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Article: US Claims Court Grants Fee-Shifting in Patent Litigation

September 9, 2019 | Posted in : Articles, Contingency Fees / POF, Expenses / Costs, Fee Jurisprudence, Fee Shifting, Fee Statute

A recent Law 360 article by Lionel Lavenue and Benjamin Cassady, “Claims Court Clears Cowebs for Fee-Shifting in Patent Litigation,” report on fee-shifting provision in patent litigation.  This article was posted with permission.  The article reads:

The U.S. Court of Federal Claims may grant attorney fees to certain patent owners who successfully litigate infringement claims against the federal government.  The claims court obtained this authority in 1996 but did not exercise it until March 2019, when it granted Hitkansut LLC $4.4 million in fees on top of a $200,000 damages judgment.

And though more than two decades elapsed before that first fee award, the second followed just three months later.  On June 27, 2019, on the back of a $12.4 million damages judgment, the claims court granted FastShip LLC $7.1 million in fees and costs.  Do these decisions herald a new era of patent litigation at the claims court?  That may be premature.  But it should make patent owners, attorneys and litigation finance companies take notice.

28 U.S.C. Section 1498(a)

When Uncle Sam infringes a patent, 28 U.S.C. Section 1498(a) limits the patent owner’s legal recourse to suit in the claims court for “reasonable and entire compensation” — typically a reasonable royalty.  No matter how egregious its infringement, the government is immune from enjoinder and enhanced damages.

Pursuant to a 1996 amendment, however, “reasonable and entire compensation” includes attorney and expert fees for some subset of prevailing patent owners — independent inventors, nonprofit organizations and entities with no more than 500 employees. (FastShip and Hitkansut both qualified.) For this subset of patent owners, Section 1498(a) presumes the plaintiff’s entitlement to fees.

But it forecloses their recovery in two situations: where recovery would be unjust or where the government-defendant’s position was “substantially justified.”  Before Hitkansut, the government always satisfied the latter exception, defeating the plaintiff-favoring presumption.

FastShip v. United States

The FastShip decision touches on a gamut of Section1498(a) topics in its ranging 34 pages.  Two of the more consequential issues include: litigation financing’s effect on a patent owner’s standing to request fees; and the fee-shifting inquiry’s occupation with prelitigation conduct.

As to litigation financing, FastShip’s receipt of funds from an entity controlled by one of its own counselors of record did not disrupt its standing to requests fees under §1498(a).  One of FastShip’s attorneys, Donald Stout both represented FastShip at critical junctures and managed a company that invested $600,000 in FastShip’s case.

Stout is better known as the co-founder of NTP Inc., the beneficiary of a $612 million infringement settlement from Research in Motion Ltd. in 2006.  Court of Federal Claims Judge Charles Lettow found Stout’s financing arrangement with FastShip immaterial to the plaintiff’s standing to request fees.  To hold otherwise would frustrate Congress’ purpose in enacting Section 1498(a)’s fee-shifting provision: incentivizing the prosecution of meritorious infringement claims against the government.

With standing established, the claims court proceeded to evaluate the government’s position, concluding that it was not “substantially justified,” partly due to prelitigation conduct.  The claims court highlighted some unreasonable government conduct during litigation: presenting expert analysis with errors that ranged from convenient to nonsensical, mischaracterizing an extraordinarily skilled expert as ordinary and misstating the law of enablement.  But the court was particularly concerned with the government’s willful infringement and its unresponsiveness to the plaintiff’s initial administrative complaint.

Specifically, FastShip’s suit originated from its solicitation of a subcontract from a U.S. Navy contractor.  As part of its pitch, FastShip divulged its invention: a semi-planing monohull ship.  Though no subcontract materialized, FastShip soon discovered that the contractor had incorporated its designs into navy vessels.

FastShip filed an administrative claim with the navy; two years of silence followed, culminating in the navy’s two-page, perfunctory denial of wrongdoing.  These actions, supplemented by its questionable litigation conduct, rendered the government’s overall position not “substantially justified,” even though the claims court found the government’s conduct reasonable in other respects.

Patent Trends in FastShip

FastShip and Hitkansut may hint at Octane Fitness LLC v. ICON Health & Fitness Inc.'s indirect influence on the claims court.  Moreover, both decisions raise issues, likely to be addressed on appeal, relevant to patents’ status as property — an issue that continues to percolate to the U.S. Court of Appeals for the Federal Circuit’s docket.

With Hitkansut, and now FastShip, the claims court has, like federal district courts, proved amenable to fee-shifting in the patent context.  Federal district courts now shift attorney fees in one-third of patent infringement cases.  That represents a stark increase from, for example, 2011, a few years before Octane Fitness, where the U.S. Supreme Court returned broad discretion to trial judges to determine which cases justify fee-shifting.

Though Octane does not control Section 1498(a)’s fee-shifting provision, the claims court has only now exercised said provision in the post-Octane era.  A prevailing sympathy for fee-shifting in the patent context, marked by Octane, may have influenced these recent claims court opinions.

Yet, FastShip’s impact may be short-lived; the government will likely appeal FastShip, as it has the Hitkansut award.  An appeal presents another opportunity for the Federal Circuit to grapple with one of the more significant questions in the field: Are patents property?

Though recent cases have muddled the question,[16] courts have historically construed the government’s unauthorized patent use as an eminent-domain taking of a license. Section 1498(a), then, supplies “just compensation” to affected patent owners.

Twenty years ago, in B.E. Meyers & Co. Inc. v. United States, the claims court reasoned that the government cannot be punished for taking — willfully or otherwise — that which it has the authority to condemn.  Recognizing the government’s authority to take a patent license, Meyers held that the willfulness of a lawful taking can never justify punitive fee-shifting against the government.

FastShip and Hitkansut, of course, implicitly rejected that theory — willfulness supported both awards.  On appeal, the government will likely argue, as it did at trial, that the claims court’s substantially justified inquiry should have ignored any prelitigation conduct, including the nature of the government’s infringement.  The Federal Circuit, thus, has an opportunity to affirm the Meyers theory and its underlying premise that patents are property subject to eminent domain.

The court, however, has more attractive vehicles for resolving this issue, including recently docketed Oil States Energy Services LLC v. Greene's Energy Group LLC follow-on suits that present the patents-as-property question more squarely.  As cases present this question with growing frequency, the Federal Circuit is poised to definitely resolve it (and likely do so in a Section 1498(a) action).

Practical Implications

In clearing the cobwebs from Section 1498(a)’s fee-shifting provision, the claims court has increased the allure of patent suits against the government — including suits where litigation costs would dwarf potential damages.  Hitkansut’s and FastShip’s vindication of litigation financiers and attorneys operating on contingency in this space will only spur their further participation.  And the awards give leverage to licensors negotiating with government agents and contractors.

That said, fee-shifting under Section 1498(a) only benefits the three named classes of patent owners: independent inventors, nonprofit organizations and entities with no more than 500 employees.  Hitkansut and FastShip supply little obvious insight for larger, for-profit plaintiffs litigating infringement against the government, who cannot recover attorney fees under Section 1498(a) or 35 U.S.C. Section 285.

But, because of Hitkansut and FastShip, the potential value of a patent, held by a large, for-profit company and infringed by the government, surges when transferred to a member of one of the named classes.  Some larger patent owners may thus nonetheless still benefit from a strategic transfer made in the shadow of FastShip.

Lionel M. Lavenue is a partner, R. Benjamin Cassady is an associate, and Regan Rundio is a law clerk at Finnegan Henderson Farabow Garrett & Dunner LLP.