In Old Reliable Wholesale, Inc. v. Cornell Corp., No. 10-1247 (Fed. Cir. Mar. 16, 2011), the Federal Circuit reversed the district court’s finding that the preceding infringement trial was exceptional and the district court’s award of attorneys’ fees to Cornell Corporation (“Cornell”).

Old Reliable Wholesale, Inc. (“Old Reliable”) is the assignee of U.S. Patent No. 5,069,950 (“the ’950 patent”) directed to multilayered insulated roof board. Cornell sold two types of insulated roof boards: Vent-Top ThermaCal 1 (“VT-1”), which included a layer of paper felt; and Vent-Top ThermaCal 2 (“VT-2”), which included two layers of oriented strand board.  

In 2006, Old Reliable filed suit against Cornell for infringement of the ’950 patent in light of Cornell’s VT-1 product. Cornell countersued that the ’950 patent was invalid as anticipated by the VT-2 product and another competitor’s product, among other reasons. During his deposition, Old Reliable’s founder and inventor of the ’950 patent testified that Old Reliable’s commercial product, which was based on the claims of the ’950 patent, the VT-1 product, and the VT-2 product, each did “exactly the same thing.” The district court granted Cornell’s motion for SJ of patent invalidity, concluding that the VT-2 product and the competitor’s product anticipated the claims of the ’950 patent. On appeal, the Court affirmed.  

Thereafter, Cornell filed a motion in district court asking that the case be declared exceptional and seeking attorneys’ fees under 35 U.S.C. § 285. The district court granted Cornell’s motion but held that Cornell was only entitled to attorneys’ fees for the portion of the infringement litigation that continued after the inventor’s deposition. Prior to that point, the district court found that Old Reliable may have had some basis for its position that the VT-2 product did not anticipate the ’950 patent claims.  

Meanwhile, during the initial infringement suit, the PTO granted Cornell’s request for ex parte reexamination of the ’950 patent. Despite the fact that Old Reliable informed the PTO of the Federal Circuit’s finding of anticipation and invalidity in the related infringement suit, the PTO issued a notice of intent to issue an ex parte reexamination certificate confirming patentability of all claims in the ’950 patent. Soon thereafter, the PTO withdrew the notice of intent, stating that the claims were invalid and noting the Federal Circuit’s decision.  

Old Reliable appealed to the Court for a second time, seeking reversal of the district court’s awarding attorneys’ fees to Cornell. Citing Brooks Furniture Manufacturing, Inc. v. Dutailier International, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005), the Court explained that “[a]bsent misconduct in conduct of 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.” The Court also noted the element of “objective baselessness” depends not on the state of mind of the party against whom fees are sought, but instead on an objective assessment of the merits of the challenged claims and defenses.

Keeping these standards in mind, the Federal Circuit concluded that the preceding infringement trial was not an exceptional case that merited awarding of attorneys’ fees to Cornell. The Court addressed each of the damaging testimonies that emerged during the infringement trial along with the related PTO reexamination proceedings in turn. Regarding the inventor’s deposition, Cornell argued that Old Reliable had no reasonable basis for maintaining its infringement action once the inventor admitted that Old Reliable’s product, the VT-1 product, and the VT-2 product did exactly the same thing. The Court disagreed, noting that anticipation requires that all of the claim elements and their limitations be shown in a single reference. Regardless of whether the VT-2 and Old Reliable’s product did the same thing, there could be no anticipation unless the VT-2 disclosed either expressly or inherently all the structural limitations contained in the asserted claims. Citing In re Ruskin, 347 F.2d 843, 846 (CCPA 1965), the Court explained that even where a prior art device is the “functional equivalent” of a patented product, it does not anticipate unless it discloses the structure required by the asserted claims. Thus, despite Mr. Crookston’s admission and given the fact that Old Reliable had pointed to structural differences between the VT-2 and its claims, the Court found that Old Reliable still had a reasonable basis on which to argue that the VT-2 product did not anticipate the ’950 patent claims.

The Court also addressed the alleged inconsistency between Old Reliable’s arguments that the VT-1 infringed the ’950 patent claims while the VT-2 failed to anticipate these claims. After reviewing the differences between the two products, the Court found that there was nothing frivolous or inherently implausible about Old Reliable’s assertion that, from a physical standpoint, separating the insulation from spaced blocks by a thin layer of felt facing was different from separating these components with a bulky layer of oriented strand board. In addition, the Court noted that although Cornell had been selling its VT-2 product for many years before it introduced the VT-1 product, the VT-1 product sales quickly surpassed VT-2 product sales, providing a legitimate basis for Old Reliable’s arugment that commercial success of the infringing VT-1 product weighed against invalidity of the ’950 patent.

Moreover, the Court recognized that, even though contrary to its earlier holding affirming invalidity, the PTO nonetheless initially issued a notice of intent to issue an ex parte reexamination certificate after concluding its analysis of the cited art. Though the Court is not bound by the PTO’s actions and must make its own determination of invalidity, the Court acknowledged that it was equally true that the PTO has expertise in evaluating prior art and assessing patent validity. The fact that the PTO initially concluded that the ’950 patent claims were valid after assessing the relevant prior art undercut Cornell’s contention that Old Reliable had no basis for arguing no anticipation of its claims. Moreover, the Court noted that the PTO’s initial conclusion of validity, even if later revoked, provided probative evidence on the issue of whether Old Reliable had a reasonable basis for arguing that the ’950 patent claims were valid and not anticipated.

Finally, the Court addressed the question of whether there was litigation misconduct that could warrant awarding attorneys’ fees, even absent objective baselessness of the patentee’s arguments. Citing ICU Medical, Inc. v. Alaris Medical Systems, Inc., 558 F.3d 1368, 1380 (Fed. Cir. 2009), the Court described the standard for litigation misconduct as involving unethical or unprofessional conduct by a party or its attorneys during the course of adjudicative proceedings. Old Reliable’s refusal to participate in settlement negotiations in the context of the facts and testimony of the infringement trial did not rise to litigation misconduct. Because Old Reliable had an objectively reasonable basis for maintaining an infringement suit, the refusal to make or accept a settlement was not in and of itself sufficient to establish litigation misconduct.

Thus, the Court reversed the district court and vacated the award of attorneys’ fees.