In a rare reversal, the U.S. Court of Appeals for the Federal Circuit held that a district court abused its discretion in denying attorneys’ fees and failing to find a patent owner’s conduct to be “exceptional” under 35 U.S.C. § 285. Rothschild Connected Devices Innovations, LLC v. Guardian Prot. Servs., Inc., No. 2016-2521 (Fed. Cir. June 5, 2017).

Rothschild Connected Devices Innovations, LLC (“Rothschild”) sued ADS Security, LP (“ADS”) and numerous other parties for infringement of U.S. Patent No. 8,788,090 (“the ’090 Patent”), directed to a system that “enable[s] users to control mix parameters” in personalizing a consumer product, like perfume or a beverage. ADS sent Rothschild an email alleging that the patent was anticipated by prior art and covered patent-ineligible subject matter, and offered to settle the case if Rothschild covered $43,330 in ADS’s attorneys’ fees and costs. Rothschild rejected the offer.

ADS subsequently sent Rothschild a “Safe Harbor Notice” pursuant to Rule 11(c)(2) to give Rothschild 21 days to withdraw its pleadings before ADS would move for sanctions under Rule 11(b). In light of this notice, Rothschild moved to dismiss its action, and ADS filed a cross-motion for attorneys’ fees under § 285. The district court denied ADS’s cross-motion for fees, finding that Rothschild’s decision to voluntarily withdraw was the “type of reasonable conduct Rule 11 is designed to encourage.”

On appeal, ADS alleged that (1) Rothschild was objectively unreasonable in filing suit on a patent that covered patent-ineligible subject matter and was anticipated by the prior art; (2) the district court failed to consider Rothschild’s “willful ignorance of prior art”; (3) Rothschild brought suit solely to extract a nuisance payment; and (4) the district court improperly conflated sanctions under Rule 11 and relief under § 285. The Federal Circuit credited the latter three allegations and held that the district court had abused its discretion in failing to find an exceptional case. Accordingly, the Federal Circuit did not address the first allegation that Rothschild’s litigating position, with respect to the validity of its patent, was weak.

The Federal Circuit acknowledged the U.S. Supreme Court’s guidance in Octane Fitness, LLC v. Icon Health & Fitness, Inc., 134 S. Ct. 1749, 1756 (2014), that exceptional cases can be distinguished on the basis of the substantive strength of a party’s litigating position or the unreasonable manner in which the case was litigated, and that such determination is a case-by-case exercise.

With respect to the analysis at hand, the Federal Circuit noted that neither Rothschild’s counsel nor its founder was able to support their declaration statements, submitted in response to ADS’s fees motion, that they had conducted a pre-suit investigation of the prior art and ADS’s accused products. Rothschild provided no examples of any publicly available information it purportedly reviewed. Moreover, the Federal Circuit found “undisputed evidence” of Rothschild’s vexatious litigation in its filing of 58 cases asserting the ’090 patent against a variety of technologies, most of which were asserted to have been settled for significantly below the average cost of defense. Finally, the Federal Circuit found the district court had erred by stating that awarding fees under § 285 would contravene the purposes of Rule 11’s safe-harbor, and explained that whether conduct was sanctionable under Rule 11 is not the “benchmark” for fees under §285. The Federal Circuit remanded for additional proceedings consistent with its opinion, including the award of costs to ADS.

What This Means for You

This case underscores the U.S. Supreme Court’s guidance in Octane Fitness that a determination of exceptional litigation warranting the award of attorneys’ fees is a case-by-case inquiry. A patentee filing an allegation of infringement should be able to demonstrate that it has conducted sufficient pre-suit investigation of the prior art and the accused products. Moreover, a patentee’s pattern of repeated filings under the same claim, particularly against diverse technologies, may predispose the court to find evidence of vexatious litigation. Additionally, this case highlights the distinction between cases that warrant sanctions under Rule 11 from cases that warrant an award of attorneys’ fees under § 285, in particular, that actions undertaken during litigation need not be sanctionable to be exceptional.