Recovering Attorneys’ Fees from Patentees in U.S. Litigation

Authored by Ming-Tao Yang and Jacob Schroeder

The bad news is that the cost of defending against patent infringement claims has imposed increasing burdens on companies with increasing assertions by non-practicing entities.   The good news is that U.S. courts are re-balancing burdens to make it easier for defendants to recover fees from plaintiffs who pursue baseless claims or litigate in bad faith. The Supreme Court eased the standard a month ago. Under the new standard, defendants no longer need to prove bad faith, but only need to show that a case is out of the ordinary, and the more stringent clear and convincing standard was held to be inappropriate. While what exactly is "out of the ordinary" or "exceptional" remains unclear and needs additional guidance from future cases, the change makes it easier for defendants to seek fees for defending against baseless infringement allegations.

The change can also be game changing. Plaintiffs used to aggressively threaten defendants, in part because the cost to the plaintiffs was nominal and the risk was little. The recent developments, however, tip the scale and shift the burden toward plaintiffs. Plaintiffs who assert baseless claims, act in bad faith, or engage in vexatious litigation conduct now face the risk of having to pay defendants’ fees and costs. Companies facing patent-infringement suits or threats now have additional leverage in litigating their defenses and negotiating settlements.   We provide summaries of several recent developments.

Raylon, LLC v. Complus Data Innovations, Inc. (Fed. Cir., Dec. 07, 2012) illustrates the extreme positions some plaintiffs have taken. Raylon asserted patent claims that require a device with a display "pivotally mounted" on housing. The accused product, however, has a fixed display that is neither movable nor pivotable. Plaintiff Raylon nevertheless pursued its claim, arguing that the claim term encompassed "a display . . . [that] can be pivoted relative to the viewer’s or the user’s angle of visual orientation," such as by pivoting about a viewer’s wrist. The defendants repeatedly raised their concerns about Rule 11 violation, which requires a complaint to be filed in good faith and not for an improper motive such as harassment. While the district court agreed that plaintiff’s position "stretch[es] the bounds of reasonableness," it declined to order sanctions or award fees, concluding that the suits were not objectively baseless.

On appeal, the U.S. Court of Appeals for the Federal Circuit disagreed, holding that the district court abused its discretion by applying a subjective, rather than objective, standard in determining reasonableness. The court held that plaintiff’s conduct warranted sanctions because no reasonable litigant would believe that the accused device infringed the asserted claims.

Monolithic Power Systems, Inc. v. O2 Micro Int’l., (Fed. Cir., Aug. 13, 2013) provided a recovery of more than $8 million in fees and costs. MPS and O2 Micro are competitors in integrated circuits that control LCD and LED lighting, and had litigated extensively for 10 years. After O2 Micro made infringement threats against MPS' customers, MPS filed a declaratory judgment action seeking a declaration that its products did not infringe O2 Micro's patents, including the '382 patent. To avoid having its patents invalidated by prior art, O2 Micro altered the date of a schematic so it predated the prior art. O2 Micro also engaged in a pattern of filing multiple infringement suits against MPS and waiting until the eve of trial (and after MPS had spent millions in defending them) to dismiss them. The tactics led to an award to MPS of nearly all of its attorney fees expended in its defense, totaling more than $8 million, which was later affirmed by the Federal Circuit on appeal.

On April 29, 2014, the Supreme Court, issued two decisions that revoke the prior, strict standard set forth by the Federal Circuit for recovering fees. In Octane Fitness, the Court lowered the standard required to prove a case "exceptional" under 35 U.S.C. § 285¬¬—a fee recovery statute. The Court concluded that the prior standard was "unduly rigid" and it "impermissibly encumber[ed] the statutory grant of discretion to district courts." The prior standard from the Federal Circuit required either (a) "some material inappropriate conduct," or (b) that the litigation is both "brought in subjective bad faith" and "objectively baseless." Focusing on the statutory language, the word “exceptional” is the only restraint for a district court to award attorney fees to the prevailing party. "[A]n ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigation position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated." In addition to giving expanded leeway for a district court to award fees under the "exceptional" case standard, the Court’s Highmark decision ensures that once a district court makes an exceptional case finding, the decision is entitled to deference when reviewed on appeal.

Between Octane Fitness and Highmark, the Supreme Court has given more freedom to district courts to award attorney fees, while at the same time divesting the Federal Circuit from significantly reviewing those decisions. In order to reverse a district court’s fee award, the Federal Circuit would have to find that the district court judge abused her discretion. Because a district court usually has lived with a case for years and is intimately more familiar with the issues and the parties' conduct, it is in a better position to make a fee-award determination, with the Federal Circuit to review with deference based on the cold record.

Aside from an award of fees under Section 285, an accused infringer may be able to recover attorney fees when an owner of standard essential patents subject to reasonable and non-discriminatory (RAND) royalty obligations fails to negotiate consistent with its RAND obligations. In Realtek Semiconductor Corp. v. LSI Corp. (N.D. Cal., Feb. 26, 2014), the jury awarded Realtek $3.825 million in attorney fees for having to defend against LSI’s International Trade Commission (ITC) investigation. Rather than negotiating reasonably given LSI’s commitment to licensing its purported Wi-Fi-essential patents on a RAND basis, LSI sought injunctive relief from the ITC before offering any license and continued to offer unreasonable royalty rates. The RAND rates the jury found for the two patents, respectively .12% and .07% of chip prices, were much lower than the high rates LSI demanded. Microsoft v. Motorola (W.D. Wa., Apr. 25, 2013) similarly shows that an accused infringer may recover the costs incurred, when a standard-essential-patent owner failed to negotiate in good faith before seeking injunctions. Specifically, Microsoft incurred over $11 million in expenses in moving Microsoft’s distribution center from Germany to the Netherlands to avoid the injunction order Motorola obtained from a German court without negotiating consistently with Motorola's RAND obligations.

These developments demonstrate the courts' increasing willingness in awarding fees against patent owners who sued without proper basis, acted in bad faith, or, for those who have made RAND commitments, failed to negotiate reasonably. Defendants who face patent infringement assertions now have reasons to negotiate confidently, to fight back against baseless claims, and more often than before, to shift the cost burden to vexatious, bad faith, or unreasonable plaintiffs.

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. Reprinted with permission from the Commercial Times, published by China Times Publishing Group. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.