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Technology: Tech companies should soon find it easier to punish bad faith patent litigation tactics

Two cases could significantly impact the current litigation landscape, especially in the technology sector

Although Section 285 of the Patent Act provides district courts with discretion “in exceptional cases to award reasonable attorney fees to the prevailing party,” such sanctions are too infrequently levied. That may change as a result of two Section 285 cases pending before the U.S. Supreme Court: Highmark Inc. v. Allcare Health Management Sys. and Octane Fitness, LLC v. ICON Health & Fitness, Inc. These two cases could significantly impact the current litigation landscape, especially in the technology sector, which is saturated with patent trolls that exploit baseless infringement litigation to extract large settlements from the industry’s leading companies. The Supreme Court’s granting of certiorari in both Highmark and Octane has generated optimism that bad faith patent assertion will be deterred by changes in the law that enable more frequent and more significant sanctions. That optimism has been heightened both by recent commentary from the Federal Circuit’s Chief Judge Rader, and by the inclusion of fee-shifting provisions in pending proposed Congressional legislation.

Under the current legal framework, after finding that the party seeking attorneys’ fees has prevailed, the district court uses a two-step process to determine whether to award fees, per Forest Labs., Inc. v. Abbott Labs. First, the court must find that the moving party has proven by clear and convincing evidence that the case is, in fact, “exceptional.” If so, then the court must determine the propriety of an award, and the amount, if an award is deemed appropriate. Absent litigation misconduct, sanctions should be imposed only if both “(1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless,” per Brooks Furniture Mfg., Inc. v. Dutailier Int'l, Inc.

In Highmark Inc., a divided Federal Circuit panel affirmed in part, reversed in part, and remanded the district court’s finding of an exceptional case under Section 285 and violation of FRCP Rule 11, which had led to sanctions in excess of $5 million. Highmark Inc., which runs a non-profit Blue Cross Blue Shield entity, sought declaratory judgment of noninfringement, invalidity and unenforceability of a patent covering a healthcare management system belonging to Allcare Health Management Sys., Inc. Allcare, a non-practicing entity, counterclaimed for infringement of three claims. Following Highmark’s summary judgment motion of noninfringement against all three claims, Allcare withdrew its allegations as to one claim, claim 102. After the district court entered a final judgment of noninfringement of the two remaining claims, Highmark moved for Section 285 attorneys’ fees and Rule 11 sanctions.

Allcare appealed the district court’s finding of exceptionality under Section 285 and award of attorneys’ fees and costs to Highmark. On appeal, the Federal Circuit held that the standard of review for the objective prong of Section 285 is de novo. The Court concluded that Allcare’s claim 102 infringement claims were objectively unreasonable on the grounds that the preamble limited the claim’s scope, and Highmark’s method did not meet the claim’s requirements, and brought in subjective bad faith because that “objective unreasonableness ‘was either known or so obvious that it should have been known’” to Allcare. However, with regards to the other pending claim, claim 52, the appeals court found that Highmark had failed to show that Allcare’s claim construction positions were objectively unreasonable. On remand, the district court was ordered to recalculate the award based on the appeals court’s holding. The Federal Circuit denied subsequent petitions for a panel rehearing and en banc rehearing.

In Octane Fitness, LLC, the Federal Circuit affirmed in one paragraph the district court’s findings that the case was not exceptional under Section 285 and stated that it “ha[d] no reason to revisit the settled standard for exceptionality.” On appeal, Octane Fitness, LLC had argued that the district court had “applied an overly restrictive standard” regarding exceptionality and that ICON Health & Fitness, Inc.’s “unreasonable claim construction positions, [] privilege assertions . . ., and emails allegedly supporting bad faith litigation” warranted a finding of exceptionality.

On Oct. 1, 2013, the Supreme Court granted certiorari to review one question from each of these cases: whether a district court’s finding of exceptionality under Section 285 is entitled to deference and whether a district court should determine exceptionality using equitable factors, instead of the two-pronged test that requires both objective baselessness and subjective bad faith. Various technology companies have filed amicus briefs, and oral arguments in both cases are scheduled for Feb. 26, 2014. More recently, the Solicitor General moved for leave to participate in oral argument as amicus curiae.

Most industry observers believe that the Supreme Court would not have granted certiorari in Highmark and Octane unless it were inclined to make it easier for district courts to levy sanctions under Section 285. That optimism is fueled by recent commentary from Chief Judge Rader of the Federal Circuit Court of Appeals. After lamenting in a June 2013 New York Times editorial that “fees were shifted under Section 285 in only 20 out of nearly 3,000 patent cases filed in 2011,” and urging district courts to impose such sanctions more often in the face of “bully” tactics by patent trolls, Judge Rader “endorse[d]” two sanctions-friendly changes in the law: dropping the “subjective bad faith” requirement, such that sanctions could be levied upon a sole showing that a litigant had taken an objectively baseless position; and lowering the burden of proof from “clear and convincing evidence” to a mere preponderance. Similar sentiments have been voiced in Congress, including via proposed legislation H.R. 3309 (the “Goodlatte Bill”), which would go even farther by forcing the nonprevailing party in patent litigation to pay the attorney fees of the prevailing party unless the nonprevailing party’s positions and conduct were “reasonably justified in law and fact” or “special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”

While a combination of legislative and judicial proactivity will likely be required to deter bad faith litigation tactics by patent trolls, increasing the discretion of district courts to award Section 285 sanctions would be a great start.

Contributing Author

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James Batchelder

James Batchelder is managing partner of Ropes & Gray’s Silicon Valley office, a co-chair of Ropes & Gray’s technology, media & telecommunications group,...

Additional Contributors: Diana Santos

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