Fee-shifting back in the news with Federal Circuit's Kilopass decsion

The CAFC

On Boxing Day the US Court of Appeals for the Federal Circuit ordered that the trial judge in Kilopass Technology v Sidense Corp analyze whether Kilopass Technology should pay the legal fees incurred by its competitor Sidense Corp.  Both parties are competitors in the embedded non-volatile memory market.  California-based Kilopass commenced infringement proceedings against Canadian Sidense despite, Sidense argued, advice that Sidense had redesigned its memory cells.  Sidense also argued that Kilopass had made conflicting arguments during trial. The district court granted summary judgment in favor of Sidense Corporation.  Sidnese filed a motion in the district court for an award of attorney's fees pursuant to Section 285 of Title 35 USC.

Under Section 285, the Court's consideration of whether to award attorneys' fees is a two-step process:

1.  The district court must determine whether the winning party has proved by clear and convincing evidence that the case is "exceptional".  A case is "exceptional" when there has been some material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent or in litigation.  Absent such conduct, sanctions may be imposed if (a) the litigation is brought in subjective bad faith and (b) the litigation is objectively baseless. 

2.  If the district court finds that the case is exceptional, it must determine whether an award of attorneys' fees is appropriate.  

The AmeriKat celebrates Boxing Day the
only way she knows how - by not
delivering an opinion of the CFAC.

Relying on the standard set by the US Court of Appeals for the Federal Circuit in Brooks Furniture Manufacturing v Dutailier, Inc (2005), the district court denied the motion stating that Sidense had not met its burden of establishing by "clear and convincing evidence" that Kilopass had brought/maintained the claim in subjective bad faith.  Sidense appealed the decision.

Sidense had argued that the standard of proof which was required to award fees only in exceptional cases be lowered, but the panel held that it was not up to them - they had to apply the current law.  Circuit Judge Kathleen O'Malley, writing the eloquent opinion of the court, stated that on remand the district court's task was to consider whether Kilopass acted in bad faith in light of the totality of the circumstances.  However, she wrote, subjective bad faith is not the obstacle to fee shifting that the district court "appears to have believed":

"As explained above, a wide variety of proofs can provide the requisite showing of bad faith under Section 285, which must be assessed in light of the totality of the circumstances.  Objective baselessness alone can create a sufficient interference of bad faith to establish exceptionallity under Section 285, unless the circumstances as a whole show a lack of recklessness on the patentee's part.  Thus, the retention of the subjective bad faith requirement may prove to have little effect on this case, as well as many that follow."

Chief Judge Rader concurred stating that judges should be able to assess what fees should be awarded but that the 2005 decision in Brooks Furniture "drastically altered" the court's earlier jurisprudence giving judges authority to assess what fees should be awarded.  Brooks Furniture is responsible for the second limb of the first step of the court's assessment which states that:

"absent misconduct in conduct of the litigation or in securing the patent, sanctions may be imposed against patentee only if both the litigation is brought in subjective bad faith and the litigation is objectively baseless".   

Chief Judge Rader

This, Judge Rader wrote, unfairly restricted the discretion of judges to award fees.   Further, the Court in Brooks Furniture based its reading on the Supreme Court's decision in Professional Real Estate Investors v Columbia Pictures Industries (1993),  but Judge Rader considered that the Supreme Court's decision did not alter the traditional fee-shifting rule.  Professional Real Estate was a case concerning antitrust issues not at play in the present case.  In the antitrust analysis, Judge Rader wrote, both subjective bad faith and objective baselessness might be reasonable to protect parties from punitive damages.  In addition, no other circuit court who applied  required both subjective bad faith and objective baselessness.

Judge Rader stated:

"This court should return to the rule that a district court may shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice."

GAO

Kilopass is the latest case in a chain of events which has seen the Federal Circuit, Congress and the Supreme Court start to grapple with loser pays principle that is a winning litigator's joy in the UK system.  The fee-shifting is also considered a deterrent for patent assertion entities (PAEs) who's business model is to extract royalty revenue from their patent portfolio.  According an August 2013 report published by the Government Accountability Office (GAO), 19% of all patent lawsuits from 2007-2011 accounted for patent infringement lawsuits brought by PAEs.

The GAO report did not touch fully on the litigation cost element as their sample data was not sufficient.  However, the report sites a 2011 AIPLA survey of patent lawyers which stated that the costs of defending one patent infringement lawsuit was between $650,000 to $5 million in 2011, depending on how much was at risk.  Those figures are enough to make any winning party fight hard to overturn the standard established by Brooks Furniture, but the Court of Appeals hands are tied - as are the district court's.  The only thing that will assist Sidense, absent new legislation, will be whether the evidence proves that Kilopass had acted in bad faith in maintaining their patent litigation proceedings.