Two years after Octane – fee shifting in patent litigation

“Exceptional cases are, by definition, the exception. But since Octane’s change in the standard, the rule seems to be for prevailing parties to bring an exceptional case motion. This case is no exception. But it is exceptional.” – Universal Electronics, Inc v Universal Remote Control, Inc (CD Cal March 11 2015)

A pair of US Supreme Court decisions in 2014 significantly lowered the threshold for fee shifting in patent litigation. At the time, many patent owners were concerned that Octane Fitness and Highmark would further the trend of legal decisions and legislation which have made enforcing intellectual property riskier and more expensive. Conversely, companies that frequently defend against patent litigation welcomed the rulings as a way to counteract litigation misconduct.

Nearly two years later, some interesting developments have emerged. As might be expected, parties have filed significantly more fee-shifting motions, while certain courts have been more willing to grant them than others. Less expected, perhaps, is the large number of multimillion-dollar awards and the fact that roughly one-quarter of them were in favour of patent owners. Further, despite broad discretion having been returned to the trial courts, the Section 285 motion grant rate has remained relatively stable since 2010.

This article discusses the impact of these Supreme Court decisions on patent litigation to date, provides context on the law relating to fee shifting in patent suits and addresses ways that businesses and the attorneys which advise them might be affected.

History of fee shifting

Before 1946, patent litigation followed the American Rule, under which each party was responsible for paying its own legal fees. This contrasted with the English Rule – followed by most of the world – in which the losing party pays the winner’s reasonable attorneys’ fees and costs.

In 1946 Congress enacted Section 70 of the Patent Act, granting courts broad discretion to award attorneys’ fees: the court “may in its discretion award reasonable attorney’s fees to the prevailing party upon the entry of judgment in any patent case.” According to the legislative history, this new provision was intended to deter infringement and to protect accused infringers from frivolous litigation. In the years that followed, courts granted fee awards using an equitable, ‘totality of-the circumstances’ approach.

Congress codified Section 70 into the current Section 285 in 1952, modifying the language to state: “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.” The legislative history suggests that Congress added the exceptional case language to be consistent with court decisions which had issued in the intervening years. For the next 50 years, courts applied Section 285 in a discretionary manner, considering the totality of the circumstances when considering a fee award.

In 2005 the US Court of Appeals for the Federal Circuit meaningfully raised the bar in its Brooks Furniture decision, defining an ‘exceptional case’ as one involving “material inappropriate conduct” or where the case both is “objectively baseless” and is “brought in subjective bad faith”. The court’s examples of inappropriate conduct included wilful infringement, inequitable conduct before the US Patent and Trademark Office and unjustified litigation that would rise to the level of attorney sanctions. In effect, Brooks Furniture made it considerably more difficult to recover fees, which set the stage for the Supreme Court’s review.

The Supreme Court recalibrated the fee-shifting standard in a pair of cases decided in April 2014. In Octane Fitness v Icon Health & Fitness, the court criticised the Federal Circuit’s standard as one that was “unduly rigid and impermissibly encumbers the statutory grant of discretion to district courts”. Rather, it held that “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”.

Figure 1. Fee award amount distribution

In the companion case, Highmark v Allcare Health Management System, the Supreme Court vested further discretion in the trial courts by raising the standard of appellate review to the more deferential ‘abuse of discretion’ test. Thus, the discretion to award fees in a particular patent case returned to the court that was most familiar with the litigation, with less risk of its decision being overturned on appeal. Many in the IP world predicted that the collective effect of these two cases would be to open the doors to more fee-shifting awards which would hold up on appeal.

Figure 2. Section 285 motion rulings

Twenty months later

The nearly two years since Octane and Highmark have borne out expectations, at least with regard to more fee award activity. As shown in Figure 2, the total number of rulings related to Section 285 motions spiked in 2014 and 2015, with 52% and 27% increases over the respective two previous years, after flat to fewer such rulings in the previous four years. Although part of this increase may reflect the courts catching up after many fee motions were stayed pending the outcome of Octane, there is also anecdotal evidence that more fee motions were (and are) being filed in light of this case.

Somewhat surprisingly, despite the return to a relatively lower standard, the overall grant rate for Section 285 motions has held steady – at around 30% – since 2010. However, the fact that so many more fee motions were in the pipeline meant that appreciably more fee awards were granted in 2014 and 2015. If more litigants continue to seek fees under the new standard, the trend of more fee awards may continue.

We analysed the initial tranche of post-Octane awards, focusing on the period from May 2014 (just after Octane and Highmark) through to the end of 2015. During that period, more than 270 rulings issued related to Section 285 motions. After accounting for multiple orders relating to a single case and omitting magistrate judge recommendations, we narrowed the focus to 76 cases in which fee-shifting awards had been granted, in full or in part, by district court judges during this period. We also reviewed the dockets for these cases to ascertain appellate and settlement outcomes.

A two-step process

Of the 76 cases in which Section 285 fee awards were granted during this period, 58 (or 76%) had progressed to the point of a fee amount determination as of the time of writing. An amount determination was pending in nine (or 12%), and another nine cases had resolved after the award ruling but before the amount was determined. Six fee awards were coupled with attorney sanctions and/or joint and several liability for the attorneys. Three of the fee awards were against pro se litigants.

In most of these 76 cases, the district court utilised a two-step approach:

• a briefing, hearing and decision as to whether to award fees under Section 285 (and any other bases sought); and
• a separate briefing, often before a magistrate judge, to address the detailed accounting and apportionment entailed in determining the amount of fees to be awarded.

In many of the cases, the judges awarded fees for just a portion of the overall litigation, usually the portion that was the basis for the exceptional case finding. Also, much of the related briefing was filed under seal due to expressed concerns about fee arrangements and other confidential party information.

Many large awards

The 58 fee awards that were quantified ranged from a low of $675 to a high of $10.3 million, with an average fee award of $1.3 million. The average fee award to accused infringers, at $1.4 million, was slightly higher than the overall average, while the average fee award to patent owners was just under $1 million. There were 13 five-figure awards (or 22%), 26 six-figure awards (or 45%) and one award in the eight figures. Perhaps surprisingly, there were 17 (or 29%) fee awards above $1 million, 10 of which went to accused infringers.

The 10 largest fee awards ranged from $2.5 million to $10.3 million. Of the top 10, only two fee awards went to a patent owner. The Highmark case – at $5.3 million – was one of the top 10 fee awards, whereas the award in Octane – at $1.6 million – did not make the top 10, although it was above both the overall average and the average for accused infringers.

The largest award to date came in Checkpoint Systems v All-Tag Security, a long-running case in which the jury returned a verdict of non-infringement and invalidity in 2007, the trial court awarded fees of $6.6 million in 2009 under the Brooks Furniture standard, the Federal Circuit reversed the award in 2013, and the Supreme Court vacated and remanded it for reconsideration under Octane and Highmark in 2014. On remand to the district court in 2015, the court found that the patent owner had brought suit in bad faith with the improper motive of crippling its much smaller competitors’ business. The court reinstated the 2009 fee award, added post-judgment interest and further awarded attorneys’ fees and costs during the appeals, for a total of $10.3 million. That award is now on appeal to the Federal Circuit.

Not just for accused infringers

While the facts of Octane and Highmark and much of the fee-shifting commentary revolve around fees sought by accused infringers, 18 (or 24%) of the Section 285 fee awards in this period went to patent owners. Half of those awards came after default judgments, where the court followed the general rule of law which accepts allegations of wilful infringement as true. The associated fee awards in those cases ranged from five to six figures, with one seven-figure award of $1.5 million.

The other half of the fee awards to patent owners ranged from six to seven figures, with an average of $1.9 million, which was higher than the overall average fee-shifting award, as well as higher than the average award to accused infringers during this period. There was a wilful infringement finding in many of these cases, which may have put upwards pressure on the fee awards. The largest award to a patent owner during this period – $3.3 million – was unusual in that the parties stipulated the amount of the award. However, on appeal, the Federal Circuit upheld the award – although not the stipulated amount – and remanded the case for a fee determination.

Thus, while fee awards to date have largely gone to accused infringers (58 awards or 76%), patent owners may take comfort in the fact that the post-Octane framework works in both directions.

Prevailing party

Section 285 provides that: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” As part of our analysis, we tracked the point in the case when a party had prevailed and was seeking fees. The awards during this period came at all stages in the litigation, with 29 (or 38%) before claim construction, 30 (or 39%) after claim construction and 17 (or 22%) after trial. Whether a party had ‘prevailed’ was frequently in dispute and numerous decisions turned on that issue.

Does the court matter?

Perhaps most surprising was how many of the fee-shifting awards were issued by a small group of federal courts. Collectively, the Central District of California (10 awards), the Northern District of California (eight awards) and the Southern District of California (five awards) granted 30% of the 76 awards we studied, which is three times the collective 10% of patent suits filed in those districts. On the other end of the spectrum, the Eastern District of Texas granted just one of the fee awards – in eDekka – as compared to its 44% share of overall patent suit filings.

The 76 fee awards were issued by courts in 29 of the 94 federal court districts, with 16 court districts having issued a single fee award. Delaware had eight awards (11%), which was in line with its 9% share of patent suit filings. The Southern District of New York had six awards; the Northern District of Illinois had five; the District of Columbia had four; the Southern District of Florida and the Eastern District of Pennsylvania each had three; and Maryland, Nevada, the Northern District of Texas and the Western District of Washington each had two.

‘Exceptional’ cases

In Octane, the Supreme Court held that an ‘exceptional’ case is “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 courts closely tracked this language in the fee award decisions, with nearly equal numbers of decisions finding an ‘exceptional’ case based on the litigating position (13 or 17% of the awards) or the litigation manner (14 or 18% of the awards). Nearly half of the decisions (36 awards) expressly found both bases to support the fee award. Six of the exceptional case findings were based on wilful infringement. Seven of the decisions did not articulate a basis for the finding, but generally were in conjunction with a default judgment or an uncontested fees motion.

Generally speaking, the fee award decisions issued shortly after Octane and Highmark were shorter and seemingly more restrained, and the associated fee amounts were on the lower end. However, as the months went on, the fee award decisions seemed to strike a stronger tone and encompass a wider range of activities. In addition to awarding fees for some or all of the district court litigation, more recent decisions also awarded attorneys’ fees and costs relating to:

• re-examination;
• mock trial arguments;
• defending against a related licensing agreement breach;
• appeals and
• pursuing the fees motion.

The courts’ reasoning and the higher review standard of Highmark are thus far supporting these fee awards. Of the 76 fee awards we studied, only about half (34) had been appealed as of the time of writing, with eight fee awards affirmed on appeal and just two reversed. Three of the appeals were withdrawn before a decision from the Federal Circuit and 21 appeals were still pending.

Attorney liability

In six of the Section 285 awards issued during this period, the attorneys shared partial or full liability under 28 USC §1927, Rule 11 and/or Rule 37. Section 1927 states: “Any attorney … who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” Rule 11 pertains to an attorney’s obligation to verify that there is a good-faith and non-frivolous basis before filing any suit or motion; while Rule 37 provides for sanctions for failure to make certain disclosures or cooperate in discovery.

Figure 3. Percentage of fee awards and patent suits

The first of these decisions issued in January 2015. In Intellect Wireless v HTC, the court found the patent owner and its attorneys jointly and severally liable pursuant to Section 285 and Section 1927 for what ultimately would be a $4 million award. As the case progressed to the fee determination stage, the defendants sought to pierce the corporate veil and hold the owner personally liable for the award against Intellect Wireless; Intellect Wireless’ own attorneys agreed with that motion. However, despite having previously found that Intellect Wireless, through its owner, had engaged in inequitable conduct, the court declined to hold the owner personally liable on procedural grounds, since the defendants were seeking to add a new party nearly three years after the original judgment was entered.

In Segan v Zynga, in addition to moving for Section 285 fees, Zynga sought to have the patent owner’s attorneys sanctioned under Rule 11 for filing a frivolous complaint. Segan waived the protection of the attorney work product doctrine to allow the court to assess the attorneys’ pre-filing investigation. The court concluded that the attorneys’ initial claim construction position was “objectively baseless from the start, and no amount of lawyer activity prior to filing suit could have changed that”. After considering holding the firm jointly and severally liable for the full amount of Zynga’s attorneys’ fees, the court decided that a sanction of $100,000 was sufficient to deter Segan’s attorney’s from filing future frivolous patent suits.

Notably, the Segan court commented that the sanction “puts similarly-situated attorneys on notice of the possibility they could be held jointly and severally liable under Rule 11 for an entire section 285 fee award”. The court noted that because patent law was fast evolving and Segan’s attorneys had filed suit three years before Octane was decided, equity counselled against ordering the attorneys to pay the full fee amount.

Other notable cases

There are a number of noteworthy decisions among this initial group of 76 fee awards. These decisions demonstrate a desire to provide a detailed rationale for fee awards in this relatively new area of the law and also signal the courts’ frustration with patent litigation as practised in recent years.

In Kilopass Technology v Sidense the defendant entered into a variable-rate hybrid contingency fee agreement while the litigation was underway, in which part of counsel’s compensation was tied to the recovery of a Section 285 fee award. In deciding its fee award, the court noted that an award of attorneys’ fees under Section 285 had to be reasonable, citing the Supreme Court’s ‘lodestar’ method, which requires “determining the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate”. While recognising that its decision could lead future litigants to structure fee agreements in anticipation of fee shifting, the court concluded that the agreement in this case represented a legitimate reflection of the prevailing rate.

In Universal Electronics v Universal Remote Control, after noting that the case was “over-litigated by both sides”, the court apportioned the fees in the Section 285 award, reasoning that one of the four patents was properly asserted, two were not and only the patent owner’s motion for reconsideration regarding a fourth patent contributed to the exceptional case finding. The court held that requiring the patent owner to pay all of the defendant’s fees “has the potential to over-deter meritorious claims, with implications for access to justice”.

In Novartis v Webvention Holdings, the patent owner had conducted an extensive litigation campaign before the asserted patent claims were rejected in re-examination during the current case. After Novartis (the declaratory judgment plaintiff) moved for judgment and fees, Webvention (the patent owner) filed a covenant not to sue and sought to have the case dismissed for lack of subject-matter jurisdiction. The court found that Novartis was the ‘prevailing party’ within the meaning of Section 285 and dismissed Webvention’s argument that because it had dissolved as a legal entity, Novartis could not recover fees from it or its counsel. Finding that “allowing entities to dissolve to avoid any contractual or other obligation would fly in the fact of any rational public policy”, the court ordered Webvention to identify all principals of the LLC to facilitate the attorneys’ fees award.

Future developments

As the case law under Octane and Highmark continues to develop, legislative changes are brewing that also could affect fee-shifting awards in patent suits. Perhaps most significant is patent reform legislation pending before the House of Representatives and Senate of the US Congress. The Innovation Act of 2015 (HR 9) and the Protecting American Talent and Entrepreneurship Act of 2015 (S 1137) have passed their respective judiciary committees and are ready to come to floor votes.

Each bill contains fee-shifting provisions that would modify Section 285. The House of Representatives bill would require the losing party to pay reasonable fees and costs unless the court found that the losing party’s arguments were “reasonably justified” or “special circumstances make fee-shifting unjust”. This language effectively shifts the burden to the losing party to prove that fees should not be paid. The Senate bill does not go as far; it would require the court to determine whether the losing party’s arguments and litigation conduct were “objectively reasonable” but, as under the current Section 285, the prevailing party would bear the burden of proof. Both bills provide means for a party to seek certification that the opposing party could pay a fee-shifting award.

It is unclear whether patent reform legislation will move forward in this election year. Those in favour of such legislation see it as a way to reduce frivolous litigation, while those opposed argue that further fee-shifting changes will harm legitimate patent enforcement activity and thus stifle innovation. The possibility of such legislation, coupled with the surge in Section 285 awards post-Octane, has some speculating about the rise of legal expense insurance as is currently available in England, where loser-pays fee shifting is the default rule in all civil litigation.

It remains to be seen whether the first two years after Octane and Highmark will be representative of the future fee-shifting landscape. Some have speculated that the wave of multimillion-dollar awards may be an anomaly, as litigants will temper their arguments and conduct in patent suits to avoid potential liability. However, the near-record number of patent suits filed in 2015 indicates that fee-shifting risk has not tempered filings. Further, the potential for venue reform, from either recently introduced legislation or the Federal Circuit’s ruling in In re: TC Heartland, could drive new patent suits to district courts that have been less receptive to fee-shifting awards, at least based on the initial decisions.

While it is difficult to predict with certainty how the law in this area will continue to develop, the fact that nearly one-third of fee-shifting motions have been granted in recent years and the size of recent fee awards caution those involved in patent litigation to be aware of the newly heightened risk and to take appropriate steps to protect their companies and their firms.