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.

Clarifying the law relating to double jeopardy in patent litigation

Author: Eddy D. Ventose (Faculty of Law, Cave Hill Campus, University of the West Indies, Barbados)

Resolution Chemicals Ltd v H. Lundbeck A-S [2013] EWCA Civ 924, Court of Appeal, England and Wales

Journal of Intellectual Property Law & Practice (2013) doi: 10.1093/jiplp/jpt194, first published online: November 12, 2013

The Court of Appeal of England and Wales has simplified the test relating to privity of interest, enabling litigants to know the circumstances in which a party will be prevented from re-litigating a matter.

Legal context and facts

Lundbeck, a Danish pharmaceutical company, owned a European patent which was subsequently the subject of a supplementary protection certificate (SPC). The SPC related to escitalopram, a single enantiomer of the compound citalopram, a drug used for the treatment of depression. The UK equivalent of the patent was ultimately declared invalid in revocation proceedings in 2005. Before and during the litigation, the claimant, Resolution, was part of the Arrow Group, the holding company of Arrow Genetics—one of the generic pharmaceutical companies that had brought the 2005 proceedings against Lundbeck. Resolution, now an independent company, wished to bring invalidity proceedings against the SPC, relying on the invalidity of the patent. Lundbeck argued that Resolution was precluded from bringing the action because of the privity of its interest with Arrow Generics, which was in turn estopped from bringing a similar action as a result of the judgment in the 2005 proceedings. Was Resolution thus precluded from bringing its proceedings? In the High Court, the judge held that Arrow Generics would be precluded by issue estoppel and the doctrine of abuse of process from challenging the validity of the SPC on the ground that the patent was invalid.

Analysis

Floyd LJ, speaking for a unanimous Court of Appeal, stated that privity of interest provided an exception to the general principle of the law of estoppel in that the estoppel binds only the parties to the previous litigation. He stated that the rules of law compendiously described as estoppels were very broadly based on the principle that nobody should be vexed twice in the same cause. So, for example, in cause of action estoppel, party A would not be allowed to litigate the question of whether a cause of action existed with a counterparty B more than once. Floyd LJ explained that the successful litigant and the public had an interest in this being the law: first, the litigant has an interest in not being vexed twice in the same cause; secondly, the public also has an interest in ensuring that the scarce resources available for resolving disputes are used efficiently. There was, however, no reason in principle why a different party, C, who had the same complaint against B, should not be free to litigate the same question. Floyd LJ noted that, notwithstanding the fact that A might have lost a first action, fairness normally demands that C should not be precluded by the manner in which A conducted the first action from bringing his own action, calling his own evidence and challenging the evidence called by B.

In the court's view, these principles applied to actions for revocation of patents as they do to any other type of action: while the final revocation of a patent was a judgment in rem and therefore could be relied on by the world at large, a judgment that a patent is valid determines issues only between the parties to the revocation action. Floyd LJ explained that third parties might launch second and subsequent attacks on the patent and that it was not necessary for any such party attacking a patent to show any particular interest: the cause of action is vested in ‘any person’. The patentee does, however, receive some protection from successive, unsuccessful attacks in terms of the costs order the court may make, but that is all. Floyd LJ claimed that the law recognizes that there are some classes of case where fairness demands that party C should be precluded from re-litigating a matter even though it was not a party to the previous proceedings between A and B. An example of these is where party C was in ‘privity of interest’ with A and that the privity of interest has been said to be a ‘somewhat narrow’ doctrine: one type of case where privity was recognized was where C knew of proceedings between A and B in which his rights were being tested but stood back and did nothing.

After considering the leading authorities, including the judgment of Sir Robert Megarry in Gleeson v J Wippell & Co [1977] 1 WLR 510, Floyd LJ summarized the state of the law relating to privity of interest as follows: a court, which has the task of assessing whether there is privity of interest between a new party and a party to previous proceedings, needs to examine (a) the extent to which the new party had an interest in the subject matter of the previous action; (b) the extent to which the new party can be said to be, in reality, the party to the original proceedings by reason of his relationship with that party; and, against this background, (c) to ask whether it is just that the new party should be bound by the outcome of the previous litigation.

Floyd LJ found that Lundbeck had not established that the judge made any error of law. He noted the extent of the identity between Arrow Generics and Resolution was that they were part of a group of companies under the common control of Mr Tabatznik, the Chief Executive Officer of the Arrow Group and a director of Resolution. Floyd LJ held there was no subsisting relationship between them in 2006 pursuant to which Arrow Generics was conducting the 2005 proceedings for Resolution's benefit. He was of the opinion that: (1) Resolution was Mr Tabatznik's chemistry set, but he was not playing with it to make escitalopram; (2) Resolution had no concrete interest in the 2005 proceedings. As a result, it would be quite unjust to hold Resolution bound by the outcome, and the judge was entitled to come to that conclusion. Floyd LJ added that he would not come to any different conclusion applying a broad merits-based approach; and, if anything, the case for Resolution was stronger as it would be proper to take into account the fact that Resolution was now independent of the Arrow Generics and operating under a different business model.

Practical significance

This decision has provided some useful clarity in relation to the byzantine area of law that is privity of interest. Moreover, it re-affirms the narrow scope of the doctrine; and the simplicity with which the test has now be cast will enable litigants to know in what circumstances a party will be prevented from litigating the same matter. In such cases, litigants should be advised of the following: (1) a litigant who had a legal interest in the outcome of earlier proceedings, but did not participate but was content to stand by and see his battle fought by someone else, would be precluded from re-litigating the matter even though he was not a party to the previous proceedings; (2) it is a question of fact whether a company within a group of companies has sufficient interest to be precluded from re-litigating the matter; (3) a commercial interest in the success of the previous proceedings it not of itself sufficient to bring a litigant within the narrow scope of the privity of interest doctrine. Of critical importance will be the degree of identification that would be necessary for the doctrine of privity of interest to stop applicants from re-litigating matters. In this case, the fact that Resolution was part of the Arrow Group was not sufficient to satisfy the necessary degree of identification and neither was its current commercial interest in marketing the generic version of escitalopram. What was critical was that, at the time of the earlier litigation, Resolution did not have necessary interest, which meant that, consequently, it did not have ‘privity of interest’ with Arrow Generics to prevent it (Resolution) from re-litigating the escitalopram patent.