Behind the Scenes on Octane Fitness and Fee-Shifting

Rudy Telscher

On Monday, June 29, 2015, I had the opportunity to speak with Rudy Telscher, a principle with Harness Dickey in the firm’s St. Louis office. Telscher is the attorney who represented Octane Fitness in what has become an instantly famous, and very important, Supreme Court decision relating to patent law. In Octane Fitness v. ICON Health & Fitness, the Supreme Court held that district court judges possess broad discretion to award attorneys fees in patent infringement litigations. According to a study completed by the Federal Circuit Bar Association, district courts have awarded fees on 50% of requests post Octane, as compared with awarding fees only 13% of the time before this landmark decision.

My conversation with Telscher was fascinating. With so much talk about fee-shifting and whether patent reform should include mandatory fee-shifting provisions I thought it would be interesting to get Telscher’s thoughts on the matter. During our interview Telscher explains that Octane Fitness was the “little guy” in this particular litigation, which proves that bad actions that support attorneys fees are not isolated to small actors who try and manipulate the system. We also discuss litigating cases in the Eastern District of Texas, and whether legislative fee shifting is really necessary.

Without further ado, here is part one of my two-part interview with patent litigator Rudy Telscher.

[Interview-1]

QUINN: Thanks for taking the time to chat with me today I really appreciate it.

TELSCHER: Absolutely.

QUINN: The patent system and the patent laws are in a state of flux right now, and to some extent you’re directly involved with that because last year you were involved with one of the major Supreme Court decisions. Now a little bit more than a year later, looking back on the case and decision, I thought it might be a good time to chat, sort of pick your brain a bit with respect to where we are and where we may go moving forward. So let’s start with a broad question and work our way from there. What was it like when you were taking Octane to the Supreme Court? What were your experiences that you had and was it what you thought it was going to be?

TELSCHER: Well, anything you have a chance to argue before the highest court in the land it’s, you know, for a lawyer it’s a thrill. Sort of the World Series of law so to speak. Making it even more exciting, you know, I’ve been in patent law for 25 years specifically patent litigation and during the last ten years have personally just seen a caliber of cases that really kind of denigrate the system. You know, just weak cases that aren’t being brought because they’re meritorious claims, they’re being brought because you can sue a lot of different companies and you can ask everybody for a couple hundred grand in nuisance value settlements knowing that it’s gonna cost them a couple million to defend. And so it’s kind of ugly business. And I got to personally see that. And the Octane case is I think one of the main cases. There are a couple others we could mention that went through the Supreme Court where the prospect of bringing the system back into equilibrium and starting to combat these cases that shouldn’t have been in the system was at stake. So what a privilege to be the lawyer that go to handle oral argument in a case of that magnitude. I think at the time of the case, you know, there are blogs that kind of rank how important cases are and I think the Octane case was ranked in a couple of the blogs as being in the top five.

QUINN: Yes, it was no doubt very important for a variety of reasons. Now let me ask you. The Octane case wasn’t your typical case or one that many people would think about as the poster child for fee shifting, I guess, right? Because Octane, your client, was the small player in this case, right?

TELSCHER: Correct.

QUINN: So can you fill us in a little bit for those who aren’t aware of the situation. It sounds to me like based on what I know about the case Octane was getting pushed around a little?

TELSCHER: They were. It was the industry giant in the exercise equipment. It involved elliptical machines. And so when a lot of people think about the plague of bad patent cases “patent trolls” is the name that comes up. Companies that go out and buy these old patents with outdated technologies that have broad patent claims. And then they try to say that technology developed 15 years later has something to do with it and of course it doesn’t. So what Octane doesn’t have in common with some of the more notorious cases is it’s not a patent troll case in the truest sense of the word. However, what Octane had in common with a lot of patent troll cases is this industry giant that sued Octane, its name is Icon, the patent that it accused our client of infringing was one of the 1990s that I got their people to admit they never commercialized. So in that sense it was a non-practicing entity as to the patent and suit. This is technology that didn’t work. And yet somehow magically our client who had award winning technology covered by a different patent was somehow going to be infringing this other patent. So there were certainly some differences between classic troll litigation yet there were some similarities and I think the case was a very good vehicle for the Supreme Court to take up the issue because we had won a summary judgement on three separate issues. That’s how far removed our client’s product was from the patent. So to our way of thinking the patent that was brought was just a really, really weak case with the company trying to use the high cost of patent litigation to get our client to pay some royalties that truly weren’t owed under any legitimate analysis.

QUINN: Well I think one of the things that your case shows is that bad action can happen on both sides, from both small and large companies. But in the prototypical trolling scenario it’s the small entity that’s going after the large entity. Of course, if you’ve done patent litigation enough or you’ve been a watcher you can see that there’s no monopoly on bad behavior it just happened. And I think Octane stands for the proposition that when it does happen district courts need to have the discretion to stop it.

TELSCHER: Yeah. I totally agree with that. And I would add a little bit to what you just said. I think there was certainly a level of abuse prior to patent trolls from larger companies that weren’t scrupulous trying to sue smaller companies and using the high cost of patent litigation to get things they weren’t entitled to. The only difference was these smaller companies that were being abused didn’t have any lobbying efforts before Congress. So when the whole patent troll issue came to a fever pitch the biggest companies in America were being held hostage to it. Apple, Microsoft, Facebook, LinkedIn, all of the most notorious companies that are just great technologies were being sued by smaller entities. And how do these smaller entities get economic leverage over these big companies? They did it because they could file 40 lawsuits at a time so the incremental cost beyond case number one didn’t cost anything. And they would just hold out for these nuisance value settlements and that’s why even the largest companies in America were being held hostage. How Octane changed that is now that you have a realistic chance of getting attorneys’ fees, now you have that chance now the bigger companies can stand up to a troll and say, ‘hey, your case is awful and we’re not gonna pay you a dime on it. We’re just gonna go ahead and litigate and we’re going for our fees.’ Prior to the Octane decision that threat was hollow because there were no fee awards really prior to the Octane case.

QUINN: Yes. I mean in theory they were available they just hadn’t been granted freely in recent memory.

TELSCHER: Yes. And I can give you the specific data since I’ve tracked it so closely and have spoken around the country on the topic. From 2005 when the Brooks decision came into existence on the federal circuit so that was the standard that got too strict in 2005. From 2005 to 2011 when our district court judge denied fees in our case there were zero fee awards, zero, based on the merits of the case. You might get some for inequitable conduct or litigation misconduct but if were talking strictly about the prospect of this plaintiff brought a weak patent case there were zero fee awards in that timeframe based on the merits. Now since Octane which was April of 2014 when that decision came down there have been dozens of fee awards and fee awards are up by something like 36-37% last statistics I saw.

QUINN: There’s no doubt that it has changed the landscape. And right now Congress is considering more patent reform. I think this is going to be an ongoing process not only this year, but I think we’re in this place where it’s going to be coming up year after year after year. And one of the big things they’re considering right now is fee shifting legislation that would to some extent codify Octane, but I think it goes further depending upon which one you’re looking at. Whether it’s the House version or the Senate version and who knows what the final language will be that they actually vote on. But this raises a couple things. One, do you think we need fee shifting legislation? And, two, I’d like to then get into a conversation with you about whether fee shifting is really necessary. I’m personally philosophically opposed to fee shifting legislation in its current form because I fundamentally think we need to have a broader discussion about whether we should do it, not conclude we should do it and then talk about which path should we go on. I also think some of the companies that are asking for this legislation are going to regret having gotten it because as your case points out it’s not just always the little guy that is going to get punished with fees. There are bad actors all over and maybe we should just give the district courts the discretion and run with it for a while.

TELSCHER: I am absolutely in your camp. I think the notion that Congress should be passing fee legislation it’s not necessary and I think it’s premature at best. You got an Octane decision out there, which is having an impact. The district court judges now have discretion to look at cases and spot ones that are just too weak and force the losing party to pay fees. And that’s working. So I think legislation in view of that Octane decision there’s no need for that at this point. Now, there are other provisions to some of this legislation that might be a good idea. Again I’m with you it needs to be thought through carefully because sometimes you fix one problem and you create three other more significant problems. But, you know, venue for example. The notion that we have roughly 30 to 40% of our patent cases in this little known area of Eastern District of Texas, you know, is obviously sends a strong signal that people are just forum shopping because they know they’re gonna get more favorable treatment there than elsewhere and I know that usually the court systems are not enjoying or not condoning a system where people are gaming it. So I think you can get into certain areas where legislative efforts may be beneficial. I don’t think fee shifting is one of them.

QUINN: Just to pick up on that whole idea about the Eastern District in Texas and the venue changes to the law. That really came up at the last minute here in the House Judiciary Committee. Detailed venue changes happened literally, I think, right at the very end of their consideration. So I have a question whether that was appropriate right now. But I also don’t like the fact that they added these venue changes that will affect the 93 other districts where there’s not really a problem. And I’d like to pick your brain on this because the Eastern District of Texas has been a let’s called it a “problem” in my words, not your words, but I have seen it as a problem for a very long period of time. The Federal Circuit has tried on occasion to make it more difficult for cases to be brought there and more easy for them to be transferred out of there to a more appropriate court, but still it continues to be the district de jour for patent litigation and it is a district that can’t have very many people in it just because there’s nothing there really.

TELSCHER: Correct.

QUINN: I would almost prefer Congress to tell the Eastern District of Texas that they have lost your patent infringement privileges. You can’t hear these cases, period. That would be better than having a broad general venue provision that is going to change the law everywhere. And I know that’s unrealistic, but what is your take on this? Because at the end of the day I wonder whether it’s going to matter and whether the judges are going to continue to do whatever they want to do down there.

TELSCHER: It’s kinda like in our office we have out of the 65 people in our St. Louis office we have a few people who don’t clean their own dishes. And so the question is do you send out a notice to everyone reminding them that everyone needs to clean their own dishes or do you go pick on the few people that you know are the culprits. So what you’re saying is, hey we all know that it’s Eastern District of Texas just go directly after them. But I think you said in the same breath that you know that’s not realistic. Congress isn’t probably going to pass a law which singles out a specific district. I also agree though, and I think your point is well taken, that any time you’re considering a venue statute or fee shifting any of that needs to be analyzed more carefully and the fact that the venue came in at the very end suggests that maybe we need to look at that a little bit more. I will say having studied that venue statute that it probably really tracks how most people approach patent litigation. Most people, you know, if I’ve got a competitor v. competitor case, you know, if my client’s in St. Louis I’m gonna try to sue in St. Louis. If my client’s from California I’m gonna try to bring the suit in California. So normally you’re gonna bring it where the plaintiff resides ‘cause they got home court advantage and that’s where all the technology was developed, that’s where the witnesses and documents are. So you’d typically do that anyway. Or if I can’t get personal jurisdiction over the defendant there then I gotta go typically where that defendant’s at. So just picking what we got now is if you’re selling product somewhere, most companies sell nationwide especially in the day and age of the internet, what we’ve come to is this illogical situation where because people know that it’s a plaintiff friendly jurisdiction where they don’t grant some rejudgements very readily which gives patent troll, you know when you’re not granting some rejudgements as readily as the other parts of the country that allows a patent troll to drag you all the way up through trial and that’s the settlement levers they’re looking for. So you know to my way of thinking I think that we have this illogical situation in Eastern District of Texas where companies that weren’t from there are now bringing litigation there. And I think if you look at the statute carefully what they’ve avoided is a lot of the patent trolls got sophisticated to avoid 1404 motions they would set up their boarded up shop in the Eastern District of Texas. There was no business. They didn’t develop technology there it was just a way of preserving jurisdiction. So when you look at the venue statute there’s no doubt in my mind that it’s directed at not allowing this little jurisdiction in the middle of Texas to be the patent dominant jurisdiction that it is.

QUINN: True, and a lot of those businesses are made up of a card table with a folding chair and a laptop. That’s it.

TELSCHER: Yes. I’ve been in several of these cases where when you do your discovery you figure out that the original patent owner was from California. They developed their technology out in California. And it got bought by a VC and then they established a boarded up shop with a card table in the Eastern District of Texas. So, yeah, there’s no question the system’s being gamed. That’s easy to see.

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