High court rulings could check ‘patent troll’ claims

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U.S. Supreme Court rulings giving federal District Court judges more flexibility in awarding attorney fees to prevailing parties in patent suits could help curb the recent uptick in abusive patent litigation.

Decisions in Octane Fitness, LLC v. ICON Health & Fitness, Inc., No. 12-1184, and Highmark Inc. v. Allcare Health Management System, Inc., 12-1163, may ultimately be game changers in litigation brought by so-called “patent trolls” who purchase old, outdated and unused patents, then sue companies using newer methods or technologies for infringement seeking to force a settlement.

But the full effect of the rulings could take some time. While they may deter some cases of questionable merit, plaintiffs also may push the envelope in order to see what district courts, armed with broader discretion in determining whether fee awards are warranted, will do.

“I think you are going to see some companies not filing cases they would have” before the rulings, said Rudolph Telscher Jr., a principal in the St. Louis office of intellectual property firm Harness Dickey who argued on behalf of Octane Fitness at the Supreme Court. “But I also think that you will see some companies testing the waters to see what district courts will do. You might see less litigation in the long run” if courts begin awarding fees in more cases.

Whether that happens “remains to be seen. District courts may feel like they are empowered a little more,” said Andrew Stein, an associate in the Washington office of DLA Piper. “I think what you will see is an uptick in motions for fees at various points in time, whether after a jury verdict or after a settlement has been reached and one side moves to dismiss the case.”

New standards

Under §285 of the Patent Act, district courts “in exceptional cases may award reasonable attorney fees to the prevailing party.”

The Octane Fitness case involved an infringement claim over exercise equipment. A district court declined to award attorney fees to the defendant, despite its summary judgment victory, citing the standard established by the U.S. Court of Appeals for the Federal Circuit in its 2005 decision Brooks Furniture Manufacturing Inc. v. Dutailier International Inc.

That ruling required a showing of “materially inappropriate conduct” on the part of the plaintiff in bringing an “objectively baseless” claim in bad faith.

But the Supreme Court overturned Brooks Furniture, saying its standard was “unduly rigid, and … impermissibly encumbers the statutory grant of discretion to district courts.”

The court reasoned that because the Patent Act expressly included a fee-shifting provision for prevailing parties, it would be unreasonable to impose a standard for enforcing that provision that is so stringent as to preclude the award of attorney fees in most cases.

The Federal Circuit’s standard is “so demanding that it would appear to render §285 largely superfluous,” Justice Sonia Sotomayor wrote for a nearly unanimous court (Justice Antonin Scalia joined all but three footnotes).

In Highmark, a party was awarded attorney fees after successfully obtaining a declaratory judgment of non-infringement in a case involving a patent on health care systems “utilization review.”

But the Federal Circuit, reviewing the case de novo, reversed the fee award and declined to give deference to the district court’s ruling, instead finding that the infringement claims were not “objectively baseless.”

In another decision authored by Sotomayor, the Supreme Court reversed, holding that appellate courts must use an abuse of discretion standard “in reviewing all aspects of a district court’s §285 determination.”

The Octane decision “lowered the bar for seeking fees in the first place, and Highmark [holds] that the decision to award fees is within the district courts’ discretion rather than appellate courts,” Stein said.

Fighting trolls

The cases were closely watched by patent attorneys who have seen an increase in patent enforcement claims in recent years from plaintiffs who obtain patents for the sole purpose of seeking an infringement settlement.

“If someone goes out and finds a patent from five years ago that didn’t make it to market and it’s a good patent, I have no problem with them suing,” Telscher said. “The problem with trolls is that, by and large, the patents [they buy] aren’t worth anything and they are abusing the system.”

In recent years, Telscher said, there has been a major uptick in the number of patents from the 1990s and earlier that have fallen inactive and been sold at auction or in bankruptcy proceedings. The buyers then use the claims of the newly acquired patents to sue users of newer technologies for infringement.

“The patent trolls will say, ‘It will cost you $3 million to defend this lawsuit. All we want is $500,000,’” Telscher said.

Under the Brooks Furniture standard, even defendants who were confident that they would win faced the possibility of racking up millions in legal fees.

“I have had clients who would have stood up and defended these allegations, but there was no incentive to do so,” Telscher said.

But while the rulings give district courts more freedom to determine whether fees can be awarded, it does not follow that such awards will suddenly become commonplace.

“The court has provided more clarity, but whether it will actually affect whether or not these cases are brought in the first instances, we have to wait and see,” Stein said.

The Octane Fitness standard still sets a high bar, he said.

“I still think it will be rare” for district courts to find “exceptional cases” warranting a fee shift, said Stein, whose practice includes defending claims brought by patent trolls. “There have only been a handful of cases where we would contemplate actually seeking fees. We will see if that calculus changes with the Octane and Highmark rulings,” he said. “But the behavior will still have to be pretty egregious” to warrant a fee award under §285.

Effect on legislation

The issue of patent trolls has caught the attention of Congress, leading to proposed legislation such as the Innovation Act, with would make it easier for patent litigation victors to seek legal fees and also beef up pleading standards for claims of patent infringement. The measure passed the House last year and is now being vetted in the Senate.

Recent reports from the White House and the U.S. Government Accountability Office show that patent troll lawsuits accounted for nearly 20 percent of all patent litigation from 2007 to 2011, and that more than 100,000 businesses have been targeted with infringement claims.

These claims “ stifle innovation and unnecessarily tie up valuable federal court resources,” said William Watkins Jr., a Greenville, S.C., attorney, research fellow at the Oakland, Calif.-based Independent Institute and author of the upcoming book “Patent Trolls: Predatory Litigation and the Smothering of Innovation.”

Telscher said the Supreme Court’s rulings fix many of the problems lawmakers were trying to address.

“In my strong view, these opinions, if applied in the right way, obviate the need for legislation,” he said.

Stein said that although the rulings deal with one area of concern with respect to patent trolls, there are other areas — such as pleading standards — that lawmakers can still address.

“The decisions “will affect the conversation going on in Congress,” but they won’t stop it, he said. “I think they will fuel the fire of some on the Hill who want to make a larger impact.” Follow @dcdicta