The Threshold of Exceptionality: There Is a Line, and It Can Be Crossed

Non-practicing entity (“NPE”) plaintiffs beware and NPE defendants be delighted: sanctions for objectively unreasonable claims and conduct are alive and well. Defendants in NPE litigations, particularly in the Eastern District of Texas, received encouraging news recently when Judge Gilstrap granted $390,829 in fees to more than 20 defendants in response to motions for attorneys’ fees on the heels of a decision invalidating the NPE’s asserted patent claims as unpatentable subject matter under 35 U.S.C. § 101. eDekka LLC v. 3Balls.com, Inc., No. 2:15-CV-541 JRG, Dkt. 136 (E.D. Tex. Jan. 20, 2016); eDekka LLC v. E Revolution Ventures, Inc., No. 2:15-CV-585 JRG, Dkt. Nos. 192 (E.D. Tex. Jan. 20, 2016). Although the post-Alice § 101 landscape is still largely unpredictable, defendants in NPE litigations can credit the decision as a reminder of the viability of fee-shifting in cases that cross “the threshold of exceptionality.”

Last spring, eDekka filed lawsuits against approximately 130 defendants alleging infringement of U.S. Patent No. 6,266,674 (“the ’674 patent”). The ’674 patent, titled “Random Access Information Retrieval Utilizing User-Defined Labels,” is directed toward apparatuses and methods for storing and labeling information. An exemplary claim follows:

1. Method for storing information provided by a user which comprises: in response to user input, receiving and storing information; in response to user input, designating the information as data while the information is being received; in response to user input, designating at least a portion of the information as a label while the information is being received; in response to user input, traversing a data structure and providing an indication of a location in the data structure; in response to user input, storing the label at the location in the data structure; and associating the label with the data.

The defendants challenged the asserted patent claims as encompassing only the abstract idea of organizing information and not being otherwise limited in any meaningful way, for example being limited to a specific machine. The court agreed, summarizing Claim 1 as reciting a method of “receiving and storing information, designating a portion of the information as data, … designating a portion of the information as a label[,] … marking the location of the data and storing it in a data structure, as well as associating the label with data.”  The court concluded that the claimed idea represents routine tasks that could be performed by a human and dismissed eDekka’s argument that the claims would be understood by the person of ordinary skill to transform the idea into eligible subject matter by tying it to a special-purpose computer or requiring custom software.

The defendants further argued that eDekka’s infringement claims were objectively unreasonable because they were ignorant of critical elements of the claims, silent as to the type of machine on which the invention operates, necessarily reliant on conclusory expert opinions, and part of an intentional litigation campaign to use cost-of-litigation expense to drive nuisance‑value settlements at scale. The court summarized the defendants’ position as arguing that the case was objectively unreasonable and was litigated in an unreasonable manner. eDekka responded that it had a reasonable basis to believe that the asserted claims were valid and infringed and the scope and form of its litigation strategy was necessary in view of believed “widespread” infringement and a limited damages period.

The court granted the motion for fees based on eDekka’s repeated and unsupportable arguments on behalf of an “obviously weak patent.” Notably, the court referenced the complete omission of any reference to a computer within the asserted claims, describing the patent, instead, as “vaguely allud[ing] to computer-based activity.” On this issue, the court questioned “whether eDekka engaged in a reasonable and thorough pre-suit investigation regarding the § 101 standard and relevant authority before filing a significant number of lawsuits.” The court effectively admonished eDekka for filing over one hundred lawsuits on its patent and expressly noted the court’s intention to deter mass litigation of faulty patents.

Litigants, both NPEs and defendants, and particularly those in the Eastern District of Texas, are wise to take heed of the eDekka decision, but are also cautioned not to take too much from it. A decision in this district sanctioning a plaintiff for objectively unreasonable claims and conduct presents a valuable benchmark for other defendants.  As Judge Gilstrap makes clear, not every losing plaintiff should be sanctioned, but the decision is a data point as to what types of claims and conduct can be viewed as crossing “the threshold of exceptionality.” In this case, a litigation strategy involving hundreds of lawsuits seeking nuisance value settlements, valued at times as low as $3,000 dollars, suggested an intent only to settle with defendants instead of pursuing claims in court. The court viewed this tactic as akin to extortion and contributing “significantly to the Court’s finding that this case is ‘exceptional.’”

In addition to the truly exceptional claims and conduct exhibited by eDekka in these cases, further caution in making too much of this decision can be gleaned from the court’s concluding comments. Judge Gilstrap expressly states the court “takes no pleasure in reaching the above conclusions” which it “arrives at reluctantly.” The court further notes that it did not mean, by its decision, to “unintentionally narrow the public’s access to the courts by chilling future decisions seeking to seek redress for a case in which success is not guaranteed.” Still, for NPEs and those defending against them, the decision is a reminder that a litigation strategy bearing the indicia of extortion, rather than good faith pursuit of claims, may cross “the threshold of exceptionality” and result in court-ordered fee shifting. There is a line, and as eDekka found out, it can be crossed.