The Harris County Texas appellate court recently affirmed summary judgment favoring the Hunton Andrews Kurth law firm and its attorneys. Taylor v. Hunton Andrews Kurth, LLP, 14-22-00410-CV (Tex. App.–Hous. [14th Dist.] July 13, 2023). Taylor and his companies WPEM and W2W had sued the firm for legal malpractice after first losing its infringement lawsuit and being stuck with the defendants attorney fees. The case offers a few key takeaways for entrepreneurs delving into the patent system.
Background: William Taylor and his business partner developed a software application called SafeCell and assigned the patent rights to their startup company W2W. They hired Hunton AK to handle the patent application process. Hunton filed provisional and non-provisional patent applications on behalf of W2W. Several years later, after a patent was granted (and their legal bill still unpaid), Taylor and his partner transferred patent rights back to themselves as individuals and terminated W2W. They then formed a new company called WPEM and assigned the patent to WPEM so it could sue another company for infringement. That lawsuit failed with a complete reversal — WPEM was ordered to pay $180,000 in attorneys’ fees to the defendant.
Taylor, his partner, WPEM, and W2W then sued Hunton for legal malpractice, alleging negligence in the handling of the original patent application. The trial court dismissed all claims except Taylor’s individual claims against one Hunton attorney, which were later severed and dismissed in a separate order. The appellate court affirmed, holding (1) Taylor was not the firm’s client, and neither was WPEM; (2) although W2W as a client its had been terminated in 2017 — more than 3 years before hand. That was a problem because Texas has a 3-year limitation on actions following dissolution of a corporation.
Key Takeaways for Inventors and Startups
1. Be careful when assigning IP rights from individuals to businesses, and back again.
The engagement letter was between W2W and Hunton, not with Taylor or his partner as individuals. And, Hunton had the individuals sign a particular statement that they were not the clients. The court found this disclaimer made clear Hunton only represented W2W. The transfer of the patent from W2W to the individuals did not transfer W2W’s attorney-client relationship.
Key quote: “The assignment of a patent does not transfer an attorney-client relationship.” (quoting Telectronics Proprietary, Ltd. v. Medtronic, Inc., 836 F.2d 1332 (Fed. Cir. 1988)).
2. Understand the effects of terminating a business entity.
W2W lacked standing to sue because it had been terminated as an entity outside the 3-year winding up period permitted under Texas law. Its claims were extinguished.
Key quote: “Once dissolved, the corporation could neither sue nor be sued, and all legal proceedings in which it was a party abated.” (quoting Hunter v. FW, 620 S.W.2d 547 (Tex. 1981)).
3. Individual shareholders generally can’t sue for harms to the company.
The court applied the corporate injury rule, which bars owners from recovering personally for injuries to the company. Taylor owned no individual losses because he did not own the patent rights at any relevant time.
Key quote: “Under the corporate injury rule, an owner of a company cannot sue to recover damages personally for a wrong done to the company. ”
The outcome here is a classic corporate defense strategy — the defense used the complex corporate structure and ownership changes to ultimately defeated of the claims. For inventors and startups seeking to protect IP, it makes sense to also consult with a corporate attorney along the way to ensure consistent protection.
I’ll note here that although Hunton Andrews Kurth won on technicalities, they also denied the substance of the claims.
In the parlance of the times: some grifty would-be tech bros sought to patent their gar bage & found a firm to write it up. Although technically the firm shouldn’t file gar bage applications, in the real world they got it to grant & every competing firm would have filed the gar bage. No malpractice there, in the real sense of the word….
But where is our mystery actor?
The one who litigated our grifty patent for our grifty patentee & did so well that they got our grifty “inventors” stuck with all the costs?
And which partner took the phone call from these geniuses? Got to regret that one!
It appears that the patent was assigned by the first LLC to the second LLC for the purpose of insulating the patent from a prospective lien that the firm may have filed against it for the first LLC’s unpaid legal bills. If the assignment prevents the firm from collecting its unpaid fees from the second LLC, then it only stands to reason that the second LLC seek recovery from the firm for its losses on account of the firm’s prior representation of the first LLC.
Sounds like the client from hell. Doesn’t pay its bills, and then has the chutzpa to accuse the firm that wrote the applications of malpractice. Pity that the judge didn’t make these jerks pay Hunton for the cost of defense of the frivolous malpractice suit.
+1
They should be suing their litigation counsel instead for not doing sufficient pre-lawsuit due diligence to discover whatever issue lead to the defendant’s attorney fee award.
Turns out that the “infringing” product was prior art to the patent.
DC: “I’ll note here that although Hunton Andrews Kurth won on technicalities, they also denied the substance of the claims”
This passage threw me for a few moments until I realized that the “claims” being referred to are not patent claims but rather the plaintiff’s “claims” that the law firm had committed malpractice.
^^^ yes, of course, Malcolm’s first instinct is that the patent claims MUST be bad (but he is not anti-patent as he himself will tell [gaslight] you so).
Get some help. Sheesh.
Excellent article on some of the “behind the scenes” aspects of serving clients.
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