Attorney Fees in Patent Cases: There is a Middle Ground
Wednesday, June 18, 2014
Automatically awarding attorney fees to the prevailing party, at least in patent cases, would be a grave mistake and wreak havoc on our legal system.
How do we ensure Americans get their “day in court” while also weeding out meritless lawsuits?
One often-discussed way is to require the losing party to pay the winning party’s attorney fees, as is common in Britain, Europe, and elsewhere in the world. After all, if a vexatious litigant faces the threat of paying his adversary’s (expensive) lawyer fees, he’ll surely be more circumspect about filing a frivolous case.
But automatically awarding attorney fees to the prevailing party, at least in patent cases, would be a grave mistake that would undermine the so-called “American rule” — whereby we’re all entitled to our day in court — and otherwise wreak havoc on our legal system. Instead, more modest changes to the standards for awarding fees represent a helpful middle ground.
I fully recognize it may seem self-serving for an American attorney to argue in favor of the American rule: easy for me to say every litigant deserves her day in court, since I and my fellow barristers also stand to profit, so to speak, from her courtroom adventures.
But in fact, I became an attorney (at least in part) because of the American rule, not the other way around. The notion that a wronged party — an individual, a corporation, a religious group, or what have you — deserves a chance at justice even in civil matters resonated deeply with me. And if popular culture is any kind of indicator, our day-in-court system strikes a chord among Americans at large: unlike our European counterparts, we overtly celebrate the courtroom experience on stage and on screen, large and small.
Most analysts expect the decisions will reduce filings by so-called ‘patent trolls,’ who will henceforth be more reluctant to pull the trigger on questionable suits.
In addition, precisely because I’m a lawyer, I deeply resent frivolous lawsuits, not only because they squander judicial resources and implicitly tax customers of the defendants, but mainly because they make a mockery of our system, unfairly exploit the day-in-court tradition, and give the legal profession a bad name. Bad-faith suits bleed consumers and breed cynicism. Thus, I generally support tort reform efforts designed to stamp out frivolous litigation.
So how should we approach attorney fees in a way that preserves our day-in-court tradition while deterring cases filed in bad faith?
Well, for one thing, the economic ramifications of fee-shifting turn out to be more complex than one might expect. While a loser-pays system may suppress overall case filings, one study found that “a switch in a system in which both parties pay their own legal fees to a system in which the loser pays the winner’s costs would increase trial expenditures for those suits that go to trial.”
Another analysis concluded that “the impact of increased expenditures by one party on the other party’s expenditures is ambiguous: the adversary may ratchet up its own legal expenditures in a form of ‘arms race’ or may be intimidated into reducing its efforts.” That same study found that the parties to some 60 percent of commercial agreements choose to include language opting out of the American rule, i.e., they agree in advance to pay their adversaries' attorney fees in the event their contract goes sour, they wind up in court, and they lose.
In patent cases in particular, there appears to be middle ground that would fairly balance these competing demands: lowering the currently high standard for awarding fees while not making a fee award the norm.
The patent statute — specifically, 35 U.S.C. § 285 — states with great simplicity that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.” This deceptively straightforward language has bedeviled courts, attorneys, and parties alike ever since Congress enacted it more than 50 years ago.
The definition of “exceptional” has varied over the years. As a general matter, the Federal Circuit — the federal court with exclusive jurisdiction over appeals of patent cases — holds that attorney fees can be awarded only for “material inappropriate conduct” or litigation both “brought in subjective bad faith” and “objectively baseless.” Without showings of such extreme bad conduct, no fees can be awarded.
Moreover, the Federal Circuit has required the prevailing party to demonstrate the “exceptionality” of a case by “clear and convincing evidence” — a high standard that is not quite as exacting as the “beyond-a-reasonable-doubt” threshold required to convict an alleged criminal, but it’s significantly higher than a “preponderance-of-the-evidence” standard.
As a practical matter, awards of attorney fees in patent cases are exceedingly rare — and, some might say, too rare. Courts have awarded fees when the patent-holder committed fraud on the Patent Office, filed a case it knew was utterly baseless, or otherwise misbehaved severely during the course of a litigation.
But in April, the Supreme Court in twin decisions lowered the standard for awarding fees in patent cases. First, in Octane Fitness v. ICON Health & Fitness, the Court unanimously (with Justice Scalia declining to join two footnotes in the opinion) held that the term “exceptional” in Section 285 refers to a claim that “stands out” from others or to litigation conduct that is “unreasonable.” The high court also ruled that an exceptional case can be proven merely by a preponderance of the evidence, not necessarily clear and convincing evidence.
The Supreme Court justices noted that the statute vested discretion in the district courts from its inception — discretion that the Federal Circuit had consistently applied until 2005, when the court “abandoned that holistic, equitable approach in favor of a more rigid and mechanical formulation.” In Octane Fitness, the trial court had denied the accused infringer’s motion for attorney fees, finding — under the old standard — that ICON’s claim was neither objectively baseless nor brought in subjective bad faith, and the Federal Circuit affirmed.
But the Supreme Court reversed, finding instead that the “ordinary” meaning of an “exceptional case” is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.” The court also found the older standard “so demanding that it would appear to render § 285 largely superfluous” and instead emphasized the importance of respecting the district court’s discretion.
The notion that a wronged party — an individual, a corporation, a religious group, or what have you — deserves a chance at justice even in civil matters resonated deeply with me.
On the same day, in Highmark v. Allcare Health Management System, the Supreme Court again unanimously ruled that the Federal Circuit should henceforth afford the trial court greater discretion in considering attorney fee awards. The trial court there found the patentee had engaged in “vexatious,” “deceitful,” and “frivolous” conduct and awarded nearly $5 million in attorney fees. The Federal Circuit, however, mostly reversed the award, applying the old “objectively baseless” standard while not recognizing the lower court’s discretion. The Supreme Court wiped out the Federal Circuit’s ruling and instead held that “the text of the [attorney fees] statute emphasizes the fact that the determination is for the district court, which suggests some deference to the district court upon appeal.”
These rulings descended like a thunderclap on the patent bar, signaling not only the Supreme Court’s displeasure with the Federal Circuit’s strict interpretation of the fee statute but also the Court’s frustration with frivolous patent suits. Most analysts expect the decisions will reduce filings by so-called “patent trolls,” who will henceforth be more reluctant to pull the trigger on questionable suits. They are plainly a step in the right direction.
The Supreme Court’s decisions coincided, perhaps appropriately, with the collapse of congressional efforts to rein in the same “trolls” many companies believe are wreaking havoc on the economy by filing meritless patent infringement complaints. I’ve written and spoken extensively about these bills for AEI’s Tech Policy Center, but the attorney fees aspect of the proposed legislation warrant further scrutiny.
Related legislation falters
Legislative efforts last year centered around the Innovation Act, introduced in the House by Rep. Bob Goodlatte (R-Virginia) and passed by that chamber in December by a 325-91 bipartisan majority. Notably, Goodlatte’s bill included the following provision regarding attorney fees:
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.
This measure would reverse the current standard and make fee awards the default in patent cases, that is, the losing party would have to pay the winner’s fees unless it could prove its position was “substantially justified” or that other “special circumstances” apply.
This shifting of the burden is problematic for numerous reasons. First, it would increase litigation costs at least modestly. Presently, it’s rare for a prevailing party to seek fees, but if they were awarded automatically absent substantial justification or special circumstances, the losing parties, facing million-dollar-plus penalties, would always file motions trying to avoid fees.
Second, the provision could easily backfire, since a company found to infringe a “troll’s” patents would be on the hook for the patent-holder’s fees, unless it could demonstrate substantial justification or special circumstances to the court.
Finally, it would undermine the American rule by establishing an exception to the day-in-court system, potentially leading the way for burden-shifting in other areas of the law.
Fortunately, the Goodlatte bill perished in the Senate, where two members of the Judiciary Committee — Senators John Cornyn (R-Texas) and Chuck Schumer (D-New York) — instead crafted a compromise bill that showed great promise. Their language included a provision that reduced the burden for litigation conduct and positions warranting a fee award from an “exceptional” to “objectively unreasonable.”
This proposal went further even than the Supreme Court but not as far as the Goodlatte and similar bills. As Cornyn and Schumer proclaimed, their language was designed to “strike a more appropriate balance between protecting the right of a patent holder to enforce his patent, including through litigation, on the one hand, and deterring abusive patent litigation and abusive threats thereof on the other.”
Alas, the Cornyn-Schumer proposal proved too radical for a variety of interest groups — universities and other research institutions, the biotech and pharmaceutical industries, trial lawyers, and Senate Majority Leader Harry Reid (D-Nevada) — who in late May squashed it, along with all patent reform efforts for the foreseeable future. But any future attempts to change the way fees are awarded in patent law will hopefully track the compromise language.
In the meantime, the Supreme Court’s recent rulings, coupled with an increased sensitivity toward both the importance of the American rule and the threat of costly, frivolous suits, should help us strike the correct balance in patent cases.
Michael M. Rosen is an attorney and writer in San Diego. Reach him at email@example.com.
FURTHER READING: Michael M. Rosen also writes "The Left’s Limits on Free Speech," "Tribal Wisdom in Modern Times," "Sweden’s Swing toward a Free Market," and "The Right Way to Combat Patent Trolls." Claude Barfield contributes "Sorting Out the High-Tech Patent Mess." Thomas A. Hemphill considers "The Paradox of Patent Assertion Entities."
Image by Dianna Ingram / Bergman Group