Rule 11 Sanctions Upheld For Lack Of Reasonable Claim Construction Argument And Failure To Conduct Presuit Inquiry

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.

"Source had the ability to draft the claim that...