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Indicia of Extortion – Federal Circuit Slams Patent Troll


Written by Gene Quinn
President & Founder of IPWatchdog, Inc.
Patent Attorney, Reg. No. 44,294
Zies, Widerman & Malek
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Posted: August 4, 2011 @ 12:27 pm
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Last week the Federal Circuit handed a major victory to a defendant who fought a baseless patent infringement litigation, giving hope that the district courts and the Federal Circuit have had enough of patent litigation used as a ploy to shake down defendants. In Eon-Net v. Flagstar Bancorp, the district court found that Eon-Net’s litigation misconduct and its filing of a baseless infringement action in bad faith for an improper purpose warranted an exceptional case finding. The Federal Circuit decision, with Judge Lourie writing and Judges Mayer and O’Malley joining, concluded that the district court did not clearly err in finding and addressing the litigation misconduct.

As a result of the misconduct found, Judge Martinez of the United States Federal District Court for the Western District of Washington slapped the patentee-plaintiff with Rule 11 sanctions totaling $141,984.70 for failure to perform a reasonable pre-filing investigation. The district court also awarded the defendant $489,150.48 in attorneys fees and costs pursuant to 35 U.S.C. 285. The Federal Circuit affirmed the district court’s rulings and cited with approval the district court’s characterization of the underlying lawsuit as bearing “indicia of extortion.”

The Federal Circuit explained that based on the explicit terms of the written description it is clear to all that Flagstar did not infringe any asserted claim. Indeed, the written description of the patents in question expressly refuted the claim construction of the patentee-plaintiff. As a result, the district court properly found that EonNet pursued objectively baseless infringement claims.

It was also determined that the underlying patent litigation was brought for no other reason than to extract nuisance payments despite the fact that there was no infringement. Specifically, the district court determined that Eon-Net filed the lawsuit 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.

Eon-Net and its related entities have filed over 100 nearly identical lawsuits against a number of diverse defendants alleging infringement of one or more patents. In each case, after the complaint was filed there was a quick follow-up with a demand for a quick settlement at a price far lower than the cost of litigation. In this case 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. In this patent litigation abbreviated by the district court seeing through the sham Flagstar was forced to spend $600,000 to defend. Had the district court allowed full discovery and not ended the case in summary fashion, Flagstar would have had to spend far more.

Eon-Net, the patentee-plaintiff, is a non-practicing entity that wanted to extract nuisance value from defendants.  Eon-Net didn’t care whether the defendants infringed, and engaged in no meaningful pre-filing due diligence.  Their own claim construction was clearly contradicted by the express terms of the written description of the patents in suit.  This adjudicated nefarious conduct well qualifies Eon-Net to be properly characterized as a patent troll.

Indeed, this type of harassing troll litigation is proliferating and needs to be stopped. I have spoken with defendants who are sued and contact the plaintiff (not a good idea) and explain they don’t do anything even similar to the patent they are being sued for infringing. I am told the response they receive is something like “I don’t really care.” Such a response could be chalked up to not being interested in taking a defendant’s word for it, or as merely unreliable hearsay that is inaccurately being recounted. The trouble is I have heard this same things on multiple occasions, and that seems to clearly be what the district court and Federal Circuit saw Eon-Net engaging in. This behavior is rampant.

In addition to being able to at will impose high costs to defend against its meritless claims, patent trolls, like Eon-Net, face little risk when filing suit because they are a non-practicing entity. As a non-practicing entity, Eon-Net is 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.

The relative immunity from negative business consequences is what allows bad actors to engage in nefarious activities. They have little at risk. Now, however, they will run the risk of paying the attorneys fees and costs of a defendant who stands and fights. Even that, however, likely won’t be enough to deter some of the bad actors because if they can shake down many defendants who cannot afford to fight they can afford to pay attorneys fees to those who do fight.

This type of egregious behavior by nefarious actors (i.e., patent trolls) needs to be characterized as patent misuse, which would taint the patents and render them incapable of being enforced. Defendants also need to unite and bring a RICO action actions these bad acting non-practicing entities. Extortion can be captured by RICO and that is exactly what these bad actors engage in.  It would do the federal government well to investigate as well.  The Federal Trade Commission should go after these nefarious actors for engaging in unfair business practices.

There is no place for mafioso tactics in a federal district court!

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Posted in: Federal Circuit, Gene Quinn, IP News, IPWatchdog.com Articles, Patent Litigation, Patent Troll Basics, Patent Trolls, Patents

About the Author

is a Patent Attorney and the founder of the popular blog IPWatchdog.com, which has for three of the last four years (i.e., 2010, 2012 and 2103) been recognized as the top intellectual property blog by the American Bar Association. He is also a principal lecturer in the PLI Patent Bar Review Course. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.

 

9 comments
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  1. Gene, while I agree with you 100% about the bad actors, it would be great if you could also write about the extreme opposite end of the “troll” spectrum. I am an independent inventor. I spend my hard-earned dollars paying to develop my inventions and prosecute patents on them, which as you know isn’t cheap even with lots of experience and when I do much of the work. Although I’m lucky to be able to afford the cost of patent prosecution, like most normal folks I can’t afford the high cost of patent litigation. That’s where a NPE enters into my story. After 5 years of work on a particular invention (including forming a company to commercialize it), a few companies are infringing one of my patents. Should I just let this happen, essentially being subject to a form of reverse extortion (from my vantage point) whereby I can either give up the rights that I fought hard (and paid much, and am legitimately entitled to) to obtain, or mortgage everything I own (and more) to fight it out in court? Instead of placing my family at risk, I chose to enter into a fair arrangement with someone who finances patent litigation (and sets up a NPE in the process, which seems quite reasonable from a legal and accounting perspective). He assumes the financial risk and we share the license income. Working with a NPE is the only way I’ve been able to come up with to enforce my legitimate rights. From my perspective, many NPEs (those working to enforce legitimate patent rights) patch a gaping hole that nobody else fills. Please don’t ignore the role that these good “trolls” play. They keep the playing field even for many of us.

  2. The problem with Eon-Net isn’t that it is a non-practicing entity, the problem is that its attorneys were willing to file a lawsuit without meeting the requirements of rule 11. This is what distinguishes a patent troll–aka, anyone willing to file a patent lawsuit without performing an adequate rule 11 investigation–from other non-practicing entities whose business involves licensing IP. For NPE’s who perform due diligence and reverse engineering prior to suit the activities of trolls like Eon-Net are immeasureably damaging because defendants, and their attorneys, assume that all such suits are simply shakedowns seeking nuisance value. My point is don’t group all NPE’s broadly under the term patent troll, there are NPE’s that do not engage in the tactics employed by Eon-Net.

  3. Gene,

    As I have said before, there is nothing wrong with using the term “Patent Troll” when circumstances require. In this case, the NPE was clearly a “Troll.”

    If is walks like a duck, smells like a duck, quacks like a duck . . . . . heck, it must be a “Troll.”

    Best,

    Richard

  4. I don’t think it is (nor should be) sanctionable merely to compromise your claims in an effort to resolve litigation. However, these guys acted like complete clowns.

    For example, they WON their previous appeal because the district court failed to construe the claims prior to dimissing the case and ordering sanctions. Yet, when Eon-Net returned district court for the Markman process to resume, they had the audicity to tell the court that “there are no claim terms in the patents-in-suit that need to be construed by the Court.”

    I’ve posted some other thoughts here: http://gametimeip.com/2011/08/03/leave-patent-licensing-to-the-professionals/

  5. Dave-

    I certainly understand what you are saying. The only issue I would take is that I would not characterize these “white hat” financiers as patent trolls. I think in order for one to be a patent troll there needs to be some kind of nefarious conduct. Given that the patent is an exclusive right by nature I just don’t see how anyone who enforces rights they obtain could be a patent troll unless they are a bad actor. The bad action that is rampant in the industry is litigation filed without any due diligence to determine if there is infringement, and a lack of care about whether there is any infringement on the part of those who are being offered cheap licenses (i.e., cheap compared to the cost to mount a defense).

    Your point is taken though, and I should write an article expanding upon this very point. Folks like you and those who help you get redress for infringement are certainly not trolls, whether or not you are a non-practicing entity. I made this point to some extent at:

    http://ipwatchdog.com/2011/07/28/the-problem-with-patent-trolls/id=18345/

    Thanks for reading.

    -Gene

  6. I’m puzzled as to why this case took a costly first Fed. Cir. remand and then a second Fed. Cir. appeal for something that should have been resolved promptly and cheaply by the initial summary judgment. Did the patent owner really not have any opportunity to argue a broader claim interpretation in response to the S.J. motion and hearing?
    I also doubt if the amount of sanctions and attorney fees either covered the defendants total costs or is sufficient to stop further lucrative shakedown suits against far more typical and numerous defendants unwilling to fight so hard to get the sanctions their client and the trolls deserve rather than make a payoff. In short, this is a serious judicial system problem, not a patent law problem.

  7. I like the court’s “indicia of extortion” standard; if defined in greater detail, it could prove helpful. Maybe one effective way of clearing the courts of the more nefarious “patent troll” activity would be for the courts to develop specific standards (e.g., multi-pronged tests and the like) that will serve effectively to identify the true “bad actors” and define unacceptable behavior. After all, since Congress looks unlikely to do anything about the worst trolls, then we will probably have to rely on the courts to weed out a substantial measure of them.
    http://www.youtube.com/watch?v=LkQELhZeDYQ

  8. I have been rather pessimistic about the whole patent litigation frenzy occurring these days. This article neatly explains one of the factors that is contributing to the mess – viz. the fact that the non-practising entities are exposed to very little risk in pursuing baseless patent litigation.

    It is refreshing to see a court call this activity for what it is: extortion. It seems unlikely that Congress will do anything about the patent fiasco, maybe this is one way the courts can deal with the non-practising entity mess.

    I would guess that other trolls, such as Intellectual Ventures, would be quite nervous about this judgment. I wonder whether a bigger troll like Intellectual Ventures would bankroll an appeal of this case?

  9. [...] While I have absolutely no problem with innovators obtaining patents and enforcing them to the fullest extent possible, there is at least some reason for concern when small enterprises are targeted with infringement.  Like many others, I have seen many complaints that merely satisfy the Federal Rules of Civil Procedure, but which we all know to be woefully inadequate.  They say that someone owns a patent and the defendant(s) are doing something similar to the title of the patent and therefore infringing.  Never mind that you cannot infringe a patent and instead only infringe patent claims.  These types of dime-a-dozen lawsuits filed for harassment purposes have caught the attention of some courts that have labeled complaints filed without due diligence “extortion-like.”  See Indicia of Extortion. [...]