What’s Next For Patent Trolls After US Supreme Court? More Risk, For Sure

The United States Supreme Court yesterday issued two rulings that were bad news for patent assertion entities, or “patent trolls”. Thanks to these decisions, trolls and other patentees could be on the hook for millions in fees whenever they bring frivolous patent infringement suits.

Both of yesterday’s rulings concerned whether a losing party in a patent infringement suit must pay the winner’s legal fees. Octane Fitness, LLC v. Icon Health & Fitness, Inc. [pdf] made it far easier for a party wrongfully accused of infringement to obtain a fee award against a patentee. And Highmark Inc. v. Allcare Health Management System [pdf] altered the appellate standard for reviewing such fee awards, making it harder for the Federal Circuit to overturn a trial judge’s award of legal fees.

In most countries, the losing party in a lawsuit routinely pays the winner’s legal fees. The US, however, has a different rule, requiring the loser to pay only in unusual circumstances.

The US fee-shifting rule for patent infringement suits is laid out in Section 285 of the Patent Act: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

The Federal Circuit has interpreted this sentence in a manner quite favourable to patentees. In a series of rulings starting in 2005, the Federal Circuit held that a patentee that loses its patent infringement suit must pay the legal fees of the alleged infringer only if

• the patentee fraudulently obtained the patent, or
• the patentee committed misconduct in the patent infringement litigation, or
• the patentee’s legal claims in the lawsuit “were so unreasonable that no reasonable litigant could believe it would succeed” and the patentee knew its claims were unreasonable.

This was a tough standard to meet, but the Federal Circuit made it still harder by imposing a heightened burden of proof. Whereas other US fee-shifting laws allow a victorious defendant to prove its right to fee-shifting by a preponderance of the evidence, the Federal Circuit held that Section 285 requires a victorious party in a patent infringement case to prove its right to fee-shifting by “clear and convincing evidence.”

All this made it extremely difficult for any alleged infringer to win attorneys fees. That, in turn, discouraged alleged infringers from fighting baseless claims of infringement. It was far cheaper for an innocent defendant to settle rather than engage in a patent infringement suit that would typically run for years and cost millions of dollars in legal fees.

This situation helped promote the growth of patent trolls – companies whose primary business is licensing their patents and suing those who refuse to purchase licences. Trolls could file infringement suits indiscriminately, knowing the companies they were targeting had a strong economic incentive to settle (since the alternative was to pay millions in legal fees in order to vindicate themselves).

Yesterday’s Supreme Court’s decision in Octane Fitness significantly altered this landscape. The court unanimously rejected the Federal Circuit’s interpretation of Section 285 and determined that fee-shifting could occur under much less egregious circumstances. The court 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. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.

Moreover, the Supreme Court held, a party can obtain fee-shifting without providing “clear and convincing evidence” that the case is exceptional. It is sufficient for the party to provide a mere preponderance of the evidence.

Octane Fitness thus makes it far easier for a victorious defendant to convince a trial court to award it attorneys fees in a patent infringement case. And the companion case, Highmark, makes it much harder for the Federal Circuit to overturn any such award of attorneys fees.

Less Power for the Federal Circuit

Highmark started as a patent infringement lawsuit in which the alleged infringer, Highmark, emerged victorious. Then the federal district court found that fee-shifting was appropriate in this case because Allcare had engaged in “vexatious” and “deceitful” conduct. This conduct included: pursuing infringement claims against Highmark long after Allcare’s experts knew these claims were meritless, and asserting defences that Allcare and its attorneys knew were frivolous. The district court ordered Allmark to pay over $5.25 million for its opponent’s legal costs.

The Federal Circuit overturned the award, holding that trial court decisions on fee-shifting were not entitled to any deference. The Federal Circuit found that such decisions should be reviewed de novo, thus providing the appellate court wide latitude to overturn lower court fee shifting rulings.

The Supreme Court yesterday overturned that Federal Circuit decision. According to the high court, the question of whether a litigant has engaged in exceptional conduct meriting fee-shifting was generally “rooted in factual determinations.” And it has long been settled that trial courts are better placed than appellate courts to make factual determinations (because only trial courts have access to witness demeanor and other evidence). Thus, the Supreme Court unanimously held, a trial court’s ruling on fee-shifting is entitled to significant deference. It can be reversed only if an appellate court finds that the lower court’s decision constituted an “abuse of discretion.”

Legal and Economic Effects

The decisions in Octane Fitness and Highmark make fee-shifting more available in patent infringement cases. This moves US law in this area closer to international norms.

Moreover, the two rulings make it financially viable for alleged infringers to fight meritless claims brought by patent trolls.

“Someone targeted by [a patent troll] now has a better chance to fight because they could get back attorneys fees,” said Cynthia E. Kernick, a partner in the law firm of Reed Smith who represented Highmark before the Supreme Court.

The risk of paying millions for an opponent’s legal fees is likely to force patent trolls to think twice before filing infringement suits. Currently, trolls “typically get a patent and sue everyone in an industry” without doing the detailed investigation needed to determine whether individual defendants are actually infringing the patent, said Kernick. In the wake of Octane Fitness and Highmark, that would be extremely risky. The decisions thus seem likely to pressure trolls into performing detailed pre-suit investigations (driving up their costs) and decreasing the number of lawsuits they file. That could significantly damage the business model of patent trolls.

That would be great news for companies doing business in the US. From 2007 through October 2010, such companies lost over $83 billion annually because they had to contend with patent trolls, according to a study published in 2011 by Profs. James E. Bessen and Michael J. Meurer of Boston University Law School. That astronomical amount includes not just legal fees, but the opportunity costs of removing engineers, scientists and executives from their ordinary work in order to address infringement claims brought by trolls. This $83 billion is equivalent to more than 25 percent of the amount spent annually by US companies on industrial research and development. From that standpoint, if Octane Fitness and Highmark significantly discourage the activity of patent trolls, these cases could give the US economy a big boost.

Steven Seidenberg is a freelance reporter and attorney who has been covering intellectual property developments in the US for more than 15 years. He is based in the greater New York City area and may be reached at info@ip-watch.ch.