A recent Law 360 story, “Collecting Fees Still Tough After Octane, Highmark Cases,” reports that more than a year after the U.S. Supreme Court’s Octane and Highmark decisions made it easier for courts to sanction nonpracticing entities and others that pursue meritless patent cases, lawyers say the rulings have helped accused infringers gain leverage to resolve weak cases earlier and get attorneys' fees awarded, but not to collect them.
The high court held on April 29, 2014, that judges can award attorneys' fees in a case that merely "stands out from others," rejecting the Federal Circuit's rule that sanctions are appropriate only when a case is "objectively baseless" and "brought in subjective bad faith" in Octane Fitness LLC v. Icon Health & Fitness Inc. The same day, it ruled in Highmark Inc. v. Allcare Health Management Systems Inc. that a judge's decision to award attorneys' fees is entitled to deference on appeal, stopping the Federal Circuit from reviewing fee awards on a de novo basis.
A year before the high court holdings, district courts granted 13 percent of attorneys’ fee motions under Section 285 of the Patent Act, based on a study by the Federal Circuit Bar Association. From April 29, 2014, to March 1, 2015, district courts showed a greater willingness to approve fee awards, granting 27 motions out of 63 cases, or about 43 percent, according to a study in the Berkeley Technology Law Journal in July.
“The rate of attorneys’ fee awards being granted has increased dramatically,” said Shawn Hansen, a partner at Nixon Peabody LLP. “As a result, [accused infringers] are more likely to file attorneys’ fee motions and to succeed in those efforts.”
The Octane ruling in particular has not just led accused infringers to win more attorneys’ fee motions, it also has strengthened defendants’ position in settlement negotiations, according to Lionel Lavenue, a partner at Finnegan Henderson Farabow Garrett & Dunner LLP, which represented Allcare in the high court case.
“If the plaintiff says it’ll dismiss the case without prejudice and each party has to bear its own fees, I’ll say, ‘No, we’re going to go after 285,’ which opens up an advantage to the defendant,” he said. “Since Octane, there are additional negotiation advantages in the resolution of a case. It could be a payment — which a nonpracticing entity never wants to do — or it could be some period of the plaintiff standing down or some other type of benefit.”
While the high court decisions aren’t deterring nonpracticing entities from filing patent cases, the rulings do seem to be reducing their appetite for fighting a case to the bitter end, according to Lavenue.
“In the old days, plaintiffs, especially nonpracticing entities, would be willing to fight a case up until the point a court issued an opinion saying they lost, but now we’re seeing nonpracticing entities willing to end a case earlier,” he said. “All the nonpracticing entities that bring those really thin cases will continue to bring them, but if the defendant makes a direct attack on the weakness of the case, they will be more likely to drop it.”
He said he has seen nonpracticing entities “dialing back at all phases,” such as dismissing cases before an initial settlement conference, following a successful patent challenge at the Patent Trial and Appeal Board, and after a Markman hearing.
“If defendants can put pressure on a nonpracticing entity early, that can be a benefit,” he said. “When I’m defending against a really bad case, I will go to the nonpracticing entity and say, ‘This is your first, last and final opportunity to drop the case before we get into the period where we consider Rule 11 sanctions or a 285 motion.’”
Both plaintiffs and defendants are recognizing that attorneys’ fees are part of the equation in any case, and not just at the end of a case, but throughout the proceeding, according to Trevor Carter, a partner at Faegre Baker Daniels LLP.
Carter and Faegre attorney Andrew McCoy secured an attorneys’ fee award for their client Intex Recreation Corp. in January when a District of Columbia federal court found that the defendant in the declaratory judgment case improperly pressed ahead with claims that Intex’s inflatable air mattresses infringed its patent following a Markman ruling in Intex’s favor. The court ruled that its claim construction foreclosed any reasonable argument that Intex’s mattresses infringed the patent, yet Team Worldwide Corp. refused Intex’s proposal to stipulate to non-infringement only to lose on a summary judgment ruling.
“At every stage of the case, both sides need to look at the merits of every claim, counterclaim and defense they are pursuing … to make sure they are still meritorious,” he said. “If the court ultimately determines the claims aren’t meritorious, even if it occurs midcase, the party could be at risk of paying a fee award.”
Although courts are granting attorneys’ fees more frequently, the prevailing side is not likely to recoup all of its fees. The Berkeley study noted that post-Octane, the majority of the courts have limited the fee awards to the litigation misconduct and apportioned the fees to the “exceptional” behavior. As a result, most of the fee awards range between $200,000 and $300,000.
“Because the fee is limited to ‘exceptional behavior,’ motion winners aren’t going to get back all of their fees in the case, which can easily run in the millions — only a fraction,” said Colleen Chien, an associate professor at Santa Clara Law.
The Highmark decision gives district courts more discretion in deciding attorneys’ fee motions with a reduced likelihood they will be overturned on appeal, but it is important for litigants to be sensitive to the fact that this creates more work for district courts in deciding when to shift fees and by how much, according to Hansen.
“How much of the prevailing party’s attorneys’ fees are the result of litigation misconduct or of an exceptionally weak position taken by the nonprevailing party is something that district courts are wrestling with, and I’m not sure there are any clear answers,” he said.
Even if accused infringers win a fee award from the court, they are running into obstacles with actually recovering the award, particularly from a nonpracticing entity, which can structure its corporate organization to be effectively judgment-proof, according to Hansen.
“The issue for operating companies is whether the nonpracticing entity will end up paying a judgment of attorneys’ fees even if they are able to obtain one,” he said. “Nonpracticing entities often are set up in such a way that they can file for bankruptcy and be judgment-proof. While they would lose whatever capital is in the entity at the time — mainly the patents — the attorneys’ fee award could far exceed the value of that, and the judgment holder wouldn’t be able to collect the remainder of the judgment.”
Lavenue said he has seen cases where the accused infringer has pursued Section 285 motions while knowing that the nonpracticing entity wouldn’t be able to pay a dime. Yet seeking the motion was important for sending a message to other potential plaintiffs. “
Sometimes you have to fight anyway,” he said. “Sometimes it’s required to show all the others waiting in line that you will fight.”
In addition to the challenge of collecting fees, Lavenue said he’s noticed that when he has a client that is part of a joint defense group, it can be difficult to convince many of the other defendants to make use of the Section 285 tool to gain leverage in settlement negotiations.
“That’s an odd issue I’ve had over and over again when I have wanted to use a Section 285 motion as a mechanism in the case,” he said. “A lot of lawyers seem to have an inherent pessimism that judges will apply the new standard set out by the Supreme Court. If it’s just my client and the plaintiff, all I have to do is convince my client. But if there are 30 other defendants, it can be more difficult because you have to get half to agree before you have a chance.”
On the legislative front, a pending bill in the U.S. House of Representatives, the Innovation Act, includes a fee-shifting provision that would require the losing party in patent suits to pay the prevailing party's attorneys' fees in many cases, while a measure in the U.S. Senate, the Protecting American Talent and Entrepreneurship Act, seeks to mandate fee-shifting in more cases.
Although courts are increasingly granting fee motions, they aren’t shifting fees just because a plaintiff loses, but the legislation would move more toward a system where the loser pays, according to Fabio Marino, a partner at McDermott Will & Emery LLP. More district court decisions on attorneys’ fee motions need to come down before it can be said that the Octane and Highmark rulings have obviated the need for legislation, he said.