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Alleged Prelitigation Bad-Faith Conduct Does Not Make Case “Exceptional”

August 07, 2003
Barney, James R.

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Last Month at the Federal Circuit - September 2003

Judges: Lourie (author), Rader, and Dyk

In Forest Laboratories, Inc. v. Abbott Laboratories, No. 03-1067 (Fed. Cir. Aug. 7, 2003), the Federal Circuit reversed the district court’s award of attorneys’ fees and held that the court erred in its finding that the case was exceptional under 35 U.S.C. § 285.

Abbott Laboratories (“Abbott”) is the exclusive licensee of U.S. Patent Nos. 4,338,301 (“the ‘301 patent”) and 4,397,839 (“the ‘839 patent”) directed to a lung-surfactant composition for treating respiratory-distress syndrome in premature babies. Abbott developed a commercial product called Survanta® in the 1980s. At about the same time, ONY Inc. (“ONY”), Coplaintiff with Forest Laboratories, Inc. (“Forest”), developed its own product for treating neonatal respiratory-distress syndrome, called calf lungsurfactant extract (“CLSE”). During the development of these products, Abbott and ONY maintained close contact regarding a possible joint development of CLSE. In 1984, Abbott informed ONY that CLSE would likely not be patentable, though Abbott did not specifically mention its own ‘301 and ‘839 patents.

In 1991, Survanta® received approval and “orphan drug” status from the FDA, and Abbott then proceeded to market Survanta®. Several years later, Abbott informed ONY and Forest that it had reason to believe that their commercial product, based on CLSE, would infringe the ‘301 and ‘839 patents if it were to be marketed. ONY and Forest sued Abbott, seeking a DJ of noninfringement and invalidity of the ‘301 and ‘839 patents.

Following a jury trial, the district court granted ONY and Forest a JMOL of noninfringement and also ruled that Abbott was equitably estopped from asserting infringement of the ‘301 and ‘839 patents against ONY and Forest because (1) Abbott, by encouraging ONY’s and Forest’s development of CLSE, had misled them to believe that it would not assert infringement; (2) ONY and Forest reasonably relied on Abbott’s misleading conduct; and (3) ONY and Forest would suffer economic and evidentiary prejudice if Abbott were permitted to proceed with its infringement counterclaim.

The district court also found the case to be exceptional under 35 U.S.C. § 285 and awarded attorneys’ fees because Abbott, in bad faith, had encouraged ONY to develop CLSE but then later pursued an infringement counterclaim against ONY and Forest in an attempt to prevent their product from reaching the market. Abbott appealed the award of attorneys’ fees.

The Federal Circuit explained that an exceptional case under 35 U.S.C. § 285 typically involves inequitable conduct before the PTO, litigation misconduct or bad faith, a frivolous suit, or willful infringement. The Court found, however, that none of those circumstances was present in this case. The Court stressed that a finding of exceptionality has never been based on a patentee’s bad-faith business conduct toward an accused infringer prior to litigation, and the Court declined to expand the scope of § 285 in that manner.

The Court recognized that bad-faith litigation can be a basis for a finding of exceptionality. It concluded, however, that Abbott had not engaged in bad-faith litigation. Under § 285, “bad faith” requires not merely misleading prelitigation conduct, but “vexatious, unjustified or frivolous litigation.” The Court concluded that the pertinent inquiry was whether Abbott knew or should have known that it would be estopped from asserting the ‘301 and ‘839 patents against ONY and Forest yet pursued its infringement counterclaim anyway. The Court ruled that the record did not support the district court’s finding that Abbott had knowledge of the events that would ultimately lead to a holding of equitable estoppel.

For all of these reasons, the Court concluded that the district court had erred in its finding that the case was exceptional under 35 U.S.C. § 285 based on Abbott’s prelitigation conduct toward ONY and Forest.