CAFC vacates $51 million fee award, exceptional case requires ‘causal connection’ to award fees

The Federal Circuit recently affirmed a district court’s exceptional case finding under 35 U.S.C. § 285, which resulted in Appellant Rembrandt Technologies paying attorney’s fees to Appellees, a number of communications companies.  The Court, however, vacated the fee award of $51 million and remanded for a new determination of fees. While the Federal Circuit was comfortable affirming this was an exceptional case, the panel explained that the district court award needs to establish some causal connection between the misconduct and the fee award.  See In re Rembrandt Techs. LP Patent Litig., No. 2017-1784, 2018 (Fed. Cir. Aug. 15, 2018) (Before O’Malley, Mayer, and Reyna, J.) (Opinion for the court, O’Malley, J.). 

This matter dates back to the mid-2000s, when Rembrandt filed suit against dozens of cable companies and broadcast networks for patent infringement. The cases were consolidated, and the district court entered final judgment against Rembrandt for all claims. Appellees filed a motion for attorney’s fees under 35 U.S.C. § 285, and almost four years after the litigation ended, the district court granted the motion. The district court found the case was exceptional for three reasons: (1) Rembrandt improperly compensated fact witnesses by giving them a stake in the outcome of the litigation; (2) Rembrandt either engaged in or failed to prevent spoliation of documents over a number of years; and (3) Rembrandt asserted “revived” patents in the litigation that it should have known were unenforceable. The district court awarded Appellees more than $51 million in total fees, and Rembrandt appealed.

The Federal Circuit found that the district court did not abuse its discretion in finding the case was exceptional. First, Rembrandt hired three patent consultants and granted them a stake in any litigation involving some of the asserted patents, even though it was foreseeable at the time of their hiring that the consultants would become fact witnesses in the litigation at hand. The district court never found that the consultants gave false testimony, but the contingent fee arrangement gave them incentive to lie, which supported the district court’s finding that the contingent fee arrangement was unreasonable and improper.

Second, the Federal Circuit found that, under Third Circuit law, the district court could have reasonably determined that spoliation occurred. The previous owners of the asserted patents destroyed thousands of boxes of documents potentially relevant to the patents over a period concurrent with the litigation. Although Rembrandt argued that they had no control over the destroyed documents, patent sale agreements obligated the prior owners to give Rembrandt access to all documents relating to the patents. Additionally, Rembrandt knew that documents were being destroyed, and that there was a significant risk that some of the destroyed documents were relevant.

Third, the Federal Circuit noted that the district court could have reasonably found that two of the asserted patents were unenforceable due to inequitable conduct, and that the inequitable conduct could be attributable to Rembrandt. The Director of the PTO may accept late payments for patent maintenance if the delay in payment was unintentional. There was evidence, however, that original owner decided not to pay maintenance fees on two asserted patents because it believed the patents lacked commercial value, which led to abandonment of the patents. The original owner later revived the patents by claiming the abandonment was unintentional. Although Rembrandt was not involved with the patent prosecution, the court found it should have known the revivals were improper because it had access to documents discussing revival of the patents. Therefore, the original owner’s inequitable conduct could render Rembrandt’s case exceptional for the purpose of awarding attorney’s fees.

Even though the district court did not abuse its discretion in finding the case was exceptional, it did not correctly determine a “causal connection” between Rembrandt’s misconduct and the fees amount awarded. The district court granted almost all of the fee requests of the Appellees but did not properly evaluate the extent to which Rembrandt’s misconduct related to the fees award. Judge O’Malley explained:

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.

With the district court not establishing the required causal connection, O’Malley explained the most appropriate thing was for the Court to remand the case for further consideration and “for the district court to determine in the first instance how much of the claimed fees Rembrandt should pay.”

Take Away

An award of attorney’s fees under 35 U.S.C. § 285 may be warranted where fact witnesses are compensated by a stake in the outcome of the case, spoliation occurs, or the plaintiff asserts patents that were improperly revived. There must, however, be a “causal connection” between the conduct which makes the case exceptional and the amount of attorney’s fees awarded.