We will be discussing two recent Federal Circuit cases regarding exceptional cases in the patent context.  We will discuss these cases in our weekly SoCal IP Institute meeting on Monday, August 8, 2011.  Brief synopses of the cases are presented below.

Old Reliable Wholesale, Inc. v. Cornell Corporation, Case. No. 2010-1247 (Fed. Cir. March 16, 2011) (attached).  Old Reliable is the owner of a patent covering insulated roof board.  Cornell is a manufacturer of roofing and manufactures several different types of insulated roofing including the VT-1 and VT-2 products.  Old Reliable brought suit in 2006 alleging that the VT-1 product infringed several claims of the patent.  In response, Cornell alleged that the VT-2 product anticipated the patent.  Old Reliable argued that VT-2 failed to teach all of the limitations of the claims.  In 2007, Cornell deposed the inventor (and Old Reliable’s owner) of the asserted patent.  During this deposition, the inventor admitted that the VT-2 did “exactly the same thing” as the asserted patent and that one other product, a Branch River Air-Flo product, also was very similar.  The district court construed the claim terms and then found that the patent was anticipated by the Air-Flow product and obvious in view of the VT-2 and Air-Flo product.  Old Reliable appealed and the Federal Circuit affirmed without opinion.

Cornell then filed a motion seeking attorney’s fees as an exceptional case under 35 U.S.C. 285.  This motion was granted-in-part.  Cornell was awarded attorney’s fees and costs for all activities after the deposition of the asserted patent’s inventor.  At that point, the district court concluded, Old Reliable should have known that it’s case was baseless.  The Federal Circuit reversed finding that the exacting standard for an award of attorney’s fees as an exceptional case was not met.  In particular, the Federal Circuit found that there was still a reasonable issue of fact as to whether the asserted patent was anticipated or obvious in view of the art discussed in the deposition.  Accordingly, the court was unwilling to conclude that Old Reliable lacked a reasonable foundation for arguing that its patent was not anticipated.  The decision to grant attorney’s fees was, therefore, reversed and vacated.

Eon-Net LP et al., v. Flagstar Bancorp, No. 2009-1308 (Fed. Cir., 2011) (attached).  Eon-Net is one of a few patent holding companies formed to enforce patents related to document processing systems for creating digital copies of physical documents and for extracting information from those documents for use by other software programs.  Eon-Net asserted the patents in this family in more than 100 suits between 2001 and 2005.

Eon-Net sued Flagstar alleging that user information input via Flagstar’s website infringed one of the patents.  Flagstar moved for summary judgment on the basis that it was licensed by its software supplier and for sanctions under Rule 11 because, it claimed, that the input of information via a website is could not infringe the scanning of tangible documents as required by the claims.  As a result, Flagstar asserted that Eon-Net’s pre-suit investigation was inadequate.  The district court granted both motions.  The Federal Circuit initially vacated and remanded the summary judgment and sanctions for failure to grant Eon-Net opportunity to present its claim construction argument before the motions were granted.  The district court construed the claims of the originally asserted patent and two others finding that the terms “document,” “file,” “extract,” and “template” were limited to information originating from a hard copy document.  The parties stipulated to non-infringement, Flagstar again moved for attorney’s fees and this motion was granted.

On appeal for a second time to the Federal Circuit, Eon-Net sought review of the claim construction ruling, the exceptional case finding and the imposition of Rule 11 sanctions.  The Federal Circuit affirmed the claim construction ruling because, “The written description repeatedly and consistently defines the invention as a system that processes information derived from hard copy documents.”

The exceptional case finding was also affirmed because the district court applied the right  35 U.S.C. Section 285 standard when, absent litigation misconduct or misconduct securing the patent, sanctions may be imposed if (1) the patentee brought the litigation in bad faith; and (2) the litigation is objectively baseless.  Brooks Furniture Mfg., Inc. v. Dutailer Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005).  The district court found that Eon-Net had failed to take part meaningfully in the claim construction process, filed contradictory declarations and “attempted to evade a careful analysis of the claim terms through the Markman process.”   The court also affirmed the district court’s determination that no reasonable construction of the claims would support a suit against Flagstar because the specification always required a physical document as the basis of the information. The court found that the suit was brought in bad faith because Eon-Net sought to “exploi[t] the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar.”

The Rule 11 sanctions award was affirmed because, in view of the exceptional case factual findings, the case was “legally or factually ‘baseless’ from an objective perspective” and the attorney failed to conduct a “reasonable and competent inquiry” before filing the complaint.

A reasonable pre-suit investigation, however, also requires counsel to perform an objective evaluation of the claim terms when reading those terms on the accused device. See Q-Pharma, Inc. v. Andrew Jergens Co., 360 F.3d 1295, 1300–01 (Fed. Cir. 2004); S. Bravo Sys., Inc. v. Contain-ment Techs. Corp., 96 F.3d 1372, 1375 (Fed. Cir. 1996).

The court concluded that Eon-Net’s contrary claim construction position “borders on the illogical” and that “[t]he specification exposes the frivolity of Eon-Net’s claim construction position.”  Accordingly, the district court’s entire decision was affirmed.

All are invited to join us in our discussion of these cases during the SoCal IP Institute meeting on Monday, August 8, 2011 at Noon in our Westlake Village office. This activity is approved for 1 hour of MCLE credit. If you will be joining us, please RSVP to Amanda Jones by 9 am Monday morning.