LEGAL
In early December 2013, the U.S. House of Representatives passed the Innovation Act by a broad bipartisan margin of 325 to 91. The act contains a number of patent litigation reforms aimed at curbing abusive practices by "non-practicing entities," more commonly known as "patent trolls." Although it hasn't become law just yet, a similar measure is being considered by the Senate, and the White House has announced its support for the proposed act.
One of the Innovation Act's principal reforms would require fees and expenses to be paid to the prevailing party "unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact."
However, such fee-shifting isn't a brand new concept in patent law: 35 U.S.C. § 285 currently allows courts to award attorneys' fees to the prevailing party in "exceptional" cases. Nevertheless, such awards are particularly uncommon occurrences. As noted in a June 2013 New York Times op-ed, that provision was invoked to shift fees in "only 20 out of nearly 3,000 patent cases filed in 2011."
That may soon change, even if the Innovation Act never becomes law. At the end of December, a three-judge panel on the U.S. Court of Appeals for the Federal Circuit ruled in Kilopass Technology v. Sidense Corp., in which it lowered the standard to invoke the fee-shifting statute in patent infringement cases.
The case involved a patent infringement dispute between Kilopass and Sidense, two competitors in the embedded non-volatile memory market (thankfully, technical knowledge of the workings of non-volatile memory isn't necessary to understand the ruling's legal implications).
The short version of the facts goes something like this:
Upon reviewing Sidense's international patent application, Jack Peng, Kilopass's founder and an inventor on all three of the company's patents, believed that the subject of Sidense's patent application was similar to Kilopass's patented cells, with some differences. Kilopass investigated into possible patent infringement claims over the course of several years, which included consulting with two different law firms on the merit of possible patent infringement claims against Sidense.
Kilopass eventually moved forward with the litigation, and the district court granted Sidense summary judgment of noninfringement. Kilopass appealed (and the judgment was summarily affirmed by the appeals court). While that appeal was pending, however, Sidense filed a motion in the district court for an award of attorneys' fees, which was denied. This most recent ruling is the result of Sidense's appeal of that denial.
The standard in determining whether to award attorneys' fees was set forth in 2005's Brooks Furniture Manufacturing v. Dutailier, Inc., which held that a case may be deemed exceptional "when there has been some material inappropriate conduct related to the matter in litigation." Absent such misconduct, however, "sanctions may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless."
Sidense argued that the district court erred in expecting that party to provide proof of actual knowledge that Kilopass knew that its claims were baseless in order to satisfy the first requirement. The appeals court couldn't divine whether the district court had actually held Sidense to such a requirement – but, the court went on, if the district court did, it erred in doing so. Instead, the appeals court held that "subjective bad faith only requires proof that the 'lack of objective foundation for the claim 'was either known or so obvious that it should have been known' by the party asserting the claim.'"
As this relates to Kilopass v. Sidense, the court found that Kilopass didn't necessarily decide to move forward with litigation with the full knowledge and awareness that its infringement claims were baseless; the court noted that Kilopass believed, misguided though it was, that its claims were not baseless.
The court faulted the company, however, for basing this belief "on zealousness rather than reason," further holding that where "the patentee is manifestly unreasonable in assessing infringement, while continuing to assert infringement in court, an inference is proper of bad faith."
Although not nearly as permissive in allowing fee-shifting as the provisions of the Innovation Act, this standard will likely see an increase in the number of patent infringement cases in which § 285 is successfully invoked.
Thus, even if the Innovation Act never becomes law, litigants in patent suits must nonetheless be cautious that their beliefs about the validity of their cases are reasonable, lest a court find otherwise and issue an order to pay the other party's fees.
Jeremy Byellin is a practicing attorney in the state of Minnesota and a writer for the Westlaw Insider blog. His articles for the blog cover a wide range of legal topics, with a specific focus on major legal developments and cyberlaw.
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