Parties accused of patent infringement are turning more and more to post-grant challenge proceedings at the United States Patent and Trademark Office (“USPTO”) as a faster and cheaper means for invalidating the asserted claims. A recent federal district court order indicates that the fees and costs associated with such proceedings may be recoverable if the underlying infringement suit is declared “exceptional” under 35 U.S.C. § 285.

On August 19, 2015, the United States District Court of the Southern District of California awarded defendant Southwest Airlines Co. nearly $400,000 in attorney fees and costs related to an inter partes reexamination of U.S. Patent No. 6,738,770 (the “’770 patent”). Order Granting Def’ts Application for Fees and Costs, Deep Sky Software, Inc. v. Southwest Airlines Co., Case No. 10-cv-1234-CAB, Dkt. No. 49 (S.D. Cal. Aug. 19, 2015). Southwest was sued for infringement of the ’770 patent in June 2010 by patent owner Deep Sky. Southwest filed a request for inter partes reexamination in April 2011, and the parties jointly moved for a stay pending the outcome of the reexamination, to which the court agreed. The reexamination concluded in December 2014, with all of the asserted claims of the ’770 patent found invalid by the Patent Trial and Appeal Board.

The court previously declared the case exceptional under § 285 on June 1, 2015. Order Granting Def’ts Mot. to find this an “Exceptional Case,” Deep Sky Software, Inc. v. Southwest Airlines Co., Case No. 10-cv-1234-CAB, Dkt. No. 44 (S.D. Cal. June 1, 2015). During the ’770 patent reexamination proceedings, the patent owner submitted a declaration by the inventor to attempt to establish that the conception and reduction to practice of the invention had predated a potentially invalidating reference. As part of the declaration, the inventor stated that “[a] key moment” in the development of the invention “occurred when [Deep Sky] purchased the Flexgrid product in 1999, as this provided tools enabling further development.” The examiner in reexamination found that the Flexgrid product, a software program, itself disclosed the claimed subject matter of the ’770 patent and indicated that the inventor did not in fact invent the claimed invention. Importantly, the content of the Flexgrid product was never disclosed to the USPTO during the initial prosecution of the patent, and was never disclosed by Deep Sky to Southwest during the district court proceedings.

The court declared the case exceptional due to Deep Sky’s failure to timely disclose material prior art (i) to the USPTO during prosecution and (ii) to Southwest in compliance with the patent local rules of the court. The court noted that the inequitable conduct in prosecution was a valid basis for finding the case exceptional, and that based on the record, it was clear that the inventor knew of the prior art Flexgrid product and its materiality to patentability, the inventor intentionally withheld its disclosure from the USPTO, and the reference would have been material to prosecution. The court further explained that Deep Sky had been required but failed to disclose the Flexgrid product to Southwest during the early stages of the litigation. Southern District of California Patent Local Rule 3.2.b requires plaintiffs to produce documentation related to the conception and development of the invention that predate the filing date of the patent application, which would have included documentation related to the Flexgrid product. The court explained that Deep Sky’s failure to disclose had violated the good-faith requirements of the local rule and had likely lengthened the litigation and reexamination proceedings to Southwest’s detriment. Following the finding of an exceptional case, the court turned to Southwest’s application for attorney fees and costs related to the reexamination.

The court noted that the “issue of whether a prevailing party in an exceptional case may recover fees for proceedings before the PTO, when the case was stayed due to the PTO proceedings, has received little attention.” The Federal Circuit has interpreted attorney fees to include “those sums that the prevailing party incurs in the preparation for and performance of legal services related to the suit.” Cent. Soya Co. v. Geo. A. Hormel & Co., 723 F.2d 1573, 1578 (Fed. Cir. 1983). The district court found that “the reexamination proceeding essentially substituted for work that would otherwise have been done before this court” and was “related to the suit” because the reexamination was initiated during and in reaction to the plaintiff’s infringement action. Further, the reexamination proceeding led to the cancellation of all of the asserted claims, disposed of Deep Sky’s complaint, and made Southwest the prevailing party. Accordingly, the court found that “under the unique circumstances of this case,” Southwest could recover fees for the reexamination proceeding.

The court’s logic would similarly apply to an application for § 285 fees for the AIA post-grant proceedings of inter partes reviews, post-grant reviews, and transitional post-grant review proceedings of covered business method patents. Of course, the threshold determination that the underlying district court litigation is exceptional must be met. But if the court finds the case exceptional, the challenger appears to have a good chance of recovering fees related to a successful post-grant proceeding challenge that invalidates all of the asserted claims-in-suit and effectively disposes of the entire complaint.

The Deep Sky decisions serve as a stark reminder of the importance of complying with USPTO Rule 56’s duty of candor and good faith in dealing with the patent office, which includes the duty to disclose all known information that may be material to patentability. For computer-implemented inventions, this may include disclosure of prior-art software packages utilized in development to provide any underlying functionality. The decisions also underscore the importance of proper pre-suit diligence by patent owners and their litigation teams to investigate the history of conception, reduction to practice, and commercialization of patents-in-suit. By failing to do so, patent owners increase the risks of facing a fee award under § 285 and effectively paying for an accused infringer to invalidate pieces of their patent portfolios. Conversely, for accused infringers this case may provide additional leverage in settlement discussions, as a favorable decision in a post-grant proceeding provides additional evidence that the case is exceptional under § 285, and the threat of attorney fees awards for AIA proceedings now appears more serious.