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Patent Litigation and Legislation Likely to Remain in the News in 2014

Posted Tuesday, January 7, 2014 by Mike Cicero

Over the last few years, the patent system generally and costly patent infringement lawsuits have frequently made their way into the news. On September 16, 2011, President Obama signed into law the America Invents Act which changed the U.S. patent system into a first-to-file system similar to much of the rest of the world. In 2012, the Eastman Kodak Company struggled through bankruptcy proceedings and leveraged an “Imaging Portfolio” comprising roughly 1,150 patents to secure financing to ultimately exit bankruptcy. Then in 2013, the Supreme Court unanimously held in Bowman v. Monsanto that the doctrine of patent exhaustion does not permit a farmer, whom was licensed to use Monsanto’s patented seed technology to grow crops, to reproduce the genetically engineered plant’s seeds for perpetually replanting crops without the patentee’s permission. 133 S.Ct 1761 (2013).

Now with two cases pending before the Supreme Court regarding fee shifting in patent infringement lawsuits and the Patent Transparency and Improvements Act (PTIA) gaining support in the Senate, 2014 is poised to be yet another year ripe with patent news. The central issue to all of these is deciding which party should bear the costs of unsuccessful patent lawsuits.

The provisions of the PTIA would afford courts greater flexibility in awarding attorney’s fees and expenses to prevailing parties in connection any claim unless the court finds the position of the non-prevailing party was “substantially justified.” If passed by the Senate (the PTIA passed the House in late 2013) the current standard for fee shifting, i.e. only if the case is deemed “exceptional,” would be relaxed and more unsuccessful litigants would find themselves shouldering more than just their own legal costs. One potential issue with such a change is the potential deterrent effect of bringing legitimate, yet uncertain, claims of patent infringement. Because the Supreme Court is poised to rule on the issue of discretion in fee shifting this year, some in the Senate wish to wait and see how the highest Court handles the issue before voting on the PTIA.

For a brief analysis of the current “exceptional case” standard of awarding fees, a review of the legal standard discussion section of Highmark, Inc. v. Allcare Health Management Systems, Inc., which is one of the cases pending before the Supreme Court, is helpful. 687 F.3d 1300 Fed. Cir. 2012). The suit commenced when Highmark, an insurance company, filed a lawsuit against Allcare seeking a declaratory judgment of non-infringement, invalidity, and unenforceability of Allcare’s U.S. Patent No. 5,310,105 (“the ‘105 patent) which is directed to “managed health care systems.” The central issue of the case is whether Allcare’s counterclaims of patent infringement against Highmark were frivolous. Ultimately, the Court of Appeals for the Federal Circuit found that only one of the infringement claims was frivolous despite Allcare’s position on claim construction changing several times throughout the suit as to the other infringement claim.

As the statutory basis for the current standard, 35 U.S.C. §285 provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” Id. at 1308. Determining whether to award fees to a prevailing party under §285 is a 2-step process. Id. First, the prevailing party must establish that the case is “exceptional,” such as when a patentee brings frivolous claims, performs inequitable conduct during patent prosecution, engages in misconduct during litigation. Id. Second, if the case is deemed exceptional, the court determines whether awarding fees is appropriate and, if so, the amount. Id. Moreover, the amount depends on the extent to which the case is exceptional. Id. Thus, if the case is exceptional as to only one claim then a court may aptly determine that an award of fees is appropriate only to the extent of defending against that claim.

Absent inequitable conduct during prosecution or misconduct during litigation, a case can be deemed exceptional only if two criteria are satisfied. First, the litigation must be “objectively baseless” such that “no reasonable litigant could reasonably expect success on the merits” of the infringement claim. Second, if the litigation is objectively baseless, it must be shown that the objective baselessness “was either known or so obvious that it should have been known” by the claimant. Id. at 1309.

The CAFC’s explanation of the current “exceptional case” standard in awarding attorney’s fee demonstrates the difficultly actually being awarded fees. For small companies wishing to enforce their patents and especially plaintiffs whose lack of funds leaves contingent representation as a sole option, the “exceptional case” standard provides some degree of certainty as to litigation costs. The extent to which the proposed “substantially justified” standard is lower than the current “exceptional case” standard is not clear.

Lowering the standard at all, however, would likely reduce the number of patent infringement lawsuits filed due to uncertainty as to whether the suits would be “substantially justified.” For large incumbent companies which simply budget for patent litigation as a regular business expense and sometimes defend against questionable claims this would potentially be good news. Contrarily, for the small start-up company barely able to afford their own legal expenses for enforcing their patent rights, let alone their adversaries costs, reducing the standard to may raise the stakes of patent infringement such that bringing even legitimate claims simply too risky a proposition.

In the opinion of attorney Robert Lindefjeld (chairman of the American Bar Association’s IP Section), the fee awarding provisions of the PTIA will increase the costs of legitimate patent lawsuits in an attempt to curb a relatively small number of frivolous lawsuits. Moreover, he believes the Supreme Court will offer a more appropriate solution by leaving the discretion in awarding fees to the trial judges who witness the case being tried first hand. However this issue is ironed out in the short run, it will certainly be interesting to follow the subsequent practical effects.

Ruttler Mills PLLC
One Union Square, 1730, 600 University Street, Seattle, Washington 98101 US
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Phone: (206) 838-6400

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