Red Flags Waved Off: Federal Circuit Rejects Overzealous Fee Award against Patentee

by Dennis Crouch

While sitting by designation as at the Federal Circuit, Judge Alan Albright has authored an important new opinion on attorney fees patent cases under 35 U.S.C. § 285. The court vacated and remanded a fee award by Colorado Judge Brooke Jackson, finding that Judge Jackson abused her discretion when determining that the case was “exceptional” under the statute. Realtime Adaptive Streaming L.L.C. v. Sling TV, L.L.C., No. 2023-1035 (Fed. Cir. Aug. 23, 2024).

One wild thing about this case is that Sling TV (DISH) was awarded a $3.9 million fee for seven months of pre-trial litigation — with the defendant on eligibility at the summary judgment stage. (Having requested ~$5 million).

• Federal Circuit decision
• Realtime Appellee Responsive Brief
• Realtime Appellant Brief

Background on Fee Shifting in U.S. Patent Cases: The United States generally follows the “American Rule” on attorneys’ fees, where each party bears its own litigation costs regardless of the outcome. This contrasts with the “English Rule” followed in many other countries, where the losing party typically pays the prevailing party’s attorneys’ fees, within reasonable limits.

In patent cases, the differences between the English and American rule are typically seen in the middle-ground cases — where the parties have reasonable good faith arguments that ultimately lose. In both systems, attorney fees are awarded for extreme cases in order to deter frivolous or vexatious litigation.  But for these middle-ground cases the English rule awards attorney fees while the American rule does not. But, it is often difficult to tell when exactly a case has moved into “exceptionality.”

In 2014, the Supreme Court offered some clarification, but it was mostly just rewording of the standards required by Section 285.  In Octane Fitness, the court explained that an exceptional case is “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.” Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545 (2014). This approach requires consideration of the totality of the circumstances and the award of fees is within the reasonable discretion of the district court. Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 572 U.S. 559 (2014).

Prior to Octane Fitness, the Federal Circuit required “material inappropriate conduct” prior to awarding fees — making it particularly difficult for a winning defendant to receive attorney fees by requiring proof that the litigation was subjectively brought in bad faith and that the litigation was objectively baseless.  Octane Fitness lowered this standard, but the Supreme Court left open consideration of how low it might go.

In Realtime, the asserted patent US8867610, claims a method of choosing a compression algorithm on both a data parameter and a communication channel throughput. The district court found the asserted claims ineligible under 35 U.S.C. § 101. This decision was later affirmed without opinions by the Federal Circuit in a separate appeal.

Once the merits were finally resolved, the Realtime district court then found the case exceptional and awarded attorney fees to the defendants. In its opinion, the court did not find a bad-behavior smoking-gun, but instead based its fee award on six “red flags” it believed should have warned the plaintiff that its case was fatally flawed:

1. Two prior district court decisions finding similar claims in a related patent ineligible under § 101
2. A Federal Circuit decision affirming ineligibility of claims of a different patent.  Adaptive Streaming Inc. v. Netflix, Inc., 836 F. App’x 900 (Fed. Cir. 2020)
3. PTAB decisions invalidating claims in a related patent
4. Office actions rejecting claims in the asserted patent during reexamination
5. A letter from the defendant warning of its intent to seek fees.
6. The opinions of the defendant’s expert witness

The district court found that “the totality of the circumstances,” in light of these six red flags, rendered the case exceptional. It concluded that by “carrying on despite numerous danger signals… [plaintiff] accepted the risk of having to reimburse defendants’ reasonable attorneys’ fees.”

Yellow Flag Approach is Rejected: On appeal, the Federal Circuit has vacated the fee award, finding that the district court abused its discretion in its exceptionality analysis. The way that I interpret the appellate decision is that a yellow flag (or even series of yellow flags) is insufficient to justify an exceptional case finding. The court seems to be saying that yellow flags, which merely signal caution, are not enough to require a litigant to abandon their case. Instead, the court appears to be looking for true red flags – clear stop signs that would make continuing the litigation objectively unreasonable.

The appellate panel took issue with several aspects of the lower court’s reasoning:

1. Overreliance on decisions involving different patents or different claims: While the Federal Circuit agreed that prior decisions finding similar claims in a related patent ineligible could be relevant, it cautioned against over-extrapolating from such decisions. The court emphasized that § 101 eligibility is claim-specific. The statute is clear that each claim is presumed valid until proven guilty. “It can not be presumed that related patents rise and fall together.”

2. Misapplication of non-precedential decisions: The district court reliedupon the non-precedential decision in Adaptive Streaming Inc. v. Netflix, Inc., 836 F. App’x 900 (Fed. Cir. 2020) as a significant warning to the plaintiff. The court explained that without a detailed side-by-side analysis of the claims, a decision on a “different technology entirely” was insufficient to render the plaintiff’s position exceptionally meritless.

3. Overvaluing threat letters: The Federal Circuit rejected the notion that a defendant’s letter threatening to seek fees could itself be a meaningful “red flag.” The court warned that if such letters were sufficient to support fee awards, “every party would send such a letter setting forth its complaints at the early stages of litigation to ensure that—if it prevailed—it would be entitled to attorneys’ fees.”

4. Mischaracterizing disagreements between experts: Finally, the Federal Circuit found that the district court erred in treating the defendant’s expert opinions as a red flag. The court explained that the presence of competing expert opinions is typical in patent cases and does not itself suggest a lack of merit in the plaintiff’s position.

In rereading the opinion, I want to note that the Federal Circuit did not reject the concept of “red flags” entirely, but rather took issue with the specific application and analysis of these flags by the district court in this case.  In particular, the opinion suggests that well-substantiated “red flags” could potentially support a finding of exceptionality. The opinion points to the prior Netflix opinion, which could create a red-flag, but would have required a more detailed analysis showing why the claims at issue in the prior decision are similar to those being later challenged.  But the focus here should be on identifying truly exceptional behavior or true case weakness.

The appellate panel noted that on remand, the district court may be able to reinstitute fees — but would require substantial new explanation.

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Claim 1. A method, comprising:

determining, a parameter or an attribute of at least a portion of a data block having video or audio data;

selecting one or more compression algorithms from among a plurality of compression algorithms to apply to the at least the portion of the data block based upon the determined parameter or attribute and a throughput of a communication channel, at least one of the plurality of compression algorithms being asymmetric; and

compressing the at least the portion of the data block with the selected compression algorithm after selecting the one or more, compression algorithms.

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Philip Wang of Russ August & Kabat argued for patentee-appellant. Also represented by Paul Kroeger, Brian Ledahl, and Reza Mirzaie.

Adam Shartzer of Fish & Richardson argued for defendants-appellees. Also represented by Michael Ballanco, Ruffin Cordell, and Brian Livedalen.