United States: Recovering Attorneys' Fees For AIA Proceedings

The U.S. Supreme Court recently confronted the ever-increasing concerns regarding frivolous patent infringement suits by clarifying the requirements of 35 U.S.C. § 285, the fee-shifting statute, which allows prevailing parties to recover attorneys' fees in "exceptional" cases. In its 2014 Octane Fitness, LLC v. ICON Health & Fitness, Inc. decision, the Supreme Court addressed the statutory term "exceptional," lowering the threshold for determining the types of patent cases in which attorneys' fees should be awarded. Parties seeking attorneys' fees in patent cases were previously required to show that a case was exceptional because "there has been some material inappropriate conduct" or because the litigation was "brought in subjective bad faith" and is "objectively baseless."

However, in Octane, the court explained that "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."1 In addition, the Octane court made it easier for parties to prove "exceptional case" status by relaxing the evidentiary standard from "clear and convincing evidence" to a "preponderance of the evidence." Importantly, the Octane court also affirmed that district courts had the discretion to determine whether or not a case is "exceptional" based on the totality of the circumstances.

Amidst a litigation landscape in which an increasing number of patents were being asserted, including those owned by non-practicing entities, many criticized the pre-Octane fee recovery requirement as overly restrictive, especially since there existed few other procedural mechanisms to curb questionable patent suits. Indeed, since the U.S. Court of Appeals for the Federal Circuit first set the restrictive standard for determining which cases would qualify as "exceptional," Congress has cautiously considered several patent reform bills and changes to federal court practice rules (including the recent 2016 updates to the Federal Rules of Civil Procedure) to create more stringent requirements for filing patent suits and to make the recovery of attorneys' fees easier for prevailing parties in patent cases.2,3 However, the Supreme Court's ruling in Octane instantly changed the game, immediately making it easier for prevailing parties in patent infringement suits to recover their attorneys' fees.

Although Octane relaxed the standard for what types of cases are deemed exceptional, the case left open the question of exactly what fees associated with "exceptional" cases are recoverable—for example, are fees expended in AIA challenges recoverable?

After their creation by the America's Invents Act, post-grant proceedings—including inter partes review (IPR), covered business method review (CBM) and post-grant reviews (PGR)—are becoming increasingly common defensive responses to district court litigation. IPRs, CBMs and PGRs challenge patent validity before the Patent and Trademark Office's Patent Trial and Appeal Board (PTAB). These hybrid litigation-administrative proceedings allow parties to use traditional litigation tools, such as limited discovery, motion practice and hearings, to argue the validity of patents in a new and highly-tailored forum before administrative judges who are well-trained in patent law.

Arguing validity of patents before the PTAB provides an opportunity for the merits of a patent case to be decided by technically savvy decision makers, the proceedings are often resolved far more quickly than through district court litigation (i.e., generally within a year from institution), and a resolution can often be reached at a much lower cost relative to litigation (especially given the PTAB's strict adherence to limited discovery during its proceedings). In fact, litigation may be stayed pending the outcome of a concurrent PTO proceeding, reducing costs for both parties. Given the numerous benefits, district court defendants in patent infringement suits turn to these post-grant proceedings at an extremely high rate, with exemplary statistics showing that halfway through 2015, approximately 87 percent of IPR and CBM proceedings involved patents that were also being litigated in district court proceedings.4

As one of the motivations for creating post-grant proceedings was to drive down traditional litigation costs by giving parties an alternative avenue to resolve matters without extensive and expensive discovery, motions and trial in district court, it seems natural that those fees would be recoverable in view of the Octane decision. Indeed, Section 285 does not expressly limit fee recovery to district court litigation expenses. But not every district court judge agrees with this rationale. Just recently, two district courts have opined on this very issue—each court reaching substantially different conclusions.

In Deep Sky Software, Inc. v. Southwest Airlines Co.,5,6 parties jointly moved to stay a proceeding in which the defendant filed for inter partes reexamination of the sole asserted patent asserted, which the U.S. District Court for the Southern District of California granted. After all claims of the asserted patent were found to be invalid, and the PTAB affirmed the decision on appeal, the district court lifted the stay, and defendant Southwest Airlines moved for an "exceptional" case finding on the basis of inequitable conduct and violations of local rules. The court granted that motion, predicating the court's later decision to award Southwest Airlines its attorneys' fees, including fees associated with the PTAB proceedings, under Section 285. In granting Southwest Airlines' application for its PTAB fees, the court noted that "[r]eexamination was initiated during and in reaction to plaintiff's action here. Further, the PTO's cancellation of the asserted [] [p]atent claims on grounds of invalidity disposed of plaintiff's complaint here and made the defendant the prevailing party. Thus . . . the reexamination proceedings essentially substituted for work that would have otherwise been done before this court." For these reasons, the court ruled that fees for PTO proceedings were recoverable under Section 285.

The Central District of California came to a different outcome in Credit Acceptance Corp. v. Westlake Services, LLC.7 Defendant Westlake Services filed a CBM petition shortly after being accused of patent infringement in district court, and the court stayed the case. The PTAB ultimately issued a final written decision in the CBM proceeding invalidating certain claims of the asserted patent, leading patent owner/plaintiff Credit Acceptance to file a voluntary motion to dismiss its district court complaint with prejudice. Westlake Services subsequently moved to recover its CBM fees under Section 285, but the court denied this motion after finding that the case was not "exceptional." The court's clerk determined that no costs would be taxed, so Westlake Services moved to retax costs, again arguing that its CBM fees should be recoverable. Noting that Westlake Services failed to provide specific arguments as to why its CBM fees should be recoverable, the court held that despite being the prevailing party, making it eligible for costs under Federal Rule of Civil Procedure 54(d) and the court's corresponding local rules for the taxing of costs, Westlake Service's CBM fees were still not recoverable. In reaching this decision, the court reasoned that the local rules expressly provide for recovery of fees that were paid to the court's clerk, which prevented recovery of CBM fees paid to the PTO, particularly given that the court had already determined that this was not an exceptional case under Section 285.

Despite the different outcomes of these cases, the analysis of both courts makes it clear that a case deemed exceptional under Section 285 could reasonably lead to an award for PTO fees. As the Southwest Airlines court explained, the reality is that PTO proceedings substitute for work that would have otherwise been done in the litigation, and this fact alone makes the incurred fees apt for recovery. This analysis, although easily applicable to district court defendants prevailing in PTO proceedings, is also arguably applied to district court plaintiffs who prevail in PTAB attacks on their patents.

In the end, the Supreme Court's Octane ruling has created a lower threshold for determining which cases are exceptional and, consequently, whether attorneys' fees will be granted to a prevailing party. Because fees associated with post-grant proceedings in the PTAB substitute for work that would have otherwise been performed during the district court litigation, and in some cases create work in addition to that which is done before the district court, prevailing parties are arguably entitled to recover these fees. Thus, prevailing parties seeking PTAB fees should consider taking advantage of the more relaxed post-Octane Section 285 standard to convince the district court that the case should be considered "exceptional."

Once a case is deemed exceptional, parties should take great care to show the court how the PTAB fees substituted for, or added to, work that would have otherwise been performed during the litigation in order to put forth a strong case for recovering PTAB fees.

Footnotes

1 Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749, 1756, 2014 BL 118431, 110 U.S.P.Q.2d 1337 (2014) (88 PTCJ 28, 5/2/14).

2 Lionel Lavenue, R. Benjamin Cassady, and Michael Su, A Review of Patent Bills in the 114th Congress, http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=c211bd3f-6ab9-4ab4-9489-4717c937fb60.

3 Lionel Lavenue, Michael Su, and R. Benjamin Cassady, 2015 Is Almost Over—What Happened to Patent Reform?, http://www.finnegan.com/resources/articles/articlesdetail.aspx?news=c211bd3f-6ab9-4ab4-9489-4717c937fb60.

4 Saurabh Vishnubhakat, Arti K. Rai, and Jay P. Kesan, Strategic Decision Making in Dual PTAB and District Court Proceedings, http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=6267&context=faculty_scholarship.

5 No. 10-cv-1234-CAB (S.D. Cal. June 1, 2015) (order granting motion to find case "exceptional" under Section 285).

6 No. 10-cv-1234-CAB (S.D. Cal. Aug. 19, 2015) (order granting fees).

7 No. 13-cv-1523-SJO (MRWx) (C.D. Cal. Jan. 5, 2016).

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