Tuesday, August 9, 2011

Federal Circuit Affirms Sanctions and Attorney Fees Against NPE

As a young lawyer preparing for one of my first hearings, I asked my mentor for some last minute advice.  He said “follow two simple rules and you will be fine.  Rule # 1 - don’t piss off the judge.”  Well, that was simple enough, so I asked “OK, so what’s Rule # 2?”  He peered over his bifocals and said with a laugh, “Rule # 2 - make sure that you never forget Rule # 1!”  Apparently, Jean-Marc Zimmerman and his client Eon-Net didn’t receive this sage advice.  Last week, in Eon-Net et al v. Flagstar Bancorp 2009-1308, the Federal Circuit affirmed the district court’s award of $489,150.48 in attorney fees and costs under 35 U.S.C. § 285 as well as $141,984.70 in sanctions under Fed. R. Civ. P. 11.

The case, which is one of about a hundred filed by Eon-Net, has a long procedural history, including a previous trip up to the Federal Circuit following an initial sanctions award.  Following remand from the Federal Circuit, the district court engaged in claim construction proceedings, and found that the written description limited certain claim terms as needing to originate from “hard copy documents” (as opposed to electronic files or information entered via a user interface).  The parties stipulated to non-infringement under this construction and Flagstar moved for a finding that the case was exceptional under §285.  The district court granted this motion “on what it found were Eon-Net’s pursuit of baseless infringement claims, Eon-Net’s improper purpose of bringing the lawsuit against Flagstar to obtain a nuisance value settlement, Eon-Net’s destruction of evidence, and Eon-Net’s offensive litigation tactics.”  Opinion 8-9.  The court also invited Flagstar to renew its previous motion for sanctions (which, of course, it did).  The court then granted the motion for sanctions under Rule 11 “concluding that Eon-Net and its counsel failed to perform a reasonable pre-filing investigation and that their claim construction positions were unsupportable.”

One point that is noteworthy is that the claim language does not expressly limit the claim to “hard copy documents.”  Instead, this construction comes from the specification’s repeated reference to “hard copy documents” and characterizing the invention as relating to “hard copy documents.”  The Federal Circuit noted that “[i]n total, the term “hard copy document” appears over 100 times in the common disclosure of [the asserted patents.]”  Although Eon-Net tried to argue that this was merely a preferred embodiment, the Federal Circuit disagreed and found that “[t]his is not a case where a district court improperly imported a limitation from the specification or where the question of what the specification teaches about the claims presents a close call; here, the specification unequivocally compels the constructions adopted by the district court.”  Opinion at 15-16.

Exceptional Case Finding

In finding a case to be exceptional, “[l]itigation misconduct and unprofessional behavior may suffice, by themselves, to make a case exceptional under §285.”  Opinion at 17.  (citations omitted).  This first test goes directly to my mentor’s Rule # 1.  “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.”  Opinion at 17.  This second test is far harder standard to satisfy.

So, how did Eon-Net break Rule # 1?  First, by destroying potentially relevant evidence. Eon-Net’s principal, Mitchell Medina, testified that “with regard to document retention, collection, and production that ‘I don’t save anything so I don’t have to look’ and further testified that his companies “‘have adopted a document retention policy which is that we don’t retain any documents’ because those companies ‘have evolved into patent enforcement companies which are  involved in the business of litigation.”  Second, by failing to meaningfully engage in the court’s claim construction process by failing to offer a construction for any of the disputed claim terms and than submitting misleading extrinsic evidence to the court.  Third, by offering ridiculous discovery responses, such as “the skill in the art required is that sufficient to converse meaningfully with Mitchell Medina.”  Although Eon-Net argued that these were merely “flippant, facetious remarks not intended to offend,” offend they clearly did!

Objectively Baseless Litigation and Bad Faith

The district court found that Eon-Net’s allegations were objectively baseless based on the claim construction that limits the claims to “hard copy documents.”  The Federal Circuit agreed, finding that “because the written description clearly refutes Eon-Net’s claim construction, the district court did not clearly err in finding the Eon-Net pursued objectively baseless infringement claims.”  Opinion at 21.

In addressing Eon-Net’s bad faith in pursuing the litigation, the district court held that the case has “’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 quick settlement at a price far lower than the cost to defend the litigation.”  Opinion at 22.  Specifically, Eon-Net had filed over 100 complaints and offered immediate settlement in the range of $25K to $75K depending on a defendant’s sales. “[T]hose low settlement offers-less than ten percent of the cost that Flagstar expended to defend suit – effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements.”  Opinion at 23. 

Rule 11 Sanctions

In imposing sanctions against Eon-Net and Zimmerman, the district court found that the pre-filing investigation was insufficient.  Significantly, it is not disputed that “Eon-Net’s counsel did examine portions of Flagstar’s website and, based on his experience, concluded that it worked in a manner that infringed the ‘697 patent.”  Opinion at 26.  The Federal Circuit found this was not enough.  “A reasonable pre-suit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device.”  Opinion at 26.  The district court found that Eon-Net’s claim construction positions “borders on the illogical” and in affirming the sanctions award, the Federal Circuit did not find this position to be clearly erroneous.  Opinion at 26.

Observations & Take Aways

What does all this have to do with my mentor and Rule # 1?  Given the facts of this case, and the applicable standard of review, if the district court had DENIED Flagstar’s motion for attorney fees and sanctions, it is very unlikely that the Federal Circuit would have disturbed that finding.  Clearly, the plaintiff behaved in a way that offended the court on several fronts, starting with the basic business model and extending to the disrespectful attitude exhibited to the court by Mr. Medina.  One or the other might have been tolerated – together these factors were fatal.  At the end of the day, had Mr. Medina and Eon-Net’s counsel pursued this litigation strategy in a manner that didn’t offend the court, it is likely that he wouldn’t now be forking over $600K in sanctions.  To paraphrase Rodney Dangerfield in “Back to School,” always follow Rule # 1, or you may wind up stepping in # 2.

FINAL NOTE- With over a hundred cases filed and most settling in the $25-75K range, one can make an educated guess that gross revenue to Eon-Net has been somewhere in the $3-5 Mil range.  It makes one wonder if the $600K in sanctions, while clearly significant,  is really an effective deterrent.

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