On September 4, 2014, the Third Circuit held that the revised, or “slightly altered standard” for awarding attorneys’ fees to a prevailing party in a patent case, as set forth in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749 (2014), also applies to cases brought under the Lanham Act. Fair Wind Sailing, Inc. v. Dempster, Nos. 13-3305 & 14-1572, 2014 U.S. App. LEXIS 17118 (Sept. 4, 2014). In Octane Fitness, the Court held that “an ‘exceptional’ case [which merits attorneys’ fees] is simply one that stands out from others with respect to the substantive strength of a party’s litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which it was litigated.” Consequently, the previous standard in the Third Circuit, which required a finding of culpable behavior before awarding fees, is no longer a prerequisite.
Like § 285 of the Patent Act, Section 35(a) of the Lanham Act (15 U.S.C. § 1117(a)) permits the recovery of reasonable attorneys’ fees only “in exceptional cases.” In fact, the Octane Fitness Court noted that the Lanham Act fee provision is “identical” to § 285 of the Patent Act. The Third Circuit interpreted this as a clear message from the U.S. Supreme Court that it “was defining ‘exceptional’ not just for the fee provision in the Patent Act, but for the fee provision in the Lanham Act as well.”
Based on Octane Fitness and Fair Wind Sailing, a prevailing party under the Lanham Act (either plaintiff or a defendant) in the Third Circuit, must show the following to be awarded attorneys’ fees: (a) an unusual discrepancy in the merits of the positions taken by the parties; or (b) the losing party has litigated the case in an “unreasonable manner.” Whether litigation positions or litigation tactics are “exceptional” enough to warrant attorneys’ fees is to be determined on a case-by-case basis by the district courts based on the totality of the circumstances.
By removing a threshold finding of culpable behavior, the Courts are making it easier to award attorneys’ fees if there is a finding that the litigation was brought or conducted in an abusive manner. Time will tell if Octane Fitness and Fair Wind Sailing have this impact.
As we noted earlier, the United States Supreme Court has taken a renewed interest in intellectual property and patent cases as of late. In Octane Fitness, LLC v. Icon Health & Fitness, Inc., No. 12-1184, the Supreme Court reversed the Federal Circuit’s long-standing standard for determining whether to award attorneys’ fees to the prevailing party in a patent infringement action. Now, prevailing parties need only show by a preponderance of the evidence that the case was “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” And, this decision lies in the sound discretion of the trial court.
In Octane Fitness, ICON sued Octane Fitness for infringement of U.S. Patent No. 6,019,710. The district court granted summary judgment in favor of Octane Fitness, but declined to award attorneys’ fees under 35 U.S.C. § 285, finding that the infringement claims were not frivolous, objectively baseless, or brought in bad faith. Octane Fitness appealed, arguing that the Federal Circuit’s standard for awarding fees under § 285 was too restrictive, but the Federal Circuit disagreed. The Supreme Court granted certiorari to clarify the standard.
In a unanimous decision written by Justice Sotomayor, the Supreme Court looked to the statute, which reads in its entirety:
The court in exceptional cases may award reasonable attorney fees to the prevailing party.
Finding that the Patent Act provides no definition or guidance beyond this statement, the Court looked to the common understanding of the term “exceptional” and to when the provision was enacted and the standards that it was meant to codify.
“Exceptional,” the Court found, was meant to encompass things that are out of the ordinary, unusual, or special. The Court further concluded that Congress intended that courts be given discretion to determine when something was exceptional.
Putting these together, the Court held that courts have the discretion to award attorneys’ fees when a case “stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”
The Court rejected the Federal Circuit’s more rigid approach of limiting fee awards only when there has been litigation misconduct or if the party’s position was brought in bad faith and was objectively baseless. Moreover, the Court found no basis to require the prevailing party to prove its entitlement to fees by clear and convincing evidence.
This decision may have substantial consequences going forward in patent cases, for both plaintiffs and defendants. Because the Court has emphasized that this decision is left to the discretion of the trial court, and the standard is much more flexible, one would expect to see more courts awarding fees. In theory, this will act as a deterrent for bringing frivolous patent claims and may reduce some of the more objectionable patent troll cases. But, it may also put more pressure on defendants with weaker defenses to settle, rather than to litigate at all costs. Only time will tell to see what effects come from this decision.
While Congress continues to consider various bills that would make it easier for prevailing parties in patent cases to collect their attorneys’ fees from non-prevailing parties, the Federal Circuit is not sitting by quietly. In Kilopass Technology, Inc. v. Sidense Corp. (Case No. 2013-1193), the Court vacated and remanded a District Court’s decision not to award attorneys’ fees to a prevailing defendant. In an opinion written by Judge O’Malley, the Federal Circuit reviewed the Court’s jurisprudence on fee shifting and clarified the elements that must be met for a defendant that prevails.
This case was a more typical competitor-on-competitor patent infringement lawsuit, rather than the “troll” variety that has been in the news of late. Kilopass and Sidense are competitors in the embedded non-volatile memory market. Kilopass became concerned that Sidense may infringe some of Kilopass’s patents after reviewing a Sidense patent application, so Kilopass hired a law firm to conduct an infringement analysis. Based on an initial review, counsel believed that there was a sufficient basis to send a friendly letter to Sidense, asking if it wanted a license and for an explanation of why it did not infringe. Sidense responded by pointing out differences between its design and the claims of the patent and declined a license.
After receiving Sidense’s response, counsel noted that his infringement analysis assumed that Sidense was making a product according to the design in its patent application, which is not always the case. He noted that if Sidense was making the product in a different way, it did not infringe (at least literally). He recommended that Kilopass try to find out how Sidense’s memory cells were made in order to better assess its potential infringement.
A Kilopass employee obtained further information that showed that Sidense was not making its memory cells the same way that it described in its patent application. With this information, counsel determined that Sidense was likely not infringing and that Kilopass would have a tough case.
Kilopass hired another law firm to conduct another analysis. The second firm preliminarily determined that Kilopass appeared to have a valid claim of infringement via equivalence, but that it needed to conduct a more detailed analysis to be sure. Counsel started this analysis, but was instructed by Kilopass to stop all work.
A team of engineers from Kilopass then concluded that Sidense infringed under the doctrine of equivalence after reviewing the patent and Sidense’s products. Kilopass filed suit approximately two years later.
During the litigation, the District Court found out that Kilopass was making inconsistent arguments regarding the proper claim construction before the Court and before the USPTO BPAI during a concurrent inter partes re-examination. The Court then chastised Kilopass for its gamesmanship. The Court ultimately granted summary judgment of non-infringement to Sidense, which the Federal Circuit summarily affirmed.
Sidense sought its fees, which the District Court ultimately denied because Kilopass performed substantial pre-filing investigations and obtained opinions from two different law firms and its own engineers that it had a non-baseless claim of infringement.
Federal Circuit’s Holding
The Federal Circuit ultimately vacated the District Court’s determination that an award of attorneys’ fees was not warranted and remanded for a further determination. In doing so, the Court clarified the current state of the law with respect to whether a court should award attorneys’ fees to a prevailing defendant in a patent infringement lawsuit.
The determination of whether to award fees is a two-step process, which must be shown by clear and convincing evidence. First, the prevailing defendant must show that the patentee’s claims of infringement were objectively baseless. Second, the defendant must show that the patentee brought the claims in subjective bad faith.
In assessing the subjective prong, a defendant does not have to show that the patentee knew its claims were baseless. A showing that it should have known based on the totality of the circumstances, which can include how objectively baseless the claims were, is sufficient. The Court noted that direct proof of subjective bad faith is often very difficult to come by, so indirect proof can be sufficient.
The Court reiterated that a showing of bad faith is required for an award of fees, although, had the panel been working on a clean slate and not bound by prior precedent, it may have found otherwise. Bad faith must be considered by viewing the totality of the circumstances. The Court also noted that in most cases the objective prong will likely be determinative of this issue, and the subjective bad faith requirement “may prove to have little effect.”
Interestingly, the Court considered whether clear and convincing evidence should be required to prove these elements. It ultimately concluded that it must, but did so based on the fact that it had to follow the precedent set by earlier panels.
Finally, the Court rejected Sidense’s proposal that fee shifting should be appropriate whether a patentee files a lawsuit having little likelihood of success. Unlike Sidense’s other arguments, the Federal Circuit did not seem inclined to expand liability in this fashion.
The Federal Circuit set forth a clearer statement of the law regarding awards of attorneys’ fees to prevailing defendants in patent infringement lawsuits. This was not a patent troll case, so the overtones and political issues associated with that topic were not present. The decision seemed to signal that the panel would have considered significant changes to the law but for the prior precedent that bound it. This may signal that this case is ripe for an en banc review. We shall have to wait and see.
The other take away is that the Federal Circuit is not going to tolerate patentees bringing weak cases, especially when counsel expresses in writing that infringement is unlikely. Patentees need to be cautious about bringing such suits, especially where it appears that literal infringement is not present.
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