SFA Systems, LLC v. Newegg, Inc.

In considering a district court’s denial of attorneys’ fees in view of the Supreme Court’s Octane Fitness standard for finding an “exceptional case” under 35 U.S.C. § 285 (IP Update Vol. 17, No. 5), the U.S. Court of Appeals for the Federal Circuit found that a practice of filing lawsuits for the purpose of extracting nuisance settlements—a charge often leveraged against many non-practicing entities (NPEs)—could make a case “exceptional.” However, the unanimous appellate panel found that there was insufficient evidentiary support in this case to find that the district court had abused its discretion in denying the fees sought. SFA Systems, LLC v. Newegg, Inc., Case No. 14-1712 (Fed. Cir., July 10, 2015) (O’Malley, J.).

The plaintiff, SFA Systems (SFA), sued various defendants for patent infringement in a series of cases filed in the U.S. District Court for the Eastern District of Texas, including the defendant, Newegg. Just over two years later, and after several parties had settled with SFA resulting in dismissal, SFA filed a second lawsuit against Newegg asserting a newly issued patent. While the two suits were pending separately, the district court held a Markman hearing relating to the first Newegg suit, in which the magistrate’s construction adopted by the district court favored SFA’s construction of a disputed term tending to favor infringement liability. Shortly thereafter, the parties agreed to consolidate the two SFA lawsuits against Newegg after all other defendants had settled their cases. After the court ordered consolidation of the two cases, the court conducted a second Markman hearing concerning the later-issued patent. As part of those claim construction proceedings, Newegg filed a motion for summary judgement of invalidity for indefiniteness consistent with local practice.

The district court subsequently issued its second claim construction order, adopting the same construction of the term in the first patent that favored SFA’s liability position and denying Newegg’s motion regarding indefiniteness. The next day, SFA voluntarily dismissed the case against Newegg and covenanted not to sue. Newegg filed motions to recover its costs and fees following the dismissal of the case. The district court found that Newegg was the prevailing party and granted Newegg’s bill of costs, but denied the request for fees because (quotingOctane Fitness) Newegg had “provided no evidence that the case ‘stands out from others with respect to the substantive strength of SFA’s litigating position.’” The district court also rejected Newegg’s argument that SFA’s filing of many lawsuits against many defendants showed a pattern of abusive and vexatious litigation to extract settlements, finding it equally likely on the case record that there was just widespread infringement. Newegg appealed.

Newegg requested de novo review of the district court’s claim construction, which Newegg argued was necessary to show that the substantive strength of SFA’s litigation position was weak in view of what the Newegg considered to be the proper construction. The Federal Circuit declined to engage in de novo review, finding that it is the substantive strength of the party’s litigating position that is relevant to an exceptional case determination, not the correctness or eventual success of that position. As a result, the appeals court concluded that it need not rule on the correctness of the district court’s decision on all underlying issues of law in reviewing a district court’s exceptional case determination. Rather, the Federal Circuit found that the district court did not abuse its discretion in finding that the plaintiffs claim construction and indefiniteness positions did not stand out and that the district court gave due and proper attention to those issues during the course of the litigation.

While the Court, in part, sided with Newegg on its arguments regarding the alleged unreasonable manner in which the case was litigated, the Federal Circuit concluded that the record did not support a finding that the district court had abused its discretion. The Court found that there were several prior settlement payments to SFA that were inconsistent with Newegg’s argument that SFA always settled with accused infringers for far less than the cost to prosecute a case to judgment. The Court concluded, however, that that a district court should consider a patentee’s pattern of litigation where adequate evidence of an abusive pattern is presented and that a pattern of litigation abuses characterized by the repeated filing of patent infringement actions for the sole purpose of forcing settlements, with no intention of testing the merits of one’s claims, is relevant to a district court’s exceptional case determination under § 285.

Practice Note: This case likely makes relevant fact discovery from serial plaintiffs that may have been previously deemed irrelevant or peripheral to the issues pending in an ongoing suit and may provide a role for third-parties (e.g., former defendants) that did not previously exist in a typical patent litigation. On the patent owner’s side, the dicta in this case tends to support the position that it is not enough to establish that another party previously settled with a patent owner and for what amount, but also why the other party settled and under what circumstances.