The U.S. Federal Circuit recently affirmed an award of attorneys' fees and sanctions against plaintiff Eon-Net in excess of $630,000. (Eon-Net LP, v. Flagstar Bancorp, Case No. 2009-1308 ). In an opinion written by Judge Lourie and joined by judges Mayer and O'Malley, the Federal Circuit affirmed the district court's finding that the case was exceptional under 35 U.S.C. § 285 in light of various instances of litigation misconduct and other bad faith behavior, including what the district court termed "indicia of extortion." The Federal Circuit also affirmed the lower court's grant of sanctions under Rule 11 because Eon-Net filed "legally baseless" infringement contentions and failed to perform a proper pre-suit investigation. At the heart of the decision was the plaintiff's strategy of suing a large number of defendants in an attempt to extract quick "cost of defense" settlements, but without performing a proper pre-suit investigation against many of those companies.

Plaintiff Eon-Net's asserted claims covered a document processing system that created a paperless environment by processing hard-copy documents and storing that information in an electronic format. Defendant Flagstar moved for summary judgment of non-infringement fairly early in the case on the basis that plaintiff's infringement claims, which were aimed at a system for processing information entered on a website rather than information in hard-copy documents, were baseless. The district court's claim construction limited the scope of the asserted claims to cover only hard-copy documents, and the parties then stipulated to non-infringement. Defendant Flagstar subsequently moved for attorneys' fees pursuant to 35 U.S.C. §285, which were awarded by the district court. The Federal Circuit upheld this decision, finding that the plaintiff had initiated suits 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." (Slip Op. at 22). The Federal Circuit agreed with the district court's characterization of this behavior as an "indicia of extortion," especially since "Eon-Net placed little at risk when filing suit." (Id. at 22-24). After finding that Eon-Net had purposefully put forth claim construction positions that were directly contradictory to the express teachings of the specification, the Federal Circuit also held that the failure to engage in the claim construction process in good faith was an additional reason to find the case exceptional under § 285. Because of this and several other discovery abuses (e.g., failure to retain documents from concurrent litigations), the Federal Circuit upheld the finding of the case as exceptional. Similarly, the Federal Circuit also found that the award of Rule 11 sanctions was not clearly erroneous is in light of Eon-Net's "legally baseless" infringement contentions and its failure to perform a reasonable pre-suit investigation.

What This Means for You

By referring to the plaintiff's litigation "strategy" as "extortion," it is clear that the Federal Circuit is becoming particularly suspicious of plaintiffs that file suits against a large number of defendants primarily to extract "cost of defense" licensing revenue, but without performing a proper pre-suit investigation against each of those defendants. The Federal Circuit explained that "[a] reasonable pre-suit investigation ... requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device." (Slip Op. at 26). It appears that the Federal Circuit would have prospective plaintiffs engage in an objectively reasonable claim construction analysis prior to the filing of any suit against another party, as part of the pre-suit investigation. In situations involving multiple defendants, this pre-suit diligence must be undertaken for each and every defendant. Moreover, the pre-suit analysis of claim construction should be supportable in light of the written description in order to avoid being found "illogical" or frivolous. (See Slip Op. at 26).

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