United States: Repeated Filing Of Lawsuits To Force Settlements With No Intention Of Testing The Merits Of The Case May Be Relevant To Awarding Attorney Fees

Abstract

Courts may award reasonable attorney fees to the prevailing party in "exceptional cases" that "stand out" in terms of a party's litigation position or its conduct during the case. Recently, the Federal Circuit concluded that conduct for determining whether to award attorney fees to a prevailing party is not limited to the conduct of the case between the parties. Rather a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements, with no intention of testing the merits of one's claims, is relevant to a district court's exceptional case determination. In this case, however, the Federal Circuit found that the defendant had not established such a pattern of abuse.

Courts may award reasonable attorney fees to the prevailing party in "exceptional cases." In its 2014 Octane Fitness decision, the U.S. Supreme Court held that an "exceptional case" is one that "stands out" in terms of a party's litigation position or conduct and tactics during the case. Recently, in SFA Systems, LLC v. Newegg Inc.,1 the Federal Circuit concluded that conduct for determining whether to award attorney fees to a prevailing party is not limited to the conduct of the case between the parties. Defendant and accused infringer Newegg argued that it deserved an award of attorney fees because (1) patent owner's SFA's position was meritless if the district court had properly construed the claims, and (2) SFA's lawsuit was part of a pattern of abusive litigation brought to extract settlements from accused infringers. The Federal Circuit explained that a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements is relevant to awarding attorney fees. In affirming the district court's refusal to award attorney fees, however, the Federal Circuit found that the district court did not abuse its discretion in declining to revisit its prior claim-construction rulings and finding that Newegg failed to prove that SFA sued just to obtain a nuisance-value settlement.

Background

In 2009, SFA filed suit against Newegg and several other entities for patent infringement. About two years later, after SFA settled with some of the defendants, it filed a second suit against the remaining defendants, asserting a new patent. Soon thereafter, SFA settled with all of the accused infringers except Newegg.

After one claim-construction ruling that favored SFA, Newegg and SFA agreed to consolidate the two lawsuits. The court then held a second claim-construction hearing on the new patent. While waiting for the second claim-construction order, the parties asked the court to extend the trial since it conflicted with another trial before the same judge where SFA accused Amazon.com, Inc. of infringing the same patents. The district court denied the parties' joint motion as premature.

Two years later, and just six months before the scheduled trial, the district court issued the second claim-construction ruling, again siding with SFA, and denied Newegg's motion for summary judgment that the asserted patent claims were indefinite. But the next day, SFA dropped the case and agreed not to sue Newegg on the patents at issue in the case.

Newegg filed a motion arguing that SFA should be required to pay the attorney fees it incurred to defend against the "abusive and vexatious litigation." In Newegg's view, it would have prevailed on the merits of the case and SFA's lawsuits were part of a pattern of abusive litigation brought to extract settlements from accused infringers.

Citing its prior claim-construction orders and denial of Newegg's motion for summary judgment, the district court rejected Newegg's arguments that it would have won if the case had gone to trial. The district court also rejected Newegg's argument that SFA's actions against it and other defendants showed an abusive and vexatious litigation strategy designed to extract nuisance settlements.

Newegg appealed.

The Federal Circuit's Decision

On appeal, the district court's prior claim construction rulings were wrong, Newegg argued, and under the right construction, the asserted patent claims were invalid and showed that SFA filed a meritless suit to begin with. Finding it irrelevant to determining whether the case was "exceptional," however, the Federal Circuit declined to review the district court's claim-construction rulings. The real question on appeal, the Court found, was not whether the district court correctly decided these underlying legal issues, but whether it abused its discretion when it found that SFA's litigating position was not "so meritless as to 'stand out' from the norm and thus be exceptional."

Newegg also argued that it was entitled to fees because SFA dragged out the litigation to increase litigation costs and then dropped the suit once it became clear that Newegg wouldn't settle. To support this position, Newegg submitted the settlement amounts SFA received from other accused infringers and argued that SFA always settled for far less than the cost to prosecute a case to judgment. The Federal Circuit held that the district court did not abuse its discretion in failing to find unreasonable conduct.

The Court did agree with Newegg that "a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements, with no intention of testing the merits of one's claims, is relevant to a district court's exceptional case determination." But the Court found that Newegg did not adequately support its characterization of SFA's improper motivations. According to the Court, Newegg provided no evidence that the dismissal was because SFA knew that Newegg was not going to settle. And SFA pointed out that it continued to litigate the same patents-in-suit in a different case against Amazon, arguing that it dismissed the Newegg lawsuit so it could focus on the potentially higher value of the Amazon case scheduled for trial on the same day.

The Court also noted that some of SFA's larger settlements indicated that it did not always seek nuisance-value settlements, contrary to Newegg's arguments. The Court further noted that the district court found no evidence of misrepresentation or misleading statements by SFA during the litigation.

Strategy and Conclusion

This decision points out that conduct for determining whether to award attorney fees to a prevailing party is not limited to the conduct of the case between the parties. Rather, a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements, with no intention of testing the merits of one's claims, is relevant to a district court's exceptional case determination.

Footnotes

1 The SFA Systems opinion can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/SFASystems_v_NeweggInc.pdf.

Previously published by LES Insights

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