Patent Troll Lawyers Smacked Down, Made To Pay Sanctions, For Mass Lawsuits Followed By Quick Settlement Offers

from the watch-out-righthaven... dept

dwg points us to a fascinating ruling by CAFC in EON-NET LP v. FLAGSTAR BANCORP, in which CAFC (who generally sides with patent holders) not only went against a patent troll, but also actually smacked the lawyers down with fairly large Rule 11 sanctions for filing a bogus lawsuit, where the intent appeared to only be to get a company to pay up. This ruling could become an interesting precedent not just in patent cases, but potentially in copyright trolling cases as well. The court points out that Eon-Net had filed over 100 patent infringement lawsuits, following up each one quickly with an offer of settlement. In this particular case, it was clear that Flagstar did not infringe on the patents in question.

While the court found a variety of misconducts (including document destruction), where this ruling becomes potentially very damaging for all sorts of trolls -- both copyright and patent trolls alike -- is in the finding of "baseless litigation in bad faith." Part of the reasoning here:
In addition to finding that Eon-Net filed an objectively baseless infringement action, the district court also determined that Eon-Net filed the lawsuit in bad faith and for an improper purpose... In particular, the district court found that Eon-Net's case 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.

The record supports the district court's finding that Eon-Net acted in bad faith by exploiting the high cost to defend complex litigation to extract a nuisance value settlement from Flagstar. At the time that the district court made its exceptional case finding, Eon-Net and its related entities, Millennium and Glory, had filed over 100 lawsuits against a number of diverse defendants alleging infringement of one or more patents from the Patent Portfolio... Each complaint was followed by a "demand for a quick settlement at a price far lower than the cost of litigation, a demand to which most defendants apparently have agreed."... In this case, as with the other cases, 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. Rule 11 Sanctions Order, at 3—4.
Check out those bolded parts. Sound familiar?

The court notes that it's no surprise that most companies agree to settle. This is important, because we regularly hear from patent system supporters insisting that when companies settle, it's proof that the patents are valid. Yet, here, the court itself points out that's ridiculous:
In this case, Flagstar expended over $600,000 in attorney fees and costs to litigate this case through claim construction. Supplemental Order on Fees and Costs, at 8—11. Viewed against Eon-Net's $25,000 to $75,000 settlement offer range, it becomes apparent why the vast majority of those that Eon-Net accused of infringement chose to settle early in the litigation rather than expend the resources required to demonstrate to a court that the asserted patents are limited to processing information that originates from a hard copy document. Thus, those low settlement offers—less than ten percent of the cost that Flagstar expended to defend suit— effectively ensured that Eon-Net's baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements.
Separately, the court clearly noted the "non-practicing entity" part of the business in pointing out that, "As a non-practicing entity, Eon-Net was generally 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."

In the end, the court agreed and allowed the district court's award of $141,984.70 for Rule 11 violations and another $489,150.48 in attorneys' fees. The law firms rushing around to file patent and copyright trolling lawsuits in the hopes of getting quick settlements may want to take notice.


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  1.  
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    Ikarushka (profile), Aug 8th, 2011 @ 10:04am

    I just realized that I was pinching myself while reading this article. What kind of reality we live in if common prompts suspicion?

     

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  2.  
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    Donnicton, Aug 8th, 2011 @ 10:05am

    'FLAGSTAR BANCORP' sounds like the name of a fictional company you'd see in Star Wars, manufacturing capital ships.


    That aside, keep building that precedent. While cases like Atlantic v. Anderson and Capitol Record v. Debbie Foster certainly prove that things turn against the trolls more often than not, no doubt the P2P attorneys still will drape themselves in the Jammie Thomas case like the TSA draping themselves with the "threat of terrorism" banner to justify their actions.

     

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  3.  
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    Ikarushka (profile), Aug 8th, 2011 @ 10:08am

    Re:

    Sorry. "common sense" of course.

     

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  4.  
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    MrWilson, Aug 8th, 2011 @ 10:16am

    Re:

    FLAGSTAR BANCORP seems more like it came from a random company name generator.

    Let's try some more:

    Basketflame Systems
    Umbrellatree United
    Crowdsun Financial
    Rainwind Strongcorp

    Actually, these are starting to sound like MMO character names...

    That's it! We need a good corporate MMO where your corporation is your character. You have to go on patent trolling quests and defend against regulatory investigations.

     

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  5.  
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    out_of_the_blue, Aug 8th, 2011 @ 10:18am

    The "quick settlement" extortion only works if target is poor.

    With money and clear extortion, stick to your guns.

    Now Eon-Net lawyers needs to be disbarred permanently, and prosecuted under RICO. Otherwise, they may now be a bit chastened, but probably still ahead on money...

     

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  6.  
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    @J_Plotkin, Aug 8th, 2011 @ 10:28am

    Good to hear

    Nice article! I enjoyed it.

    It's nice to see the CAFC recognizing a clear and blatant case of abusive use of a patent. However, one might beckon the question, why only on law suit number 100 did the court come to this grand epiphany. nevertheless, I'm happy to see this ruling in the books.

    I wonder if it will be cited as a precedent in copyright cases as well. Though the principle of patent trolling is strikingly similar to the principle of copyright trolling, I'm not certain the court will see this as a directly applicable precedent. Even though the mechanism used by the trolls in both patent and copyright litigation are the same, the rights themselves are vastly different.

    When discussing patent trolls, we often come back to the point that the sole existence of these mythical creatures is predicated on the collecting and stockpiling of patents for the sole purpose of using them to litigate. I can see the software copyright industry fitting neatly into this picture though I have a little more difficulty likening the actions of a patent troll to those of an organization like the RIAA for instance.

    The RIAA has also filed suits only to immediately offer settlement options a fraction of the cost of litigating the matter (they even set up a discreet and anonymous settlement payment service aimed at college kids who want to keep the entire affair under wraps).

    That being said, they maintain that they are championing the rights of copyright holders everywhere.

    So you see, though the methodology used by these two entities is almost identical (one might even argue that the RIAA's "discreet payment option" is worse), it would be exceedingly hard to agree that the behavior of an organization such as the RIAA is tantamount to abuse of procedure and frivolous suits being brought by patent trolls.

     

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  7.  
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    That Anonymous Coward (profile), Aug 8th, 2011 @ 10:30am

    The wheels on the Justice go round and round, round and round.
    The wheels on the Justice go round and round, just sometimes to damn slow.

    The lawyers on the case go, sue sue sue, sue sue sue.
    The lawyers on the case go, sue sue sue, what do you mean we loose?!

    The Judge on the bench goes, slap slap slap, slap slap slap.
    The Judge on the bench goes, slap slap slap, you lousy freaking trolls.

    The verdict on the page goes, dum dum dum, dum dum dum.
    The verdict on the page goes, dum dum dum, sounding ominous doom.

    The patent system will go, sue sue sue, sue sue sue.
    The patent system will go, sue sue sue, because its still broken.

    Hopefully this will change the landscape some in many different areas. But you know some will keep at it, because they have an angle that can't miss.

     

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  8.  
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    :Lobo Santo (profile), Aug 8th, 2011 @ 10:30am

    Re: Re:

    LOL. Vote Ikarushka! Putting the "Sense" in "Common Sense"!

    ;-P

     

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  9.  
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    rubberpants, Aug 8th, 2011 @ 10:30am

    It just occurred to me

    The effect that patent trolls have on business is basically the same effect that terrorists would have on the world if they acquired nuclear weapons.

     

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  10.  
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    @J_Plotkin, Aug 8th, 2011 @ 10:31am

    Re: The "quick settlement" extortion only works if target is poor.

    I think that may be a bit harsh. I don't agree with their tactics. At the same time, I think a hefty financial sanction will make them think twice about bringing suits like this in the future. If not, a heavier sanction will be necessary to drive home the point that patents should not be used for the singular goal of profiting from the stifling of the innovation of others.

     

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  11.  
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    Anonymous Coward, Aug 8th, 2011 @ 10:32am

    Contrary to the popular perception here, the CAFC does not generally side with holders of patents or patent applicants.

    The court's sole role is to apply existing precedent to cases presented to it for a decision. If it happens to render a decision that benefits a patent holder or a patent applicant, it is because the law happens to align with their interests, and not because the court is predisposed to favor them.

    It is also worthwhile to note that the CAFC is not a "Patent Court". This is merely one of several areas in which the court has original jurisdiction over appeals. Similarly, it is not a court dominated by persons who have practiced patent law prior to their appointment to the bench. At this time only 3 of the judges have practiced patent law, and at least two of them will very likely take "Senior Status" in the near term. Who will be appointed in their stead? Almost certainly persons who have never been involved in the practice of patent law.

     

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  12.  
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    The Devil's Coachman (profile), Aug 8th, 2011 @ 10:34am

    Re: Re: The "quick settlement" extortion only works if target is poor.

    I have a less harsh punishment in mind - beating the crap out of them, literally. Then, after their wounds heal, they may resume the practice of law, but if they follow their previous path, then fitting them for a wooden kimono would seem appropriate and justifiable.

     

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  13.  
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    That Anonymous Coward (profile), Aug 8th, 2011 @ 10:38am

    Re: Good to hear

    "why only on law suit number 100 did the court come to this grand epiphany."

    They were the only company that stood up to the bully and went to court. Only then could the Judge review all of the information rather than just what Eon-Net submitted to the court.

    Much like the information in the copyright trolling cases, they claim the discovery of the account holders name will give them the infringer.
    Except an IP address does not equal a person, and it is possible the account holder was completely unaware of any infringing activity.
    But they get a handy letter telling them that because they pay the bill they are automatically responsible and they should just pay up or face being fined up to $150,000.

    USCG submitted a huge pile of IP addresses, that included a DNS belonging to Google. Any lawyer given a chance to argue against the filing would point to this as a huge glaring problem with the data collection. Instead this filing was rubber stamped... until the Judge figured out that all of those people were most likely not subject to his courts jurisdiction and that plaintiffs had mischaracterized the facts by omission.

    The RIAA also has a history of stringing people along and just as the case was about to go to trial, dropping it. The Judge then ruled no harm no foul after the target tried to countersue. They suffered "no harm" so they had no standing.

     

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  14.  
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    TCBloo (profile), Aug 8th, 2011 @ 10:39am

    Re: It just occurred to me

    This makes a lot of sense:

    "Give us what we want, or we drop the gavel."
    VS.
    "Give us what we want, or we drop the bomb."

     

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  15.  
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    Anonymous Coward, Aug 8th, 2011 @ 10:40am

    Re: Re: The "quick settlement" extortion only works if target is poor.

    It is a sad commentary on the legal profession that prior to the mid-80's cases such a this were virtually non-existent. Why the change? Because about that time general practice firms heavily invested in litigation saw there was money to be made expanding their efforts into the field of patent law.

    When the word "troll" is used, it is useful to keep in mind that it has two distinct meanings, one being persons who buy up "paper" and then treat it like any negotiable instrument, and the other being law firms trolling for business.

     

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  16.  
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    That Anonymous Coward (profile), Aug 8th, 2011 @ 10:41am

    Re:

    "Almost certainly persons who have never been involved in the practice of patent law."

    This alone might make them more qualified than anyone else.

     

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  17.  
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    Anonymous Coward, Aug 8th, 2011 @ 10:45am

    Re: Re:

    Perhaps, but as of late appointments to the CAFC appear to be based more on political reward than on substantive knowledge of the law over which the court presides.

     

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  18.  
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    Anonymous Coward, Aug 8th, 2011 @ 10:45am

    Re: Re:

    Perhaps, but as of late appointments to the CAFC appear to be based more on political reward than on substantive knowledge of the law over which the court presides.

     

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  19.  
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    Prisoner 201, Aug 8th, 2011 @ 10:49am

    Re: Re: Re: The "quick settlement" extortion only works if target is poor.

    I was thinking that the penalties for copyright infringement may be a guidline in deciding the fine.

    Using established industry standard methods(*) to find the damages caused by this incident I think that (rounded to nice numbers) two trillion dollars is about right.

    (*) One: take a really big number. Two: multiply by time of day and your favourite number. Three: ??? Four: Profit!

     

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  20.  
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    The eejit (profile), Aug 8th, 2011 @ 10:49am

    Re: Re: It just occurred to me

    Someone set up us the Patent?

     

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  21.  
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    Prisoner 201, Aug 8th, 2011 @ 10:52am

    Re: Re: Re: It just occurred to me

    All your IP are belong to us!

     

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  22.  
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    Chuck Norris' Enemy (deceased) (profile), Aug 8th, 2011 @ 10:55am

    Corroding husk

    Sadly, Eon-Net is probably just a shell of a shell etc.? Good luck extracting that $600k.

     

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  23.  
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    Donnicton, Aug 8th, 2011 @ 11:02am

    Re: Re:

    That's it! We need a good corporate MMO where your corporation is your character. You have to go on patent trolling quests and defend against regulatory investigations.

    EVE Online.

     

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  24.  
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    Rikuo (profile), Aug 8th, 2011 @ 11:06am

    Did I read the second-to-last paragraph correctly? About "non-practicing"? Am I correct in interpreting that to mean that they didn't actually do any business at all, just held patents and sued over them?
    How can I harm a patent holder's stake in the marketplace if s/he doesn't actually sell anything?

     

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  25.  
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    That Anonymous Coward (profile), Aug 8th, 2011 @ 11:07am

    Re: Re: Re:

    This statement did not need qualification.

    Appointments have been and continue to be a political reward system. Until we demand better, we will always get the same.

     

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  26.  
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    That Anonymous Coward (profile), Aug 8th, 2011 @ 11:33am

    Re:

    because they stole you idea, and so they owe you money.
    It doesn't matter the patent is on something obvious, we hold the patent and your use of it cost us money! Now pay up or else.

    Welcome to the big players in patents. Companies that buy up huge pools of patents, and then rent them out so companies have have epeen measuring contests and waste money fighting in court.

    When no one wants to rent them, find someone doing something remotely similar to your broad patent and file suit and offer a quickie settlement cheaper than what a legal battle will cost.

     

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  27.  
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    LDoBe (profile), Aug 8th, 2011 @ 11:42am

    Re: Re: Re: Re: It just occurred to me

    Every zero lawyer go! You know what you doing!

    ....For great justice...

     

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  28.  
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    Joe Mullin, Aug 8th, 2011 @ 1:24pm

    History of Zimmerman / Eon-Net

    Zimmerman was actually first sanctioned for patent litigation behavior back in 2006 in 2006. However, those sanctions were overturned overturned by a different Federal Circuit panel.

     

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  29.  
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    BeeAitch (profile), Aug 8th, 2011 @ 1:53pm

    Nitpicking

    "In this case, as with the other cases, 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."

    By their wording, couldn't a company be exempt from the license fee schedule if they could somehow show that they made a) exactly $3,000,000; b) exactly $20,000,000; or c) >$100,000,000?

    OT: It's good to see more courts recognizing the 'legal extortion' racket for what it really is.

     

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  30.  
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    Steven W., Aug 8th, 2011 @ 1:58pm

    Attention required - patents were already licensed!

    It seems folks are missing the basic premise of the decisions here - being that the defendant company already had a license to the claimed patents through Kofax Image Products. Thus the action taken by plaintiffs was doomed to fail and therein lies everything else that happened thereafter.

     

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  31.  
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    Anonymous Coward, Aug 8th, 2011 @ 2:33pm

    Even if this isn't reversed on appeal, how much of the award will Flagstar ever see? (I mean, does Eon-Net itself have any assets, or can it just declare bankruptcy and lose very little beyond the irrelevant patent it was using to sue?)

     

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  32.  
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    Anonymous Coward, Aug 8th, 2011 @ 4:36pm

    Re:

    In a similar vein, a 'Donkey Punch' isn't intended to decrease your enjoyment or feelings of satisfaction, but to increase my enjoyment and feelings of satisfaction.

    So when I hit you in the back of the head and knock your ass out, don't worry, it's not about you and you have no input in the decision, it's only about me, so you should be fine......

     

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  33.  
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    Lawrence D'Oliveiro, Aug 8th, 2011 @ 8:05pm

    Make it “adjectivenoun adjectivenoun”

    Basketflame Intersystems
    Umbrellatree Cyberunited
    Crowdsun Intellifinancial

     

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  34.  
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    Anonymous Coward, Aug 9th, 2011 @ 9:12am

    How is this any different than what the RIAA does?

     

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  35.  
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    Rob McMillin, Aug 9th, 2011 @ 9:22am

    Unfortunately, only a handful of states have laws against barratry, and the offense goes almost unprosecuted; the federal government knows no such restrictions. Too bad, because cases like this one are an obvious application.

     

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  36.  
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    Anonymous Coward, Aug 9th, 2011 @ 10:09am

    Re: Good to hear

    The "grand epiphany" was reached only at this point specifically because of the tactics being used -- early settlement meant that no motion for rule 11 sanctions was ever heard by any court.

     

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  37.  
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    Anonymous Coward, Aug 9th, 2011 @ 10:38am

    Intangible Assets

    I say there should be a law that restricts intangible asset to a fraction of total assets. Shouldn't affect companies like Microsoft, but patent trolls would be something of the past.

     

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  38.  
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    Random Guy, Aug 9th, 2011 @ 11:18am

    Re: The "quick settlement" extortion only works if target is poor.

    Actually, large companies often settle too. It is still a case of pay the troll a (relatively) small amount to go find another victim or spend 10x as much defending. And what if the unthinkable happens and they lose the case? Then they're out the 10x settlement cost for legal fees, plus whatever the patent troll sued for, plus they've set a precedent for the next victim. Most companies won't take the risk.

     

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  39.  
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    staff, Aug 9th, 2011 @ 11:49am

    propaganda

    Call it what you will...patent hoarder, patent troll, non-practicing entity, etc. It all means one thing: “we’re using your invention and we’re not going to pay”. This is just dissembling by large infringers to kill any inventor support system. It is purely about legalizing theft.

    Prior to eBay v Mercexchange, small entities had a viable chance at commercializing their inventions. If the defendant was found guilty, an injunction was most always issued. Then the inventor small entity could enjoy the exclusive use of his invention in commercializing it. Unfortunately, injunctions are often no longer available to small entity inventors because of the Supreme Court decision so we have no fair chance to compete with much larger entities who are now free to use our inventions. Essentially, large infringers now have your gun and all the bullets. Worse yet, inability to commercialize means those same small entities will not be hiring new employees to roll out their products and services. And now some of those same parties who killed injunctions for small entities and thus blocked their chance at commercializing now complain that small entity inventors are not commercializing. They created the problem and now they want to blame small entities for it. What dissembling! If you don’t like this state of affairs (your unemployment is running out), tell your Congress member. Then maybe we can get some sense back in the patent system with injunctions fully enforceable on all infringers by all inventors, large and small.

    For the truth about trolls, please see http://truereform.piausa.org.

     

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  40.  
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    Bill Stewart, Aug 9th, 2011 @ 1:03pm

    Why the court took so long to notice

    The court took that long to notice because most of the defendants chose to settle for a relatively small amount vs. spending a lot of money fighting a case they might not win. Courts are fine with people settling cases instead of using lots of court resources to try them.

    Flagstar not only didn't want to pay extortion for a patent claim that they thought was bogus, but they checked and found that EON was doing lots of quickly-settled lawsuits, and brought it to the court's attention. That's why the court did notice that case.

     

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  41.  
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    burdlaw (profile), Aug 9th, 2011 @ 1:30pm

    Re: Flagstar Bancorp sounds like Star Wars

    Donnicton, you show your prejudices and biases when you say patent trolls lose more than they win. In your, dreams my friend, but not in reality. In reality, the opposite is true. Even with Zimmerman, the court found he had won enough to pay a $600K+ judgment, so you have your head up your rear to think things turn against trolls more often than not. Zimmerman claimed poverty only to avoid the judgment and the Judge saw through that. Intellectual Ventures, Acacia, General Patent, Lodsys, etc. - all making fortunes. The TSA analogy is really misplaced and inapplicable. With much, much more at stake than $600K, we have not had a commercial airplane successfully terrorized since TSA was formed, so it is actually a great success story, much like patent enforcement companies are a great success story with MS, Apple & their team coughing up $4.5 billion to keep Nortel patents out of the hands of Google or the patent trolls. $4.5 billion evidences the level of their fear.

     

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  42.  
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    john, Aug 9th, 2011 @ 1:41pm

    They are still ahead of the game

    100 wins at minimum $25K each = $2.5 million
    1 loss @ $600K

    total win = $1.9 million.

     

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  43.  
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    Speckk, Aug 9th, 2011 @ 4:56pm

    +1 on more punitive actions

    According the recent "This American Life" episode, "When Patents Attack", these trolls will often transfer patents into individual LLC's with small empty offices in quiet rural towns where Federal Courts see few criminal cases, and thus have more time to handle civil patent cases

    Disbarring the lawyer for filing a bad suit isn't enough. The court should seize and invalidate the patent in cases of gross abuse, while hopping over shell LLC's to the real money behind the extortion.

     

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  44.  
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    Kaz, Aug 9th, 2011 @ 5:05pm

    Re:common-sense

    Hi Ikarushka

    Common sense should be regarded with suspicion.

    Albert Einstein on common sense:

    "Common sense is the collection of prejudices acquired by age eighteen."

    *wink*

     

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  45.  
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    mike, Aug 9th, 2011 @ 7:31pm

    Re: Re: It just occurred to me

    How about look at as a basic framework; "Give us what we want, or we retaliate."

     

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  46.  
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    Paul, Aug 10th, 2011 @ 4:58am

    Attorneys are the extortionists

    This case proves that it's not the patent system that is faulty but it is the colluding patent and defense attorney who are exploiting the system and who are the real extortionists.

    $600,000 in attorney fees for Patent defense is considered small potatoes, WTF can justify such a ridiculous fee for a 'service'?

     

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  47.  
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    Anonymous Coward, Aug 10th, 2011 @ 10:27am

    Check out this episode of This American Life about patent trolls. http://www.thisamericanlife.org/radio-archives/episode/441/when-patents-attack

     

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  48.  
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    patent litigation, Aug 15th, 2011 @ 11:03am

    standards

    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.

     

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  49.  
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    dwg, Apr 12th, 2012 @ 9:10am

    Re:

    Just noticed this piece.

    "Contrary to the popular perception here, the CAFC does not generally side with holders of patents or patent applicants.

    The court's sole role is to apply existing precedent to cases presented to it for a decision. If it happens to render a decision that benefits a patent holder or a patent applicant, it is because the law happens to align with their interests, and not because the court is predisposed to favor them."

    There are so many misstatements in here that I can't imagine how to begin.

    First of all, the CAFC is a patent court. It has been tasked by Congress specifically to unify the law of patents in the United States. That makes is a unique court among all circuit courts, and, indeed, among all courts in the country. Other courts can hear appeals on patent counter-claims, but that isn't standard. Oh, and the CAFC's patent precedent is binding on all other circuits. Think about that. So, again, CAFC is a patent court. The fact that it hears other cases does not change this.

    There is no such thing as "original jurisdiction over an appeal." Original jurisdiction means you bring your case there first, as opposed to a lower court.

    Saying that the court only sides with patent holders because of the state of the law is also silly. Judges--all judges--have personal biases, and the law can be applied in many, many cases to bring results that favor one party or the other. If a particular court consistently renders verdicts favoring one sort of party over the other, that can be used to impute bias. Here's an example: would you say that a court, say, in the deep south, that regularly returns verdicts against black parties and favoring white parties is doing so "because the law happens to align with [whites'] interests, and not because the court is predisposed to favor them?"

    All that said, I don't have it in for the CAFC. I just think it's important to debunk your debunking, because it's bunkum.

     

    reply to this | link to this | view in thread ]


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