Monday, October 28, 2013

Congressman Goodlatte's New Patent Bill's Provision on Attorneys' Fees

Full text of the bill (called the Innovation Act) is here.  If enacted, it would introduce a number of reforms, including heightening the pleading burden for patent infringement, limits on discovery until claim construction has taken place, and requiring more transparency with respect to patent ownership.  Good coverage at Patently-O, with some comments suggesting the bill has a reasonable chance of passing.  From the standpoint of remedies, the most important provision is section 3(b) on attorneys' fees.  In relevant part it reads:
(1) AMENDMENT.—Section 285 of title 35, 10 United States Code, is amended to read as follows:
‘‘§ 285. Fees and other expenses
‘‘(a) AWARD.—The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position of the nonprevailing party or parties was substantially justified or that special circumstances make an award unjust.
 ‘‘(b) RECOVERY.—If a nonprevailing party is unable to pay reasonable fees and other expenses awarded by the court pursuant to subsection (a), the court may make the reasonable fees and other expenses recoverable against any interested party joined pursuant to section 299(d). . . ."
Presumably a lot will turn on how the term "substantially justified" is interpreted.  According to the Judiciary Committee's Section-by-Section Analysis, this provision "aligns fee shifting in patent cases with the standard that is used for awarding fees against the U.S. under the Equal Access to Justice Act (28 U.S.C. §2412(d)). The EAJA was enacted in 1980, and there is now a well-developed body of case law explaining what 'substantially justified' means in the fee-shifting context. The standard is reasonably fair and predictable and is reliably enforced. The provision also allows for limited joinder of parties (ex: parent entity) to satisfy a fee-shifting award."  Here is the text of the Equal Access to Justice Act (EAJA).  Section (1)(A) provides:
Except as otherwise specifically provided by statute, a court shall award to a prevailing party other than the United States fees and other expenses, in addition to any costs awarded pursuant to subsection (a), incurred by that party in any civil action (other than cases sounding in tort), including proceedings for judicial review of agency action, brought by or against the United States in any court having jurisdiction of that action, unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.
You also may recall that some questions relating to the current law on fee awards in patent cases are before the Supreme Court this term, as explained here.  When the Federal Circuit denied a rehearing en banc in one of those two cases, Highmark, Inc. v. Allcare Health Mgt. Sys. Inc., 701 F.3d 1351, both Judge Dyk (joined by Judge Newman), concurring, and Judge Moore (joined by Judges Rader, O'Malley, Reyna, and Wallach) dissenting, mentioned the EAJA standard as it relates to the standard of review on appeal.  Judge Moore's dissent also notes the following about the "substantially justified" standard:
In Pierce v. Underwood, 487 U.S. 552 (1988), the Supreme Court analyzed the EAJA fee-shifting provision and concluded that the “substantially justified” language means “justified to a degree that could satisfy a reasonable person,” which is “no different from the ‘reasonable basis both in law and fact’ formulation” adopted by the vast majority of the appellate courts having addressed the issue. 487 U.S. at 565. As a result, the Court concluded that the issue should be reviewed under the abuse of discretion standard. The Court reasoned that the district court was in the best position to make this determination: 
[D]etermining whether mixed questions of law and fact are to be treated as questions of law or of fact for purposes of appellate review . . . has turned on a determination that, as a matter of the sound administration of justice, one judicial actor is better positioned than another to decide the issue in question. We think that consideration relevant in the present context as well, and it argues in favor of deferential, abuse-of-discretion review. To begin with, some of the elements that bear upon whether the Government’s position was substantially justified may be known only to the district court. Not infrequently, the question will turn upon not merely what was the law, but what was the evidence regarding the facts. By reason of settlement conferences and other pretrial activities, the district court may have insights not conveyed by the record, into such matters as whether particular evidence was worthy of being relied upon, or whether critical facts could easily have been verified by the Government.
Interestingly, it looks like the burden of proving "substantial justification" rests on the government in an EAJA case.  See Scarborough v. Principi, 541 U.S. 401, 414-15 (2004).  I wonder whether this feature of the EAJA, as well as the standard of appellate review, would be incorporated into the Innovation Act.  For one court's take on the standard of appellate review under the EAJA, see Murkeldove v. Astrue, 635 F.3d 784, 789-90 (11th Cir. 2011):
We review a district court's decision to grant or deny a party's request for attorney's fees pursuant to the EAJA for an abuse of discretion. Pierce v. Underwood, 487 U.S. 552, 570, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988). We noted in Houston Agricultural Credit Corp. v. United States that the abuse of discretion standard under the EAJA requires the court to conduct “a highly deferential review of district courts' tentative findings of fact,” but to closely scrutinize “the district courts' rulings on questions of law.” 736 F.2d 233, 235 (5th Cir.1984) (citing Spencer v. N.L.R.B., 712 F.2d 539, 565 (D.C.Cir.1983) (citations and internal quotation marks omitted)). Because the district court's determination turns on its interpretation of the EAJA and statutory interpretations are conclusions of law, we review the district court's interpretation de novo. See Teemac v. Henderson, 298 F.3d 452, 456 (5th Cir.2002). However, we do so with the understanding that the “EAJA is a partial waiver of sovereign immunity, and it must be strictly construed in the government's favor.” Tex. Food Indus. Ass'n v. USDA, 81 F.3d 578, 580 (5th Cir.1996) (citation omitted).
 *              *              *

There is also a provision in Rep. Goodlatte's bill (section 5) dealing with stays of suits against customers that is worth a look.


  1. I am not entirely familiar with the fee-shifting literature. What is the justification for the “substantial justification” requirement? My understanding was that the justification for fee shifting is that it will encourage small entity defendants to defend against patent infringement actions which they believe to be unmeritorious, but which they might otherwise settle to avoid litigation fee risk. By making fee-shifting dependent on whether the _plaintiff_ believes the claim to have reasonable merit, the defendant’s decision to litigate or settle turns not on whether the defendant believes that it has a good defence, but on whether it thinks that the plaintiff thinks that the plaintiff has a reasonable basis for the action. Both the reasonableness standard and the fact that the defendant has to guess about the plaintiff’s beliefs, introduces uncertainty which seems to me to undermine the incentive effect of fee shifting. Also, the reasonableness inquiry is itself costly, and so increases the litigation costs at risk. My initial intuition is that this halfway house between the English and American rules may be the worst of both worlds.

  2. I'm not very familiar with the EAJA and should spend some time learning more about it. But if, as Judge Moore states, "the '“substantially justified' language means 'justified to a degree that could satisfy a reasonable person,'" that sounds to me like it's supposed to be an objective standard. And that probably means that the claim is objectively reasonable in light of likely defenses. But I see your point. Suppose the defendant knows about some invalidating prior art that the plaintiff doesn't. Is the infringement claim objectively unreasonable because this prior art reference exists, or objectively reasonable because the plaintiff doesn't know about it? I think the former is probably technically correct, but maybe not. Anyway, your broader point that having to engage in such an inquiry introduces a lot of uncertainty and thus defeats much of the purpose of fee-shifting may be right. I'm inclined to favor fee-shifting as a general rule, but that is almost certainly a minority view in the U.S.

  3. I assumed it was an objective standard, but as you say, reasonableness introduces uncertainty even so. The reasonableness standard in negligence law is objective, but it is nonetheless easier to predict the outcome of a strict liability tort than an action based on negligence. That seems to me to be a problem even when both parties have the same knowledge, just because of the inherently vague nature of the reasonableness standard.

    The problem is worse when information is assymetric. It seems to me the problem isn't when the defendant has special knowledge, because the defendant knows that the plaintiff doesn't have that knowledge, and so can assess its likelihood of getting its fees accordingly. The problem is when the plaintiff has special knowledge which the defendant does not have. The defendant has to ask itself whether a court will find that the plaintiff had an (objectively) reasonable claim in light, presumably, of the information known to the plaintiff. In that case the defendant may believe that the plaintiff's case is objectively unreasonable, but it may turn out to be objectively reasonable.