Companies that successfully fight off “unreasonable” patent lawsuits can get their legal fees paid, the U.S. Supreme Court ruled in a decision that may benefit Google Inc. (GOOG:US), Apple Inc. (AAPL:US) and other technology businesses.
The high court today gave trial judges more power to impose fees if they determine the case “stands out from others” in the conduct of the losing party. In a related opinion, the court also limited the ability of an appeals court to overturn a trial judge’s decision in such cases.
“A case presenting either subjective bad faith or exceptionally meritless claims may sufficiently set itself apart from mine-run cases to warrant a fee award,” Justice Sonia Sotomayor wrote for a unanimous court.
Apple and Google were among the companies urging the court to ease the rules, saying they are too often faced with frivolous infringement claims by patent owners who leverage the potentially high cost of litigation to prod quick settlements. Congress is considering legislation that would require the loser to pay the winner’s fees in most circumstances.
“A lot of the so-called patent trolls thought they could get away with it, because they thought there was a small chance they could get hit with the attorney’s fees, and this may change that,” said Brad Wright, a patent lawyer with Banner & Witcoff in Washington who wasn’t involved in the case. “They’re trying to right the ship and level the playing field.”
Octane was 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 allowed fees if a suit is “objectively baseless” and was filed in bad faith, though in a December ruling it softened its stance.
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.
The case before the justices involves exercise-equipment maker 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. over a component in elliptical machines.
In the second case, Highmark Inc., a Pittsburgh-based insurer, is seeking to reinstate a $5 million fee award it won after defeating a patent suit by Allcare Health Management Systems Inc. The court said the Federal Circuit, which threw out the award, should be more deferential to trial judges on the issue.
“The parties most likely to suffer an impact are those that commence litigation without performing a sufficiently detailed investigation,” said Highmark lawyer Cindy Kernick, with Reed Smith in Pittsburgh. “Most legitimate patent holders tend to take formal, serious steps before they sue someone and the world has not changed for them. The changes are for those companies that have done no research at all, or what they do is an investigation on one company in an industry and then assume that every company in that industry does the same thing.”
The U.S. Patent Act says fees can be awarded “in exceptional cases.” The justices said the Federal Circuit rule was too rigid and made the standard the same as a federal law that allows for sanctions only if there is litigation misconduct.
“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,” the court ruled.
That will require courts to determine whether it’s just a case of two sides disagreeing on the scope of the patent or whether there is infringement, said Paul Berghoff, a patent lawyer with Chicago-based McDonnell Boehnen Hulbert & Berghoff.
“The rigidity of the old test is gone, but the Supreme Court has not opened the floodgates to district courts awarding legal fees in significantly greater cases,” he said. “In any litigation, both sides develop almost instinctively skepticism of the other side’s arguments. If you step back and look at it coldly and objectively, there aren’t that many patent cases where blatantly frivolous arguments are being made.”
The ruling shows there’s no need for legislative changes, said Rob Berman, chief executive officer of patent-licensing company CopyTele Inc.
“Let the courts determine what’s abusive and frivolous, don’t legislate it,” Berman said. “We don’t take cases that are on the wrong side of the line. Has the line been moved a little bit? We don’t know. We don’t like to get even close to the line. To us, it’s no big deal, as long as the judge has discretion.”
The cases are Octane Fitness v. Icon Health & Fitness, 12-1184, and Highmark v. Allcare Health Management Systems, 12-1163.
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