CAFC Says District Court Failed to Provide Sufficient Reasoning for Denying Sanctions, Attorney’s Fees

The U.S. Court of Appeals for the Federal Circuit (CAFC) issued a precedential decision Wednesday vacating and remanding a district court ruling that had denied Pen-Tech Associates, Inc.’s motion for sanctions and attorney’s fees due to Epic Tech, LLC’s allegedly frivolous infringement claims. The CAFC found the district court had provided “insufficient detail to permit meaningful review.”

Epic Tech owns U.S. Patent No. 8,545,317, issued in October 2013, for an electronic sweepstakes system. Claims of a related patent were rejected by the U.S. Patent and Trademark Office (USPTO) in December 2013 for nonstatutory double patenting over the ‘317 patent. Six months later, the U.S. Supreme Court issued its decision in Alice v. CLS Bank and the USPTO reopened prosecution of the second patent application and rejected it on Section 101 grounds. The Office also rejected two other related applications on 101 grounds. Epic Tech ultimately abandoned all three applications.

In 2020, “six years after Alice and two years after Baker, Donelson, Bearman, Caldwell & Berkowitz, PC (Baker Donelson) began prosecuting Epic Tech’s patent applications,” according to the CAFC, Epic Tech sued Pen-Tech for infringement of various claims of the ‘317 patent. Pen-Tech sought declaratory judgment that the claims were invalid as ineligible, relying on an order issued by another court in Epic Tech’s suit against a separate party (the Fusion Skill case) involving a related patent in which the court held the asserted claims ineligible under Section 101. The U.S. District Court for the Northern District of Georgia ultimately granted Pen-Tech’s motion and found the asserted claims of the ‘317 patent invalid under 101.

Before the court entered summary judgment, Pen-Tech moved for Rule 11 sanctions, arguing that Epic Tech had notice that the ‘317 patent’s claims were ineligible in at least three instances:  (1) When Alice issued; (2) when the USPTO rejected patentably indistinct claims under Section 101 in three related applications; and (3) when the Fusion Skill court held similar claims of U.S. Patent No. 8,545,315 invalid under Section 101.

“These notices, in Pen-Tech’s view, should have prompted Epic Tech to investigate the asserted claims’ validity before filing suit,” wrote the CAFC.

While the district court recognized its summary judgment of invalidity lent “considerable credence” to Pen-Tech’s sanctions motion, it denied the motion nonetheless, finding that “neither ‘Epic Tech [nor] Baker Donelson’s conduct was so unreasonable as to be frivolous,’” and declining to award attorneys’ fees and costs “because it determined the case was not exceptional and Epic Tech had not unreasonably or vexatiously litigated its case.”

On appeal, the CAFC declined to weigh in on Pen-Tech’s allegation that the district court had abused its discretion, instead holding that the Georgia court’s order “does not permit meaningful review of its denial in light of Pen-Tech’s validity-based notice theory.”

In the CAFC’s view, the notice factors Pen-Tech pointed to “created a compelling concern over the validity of the claims before this litigation was brought,” but the district court failed to sufficiently address them.

With respect to the Alice argument, the CAFC said that the district court focused too much on evidence of Epic Tech’s pre-suit investigation into infringement rather than validity. While the district court credited testimony by Epic Tech’s Rule 30(b)(6) witness regarding his “good faith, pre- suit [infringement] investigation” and found Baker Donelson met its pre-suit obligations by “creating a claim chart and a cease and desist letter using images from Epic Tech’s pre-suit [infringement] investigation,” those facts “do not address the distinct question of whether Epic Tech should have investigated validity given the notice of potential invalidity Alice provided,” said the CAFC.

With respect to the USPTO’s office actions, the district court held that “no court has found that the prosecution history of a later patent can reach back and limit a claim using the same element in an earlier related patent.” But the CAFC said this did not address Pen-Tech’s theory, which focused not on the related patents’ limitation of the ‘317 patent claims but on the fact that related patents that had been determined to be patentably indistinct form the ‘317 patent had been rejected under Section 101 post-Alice.  The district court’s rationale “fails to explain why those office actions, whether considered individually or collectively, were insufficient to serve as notice of potential invalidity despite their substantive relevance to the asserted claims,” said the CAFC opinion.

Finally, the district court’s reasoning for rejecting Pen-Tech’s theory of notice provided by the Fusion Skills case was inadequate as it essentially amounted to “the issues were not the exact same,” said the CAFC. “The court’s reasoning did not suffice under these circumstances to permit meaningful review by this court,” it added.

The CAFC additionally held that the lack of reasoning in the district court’s order also did not permit meaningful review of the attorney’s fees motion for the same facts explained with respect to the Rule 11 motion. The order was therefore vacated and the case remanded for further proceedings.

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