Baseless Infringement Allegations (by an NPE) Warrants “Exceptional” Case

Affirming the district court’s finding that plaintiff, Eon-Net’s, infringement claims were objectively baseless and made in bad faith, the U.S. Court of Appeals for the Federal Circuit upheld sanctions totaling over $600,000 against Eon-Net and its attorneys.  Eon-Net LP v. Flagstar Bancorp, Case No. 09-1308 (Fed. Cir., July 29, 2011) (Lourie, J.).

Eon-Net asserted that Flagstar Bancorp infringed three patents covering document processing systems that disclose a system and method for imputing information from a hard copy document, storing portions of the inputted information in memory and formatting the stored document information for use by a computer program.  In pursuing its infringement claims against Flagstar, Eon-Net argued that Flagstar’s processing of information entered on Flagstar’s website infringed the asserted patents.

Flagstar filed a motion for summary judgment and a motion for sanctions—arguing that its website does not infringe, that Eon-Net’s claims were baseless and that Eon-Net failed to investigate or identify allegedly infringing products.  The district court granted both motions and held that the written description limited the asserted claims to processing information in hard copy documents.  The district court also awarded Flagstar attorneys’ fees and costs.  After Eon-Net appealed this ruling, the Federal Circuit vacated and remanded the judgment “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.”  The Federal Circuit held that “[w]ithout a full claim construction analysis, including a consideration of Eon-Net’s claim construction arguments … it was impossible to determine if Eon-Net’s claim construction and infringement positions were without merit.”

On remand, the district court permitted briefing and held a claim construction hearing.  The district court then concluded that the key disputed terms were limited to information originating from a hard copy document.  After the district court issued its claim construction, the parties entered into a stipulated order of non-infringement of the asserted patents.  Afterward, the district court, finding the case “exceptional” under § 285 and finding that Eon-Net and its attorneys violated F.R. Civ. P. 11, awarded Flagstar sanctions and attorneys’ fees and costs totaling over $600,000.  Eon-Net and its attorneys appealed.

On appeal, the Federal Circuit affirmed the district court’s claim construction limiting the scope of the asserted patents to information originating from hard copy documents.  The Federal Circuit also affirmed the § 285 and Rule 11 sanctions, finding that the district court did not commit clear error in its exceptional case finding and did not abuse its discretion by imposing Rule 11 sanctions.  The Court stated that “many varieties of misconduct can support a district court’s exceptional case finding, including lodging frivolous filings and engaging in vexatious or unjustified litigation.”  The Court went on to find that the district court did not err in finding that Eon-Net brought the litigation in bad faith and that the litigation was objectively baseless—two requirements for sanctions under § 285 if there is no litigation misconduct or misconduct in securing the asserted patent.  In so finding, the Federal Circuit agreed with the district court that Eon-Net’s litigation tactics, its failure to engage in good faith in the claim construction process and the owner of Eon-Net’s “lack of regard for the judicial system” all supported the district court’s imposition of sanctions.  In addition, the Federal Circuit, citing iLOR v. Google, found that because the “written description clearly refutes Eon-Net’s claim construction, the district court did not clearly err in finding that Eon-Net pursued objectively baseless infringement claims.”  Finally, the Federal Circuit agreed with the district court’s finding that 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” bore the “indicia of extortion.”   The Federal Circuit also agreed that Eon-Net acted in bad faith by “exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar.”