CAFC Clarifies Rule 11 Sanctions Against Patentee for Ninth Circuit

EON-Net LP, et al. v. Flagstar Bancorp (07-1132) September 27, 2007 (nonprecedential)

Big waves rippled through the patent world last year when Judge Pechman from the W.D. Wa. ruled on Summary Judgment in favor of Flagstar, and levied sanctions against patentee EON-Net for filing multiple complaints against defendants for infringing a patent that was purchased by EON-Net prior to the litigation. After reviewing EON-Net's conduct, the court found that "indicia of extortion are present in this case," where EON-Net engaged in "fill-in-the-blank" demand letters to Flagstar and at least 24 other defendants alleging infringement, along with an offer for an "inexpensive settlement." Eon-Net's complaint and claim chart were virtually identical to its other complaints in other cases.

On appeal, the CAFC reversed the district court, finding that the court acted too hastily in granting summary judgment and issuing sanctions.

On the summary judgment issue, Flagstar argued that it had an existing license from the previous patent owner, Kofax, and additionally argued, albeit in passing, that Flagstar didn't infringe. This created an apparent contradiction that the district court ruled, sua sponte, in favor of EON-Net. On the one hand, Flagstar admits that its activities fall under the scope of the patent vis-a-vis the Kofax license. On the other hand, Flagstara also alleged that it didn't infringe. More importantly, the district court did not conduct a Markman hearing to determine what the patent's scope. Since EON-Net was not given the opportunity to address the claimed features, the CAFC vacated the summary judgment of noninfringement:

Eon-Net also did not have an opportunity to raise evidence of infringement and claim construction in its motion to reconsider, as Flagstar argues it should have done; its motion to reconsider properly argued that the district court’s grant of summary judgment was without notice and appropriately requested an opportunity to present its arguments. The district court should have given Eon-Net an opportunity to fully present its arguments on these issues, even if the district court ultimately would have reached the same conclusion. We have previously held that where a district court construes a patent without following the necessary steps, we should remand the matter for further proceedings so that the district court can follow the appropriate steps.

Regarding the sanctions, the CAFC applied 9th Circuit law on Rule 11 and stated that a party filing a patent infringement claim must first, at minimum, "apply the claims of each and every patent that is being brought into the lawsuit to an accused device and conclude that there is a reasonable basis for a finding of infringement of at least one claim of each patent so asserted." View Eng’g, Inc. v. Robotic Vision Sys., Inc., 208 F.3d 981, 986 (Fed. Cir. 2000). Additionally, "an attorney may not be sanctioned solely for failing to conduct a reasonable inquiry as long as the complaint is well-founded." Since there was sufficient evidence showing there was a reasonable basis behind EON-Net's complaint, and without the benefit of a Markman hearing, the CAFC vacated the sanctions as well:

Although the district court applied the correct standard in addressing Flagstar’s motion for sanctions, we conclude that its assessment of the evidence was "clearly erroneous" as to warrant vacatur . . . Ultimately, all of the district court’s bases for awarding sanctions are tied to its conclusion that Eon-Net had not established that the ’697 patent covered online web applications. First, there is evidence that Eon-Net’s counsel did follow the requirements of View Engineering by applying the claims of the ’697 patent to the accused device (portions of the Flagstar website) and concluding that there was a reasonable basis for a finding of infringement. There is really no dispute that Eon-Net’s counsel did examine portions of Flagstar’s website and, based on his experience, concluded that it worked in a manner that infringed the ’697 patent . . . While we are not passing judgment on what the appropriate construction of the ’697 patent should be, without a full claim construction analysis it is impossible to assess whether Eon-Net’s claim construction was unrealistic.

Also, with regard to EON-Net's litigation conduct, the CAFC also held that a "shotgun" approach to sending demand letters cannot be improper until a proper claim construction is determined:

It may be true that ultimately Eon-Net’s suit was for an improper purpose and that Eon-Net’s pattern of filing nearly identical complaints against a wide variety of companies and then offering to settle those complaints for a relatively small amount of money is one indicia of that improper purpose . . . Without full analysis of the merits of Eon-Net’s claim construction arguments, however, the mere fact Eon-Net filed identical infringement suits against a variety of companies does not by itself establish an improper purpose.