Ideas and Insights

Patent Lawsuit Defendants Behaving Badly

This paper shows how it's not only plaintiffs who can "behave badly" in court. Key topics discussed in this paper include:

• The definition of "exceptional circumstances" used in deciding if fees should be awarded
• Several examples of litigation misconduct on the part of defendants, including outright fraud
• Some of IPNav's experiences with defendants behaving badly
• A proposal for how to improve the situation and reduce litigation misbehavior

Why would a “patent troll” be in favor of “fee-shifting” -- a change in rules such that the loser in a patent infringement lawsuit would have to pay the winner’s legal fees? Isn’t fee-shifting designed to deter “groundless” patent infringement lawsuits from patent trolls?

Despite the popular conception that the “bad guys” are “patent troll” plaintiffs bringing meritless lawsuits to extort money from innocent victims, there are plenty of defendants in patent lawsuits who behave badly.

Some defendants engage in willful infringement – they infringe a patent “deliberately and intentionally, and with knowledge of the patent.” Some defendants take steps to drive up the patent owner’s legal costs, hoping this will make the patent owner more amenable to a low-ball settlement offer.

Defendants (and their lawyers) sometimes make legal arguments that are completely without merit, to drag the litigation process out and defer the day when they’ll have to pay for the intellectual property they’re stealing. “Litigation misbehavior” is not something only plaintiffs do.

Unlike in most of the rest of the world, in the American legal system as a general rule each party to a lawsuit pays its own legal fees. This system, in fact, is known as “the American rule” in the rest of the world.

In most other countries, the loser in a lawsuit has to pay the winner’s legal fees. This serves a few purposes: 1) it deters people from bringing groundless or marginal lawsuits that they are likely to lose; 2) it encourages defendants to settle early if the plaintiff has a strong case, saving everyone money and easing the load on the court system.

There are some exceptions to the general rule that everyone pays their own legal fees in America. One such exception specifically applies to patent cases. Section 285 of the Patent Act says “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

“Exceptional cases,” of course, is a vague standard. Since the Patent Act became law, case law has developed to define “exceptional.” In Brooks Furniture Manufacturing v. Dutailier International the Federal Circuit defined an exceptional case as involving:

material inappropriate conduct related to the matter in litigation, such as willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.

In Minks v. Polaris Industries the court expressly set out a standard that

An express finding of willful infringement is a sufficient basis for classifying a case as ‘exceptional,’ and indeed, when a trial court denies attorney fees in spite of a finding of willful infringement, the court must explain why the case is not ‘exceptional’ within the meaning of the statute.

Willful infringement may be one of the commonest ways in which defendants misbehave, but it’s not the only one. Several examples of “defendants behaving badly” follow.

Takeda Chemical v. Mylan Laboratories. This case appears to be the largest award of attorney fees to a patent owner: $16.8 million. Takeda is a Japanese pharmaceutical company and owner of US patent number 4,687,777, which covers an anti-diabetic drug, pioglitazone. Mylan and co-defendant Alphapharm wanted to make a generic version of the drug, and they challenged the patent on the basis of “obviousness.” First turning to Alphapharm’s behavior, the court said that its certification letter was “so devoid of merit and so completely fail[ed] to establish a prima facie case of invalidity that it must be described as `baseless.’” The court also found that Alphapharm engaged in litigation misconduct for a “shifting theory of obviousness.”

When it came to Mylan, the court said “Mylan's invalidity argument in its certification letter appears even more baseless than Alphapharm's.” The district court said that Mylan’s defense of the merits of its letter were “utterly frivolous.” The court found that Mylan’s letter “was filed in bad faith and with no reasonable basis to claim the ’777 patent invalid.”

This case also shows how costly fighting litigation misconduct can be for patent owners: Takeda spent $16.8 million fighting a case that should never have been brought in the first place. Fortunately, in this case the patent owner was able to recover its full costs.

Beckman Instruments, Inc. V. Lkb Produkter Ab. Beckman, a California-based instrument company, is the owner of US patent number 4,029,401, which covers circuitry used in liquid scintillation nuclear counters. In this case there was no willful infringement of the patent, but the district court found the defendant’s behavior bad enough to merit awarding the patent owner fees anyway:

Defendants' approach to this case has been to conduct vexatious litigation. Defendants have pursued baseless claims that required extensive allocations of time and resources during the conduct of this litigation. Soon after plaintiff brought suit, for example, defendants filed a counterclaim that alleged an antitrust violation. Defendants subsequently demanded extensive discovery but failed to unearth any evidence in support of their assertions. Finally, defendants dismissed the claim themselves shortly before the case was to go to trial. Similarly, defendants vigorously pursued a claim that Beckman committed inequitable conduct in obtaining its '401 patent. Extensive litigation over the specifics of the claim then followed, along with intense and protracted discovery. When the issue came up for decision, having been severed from the infringement claim that was tried before a jury, following an evidentiary hearing held August 27, 1987, this Court found no basis whatsoever for the charge of inequitable conduct. Similarly, one defendant sought dismissal for lack of personal jurisdiction. This claim, too, initiated extensive litigation and protracted discovery. Finally, the defendant abandoned the defense. These frivolous claims with their attendant pleading requirements and protracted discovery needs, along with other dilatory tactics, greatly expanded the time and expertise this case required (emphasis added).

On appeal the Federal Circuit upheld the finding that the case was “exceptional” and merited an award of fees, although it sent the matter back to the district court for reconsideration of the $2 million in fees. Also noteworthy about this case is that not only was there no willful infringement, the defendants actually prevailed on a few of the patent’s claims they challenged – yet the court still awarded fees.

Finding ways to jack up the cost of discovery is another technique that some defendants use. Michael Powell is an inventor who came up with an idea for a safety guard for a radial arm saw, for which he was awarded US patent 7,044,039. Home Depot hired Powell to come up with a mechanism to protect workers from radial saws. But instead of paying Powell, Home Depot stiffed him, and claimed the idea was obvious. In Michael S. Powell v. The Home Depot Powell was awarded $15 million in damages plus attorney fees.

In addition to engaging in willful infringement, the court found that Home Depot engaged in “vexatious and bad faith litigation.” Home Depot repeatedly tried to reassert claims that the court had dismissed. Additionally, in the discovery phase, Home Depot produced more than 6,000 pages of nonresponsive documents – documents that Powell’s lawyers had to review even though Home Depot knew they were not responsive to what Powell’s lawyers had requested. It was all extraneous paper that served no purpose other than to run up the patent owner’s costs. Of course, Home Depot must not have been trying very hard – a company that big could no doubt have produced 600,000 pages of non-responsive documents if it wanted to.

On occasion litigation misconduct goes beyond raising frivolous arguments or driving up costs. One of the most egregious cases we’ve seen involves outright fraud on the part of the defendant. Furminator was the owner of US patent 7,334,540, “Pet grooming tool and method for removing loose hair from a furry pet.” The company filed a lawsuit against Kim Laube & Co., Inc., and Munchkin, Inc., alleging infringement of the ‘540 patent. In Furminator v. Kim Laube & Co.the district court agreed with Furminator’s assertion that “Laube is guilty of repeatedly concealing evidence during discovery, fabricating evidence, making a baseless claim of patent invalidity, and engaging in evasive litigation tactics.”

Laube went so far as to create a fake pet grooming tool, which it tried to claim was “prior art” invalidating the patent. The court ruled that “Laube’s conduct revealed a pattern and practice of misrepresentations and misconduct in this case, and that Laube acted in bad faith and committed a fraud upon the Court.” Laube was ordered to pay $2.6 million in attorney fees.

We’ve been on the receiving end of “defendants behaving badly.” As we wrote about previously, Newegg – a company whose general counsel, Lee Cheng, famously claims “I don’t settle with trolls” – was itself ordered to pay one of our client’s legal fees for filing and pursuing a frivolous motion. As we said before:

…they wanted to see everything IPNav and TQP ever talked about. TQP’s counsel attempted to reason with Newegg and have them focus the request on actual information that would be relevant to the litigation (if any). To no avail, Newegg and their counsel continued to abuse the system and even filed a motion to attempt to force TQP to comply with Newegg’s ridiculous demands.

In another high profile case, Rackspace’s general counsel, Alan Schoenbaum, got a lot of press for filing a lawsuit against the “most notorious patent troll in America” (IPNav). We wrote a blog post showing how bogus Rackspace’s claims were – a post we closed by saying, “Alan, are you sure you do not want to dismiss this one?” He did eventually dismiss it, but it still cost us time and money.

One of the reasons we favor going to a simple “loser pays” system is that in many cases bad litigation conduct doesn’t rise to the high standard of “exceptional circumstances,” as now construed, required to get an award of fees under section 285.

Just last week a judge denied a request for oral argument from Micron that was filed against our client Semcon Tech, saying, “The request for oral argument is denied. Micron’s position is meritless, and I am surprised that Micron’s distinguished Delaware counsel did not talk lead counsel out of its opposition to the motion.” We had to waste time (and our lawyer’s billable hours) to respond to the “meritless” claim. Note that “meritless” is not language that a federal judge uses lightly.

Congressman Bob Goodlatte’s (R-VA) Innovation Act, which was passed by the House of Representatives in December, attempts to correct the “exceptional circumstances” problem by making awarding fees to the winner by default, unless the loser was “substantially justified” in pursuing the litigation and in its conduct of the litigation.

As pointed out in our post analyzing the second draft of the Goodlatte bill, the out for “substantially justified” simply provides something else for lawyers to argue about. As we said in the earlier post, “Getting a flimsy legal opinion that a patent is valid or that a product does not infringe should not be a basis for “substantially justified.” It would be better to go to a straight “loser pays” system with very limited exceptions…”

Real fee-shifting in patent litigation – a straight “loser pays” system – is something that Congress should adopt. From our perspective the reason is not so much to stop “patent trolls” from filing “meritless lawsuits” (although we have no objection to stopping meritless lawsuits, from either side) as it is to stop companies that are infringing our clients’ patents from running up huge legal bills in an effort to break the patent owner’s bank. The benefits of a true “loser pays” system include: (i) a reduction in the amount of patent litigation—both sides are going to think longer before initiating suit; (ii) shorter duration (and less expensive) litigation—once one side or the other figures out they are likely to lose, they would have every incentive to settle in order to stop the bleeding; and (iii) lower license prices as the risk of starting suit and having to pay both sides fees will lower demands; this will also remove the "cost of defense"/"cost to pursue" settlements as a concern for both sides.

True fee-shifting as in a straight “loser pays” system is fair, and would discourage bad behavior on the part of both plaintiffs and defendants.

http://www.ipnav.com/resource-center/ideas-and-insights/patent-lawsuit-defendants-behaving-badly/