Source Vagabond Systems v. Hydrapak, Inc.

Rule 11 Sanctions Upheld for Lack of Reasonable Claim Construction Argument and Failure to Conduct Presuit Inquiry

13-1270

June 05, 2014

Decision

Last Month at the Federal Circuit - July 2014

Judges: Moore, Reyna, Wallach (author)

[Appealed from: S.D.N.Y., Judge McMahon]

In Source Vagabond Systems Ltd. v. Hydrapak, Inc., Nos. 13-1270, -1387 (Fed. Cir. June 5, 2014), the Federal Circuit affirmed the district court’s orders imposing sanctions under Rule 11 against Source Vagabond Systems Ltd. and its attorneys (collectively “Source”), holding that Source’s claim construction and infringement positions were untenable, and that Source did not make reasonable arguments and did not make a reasonable inquiry into its claims against Hydrapak, Inc. (“Hydrapak“).

Source is the assignee of U.S. Patent No. 7,648,276 (“the ’276 patent”) relating to flexible hydration reservoirs, focusing specifically on sealing mechanisms for reservoirs. The sealing mechanism described in the ’276 patent contains a rod in a hollow cylinder over which the top portion of a container is folded, and a slot in the cylinder to create a hermetic seal. The asserted claim of the ’276 patent contains the limitation that “the slot [is] narrower than the diameter of the rod, so that the sealer is only to be slidingly mounted sideways over the rod.” Slip op. at 3 (emphasis and citation omitted). Hydrapak manufactures the Reversible Reservoir II flexible hydration reservoir. The Reversible Reservoir II product includes a “sealing member, called a ‘slider,’ with an opening or gap along its long axis.” Id. at 5. The slider attaches to elements, called “catches,” located on plastic lips that “run along each side of the water reservoir’s mouth.” Id.

Source sued Hydrapak, alleging infringement of the ’276 patent by Hydrapak’s Reversible Reservoir II. In response, Hydrapak filed a motion for sanctions under Rule 11. Both parties then filed cross-motions for SJ with respect to infringement. The district court granted Hydrapak’s motions for SJ of noninfringement and Rule 11 sanctions, finding that Source’s claim for literal infringement lacks support “no matter how the claim was construed.” Id. at 7 (citation omitted). Source filed two appeals, one appealing the district court’s denial of a motion to reconsider the Rule 11 order and one on the merits decision. Source subsequently terminated the motion for reconsideration appeal. The Federal Circuit summarily affirmed the district court’s SJ motion. In parallel with Source’s merits appeal, the district court found two interrelated violations of Rules 11(b)(2) and 11(b)(3), and awarded Hydrapak attorneys’ fees. Source appealed the Rule 11 sanctions determination.

On appeal, the Federal Circuit affirmed the district court’s ruling imposing sanctions under Rules 11(b)(2) and 11(b)(3). The Court first examined the district court’s claim construction and did not disturb the district court’s construction on appeal. The Court rejected Source’s proposed construction that “the slot/rod limitation . . . should be construed to mean ‘the slot is narrower than the diameter of the rod together with the container folded over it, so that the sealer is only to be slidingly mounted sideways over the rod and the container.’” Id. at 11-12 (citation omitted). The Court found that Source’s attorneys added words to the actual claim language, changing the relevant comparison from the slot to the diameter of the rod to a comparison of the slot to the diameter of the rod and the thickness of the container folded over the rod. The Court also determined that Source’s added language did not have support in the specification or prosecution history and altered the “otherwise unambiguous claim language, a practice [the Court] has repeatedly rejected.” Id. at 12.

The Court disagreed that the claim language was ambiguous. The Court noted that Source did not explain what terms were ambiguous or how the terms were ambiguous. The Court also determined that the patentee had not acted as his own lexicographer and there was no indication in the specification that the term “rod” meant “rod-plus-container.” Id. at 13. The Court then rejected Source’s assertion that the patent’s drawings supported Source’s construction because “patent drawings do not define the precise proportions of the elements depicted and may not be relied on to show particular sizes if the specification is completely silent on the issue.” Id. (quoting Hockerson-Halberstadt, Inc. v. Avia Grp. Int’l, Inc., 222 F.3d 951, 956 (Fed. Cir. 2000)). The Court also examined the prosecution history of the ’276 patent and determined that the claim language was amended to narrow the claim “by excluding any device in which the slot is not narrower than the diameter of the rod,” further contradicting Source’s claim construction. Id. at 14 n.3.

The Court next considered Source’s argument that its proposed construction avoids a nonsensical result. The Court reiterated that courts may not rewrite claims, even if construing them under their plain and ordinary meaning would lead to a nonsensical result. The Court noted that it would be improper to rely on the purpose of the invention and that the district court properly determined that “claim construction is a function of the words of the claim[,] not the ‘purpose’ of the invention.” Id. at 15 (citation omitted). The Court further explained that Source was required to perform an objective evaluation of the claim terms to satisfy its obligation to conduct a reasonable presuit evaluation. Because Source’s proposed definition ignored the canons of claim construction, Source did not meet this standard, and the Court held that the district court did not abuse its discretion in imposing Rule 11(b)(2) sanctions based on Source’s claim construction arguments.

Next, the Court held that the district court did not abuse its discretion in finding that, even under Source’s proposed claim construction, Source had no reasonable basis for alleging that Hydrapak’s product literally infringed. The Court noted that Source’s opposition to the Rule 11 sanctions “lacked any analysis or product measurement and calculation” to support a finding that Source’s attorneys performed a sufficient analysis to support a reasonable belief of literal infringement, even under Source’s construction. Id. at 16. The Court found that Source “failed to offer any legitimate evidence supporting a reasonable belief that it had a meritorious direct infringement claim.” Id. The Court also rejected Source’s argument that the district court abused its discretion because it did not address the “catches” in Hydrapak’s product. The Court noted that the catches were “discrete elements” from the “plastic lips” and that “the catches do not go onto the portion of the container that is folded over the rod, as is required by Source’s proposed claim construction.” Id. at 17. The Court then held that the district court did not abuse its discretion in imposing sanctions under Rule 11.

Finally, the Court examined Source’s argument that Hydrapak’s Reversible Reservoir II infringed under the DOE. The Court concluded that Source failed to offer any legal or factual support for its conclusion, and that Source was “obligated to come forward with a showing of exactly why, prior to filing suit, they believed their claim” was reasonable. Id. at 18. Accordingly, the Court affirmed the district court’s finding of a Rule 11(b)(3) violation.

Summary authored by David C. Seastrunk, Summer Associate at Finnegan.