Kilopass Tech., Inc. v. Sidense Corp.: Panel Maintains Inquiries for Attorney's Fees Predicated on Subjective Bad Faith, but Opens Door for en banc Review

Category: Damages
 By: Jesus Hernandez, Blog Editor/Contributor   
TitleKilopass Tech., Inc. v. Sidense Corp., No. 2013-1193 (Fed. Cir. Dec. 26, 2013).
[1] Sidense first faults the district court for its reliance on our decision in MarcTec, LLC v. Johnson & Johnson, 664 F.3d 907 (Fed. Cir. 2012), which, in Sidense’s view, requires too great a showing to establish subjective bad faith [in determining whether to award attorneys’ fees].
Kilopass Tech., Inc. at *12-13 (text added).
[2] Sidense also argues that it should not even be required to prove that Kilopass acted in bad faith to show exceptionality. Proof of objective baselessness, in Sidense’s view, should be enough to demonstrate exceptionality under § 285. Sidense does not contend that a finding of exceptionality predicated on objective baselessness would demand that the district court shift fees, only that it should permit it to do so in its discretion in light of the totality of the circumstances.
Id. at *17-18.
[3] Sidense also contends that it should not be required to prove exceptionality by clear and convincing evidence, as our law currently requires. According to Sidense, proof by a preponderance of the evidence should be sufficient under § 285.
Id. at *23.
[1] [T]o the extent that the district court did require actual knowledge of objective baselessness, it erred. The language from [...] MarcTec that Sidense interprets as requiring actual knowledge does not reflect this court’s law governing § 285,[…] and is dictum.
Kilopass Tech., Inc. at *12-13.
[2] While Sidense’s arguments may constitute good faith assertions that our law should be something other than it is, as a panel, we are not able to entertain them. We must, and do, apply our current law, which requires proof of objective baselessness and subjective bad faith as a prerequisite to a finding of exceptionality—the first prong in the court’s § 285 inquiry.
Id. at *22.
[3] "In Reactive Metals & Alloys Corp. v. ESM, Inc., 769 F.2d 1578 (Fed. Cir. 1985), we cited Hycor for the proposition that “[t]he quantum of proof required to prove bad faith conduct is clear and convincing evidence.” […] The pronouncement in Reactive Metals, however, seems to reflect an unneeded expansion of the clear and convincing burden to all aspects of the § 285 analysis." Kilopass Tech., Inc. at *24. "Again, while we cannot fault Sidense for making good faith arguments asking that we change our current law, as a panel we may not indulge it [and hold that the standard of proof for subjective bad faith in the present situation is clear and convincing.]." Id. at *24 (text added).

Procedural HistoryThis appeal arises from the United States District Court for the Northern District of California. The district court granted summary judgment in favor of Sidense Corporation (“Sidense”), holding that it did not infringe Kilopass Technology, Inc.’s (“Kilopass’s”) U.S. Patents 6,940,751 (“the ’751 patent”), 6,777,757, and 6,856,540. [...] We summarily affirmed that decision under Federal Circuit Rule 36. [...] While that appeal was pending, Sidense filed a motion in the district court seeking an award of attorneys’ fees under 35 U.S.C. § 285, which the district court denied. [...] Sidense now appeals from the district court’s denial of that motion.
Kilopass Tech., Inc. at *2 (internal citations omitted).
Legal Reasoning (O'Malley, Lourie, Rader, CJ)
Attorney's fees: standardA determination of whether to award attorneys’ fees under § 285 involves a two-step process. First, a district court must determine whether the prevailing party has proved by clear and convincing evidence,[…] that the case is “exceptional.” […]. Under Brooks Furniture, A case may be deemed exceptional when there has been some 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 [Federal Rule of Civil Procedure] 11, or like infractions. […] Absent misconduct in the litigation or in securing the patent, sanctions may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless […].
Kilopass Tech., Inc. at *11 (internal citations omitted).
[1] Actual Knowledge of Objective Baselessness Not Required to Prove Subjective Component of § 285 Attorney's Fees Analysis
A defendant need only prove reckless conduct to satisfy the subjective componentAs we made clear in Highmark, Inc. v. Allcare Health Management, 687 F.3d 1300 (Fed. Cir. 2012), subjective bad faith only requires proof that the “lack of objective foundation for the claim ‘was either known or so obvious that it should have been known’ by the party asserting the claim.” Id. at 1309 […]. Thus, actual knowledge of baselessness is not required. Like a plaintiff seeking to recover attorneys’ fees under § 285 based on alleged willful infringement, a defendant need only prove reckless conduct to satisfy the subjective component of the § 285 analysis. […]
Kilopass Tech., Inc. at *14 (some internal citations omitted).
District Court failed to address the objective merits of Kilopass’s claimsIn addition to any errors the district court may have made by requiring too great a showing of subjective bad faith, the court erred by taking too narrow a view of the proof that can satisfy the subjective prong of the § 285 analysis. The court rejected Sidense’s request for fees based solely on Sidense’s purported failure to establish subjective bad faith. […] The court reached this determination, however, without addressing the objective merits of Kilopass’s claims. […] Instead, it focused exclusively on evidence it considered to be indicative of good faith on Kilopass’s part—including opinions of counsel and Kilopass’s own independent infringement analysis. […] This focus was inappropriately narrow, rendering the district court’s analysis incomplete.
Id. at *15 (internal citations omitted).
Consideration of subjective state of mind requires account of the totality of circumstancesOur case law has long held that, “in considering a party’s subjective state of mind, we are ‘to take into account the totality of the circumstances.’” Highmark, 687 F.3d at 1311 (quoting Mach. Corp., 774 F.2d at 473). In Eltech, we examined the difficulty of proving what a party actually knew or did not know, explaining: The “should know” rubric obviously applies when a party attempts to escape the consequences of its conduct with the bare statement, “I didn’t know.” A party confronted with the difficulty of proving what is in an adversary’s mind must be at liberty to prove facts establishing that that adversary should have known, i.e. to prove facts that render the “I didn’t know” excuse unacceptable. 903 F.2d at 810. Thus, focusing first and only on subjective factors, as the district court did here, is inadequate to obtain the justice that §285 is intended to achieve.
Id. at *15.
[2] Because of precedent and the case being before a panel, subjective bad faith is required under § 285 when analyzing a situation without litigation misconduct or misconduct in securing a patent. However, standard may be open to review en banc.
Aim of § 285Thus, a central aim of § 285, as well as its predecessor, is to prevent an alleged infringer from suffering a “gross injustice.” The injury to the alleged infringer is the focus—an injury that can occur regardless of a plaintiff’s state of mind. In the same vein, we have stressed that § 285 “is remedial and for the purpose of compensating the prevailing party for the costs it incurred in the prosecution or defense of a case where it would be grossly unjust . . . to require it to bear its own costs.” Highmark, 687 F.3d at 1310. Again, it is clear that the aim of § 285 is to compensate a defendant for attorneys’ fees it should not have been forced to incur.
Kilopass Tech., Inc. at *19.
Bad Faith Requirement May be Subject to Review en bancWe cited Professional Real Estate Investors in Brooks Furniture for the proposition that both subjective bad faith and objective baselessness are required under § 285 in the absence of litigation misconduct or misconduct in securing the patent at issue. Brooks Furniture, 373 F.3d at 1381. But, Professional Real Estate Investors DOES NOT SEEM TO DEMAND THE BAD FAITH REQUIREMENT WE GLEANED FROM IT. It is true that, in Professional Real Estate Investors, the Court does demand inquiry into a “litigant’s subjective motivation.” 508 U.S. at 60. But, the Court’s subjective inquiry has nothing to do with what a litigant knew or should have known regarding the merits of its claims— the inquiry that currently forms the subjective prong of our § 285 analysis. Instead, the Supreme Court focused on “whether the baseless lawsuit conceals an attempt to interfere directly with the business relationships of a competitor through the use [of] governmental process—as opposed to the outcome of that process—as anticompetitive weapon.” Id. at 60–61 (alteration and emphases in original) (citations and internal quotation marks omitted). Thus, the subjective component in Professional Real Estate Investors, as Sidense argues, may only pertain to antitrust concerns not present in § 285 analyses.
Id. at *20-21 (emphasis added).
[3] Standard of proof for subjective bad faith is clear and convincing
Basis for Clear and Convincing RequirementWe have justified the requirement that a party prove exceptionality by clear and convincing evidence by citing the “‘presumption that an assertion of infringement of a duly granted patent is made in good faith.’” […] According to our case law, this presumption of good faith originated in the Supreme Court’s decision in Virtue v. Creamery Package Manufacturing Co., 227 U.S. 8, 37–38 (1913). […] In Virtue, however, the Court merely stated that “[p]atents would be of little value if infringers of them could not be . . . proceeded against in the courts. Such action, considered by itself, cannot be said to be illegal.” […] This language does not establish, or even suggest, that there is a presumption that patents are asserted in good faith. It simply states that the assertion of a patent, in and of itself, is not a proper predicate for antitrust liability.
Kilopass Tech., Inc. at *23 (internal citations omitted).
Questioning the clear and convincing standardA preponderance-of-the-evidence standard is typical in civil cases—particularly with respect to compensatory provisions such as § 285. […] The heightened burden of proof that applies to allegations of fraud is an exception to the general rule. […] Although fraud certainly is a ground upon which a finding of exceptionality under § 285 may be predicated, other forms of misconduct (e.g., recklessly pursuing a baseless infringement claim) can support an exceptionality finding as well. And, because exceptionality can be based on conduct less culpable than fraud, there is arguably no reason to depart from the typical preponderance standard with respect to § 285 where fraud is not at issue.
Id. at *24-25 (internal citations omitted).
[4] § 285 fees should not be awarded as long as the patentee had an objectively reasonable basis for its claims
§ 285 no to be altered to include Fee Shifting
We find this to be Sidense’s weakest argument for a change in our jurisprudence [to require fee shifting]. As we explained in iLOR, Section 285 must be interpreted against the background of the Supreme Court’s decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 . . . (1993). There, the Court recognized that the right to bring and defend litigation implicated First Amendment rights and that bringing allegedly frivolous litigation could only be sanctioned if “objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits.”
Kilopass Tech., Inc. at *26 (text added).
Thus, where there is no basis upon which to predicate exceptionality other than the viability of the claims asserted, we conclude that § 285 fees should not be awarded as long as the patentee had an objectively reasonable basis for its claims, or, as the Supreme Court put it in Professional Real Estate Investors, “[i]f an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome.” 508 U.S. at 60.
Id. at *27.
Because the district court’s decision was premised on an incorrect legal standard, the decision of the district court is vacated and remanded.
Kilopass Tech., Inc. at *29.
RADER, Chief Judge, concurring. Kilopass Tech., Inc., Rader, CJ Op., at *1.
Effect of Brooks Furniture on Attorney's Fees Inquiry
I wish to add to some of the court’s reasoning with my hope that our court will return to its original binding precedent on fee-shifting. Our earlier jurisprudence governs over the subsequent case of Brooks Furniture. […] Before Brooks Furniture, district courts enjoyed broad discretion to shift fees under 35 U.S.C. § 285. In my view, this court should return to the rule that a district court may shift fees when, based on the totality of the circumstances, it is necessary to prevent a gross injustice.
Kilopass Tech., Inc., Rader, CJ Op., at *1-2 (internal citations omitted).
This court properly concludes that although the 1952 Patent Act slightly modified the 1946 statute by adding the word “exceptional” and removing the word “discretion,” this change did not depart from the original undernstanding. Majority Op. at 19. And for a long period of time, this court did just that, reading 35 U.S.C. § 285 as applying a totality of the circumstances test.
Id. at *31 (internal citations omitted).
In 2005, a panel of this court in Brooks Furniture drastically altered this court’s jurisprudence regarding 35 U.S.C. § 285: “Absent misconduct in conduct of the litiga- tion or in securing the patent, sanctions may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.” Brooks Furniture Mfg. v. Dutailier, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005) (emphasis added). This court based this new reading on the Supreme Court’s decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49, 60–61 (1993). From my perspective, this intervening Supreme Court case does not change this court’s traditional fee-shifting rule.
Id., at *3-4.
Professional Real Estate Investors deals with AntitrustAs this court notes, Professional Real Estate Investors rests on antitrust concerns that are not present in the § 285 analysis. Majority Op. at 21. In the antitrust context, both subjective bad faith and objective baselessness might be reasonable to protect parties from claims for punitive damages. See 15 U.S.C. §§ 1, 2. On the other hand, 35 U.S.C. § 285 is a compensatory fee-shifting statute. Highmark, Inc. v. Allcare Health Mgt. Sys., 687 F.3d 1300, 1310 (Fed. Cir. 2012). The Supreme Court itself counsels against requiring both subjective bad faith and objective baselessness in compensatory fee-shifting statutes. Christiansburg Garment Co. v. Equal Emp’t Opportunity Comm’n, 434 U.S. 412, 416 (1978).
Id., at *4.
Brooks Furniture ParadoxBrooks Furniture, to my eyes, does not fully account for Supreme Court precedent and does not align with decisions of other circuit courts of appeals. For example, the Lanham Act’s fee-shifting clause, 15 U.S.C. § 1117(a), is identical to section 285: “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” 15 U.S.C. § 1117. Yet, in applying that identical language, no other circuit court requires both subjective bad faith and objective baselessness.
Id. at *5.
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