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Fee-shifting in patent cases: Will proposed legislation actually change anything?

The first of a three article series addressing proposed legislation to curb abusive patent litigation

This is the first of a three article series addressing proposed legislation to curb abusive patent litigation. This article addresses proposed changes governing fee-shifting. The remaining articles will address proposed pleading standards and proposed discovery rules.

Non-practicing, non-academic, entities that make money simply by owning patents are often called trolls. They come in all shapes and sizes, and some assert more legitimate patents rights than others. The questionable trolls are a plague, costing United States businesses billions every year. Because of this, there have been a number of recent initiatives to curb abuse. There are some provisions in the Leahy-Smith Invents Act (AIA), and Congress is now again debating reform.

One proposal is that trolls who lose lawsuits should pay the attorneys’ fees of winning defendants. Often, trolls are represented by lawyers working via contingency fee, while defendants' attorneys bill by the hour. Moreover, since trolls do not make products, they often have fewer documents, resulting in a lopsided discovery burden. These factors have led to the perception there is an unfair playing ground — trolls can, with little risk, over-plead their case and ask for burdensome discovery to “make work” for defendants, resulting in the cost-to-defend often being higher than the cost to settle.

Currently 35 U.S.C. § 285 provides: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” Fee-shifting is allowed not only in favor of patent owners, but also in favor of accused infringers who defeat a patent case brought in “bad faith,” that was “objectively baseless,” where the patents were fraudulently obtained, or where there was “litigation misconduct.” To prove “bad faith,” a winning defendant must show that the “lack of objective foundation for the claim ‘was either known or so obvious that it should have been known’….” If “the patentee is manifestly unreasonable in assessing infringement, …an inference is proper of bad faith.” In practice, courts have often given losing patent owners the benefit of the doubt.

On Dec. 5, 2013, the House passed the “Innovation Act,” H.R. 3309, that addresses fee-shifting and similar bills have been introduced in the Senate. H.R. 3309 would amend Section 285 as follows:

The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action…., unless the court finds that the position of the nonprevailing party or parties was reasonably justified or that special circumstances make an award unjust.” H.R. 3309, 113th Cong.

Of course, this begs the question: “How, if at all, is this different than the old rule?” The key words suggesting fees will be shifted more often are “shall” and “reasonably justified.” However, that language is still subject to interpretation, and reasonable decision makers can vary about what it means.

The House Republican Conference Summary explained the proposal as follows:

The modification does not impose a strict “loser pays” system, as the nonprevailing party is immune from paying a fee award if its claims were brought in good faith and were reasonably justified in law and fact.”

This looks similar to the “reasonableness” and “good faith/bad faith” analysis already undertaken under current law. Notably, the Supreme Court interpreted similar language in the Equal Access to Justice Act, which the fee-shifting language in H.R. 3309 is similar to, as follows:

To our knowledge, that has never been described as meaning “justified to a high degree,” but rather has been said to be satisfied if there is a “genuine dispute,” …..or “if reasonable people could differ as to [the appropriateness of the contested action].

Accordingly, it looks like what is, in essence, a “reasonable person” test.

One way a change may have an effect is on the burden of proof. Currently, the winning party has the burden of demonstrating that fee-shifting is warranted. However, the words “shall award…unless” in the proposal suggest the losing party would have to demonstrate its conduct was reasonably justified, such as in Scarborough v. Principi in interpreting the Equal Access to Justice Act.

Commentators have questioned the need for Congressional action given powers courts already have. Federal Circuit Chief Judge Randall Rader has noted authority courts already have and said courts should more often use that authority to address abuse.

There have also been several recent judicial developments. A recent Federal Circuit decision addressed the current standard and requires courts to take a hard look when considering exceptionality. Moreover, two cases are currently before the Supreme Court that involve the fee-shifting standard, Octane Fitness, LLC v. ICON Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Management Sys.

In any event, any move toward a milieu of more fee-shifting will apply to losing patent owners (both troll and non-troll) and losing infringers, changing the stakes for everyone. And it still would not address the lopsided monetary threat accused infringers face — the specter that a losing infringer may have to pay not only everyone’s fees, but also damages, which may then be multiplied as much as three times under 35 U.S.C. § 284. There is no corresponding threat to multiply any monetary award against a losing patent owner.

Contributing Author

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Josephine Benkers

Josephine Benkers is a partner at Quarles & Brady LLP and practices in the areas of intellectual property and commercial litigation. Her experience in intellectual...

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