ALERT: Supreme Court Moves Ahead of Congress and Will Make Patent Plaintiffs Pay Legal Fees

Tangible IP, LLC
Up to this day, any inventor or patent owner wanting to have their just compensation against entities they perceive were infringing on their rights could file suit with the relative comfort that, should they lose their case, each party would still be responsible for their own legal fees. Only in the most egregious cases where the suit was “objectively baseless” and “filed in based faith” would the Federal Court have the discretion to award legal fees to the victorious party. Not anymore!

In a direct attack on the patent assertion model that is common practice in the US, the Supreme Court ruled this morning in Octane Octane Fitness, LLC, v. Icon Health & Fitness Inc. (572 U. S. ____ (2014)) that the present test above is too rigid (ironically, this case pitted two competitors against one another, i.e., two practicing entities). From now on, a trial judge may award full compensation to the winner of a patent case if the lawsuit simply “stands out from others”, whatever that may mean. Furthermore, in a related decision, the court essentially put a preemptive gag order in case the Federal Court’s Appellate bench might be tempted to bring the pendulum back to where it’s been historically, by saying that a fee shifting decision by a trial judge should be given broad deference and only reversed in the presence of an “abuse of discretion”. These guys sure know how to plug a potential loophole when they see one!

The Supreme Court’s reasoning is based on a provision in the Patent Act stating that fees can be awarded to the winning party in “exceptional circumstances”. For the Court, “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.”  In other words, unless they have what the judge will determine -ex post facto- was a “strong” case, plaintiffs should beware.

This approach is very similar in concept to the “fee shifting” provisions that Congress has recently introduced in a bill to curtail patent lawsuits by owners who are not the original inventors (aka as Patent Assertion Entities- or trolls) and which is finally undergoing a robust debate on The Hill given the impact it might have beyond its original intent. Today’s Supreme Court decision has made that whole debate moot to a large extent.

The winners of this double decision are, without any doubt, large tech companies who are routinely sued for infringement by patent owners. They can now more easily take the gamble when approached to negotiate a license and simply say “sue me”, knowing that the trial judge can now make the Plaintiff pay millions in legal fees at the end if somehow he/she thinks the case “stands out” from others… There are many losers however.

Since the judges already had discretion to award legal fees up to this day and have not been shy to exercise it when they deemed appropriate, this new test can only been seen as lowering the bar and thus will create uncertainty until a new body of precedents develops. This also provides even more incentives to the unfortunate “forum shopping” practice to avoid judges who are perceived to hold some anti-troll bias, as those will have new tools at their disposal to punish Plaintiffs, with very little oversight from the appellate division to curb their judicial advocacy.

In the US, a typical patent law suit can cost up to $3-5M in legal fees alone and most small inventors who have to sue infringers retain firms who will take the case on a contingency (percentage) basis for the very simple reason that they would not have the means to protect their rights otherwise. We believe that the fact they now stand to foot the legal bill of their opponent should a judge consider that they shouldn’t have brought the suit in the first place will have a crippling effect on their ability and willingness to bring suit and may considerably impact their access to justice. This in turn will mean fewer choices to inventors trying to monetize their patents, as many small patent buyers who brought much needed liquidity to the marketplace will just decide to fold and move on to other opportunities given the added and exposure to their business model. Finally, contingency lawyers may be less inclined to pick up new cases if they stand the risks of being held jointly responsible for their opponents’ fees in the cases where their own handling of a case may be in cause.

Only time will tell whether the decision in Octane will become a game changer in the way the patent marketplace has operated so far; however, it contains all the seeds to profoundly alter the rights of patent owners in the future in a way that we don’t think the highest tribunal fully comprehends.
Louis Carbonneau, Founder & CEO
Louis Carbonneau
Founder & CEO

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