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Federal Circuit Affirms Exceptional Case Finding and Rule 11 Sanctions Against a Patent-Holding Company and Its Counsel

July 29, 2011

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Last Month at the Federal Circuit - August 2011

Judges: Lourie (author), Mayer, O’Malley

[Appealed from: W.D. Wash., Judge Martinez]

In Eon-Net LP v. Flagstar Bancorp, No. 09-1308 (Fed. Cir. July 29, 2011), the Federal Circuit affirmed the district court’s exceptional case finding under 35 U.S.C. § 285 and its imposition of Fed. R. Civ. P. 11 sanctions against plaintiff Eon-Net LP (“Eon-Net”) and counsel for Eon-Net, Zimmerman & Levi, L.L.P., including its principal, Jean-Marc Zimmerman.

Eon-Net asserted U.S. Patent Nos. 6,683,697 (“the ’697 patent”), 7,075,673 (“the ’673 patent”), and 7,184,162 (“the ’162 patent”) against Flagstar Bancorp (“Flagstar”). These patents are part of a larger patent family (“the Patent Portfolio”), share a common specification, and relate to systems and methods for inputting information from a “hard copy” document by scanning, storing portions of the inputted document information in memory, and formatting the stored document information for use by a computer program, thus effectuating a paperless office. Eon-Net, a patent-holding company, and Zimmerman have filed over 1000 lawsuits, asserting infringement of the Patent Portfolio, most ending in quick and inexpensive settlements far below the cost of litigation.

Eon-Net sued Flagstar in 2005, alleging that the processing of information entered by customers on Flagstar’s website infringed the ’697 patent. Flagstar sought SJ of noninfringement because it used document-processing technology provided by a licensee of the ’697 patent. Flagstar also moved for Rule 11 sanctions based on Eon-Net’s failure to investigate or identify allegedly infringing products and because Eon-Net asserted baseless infringement claims. The district court granted both motions and assessed attorneys’ fees and costs against Eon-Net and Zimmerman.

Eon-Net and Zimmerman appealed to the Federal Circuit, which in 2007 vacated and remanded both the SJ ruling and the imposition of sanctions “because the district court failed to afford Eon-Net notice and the opportunity to present its infringement and claim construction arguments during the briefing on the motions.” Slip op. at 8. On remand, the district judge who initially handled the case recused herself, and Eon-Net added infringement allegations for the ’673 and ’162 patents as well. After a full claim construction process, the district court construed the disputed claim terms. In particular, the district court concluded that the claim terms “document,” “file,” “extract,” and “template” (collectively “the disputed claim terms”) were limited to information originating from a hard copy document. Eon-Net accordingly stipulated to noninfringement. Flagstar subsequently moved for attorneys’ fees under 35 U.S.C. § 285 and the district court, concluding that this was an exceptional case, granted the motion. Eon-Net, upon invitation from the district court, renewed its motion for Rule 11 sanctions, which the district court granted. The district court awarded attorneys’ fees and costs under Rule 11 and under § 285. Eon-Net and Zimmerman appealed, contesting the district court’s construction of the disputed claim terms, the imposition of Rule 11 sanctions, and the exceptional case finding.

On appeal, Eon-Net argued that the ordinary meanings of the disputed claim terms do not limit them to information derived from a hard copy document. The Federal Circuit disagreed, affirming the district court’s claim constructions in all respects. Noting that “[t]he written description repeatedly and consistently defines the invention as a system that processes information derived from hard copy documents,” id. at 11, and detailing the myriad ways in which the specification supports this reading, the Federal Circuit stated that this issue was not a “close call” and that “the specification unequivocally compels the constructions adopted by the district court,” id. at 15-16. Accordingly, the Federal Circuit affirmed the judgment of noninfringement.

Next, the Federal Circuit reviewed the district court’s finding that this case was “exceptional” under 35 U.S.C. § 285. (Eon-Net did not appeal the district court’s determination of the amount of attorneys’ fees and costs.) The district court based its determination that this case was exceptional on its findings that Eon-Net engaged in litigation misconduct and filed a baseless infringement action “in bad faith for an improper purpose.” Id. at 17-18. The Federal Circuit detailed Eon-Net’s numerous instances of litigation misconduct, including destruction of relevant documents, intentional failure to implement a document retention plan, “lack of regard for the judicial system,” and improper litigation tactics, such as failing to offer a construction for any disputed claim terms, lodging incomplete and misleading extrinsic evidence with the court, and submitting declarations that contradicted earlier deposition testimony by the declarants. The Federal Circuit concluded that Eon-Net failed to show that the district court’s findings as to litigation misconduct were clearly erroneous. Further, the Federal Circuit concluded that the district court did not clearly err in finding that Eon-Net pursued baseless infringement allegations, noting again that “the written description as a whole repeatedly and expressly defines [the information] as information originating from a hard copy document.” Id. at 21-22. The Federal Circuit also upheld the district court’s finding that Eon-Net filed the lawsuit in bad faith and for an improper purpose, recounting nonpracticing entity Eon-Net’s extensive history of filing “[m]eritless cases like this one,” id. at 23, and “exploiting the high cost to defend complex litigation to extract a nuisance value settlement,” id. at 22. Though “it is not improper for a patentee to vigorously enforce its patent rights or offer standard licensing terms,” the Federal Circuit opined that “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.” Id. at 24. As such, the Federal Circuit affirmed the district court’s exceptional case finding.

Regarding the district court’s imposition of Rule 11 sanctions, the Federal Circuit noted that “all aspects of a district court’s imposition of Rule 11 sanctions [are reviewed] under an abuse of discretion standard.” Id. at 25. Applying Ninth Circuit law, the Federal Circuit observed that in order to impose sanctions, the district court must determine that the complaint is legally or factually baseless from an objective perspective and that the attorney failed to conduct a reasonable and competent inquiry before filing the complaint. The Federal Circuit concluded that for the reasons explained above, the district court did not clearly err in concluding that Eon-Net’s infringement was objectively baseless, and for the same reasons, the district court did not abuse its discretion in finding that Eon-Net’s infringement contentions were legally baseless. The Federal Circuit opined that “[a] reasonable pre-suit investigation” requires more than comparing the potential defendant’s website and publicly available source code to each claim limitation and generating a claim chart, as Zimmerman did here. Id. at 26. Rather, “counsel [must] perform an objective evaluation of the claim terms when reading those terms on the accused device.” Id. For the reasons described above, the Federal Circuit concluded that “Eon-Net has failed to meet its high burden to show that the district court abused its discretion in imposing Rule 11 sanctions.” Id. at 26-27.

Summary authored by Elizabeth A. Laughton, Esq.