EPIC TECH, LLC v. PEN-TECH ASSOCIATES, INC.

Authored by: Jeremy J. Gustrowsky

A patent owner that pressed an infringement suit despite a stack of warning signs about its patent’s validity will get another look from the district court, after the Federal Circuit vacated an order denying sanctions and attorneys’ fees. The appeals court did not say sanctions were required. It said the trial court never explained why they weren’t.

The case revolves around U.S. Patent No. 8,545,317, owned by Epic Tech, LLC, which covers an electronic sweepstakes system that links gaming terminals over a server network so that a secondary game runs in the background of an initial game. The patent issued in October 2013. Six months later, the Supreme Court decided Alice Corp. v. CLS Bank, which set out the now-familiar two-step framework for deciding whether a claim is eligible for patenting under 35 U.S.C. § 101. After Alice, the Patent and Trademark Office reopened prosecution of a related Epic Tech application and rejected its claims under § 101. The PTO then issued § 101 rejections in two more related applications. In two of those cases, the PTO had already found the claims patentably indistinct from claims of the ‘317 patent. Epic Tech abandoned all three applications without overcoming the eligibility rejections.

There was one more warning sign. Before suing Pen-Tech Associates, Inc. in June 2020, Epic Tech had asserted a closely related patent, U.S. Patent No. 8,545,315, against a different company in Texas. That court applied Alice and held the asserted claims ineligible under § 101. Pen-Tech pointed to that ruling in its own summary judgment motion, and the Georgia district court agreed, declaring the asserted claims of the ‘317 patent invalid under § 101.

Pen-Tech then sought sanctions under Federal Rule of Civil Procedure 11 and fees under 35 U.S.C. § 285, 28 U.S.C. § 1927, and the court’s inherent power. Its theory was straightforward: Alice, the PTO’s repeated § 101 rejections, and the Texas decision together put Epic Tech on notice that its claims were likely unpatentable, and Epic Tech should have investigated validity before filing. The district court acknowledged that Pen-Tech’s frivolousness argument had “considerable credence” in light of the invalidity ruling, but denied relief anyway, finding the conduct not unreasonable and the case not exceptional.

The Federal Circuit found that explanation inadequate for meaningful review. The trial court leaned on evidence that Epic Tech and its counsel had performed a good faith pre-suit infringement investigation, complete with a claim chart and a cease and desist letter. That, the appeals court observed, says nothing about whether the patent owner should have investigated validity. The district court also brushed aside the PTO office actions by reasoning that prosecution history from a later patent cannot limit claims in an earlier related patent, but Pen-Tech never made a claim construction argument. It argued notice. And the court’s only response to the Texas decision was that “the issues were not the exact same,” which the Federal Circuit said misses the point. Issues need not be identical to raise a serious concern about validity.

The panel’s language was pointed. Given what it called “unusually strong factors pointing to the invalidity of the patent-in-suit,” it said a patent owner and its counsel cannot simply lean on the statutory presumption of validity when confronted with multiple indicators that the claims are unpatentable under § 101. Because the fee motions under § 285, § 1927, and the court’s inherent power rested on the same facts (and because the inherent-power ruling contained no independent analysis at all), those denials were vacated as well.

Importantly, the Federal Circuit decided very little on the merits. It did not hold that Epic Tech or its law firm violated Rule 11, did not decide whether the asserted claims were substantively similar to the ones invalidated in Texas, and expressly declined to say at what point notice of potential invalidity makes continued assertion of a presumptively valid patent unreasonable. The message to district courts is procedural but significant: when a sanctions motion presents a specific theory, the order resolving it has to engage with that theory on the record. Costs were awarded to Pen-Tech.