Federal Circuit Cracks Down on Non-Practicing Entities
By Swati S. Desai, Litigation News Associate Editor – November 15, 2011

Non-practicing entities (NPEs) have a reputation with the defense bar for pursuing patent infringement litigation in part for the high nuisance-value settlements this expensive-to-defend form of litigation can yield. The Federal Circuit recently issued an opinion that may give some hope [PDF] to the targets of NPEs, and which may cause less precise NPE’s to think twice about having their ducks in a row before serving their next patent infringement lawsuit.

“Non-practicing entities in their strictest sense are parties that seek to enforce a patent where they do not themselves practice the patented technology,” explains ABA member Paul J. Lerner, Stamford, CT, whose practice the past dozen years has focused on enforcing patent holders’ rights. “You sometimes hear the word ‘troll’—it is used pejoratively—to mean companies that acquire patents simply to sue others for relatively small amounts of money in nuisance claims,” he adds.

A Picture Is Worth 1,000 Words
An NPE named Eon-Net filed suit against Flagstar Bancorp (Flagstar) in 2005 for violation of three of its patents. These patents detail the process for inputting information from a hard copy document or file into a computer and converting it to a format usable in software applications such as Quicken. The point of contention in the lawsuit was whether the patents covered conversion from hard copy material only (as Flagstar argued), or if it expanded to include conversion from both hard copy and computer-inputted material (as Eon-Net argued).  

The U.S. District Court for the Western District of Washington found the patents themselves to be dispositive, as they included the words “hard copy document” and pictures of scanners as inputs. In a claim construction ruling [PDF], the court accepted Flagstar’s definition of document, which limited the scope to “a nontextual electronic representation of a hard copy document (e.g., a scanned hard copy document stored on a hard drive).” The parties subsequently stipulated to a judgment of non-infringement and the appeal to the Federal Circuit followed.

The Federal Circuit agreed, upholding both the final judgment as well as the Rule 11 and 35 U.S.C. § 285 (exceptional case) sanctions against Eon-Net and its attorney, Jean-Marc Zimmerman, stating:

[t]he 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.

The record supports the district court’s finding that Eon-Net acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar.

As a result the trial court’s award [PDF] of $141,984.70 in Rule 11 sanctions and $489,150.48 for attorneys’ fees and costs incurred by Flagstar stands. The appeals court denied Eon-Net and Zimmerman’s requests for rehearing, and the mandate [PDF] came back on October 4, 2011.

Court Examines Eon‑Net’s Business Model
The district court noted that Eon-Net and its related NPEs had filed and resolved (by settlement or dismissal) more than 80 infringement cases at the time the district court made its exceptional case filing. It noted that Eon-Net’s approach was to follow each lawsuit with a demand to settle for a figure of $25,000, $50,000, or $75,000 based on the defendant’s annual sales. According to the district court, the Flagstar case, “is the only one that has been litigated as far as a ‘Markman’ hearing.”  

The claim construction process, also known as a Markman hearing, is when the court makes its final determination on the construction of a patent, including terms of art therein. The Jury must rely upon court’s interpretation if the case goes to trial. The party that prevails at a Markman hearing typically has the upper hand in subsequent settlement discussion and at trial.  

The appeals court noted Flagstar spent more than $600,000 to prevail at the claim construction phase of the case. It noted this figure would have been substantially higher had the district court not stayed discovery unrelated to the claim construction. It also noted that Eon‑Net’s approach “require[d] the district court to engage in excessive claim construction analysis before it [was] able to see the lack of merit of the patentee’s infringement allegations.”

Litigators React
“Different courts are beginning to take action to prevent or eliminate the business model of suing a large number of defendants and seeking relatively small amounts of money from each,” notes Lerner. “What they are doing is expedited claim construction of a few selected terms, to bring the case to a position where the defendant can move for summary judgment.”  

 “This is a situation where you have entities that are acquiring patents for the sole purpose of pursuing litigation,” observes Robert E. Schaberg, San Francisco, member of the Section of Litigation’s Intellectual Property Litigation Committee. “It is fairly transparent behavior. The courts recognize that, struggle with it, and are troubled by it.”

“In many ways,” concurs Gregory P. Joseph, New York, member of the Section’s Federal Practice Task Force, “courts are attempting to limit what they perceive to be frivolous lawsuits. If the court perceived the plaintiff to be a recidivist violator, that is something the courts are always allowed to take into account with regard to sanctions.”

The court juxtaposed the fact that the plaintiff was a NPE “together with the facts that there were documents destroyed, incomplete and missing evidence, and submitted evidence that contradicted written testimony,” suggests Edward M. Waller Jr., Tampa, member of the Federal Practice Task Force. The court sanctioned Zimmerman because it felt that, “an attorney, in addition to his obligation to his client, also has an obligation to the court and should not blindly follow the client’s interests if not supported by law and facts.”  

 “The attorney has an obligation to the court to ensure that the pre-filing investigation is done,” affirms Joseph M. Drayton, New York, cochair of the Section’s Intellectual Property Committee, “and also to conduct and pursue the prosecution of litigation in a manner that is respectful to the court. If we do not do that, we can incur sanctions from the court.

Keywords: Litigation, intellectual property, patent trolls, Federal Circuit, Eon-Net, Flagstar

 
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