FEE SHIFTING IN PATENT LITIGATION Sughrue Mion, PLLC Abraham J. Rosner May 2014 I. BACKGROUND In the U.S., each party to litigation ordinarily pays its own attorney fees regardless of the outcome (called the American Rule). However, in the context of patent litigation, the Patent Act of 1952 allowed for an award of reasonable attorney fees to the prevailing party in exceptional cases at the discretion of the lower court. 35 USC 285 The court in exceptional cases may award reasonable attorney fees to the prevailing party. Courts did not award fees as a matter of course. The award of fees was viewed not as a penalty for failure to win a patent infringement suit, but as appropriate only in extraordinary circumstances, for example, to address unfairness or bad faith. Although it was unusual that a case would warrant fee-shifting, the Federal Circuit for over two decades instructed district courts to consider the totality of the circumstances when making fee-shifting determinations. In the decision of Brooks Furniture Mfg., Inc., (Fed. Cir. 2005), the Federal Circuit adopted a more rigid and mechanical formula, defining an exceptional case as one which either involves material inappropriate conduct or is both objectively baseless and brought in subjective bad faith. Brooks Furniture also required that parties establish the exceptional nature of a case by clear and convincing evidence. Consequently, the Federal Circuit s stringent standards have made fee awards in patent cases quite uncommon, even in outrageous cases. II. WHAT MAKES A CASE EXCEPTIONAL? 1. Material inappropriate conduct related to the matter in litigation such as willful infringement (attorney s fees in addition to treble damages), inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates FRCP 11. 1 2. Where a lawsuit is brought in subjective bad faith and is objectively baseless. For example, where a patent owner knew or should have known that its asserted claims are not infringed, a court by infer that the case was brought or maintained in bad faith. A lawsuit is objectively baseless where no reasonable litigant could realistically expect success on the merits. 1 In the context of patent infringement actions, Rule 11 requires, at a minimum, that an attorney interpret the asserted patent claims and compare the accused device with those claims before filing a claim alleging infringement. -1-
III. SOME STATISTICS OF FEE-SHIFTING 2010 2013 (patstats.org and other sources) 18,861 patent cases filed (district court) 11,106 determinations 208 motions for attorney fees 94 awards of attorney fees, 46 for the patentee; 48 for the accused infringer Fee-shifting is ordered in less than 1% of patent determinations. IV. SUMMARY OF SUPREME COURT DECISIONS ON FEE-SHIFTING The Supreme Court recently gave its decision on two patent fee-shifting cases, namely, Octane Fitness and Highmark that focus on (i) the proper standard for an exceptional case finding by a district court under 285 and (ii) the proper standard of review on appeal. As to (i), the Court held that an exceptional case is one that stands out from others with respect to the strength of a party s litigating position or the unreasonable manner in which the case was litigated. District courts may determine whether a case is exceptional on a case-by-case basis, considering the totality of the circumstances. Specifically, the Supreme Court overruled the Brooks Furniture standard for an award of attorney fees. As to (ii), the Court held that all aspects of a district court s exceptional-case determination under 285 should be reviewed by an appeal court for abuse of discretion (and not de novo) since it is essentially a question of fact. In other words, the appeal court will affirm if it finds that the district court did not abuse its discretion in making the award of attorney fees and will not review de novo (as if no decision had been previously rendered). More particularly, these Supreme Court decisions make it easier for district court judges to award attorney fees in patent cases and make it more difficult to overturn an award of attorney fees on appeal. V. OCTANE FITNESS v. ICON HEALTH & FITNESS ICON sued Octane, alleging that its Q45 and Q47 exercise machines infringed ICON s 710 patent. ICON is the largest manufacturer of exercise equipment. For 6 years, Octane had sold a very successful line of high-end elliptical machines for use in commercial fitness centers. In internal e-mails uncovered during litigation, ICON discussed Octane s success and boasted that it was pulling an old patent off the shelf to sue the smaller, successful Octane to extract royalties. The district court granted Octane s motion for summary judgment, concluding that Octane s machines did not infringe. Octane then moved for attorney s fees under 285. -2-
Applying the Brooks Furniture standard, the district court denied Octane s motion (no fee award), finding that Octane could not show that ICON s claim was objectively baseless or that ICON had brought the suit in subjective bad faith. The district court also rejected Octane s argument that the judgment of noninfringement should have been a foregone conclusion to anyone who visually inspected Octane s machines. On appeal, the Federal Circuit affirmed both the judgment of non-infringement and the denial of attorney s fees. In upholding the denial of attorney s fees, the Federal Circuit rejected Octane s argument that the district court had applied an overly restrictive standard in refusing to find the case exception under 285 and declined to revisit its standard for determining whether a case is exceptional. The Supreme Court granted certiorari. Question for Review: Did the appellate court s interpretation of exceptional under the attorney fees statute improperly raise the standard for accused patent infringers to recoup attorney fees and encourage plaintiffs to bring frivolous patent lawsuits that cause competitive harm? Holding: The Brook s Furniture standard is unduly rigid and impermissibly hinders the discretion of district courts to award attorney fees. The Federal Circuit decision was reversed and the case was remanded. 1. The term exception is construed in accordance with its ordinary meaning, namely, uncommon, rare, or not ordinary. Thus, an exceptional case is one that stands out from others with respect to the strength of a party s litigating position or the unreasonable manner in which the case was litigated. District courts may determine whether a case is exceptional on a case-by-case basis, considering the totality of the circumstances. -3-
a. The Federal Circuit s standard is so narrow that it essentially duplicates Federal Rule 11 (sanctions) or the court s inherent power to punish litigation conduct, making 285 superfluous. b. With regard to baseless litigation, a case can be exceptional if it involves either subjective bad faith or exceptional meritlessness, there is no reason to require both for a fee award c. The Federal Circuit s decision to use a standard from antitrust law (objectively baseless claims in an attempt to thwart competition) is improper because such standard has no relation to 285 d. There is no basis for the requirement that entitlement to fees be shown by clear and convincing evidence. VI. HIGHMARK, INC. v. ALLCARE HEALTH MANAGEMENT SYSTEM, INC. Allcare owns the 105 patent which covers utilization review in managed health care systems. Highmark, a health insurance company, sued Allcare seeking a declaratory judgment that the 105 patent was invalid and unenforceable, and that Highmark s actions did not infringe. Allcare counterclaimed for patent infringement. Both parties filed motions for summary judgment. The district court entered a final judgment of non-infringement in favor of Highmark. The Federal Circuit affirmed. Highmark then moved for an award of attorney fees under 285. The district court granted Highmark s motion, finding this to be an exceptional case. The court reasoned that Allcare had engaged in a pattern of vexatious and deceitful conduct throughout the litigation. Specifically, the district court found that Allcare had pursued this suit as part of a bigger plan to identify companies potentially infringing the 105 patent under the guise of an informational survey, and then to force those companies to purchase a license of the 105 patent under threat of litigation. The district court further found that Allcare had maintained infringement claims against Highmark well after such claims had been shown by its own experts to be without merit and had asserted defenses it and its attorneys knew to be frivolous. The district court fixed the amount of the award at $4.7 M in attorney s fees and $210 k in expenses in addition to $375 k in expert fees. On appeal, the Federal Circuit affirmed the district court s exceptional-case determination with respect to one claim of the patent, but reversed with respect to another claim of the patent. In reversing the exceptional-case determination, the Federal Circuit reviewed it de novo and without deference to the finding of the district court (the standard of review applied by the appeal court when reviewing a question of law). The Federal Circuit then determined, contrary to the judgment of the district court, that Allcare s argument as to claim construction was not so unreasonable that no reasonable litigant could believe it would succeed. The Federal Circuit further found that none of Allcare s conduct warranted an award of fees under the litigation-misconduct prong of Brooks Furniture. The Supreme Court granted certiorari. -4-
Question for Review: Whether a district court s exceptional-case finding under 35 USC 285, based on its judgment that a suit is objectively baseless, is entitled to deference. Holding: All aspects of a district court s exceptional-case determination under 285 should be reviewed for abuse of discretion (and not de novo) since it is essentially a question of fact. The judgment of the Federal Circuit was vacated and the case was remanded. VII. FEE-SHIFTING AND PATENT TROLLS In view of the above two decisions of the Supreme Court, the hurdle may now be lower for feeshifting (obtaining an award of attorney s fees) if a patent owner brings a lawsuit without merit. However, if fee-shifting is meant to make patent trolling less lucrative, then fee-shifting must become the norm (and not the exception). The case law could evolve in view of the above two Supreme Court decisions such that feesifting becomes more common. Or, fee-shifting might be achieved directly through legislation. VIII. PENDING LEGISLATION On December 5, 2013, the House passed the Innovation Act H.R. 3309 that addresses feeshifting (among other patent reforms) and similar bills have been introduced in the Senate. H.R. 3309 would amend 285 as follows: The court shall award to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action, unless the court finds that the position of the non-prevailing party or parties was reasonably justified or that special circumstances make an award unjust. How does this differ from current 285? This is a reasonable person test not so different from current 285, but the change is in the burden of proof. Currently, the winning party has the burden of demonstrating that fee-shifting is warranted. The proposed legislation would apply to losing patent owners (troll and non-troll) and to losing infringers. The Senate is moving forward on its own patent reform bill (Patent Transparency and Improvements Act). The current version of the Senate bill does not include any fee-shifting provision, although a recent proposal would establish new fee-shifting rules beginning April 24 (requiring the losing party in patent cases to pay the winning party s legal fees in more cases). 190 new patent suits were filed on April 23, the bulk of them by non-practicing entities in the Eastern District of Texas. The measures being considered in Congress would allow fee awards in many more cases, and the suits on April 23 were apparently filed by companies concerned that their litigation positions might be found not objectively reasonable, making them responsible for fees if the law were passed. -5-