A recent Law 360 article by Lionel Lavenue, Amanda Stephenson, R. Benjamin Cassady. and Brooke Wilner of Finnegan LLP, “Evolving Case Law Elucidates Atty Fees For Patent Litigants” reports on recent case law development in awarding attorney fees in patent litigation. This article was posted with permission. The article reads:
Title 35 of the U.S. Code, Section 285, in its entirety, states that "[t]he court in exceptional [patent] cases may award reasonable attorney fees to the prevailing party." This means that if a party prevails in an "exceptional" case, the court may award it upwards of millions of dollars in attorney fees. Unsurprisingly, the high value of these fees in often complex and high-stakes patent litigation has encouraged much debate over who can recover, and how they can recover, fees under the deceptively brief Section 285.
Though some decisions from the U.S. Court of Appeals for the Federal Circuit have clarified some answers to those questions, refining the definition of a "prevailing party" and explaining some circumstances when a court has jurisdiction to award attorney fees under Section 285, ambiguity remains. For instance, uncertainties remain over what is required for a party to be deemed prevailing and when courts have jurisdiction to award fees. Special circumstances, such as when an intervenor, or other entity whose involvement was limited and tangential to the main action, seeks attorney fees, further cloud the issues. Is such an entity a prevailing party in a patent case under Section 285, such that the court has authority to award attorney fees?
Recent decisions in the Federal Circuit and other courts have provided some guidance for these questions. For example, in My Health Inc. v. ALR Technologies Inc., the U.S. District Court for the Eastern District of Texas recently found, agreeing with a long line of cases, that a nonparty can be held liable for exceptional fees under Section 285. And for its part, the Federal Circuit clarified this year, in Mossberg & Sons Inc. v. Timney Triggers LLC, what makes a defendant a prevailing party. These recent decisions, when combined with the growing body of law on Section 285, give crucial and valuable insight to parties seeking attorney fees under Section 285 and defending against such requests.
When does a court have jurisdiction to award attorney fees under Section 285?
Determining whether and when a court has jurisdiction to award fees under Section 285 depends on what, exactly, the nature of an award under Section 285 is — a claim, cause of action, a sanction, a defense or something else. Courts have made clear that it is not a standalone cause of action; i.e., not a claim or controversy. In other words, a request for an award of attorney fees under Section 285 cannot be pled independently and cannot support jurisdiction on its own. It must be collateral to an independent controversy over which the court has (or had) subject matter jurisdiction.
But this creates a curious procedural posture, as fees under Section 285 cannot be awarded until there is a prevailing party, i.e., when no controversy remains and jurisdiction for the original proceeding has terminated. However, the U.S. Supreme Court, in Cooter & Gell v. Hartmarx Corp., confirmed that "district courts may award costs after an action is dismissed for want of jurisdiction" and that motions for attorney fees are "independent proceedings supplemental to the original proceeding and not a request for a modification of the original decree."
Thus, Cooter clarified that the imposition of attorney fees is not a judgment on the merits, but rather a determination of a collateral issue. And, consistently with Cooter, the Federal Circuit has held that a court retains jurisdiction to decide requests for attorney fees under Section 285 after the court otherwise loses subject matter jurisdiction. Thus, Section 285 is an ancillary issue over which a court will retain jurisdiction so long as it had jurisdiction over the underlying controversy and can properly be thought of as a sanction or remedy. Indeed, in some cases, the Federal Circuit has described the grant of attorney fees under Section 285 as a sanction.
At its core, though, Section 285 provides one of several remedies available to prevailing parties in patent cases. Indeed, "[t]he purpose of Section 285 is to reimburse a party injured when forced to undergo an 'exceptional' case." Consistently with this purpose, courts have found that a litigant cannot avoid a prevailing party determination, and thus exposure to an attorney fee award, simply by dismissing their claims when it becomes clear that they have lost.
Indeed, such "mid-case mootness" does not necessarily remove a court's jurisdiction to determine which party is prevailing under Section 285, because "[w]here [parties] unilaterally dismiss cases after adverse findings, or move to dismiss them after granting a covenant not to sue, the [other party] is the prevailing party." In patent cases, the issue of the nature of the dismissal itself may be considered a live controversy conferring jurisdiction, even where a judgment has cancelled all relevant patent claims.
What is required for a party to be deemed prevailing?
Whether jurisdiction to award fees exists is not the only issue — courts may only grant attorney fees under Section 285 to prevailing parties. Of course, a party winning on every theory it proposed would certainly be a prevailing party. But other victories may nonetheless allow a party to be characterized as prevailing under Section 285. The Supreme Court has held that the touchstone of the prevailing party inquiry is "the material alteration of the legal relationship of the parties." Thus, a favorable judgment on the merits is not explicitly required. Instead, courts consider whether the court's decision, action or order — a "judicially sanctioned change in the legal relationship of the parties" — either "effects or rebuffs a plaintiff's attempt to effect" the alteration in the parties' relationship.
Accordingly, a dismissal with prejudice is enough to confer "prevailing" status. In Raniere v. Microsoft Corp., for example, the Federal Circuit found that the court's dismissal with prejudice of plaintiff's claims was enough to make the defendant a prevailing party. In fact, the Raniere court did not even adjudicate any patent claim—the plaintiff's claims were dismissed for lack of standing. Dismissals with prejudice, even if they do not resolve patent claims, may thus be sufficient to confer "prevailing" status.
Not all dismissals will do, however. Recently, in O.F. Mossberg & Sons Inc. v. Timney Triggers LLC, the Federal Circuit found that a voluntary dismissal without prejudice following successful post-grant proceedings was not sufficient to make the defendant a prevailing party. Although the defendant had prevailed in trial proceedings at the Patent Trial and Appeal Board, a voluntary dismissal takes effect immediately upon giving notice, and thus the court's order to dismiss did not have the necessary judicial force — i.e., there was no judicially sanctioned change to the parties' legal relationship.
These cases highlight that winning on the merits may not always equate to prevailing under Section 285. Timney Triggers won its case, after all, achieving a dismissal without prejudice after successful post-grant proceedings. And Microsoft achieved a victory on constitutional grounds, not on the merits of its patent defense.
Thus, prevailing on the merits is not required; prevailing in the correct way is. A party seeking to be deemed prevailing must prove (1) that the court decision which it believes makes it prevailing is indeed a final court decision with the necessary judicial imprimatur; and (2) that the relationship between it and the opposing party was materially altered in its favor.
When is a party, such as an intervenor or other entity whose involvement was limited and tangential to the case, entitled to attorney fees?
Where the Section 285 inquiry gets particularly thorny is where a party other than plaintiff or defendant seeks a remedy of attorney fees under Section 285. After all, Section 285 allows that remedy for any prevailing party — it does not distinguish between plaintiffs, defendants and third parties.
Third parties have many times been made to pay attorney fees under Section 285. Even if a party was not an original party to the suit, but rather joined in its sole capacity as a third party defendant, for example, the case law is unanimous: Courts have the authority to award fees against a nonparty.
One special class of third parties stands out in the limited case law on this issue — shareholders. Recently, in My Health v. ALR Technologies, the court clarified the state of the law on this issue, finding that corporations' shareholders can be held liable for deceptive conduct that leads to an exceptional case finding and the award of Section 285 attorney fees.
Just as third parties may be ordered to pay fees under Section 285, so too are they likely able to seek them. Although there have been relatively few cases where such parties have sought attorney fees under Section 285, there is no case indicating that such parties may not do so.
In Sony Electronics, Inc. v. Soundview Technologies, for example, a third-party defendant sought Section 285 attorney fees as part of its prayer for relief related to an inequitable conduct issue. The court found that the third-party defendant's actions in seeking Section 285 attorney fees as a remedy was "wholly appropriate" but denied the request because the inequitable conduct issue was moot. Other courts have assumed that third parties or nonparties can recover fees under Section 285 but then found that those cases were not exceptional. These cases were predominantly decided before the formation of the Federal Circuit.
The enticing remedy of attorney fees under Section 285 has provided incentive for parties to litigate over the brief statute's meaning for decades. Recent decisions have clarified when a court has jurisdiction to grant attorney fees, when a party is prevailing, such that it could receive fees under Section 285, and how the section applies to third parties. But with so much money potentially on the line, parties can expect more litigation in the years to come.