United States: Consideration Under Octane Fitness Requires Fresh Case Analysis

The US Court of Appeals for the Federal Circuit reversed and remanded a district court decision for proper application of the exceptional case standard set forth in Octane Fitness v. Icon Health & Fitness ( IP Update, Vol. 18, No. 8), finding that the district court is required to reconsider the record under the Octane Fitness standard instead of relying upon the findings in the original decision. AdjustaCam, LLC v. Newegg, Inc., Case No. 16-1882 (Fed. Cir., July 5, 2017) (Reyna, J).

AdjustaCam owns a patent directed to a camera clip that supports a camera on a flat surface or when attached to a computer monitor. AdjustaCam sued Newegg, among other defendants, for patent infringement, ultimately moving to dismiss its claims against Newegg just prior to summary judgment briefing, contingent on Newegg's right to seek fees after dismissal. A key dispute among the parties was whether the ball and socket joint of Newegg's products could meet the claim limitation of the asserted patent, which requires the hinge member to be rotatably attached to the camera in a single axis of rotation. Newegg moved for a declaration that the case was exceptional under 35 USC § 285 and an award of fees, arguing that AdjustaCam brought an objectively baseless lawsuit in bad faith to extract nuisance-value settlements unrelated to the merits and far below the cost of the defense, prolonging the litigation in bad faith even after the Markman order. After the district court denied Newegg's motion, Newegg filed a first appeal to the Federal Circuit.

In the first appeal, Newegg challenged the district court's denial of its motion, and the Federal Circuit remanded the case for reconsideration in light of Octane Fitness, noting in its order that Octane Fitness (IP Update, Vol. 17, No. 5) substantially changed the analysis under § 285 and that "Newegg's arguments appear to have significant merit"

On remand, the case was assigned to a new judge, and the parties re-briefed the § 285 issue under the Octane Fitness standard. The district court again denied Newegg's motion for fees, relying heavily on the findings of the original judge in order to avoid hindsight bias, noting that the original trial judge was in the best position to evaluate the merits of the case. The district court found that AdjustaCam's infringement and validity arguments were not so weak, nor its litigation conduct so poor, as to constitute an exceptional case. Newegg again appealed.

In this appeal, the Federal Circuit found that the district court abused its discretion by not awarding fees to Newegg for two reasons:

  • The district court failed to follow the Federal Circuit's mandate on remand.
  • The district court's decision was based on a clearly erroneous assessment of the evidence.

First the Federal Circuit found that the district court erred by failing to engage in an independent analysis to determine whether the case was "exceptional" under the totality of the circumstances and the lower burden of proof under Octane Fitness. The district court abused its discretion by adopting the previous judge's factual findings wholesale and failing to follow the Federal Circuit's mandate by not evaluating the merits of Newegg's motion in the first instance based on the Octane Fitness standard.

Second, the Federal Circuit found the district court's findings regarding the substantive strength of AdjustaCam's case to be clearly erroneous because AdjustaCam did not introduce any evidence showing infringement by Newegg's products under the adopted claim construction. Based on the evidence presented, the accused products did not infringe the asserted patent, making AdjustaCam's litigation position baseless. In terms of litigation misconduct, the Federal Circuit also noted that the district court erred in failing to consider AdjustaCam's repeated use of after-the-fact declarations—such as serving a new expert report on the day of the expert's deposition and use of supplemental declarations making new infringement arguments—as litigation misconduct. The Federal Circuit further explained that the district court erred by not considering AdjustaCam's damages methodology because, while not determinative of an exceptional case on its own, AdjustaCam's assertion of nuisance-value damages against many defendants, in combination with its frivolous infringement arguments and unreasonable manner of litigation, should have played a role in evaluating whether the case was exceptional based on a totality of the circumstances test. The Court reversed and again remanded the case for further proceedings, including the calculation of attorneys' fees.

Consideration Under Octane Fitness Requires Fresh Case Analysis

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