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.

False Marking Revisited - The New Wave of Patent Prospecting Is On

In my December 30, 2009 post, I speculated that “the holding in the Forest Group may still create an incentive for more qui tam actions being brought for false marking. After all, even a fraction of a penny applied to a billion items can still amount to millions of dollars in potential recovery. [The holding in Forest Group] may invigorate a new class of litigation prospectors… .” A short two months later, it is clear that this is indeed the case.

Based on case filings as reported by Justin Gray, on his Gray on Claims blog, ( http://www.grayonclaims.com/false-marking-case-information ), during the period from September 5, 2007 through November 13, 2009, only ten cases were filed alleging false patent marking. In the two month period since December 30, 2009, at least 69 false marking cases have been filed. These cases have been filed by twenty two (22) different plaintiffs. One plaintiff, Mr. Simonian, is the named party in 28 cases, another, Dr. Hollander, is the named plaintiff in seven cases. Most, if not all, of these cases are based on a manufacturer marking product with patents that are now expired.

Clearly, false marking is an area that will continue to be exploited by a new breed of plaintiffs during 2010. As I said just before the new year, given this “new class of litigation prospectors, the time is right to review your patent marking and clean up any marking that may no longer be applicable.”

POINT OF NOVELTY

The world of patent law is in transition. The last few years have seen unprecedented levels of patent litigation spurred on by many substantial verdicts and an increase in the number of non-practicing entities looking to acquire and assert patent rights.

In what would appear to be a response to this trend, the Supreme Court has, among other things, made it easier to invalidate patents and harder to get injunctions when a patent is found to be infringed. As a trial lawyer who represents both patent owners and companies that need to defend themselves against accusations of infringement, this trend cannot be considered either clearly bad or good- but it is a significant legal and economic issue and must be understood.

This blog will follow and evaluate current trends in patent law and policy and try to offer insight as to how these trends impact the ability to obtain and enforce patents.


(Yes, I know that there is no longer a "point of novelty" test in patent law. But the concept, a single differentiating point, seemed to be as a good title for this blog as any.)

The views expressed in this blog are mine alone and should not be attributed to Dorsey & Whitney LLP, its attorneys, or its clients.