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The Debate Over Fee-Shifting in Patent Infringement Litigation

Posted on Apr 22, 2015 in Articles

This article originally appeared in The Legal Intelligencer on April 22, 2015.

The Innovation Act is a bill currently before Congress to revamp several statutes relating to patent litigation. Earlier this month, over 150 university presidents received a letter from the Consumer Electronics Association urging those presidents to support the Innovation Act. At issue is a controversial proposal to provide for fee-shifting in patent infringement litigation.

Most countries follow what is sometimes referred to as the “English Rule,” whereby the losing party in a litigation not only bears its own costs, but must pay the expenses incurred by the prevailing party, including attorney fees and other costs. By contrast, in the United States, most courts follow the “American Rule,” whereby each party in a litigation typically bears its own costs. “In the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser,” according to Alyeska Pipeline Service v. Wilderness Society, 421 U.S. 240, 247 (1975). There are more than 100 federal statutes, however, that set forth exceptions to this rule and permit legal fees to be paid to a prevailing plaintiff (e.g., patent litigation in “exceptional cases,” civil rights cases in certain situations, litigation pursuant to the Freedom of Information Act and subject to court discretion).

Until last year, the number of patent infringement suits grew at an enormous rate. A number of those lawsuits garnered significant attention because they were based on patents that were overly broad and of questionable validity. Furthermore, numerous situations arose in which companies received threats to have patents of questionable value asserted against them unless license fees were paid, and many of those companies typically capitulated to the licensing demands, which were usually cheaper than the initial-stage costs of defending against a patent infringement lawsuit.

In response to such lawsuits and threats, Congress introduced various bills that are grouped under the heading of “patent reform.” The goal of these bills is to curb patent infringement suits based on questionable patents. Several of these bills have included fee-shifting provisions that allow the prevailing party to be awarded its legal expenses. As can be expected, these proposals have attracted significant controversy.

Proponents of fee-shifting in patent litigation argue that such statutes will discourage the assertion of questionable patents. Supporters of the proposal argue that a party will be afraid to assert an overly broad patent because of the risk that the patent will be found invalid during the course of the infringement suit, and in addition will need to pay the prevailing party’s expenses. At present, it is argued, parties asserting patents have “nothing to lose” by asserting questionable patents in any manner they choose.

Opponents of fee-shifting in patent litigation argue that fee-shifting will have a chilling effect on legitimate assertion of patent rights. Litigation is unpredictable, and a patent owner may be reluctant to assert its patent for fear of an adverse decision. The patent owner would then be required to pay the legal fees of the party against whom the patent was asserted.

Part of the problem is that some of the parties who are asserting patents are judged to be legitimate: universities and research laboratories fit into this category. Other parties asserting patents who make threats based on patents of questionable validity are judged to be “trolls.” One such company recently settled with the Federal Trade Commission over “phony legal threats of patent infringement.”

Some commentators have accurately pointed out that attorneys’ positions on whether fee-shifting should be the norm in patent litigation depend on the types of clients those attorneys represent. Attorneys representing large corporations that are constantly subject to attack by trolls are typically in favor of fee-shifting. On the other hand, attorneys representing legitimate patent holder interests are afraid that fee-shifting provisions will discourage their clients from actively pursuing enforcement of legitimate patent rights.

Last year, two U.S. Supreme Court decisions dealt with the issue of fee-shifting in patent litigation. Do those court decisions eliminate the need for Congress to address the issue of fee-shifting?

Octane Fitness LLC v. Icon Health & Fitness, 134 S. Ct. 1749 (2014), examined the language of Section 285 of the Patent Act. The statute states that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.” Prior to the decision, a case was deemed to be “exceptional” in two circumstances: “when there has been some material inappropriate conduct,” or when litigation was “brought in subjective bad faith” and “objectively baseless,” as in Brooks Furniture Manufacturing v. Dutailier International, 393 F. 3d 1378 (2005). In Octane, the U.S. Supreme Court determined that the Brooks framework was too rigid. It was thus held that an “exceptional” case is “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.” Furthermore, district courts are to use a “case-by-case exercise of their discretion, considering the totality of the circumstances.”

Highmark v. Allcare Health Management System, 134 S. Ct. 1744 (2014), involved a district court award of attorney fees, expenses and expert fees. The U.S. Court of Appeals for the Federal Circuit affirmed one exceptional-case determination by the district court, but reversed another, based on de novo review and citing Brooks. The U.S. Supreme Court vacated and remanded, stating “the exceptional-case determination is to be reviewed only for abuse of discretion.” To clarify, the determination of whether a case is “exceptional” under Section 285 is committed to the discretion of the district court.

Octane and Highmark have affected numerous district court decisions. Some courts have awarded attorney fees based on the Octane and Highmark decisions, while other courts have used their discretion and refrained from awarding attorney fees. Commentators have argued that the holdings of Octane and Highmark make it easier for district courts to fee-shift, and thus legislative intervention is unnecessary. Furthermore, in a letter sent this month to the U.S. Senate

Committee on the Judiciary, the Federal Circuit Bar Association explained that data from its review of each district court decision between the date of the Octane decision and March 31 “established that motions for attorney fees under Section 285 after Octane were granted at a rate almost three times as high as in the year preceding Octane.”

The Innovation Act, which the Consumer Electronics Association has urged universities to support, was drafted with the following language: “The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party … unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact.”

As can be seen, the Innovation Act uses a “shall award … unless” approach in place of the current statute’s “in exceptional cases may” requirement.

In a letter to the U.S. Senate Committee on the Judiciary, 150 universities stated: “Mandatory fee-shifting and involuntary joinder … are especially troubling to the university community because they would make the legitimate defense of patent rights excessively risky and thus weaken the university technology transfer process, which is an essential part of our country’s innovation and entrepreneurial ecosystem.”

The Consumer Electronics Association, however, argues that universities would not file suits “that would come anywhere close to not being ‘reasonably justified in law or fact'” as required by the Innovation Act.

It is expected that the fee-shifting debate will continue as patent stakeholders express their positions and lawmakers attempt to find an appropriate balance.

– by Lawrence Ashery

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