Robert C. Scheinfeld
Robert C. Scheinfeld ()

The U.S. Court of Appeals for the Federal Circuit has recently reviewed multiple cases related to the award of attorney fees. In a series of three precedential decisions, the Federal Circuit examined whether each case was exceptional under 35 U.S.C. §285, such that an award of attorney fees was merited, in the wake of the U.S. Supreme Court’s decision in Octane Fitness v. ICON Health & Fitness, ___ U.S. ___, 134 S. Ct. 2134 (2014). In Octane Fitness, the Supreme Court found that the Federal Circuit’s standard for an exceptional case was too rigorous and that an exceptional case “is simply one that stands out from others with respect to the substantive strength of a party’s litigating positions (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” This article addresses each of these decisions.

‘Rothschild’

In Rothschild Connected Devices Innovations v. Guardian Prot. Servs., 2016-2521, Slip Op. at 1, 13 (Fed. Cir. June 5, 2017), the Federal Circuit reversed a district court decision, holding that the judge abused his discretion in not deeming the case exceptional and awarding attorney fees, and remanded the case for a calculation of attorney fees. ADS argued that the district court abused its discretion because: (1) “[it] failed to properly assess the weakness of Rothschild’s litigating position”; (2) “[it] failed to consider Rothschild’s willful ignorance of the prior art”; (3) “Rothschild engaged in vexatious litigation by bringing suit solely to extract a nuisance payment”; and (4) “[it] failed ‘to consider the totality of the circumstances’” by “improperly conflat[ing] the provisions of Rule 11 and relief under [§]285.” The Federal Circuit found that ADS’s last three arguments demonstrated an abuse of discretion, but did not address ADS’s first argument.

First, the Federal Circuit found that the district court misjudged the strength of Rothschild’s litigating position in consideration of the prior art. In opposition to ADS’s cross-motion for attorney fees, Rothschild submitted affidavits by Rothschild’s counsel and Rothschild’s founder. In the affidavits, Rothschild’s counsel stated, and Rothschild’s founder echoed, that Rothschild “had ‘not conducted an analysis of any of the prior art asserted in [the] Cross[-]Motion to form a belief as to whether that art would invalidate’ the [patent-in-suit].” In those same affidavits, the counsel and founder both “assert[ed] that [Rothschild] possessed a ‘good faith’ belief that the [patent-in-suit] ‘[was] valid.’” The Federal Circuit found that the district court abused its discretion in failing to address these inconsistent statements. Additionally, the district court failed to address how Rothschild could reasonably argue that ADS’s Rule 11(b) motion was meritless if it did not analyze the prior art that accompanied the safe harbor notice. While Rothschild continued to assert that “it acted in good faith,” Rothschild merely pointed to “[t]he conclusory and unsupported statements from Rothschild’s counsel and founder” without further evidence.

Second, the Federal Circuit decided that the district court misjudged Rothschild’s conduct in other litigation. ADS alleged that Rothschild engaged in a pattern of litigation abuse, suing over 50 other defendants and settling the vast majority for significantly below the average cost of defending an infringement lawsuit. In rejecting this argument, the district court found that “the fact that a patentee has asserted a patent against a wide variety of defendants and settled many of those cases … does not alone show bad faith.” This analysis, however, was predicated “on ‘the absence of any showing that [Rothschild] acted unreasonably or in bad faith.’” Since, as discussed above, Rothschild acted unreasonably, the Federal Circuit determined that “the undisputed evidence regarding Rothschild’s vexatious litigation warrants an affirmative exceptional case finding here.”

Finally, and perhaps most importantly, the Federal Circuit concluded that the district court improperly conflated Rule 11 with §285. The district court held that “§285 should [not] be applied in a manner that contravenes the aims of Rule 11.” The Federal Circuit disagreed, finding that “Rule 11(b) ‘is not the appropriate benchmark’ [of §285]” and that “ a party’s unreasonable conduct—while not necessarily independently sanctionable—[may] nonetheless [be] so exceptional as to justify an award of [attorneys'] fees.” Id. (citing Octane Fitness, 134 S. Ct. at 1756-57).

‘Checkpoint’

On the same day as Rothschild, the Federal Circuit reversed an award of attorney fees in Checkpoint Sys. v. All-Tag Sec. S.A., 2016-1397, Slip Op. at 2 (Fed. Cir. June 5, 2017). The district court there found the case to be exceptional because: (1) Checkpoint’s motivation was improper by bringing suit “to interfere improperly with Defendant’ business and to protect its own competitive advantage”; (2) Checkpoint’s pre-suit investigation was “based on an European infringement verdict against All-Tag on a counterpart of the [patent-in-suit] and two infringement opinions from counsel” that “were given years before filing”; and (3) Checkpoint’s expert witness’s infringement opinion was based on “examination of imported tags that were manufactured by All-Tag in Switzerland, although the accused tags were manufactured by All-Tag in Belgium.” The Federal Circuit rejected these reasons, finding that the district court abused its discretion since “the record show[ed] that the charge of infringement was reasonable and the litigation was not brought in bad faith or with abusive tactics.”

As to Checkpoint’s motivation, the Federal Circuit, emphasizing the statutory right to exclude provided through patent law, found that enforcement of this right did not amount to an exceptional case under §285. The Federal Circuit acknowledged that “‘motivation’ to harass or burden an opponent may be relevant to an ‘exceptional case’ finding,” but found that no such harassment or abuse was demonstrated (citing SFA Sys. v. Newegg, 793 F.3d 1344, 1350 (Fed. Cir. 2015)). An assertion of reasonable claims of infringement, however, is “the mechanism whereby patent systems provide an innovation incentive,” not an improper motive.

As to Checkpoint’s pre-suit investigation and expert witness, the Federal Circuit determined that neither made the case exceptional. For the pre-suit investigation, the Federal Circuit relied upon “a ‘presumption that an assertion of infringement of a duly granted patent is made in good faith.’” Id. at 7 (citing Medtronic Navigation v. BrainLAB Medizinische Computersysteme GmbH, 603 F.3d 943, 954 (Fed. Cir. 2010)). Furthermore, “[a]bsent misrepresentation to the court, a party is entitled to rely on a court’s denial of summary judgment and JMOL … as an indication that the party’s claims were objectively reasonable and suitable for resolution at trial.” As for the expert witness, the Federal Circuit found that All-Tag never alleged “that the accused products were different from the tested products” or that Checkpoint or its expert acted with “falsity or fraud or bad faith.”

‘AdjustaCam’

In AdjustaCam v. Newegg,, 2016-1882, Slip Op. at 2 (Fed. Cir. July 5, 2017), the Federal Circuit again reversed a district court decision denying a motion for attorney fees. AdjustaCam sued Newegg and dozens of other defendants for infringing the patent-in-suit. Many defendants settled with AdjustaCam “for far less than the cost of litigation.” Following a Markman order, more defendants settled with AdjustaCam. The case against Newegg proceeded, however, into expert discovery. AdjustaCam, the plaintiff patentee, moved to dismiss its own claims against Newegg with prejudice before summary judgment briefing. In response, Newegg moved for attorney fees under §285, alleging that AdjustaCam “brought the case simply to extract nuisance-value settlements,” that AdjustaCam “had no reasonable expectation of success on its infringement claims against Newegg, particularly after the district court’s Markman order,” and that AdjustaCam served “a substantively different ‘supplemental’ infringement report the day of its infringement expert’s deposition.”

The district court denied Newegg’s motion for attorney fees. Newegg appealed, and the Federal Circuit remanded the case for reconsideration following the Supreme Court’s decision in Octane Fitness. On remand, the case was reassigned to a new judge, and the new judge allowed the §285 issue to be re-briefed under Octane Fitness. In its response, AdjustaCam filed a supplemental report that “contain[ed] infringement arguments not raised before the original judge.” The new judge adopted factual findings of the original judge and again denied Newegg’s motion.

On appeal, however, the Federal Circuit found that the district court abused its discretion by (1) failing to following the Federal Circuit’s mandate on remand and (2) basing its decision “on ‘a clearly erroneous assessment of the evidence.’” As to the failure to follow its mandate, the district court was told to engage in an independent analysis. Contrary to this mandate, the district court “adopted the previous judge’s factual findings wholesale.” The Federal Circuit emphasized the fact that additional briefing and oral arguments occurred to support its conclusion that “the facts had changed since the case was before the original district judge.”

The Federal Circuit also found that while AdjustaCam’s infringement lawsuit may have been weak at filing, it “became baseless after the district court’s Markman order.” While the district court deemed AdjustaCam’s litigating position not exceptional because it could be reasonably argued that Newegg’s products still infringed, AdjustaCam neither “advance[d] that argument” nor “introduce[d] any evidence” related to it. Since the parties did not dispute whether Newegg’s products infringed the patent-in-suit, AdjustaCam’s litigation position “was baseless.”

In addition to finding that AdjustaCam’s litigating position was frivolous, the Federal Circuit found that “AdjustaCam litigated the case in an ‘unreasonable manner.’” This was demonstrated by “AdjustaCam’s repeated use of after-the-fact declarations.” AdjustaCam not only “served a new expert report on Newegg the day of that expert’s deposition,” but also “filed a supplemental declaration making new infringement arguments” without disclosing them as new.

Finally, the Federal Circuit looked to the nuisance-value damages asserted by AdjustaCam. While such behavior does not make a case inherently exceptional, the Federal Circuit found that the nuisance-value damages were worth consideration as part of a totality-of-the-circumstances analysis “[i]n light of AdjustaCam’s frivolous infringement arguments and unreasonable manner of litigation.”