Taming the Trolls – Awarding Attorney Fees in Patent Cases

The big patent-related news in the US this past week has been the Supreme Court’s dual decisions in Octane Fitness, LLC v. ICON Health & Fitness, Inc. [PDF, 112kB] and Highmark, Inc. v. Allcare Health Management System, Inc. [PDF, 80kB], in which the court confirmed that district courts have discretion to determine whether a case is ‘exceptional’, such that attorney fees may be awarded against a losing party under section 285 of the US patent code. 

Furthermore, the Supreme Court has ruled that the the role of an appeals court (i.e. the US Court of Appeals for the Federal Circuit), in reviewing a decision of a district court to award attorney fees, is to determine whether or not the lower court has abused its discretion.

These decisions of the Supreme Court overturn a standard set by the Federal Court in 2005, which started from a presumption that patent cases are litigated in good faith, and then required that a party show, by ‘clear and convincing evidence’ either that ‘there has been some material inappropriate conduct’ or that the litigation is both ‘brought in subjective bad faith’ and ‘objectively baseless’ before an award of attorney fees can be made.

By coincidence, the Federal Court of Australia has also issued a decision in the past few days relating to a ‘special case’ of fee awards which is provided for under the Australian Patents Act 1990.  Specifically, in AstraZeneca AB v Alphapharm Pty Ltd [2014] FCA 419, the patentee has been awarded a higher level of attorney fees under section 19 of the Patents Act, which relates to Certificates of Validity.

The general rule in the US is that parties pay their own costs, whereas the general rule in Australia is that a losing party is ordered to pay the legal costs of the winning side on what is known as ‘party/party’ basis.  What this means, in simple terms, is that the winning party will be awarded an amount equivalent to the basic cost of running its case.  In practice, since few litigants do the bare minimum possible to prosecute or defend litigation, party/party costs are likely to be anywhere from about 40% to about 70% of the actual costs incurred by the successful party.

Under specific circumstances set out in section 19, however, the court has discretion to award costs on a ‘solicitor/client’ basis.  Again putting it in very simple terms, solicitor/client costs are likely to be far closer to actual costs than party/party costs.

Impact of US Supreme Court Decisions On Troll Activity

As IP Watchdog’s Gene Quinn has explained in his discussion of the Octane and Highmark decisions, the standard set by the Federal Circuit in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F. 3d 1378 (2005) was so high that it had become ‘difficult, if not impossible, for prevailing parties to demonstrate entitlement to attorneys fees.’

In the US, the award of attorney fees against a losing party is called ‘fee shifting’, because the usual position under the so-called ‘American Rule’ is that each party in any litigation is expected to bear its own costs, regardless of the outcome.  In other common law jurisdictions, including Australia, the opposite rule applies – a losing party can expect to be ordered to pay the winning party’s reasonable costs of litigation, unless there is some specific circumstance that would justify an alternative order.

On more than one occasion I have identified the inflexible application of the ‘American rule’ in patent cases as one of the key factors in making the US system the primary playground for the abusive litigators commonly known as ‘patent trolls’ (see, e.g., Patent Trolls: As American As Apple Pie? and 5 Troll-Busting Tactics the US (Mostly) Won’t Adopt).

In an earlier article, I provided a ‘definition’ of a patent troll by reference to behaviour:

If the party asserting the patent has no interest in discussing the actual value of the allegedly infringing products or services; if it has no interest in evaluating the contribution actually made by the patented technology to the commercial success of the products or services; if it is not interested in talking about net profits, but only about gross revenues; and (here’s the clincher) if talk rapidly turns to how much the litigation will cost, rather than how much the patent is actually worth, then you are dealing with a troll!

The point about such entities is that they are less interested in whether the patent is valid, or whether it is actually infringed, than they are in the fact that litigation is expensive, and that an accused ‘infringer’ may therefore be willing to pay a lesser (though still sizable) sum to make the problem go away.  This is all very well as a business model when the troll has complete control over the costs incurred, win or lose.  However, when there is a risk – or, perhaps, a certainty – that the troll may be ordered to pay the other party’s costs of defending the suit in the case of a loss, the model becomes far less clearly profitable.

Troll behaviour is often clearly evident at the earliest stages of a dispute, and district courts ought really to be able to recognise extortionate litigation activity when they see it.  The fact is, however, that they have been hamstrung for too long by the unreasonably high standard of exceptionality established by the Federal Circuit.

The Supreme Court has put an end to this unsatisfactory situation, stating:

We hold, then, that an “exceptional” case is simply 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. District courts may determine whether a case is “exceptional” in the case-by-case exercise of their discretion, considering the totality of the circumstances.

I hope that this represents at least one nail in the coffin of the most egregious forms of patent litigation abuse!

Solicitor/Client Costs in Australia

Costs awarded by the Federal Court in Australia have a statutory basis, as the court explained in the recent AstraZeneca case (at [9]):

By s 43(1) of the Federal Court of Australia Act 1976 (Cth) … the court has jurisdiction to award costs in all proceedings. … A general rule of long standing is that costs follow the event, which means, for example, in a case in which one party is wholly successful against another party, that the latter should pay the former’s costs. A permissible exception to that rule – in the discretion of the court on the particular occasion, of course – is that a party who commences or maintains a proceeding needlessly should not expect to have the losing party pay for the exercise.

It is also a principle of long standing that such costs are generally awarded on a ‘party/party’ basis, and are not intended to fully compensate the winning party for its losses.  And when I say ‘long standing’, I mean nearly 800 years!  As the High Court explained in Cachia v Hanes [1994] HCA 14, at [11]:

It has not been doubted since 1278, when the Statute of Gloucester introduced the notion of costs to the common law, that costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation. They were never intended to be comprehensive compensation for any loss suffered by a litigant. As Coke observed of the Statute of Gloucester, the costs which might be awarded to a litigant extended to the legal costs of the suit, “but not to the costs and expences of his travell and losse of time”. (Citations omitted)

However, subsections 19(2) and (3) create a specific statutory exception to this general rule: where a patentee has previously been granted a Certificate of Validity in relation to a patent, and another party unsuccessfully challenges the validity, the court may, at its discretion, award ‘full costs, charges and expenses as between solicitor and client’ against the unsuccessful challenger.

Certificates of Validity

In another difference between Australia and the US (and, again, one that I have identified as making the US system more favourable to patent trolls) there is no presumption in Australia that a patent is valid.  Indeed, section 20 of the Patents Act expressly states that ‘[n]othing done under this Act or the PCT guarantees the granting of a patent, or that a patent is valid, in Australia or anywhere else,’ while the standard of proof in order to invalidate a patent in an Australia court is the ‘balance of probabilities’.

In the US, on the other hand, there is a relatively strong presumption of validity, and a patent can only be ‘defeated’ on the basis of ‘clear and convincing evidence’.

However, when a patent claim survives an attack on validity in an Australian court, the patentee may obtain a Certificate of Validity in relation to the claim, under subsection 19(1) of the Act.

A Certificate of Validity still does not create a strong presumption of validity – remember that nothing done under the Act guarantees that a patent is valid, and there is no provision for different treatment of claims in a revocation action under section 138 depending upon whether or not they have been certified valid.

However, to give pause to any party considering re-challenging a certified claim, subsection 19(2) entitles the patentee to a higher level of costs against such a party if it is unsuccessful.  This entitlement is, however, limited by subsection 19(3), which gives the court discretion to direct otherwise.

Basis for Award of Solicitor/Client Costs

There was no question in the AstraZeneca case that the patentee had previously been granted a relevant Certificate of Validity, or that the respondent, Alphapharm Pty Ltd, had unsuccessfully challenged the validity of certified claims.  The issue was whether the court should exercise its discretion under subsection 19(3), and either decline to award costs at all, or alternatively to award costs on the more common party/party basis.

Although the litigation did have something of a tangled history, and Alphapharm’s arguments were not manifestly unreasonable, the court determined that the circumstances did not warrant a departure from AstraZeneca’s entitlement to costs on a solicitor/client basis under subsection 19(2).  It appears from the court’s reasoning in this case that, so long as a patentee holding a Certificate of Validity proceeds in good faith, and does not clearly commence litigation precipitously or needlessly, the court will be reluctant to depart from awarding costs on a solicitor/client basis, to which subsection 19(2) states that the patentee is entitled.

Conclusion – ‘Good’ Versus ‘Bad’ Patents, and Attorney Fees

These examples demonstrate the significant differences between Australia and the US in the approach to awarding attorney fees in patent cases.

In the US:

1. the normal rule is that each party must pay its own costs of litigation;
2. patents are presumed valid once granted by the USPTO, and there is a high standard of evidence required to overcome this presumption;
3. if a patentee commences litigation in good faith, and from a position of reasonable strength, it can be confident that it will not be ordered to pay the other party’s attorney fees, even if it is ultimately unsuccessful;
4. however, under the standards now set by the Supreme Court, a patentee that litigates from a position of weakness, either because the patent is ‘weak’ or ‘bad’, or because its infringement case is poor, is more likely to find itself facing an order to pay the other party’s costs of litigation.

It is my sincere hope that this new standard will result at least in some of the most egregious cases of patent troll behaviour being curbed.

By contrast, in Australia:

1. the normal rule is that costs ‘follow the event’, i.e. a losing party can expect to be ordered to pay the winner’s costs on a ‘party/party’ basis;
2. patents are not presumed valid, and a granted patent can subsequently be revoked if the evidence shows that it is more likely invalid than not;
3. any patentee that initiates litigation can expect that it will be liable to pay the other party’s costs if it is ultimately unsuccessful;
4. however, a patent that survives an invalidity attack can be certified valid such that any subsequent failed attempts to invalidate it can be ‘punished’ with a award of costs on the higher ‘solicitor/client’ basis.

It can therefore be seen that the US approach is to place patentees in an initial position of strength, and impose penalties only if they abuse that advantage.  In Australia, on the other hand, there is a more cautious approach to the strength of the rights initially granted to a patentee, with the possibility of improving its enforcement position if the patent is proven to be ‘good’ in court.

Tags: Attorney fees, Australia, Costs, Litigation, Patent law, Patent litigation, Trolls, US