How to slay ‘trolls’: a 7th Circuit copyright story

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  • Design Basics ruling
  • Appeals court ruling
  • Second 7th Circuit ruling

(Reuters) - I bring you today the tale of a troll – at least in the depiction of the 7th U.S. Circuit Court of Appeals – and the would-be troll-slayers who risked hundreds of thousands of dollars in legal fees in a quest to vanquish their foe.

Troll-hunting, it turns out, is not cheap or easy, even with the prospect of a reward -- in the form of attorneys' fees -- at the end. But as today’s story shows, the quest can be worth the risk.

Our story begins with a company called Design Basics, which once upon a time made money from licensing simple copyrighted designs to home builders. Business was good: Design Basics sold licenses to more than 160,000 customers across the country, generating abut $4 million a year in revenue in the late 1990s and early 2000s, according to a 2019 ruling from a federal judge in Fort Wayne, Indiana.

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Then came the 2008 housing crisis. The home design licensing business wasn’t so great anymore. Design Basics' revenue was down to $1 million in 2009, the year that the company's owner sold out to two entrepreneurs. The new owners had an idea for an alternative way to generate revenue: They would vigorously protect the company’s copyrighted designs, which were widely circulating on the internet.

Employees and outside contractors acted as “copyright detectives,” scouring homebuilders’ websites to find floorplans that resembled Design Basics’ copyrighted plans. When they found potential infringement, they were entitled to a bounty – a percentage of the company’s recovery. Design Basics even conducted “controlled buys” at various lumberyards, according to the 2019 ruling, to root out draftsmen who were allegedly copying its plans.

The new business model was a success, at least for the company’s new owners. Design Basics filed about 150 copyright infringement suits between 2009 and 2019. Settlements in those cases netted the company’s owners about $5 million in just 2016 and 2017, according to the 2019 decision. (That money was apparently separate from Design Basics’ corporate gross revenue, which was just $2.5 million in those two years.)

Not every defendant, however, was willing to pay up after receiving a cease-and-desist letter from Design Basics or even after being sued. In 2016, Lexington Homes won summary judgment against Design Basics in federal court in Green Bay, Wisconsin. Design Basics appealed to the 7th Circuit. The appeals court not only affirmed summary judgment for Lexington – finding, among other things, that Design Basics couldn’t even show that Lexington ever saw the designs it allegedly infringed – but also lumped Design Basics in with “so-called intellectual property ‘trolls’” that file “strategic infringement claims of dubious merit in the hope of arranging prompt settlements with defendants who would prefer to pay modest or nuisance settlements rather than be tied up in expensive litigation.”

The 7th Circuit captioned its description of the strategy as “the art of the intellectual property shakedown.”

As you can imagine, the Lexington ruling reverberated in other Design Basics cases. Last April, the 7th Circuit issued a second ruling against the company, affirming summary judgment for Signature Construction in a case in federal court in Peoria, Illinois. And on Wednesday, Design Basics lost again at the 7th Circuit, this time in an Indianapolis case.

Wednesday’s ruling didn’t simply affirm summary judgment and underscore the appellate court’s “derisive moniker” for Design Basics. The 7th Circuit also upheld the trial court’s award of fees against Design Basics. Because the defendants in the Kerstiens’ case “successfully fought off a dubious lawsuit,” the 7th Circuit said they were entitled to recover their legal fees: nearly $520,000.

Design Basics was also socked with fees for defense counsel in the Lexington and Signature cases: about $195,000 in Signature and about $245,000 in Lexington. All told, that’s more than $900,000 in fee awards against the so-called troll.

Will that put a damper on Design Basics’ litigiousness? I emailed six Design Basics lawyers, including those who represented the company at the 7th Circuit in the Lexington, Signature and Kerstiens cases, but did not receive a response. The company and its counsel also did not respond Wednesday to a query from my colleague Blake Brittain.

In his August 2020 fee ruling in the Signature case, U.S. District Judge Colin Bruce of Peoria said Design Basics still seemed to be filing copyright infringement suits after the 7th Circuit’s Lexington decision, although not at the same pace as its filings in 2015 and 2016. My Pacer search showed the company has filed at least 24 suits since 2018.

Paul Overhauser of the Overhauser Law Offices, who won the Kerstiens case at the 7th Circuit, told me he nevertheless believes the fee awards against Design Basics have slowed its filings. Trolls, he said, succeed when defendants decide it’s cheaper to pay a settlement than to litigate. To stop them, he said, someone has to take the risk of litigating the case.

“All it takes is one defendant with a sense of righteousness,” said Overhauser, who said he has represented several other homebuilders hit with Design Basics’ infringement suits.

There was an interesting twist in Design Basics’ litigation campaign, he said. Most homebuilders are heavily insured, including for representations on their websites, Overhauser said. A handful of insurers write most of the commercial policies for Indiana homebuilders, he said. So when Design Basics started suing homebuilders en masse, those insurers realized they could be on the hook in multiple cases. That changes the calculation on whether it makes economic sense to litigate – and bear the risk that you might not recover legal fees – or to settle, Overhauser said.

The insurance company Acuity, for instance, defended against Design Basics' claims in the Lexington case. An insurer was also involved in the Kerstiens case, Overhauser said.

“They were quite profitable for a long time,” Overhauser said of Design Basics’ lawsuits. “Some would say that in they end, (the company’s owners) just got too greedy.”

(By Alison Frankel)

Read more:

7th Circuit shows 'copyright troll' the door in floor-plan infringement case

7th Circuit squashes floor-plan copyright owner for third time

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.