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Congress and the Court: Loser-Pay Fee Shifting


Written by Andrew Baluch
Posted: March 25, 2014 @ 4:54 pm
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Editorial Note: This article is a portion of a larger work by Andrew Baluch titled Patent Reform 2014, modified here for purposes of publication on IPWatchdog.com. Baluch’s article is a comprehensive review of pending legislation developments in Congress, the Executive Branch, the Courts and the States. For more specifically on fee-shifting please also see Will Fee Shifting Solve the Patent Troll Problem?

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U.S. patent litigation has followed the centuries-old “American Rule” under which each party to a litigation pays its own legal fees and costs, regardless whether it wins or loses the litigation.  A narrow exception exists in patent cases, but only in “exceptional cases” under 35 U.S.C. § 285, such as where the losing party engaged in litigation misconduct, or if the patent was fraudulently procured, or if the losing party raised arguments that were both objectively baseless and made in bad faith.

Despite the long tradition of litigants paying their own legal fees and costs, Congress has shown interest in changing the playing field and deviating from the American Rule in patent cases. This comes at a time when the U.S. Supreme Court is already considering two cases that relate to the definition of “exceptional cases” in § 285 that may well alter how this existing exception to the American Rule is applied in practice.

What follows is discussion of various legislative proposals relative to fee-shifting, as well as a brief discussion of the two cases currently pending before the Supreme Court.

 

Legislative Proposals

In February 2013, Reps. DeFazio (D-OR) and Chaffetz (R-UT) introduced H.R. 845 (“SHIELD Act”), which would replace the “American Rule” in favor of a “British Rule” loser-pays system that specifically targets patent assertion entities (“PAEs”).  The bill targets PAEs by applying only to patent owners who have not made a “substantial investment” in the “production or sale of an item covered by the patent” and who themselves are not a university or the original inventors of the patent.  The bill would require these PAEs, if they lose the litigation, to pay all of the defendant’s legal fees.  The SHIELD Act gives courts no flexibility or discretion to reduce or exempt a fee-shifting award, even if the plaintiff had an otherwise plausible and non-frivolous case.

Unlike the SHIELD Act, other bills have been introduced that do not single out PAEs and also give courts more flexibility to deny a fee-shifting award.  Sen. Cornyn (R-TX) introduced S. 1013 in May 2013 that would make fee-shifting to the prevailing party the default, subject to an exception if (A) the position and conduct of the non-prevailing party were objectively reasonable and substantially justified, or (B) exceptional circumstances make such an award unjust.  Rep. Goodlatte (R-VA) in May 2013 released a first discussion draft bill that, like the Cornyn bill, does not specifically target PAEs, but is more open-ended insofar as it simply states, “The court may award reasonable attorney fees to the prevailing party.”  Goodlatte released a second discussion draft in September 2013 that essentially adopts Sen. Cornyn’s approach, by shifting fees to the prevailing party unless (A) the position of the non-prevailing party was substantially justified or (B) special circumstances make the award unjust.  If a non-prevailing party is unable to pay court awarded fees, the Goodlatte proposal would allow recovery against any “interested party” joined in the action.

In October 2013, Sen. Hatch (R-UT) introduced S. 1612 which contains a similar fee-shifting provision as the Goodlatte second draft, i.e., “substantially justified” and “special circumstances.”  However, the Hatch bill also contains a one-way bonding provision that would allow a court, upon a defendant’s motion, to require the plaintiff to post a bond sufficient to ensure payment of the defendant’s fees.  The bill lists factors that a court would be required to consider when deciding whether the plaintiff should post a bond—factors clearly aimed at PAEs, including: (a) whether the bond will burden the ability of the party alleging infringement to pursue “activities unrelated to the assertion, acquisition, litigation, or licensing of any patent,” (b) whether the plaintiff makes or sells products related to the patent, and (c) whether the patent holder is a named inventor, an original assignee of the patent, or a non-profit technology transfer organization.

The White House’s June 2013 “fact sheet” contains a “legislative recommendation” to “[p]ermit more discretion in awarding fees to the prevailing parties in patent cases, [by] providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).”

On December 5, 2013, Rep. Goodlatte’s bill H.R. 3309 (“Innovation Act”) passed the House of Representatives by a recorded vote of 325 to 91.  The bill includes a fee-shifting provision similar to the prior Goodlatte discussion drafts, and reads: “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 and conduct of the non-prevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.”  Like the discussion draft, H.R. 3309 (as passed) makes the fee award recoverable against any “interested party” joined in the action, if the non-prevailing party is unable to pay the fees.

Sen. Leahy (D-VT) introduced S. 1720 (“Patent Transparency and Improvements Act of 2013”) in November 2013.  This bill as introduced does not contain any fee-shifting provision and does not amend the exceptional case standard in 35 U.S.C. § 285.

A comparison of the fee-shifting provisions in the Goodlatte, Cornyn and Hatch bills is shown below.

Goodlatte – H.R. 3309 [passed]

Cornyn – S. 1013 [introduced]

Hatch – S. 1612 [introduced]

Awards attorney fees to prevailing party, unless position and conduct of the non-prevailing party were reasonably justified in law and fact, or special circumstances (such as severe economic hardship to a named inventor) make an award unjust. Awards attorney fees to prevailing party, unless position and conduct of the non-prevailing party were objectively reasonable and substantially justified, or exceptional circumstances make such an award unjust. Awards attorney fees to prevailing party, unless position and conduct of the non-prevailing party were substantially justified, or special circumstances make an award unjust.
Makes fees recoverable against interested joined party. Makes fees recoverable against interested joined party. Court may order plaintiff to post a bond sufficient to ensure payment of the accused infringer’s fees.

 

Supreme Court

On October 1, 2013, the Supreme Court granted certiorari in two cases involving fee-shifting to prevailing parties under 35 U.S.C. § 285: Octane Fitness LLC v. ICON Health & Fitness Inc. and Highmark Inc. v. Allcare Health Management Systems.  This has led some Members to question whether it is necessary for Congress to step in and legislatively address this very issue without having the benefit of the Supreme Court’s decision and a chance to see how it plays out in practice.

In Octane, the accused infringer challenges the Federal Circuit’s two-part test for determining whether a case is “exceptional” to warrant shifting of fees under § 285.  According to the Federal Circuit, in the absence of litigation misconduct or fraud in securing the patent, a case is exceptional only if it is both (1) “objectively baseless” and (2) “brought in subjective bad faith” by the patentee.  Octane argues that this standard is too high and urges the Supreme Court to find a case exceptional if it is brought despite an “objectively low likelihood of success.”

In Highmark, the accused infringer challenges the Federal Circuit’s “de novo” standard of review of a district court’s finding that a cases is “objectively baseless” for purposes of § 285.  Highmark urges the Supreme Court to give the district courts more deference in this regard and to review such findings for “clear error.”

Oral arguments were held on February 26, 2014.  Decisions in both cases are expected by the end of June 2014.

 

Conclusion

Handicapping the Supreme Court can be fun, but it is hardly a science. It is possible that the Supreme Court decisions in Octane and Highmark may shift the playing field and give district courts more ability to award fees and provide meaningful guidance to help determine what qualifies as an “exceptional case.” The fact that the Supreme Court is considering this issue has already given Senators who are skeptical of loser-pay rules additional ammunition against these proposals.

 

About the Author

Andrew S. Baluch is a registered patent attorney and special counsel with the Washington, DC office of Foley & Lardner LLP.  He is also a Professorial Lecturer in Law at the George Washington University Law School where he teaches international and comparative patent law.  Previously, Mr. Baluch served in the White House office of the Intellectual Property Enforcement Coordinator (IPEC) and before this as expert legal advisor to the Undersecretary of Commerce for Intellectual Property and Director of the U.S. Patent & Trademark Office.  He also previously served as a law clerk in the U.S. Court of Appeals for the Federal Circuit.  He can be reached at abaluch@foley.com.


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2 comments
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  1. loser pays is a devastating provision for ALL undercapitalized entities – be it trolls, universities or real producing small companies
    the thing is – patent litigation in US is a crap shoot – the odds of winning in the best case sceario is 60-70% at most (and the odds of losing a crappy patent case is at worst 30-40%)
    The whole thing becomes like playing in casino against the house – the house always wins

    Besides, they already have mandatory Rule 11 sanctions more than taking care of bad troll cases

    It’s good old rich get richer and poor stay poor type of deal in congress, white house and scotus

    screw them all

  2. This is assuming that some increased form of “loser pays’ is actually enacted by legislation rather than the pending Sup. Ct. decision. [Remember that we already have it for "exceptional" patent cases, and that there are many lawyers with Congressional influence who fear this idea spreading to OTHER torts.]
    Also, the very fact noted above, that patent case outcomes are so unpredictable, will makes it dangerous for either side in patent suits to assume in advance that THEY will be the ones recovering attorney fees rather than paying for for both their own and the other sides legal fees. “Loser pays” cuts both ways, in that NPE’s that win could collect their attorney fees on top of their infringement damages. But it may encourage more realistic pre-trial case appraisals and settlements? Nor by any means are all NPE’s so “undercapitalized” that they cannot risk paying attorney fees. Not among the ones willing to litigate their patents all the way. [E.g., IV, Acacia, Spangenberg, and others with large secret financial investment backing.

    Even “loser pays” will have no direct effect on the 97% or so of traditional patent suits with NO “loser” because they settled before any D.C. decision, much less any CAFC appeal reversal opportunity.
    Re the above, is clear from years of availability that FRCP Rule 11 sanctions have NOT been effective in patent suits. Rarely granted, and usually with insignificantly small sanctions.

    Now for an interesting legal question that I have not head discussed, which surely ought to be. What about the now-increasingly- typical patent suit in which the defendant promptly files an IPR and gets the asserted claims cancelled in the IPR well before the trial date? The D.C. judge will presumably have to dismiss the untried case with prejudice? Does an IPR decision convert all, or at least the D.C. part of, the defendants legal expenses into recoverable “loser pays?” Has anyone seriously considered that?