 2016 deposition of Mr. Brian Yates (Dkt. No. 97-1) are cited as “Yates,” and citations
to the November 2, 2016 depositions of Mr. Nicolas Labbit (Dkt. No. 97-2) and Mr. Charles Tadlock (Dkt. No. 978) are cited similarly. Citations to the declarations of Mr. Brian Yates (Dkt. No. 128) are cited as “Yates Decl.” and
citations to the declarations of Mr. Nicolas Labbit (Dkt. No. 129) and Mr. Charles Tadlock (Dkt. No. 122) are cited
similarly. Citations to the January 12, 2017 hearing transcript (Dkt. No. 141) are cited as “Hearing.”
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Mr. Brian Yates
Mr. Yates is a California lawyer residing in Pasadena, California. He actively practiced
in the area of intellectual property law for over 20 years. He is President and sole shareholder of
Q Patents. (Yates at 10:6–8, 70:11–14.)
Mr. Charles Tadlock and the Tadlock Law Firm
Charles Craig Tadlock, a Texas lawyer, is the Managing Partner of the Tadlock Law Firm
based in Plano, Texas.
Mr. Tadlock is an established trial lawyer with over 20 years of
experience. From the beginning of this suit until November 28, 2016, Mr. Tadlock and the
Tadlock Law Firm represented Iris Connex against Dell.
Defendants are manufacturers of consumer electronics, including smartphones and/or
tablets with two or more fixed cameras. Of the eighteen original Defendants to this lawsuit, only
Dell, Inc. (“Dell”) remains before the Court. Pursuant to joint stipulations with Iris Connex,
former Defendants Acer America Corp.; Alcatel-Lucent USA, Inc.; Apple Inc.; Asus Computer
International; Blackberry Corporation; Fujitsu America, Inc.; Hewlett-Packard Company; HTC
America, Inc.; Huawei Device USA Inc.; Lenovo (United States) Inc. and Motorola Mobility LLC;
LG Electronics U.S.A., Inc.; Microsoft Corporation; Panasonic Corporation of North America;
Communications (USA), Inc.; and Toshiba America Information Systems, Inc. have each been
dismissed with prejudice. As a part thereof, they have each agreed to forego all claims against
Iris Connex for attorney fees, expenses, sanctions, and costs. Many of these Defendants were
affirmatively compensated by Mr. Yates to secure such dismissals after the entry of summary
judgment, but before formally asserting their own Section 285 motions. Such compensation from
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Mr. Yates (or entities controlled by Mr. Yates) included some or all of the following: direct cash
payments, free licenses to the patent-in-suit, free licenses to unrelated patents held by other entities
controlled by Mr. Yates, and covenants not to sue. (See Dkt. No. 130-1 (Summary of Iris Connex
LLC Settlement Agreements).)
U.S. Patent No. 6,177,950
Iris Connex allegedly acquired the ’950 patent by assignment on November 11, 2015 from
AVT Audio Visual Telecommunications (“AVT”). (Id.)
The ’950 patent relates to a personal
communication device that includes a number of elements.
Figure 1A of the ’950 patent
illustrates an exemplary embodiment of the “Multiphone.”
In this lawsuit, Iris Connex asserted Claim 1 and claims depending from Claim 1 to establish
infringement by making, using, selling, or offering for sale various smartphones and tablets
containing a front-facing and rear-facing camera. Claim 1 of the ’950 patent reads:
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A personal communication device, comprising:
a display for displaying data and video signals;
a loudspeaker for generating an audible signal;
a microphone for receiving an audio signal;
a keypad for entering data;
a telecommunications interface for receiving and transmitting information; and
an internal multi-position and multi-function reading head for producing an image signal
when in a first position using a first lensing and for reading for image conversion using
a second lensing when in a second position.
(Dkt. No. 1-1 at 23) (emphasis added).
Iris Connex’s Complaint
On November 30, 2015, Iris Connex filed its Complaint against Dell and concurrently filed
serial actions against other manufacturers of smartphones and tablets containing fixed rear-facing
and fixed front-facing cameras. These cases collectively reflect a single effort by Iris Connex to
recover from multiple Defendants regarding their alleged infringement of the ’950 patent “by
making, using, selling, or offering for sale various smartphones and tablets containing a frontfacing and rear-facing camera.”
By letter dated January 20, 2016, Dell’s attorneys notified Iris Connex and its counsel of
the implausibility of these allegations and urged Iris Connex to withdraw its Complaint. (Dkt. No.
97-10.) Dell pointed out that its tablets simply do not have a camera with the essential claim
elements of the ’950 Patent and that Iris Connex did not have a reasonable basis for maintaining
this suit. (Id.) Iris Connex continued to act as though such letter had never been sent. In fact,
on March 2, 2016, Iris Connex offered Dell a settlement and non-exclusive license to the ’950
Patent for a one-time lump-sum of $80,000. (Dkt. No. 122-10.)
On March 8, 2016, Dell filed a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) stating that Iris Connex’s allegations were implausible. Specifically, Dell argued that
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the two fixed-cameras in its products—“tablets with a front-facing camera and a rear-facing
camera”—could not plausibly infringe a claim directed to a personal communication device having
a “multi-position and multi-function reading head with first and second positions” as claimed in
the ʼ950 Patent. Dell argued that the plain language of the claim limitation required that at least
one reading head be capable of being oriented into “a first position” and “a second position,”
thereby excluding its products which had only fixed, non-moveable cameras. On March 23, 2016,
as it often does for case management purposes, the Court consolidated this case with the cases
which had been serially filed against the other Defendants. Between April 4, 2016 and April 25,
2016, most of the Defendants filed similar motions to dismiss, each urging dismissal of the
Complaint on the same grounds.
On April 15, 2016, Iris Connex served its infringement contentions on Defendants. In
response, Dell sent a letter to counsel for Iris Connex alleging that it intended to seek sanctions
under Rule 11 for what it believed to be an objectively baseless lawsuit. Dell stated that if Iris
Connex did not dismiss its Complaint by May 9, 2016 it would seek Rule 11 sanctions against Iris
Connex and its counsel.
The Court, by conducting an early review of these motions to dismiss, became aware that
each turned on the construction of the last element of Claim 1 of the ’950 patent. Accordingly,
on May 25, 2016, the Court sua sponte entered an Order setting an early and targeted claim
construction in this case on July 20, 2016 which was limited to the disputed critical term. Iris
Connex v. Acer, et al., Case No. 2:15-cv-1909, Dkt. No. 176 (E.D. Tex.) (“Acer Case”); see also
Wordcheck Tech, LLC v. Alt-N Techs., Ltd., 2012 WL 975725, at *2 (E.D. Tex. Jan. 11, 2012)
(opining that a “mini-Markman” is appropriate early in a case where “construction of a very narrow
set of terms could resolve the case as to most, if not all, parties.”); Uniloc USA, Inc. v. Inmagine
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Corp., LLC, 2013 WL 3871360, at *5 (E.D. Tex. July 24, 2013) (“The Court utilizes the miniMarkman proceeding to address terms that, if construed, are case dispositive.”).
During the resulting briefing, the parties submitted various outside materials which went
beyond the pleadings. The Court deemed these materials to be probative and relevant to the issues
before the Court. Therefore, pursuant to Federal Rule of Civil Procedure 12(d), the Court
converted the then-pending motions to dismiss into motions for summary judgment under Rule
56, see Trinity Marine Prods., Inc. v. United States, 812 F.3d 481, 487 (5th Cir. 2016), and gave
notice to the parties of the same at the claim construction hearing. (See Dkt. No. 231 at 71:6–22.)
The Court instructed the parties to submit the relevant materials accompanied by a brief of up to
ten pages. (See id. at 72:7–22; Dkt. No. 229.). The Court later allowed the parties to file responses
to address issues raised by the opposing parties. (See Dkt. No. 238.)
Summary Judgment of Non-Infringement
On September 2, 2016, the Court construed the claims of the ’950 patent and granted
summary judgment of non-infringement against Iris Connex and in favor of each Defendant. (Dkt.
No. 21) (the “Summary Judgment Order”). As the Court stated, the “cases demonstrate, [that]
early claim construction on a limited set of disputed terms followed by entry of summary judgment
is appropriate if a superficial understanding of the accused products makes it clear that a single
limitation is obviously absent from the accused products and that full blown discovery could not
lead a reasonable jury to any other conclusion.” (Summary Judgment Order at 39.)
Such was the case here. Regarding claim construction, the Court construed the disputed
phrase “an internal multi-position and multi-function reading head” to mean “a single internal
multi-function reading head that is physically moveable.” Then, having determined that the
asserted claims all required “a single internal multi-function reading head that is physically
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moveable where the reading head has a single sensor,” the Court turned to the question of summary
judgment, i.e., whether a reasonable jury could find that the Accused Products contained such,
either literally or through the doctrine of equivalents. “There can be no infringement as a matter
of law if a claim limitation is totally missing from the accused device.” London v. Carson Pirie
Scott & Co., 946 F.2d 1534, 1538 (Fed. Cir. 1991). It was clear from the parties’ submissions
that each camera in the accused devices was fixed.
Further, the Court held that Iris Connex’s
doctrine of equivalents argument failed for two independent reasons: (1) the argument was
unavailable as a matter of law due to prosecution history estoppel and (2) the alleged equivalent
structure in the accused device, a multi-camera/software-toggling system, was the “fundamental
opposite” of the claimed single multi-function and multi-positional reading head. As a result, the
Court concluded that neither infringement position had any merit.
The Court then entered
summary judgment in favor of all Defendants.
Dell’s Motion To Declare This Case Exceptional
On September 16, 2016, Dell filed its Motion to Find the Case Exceptional and Award
Fees seeking attorney fees and sanctions from Iris Connex and its counsel pursuant to 35 U.S.C.
§ 285, 28 U.S.C. § 1927, Federal Rule of Civil Procedure 11, and the Court’s inherent authority.
(Dkt. No. 25, “Dell’s Section 285 Motion”.) Dell argues that fees and sanctions are appropriate
against Iris Connex and its counsel because, in spite of being placed on notice, Iris Connex
persisted in prosecuting an objectively unreasonable case. (Id. at 7–8.) Dell further argues that
Iris Connex’s real purpose in filing this litigation was to procure settlements, in amounts less than
the defense costs that Dell and other Defendants would incur over a period of only a few months.
(Id. at 8.)
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In light of serious allegations raised in Dell’s Section 285 Motion as to Iris Connex’s true
identity, the Court ordered a telephonic status conference. (See Dkt. No. 40.) As a result, the
Court ordered that Dell conduct targeted post-judgment discovery concerning the extended identity
of Iris Connex to identify the ultimate party at interest acting as the Plaintiff. At the conclusion
of this telephonic conference, the parties were instructed to meet-and-confer and then submit by
October 7, 2016 a jointly proposed discovery order for the Court to consider in this regard.
The Court now pauses its narrative to emphasize that such post-judgment discovery is rare,
but justified by the facts of this case. The Court did not order this discovery because Iris Connex
is a non-practicing entity. Dell’s Motion also asserted that Mr. Labbit, the manager of Iris Connex
and a recently minted lawyer, was “the only person identified or associated with Iris Connex” and
managed many other non-practicing entities from the same office as Iris Connex. (Dkt. No. 25 at
2–3.) Also, Iris Connex, which was formed less than two months before filing this suit, did not
disclose a corporate parent in its Rule 7.1 corporate disclosure statement, (Dkt. No. 3), and it did
not disclose in its initial disclosures any person or entity directly associated with Iris Connex other
than Mr. Labbit. (Dkt. No. 17-11.) Those disclosures required Iris Connex to identify all persons
“having knowledge of relevant facts, a brief statement of each identified person’s connection with
the case, and a brief, fair summary of the substance of the information known by any such person.”
(Id.; Acer Case, Dkt. No. 136). In fact, the only such persons disclosed by Plaintiff were Mr.
Labbit, the inventor Mr. Garry Robb, and the two prosecuting attorneys for the patent-in-suit.
Simply put, it appeared to the Court that there must be a real but hidden party in interest. These
troubling allegations supported the unusual step of ordering targeted post-judgment discovery in
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Iris Connex And Its Undisclosed Corporate Parent File For
Bankruptcy In California
What unfolded shortly after the Court ordered post-judgment discovery quickly confirmed
the Court’s concerns. On October 6, 2016, Q Patents filed a petition for bankruptcy under Chapter
11 in the Central District of California. (See Dkt. No. 1, 2:16-bk-23244 (C.D. Cal.).) Then, just
twenty-five minutes after Q Patents filed for bankruptcy, Iris Connex filed for Chapter 11
bankruptcy in the same district, declaring that a bankruptcy case concerning its affiliate, general
partner, or partnership was pending in that District. As a part thereof and for the first time, Iris
Connex represented that it was a wholly owned subsidiary of Q Patents. (See Dkt. No. 1, 2:16-bk23249 (C.D. Cal.).)
After the close of business on October 6, 2016, Iris Connex filed a
supplemental Rule 7.1 Disclosure in this Court, changing by 180 degrees its previous
representation that it did not have a parent corporation. The supplemental disclosure provided that
“all of the membership interests in Iris Connex are held by Q Patents, Inc., a California
corporation.” Compare Dkt. No. 3 (September 2, 2015 Corporate Disclosure Statement):
with Dkt No. 33 (October 6, 2016 Corporate Disclosure Statement):
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Rather than meet-and-confer with Dell concerning a schedule for the targeted discovery as
ordered, Iris Connex ran to the bankruptcy court in California and immediately served this Court
with a notice entitled “Suggestion of Bankruptcy” asserting that pursuant to 11 U.S.C. § 362(a),
all proceedings against Iris Connex (including the post-judgment discovery ordered only days
before by this Court) were automatically stayed. This Court disagreed. (Dkt. No. 36.) Having
considered the applicable statute and relevant authorities, the Court concluded that its pending
matters were not proceedings “against the debtor” as contemplated by the statute. 11 U.S.C.
§ 362(a). Perhaps more importantly, the Court retains jurisdiction to police misconduct before
the Court under 11 U.S.C. § 362(b)(4). The Court also recognized that it has the inherent
authority to protect the integrity of the judicial process. It was apparent that “Iris Connex’s only
stated justification for seeking bankruptcy protection was entirely contingent on the outcome of
the very proceedings it sought to stay.” (Dkt. No. 36 at 8.) The Court ordered Dell to proceed with
the post-judgment discovery it had specified.
One week later, Iris Connex filed a motion seeking a 45-day stay to allow it to obtain
substitute counsel. According to Iris Connex, under the agreement for legal services, the Tadlock
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Law Firm did not agree to handle fee-shifting motions. Further, the motion mistakenly asserted
(with no cited legal authority) that continued representation of Iris Connex by the Tadlock Law
Firm in this matter required approval of the Bankruptcy Court in California. This motion was
denied. (Dkt. No. 48.) Next, Iris Connex filed a Motion to Withdraw the Tadlock Firm as its
counsel. Such motion did not name or propose substitute counsel, which would have effectively
left Iris Connex in a pro se posture. This too was denied. (Id.) Then, Iris Connex filed an
“emergency motion” for a protective order to prevent Dell from taking the depositions of Mr.
Yates, Mr. Tadlock, and Mr. Labbit until Iris Connex obtained substitute counsel free of conflicts.
(Dkt. No. 46 at 1.) This also was denied. (Dkt. No. 48.)
On October 26, 2016, the day after the Court denied all three of these late-breaking
motions, Iris Connex moved to dismiss its California bankruptcy case. Interestingly, this Motion
noted that neither Iris Connex nor Q Patents would be filing their respective Schedules of Assets
and Liabilities or their Statements of Financial Affairs with the Bankruptcy Court—even though
those items were then past due. The Bankruptcy Court dismissed the Chapter 11 case on October
On November 28, 2016, Dell notified the Court that it had completed discovery concerning
the extended identity of Iris Connex, and it requested leave to supplement its Section 285 Motion.
(Dkt. No. 59.)
Dell also sought relief from the extensive confidentiality designations and
privilege assertions made by deponents Brian Yates, Nicolas Labbit, and Craig Tadlock during
such discovery. (Dkt. No. 60.)
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On December 6, 2016, the Court lifted its earlier stay in the consolidated member cases
and granted Dell leave to supplement its initial brief. (Dkt. No. 74.) Lifting the stay opened the
way for the other Defendants to join Dell in seeking fee-shifting under Section 285. The Court
had earlier stayed these separate but similarly situated Defendants to insure there would be no
duplication of effort or compounding of expenses in the post-judgment discovery process. In
addition, the Court prescribed a briefing schedule for all parties but ordered that all additional
briefing be submitted under seal pending the Court’s consideration of Dell’s Motion for Relief
From Confidentiality. (Dkt. No. 74.)4 Importantly, the Court (pursuant to Federal Rule of Civil
Procedure 19 and the Court’s inherent power) formally joined Q Patents, Mr. Yates, Mr. Labbit,
and Mr. Tadlock as parties to this case to insure each a full opportunity to respond, to contest
liability for any sanction or fee award, and to otherwise receive due process. (Id. at 1–2.)
The Court’s Hearing
On January 12, 2017, the Court held a hearing on these post-judgment matters. All parties
appeared by counsel and Messrs. Yates, Labbit, and Tadlock appeared in person. Each of these
three presented live testimony. The post-judgment discovery and such hearing established the
following additional facts:
Iris Connex has no assets except for the ’950 patent and it holds no working capital.
(Yates 25:11–19, 55:2–7.)
Iris Connex was formed and authorized to do business as a Texas limited liability
company on October 13, 2015. (Dkt. No. 97-4 at 9.)
Iris Connex has no employees. (Yates 29:5–7.)
The Court’s Order concerning such motion will be entered contemporaneously with this Memorandum Opinion and
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Iris Connex was formed for the sole purpose of enforcing its lone asset. (Yates
The regulations governing Iris Connex called for a $1,000 capital contribution from
Q Patents as well as a $100,000 line of credit from Q Patents for the benefit of Iris
Connex. Q Patents is the sole obligor on the line of credit. The initial $1,000
capital contribution from Q Patents was used to pay for the formation of Iris Connex
with the Texas Secretary of State. (See Dkt. No. 129-2.) (Iris Connex’s Regulations)
Iris Connex paid no cash value for the ’950 patent. (Dkt. No. 128-2 at 4.) AVT,
the assignor, reserved a right to 50 percent of all the profits realized by monetizing
the ’950 patent. AVT also retained a right to reacquire the ’950 patent, unless Iris
Connex produced and paid at least $500,000 under the terms of the agreement to
AVT within 24 months of the assignment. (See id.; Yates at 15:1–9.)
Iris Connex did not have a bank account until April 2016, seven months after its
formation and more than five months after filing this lawsuit. (Labbit at 54:2–13.)
Once a bank account was finally opened in the name of Iris Connex, its total cash
balance consisted of $100.00 deposited from Mr. Labbit’s personal funds. (Labbit
Iris Connex pays no rent, (Labbit at 22:22–23:10), and shares its office with 15 to
20 other entities owned directly or indirectly by Brian Yates. (Labbit at 12:3–8.)
Iris Connex has no furniture or other physical assets at this location. (Labbit at
26:7–15.) There is no sign for Suite 600-A displayed on any door in the building
identifying Iris Connex as an occupant. (See Dkt. No. 17-2.)
Q Patents pays the debts of Iris Connex, including the expenses associated with
forming Iris Connex and its litigation fees, under a line of credit. (Yates at 51:22–
56:7; Labbit at 84:14–17.) Q Patents ultimately paid the Tadlock Law Firm to
represent Iris Connex in this litigation. (Yates at 52:2–9.)
Mr. Tadlock did not know about Q Patents when he filed the original Rule 7.1
disclosure. (Hearing at 46:5–7.) Mr. Labbit did. (Hearing at 60:4–6.)
At present, Q Patents is a holding company for four currently operating patent
assertion entities, two of which are managed by Mr. Labbit and two of which are
managed by Lloyd Kraus, another attorney in Tyler, Texas. (See Yates at 26:8–
27:9.) The assets of the other subsidiary companies held by Q Patents are “fairly
fluid.” (Yates at 154:4–11.)
Q Patents had, as of November 1, 2016, less than $10,000 in its bank account.
All of Iris Connex’s net profits and losses for any fiscal year are wholly allocated
to Q Patents. (Dkt. No. 97-4 at 25.)
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When Q Patents has insufficient cash on hand to pay its obligations, or those of Iris
Connex, Mr. Brian Yates injects his own money into the company or pays their
bills directly. (Yates at 59:17–61:8.)
Entities owned directly or indirectly by Mr. Yates, many of which show Mr. Labbit
as the Manager and which share the same mailing address as Iris Connex, have filed
multiple patent infringement lawsuits in Eastern District of Texas. These entities
have also failed to disclose their corporate parent pursuant to Federal Rule of Civil
Procedure 7.1 (Yates at 97:17–98:15; e.g., id. at 102:8–18; id. at 104:9–18.)
None of the lawsuits brought by the entities owned directly or indirectly by Mr.
Yates have ever gone to trial. (Yates at 94:1–7.) When the lawsuits are over, the
patent assertion companies dissolve. (Yates at 31:22–32:12.)
Mr. Labbit receives no salary from Iris Connex. He receives a salary from
Spectrum Patents, Inc., another Yates-owned holding company for patent assertion
entities. (Yates 27:14–28:15.) Mr. Labbit is entitled to receive 10 percent of any
net profits from Iris Connex. (Yates at 27:17–22.)
Mr. Labbit generally works from home and only occasionally visits Suite 600-A to
pick up the mail. (Labbit at 10:11–11:2.)
Mr. Labbit was admitted to practice law in Texas in 2012. Currently he works
only for Mr. Yates, Q Patents, and Spectrum Patents. (Labbit at 18:20–24.)
Mr. Tadlock has represented at least a dozen patent enforcement entities owned
directly or indirectly by Mr. Yates. (Tadlock at 47:4–15.)
Neither Mr. Yates nor Mr. Tadlock has ever visited the office of Iris Connex in
Longview, Texas. (Yates at 34:11–18; Tadlock at 35:21–22; Labbit at 19:17–20.)
The engagement letter between Iris Connex and the Tadlock Law Firm, (Dkt. No.
97-9) (“Tadlock Engagement Agreement”), dated October 13, 2015, contemplates
claims under Rule 11. (Id. at 5.) It also provides, among other things, that:
a. No later than the execution of the engagement agreement, Iris Connex would
provide the Tadlock Firm with information and materials concerning the
identity of all entities or individuals with a pecuniary interest in the case, and
draft and provide infringement charts evidencing a reasonable, good faith belief
that Defendants infringe the ’950 patent. (Id. at 4, 8–9.) This did not happen.
b. No later than the execution of the engagement agreement, Iris Connex would
provide the Tadlock Law Firm with documents sufficient to evidence Iris
Connex’s ownership of the ’950 patent. (Id. at 8.) Iris Connex did not own the
’950 patent at that time. The assignment agreement between AVT and Iris
Connex was executed on November 11, 2016.
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c. No later than the execution of the engagement agreement, Iris pledged to
provide the Tadlock Law Firm with, among other things, the complete
prosecution history for the ’950 patent. (Id.) That did not happen.
d. Iris Connex agreed to pay the Tadlock Law Firm a contingency fee as
compensation for its representation. (Dkt. No. 97-9 at 5.)
Both Mr. Labbit and Mr. Yates performed pre-suit diligence and established the
infringement theories in this case. (Yates at 34:5–10; Yates Decl. at ¶ 45, 71.) Mr.
Yates was responsible for diligence prior to acquisition and both Mr. Yates and Mr.
Labbit examined the prosecution history and the accused products before filing this
lawsuit. (Yates at 131:23–132:11; Yates Decl. at ¶ 45, 71.) Mr. Yates reviewed
and approved the decision to sue Dell. (Yates at 134:15–17.)
Mr. Yates was responsible for approving all settlements and license agreements on
behalf of Iris Connex. (Yates Decl. at ¶ 45, 72–80; Hearing at 65:10–68:15.) He
oversaw Iris Connex’s financial operations and decision making. (Yates Decl. at
EXCEPTIONAL CASE FEES
The Court first turns to the issue of whether this case is exceptional under Section 285 and
who might be properly liable.
“District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise
of their discretion, considering the totality of the circumstances.” Octane Fitness, LLC v. ICON
Health and Fitness, Inc., 134 S. Ct. 1749, 1756 (2014); see also Highmark Inc. v. Allcare Health
Mgmt. Sys., Inc., 134 S. Ct. 1744, 1748 (2014) (“[T]he determination whether a case is
‘exceptional’ under § 285 is a matter of discretion.”). Section 285 imposes “one and only one
constraint” on a district court’s discretion to award attorney fees in patent litigation: the case must
be “exceptional.” Octane Fitness, 134 S. Ct. at 1755–56. The movant must show exceptionality
by a preponderance of the evidence. Site Update Sols., LLC v. CBS Corp., 639 Fed. App’x 634,
637 (Fed. Cir. 2016).
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The standard for determining whether a case is exceptional has been well explored. An
exceptional case “is simply one that stands out from others with respect to the substantive strength
of a partyʼs litigating position (considering both the governing law and the facts of the case) or the
unreasonable manner in which the case was litigated.” Octane Fitness, 134 S. Ct. at 1756. The
Supreme Court further opined that a district court may consider a “nonexclusive” list of “factors,”
including “frivolousness, motivation, objective unreasonableness (both in the factual and legal
components of the case) and the need in particular circumstances to advance considerations of
compensation and deterrence.” Id. at 1756 n.6. Octane Fitness gives this Court wide discretion
to consider the totality of the circumstances in determining whether and to what extent to award
attorney fees under Section 285. In assessing a party’s subjective state of mind, the Court also
considers the totality of the circumstances. See Kilopass Tech., Inc. v. Sidense Corp., 738 F.3d
1302, 1310 (Fed. Cir. 2013).
The issue concerning the amount to be awarded has also been well explored. That too lies
within the sound discretion of this Court. See Lumen View Tech. LLC v. Findthebest.com, Inc., 811
F.3d 479, 483 (Fed. Cir. 2016); Monolithic Power Sys., Inc. v. O2 Micro Int’l Ltd., 726 F.3d 1359,
1365 (Fed. Cir. 2013). See also Highmark, 134 S. Ct. at 1749.
Who Can Be Liable
The question of who can be held liable under Section 285 has not been exhaustively
explored by the appellate courts. However, this Court does not have the luxury of waiting for
further guidance. As explained below, the Court concludes that the statutory text, current case
law, and statutory purpose behind the Patent Act and Section 285 all support assessing direct
Section 285 liability against non-parties, so long as (1) the actor is responsible for conduct that
makes the case exceptional, (2) the actor is afforded due process, and (3) it is equitable to do so.
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The Court starts with the text: “The court in exceptional cases may award reasonable
attorney fees to the prevailing party.” 35 U.S.C. § 285. The statute imposes only one constraint
on district courts’ discretion to award attorney fees—the case must be exceptional. It is silent on
the question of who should pay. Nothing in the text limits liability to a named party in the suit.
Congress could have specified otherwise, but it did not.
The Case Law
Admittedly, the current case law interpreting Section 285 in this regard is limited.
Nevertheless, as capably explained in a recent law review article, the few cases that have
confronted this question have all recognized the district court’s authority to award fees against a
non-party, “even if the person was not an original party to the action, but rather joined in his or her
sole capacity as a third party defendant.” Daniel Kennedy, Holding Parent Corporations Liable
for Attorneys’ Fees Under 35 U.S.C. § 285 of the Patent Statute, 61 Baylor L. Rev. 999, 1010
In Ohio Cellular Products Corp. v. Adams USA, Inc., 175 F.3d 1343, 1349 (Fed. Cir. 1999),
the Federal Circuit upheld an award under Section 285 against someone other than an original
plaintiff. There, the defendants sought leave after the entry of judgment to amend their pleading
to add Donald Nelson, co-inventor of the patent-in-suit and sole shareholder of the plaintiff, in his
individual capacity as a third-party defendant, specifically because “they feared that they would
be unable to collect most or all of the fee award if only Ohio Cellular remained liable.” Id. at
1346. The district court found that Nelson was intimately involved in the prosecution of the patentin-suit and that it was his conduct that formed the basis for concluding that the case was
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exceptional. Under such circumstances, the Federal Circuit perceived no error in holding Nelson
individually liable under Section 285.5
Ohio Cellular does not stand alone. Other Federal Circuit cases have upheld similar
results. See also Mach. Corp. of Am. v. Gullfiber AB, 774 F.2d 467, 475 (Fed. Cir. 1985) (opining
that the Court may assess fees under Section 285 against the agent of a disclosed principal, even
if he is a non-party to the patent claims, when that agent is responsible for the predicate acts
rendering the case exceptional). A district court in the Southern District of New York recognized
this line of authority in holding an individual who served as president, CEO, and major stockholder
of the patentee jointly liable under Section 285. D.O.C.C. Inc. v. Spintech Inc., 1994 WL 872025,
at *20 (S.D.N.Y. Aug. 15, 1994). More recently, another court within that district came to the
same legal conclusion, even though it ultimately found that there was insufficient evidence to
support imposing an award beyond the originally named party. Gust, Inc. v. AlphaCap Ventures,
LLC, 2016 WL 7165983, at *10 (S.D.N.Y. Dec. 8, 2016).
These cases all recognize a more general and uncontroversial principle: that the corporate
form cannot be used as a shield to insulate officers and parent corporations against liability for
their own tortious conduct or tortious conduct they control. Cf. United States v. Bestfoods, 524
U.S. 51, 64 (1998) (stating that a corporate parent that actively participated in, and exercised
control over, the operations of a facility may be held directly liable in its own right as an operator
of the facility under CERCLA). Patent law holds no exception to this general principle. Thus,
The Supreme Court reversed Ohio Cellular in Nelson v. Adams USA, Inc., 529 U.S. 460, 466 (2000), holding that
simultaneously amending the judgment with amendment of pleadings to impose liability on Nelson violated due
process. However, the substantive holding remained intact. The due process concern raised in Nelson does not
apply here. This Court acted on its own to join Messrs. Yates, Labbit, Tadlock, and Q Patents to insure their individual
receipt of due process.
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in the context of infringement, the Federal Circuit has held that corporate officers remain
individually liable if they personally took part in the commission of the tortious act.
Orthokinetics, Inc. v. Safety Travel Chairs, Inc., 806 F.2d 1565, 1579 (Fed. Cir. 1986). More
recently, the Federal Circuit has held that a parent corporation cannot circumvent liability for direct
patent infringement by outsourcing performance of a step of the claim, if it directs or controls the
performance of that step. Akamai Techs., Inc. v. Limelight Networks, Inc., 797 F.3d 1020 (Fed.
Cir. 2015). The Court sees no compelling reason to deviate from these cases and generally
established legal principles. Indeed, to do so would be error.
Intent of Section 285
Next, the Court turns to the intent and purposes behind Section 285.
Statutory fee shifting is an exception to the “American Rule” in which the prevailing
litigant is not entitled to attorney fees. The American Rule is rooted in the idea that litigants
should not be penalized for defending or prosecuting lawsuits and to do so would chill the public’s
access to justice. See Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718
Congress first made fee shifting available in patent cases during the Truman
Administration. The relevant shifting provision provided that “[t]he court may in its discretion
award reasonable attorney’s fees to the prevailing party upon the entry of judgment on any patent
case.” 60 Stat. 778 (codified at 35 U.S.C. § 70 (1946)). Courts went on to construe this text to
allow the award of fees upon “a finding of unfairness or bad faith in the conduct of the losing party,
or some other equitable consideration of similar force, which makes it grossly unjust that the
winner of the particular law suit be left to bear the burden of his counsel fees which prevailing
litigants normally bear.” Mach. Corp., 774 F.2d at 471 (quoting Park-in Theatres, Inc. v. Perkins,
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190 F.2d 137, 142 (9th Cir. 1951)). See also Rohm & Haas Co. v. Crystal Chem. Co., 736 F.2d
688, 691 (Fed. Cir. 1984). Thus, the Court notes that fee shifting in patent cases has always
focused on the equities, especially the overarching issues of fairness and substantial justice.
In 1952, Congress amended Section 70 to read as it does now: that the district court could
only award fees in “exceptional” cases. The inclusion of this additional limitation codified the
existing jurisprudence reflecting an intentional public policy. See Mach. Corp., 774 F.2d at 471
(citing S. Rep. No. 1979, 82nd Cong., 2d Sess. (1952)). Restricting attorney fees in patent cases
to exceptional cases “is based on the premise that courts should attempt to strike a balance between
the interest of the patentee in protecting his statutory rights and the interest of the public in
confining such rights to their legal limits.” Id. Nothing in the present law alters the original
rationale behind fee shifting in the patent context—that an award of fees under Section 285 “should
be bottomed upon a finding of unfairness or bad faith in the conduct of the losing party, or some
other equitable consideration of similar force.” Park-in Theatres, 190 F.2d at 142.
Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994), a case cited by the Supreme Court in Octane
Fitness, is also instructive. In Fogerty, the Supreme Court addressed the Copyright Act’s fee
shifting provision. The analogous Section 505 reads that “the court may also award a reasonable
attorney’s fee to the prevailing party as part of the costs.” In Fogerty, the Court opined that “[t]he
primary objective of the Copyright Act is to encourage the production of original literary, artistic,
and musical expression for the good of the public.” Id. at 524. The policies served by the
Copyright Act are more complex than “simply maximizing the number of meritorious suits for
copyright infringement.” Id. at 526.
The same principles articulated in Fogerty ring true here. Both patent law and copyright
law are derived from the same constitutional mandate, “[t]o promote the Progress of Science and
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useful Arts.” U.S. Const. art. I, § 8. Patent law, like copyright law, serves the specific purpose
of enriching the general public, albeit through access to new and useful innovations as opposed to
artistic creations. To further these aims, Congress has chosen to increase the risk borne by those
who assert frivolous and exceptionally weak claims thereby incentivizing parties, like Dell, to
defend against such claims. If that risk can be side-stepped by use of an empty shell to front for
the real actor, simply because the real actor was not originally named as the plaintiff, then Section
285 means nothing.
An honest reading of Section 285 must be in accord with these purposes, if Section 285 is
to have meaningful effect. Congress enacted Section 285 not only to deter frivolous claims and
bad faith litigation (which are already covered by other statutes and rules), but also lawsuits that
are simply exceptional in that they “stand out.” Octane Fitness, 134 S. Ct. at 1758. To be sure,
exceptional cases are still, by definition, rare. Id. at 1756. Exceptional means exceptional.
However, the threat of Section 285 looming overhead provides a check and balance meant to deter
exceptional cases by imposing a direct and significant financial risk. For such a deterrent to mean
something it must reach the person or entities that cause or contribute materially to the exceptional
nature of the case.
However, if we assume that Section 285 permits recovery only against the originally named
non-prevailing party, then the law has perversely incentivized third parties to act in ways that stand
out from established litigation norms. This would foster the very type of litigation that the statute
was meant to deter. See Dkt. No. 97 (“[H]olding Q Patents alone liable for the acts of Iris Connex
would simply encourage others to create shell companies within companies, like Russian nesting
dolls, to avoid Section 285 liability”). That result would be both illogical and absurd. Congress
enacted Section 285 to provide incentives to defend against frivolous infringement claims because
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doing so benefits the public. However, if recourse can only be had against a judgment-proof shell
company, no such incentive exists. The lack of deterrence caused by empty shell plaintiffs
negates the incentive to vigorously defend against meritless claims when there are no practical
means by which to recover costs. See, e.g., Raylon, 6:09-cv-355, Dkt. No. 207 (E.D. Tex. May
4, 2015) (“On remand, Defendants abandoned their § 285 claims against Raylon because Raylon
was insolvent.”). As explained herein, the Court is persuaded that Iris Connex v. Dell never would
have been filed but for Mr. Yates’ calculated assumption that he could insulate himself personally
from the possible application of Section 285.
Iris Connex argues that, both in this case and in general, the proper mechanism to recover
exceptional case fees from someone like Mr. Yates is to bring a separate lawsuit to pierce the
corporate veil after Section 285 fees have been separately awarded. (Hearing at 86:13–87:1.)
The Court disagrees. First, while this approach may be used, it is not the only path. One
acceptable way to recover fees does not preclude another. Further, any requirement that a second
lawsuit must be filed to reach the real actor runs counter to the congressional intent and the clear
purpose behind Section 285.
The Court rejects this narrow view of its authority to award fees under Section 285. Such
would frustrate the balancing of risk and reward which Congress intended. Ultimately, the
interposing of an “Iris Connex” between the real actor and an exceptional case fails to deter
frivolous lawsuits. Even worse, it would actually encourage them.
With these principles in mind, the Court now turns to their application to this case.
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This Case is Exceptional
Iris Connex’s Arguments Were Unsupportable
Dell argues that “review of the ’950 Patent, its file history, and the Dell tablet products
shows that Plaintiff did not develop an objectively reasonable theory of infringement before filing
the Complaint.” (Dkt. No. 25 at 13.) On this point, the Court agrees with Dell, and it is the Court’s
primary—but not only—basis for finding this case exceptional.
An Unsound Claim Construction
With regard to the sole disputed term, “multi-function and multi-position reading head,”
Iris Connex’s proposed claim construction was not only implausible but nonsensical:
Iris Connex’s Proposed Construction
an internal multi-position and multi-function an internal multi-position and multi-function
reading head with at least two lensings,
such reading head may comprise one or more
cameras, and wherein
‘camera’ should be read within the context of
‘an internal multi-positon and multi-function
camera’ and otherwise has its plain and
ordinary meaning within the context in which
it is used, and which is not limited to merely
the lens(es) nor to merely the lens(es) and
For reasons explained in the Summary Judgment Order, Iris Connex’s proposed construction
contravened well-established law by (1) adding words and limitations to the claim language
without support in the intrinsic evidence; (2) construing the claims in light of the accused device,
not the specification; and (3) relying on extrinsic evidence to the exclusion of the intrinsic
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evidence. (Summary Judgment Order at 25–32.) Adopting Iris Connex’s construction would
have required the Court to disregard these accepted tenets of claim construction.
The purpose underlying the claim construction process is for the Court to interpret the
claims and thereby aid the jury in determining infringement and invalidity. See Embrex, Inc., v.
Serv. Eng’g Corp., 216 F.3d 1343, 1347 (Fed. Cir. 2000) (“The construction of claims is simply a
way of elaborating the normally terse claim language in order to understand and explain, but not
to change, the scope of the claims.”); Paradox Sec. Sys. Ltd. v. ADT Sec. Servs., Inc., 710 F. Supp.
2d 590, 608 (E.D. Tex. 2008). Not only was Iris Connex’s proposed construction verbose, but it
was self-referential 6 by including the disputed terms within the construction—twice.
reasonable litigant would not have proposed this construction nor would it have expected it to
At the Markman hearing, Iris Connex argued that its construction would have read on
Dell’s accused products. Acer Case, Dkt. No. 231 at 7:21–9:6. However, as the Federal Circuit
has repeatedly stated, claim constructions are not evaluated in light of the accused products.
Cohesive Techs., Inc. v. Waters Corp., 543 F.3d 1351, 1367 (Fed. Cir. 2008). Much of Iris
Connex’s claim construction briefing was an attempt to construe the claims in light of the accused
products. See, e.g., Acer Case, Dkt. No. 217 at 5–11 (E.D. Tex.). In point of fact, what Iris
Connex was really trying to do was to import a “fixed” limitation into the claim when the claim
language itself made it abundantly clear that the camera (or reading head) was moveable.
Connex accused Dell of importing limitations into the claim. While this smoke screen to hide its
By “self-referential,” the Court refers to the discredited practice of using the language to be construed to craft the
adopted construction. Merely re-arranging the language in question rarely provides valuable guidance to the fact
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own efforts to import limitations might be clever, it reveals a lack of candor which the Court is
entitled to expect from counsel. Iris Connex’s construction was not merely wrong. See, e.g.,
SFA Sys., LLC v. Newegg Inc., 793 F.3d 1344, 1348 (Fed. Cir. 2015). Rather it was completely
divorced from the claim language and the specification, and was an attempt to turn the claim
language on its head. Plaintiff’s counsel offered no reasonable arguments to adopt such a
A Flawed Doctrine of Equivalents Analysis
Plaintiff next put forward a doctrine of equivalents argument for the disputed “multifunction and multi-position reading head” limitation. However, that argument simply never
existed. Festo foreclosed a doctrine of equivalents argument prior to filing suit. See generally
Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722 (2002). Iris Connex and its
counsel should have known this. Despite written warnings from the Defendants citing well
established case law, Iris Connex persisted. Iris Connex argued to the Court that the patentee’s
earlier amending of the limitation “adjustable reading head for producing an image signal” to
“multi-position and multi-function reading head for producing an image signal when in a first
position using a first lensing and for reading for image conversion using a second lensing when in
a second position” was not a narrowing amendment. In other words, Iris Connex argued that
“multi-position and multi-function” was not narrower in scope than “adjustable.”
To argue that the amendment was not narrowing (thereby avoiding the Festo presumption),
Iris Connex had to ignore the entire file history. The original claims did not require that the
reading head be multi-function or multi-position, only adjustable. The application originally
recited “an internal adjustable reading head for producing an image signal.” (Dkt. 217-8 at 182.)
The Examiner rejected this claim over the prior art. To distinguish the prior art, the applicant
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narrowed the claim element: an internal [adjustable] multi-position and multi-function reading
head for producing an image signal when in a first position using a first lensing and for reading for
image conversion using a second lensing when in a second position. Compare Acer Case, Dkt. No.
217-8 (July 16, 1998 Preliminary Amendment) at 9, with Acer Case, Dkt. 217-11 (May 2, 2000
Amendment) at 3.7 “Estoppel arises when an amendment is made to secure the patent and the
amendment narrows the patent’s scope,” Festo, 535 U.S. at 736–37, and that is precisely what
occurred here. This is made clear in the missing Office Action that Iris Connex and its counsel
never read or reviewed prior to filing suit. Acer Case, Dkt. No. 217-10 (October 27, 1999 Office
Action) (the “Missing Office Action”).8
Iris Connex also argues that it reasonably believed the “tangential relation” exception to
the Festo presumption of estoppel should apply and that the “objectively apparent reason for the
amendment was unrelated to a movability requirement.” (Dkt. No. 127 at 8.) Iris Connex argued
that the applicant relied on only the “multi-function” part of the amendment to differentiate the
claimed invention from the prior art. That argument makes no sense. No applicant would
include a significant extraneous limitation (“multi-position”) if something substantially less
(“multi-function” only) was adequate. See Felix v. Am. Honda Motor Co., 562 F.3d 1167, 1183–
84 (Fed. Cir. 2009). The only reasonable reading of the complete prosecution history is that both
limitations were necessary to overcome the prior art (Wilska alone or the combination Wilska and
The Court notes that the amendment, as it appears in the prosecution history, omits the fact that the word “adjustable”
was removed from the claim. Rather, it simply notes the addition of words “multi-position and multi-function.” Acer
Case, Dkt. 217-11 at 5.
See Dkt. No. 130 at 15 n.6 (citing to e-mail exchanges that reflect that Iris Connex did not have the complete
prosecution history prior to suit). At the hearing, Mr. Yates explained that he was confident that the Missing Office
Action did not hinder his ability to assess the strength or weakness of a doctrine of the equivalents argument. (Hearing
at 42:5–43:23.) He was mistaken.
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Boyd). See Missing Office Action at 2–3, (“Boyd discloses lens tilt mechanism . . . . Thus, it
would have been obvious to . . . modify Wilska’s system to provide for an adjustable reading head
for producing an image signal . . . without having to move the communication device as taught by
Boyd”). See also Acer Case, Dkt. No. 217-11 (May 2, 2000 Amendment) at 6 (“Neither Wilska
et al. nor Boyd et al. have a reading head that is both multi-positional and multi-functional.”)
(emphasis added.). Put another way, the “multi-position” limitation was added to the claim
specifically to overcome the prior art. It was not tangential. It was essential.
As this Court previously explained in its Summary Judgment Order, Iris Connex’s doctrine
of equivalents argument contained another deficiency: “The multi-camera / software-toggling
system, such as that used by the accused products, is essentially the ‘fundamental opposite’ of the
single, multi-positional and multi-functional camera recited in the claims.” (Summary Judgment
Order at 44.) Nothing can be the equivalent of its fundamental opposite. This argument failed
as a matter of law.
The combination of these deficiencies in Iris Connex’s doctrine of equivalents position
persuades the Court that such was not only weak, but exceptionally so.
Iris Connex’s Litigation Conduct
Dell also argues that Iris Connex sought to exploit the high cost to defend complex
litigation as a means to extract nuisance settlements from Defendants. It is undisputed that Iris
Connex offered to settle its suit against Dell for $80,000. While $80,000 is not “extraordinarily
low,” that does not end the inquiry. As the Federal Circuit has held, even a $75,000 settlement
offer in the context of a $20,000,000 case could be considered a nuisance settlement. Eon-Net LP
v. Flagstar Bancorp, 653 F.3d 1314, 1327 (Fed. Cir. 2011). Moreover, while the settlement
demand in this case was significantly higher than those offered in some cases, see, e.g., eDekka
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LLC v. 3balls.com, Inc., 2015 WL 9225038 (E.D. Tex. Dec. 17, 2015), so were the stakes. To
determine whether a settlement offer is fair and made in good faith, it is not the absolute value of
the settlement but rather the prospective recovery that must be evaluated, i.e., how much is at stake.
See generally Reynolds v. Beneficial Nat. Bank, 288 F.3d 277, 284–85 (7th Cir. 2002).
Dell argues that $80,000 is a nuisance settlement which evidences bad faith because it is
below the cost of defense. Iris Connex and Mr. Yates respond that $80,000 was a thoughtful and
realistic settlement offer. Mr. Yates testified that he based his damages model on the Federal
Circuit decision in Summit 6, LLC v. Samsung Elecs. Co., Ltd., 802 F.3d 1283 (Fed. Cir. 2015),
(See Yates Decl. at ¶ 73–74), where the Federal Circuit upheld a per-unit royalty rate of
approximately 15 cents per-unit for infringement of a patent teaching a method of intelligent
preprocessing of digital photos.
What troubles the Court is not simply that Iris Connex tried to settle the case below the
cost of defense. In some cases, a settlement amount below the cost of defense could be a
reasonable offer. Rather, if Iris Connex believed the ’950 patent truly covered what it said it
claimed—essentially front and rear camera functionality, however employed, on a personal
communication device—then it essentially would hold a patent claiming the ubiquitous “selfie.”
See Acer Case, Dkt. No. 217 at 13. If so, Iris Connex should have demanded far more, and the
fact that it did not leads the Court to one of two possible conclusions. Either Iris Connex was
trying to obtain settlements driven by litigation costs rather than the merits of this case, or it
realized that its infringement position was extraordinarily weak. See Raylon LLC v. Complus Data
Innovations, 2011 WL 13098297, at *2 (E.D. Tex. Mar. 9, 2011) (“In some situations, a plaintiff
asserting a large damages model while making very low offers of settlement early in the case may
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indicate that the plaintiff realizes its case is very weak or even frivolous.”). Either conclusion
supports granting this motion under Section 285.
The Court also considers it probative that other members of the Yates collective (some
owned by Q Patents, some not) have filed hundreds of patent infringement suits in this district, but
only one case (not counting this case) has gone as far as claim construction. None of these cases
have been tried before a jury. (Yates 94:1–7.) As soon as these cases end, the asserting entities
dissolve. (Yates 31:22–32:12.) While this is background information that does not emanate from
the present case, it does speak to the totality of the circumstances.
Iris Connex has argued that
the Court cannot consider the actions of “unnamed and unrelated” third parties in determining
exceptionality, but only the facts limited to this single case. (See generally Dkt. No. 70.) The
Nothing in the authorities cited by Iris Connex forecloses the Court’s
consideration of the conduct of third parties. Indeed, current Federal Circuit authority suggests the
opposite. See, e.g., Eon-Net, 653 F.3d at 1319, 1325 (“Zimmerman had filed over 100 lawsuits
on behalf of Eon–Net or its related entities asserting infringement of the Patent Portfolio.”)
In sum, the combined conduct of Iris Connex, Mr. Yates, Mr. Labbit, and Mr. Tadlock
persuades the Court that this case was not litigated in good faith.
This case crossed the Rubicon of exceptionality when the Court concluded that Iris
Connex’s case was so weak from the outset that it lacked any real merit. This Court has seen its
fair share of infringement contentions and heard its fair share of claim construction arguments.
Those presented in this case clearly stand out.
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That said, Dell urges a number of additional grounds to support a finding that this case is
exceptional. The Court rejects most of those as simply unpersuasive. For example, Dell asserts
that “[a]ll asserted claims of [the] patent-in-suit have been determined invalid by the United States
Patent and Trademark Office,” during ex parte reexamination. (Dkt. No. 130 at 3.) It is true that
this Court has previously held that the substantive weakness of a patent may factor into the
exceptional case analysis. See eDekka, 2015 WL 9225038, at *2. However, that holding finds
no application here. In eDekka, the Court concluded that the patent was obviously weak on its
face in light of Alice. Patents carry a presumption of validity, and the corollary is that a defendant
asserting that a patent is “demonstrably weak on its face” confronts a significant hurdle. Id. In
eDekka, that hurdle was overcome because the claims “did not even recite computer components.”
NexusCard, Inc. v. Brookshire Grocery Co., 2016 WL 6893704, at *3 (E.D. Tex. Nov. 23, 2016).
The same is not true here.
First, the fact that the USPTO granted Dell’s ex parte
reexamination petition on June 17, 2016 after Iris Connex filed suit in this case says nothing about
the substantive weakness of the patent at the time the suit was filed. This Court will not burden
patent owners with somehow divining what the Patent Office might do at a future date. Second,
institution of reexamination is not alone evidence of a patent’s weakness. In fact, institution of an
ex parte reexamination is not uncommon, and more often than not, patents emerge from
reexamination with at least some of their claims intact.9 Third, the Patent Office issued a Final
Office Action rejecting the claims on November 25, 2016, over two months after this Court entered
its Summary Judgment Order of non-infringement. Finally, the Patent Office uses different
See USPTO, Ex Parte Reexamination Filing Data – September 30,
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evidentiary and claim construction standards. See Large Audience Display Sys., LLC v. Tennman
Prods., LLC, No. 2015-2040, 2016 WL 6123901, at *4 (Fed. Cir. Oct. 20, 2016). For this reason
alone, the argument advocated by Iris Connex—that the Court should consider Dell’s submission
of a petition for reexamination as “an admission that Dell is not confident in its noninfringement/claim construction provision, that Iris Connex’s contrary position is non-frivolous,
and that fee-shifting and sanctions . . . are inappropriate” (Dkt. No. 25-9 at 2)—fares no better. In
this case, the reexamination does not impact the Court’s analysis under Section 285.
However, there are two additional reasons that resonate with the Court and support a
finding of exceptionality in this case. First, and the more significant of the two, is that Mr. Yates
made an intentional decision to create and undercapitalize Iris Connex as an empty shell. As this
case reflects, such a design choice has real world effects, undermines the integrity of the judicial
system, and certainly makes a case “stand out.” The Court and those other parties before it have
the right to know who is the real party at interest on the other side of any case. The fact that Iris
Connex was part of a pattern of setting up empty shell companies is not lost on this Court. This
suggests to the Court that Mr. Yates intended to game the judicial system as part of a pattern of
That said, the Court notes that it will not ordinarily scrutinize litigants’ business decisions,
including how they might structure a business or make a decision to open an office in a particular
location. “[A] business opens its doors in a particular location for a number of considerations,
including the cost of rent, market profitability, cost of doing business, and tax benefits.” See
Medidea, LLC v. Smith & Nephew, Inc., 2010 WL 1444211, at *2 (E.D. Tex. Apr. 12, 2010).
Here, however, because of the apparent absence of a missing actor, the Court ordered limited and
targeted post-judgment discovery to protect the integrity of the Court’s proceeding.
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refused to stay such discovery even when Iris Connex and Q Patents fled to California to file
Another reason supporting the exceptionality of this case is the admitted sloppiness in
prosecuting this case, brought about predominantly by Mr. Yates. (Hearing at 86:10–12 (“We have
to admit that there were mistakes made. They shouldn't have been made. My client was sloppy.
Thatʼs what it boils down to.”).) These mistakes include disclosure errors, assignment issues,
misuse use of form documents, conflicting sworn testimony, and a failure to properly communicate
among Mr. Yates, Mr. Labbit, and Mr. Tadlock. Most of these issues were well explored at the
hearing and do not deserve extended discussion here. (See, e.g., Hearing at 33:18–39:2, 61:3–62:1
(discussing authority to execute assignment and possible standing issues)); (id. at 45:17–50:14,
53:25–54:15 (discussing the Tadlock Law Firm’s engagement agreement)); (id. at 55:8–56:22
(discussing failure to disclose Mr. Yates in initial disclosures requiring listing of all persons with
“knowledge of relevant facts”).) Some of the more serious issues are elaborated upon below.
The Court recognizes that all businesses and lawyers occasionally make mistakes. In the Court’s
view, a minor mistake or two made by a lawyer, party, or principal does not mean a case is
exceptional. Here, however, the sloppy mistakes made were not minor or isolated.
collective import does make this case stand out.
Joint and Several Liability of Iris Connex and Mr. Yates
The Court finds and holds that Iris Connex and Mr. Yates are jointly and severally liable
for the fees shifted, pursuant to 35 U.S.C. § 285. As the named plaintiff, the application of fee
shifting to Iris Connex is clear. The Court finds that Mr. Yates, having been afforded ample due
process, is also liable given that his personal conduct was the dominant cause making this case
exceptional. From start to finish, Mr. Yates has been the driving force behind this litigation.
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Every reason for this Court’s exceptional case finding emanates from Mr. Yates. The Court is
persuaded that not to hold Mr. Yates personally liable would make a mockery out of Section 285.
Mr. Yates conceived and then carried out each step leading up to the filing of this meritless
lawsuit. First, he “discovered” the soon-to-expire ’950 patent while searching for “high value”
patents. (Yates Decl. at ¶ 14.) Then he contacted the inventor to negotiate the assignment of the
’950 patent, well before he created Iris Connex. (Hearing at 40:23–41:12.) Mr. Yates alone
conducted the negotiations to acquire the patent, (see Hearing at 38:7–9), before “bringing [Mr.
Labbit] in” (Hearing at 61:24). In fact, the inventor, Mr. Robb, never communicated with Mr.
Labbit. (See Hearing at 38:23.) Mr. Yates “brought” the patent to Mr. Labbit. (Hearing at 61:25–
Mr. Yates next created Iris Connex as a subsidiary of Q Patents, the holding company he
He then designated Mr. Labbit, an employee of another of his holding
companies, Spectrum Patents Inc., to be the manager of Iris Connex. (Labbit at 28:20.) Mr.
Labbit was manager of Iris Connex in name only. He consulted Mr. Yates on “anything that
would affect the economic standing of Iris Connex.” (Labbit at 90:20–24). As an example, Mr.
Yates (through Q Patents) controlled the decision about whether or not to spend money on Iris
Connex’s behalf. (Labbit at 92:17–93:5.)
After the formation of Iris Connex, it was Mr. Yates—not Mr. Labbit—who executed the
assignment acquiring Iris Connex’s only asset. While Mr. Yates acknowledges that Mr. Labbit
should have been the one to act for Iris Connex in executing the assignment of the ’950 patent,
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both of them testified that Yates personally acted with full authority. (Hearing at 38:20–22.)10 This
assignment contractually obligated Iris Connex to initiate litigation against at least ten defendants
by November 30, 2015. (Dkt. No. 128-2 at 2; Hearing at 39:3–11.) In other words, Mr. Yates
knew he was contractually obligating Iris Connex to file this lawsuit. It is hard (vis-à-vis the
exceptionality of this case) to understate the importance of Mr. Yates’ direct and personal control
through the pre-suit process of finding and acquiring the ’950 patent, as Iris Connex had no other
purpose than to enforce its only asset.
Mr. Yates’ involvement did not end there. He independently performed pre-suit diligence.
For example, he reviewed the prosecution history (excluding the Missing Office Action). (See
Hearing at 41:17–21; 42:6–17 (“It was very clear from the record, and that analysis was done by
me prior to even having a decision of wanting the patent.”).) It is also undisputed that Mr. Yates
personally controlled the events occurring toward the end of this lawsuit. His involvement in the
settlement process is unquestioned. He admitted as much. (See, e.g., Hearing at 65:10–11 (“I
have played a key role in settlement.”).) For example, he calculated Iris Connex’s damages
model, its settlement offers, and the determination of a reasonable royalty. (Hearing at 65:24–
66:25.) He controlled Iris Connex’s settlement posture and how it would reach out to the
The Court has been told that Mr. Yates (who is not a member of Iris Connex) had the requisite authority to execute
the assignment; assuming such to be the case then the assignment was valid and Iris Connex had standing to sue.
(See Hearing at 36:18–39:14.) At the hearing, Mr. Yates and Mr. Labbit testified that Yates acted with authority
when executing the assignment. (Hearing at 39:9.) However, Mr. Yates then testified that the regulations of Iris
Connex “defin[ed] their respective roles.” (Id. at 39:12–13.) Those regulations clearly state that the Member (Q
Patents and not Mr. Yates) “unless appointed” by Mr. Labbit, has no authority “to act for . . . undertake or assume,
any obligation, debt, duty, or responsibility on behalf of the Company.” (Dkt. No. 129-2.) For example, prior to
filing bankruptcy, Iris Connex held a special meeting and specifically authorized Brian Yates to file a bankruptcy
petition for Iris Connex, which authorization was subsequently certified by Mr. Labbit. (Dkt. No. 34-1 at 22.) While
the Court has not seen any formal authorization given to Mr. Yates to execute and accept the assignment of the ’950
patent from AVT, the Court need not determine whether authorization “by phone” is sufficient. (Hearing at 62:4–8.)
In any case, in light of Mr. Yates’ individual conduct on behalf of Iris Connex, he has precluded himself from using
Q Patents as a shield for him to hide behind. He is directly liable.
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Defendants. (Hearing at 66:2–68:6.) When things turned upside down in the face of Dell’s
Section 285 motion and the Court’s allowing unexpected post-judgment discovery, Mr. Yates used
his personal resources to settle the serially filed cases by paying large sums of money, entering
covenants not to sue, and granting licenses to other patents in which Iris Connex had no direct
interest. (Hearing at 69:5–72:22.)
Finally, Mr. Yates was directly responsible for the post-judgment events which confirmed
the exceptional nature of this case. He bears primary responsibility for the erroneous Rule 7.1
disclosure. He also bears sole responsibility for the decision to declare bankruptcy in California
and the successive events that flowed from that decision. As clearly established, he made the
decision to put Iris Connex into bankruptcy without first consulting Mr. Labbit. (Labbit Dep. at
78:8–12 (“Q. Were you consulted on the filing of the bankruptcy petition? A. No. I was notified
Iris would need to file the petition”).) Every one of these twists and turns arose from his deliberate
decision to structure Iris Connex as an empty shell corporation. Consequently, all of the postjudgment discovery matters were the fruit of the tree planted by Mr. Yates alone.
It is true that Mr. Yates did not control every legal argument put forward by Iris Connex.
For example, there is no evidence he chose which claims to assert. None of that is of consequence.
While Mr. Yates did not actively make some of the litigation decisions in the case, he certainly
had input and retained supervisory authority over such matters. (See Hearing at 65:10–17; Yates
Decl. at ¶ 71 (“Prior to acquiring any patent, I personally complete an analysis of the patent and
its file history, and define an infringement theory that involves a preliminary construction of the
relevant claim limitations.”) (emphasis added).)
It is not necessary that Mr. Yates have
controlled every substantive aspect of the litigation. It is only important that his conduct made
this case exceptional. About that, the Court has no doubt. By the time Mr. Tadlock and Mr.
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Labbit became involved, the die had already been cast by Mr. Yates. Then, during the litigation,
Mr. Yates held sway over Iris Connex’s refusal to dismiss the case. Finally, it was Mr. Yates
alone who made the choice to file for bankruptcy. These post-judgment contortions each had
their genesis in Mr. Yatesʼ strategic decision to create Iris Connex as an empty shell and thereby
avoid Section 285 liability. Without this there would have been no need for post-judgment
The Court finds Ohio Cellular to be instructive as to Mr. Yates’ responsibility for the
conduct of Iris Connex. See Ohio Cellular, 175 F.3d at 1350 (Fed. Cir. 1999).
unlike the trial court in Ohio Cellular, this Court has afforded Mr. Yates ample due process11 to
contest his liability by joining him sua sponte. Accordingly, it is both equitable and proper that
Mr. Yates be jointly and severally liable for all costs and fees shifted to Iris Connex in this case.
The underlying purpose of Section 285 is to deter exceptional litigation. This Court will not look
the other way as to Mr. Yates’ exceptional conduct while forthright litigants must come to court
knowing they face the risk of fee shifting if their case is deemed exceptional.
Failing to extend liability to Mr. Yates personally would effectively negate Section 285.
The clear language of Section 285 does not specify against whom fees should be shifted.
Congress could have easily spelled that out. It did not. Here, the responsible actor is Brian Yates
and this Court finds he caused this lawsuit to be exceptional.
He is held by the Court to be
personally liable for Dell’s attorney fees from the inception of this case through September 2,
2016, and including subsequent briefing on Dell’s Section 285 Motion.
See supra Section III(A)(b), n.5 and infra Section IV(C)(b), n.15.
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Amount of Fee Award
An award of fees under Section 285 is typically calculated by “multiplying a reasonable
hourly rate by the reasonable number of hours required to litigate a comparable case,” i.e., the
“lodestar” method. Lumen View Tech. LLC v. Findthebest.com, Inc., 811 F.3d 479, 483 (Fed. Cir.
2016). The Court may, in its discretion, exclude any hours that are excessive, redundant, or
otherwise unnecessary and may reduce the hourly rate if it deems it excessive. See Hensley v.
Eckerhart, 461 U.S. 424, 434 (1983). A rate is reasonable if it is “in line with those prevailing in
the community for similar services by lawyers of reasonably comparable skill, experience and
reputation.” SUFI Network Servs., Inc. v. United States, 785 F.3d 585, 594 (Fed. Cir. 2015)
(citation omitted). In all, “[t]here is no precise rule or formula for making these determinations,”
Eckerhart, 461 U.S. at 436, and a court may exercise its discretion to adjust the figure based on a
variety of factors, including the novelty and difficulty of the issues and the degree of the success
achieved, see Johnson v. Georgia Highway Exp., Inc., 488 F.2d 714, 717 (5th Cir. 1974)
In light of these principles and pursuant to the Court’s finding that this case is exceptional,
the Court awards Dell reasonable attorney fees incurred in this litigation from inception through
the Court’s September 2, 2016 Order, and briefing subsequent to such Order insofar as that briefing
relates to Dell’s Section 285 Motion. The Court has reviewed the tasks performed by Dell’s
counsel. (See Dkt. Nos. 132, 139.)
The Court is persuaded that most of these tasks were
reasonable and necessary to this litigation, with some exceptions.12 In doing so, the Court has
For example, the Court excludes expenses incurred by Dell for its ex parte reexamination petition, which is a
collateral administrative proceeding before the Patent Office, not this Court. The same exclusion applies to work
related to an appeal. The Court has also assessed the reasonableness of the hours and rates which Dell has submitted.
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consulted the 2015 American Intellectual Property Law Association (AIPLA) Economic Survey,
which is routinely relied upon in intellectual property cases to determine the reasonableness of fee
requests. See, e.g., T&M Inventions, LLC v. Acuity Brands Lighting, 2016 WL 7441650, at *1
(E.D. Wis. Dec. 27, 2016). The Court has also weighed the fact that prior to September 2, 2016,
Dell was one of 18 Defendants who were then jointly defending against this Plaintiff.
The Court in its discretion believes $355,000 to be an appropriate and just award of
exceptional case fees under Section 285. Such fees are awarded to Dell and are imposed upon
and payable by Iris Connex and Brian Yates, jointly and severally.
Much of the same conduct which renders this case exceptional also renders it sanctionable.
The Court now discusses such conduct.
Relevant to patent infringement actions, Rule 11 requires that the patent holder’s attorney
“interpret the pertinent claims of the patent in issue before filing a complaint alleging patent
infringement.” Antonious v. Spalding & Evenflo Cos., 275 F.3d 1066, 1072 (Fed. Cir. 2002). In
particular, claim constructions are subject to Rule 11(b)(2) which requires legal arguments to be
non-frivolous and attorneys to make a “reasonable effort to determine whether the accused device
satisfies each of the claim limitations.” Id. at 1074. To determine whether an attorney has
complied with Rule 11, “the standard under which an attorney is measured is an objective, not
For example, Dell requests approximately $275,000 for over 500 hours billed in briefing Dell’s Section 285 Motion
(Dkt. Nos. 25, 97, 130). This is clearly excessive.
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subjective, standard of reasonableness under the circumstances.” Whitehead v. Food Max of Miss.,
Inc., 332 F.3d 796, 802 (5th Cir. 2003) (en banc).
Once an attorney’s conduct is deemed to have violated Rule 11, “the district court is vested
with considerable discretion in determining the ‘appropriate’ sanction to impose upon the violating
party.” Thomas v. Capital Sec. Servs., Inc., 836 F.2d 866, 876–77 (5th Cir. 1988). “A sanction
imposed under this rule must be limited to what suffices to deter repetition of the conduct or
comparable conduct by others similarly situated.” Fed. R. Civ. P. 11(c)(4); see also Mercury Air
Grp., Inc. v. Mansour, 237 F.3d 542, 548 (5th Cir. 2001) (“[C]ourts must impose the least severe
sanction on attorneys and parties who violate Rule 11.”). “The court possesses the discretion to
tailor sanctions to the particular facts of the case.” Thomas, 836 F.2d at 877. “Deterrence, rather
than compensation, has long been recognized as the primary purpose to be achieved by Rule 11
sanctions.” Raylon LLC v. Complus Data Innovations, Co., 2015 WL 11121530, at *4 (E.D. Tex.
May 4, 2015).
Dell urges a number of reasons as to why this Court should find Mr. Tadlock in violation
of Rule 11.
Only one of them is meritorious: Mr. Tadlock advanced a frivolous claim
The Court finds an earlier case from this district to be particularly informative. See Raylon
LLC v. Complus Data Innovations, 2011 WL 1104175 (E.D. Tex. Mar. 23, 2011). Raylon bears
obvious similarities to this case. In Raylon, the asserted claim required a “display being pivotally
mounted on said housing,” and it was asserted against devices whose displays were rigidly
mounted to the device’s housing. Id. Similar to the cameras here, it was undisputed that the
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accused products all had displays that were fixed and did not move. The Raylon defendants also
filed early dispositive motions for a judgment of non-infringement, asserting that Raylon’s
infringement claims were not plausible. Further, the parties represented that construction of a
single term, the “pivotally mounted” term, would resolve liability in all cases. Id. at *1.
Raylon advanced a similarly nonsensical claim construction arguing the “pivotally
mounted” term was met because a user’s wrist could pivot while it held the rigidly mounted device.
See Raylon LLC v. Complus Data Innovations, 6:09-cv-355, Dkt. No. 147 (E.D. Tex. March 9,
2011); Raylon, LLC v. Complus Data Innovations, Inc., 700 F.3d 1361, 1367–70 (Fed. Cir. 2012).
On appeal, the Federal Circuit concluded that Raylon’s proffered construction was a clear instance
where “no objectively reasonable litigant, relying on the single sentence in the specification to
support its position, would believe its claim construction could succeed; therefore, Raylonʼs claim
construction is frivolous and thus sanctionable under Rule 11(b)(2).” Id. at 1369; see also Source
Vagabond Sys. Ltd. v. Hydrapak, Inc., 753 F.3d 1291, 1300–01 (Fed. Cir. 2014).
In this case, Mr. Tadlock violated Rule 11 because he advanced a claim construction
divorced from the specification and claim language, ignored the file history, contravened Federal
Circuit law, relied heavily on extrinsic evidence to the exclusion of the intrinsic evidence, and
asked the Court to adopt a construction that simply did not make any sense. As the Federal Circuit
made clear in Raylon, this Court has no latitude to determine if Mr. Tadlock acted in good faith,
but must sanction him where his arguments failed to pass a purely objective standard of review.
Raylon, 700 F.3d at 1369; Source Vagabond, 753 F.3d at 1301.
The Court notes that Mr. Tadlock received multiple notices from different Defendants that
they intended to file for sanctions in this case, and in the face of these warning signs, Iris Connex
and its counsel “proceeded through claim construction undeterred.” Raylon, 700 F.3d at 1370 n.6
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(Reyna, J. concurring). As Judge Reyna made clear in his Raylon concurrence, the lawyer has a
duty to “stop and think and to investigate whether its positions were objectively baseless.” Id. Put
simply, Mr. Tadlock did not stop and think before plunging ahead with an objectively unreasonable
claim construction. Under this objective standard, Mr. Tadlock’s conduct must be sanctioned and
the Court cannot consider his underlying conduct or state of mind. That is to say, the Court must
react to what he did, not what his intentions were.13
While the law constrains this Court as to the conclusion it must reach, the Court has
considerable discretion in fashioning an appropriate sanction under Rule 11. Mendoza v. Lynaugh,
989 F.2d 191, 195–96 (5th Cir. 1993). Ultimately, the sanction should be educational and
rehabilitative in nature, but the absolute minimum to effect deterrence.
Fee awards are
discretionary if they are appropriate in light of the facts of the case. See Raylon, 6:09-cv-355,
Dkt. No. 207 at 8 (E.D. Tex. May 4, 2015). While Mr. Tadlock has not received any settlement
proceeds in this case, he has had to spend considerable time and expense working on this case
without compensation. Indeed, Mr. Tadlock and his firm have spent thousands of hours on this
case without any payment whatsoever. (Tadlock Decl. at ¶ 122; see also id. 99–104 (describing
other adverse impacts of this case).) While this might be said to be an educational sanction in and
of itself, the Court is persuaded that it must also impose some additional sanction to further effect
In its zeal to find sanctionable conduct to assert against Mr. Tadlock, Dell makes a number of other unpersuasive
arguments. The Court rejects them all. In fact, one of these argument relies on a significant misstatement of fact.
Dell argues that “[t]he Complaint signed by Mr. Tadlock on behalf of Iris Connex falsely alleged that Iris Connex’s
principal place of business was in Longview, Texas,” (Dkt. No. 97 at 18; see also Dkt. No. 130 at 7–8), because
“the ‘principal place of business refers to the place where the corporation’s high level officers direct, control, and
coordinate the corporation’s activities,” (id. at 9–8) (citing Hertz Corp. v. Friend, 599 U.S. 77, 92–93 (2010)). The
Complaint actually states that Iris Connex “is a Texas limited liability company with its principal office located in
the Eastern District of Texas, at 211 E. Tyler Street, Suite 600-A, Longview, Texas 75601.” (Dkt. No. 1 at ¶ 3)
(emphasis added). The Court is reluctant to sanction lawyers based on arguments that are simply factually incorrect.
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deterrence. In this Court’s judgment, payment of $25,000 by Mr. Tadlock adequately achieves
Mr. Tadlock shall pay forthwith the sum of $25,000 to the Clerk of the Court as a penalty
for his conduct in this case. He shall be required, when asked to advise any other court or district
in which he may seek admission or leave to practice pro hac vice, that he has been formally
sanctioned by this Court.
Despite Mr. Labbit’s role as the manager of Iris Connex, the Court is not persuaded that he
is “responsible” for any violation of Rule 11. See Fed. R. Civ. P. 11(c)(1). Notably, Dell has not
urged the Court to find Mr. Labbit in violation of Rule 11. The Court is persuaded that Mr.
Labbit’s primary error was that he exercised extremely poor judgment. This must be somewhat
attributed to the vulnerabilities of being a relatively new lawyer. The Court is also mindful that
Mr. Labbit will long bear a direct association with this case. Even if the Court were persuaded
that Mr. Labbit were responsible for a Rule 11 violation, sanctioning him beyond that would not
serve any useful or remedial purpose. The Court is persuaded that Mr. Labbit will exercise much
better judgment in the future.
Accordingly, the Court does not find that Mr. Labbit has violated Rule 11.
Pursuant to Section 1927, a district court may shift reasonable fees to any attorney who
multiplies the proceedings in any case “unreasonably” and “vexatiously.” 28 U.S.C. § 1927;
Proctor & Gamble Co. v. Amway Corp., 280 F.3d 519, 525 (5th Cir. 2002). The Fifth Circuit has
held that Section 1927 sanctions “require ‘clear and convincing evidence, that every facet of the
litigation was patently meritlessʼ and ‘evidence of bad faith, improper motive, or reckless disregard
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of the duty owed to the court.’” Bryant v. Military Depʼt, 597 F.3d 678, 694 (5th Cir. 2010)
(quoting Procter & Gamble Co., 280 F.3d at 525–26); see also Raylon, 700 F.3d at 1370 n.6
(“Establishing attorney misconduct under § 1927 implicates a higher level of culpability than Rule
11.”). While Mr. Tadlock prosecuted an objectively weak case on the merits that probably should
not have been filed, and advanced an objectively unreasonable claim construction, Dell has not
shown by clear and convincing evidence that Mr. Tadlock “multiplied” the proceedings in this
case both “unreasonably and vexatiously.”
Accordingly, the Court declines to award costs and fees under Section 1927.
The Court has the inherent power to sanction conduct. See Chambers v. NASCO, Inc., 501
U.S. 32, 44 (1991). The inherent power allows the Court to address “a full range of litigation
abuses” including conduct beyond the confines of this case. Id. at 46. The inherent power allows
the Court to sanction non-parties that may be beyond the purview of the Federal Rules or Section
1927, but are closely tied to the litigation. See Intellect Wireless, Inc. v. Sharp Corp., 87 F. Supp.
3d 817, 844–45 (N.D. Ill. 2015) (opining that inherent power provides trial court with ability to
sanction pre-suit conduct). For example, “[a] court may sanction a non-party corporate officer
who acts improperly on behalf of a corporate defendant and who attempts to avoid sanctions by
hiding behind the corporate veil.” Anchondo v. Anderson, Crenshaw & Assocs., LLC, 2011 WL
4549279, at *4 (D.N.M. Sept. 29, 2011), affʼd sub nom., 511 F. Appʼx 736 (10th Cir. 2013) (“[T]he
evidence demonstrates a peculiarly close relationship between Mr. Dunn and Mr. Backal. Mr.
Dunn was a signatory on ACA bank accounts; accounts show him to be a manager of ACA; Mr.
Dunn was a managing officer of two corporations with Mr. Backal; and Mr. Dunn located his law
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office at ACAʼs offices until ACA went out of business.”). Sanctions under the inherent power
require a finding of bad faith. Carroll v. Jaques Admiralty Law Firm, P.C., 110 F.3d 290, 294 (5th
Two years after the Supreme Court’s decision in Chambers, the Eastern District of
Michigan addressed a trial court’s inherent power to sanction non-parties in light of Chambers.
See Helmac Prod. Corp. v. Roth (Plastics) Corp., 150 F.R.D. 563 (E.D. Mich. 1993).
articulated a two-part test which this Court considers persuasive. “To be subject to the Courtʼs
inherent power to sanction, a non-party not subject to court order must (1) have a substantial
interest in the outcome of the litigation and (2) substantially participate in the proceedings in which
he interfered.” Id. at 568. Helmac is not unique. Many other cases recognize a court’s inherent
authority to sanction non-parties who are entwined in the pending litigation. See also, e.g., Manez
v. Bridgestone Firestone N. Am. Tire, LLC, 533 F.3d 578, 585 (7th Cir. 2008) (“No matter who
allegedly commits a fraud on the court—a party, an attorney, or a nonparty witness—the court has
the inherent power to conduct proceedings to investigate that allegation and, if it is proven, to
punish that conduct.”); Bartos v. Pennsylvania, 2010 WL 1816674, at *5 (M.D. Pa. May 5, 2010)
(“It is also beyond serious dispute that this power extends, not only to parties in civil litigation, but
also to other persons, such as witnesses, who may be embroiled in that litigation.”). More
recently, the Northern District of California relied upon its inherent power to sanction after it found
that certain principals were the leaders and decision makers behind a “national trolling scheme.”
See Ingenuity13 LLC v. Doe, 651 F. App’x 716, 718 (9th Cir. 2016).
Mr. Yates and his conduct also fall within the purview of the Court’s inherent power. Mr.
Yates has an interest in the outcome of this litigation and substantially participated in these
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The record is checkered with Mr. Yates’ bad faith conduct. Having presided over this
case for more than a year, the Court is left with the firm conviction that Mr. Yates intentionally
structured Iris Connex to effectuate an end-run around Section 285.
Mr. Yates’ Shell Operation
In his declaration, Mr. Yates outlined how his shell operation works. (See Yates Decl. at
¶ 10.) According to Yates, this segment of his career began when, as a part of his law practice,
he saw a gap in the legal market for small patentees where the amount of potential damages was
not large enough to obtain representation from larger firms. (Id.) In light of these experiences,
he decided to become an advocate for the individual inventors and small companies who were
unable to find contingency counsel. (Id.) He acquired patents on a profit sharing basis, retaining
a different lawyer to assert the patents on a pure contingency basis. (Id.) He would create new
LLCs to enforce the patents against infringers and, through the patent assignment, agreed to share
50 percent of any resulting revenue with the prior patent owner. (Id.)
There are, of course, other ways to accomplish the same result without the use of multiple
corporate shells. For example, Mr. Yates, an experienced patent litigator, could have represented
each inventor directly. He could have referred the inventor to a different lawyer and taken a
referral fee. It is not the Court’s duty to dictate how one should operate his or her business, yet
the intentional way Mr. Yates structured his business in this case reveals that one of his major
goals was to shield himself personally if any of these risky ventures “went south.” To accomplish
this, he devised an approach to circumvent the law. This is sanctionable.
The facts refute the “inventor David versus corporate Goliath” story that Mr. Yates
attempts to tell. (See, e.g., Yates Decl. at ¶ 71 (“These patent owners would otherwise be largely
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excluded from the legal system.”).) Mr. Yates acquired the ’950 patent from AVT, which is itself
a patent holding and enforcement company located in Canada. AVT is owned by Garry Robb,
the inventor of the ’950 patent. If Mr. Robb believed that his patent was being infringed, he could
have retained an attorney to enforce his patents. History reveals that this is not simply conjecture.
As the many DataQuill cases reveal, Mr. Robb, who had an interest in the named plaintiff
DataQuill, was well acquainted with the nature of patent litigation. In fact, a little more than three
years ago, in DataQuill Ltd. v. ZTE Corp., 2:13-cv-00634-JRG (E.D. Tex.), this Court saw a jury
return a $31.5 million verdict against ZTE and in favor of DataQuill. Clearly, Mr. Robb was not
“left out in the cold” without the help of Mr. Yates.14
The facts here tell a different story than the one Mr. Yates portrays.
“discovered” the soon-to-expire ’950 patent doing his regular research to find acquirable “high
value” patents. (Yates Decl. at ¶ 14.) Then, he reached out to Mr. Robb to acquire his patent,
presumably without solicitation. (Id. at ¶ 15.) There is no indication that Mr. Robb had any
intention of asserting the ’950 patent against Dell or any of the other Defendants until Mr. Yates
approached him. Mr. Yates then created Iris Connex as an empty shell and retained a lawyer on
a contingency to assert its only asset. Iris Connex never functioned independently of Mr. Yates.
When it became clear that, despite his efforts, this structure might unravel and expose him
personally, Mr. Yates scrambled to throw roadblocks into the post-judgment discovery process.
All of this unnecessary time and expense could have been avoided if, instead of attempting to
dodge liability under Section 285, Mr. Yates had simply disclosed to Dell and the Court the true
See also Iris Connex, LLC v. Apple, Inc., 2:15-cv-1911, Dkt. No. 12-9 (E.D. Tex.) (AVT 2008 Year End Report
stating that AVT had assigned 50 percent of its interest in its IP Portfolio including the ’950 patent to a private
investment company that “helped AVT to secure and pay for a top-notch group of patent attorneys” to protect AVTs
intellectual property rights).
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corporate ownership and the real parties in interest in this lawsuit. Such was the very narrow,
targeted discovery the Court sought in the first instance. (See Dkt. No. 40 at 12:6–9) (“I am going
to order targeted discovery on the identity of the real party at interest, standing in the position of
There is, of course, nothing inherently wrong with Mr. Yates or anyone else capitalizing
on underused patents in the marketplace. However, one cannot abuse the judicial process through
the creation of shell entities to facilitate the assertion of otherwise meritless claims as part of a
scheme to avoid the risks that Section 285 creates. Equally important, the Court must protect the
functioning of its own processes. Mr. Yates’ decision to create an empty shell and then hide its
corporate parent until the eleventh hour (while at all times being sure any resulting monetary gains
would flow to him unimpeded) led to the judicial inefficiencies and delays recounted herein, which
far exceed those present in an ordinary case.
Based on the information before it, the Court concludes that Mr. Yates’ above described
conduct rises to the level of an abuse of the judicial system.
Rule 7.1 Disclosures
While Iris Connex and Respondents concede that the initial Rule 7.1 disclosure was
incorrect, the reason behind such remains unclear.
Mr. Yates suggested in his deposition
testimony that he did not understand Q Patents to be a “corporate parent.” (See Yates Dep. at 48:2–
49:21.) That understanding is neither a plausible nor objectively reasonable interpretation of
“corporate parent,” especially by an attorney like Mr. Yates. Even a cursory survey of other cases
would have revealed to him that whenever a wholly owned limited liability company has a
corporation as its sole member, that corporation is to be disclosed pursuant to Rule 7.1. See, e.g.,
Arcelormittal Indiana Harbor LLC v. Amex Nooter, LLC, 2016 WL 3746369, at *1 (N.D. Ind. July
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13, 2016); Gardner v. Nationstar Mortg. LLC, 2014 WL 7239496, at *3 (E.D. Cal. Dec. 16, 2014);
Yagoozon, Inc. v. Fun Express, LLC, 2014 WL 1922793, at *2 n.2 (D.R.I. Feb. 10, 2014); Corp.
Trade, Inc. v. Golf Channel, 2013 WL 5375623, at *1 (S.D.N.Y. Sept. 24, 2013).
Mr. Yates and Mr. Labbit now essentially disavow any involvement with the Rule 7.1
disclosure, attempting to lay the blame at the feet of Mr. Tadlock. (Yates Decl. ¶ 36–43.) They
attribute this “clearly erroneous” filing to a “miscommunication” between Mr. Yates and Mr.
Tadlock. (Hearing at 22:9–11; Yates Decl. at ¶ 37.) Mr. Tadlock has represented other Yates
enforcement entities prior to this lawsuit. In those cases, the corporate structures differed from
that of Iris Connex in that Mr. Yates had direct ownership of the enforcement entity. Prior to
filing this lawsuit, Mr. Tadlock inquired of Mr. Yates if the ownership of Iris Connex was the same
as the other entities in the prior cases in which Mr. Yates was the sole member. (See Hearing at
48:19–49:14.) Mr. Tadlock understood the answer to be “yes.” (See id.) When the Court asked
Mr. Tadlock if he had any knowledge of Q Patents when he filed the original Rule 7.1 disclosure,
he said no. (Hearing at 46:5–7.) This explanation makes sense. Q Patents is unmentioned and
completely absent from the assignment of the ’950 patent. It is also absent from every other Iris
Connex document subject to the Discovery Order’s production mandate. See Acer Case, Dkt. No.
136 at 2–3 (E.D. Tex.).
The Court is not persuaded by Mr. Yates’ latest explanation, in large part, because his
(misunderstanding of “corporate parent”). Further, this issue is not localized to lawsuits brought
by Yates entities represented by Mr. Tadlock. The same erroneous corporate disclosures exist in
various other lawsuits filed by other Yates enforcement entities in this District, including cases
involving attorneys other than Mr. Tadlock. (See, e.g., Hearing at 57:6–59:21 (discussing
Case 2:15-cv-01915-JRG Document 149 Filed 01/25/17 Page 53 of 57 PageID #: 4602
erroneous disclosures in other cases pending in this district).)
This Court is left with the
conclusion that either Mr. Yates has the same miscommunications with all of his attorneys or he
never intended to communicate his true corporate structure to any of his attorneys. The most
reasonable conclusion, based on the complete record before the Court and the credibility of the
witnesses, is the latter. This is why the 7.1 disclosure is important in this case.
Both the Court, the other parties, and the public have a right to know who is the real party
in interest in any case. As an example, Iris Connex’s standing to bring this lawsuit may have been
hidden from the Court and Dell as a result of this error. As another example, this filing deprived
Dell and the other Defendants from pleading an alter ego theory of recovery or a direct liability
theory against Mr. Yates early in the case. This is also why Respondents’ procedural attacks on
this Court’s joinder of Respondents post-judgment must fail. As Dell correctly points out, it did
not learn that Mr. Yates was the real party in interest until after the Court ordered post-judgment
discovery. (Dkt. No. 130 at 14–15.) On the equities, Respondents cannot claim a lack of proper
joinder when they have unclean hands. To be sure, those claims fail on the law as well, (see Dkt.
No. 11 at 11–12), and the Court has taken clear steps to provide all parties with ample due
Considering the totality of the circumstances, the Court is persuaded that Mr. Yates
intended to keep Q Patents out of sight as his “ace in the hole” against the prospect that this lawsuit
would open the door, just as it has, to a Section 285 motion, such that he could produce Q Patents
as a hidden shield to his own liability. The complete absence of any mention of Q Patents until
Compare Nelson v. Adams USA, Inc., 529 U.S. 460 (2000) (reversing Ohio Cellular and holding that party must be
given an opportunity to respond and contest personal liability for a fee award prior the entry of liability against party),
with Dkt. No. 74 (giving parties notice and opportunity to respond, including 100 pages of collective responsive
briefing, and an in-person hearing opportunity to testify and present oral argument to the Court).
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the aborted post-judgment effort to bury this problem beneath the sands of the Bankruptcy Court
in California speaks volumes.
Despite Mr. Yates’ late-breaking efforts to compensate and settle with the other 17 of the
original 18 Defendants, he is ultimately left to confront a problem of his own making. He chose
to file multiple lawsuits each employing an empty shell assertion company. He intentionally
obscured his own presence, and failed to disclose any other intermediary empty shell, all while
carefully keeping the pathway open for any money to flow directly to him. This atmosphere not
only precipitated an assortment of sloppy mistakes, (see e.g., Hearing 35:23–36:1), it also
contributed to the advancement of an objectively unreasonable infringement position in this case—
the most compelling reason why this case is exceptional.
Any sanction must not only be proportionate to the harm suffered, but must also be
sufficient to deter future litigants from engaging in similar behavior. Nevertheless, it should be
the “least severe sanction available.” Carroll, 110 F.3d at 294. Here, Mr. Yates’ sanctionable
conduct not only necessitated the Court’s ordering of post-judgment discovery, but it prolonged
such discovery while his twists and turns ran their course.
An appropriate monetary sanction is to order Mr. Yates to pay Dell all reasonable costs
and fees brought about by Mr. Yates’ conduct. Cf. Atlanta Gas Light Company v. Bennett
Regulator Guards, Inc., IPR2015-00826 (P.T.A.B. Dec. 6, 2016), Paper 39, at 8 (sanctioning
Petitioner and awarding Patent Owner costs and fees related to discovery of the real party in
interest after issuance of decision on the merits). Here, the Court tailors its monetary sanction
only as to those additional costs and expenses brought about by the above misconduct. Such costs
include not only the hours and expenses generated in conducting the Court ordered post-judgment
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discovery, but includes many of Dell’s responses to the various filings seeking to stay or delay the
case urged after Dell filed its Section 285 Motion. However, these costs do not include the costs
of briefing Dell’s Section 285 Motion, which the Court has included in its award of fees under
Section 285. This sanction is limited to additional expenses and costs related to the post-judgment
discovery necessitated by Mr. Yates’ misconduct described above.
After adjusting hours and rates appropriately, the Court invokes its inherent power and
Orders Mr. Yates to pay Dell $152,000 as a sanction for his misconduct.
In addition, Mr. Yates is ordered to personally deliver, via certified-mail or overnight
delivery, full and complete copies of this Opinion to each defendant sued by any Yates
enforcement entity, in all cases pending as of the date of this Opinion, and in which such entity (a)
had a corporate parent and (b) failed to disclose such parent pursuant to Rule 7.1, regardless of
whether that disclosure was subsequently corrected.
Such notice should be sent to each
defendant’s counsel and the presiding judge in each of those cases. Mr. Yates shall file a Notice
of Compliance with this Court within 30 days listing each pending case, identifying to whom he
sent this Opinion and attaching proof of compliance therewith.
This is the clearest example of an exceptional case to yet come before the undersigned.
Simply put, if this case is not an exceptional case, then there are none.16
In making these decisions herein, the Court has not considered the argument that Dell has raised that Iris Connex’s
efforts to establish venue in this district amounted to a sham. While Dell may have had a viable argument for transfer
under Section 1404, the Court stayed this case to pursue its mini-Markman before venue was considered. As a
result, any venue-related facts have not been factored into the Court’s determinations herein.
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This challenging set of circumstances confirms the important benefits of the Court’s active
case management. This is especially true when a single trial court manages multiple related cases
as a means of providing the direct oversight that each branch of government is duty bound to
exercise within its own area of responsibility.
For the reasons stated herein and in the Court’s Memorandum Opinion and Order of
September 2, 2016 (Dkt. No. 21), and pursuant to Rule 58 of the Federal Rules of Civil Procedure,
the Court hereby ORDERS and ENTERS JUDGMENT as follows:
Dell does not infringe any of the asserted claims of U.S. Patent 6,177,950;
This case is exceptional under 35 U.S.C. § 285;
Dell, as the prevailing party, shall recover its attorney fees under 35 U.S.C. § 285,
in the amount of $355,000 (“Exceptional Case Fees”). This amount includes
reasonable costs and fees incurred prior to the Court’s Summary Judgment Order
and also the reasonable costs and fees incurred in briefing Dell’s Section 285
Motion (Dkt. Nos. 25, 97, and 130). Iris Connex and Mr. Brian Yates are jointly
and severally liable for payment of Dell’s Exceptional Case Fees;
Dell, as the prevailing party, shall recover its costs in the amount of $624.39 from
Iris Connex. (See Dkt. No. 24.)
The Court sanctions Mr. Brian Yates pursuant to its inherent power. As a
monetary sanction, Mr. Yates shall pay Dell $152,000 accounting for additional
expenses and costs related to the post-judgment discovery necessitated by Mr.
Yates’ misconduct. As a further and non-monetary sanction, Mr. Yates shall
disseminate this Opinion as ordered herein and within 30 days file a Notice of
Compliance with the Court as directed; and
The Court sanctions Mr. Charles Tadlock pursuant to Federal Rule of Civil
Procedure 11(b)(2). As a sanction, Mr. Tadlock shall pay $25,000 to the Clerk of
This is a final judgment.
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SIGNED this 19th day of December, 2011.
So ORDERED and SIGNED this 25th day of January, 2017.
UNITED STATES DISTRICT JUDGE
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