One Year After Octane Fitness – Is Fee-Shifting An “Exceptional” Risk For Patent Trolls?

This article appeared in the June 3, 2015 Edition of The Legal Intelligencer

Last year, the Supreme Court issued a number of landmark decisions which can be argued as geared towards reforming patent litigation and, in particular, towards curbing questionable litigation strategies, typically associated with patent trolls. We wrote last month regarding the benefits of an accused infringer moving for an early dismissal under Fed. R. Civ. P. 12 based on the patent ineligibility guidelines set forth in the Supreme Court’s decision in Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014). This article explores another deterrent against such litigation tactics: the enhanced prospect of fee-shifting arising from the Supreme Court’s decisions in Octane Fitness LLC v. Icon Health & Fitness Inc., 134 S. Ct. 1749 (2014) and Highmark v. Allcare Health Management System Inc., 134 S. Ct. 1744, 1749 (2014). A year of decisions following Octane demonstrates that courts have taken heed and are not hesitant to award fees.

For patent cases, 35 U.S.C. § 285 provides a statutory basis for an award of attorney fees, but only when a case is deemed “exceptional.” Before Octane, district courts could only find a case “exceptional” when “there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.” Brooks Furniture Mfg. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed.Cir.2005).

The Supreme Court changed the paradigm for an award of attorney fees in Octane. Octane rejected Brooks’ “overly rigid” analysis in favor of a more relaxed standard. Now, “an ‘exceptional’ case 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.” Octane, 134 S. Ct. at 1756. District courts may consider a “nonexclusive” list of factors in determining whether to award fees, including “frivolousness, motivation, objective unreasonableness (both in the factual and legal components of the case) and the need in particular circumstances to advance considerations of compensation and deterrence.” Id. Octane also lowered the movant’s burden required to demonstrate entitlement to a fee award from a “clear and convincing” to a “preponderance of the evidence” standard. Id. at 1758.

Octane’s lowering of the bar for fee motions is reflected in the dramatic increase in both the incidence of filing and granting of such motions. According to the Federal Circuit Bar Association (“FCBA”), which recently analyzed all orders on fee motions since Octane in a report to Congress, the grant rate has almost tripled. In particular, the grant rate over one year before Octane rose from 13% (based on 46 motions filed) to 36% (based on 85 motions filed) over the year following the Supreme Court’s decision. During one four month period (January, 2015 to April, 2015), the grant rate was a staggering 50% (based on 24 motions filed).

Interestingly, the FCBA found that the “raw number of fees awards to prevailing accused infringers has more than quadrupled in the 11 months since Octane, as compared with decisions in the 12 months preceding Octane.” Fee motions by patentees have also fared better, with the district courts granting 11 out of 16 post-Octane motions, as compared to only 8 out of 25 pre-Octane motions.

The lowered threshold for recovering attorney fees has even resulted in the Federal Circuit vacating and remanding district court denials of fee motions under certain circumstances. In Oplus Technologies, Ltd. v. Vizio, Inc., 782 F.3d 1371 (Fed. Cir. Apr. 10, 2015), the Federal Circuit, in reviewing the district court’s fee motion denial, recounted the district court’s characterization of Oplus’ behavior during the litigation, which included:

[D]elay[ing] the litigation by strategically amending its claims to manufacture venue, and, in doing so, flouted the standards of appropriate conduct and professional behavior…[,] misus[ing] the discovery process to harass Vizio by ignoring necessary discovery, flouting its own obligations, and repeatedly attempting to obtain damages information to which it was not entitled…[,][and] presenting contradictory expert evidence and infringement contentions as well as misrepresenting legal and factual support….

Id. at 1372-74. The district court had concluded, based on these facts, that the case was exceptional, but ultimately denied the fee award. The court noted that “[a]though Oplus’s behavior has been inappropriate, unprofessional, and vexatious, an award of attorney fees must take the particular misconduct into account” and that “[t]here is little reason to believe that significantly more attorney fees or expert fees have been incurred than would have been in the absence of Oplus’s vexatious behavior.” Id.

The Federal Circuit disagreed with the result, finding no “basis to support the court’s refusal to award fees.” Id. at 1375. Directly refuting the district court’s reasoning, the Federal Circuit explained “[g]iven that the district court found counsel’s behavior ‘inappropriate,’ ‘unprofessional,’ ‘vexatious,’ and ‘harassing,’ it is difficult to imagine how Vizio had not incurred additional expenses defending against such filings ….” Id. In remanding the case back to the district court the Federal Circuit held that “when, as here, a court finds litigation misconduct and that a case is exceptional, the court must articulate the reasons for its fee decision.” Id.

The Oplus decision is notable in that it appears to signify that the Federal Circuit may be taking an active role in enforcing Octane’s lower threshold for fees, regardless of the “abuse of discretion” standard for appellate review of district court fee determinations enunciated in Octane’s sister case, Highmark (which clarified Octane, holding that the determination of whether a case is “exceptional” falls within the district court’s discretion; therefore, “abuse of discretion,” and not de novo review, is the appropriate appellate standard of review.). It also appears to signal to district courts litigation misconduct that the Federal Circuit deems presumptively fee-worthy.

Moreover, district courts have identified certain questionable practices typically associated with patent trolls as meeting Octane’s definition of “exceptional.” For example, the District of Delaware found, in one of a series of related cases brought by Summit (a non-practicing entity), that the “practice of extracting settlements worth a fraction of what the case would cost to litigate supports a finding of exceptionality.” Summit Data Sys., LLC v. EMC Corp., No. CV 10-749-GMS, 2014 WL 4955689, at *4 (D. Del. Sept. 25, 2014). In support of this premise, the Summit Court cited to the Federal Circuit’s precedent in Eon–Net LP v. Flagstar Bancorp, 653 F.2d 1314, 1327–28 (Fed. Cir. 2011) which held that “nuisance value settlements” can determine whether a case is exceptional. Id. In awarding fees against Summit, the district court noted that

Non-practicing entities like Summit and Acacia are entitled to enforce their patent rights through litigation and seek settlements and licenses. ‘But the appetite for licensing revenue cannot overpower a litigant’s and its counsel’s obligation to file cases reasonably based in law and fact and to litigate those cases in good faith.’

Id. (citing Eon, 653 F.2d at 1328.).

A time-tested patent troll litigation strategy is to offer to settle for nuisance amounts, substantially less than the cost to litigate the case. Prior to Octane (and Alice), defendants in these cases had little choice but to seriously consider such offers, as they had dim prospects of avoiding or recovering the substantial attorney fees needed to litigate even highly speculative claims of infringement to a judgment. Following Octane, the Supreme Court and the Federal Circuit have ushered in a year of dramatically increased filing and grants of attorney fee motions. The “business model” of patent trolls must now take into consideration that the increased rate of fee awards will embolden defendants to fight back rather than purchase a license early on in the case. Alice and Octane may prove to be the one–two punch to take patent trolls down a notch.