A Blow to Patent Trolls

August 2011

On July 29, 2011, the U.S. Court of Appeals for the Federal Circuit (the court that hears all patent appeals) issued a decision that struck a decisive blow to patent trolls. The term "patent troll" generally refers to a company that owns one or more patents but does not practice (make, sell, etc.) the inventions described in the patents. Although there is no requirement under U.S. law that a patent holder practice its invention, the term "patent troll" has taken on a derogatory connotation due to the generally litigious nature of patent trolls that acquire patent portfolios for the sole purpose of suing potential infringers.

The problem--perceived by many and experienced by some of our clients--is that patent troll plaintiffs often cut an extremely broad swath in terms of whom they name as defendants. In practice, there may be very little attempt on the part of the plaintiff to determine which of the defendants actually infringed the patents at issue. (In our experience, even non-infringement opinions may be summarily dismissed by plaintiff's counsel.) Instead, these cases are approached as investment vehicles with settlement thresholds arbitrarily imposed on certain classes of defendants. For a smaller Montana company, defending these cases can be particularly challenging financially.

In Eon-Net LP v. Flagstar Bancorp, 2011 U.S. App. LEXIS 15650 (Fed. Cir., July 29, 2011), the plaintiff, Eon-Net, had filed over 100 patent infringement lawsuits, almost all of which were resolved through early settlement or dismissal. In one of these cases, however, one of the defendants, Flagstar, moved for summary judgment of non-infringement on the grounds that it had obtained the technology from a licensee of the defendant; in other words, it was using technology pursuant to a license granted by the plaintiff. Flagstar also moved for Rule 11 sanctions, which apply when there is no reasonable basis in fact or law for a position taken by a party in litigation. The basis for Flagstar's Rule 11 motion was that Eon-Net had failed to investigate or identify allegedly infringing products and had asserted baseless claims against Flagstar.

The trial court held that the patents, all of which related to an "Information Processing Methodology," applied to hard copy documents only. Because Flagstar's process did not involve hard copy documents, Eon-Net stipulated to non-infringement after the trial court construed the patents in suit to apply to hard copy documents only. Flagstar then moved for attorneys' fees pursuant to Section 285 of the Patent Act, which allows a prevailing party to recover attorneys' fees in an "exceptional case." Courts are left to determine what constitutes an "exceptional case," but the trial court found that this was an exceptional case justifying an award of attorneys' fees to Flagstar because of Eon-Net's "improper purpose of bringing the lawsuit against Flagstar to obtain a nuisance value settlement" and Eon-Net's "offensive litigation tactics." Flagstar recovered over $500,000 in attorneys' fees and costs under both Section 285 of the Patent Act and Rule 11 of the Federal Rules of Civil Procedure.

On appeal, the Federal Circuit agreed with the trial court's construction of the patent claims as applying to hard copy documents only. As for Section 285, the court upheld the lower court's finding that Eon-Net had destroyed relevant documents and failed to implement a document retention plan. More significantly, however, the court disapproved of Eon-Net's litigation tactics, including its failure to engage in the claim construction process in good faith (Eon-Net argued that no claims required construction). The court described Eon-Net's attitude toward the litigation as "cavalier" and said that Eon-Net exhibited a "lack of regard for the judicial system" (including a statement on the record from one of Eon-Net's principals that he regarded his deposition as an "inconvenience and a bother").

Regarding the merits of Eon-Net's patent infringement claims, the court held that Eon-Net "acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar." The court noted that in each of the 100 cases filed by Eon-Net, the filing of the complaint was followed by a demand for quick settlement. Furthermore, Eon-Net offered to settle using a license fee schedule based on the defendant's annual sales, which is typical in patent troll cases. According to the court, "meritless cases like this one unnecessarily require the district court to engage in excessive claim construction analysis before it is able to see the lack of merit of the [plaintiff's] infringement allegations." The court concluded that Eon-Net's low settlement offers "effectively ensured that Eon-Net's baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements."

The court went on to say that in addition to imposing high costs to defend against meritless claims, Eon-Net placed little at risk when filing suit. Because Eon-Net was not practicing the invention (technology) at issue, it risked losing nothing from a business perspective if the patent were held invalid. In sum, the court acknowledged that a patent owner has the right to vigorously enforce its patents: "But 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."

I applaud the Federal Circuit for its holding in this case because I have seen its real-world impact on Montana companies that can scarcely withstand the costs associated with baseless patent troll lawsuits. Fortunately, the Eon-Net case will provide those embroiled in such cases with additional ammunition for their defense. Would-be patent trolls are on notice that they must do their homework, and they must be reasonably willing to discuss the merits of a case with a defendant, or else they will face the consequences of wasting judicial resources and extorting revenues from innocent companies.

This kind of conduct is anti-competitive and not consistent with the letter or the spirit of our patent laws, which are intended to foster innovation, encourage the taking of business risks, and allow society to move forward through the constant improvement of technology. Instead, true patent troll litigation (as described in Eco-Net) has a chilling and sometimes fatal effect on business.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.