Rothschild Connected Devices Innovations, LLC v. Guardian Prot. Servs., Inc.

• Decision Date: 05 June 2017
• Docket Number: 2016-2521
• Citation: 858 F.3d 1383
• Parties: ROTHSCHILD CONNECTED DEVICES INNOVATIONS, LLC, Plaintiff–Appellee v. GUARDIAN PROTECTION SERVICES, INC., Alarm Security Group, LLC, Central Security Group–Nationwide, Inc., Guardian Alarm Company, Guardian of Georgia, Inc., dba Ackerman Security Systems, Icon Security Systems, Inc., Monitronics International, Inc., Slomin's, Inc., Defendants ADS Security, L.P., Defendant–Appellant
• Court: U.S. Court of Appeals — Federal Circuit

858 F.3d 1383

ROTHSCHILD CONNECTED DEVICES INNOVATIONS, LLC, Plaintiff–Appellee

v. GUARDIAN PROTECTION SERVICES, INC., Alarm Security Group, LLC, Central Security Group–Nationwide, Inc., Guardian Alarm Company, Guardian of Georgia, Inc., dba Ackerman Security Systems, Icon Security Systems, Inc., Monitronics International, Inc., Slomin's, Inc., DefendantsADS Security, L.P., Defendant–Appellant

2016-2521

United States Court of Appeals, Federal Circuit.

Decided: June 5, 2017

Jay B. Johnson , Kizzia Johnson PLLC, Dallas, TX, argued for plaintiff-appellee.

Nathan Bailey , Waller Lansden Dortch & Davis, LLP, Nashville, TN, argued for defendant-appellant. Also represented by Eric Brandon Fugett .

Before Prost, Chief Judge, Mayer and Wallach, Circuit Judges.

Concurring opinion filed by Circuit Judge Mayer.

Wallach, Circuit Judge.

Appellant ADS Security, L.P. ("ADS") appeals the opinion and order of the U.S. District Court for the Eastern District of Texas ("District Court") denying ADS's request for attorney fees pursuant to 35 U.S.C. § 285 (2012). See Rothschild Connected Devices Innovations, LLC v. Guardian Prot. Servs., Inc. , No. 2:15-cv-01431-JRG-RSP, 2016 WL 3883549, at *4 (E.D. Tex. July 18, 2016). The District Court found that Appellee Rothschild Connected Devices Innovations, LLC ("Rothschild") had not engaged in conduct sufficient to make the litigation "exceptional," such that ADS did not merit attorney fees pursuant to § 285. See id. at *1–3.

ADS appeals the District Court's exceptional case determination. We possess subject matter jurisdiction pursuant to 28 U.S.C. § 1295(a)(1) (2012). We reverse and remand.

BACKGROUND

The instant dispute arises as a consequence of Rothschild's allegation that ADS's home security system infringes U.S. Patent No. 8,788,090 ("the '090 patent"). The '090 patent generally recites "[a] system and method for creating a personalized consumer product," '090 patent, Abstract, where the system and method "enable a user to customize products containing solids and fluids by allowing a server on the global computer network, e.g., the Internet, to instruct the hardware mixing the solids and fluids of the user's preferences for the final mix," id. col. 1 ll. 58–62. Rothschild has filed numerous lawsuits against various parties alleging infringement of the '090 patent. J.A. 1086, 1097.

Rothschild filed a complaint against ADS alleging infringement of claim 1 of the '090 patent. J.A. 62, 73. ADS responded by filing an answer and counterclaims. J.A. 84–92. ADS subsequently sent an email to Rothschild alleging that the '090 patent covers patent-ineligible subject matter under 35 U.S.C. § 101¹ and that prior art anticipates claim 1 of the '090 patent under 35 U.S.C. § 102(a)(1).² J.A. 704. ADS offered to settle the case if Rothschild paid ADS $43,330 for attorney fees and costs. J.A. 704. Rothschild rejected ADS's offer. J.A. 855.

ADS next filed a motion for judgment on the pleadings, arguing that claim 1 of the '090 patent covers patent-ineligible subject matter under § 101. J.A. 93–104. ADS also sent Rothschild a notice pursuant to Federal Rule of Civil Procedure 11(c)(2) ("Safe Harbor Notice"),³ which included copies of a proposed Rule 11(b) motion for sanctions and prior art that purportedly anticipates claim 1. J.A. 270, 685. In light of the Safe Harbor Notice, Rothschild voluntarily moved to dismiss its action. See J.A. 247. ADS opposed and filed a cross-motion for attorney fees pursuant to § 285,⁴ see J.A. 249, based on its view that Rothschild's suit was objectively unreasonable because Rothschild knew or should have known that claim 1 covers patent-ineligible subject matter under § 101 and is anticipated by prior art under § 102(a)(1), see J.A. 261–64. ADS also argued that Rothschild did not intend to test the merits of its claim and instead filed this and over fifty other lawsuits in the District Court to " ‘exploit[ ] the high cost to defend complex litigation to extract nuisance value settlements' " from various defendants. J.A. 265 (brackets omitted) (quoting Eon–Net LP v. Flagstar Bancorp , 653 F.3d 1314, 1327 (Fed. Cir. 2011) ).

The District Court ultimately granted Rothschild's Motion to Dismiss and denied ADS's Cross–Motion for attorney fees. Rothschild , 2016 WL 3883549, at *4. As to the latter, the District Court found that Rothschild did not engage in conduct sufficient to make the action "exceptional" under § 285. Id. The District Court found that Rothschild's "decision to voluntarily withdraw its [C]omplaint within the safe harbor period is the type of reasonable conduct Rule 11 is designed to encourage." Id. at *2. The District Court also found that Rothschild recited "non-conclusory and facially plausible arguments supporting patent eligibility" under § 101. Id. Turning to the anticipation allegations, the District Court found that ADS neither filed a motion seeking to invalidate claim 1 of the '090 patent under § 102(a)(1) nor demonstrated that Rothschild failed to conduct a reasonable pre-suit investigation of the prior art. Id. Finally, the District Court held that Rothschild's numerous other suits for infringement pending against other companies did not alone make the case exceptional. Id. at *3. This appeal followed.

DISCUSSION

I. Legal Framework and Standard of Review

A "court in exceptional cases may award reasonable attorney fees to the prevailing party." 35 U.S.C. § 285. The Supreme Court has explained that an exceptional case, though rare,

is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated. District courts may determine whether a case is "exceptional" in the case-by-case exercise of their discretion, considering the totality of the circumstances.

Octane Fitness, LLC v. ICON Health & Fitness, Inc. , ––– U.S. ––––, 134 S.Ct. 1749, 1756, 188 L.Ed.2d 816 (2014) (footnote omitted); see id. at 1757 (explaining that "a district court may award fees in the rare case in which a party's unreasonable conduct—while not independently sanctionable—is nonetheless so ‘exceptional’ as to justify an award of fees"). In weighing the evidence, the district court may consider, among other factors, "frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case)[,] and the need in particular circumstances to advance considerations of compensation and deterrence." Id. at 1756 n.6 (internal quotation marks and citation omitted); see also id. at 1758 (explaining that a § 285 attorney fee award is appropriate "when the losing party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons" (internal quotation marks and citation omitted)). An exceptional case determination must find support in a "preponderance of the evidence." Id. at 1758.

"We review all aspects of a district court's § 285 determination for an abuse of discretion," Lumen View Tech. LLC v. Findthebest.com, Inc. , 811 F.3d 479, 482 (Fed. Cir. 2016) (citation omitted), including its "exceptional case determination," SFA Sys., LLC v. Newegg Inc. , 793 F.3d 1344, 1347 (Fed. Cir. 2015) (citation omitted). An abuse of discretion occurs when, inter alia, the district court "base[s] its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence." Highmark Inc. v. Allcare Health Mgmt. Sys., Inc. , ––– U.S. ––––, 134 S.Ct. 1744, 1748 n.2, 188 L.Ed.2d 829 (2014) (internal quotation marks and citation omitted). "A factual finding is clearly erroneous if, despite some supporting evidence, we are left with the definite and firm conviction that a mistake has been made." InsiteVision Inc. v. Sandoz, Inc. , 783 F.3d 853, 858 (Fed. Cir. 2015) (internal quotation marks and citation omitted).

II. The District Court's Exceptional Case Determination Constitutes an Abuse of Discretion

ADS challenges the District Court's exceptional case determination on several grounds. First, ADS alleges that the District Court failed to properly assess the weakness of Rothschild's litigating position because claim 1 of the '090 patent covers patent-ineligible subject matter under § 101 and is anticipated by the prior art under § 102(a)(1). See Appellant's Br. 18–32. Second, ADS avers that "the District Court failed to consider Rothschild's willful ignorance of the prior art," which further demonstrates the weakness of Rothschild's litigating position. Id. at 32 (capitalization modified); see id. at 32–35. Third, ADS contends that Rothschild engaged in vexatious litigation by bringing suit solely to extract a nuisance payment, citing the numerous lawsuits that Rothschild has filed regarding the '090 patent. See id. at 37–40. Fourth, ADS argues that the District Court failed to "consider the totality of the circumstances as required by Octane Fitness " because, inter alia, it "improperly conflat[ed] the provisions of Rule 11 and relief under [§] 285." Id. at 40; see id. at 40–43.

We need not address ADS's first argument because the second, third, and fourth arguments demonstrate an abuse of discretion. We address these three arguments in turn.

A. The District Court Misjudged the Strength of Rothschild's Litigating Position in Consideration of the Prior Art

ADS avers that Rothschild submitted affidavits that include statements "evidenc[ing] a conscious disregard for Rothschild's continuing obligation to inquire into the merits of its case." Id. at 33. According to ADS, the District Court did "not address[ ] these troubling statements." Id. ADS argues that the District Court thus "fail[ed] to properly assess the substantive strength of Rothschild's litigating position." Id. at 35.

The District Court clearly erred by failing to consider Rothschild's willful ignorance of the prior art. In its Safe Harbor Notice and Cross–Motion for attorney fees, ADS included prior art that purportedly anticipates...