United States: ‘Exceptional' Patent Case Ended With Attorney Fee Awards Exceeding Damages

A U.S. District Judge in the Eastern District of Texas recently awarded Imperium IP Holdings more than $7 million in attorney fees and nontaxable costs. Imperium IP Holdings (Cayman) Ltd. v. Samsung Elec. Co., No. 14-cv-371, 2018 WL 1602460 (E.D. Tex. Apr. 3, 2018). It was one of the largest attorney fee awards under Section 285 of the Patent Act, 35 U.S.C.A. § 285, since the Supreme Court established the new "exceptional" standard for fee-shifting in Octane Fitness LLC v. ICON Health & Fitness Inc., 134 S. Ct. 1749 (2014). The judge deemed Imperium's case exceptional after finding Samsung Electronics Co. Ltd. and its subsidiaries willfully infringed Imperium's patents, continued to infringe them even after the jury verdict, made multiple misrepresentations under oath and pleadings, and failed to timely produce documents.1Despite this list of improprieties, however, the judge found Samsung's conduct did not amount to fraud or abuse of the judicial process sufficient to warrant sanctions in the form of Imperium's expert fees.2Nevertheless, the judge ordered Samsung to pay all of Imperium's attorney fees, except for those associated with purely clerical work.

Background of the Dispute

Imperium sued Samsung Electronics Co. Ltd., Samsung Electronics America Inc., Samsung Telecommunications America LLC and Samsung Semiconductor Inc. for infringing U.S. Patent Nos. 6,271,884; 7,092,029; and 6,836,290. The jury found Samsung willfully infringed claims of the '884 and '029 patents. It awarded Imperium $4.8 million in damages for infringing the '884 patent and $2.1 million for infringing the '029 patent. Imperium later sought attorney fees and nontaxable costs.

The judge granted Imperium's motion on Sept. 13, 2017, and ordered Imperium to submit detailed documentation on the hours and billing rates of its attorneys. In its April 3 order, the judge awarded Imperium more than $7 million in attorney fees — which exceeded the damages the jury awarded for infringement — and $582,000 in nontaxable costs.

Legal Requirements of Section 285

Section 285 provides that "[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party." Courts generally conduct a Section 285 analysis in three steps. Specifically, the court must decide whether the case is "exceptional." If it is, the court must then consider whether attorney fees are justified. Finally, it must determine whether the movant is the prevailing party. In Octane Fitness — the landmark Section 285 case — the Supreme Court clarified the first step and held 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." A district court has broad discretion in determining exceptionality, and such determinations are made on a case-by-case basis, considering the totality of circumstances. Factors considered in the "exceptional case" analysis include frivolousness, motivation, objective unreasonableness with respect to the factual and legal components of the case, and the need for compensation and deterrence. For example, a party's unreasonable conduct, which may not be independently sanctionable, may still create an exceptional case if the movant establishes that the nonmovant subjectively acted in bad faith or pursued exceptionally meritless claims. However, the court may find a case to be exceptional even in the absence of bad faith.

In addition, to qualify for Section 285 fees, the movant must establish that it is the prevailing party. The Supreme Court has construed "prevailing party" under Section 285 as a party that succeeds on any significant issue and achieves some of the benefit sought in the lawsuit.3For a party to "prevail," the high court explained, the litigation must cause an event that modifies the opponent's behavior and materially alters the legal relationship between the parties. There is only one prevailing party and, importantly, a prevailing party need not have won on all issues.

Court's Reasoning

The U.S. District Court for the Eastern District of Texas applied the three-part test for analyzing Imperium's Section 285 claim. As a threshold matter, it found that Imperium was the prevailing party because it successfully proved Samsung's infringement of two of the asserted patents and won damages. In so doing, the court rejected Samsung's argument that it was the prevailing party merely because it obtained favorable decisions before the U.S. Patent Trial and Appeal Board. The court found that such decisions do not affect the prevailing party analysis in district court.

Then, the court found this case to be exceptional under the totality of circumstances. In holding so, the court relied on the finding of willful infringement and litigation misconduct. First, the court found there was ample evidence to prove Samsung's willful infringement, including copying and the lack of a good-faith belief regarding noninfringement and invalidity. Specifically, the court relied on Imperium's witness, who testified that Samsung sought information on how Imperium made its camera and how Samsung could duplicate Imperium's camera testing lab. Additional evidence showed Samsung was aware of and monitored Imperium's patents, and that it even tried to obtain the patents through a broker prior to the lawsuit. Moreover, Samsung continued its infringing actions even after the jury verdict, which the court found to be "unreasonable, deliberate and willful." According to the court, such evidence was sufficient to prove willful infringement and make the case exceptional under Section 285.

Second, the court found that Samsung's multiple instances of litigation misconduct also justified finding this case exceptional. For example, Samsung repeatedly represented to the court — under oath and in its pleadings — that it was not aware of Imperium's patents until Imperium filed suit in June 2014. However, contrary evidence showed that Samsung acknowledged and tracked Imperium's patents prior to that time. As additional evidence of misconduct, the court held that Samsung's failure to produce requested documents in a timely manner was unreasonable. Remarkably, the court found that Samsung had documents responsive to Imperium's request collected in one folder labeled "Imperium," but failed to produce such documents until the fourth day of trial. The court noted that each instance of misconduct by itself was not sufficient to find the case exceptional. But it said that when taken together, its conduct amounted to an exceptional case sufficient to justify awarding the requested attorney fees under Section 285. The court, however, refused to shift expert fees because there was not enough evidence to conclude that Samsung engaged in sanctionable conduct, such as fraud or abuse of judicial process.

The court then analyzed the reasonableness of the requested attorney fees using the lodestar method. The lodestar method takes into account the number of hours an attorney spent on a given case and the attorney's reasonable hourly rate. On Sept. 13, 2017, the court issued an order declaring the case exceptional and instructed Imperium to submit supporting documentation showing the total number of hours and the hourly rate of each attorney who worked on the lawsuit.

The Lodestar Method and 'Johnson' Factors

In its April 3, 2018, order, the court described in detail how it arrived at an attorney fee award of $7 million. The initial lodestar calculation yielded a total amount of $7,110,290.77. The court then considered whether any adjustment was necessary in light of the 12 Johnson factors.4

Samsung argued the fees associated with unsuccessful claims should be deducted. The court rejected this argument because the work done on unsuccessful claims was intertwined with the work done on successful claims. The court also rejected Samsung's argument that a downward adjustment was necessary because senior attorneys performed tasks that are traditionally delegated to junior attorneys. It reasoned that a senior attorney may perform the tasks more efficiently and accurately, making the cost about the same regardless of whether a junior or senior attorney performed it. The court, however, excluded the amount billed for purely clerical work. Ultimately, the court found that Imperium's bills showed good billing judgment and no sign of block billing. The court, therefore, awarded Imperium $7,080,695.77, which was the amount it requested minus the amount billed for purely clerical work. It was slightly less than Imperium sought, but it was a significant amount nonetheless.

How Other Courts Calculate Attorney Fees

Recently, other district courts have awarded significant attorney fees to prevailing parties. One of the highest attorney fee awards was made in Howmedica Osteonics Corp. v. Zimmer Inc., No. 05-cv-897, 2018 WL 2378406 (D.N.J. Apr. 20, 2018). The U.S. District Court for the District of New Jersey in that case awarded more than $13 million to the defendant. It concluded that the case was exceptional because the plaintiff engaged in questionable conduct during patent prosecution, including withholding unfavorable data and failing to disclose the employment relationship between the declarant and the patent applicant. The court also found that the plaintiff engaged in litigation misconduct by proposing a facially indefinite claim construction position, which was different from its original position, to get around belatedly discovered information that potentially invalidated its asserted patents. Therefore, the court found that the totality of circumstances justified an exceptional case finding and fee award.

In SRI International v. Cisco Systems Inc., No. 13-cv-1534, order issued (D. Del. May 25, 2017), the U.S. District Court for the District of Delaware granted almost $8 million in attorney fees to the plaintiff. The court held that the defendant pursued aggressive defense strategies that "crossed the line" on multiple occasions. For example, the defendant relied on 19 defenses until the eve of trial, but presented only a small subset of defenses at the trial, forcing the plaintiff to spend significant resources on needlessly repetitive and frivolous work. The court further reasoned that awarding attorney fees was appropriate because the jury found willful infringement against defendant.

How to Prevent a Section 285 Judgment Against Your Client

In recent years, courts have been more willing to award a large sum of attorney fees under Section 285. Generally, courts appear to do so when the nonmovant engages in litigation misconduct, such as failing to present important evidence or persistently pursuing frivolous claims. To prevent these problems, attorneys should critically review all evidence early in the case, thoroughly evaluate the strengths and weaknesses of the case, and counsel clients regarding the same and the expectations of good-faith litigation. Bad facts can be explained early in litigation, but hiding them until late in the game potentially exposes parties to liability under Section 285.

In addition, comprehensive evaluation of the documents and the strength of a party's claims early in the case is strongly advisable. As with bad evidence, bad arguments should be disclosed and culled early in the litigation, as the more resources (especially court resources) expended on a claim the more scrutiny that claim will face under Section 285 if it is unsuccessful. Claims and defenses should be well-supported by evidence to minimize the possibility that they could later be labeled as frivolous.

Importantly, as the court in the Imperium case noted, none of Samsung's conduct in isolation was egregious enough to justify sanctions. The court concluded the case to be exceptional for attorney-fee purposes when Samsung's conduct throughout the litigation was considered as a whole. What was labeled as "litigation misconduct" in Imperium could be considered a series of relatively minor mistakes or missteps. Hence, litigants should keep in mind that while such mistakes or less-than-fully supported positions may seem innocuous in isolation, a court may nevertheless find the case exceptional for Section 285 purposes under a totality of circumstances analysis. Therefore, every decision during patent prosecution and litigation should be made with the understanding that it could be scrutinized for the "exceptional case" element under Section 285.

One way to avoid a Section 285 judgment is to seek an opinion of counsel on infringement and validity issues during the early phase of litigation.5The opinion should be drafted by an independent third-party counsel so that it can be revealed without compromising privilege claims on the communications with the trial counsel. For the opinion to be effective, it must be competent, meaning it must thoroughly address relevant issues consistent with the claims raised at trial based on accurate and complete information.6More importantly, parties should obtain opinions of counsel regardless of the status of inter partes review petitions before the PTAB, so that they can be used to rebut willful infringement allegations and attorney-fee claims under Section 285.

Footnotes

1 Imperium IP Holdings (Cayman) Ltd. v. Samsung Elec. Co., No. 14-cv-371, 2017 WL 4038883 (E.D. Tex. Sept. 13, 2017).

2 See Takeda Chem. Indus. v. Mylan Labs., 549 F.3d 1381 (Fed. Cir. 2008) (holding that the district court's discretion to shift expert fees is limited to cases where the party committed fraud or abuse of the judicial process).

3 Farrar v. Hobby, 506 U.S. 103 (1992) (quoting Hensley v. Eckerhart, 461 U.S. 424 (1983)); see also Raniere v. Microsoft Corp., 887 F.3d 1298 (Fed. Cir. 2018) (holding that plaintiff is a prevailing party if it "achieves the desired result by bringing about a voluntary change in the defendant's behavior").

4 The Johnson factors include: (1) time and labor required; (2) novelty and difficulty of issues; (3) skill required; (4) loss of other employment in taking the case; (5) customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by client or circumstances; (8) amount involved and results obtained; (9) counsel's experience, reputation, and ability; (10) case undesirability; (11) nature and length of relationship with the client; and (12) awards in similar cases. Johnson v. Ga. Highway Express Inc., 488 F.2d 714 (5th Cir. 1974).

5 Aspex Eyewear Inc. v. Clariti Eyewear Inc., 605 F.3d 1305, 1313 (Fed. Cir. 2010) (holding that timing and the content of an opinion of counsel is important in determining whether the accused infringer engaged in objectively reckless behavior).

6 nCube Corp. v. Seachange Int'l Inc., 436 F.3d 1317 (Fed. Cir. 2006) (holding that the opinion of counsel must be effective, addressing complete information).

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