Federal Circuit Fires Shot Across Congress’s Bow: Redefines Standard for Finding an Exceptional Case and Awarding Attorneys’ Fees

In Kilopass Tech., Inc. v. Sidense, Corp., No. 13-1193, 2013 U.S. App. LEXIS 25671 (Fed. Circ., Dec. 26, 2013), the Court of Appeals for the Federal Circuit recently relaxed the standard for finding “an exceptional case” to justify attorneys’ fees in patent infringement actions. For IP practitioners, this case highlights the current state of the law regarding the necessary showing of bad faith to justify an award of attorneys’ fees in a patent infringement suit.

Kilopass and Sidense are competitors in the embedded non-volatile memory market. Kilopass suspected Sidense may infringe its patents after reviewing Sidense’s application for an international patent. Kilopass made Sidense an offer to negotiate a license, which Sidense refused on the basis that it did not infringe Kilopass’s patents. Kilopass conducted an additional infringement analysis before filing suit, alleging literal infringement. The district court granted Sidense summary judgment of noninfringement, but denied Sidense’s motion for an award of attorneys’ fees under 35 U.S.C. § 285, holding that Sidense had not met its burden of establishing with clear and convincing evidence that Kilopass brought or maintained its claims of patent infringement in bad faith. Relying on Kilopass’s substantial pre-filing investigation, obtention of two opinions of counsel, and the technical investigation conducted by Kilopass, the district court found that Kilopass’s asserted infringement claims were not baseless.

The Federal Circuit panel, including Chief Judge Rader, vacated the district court’s decision and remanded for reconsideration, noting that “to the extent that the district court did require actual knowledge of objective baselessness, it erred.” 2013 U.S. App. LEXIS 25671, at *18-19. The panel dismissed any pretense that “smoking gun” evidence is required to establish subjective bad faith, instructing district courts to examine the totality of the circumstances, and where appropriate, apply an inference of bad faith when warranted by fact or other circumstantial evidence. Chief Judge Rader concurred, noting that a better rule would permit a district court to shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice: a standard that “properly empowers district courts, the entities best situated to recognize and address litigation excesses and misconduct, to supply a fee reversal remedy.” Id. at *50 (Rader, C.J., concurring).

As a response to Congress’s recent initiatives in curbing frivolous patent suits, the Federal Circuit sent a clear message that judges are best-positioned to penalize bad faith litigation. Especially when Kilopass is read in conjunction with a recent article co-authored by Chief Judge Rader and the Supreme Court’s recent activity (accepting certiorari in two cases related to fee awards, Highmark Inc. v. Allcare Management Systems, Inc., and Octane Fitness v. Icon Health & Fitness, and deciding not to review a Federal Circuit opinion invalidating one patent troll’s patents Soverain Software LLC v. Newegg Inc.), the federal appellate courts seem to indicate that Congress should trust the third branch to keep the trolls in line.

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