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30 April 2014Patents

US Supreme Court hits ‘trolls’ with double whammy

‘Patent trolls’ may be less keen to litigate cases in the US after the Supreme Court made it easier to seek legal fees from the losing party.

The twin decisions, both handed down with a 9-0 majority on April 29, give district courts more flexibility when deciding whether to award the winner its costs.

Under US patent law, litigants are expected to pay their own fees regardless of the result. But a narrow provision, called § 285, allows the winner to force the loser to pay its costs in “exceptional” circumstances.

The provision is often used by prevailing plaintiffs, but in the cases before the Supreme Court, two defendants were seeking payment for their non-infringement.

Octane Fitness, a maker of exercise equipment, was sued by competitor Icon Health and Fitness for infringing a patent. A US district court rejected the claims but denied Octane’s calls for attorneys’ fees under § 285.

The US Court of Appeals for the Federal Circuit, which later backed the fee rejection, relied on a case called Brooks Furniture, in which it defined an “exceptional case” as involving either “material inappropriate conduct” or being both “objectively baseless” and “brought in subjective bad faith”.

But the Supreme Court said the Brooks Furniture framework is “unduly rigid” and impeded the discretion of district courts.

Overturning the Federal Circuit’s ruling, the Supreme Court held that an “exceptional” case is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position … or the unreasonable manner in which the case was litigated”.

In the second case, health insurer Highmark was sued by Allcare Health Management Systems, which claimed that Highmark's data systems infringed a patent covering computerised information-management systems.

A US district court agreed that the suit was exceptionally baseless and awarded Highmark all its attorneys’ fees. On appeal, however, the Federal Circuit partially vacated this award, ruling that “objectively baseless” is a question of law subject to de novo review.

But according to the Supreme Court, which said the Highmark decision followed directly from Octane, an appellate court should instead apply an “abuse-of-discretion” standard when reviewing all aspects of a district court’s § 285 finding.

Cindy Kernick,partner at Reed Smith who represented Highmark in its dispute, said both rulings will make patentees, especially non-practising entities, “stop to think about the true merits of infringement claims before they are asserted.”

While this may be true, district courts might also react to defensive positions asserted by accused infringers that are viewed as having “questionable merit” or where a party “merely asserts any defence under the sun hoping that it will stick,” said Jeanne Gills, partner at Foley & Lardner LLP.

Nevertheless, she said, the decisions are likely to spark an increase in the number of § 285 fee awards sought by prevailing defendants, particularly those that win “across the board” on non-infringement, invalidity or some other defence.

Despite a probable rise in § 285 cases, there will not necessarily be an increase in successful claims, said Orion Armon, partner at Cooley LLP.

“Even under a lower legal standard and lower burden of proof, fee awards are only available when there’s a final judgment. The vast majority of cases settle, so most litigants won’t get an opportunity to raise the issue.

“Even when a final judgment is entered, litigation outcomes are often mixed, so a key question litigated in fee motions will be determining who the prevailing party is,” he said.

The two cases are expected to return to the district court.

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