October 2018
Intellectual Property & Technology Law Journal
By Lionel M. Lavenue; Sean D. Damon; R. Benjamin Cassady
Federal Rule of Civil Procedure 11 requires plaintiffs to perform a reasonable prefiling investigation before bringing suit, and given that Rule 11 violations are extremely rare, it stands to reason that the majority of plaintiffs perform the required due diligence. Moreover, 35 U.S.C. Section 285 allows courts in patent cases to award reasonable attorneys’ fees to the prevailing party in “exceptional cases.”
Four years ago, however, the standard for an “exceptional case” required both objectively baseless claims and subjective bad faith on the part of the losing party. But in two decisions that issued on the same day, the U.S. Supreme Court confronted the ever-increasing concerns regarding frivolous patent infringement suits by making it easier for prevailing parties to recover attorneys’ fees in “exceptional” cases under the patent-law fee-shifting statute, 35 U.S.C. § 285.
The first decision, Octane,1 promulgated a new standard for an “exceptional” case—it is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”
The second decision, Highmark,2 said that “exceptional case” determinations should be left to the discretion of the district court, limiting the ability for appellate courts to second-guess such findings. The Supreme Court ruled that attorneys’ fees awards under Section 285 should be reviewed for an abuse of discretion, not de novo.
Despite Rule 11’s investigation requirement, and the lowered Octane standard, in Intellectual Ventures II LLC v. Commerce Bancshares, Inc., a Missouri federal district court declined to award attorneys’ fees under Section 285 to a prevailing defendant. Instead, the court found that without additional misconduct, failure to investigate plaintiff’s claims did not warrant an award of attorneys’ fees under Section 285.
This article analyzes the Commerce Bancshares decision in the context of the intent of Section 285, the rationale of the Supreme Court holding in Octane, and other recent “exceptional case” rulings to ascertain whether the relaxed standard for awarding attorneys’ fees is still relaxed in practice.
Rule 11 of the Federal Rules of Civil Procedure imposes a threshold prefiling investigation that, while appearing straightforward, might leave doubt about what satisfies the requisite inquiry. Under Rule 11, there is an affirmative duty to investigate both as to law and as to fact before a complaint is filed. All pleadings, motions, papers, and representations to the court must also meet the requirements of Rule 11 or risk triggering sanctions against the offending parties and their attorneys. Failure to make an adequate prefiling investigation can lead to a violation of Rule 11, and trial courts may grant sanctions, including expenses and attorneys’ fees.
Section 285 provides that “[t]he court in exceptional cases may award reasonable attorneys’ fees to the prevailing party.”3 Although Congress expressly authorized discretionary fee shifting for exceptional cases in the 1946 Patent Act, the Senate report on the Act indicated otherwise. At the time, “[i]t [was] not contemplated that the recovery of attorney[s’] fees will become an ordinary thing in patent suits.”4
In 2005, in Brooks Furniture,5 the U.S. Court of Appeals for the Federal Circuit established a standard that “exceptional cases” under Section 285 required litigation that is both:
(1) objectively baseless; and
(2) brought in “subjective bad faith.”6
Further, the Federal Circuit required clear and convincing evidence for both.
But in the years that followed, some began to believe that plaintiffs were abusing the patent systems by filing suits based on questionable patents and infringement allegations. To reduce these practices, many urged for legislative or judicial reform. But such proposals, which would have signaled a departure from the traditional “American rule” that each party pays its own legal fees, were met with significant resistance.
One of the proposed bills, the Innovation Act (H.R. 9)—originally introduced by Representative Bob Goodlatte (R-Va.) in October 2013 and advanced as “the solution to the problem of abusive patent litigation”7—swiftly passed the House in December 2013. But its Senate counterpart, the Patent Transparency and Improvements Act (S. 1720)—introduced by Senator Patrick Leahy (D-Vt.) in November 2013—stalled and died. According to proponents of the Innovation and PATENT Act, the traditional “American rule” allegedly affords patentees an advantage because accused infringers often face higher fees and litigation costs an advantage.8 As such, the rule arguably forces wrongly accused parties to settle, given that the total attorneys’ fees and costs to defend the case often exceed the cost of settlement.
In Octane, the Court considered the standard for deciding whether a case is exceptional and thus justifies awarding attorneys’ fees. ICON sued Octane for patent infringement. Octane won summary judgment of noninfringement and sought attorneys’ fees under Section 285. Applying the Brooks Furniture standard, the district court denied Octane’s request, and the Federal Circuit subsequently affirmed.9 The Supreme Court reversed and remanded, abrogating the Federal Circuit’s Brooks Furniture standard.
In Highmark, Highmark filed a declaratory judgment action for invalidity, unenforceability, and noninfringement of Allcare’s patent. Highmark won summary judgment of noninfringement and sought attorneys’ fees under Section 285 based on Allcare’s litigation misconduct, and the district court awarded fees for litigation misconduct for two patent claims. The Federal Circuit, however, reviewed de novo, affirming the attorneys’ fee award for one claim, but reversing the award for the second claim. The Supreme Court held that abuse of discretion is the proper standard of review, and vacated and remanded with instructions to apply the Octane standard to the merits of Highmark’s Section 285 claim.
In 2013, Intellectual Ventures (IV) sued dozens of banks, alleging infringement of five patents all related generally to Payment Card Industry Data Security Standard:
On June 20, 2013, a day after sending defendants Commerce Bancshares, Inc. and Commerce Bank (together, Commerce) a letter accusing it of infringement, IV filed suit.
In September 2013, Commerce notified IV that Commerce “has not used and does not use the crypto card of the IBM system z10 mainframe computer,” which IV accused of infringing the ’666 patent. Following mediation efforts in November 2013, IV asked Commerce for a declaration substantiating the claim that the zSeries mainframe do not use the crypto card. The same month, Commerce’s counsel supplied the requested declaration and IV did not include in its infringement contentions against Commerce any allegations regarding the ’666 patent. The parties also reached a joint stipulation and a covenant not to sue, and filed a stipulation of dismissal of the claims for the ’666 patent.
Meanwhile, Commerce filed petitions for inter partes review of the other asserted patents, and moved to stay the district court case while the IPRs were resolved. On June 4, 2014, the court granted Commerce’s motion to stay and further dismissed the case without prejudice, subject to being reopened upon the competition of the IPR process. As a result of the IPR petitions and challenges in the U.S. District Court for the Southern District of New York, every asserted claim of the four remaining patents was found unpatentable or invalid under 35 U.S.C. Sections 101, 102, and/or 103, thus making Commerce the prevailing party.
The Federal Circuit affirmed the Patent Trial and Appeal Board’s decision holding two of the patents unpatentable, but at the time of the District Court of Missouri’s order, IV’s time to appeal the Southern District of New York’s decision had not yet elapsed. Following, Commerce moved to reopen the case and enter final judgment in favor of Commerce on each of the remaining claims. Thereafter, Commerce filed its motion seeking attorneys’ fees and filed a bill of costs.
After the court’s decision in Commerce’s favor, Commerce moved attorneys’ fees pursuant to 35 U.S.C. § 285. In determining whether the case was exceptional, the court found that the IV “fail[ed] to conduct an adequate pre-filing investigation,”10 which typically is sufficient for a Rule 11 violation, let alone an exceptional case finding. The court, however, found that without additional misconduct, failure to investigate plaintiff’s claims did not warrant an award of attorneys’ fees under Section 285.
Indeed, even though every asserted claim of the ’574, ’084, ’694, and ’409 patents were invalidated—traditionally considered a showing that the litigation positions were weak—the court did not find IV’s litigation positions to be “objectively baseless.” Instead, the court gave leniency to the patents invalidated under Section 101 because “the legal landscape surround Section 101 was evolving,” and thus, the court “could not conclude that IV’s ‘positions on its patents were at the time objectively unreasonable.”11
The court was also lenient of IV’s failure to provide the required corroborating evidence for its positions, concluding that, despite this failure, it could not find that “IV’s positions with respect to the ’574 Patent was objectively baseless.”12 This decision, which found conduct that arguably violated Rule 11 did not make the case “exceptional” without more, seemingly harkens back to subjective-bad-faith requirements of the pre- Octane test.
Although the Commerce Bancshares decision indicates that IV brought a weak infringement suit, it also reveals a weak showing of exceptionality by Commerce. Movants must show strong support in establishing an “exceptional case.”
Here, the court noted several failures of Commerce during the litigation, which hurt Commerce’s exceptionality arguments. First, Commerce never suggested that IV intended to harass Commerce into settling the case,13 behavior that can support an exceptional case finding. Second, despite arguing that IV failed to identify the particular products or systems that purportedly infringed IV’s patents, Commerce conceded that the case was “in its infancy” and failed to move to dismiss for lack of particularity or even raise any related defense in its answer.14
Nonetheless, the fact remains that, in deciding a case was not exceptional despite the existence of what is traditionally considered independently sanctionable conduct (i.e., not completing an adequate prefiling investigation), the Western District of Missouri, knowingly or unknowingly, went against the grain of the traditional thinking of what is “exceptional.” Indeed, since Octane, other courts generally have been more willing to find a case “exceptional” where the substantive strength of the party’s positions are “weak.” Some recent district court decisions illuminate this general trend.
For example, in Sonix Tech., after the court entered summary judgment of noninfringement for the nonpatentee plaintiff,15 the plaintiff brought a Section 285 motion against the defendant and its attorneys for advancing vague and contradictory positions and failing to undertake a sufficient prefiling investigation.16 The court granted the motion and held that fees were warranted to “advance considerations of compensation and deterrence, and discourage lawyers from abrogating their independent duties of investigation.”17 Similarly, in Tech. Props., a defendant moved under Section 285 motion winning a summary judgment of non-infringement in the district court (and succeeding on non-infringement in a parallel International Trade Commission proceeding).18 The district court granted the defendant’s motion, finding that the two decisions upholding defendant’s non-infringement position demonstrated that plaintiff’s infringement theory was meritless.19
Also, in Lyda, the court granted defendant’s Section 285 motion because plaintiff’s claims were barred by res judicata, holding that plaintiff’s untenable legal position suggested lack of sufficient pre-suit diligence. [20] These cases illustrate that courts find cases exceptional when facts strongly indicate that the losing party’s positions are substantively weak, especially when that weakness would have been uncovered by a proper pre-filing investigation.
Although this case seemingly harkens back to the subjective-bad-faith requirements of the pre- Octane test, the facts demonstrated to the court, which has wide discretion in making these decisions, that IV’s conduct simply was not “exceptional.” And although the purpose of a fee award under Section 285 is to prevent “exceptional conduct” and to compensate the prevailing party for its resultant fees—which a complaint filed without Rule 11’s required pre-suit investigation would seemingly trigger—without more, a court may not award attorneys’ fees on a Rule 11 violation alone.
Endnotes
1 Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014).
2 Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 134 S. Ct. 1744 (2014).
3 35 U.S.C. § 285.
4 S. REP. NO. 1503, 79th Cong., 2d Sess. (1946), reprinted in 1946 U.S.C.C.A.N. 1386, 1387 (“[B]ut the discretion given the court in this respect . . . will discourage infringement of a patent by anyone thinking that all he would be required to pay if he loses the suit would be a royalty. The provision is also made general so as to enable the court to prevent a gross injustice to an alleged infringer.”).
5 Brooks Furniture Mfg., Inc. v. Dutalilier Int’l, Inc., 393 F.3d 1378 (Fed. Cir. 2005).
6 Id. at 1381-82.
7 Press Release, Congressman Jerrold Nadler, Nadler, Goodlatte, DeFazio, Issa, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill (Feb. 5, 2015), https://nadler.house.gov/press-release/nadler-goodlattedefazio-issa-smith-lofgren-eshoo-introduce-patent-litigation-reform (quoting Rep. Eshoo).
8 Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015) (“Our basic point of reference when considering the award of attorney[s’] fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney[s’] fees, win or lose, unless a statute or contract provides otherwise.”).
9 ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 496 F.App’x 57 (Fed. Cir. 2012).
10 No. 2:13-CV-04160-NKL, 2017 WL 4391776 (W.D. Mo. Sept. 29, 2017).
11 Id. at *10.
12 Id. at 8.
13 Id. at 4.
14 Id. at *6.
15 Sonix Tech. Co. v. Yoshida, Case No. 12-cv-00380-CAB-DHB (May 23, 2016).
16 Id. at 2.
17 Id. at 4.
18 Tech. Props. Ltd. LLC v. Canon, Inc., No. C. 14-3640 CW (N.D. Cal. Jan. 26, 2017).
19 Id. at 8.
20 Lyda v. CBS Interactive, Inc., Case No. 16-cv-06592-JSW (N.D. Cal. Jan. 24, 2018).
attorney fees, Federal Rules of Civil Procedure (FRCP), Octane Fitness LLC v. Icon Health & Fitness Inc., Highmark Inc. v Allcare Health Management Systems, Inc. , 35 U.S.C. § 285, exceptional case
Originally printed in Intellectual Property & Technology Law Journal in October 2018. 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.
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