In ResQNet.Com, Inc. v. Lansa, Inc., the Court of Appeals for the Federal Circuit ("CAFC") affirmed the United States District Court for the Southern District of New York's ("District Court") ruling that Lansa had infringed ResQNet.Com's ("ResQNet") patents; vacated and remanded the District Court's damages award; and reversed the District Court's Rule 11 sanction against ResQNet.

In 2001, ResQNet filed an infringement complaint against Lansa for five patents covering screen recognition and terminal emulation technology: U.S. Patent No. 6,295,075 ("the '075 patent"), U.S. Patent No. 5,831,608 ("the '608 patent"), U.S. Patent No. 5,812,127 ("the '127 patent), U.S. Patent No. 5,792,659 ("the '659 patent"), and U.S. Patent No. 5,530,961 ("the '961 patent"). The District Court held that Lansa infringed the '075 and '608 patents and awarded ResQNet $506,305 in damages based on a 12.5% royalty rate. The District Court also imposed a Rule 11 sanction against ResQNet regarding the '127 and '608 patents. On appeal, the CAFC vacated the damages award because the District Court's calculations relied on prior licensing agreements that had no link to ResQNet's patents. The CAFC also reversed the District Court's Rule 11 sanction because Lansa's motion was untimely and because ResQNet did not act in bad faith in litigating its patents.

The first issue is whether the District Court erred in awarding ResQnet $506,305 in damages based on a 12.5% reasonable royalty rate. Under 35 U.S.C. § 284, a patentee is entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." Moreover, a "reasonable royalty" is derived from a hypothetical negotiation between the patentee and the infringer at the time of infringement. According to Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970), courts may consider several factors, including past licensing agreements when calculating a reasonable royalty. At trial, ResQNet's expert calculated a 12.5% royalty rate based on several past licensing agreements.

The CAFC reversed the District Court's damages award because several of the past licensing agreements had no relation to the claimed invention. The CAFC ruled that lower courts should (1) consider only past and present licenses to the "actual patent and the actual claims in litigation" and (2) "tie proof of damages to the claimed invention's footprint in the market place." The CAFC reasoned that plaintiffs should be prevented from conveniently selecting licenses in order to inflate a royalty rate. Moreover, past licensing agreements should not be radically different from those used in a hypothetical negotiation.

Of the seven licenses cited by ResQNet's expert, the CAFC found that five of them did not mention the patent and had no "discernible link" to the patent. Rather, these five licenses, considered "re-bundling licenses," furnished software products, source code, training, maintenance, marketing, and upgrades. In contrast, the CAFC found that the two other licenses were related to the patent and had royalty rates substantially lower than the five re-bundling licenses. The CAFC found that the unrelated licenses substantially inflated the royalty rate and that the District Court failed to link these licenses to the patents in suit. Thus, the CAFC vacated the damages award and remanded back to the District Court to recalculate damages.

Judge Newman dissented from the court's damages ruling and disagreed with the majority's ruling that it was improper to consider licenses involving patents bundled with additional technologies. Judge Newman reasoned that the majority's ruling created "strict barriers" in the licensing agreements a court could consider. Courts were now required to disregard agreements where a patent was not directly licensed or where a patent was bundled with additional subject matter. Judge Newman agreed with the District Court's finding because the District Court (1) recognized the additional subject matter in the re-bundled licenses and considered those additions in its calculations; (2) considered the licensing practices in the industry; and (3) tied the re-bundling licenses to the patent at issue.

The second issue is whether the District Court abused its discretion in imposing a Rule 11 sanction against ResQNet. In 2001, prior to discovery, ResQNet's attorney sent a letter to Lansa informing them that, unless evidence is discovered, the '127 and '608 patents did not appear to be infringed. In 2002, ResQNet withdrew the '127 patent from its complaint. In 2004, Lansa served ResQNet a Rule 11 sanction motion, claiming that ResQNet acted in bad faith for failing to withdraw the '127 and '608 patents. In 2005, the District Court denied Lansa's motion for summary judgment of non-infringement of the '608 patent.

The CAFC reversed the District's Court's Rule 11 sanction because Lansa's motion was untimely and because ResQNet did not act in bad faith. The CAFC ruled that Rule 11 motions are untimely if delayed too long or if the "offending contention has been withdrawn or resolved." The CAFC held that Lansa's motion was untimely because ResQNet had withdrawn the '127 patent from its complaint two years before Lansa's motion. The CAFC also held that ResQNet did not act in bad faith for failing to withdraw the '608 patent from its complaint. The CAFC reasoned that the assertions of non-infringement in ResQNet's 2001 letter were based on representations Lansa had made, prior to any discovery. Moreover, because the District Court declined to grant summary judgment of non-infringement for the '608 patent, it was reasonable for ResQNet to believe that this patent was infringed.