Federal Circuit To Allow More Fee Shifting
Scott Graham writes for The Recorder in San Francisco.
In a move that's sure to please advocates for patent litigation reform, the Federal Circuit has sent a strong message to district judges: Make more attorney fee awards in abusive cases.
The court on Thursday overhauled its standard for fee shifting in "exceptional cases" under Section 285 of the Patent Act, ruling among other things that it isn't necessary to show that a patent holder actually knew its claims were bogus.
The U.S. Court of Appeals for the Federal Circuit stopped just short of overruling a controversial 2005 opinion that required a showing of subjective bad faith. But the court substantially watered down the standard and provided a roadmap for the U.S. Supreme Court to go further as it gears up to overhaul the Federal Circuit's jurisprudence in the area next year. Judge Kathleen O'Malley's opinion in Kilopass v. Sidense also could remove some of the impetus from Congress to enact legislation to rein in patent "troll" litigation.
"The Federal Circuit is being responsive to the general sense in the community that fee shifting needs to be more liberally granted," said Weil, Gotshal & Manges partner Edward Reines, who is not involved in the case. "The same currents that are pushing the legislators and the Supreme Court toward reconsideration of fee-shifting dynamics" are being felt at the Federal Circuit.
Kilopass directs trial judges to put more weight on the objective merits of a case when considering whether to award attorney fees. A "smoking gun" showing that the patent holder actually knew its claims were baseless isn't needed to show bad faith, O'Malley wrote. Mere recklessness will suffice.
Her decision will require U.S. District Judge Susan Illston to reconsider fees against Kilopass Technology Inc., a Santa Clara semiconductor designer that pressed ahead with litigation against a competitor even after its co-founder and an outside attorney acknowledged potential problems with their claims.
"The primacy of objective evidence over assertions of subjective good faith or lack of knowledge is well established in our Section 285 case law," O'Malley wrote. "One's misguided belief, based on zealousness rather than reason, is simply not sufficient by itself to show that a case is not exceptional in light of objective evidence that a patentee has pressed meritless claims."
Judge Alan Lourie concurred in O'Malley's ruling, while Chief Judge Randall Rader called on the court to overrule Brooks Furniture Manufacturing v. Dutailier International, the 2005 ruling that requires a claim be objectively baseless and brought in bad faith for an exceptional case award.
"Brooks Furniture, to my eyes, does not fully account for Supreme Court precedent and does not align with decisions of other circuit courts of appeals," Rader wrote.
O'Malley suggested she'd like to overrule Brooks Furniture too, but noted that a three-judge panel of the Federal Circuit may not overrule another three-judge panel. Her opinion goes most of the way there, though, because in addition to lowering the standard for bad faith, O'Malley held that trial judges should consider objective baselessness first, and then consider bad faith under the totality of the circumstances.
"Objective baselessness alone can create a sufficient inference of bad faith to establish exceptionality under Section 285, unless the circumstances as a whole show a lack of recklessness," she wrote, "Thus, the retention of the subjective bad faith requirement may prove to have little effect on this case, as well as many that follow."
O'Malley went on to write that Sidense Corp., represented by Kilpatrick Townsend & Stockton partner Roger Cook, made good arguments that the Federal Circuit never should have imposed the bad faith requirement in the first place, and then compounded the problem by requiring that exceptionality be proven by clear and convincing evidence.
A 1993 Supreme Court precedent "does not seem to demand the bad faith requirement we gleaned from it," O'Malley wrote, and "there seems to be no basis" for the clear and convincing standard. None of the regional circuit courts require bad faith for an "exceptional case" finding under identical language in the Lanham Act, while they're split on the clear and convincing standard, she pointed out.
O'Malley's opinion might normally be considered a call for Federal Circuit en banc review, but the U.S. Supreme Court is already considering the court's "exceptional case" jurisprudence in two cases. Arguments are scheduled for February.
Along with district judges, the target audience may have included Congress, which is weighing a slew of reforms intended to address abusive patent "troll" litigation. Rader and O'Malley are among the Federal Circuit judges who have stated forcefully that the judiciary is better suited to address the concerns.
Kilopass is not a troll case, but Rader has suggested publicly that liberalizing fee-shifting would discourage abusive litigation by non-practicing entities. According to a New York Times article he co-wrote earlier this year, only 20 cases were found exceptional out of about 3,000 filed in 2011.
Cook said he and his client were pleased by the decision. "It has been far too tough for prevailing alleged infringers to collect attorney fees, which has led to abuses of the system by a few patent owners," he wrote. "This decision goes a long way to correcting those abuses without chilling appropriate patent enforcement."
Daralyn Durie of Durie Tangri, who represented Kilopass on appeal, could not immediately be reached for comment.