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Rothschild Connected Devices Innovations, LLC v. Guardian Protection Services, Inc.

United States Court of Appeals, Federal Circuit

June 5, 2017

ROTHSCHILD CONNECTED DEVICES INNOVATIONS, LLC, Plaintiff-Appellee
v.
GUARDIAN PROTECTION SERVICES, INC., ALARM SECURITY GROUP, LLC, CENTRAL SECURITY GROUP - NATIONWIDE, INC., GUARDIAN ALARM COMPANY, GUARDIAN OF GEORGIA, INC., DBA ACKERMAN SECURITYSYSTEMS, ICON SECURITY SYSTEMS, INC., MONITRONICS INTERNATIONAL, INC., SLOMIN'S, INC. Defendants ADS SECURITY, L.P., Defendant-Appellant

         Appeal from the United States District Court for the Eastern District of Texas in Nos. 2:15-cv-01431-JRG-RSP, 2:15-cv-01463-JRG-RSP, 2:15-cv-01464-JRG-RSP, 2:15-cv-01462-JRG-RSP, 2:15-cv-01496-JRG-RSP, 2:15-cv-01429-JRG-RSP, 2:15-cv-01468-JRG-RSP, 2:15-cv-01466-JRG-RSP, 2:15-cv-01469-JRG-RSP Judge J. Rodney Gilstrap.

          Jay B. Johnson, Kizzia Johnson PLLC, Dallas, TX, argued for plaintiff-appellee.

          Nathan Bailey, Waller Lansden Dortch & Davis, LLP, Nashville, TN, argued for defendant-appellant. Also represented by Eric Brandon Fugett.

          Before Prost, Chief Judge, Mayer and Wallach, Circuit Judges. Opinion for the court filed by Circuit Judge Wallach. Concurring opinion filed by Circuit Judge Mayer.

          WALLACH, CIRCUIT JUDGE.

         Appellant ADS Security, L.P. ("ADS") appeals the opinion and order of the U.S. District Court for the Eastern District of Texas ("District Court") denying ADS's request for attorney fees pursuant to 35 U.S.C. § 285 (2012). See Rothschild Connected Devices Innovations, LLC v. Guardian Prot. Servs., Inc., No. 2:15-cv-01431-JRG-RSP, 2016 WL 3883549, at *4 (E.D. Tex. July 18, 2016). The District Court found that Appellee Rothschild Connected Devices Innovations, LLC ("Rothschild") had not engaged in conduct sufficient to make the litigation "exceptional, " such that ADS did not merit attorney fees pursuant to § 285. See id. at *1-3.

         ADS appeals the District Court's exceptional case determination. We possess subject matter jurisdiction pursuant to 28 U.S.C. § 1295(a)(1) (2012). We reverse and remand.

          Background

         The instant dispute arises as a consequence of Rothschild's allegation that ADS's home security system infringes U.S. Patent No. 8, 788, 090 ("the '090 patent"). The '090 patent generally recites "[a] system and method for creating a personalized consumer product, " '090 patent, Abstract, where the system and method "enable a user to customize products containing solids and fluids by allowing a server on the global computer network, e.g., the Internet, to instruct the hardware mixing the solids and fluids of the user's preferences for the final mix, " id. col. 1 ll. 58-62. Rothschild has filed numerous lawsuits against various parties alleging infringement of the '090 patent. J.A. 1086, 1097.

         Rothschild filed a complaint against ADS alleging infringement of claim 1 of the '090 patent. J.A. 62, 73. ADS responded by filing an answer and counterclaims. J.A. 84-92. ADS subsequently sent an email to Rothschild alleging that the '090 patent covers patent-ineligible subject matter under 35 U.S.C. § 101[1] and that prior art anticipates claim 1 of the '090 patent under 35 U.S.C. § 102(a)(1).[2] J.A. 704. ADS offered to settle the case if Rothschild paid ADS $43, 330 for attorney fees and costs. J.A. 704. Rothschild rejected ADS's offer. J.A. 855.

         ADS next filed a motion for judgment on the pleadings, arguing that claim 1 of the '090 patent covers patent-ineligible subject matter under § 101. J.A. 93-104. ADS also sent Rothschild a notice pursuant to Federal Rule of Civil Procedure 11(c)(2) ("Safe Harbor Notice"), [3]which included copies of a proposed Rule 11(b) motion for sanctions and prior art that purportedly anticipates claim 1. J.A. 270, 685. In light of the Safe Harbor Notice, Rothschild voluntarily moved to dismiss its action. See J.A. 247. ADS opposed and filed a cross-motion for attorney fees pursuant to § 285, [4] see J.A. 249, based on its view that Rothschild's suit was objectively unreasonable because Rothschild knew or should have known that claim 1 covers patent-ineligible subject matter under § 101 and is anticipated by prior art under § 102(a)(1), see J.A. 261-64. ADS also argued that Rothschild did not intend to test the merits of its claim and instead filed this and over fifty other lawsuits in the District Court to "'exploit[] the high cost to defend complex litigation to extract nuisance value settlements'" from various defendants. J.A. 265 (brackets omitted) (quoting Eon-Net LP v. Flagstar Bancorp, 653 F.3d 1314, 1327 (Fed. Cir. 2011)).

         The District Court ultimately granted Rothschild's Motion to Dismiss and denied ADS's Cross-Motion for attorney fees. Rothschild, 2016 WL 3883549, at *4. As to the latter, the District Court found that Rothschild did not engage in conduct sufficient to make the action "exceptional" under § 285. Id. The District Court found that Rothschild's "decision to voluntarily withdraw its [C]omplaint within the safe harbor period is the type of reasonable conduct Rule 11 is designed to encourage." Id. at *2. The District Court also found that Rothschild recited "non-conclusory and facially plausible arguments supporting patent eligibility" under § 101. Id. Turning to the anticipation allegations, the District Court found that ADS neither filed a motion seeking to invalidate claim 1 of the '090 patent under § 102(a)(1) nor demonstrated that Rothschild failed to conduct a reasonable pre-suit investigation of the prior art. Id. Finally, the District Court held that Rothschild's numerous other suits for infringement pending against other companies did not alone make the case exceptional. Id. at *3. This appeal followed.

         Discussion

         I. Legal Framework and Standard of Review

         A "court in exceptional cases may award reasonable attorney fees to the prevailing party." 35 U.S.C. § 285. The Supreme Court has explained that an exceptional case, though rare,

is simply one that stands out from others with respect to the substantive strength of a party's litigating position (considering 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 ...

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