Because I Said So: Courts’ Inherent Powers to Impose Fees for Bad Faith, Vexatious, or Wanton Litigation

Fee shifting has been a recent theme in patent litigation, with judges, legislators, and state attorney generals alike attempting to curb abuses of the patent system by creating new penalties. One judge has fallen back on the long-standing inherent powers of the judiciary to do so. This appealing new method of punishing patent litigation abusers comes from the U.S. District Court of the District of Delaware, one of the nation’s busiest patent dockets. Judge Richard G. Andrews’ well-reasoned opinion awards attorneys’ fees to the defendant on the basis of the court’s inherent powers to penalize those who act in “bad faith, vexatiously, wantonly, or for oppressive reasons.” Parallel Iron LLC v. NetApp Inc., No. 12-769, Slip Op. at 15 (D.Del. Sept. 12, 2004).

The court examined first the defendant’s request for fees under 35 U.S.C. § 285 of the Patent Act. Fees under this provision are awarded to a “prevailing party” in exceptional cases. Despite noting the Supreme Court’s recent redefinition of “exceptional” to merely a case that stands out from others, the court concentrated its analysis on the issue of prevailing party. The court noted that to be a prevailing party required some “material alteration of the legal relationship of the parties.” Id. at 5. Here, the case, along with several other cases involving the same patents, settled through a license granted to one party, that included a sublicense to the defendant. Id. at 3-4. The court noted that it had “made no finding regarding any substantive issue in the case,” having neither construed any terms of the patents, nor resolved either motions to dismiss or for summary judgment. Id. at 7. Accordingly, the court held that a bona fide licensing agreement achieved after litigation began without substantive favorable decision by the court would be insufficient to establish a defendant had been the prevailing party in the litigation pursuant to Section 285. Id. at 8.

The court moved onto the issue of defendant NetApp’s request for attorneys’ fees pursuant to the court’s inherent powers. First the Court reviewed the source and extent of its inherent powers, which permit courts to require respect for the forum and “submission to their lawful mandates.” Id. at 9. Quoting precedent from the Court of Appeals for the Third Circuit, the Court noted that such potent power demanded both “adequate factual predicate for flexing its substantial muscle under its inherent powers” and a “sanction . . . tailored to address the harm identified.” Id. at 9. The Court took special notice that attorneys can also be subject to a sanction under the Court’s inherent powers, where it is the attorney rather than the client who is at fault. Id.

Upon review of the parties’ arguments, the Court found that the plaintiff acted “in bad faith, vexatiously, and wantonly” by bringing the lawsuit without a good faith basis and then continuing to litigate with a “misleading and prejudicial litigation strategy.” Id. at 9-10. The Court required the plaintiff to submit those materials turned up by the pre-suit investigation for in camera review. After reviewing those materials, the Court determined that the plaintiff not only did not have any evidence that the defendant used the technology at issue in the patents, let alone in an infringing manner, but that there was little evidence showing that the plaintiff had conducted any investigation at all prior to filing the suit. Id. at 12. Further, the Court found unconvincing the plaintiff’s arguments that $32,000 in pre-suit investigation costs were sufficient, especially where those costs covered first and second round litigants and were spread over more than 26 related cases in just the District of Delaware. Id. at 15.

The Court ordered sanctions both as a compensatory measure, and to deter bad faith litigation such as the plaintiff engaged in here. Id. For patent practitioners, especially those who litigate in the District of Delaware, this opinion cautions that diligent and specific pre-suit investigations should be conducted prior to filing. Fulfilling these standards requires documented evidence that support a good faith assertion that the accused products actually infringe the asserted patents. Plaintiffs should be prepared to provide the results of the investigation with specific citation to those proofs which evidence the allegations of infringement.

Gibbons will continue to monitor Third Circuit intellectual property cases to determine if other courts and litigants find this penalty to be a compelling solution to vexatious litigation.

Charles H. Chevalier is an Associate in the Gibbons Intellectual Property Department.
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