Wednesday, January 8, 2014

Kilopass v. Sidense: The Standard for Awarding the Prevailing Patent Infringement Defendant Its Attorneys’ Fees Under U.S. Law

On December 26, 2013, the U.S. Court of Appeals for the Federal Circuit published its opinion in Kilopass Tech., Inc. v. Sidense Corp., No. 2013-1193, available here.  Patently-O and IPKat have already reported on the decision, but I thought it would be worthwhile to add my two cents’ worth as well.

Plaintiff sued defendant for infringement of a patent directed to a programmable memory cell.  The district court concluded that the defendant’s product did not infringe and granted summary judgment for the defendant; the Federal Circuit summarily affirmed.  While the appeal was pending, the defendant filed a motion for attorneys’ fees, which the district court denied.  The defendant appealed this determination, and the Federal Circuit vacated and remanded.

Writing for the court, Judge O’Malley went through the requirements under current law for the prevailing defendant to recover its attorneys’ fees.  First, the court determines whether the prevailing party has proven by clear and convincing evidence—a higher standard of proof than the normal “preponderance of the evidence” standard—that the case is “exceptional,” as required by 35 U.S.C. § 285.  Quoting the Federal Circuit’s 2005 decision in Brooks Furniture, Judge O’Malley noted that a case may be exceptional “when there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, conduct that violates [Federal Rule of Civil Procedure] 11, or like infractions. . . .  Absent misconduct in the litigation or in securing the patent, sanctions may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”   Second, if the case is exceptional, the court then determines whether a fee award is appropriate.

The issues on appeal centered on the subjective bad faith/objective baselessness standard as applied to prevailing defendants.  One question was whether, as some previous Federal Circuit cases had suggested, the subjective bad faith requirement can be satisfied only if the plaintiff has actual knowledge that its infringement claim was baseless.  Noting, among other things, that such a requirement arguably would put prevailing defendants at a disadvantage in comparison with prevailing plaintiffs (who can show exceptionality based on willful infringement, which requires only evidence of recklessness), and that this is one of the bones of contention in one of the two § 285 cases currently pending before the Supreme Court, Judge O’Malley concluded that the case law requiring actual knowledge is not controlling:  all that is required is that the defendant acted recklessly, meaning that the objective baselessness of the claim was either known to the plaintiff or was so obvious that the plaintiff should have known it was baseless.  In addition, subjective bad faith is a totality of the circumstances inquiry; and because it can be difficult to prove subject bad faith by direct evidence, a court should consider objective baselessness, which itself may be circumstantial evidence of subjective bad faith, first. 

Judge O’Malley also discussed the defendant’s arguments that the court should do away with the subjective prong and the “clear and convincing evidence” standard altogether, and that it should allow defendants to recover fees as long as the plaintiff’s claim had an “objectively low likelihood” of success.  Judge O’Malley expressed some sympathy for the first two arguments, but concluded that the panel was bound by Federal Circuit precedent on these issues.  As for the third argument, she expressed concern that allowing fees to be recovered when the plaintiff has a reasonable but weak claim of infringement was not the intent of Congress in enacting § 285, and might conceivably interfere with the First Amendment right to petition the government.  (I rather doubt this, but I’ll be giving the matter some further consideration.)  Concurring, Chief Judge Rader “endorsed” the objective-baselessness-alone and preponderance-of-the-evidence arguments, and argued that the correct approach for determining exceptionality is the totality of the circumstances test. 

As I have noted before, Chief Judge Rader is already on record in favor of awarding prevailing defendants their attorneys’ fees more frequently than is currently done; the Supreme Court may weigh in on the issue, as noted above (see here); and the House of Representatives passed a bill late last year that if signed into law would allow fee awards when the plaintiff’s position is not “reasonably justified,” whatever that means (see here and here).  As I note in my book (see pp. 148-49), the economic literature expresses conflicting views as to whether routine awards of attorneys’ fees are good (because they discourage losing claims from being brought) or bad (because they encourage parties with strong claims to overlitigate); others may be worried that routine fee-shifting discourages some meritorious claims, particularly by less well-off entities.  In any event, many, though not all, countries routinely award fees to the prevailing party, though often not in the full amount incurred.  But routine fee-shifting doesn’t appear to be on the table in the U.S. Instead, the question now facing the courts and Congress is whether awarding fees in a somewhat greater number (but probably still a minority) of cases would be a good idea, or whether the costs (in terms of deterring meritorious claims, as well as the costs of satellite litigation to determine whether whatever standard applies has been satisfied or not) outweigh the benefits.  One of my research projects over the next year will be to focus on the comparative law and economics of various approaches to defining and responding to "wrongful" patent litigation, so I will be giving a good deal of thought to these and other related issues over the course of the next several months.           

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