Federal Circuit Limits Review of Attorney Fee Issues

SFA Systems v. Newegg (Fed. Cir. 2015)

Although it received a somewhat favorable claim construction ruling and won a summary judgment challenge, the patentee (SFA) dropped its case against Newegg and issued a covenant not to sue the erstwhile defendant based upon what SFA termed “business reasons.”  Rather than simply walking away, Newegg demanded attorney fees to compensate for its costs defending against what it termed a “frivolous and abusive lawsuit.”

On appeal here, the Federal Circuit has affirmed the lower court’s denial of fees under Section 285 of the Patent Act.  That provision states that a district court “may award reasonable attorney fees to the prevailing party” in “exceptional cases.”  In its 2014 Octane Fitness decision, the Supreme Court interpreted an “exceptional case” to be 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.

Exceptionality appears to be implicitly linked to reasonableness — at least insofar that a showing that your actions were “reasonable” will avoid an exceptional case award.  In practice, the determination of an exceptional case is done on a case-by-case basis, “considering the totality of the circumstances.”  Id. In its parallel 2014 Highmark decision, the Supreme Court also held that the district court’s determination regarding exceptional case awards should be given deference on appeal.


Not Reviewing a Double Mistake: As I mentioned, the district court’s claim construction and summary judgment denials both favored the patentee.  In arguing that SFA’s case lacked substantive merit, Newegg provided the following logical chain of reasoning: (a) if the district court had not erred in its claim construction, (b) it would have held the claims invalid as indefinite (c) therefore showing that SFA’s case lacked substantive merit.    On appeal, the Federal Circuit refused to follow the bait and instead found that a fee-award petition does not open the door to re-litigating all underlying substantive issues decided by the district court.  Rather, according to the court, the review of a fee-award petition should focus only on “whether the district court abused its discretion when it found that the party’s litigating position was not so meritless as to ‘stand out’ from the norm and, thus, be exceptional.”   Likewise, the Court wrote that district court need not revisit its prior decisions when judging a fee award motion.

Nuisance Fee Litigation Not Necessarily Unreasonable:  Following the holding of Eon-Net v. Flagstar, 653 F.3d 1314 (Fed. Cir. 2011), Newegg argued that SFA’s practice was abusive “by exploiting the high cost to defend complex litigation to extract a nuisance value settlement.” (quoting Eon-Net).  On appeal, however, the appellate panel found that the district court had not abused its discretion in failing to find unreasonable conduct.

We agree with Newegg … that a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements, with no intention of testing the merits of one’s claims, is relevant to a district court’s exceptional case determination under § 285. And, we agree with Newegg, moreover, that to the extent the district court’s opinion in this case can be read to discount the motivations behind a patentee’s litigation history, the district court was wrong. The problem with Newegg’s request that we reverse the district court’s exceptional case determination on these grounds, however, is its failure to make a record supporting its characterization of SFA’s improper motivations.

In particular, SFA was able to point to some larger settlements and other cases that it had not (yet) settled.

Here, the Federal Circuit repeated its prior holdings that a repeated pattern of filing lawsuits and then settling for only a “nuisance” amount (<10% of expected litigation costs) provides evidence of exceptionality.  The problem was simply that the defendant did not prove-up that pattern in this case.  Apparently it is acceptable and reasonable to have some nuisance-settlement cases as long as the patentee is willing to push its case to the merits in other cases.

Totality of Circumstances: Although the appellate court walked-through the two factors of (1) low-merit case and (2) litigation misconduct, it also recognized that the test is a totality-of-the-circumstances test.  However, the unstated conclusion from the case is that the case cannot be exceptional unless at least one of the factors shows unreasonable behavior.

= = = = =

One problem with the current patent system is that valid but low-value patents are fairly worthless, and this decision only exacerbates that problem. Take the example of a valid patent covering an improvement that incrementally adds only $500,000 in value to a product’s entire market.  And, assume that market is split among five competitors.  The sequential settlements of $100,000 are all “nuisance level,” but they are also all at the correct market level.  Now, Despite what you might conclude from the decision’s language, I don’t believe that the court here is trying to say that a patentee would act unreasonble wrong in this situation by filing and settling these cases. However, the language is loose enough to support a defendant who mounts such a case.  (And, I recognize that my hypothetical is not exactly parallel to the facts at issue in the SFA case.)

One solution to this problem is to have more focus on potential damage awards early-on in a case in order to form realistic limits that, in turn, should tend to limit reasonable litigation expenditures.

= = = = =

Mark Lemley argued the case before the Federal Circuit for Newegg, although he was apparently not on the original appellant brief. John Edmonds appeared on behalf of SFA.

Judge O’Malley penned the opinion that was joined by Judges Clevenger and Hughes.



24 thoughts on “Federal Circuit Limits Review of Attorney Fee Issues

  1. 12

    How many more to go until Malcolm hits his claimed 99%…

    And the tail of the flea on the tail of the dog continues to wag…

    Perhaps the other fleas need someone so obsessed…

  2. 11

    Four more Rule 36 affirmances against patentees/patent applicants in the last four days. None in favor.

    But surely it is defendants who are “driving up costs”.


  3. 10

    Real Estate Alliance (REA), owner of one of the most ridiculous patents ever (covering the use of a computer to identify “available real estate”), is still hobbling along (the case originally filed in 2008 — the Dark Ages of the US patent system). But REA is not driving up costs! Nope, surely it’s the defendant who is “driving up costs” here, right? So we are endlessly told.

    [regular readers of this blog will recall earlier discussion of this case here link to patentlyo.com; the patentee was given the breath of life by the CAFC with their en banc decision to expand inducement liability in Akamai, a decision that was soundly rejected by the Supreme Court 9-0; more here: link to patentlyo.com]

    The oral arguments are priceless

    link to cafc.uscourts.gov

    in part because the attorney arguing for the patentee is the same guy who wrote the claims. So (he tells everyone) he knows what the claims really mean! <–lol

    The best part is when the Real Estate Alliance attorney states at 5:00 that the defendant made a "misrepresentation to this court and the district court" that caused a "manifest injustice". He explicitly refers to the defendant's alleged behavior as "litigation misconduct." (around 6:00). But wait! After members of the panel incredulously ask him whether he's accusing the defendant of litigation misconduct based on unbriefed (!) accusations, the patentee's attorney begins his dust-kicking in earnest. It must be heard to be believed.

  4. 9

    The habitual defenders of some of the greediest, griftiest attorneys who ever walked the face of the earth might want to listen to the oral argument in Orenshteyn v. Citrix Systems, Inc. (argued before Prost, Lourie, & Linn).

    Here’s the summary judgment detailing how the district court case went down (to the extent there are any “details” to be discussed): link to leagle.com

    It’s not every day that you get to hear a patentee’s attorney — presumably hired on a contingent fee basis — admit that he never talked to the plaintiff about the legal issues in the case before filing suit (at 11:30 in the oral argument).

    That admission followed a rambling exposition by the patentee’s attorney describing unbriefed events that the patentee felt “might be interesting” to the panel (for the record, they didn’t seem terribly interested).

    Please, let’s hear some more hilarious stories about “defendants driving up costs of patent litigation”! And let’s hear them from the world’s funniest storytellers in this genre. We all know that they never tire of sharing their fantastic tales.

  5. 8

    Lest we forget the background:

    link to arstechnica.com

    A full 90 percent of tech patent cases are filed by patent trolls. That’s compared to 85 percent in the same period last year and 82.5 percent in the second half of 2014….

    Incredibly, the top three filers of lawsuits—eDekka LLC, Data Carriers LLC, and Wetro Lan LLC—are all represented by the same law firm, Dallas-based Austin Hansley. All of them file lawsuits almost exclusively in the Eastern District of Texas….

    The #3 troll, Wetro Lan, has a patent that’s said to cover Internet firewalls and was recently featured as the Electronic Frontier Foundation’s “St-p-d Patent of the Month.”

    Austin Hansley, the law firm, has tangled with EFF in court, as well. The Texas firm helped Garfum.com sue small businesses over photo contests but backed down once the EFF took the case.

    Until the trash is taken out, more reforms are coming. Get used to it.

  6. 7

    The high cost of defenses to patent suits in general is worthy of better economic studies than it seems to get. The length and scope of litigation physical and electronic documents and deposition DISCOVERY demands against large companies with many different products that is allowed virtually uncontrolled by many D.C.s before any claim interpretation, much less a trial date, may be the largest factor? The failure of many defendants to intelligently supervise their outside counsel billings, motions, etc., is another factor. Another is the failure of many D.C. judges to consider any summary judgement motions, or even provide a Markman claim interpretation that could clarify infringement or not, until shortly before the trial date. Also, Fed. Cir. reversals of many S.J. decisions from either party that do get granted [KSR being a prime example]. Plus the need for defendants to find “clear and convincing evidence” for every patent law issue that may be raised in patent litigation other than non-infringement or damage-reduction defenses. Plus one cannot ignore the deliberate efforts in some cases of one side trying to run up litigation costs for the other side. And finally, the fact that too many D.C. judges do not seem to care enough about such high costs to the parties and actually benefit from such high costs forcing settlements that reduce their docket loads. Especially in reducing the number of cases actually going to trial, which as now shrunk to only a very small % of the number of patent suits filed.
    [Plus other litigation cost reasons other readers can provide.]

    All of these costs [and the D.C. delays that increase them other than in a few “rocket dockets”] are driving increased usage of IPRs and CBMs.

    1. 7.1

      P.S. In response to some comments below, unlike many other tort suits, law firms taking patent cases [many of which are now large general practice firms] are just as happy to take patent owner clients for patent suits as to take defendants, if on a cash basis of some kind, even if the amount is “capped.”

      Only patent owners can obtain attorneys on a “contingent fee” basis in some cases. But the increased risk of sanctions and damages reductions plus the recent increase in effective lower cost defenses [IPRs, 101, ambiguity, 112, etc.] seems to have scared off some law firms that had specialized in contingent fee patent suits.

    2. 7.2

      [Further to my point about about the need for clients to better control their O.C. costs.] Newegg [the defendant in the subject case] via its Chief Legal Officer Lee Cheng has developed quite a reputation for being one of the most aggressive non-settling patent suit defendants against aggressive PAE’s. Yet he has testified in one trial that while the average cost of [a defendant] taking a patent case through trial is $2 million to $6 million, Newegg has kept its costs to about $3 million for the cases that have gone through trial so far.

  7. 6

    large defense firms, who have driven up the cost of patent litigation

    Still funny as heck every time I read it.

    1. 6.1

      Malcolm humor: because g-g-g-grifting only happens on one side of the equation when it comes to obtaining and enforcing patent rights…

      How anyone mistakenly believes that Malcolm is not anti-patent is beyond rational belief.

      1. 6.1.1

        Remember: “anon” and his cohorts are the same folks who rail against the quick disposal of cases on the pleadings or summary judgment based on the fact that the claims protect ineligible subject matter.

        But they’re really very concerned about litigation costs! Sure they are. They’re very serious people.

  8. 5

    Take the example of a valid patent covering an improvement that incrementally adds only $500,000 in value to a product’s entire market. And, assume that market is split among five competitors. The sequential settlements of $100,000 are all “nuisance level,” but they are also all at the correct market level.

    This isn’t a problem at all. If any of the five infringers force you to proceed to court, just win your lawsuit, and then you don’t have to worry about the case being found “exceptional” to your detriment.

  9. 3

    JNG on what reasonable basis can you find that defense firms have been worse actors than plaintiff firms in driving costs ? By what, defending their clients?

    We do seem to have a problem when a $20K hypothetical negotiation result costs a million bucks to defend, most pointedly when millions are at risk due to plaintiff’s unrealistic assertions of the value of the invention. One must vigorously defend or risk extinction. Its a horrifying catch 22 for a small business defendant.

    It’s a real problem too that a small patentee trying to get at the $20K may have to spend ten times that to legitimately assert the patent, but at least the patentee has a choice in the matter. Assuming the merits too- which is a big assumption with the quality of many (most) older method and software patents, and some newer ones…

    If we had a patent small claims court, how might that work? Case limits? Procedures? State courts involvement? What’s good for the bar?

  10. 2

    Dennis, I agree that an early assessment of damages might focus one’s attention on whether the litigation tactics of either party are abusive.

    In Germany, that appears to be what they do at the outset. Once the value of the case is determined, the court sets a cap on the amount of attorneys fees it will award to the prevailing party.

    Now, Newegg never settles. So if one sues them, one is going to spend big buck to get from here to there. This makes them judgment proof for small claims.

    Perhaps a court could find this type of litigation tactic abusive, and make it known that if the defense grossly exceeds the cap, that the defendant will also have to pay the plaintiff’s fees regardless of the outcome.

    1. 2.1

      I agree that earlier court intervention as to what is actually important/value of the case could be really useful. In fact, the Federal Rules already provide for this. Rule 26 says, in relevant part, that the court *must* “limit the frequency or extent of discovery” based on “the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.” (See Rule 26(b)(1), which in turn references (b)(2)(c))

      Seems pretty clear that the Rules already require this sort of assessment.

      A problem though, is that many courts don’t do this. Take ED Tex, for example (which has ~30% of all patent cases) and Judge Gilstrap’s rules, which require for the automatic disclosure of all “relevant” documents *without request* and without making any determination as to the amount in controversy.

      So what is someone to do when hit by a patent lawsuit in ED Tex, where there is no court consideration of the amount in controversy early on, where rules make it difficult to get early resolution (see the rules re 101 motions and requiring permission to file summary judgment)? And if a patent owner specifically picks that jurisdiction, what are we to take from that?

      Dennis’ point about small, legitimate players being at risk of being considered having fees assessed against them works a lot more for those who file outside of a district that makes consideration of the amount in controversy irrelevant to how the case is actually litigated.

      (As a side note: the notes to the current proposed revisions to Rule 26 are worth reading to see how there is a concern that courts have essentially not managed cases based on the value in controversy, and the revisions are attempting to make clear that discovery shouldn’t be unlimited).

      1. 2.1.1

        Take ED Tex, for example (which has ~30% of all patent cases) and Judge Gilstrap’s rules, which require for the automatic disclosure of all “relevant” documents *without request* and without making any determination as to the amount in controversy.

        Gilstrap is on the fast rain to Raderville.

    2. 2.2

      Another point:

      Courts should be much more vigilant in enforcing Rule 26 initial disclosures. They require “a computation of each category of damages claimed by the disclosing party” — but how often are they just given as “a reasonable royalty, subject to expert testimony” and that’s it?

      Patent holders should be clear in what they think their patent is worth upfront. If it’s a small amount, they should ask the court to limit discovery based on that, making clear that there is no reason for discovery/litigation costs to get out of control. Doing that upfront would seem to support a finding of not being an exceptional case if the patent holder loses.

      But how many patent holders do that? And in addition, how many defendants push courts to require it? Why do we push all the disclosures to the back end, leading to arguments that “litigation costs too much” when if courts/parties disclosed more up front, we could cut back on the wasteful discovery (presuming the court and the parties are reasonable — perhaps that is assuming too much)

  11. 1

    Dennis, thanks for posting this… did you listen to the oral arguments?

    Lemley lost the case, but should win an award for the highest output of BS/minute, I clocked him at about a few dozen mischaracterizations, half-truths and other reality distortions in his allotted 12-15 minutes. Your point about the disparity in patent “market” vs litigation “market” is right on point. Somehow, a patentee owning a decent invention that is worth $1m (in reasonable royalties over the life of the patent) in the overall market with 5 prospects is now de facto a bad actor, because asking for $200k from each is characterized as a “nuisance” settlement. This “nuisance” label is based on artificial numbers controlled by, guess what, large defense firms, who have driven up the cost of patent litigation into the stratosphere. In effect, their bad behavior and greedy practice of milking clients for scorched earth tactics have created a distortion in the negotiations world.

    Just another side effect/perversion resulting from the new world order in which big D firms have manipulated the world of patents into a pure litigation play.

    1. 1.1

      The fee petition was clearly overreaching, but I don’t think NewEgg cares one bit. They like the publicity of going after fees in this case, even though fees were not warranted. This is just part of NewEgg’s longstanding and famous litigation strategy of becoming the fly in the ointment in any troll suit. Their strategy is to fight the case, never settle, all the way to the appeals court level, and seek fees in every case, whether warranted or not. They took Soverain to trial and invalidated its patent at the Federal Circuit after losing a jury verdict, after everyone else settled out.

      NewEgg’s strategy only works because NewEgg itself is a bit player in the “e-tailer” industry. Their damages exposure in these cases is relatively small (usually single-digit millions), much less than Amazon and many of the other companies named in these suits. By fighting everything, NewEgg breaks the economic model essential to profitable trolling. That’s why they generally get dropped out of cases like this; in this case, they’re trying to send the message that they’ll go after fees even if you drop them, so you should best just not sue them in the first place.

      They have a reputation among district court judges of reflexively, knee-jerk seeking fees in every case, whether warranted or not. Judges approach their fee petitions with a grain of salt at this point. The big question is that I wonder if NewEgg’s ability get fees in future cases is compromised by its overreaching strategy through these motions.

      1. 1.1.1

        Not caring about their own frivolous filings….

        … should someone be upset about that?

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