The Latest On Fee-Shifting In Patent Cases

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: The Latest On Fee-Shifting In Patent Cases Law360, New York (February 19, 2014, 6:08 PM ET) -- As Congress and the judiciary consider strategies for curbing perceived abuses of the patent system, the practice of fee-shifting requiring the losing party to pay the prevailing party s attorneys fees in patent litigation has recently received renewed attention. The fee-shifting provision in the patent statute, located at 35 U.S.C. 285, has existed in its current form since 1952: The court in exceptional cases may award reasonable attorney fees to the prevailing party. Under the current statute, only cases that qualify as exceptional are eligible for fee-shifting. Several bills pending before Congress, however, propose changes to Section 285 that would make fee-shifting the rule rather than the exception.[1] For example, the Innovation Act (H.R. 3309), which was approved by the House of Representatives on Dec. 5, 2013, would replace current Section 285 with the following: The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.[2] Scrutiny of Section 285 is not coming from Congress alone. The U.S. Supreme Court recently granted certiorari on two cases challenging aspects of the Federal Circuit s test for awarding attorneys fees under 35 U.S.C. 285.[3] Given all of the attention on fee-shifting in patent cases, it s not surprising that the Federal Circuit recently took the opportunity to revisit its two-part test for awarding attorneys fees under Section 285. Kilopass Technololgy Inc. v. Sidense Corp. In Kilopass Technology Inc. v. Sidense Corp., a panel consisting of Chief Judge Randall Radar and Judges

2 Alan Lourie and Kathleen O Malley reviewed a district court s denial of a prevailing defendant s motion for attorneys fees under Section 285.[4] Kilopass Technology Inc. sued Sidense Corporation in the Northern District of California for infringement of three patents claiming programmable memory cells. Prior to filing suit, Kilopass sent a letter advising Sidense that its memory cell product may infringe Kilopass patents. Sidense responded by identifying two claim limitations (included in every claim of the asserted patents) absent from Sidense s product. Kilopass own analysis similarly suggested that the Sidense memory cell did not literally infringe Kilopass s patents. Nonetheless, over two years later, Kilopass sued Sidense alleging both literal infringement and infringement under the doctrine of equivalents. The district court granted Sidense summary judgment of noninfringement, and Sidense filed a motion seeking sanctions and attorneys fees under 35 U.S.C The district court denied Sidense s motion, providing the following brief explanation: [T]he Court concludes that Sidense has not met its burden of establishing with clear and convincing evidence that Kilopass brought or maintained the prosecution of its patent infringement in bad faith. See Marctec, 664 F.3d at 916. Kilopass performed substantial pre-filing investigation and was able to obtain opinions from two different law firms that Kilopass had a nonbaseless claim against Sidense. In addition, Kilopass s Chief Technology Officer performed his own independent analysis based on the results of an outside intellectual-property forensics firm to determine that a patent-infringement suit was appropriate.[5] On appeal, the Federal Circuit vacated the district court s denial of Sidense s motion for attorneys fees and remanded the case for consideration of whether Kilopass s claims were objectively baseless and whether the totality of the circumstances demonstrates that Kilopass acted with subjective bad faith. The Federal Circuit s opinion, issued Dec. 26, 2013, addresses several arguments brought by the parties related to the current application of Section 285. The Section 285 Two-Part Test As explained by the Federal Circuit in Kilopass Technology, to award attorneys fees to a prevailing party under Section 285, a district court must first determine whether a prevailing party has proved that the case is exceptional by clear and convincing evidence. A case may be deemed exceptional if it involves some material inappropriate conduct such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates [Federal Rule of Civil Procedure] 11, or like infractions. In the absence of such material inappropriate conduct, sanctions may be imposed against a patentee only if (1) the litigation is brought in subjective bad faith and (2) the litigation is objectively baseless. If the district court finds the case to be exceptional, it has the discretion to then assess whether an award of attorneys fees to the prevailing party is appropriate. Objective Baselessness and Subjective Bad Faith On appeal, Sidense reiterated its argument that its case is exceptional because Kilopass claims were objectively baseless and brought in bad faith. Judge O Malley, writing for the court, provided a fairly extensive analysis of the proof required to establish objective baselessness and subjective bad faith. First, the court clarified that a prevailing defendant is not required to prove that the patentee actually knew its claims were objectively baseless.

3 Rather, the defendant must prove only that the patentee acted recklessly by showing that the objective baselessness of the claims was either known or so obvious that it should have been known to the patentee. To the extent the court s earlier decision in MarcTec LLC v. Johnson & Johnson (which stated the patentee s case must have no objective foundation, and the plaintiff must actually know this [6]) purports to require actual knowledge, the court clarified that this language is only dicta and does not reflect this court s law governing 285. Second, turning to the subjective bad-faith requirement, the court explained that direct evidence of subjective bad faith is difficult to prove and, therefore, district courts must instead consider the totality of the circumstances. Accordingly, the court found that, in this case, the district court erred by conducting an inappropriately narrow and incomplete analysis that focused only on subjective factors. The district court should have determined whether Kilopass claims were objectively baseless and whether that fact or other circumstantial evidence would support an inference of bad faith. Concluding that objective, circumstantial evidence can support an inference of subjective bad faith, the court made clear that [o]bjective baselessness alone can create a sufficient inference of bad faith to establish exceptionality under 285, unless the circumstances as a whole show a lack of recklessness on the patentee s part. Third, the court addressed Sidense s argument that the exceptional-case analysis should not require proof of subjective bad faith. The subjective bad-faith prong derives from a Supreme Court case, Professional Real Estate Investors,[7] which considered a litigant s subjective motivation in the context of an antitrust analysis. As perhaps a suggestion to the Supreme Court, the Federal Circuit noted that reading Professional Real Estate Investors to require proof subjective bad faith for a Section 285 analysis may be a misguided interpretation of the case. The court explained, Professional Real Estate Investors does not seem to demand the bad-faith requirement we gleaned from it because the subjective bad-faith analysis contained therein may only pertain to antitrust concerns not present in 285 analyses. As support for the proposition that subjective bad faith may not be helpful to the Section 285 analysis, the court noted that inquiry into a patentee s subjective state of mind is not all that relevant to the goal of Section 285, which is to prevent a gross injustice to the defendant. Chief Judge Radar, who authored a concurrence in this case, proposed that the court revise its Section 285 analyses to focus solely on preventing a gross injustice to the prevailing party: In my view, this court should return to the rule that a district court may shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice. Even though the panel appeared to agree with Sidense that the subjective bad-faith requirement should be eliminated, it declined to do so, explaining that [w]hile Sidense s arguments [that the exceptionalcase determination should not require proof of subjective bad faith] may constitute good faith assertions that our law should be something other than it is, as a panel, we are not able to entertain them. Nonetheless, the court appears to invite the Supreme Court to reevaluate whether subjective bad faith should properly be a part of the exceptional-case analysis. Fortunately, we may not have to wait long to find out whether the Supreme Court shares the Federal Circuit s opinion regarding the propriety of the subjective bad-faith requirement. The Supreme Court is set to hear oral arguments in Octane Fitness v. Icon Health and Fitness and Highmark Inc. v. Allcare

4 Management Systems Inc. on Feb. 26, both of which address Section 285. The issue presented in Octane Fitness asks whether the Federal Circuit s rigid and exclusive two-part test for determining whether a case is exceptional under 35 U.S.C. 285 improperly appropriate[s] a district court s discretionary authority to award attorney fees to prevailing accused infringers in contravention of statutory intent and this court s precedent, thereby raising the standard for accused infringers (but not patentees) to recoup fees and encouraging patent plaintiffs to bring spurious patent cases to cause competitive harm or coerce unwarranted settlements from defendants. [8] Regardless of how the Supreme Court decides the Octane Fitness and Highmark cases, its review and analysis of Section 285 will become moot if Congress passes one of the bills proposing significant changes to the statutory language. While we cannot predict the outcome of the Supreme Court s review, there s a good chance that the Supreme Court s treatment of Section 285 will be more measured than some of the proposed legislation recently presented in Congress. Perhaps, as some have suggested, a moderate correction by the Supreme Court will appease congressional lawmakers who support a more aggressive overhaul of Section 285, convincing them to leave the current statutory language of Section 285 intact and thereby preventing unintended consequences that could result from the proposed revisions that would make loser pays the default rather than the exception. By Stephen Hash, Erin Ator Thomson and Samantha Kuhn, Vinson & Elkins LLP Stephen Hash is a partner and Erin Ator Thomson and Samantha Kuhn are associates in Vinson & Elkins' Austin, Texas, office. The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] The Innovation Act, H.R. 3309, 113th Cong. (2013); the Saving High-Tech Innovators from Egregious Legal Disputes ( SHIELD ) Act of 2013, H.R. 845, 113th Cong. (2013); the Patent Abuse Reduction Act of 2013, S. 1013, 113th Cong. (2013); and the Patent Litigation Integrity Act of 2013, S. 1612, 113th Cong. (2013). [2] Innovation Act, H.R. 3309, 113th Cong. 3(b)(1) (2013). [3] Octane Fitness, LLC v. Icon Health & Fitness, Inc., 496 F. App x 57 (Fed. Cir. 2012), cert. granted, 134 S.Ct. 49 (U.S. Oct. 1, 2013) (No ); Highmark Inc. v. Allcare Health Management Systems, Inc., 687 F.3d 1300 (Fed. Cir. 2012), cert. granted, 134 S.Ct. 48 (U.S. Oct. 1, 2013) (No ). [4] This decision can be found at Kilopass Tech. Inc. v. Sidense Corp., 738 F.3d 1302 (Fed. Cir. 2013). Except where otherwise cited, all information pertaining to the facts of Kilopass Tech. and the court s analysis and holding in the case can be found at Kilopass Tech., 738 F.3d 1302 at [5] Kilopass Tech. Inc. v. Sidense Corp., No. C SI, at *3 (N.D. Cal. Dec. 18, 2012). [6] 664 F.3d 907, 916 (Fed. Cir. 2012).

5 [7] Prof l Real Estate Investors Inc. v. Columbia Pictures Indus. Inc., 508 U.S. 49 (1993). [8] Petition for a Writ of Certiorari at *i, Octane Fitness LLC v. Icon Health & Fitness Inc., 496 F. App x 57 (Fed. Cir. 2012) (No ). All Content , Portfolio Media, Inc.