By Jason Rantanen
Eon-Net LP v. Flagstar Bancorp (Fed. Cir. 2011) Download 09-1308
Panel: Lourie (author), Mayer and O'Malley
This decision is an important opinion in the area of litigation sanctions entered against a patentee, and should be read in conjunction with two cases issued earlier this year, iLor v. Google, 631 F.3d 1372 (Fed. Cir. 2011), and Old Reliable v. Cornell, 635 F.3d 539 (Fed. Cir. 2011). Patently-O commentary on those cases can be found here and here.
Eon-Net is a patent holding company formed to enforce the three patents in suit, which it did with vigor. While most of its lawsuits resulted in early settlements or dismissals, Eon-Net's suit against Flagstar took a different turn. The district court initially entered summary judgment of non-infringement on the sua sponte ground "that the written description limited the claims to processing information originating from a hard copy document and Eon-Net's position that the claims covered the processing of information entered on a website was baseless," and awarded Rule 11 sanctions. Slip Op. at 7. However, that decision was vacated by the Federal Circuit because Eon-Net had not been given an opportunity to respond, and thus "it was impossible to determine if Eon-Net's claim construction and infringement positions were without merit." Id. at 8.
On remand, the case was reassigned to a new judge and the parties engaged in the claim construction process, after which the court again limited the disputed elements to information originating from a hard copy document. Eon-Net stipulated to non-infringement. Upon motion by Flagstar, the district court found the case exceptional under 35 U.S.C. 285 and in violation of Rule 11 of the Federal Rules of Civil Procedure. On appeal, the CAFC first affirmed the district court's claim construction before turning to the exceptional case finding.
Many Varieties of Misconduct Can Support an Exceptional Case Finding
Before engaging in analysis of the specific bases for the district court's exceptional case finding, the CAFC first noted that many varieties of misconduct can support an exceptional case finding under 35 U.S.C. § 285: lodging frivolous filings, engaging in vexatious or unjustified litigation, and litigation misconduct and unprofessional behavior. The court reiterated, however, that absent litigation misconduct or misconduct in securing the patent, "sanctions under § 285 may be imposed against the patentee only if both (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless." Slip Op. at 17.
Eon-Net Filed Objectively Baseless Litigation in Bad Faith
Affirming the district court's exceptional case finding, the Federal Circuit agreed that this lawsuit was objectively baseless, filed in bad faith and for an improper purpose. After distinguishing iLor v. Google, in which the CAFC also addressed the issue of whether a claim construction was objectively baseless, the court turned to the question of whether Eon-Net had filed the lawsuit in bad faith and for an improper purpose, concluding that it had:
In particular, the district court found that Eon-Net’s case against Flagstar had “indicia of extortion” because it was part of Eon-Net’s history of filing nearly identical patent infringement complaints against a plethora of diverse defendants, where Eon-Net followed each filing with a demand for a quick settlement at a price far lower than the cost to defend the litigation.
Slip Op. at 22. This strategy of exploiting the high cost to defend complex patent litigation in order to extract nuisance value settlements constituted bad faith. The court pointed to Eon-Net's pattern of filing complaints, then demanding quick settlements at a price far lower than the cost of litigation. Parties must either expend significant resources to defend against the suit – as Flagstar did in this case – or give in to the nuissance settlement demand. FIling such a meritless lawsuit also is also a waste of judicial resources, as it "unnecessarily require[s] the district court to engage in excessive claim construction analysis before it is able to see the lack of merit of the patentee's infringement allegations." Slip Op. at 23.
Of course, patentees should be able to enforce their patent rights or offer licensing terms. Nevertheless, "the appetite for licensing revenue cannot overpower a litigant’s and its counsel’s obligation to file cases reasonably based in law and fact and to litigate those cases in good faith." Slip Op. at 24.
Comment: although the CAFC affirmed the district court's finding that Eon-Net had acted with an improper purpose, it did not suggest that that requirement should be grafted onto the "bad faith" element.
The CAFC also affirmed the district court's finding that Eon-Net and Zimmerman had engaged in litigation misconduct and its imposition of Rule 11 sanctions.