Opinion ID: 222137
Heading Depth: 3
Heading Rank: 2

Heading: Filing Objectively Baseless Litigation in Bad Faith

Text: Eon-Net also challenges the district court's finding that Eon-Net pursued baseless infringement allegations in bad faith and for an improper purpose. In support, Eon-Net points to dictum in our opinion in its prior appeal, where we stated that the written description supports Eon-Net's infringement allegations in this case because it provides that the hardware for inputting data can include `a keyboard, a light pen, a mouse, a touch screen, a laser scanner, a microphone, a tablet, a disk drive, a magnetic tape drive, and a modem.' Eon-Net I, 249 Fed.Appx. at 196. We disagree. As explained above, the written description repeatedly defines the invention as a system for processing information that originates from hard copy documents, and, under this construction, it is undisputed that Flagstar does not infringe any asserted claim of the '697, '673, and '162 patents. Thus, 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. Cf. iLOR v. Google, Inc., 631 F.3d 1372, 1378-79 (Fed.Cir.2011) (reversing finding that the patentee's claim construction position was objectively baseless where [o]n its face, the claim language does not preclude the patentee's construction, the written description failed to clearly refute the patentee's construction, and the patentee could reasonably argue that the prosecution history did not preclude its construction). The dictum from Eon-Net I upon which Eon-Net relies does not alter this result. In Eon-Net I, we noted that one portion of the written description supported Eon-Net's construction because it discloses that the hardware for inputting document information can include devices other than a scanner, such as a light pen or other device. 249 Fed.Appx. at 196. However, as explained above, the cited passage does not speak to the character of the information processed, which the written description as a whole repeatedly and expressly defines as information originating from a hard copy document. See Netcraft Corp. v. eBay, Inc., 549 F.3d 1394, 1398 (Fed.Cir. 2008) (explaining that disputed claim language must be read in the context of the entire specification and prosecution history). Indeed, the Eon-Net I opinion expressly leaves open the possibility that, after a full claim construction analysis, the district court could conclude that Eon-Net's claim construction position was baseless, 249 Fed.Appx. at 196, which is what happened in this case on remand. In addition to finding that Eon-Net filed an objectively baseless infringement action, the district court also determined that Eon-Net filed the lawsuit in bad faith and for an improper purpose. Exceptional Case Order, at 16-17. In particular, the 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. Id. 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. At the time that the district court made its exceptional case finding, Eon-Net and its related entities, Millennium and Glory, had filed over 100 lawsuits against a number of diverse defendants alleging infringement of one or more patents from the Patent Portfolio. Id. at 2-4, 16. Each complaint was followed by a demand for a quick settlement at a price far lower than the cost of litigation, a demand to which most defendants apparently have agreed. Id. at 16. In this case, as with the other cases, Eon-Net offered to settle using a license fee schedule based on the defendant's annual sales: $25,000 for sales less than $3,000,000; $50,000 for sales between $3,000,000 and $20,000,000; and $75,000 for sales between $20,000,000 and $100,000,000. Rule 11 Sanctions Order, 239 F.R.D. at 612-13. 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 patentee's infringement allegations. See Allen Eng'g Corp. v. Bartell Indus., Inc., 299 F.3d 1336, 1346 (Fed.Cir.2002). In this case, Flagstar expended over $600,000 in attorney fees and costs to litigate this case through claim construction. Supplemental Order on Fees and Costs, at 8-11. Viewed against Eon-Net's $25,000 to $75,000 settlement offer range, it becomes apparent why the vast majority of those that Eon-Net accused of infringement chose to settle early in the litigation rather than expend the resources required to demonstrate to a court that the asserted patents are limited to processing information that originates from a hard copy document. Thus, those 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. In addition, Eon-Net had the ability to impose disproportionate discovery costs on Flagstar. This is, at least in part, because accused infringers often possess enormous amounts of potentially relevant documents that are ultimately collected and produced. See In re Nintendo Co., 589 F.3d 1194, 1199 (Fed.Cir.2009). The Federal Rules of Civil Procedure, as well as the local discovery rules and policies of a number of district courts, allow for liberal discovery, and it is not uncommon for an accused infringer to produce millions of pages of documents, collected from central repositories and numerous document custodians. Those discovery costs are generally paid by the producing party, see Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978), increasing the nuisance value that an accused infringer would be willing to settle for in a patent infringement case. In this case, it is notable that the district court stayed all discovery that did not relate to claim construction issues, and, while Flagstar expended over $600,000 to litigate this case, that amount would have substantially increased if the district court had allowed full discovery. In addition to its ability to impose high costs to defend against its meritless claims, Eon-Net placed little at risk when filing suit. As a non-practicing entity, Eon-Net was generally immune to counterclaims for patent infringement, antitrust, or unfair competition because it did not engage in business activities that would potentially give rise to those claims. And while Eon-Net risked licensing revenue should its patents be found invalid or if a court narrowly construed the patents' claims to exclude valuable targets, Eon-Net did not face any business risk resulting from the loss of patent protection over a product or process. Its patents protected only settlement receipts, not its own products. Eon-Net argues that it is not improper for a patentee to vigorously enforce its patent rights or offer standard licensing terms, and Eon-Net is correct. 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. Here, the district court did not clearly err when it found that Eon-Net filed an objectively baseless infringement action against Flagstar and brought that action in bad faith, specifically to extract a nuisance value settlement by exploiting the high cost imposed on Flagstar to defend against Eon-Net's baseless claims. It also appears that in filing this case, Zimmerman merely followed the direction of his client, Medina, who Zimmerman characterized at oral argument as difficult to control. Oral Arg. at 28:05-28:20, available at http://oralarguments.cafc.uscourts.gov/default.aspx?fl=2009-1308.mp3. But 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. In these circumstances, coupled with the district court's supported findings regarding Eon-Net's litigation misconduct, we conclude that the district court did not clearly err in its exceptional case finding.