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Federal Circuit Signals "Cut and Run" Settlements Should Factor in Fee-Shifting

May 22, 2015 | Posted in : Fee Award, Fee Award Factors, Fee Issues on Appeal, Fee Jurisprudence, Fee Shifting

A recent The Record story, “Federal Circuit Signals Nuisance Settlements Should Factor in Fee-Shifting,” reports that two judges on the U.S. Court of Appeals for the Federal Circuit seemed to suggest during oral arguments that a patent owner’s pattern of suing multiple parties and then settling for modest amounts should be a factor judges consider when deciding whether to award fees under the U.S. Supreme Court’s Octane Fitness ruling.

An attorney representing a subsidiary of IP Nav, one of the country’s largest patent-monetization firms, argued in SFA System v. Newegg that there was no evidence his client litigated without regard to the merits of the case.  But the Federal Circuit judges Kathleen O’Malley and Todd Hughes suggested that the mere pattern of settlements in the litigation—which involved 86 other operating companies—might be enough alone to draw an inference.

“In all those cases involving this patent over the years, have any of them ever proceeded to a decision, a merits decision on infringement and/or validity,” Hughes asked John Edmonds, the Collins Edmonds Pogorselski partner representing SFA Systems LLC.

SFA sued a host of software manufacturers and retailers over a patent on sales force automation.  Many of the cases settled in the $25,000 to $50,000 range, Mark Lemley, partner at Duris Tangri said, though he acknowledged under questioning that some manufacturers paid millions and one retailer paid more than $500,000.

Newegg moved for fees, saying that SFA and IP Nav never intended to take the case through judgment, and instead were looking to score cheap settlements.  Davis disagreed.  “The fact that SFA has filed several lawsuits against numerous defendants is insufficient to render this case exceptional,” he wrote.  “In many cases, patent infringement is widespread and the patent owner may be forced to revert to widespread litigation against several infringing parties to enforce its intellectual property rights.”

Federal Circuit Judge Hughes picked up that thread at the outset of the appellate argument.  “What if these patents aren’t actually worth that much money?” he asked Lemley.  SFA’s calculation might be, “We’ll spend money to file a complaint.  If the defendants realize they’re infringing they’ll pay for the small value of these patents, and we’ll move on.  If somebody’s going to fight it, we're not going to spend $5 million when our damages are only $50,000."

But O’Malley then posed a question that might cause nonpracticing entities some heartburn.  “Are you saying under the totality of the circumstances,” he asked, “if you have someone whose entire strategy is to use litigation for an improper purpose, that that would be enough, under Octane ?