Published in Landslide Vol. 11 No.2, ©2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Feature
Making the Nonprevailing Party Pay: Statistics on Exceptional Cases Four Years after Octane and Highmark
By R. Benjamin Cassady, Lionel M. Lavenue, and Sean D. Damon
Four years ago, in two decisions that issued on the same day, the Supreme Court confronted the ever-increasing concerns regarding frivolous patent infringement suits by making it easier for prevailing parties to recover attorney fees in “exceptional” cases under the patent law fee-shifting statute, 35 U.S.C. § 285. The first decision, Octane Fitness, LLC v. ICON Health & Fitness, Inc.,1 significantly relaxed the criteria for determining when district courts adjudicating patent cases may award attorney fees to the prevailing party. Under the new standard, an “exceptional” case is “simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”2 Now, a prevailing party need only prove the case is exceptional by a preponderance of the evidence, rather than by clear and convincing evidence. The second decision, Highmark Inc. v. Allcare Health Management System, Inc.,3 revised the standard of review for attorney fees decisions. The Supreme Court ruled that attorney fees awards under § 285 should be reviewed for an abuse of discretion, not de novo.
By their second birthday, the patent communities’ assumptions that Octane and Highmark would cause an increase in awards of fees had been confirmed. Both the number of motions filed and awards granted significantly increased in the immediate wake of the decisions. Now two more years later, we look to see if these trends remain, and which courts decide and award the most attorney fees motions. This article also explores whether plaintiffs or defendants have fared better or worse with § 285 motions.
Background
The Pre-Octane Patent World
Section 285 provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.”4 Although Congress expressly authorized discretionary fee shifting for exceptional cases in the 1946 Patent Act, the Senate report on the Act indicated otherwise. At the time, “[i]t [was] not contemplated that the recovery of attorney’s fees will become an ordinary thing in patent suits.”5
In 2005, in Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc., the Federal Circuit established a standard that “exceptional cases” under § 285 required litigation that is both (1) objectively baseless and (2) brought in “subjective bad faith.”6 Further, the Federal Circuit required clear and convincing evidence for both.
But in the years that followed, patent litigation practices changed, and some tactics that some felt abused the patent system emerged, including the perception that entities were filing suits based on questionable patents and infringement allegations. To reduce these practices, the White House, some justices on the Supreme Court, and many members of Congress urged reform to empower district court judges to order the nonprevailing party to pay the attorney fees and other costs. Proposals for legislative changes to allow fee shifting were a particularly contentious issue, however, as such an approach would depart significantly from the traditional “American rule” that each party pays its own legal fees.
One of the proposed bills, the Innovation Act (H.R. 9)—originally introduced by Representative Bob Goodlatte (R-Va.) in October 2013 and advanced as “the solution to the problem of abusive patent litigation”7—swiftly passed the House in December 2013. But its Senate counterpart, the Patent Transparency and Improvements Act (S. 1720)—introduced by Senator Patrick Leahy (D-Vt.) in November 2013—stalled and died. According to proponents of the Acts, the traditional “American rule” allegedly affords patentees an advantage because accused infringers often face higher fees and litigation costs.8 As such, the rule arguably forces wrongly accused parties to settle, given that the total attorney fees and costs to defend the case often exceed the cost of settlement.
The Octane and Highmark Decisions
In Octane, the Court considered the standard for deciding whether a case is exceptional and thus justifies awarding attorney fees. ICON sued Octane for patent infringement. Octane won summary judgment of noninfringement and sought attorney fees under § 285. Applying the Brooks Furniture standard, the district court denied Octane’s request, and the Federal Circuit subsequently affirmed.9 The Supreme Court reversed and remanded, abrogating the Federal Circuit’s Brooks Furniture standard.
In Highmark, Highmark filed a declaratory judgment action for invalidity, unenforceability, and noninfringement of Allcare’s patent. Highmark won summary judgment of noninfringement and sought attorney fees under § 285 based on Allcare’s litigation misconduct, and the district court awarded fees for litigation misconduct for two patent claims. However, the Federal Circuit reviewed de novo, affirming the attorney fees award for one claim, but reversing the award for the second claim. The Supreme Court held that abuse of discretion is the proper standard of review, and vacated and remanded with instructions to apply the Octane standard to the merits of Highmark’s § 285 claim.
The Prevailing Party Requirement
Section 285 allows for the award of reasonable attorney fees to the “prevailing party” in exceptional cases. Intuitively, a “prevailing party” is whoever won the case. But what qualifies as a win the context of § 285? The Federal Circuit recently analyzed that question in Raniere v. Microsoft Corp.10
In response to Raniere’s complaint alleging two counts of patent infringement, Microsoft moved to dismiss the suit for lack of standing after discovering that the U.S. Patent and Trademark Office’s records indicated that Raniere did not own the patents. After Raniere produced “wholly incredible and untruthful” documents and testimony regarding patent ownership, the district court dismissed the case with prejudice and awarded Microsoft its attorney fees under § 285. Raniere appealed, claiming that § 285 required a party to succeed on the merits to be the prevailing party.
Rejecting Raniere’s arguments, the Federal Circuit held that success on the merits was not required for a party to be awarded attorney fees. Instead, and consistent with Supreme Court precedent, a prevailing party is a party that receives a judicially sanctioned change in the legal relationship of the parties. In other words, if a party earns the fullest relief it could possibly obtain, it is a “prevailing party.” Thus, the grant of a motion to dismiss can make the moving party the prevailing party under § 285.
The Octane Effect: Still Reverberating?
The number of fees motions filed has been greater in each year since Octane and Highmark than in any year prior. In 2014—the year of the decisions—72 motions under § 285 were filed. In 2015, the first full year after the decisions, the total number of motions filed rose precipitously to 138. And while the number of motions filed in 2016 (101) and 2017 (88) declined in comparison, a significant number of motions were still filed in that two-year span (189). As an indicator of how impactful Octane and Highmark continue to be, three months into 2018 there were 17 fees motions filed—just three shy of the total number filed in all of 2002 (20). Table 1 shows the total number (416) of contested § 285 motions filed in district courts between 2014 and 2018.11
While Octane’s influence on patent practitioners filing § 285 motions cannot be denied, it is still far from a guarantee that the prevailing party will be awarded attorney fees in a patent infringement case. Looking back to pre-Octane, for example, in 2002 the award rate was just 20 percent. Similarly, in 2011, courts awarded attorney fees in 23 percent of § 285 motions filed. In just a little over a year following Octane, the award rate jumped to nearly 42 percent (almost doubling 2011’s rate of 23 percent).12 But that success leveled out since ending 2015 with a success rate of 22.8 percent. Since Octane, patent practitioners have seen an increase in the number of awards granted, 27.3 percent; this is not nearly the doubling effect we saw shortly after the Octane decision issued. Figure 1 depicts the yearly win rates on contested § 285 motions filed in district courts since 2014, and table 2 summarizes those results.
Figures 2 and 3 depict the number of contested § 285 motions by district and the win rates for each district. Fifteen of the top 20 districts for contested attorney fees awards grant an award at or above the average of pre-Octane. This may be due to judges’ desire to prevent frivolous lawsuits from appearing on their dockets, or it could be a symptom of the litigation conduct or abuses warned of by proponents pre-Octane patent reform. But what conduct or abuses render a case “exceptional”?
What Is “Exceptional”?
Since Octane, courts generally are more willing to find a case “exceptional” where the substantive strength of the party’s positions are “weak,” rather than when their litigation conduct is outside the norm. Some recent district court decisions illuminate this general trend.
For example, in Sonix Technology Co. Ltd. v. Yoshida, after the court entered summary judgment of noninfringement for the nonpatentee plaintiff, the plaintiff brought a § 285 motion against the defendant and its attorneys for advancing vague and contradictory positions and failing to undertake a sufficient prefiling investigation.13 The court granted the motion and held that fees were warranted to “‘advance considerations of compensation and deterrence,’ and discourage lawyers from abrogating their independent duties of investigation.”14
Similarly, in Technology Properties Ltd. LLC v. Canon, Inc., a defendant moved under a § 285 motion after winning summary judgment of noninfringement in the district court (and succeeding on noninfringement in a parallel U.S. International Trade Commission proceeding).15 The district court granted the defendant’s motion, finding that the two decisions upholding the defendant’s noninfringement position demonstrated that the plaintiff’s infringement theory was meritless.16
Also, in Lyda v. CBS Interactive, Inc., the court granted the defendant’s § 285 motion because the plaintiff’s claims were barred by res judicata, holding that the plaintiff’s untenable legal position suggested lack of sufficient presuit diligence.17 These cases illustrate that courts find cases exceptional when facts strongly indicate that the losing party’s positions are substantively weak.
“Exceptional” litigation conduct, however, tends to be more of an outlier, with courts typically only granting § 285 motions on that basis where, for example, the party falsifies ownership of the patent, violates a court order, engages in discovery abuses, or fails to engage in the litigation process. For example, in SAP America, Inc. v. InvestPic, LLC, the court granted the plaintiff’s § 285 motion based on the defendant’s suspicious discovery tactics, such as sending individuals under the guise of another company to obtain information favorable for its case.18
Regardless of the basis—weak substantive positions or questionable litigation tactics—the district court cases following Octane demonstrate that § 285 fees are granted when they are strongly warranted by the facts, and movants should have strong support for establishing an “exceptional case.”
Plaintiff vs. Defendant—Who Files More?
Defendants are more likely to file § 285 motions than plaintiffs. For example, in 2017, defendants filed 69 motions (78 percent) while plaintiffs only filed 19 motions (22 percent), a trend that has held each year since Octane (see tbl. 3).
This is unsurprising given that defendants have more opportunities to meet the statutory requirement of a “prevailing party.” For example, defendants can win early on a summary judgment motion or a motion to dismiss and can win on any number of substantive or nonsubstantive grounds. Plaintiffs, on the other hand, have fewer opportunities to prevail because they generally must carry cases to completion to win. As a result, the bulk of patent holder motions come after a finding of willful infringement (37 percent) or after the accused infringer defaults (33 percent).
As one could argue that it was intended, § 285 ostensibly favors prevailing accused infringers over patent asserters. And this advantage extends to the amount of fees sought, due significantly to inequities in discovery costs: plaintiffs, especially those whose business is asserting patents, generally do not incur as much litigation costs as manufacturer-defendants. However, these perceived inequities are arguably offset by the § 285 win rates for plaintiffs and defendants.
Plaintiff vs. Defendant—Who Really Has the Advantage?
As discussed above, defendants file more § 285 motions, but plaintiffs generally win such motions at a higher rate. For example, between 2014 and March 2018, plaintiffs won at an average rate of 47 percent, while defendants won at 22 percent (see fig. 4). Notably, for the first three months of 2018, plaintiffs enjoyed a win rate of 80 percent compared to only 17 percent for defendants.19
The disadvantages plaintiffs have in becoming the prevailing party may explain their higher win rate. By the time a plaintiff becomes a prevailing party (i.e., at the end of the case), the plaintiff may have stronger factual support for establishing an “exceptional case” than a defendant who brings the motion early in the case, and thus the relative strength of their § 285 motions is greater.
Top Five Districts—Which Prevailing Party Has the Best Chance to Win?
As shown in figure 2, the top five districts where the most § 285 motions were filed are the Northern District of California, the Eastern District of Texas, the Central District of California, the District of Delaware, and the Southern District of New York. The Northern District of California, the fourth most popular district for patent litigation, is the top district for attorney fees motions, with 53 filed in the past three years (see fig. 5). Following the general trend, defendants filed a significantly higher number of § 285 motions (40) than plaintiffs (5). The overall contested win rate in the Northern District of California is 23.6 percent, which is close to the average win rate of all districts (27.2 percent). The contested win rates of plaintiffs and defendants differed by a small margin, with defendants having a slightly higher win rate of 23.1 percent than plaintiffs at 20 percent. Therefore, neither party appears to have advantage in winning the § 285 motion in the Northern District of California.
Similar to the Northern District of California, the Eastern District of Texas has evenly distributed contested win rates among plaintiffs and defendants (see fig. 6). The overall contested win rate in the district is 15.9 percent, which is close to both plaintiffs’ win rate (16.7 percent) and defendants’ contested win rate (15.6 percent).
In the Central District of California, however, plaintiffs appear to have a better chance of winning the § 285 motion (see fig. 7). While the overall contested win rate is 31.8 percent, plaintiffs have significantly higher win rate at 44.4 percent, but defendants’ win rate is only 25.6 percent.
In stark contrast, the District of Delaware appears to favor defendants and grant their motions at a significantly higher frequency than plaintiffs (see fig. 8). The average contested win rate in the district is 23.9 percent, with defendants winning 25.6 percent of the time. But plaintiffs have yet to score a win on a § 285 motion. All of the motions granted or granted in part were filed by defendants, leaving plaintiffs’ contested win rate at 0 percent.20
Interestingly, the Southern District of New York showed the opposite trend to the District of Delaware (see fig. 9). The district had an average contested win rate of 43.8 percent, with plaintiffs winning at a significantly higher rate (75 percent) than the average rate for defendants (31.8 percent).
Although the § 285 motions are decided on a factual basis, making it difficult to draw general conclusions, the most popular districts for attorney fees do differ in their win rates for plaintiffs and defendants. For example, plaintiffs have a higher chance of winning such motions in the Southern District of New York than in the District of Delaware. On the other hand, defendants have been more successful on fees motions in the District of Delaware than in the Southern District of New York. The other most popular districts have generally granted motions for defendants and plaintiffs at similar rates.
Conclusion
The Supreme Court did not strictly define an “exceptional” case when it articulated that the Federal Circuit’s rigid standard was too stringent. It thus allowed for a wide variation in “exceptional” determinations, often making the question of what “stands out” hard to answer. Four years of data has begun to slowly peel the veil back of what is “exceptional.” Our analysis shows that a party has a greater chance of establishing an “exceptional” case based on the other party’s substantively weak legal position rather than its bad litigation conduct. To establish an “exceptional” case based on bad litigation conduct, the conduct must be sufficiently egregious, such as falsifying ownership of the patent, violating a court order, engaging in discovery abuses, or failing to engage in the litigation process. Based on the foregoing, plaintiffs now have one more data point to consider in their forum shopping analysis.
Endnotes
1. 134 S. Ct. 1749 (2014).
2. Id. at 1756.
3. 134 S. Ct. 1744 (2014).
4. 35 U.S.C. § 285.
5. S. Rep. No. 1503 (1946), as reprinted in 1946 U.S.C.C.A.N. 1386, 1387 (“[B]ut the discretion given the court in this respect . . . will discourage infringement of a patent by anyone thinking that all he would be required to pay if he loses the suit would be a royalty. The provision is also made general so as to enable the court to prevent a gross injustice to an alleged infringer.”).
6. 393 F.3d 1378, 1381–82 (Fed. Cir. 2005).
7. Press Release, Congressman Jerrold Nadler, Nadler, Goodlatte, DeFazio, Issa, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill (Feb. 5, 2015), https://nadler.house.gov/press-release/nadler-goodlatte-defazio-issa-smith-lofgren-eshoo-introduce-patent-litigation-reform (quoting Rep. Anna Eshoo).
8. Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2164 (2015) (“Our basic point of reference when considering the award of attorney’s fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney’s fees, win or lose, unless a statute or contract provides otherwise.”).
9. ICON Health & Fitness, Inc. v. Octane Fitness, LLC, 496 F. App’x 57 (Fed. Cir. 2012).
10. 887 F.3d 1298 (Fed. Cir. 2018).
11. The number of contested motions for 2018 are through March. The number of contested attorney fees motion decisions is based on 35 U.S.C. § 285 in patent cases in the U.S. district courts. Additionally, unless otherwise noted, statistics and graphics included herein were obtained and created by LegalMetric at the direction of the authors. During data collection and compilation, the authors observed that the statistics are sensitive to both the input parameters of the searchers (e.g., how deferred or stayed motions are treated) and the database searched. Accordingly, the statistics cited herein are intended as a guide, and it is expected that independently conducted searches may yield slightly different results.
12. Statistics based on district court cases filed between April 29, 2014, and September 15, 2015. The cases were collected using Westlaw and Docket Navigator and excluded cases published exclusively on LexisNexis.
13. No. 12-cv-00380-CAB-DHB (S.D. Cal. May 23, 2016).
14. Id., slip op. at 4 (citation omitted).
15. No. C. 14-3640 CW (N.D. Cal. Jan. 26, 2017).
16. Id., slip op. at 8.
17. No. 16-cv-06592-JSW (N.D. Cal. Jan. 24, 2018).
18. No. 3:16-cv-02689-K (N.D. Tex. Feb. 21, 2018).
19. The numbers for 2018 may be skewed because of the small sample size with only 11 motions in total, but it shows an interesting trend as the year moves forward.
20. Plaintiffs filed two § 285 motions while defendants filed 21 motions between May 2014 and December 2017.