Patent litigants beware: awards of attorneys' fees just got easier with Federal Circuit's Kilopass decision

Authors: Paul Keller and Annsley Merelle Ward (1Allen & Overy, New York and London respectively)

Kilopass Technology, Inc v Sidense Corporation No 2013-1193 (Fed Cir Dec 26, 2013), Court of Appeals for the Federal Circuit, USA

Journal of Intellectual Property Law & Practice (2014) doi: 10.1093/jiplp/jpu027, first published online: March 27, 2014

In further clarifying the burden of proof required to prove that fee-shifting should apply under 35 USC s 285, the Federal Circuit's decision continues to demonstrate the court's attempts to minimize gamesmanship in patent infringement cases and discourage unsupported allegations from being brought.

Legal context

Unlike in jurisdictions such as England and Wales, there is no presumption under US law that a proportion of the attorneys' fees of the winning party is to be paid by the losing party. Parties instead bear their own legal costs. However, under 35 USC § 285 and, as expounded in the Court of Appeals for the Federal Circuit (CAFC) in Brooks Furniture Manufacturing v Dutailier, Inc, 393 F3d 1378 (Fed Cir 2005), a District Court can decide to depart from that rule in exceptional circumstances. Under that case, a winning party had to prove
* by clear and convincing evidence (Ruiz v AB Chance Co, 234 F3d 654, 669 (Fed Cir 2000)), that the case is ‘exceptional’ (35 USC s 285; Cybor Corp v FAS Techs, Inc, 138 F3d 1448, 1460 (Fed Cir 1998) (en banc)) or, if absent conduct that makes a case ‘exceptional’, the litigation is brought in subjective bad faith and the litigation is objectively baseless (Professional Real Estate Investors v Columbia Pictures Industries, 508 US 49, 60–61), and

* that an award of attorneys' fees is appropriate.
A case is ‘exceptional’ when there has been ‘some material inappropriate conduct related to the matter in litigation, such as wilful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Federal Rule of Civil Procedure 11 or like infractions’ (see Brooks Furniture, above; Cambridge Prods Ltd v Penn Nutrients, Inc 962 F2d 1048, 1050–51 (Fed Cir 1992); Beckman Instruments, Inc v LKB Produkter AB, 892 F2d 1547, 1551 (Fed Cir 1989)). Rule 11 permits courts to impose sanctions where a claim, defence or other legal contentions are ‘not warranted by existing law or by a non-frivolous argument’.

Facts

California-based Kilopass and Canada-based Sidense are competitors in the embedded non-volatile memory (NVM) market. NVM consists of memory devices that retain their information or state when power is removed. In May 2010, Kilopass commenced patent infringement proceedings in the United States District Court for the Northern District of California against Sidense, alleging both literal infringement and infringement under the doctrine of equivalents in respect of three patents related to programmable memory cells comprising of transistors located at the intersection of a column bitline and a row wordline. Claim 1 of the representative patent, US 6 940 751 requires (i) a first and second doped semiconductor region of the memory cell and (ii) that the second doped region be connected to one of the row wordlines.

Before commencing proceedings in 2005, Kilopass instructed a patent firm to assess whether technology described in a Sidense international patent application that was directed to protecting its 1T-Fuse memory product infringed Kilopass's patents. Kilopass was advised that, if Sidense's actual 1T-Fuse product was the same as that described in the international patent application, Sidense's product did in fact infringe Kilopass's patents. However, if that assumption was wrong and Sidense had eliminated any particular claimed element, most notably, the first doped region, and replaced it with a shallow trench isolation region, then Sidense ‘would not infringe [the] claims literally’ (JA 10601 (emphasis in the original)).

Later, Kilopass was informed by its attorneys that the Sidense ‘area of interest’ had indeed been replaced, and that the redesign had avoided infringement of Kilopass's patents or ‘at least make our case much tougher’ (JA 10604). Another firm retained by Kilopass confirmed the earlier advice it had received—although Kilopass had reasonable arguments that Sidense's field oxide region was equivalent to the doped region in Claim 1, arguing literal infringement ‘may be difficult’ (JA 11497).

At trial, the District Court found that Sidense's product did not infringe any of Kilopass's patents. The court's decision was based primarily on the difference in the ‘area of interest’ and the claimed region. The decision was affirmed by the CAFC.

In addition to its finding of no liability, however, the District Court took pains in its decision to discuss what it considered to be Kilopass's ‘gamesmanship’ in the proceedings. Most notably, the court found that Kilopass had made contrary construction arguments to the USPTO's Board of Patent Appeals and Interferences. The court also criticized Kilopass for attempting to advance previously undisclosed arguments on the doctrine of equivalents without the court's permission. This, the court held, was ‘particularly inappropriate in light of evidence that Kilopass has known for many years that Sidense does not literally infringe its patents’ (Kilopass, 2012 WL 6599428, note 8). Following the District Court's ruling, Sidense filed a motion in the District Court seeking an award of over $4.2 million in attorneys' fees under 35 USC s 285.

Relying on the standard set by the CAFC in Books Furniture, the District Court denied Sidense's motion holding that Sidense had failed to demonstrate by ‘clear and convincing evidence’ that Kilopass had brought or maintained its claim in subjective bad faith. Focusing on Kilopass's ‘good faith’ acts–such as having performed a pre-filing investigation and obtaining infringement opinions from two different law firms–the District Court concluded that Kilopass's acts had not raised to the level required by s 285, and could not grant Sidense's motion for fees (ibid, note 3). Sidense appealed to the CAFC.

Analysis

Sidense advanced four arguments before the CAFC. First, it argued that the District Court applied the wrong legal standard in requiring that it be shown that Kilopass had actual knowledge that its case had no objective foundation (MarcTec, LLC v Jonson & Johnson 664, F3d 907 (Fed Cir 2012)). The CAFC agreed. To demonstrate bad faith for s 285 purposes, proof that the plaintiff was reckless is all that is required (ie, it was known or it should have been known that there was an objective lack of foundation in the claim: Highmark v Alcare Health Management, 687 F3d 1300 (Fed Cir 2012)). The CAFC further clarified that in considering a party's subjective state of mind, courts must take into account ‘the totality of the circumstances’. Focusing narrowly on only on the evidence of ‘good faith,’ as the District Court did, is inadequate under s 285. Objective factors, including the objective merits of Kilopass's claim, must also be taken into account (Professional Real Estate Investors, p 16).

Secondly, Sidense argued that instead of having to prove bad faith and objective baselessness to satisfy the ‘exceptional’ standard under s 285, proving objective baselessness should be enough. Although the CAFC disagreed and re-affirmed that the ‘exceptionality’ inquiry under s 285 requires an analysis of both objective baselessness and subjective bad faith, it did agree that a showing of objective bad faith alone may justify a finding of exceptionality under s 285 (Professional Real Estate Investors, p 22). The Appeals Court found that if such an objective bad faith showing is made, the subjective bad faith requirement ‘may prove to have little effect on this case, as well as many that follow’ (ibid, p 23).

Third, Sidense argued that a winning party should be able to prove exceptionality by a preponderance of evidence, not ‘clear and convincing’ evidence. Here, although the particular CAFC panel hearing the case was sympathetic to Sidense's views, it was bound by the court's previous precedents, and was not in a position to reverse those now. Specifically, in reviewing the origin of the clear and convincing standard in ‘exceptionality’ cases, the CAFC panel reviewed the Supreme Court's decision in Virtue v Creamery Package Manufacturing Company, 227 US 8, 37–38 (1913) and the pronouncement that ‘an assertion of infringement of a duly granted patent is made in good faith’. The panel found, however, that Virtue did not record any such presumption or any requirement that a defendant needs to overcome such a presumption by clear and convincing evidence (Highmark, 687 F3d at 1310 (quoting Medtronic Navigation, Inc v BrainLAB Medizinische Computersysteme GmbH, 603 F3d 943, 954 (Fed Cir 2010)). Other CAFC cases that referred to the clear and convincing standard of proof under s 285 were limited to cases of fraud. Reactive Metals & Allows Corp v ESM Inc, 769 F2d 1578 expanded the clear and convincing burden to all aspects of the s 285 analysis. The panel found that the historical expansion of the standard was ‘unneeded’ and that a ‘preponderance-of-the-evidence standard is typical in civil cases–particularly with respect to compensatory provisions such as Section 285’ (Professional Real Estate Investors, p 24). It could not, however, reverse the full Appeal Court's precedent, and thus could not accept Sidense's position.

Finally, Sidense argued that instead of requiring that a case be objectively baseless to support fee-shifting in the absence of litigation misconduct, the court should find that fee-shifting is appropriate when a patentee has filed or maintained a patent infringement suit that merely has little likelihood of success. The CAFC considered this to be the weakest of the four arguments, holding that in light of the Supreme Court's decision in Professional Real Estate Investors, Inc v Columbia Pictures Industries, Inc 508 US 49 (1993) as long as the patentee has an objectively reasonable basis for its claim, then s 285 fees should not be awarded. The CAFC reiterated that even if a defendant cannot show that a patentee's claim was objectively baseless, there are other bases for fee-shifting under s 285, ie litigation misconduct, wilful infringement or unprofessional behaviour (MarcTec, LLC and Monolithic Power, Sys Inc v O2 Micro International Ltd 726 F3d 1359, 1366 (Fed Cir 2013)). Trial courts retain broad discretion to make findings of exceptionality under s 285 in a wide variety of circumstances; proving objective baselessness and subjective bad faith is just one of them.

In a concurring opinion, Chief Judge Rader endorsed Sidense's arguments that objective baselessness and proof by a preponderance of the evidence should be sufficient for an award of attorneys' fees. He stated that trial judges should be able to assess what fees should be awarded but that Brooks Furniture ‘drastically altered’ (Professional Real Estate Investors, p 23) earlier jurisprudence that gave judges authority to assess what fees should be awarded in the totality of the circumstances. In his opinion, this decision unfairly restricted the discretion of judges to award fees.

The CAFC therefore vacated the District Court's decision denying Sidense's motion for attorney's fees and remanded for consideration whether Kilopass's doctrine of equivalents theory was objectively baseless and then, whether the totality of the circumstances demonstrated that Kilopass acted with subjective bad faith. If the District Court considers that the case is exceptional, then it should determine whether, in its discretion, it should award attorneys' fees to Sidense under s 285 or on alternative grounds, if any exist.

Practical significance

The required showing of exceptionality under s 285 has changed. If, under the totality of the circumstances, an alleged infringer can show by clear and convincing evidence that the patentee's assertions were ‘objectively baseless’, an award of attorneys' fees will be justified. As such, patent litigants considering whether to pursue ‘aggressive’ tactics should take pause and carefully consider the potential risk of losing the matter and the likelihood that they will be required to pay the attorneys' fees of the other side. This additional assessment is important especially now that the impact of non-practising entities (NPEs) is being scrutinized by the judicial and legislative branches of the US government.

Indeed, according to a 2013 report published by the US Government Accountability Office (GAO), between 2007 and 2011 patent infringement suits brought by NPEs in the USA accounted for 19 per cent of all patent lawsuits (United States Government Accountability Office, Report to Congressional Committees, August 2013, ‘Assessing Factors That Affect Patent Infringement Litigation Could Help Improve Patent Quality’, http://www.gao.gov/assets/660/657103.pdf (accessed 29 January 2014)). Although the GAO report did not touch fully on the litigation cost element, the report cited a 2011 American Intellectual Property Lawyers Association survey of patent lawyers that showed that the costs of defending one patent infringement lawsuit was between $650 000 to $5 million in 2011 (AIPLA, Report of the Economic Survey 2011 (Arlington, VA: July 2011)). This decision highlights the risks to those litigants who are not pursuing their claims in good faith but are gaming the litigation process for an improper purpose.

No comments:

Post a Comment