CAFC Affirms Exceptional Case and Maybe Encourages Sand-Bagging

By David Hricik

Thermolife Int’l LLC  v. GNC Corp. (Fed. Cir. May 1, 2019) (here) is pretty interesting.  Plaintiffs (Stanford University was one of them) filed about 80 lawsuits, settling many for nuisance value.  Among the 80 defendants were Hi-Tech Pharmaceuticals, Inc. and Vital Pharmaceuticals, Inc. (“Hi-Tech”).  The defendants moved for and lost summary judgment on invalidity, but then the parties agreed to bifurcate further proceedings, with invalidity being determined first.

The trial court held after a bench trial that the asserted claims were invalid under 102 and 103.  A month after that, Hi-Tech moved for an exceptional case finding, but based upon lack of adequate pre-suit investigation into (wait for it) infringement.  The accused products had been publicly available and their labels indicated no infringement (insufficient amounts of one ingredient).

The court allowed plaintiff’s counsel to explain what pre-suit investigation had been done, but the trial court struck the declaration as belated.  Beyond that, the response did not fully address the claims and issues Hi-Tech had raised.  The court then found the case exceptional, essentially reasoning that because the labels indicated no infringement and the products were publicly available, the lawyers should have tested them, but did not.

The panel affirmed (Taranto, Bryson, Stoll).  Calling the determination unusual, the court nonetheless found no abuse of discretion. It noted that Hi-Tech had not “give early notice of the defects in plaintiffs’ infringement assertions that later became he basis for the fee award,” but concluded that because of the numerous suits and need to consolidate this “reasonably led not only to coordination among numerous defendants but to the agreement of all parties, for efficiency, to give priority to the common issue fo validity so that even discovery as to party-specific issues like infringement could be postponed.”  In addition, the court found no abuse of discretion that the pre-suit investigation had been inadequate given the labels and publicly-available products.

I suppose in the narrow sense of mass consolidated suits, the award of fees makes sense, but if the concept is taken out of context, one could imagine defense firms racking up hours hoping for a win on a hard issue while then using an easy issue to establish an exceptional case.  Further, if the invalidity case was close, presumably the amount of fees (not mentioned in the appeal and not challenged) would reflect some discount or adjustment since invalidity was, presumably, not “out of the ordinary.”

Interesting case, not for the merits of finding no adequate pre-suit investigation, but for the rest.

About David

Professor of Law, Mercer University School of Law. Formerly Of Counsel, Taylor English Duma, LLP and in 2012-13, judicial clerk to Chief Judge Rader.

16 thoughts on “CAFC Affirms Exceptional Case and Maybe Encourages Sand-Bagging

  1. 4

    My first question was, who was the genius on the plaintiff’s side who consented to having invalidity tried in a bench trial (without a jury)?

    But that aside, Hricik’s concern over “sand-bagging” is misplaced. As the opinion explicitly recognized, the early invalidity determination cut down all of the pending lawsuits in one swoop, which is far more efficient than adjudicating the (apparently baseless) infringement claims separately across the many pending cases. The invalidity determination prevented the filing of future cases on the invalidated claims. A win-win for judicial resources and future defendants.

    But the decision is still justifiable even without the consolidation issue. If you’re a defendant in a baseless suit, it doesn’t matter if it’s a patent case or any other type of civil litigation, the defendant has no obligation to mitigate the potential attorneys’ fees the plaintiff would be ordered to pay when the groundless nature of the suit is later exposed. A groundless suit is only in court because of the plaintiff chose to file it; such a plaintiff cannot be heard to complain about the strategies the defendant employed to defeat that suit. In other words, the plaintiff who files a baseless suit and wastes the time of the defendant and the court should bear the full risk of having to pay fees; it is totally understandable that a court wouldn’t be receptive to a plaintiff’s argument, “our case was so baseless on ground X, you should have defended on that issue first.”

    As for incentives, Hricik obviously has very little litigation experience, because no competent defense lawyer would deliberately litigate a more complex issue simply just to get more fees under Section 285 at the end of a case. A fee award is not assured even with a complete victory — everyone knows that the vast majority of Section 285 motions are denied, primarily because many district courts are reluctant to shift fees regardless of the facts. And even if you get a 285 fee award, if the plaintiff is an NPE or an empty LLC holding company (which is the case with most 285 fee awards), you probably won’t be able to collect a penny of your fee judgment because the NPE is judgment-proof with all of its assets drained (except the non-infringed or invalid patent-in-suit).

    So the idea that awarding attorneys’ fees in a case like this will encourage sand-bagging by defense counsel is without basis.

  2. 3

    but if the concept is taken out of context, one could imagine defense firms racking up hours hoping for a win on a hard issue while then using an easy issue to establish an exceptional case.

    This is a danger, but remember that any award of fees has to be reasonable. If a defendant’s counsel has an easy win and a hard win and wastes resources on the hard win, then there is an argument to be made that the fees expended on the hard win were not reasonable.

    There is in fact case law that suggests that fee awards are supposed to mirror what happens in the marketplace. If a lawyer racked up $ 1 Million in fees to defend a case he could have won for $50k on an easier issue, the client would understandably be irate. A good judge should take this into account.

    1. 3.1

      Yeah, and Hrick’s theory about incentivizing sand-bagging ignores the fact that there is no windfall here; a defendant cannot recover attorneys’ fees that it didn’t actually pay out. A defendant cannot recover more than it paid, and in most cases, fee awards get substantially reduced and do not cover the prevailing defendant’s entire fees.

      Hrick’s argument that a defendant would deliberately incur and pay unnecessary fees just to have a chance of recovering some portion of them later, makes absolutely no sense. There is no incentive to sandbag here.
      It would be like paying $10 for a lottery ticket whose maximum payout, if you win and everything goes your way, is $5. I doubt you’d sell many tickets.

      1. 3.1.1

        Excellent posts, LR.

  3. 2

    Holding makes perfect sense. Any violation occurs at the time of filing the suit. Infringement is the “case or controversy” requirement — absent a properly investigated, plausible allegation of infringement, there’s no legitimate basis for filing a complaint. Every dollar the defendant spends in answering or defending any part of the suit therefore arises solely because of the improper complaint. Agreeing to bifurcation to save some of those dollars doesn’t waive defendant’s right to compensation for the violation.

    It would have been helpful if the District Court had relied more clearly on FR Civ Pro 11 in addition to Sect 285 but the CAFC got the important part right — a choice not to file a Rule 11 motion early doesn’t waive the right to seek sanctions.

    1. 2.1

      Thanks Cass – that was helpful.

      I suppose a lesson learned then is why bother with bifurcation?

      1. 2.1.1

        Because you don’t always get a fee award, and you owe it to your client to resolve the case as efficiently as you can. If you have a slam-dunk non-infringement argument (or invalidity argument), it makes sense to press that and avoid the harder, more expensive, issues.

        1. 2.1.1.1

          That’s just it, Bored – Cass makes the point that there is NO efficiency to be had with any type of bifurcation, since you have to have had done that work that would have been saved with the bifurcation in the first instance.

          I “get” what you are saying if you have some type of “known” easy and hard pairing presented to you, but that “version” is not at point here.

          What is at point is that the supposedly “hard” item was rationally separated and bifurcated and then before that second part was engaged, counsel gets Dinged for the first part of the bifurcated pairing, based on — lack of the second part.

          1. 2.1.1.1.1

            Cass makes the point that there is NO efficiency to be had with any type of bifurcation, since you have to have had done that work that would have been saved with the bifurcation in the first instance.

            That is not the reality of litigation. True, when you first get a case, you have to invest time (and client resources) to ascertain the case, including all aspects. But then you have to litigate the case, including discovery, summary judgment and trial.

            After the initial investigation, you may come the conclusion that one aspect (infringement, validity, Alice issues) is a clear winner, but others are murky. If you can convince the court to bifurcate, then you only have to litigate that aspect and then (hopefully) prevail. That is where bifurcation can create a savings in litigation expenditure.

            1. 2.1.1.1.1.1

              I <know that THAT is not the reality of litigation -which makes the write-up here reason to post as has been posted.

              I “get” that you want to discuss some type of “clear winner” known (or at least reasonably estimated) easy and hard paring, but that is just not what has been presented as the issue here.

              1. 2.1.1.1.1.1.1

                What is being discussed here is this situation:

                one could imagine defense firms racking up hours hoping for a win on a hard issue while then using an easy issue to establish an exceptional case

                That is exactly an easy-hard pairing. (Of course you don’t know, but that is your best understanding.)

                The question is whether bifurcation can ever achieve an efficiency. Given that it is asked for many times (and sometimes granted), the answer is clearly yes. And it usually makes sense where you have strong reason to believe you will prevail on one issue, and don’t want to waste time litigating other issues.

          2. 2.1.1.1.2

            Anon, perhaps you have misunderstood my OP regarding efficiency and bifurcation. I explicitly said that bifurcation saves money. Bored Lawyer has stated the reasons why.

            1. 2.1.1.1.2.1

              Certainly there are different focal points in the conversations here.

              It is THIS case’s particular bifurcation and “gotcha” that is my emphasis (which feeds off of YOUR direct points on THIS matter).

              I apologize if my post indicated that bifurcation could never work (or perhaps more accurately, bifurcation beyond this case’s type was to have been included within the scope of my comment). Certainly, different bifurcations with different set-ups would not fall prey to what you point out Cass. I did not intend my comment to go beyond the topic at hand.

    2. 2.2

      I also wondered why a FRCP 11 motion had not been filed to begin with for inadequate pre-trial infringement if that was obvious from mass suits against products with labeled ingredients indicative of non-infringement?
      Also, was not the logical decision to bifurcate this trial to try validity first [to dispose of all 80 suits] up to the judge himself, not requiring the request or consent of either party?

  4. 1

    Am I readin the write-up here correctly?

    The parties agree to bifurcate and handle VALIDITY first, and then obtain “special” because in the first part of the bifurcated case, there was inadequate SECOND bifurcated case elements…?

    Does not the agreement to bifurcate and handle validity first necessarily excuse any “non-fullness” in the second case aspect?

    1. 1.1

      The only way the holding makes sense is the consolidation aspect….

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