Case Has  Potential to Curb Patent Infringement Case Settlement Strategies by “Patent Trolls”

by: John R. Harris

The Court of Appeals for the Federal Circuit (CAFC) recently upheld significant sanctions imposed by a district court against a patent holding company and its attorneys. The CAFC believed this was an exceptional case of behavior in extracting patent litigation settlements that warranted punitive action.  The case is Eon-Net LP, and Zimmerman & Levi, L.L.P. and Jean-Marc Zimmerman v. Flagstar Bancorp, Case No. 2009-1308 (Fed. Cir. July 29, 2011).

The case can be accessed by clicking here.

Eon-Net v. Flagstar has the potential to affect the way that patent holding companies – sometimes called “non-practicing entities” (NPEs) or the allegedly perjorative term “patent trolls” – conduct their business of enforcing patents to extract monetary payments. NPEs are a currently popular vehicle for monetizing patents because the patents that are sought to be enforced are owned by companies that do not have any underlying patent-vulnerable business that they practice. Without a business at risk, patent holding companies are insulated from patent infringement damages counterclaims from the companies that they sue.

The district court handling the case found that Eon-Net’s case of patent infringement against Flagstar had an “indicia of extortion” because of Eon-Net’s history of filing nearly identical patent infringement complaints against a number of different defendants. Eon-Net had followed each filing with a demand for quick settlement at a price far lower than the cost to defend the litigation.

The CAFC agreed with the district court’s finding that exploiting the high cost of defending complex patent litigation in order to extract nuisance value settlements constituted bad faith.  The court pointed to Eon-Net’s pattern of filing complaints against many different companies, then demanding quick settlements at a price far lower than the cost of litigation.  Parties must either expend significant resources to defend against the suit and ferret out evidence of a baseless claim – as Flagstar did in this case – or give in to the nuisance settlement demand.

It should be noted that a driving factor of the sanctions was the fact that Eon-Net was ultimately found to have filed an objectively baseless infringement lawsuit.  Flagstar was forced to expend significant resources in proving that the infringement action was baseless, and sought sanctions to recover its costs.

After this decision, these questions remain:  How can an infringement defendant determine that a claim is baseless without expending significant resources?  Are sanctions only available if a claim is baseless?  On the other hand, must patent owners (NPEs and others) now expend greater resources before filing suit to minimize their risk of bringing a baseless lawsuit?

One thing is clear, however – the stakes against patent owners (NPEs in particular) are now higher, and the risk of sanctions for a losing case is higher as well.

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This information is presented for educational purposes and is not intended to constitute legal advice. Opinions expressed are those of the author and not of Morris, Manning & Martin, LLP; see disclaimer at http://www.www.mmmtechlaw.com/privacy-policy-and-disclaimer/. Contact John Harris for more information at jharris@mmmlaw.com