Keeping Your Settlement Secret from the Court?

by Dennis Crouch

I’m going to link-in with Prof. Hricik on this case — it feels wrong to me to “settle” a lawsuit using a secret side-bet about how the court will decide a particular motion and then only reveal the settlement after the motion is decided. However, the court didn’t appear to blink its eye. 

In Diem LLC v. BigCommerce, Inc., the defendant BigCommerce asks the Federal Circuit to reconsider its legal definition of “prevailing party” in order to allow attorney fee shifting:

According to the Supreme Court, the phrase “prevailing party” bears a uniform meaning across fee-shifting statutes. CRST Van Expedited, Inc. v. EEOC, 136 S.Ct. 1642 (2016) (“Congress has included the term ‘prevailing party’ in various fee-shifting statutes, and it has been the Court’s approach to interpret the term in a consistent manner.”).

The Federal Circuit has not respected that mandate. Its “prevailing party” jurisprudence has diverged from most sister circuits in contradiction of Supreme Court law.

[En Banc Petition]. The particular legal issue here is if a patent infringement settlement agreement can create a “prevailing party” that could then result in an attorney fee award.

While this legal question is important, a big issue in the case for me is the cooperation between the parties to get the court to decide an issue after the case had been settled.

In 2018 Diem sued BigCommerce for patent infringement, BigCommerce responded with a motion for summary judgment of non-infringement based upon a joint infringement argument.  The parties “settled” the case prior to the court’s determination of the MSJ.  “Settled” is in quotation-marks because the agreement was not a complete settlement but rather a conditional agreement creating what I call a side-bet.  Under the agreement – If the MSJ is denied and the court finds that a the infringement contentions included a joint infringement claim then BigCommerce gets $30k; otherwise case dismissed with no payment. I put together the following flow-chart for how the settlement agreement works.  Note that the agreement also includes a contractual requirement to for BigCommerce to resubmit its summary judgment motion if the joint infringement contention issue isn’t addressed in court’s first determination.

[Note – my flow chart is slightly simplified from the contract language].

]The following language comes from the settlement agreement:

MSJ Denied: If the MSJ is denied and the Court rules that Joint Infringement [was disclosed in the infringement contentions], then BigCommerce will pay Diem the sum of $30,000.00 (the “Payment”). . . .

Any Other Outcome: If any other outcome occurs, then Diem agrees to the following (collectively, a “BC-Favorable Resolution”): (i) Diem will walkaway and will not appeal or object to any order(s), (ii) the parties will allow the Court to determine the prevailing party and enter a final judgment, and (iii) if the case is not otherwise disposed, the parties will move to dismiss the action with prejudice (with clear language that BigCommerce did not pay Diem to settle this action).

Note here that the settlement agreement was not filed with the district court at that time — rather the parties waited for the court to rule on the summary judgment motion before telling the court that they had settled the case.

When it finally ruled on the motion, the district court granted summary judgment but did not address whether Diem had disclosed joint infringement in its original contentions — explaining that the theory was mooted by amended contentions and the court’s claim construction ruling.  After then being confronted with the settlement agreement, the Court (now a different judge) went ahead and decided the joint infringement disclosure question — holding that joint infringement was not disclosed in the original contention. The result then under the settlement: case-dismissed with no money being paid.

Prevailing Party: The defendant BigCommerce thought that it won — case was dismissed with prejudice in favor of the defendant — and consequently asked for prevailing-party attorney fees under Section 285.  The court quickly shot-down that request — holding that the case had no prevailing party because it was settled.

While the Court granted Defendants’ motion, resulting in BigCommerce not having to pay anything, this precise scenario was contemplated by the parties and accounted for in the Settlement Agreement. Thus, there is no “prevailing party.”

This decision fits to Federal Circuit precedent in Exigent Tech. v. Atrana Solutions, Inc., 442 F.3d 1301, 1312, (Fed. Cir. 2006) (“An award of [attorney fees] was not proper unless Atrana was a prevailing party. Atrana cannot be a prevailing party if the case was resolved by settlement (not incorporated by judicial decree) prior to any relief on the merits.”).  On appeal, the Federal Circuit affirmed the award in a R.36 judgment without opinion.  The major twist here as suggested by the en banc request is that the Supreme Court has – in other contexts – repeatedly held that a prevaling party can be determined based upon a settlement where the question is left for the court to decide. See Maher v. Gagne, 448 U.S. 122 (1980); Perdue v. Kenny A. ex rel. Winn, 559 U.S. 542 (2010)

9 thoughts on “Keeping Your Settlement Secret from the Court?

  1. 6

    What does it mean when someone argues that there is “non-infringement based upon joint infringement?” What is BigCommerce’s argument for its non-infringement? Thanks.

  2. 5

    I admit I’m speculating here, but this seems like it was primarily a walkaway deal, but BigCommerce said: “Hey, I had to spend $30K on this MSJ. You should compensate me for that Diem.” And Diem said: “Well you are infringing, and we are letting you off cheap.” So, the parties thought it would be nice to let the court decide the MSJ, thereby determining who takes the $30K hit.

    My first thought is this was an error in drafting the settlement agreement. If the parties decided to take this approach, rightly or wrongly, they should have included a provision in the settlement agreement that said something like: “Except for the $30K at issue, each party shall bear its own costs and attorney’s fees.”

    At first blush this “side bet” may not seem improper since, after all, courts are in the business of resolving disputes, and the parties had a real dispute on the issue of infringement. But what if the court had to expend $100K worth of resources, for example, to decide the parties’ $30K dispute. (This is not unrealistic, considering the Courts are now having to deal with the attorney fees motion.) In that circumstance, concealing the facts from the court does not sit well with me.

    Here in Texas, the Texas Lawyers Creed requires lawyers to “be considerate of the time constraints and pressures imposed upon the Court, Court staff and counsel in efforts to administer justice and resolve disputes.”

    1. 5.1

      “Except for the $30K at issue, each party shall bear its own costs and attorney’s fees.”

      My first thought as well CW5.

      Leading to the question:

      Could one — or both — of the two parties purposely left such a clause out of their agreement?

      And if so, why?

      1. 5.1.1

        Great question!

        If the court denied the MSJ, plaintiff would not be a prevailing party, as it would still need to win at trial. If the court granted the MSJ, as it apparently did, then defendant would have a good argument it was the prevailing party.

        Seems like the defendant’s lawyers may have been a few steps ahead of the plaintiff’s lawyers when they negotiated the settlement. If the attorney fees motion was all part of the defendant’s “cunning plan,” one really must question the propriety of the “side bet.”

  3. 4

    Meh seems aight. If the one party doesn’t want to deal with the case but in that one circumstance then that’s fine.

  4. 3

    This does not seem to be the kind of secret settlement agreement that many would find more concerning? Namely, a settlement of a patent suit that effectively conceals a difficult to uncover piece of material prior art, or other defect in the patent found by that defendant, and thus leave the patent owner free to sue other companies unaware of that defect.

    1. 3.1

      Also, the subject en banc petition does not suggest any reason why this is an exceptional case in which attorney fee sanctions should be awarded. A lot more than just being the prevailing party is needed for that.

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