FEE SHIFTING IN PATENT LITIGATION Sughrue Mion, PLLC Abraham J. - PDF document

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-