The U.S. Supreme Court’s rulings Tuesday in two cases involving fee shifting in patent infringement actions have been hailed by some as a victory in a battle against patent assertion entities, often referred to as patent trolls. But there is a bit of a debate among patent lawyers as to whether that will be the case.
On Tuesday, Justice Sonia Sotomayor issued opinions in two unanimous rulings that flatly rejected the U.S. Court of Appeals for the Federal Circuit’s nearly 10-year policy for determining whether the winning party in a patent infringement action could recoup fees from the losing side. Sotomayor said the Federal Circuit’s policy, as outlined in the 2005 decision in Brooks Furniture Manufacturing v. Dutailier International, was “unduly rigid” and took the discretion away from the district courts in determining whether a patent infringement action was an exceptional case that was “objectively baseless,” therefore invoking the fee-shifting provision of the Patent Act.
In both Octane Fitness v. ICON Health & Fitness out of Minnesota and Highmark v. Allcare Health Management System out of the Northern District of Texas, the Federal Circuit found it could review, de novo, the district courts’ determinations on whether the case was exceptional and whether fees could be awarded.
“The Federal Circuit’s formulation is overly rigid,” Sotomayor said in Octane. “Under the standard crafted in Brooks Furniture, a case is ‘exceptional’ only if a district court either finds litigation-related misconduct of an independently sanctionable magnitude or determines that the litigation was both ‘brought in subjective bad faith’ and ‘objectively baseless.’ This formulation superimposes an inflexible framework onto statutory text that is inherently flexible.”
Section 285 of the Patent Act states in its entirety that “‘the court in exceptional cases may award reasonable attorney fees to the prevailing party.’” Because exceptional isn’t defined in the act, Sotomayor said district courts can determine if a case is “exceptional” in a case-by-case exercise of their discretion.
Sotomayor further rejected the Federal Circuit’s imposition of a clear and convincing standard of review, noting patent law in general has followed a preponderance of the evidence standard and issues such as fee shifting are up to the judge’s discretion and should be reviewed for an abuse of discretion.
John F. Murphy of Baker & Hostetler in Philadelphia said it can’t be debated that these cases shift the power back down to the district court to determine fee-shifting issues.
“The Supreme Court wants district court judges to police their own courtrooms,” Murphy said.
He said the conventional wisdom has been that the high court’s rulings are bad news for patent plaintiffs—particularly those known as patent trolls, or companies that own several patents and sue hundreds of defendants at a time against which the “trolls” could make a plausible case and try to collect quick settlement fees.
“A fee award was extremely unlikely [before the court's rulings Tuesday] because even if a defendant could show a case was meritless, it could never show it was entirely unreasonable,” Murphy said. “That was the Federal Circuit’s rule. Now that’s gone.”
Murphy said some have taken that to mean the district courts are going to be free to police patent trolls and impose awards against them and that that’s going to be a way to rein in what is seen as a bad litigation trend. But Murphy was somewhat skeptical.
“All you are doing is letting the district courts make up their own mind. Some district courts are going to feel differently than others,” he said.
Patent trolls have already found district courts that are more friendly to their viewpoints and will continue to target those jurisdictions, Murphy said.
“There will be a lot of divergence,” Murphy said. “That didn’t exist under the Federal Circuit’s rule.”
Murphy also noted that fee awards can only be doled out when one side is victorious. With so many of these cases settling to avoid the cost of lengthy litigation, the “bad behavior” of patent trolls won’t reach the fee-shifting stage anyway, Murphy said.
“This case may not be this great pro-defendants case against patent trolls,” Murphy said.
Reed Smith Pittsburgh-based partner Cynthia E. Kernick is quite familiar with these issues. She has represented Highmark since the company got a cease-and-desist letter from Allcare years ago and worked on the case through the briefing to the Supreme Court.
Kernick said she thinks the court’s rulings will bring patent litigation back to the old practice of ensuring patentees research their claims against a defendant and make an initial determination of whether there could be potential infringement before sending a cease-and-desist letter.
“It has always been easier for patentees to get fees than accused infringers,” Kernick said. “That is not the case anymore. It will be a much more even playing field.”
While Kernick recognized that there will always be companies that test the limits, she said these rulings will slow down patent trolls.
As to whether enough cases get to a stage where fee shifting could even be addressed, Kernick said an increasing number of cases are reaching the summary judgment stage, and fee shifting could come into play there. She also noted that every client has a number they are willing to spend on litigation—it depends on the product at stake and how crucial it is to their business.
“I think that this does still help,” Kernick said of the court’s rulings. “Does it kill a troll? No. It doesn’t kill the trolls. I’m not sure anything will kill the trolls.”
Kernick said any method to kill patent trolls would also harm legitimate patentees. So Congress and the courts can only come up with multiple solutions that, when used in combination, limit patent trolls’ effectiveness.
“It’s not just an award of fees that will kill the trolls, it’s sanctions of the lawyers,” Kernick said, noting that as long as there are lawyers to bring cases, patent trolls will continue to exist.