In a rare ruling in a patent case, the U.S. Court of Appeals for the Federal Circuit has upheld sanctions without a finding of inequitable conduct — i.e., fraud on the patent office. The court affirmed a finding that patent holding company Eon-Net “pursued baseless infringement allegations in bad faith and for an improper purpose.” The decision discussed the inequities involving companies that use their patents solely to demand licenses or bring suits, sometimes referred to as patent trolls.

The Federal Circuit’s July 29 unanimous panel ruling in Eon-Net v. Flagstar Bancorp affirmed an exceptional case finding by Judge Ricardo Martinez of the District of Washington, as well as his subsequent order for patent lawyer Jean-Marc Zimmerman and Eon-Net to pay $631,135.18 in sanctions and fees.

Martinez awarded Flagstar $489,150.48 in attorney fees and expenses and issued a $141,984.70 sanctions order against Zimmerman pursuant to Rule 11 of the Federal Rules of Civil Procedure.’

The Federal Circuit opinion follows a November order from the court denying Eon-Net and Zimmerman’s motion to stay the monetary judgment against them pending the Federal Circuit appeal.

The case concerns three document-processing systems patents owned by Eon-Net and its companion corporation, Millennium L.P.

According to the Federal Circuit ruling, Millennium filed four patent infringement lawsuits related to its portfolio between 1996 and 2001, the year Zimmerman started representing Millennium as its litigation counsel.

By the time of Martinez’s January 2010 exceptional-case finding, Zimmerman had filed more than 100 lawsuits on behalf of Eon-Net or related entities asserting infringement of the patent portfolio. Nearly all of the cases led to early settlements or dismissals.

Judge Alan Lourie authored the Federal Circuit ruling, joined by Senior Judge Haldane Robert Mayer and Judge Kathleen O’Malley.

Lourie wrote that the panel agreed with the district court’s construction of the patents’ claim terms. Observing that Eon-Net eventually stipulated to noninfringement of the asserted claims of the patents at issue, the panel affirmed the court’s judgment of noninfringement.

The panel also agreed with the district court that the case is exceptional; it affirmed that court’s finding that Eon-Net and its counsel destroyed relevant documents before filing the lawsuit against Flagstar and that Eon-Net did not engage in the claim-construction process in good faith.

Lourie wrote that Eon-Net’s case against Flagstar “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,” he wrote.

Lourie noted that “[m]eritless cases like this one unnecessarily require the district court to engage in excessive claim construction analysis before it is able to see the lack of merit of the patentee’s infringement allegations.”

He observed that Eon-Net’s settlement offer range of $25,000 to $75,000, which was less than 10% of what Flagstar spent defending its suit, “effectively ensured that Eon-Net’s baseless infringement allegations remained unexposed, allowing Eon-Net to continue to collect additional nuisance value settlements.”

He also mentioned that Eon-Net “had the ability to impose disproportionate discovery costs on Flagstar” because accused infringers often have “enormous amounts of potentially relevant documents.”

Flagstar spent more than $600,000 to litigate the case brought by Eon-Net even though the district court stayed all discovery that not related to claim construction issues.

In contrast, “Eon-Net placed little at risk when filing suit,” Lourie observed. “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. And while Eon-Net risked licensing revenue should its patents be found invalid or if a court narrowly construed the patents’ claims to exclude valuable targets, Eon-Net did not face any business risk resulting from the loss of patent protection over a product or process.”

Lourie acknowledged that Eon-Net correctly argued that “it is not improper for a patentee to vigorously enforce its patent rights or offer standard licensing terms.” But, he noted, “the appetite for licensing revenue cannot overpower a litigant’s and its counsel’s obligation to file cases reasonably based in law and fact and to litigate those cases in good faith.”

Flagstar’s lawyer, Melissa Baily, a partner in the San Francisco office of Quinn Emanuel Urquhart & Sullivan, said that the court recognized the disproportionate risk placed on defendants in cases filed by nonpracticing entities. “The court acknowledged that those circumstances can be unfairly exploited by the nonpracticing entities,” Baily said. “It’s important that the court recognized that, in appropriate circumstances, those circumstances can be factored into a decision or an analysis on sanctions.”

Zimmerman did not respond to a call left at his Westfield, N.J. ,office.

John Hathaway, a Seattle lawyer who also represented Eon-Net at the lower court, did not respond to requests for comment.

Eon-Net, a limited partnership with a post office box in the British Virgin Islands according to court papers, could not be located for comment.

The are very few cases in which the Federal Circuit has affirmed an exceptional-case finding against a patent owner without a finding of inequitable conduct, said Scott McBride, a partner at Chicago-based McAndrews, Held & Malloy, who isn’t involved in the case.

“The Federal Circuit appears to have criticized the practice of some nonpracticing entities,” McBride said. “That practice might include, and was found to have included here, the filing of numerous lawsuits against numerous defendants, without sufficient prefiling investigation, coupled with offers to settle for a small amount compared to the anticipated costs of the litigation. While such cases could presumably be filed after a reasonable prefiling investigation, the plaintiff in this case was found not to have conducted such an investigation.”

The long-running case has been bouncing back and forth between the district court and the Federal Circuit for six years.

Eon-Net first sued Flagstar in 2005, alleging that the processing of information entered by Flagstar’s customers on the company’s Web site infringed various claims of one of the patents. Flagstar sought a summary judgment ruling of noninfringement because it used document-processing technology provided by an Eon-Net licensee.

In December 2006, Judge Marsha Pechman entered a judgment for $141,984.70 in attorney fees and costs against Zimmerman and his former firm, Zimmerman, Levi & Korsinsky LLP, which is now New York-based Levi Korsinsky.

In a 2007 ruling, the Federal Circuit vacated and remanded both the summary judgment ruling and the sanctions order because the district court did not give Eon-Net the opportunity to present its infringement and claim construction arguments.

Pechman recused herself, the case was reassigned to Martinez, and Eon-Net added infringement claims for two more patents. Following a hearing,

Eon-Net stipulated to noninfringement of the asserted claims.

Martinez reinstated the order for $141,984.70 in attorney fees and costs against Eon-Net and Zimmerman and awarded Flagstar $489,150.48 in attorney fees and costs for the additional litigation.

Martinez’s judgment found “indicia of extortion” in patent lawsuits filed by Zimmerman and that Zimmerman’s declaration that he was unable to pay the sanctions and fees was “not credible with respect to counsel’s alleged poverty.”

Sheri Qualters can be contacted at squalters@alm.com.