On Friday, December 7, 2012, the United States Court of Appeals for the Federal Circuit issued a precedential opinion in Raylon v. Complus Data that gives hope to defendants everywhere who face objectively baseless patent infringement claims. For a very long time I have preached that the tools to deal with the bad actors in the patent community (i.e., patent trolls) exist if only the Federal Circuit and the district courts would stand up to the challenge. Rule 11 of the Federal Rules of Civil Procedure give district courts the ability to sanction litigants for frivolous court filings. Unfortunately, Rule 11 is almost never used. Today, however, the Federal Circuit determined that the district court abused its discretion when it denied the defendants’ Rule 11 motions.
At the conclusion of the decision Judge Prost, writing for the majority, wrote:
We reverse the district court’s holding that there was no Rule 11 violation and remand to the district court to determine, in the first instance, a proper sanction. Because the court’s evaluation of § 285 relied on its Rule 11 analysis, we vacate the district court’s denial of attorneys’ fees and costs, and remand for the court to reconsider defendants’ motions in light of our decision.
Of particular note, however, is that Judge Reyna only joined in the decision, but chose to file a separate concurring opinion. Judge Reyna explained that he differed only slightly with his colleges (Judges Prost and Moore). Judge Reyna would not have preferred not to remand the issue for further consideration on the merits of the defendants’ request for attorneys fees, but rather would have found this case exceptional and remanded only on the issue of what sanctions would be appropriate pursuant to 35 U.S.C. § 285.
Judge Reyna wrote:
I concur with the majority opinion and the result reached. I write separately to make clear that when a court finds a Rule 11 sanction based on conduct involving the allegation and pursuit of patent infringement claims that have been found objectively unreasonable, the court is compelled, if so moved by a party, to undertake a detailed and thorough § 285 inquiry and analysis. I deviate slightly from my colleagues in the majority in that, given the record in this case, I would reverse and declare this an exceptional case and limit the remand to determination of appropriate sanctions.
This is very good news for defendants and for the patent system. If Rule 11 is actually enforced against those who sue without a reasonable basis the bad actors will be wiped out. It will also work to identify those who are REALLY the patent trolls compared with those who are patent owner who simply seek redress for rights that are being trampled. As long as the bad actors operate the patent system will remain in jeopardy because the popular press and critics of the patent system unjustifiably paint all non-practicing entities with the same brush. Meaningful and appropriate use of Rule 11 will deal with the bad actors, while distinguishing from those non-practicing entities that have reasonable grievances that deserve consideration rather that ridicule.
At the District Court
Raylon, LLC (“Raylon”) brought three suits against Complus Data Innovations, Inc., Casio America, Inc. and Casio Computer Co., Ltd., (collectively “Casio”), and Symbol Technologies, Inc. (“Symbol”), among other defendants, in the Eastern District of Texas. Raylon alleged that all defendants infringe claims 1-17 of U.S. Patent No. 6,655,589. The district court consolidated the three suits and after a combined hearing the court adopted defendants’ claim construction. This lead to the district court granting summary judgment in favor of the defendants, but denied the defendant’s motions for Rule 11 sanctions.
In the Order denying the Rule 11 sanctions, the district court quoted the Fifth Circuit’s objective standard and stated that while “Raylon’s claim construction arguments and infringement theory do stretch the bounds of reasonableness, and the Court rejected Raylon’s positions, they do not cross the line.” The court then analyzed Raylon’s settlements and damages model to determine whether Raylon filed suit to recover nuisance value settlements or whether the numbers were “indicative of the good faith nature with which the case is brought.” Ultimately, the district court concluded that this was not a situation where “the cost of the litigation is more of a driving force than the merits of the patent-insuit,” so it denied the motions without considering the merits of the suit.
The district court also denied defendants’ motions for attorneys’ fees and costs under 35 U.S.C. § 285, citing its Rule 11 decision. The defendants appealed the denial of sanctions and attorneys’ fees.
At the Federal Circuit
The defendants argued, among other things that the district court employed the wrong standard to evaluate Rule 11 compliance. The Federal Circuit, ruling based on the law of the Fifth Circuit as is customary with respect to issues that are not core to substantive patent law, agreed with the defendants. The Federal Circuit explained that under Fifth Circuit law whether there was a Rule 11 violation must be measured based on “an objective, not subjective standard of reasonableness under the circumstances.”
The Federal Circuit explained:
The Fifth Circuit “has been emphatic” that the Rule 11 analysis is a strictly objective inquiry and “expressly rejected any inquiries into the motivation behind a filing.” Thus, an evaluation of Raylon’s litigation motives—whether it brought suit in good faith or to obtain nuisance value settlements—contradicts Fifth Circuit law and has no place in the Rule 11 analysis.
After this the Federal Circuit found that Raylon’s offered claim constructions was objectively frivolous. For example, despite the fact that each and every claim of the ’589 patent requires a “display being pivotally mounted on said housing,” Raylon continued to argue throughout the litigation that this meant a “display being capable of being moved or pivoted relative to the viewer’s perspective.” The Federal Circuit explained that “[ne]ither this sentence nor any other intrinsic evidence supports Raylon’s position…”
This was not the only cited frivolous claim construction mentioned by the defendants and recognized by the Federal Circuit. The Federal Circuit Ordered the district court to “weigh Raylon’s multiple frivolous arguments with respect to Symbol’s products when crafting an appropriate sanction.”
Although Judge Reyna would have found this case exceptional for purposes of attorneys fees, that was not the majority opinion. The majority chose to remand that to the district court saying:
Since we reverse the district court’s holding with regards to a Rule 11 violation, the district court can no longer rely on its Rule 11 analysis to find the objectively baseless prong not met. We remand to the district court to reconsider, in light of our decision, whether these cases are exceptional under § 285.
So now we wait. The Federal Circuit has in the past looked at the bad actors and characterized activity as “extortion like.” See Indicia of Extortion: Federal Circuit Slams Patent Troll. Is this going to be one shot across the bow or will this signal real interest in meaningful application of Rule 11 as it is actually written.