Sfa Systems, LLC v. Newegg Inc.

United States Court of Appeals
for the Federal Circuit
______________________
SFA SYSTEMS, LLC,
Plaintiff-Appellee
v.
NEWEGG INC.,
Defendant-Appellant
______________________
2014-1712
______________________
Appeal from the United States District Court for the
Eastern District of Texas in Nos. 6:09-cv-00340-LED,
6:11-cv-00399-LED, Chief Judge Leonard Davis.
______________________
Decided: July 10, 2015
______________________
JOHN J. EDMONDS, Collins, Edmonds, Pogorzelski,
Schlather & Tower PLLC, Houston, TX, argued for plain-
tiff-appellee. Also represented by ELIZABETH A. WILEY,
The Wiley Firm PC, Austin, TX; ANDREW W. SPANGLER,
Spangler Law PC, Longview, TX.
MARK A. LEMLEY, Durie Tangri LLP, San Francisco,
CA, argued for defendant-appellant. Also represented by
KENT E. BALDAUF, JR., DANIEL H. BREAN, The Webb Law
Firm, Pittsburgh, PA; RICHARD GREGORY FRENKEL, Lat-
ham & Watkins LLP, Menlo Park, CA; EDWARD R.
2 SFA SYSTEMS, LLC v. NEWEGG INC.
REINES, Weil, Gotshal & Manges LLP, Redwood Shores,
CA.
______________________
Before O’MALLEY, CLEVENGER, and HUGHES, Circuit
Judges.
O’MALLEY, Circuit Judge.
SFA Systems, Inc. (“SFA”) brought this patent in-
fringement action against multiple accused infringers,
including Newegg, Inc. (“Newegg”), in the United States
District Court for the Eastern District of Texas. After the
district court issued its claim construction order, but
before the parties exchanged expert reports, SFA volun-
tarily dismissed the suit with prejudice under Federal
Rule of Civil Procedure 41(a), and covenanted not to sue
Newegg for infringement of the patents at issue. Newegg
then moved for attorneys’ fees under 35 U.S.C. § 285(2012). Because we find that the district court did not
abuse its discretion in denying Newegg’s § 285 motion, we
affirm.
I. BACKGROUND
A. The Patents
There are two related patents at issue in this appeal,
U.S. Patent Nos. 6,067,525 (“the ’525 patent”) and
7,941,341 (“the ’341 patent”). Both patents relate to a
computer sales system that includes a plurality of subsys-
tems or components, where each of the components corre-
sponds to a different phase of the sales process. The
patents disclose “an event manager” that integrates all of
the different sales process components. The event man-
ager detects the occurrence of “events” and automatically
implements operations based on those events. For exam-
ple, the event manager allows data from one component to
be shared with all of the other components in the sales
SFA SYSTEMS, LLC v. NEWEGG INC. 3
system so that when data is entered in one component, it
will also be available in all of the other components.
B. Procedural History
On July 28, 2009, SFA filed this patent infringement
suit in the United States District Court for the Eastern
District of Texas against multiple online retailers, includ-
ing Newegg, alleging infringement of the ’525 patent. A
little over two years later, after some parties settled with
SFA and were dropped from the suit, SFA filed a separate
suit against the remaining accused infringers, this time
asserting the ’341 patent, which had issued on May 10,
2011. On October 21, 2011, after all of the other accused
infringers settled, Newegg and SFA jointly agreed to
consolidate the two lawsuits.
Prior to the consolidation of the two suits, the district
court held a Markman hearing regarding the disputed
terms of the ’525 patent. The magistrate judge issued a
Markman order on August 8, 2011, rejecting Newegg’s
proposed constructions that limited the asserted claims to
systems that assist a salesperson, or are used by a sales-
person. The district court adopted the magistrate judge’s
constructions.
After the district court granted the parties’ joint mo-
tion to consolidate the two lawsuits, the court held a
second Markman hearing regarding the disputed terms of
the ’341 patent. Newegg also moved for summary judg-
ment that the claims at issue in both patents were invalid
as indefinite. In that motion, Newegg argued that the
system claims contained method step limitations, making
it unclear when infringement occurs. While awaiting the
district court’s decisions on claim construction for the ’341
patent and definiteness of the patents, the parties filed a
joint motion for an extension of the case schedule, arguing
that the scheduled trial date conflicted with the scheduled
trial date in another case in which SFA had asserted the
same patents against a different defendant. See SFA
4 SFA SYSTEMS, LLC v. NEWEGG INC.
Sys., LLC v. Amazon.com, Inc., No. 6:11-cv-52-LED (E.D.
Tex. Nov. 11, 2011), ECF No. 243. The district court
denied the motion for an extension as premature, urging
counsel to refile the request closer to trial.
On April 11, 2013, the district court issued its Mark-
man order on the terms in the ’341 patent, again siding
with SFA that the claimed system did not require in-
volvement of a salesperson. In that same order, the
district court also denied Newegg’s motion for summary
judgment that the claims at issue were indefinite. The
next day, on April 12, 2013, SFA moved to dismiss the
case against Newegg with prejudice under Federal Rule of
Civil Procedure 41(a), and covenanted not to sue Newegg
on the patents at issue. Newegg filed motions to recover
its costs and fees following the dismissal of the case.
After briefing was completed, but before the district
court acted on Newegg’s motions for costs and fees, the
Supreme Court decided Octane Fitness, LLC v. ICON
Health & Fitness, Inc., 134 S. Ct. 1749 (2014). The par-
ties did not request leave to file additional briefing and
the district court decided that none was required. On
July 8, 2014, the district court found that Newegg was the
prevailing party and granted Newegg’s bill of costs. That
same day, the district court also denied Newegg’s § 285
motion for attorneys’ fees. The district court cited the
Supreme Court’s standard in Octane Fitness, finding that,
“[e]ven under the new, lower standard for an exceptional
case designation, Newegg has provided no evidence that
this case ‘stands out from others with respect to the
substantive strength of [SFA’s] litigating position.’” SFA
Sys., LLC v. 1-800-Flowers.com, Inc., No. 6:09-cv-340, slip
op. at 4 (E.D. Tex. July 8, 2014), ECF No. 473 (“Section
285 Order”) (quoting Octane Fitness, 134 S. Ct. at 1756).
The district court rejected Newegg’s assertions that it
would have prevailed on the merits, pointing out that the
court had already rejected Newegg’s attempts to limit the
scope of the patent through claim construction and had
SFA SYSTEMS, LLC v. NEWEGG INC. 5
denied Newegg’s motion for summary judgment. The
district court explained that Newegg’s primary complaint
was that SFA filed many suits against many defendants,
showing a pattern of abusive and vexatious litigation to
extract settlements. The district court concluded, howev-
er, that “the fact that SFA has filed several lawsuits
against numerous defendants is insufficient to render this
case exceptional. In many cases, patent infringement is
widespread and the patent owner may be forced to revert
to widespread litigation against several infringing parties
to enforce its intellectual property rights.” Id.Newegg timely appealed the district court’s denial of
its § 285 attorneys’ fees motion. 1 We have jurisdiction
under 28 U.S.C. § 1295(a)(1).
II. DISCUSSION
Under 35 U.S.C. § 285, a “court in exceptional cases
may award reasonable attorney fees to the prevailing
party.” In Octane Fitness, the Supreme Court clarified
that:
an “exceptional” case is simply one that stands out
from others with respect to the substantive
strength of a party’s litigating position (consider-
ing 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 totali-
ty of the circumstances.
1 Although Newegg also argues the district court’s
denial of its motion for experts’ fees on appeal, it fails to
separately argue the merits of its case for experts’ fees.
As a result, we will not separately address that issue.
6 SFA SYSTEMS, LLC v. NEWEGG INC.
Octane Fitness, 134 S. Ct. at 1756 (footnote omitted). On
appeal, we review the district court’s exceptional case
determination under § 285 for an abuse of discretion.
Highmark Inc. v. Allcare Health Mgmt. Sys., 134 S. Ct.
1744, 1747 (2014).
Newegg argues that the district court erred in finding
that this case was not exceptional because: (1) the district
court’s analyses on claim construction and indefiniteness
were wrong and, under the correct analyses, SFA’s law-
suit is meritless; and (2) SFA maintained and filed this
lawsuit in bad faith for the improper purpose of obtaining
a nuisance value settlement (“the unreasonable manner
in which the case was litigated”). Octane Fitness, 134 S.
Ct. at 1756. Although, under Octane Fitness, we ulti-
mately consider these issues together under the “totality
of the circumstances,” id., it helps to first parse Newegg’s
arguments because Newegg argues that we should apply
different standards of review to them.
A. “The substantive strength of a party’s litigating
position”
Newegg contends that the district court erroneously
construed the claims of the patents to not require a sales-
person. Newegg asserts that, under the proper claim
construction, its online sales website does not infringe
because the website sells products without any salespeo-
ple, rendering SFA’s suit meritless. According to Newegg,
moreover, the district court also erred in finding the
claims at issue were not indefinite. Because claim con-
struction and indefiniteness are matters of law, Newegg
insists that we review the district court’s orders on these
issues de novo as part of our review of the district court’s
exceptional case determination under Highmark. Newegg
argues that a searching merits review is required in this
context because, otherwise, “plaintiffs could file frivolous
cases in front of judges or courts that typically deny
summary judgment or defer deciding summary judgment
SFA SYSTEMS, LLC v. NEWEGG INC. 7
motions until the last minute before trial.” Appellant’s
Br. 29–30.
Newegg latches onto footnote 2 in Highmark, where
the Supreme Court states that “[t]he abuse-of-discretion
standard does not preclude an appellate court’s correction
of a district court’s legal or factual error: ‘A district court
would necessarily abuse its discretion if it based its ruling
on an erroneous view of the law or on a clearly erroneous
assessment of the evidence.’” 134 S. Ct. at 1748 n.2
(quoting Cooter & Gell v. Hartmarx Corp., 496 U.S. 384,
405 (1990)). This language, however, does not mean that
we must evaluate and determine all issues of law decided
by the district court de novo as part of our review of the
district court’s exceptional case determination.
In Octane Fitness, the Supreme Court made clear that
it is the “substantive strength of the party’s litigating
position” that is relevant to an exceptional case determi-
nation, not the correctness or eventual success of that
position. Octane Fitness, 134 S. Ct. at 1756 (emphasis
added). A party’s position on issues of law ultimately
need not be correct for them to not “stand[] out,” or be
found reasonable. Id.; cf. Raylon, LLC v. Complus Data
Innovations, Inc., 700 F.3d 1361, 1368 (Fed. Cir. 2012)
(“Reasonable minds can differ as to claim construction
positions and losing constructions can nevertheless be
nonfrivolous.”). Importantly, this means that we need not
rule on the correctness of the district court’s decision on
all underlying issues of law in reviewing a district court’s
exceptional case determination. We need only determine
whether the district court abused its discretion when it
found that the party’s litigating position was not so merit-
less as to “stand out” from the norm and, thus, be excep-
tional. Octane Fitness, 134 S. Ct. at 1756.
In this case, we conclude that the district court did
not abuse its discretion in finding that SFA’s claim con-
struction and indefiniteness positions did not stand out.
8 SFA SYSTEMS, LLC v. NEWEGG INC.
Newegg does not contend that the district court used the
wrong law, only that its conclusions were flawed. The
district court did not clearly err in its assessment that
SFA’s claim construction position—that the claims at
issue did not require a salesperson—was reasonable. See,
e.g., ’525 patent col. 36 ll. 55–61 (requiring a “sales per-
son” in dependent claims); ’341 patent col. 15 ll. 12–14
(“The Kiosk module 302, illustrated in FIG. 3, is utilized
at public forums where the salesperson may not neces-
sarily be present.”); id. fig. 3 (depicting a “kiosk” and “web
site” as inputs to the event manager). Nor did the district
court clearly err in its assessment that the claims at issue
were not indefinite because they were distinguishable
from the claims in cases like IPXL Holdings, L.L.C. v.
Amazon.com, Inc., 430 F.3d 1377, 1384 (Fed. Cir. 2005).
See SFA Sys., LLC v. 1-800-Flowers.com, Inc., 940 F.
Supp. 2d 433, 455 (E.D. Tex. 2013) (“However, the claims
in those cases suffered from a true ambiguity as to
whether the claims require building a product or perform-
ing a method. In particular, those cases involved appa-
ratus claims incorporating steps where a user acts upon
the system. Here, the claims involve capabilities of the
system, as limitations on the ‘event manager’ and ‘subsys-
tem’ structural elements.”). Where, as here, a party’s
motion for fees does no more than refer the court back to
its previous rulings, the district court has no obligation to
reconsider or re-explain its prior rulings. Section 285
Order at 4 (characterizing Newegg’s arguments regarding
the merits of SFA’s claims as “bare allegations”).
To the extent Newegg argues that the district court
erred when it stated that “evidence of the frivolity of the
claims must be reasonably clear without requiring a
‘mini-trial’ on the merits for attorneys’ fees purposes,” or
somehow failed to give consideration to Newegg’s claim
construction or indefiniteness positions, we reject that
argument. Section 285 Order at 4–5. The district court
considered and rejected Newegg’s claim construction
SFA SYSTEMS, LLC v. NEWEGG INC. 9
arguments not once, but twice, after a fulsome claim
construction process. And, there is nothing in the district
court’s summary judgment ruling to indicate the court
gave Newegg’s arguments scant attention or that its
denial of summary judgment was predicated on an insti-
tutional bias against granting such requests. Newegg
does not contend, moreover, that any of the rulings with
which it disagrees in this case occurred at “the last mi-
nute before trial.” Appellant’s Br. 29–30; see SFA Sys.,
LLC v. 1-800-Flowers.com, Inc., No. 6:09-cv-340 (E.D. Tex.
Oct. 4, 2013), ECF No. 461, at 12–15.
Accordingly, we find that the district court did not
abuse its discretion in concluding that SFA’s litigation
position was not “one that stands out from others with
respect to the substantive strength of [SFA’s] litigating
position.” Octane Fitness, 134 S. Ct. at 1756. Again, our
holding is based on the district court’s evaluation of the
strength of SFA’s litigating position, not on the correct-
ness of the district court’s claim construction and indefi-
niteness orders. We express no opinion as to whether we
ultimately would have affirmed those determinations.
B. “The unreasonable manner in which the case was
litigated”
Newegg asserts that SFA brought this suit for the
improper purpose of obtaining a nuisance value settle-
ment. Newegg alleges that SFA dragged out the litigation
to increase Newegg’s litigation costs and that SFA dis-
missed the suit as soon as it realized that Newegg was not
going to settle. As evidence, Newegg submitted the
settlement amounts that SFA received from previous
accused infringers, which, according to Newegg, were all
substantially below the cost of defending a patent litiga-
tion suit and below what SFA could have recovered in
damages if it had prevailed in those actions. Newegg
proffered no other evidence regarding SFA’s motivations.
10 SFA SYSTEMS, LLC v. NEWEGG INC.
Prior to Octane Fitness, in addition to the test for
§ 285 fees set out in Brooks Furniture Manufacturing, Inc.
v. Dutailier International, Inc., 393 F.3d 1378 (Fed. Cir.
2005), we observed that a district court may declare a
case exceptional based on unreasonable and vexatious
litigation tactics, even where it finds the legal theories
advanced not objectively baseless. See, e.g., MarcTec,
LLC v. Johnson & Johnson, 664 F.3d 907, 919 (Fed. Cir.
2012) (“[T]he district court further found that [the patent-
ee] engaged in litigation misconduct. This finding pro-
vides a separate and independent basis for the court’s
decision to award attorney fees.”); Eon-Net LP v. Flagstar
Bancorp, 653 F.3d 1314, 1324 (Fed. Cir. 2011) (“[A]s a
general matter, we have observed that many varieties of
misconduct can support a district court’s exceptional case
finding, including lodging frivolous filings and engaging
in vexatious or unjustified litigation.”). And, although the
Supreme Court rejected our Brooks Furniture test in
Octane Fitness, it gave no indication that we should
rethink our litigation misconduct line of § 285 cases.
Indeed, the Supreme Court sanctioned a district court’s
discretion to find a case exceptional based on “the unrea-
sonable manner in which the case was litigated.” Octane
Fitness, 134 S. Ct. at 1756. Accordingly, we conclude that,
under Octane Fitness, the district court must consider
whether the case was litigated in an unreasonable man-
ner as part of its exceptional case determination, and that
district courts can turn to our pre-Octane Fitness case law
for guidance.
For example, in Eon-Net, this court affirmed the
district court’s finding of litigation misconduct based on
the patentee’s destruction of relevant documents and
lodging of incomplete and misleading extrinsic evidence.
653 F.3d at 1324–25. This court also concluded that the
record supported the district court’s finding that the
patentee acted in subjective bad faith “by exploiting the
high cost to defend complex litigation to extract a nui-
SFA SYSTEMS, LLC v. NEWEGG INC. 11
sance value settlement.” Id. at 1327. We held that the
district court properly considered the patentee’s “ability to
impose high costs to defend against its meritless claims,”
and inducement of settlement payments by proposing low
settlement offers of “less than ten percent of the cost that
[the accused infringer] expended to defend suit.” Id. at
1327; see Kilopass Tech., Inc. v. Sidense Corp., 738 F.3d
1302, 1311 (Fed. Cir. 2013) (holding that the district court
should consider the “totality of the circumstances” in
determining whether the patentee acted in subjective bad
faith and should consider whether circumstantial evi-
dence would support an inference of bad faith).
Similarly, in MarcTec, we affirmed the district court’s
finding of litigation misconduct sufficient to support an
award of attorneys’ fees because the patentee “(1) misrep-
resented both the law of claim construction and the con-
structions ultimately adopted by the court; and (2)
introduced and relied on expert testimony that failed to
meet even minimal standards of reliability, thereby
prolonging the litigation and the expenses attendant
thereto.” 664 F.3d at 920. This court explained that the
district court’s findings were sufficient to support the
conclusion that the patentee engaged in litigation mis-
conduct because it “not only initiated a frivolous lawsuit,
it persisted in advancing unfounded arguments that
unnecessarily extended this litigation and caused [the
accused infringer] to incur needless litigation expenses.
This vexatious conduct is, by definition, litigation miscon-
duct, and provides a separate and independent basis
supporting the district court’s determination that this
case is exceptional.” Id. at 920–21.
In Monolithic Power Systems, Inc. v. O2 Micro Inter-
national, Ltd., 726 F.3d 1359 (Fed. Cir. 2013), moreover,
this court affirmed the district court’s award of attorneys’
fees based on “an overall vexatious litigation strategy and
numerous instances of litigation misconduct.” 726 F.3d at
1367. The district court found that, over the course of a
12 SFA SYSTEMS, LLC v. NEWEGG INC.
decade of litigation between the two parties, the patentee
exhibited a pattern of litigation where it would sue the
accused infringer’s customers to prompt the accused
infringer to file a declaratory judgment action, only to
withdraw its claims after substantial litigation had taken
place. Id. The district court also found that the patentee
misrepresented the date of key evidence, and tried to
mask its false testimony through motion practice. Id.
We agree with Newegg, accordingly, that a pattern of
litigation abuses characterized by the repeated filing of
patent infringement actions for the sole purpose of forcing
settlements, with no intention of testing the merits of
one’s claims, is relevant to a district court’s exceptional
case determination under § 285. And, we agree with
Newegg, moreover, that to the extent the district court’s
opinion in this case can be read to discount the motiva-
tions behind a patentee’s litigation history, the district
court was wrong. The problem with Newegg’s request
that we reverse the district court’s exceptional case de-
termination on these grounds, however, is its failure to
make a record supporting its characterization of SFA’s
improper motivations.
Newegg argued to the district court that SFA engaged
in a vexatious litigation strategy based on evidence that:
(1) SFA dismissed its claims against Newegg once it was
faced with the prospect of a trial in which the merits of its
claims would be tested; (2) SFA sued many defendants for
infringement of the same patents; and (3) SFA frequently
settled with prior defendants for relatively small
amounts. See SFA Sys., LLC v. 1-800-Flowers.com, Inc.,
No. 6:09-cv-340 (E.D. Tex. Oct. 4, 2013), ECF No. 461, at
12. On this record, we cannot say that the district court
abused its discretion in finding that Newegg’s evidence
was insufficient to show that SFA actually litigated this
case in an “unreasonable manner.” Octane Fitness, 134 S.
Ct. at 1756. “[B]ecause [the district court] lives with the
case over a prolonged period of time,” Highmark, 134 S.
SFA SYSTEMS, LLC v. NEWEGG INC. 13
Ct. at 1748, it is in a better position to determine whether
a case is exceptional and it has discretion to evaluate the
facts on a case-by-case basis. Octane Fitness, 134 S. Ct. at
1756. Although SFA dismissed this suit after the court
had ruled in its favor on claim construction and only six
months before trial, Newegg presented no evidence that
the dismissal was because SFA knew that Newegg was
not going to settle. In fact, SFA continued to litigate the
same patent in its suit against Amazon.com, Inc. (“Ama-
zon”) with no guarantee of obtaining a settlement in that
case. And, SFA argues that it dismissed its suit against
Newegg soon after the court denied its motion to continue
trial so its counsel could focus on its potentially higher
value action against Amazon, which was scheduled for
trial on the same day. Both of these cases were before the
same judge, so the district court was in the best position
to evaluate SFA’s dismissal of one suit and continuance of
another. We conclude, moreover, that the district court
did not abuse its discretion in finding that the existence of
other lawsuits by SFA does not, without more, render this
case exceptional. The mere existence of these other suits
does not mandate negative inferences about the merits or
purpose of this suit.
Although Newegg presented evidence of amounts SFA
had obtained in previous settlements, there were several
payments that were inconsistent with Newegg’s argument
that SFA always settled with accused infringers for far
less than the cost to prosecute a case to judgment. Alt-
hough Newegg argued at oral argument that the larger
amounts were to settle claims of a different patent, Oral
Arg. at 2:03, SFA Sys., LLC v. Newegg Inc., 2014-1712,
available at http://oralarguments.cafc.uscourts.gov/default
.aspx?/fl=2014-11712.mp3, those larger settlements imply
that SFA does not always seek nuisance value settle-
ments for amounts far less than the cost of litigation as
Newegg asserts. Accordingly, the district court’s unwill-
ingness to read bad faith motivations into SFA’s settle-
14 SFA SYSTEMS, LLC v. NEWEGG INC.
ment amounts, without more evidence about what
prompted those settlements, was neither clearly errone-
ous nor an abuse of discretion.
As discussed above, moreover, the district court did
not abuse its discretion in finding that SFA’s litigating
position does not stand out as meritless. SFA’s prior
lawsuits, therefore, differ from the pattern of litigation in
Eon-Net where we affirmed the finding that the patentee’s
pattern of infringement claims was “meritless” and in bad
faith. 653 F.3d at 1327–28.
Even taking all of this evidence together—SFA’s dis-
missal of this case, the existence of other lawsuits by SFA,
and its previous settlement amounts—we cannot conclude
that the district court abused its discretion in finding that
this case did not “stand[] out from others with respect to
. . . the unreasonable manner in which the case was
litigated.” Octane Fitness, 134 S. Ct. at 1756. Notably,
the district court did not find any evidence of misrepre-
sentation or misleading statements by SFA during the
course of this litigation. Cf. Monolithic Power, 726 F.3d at
1367 (finding that the patentee misrepresented the date
of key evidence, and tried to mask false testimony
through motion practice); MarcTec, 664 F.3d at 920
(finding that the patentee misrepresented both the law of
claim construction and the constructions ultimately
adopted by the court); Eon-Net, 653 F.3d at 1324–25
(finding that the patentee lodged incomplete and mislead-
ing extrinsic evidence).
Importantly, we do not hold that the district court
cannot consider a patentee’s pattern of prior litigation in
determining whether a case is exceptional. Indeed, our
§ 285 cases that address litigation misconduct, which
were not overruled by Octane Fitness, make clear that a
district court should consider a patentee’s pattern of
litigation where adequate evidence of an abusive pattern
is presented. In this case, we merely hold that the district
SFA SYSTEMS, LLC v. NEWEGG INC. 15
court did not abuse its discretion in finding that Newegg
failed to proffer sufficient evidence of a pattern of litiga-
tion misconduct by SFA. Section 285 Order at 5 (charac-
terizing Newegg’s motion as being predicated on
“insufficient evidence”).
III. CONCLUSION
Because we conclude that the district court did not
abuse its discretion in finding that SFA’s litigating posi-
tion and the manner in which it litigated this case did not
stand out, we affirm the district court’s determination
that Newegg failed to establish that this case is excep-
tional under § 285.
AFFIRMED