Federal Circuit Decides A Couple of Big Fee Award Cases

On Monday, the Federal Circuit issued a two-page per curiam nonprecedential Rule 36 order affirming the judgment in R+L Carriers, Inc. v. Qualcomm, Inc.  I would have had no idea what this was about, but Law360 published an article explaining that the affirmance means that Qualcomm gets to keep a $1.8 million attorneys' fee award in a dispute involving a shipping logistics patent.

Then today, the court affirmed in part, vacated in part, and remanded in In re Rembrandt Techs., LP Patent Litig., a case in which the district court had awarded $51 million in fees to a group of defendants whose individual cases had been consolidated by the district court.  The opinion today is quite lengthy and fact-specific, but here is the gist from the beginning of the opinion (p.4):

This appeal derives from a multitude of patent infringement actions that plaintiffs-appellants Rembrandt Technologies, LLC and Rembrandt Technologies, L.P. (collectively, “Rembrandt”) filed in the mid-2000s against dozens of cable companies, cable equipment manufacturers, and broadcast networks. The cases were consolidated in the District of Delaware. After several years of litigation, the district court entered final judgment against Rembrandt as to all claims.

Many of the defendants (collectively, “Appellees”) thereafter filed a motion requesting attorney fees under 35 U.S.C. § 285. Nearly four years after the litigation ended, the district court issued a brief order granting that motion and declaring the case exceptional. In re Rembrandt Techs., LP Patent Litig., No. 1:07-md-01848-GMS (D. Del. Aug. 20, 2015), ECF No. 951 (“Exceptional Case Order”). The court then granted the bulk of Appellees’ requests for fees, including nearly all of the attorney fees Appellees incurred in the litigation. In re Rembrandt Techs., LP Patent Litig., No. 1:07-md-01848-GMS (D. Del. Aug. 24, 2016), ECF No. 1013 (“First Fees Order”). In total, the court awarded Appellees more than $51 million in fees. In re Rembrandt Techs., LP Patent Litig., No. 1:07-md-01848-GMS (D. Del. Mar. 2, 2017), ECF No. 1044 (“Second Fees Order”).

Rembrandt appeals both the district court’s exceptional-case determination and its fee award. We conclude that the district court did not abuse its discretion in deeming this case exceptional, but that the court erred by failing to analyze fully the connection between the fees awarded and Rembrandt’s misconduct. We thus affirm the district court’s exceptional-case determination, vacate the district court’s fee award, and remand for further proceedings. . . .

An interesting set of substantive issues involves the interplay between inequitable conduct, which was one of the bases for finding the case exceptional, and fee awards. Normally, inequitable conduct is a defense that, when proven by clear and convincing evidence, renders a patent unenforceable.  There are two elements--intent and materiality--and the latter usually goes to whether someone associated with the prosecution of the patent withheld information that, if known to the examiner, would have resulted in a claim not being allowed.  Here, however, the conduct at issue related not to the prosecution but rather to the revival of two patents that the assignor had allowed to lapse for failure to pay maintenance fees.  The court concludes that alleged misconduct surrounding a revival nevertheless can constitute inequitable conduct (p.29 n.**):

In setting forth its test for materiality, Therasense contemplated statements made to the PTO during initial prosecution of a patent. 649 F.3d at 1291–95. But statements critical to the “survival of the patent”—even though they do not, strictly speaking, bear on patentability—also can be material within the meaning of Therasense. See Ulead Sys., Inc. v. Lex Comput. & Mgmt. Corp., 351 F.3d 1139, 1146 (Fed. Cir. 2003) (finding that a “false declaration of small entity status” in an effort to reduce the required maintenance fees satisfied the materiality prong of the inequitable conduct test).

Anyway, in this case the district court concluded that the assignor's revival of two patents constituted inequitable conduct, because the patents had been allowed to lapse not for inadvertence but because of a deliberate decision that they lacked commercial value.  The Federal Circuit agrees that the "the PTO would not have revived the patents if it had known that Paradyne consciously allowed them to expire. In other words, the statement was material to patentability—or at least continued enforceability" (p.29).  The court also affirms the finding that the assignor's conduct was intentional. Without going through all the evidence, I'll note only that an interesting question is whether the normal clear and convincing evidence standard applies to the inequitable conduct finding, or whether only a preponderance of evidence was required, given that the district court cited inequitable conduct on the part of the assignor as one of the reasons for finding the case exceptional for purposes of the attorneys' fee statute (section 285).  In the section 285 context, the standard according to Octane Fitness is merely preponderance of the evidence.  So which standard--clear and convincing evidence, or preponderance of the evidence--governs in determining whether a case is exceptional due to inequitable conduct?  Here, the court concludes that it doesn't matter, since it would find no abuse of discretion regardless of which standard applied (see pp. 26-27, and noting different views among the lower courts on this issue). Finally, the court concludes that for purposes of section 285 the case can be exceptional even if the assignee (Rembrandt) merely should have known of the assignor's alleged inequitable conduct (p.33):

Rembrandt argues that the district court’s implicit application of the “should have known” standard imposes too high a burden on Rembrandt and conflicts with our guidance in Therasense. See 649 F.3d at 1290 (“A finding that the misrepresentation or omission amounts to gross negligence or negligence under a ‘should have known’ standard does not satisfy [the] intent requirement.”). But Appellees are right that Rembrandt conflates the inequitable conduct and exceptional case inquiries. The first question—the one governed by Therasense—is whether Paradyne committed inequitable conduct. The second question—to which Therasense does not apply—is whether Paradyne’s conduct renders Rembrandt’s case exceptional. Rembrandt’s reliance on Therasense in the latter context is misplaced.

It remains to be the seen what the ultimate award will be.  The court concludes the opinion by stating that the district court has a lot more work to do:

In the run-of-the-mill patent infringement case involving a few patents and a couple of defendants, a finding of pervasive misbehavior or inequitable conduct that affects all of the patents in suit may justify an award of all of the fees incurred. But this massive case featured nine patents and dozens of defendants, and the claimed misconduct affected only some patents asserted against some defendants. Even if Rembrandt’s misconduct, taken as a whole, rendered the case exceptional, the district court was required to establish at least some “causal connection” between the misconduct and the fee award. Id. What the district court did here—award all fees with no explanation whatsoever of such a causal connection—was not enough.

The most appropriate course, therefore, is to remand for the district court to determine in the first instance how much of the claimed fees Rembrandt should pay. This does not require a tedious, line-by-line investigation of the hours Appellees expended. As the Supreme Court recently explained in Goodyear, “‘[t]he essential goal’ in shifting fees’ is ‘to do rough justice, not to achieve auditing perfection.’” Id. (quoting Fox v. Vice, 563 U.S. 826, 838 (2011)). “The court may decide, for example, that all (or a set percentage) of a particular category of expenses—say, for expert discovery—were incurred solely because of a litigant’s bad-faith conduct.” Id. “And such judgments,in light of the trial court’s ‘superior understanding of the litigation,’ are entitled to substantial deference on appeal.” Id. (quoting Hensley, 461 U.S. at 437).

We therefore vacate the district court’s fee award and remand for the district court to conduct the appropriate analysis in the first instance (p.42).

The court also notes, earlier in the opinion, that the amount of fees awarded are intended to be "compensatory, not punitive," and that deterrence is not a legitimate rationale for determining the amount (pp. 38-39). 

Update:  I should also note that yesterday the Federal Circuit issued a per curiam order vacating the judgment in Realvirt LLC v. Iancu in light of the court's recent fee award opinion in NantKwest.  For discussion of the latter, see here.