Indicia of Extortion – Federal Circuit Slams Patent Troll

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!