[W]hen determining whether there was a Rule 11 violation, "the standard under which an attorney is measured is an objective, not subjective standard of reasonableness under the circumstances." [Thus, an evaluation of the plaintiff's] litigation motives -- whether it brought suit in good faith or to obtain nuisance value settlements . . . has no place in the Rule 11 analysis.

On December 7, 2012, in Raylon, LLC v. Complus Data Innovations, Inc., the U.S. Court of Appeals for the Federal Circuit (Prost,* Moore, Reyna) affirmed-in-part, vacated-in-part and remanded the district court's summary judgment that Complus did not infringe U.S. Patent No. 6,655,589, which related to a hand-held identification investigating and ticket issuing system, and the denial of Complus' motion for Fed. R. Civ. P. 11 sanctions and attorney fees and costs under 35 U.S.C. § 285. The Federal Circuit stated:

Rule 11 expressly requires that an attorney presenting a pleading, motion, or other paper before the court certify that he has performed "an inquiry reasonable under the circumstances" such that he can verify that (1) "it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation," (2) "the claims . . . are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law;" (3) "the factual contentions have evidentiary support or, . . . will likely have evidentiary support after a reasonable opportunity for further investigation or discovery." [W]hen determining whether there was a Rule 11 violation, "the standard under which an attorney is measured is an objective, not subjective standard of reasonableness under the circumstances."

The district court abused its discretion by evaluating Raylon's conduct under a subjective standard. Specifically, the court evaluated Raylon's damages model and early settlements to determine whether it brought its suits in good faith or merely to obtain nuisance value settlements. The court opined that "in some situations, a plaintiff asserting a large damages model while making very low offers in the case may indicate that the plaintiff realizes its case is very weak or even frivolous" and that the amount of damages "may be indicative of the good-faith nature with which the case is brought." It found Raylon's damages model "not large for a patent case" such that "the earlier settlements were not so unreasonable as to indicate that Raylon believed its case was weak or frivolous." Based on these findings as to Raylon's motives, the district court denied defendants' motion. In its view, Rule 11 sanctions only apply "[w]here it is clear that a case lacks any credible infringement theory and has been brought only to coerce a nuisance value settlement." But, this is not the proper standard. 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. The district court denied Rule 11 sanctions through the lens of an erroneous view of the law, and thus abused its discretion.

Applying the objectively reasonable standard, we agree with defendants that Raylon's claim construction (and thus infringement contentions) were frivolous. Claim construction is a matter of law, so that an attorney's proposed claim construction is subject to Rule 11(b)(2)'s requirement that all legal arguments be nonfrivolous. Reasonable minds can differ as to claim construction positions and losing constructions can nevertheless be nonfrivolous. But, there is a threshold below which a claim construction is "so unreasonable that no reasonable litigant could believe it would succeed," and thus warrants Rule 11 sanctions.

Raylon's claim construction of "display pivotally mounted on said housing" is a prime example of a construction that falls below this threshold. . . . Raylon's claim construction -- that pivotally mounted only requires the display be pivotable relative to the user -- is contrary to all the intrinsic evidence and does not conform to the standard canons of claim construction. This is a clear instance where no objectively reasonable litigant, relying on the single sentence in the specification to support its position, would believe its claim construction could succeed; therefore, Raylon's claim construction is frivolous and thus sanctionable under Rule 11(b)(2). . . .

When a party's conduct violates Rule 11(b), the court must impose "an appropriate sanction." Rule 11 sanctions "may be set at a level 'sufficient to deter repetition of such conduct or comparable conduct by others similarly situated.'" Determining what sanction to impose is initially a matter within the discretion of the district court. We remand these cases for a determination of an appropriate sanction.

Defendants argue that the district court improperly denied attorneys' fees and costs under 35 U.S.C. § 285, and that these cases qualify as exceptional under the statute. A case is exceptional under § 285 if there has been some inappropriate conduct relating to the matter in litigation. Absent litigation misconduct or misconduct in securing the patent, a case is exceptional under § 285 if "(1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless." Similar to the evaluation under Rule 11, for litigation to be objectively baseless, the allegations "must be such that no reasonable litigant could reasonably expect success on the merits."

The district court found that there was no litigation misconduct. In evaluating whether the cases were otherwise exceptional, the court relied exclusively on it Rule 11 order to find that the litigation was not "objectively baseless." 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.

If you have questions about the material presented above, please contact Dr. Lawrence M. Sung ( lsung@bakerlaw.com or 202.861.1537) or any member of our Intellectual Property Team.

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