Rule 11 Sanctions Imposed where Plaintiff's Failure to Evaluate and Understand the Accused Product Was Unreasonable and Easily Avoided

February 22, 2013

In Smart Options, LLC v. Jump Rope, Inc., Case No. 12-C-2498 (N.D. Ill. March 25, 2013), plaintiff Smart Options brought suit for infringement of U.S. Patent No. 7,313,539 against Jump Rope. The '539 Patent relates to a method for purchasing an "option" to buy a good or service (e.g., concert ticket) at a "reservation price" within a designated time period. If the option to buy is not exercised then it expires and there is no refund of the "option fee." Smart Options utilizes the patent in the operation of its website www.optionit.com. Jump Rope operated a smart phone application that allows users to bypass entrance lines at events by purchasing a "Jump" which allows immediate access to the event without any additional purchase required.

After the suit was filed, Jump Rope served Smart Options with a Rule 11 motion and cover letter stating that Jump Rope would seek its attorneys' fees and costs if Smart Options proceeded with the suit and the Court entered a finding of non-infringement. Jump Rope explained why it considered the suit to be meritless:

Plaintiff alleges violation of a patent that covers providing options on the right to purchase goods or services at a future time. Defendant's software application, however, does not provide options or charge option fees. Rather, it allows someone to buy the service provided - a right to "jump the line" at an event or facility. Plaintiff and its counsel could have and easily should have discovered this, as the iPhone/Android application they accuse is free to download.

Id. at *2. Smart Options proceeded with the suit undeterred and Jump Rope filed a motion for summary judgment of non-infringement. In granting the motion, the Court noted the clear distinction between selling an actual good or service (i.e., Jump Rope's sale of a "Jump" that provides immediate access to the event) as opposed to the sale of a "right" or "option" to obtain a good or service pursuant to the '539 patent.

As promised, Jump Rope subsequently filed a motion for Rule 11 sanctions seeking its fees and costs. The Court noted that while regional circuit law should be used to determine whether sanctions were appropriate, Federal Circuit law should be applied to determine what type of pre-filing investigation Rule 11 requires in the patent context. Carter v. ALK Holdings, Inc., 605 F.3d 1319, 1323 (Fed. Cir. 2010) ("In reviewing Rule 11 sanctions, we apply the law of the regional circuit."); Pregis Corp. v. Kappos, 700 F.3d 1348, 1354 (Fed. Cir. 2012) ("Federal Circuit law applies to 'issues of substantive patent law and certain procedural issues pertaining to patent law.'").

As an initial matter, the Court held that while Smart Options' filing of a notice of appeal to the Federal Circuit divested the district court of jurisdiction on matters related to the appeal, it did not divest jurisdiction over a Rule 11 sanctions motion. Zahran v. Frankenmuth Mut. Ins. Co., No. 94 C 4827, 1997 WL 53107, at *1 (N.D. Ill. Feb. 6, 1997) ("We retain jurisdiction to consider motions for Rule 11 sanctions despite the pending appeal on the case's underlying merits.").

The Court was not impressed with the declaration of Smart Options' counsel describing the pre-filing investigation, and found that it used conclusory language and lacked detail as to the steps taken to examine the application and compare the claims to the application. The Court also cited the lack of screenshots from the application, statements detailing use of the application, statements showing any step in the purchase of a Jump (which cost only tens of dollars), or other specific evidence of investigative measures. Importantly, the Court noted that there was no statement that counsel purchased a "Jump" or actually used the application:

Smart Options, however, did not take this simple, inexpensive investigative step, either before filing the complaint or after receiving Jump Rope's initial Rule 11 motion. As discussed above, Smart Options instead reviewed Terms of Use on Jump Rope's website - not even the terms of service on the application itself - rather than using the application to purchase a Jump.
Id. at *10. (emphasis not in original). The Court noted that while the law does not require a patent plaintiff to obtain and test an accused product before filing suit, it is an effective way to assess infringement.

Aside from the inadequacy of it's pre-filing investigation, the Court also took issue with Smart Options' continued assertion of its infringement claims:

Smart Options' failure to purchase a Jump is problematic because, as discussed in the Court's summary judgment opinion - and Jump Rope's initial Rule 11 motion - Smart Option's portrayal of the Jump Rope application is factually inaccurate. Indeed, Smart Options based its arguments at summary judgment and the present Rule 11 motion on the mistaken belief that Jump Rope requires a Jump-purchaser to pay an additional cover fee to enter the event or facility once he jumps to the front of the line.

Id. at *11. This decision makes clear that it is best practice for a patent plaintiff to obtain and test an accused product prior to bringing suit, particularly where it can be done with minimal cost or effort. Moreover, this exercise should be revisited in light of changing circumstances.

The authors of www.PatentLawyerBlog.com are patent trial lawyers at Jeffer Mangels Butler & Mitchell LLP. We represent inventors, patent owners and technology companies in patent licensing and litigation. Whether pursuing patent violations or defending infringement claims, we are aggressive and effective advocates for our clients. For more information contact Ali Shalchi at 949.623.7247 or AShalchi@jmbm.com.