USPTO Loses Its-Heads I Win, Tails You Lose Rule re: Attorneys’ Fee Awards

Jul 27, 2018


Last year I wrote about the United States Patent and Trademark Office (USPTO) taking the position that even when it lost, the other side had to pay its attorneys’ fees.

Today, the Federal Circuit Court issued a decision rejecting the USPTO’s position.  In a split decision, the Court found that the “American Rule [that parties only pay their own attorneys] prohibits courts from shifting attorneys’ fees from one party to another absent a ‘specific and explicit’ directive from Congress” and that the language relied on by USPTO “falls short of this stringent standard.”

In Nankwest, Inc. v. Matal,(E.D. Virginia 2016) 162 F. Supp.3d 540, the USPTO rejected a patent application and the applicant appealed the USPTO’s decision to a federal district court. The district court partially affirmed and partially denied the USPTO’s decision.  The USPTO filed a motion to recover its costs from the patent applicant, including its attorneys’ fees, but the trial court refused to award the USPTO its attorneys’ fees.  The USPTO appealed to the Federal Circuit, which reversed and awarded the USPTO its attorney’s fees, finding that even when the USPTO lost, it was entitled to recover its attorneys’ fees.

That decision was widely criticized and the Federal Circuit withdrew its earlier decision and reviewed the issue en banc. On July 27, the Federal Circuit issued its en banc decision that the USPTO cannot recover its attorneys’ fees from applicants that appeal USPTO decisions to the federal courts, even when the applicant loses: “The American Rule is a bedrock principle of this country’s jurisprudence” that “in the United States each litigant pays his own attorney’s fees, win or lose.”  So as it’s often been asserted, in litigation everybody loses except the lawyers.


Rumors of the Patent Troll’s Death Have Been Greatly Exaggerated

Jun 04, 2014

The Supreme Court’s recent decision in Octane Fitness v. ICON has been hailed by patent reform advocates and some commentators as a death blow to so-called “patent trolls,” patent owners who enforce patent rights despite not actually using or licensing the patents in question.  In Octane Fitness, the Court relaxed the standard for awarding attorney’s fees in patent cases.  Many believe that patent trolls, as bad actors, will now run for the hills in fear of paying successful defendants’ fees.  The reality, however, is far more nuanced.  Indeed, patent trolls’ prevalence in United States courts could actually prevent any bright line application of the Octane Fitness rule to patent trolls.

The Octane Fitness Case

At issue in Octane Fitness was the application of a federal statute allowing district courts to award “reasonable attorney fees to the prevailing party” in “exceptional cases.”  The Federal Circuit Court of Appeals had previously interpreted the provision to require findings of “material inappropriate conduct” or that the losing party’s case was both “objectively baseless” and “brought in subjective bad faith.”  Justice Sotomayor, writing for a unanimous Court, found that test too narrow, noting that the attorney’s fees statute “imposes one and only one constraint on district courts’ discretion to award attorney’s fees in patent litigation: The power is reserved for ‘exceptional’ cases.’”  The Court held the statute applied more broadly:

“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. District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.”

The Court also overturned the high “clear and convincing evidence” threshold, which the Federal Circuit had previously required litigants to satisfy to recover fees, finding that fees should be awarded if a party proves by a preponderance of the evidence that the case is “exceptional.”

Octane Fitness’ Impact

So, how severe a blow is this holding to the average patent troll?  The likelihood is:  Not as fatal as advertised.  Although a defendant that prevails in litigation against a patent troll will now have an easier time establishing that its case is “exceptional,” nothing in the decision suggests that cases brought by patent trolls, (patent owners who don’t use their patents) will automatically be more susceptible to a fee award than any other patent infringement litigant.  To the contrary, Octane Fitness, expressly states that “there is no precise rule or formula for making these determinations.”  Neither party in the Octane Fitness case was a patent troll, nor does the case discuss patent trolls even once.

Patent Trolls Are Not Automatically “Exceptional”

Those suggesting that Octane Fitness will dramatically alter the landscape of patent troll lawsuits, therefore, appear to be assuming that patent trolls, en masse, will fear the prospect of paying the defendants’ legal fees and opt against filing infringement suits.  But Octane Fitness provides patent trolls with plenty of room to maneuver.  The Court notes that “exceptional” means “uncommon, rare, or not ordinary.”  Patent trolls and their counsel, however, can point to substantial data refuting the proposition that their infringement suits are particularly “exceptional.”  A 2013 White House report states that 62% of all infringement suits are brought by patent trolls, who threatened more than 100,000 companies in the year prior to that report.  If such suits make up more than half of the patent suits in the federal courts, can they be said to be, by definition “uncommon, rare, or not ordinary”?

Some Patent Trolls May Be “Exceptional”

This is not to say that patent trolls will be immune from the attorney’s fees provision in question.  Far from it.  The point is simply that the strength of their cases, and the legitimacy of their litigation conduct will more likely be judged on a case-by-case basis.  The same White House report referenced above finds that many patent trolls engage in conduct that most district courts may find exceptional, including:  “focus[ing] on aggressive litigation, using such tactics as: threatening to sue thousands of companies at once, without specific evidence of infringement against any of them; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not imagined at the time they were granted.”

Nonetheless, couldn’t such conduct easily be described as “materially inappropriate” and the cases in question “objectively baseless” and “brought in subjective bad faith”?  If so, do patent trolls truly face an increased risk of paying defendants’ attorney’s fees?  Arguably not, and the prior standard clearly did little to dissuade patent troll infringement suits.

Additionally, defendants, and not only patent trolls, face a less exacting standard for having fees awarded against them.  If the troll has a valid patent and a strong case of infringement, therefore, Octane Fitness could make it twice as expensive for a defendant to fight, as the court could force the defendant to pay the troll’s fees.

In sum, the impact that Octane Fitness will have on patent troll lawsuits is far from clear.  Despite the public policy implications of such suits, they have become so ubiquitous that courts may not be able to deem them per se “exceptional.”  To the extent that the decision in Octane Fitness does result in fewer suits by patent trolls, arguably, the relaxed burden of proof (from clear and convincing to preponderance of the evidence) will have been  more significant than the Court’s revised definition of “exceptional.”  In any event, it is likely that infringement suits brought by patent trolls will continue to be decided on the merits of the particular case and the deftness of the attorneys on either side.