Judges: Newman (dissenting), Mayer, Lourie (author)

[Appealed from N.D. Ill., Judge Darrah]

In Nilssen v. Osram Sylvania, Inc., Nos. 07-1198, -1348 (Fed. Cir. June 17, 2008), the Court affirmed the district court’s decision to (1) grant approximately $6 million in costs and attorneys’ fees to Osram Sylvania, Inc. (“Osram”) pursuant to 35 U.S.C. § 285, and (2) deny Nilssen’s motion for expert witness fees pursuant to Fed. R. Civ. P. 26(b)(4)(C)(i).

Nilssen is the owner and principal inventor of over 200 patents, many of which concern fluorescent light bulbs and ballasts used in combination with those bulbs. In August 2000, Nilssen brought an action alleging that certain light bulbs and ballasts made and sold by Osram infringed twenty-six of Nilssen’s patents. Osram denied the allegations and filed a counterclaim alleging patent invalidity. Following a bench trial, the district court held the patents-in-suit unenforceable due to inequitable conduct committed by Nilssen based on misclaiming small entity status, improperly paying small entity maintenance fees, failing to disclose related litigation, misclaiming the priority of earlier filing dates, withholding material prior art, and submitting misleading affidavits to the PTO, which was affirmed on appeal. Nilssen v. Osram Sylvania, Inc., 440 F. Supp. 2d 884 (N.D. Ill. 2006), aff’d, 504 F.3d 1223 (Fed. Cir. 2007).

After trial, Osram filed a motion for reimbursement of costs and attorneys’ fees, and Nilssen responded with a motion to recover expert deposition fees. The district court granted Osram’s costs and attorneys’ fees after finding that the case was exceptional under § 285. The district court noted three reasons for finding exceptionality: (i) Nilssen’s inequitable conduct, (ii) the frivolous nature of the lawsuit, and (iii) Nilssen’s litigation misconduct. With respect to frivolousness, the district court noted Nilssen “knew or should have known” that the suit was baseless. In support of the finding of litigation misconduct, the district court cited Nilssen’s (1) refusal to allow a deposition of Nilssen’s nephew and lone officer of assignee of the patents-in-suit in the United States; (2) late withdrawal of fifteen of the patents-in-suit, just months before the start of trial; (3) belatedly produced documents, toward the end of trial, which Osram had requested earlier; (4) last-minute waiver of the attorney-client privilege during trial without providing notice to Osram, which forced Osram to conduct a new deposition of Nilssen’s attorney during trial; and (5) providing incorrect responses to interrogatories and never filing a formal correction, followed by an attempt to exclude them for impeachment purposes based on the fact that they were unsigned. Additionally, the district court denied Nilssen’s motion seeking recovery of expert deposition fees, holding that awarding those fees to Nilssen would result in “manifest injustice” due to Nilssen’s initial filing of the lawsuit based on twenty-six patents and subsequent withdrawal of fifteen of the patents and Nilssen’s inequitable conduct before the PTO.

On appeal, Nilssen argued that the district court clearly erred in finding the case exceptional and abused its discretion in awarding attorneys’ fees. With respect to exceptionality, Nilssen argued that a finding of inequitable conduct is an insufficient ground for a finding of exceptionality and that conduct must be “egregious,” i.e., fraudulent and not benign, to qualify as exceptional. Nilssen claimed that his conduct did not rise to the level of egregiousness to justify attorneys’ fees. Furthermore, Nilssen argued that the district court’s findings of frivolousness and litigation misconduct were clearly erroneous. Finally, Nilssen disagreed with the district court’s conclusion that the attorney fee award was necessary to prevent a “gross injustice,” which Nilssen reasoned was required for fee-shifting under § 285.

In response, Osram noted that the district court’s exceptional case decision relied on three separate grounds listed above. Osram argued that there was overwhelming evidence supporting all three grounds such that the district court did not clearly err. Moreover, Osram argued that after finding the case exceptional, the district court was within its discretion to award Osram its fees as it would have been grossly unjust not to do so in light of Nilssen’s conduct.

The Court agreed with Nilssen that there is no per se rule of exceptionality in cases involving inequitable conduct. However, the Court stressed that the lack of such a rule did not mean that inequitable conduct was insufficient to support a finding of exceptionality as inequitable conduct “may constitute a basis for an award of attorney fees under . . . § 285.” Slip op. at 9 (citing A.B. Chance Co. v. RTE Corp., 854 F.2d 1307, 1312 (Fed. Cir. 1988)). Moreover, the Court rejected Nilssen’s argument that exceptionality required a showing of fraud, concluding that there was no case law or statutory authority supporting Nilssen’s distinction between inequitable conduct that is somehow benign and inequitable conduct that is otherwise. In fact, the Court stated, “[I]t is a contradiction to call inequitable conduct benign.” Id.

The Court noted that, even if it were to agree with Nilssen that his actions were less egregious than other actions more typical of inequitable conduct holdings, the Court was faced with more than inequitable conduct. Rejecting Nilssen’s contention that the acts the district court called litigation misconduct were no more than oversight of legal formalities or permissibly rough litigation tactics, the Court concluded that instances considered by the district court were context-specific, and that the district court found that, taken in context, they amounted to litigation misconduct. Noting that the district court dealt with this case and parties for nearly six years, the Court concluded that the district court did not clearly err in finding the case exceptional.

With respect to Nilssen’s request for its expert fees, the Court noted that under Rule 26(b)(4)(C)(i), a court, unless “manifest injustice” would result, shall require that the party seeking discovery pay the expert a reasonable fee for the time spent in responding to discovery. On appeal of the district court’s decision to apply the “manifest injustice” exception, Nilssen argued that the district court misinterpreted the term “manifest injustice,” reasoning that the exception was limited to cases where a party was indigent or otherwise unable to pay the fee award. The Court rejected this argument, agreeing with Osram that the term should be given its plain and ordinary meaning: “an outcome that is plainly and obviously unjust.” Id. at 13. In support, the Court looked to the 1983 Amendment Advisory Committee Notes where the committee found that the term was sufficiently familiar to be a useful guide for courts. As such, since there was nothing in the familiar understanding of the term to suggest that it applied only to indigent parties, the Court affirmed the district court’s denial of Nilssen’s request for expert fees.

Judge Newman dissented, concluding that the majority departed from precedent in holding that the nature of the grounds on which inequitable conduct was found are not relevant to the attorney fee determination under § 285. Judge Newman stressed that it is always appropriate and necessary to consider the nature of the conduct in reviewing an attorney fee award and to limit such award to major infractions, as statute and precedent require. Noting that the Court observed in its affirmance of the inequitable conduct case that Nilssen’s actions were not unreasonable as such and “may have been an oversight,” Judge Newman stated that it was now inappropriate to recharacterize Nilssen’s conduct as “litigation misconduct.” Newman Dissent at 7 (citing Nilssen, 501 F.3d at 1223). With no evidence or charge of bad faith or prejudice, Judge Newman stressed that the majority’s decision enlarged the scope of “exceptional case” to include less than egregious aspects of patent prosecution and litigation practice.