In a rare decision, the U.S. Court of Appeals for the Federal Circuit reversed an Eastern District of Texas federal judge on a sanctions issue, finding that the trial judge used the wrong standard in deciding to deny the defendants’ Rule 11 sanction motions in a patent case.

The background to the Dec. 7 decision in Raylon v. Complus Data Innovations Inc., et al., is as follows, according to the Federal Circuit’s opinion: Raylon filed complaints against three defendants, alleging they infringed on a patent for a hand-held ticket-issuing system. The defendants later sent several letters to Raylon expressing concerns that Raylon’s complaints violated Federal Rule of Civil Procedure 11(b)(2) and 11(b)(3) because, they argued, the plaintiff’s claim construction positions were unsupportable by intrinsic evidence and the asserted claims were unreasonable. Rule 11 generally requires attorneys filing pleadings to conduct a reasonable inquiry so they can verify that the pleadings are “not being presented for an improper purpose,” “the claims . . . are warranted by existing law or a nonfrivolous argument” and the “factual contentions have evidentiary support.”

Raylon disagreed, the opinion continues, maintaining that the patent supported broad claim construction and that the accused products infringed each and every claim of the patent. Specifically, the term construed during the litigation was “display being pivotally mounted on said housing” of the hand-held ticketing device. Raylon construed the term to mean “an electronic device attached to housing for the visual presentation of information, the display capable of being moved or pivoted relative to the viewer’s perspective.” The defendants proposed various constructions, all of which excluded from “pivotally mounted”displays that were fixed or incapable of pivoting.

The defendants later filed for Rule 11 sanctions in the case. The trial court rejected Raylon’s claim construction, noting that it “stretch[es] the bounds of reasonableness beyond what I am willing to accept,” accepted the defendants’ construction and granted summary judgment in their favor. The trial court rejected the defendants’ motions for Rule 11 sanctions.

In making his analysis, the trial judge found that while Raylon’s claim construction arguments stretched the bounds of reasonableness, “they do not cross the line,” wrote the Federal Circuit. The trial court also analyzed Raylon’s settlements and its damage model to determine whether Raylon filed the suit to “recover nuisance value settlements.” The trial court found the plaintiff’s damage model was “not large for a patent case,” suggesting that Raylon’s “earlier settlements were not so unreasonable as to indicate that Raylon believed its case was weak or frivolous.”

After the trial court issued its final judgment, the defendants filed motions for attorney fees and costs under 35 U.S.C. §285 and 28 U.S.C. §1927, which the court denied. The defendants appealed the denial of Rule 11 sanctions and of attorney fees and costs to the Federal Circuit.

In its decision, the Federal Circuit found that the trial court did not use the proper standard as set forth in decisions by the 5th U.S. Circuit Court of Appeals.

“The Fifth Circuit ‘has been emphatic’ that Rule 11 analysis is a strictly objective inquiry and ‘expressly rejected any inquiries into the motivation behind a filing.’” wrote Judge Sharon Prost, in a decision joined by Judge Kimberly Moore.

The panel reversed the trial court’s holding that there was no Rule 11 violation and ordered the judge to determine “a proper sanction.”

The court also remanded the case to consider the motion for attorney fees and costs under §285 to determine whether the case qualifies as “exceptional” under the statute. A case is exceptional under that rule if, absent litigation misconduct or misconduct in securing a patent, the litigation is “brought in subjective bad faith” and the “litigation is objectively baseless.”

In a footnote, the majority opinion notes that it leaves the district court’s denial of attorney fees and costs under §1927 undisturbed. “Establishing attorney misconduct under §1927 implicates a higher level of culpability than Rule 11, and defendants have not established that Raylon’s misconduct rises to the level required by §1927.

Judge Jimmie Reyna wrote a concurring opinion, noting: “I write separately to make clear that when a court finds a Rule 11 sanction based on conduct involving the allegation and pursuit of patent infringement claims that have been found objectively unreasonable, the court is compelled, if so moved by a party, to undertake a detailed and thorough §285 inquiry and analysis.”

He continues: “I deviate slightly from my colleagues in the majority in that, given the record in this case, I would reverse and declare this an exceptional case and limit the remand to determination of appropriate sanctions.”

D. Scott Hemingway, a partner in Dallas’ Hemingway & Hansen who argued the case for Raylon on appeal, did not return a call seeking comment.

Russ Emerson, a partner in Dallas’ Haynes and Boone who argued for defendant Complus Data Innovations Inc. on appeal, is pleased with the decision — one he says is rare for the Federal Circuit.

“Sanctions cases are pretty rare all the way around. And as far as I know the Federal Circuit has never reversed a refusal to grant sanctions” before, Emerson says.

Mitchell Feller, a partner in New York City’s Sobel & Feller who argued for Symbol Technologies Inc. on appeal, is also pleased with the decision.

“The decision will provide an extra tool for patent defendants where there are serious concerns where a lawsuit has no merit, but to simply exploit the cost of litigation,” Feller says.

Scott Stimpson, a partner in New York City’s Sills Cummins & Gross who argued on appeal for defendant Casio Computers Co., is glad the federal circuit ruled in his client’s favor.

Stimpson notes that, when his client believes infringement claims are unreasonable, “they won’t hesitate to fight the case hard.”

“We just thought the sanctions should be imposed here, and the Federal Circuit agrees with us,” he says.