Data Shows Spike In Patent Attorney Fee Motions And Awards After Octane

Prior to last year’s U.S. Supreme Court decisions in Octane Fitness LLC v. Icon Health & Fitness, Inc, 134 S. Ct. 1749 (2014) and Highmark, Inc. v. Allcare Health Mgmt. Sys., 134 S. Ct. 1744 (2014), district courts in the United States awarded attorney fees in patent cases only in extreme circumstances. In Octane, however, the Court lowered the bar for fee awards. Furthermore, in Highmark, the Court made it clear that district court judges have broad discretion in awarding fees for litigation misconduct.

The Octane Court focused on the plain meaning on 35 U.S.C. § 285, which simply states that, “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” The Court noted that, “This text is patently clear. It imposes one and only one constraint on district courts' discretion to award attorney's fees in patent litigation: The power is reserved for ‘exceptional’ cases.” 134 S. Ct. at 1755-56. In turn, the Court held that an “exceptional” case within the statute 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. District courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.” Id. at 1756.

The combination of Octane and Highmark has had a significant effect on attorney fee awards in patent cases. According to a recent report by the Federal Circuit Bar Association submitted to Congress earlier this year, motions for fees filed by accused infringers were granted 36 percent of the time following Octane, compared to only 13 percent of the time in the one year prior to the decision. In addition, Octane apparently has resulted in a sharp increase in the number of fee motions. In the one year prior to Octane, accused infringers filed an average of approximately four fee motions per month. That rate increased to over seven motions per month in the months following the decision.

The new Octane standard’s effect on attorney fee awards is illustrated by a recent Federal Circuit decision, Olpus Technologies, Ltd. v. Vizio, Inc., Case No. 2014-1297 (Fed. Cir. Apr. 10, 2015). In Olpus, the district court granted summary judgment of noninfringement in favor of the defendant-alleged infringer. The defendant then moved for an award of attorney fees under § 285, 28 U.S.C. § 1927, and the district court’s inherent equitable powers, citing a long pattern of vexatious conduct by the patentee prior to and during the litigation. The district court reviewed the parties’ conduct and found that, among other things, the patentee had engaged in an “abusive discovery strategy,” had used “inappropriate, unprofessional, and vexatious” litigation tactics, and had manipulated its expert testimony and infringement contentions so that the defendant faced “a frustrating game of Whac-A-Mole throughout the litigation.” Nonetheless, under the pre-Octane standard, the district court declined to award fees, mainly because case had “been fraught with delays and avoidance tactics to some degree on both sides” and the court could not say that the patentee’s tactics resulted in increased legal costs.

On appeal, the Federal Circuit vacated the denial of fees. After cataloging the patentee’s misconduct and expressing skepticism that those antics did not escalate the defendant’s legal fees, the appeals court remanded with instructions to apply the Octane standard:

Although the award of fees is clearly within the discretion of the district court, when, as here, a court finds litigation misconduct and that a case is exceptional, the court must articulate the reasons for its fee decision. In light of the court’s fact findings regarding the extent of harassing, unprofessional, and vexatious litigation, the change in legal standard by the Supreme Court, and the lack of sufficient basis to deny fees under § 285, we vacate and remand for the district court to consider whether and the extent to which fees are warranted.

Slip op. at 8.

The Olpus case is a clear example of circumstances where a fee award now is likely, even though the district court’s denial of fees would not have been disturbed prior to Octane. Although attorney fee awards are not available in all cases, district courts and the Federal Circuit have greater power under Octane to award them in cases involving bad conduct by either party, including vexatious litigation tactics and unfounded claims.

DDR Holdings: A New Perspective On Patenting Internet Processes?

The Supreme Court’s decision in Alice Corp. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014) created perplexing issues for those hoping to patent computer-implemented processes and associated systems. The Court described a potentially broad (but effectively undefined) notion of “abstract ideas,” and held that a patent that implicates an abstract idea is eligible for patenting under 35 U.S.C. § 101 only if the claims recite an “inventive concept” that restricts the claimed subject matter to something significantly different from the abstract idea per se. Routine and conventional computer hardware and functions are insufficient to provide this inventive concept.

Following Alice, a series of cases have invalidated patents covering computer-implemented inventions as ineligible abstract ideas. Ultramercial, Inc. v. Hulu, LLC, ___ F.3d ___, 2014 WL 5904902 (Fed. Cir. Nov. 14, 2014)(process for using advertising as a currency for accessing media content over internet); buySAFE, Inc. v. Google, Inc., 765 F.3d 1350 (Fed. Cir. 2014)(use of computer to create a transaction performance guaranty); Accenture Global Servs., GmbH v. Guidewire Software, Inc., 728 F.3d 1336 (Fed. Cir. 2013)(system to perform insurance-policy-related tasks on a computer); Bancorp Servs. LLC v. Sun Life Assur. Co. of Canada, 687 F.3d 1266 (Fed. Cir. 2012)(use of computer to perform repetitive insurance value computations). In light of those decisions, the outlook for internet-related computer patents appeared bleak.

On December 5, however, the Federal Circuit signaled that some hope still exists by affirming the eligibility of a software patent involving commerce on the internet. DDR Holdings, LLC v. Hotels.com, LP, No. 2013-1505 (Fed. Cir. Dec. 5, 2014). Slip opinion HERE. In a 2-1 decision written by Circuit Judge Chen, the Federal Circuit ruled that an invention directed to merchandising on the internet was patent-eligible.

DDR concerned U.S. Patent No. 7,818,399 (entitled “Methods of expanding commercial opportunities for internet websites through coordinated offsite marketing”). The ‘399 patent addressed the problem facing internet stores with websites that include ads for third-party merchants. In prior art systems, a customer clicking on an ad on a host website would be directed to a third-party site, often being lost to the host site forever. The ‘399 patent claims a process involving stored data concerning the visual elements responsible for the “look and feel” of the host website, so that upon clicking an ad the customer is directed to a webpage on the host website that is a composite of the third-party merchant’s product information and the look and feel elements of the host website.

The Federal Circuit applied the two-step test for patentability set forth in Alice. First, it considered whether the ‘399 patent claims were directed to a patent-ineligible abstract idea. It noted that distinguishing between a patentable invention and an abstract idea “can be difficult, as the line separating the two is not always clear.” Slip op. at 16. After reviewing Supreme Court cases characterizing (without defining) abstractness, the Federal Circuit side-stepped the issue by noting that, even if the ‘399 patent claims included abstract ideas, they nonetheless were saved by step two of the Alice analysis.

In step two, the court must “consider the elements of each claim—both individually and as an ordered combination — to determine whether the additional elements transform the nature of the claim into a patent-eligible application of that abstract idea. This second step is the search for an ‘inventive concept,’ or some element or combination of elements sufficient to ensure that the claim in practice amounts to ‘significantly more’ than a patent on an ineligible concept.” Id. 16, quoting Alice, 134 S. Ct. at 2355.

The Federal Circuit ruled that, although the ‘399 patent was directed to internet commerce, it was limited to a particular application of any broad, abstract concept: 

As an initial matter, it is true that the claims here are similar to the claims in [earlier cases finding patents ineligible] in the sense that the claims involve both a computer and the Internet. But these claims stand apart because they do not merely recite the performance of some business practice known from the pre-Internet world along with the requirement to perform it on the Internet. Instead, the claimed solution is necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks.  

In particular, the ’399 patent’s claims address the problem of retaining website visitors that, if adhering to the routine, conventional functioning of Internet hyperlink protocol, would be instantly transported away from a host’s website after “clicking” on an advertisement and activating a hyperlink. For example, asserted claim 19 recites a system that, among other things, 1) stores “visually perceptible elements” corresponding to numerous host websites in a database, with each of the host websites displaying at least one link associated with a product or service of a third-party merchant, 2) on activation of this link by a website visitor, automatically identifies the host, and 3) instructs an Internet web server of an “outsource provider” to construct and serve to the visitor a new, hybrid web page that merges content associated with the products of the third-party merchant with the stored “visually perceptible elements” from the identified  host website. 

Slip op. at 20. The court distinguished Ultramercial, a recent case holding that an-Internet based process was ineligible: 

Unlike the claims in Ultramercial, the claims at issue here specify how interactions with the Internet are manipulated to yield a desired result—a result that overrides the routine and conventional sequence of events ordinarily triggered by the click of a hyperlink. Instead of the computer network operating in its normal, expected manner by sending the website visitor to the third-party website that appears to be connected with the clicked advertisement, the claimed system generates and directs the visitor to the above-described hybrid web page that presents product information from the third-party and visual “look and feel” elements from the host website. When the limitations of the ’399 patent’s asserted claims are taken together as an ordered combination, the claims recite an invention that is not merely the routine or conventional use of the Internet. 

Id. at 22-23. As a result, the court ruled that the process was eligible under §101. Circuit Judge Mayer dissented, arguing that the ‘399 patent was “long on obfuscation but short on substance[,]” and that the invention disclosed was “so rudimentary that it borders on the comical.” He interpreted Alice to create a “technological arts” test for eligibility, which was not met because the ‘399 patent was not rooted in any new computer technology.

Should All U.S. Patent Issues (Even Those Arising In State-Law Claims) Be Decided In Federal Court?

(The following is a guest contribution from Mark A. Cantor of Brooks Kushman P.C., a patent and technology law firm with offices in Detroit and Los Angeles. Mark is President of BK and Co-Chair of the firm's litigation practice. He can be contacted at mcantor@brookskushman.com.)

In the United States, we usually think of patent litigation as a federal court practice. However, significant patent issues can arise in IP-related state law claims. One question that arises frequently is whether those issues should be tried in state courts or federal court. Although the Supreme Court’s 2013 ruling in Gunn v. Minton, ___ U.S. ___, 133 S. Ct. 1059 (2013) restricted the types of state-law claims that are subject to federal court jurisdiction, the Federal Circuit may be poised to reassert jurisdiction to avoid potentially conflicting rulings in state and federal forums.

Federal Jurisdiction Under the Gunn

 

The federal courts exercise exclusive subject matter jurisdiction over claims for relief “arising under any Act of Congress relating to patents[.]” 28 U.S.C. § 1338(a). In the past, in addition to typical patent infringement actions, federal courts exercised “arising under” jurisdiction to a variety of state-law claims, including suits alleging breach of patent license agreements, defamation, and legal malpractice.

In Gunn, the Court held that a state-law claim “arises” under the Patent Act if patent issue implicated in a claim is: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. Of particular importance is the requirement that the issue be “substantial.” As Gunn explained, it is not enough for the issue to be important to the outcome of the claim. Instead, an issue is substantial only if it is important “to the federal system as a whole.”

The state-law action in Gunn was for legal malpractice. The defendant attorney allegedly neglected to raise an argument in a patent infringement action that would have rebutted an alleged infringer’s argument that the patent was invalid due to a statutory bar. The Supreme Court held that while that argument was pivotal to the success of the malpractice claim, its “backward-looking” nature prevented federal jurisdiction:

Because of the backward-looking nature of a legal malpractice claim, the question is posed in a merely hypothetical sense: If Minton’s lawyers had raised a timely experimental-use argument, would the result in the patent infringement proceeding have been different? No matter how the state courts resolve that hypothetical “case within a case,” it will not change the real-world result of the prior federal patent litigation. Minton’s patent will remain invalid.

133 S. Ct. at 1068. For a more lengthy comment on Gunn, see “Gunn v. Minton: Supreme Court Pokes Another Hole In Exclusive Federal Jurisdiction Over Patent Rights,” SSRN No. 2232879 (Mar. 13, 2013).

Courts Apply Gunn To Expand State Court Jurisdiction

In applying Gunn, courts have focused on whether the patent law issue to be decided in the action is “backward-looking” or forward-looking. In other words, does the issue only relate to the state-law claim, or could it affect patent rights in future cases?

In Forrester Environmental Services, Inc. v. Wheelabrator Tech., Inc., 715 F.3d 1329 (Fed. Cir. 2013), the Federal Circuit applied Gunn to decline federal jurisdiction over a state court defamation action based on the defendant’s statements that the plaintiff was infringing three patents. The court noted that pre-Gunn cases in which it had recognized jurisdiction over disparagement claims “may well have survived the Supreme Court’s decision in Gunn.” 715 F.3d at 1334. Forrester’s claim did not survive, however, because any state court rulings on the scope or infringement of the patents would have no forward-looking affect: The patents all had expired and the defamatory statements referenced conduct in Taiwan, which would not be infringement in any event.

Like the Federal Circuit in Forrester, the majority of courts applying Gunn have failed to recognize federal question jurisdiction. However, unlike Forrester, many of those involved patents which are not invalid or expired. The courts tend to brush aside patentee arguments that any determination of patent law issues could have future preclusive effects.

In MDS (Canada) Inc. v. Rad Source Techs., Inc., 720 F.3d 833 (11th Cir. 2013), the court ruled that the Federal Circuit lacked appellate jurisdiction over a breach of license dispute that turned on whether the licensee’s product infringed three patents. The court held that the issue of patent infringement was not substantial. Notably, the court stated that infringement of the patent was not a substantial issue because, “Both the highly specialized nature of patent claims and the niche market for [the accused] blood irradiation devices suggest that the resolution of this issue is unlikely to impact any future construction of claims.” 720 F.3d at 842. The court did not mention that the licensed patents do not expire until 2022.

A review of other decisions applying Gunn reveal that courts have interpreted it to broadly discourage federal jurisdiction even when the underlying claim involves the validity or infringement of “live” patents. See, e.g., Bonnafant v. Chico’s FAS, Inc., Case No. 2:13-CV-893-FTM-29CM, 2014 WL 1664554 (M.D. Fla. Apr. 25, 2014) (whistleblower case lacked federal question jurisdiction when issue whether employee was instructed in infringe patent “will hardly call into question the entire federal trademark/patent system. Instead, it will require the application of a set body of law to the facts at hand.”); Airwatch LLC v. Good Technology Corp., No. 1:13-cv-2870-WSD, 2014 WL 1651964 (N.D. Ga. Apr. 24, 2014) (no federal jurisdiction over defamation action because infringement issue was “context-specific”); Transcardiac Therapeutics, Inc. v. Yoganathan, No. 1:13-CV-3089-AT, 2014 WL 1624086 (N.D. Ga. Feb. 28, 2014) (breach of contract, interference and fraud claims involving inventorship dispute lack federal question where inventorship was “not substantial in any relevant sense”).

Jang v. Boston Scientific: The Fed. Cir. Strikes Back?

More recently, the Federal Circuit has signaled that federal jurisdiction may continue over state-law claims in similar circumstances. In Jang v. Boston Scientific Corp., No. 2014-134, 2014 WL 4746002 (Fed. Cir. Sept. 16, 2014), the court considered whether it had appellate jurisdiction over a patent license dispute. The appeals court distinguished Forrester and stressed the risks of allowing other courts to rule on patent validity or infringement:

Permitting regional circuits to adjudicate questions of patent validity, for example, could result in inconsistent judgments between a regional circuit and the Federal Circuit, resulting in serious uncertainty for parties facing similar infringement charges before district courts within that regional circuit. Maintaining Federal Circuit jurisdiction over such contractual disputes to avoid such conflicting rulings is important to “the federal system as a whole” and not merely “to the particular parties in the immediate suit.” Gunn, 133 S.Ct. at 1066.

Jang, 2014 WL 4746002 at *3. As a result, the appeals court ruled that the patent issues raised by Jang’s breach of license claim were substantial and triggered “arising under” jurisdiction. This was true even though Jang’s patent had been invalidated as a result of reexamination proceeding. The Federal Circuit reasoned that jurisdiction must be assessed at the time an action is commenced, and since the patent only was invalidated later, federal jurisdiction attached to Jang’s claim.

The Jang decision suggests that the Federal Circuit, the regional circuit courts of appeals, and potentially state courts will continue to struggle with jurisdiction over patent issues arising in the context of state-law claims. Despite broad language in Gunn, it is likely that the Federal Circuit will tend to find jurisdiction in cases involving patents which remain in effect and where the application of patent law may affect future market activity or be the subject of future litigation.