Bad Acts and Actors Never Die; They Simply Lose Their Appeal

Inequitable conduct not only wipes out the entire patent, but it may also spawn all kinds of other lawsuits, as discussed in the Energy Heating and Chandler cases below.  This is also true for attorneys. That is, it may further result in disciplinary actions before the state bar and, if applicable, the USPTO Office of Enrollment and Discipline.

I. Energy Heating, LLC v. Heat On-The-Fly, LLC, Case No. 4:13-cv-10

Holding: On Jan. 14, 2016, the District Court of North Dakota ordered, inter alia, $75,000 in damages for intentional tortious conduct of Heat On-The-Fly (“HOTF”) and held U.S. Pat. No. 8,171,993 (“the ’993 patent”) unenforceable for inequitable conduct. On Mar. 16, 2016, the district court judge denied motions for a declaration that the case was exceptional and for an award of attorney fees. On May 4, 2018, on appeal, the Federal Circuit upheld the finding of unenforceability of the ’993 patent due to inequitable conduct but vacated and remanded the denial of attorney fees, in particular for reconsideration of the question of whether the case is exceptional within the meaning of 35 U.S.C. § 285, which provides the basis for an award of attorney fees. Energy Heating, LLC v. Heat On-The-Fly, LLC, 889 F.3d 1291 (Fed. Cir. 2018). On remand, the presiding judge found this case exceptional under 35 U.S.C. §285. On June 15, 2020, the district court judge adopted magistrate judge’s report and recommendation awarding attorney fees totaling about $5M.^[1]  

Issue: Does a finding of inequitable conduct mandate an award of attorney fees?

Decision: The short answer is no while in this case, the district court on remand found the case exceptional and determined an award was appropriate. 2019 U.S. Dist. LEXIS 238396. 35 U.S.C. § 285 provides the basis for an award of attorney fees in a patent case, stating “The court in exceptional cases may award attorney fees to a prevailing party.”

The district court on remand noted that under the applicable law, an “exceptional case” is: (1) “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 (2) one that was litigated in “an unreasonable manner.” Id. at *15 (citing Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1756 (2014)).

First, the district court acknowledged that “[a] finding of inequitable conduct does not mandate a finding of exceptionality, though both before and since Octane Fitness a finding of inequitable conduct is sufficient reason—by itself—to find a case exceptional.” Id. at *27-*28 (citing Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276 (Fed. Cir. 2011) (en banc)).

On remand, the magistrate judge in the district court gave considerable weight to and agreed with the jury’s finding “that it was both objectively and subjectively baseless for HOTF to suggest its patent was valid, that no reasonable person could expect to prevail on claims of the patent's validity, and that HOTF either knew the patent was invalid or the invalidity of the patent was so obvious HOTF should have known it was invalid.” Id. at *45. The presiding judge subsequently agreed with this finding that the case was “exceptional.” The “exceptionality” in Energy Heating, LLC v. Heat On-The-Fly, LLC, 889 F.3d 1291 (Fed. Cir. 2018), where the Federal Circuit affirmed a holding of unenforceability due to inequitable conduct was based on failure to disclose 61 pre-critical-date commercial sales and public uses of the claimed fracking process. This is what was now deemed “exceptional.”

The case came back to the same magistrate judge, who found the hours expended by Energy Heating and Marathon’s attorneys and their hourly rates reasonable. 2020 U.S. Dist. LEXIS 255598. While noting “[e]ven if a case is determined exceptional under the totality of the circumstances, a district court has discretion to decline to award fees but must articulate its reasons for doing so once finding a case to be exceptional (citing Oplus Techs. Ltd. v. Vizio, Inc., 782 F.3d 1371, 1375-76 (Fed. Cir. 2015)),” the magistrate judge accordingly recommended the presiding judge award Energy Heating and Marathon certain fees and costs, totaling about $5M. Id. at *18. The presiding district court judge adopted the recommendation.

Federal Circuit: HOTF again appealed the decision to the Federal Circuit. Oral arguments were heard on June 7, 2021 (Case 20-2038), so the case remains pending, and we shall see if HOTF loses yet a second appeal.

II. Chandler v. Phoenix Servs. LLC, 1 F.4th 1013 (Fed. Cir. 2021)

Holding: The Federal Circuit concluded it lacked subject matter jurisdiction and transferred the case to the Court of Appeals for the 5^thCircuit.

Issue: Does an antitrust suit based on asserting a patent automatically provide sufficient relation to patent law for Federal Circuit jurisdiction?

Decision: Defendant Phoenix acquired HOTF and the ’993 patent that was discussed above. In this case, Phoenix asserted the ’993 patent subsequent to the holding of unenforceability of the patent for inequitable conduct. This, according to Chandler, is an antitrust violation. The Federal Circuit stated that, according to the Supreme Court in Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 176–77 (1965), enforcement of a patent procured by fraud on the PTO can be the basis for an antitrust claim. The Federal Circuit specifically stated that:

To succeed on a Walker Process claim, a plaintiff must prove (1) that “the antitrust-defendant obtained the patent by knowing and willful fraud on the patent office and maintained and enforced that patent with knowledge of the fraudulent procurement,” and (2) that the plaintiff can satisfy “all other elements necessary to establish a Sherman Act monopolization claim.”

Chandler, at 1014 (citing TransWeb, LLC v. 3M Innovative Props. Co., 812 F.3d 1295, 1306 (Fed. Cir. 2016)).

The Federal Circuit determined that Chandler’s cause of action arose under the Sherman Act and did not depend on resolution of a substantive patent law issue. Since the Federal Circuit’s jurisdiction covers appeals of district court decisions relating to patents,[2] the Court lacked subject matter jurisdiction in this case. The Federal Circuit found that its decision in Xitronix Corp. v. KLA-Tencor Corp., 882 F.3d 1075 (Fed. Cir. 2018) mandated transfer of this case to the 5^thCircuit. Chandler at 1016. The patent at issue was already ruled unenforceable. Chandler’s appeal will not change that, nor will it require analysis of patent law issues. “Simply put, this is not a patent case. Rather, this case purports to raise novel Fifth Circuit antitrust issues.” Id. at 1018. 

Take-Aways

Here, the initial finding of unenforceability came because the patent owner failed to disclose 61 pre-critical-date commercial sales and public uses of the claimed fracking process. It would be prudent for a patent professional to explain to the client the elements of a public use and sale and the relevant times involved. That explanation probably should be in writing.  Then, probably in writing, the patent professional asks whether the patent applicant engaged in any of those activities at a relevant time. Assuming the absence of an overwhelming stench of dishonesty, getting those answers in writing may insulate the patent prosecutor from being fingered for inequitable conduct if the patent applicant lies or misrepresents to the prosecutor. And if the patent applicant fesses up, full disclosure to the USPTO may be the order of the day.  And if these sorry facts come to the prosecutor’s attention after issuance but before litigation, Supplemental Examination, an AIA procedure, may be just the ticket. For more information about supplemental examination, please see our publications below.

• AIA Supplemental Examination Nuts and Bolts: Get it in your toolbox and don’t leave home without it!” https://www.finnegan.com/en/insights/blogs/america-invents-act/aia-supplemental-examination-nuts-and-bolts-get-it-in-your-toolbox-and-dont-leave-home-without-it.html
• “A Tale of Two Supplemental Examinations: Part 1: Unraveling Confusion,” https://www.finnegan.com/en/insights/blogs/america-invents-act/a-tale-of-two-supplemental-examinations-part-1-unraveling-confusion.html
• “A Tale of Two Supplemental Examinations, Part II: Surprising Events When Citing Art That, but for a Clerical Error, Would Have Been Cited During Original Prosecution,” https://www.finnegan.com/en/insights/blogs/america-invents-act/a-tale-of-two-supplemental-examinations-part-ii-surprising-events-when-citing-art-that-but-for-a-clerical-error-would-have-been-cited-during-original-prosecution.html
• “Supplemental Examinations and Alice: The Bare Essentials of When Not to Poke the Bear,” https://www.finnegan.com/en/insights/blogs/america-invents-act/supplemental-examinations-and-alice-the-bare-essentials-of-when-not-to-poke-the-bear.html
• “In Supplemental Examination, Discretion Is the Better Part of Valor,” https://www.finnegan.com/en/insights/blogs/america-invents-act/in-supplemental-examination-discretion-is-the-better-part-of-valor.html
• “Supplemental Examination Update,” https://www.finnegan.com/en/insights/blogs/at-the-ptab-blog/supplemental-examination-update.html

[1] The magistrate’s report recommending this order was reported at 2020 U.S. Dist. LEXIS 255598 (D.N.D Mar. 4, 2020).

[2] See 28 U.S.C. § 1295(a)(1).