Judges: Michel (author), Moore, Cote (District Judge sitting by designation)

[Appealed from W.D. Wash., Judge Robart]

In Digeo, Inc. v. Audible, Inc., No. 07-1133 (Fed. Cir. Nov. 1, 2007), the Federal Circuit affirmed the district court’s denial of defendant’s motion for attorneys’ fees under 35 U.S.C. § 285, including its request for additional discovery to develop the section 285 claim. In doing so, the Court found no clear error in the district court’s finding that this was not exceptional and no abuse of discretion in its denial of additional discovery.

Digeo, Inc. (“Digeo”) purchased U.S. Patent No. 5,734,823 (“the ’823 patent”) “as is” at a bankruptcy estate sale. The ’823 patent, directed towards video pocket readers, listed four inventors, including Edward Chang and his brother, Hsiao-Shih Chang, who goes by the informal name Oliver Chang. According to the file history for the ’823 patent, Oliver Chang signed an assignment and a power of attorney as the executor of the estate of his apparently deceased brother, Edward.

Claiming to be the rightful owner of the patent, Digeo sued Audible, Inc. (“Audible”) for infringement of the ’823 patent. During a deposition, Audible discovered that Edward Chang was alive and that Oliver Chang had not signed the purported power of attorney or assignment. Upon learning this information, Audible secured a license from Edward Chang to the ’823 patent retroactive to the date of issuance. Soon thereafter, the district court dismissed the case, in part because the assignments were forgeries and, thus, did not convey legal title to Digeo. The district court also denied Audible’s section 285 motion and request for additional discovery because there was no clear and convincing evidence that Digeo knew or should have known about the forged documents. Audible appealed.

On appeal, the Court initially reviewed the district court’s findings that there was no clear and convincing evidence that Digeo knew or should have known of the defect in its title to the ’823 patent. The Court found that the district court’s findings and inferences were not clearly erroneous. In so doing, the Court rejected Audible’s argument that the defect in title should have been discovered by Digeo through ordinary diligence, noting that no one else (including prior litigants that had settled their suit with Digeo) discovered the defect prior to Audible, and that it took Audible itself at least a year of litigation to discover the problem.

Audible further argued that the district court committed error by switching the burden of proof to Audible to show that Digeo had not performed an appropriate presuit investigation, rather than leaving that burden with Digeo, in contravention of View Engineering, Inc. v. Robotic Vision Systems, Inc., 208 F.3d 981 (Fed. Cir. 2000). The Court was not persuaded by this argument. The Court found View Engineering inapposite because the case interprets Fed. R. Civ. P. 11, not section 285. For section 285 motions, the burden of proof remains with the movant to show by clear and convincing evidence that the case is exceptional. Further, although the Court noted that a Rule 11 violation may serve as the basis for finding a case exceptional, there was no Rule 11 motion or finding by the district court in this case. Therefore, the burden was on Audible, as the movant, “to prove by clear and convincing evidence that the case was exceptional by showing that Digeo brought a frivolous lawsuit because it knew or should have known that it lacked legal title to the ’823 patent.” Slip op. at 8. Thus, the Court held that the district court did not misapply the legal standard under section 285.

In addition, the Court rejected Audible’s argument for a heightened standard of presuit investigation when a patent holder purchases a patent “as is,” noting that Digeo ignored “red flags” in the file history. The Court disagreed with Audible’s expansive reading of section 285, stating that it has “never required a heightened investigation into the legal title of all patents purchased ‘as is.’” Id. at 9. Instead, the Court explained that merely negligent conduct does not suffice to establish that a case is exceptional. The Court found no clear error in the district court’s finding that Audible adduced no evidence suggesting Digeo’s negligence, much less a higher degree of culpability, in not learning of the title defect.

The Court further stated that the pertinent inquiry was whether Digeo knew or should have known its legal title was defective. The Court found that the district court did not commit clear error in finding that Digeo did not perpetrate or know about, nor should Digeo have known about, the forged documents—and hence a possible defect in its legal title. Although noting that the facts of this case were unusual, the Court held that the case was not exceptional under section 285.

As for the district court’s denial of additional discovery, the Court reviewed the district court’s decision for abuse of discretion, applying the law of the regional circuit. A reviewing court will not disturb a denial of additional discovery unless there is “the clearest showing” that the denial will result in “actual and substantial prejudice to the complaining litigant.” Id. at 11 (quoting Laub v. U.S. Dep’t of Interior, 342 F.2d 1080, 1093 (9th Cir. 2003)). In denying Audible’s request for additional discovery, the district court found that Audible’s motion was based on its unsubstantiated speculation of Digeo’s misconduct and that Audible’s request was late under the circumstances. The Court found that the district court balanced Audible’s assertion that additional discovery would produce evidence of Digeo’s culpable conduct against the expenditure of resources discovery would require and determined that additional discovery was not warranted. Audible’s “unsubstantiated speculation” about Digeo’s conduct did not demonstrate a “reasonable probability that the outcome [of its section 285 motion] would have been different had discovery been allowed.” Id. Therefore, the Court found no abuse of discretion in the district court’s denial of the discovery motion.