U.S. District Judge Leonard Davis of Tyler has been noted recently for making repeated comments about when sanctions may be considered appropriate for parties filing meritless patent infringement lawsuits in his court, starting with his comments at a claim construction hearing which became a sanctions hearing in Raylon LLC v. Complus Data Innovations, et al., 6:09cv355, 356, 357., and continuing through several status conferences and post-conference hearings in other cases.

These comments finally found official form this week in Judge Davis' opinion March 7 on the defendants' motions for sanctions in the Raylon case.

Plaintiff Raylon alleged in these cases that the defendants infringed its patent, and asserted a claims construction position that supported that position. The defendants asserted a claims construction under which they would not infringe and moved for summary judgment of noninfringement, but went a step further, asserting that the plaintiff's claims construction position was so legally untenable that the plaintiff violated Rule 11 by bringing a suit asserting it.

Judge Davis agreed at the hearing that the plaintiff's claims construction position was not correct, and granted summary judgment at the hearing in defendants' favor, then conducted a hearing on the motion for sanctions to consider defendants' argument that the plaintiff's position, as well as its settlements with other defendants for less than the cost of defending the case, was evidence that the infringement theory was frivolous.

"Raylon did settle with some defendants for substantially less than their cost of defense," Judge Davis noted, and went on to observe that "[i]n some situations, a plaintiff asserting a large damages model while making very low offers of settlement early in the case may indicate that the plaintiff realizes its case is very weak or even frivolous. While the numbers cannot be determinative, they may be indicative of the good-faith nature with which the case is brought."

But in this case the Court noted that Raylon described its damages model to the court, which Judge Davis observed was not large for a patent case. Given that description, Judge Davis concluded that the earlier settlements were not so unreasonable as to indicate that Raylon believed its case was weak or frivolous.

And while Raylon's claim construction arguments and infringement theory "do stretch the bounds of reasonableness, and the Court rejected Raylon's positions, they do not cross that line."

Although the court ruled against Raylon on claim construction and on summary judgment, Judge Davis noted that taking losing positions on claim construction or infringement will not warrant sanctions. Instead, Rule 11 sanctions are only merited when an attorney's arguments are "objectively frivolous."

Missing from the opinion but in the transcript of the hearing was the court's apparent recognition when making this conclusion that claims construction rulings do not consistently fare well on appeal and thus that losing a type of ruling that is regularly reversed by the Federal Circuit on de novo review perhaps counsels against a "loser pays" stance based on claims construction rulings.

In any event, the court concluded that "[t]his was not a case brought on frivolous infringement theories to recover nuisance value settlements from Defendants. Rule 11 sanctions are not justified here."

But Judge Davis, which is expected to take office as Chief Judge of the Eastern District of Texas on Jan. 1 of next year, went on to offer some statements about his concerns in this area:

As expressed at the hearing, this court has some concerns about plaintiffs who file cases with extremely weak infringement positions in order to settle for less than the cost of defense and have no intention of taking the case to trial. Such a practice is an abuse of the judicial system and threatens the integrity of and respect for the courts.

Often in such cases, a plaintiff asserts an overly inflated damages model, seeking hundreds of millions of dollars, and settles for pennies on the dollar, which is far less than the cost of defense. Where it is clear that a case lacks any credible infringement theory and has been brought only to coerce a nuisance value settlement, Rule 11 sanctions are warranted.

But the Court make clear that simply settling with some defendants is not sanctionable per se, and can in fact reflect a legitimate trial strategy.

In contrast, there may be legitimate cases where a plaintiff settles with a few smaller defendants in an effort to raise needed capital in order to proceed to trial against the remaining major defendants. In those situations, plaintiffs typically settle with smaller defendants and proceed to trial against larger defendants who have larger damage potential. Such is a legitimate trial strategy. Moreover, the Court does not want to discourage early settlement of some or all defendants. This Court has always taken a favorable view of business resolutions to legitimate commercial disputes when those settlements are based on the case's merits and risks.

The opinion concludes with a warning and some guidance as to when the court will consider conduct in bringing a case sanctionable.

This Court has high expectations for the parties and counsel who file patent cases in the Eastern District of Texas, and an attorney who files a patent case has a serious responsibility to ensure that his case has merit and that he is prepared to take the case to trial. See Antonious, 275 F.3d at 1074. Most parties and counsel strive to meet these expectations. Prosecuting and defending patent litigation is undoubtedly expensive for both sides. And that expense must be born by both sides in resolving a dispute on the merits-by settlement or trial. But when it appears to the Court that the cost of the litigation is more of a driving force than the merits of the patent-in-suit, then this Court will not hesitate to put the emphasis back on the merits of the patent-in-suit and consider Rule11 sanctions if necessary.

These expressions, previously provided to practitioners at hearings in numerous patent infringement cases, appear to have already resulted in at least some patent plaintiffs dismissing smaller defendants from cases, possibly to avoid a pattern of settlements which may be considered by the court to be related more to the cost of the litigation than the merits of the case.

Paradoxically, however, some practitioners report that these expressed concerns are also actually discouraging settlements as well, for the same reason.

Michael C. Smith is a partner in the Marshall office of Siebman, Burg, Phillips & Smith LLP where he specializes in complex commercial and patent litigation in the Eastern District of Texas. He maintains the www.EDTexweblog.com weblog dealing with Eastern District practice, and edits the O'Connor's Federal Rules - Civil Trials federal court rulebook.