House Judiciary Chairman Bob Goodlatte (R-Va.) on May 23, 2013 released a discussion draft of legislation designed to curb abusive patent litigation. Among the draft’s various provisions is a section titled “Incentivizing Settlement in Patent Litigation.” This proposal would essentially expand today’s Federal Rule of Civil Procedure 68 “Offer of Judgment” to require “attorneys’ fees” in patent cases to be paid by a party who first rejects a settlement offer and then fails to improve on the offer at trial. There are, however, important differences between the Goodlatte proposal and Rule 68 that litigators need to know. And several thorny issues ought to be resolved before this proposal becomes law.

The Proposal

Proposed new 35 U.S.C. § 285A would apply to “an action involving the validity or infringement of a patent (including a counterclaim or cross claim).” The most important provisions are subsections (f) and (g), which read in relevant part:

(f) ORDER TO PAY COSTS AND EXPENSES
.—(1) IN GENERAL.—Except as provided in paragraph (2), if the court finds, pursuant to a petition filed under subsection (e) with respect to a claim or claims, that the judgment, verdict, or order finally obtained is not more favorable to the offeree with respect to the claim or claims than the last offer made under this section, the court shall order the offeree to pay the offeror’s costs and expenses, including attorneys’ fees, incurred with respect to the claim or claims on or after the date the last offer was made or, if the offeree made an offer under this section, on or after the date the last such offer by the offeree was made.
(2) EXCEPTIONS.—The court may not order the offeree to pay the offeror’s costs and expenses described in paragraph (1) if the court finds that—
(A) requiring the payment of such costs and expenses would be manifestly unjust; or
(B) the offeree’s rejection of the offer was substantially justified.
* * *
(g) EQUITABLE REMEDY.—This section does not apply to any claim seeking an equitable remedy.

The immediate effect of this proposal would be that a party receiving a settlement offer in a patent case will need to think twice before rejecting the offer, because if it fails to achieve a better result at trial, it will be forced to pay the offeror’s “costs and expenses, including attorney’s fees” incurred after the offer was made (potentially millions of dollars).

Rule 68 Compared

Federal Rule of Civil Procedure 68, which applies to all federal civil litigation, contains a similar fee-shifting mechanism in cases where “the judgment that the offeree finally obtains is not more favorable than the unaccepted offer.” Importantly, Rule 68 provides for payment of the offeror’s “costs,” but does not expressly include attorney’s fees. The deadline for making a Rule 68 settlement offer is “14 days before the date set for trial,” and if the extent of liability remains to be determined, then “14 days . . . before the date set for a hearing to determine the extent of liability.”

The Goodlatte proposal, by contrast, applies only to patent cases and does expressly include attorney’s fees. In addition, the deadline for making an offer is “10 days before trial,” with no express provision in cases where liability and damages have been bifurcated. Also, unlike Rule 68, the Goodlatte proposal expressly excludes from fee-shifting “any claim seeking an equitable remedy.”

GOP “Contract With America” (Part II)?

Interestingly, proposed new 35 U.S.C. § 285A in the Goodlatte draft is nearly identical to a settlement offer provision in a bill that Rep. Goodlatte co-sponsored in 1995 (H.R. 988, “Attorney Accountability Act of 1995”). The only real difference between the Goodlatte draft and H.R. 988 is that the latter would have applied to “any action over which the court has jurisdiction,” rather than being limited to patent cases. As a historical aside, H.R. 988 was a bill to implement the litigation-reform proposals in the GOP’s 1994 “Contract With America.” H.R. 988 passed the House but failed in the Senate.

Real-World Examples under 35 U.S.C. § 285A

Settlement negotiations in patent cases typically involve offers and counter-offers. Section 285A(c) provides that “[t]he fact that an offer under subsection (a) is made but not accepted does not preclude a subsequent offer under subsection (a).” Thus, § 285A contemplates the possibility of a series of unaccepted offers and counter-offers leading up to trial, with payable fees accruing from “the date the last offer was made or, if the offeree made an offer under this section, on or after the date the last such offer by the offeree was made.”

To understand how § 285A would work in practice, consider the following scenarios where infringement defendant (D) and patent plaintiff (P) make several unaccepted settlement offers for different amounts at different points in time (T1, T2, T3, T4). After all offers are rejected, the case goes to trial and a jury returns one of five possible verdicts (A, B, C, D, E).

Verdict A ($10m) gives plaintiff a damages award that is more than what plaintiff offered ($7m). In this case, defendant must pay plaintiff’s fees accrued from T4, because the verdict is “not more favorable” to defendant than plaintiff’s last offer ($7m). In other words, defendant should have settled for the amount the plaintiff offered, as the defendant would have paid less under the settlement agreement than the amount the jury determined. Conversely for the plaintiff, Verdict A is more favorable to the plaintiff than defendant’s last offer ($3m), so plaintiff is not required to pay defendant’s fees in this scenario.

Verdict B ($3m) comes in at exactly the amount offered in plaintiff’s last offer. Here again, the defendant must pay plaintiff’s fees accruing from T4 because Verdict B is “not more favorable” to defendant than plaintiff’s last offer ($3m). In other words, defendant should have settled for the amount that plaintiff offered, because the same amount of money would have changed hands without the need for trial.

Verdict C ($5m) falls between both parties’ offers. It is more than what defendant was willing to settle for ($3m) and less than what plaintiff was willing to settle for ($7m). In this scenario, nobody pays the other side’s attorneys fees. Verdict C is more favorable to each party than the last offer it received.

Verdicts D and E are the mirror images of Verdicts B and A, respectively. Verdict E ($0) is the least favorable verdict for plaintiff. Thus, plaintiff must pay defendant’s fees accruing from T3, because Verdict E ($0) is “not more favorable” to the plaintiff than defendant’s last offer ($3m). Likewise, Verdict D ($3m) comes in at exactly the defendant’s last offer ($3m), thus plaintiff must pay defendant’s fees accruing from T3, as Verdict D is “not more favorable” to plaintiff than defendant’s last offer.

Open Questions

  1. The ability to recover attorneys fees under the proposal is ostensibly available to “any party” in a patent case. Importantly, however, it “does not apply to any claim seeking an equitable remedy.” Infringement defendants typically assert equitable counterclaims of invalidity and non-infringement. So does this mean that § 285A is effectively a one-way fee-shifting provision where only a patent owner would ever pay? And if a patent owner’s infringement claim seeks an injunction (an equitable remedy), is there anything left of § 285A in such a case?
  2. What happens when the issues of infringement and damages are bifurcated into separate trials? Rule 68 expressly provides a new time period for making settlement offers “before the date set for a hearing to determine the extent of liability.” There is no corresponding language in the Goodlatte draft. The draft instead speaks in terms of a single “trial.”
  3. How does a court decide if an offer is “more favorable” than the verdict? For example, what if a patent owner offers (or a defendant asks for) a license to an entire suite of patents, many of which are not asserted in the litigation? Alternatively, what happens if multiple patents are asserted in the litigation and included in a lump-sum settlement offer, but then the jury finds some patents infringed and others not infringed? What if an offer is made to settle only some of the asserted patents, and the jury does not apportion damages among the various patents? In these cases, there is no easy way to do an apples-to-apples comparison between the offer and verdict to tell which is “more favorable.”
  4. Can settlement offers be revoked, whether before or after the 10-day window? If so, does another party’s attempted “acceptance” of a revoked offer itself become an “offer” for purposes of § 285A?
  5. Suppose a defendant makes an offer to settle for a mere $1 on the very same day it is served with a complaint? Suppose then that the defendant succeeds in invalidating all asserted patent claims, such that the plaintiff recovers $0. Must the plaintiff pay 100% of the defendant’s attorney’s fees for the entire litigation (i.e., a pure loser-pays rule)? Or would the “manifestly unjust” or “substantially justified” exceptions in § 285A(f)(2) always apply in this situation?
  6. Do payable “costs and expenses, including attorney’s fees” under § 285A include a party’s fees spent challenging or defending the asserted patent in a parallel U.S. Patent Office inter partes review or post-grant review? If not, would the exclusion of these expenses discourage the use of these new Office proceedings, given that an invalidation by a jury would potentially allow a defendant to recover the expense of trial? Is it feasible to parse out litigation and reexamination expenses where the same prior art is asserted in both venues by the same or overlapping teams of attorneys (assuming a prosecution bar does not apply)?
  7. Does fee-shifting under § 285A apply to patent suits in which the U.S. Government is a party (e.g., 28 U.S.C. § 1498(a) infringement suits; 35 U.S.C. § 145 civil actions)?