Intellectual Property & Technology Law Journal
With its 2014 decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc., the U.S. Supreme Court relaxed patent litigation’s fee-shifting standard under 35 U.S.C. § 285. Section 285 grants district courts the discretion to award attorneys’ fees to prevailing patent litigants in “exceptional cases.” But pre-Octane, only certain categories of conduct could render a case exceptional: “willful infringement, fraud or inequitable conduct in procuring the patent, misconduct during litigation, vexatious or unjustified litigation, conduct that violates Fed. R. Civ. P. 11, or like infractions.” Octane rejected the categorical approach and returned to trial judges the discretion to determine what conduct qualifies as exceptional—that is, it need only “stand out.”
Two years before Octane, Congress passed the America Invents Act, establishing the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB), a body of administrative patent judges who oversee the administration of a new regime of post-grant procedures for challenging a patent’s validity. These new instruments—inter partes review (IPR), covered business method review, and post-grant review—were designed as an alternative to parts of district court litigation and expanded upon and replaced inter partes reexamination, a less-robust procedure conducted by USPTO examiners with a minimal adversarial posture. The renewed vigor of § 285 coinciding with the prevalence of PTAB proceedings has given rise to thorny issues, among them whether and when courts should include in § 285 awards those attorneys’ fees attributable to parallel PTAB proceedings.
While no single standard has emerged from the federal bench, Magistrate Judge John E. McDermott of the Central District of California recently granted attorneys’ fees attributable to an inter partes review, providing occasion to consider the variety of standards.
Munchkin v. Luv N’ Care
In Munchkin, Inc. v. Luv N’ Care, Ltd., Munchkin sued Admar International and Luv N’ Care (LNC) alleging patent infringement by LNC’s leak-proof cups for children. LNC filed an IPR petition against Munchkin’s asserted patent and Magistrate Judge McDermott, conducting the case by consent, stayed the trial when the PTAB instituted the IPR. After the PTAB invalidated the patent and Munchkin unsuccessfully appealed to the U.S. Court of Appeals for the Federal Circuit, the trial court lifted the stay. In a gambit that would have precluded LNC from seeking attorneys’ fees, Munchkin immediately moved to voluntarily dismiss the case under Fed. R. Civ. P. 41(a)(2). The court denied Munchkin’s motion, dismissed the case under Fed. R. Civ. P. 12(b)(6), and granted LNC attorneys’ fees pursuant to § 285, stating that Munchkin was “objectively unreasonable in persisting in all out litigation” where it was “aware of the substantive weakness of ” its patent. This rendered the case exceptional.
In the court’s judgment, the petition for and institution of the IPR notified Munchkin of the weakness of its patent—a weakness made more conspicuous by LNC’s allegation that, during patent procurement, Munchkin was aware of and failed to present potentially invalidating prior art before the USPTO. Despite these setbacks, Munchkin eschewed settlement with LNC, fought LNC’s motion to stay the trial pending resolution of the IPR, unsuccessfully appealed the PTAB’s judgment, and immediately thereafter moved to voluntarily dismiss its claim. Munchkin’s “doggedness” was, in the court’s opinion, unreasonable. Judge McDermott’s displeasure with the patentee’s litigation strategy was no doubt aggravated by Munchkin’s conduct in prosecuting a trademark claim earlier in the suit, which the court also found sufficiently exceptional to justify awarding LNC attorneys’ fees for defending that claim.
Of the $1.43 million in attorneys’ fees requested by LNC, nearly a third were attributable to the IPR proceeding and related Federal Circuit appeal. Munchkin objected to inclusion of LNC’s IPR fees, citing Deep Sky Software, Inc. v. Sw. Airlines Co. for the proposition that the court could only include these fees if the IPR “essentially substituted for work that would otherwise have been done before th[e] court.” Munchkin asserted that the IPR did not substitute for the work of the court; rather, it unwound work already done. The IPR had, in Munchkin’s description, “resurrected [LNC’s] defense” by “effectively revers[ing]” the court’s claim construction rulings rendered prior to the IPR’s institution.
Rejecting this argument, Judge McDermott reasoned that because the PTAB decided issues of validity not addressed by the court, the IPR did substitute or the court’s work. Not content to rest its holding on this substitution rationale alone, the court also recognized that the IPR satisfied a “but for” standard: because LNC would not have expended fees to litigate an IPR and a Federal Circuit appeal but for Munchkin’s infringement claim, those fees were properly included in the § 285 award. The award fully satisfied LNC’s requested IPR fees; the court did not discount the award to reflect claim construction arguments presented at the PTAB that may have been duplicative of arguments already put forward at trial.
These two standards—substitution and but-for causation—represent two of the four standards district courts have applied when deciding whether to grant attorneys’ fees from PTAB proceedings under § 285. The other two standards are tests for relevance and necessity. In the majority of opinions that address this issue, most have used one of the substitution, relevance, and necessity standards to deny the prevailing party attorneys’ fees attributable to PTAB procedures. But two opinions, each employing the but-for standard, have granted such fees.
The Substitution, Necessity, and Relevance Standards
To justify excluding from § 285 awards those attorneys’ fees attributable to PTAB proceedings, district courts have seized upon the text of two opinions from the Federal Circuit: Lam, Inc. v. Johns-Manville Corp.11 and PPG Industries, Inc. v. Celanese Polymer Specialties Co.12 The Northern District of Illinois has followed PPG’s “substitution” standard, the District of Colorado and the Southern and Northern Districts of Texas have followed Lam’s “necessity” standard, and the Central District of California has followed PPG in one case and Lam in another. Anomalously, the District of Minnesota has ignored Lam and PPG and adopted a “relevance” standard.
Lam and PPG
In 1983, the Lam court stated that as a general principle, § 285 “permits the prevailing party to recover disbursements that were necessary for the case.”13 Five years later, the PPG court reviewed a patent infringement trial that, like Munchkin, had at one point been stayed pending the resolution of a post-grant procedure at the USPTO.14 The patentee convinced the court to stay the trial in favor of the USPTO proceeding, an inter partes reissue examination, by asserting that it could resolve matters that may shorten the trial. The patentee’s argument proved prescient, as the reissue resulted in the rejection of the patentee’s asserted claims and ended the infringement suit.15
The trial court found the case exceptional under § 285, but excluded fees attributable to the USPTO proceedings. The trial court reasoned that the reissue procedure did not, by law, require the defendant’s participation, so the defendant’s work on the reissue was not necessary. And, under the trial court’s theory, what was not necessary was not compensable under § 285 (evoking Lam).16
The Federal Circuit was unconvinced; it recognized that the trial court instituted the stay intending that the reissue proceeding, with both parties’ participation, would replace the district court litigation. And though it recognized that this had rendered the reissue necessary,17 the Federal Circuit concluded that the defendant’s entitlement to attorneys’ fees from the reissue turned on the fact that reissue proceedings “substituted for the district court litigation.”
District Court Applications
Of the district courts that have considered the propriety of granting attorneys’ fees for post-issuance procedures, most have embraced the “necessary” phraseology of Lam, while a minority have gravitated to the substitution standard elucidated in PPG.
1. The “Substitution” Standard
The Southern District of California was an early adopter of the substitution standard. In Deep Sky Software, Inc. v. Southwest Airlines Co.,19 upon which the Munchkin court relied, the Southern District cited PPG to support granting attorneys’ fees attributable to an inter partes reexamination that had stayed the trial and “essentially substituted” for the court’s work.20 Recently, however, the Northern District of Illinois in Chamberlain Group, Inc. v. Techtronic Industries Co. adopted the same standard, but reached the opposite result.21 The court refused to wrap fees attributable to an IPR into a § 285 award because, unlike USPTO proceedings in Deep Sky and PPG, the IPR of Chamberlain did not instigate a stay of trial litigation to facilitate any substitution of work.22 Because the Central District of California had stayed the Munchkin trial in favor of an IPR, the Munchkin court could not distinguish Deep Sky and so it held that the PTAB’s work substituted for the court’s. In awarding attorneys’ fees from the IPR, however, the Munchkin court did not rely solely on PPG’s substitution standard. As explained below, Judge McDermott also cited a “but-for” standard.
2. The “Necessity” Standard
Lam’s necessity standard has proved more popular than PPG’s substitution standard. Three months before it decided Munchkin, the Central District of California decided Spitz Technologies Corp. v. Nobel Biocare USA LLC, in which the court excluded from a § 285 award fees attributable to the preparation of IPR petitions that were denied institution. In justifying the exclusion, the court stated that the PTAB proceedings were not “necessary” to, nor did they have any bearing on, the court’s ultimate conclusion of noninfringement.23 Using the same reasoning, the District of Colorado and the Southern and Northern Districts of Texas have also excluded fees related to IPRs on similar facts.24
3. The “Relevance” Standard
The District of Minnesota developed its own, anomalous standard. In M-I Drilling Fluids UK Ltd. v. Dynamic Air Inc., the defendant filed an IPR petition against the asserted patent, but ultimately prevailed on a noninfringement theory. When apportioning the defendant’s § 285 award, the court refused to include fees attributable to an IPR petition that was irrelevant to the successful noninfringement defense.25 The court adapted this relevance standard from a decade-old District of Oregon decision that limited attorneys’ fees (in purportedly any context) to those “expended in furtherance of successful claims, or of claims closely related to successful claims.”26
The But-For Standard
Two district courts—the Eastern District of Texas and the Central District of California—have relied on Supreme Court precedent to justify the award of attorneys’ fees attributable to PTAB proceedings. In Munchkin, the Central District of California turned to the Supreme Court’s “but-for” standard of Fox v. Vice27 to determine how to allot attorneys’ fees under § 285. In Fox, the Supreme Court considered 42 U.S.C. § 1988, a fee-shifting statute applicable in civil rights cases. Prior to Fox, the Court had interpreted § 1988 to allow awarding attorneys’ fees to defendants who prevailed in frivolous civil rights suits. The Fox Court contemplated how to apportion attorneys’ fees when only some of the plaintiff ’s civil rights claims are frivolous. It held that, under § 1988, a prevailing defendant “receives only the portion of his fees that he would not have paid but for the frivolous claim.”28
In 2017, the Supreme Court confirmed in Goodyear Tire & Rubber Co. v. Haeger that Fox’s but-for standard extends beyond the § 1988 context and into awards of attorneys’ fees promulgated under a court’s inherent authority to sanction abuses of the judicial processes.29 Months later, Magistrate Judge Roy S. Payne of the Eastern District of Texas invoked Goodyear in My Health, Inc. v. ALR Technologies, Inc. to justify applying the but-for standard in the § 285 context.30 In Munchkin, the Central District of California turned to the Supreme Court’s “but-for” standard of Fox v. Vice to determine how to allot attorneys’ fees under § 285.
Unlike the courts in Munchkin or PPG, the My Health court had not stayed the trial in favor of a post-grant proceeding. Rather, the court invalidated the asserted patent under 35 U.S.C. § 101 (an invalidity ground unavailable in an IPR) on a motion to dismiss. Nevertheless, the prevailing defendants requested attorneys’ fees for the IPR petition they prepared after being sued, but that was unresolved prior to the court’s invalidating the patent under § 101. Because Judge Payne was satisfied that the defendants “never would have sought IPR if they had not been sued for allegedly infringing the” asserted patent, he awarded them fees attributable to the IPR. Citing Goodyear’s but-for standard, the court stated that “all of the defendants’ reasonable expenses after the day My Health filed suit should be awarded.”31 In resolving the case on the threshold issue of subject-matter eligibility under § 101, Judge Payne had no occasion to stay the trial in favor of an IPR proceeding that prohibits invalidity challenges under § 101.
In resolving the case on the threshold issue of subject-matter eligibility under § 101, Judge Payne had no occasion to stay the trial in favor of an IPR proceeding that prohibits invalidity challenges under § 101. Thus, referring back to Lam and PPG, one could argue that the defendant’s filing of the IPR petition in My Health was not “substitutive” of the court’s work, and, in view of the court’s final judgment, was wholly “unnecessary” and “irrelevant.” But because the court adopted Goodyear’s but-for standard, even attorneys’ fees for work that was arguably unnecessary, irrelevant, and non-substitutive were nonetheless recoverable.
Though the Munchkin court was satisfied that the IPR had substituted for the work of the court, it also adopted My Health’s but-for standard and found it satisfied for the same reason provided by Judge Payne in My Health: because the prevailing defendant would not have expended fees to litigate an IPR but for the patentee’s infringement suit, those fees were recoverable under § 285.
To date, district courts have employed at least four different standards when determining whether to award attorneys’ fees from PTAB proceedings under § 285: 1. Substitution; 2. Necessity; 3. Relevance; and 4. But-for.
The first three standards have proven to be a hurdle for defendants in seeking attorneys’ fees for PTAB-related proceedings.32 By contrast, the but-for standard applied in My Health and Munchkin poses less of a challenge. As an example, in the Spitz case discussed above—where the Central District of California refused to include attorneys’ fees from denied IPR petitions because they were not “necessary” to the court’s final judgment of noninfringement33—it is reasonable to assume that the court there may have come to a different conclusion had it instead applied the but-for standard.
In summary, reasonable expenditures made by the defendant at any point after the plaintiff files its lawsuit appear to satisfy the but-for standard. In contrast, satisfaction of the three other standards depends upon events that occur after filing (e.g., whether the case was stayed, whether the IPR petitions were a substitute for litigation, etc.). But Munchkin’s reliance on two distinct standards—but-for and substitution34—illustrates the lack of consensus among federal district courts on which standard the law demands. Until the Federal Circuit provides guidance on the split between the four standards, prevailing defendants would do well to argue for the propriety of the but-for standard, as promulgated under Supreme Court precedent—Fox and Goodyear—and as modeled by My Health and Munchkin. The alternative standards—substitution, necessity, and relevance—appear to present a much higher bar to recovery.