Proposed Legislation May Now Permit Fee Shifting in Patent Litigation
Currently in patent infringement cases (including declaratory judgment cases), 35 U.S.C. section 285 reads, “the court in exceptional cases may award reasonable attorney fees to the prevailing party” (emphasis added). As of December 5, 2013, House Representative Bob Goodlatte’s “Innovation Act,” among other changes, seeks to amend this fee shifting statute to have the non-prevailing party pay the prevailing party’s fees as the norm, unless the non-prevailing party was “reasonably justified in law and fact.” See H.R. 3309, Innovation Act, section 3 Patent Infringement Actions, subsection b, Fees.
Generally, attorneys are fond of such fee shifting provisions as such provisions permit an attorney to take cases with merit but where the client may not be in a financial position to pay the likely fee arising from the representation. However, this fee shifting provision was not proposed to enable small companies to sue large companies. Rather, this fee shifting provision was proposed to target the perceived abusive litigation practices of patent-trolls. H.R. 3309 refers to patent-trolls as PAEs – patent asserting entities. Patent-trolls are also commonly known as NPEs – non-practicing entities. Regardless of name, patent-trolls do not practice the inventions for which they own patent rights; but rather, trolls seek license agreements from alleged infringers by threatening infringement litigation if the alleged infringer does not settle for some licensing agreement. At one extreme of this behavior, trolls practice extortion which is why there is now pending legislation aimed at mitigating such behavior. However, at lesser extremes, what trolls do, is what any patentee would do to protect their patent rights and thus the line between trolls and other patentees is not always clear. In any event, the point of this article is not to discuss the merits of troll behavior, but instead to discuss potential unintended consequences of this proposed fee shifting provision.
This proposed fee shifting legislation may have four unintended consequences, which are: (1) reducing the number of good-faith patent suits that otherwise would be brought by a small company; (2) reducing communication and negotiations between potential litigants; (3) artificially increasing the financial burden to file a patent suit; and (4) eliminating the viability of the covenant not to sue as a settlement tool. Lastly, the proposal exception language of “reasonably justified in law and fact” will be discussed.
The logical result of such fee shifting in the patent infringement litigation context will be to reduce the number of cases filed because the fees associated with litigating patent cases are generally high compared to other categories of litigation. For example, it is not unusual for litigation fees to run at a million dollars or more through discovery and over two million dollars through trial in a patent suit. So whether one is a patentee who wants to file an infringement action or one is declaratory judgment plaintiff, one will think twice before filing, knowing that if they lose they could be on the hook for the other side’s fees. That is, this fee shifting provision will chill patent litigation in general, which in general diminishes the strength of patent rights.
Additionally, that logical result tends to be asymmetrical as between a small company and a large company. The prospect of having to pay the opposition’s attorney fees is much more significant for a small company with less resources compared to the large company. Thus the fee shifting provision actually tends to chill litigation arising from the small company, which places the small company at a disadvantage against larger companies.
This problem is even worse for a small company. This fee shifting provision will also act to reduce communication and negotiations between potential litigants, which runs contrary to the courts encouraging out of court resolutions to disputes. Why is this so?
Consider a small patentee concerned a large company is infringing. But the small patentee is not sure enough about the alleged infringing activities of the large company and does not want to risk having to pay the larger company’s attorney fees and so does not yet file for infringement. Instead, the small patentee begins a dialogue with the large company. The result, the large company files a declaratory judgment action against the small patentee and now the small patentee is faced with paying the prevailing party’s fee, which is the very reason why the small patentee did not file first. So instead, what we will start to see happen under such a fee shifting provision are small patentees delaying suing and not communicating with a potential infringer until the patentee feels strongly their patent is being infringed.
Such a fee shifting provision could also change the way wilful infringement is historically established. If the fee shifting provision reduces a patentee’s communications with a potential infringer, the patentee will be less inclined to send out demand letters and cease and desist letters to potential infringers, because such letters could give the potential infringer standing to then bring a declaratory judgment action, potentially putting the patentee on the hook for attorney fees of this potential infringer.
This fee shifting proposal also creates a further problem for the small patentee. That is, to get to the point of feeling comfortable enough to file suit will now require a significant outlay of funds to conduct pre-filing due diligence. Such diligence would include hiring experts, reverse engineering, and claim construction – all before filing – just to make the patentee comfortable with filing an infringement claim with minimal risk of having to pay the other side’s attorney fees. Again, this creates a high hoop for the small patentee to jump to just file suit and will reduce not only meritless claims but also will reduce the filing of claims with merit.
Further, the proposed legislation has also removed one of the patentees’ litigation tactics so as not to be deemed a non-prevailing party. Traditionally, a patentee litigant would offer a covenant not to sue for infringement to settle a case right before trial if the case had progressed to a point which began to look unfavorable for the patentee. For example, rather than risk having the patent invalidated at trial, the patentee extends the covenant not to sue to the alleged infringer to settle the case. This is currently a tactic of trolls who typically have no idea whether the patent claims they were asserting were valid or not. So when an alleged infringer would take a troll up to the eve of trial, was often offered a covenant not to sue, so the troll could then go after another alleged infringer who may not fight them as strongly. To deal with this troll behavior, H.R. 3309 will deem a party who has asserted a claim for relief and then subsequently and unilaterally extends a covenant not to sue for infringement as a non-prevailing party. The proposed legislation does carry a narrow exception, in that such a party will not be deemed a non-prevailing party if that party who made the unilateral offer could have voluntarily dismissed the action under FRCP 41. Thus, the covenant not to sue as a settlement tool is effectively eliminated, which again then places more pressure on a claimant up-front in deciding whether to file or wait. That is, elimination of this settlement tool also tends to chill patent litigation.
Note the above example was couched from the small patentee’s perspective. But these problems also exist for the small company who is facing a large company patentee. That is, the small company under this fee shifting proposal will be reluctant to file a declaratory action if they believe the larger company’s patent may be invalid or that they are not infringing, just because of the prospect of potentially having to pay the larger company patentee’s legal fees. Thus whether you are a small patentee or a small company declaratory judgment plaintiff, the small company is disadvantaged against larger companies.
As a quick aside, additionally, this proposed fee shifting may also harm those attorneys who offer litigation services at lower fees because this proposal encourages a client to engage a firm with higher fees as a litigation tactic.
Now of course all of the above doomsday talk is tempered by the proposals exception language of “reasonably justified in law and fact.” That is, in theory the non-prevailing party will not be on the hook for the prevailing party’s fees if the non-prevailing party’s claims were reasonably justified in law and fact. But what does this standard mean? You can bet litigators will litigate that phrase regardless of the current purported legislative intent. Ostensibly, Rep. Goodlatte’s states the exception’s intent is to run parallel to the standard in the Equal Access to Justice Act of 1980, which does have a predictable body of case-law to rely upon. See 28 U.S.C. section 2412(d). However, when the prospect of having to pay the other side’s high fees are on the line, a litigant is much more likely to treat the “reasonably justified in law and fact” standard conservatively by conducting the expensive pre-filing due diligence discussed above.
Also, it is interesting to note how this “reasonably justified in law and fact” language may be interpreted in light of the current jurisprudence on FRCP 11 and PICs (preliminary infringement contentions) with respect to patent litigation. FRCP 11 “require[s] that an attorney interpret the pertinent claims of the patent in issue before filing a complaint alleging patent infringement.” Network Caching Technology, LLC v. Novell, Inc., 2003 WL 21699799, at 6 (N.D. CA March 21, 2003) (citing Antonious v. Spalding & Evenflo Cos., Inc., 275 F.3d 1066, 1072 (Fed. Cir. 2002)). This entails, “at a bare minimum, apply[ing] the claims of each and every patent that is being brought into the lawsuit to an accused device and conclude that there is a reasonable basis for a finding of infringement of at least one claim of each patent so asserted.” Network Caching Technology, LLC v. Novell, Inc., 2003 WL 21699799, at 6 (N.D. CA March 21, 2003) (citing View Eng’g Inc. v. Robotic Vision Systems, Inc., 208 F.3d 981, 986 (Fed. Cir. 2000)). Most federal district courts that have a high volume of patent litigation have special patent rules, which often include a rule governing PICs. For example, a party may comply with the Northern District of California’s PIC rule by setting forth particular theories of infringement with sufficient specificity to provide defendants’ with notice of infringement beyond that which is provided by the mere language of the patents themselves. Network Caching Technology, LLC v. Novell, Inc., 2003 WL 21699799, at 4 (N.D. CA March 21, 2003).
Now is this “reasonably justified in law and fact” language imposing a third obligation a litigant must meet on top of the FRCP 11 and PIC rule obligations? For example, if a claimant does meet the pleading and discovery standards of FRCP 11 and any PIC rules, could such a claimant who then does not prevail in the suit still be on the hook for the prevailing party’s attorney fees?
In summary, the proposed fee shifting legislation of H.R. 3309 which was intended to curb troll litigation behavior, may actually have the unintended consequences of diminishing patents rights, particularly those of small patentees by: (1) reducing the number of good-faith patent suits that otherwise would be brought by a small company; (2) reducing communication and negotiations between potential litigants; (3) artificially increasing the financial burden to file a patent suit; and (4) eliminating the covenant not to sue as a settlement tool. And the proposals exception language has not been tested in litigation and thus it is currently unknown whether this exception will temper these potential unintended consequences. Lastly, H.R. 3309 contains many other important changes and we will keep updated as to whether any of the changes do become law.
Patent Attorney at
JAFARI LAW GROUP®, INC.