The U.S. Supreme Court considered making it easier for companies that successfully fight off patent infringement suits to collect legal fees from the losers in a case with ramifications for Apple Inc. (AAPL:US) and Google Inc. (GOOG:US)
Hearing arguments today in Washington, the justices debated how best to deter meritless suits as they weighed for the first time the rules that govern fee awards in patent litigation. Apple and Google are among the companies urging the court to lower the bar for fee awards.
The justices voiced concern about patent misuse by companies of all sizes. Justice Antonin Scalia said large businesses could use their patents in a “shakedown” to drive smaller competitors out of the market. Justice Stephen Breyer said owners of weak patents were using the high cost of litigation to extract cheap and easy settlements.
“It may be a small slice of litigation, but it’s a small slice that costs a lot of people a lot of money,” Breyer said. The current standard of awarding fees “leaned pretty much against the person who was sued.”
The arguments were briefly interrupted by a protester urging the court to overturn its 2010 decision that allowed unlimited corporate spending on political campaigns. The justices made no comment as the man was pulled away by security.
More than 100,000 companies were threatened in 2012 alone with infringement suits by businesses whose sole mission is to extract royalty revenue, according to a White House report. Those entities, called pejoratively “patent trolls” by critics, filed 19 percent of all patent lawsuits from 2007 to 2011, according to the Government Accountability Office.
Apple and Google each have been sued more than 125 times in the past five years by “patent-assertion entities,” companies that get most of their revenue from patent licensing and enforcement, according to the research firm PatentFreedom. For every case that reaches court, Apple says, it gets dozens of letters demanding royalties.
The case before the justices involves Octane Fitness LLC, which is seeking as much as $1.8 million in fees after defeating a patent suit. Octane was sued by Icon Health & Fitness Inc., another exercise equipment maker, over a component in elliptical machines.
Octane is challenging the test for awards established in 2005 by the U.S. Court of Appeals for the Federal Circuit, which handles patent cases. The Federal Circuit allows fees if a suit is “objectively baseless” and was filed in bad faith.
The U.S. Patent Act says fees can be awarded “in exceptional cases,” and the justices grappled with how to define that phrase.
“I’m not sure what words we’re going to give to the district court if you’re to prevail,” Justice Anthony Kennedy told Octane’s lawyer, Rudolph Telscher, calling the case “a search for adjectives.”
Federal law already allows judges to impose sanctions for filing a frivolous lawsuit. The high cost of litigation cuts both ways, with patent owners wanting to make sure they have a case before filing suit, said Icon lawyer Carter Phillips.
Congress is considering legislation that would make the loser in a patent case pay the winner’s fees unless a judge finds that it wouldn’t be fair, such as in close cases or when the patent owner is unable to pay. A three-judge panel of the Federal Circuit, in a December ruling, said judges must consider the “totality of the circumstances.”
The administration supports Octane. Assistant Solicitor General Roman Martinez said the Federal Circuit has been inconsistent in its opinions and is divided among different judges, so urged the court to establish a clear standard.
Octane says the Federal Circuit in its case has erected an all but insurmountable hurdle. Trial judges instead should award fees when a patent holder “unreasonably pursues a case having an objectively low likelihood of success,” argued the company, which is based in Brooklyn Park, Minnesota.
The Federal Circuit’s approach is also drawing criticism from some of the biggest names in the computer and telecommunications industries: Facebook Inc. (FB:US), Cisco Systems Inc., Intel Corp., Verizon Communications Inc. and Yahoo Inc. (YHOO:US), as well as Apple and Google.
General Electric Co. and 3M Co. said any standard should apply to both sides, because there are instances where defendants drag out cases “to force unjust settlements.”
The justices also heard arguments today in a separate case testing how deferential the Federal Circuit must be when trial judges make a decision about fees.
The cases are Octane Fitness v. Icon Health & Fitness, 12-1184, and Highmark v. Allcare Health Management Systems, 12-1163.
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