Supreme Court Helps Rein In Patent Trolls, Legislation Still Needed

It’s another big day in patent law, as the Supreme Court issued decisions in two fee-shifting cases: Octane Fitness and Highmark. The Federal Circuit’s opinions were unanimously rejected in both cases, continuing a pattern I noted a few weeks ago.

But most importantly, the Supreme Court recognized the importance of fee-shifting in curbing abusive litigation.

The Court found that the Federal Circuit was giving judges too little discretion to award fees. Justice Sotomayor, writing for the Court in both cases, gave us a new definition for when a case is “exceptional” in the meaning of the fee-shifting provision of the patent statute (this quote is from Octane Fitness):

[A]n “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.

The Court observed that the Federal Circuit’s test was so narrow as to limit fees to cases where a party’s conduct was sanctionable or where the litigation was essentially a sham. But that’s not what Congress meant by “exceptional.”

The Court also rejected the Federal Circuit’s requirement that a case has to be proven exceptional by clear and convincing evidence, which is a much harder requirement to meet than most issues in a civil case. And the Court rejected the Federal Circuit’s position that trial judges don’t get deference to their decisions with respect to awarding fees.

OK, but what does this mean for patent reform?

Certainly, these decisions make the current situation better, because they give judges more discretion in awarding fees than the previous rule.

But there are many problems solved by the proposed legislation that the Court couldn’t address in an opinion interpreting an existing statute. For instance, the pending legislation raises pleading standards so that trolls cannot shoot off cookie cutter complaints, and it also deals with abusive demand letters.

Just as importantly, the legislation addresses problems with fee shifting and costs that the Court could not reach. The fee-shifting statute (35 U.S.C. § 285) limits awards to attorney fees, which most courts interpret as excluding major expenses like discovery costs. This means that if a patent troll brings a frivolous case, the victim is unlikely to be made whole even if the court awards fees.  And of course, the victim needs to litigate to the end to get its fees and some won’t have the cash to do that.  That is why we need legislation that will help lower discovery costs to something more rational.

Second, these decisions do nothing to stop empty patent holding companies. Rather, by making it easier to recover fees, they actually encourage more patent trolls to be careful to set up shell companies to make themselves judgment-proof against any award of fees. We need legislation to shine a light on the financial backers of shell companies and either put them on the hook for fees or require shell companies to post a bond in advance.

Finally, the Court’s test does not include any express protections for special circumstances, such as small inventors with few assets.

Simply put, while the Court’s decisions help in some respects, we still need legislation.

One final note about the Octane Fitness decision. Justice Sotomayor made a key observation, namely that awarding fees in cases that were unreasonably pursued doesn’t hurt patent rights:

[T]o the extent that patent suits are … protected as acts of petitioning, it is not clear why the shifting of fees in an “exceptional” case would diminish that right. The threat of antitrust liability (and the attendant treble damages, 15 U. S. C. §15) far more significantly chills the exercise of the right to petition than does the mere shifting of attorney’s fees. In the Noerr-Pennington context, defendants seek immunity from a judicial declaration that their filing of a lawsuit was actually unlawful; here, they seek immunity from a far less onerous declaration that they should bear the costs of that lawsuit in exceptional cases.

I couldn’t have said it better.