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