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Cognex Corp. v. VCode Holdings, Inc.: US District Court: PATENT | TORT - business defamation claim; punitive damages, Rule 9(g) special damages; exceptional case for inequitable conduct but no fees

1
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Cognex Corporation,
Plaintiff,
v. Civ. No. 06-1040 (JNE/JJG)
ORDER
VCode Holdings, Inc., VData LLC,
Acacia Research Corporation, and
Veritec Inc.,
Defendants.
This patent lawsuit, concerning data matrix symbols and reader products, returns to the
Court on three motions filed by Cognex Corporation. Cognex commenced this action against
VCode Holdings, Inc. (VCode), VData LLC, Acacia Research Corporation (Acacia), and Veritec
Inc., (collectively Defendants) on March 13, 2006, seeking a declaration of noninfringement of
U.S. Patent No. 5,612,524 (filed March 18, 1997) (524 patent), and that the 524 patent was
invalid and unenforceable. Cognex also asserted claims against Acacia for violation of the
Minnesota Uniform Deceptive Trade Practices Act (MDTPA), Minn. Stat. 325D.43-.48
(2006), and for business defamation. VCode and VData asserted a counterclaim against Cognex
alleging infringement of certain claims of the 524 patent. On May 19, 2008, the Court issued an
Order (1) granting Cognex summary judgment on its invalidity and unenforceability claims; (2)
denying VCode and VData partial summary judgment on the issue of infringement of certain
asserted claims; (3) denying Acacia summary judgment on Cognexs business defamation claim;
and (4) granting Acacia summary judgment on Cognexs MDTPA claim. See Cognex Corp. v.
VCode Holdings, Inc., Civ. No. 06-1040, 2008 WL 2113661 (D. Minn. May 19, 2008) (May 19
Order). The May 19 Order also granted the parties permission to file additional dispositive
motions relating to the remaining claims in the First Supplemental Complaint, which resulted in
2
the three motions now pending. For the reasons set forth below, the Motion for Summary
Judgment on Count V of Plaintiffs First Supplemental Complaint/Defamation is denied; the
Motion for Leave to Amend the First Supplemental Complaint is granted in part and denied in
part, and the Motion to Declare this an Exceptional Case Pursuant to 35 U.S.C. 285 is denied.
I. BACKGROUND
The United States Patent and Trademark Office (PTO) issued the 524 patent, titled
Identification Symbol System and Method with Orientation Mechanism, on March 18, 1997.
The 524 patent issued from a continuation application and claims priority to U.S. Application
Ser. No. 07/125,616, filed on November 25, 1987, and now U.S. Patent No. 4,924,078 (issued
May 8, 1990) (078 patent). Veritec previously owned both the 078 and 524 patents. Veritec
subsequently assigned the patents to VCode, which is a wholly-owned subsidiary of Veritec. In
2003, VCode granted an exclusive license to VData in the patents, in exchange for receipt of a
certain percentage of the net profits and proceeds obtained by VData in the exploitation and
enforcement of the patents. VData is a subsidiary of Acacia.
The 524 patent is directed to a symbol identification system that includes a computerreadable
two-dimensional data matrix symbol with an orientation mechanism that can be
attached or affixed to an object and a method and apparatus for capturing an image of the symbol
and identifying the object from the information in the symbol. A two-dimensional data matrix
symbol represents an improvement over traditional bar codes in that it has much higher
information density and can contain significantly more data than a traditional bar code. Also,
unlike a bar code, a two-dimensional data matrix symbol does not have a preferred scanning
direction and is capable of being read from various orientations. Cognex manufactures and sells
products designed to capture and read two-dimensional data matrix symbols.
3
Cognex alleges Defendants improperly attempted to enforce the 524 patent extrajudicially
by contacting Cognexs current and potential data matrix reader customers and
threatening them with patent litigation unless they purchase a license under the 524 patent.
Cognex claims these actions have affected its ability to solicit and retain customers. Cognex also
alleges that after Cognex filed the instant lawsuit, individuals associated with Acacia told certain
third parties that Cognex attempted to purchase patents from Veritec, including the 524 patent,
for an eight-figure amount. Cognex contends these statements were false and defamatory, and
that they harmed Cognexs reputation in the business community regarding its intentions and
conduct of the legal proceedings of the instant lawsuit.
In the May 19 Order, the Court declared the claims of the 524 patent that VCode and
VData alleged Cognex infringed invalid and the entire 524 patent unenforceable due to
inequitable conduct by the patentees in the procurement of the 078 patent and the patentees
failure to sufficiently cure that conduct during the prosecution of the 524 patent. See Cognex,
2008 WL 2113661, at *23-24, 33. The Court also denied Acacias motion for summary
judgment on Cognexs business defamation claim after determining that genuine issues of
material fact existed as to the veracity of the alleged defamatory statements made by Acacia.
Nonetheless, Cognex now seeks summary judgment on its defamation claim, as well as leave to
amend the First Supplemental Complaint to assert a claim for punitive damages. Cognex also
seeks an award of attorney fees as the prevailing party on the patent claims.
II. DISCUSSION
A. Motion for summary judgment on business defamation claim
The Court first considers Cognexs motion for summary judgment on its business
defamation claim against Acacia. Summary judgment is proper if the pleadings, the discovery
4
and disclosure materials on file, and any affidavits show that there is no genuine issue as to any
material fact and that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(c); see Nike Inc. v. Wolverine World Wide, Inc., 43 F.3d 644, 646 (Fed. Cir. 1994). The
movant bears the initial responsibility of informing the district court of the basis for its motion,
and must identify those portions of [the record] which it believes demonstrate the absence of a
genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the
movant satisfies its burden, the party opposing the motion must respond by submitting
evidentiary materials that set out specific facts showing a genuine issue for trial. Fed. R. Civ.
P. 56(e)(2); see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In
determining whether summary judgment is appropriate, a court must look at the record and any
inferences to be drawn from it in the light most favorable to the party opposing the motion.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
Cognex asserts it is entitled to summary judgment because there is no genuine issue of
material fact that Acacia published false and defamatory statements about Cognex regarding its
interest in purchasing the 078 and 524 patents for a substantial sum and that the statements
harmed Cognexs business reputation and credibility in the business community. Specifically,
Cognex claims that after it commenced the present litigation, Acacias Vice President of
Licensing, Tisha DeRaimo-Stender, informed at least two Cognex customers, whom Acacia
alleged infringed the 524 patent and who raised the instant lawsuit as a reason to decline or
defer taking a license under the 524 patent, that Cognex offered to buy the 078 and 524 patents
for an eight-figure price. Cognex alleges DeRaimo-Stender also told at least one of the alleged
infringers that Veritec was in possession of a letter of intent evidencing Cognexs alleged offer to
purchase the patents. Cognex alleges that these statements were false and that Cognex never
5
offered to buy the patents from Veritec. Cognex claims the statements were made by Acacia for
the specific purpose of deceiving the alleged infringers into believing that Cognex had no
intention of fully pursuing the instant lawsuit and to fraudulently induce the alleged infringers to
pay for a license fee under the 524 patent. Cognex claims these statements defamed Cognex
because of their tendency to harm its reputation by lowering Cognex in the estimation of the
business community in which it operates and by deterring third persons from associating or
dealing with Cognex. Cognex also alleges the statements undermined its credibility in view of
the published statements Cognex had made with respect to the invalidity and unenforceability of
the 524 patent, and that Acacias statements were calculated to prejudice Cognexs business and
cast doubt on its professed loyalty to its customers.1
Under Minnesota law, a statement constitutes defamation if (1) it is communicated to
someone other than the plaintiff, (2) it is false, and (3) it tends to harm the plaintiffs reputation
and lower him in the estimation of the community. See Stuempges v. Parke, Davis & Co., 297
N.W.2d 252, 255 (Minn. 1980).2 Corporate plaintiffs stand on the same footing as individuals in
defamation actions. See Advanced Training Sys., Inc. v. Caswell Equip. Co., 352 N.W.2d 1, 10
(Minn. 1984). To recover, a corporation must show that a defendants written statements
directly tended to prejudice it in the conduct of its business or to deter third persons from dealing
with it, and the corporation need not prove any special pecuniary damages to do so. Id.
1 Defendants correctly point out that Cognex includes allegations of false and defamatory
statements it claims are attributable to Acacia in its motion for summary judgment that were not
pleaded in the First Supplemental Complaint. Defamation claims must be pled with specificity.
See Glenn v. Daddy Rocks, Inc., 171 F. Supp. 2d 943, 947 (D. Minn. 2001); Moreno v.
Crookston Times Printing Co., 610 N.W.2d 321, 326 (Minn. 2000). The Court thus considers
Cognexs motion for summary judgment only on the basis of the allegations specifically pleaded
in the First Supplemental Complaint.
2 In the May 19 Order, the Court determined that Minnesota law applied to Cognexs
business defamation claim. See Cognex, 2008 WL 2113661, at *35.
6
Whether a defamatory meaning is conveyed is dependent upon how an ordinary person
understands the language used in the light of surrounding circumstances. Harman v.
Heartland Food Co., 614 N.W.2d 236, 240 (Minn. Ct. App. 2000) (quoting Gadach v. Benton
County Co-op. Assn, 53 N.W.2d 230, 232 (Minn. 1952)). Upon review of the parties latest
submissions on this claim, the Court concludes that the factual dispute regarding the veracity of
the statements made by Acacia representatives at the center of Cognexs business defamation
claim remains.
According to the record, Veritecs CEO Van Tran testified in her deposition about her
participation in what she thought were serious discussions in 2005 regarding the purchase of
Veritec, including its patents, by Cognex. The purchase of Veritec would include its patents.
Cognex Vice President, Justin Testa, testified in his deposition that he had conversations with
Tran in 2005 about Cognexs interest in buying Veritec for million. However, Testa
testified that he told Tran that Cognex was not interested in purchasing Veritec. Testa further
testified that Tran asked if Cognex would provide a letter of intent for Veritec to use in its ongoing
bankruptcy proceedings, and that he told Tran that Cognex would not produce a letter of
intent expressing such interest when it, in fact, had none. However, according to Trans
testimony, the negotiations led to the drafting of a letter of intent that was delivered to Cognex
for review. Testa testified that Tran never provided any such letter to anyone at Cognex. Tran
testified that she subsequently told DeRaimo-Stender about the negotiations between Cognex
and Veritec. DeRaimo-Stender testified in her deposition that she relied on the information she
received from Tran and did not independently verify its accuracy before sending the allegedly
defamatory emails.
7
When there is a factual dispute, as there is here, the truth of defamatory statements is a
factual issue to be decided by the jury. Dunn v. Natl Beverage Corp., 729 N.W.2d 637, 652
(Minn. Ct. App. 2007) (citing Lewis v. Equitable Life Assurance Socy, 389 N.W.2d 876, 889
(Minn. 1986) (superseded by statute on other grounds)). Moreover, the factual dispute here
centers on the credibility of the witnesses and the weight that their individual testimony deserves.
While a jury might credit the testimony of Testa and disbelieve the testimony of Tran at trial, this
is for the jury, not the court, to decide. See Henderson v. Munn, 439 F.3d 497, 503 (8th Cir.
2006) ([I]t is not [the courts] function to remove the credibility assessment from the jury.)
(Citation omitted); Melvin v. Car-Freshener Corp., 453 F.3d 1000, 1004 (8th Cir. 2006) (Lay, J.,
dissenting) (indicating that where witness credibility will be determinative, a jury, not the
courts, should ultimately decide whether the plaintiff has proven [its] case). Thus, the
resolution of Cognexs business defamation claim is improper at the summary judgment stage of
these proceedings. Therefore, Cognexs request for summary judgment is denied.
B. Motion to amend complaint
The Court next considers Cognexs Motion for Leave to Amend the First Supplemental
Complaint. In this motion, Cognex requests permission to file a Second Amended and
Supplemental Complaint to add a claim for punitive damages.
Under Minnesota law, a plaintiff may not assert punitive damages in its complaint but
must instead later move to amend the pleadings to claim punitive damages. Minn. Stat.
549.191 (2006); Olson v. Snap Prods., Inc., 29 F. Supp. 2d 1027, 1034 (D. Minn. 1998). A court
will grant the motion if it finds prima facie evidence of an entitlement to punitive damages. Id.
In this context, the term prima facie does not refer to a quantum of evidence, but to a procedure
8
for screening out unmeritorious claims for punitive damages. Thompson v. Hughart, 664
N.W.2d 372, 377 (Minn. Ct. App. 2003) (citation omitted).
Minnesota Statutes 549.20 (2006) provides the applicable standard for entitlement to
punitive damages:
(a) Punitive damages shall be allowed in civil actions only upon clear and
convincing evidence that the acts of the defendant show deliberate
disregard for the rights or safety of others.
(b) A defendant has acted with deliberate disregard for the rights or safety of
others if the defendant has knowledge of facts or intentionally disregards
facts that create a high probability of injury to the rights or safety of
others and:
(1) deliberately proceeds to act in conscious or intentional disregard
of the high degree of probability of injury to the rights or safety of
others; or
(2) deliberately proceeds to act with indifference to the high
probability of injury to the rights or safety of others.
Here, there is a factual dispute as to the falsity of the statements Acacia made regarding
Cognexs interest in purchasing Veritec. However, in reviewing the evidence, a court makes no
credibility rulings, and does not consider any challenge, by cross-examination or otherwise, to
the plaintiffs proof. Berczyk v. Emerson Tool Co., 291 F. Supp. 2d 1004, 1008 n. 3 (D. Minn.
2003) (citation omitted). In support of its business defamation claim, Cognex submits the
deposition testimony of Trista, who testified that Cognex never made an offer to purchase
Veritec or the 078 or 524 patents. Trista testified that in his discussions with Tran, he told her
that Cognex was not interested in purchasing Veritec and that Cognex would not draft or sign a
letter of intent stating such an interest when it, in fact, had none. Trista also testified that Cognex
never drafted nor received a letter of intent regarding the purchase of Veritec or its patents.
Cognex also presents the deposition testimony of DeRaimo-Stender, who could not remember
9
the exact words Tran used, but stated that she understood from Tran that Cognex was interested
in purchasing the patents from Veritec . . . [for] an eight-figure amount. DeRaimo-Stender
testified that she sent emails to prospective licensees/alleged infringers who mentioned being
indemnified by Cognex stating that Cognex had offer[ed] to purchase Veritecs patents.
DeRaimo-Stender testified that she did not attempt to verify Trans assertion before sending the
emails. When asked whether one of her objectives in mentioning the alleged offer to purchase
was that Cognex was not sincere in its contentions that the patents were not infringed and/or
invalid, DeRaimo-Stender answered, Yes. Or contradictory. DeRaimo-Stender further
testified that her objective was to encourage [the recipient] to do his own independent review
and not rely on the statements of Cognex.
A plaintiff is not required to demonstrate an entitlement to punitive damages per se, but
only an entitlement to allege such damages. Ulrich v. City of Crosby, 848 F. Supp. 861, 867 (D.
Minn. 1994). Here, Cognex has met its prima facie burden. The evidence is clear and
convincing, when considered without an assessment of credibility or cross-examination and
challenges by Acacia. See Berczyk, 291 F. Supp. 2d at 1008 n.3. The Court concludes that a
jury could determine that Acacia acted with deliberate disregard for the rights of Cognex when it
intentionally disseminated false information to Cognex customers about Cognexs interests in
purchasing the 078 and 524 patents after Cognex had represented to its customers that these
patents were invalid and unenforceable, and that Acacia did so for the purpose of causing injury
to Cognexs business reputation and prejudice to Cognex in the conduct of its business.
The Court is not persuaded by Acacias contentions that Acacia is not responsible for the
allegedly defamatory statements of DeRaimo-Stender. By statute, punitive damages may be
awarded against an employer because of an act done by an employee when the employer
10
authorized the doing of and the manner of the acts. Minn. Stat. 549.20, subd. 2. Acacias
Chief Operating Officer and General Counsel Robert Berman testified that he authorized
DeRaimo-Stender to relay information regarding Cognexs alleged interest in acquiring rights to
the Veritec patents to prospective licensees. Punitive damages can also be awarded against an
employer if the employee worked in a managerial capacity and acted in the scope of
employment. Muehlstedt v. City of Lino Lakes, 473 N.W.2d 892, 896 (Minn. Ct. App. 1991)
(citing Minn. Stat. 549.20, subd. 2(c)). DeRaimo-Stender testified that she was Vice President
of Licensing for Acacia at the times relevant here and that her job included the negotiation of
licenses on behalf of Acacia on various patent portfolios assigned to her, including the 524
patent. The emails that she sent to Cognex customers containing the allegedly false statements
were sent in the course of her work for Acacia and were part of her efforts to collect license fees
for Acacia under the patent.
On the basis of the foregoing, the Court concludes that Cognex has sufficiently
demonstrated prima facie evidence of entitlement to punitive damages on its business defamation
claim, and its motion for leave to amend its complaint is granted in that regard. See Minn. Stat.
549.191 ([I]f the court finds prima facie evidence in support of the motion, the court shall grant
the moving party permission to amend the pleadings to claim punitive damages.). However, the
Court rejects the Proposed Second Amended and Supplemental Complaint as submitted by
Cognex because it improperly includes additional amendments that are not part of Cognexs
claim for punitive damages.
Specifically, the First Supplemental Complaint only seeks presumed, or general,
damages for Acacias defamation. These damages are pleaded in the nature of harm to
Cognexs business reputation and credibility. However, in the Prayer for Relief of the Proposed
11
Second Amended and Supplemental Complaint, Cognex states a claim for special, general and
punitive damages due to Acacias defamation. Federal Rule of Civil Procedure 9(g) requires
that [i]f an item of special damages is claimed, it must be specifically stated. Cognex argues
that it should be awarded, as special damages directly and probably caused by Acacias
defamation, its attorney fees, expenses, and costs incurred from the filing of the instant action
through to the present.
The Court finds no specific reference in the First Supplemental Complaint to special
damages in the form of attorney fees incurred as a result of Acacias alleged defamation. Nor are
there factual allegations of attorney fees as special damages arising from Acacias alleged
defamation in the Proposed Second Amended and Supplemental Complaint. It only provides the
general reference to special damages in Cognexs Prayer for Relief.
The plaintiff under a general allegation of damages may recover all such damages
as are the natural and necessary result of such injuries as are alleged for the law
implies their sequence. Not every loss which may result from an injury is a
natural and necessary result of the injury. To permit recovery of other or special
damages, there must be allegation of the specific facts showing such damages to
apprise the defendant of the nature of the claim against him.
Burlington Transp. Co. v. Josephson, 153 F.2d 372, 377 (8th Cir. 1946); 5A Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure 1310 (3d ed. 2004) (Special
damages are those elements of damages that are the natural, but not the necessary or usual,
consequence of the defendants conduct, and typically stem from and depend upon the particular
circumstances of the case . . . Pleading special damages is necessary for items that are in addition
to the general damages the law normally awards to compensate the plaintiff for the injury sought
to be redressed and these items must be pleaded in accordance with Rule 9(g).).
Cognex claims that it is entitled to recover its attorney fees as actual damages in this
action because Acacias defamation left Cognex with no choice other than to see the litigation
12
through to its full completion. However, the attorney fees claimed by Cognex are not the
proximate and foreseeable consequences of Acacias allegedly defamatory statements. Rather,
they are the result of the circumstances into which the alleged falsehoods were interjected. The
record establishes that the instant patent litigation was already underway when DeRaimo-Stender
made the allegedly false statements to Cognex customers. The attorney fees accumulated by
Cognexs claimed inability to settle the on-going patent infringement case following the
allegedly defamatory remarks arose not from Acacias statements themselves, but due to the fact
that the instant litigation had already been commenced on the basis of Cognexs good faith belief
that the 524 patent was invalid and unenforceable. Under these circumstances, the Court
concludes that Cognexs attorney fees are not the natural and necessary result of Acacias
allegedly defamatory statements. They are special damages that must be specifically pleaded
pursuant to Rule 9(g).
The Court concludes that Cognex has not pleaded special damages in accordance with
Rule 9(g) in either the First Supplemental Complaint or the Proposed Second Amended and
Supplemental Complaint, and that Cognex has improperly asserted a new claim for special
damages in the Proposed Second Amended and Supplemental Complaint. Moreover, the time
for amending the pleadings has long passed.3 Discovery in this case has been closed for more
than a year, and the parties motions for summary judgment have been submitted to and
considered by the Court. Because Cognex did not bring a motion to amend to add a claim for
special damages as soon as reasonably possible as required by the Pretrial Scheduling Order
3 The Court notes that due to the requirements of Minn. Stat. 549.191, the timeliness of a
motion to amend to assert a claim for punitive damages is viewed differently. See Rosenbloom v.
Flygare, 501 N.W.2d 597, 601 (Minn. 1993) (finding trial judge did not abuse discretion in
allowing amendment for punitive damages raised for first time on day of trial). Thus, Cognexs
motion to amend to assert a punitive damages claim is not untimely.
13
issued by the magistrate judge on February 26, 2007, because Cognex fails to provide good
cause for seeking to amend its complaint at such a late date in these proceedings, and because
Acacia would suffer undue prejudice in its defense of the defamation claim if an additional claim
for special damages were now permitted, the Court denies what it perceives as a request by
Cognex to amend the First Supplemental Complaint to assert an additional damages claim for
special damages. See Fed. R. Civ. P. 16(b) (providing that a pretrial schedule may be modified
only for good cause and with the judges consent). However, for the reasons previously stated,
the Court grants Cognexs leave to amend the First Supplemental Complaint to assert a claim for
punitive damages.
C. Motion for attorney fees
Under 35 U.S.C. 285 (2000), a court may award reasonable attorney fees to the
prevailing party in a patent infringement case where the conduct of the losing party is determined
to be exceptional. In order for a court to award attorney fees, the court must undertake a twostep
inquiry. Evident Corp. v. Church & Dwight Co., 399 F.3d 1310 (Fed. Cir. 2005). The
court examines first whether there is clear and convincing evidence that the case is exceptional,
and second whether an award of attorney fees to the prevailing party is warranted. Id. Cognex
asserts this is an exceptional case and seeks an award of attorney fees pursuant to 35 U.S.C.
285. Defendants deny that this case is exceptional and argue that even if it is, an award of
attorney fees under section 285 is not warranted under the circumstances presented here. There
is no dispute that Cognex is the prevailing party. See Manildra Milling Corp. v. Ogilvie Mills,
Inc., 76 F.3d 1178, 1183 (Fed. Cir. 1996) (A party who has a competitors patent declared
invalid meets the definition of prevailing party.).
14
1. Exceptional case
Cognex may prove the existence of an exceptional case by showing: inequitable
conduct before the PTO; litigation misconduct; vexatious, unjustified, or otherwise bad faith
litigation; a frivolous suit or willful infringement. Brasseler, U.S.A., L.P. v. Stryker Sales
Corp., 267 F.3d 1370, 1377 (Fed. Cir. 2001); see also Brooks Furniture Mfg., Inc. v. Dutailier
Intl, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005) (A case may be deemed exceptional when
there has been some material inappropriate conduct related to the matter in litigation, such as
willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during
litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like
infractions.); Rohm & Haas Co. v. Crystal Chem. Co., 736 F.2d 688, 691 (Fed. Cir. 1984)
(stating that an award of attorney fees under section 285 should be bottomed upon a finding of
unfairness or bad faith in the conduct of the losing party, or some other inequitable consideration
of similar force, which makes it grossly unjust that the winner of the particular law suit be left to
bear the burden of his own counsel fees which prevailing litigants normally bear). As the party
seeking attorney fees, Cognex bears the burden of proving by clear and convincing evidence that
this case is exceptional. Forest Labs., Inc. v. Abbott Labs., 339 F.3d 1324, 1327 (Fed. Cir.
2003). Cognex presents two arguments in support of its contention that this is an exceptional
case: (1) litigation misconduct by Defendants during the course of this litigation, and (2)
inequitable conduct committed by one or more Defendants in procurement of the 078 patent and
during the prosecution of the continuation applications that ultimately issued as the 524 patent.4
a. Litigation misconduct
4 The specific details of Defendants inequitable conduct are set forth in Cognex, 2008 WL
2113661, at *25-33, and are not repeated here unless necessary to the Courts analysis of the
pending motion for attorneys fees.
15
Cognex contends this is an exceptional case due to litigation misconduct by Defendants
during the course of these proceedings. Cognex alleges five instances of misconduct by one or
more Defendants in support of its argument: (1) Acacias defamation of Cognex in its continued
pursuit of license fees on the basis of the 524 patent when it knew or should have know that the
524 patent was invalid and unenforceable; (2) Defendants assertion of infringement claims in
this action after litigation in a separate case, which was settled by Veritec before trial,
demonstrated that the 078 patent was invalid and unenforceable; (3) Defendants inequitable
conduct during the reexamination of the 524 patent by failing to timely disclose to the PTO
damaging admissions made by Defendants own expert; (4) Defendants failure to preserve
critical evidence; and (5) Defendants filing of questionable, if not frivolous, motions that were
calculated to unnecessarily delay resolution and multiply Cognexs litigation costs. The Court
concludes that these claims do not individually or collectively justify a conclusion that this case
is an exceptional case due to litigation misconduct by one or more Defendants.
First, Cognexs reliance on defamatory statements by Acacia to demonstrate litigation
misconduct is misplaced at this point in time. The Court has now twice concluded that questions
of fact remain regarding the falsity of the statements underlying Cognexs business defamation
claim against Acacia. Second, Cognexs assertion that Veritec settled another lawsuit
concerning the 078 patent because it realized the patent was invalid and unenforceable is
speculative and not supported by clear and convincing evidence. See Stephens v. Tech Intl, Inc.,
393 F.3d 1269, 1276 (Fed. Cir. 2004) (indicating that an exceptional case finding is not to be
based on speculation or conjecture but upon clear and convincing evidence). Rather, the record
indicates that Veritec settled the case to which Cognex refers prior to any determination of
invalidity or unenforceability by the Court. Moreover, review of the terms of the settlement
16
agreement establishes that they do not alter or call into question the presumption of validity
afforded to the 078 patent at the commencement of the instant action. See 35 U.S.C. 282
(2000) (granting a presumption of validity to patents). Third, Cognexs allegations that
Defendants engaged in inequitable conduct during the reexamination of the 524 patent and in
the spoliation of evidence were the subject of two motions previously filed by Cognex during the
summary judgment phase of these proceedings. The Court denied both motions. Cognex
resurrects its prior arguments here in support of its assertion that this is an exceptional case, but
they are insufficient to establish Defendants litigation misconduct by clear and convincing
evidence.
Finally, the record does not clearly and convincingly establish improper motive or
frivolous filings by Defendants during the course of this lawsuit. Cognex contends Defendants
motion to dismiss was frivolous. The Court disagrees. The Court adopted the magistrate judges
recommendation to grant Defendants motion in part after its de novo review of the record
indicated portions of Defendants motion were meritorious. Cognexs argument that Defendants
filed their motion to stay these proceedings pending the reexamination of the 524 patent only to
effectuate delay also lacks merit when the full context of the filing is considered. Specifically,
although Defendants motion to stay was denied, the filing of the motion appears reasonable in
light of the granting of a similar motion to stay by the magistrate judge in another case in this
District that involved the 524 patent only a few days prior to Defendants filing in this case.
Defendants explanation that the avoidance of inconsistent rulings motivated their filing of the
motion to stay in this action is reasonable under these circumstances.
In sum, viewing the totality of the circumstances through the lens of the Courts
knowledge of the twenty-nine months of proceedings in this action to date, the Court concludes
17
that Cognex has failed to demonstrate clear and convincing evidence of conduct that would
justify a finding that this is an exceptional case due to Defendants litigation misconduct. See
L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1128 (Fed. Cir. 1993) (indication that
the trial judge is in the best position to determine, in light of the totality of the circumstances,
whether litigation misconduct renders the case exceptional for purposes of 285)
b. Inequitable conduct
Cognex also argues that this is an exceptional case under 35 U.S.C. 285 because of
Defendants inequitable conduct before the PTO. There is no per se rule of exceptionality in
cases involving inequitable conduct. Nilssen v. Osram Sylvania, Inc., 523 F.3d 1352, 1358 (Fed.
Cir. 2008). A finding of inequitable conduct may constitute a basis for an award of attorney
fees under 35 U.S.C. 285. A.B. Chance Co. v. RTE Corp., 854 F.2d 1307, 1312 (Fed. Cir.
1988); see also Agfa Corp. v. Creo Prods., Inc., 451 F.3d 1366, 1380 (Fed. Cir. 2006) (finding
Agfas inequitable conduct rendered the case exceptional); Basseler, 267 F.3d at 1386 (holding
that a party may prove the existence of an exceptional case by showing inequitable conduct
before the PTO). On the other hand, a finding of inequitable conduct does not require a finding
that the case is exceptional. Gardco Mfg., Inc. v. Herst Lighting Co., 820 F.2d 1209, 1215 (Fed.
Cir. 1987) (stating it has not been held that . . . every instance of inequitable conduct mandates
an evaluation of the case as exceptional).
In the May 19 Order, the Court concluded that the patentees of the 078 patent, including
co-inventor Robert Sant Anselmo, then Executive Vice President of Veritec, engaged in
inequitable conduct by withholding material information from and making false and incomplete
statements to the PTO examiner during the procurement of the 078 patent, and that this
inequitable conduct tainted the issuance of the 524 patent, which claims priority to the 078
18
patent. See Cognex, 2008 WL 2113661, at *25-33. Specifically, the Court determined that the
patentees failed to disclose information about public demonstrations of the claimed invention
that were made prior to the critical date of the 078 patent. The Court also determined that the
patentees failed to disclose a sale of the claimed invention prior to the critical date of the 078
patent. The Court concluded that Defendants explanation for the failure to disclose the prior
demonstrations and sale were implausible. The Court also concluded that the patentees had
knowledge of the withheld information and determined that it was intentionally withheld in an
effort to avoid rejection of the proposed patent claims. The Court determined that the patentees
not only failed to provide the examiner with a full record upon which to examine the application
for the 078 patent, but that they also knowingly submitted false and incomplete information to
the examiner. In the absence of a credible explanation from the patentees, the Court concluded
that an inference of deceptive intent was inescapable under the facts and circumstances.
Upon finding inequitable conduct by the patentees in the procurement of the 078 patent,
the Court, relying on Rohm & Haas Company, 722 F.2d at 1572, then determined that the
patentees failed to sufficiently cure their inequitable conduct during the prosecution of the 524
patent. Because the 524 patent application was a continuation of the 078 patent application and
the claims of the patents were determined to be sufficiently connected and related, the Court
concluded that the uncured inequitable conduct during the procurement of the 078 patent tainted
the prosecution of the 524 patent.5 Based upon these findings of inequitable conduct that
5 The Court notes its apparent misidentification of the notification of allowability referred
to in the May 19 Orders discussion of the patentees failure to cure. Although the Court referred
to a Notice of Allowance issued by the PTO prior to the patentees November 17, 1995
submission of an Information Disclosure Statement containing the previously withheld
information, the Court recognizes that the formal Notice of Allowance was not issued by the
PTO until January 25, 1986. However, there is no dispute, nor was there at the time of the May
19 Order, that on May 22, 1995, the examiner of the 524 patent application provided the
19
involved intentional deceit by the patentees before the PTO, the Court concludes that the present
case is an exceptional case within the meaning of 35 U.S.C. 285 due to inequitable conduct
before the PTO. See Agfa Corp., 451 F.3d at 1380; Evident Corp., 399 F.3d at 1316.
2. Attorney fees
Once a court finds a case is exceptional, the court must then determine whether an award
of attorney fees is appropriate. Forest Labs., 339 F.3d at 1328. A finding of exceptional
circumstances does not mandate the award of attorneys fees. See Consolidated Aluminum Corp.
v. Foseco Intl Ltd., 910 F.2d 804, 815 (Fed. Cir. 1990). Rather, if a case is declared exceptional,
the decision to award attorney fees remains discretionary and permits [a] judge to weigh
intangible as well as tangible factors. Superior Fireplace Co. v. Majestic Prods. Co., 270 F.3d
1358, 1378 (Fed. Cir. 2001) (quoting Natl Presto Indus., Inc. v. West Bend Co., 76 F .3d 1185,
1197 (Fed. Cir. 1996)). These factors include the closeness of the question, litigation behavior,
and any other factors whereby fee shifting may serve as an instrument of justice. Id.
It is the courts duty, in awarding attorney fees under section 285, to refuse to condone
behavior that exceeds reasonable litigation tactics. Sensonics, Inc. v. Aerosonic Corp., 81 F.3d
1566, 1575 (Fed. Cir. 1996). However, no such behavior has occurred here. During the course
of this litigation, Defendants have vigorously defended their position that the omni-directional
three-dimensional orientation component of the inventions of the 078 and 524 patents was not
fully developed until after the critical date of the patents. Although the Court ultimately
disagreed with Defendants assertions during claim construction and at summary judgment, the
patentees with an informal notification of the allowability of most of the patentees claims,
subject to the filing of a terminal disclaimer by the patentees. This notification of allowability is
also discussed in the May 19 Order, and the Courts conclusion regarding the sufficiency of the
patentees submissions of the withheld material information and Defendants failure to cure the
inequitable conduct during the prosecution of the 524 patent stands unaltered.
20
Court is satisfied that Defendants offered their arguments in good faith and supported their
positions with competent documentary, testimonial, and expert report evidence.
Moreover, the Courts claim construction of certain disputed terms determined the issue
of invalidity of the asserted claims of the 524 patent. The Courts construction of these terms
also established the context in which the Court determined that Defendants engaged in
inequitable conduct before the PTO by withholding material prior art references during the
prosecution of the 078 patent and by intentionally providing material false and misleading
statements to the PTO.
In sum, while Cognex seeks an award of attorney fees, expenses, and costs in the amount
of .6 million, the Court concludes, on the basis of its familiarity with this litigation and the
interests of justice, that this is not a case in which an award of attorney fees to the prevailing
party is warranted. See Gardco, 820 F.2d at 1215 (citing S.C. Johnson & Son, Inc. v. Carter-
Wallace, Inc., 781 F.2d 198, 201 (Fed. Cir. 1986). The purpose of section 285 is to provide
discretion where it would be grossly unjust that the winner be left to bear the burden of his own
counsel which prevailing litigants normally bear. Badalamenti v. Dunhams, Inc., 896 F.2d
1359, 1364 (Fed. Cir. 1990) (citation omitted). Finding no gross injustice in requiring each party
to pay the attorney fees incurred in litigating the patent disputes in this action, the Court, in its
discretion, declines to award attorney fees to Cognex.
III. CONCLUSION
Based on the files, records, and proceedings herein, and for the reasons stated above, IT
IS ORDERED THAT:
1. Cognexs Motion for Summary Judgment on Count V of Plaintiffs First
Supplemental Complaint/Defamation [Docket No. 294] is DENIED.
21
2. Cognexs Motion for Leave to Amend the First Supplemental Complaint
[Docket No. 291] is GRANTED IN PART AND DENIED IN PART.
3. Cognex shall serve and file a Second Amended Complaint in accordance
with the substance of this Order.
4. Cognexs Motion to Declare this an Exceptional Case Pursuant to 35
U.S.C. 285 [Docket No. 285] is DENIED.
Dated: August 7, 2008
s/ Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge
 

 
 
 

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