SAN FRANCISCO — Patent litigation reform has made it halfway through Congress, and the U.S. Supreme Court is set to take up a related issue in February. But the U.S. Court of Appeals for the Federal Circuit could beat them both to the punch. And it might use a San Francisco case that U.S. District Judge Susan Illston called “acrimonious” and “disturbing”—but not worthy of an attorney fee award—as the poster child.

The Federal Circuit has set a high standard for showing that a case is so “exceptional” as to merit fee shifting under Section 285 of the Patent Act—a standard many reformers claim is virtually impossible to meet.

But in October, Chief Judge Randall Rader and Judge Kathleen O’Malley strongly hinted during arguments in Kilopass Technology v. Sidense that they are considering walking back the 2005 Federal Circuit decision that requires a showing of bad faith for a Section 285 award.

“Why is that part of the requirement?” Rader asked at the Oct. 9 argument. “How can it be part of a statute that doesn’t mention bad faith?”

The Supreme Court voted Oct. 1 to review the Federal Circuit precedent, Brooks Furniture Manufacturing v. Dutailier International—a move Rader called “the elephant in the room.”

A second elephant is U.S. Rep. Bob Goodlatte’s Innovation Act, approved by the House Dec. 5 and to be taken up by the Senate on Tuesday. Rader and O’Malley have both said publicly that the judiciary is better equipped to address the problem of abusive patent litigation. A more flexible standard for finding a case “exceptional” and worthy of fee shifting is a tool Rader has expressly embraced.

Kilopass offers a unique vehicle for reconsidering the rule. Santa Clara semiconductor designer Kilopass Technology Inc. sought legal analysis from Perkins Coie, Morrison & Foerster and its own chief technology officer over a period of five years before finally suing Canadian competitor Sidense Corp. During litigation, Kilopass inadvertently disclosed the two law firms’ tepid evaluations of its infringement claims, which Sidense says proves there was never a reasonable basis for bringing the suit.

“You did assert a claim that two different law firms said you shouldn’t assert,” O’Malley told Durie Tangri partner Daralyn Durie, who is representing Kilopass on appeal, during the October argument.

Durie insisted that’s not true, that Sidense is mischaracterizing the law firm evaluations, and that the record demonstrates Kilopass painstakingly reviewed the merits of its claims before reasonably proceeding. She also points out that a three-judge panel of the court does not have the authority to overrule Brooks Furniture, which held that patent cases must be both “objectively baseless” and brought with “subjective bad faith” to trigger a fee award.

Rader didn’t sound convinced, suggesting the court ought to follow cases from before Brooks Furniture that properly laid out the law.

O’Malley seemed to be leaning toward a more nuanced approach that might leave Brooks Furniture in place but put more emphasis on the objectively baseless part of the test.

WHAT IS EXCEPTIONAL?

Controversy over Section 285 and the Brooks Furniture standard is not new. In the case now pending before the U.S. Supreme Court, Octane Fitness v. Icon Health and Fitness, an equipment manufacturer argues that the ruling “so severely limits district court discretion to award fees to prevailing accused infringers that Section 285 fee awards are essentially nonexistent.”

Numerous technology companies have lined up as amici curiae. The position is so popular that even Apple and Google are in agreement.

Goodlatte has called the Brooks Furniture standard “antiquated, unclear and restrictive,” and his legislation would require fee shifting in patent cases unless a district judge found the litigation “reasonably justified,” among many other changes.

Rader and O’Malley are among the judges who have pushed back on the Goodlatte legislation, arguing that the judiciary is capable of reining in abusive patent litigation. Rader has specifically mentioned loosening the Section 285 standard as a workable judicial reform.

“When a judge perceives that a case exhibits litigation abuse, that case should be ‘exceptional’ on that basis alone,” Rader said last month at a speech before the Eastern District of Texas bench and bar. “Without going into detail, I will just suggest that the Federal Circuit is on course to give trial judges more discretion to reverse fees and make litigation abusers take responsibility for their culpable conduct.”

Sidense attorney Roger Cook is trying to ride the patent reform wave. “Many members of the bar and persons in industry, in Congress, in the Obama administration and in the judiciary, including some members of this court” support more liberal use of the §285 standard, the Kilpatrick Townsend & Stockton partner writes in briefs.

The congressional debate has focused mostly on litigation brought by patent “trolls,” or nonpracticing entities. Cook argues that litigation between competitors, like the Kilopass case, is “far more heinous” because trolls typically seek a small payoff, whereas competitors seek to disrupt each other’s business.

‘WE SHOULD HAVE FILED THIS PATENT’

Kilopass and Sidense design programmable semiconductor cells that retain memory when power is shut off. Kilopass’ patent describes two “doped semiconductor regions” that define a channel. Designing around the Kilopass patent, Sidense came up with a competing product that employs a single doped semiconductor with a shallow trench isolation insulator.

When Kilopass founder Jack Peng first learned of the Sidense design, he told outside counsel at Perkins Coie that Kilopass had chosen not to pursue it because it would be more bulky. “Anyway, we should [have] filed this patent long time ago even though we were very busy,” he wrote in an email to Perkins partner Chun Ng and top Kilopass executives.

Ng later told Kilopass’ CEO that if Sidense had designed its cell as it claimed, “then they would not infringe our claims literally.” He later concluded that “they have redesigned their memory cell to avoid infringement of our patents. Or at least make our case much tougher.”

Kilopass next retained Morrison & Foerster to analyze whether the Sidense chip infringed under the doctrine of equivalents. But the company told MoFo to stop work after about 10 days. Kilopass says MoFo’s analysis confirmed its theory, but Sidense attorney Cook argues the work was unfinished, based on incomplete data and explicitly labeled “preliminary.”

Finally, Kilopass obtained a Sidense cell, reverse-engineered it, and had its own chief technology officer analyze the claims. Backed by Dentons partner Mark Hogge, the company filed suit in 2010.

The litigation quickly turned ugly. Both sides added business tort claims that were eventually dismissed. Kilopass’ theory of infringement shifted as the case went before the U.S. Patent and Trademark Office and then returned to district court, prompting Illston to criticize the company’s “gamesmanship.”

She ultimately granted summary judgment to Sidense, ruling, among other things, that the size of the cells was a substantial difference in design.

“Seven years and millions of dollars in attorney fees later,” Cook writes in his appellate brief, “the district court granted summary judgment of noninfringement for precisely the same reason” that company founder Peng had outlined to Kilopass executives in 2005.

But Illston rejected Sidense’s claim that this was an “exceptional case” meriting an award of attorney fees under Section 285. Citing the “substantial prefiling investigation” performed by Kilopass, Illston ruled that Sidense had not shown bad faith by clear and convincing evidence. She did not address whether Kilopass’ claim was objectively baseless.

The litigation, she added, was “hard-fought,” “acrimonious” and “discouraging to the court.” As O’Malley put it at the October hearing, “It seems to be the district court felt ‘a pox on both your houses.’”

A ‘ROBUST DISCUSSION’

At the Oct. 9 argument, Rader, O’Malley and Judge Alan Lourie peppered Durie with questions about Kilopass’ prelitigation conduct.

“Why did it take five years to generate the basis for filing an equivalence claim?” Lourie asked.

“I would not say, Your Honor, they spent five years trying to come up with a theory,” Durie said. “I would say they spent a long time being sure that that was a viable theory.”

The emails between Kilopass and its lawyers merely reflect “a robust discussion back and forth about the merits of the case,” Durie said. Unlike a formal opinion letter, those communications weren’t developed for public consumption, she noted: “This is not a record that simply says we’re going to file a lawsuit without interrogating the merits.”

But the panel seemed determined to send the case back to Illston for reconsideration. “I have the greatest respect for Judge Illston, but the entirety of her opinion [on Section 285] was one paragraph. One paragraph,” O’Malley said. “She simply just says there’s not enough to show they acted in bad faith. There’s no objective [basis] analysis.”

The more difficult question appeared to be whether the panel might tweak—or overrule—the Brooks Furniture standard. Lourie, who concurred in Brooks Furniture, sounded convinced that Illston could award fees under the present standard. O’Malley floated a possible tweak: that district judges be required to make findings about both objective basis and subjective bad faith, and “one prong is informative of the other.”

Rader, meanwhile, sounded ready to return to the court’s 1990 standard for a Section285 award, Eltech Systems v. PPG Industries. “As a matter of policy, wouldn’t we prefer the broader Eltech exceptional circumstances, the court’s original doctrine?” he said. “It gives the district judge the broadest latitude to decide whether fees are warranted.”

Contact the reporter at sgraham@alm.com.