Judges: Lourie (author), Rader, Bryson (concurring-in-part in the opinion and concurring-in-part in the result)

[Appealed from S.D.N.Y., Judge Cote]

In Takeda Chemical Industries, Ltd. v. Mylan Laboratories, Inc., Nos. 07-1269, -1270 (Fed. Cir. Dec. 8, 2008), the Federal Circuit held that the district court did not clearly err in finding that the case was exceptional due to the misconduct of defendants Alphapharm Pty. Ltd. and Genpharm, Inc. (collectively “Alphapharm”), and Mylan Laboratories, Inc., Mylan Pharmaceuticals, Inc., and UDL Laboratories, Inc. (collectively “Mylan”), and did not abuse its discretion in awarding attorneys’ fees.

Plaintiffs Takeda Chemical Industries, Ltd. and Takeda Pharmaceuticals North America, Inc. (collectively “Takeda”) own U.S. Patent No. 4,687,777 (“the ’777 patent”), which covers the antidiabetic drug pioglitazone, which Takeda sells under the trade name ACTOS®. Generic drug companies Alphapharm and Mylan filed an ANDA seeking approval to produce generic pioglitazone. Alphapharm and Mylan made certifications under Paragraph IV that the ’777 patent was invalid for obviousness. Takeda then filed suit for infringement against Alphapharm and Mylan.

In a bench trial, the district court held the ’777 patent to be nonobvious and enforceable, and the Federal Circuit affirmed. Takeda then moved for an award of attorneys’ fees against both Mylan and Alphapharm on the theory that this was an exceptional case because Mylan and Alphapharm lacked a good-faith basis for their Paragraph IV letters and engaged in litigation misconduct. The district court ruled for Takeda and awarded $16.8 million, with Alphapharm to pay $5.4 million and Mylan to pay $11.4 million. Both defendants appealed.

On appeal, Alphapharm argued that its Paragraph IV letter was not baseless under structural obviousness law. First, it asserted that its letter did make out a prima facie case of obviousness, and that the letter need not detail why a skilled artisan would have identified a particular compound (“compound b”) as the lead compound. The Federal Circuit found, however, that apart from a brief reference to compound b in its Paragraph IV letter, Alphapharm failed to provide any reason for identifying that as the lead compound. Thus, Alphapharm did not make out a prima facie case of obviousness based on the structural similarity between compound b and pioglitazone.

The Federal Circuit also noted that the district court did not fault Alphapharm simply for changing its obviousness case at trial from that presented in the certification letter. The Federal Circuit affirmed the district court’s findings, which noted a series of shortcomings in the certification. The article relied upon by Alphapharm presented many impediments to the choice of compound b as a lead compound. And the “insidious” scientific errors in the letter refl ected a lack of due care or good faith by Alphapharm. Other assertions in the letter were dropped at trial not for tactical reasons, but because they were unsupportable.

Regarding Alphapharm’s litigation misconduct, the Federal Circuit affirmed the district court’s analysis by which it concluded there was overwhelming evidence of Alphapharm’s bad faith. Alphapharm had over two years to develop its obviousness arguments, yet it failed to explain why its certification was so flawed and why its obviousness arguments had such a “dramatic evolution.” Slip op. at 9. Furthermore, assertions by Alphapharm unrelated to the obviousness claim created confusion, wasted time, and increased the burden of litigation.

The Federal Circuit ruled that the Hatch-Waxman Act imposes a duty of care on an ANDA filer that, though more than a simple negligence standard, does not rise to a gross negligence standard. An ANDA filer fails to meet its duty when it files a baseless certification. The purpose of § 285 is to prevent gross injustice when a party demonstrates bad faith and litigation misconduct. The district court found Alphapharm’s filing to be baseless, and, moreover, found misconduct during litigation. The Federal Circuit concluded that, given the district court’s familiarity with the parties and the issues and its thorough analysis, it could not say that the district court committed clear error in finding this to be an exceptional case.

In its appeal, Mylan argued that the finding of an exceptional case under § 285 was mere conjecture unsupported by a clear and convincing showing by Takeda. Mylan noted that its original invalidity theory presented in its certification letter was never pursued, and therefore never tested in court. Accordingly, whether it was baseless would be speculative, and it should not be charged with bad faith for developing different defenses during discovery.

The Federal Circuit concluded, however, that Mylan’s certification was “even more baseless” than Alphapharm’s. Id. at 12. Mylan’s own designated Rule 30(b)(6) witness testified that no reason existed to choose compound 14 as a lead compound for an obviousness analysis, yet Mylan did so in its certification. The Federal Circuit thus affirmed the district court’s finding that Mylan’s certification letter was filed in bad faith and with no reasonable basis to claim the ’777 patent invalid, and that the claims Mylan offered as substitutes were similarly frivolous. Thus, the Court held that the district court, which was in the best position to evaluate Mylan’s strategy, did not commit clear error in finding litigation misconduct.

Alphapharm, Mylan, and, through an amicus brief, the Generic Pharmaceutical Association each argued that affirming the case as exceptional would have a chilling effect of deterring ANDA filers from presenting at trial their best defenses if they were not included in their certification letters. The Federal Circuit was not persuaded, noting that ANDA filers are required by statute to include a detailed statement of the factual and legal bases for an invalidity challenge, and that a well-supported filing should not raise the specter of an unjustified holding of an exceptional case.

With respect to the amount of the award, Alphapharm and Mylan argued that $16.8 million was excessive for a two-year litigation, and that additional sanctions of expert fees and expenses were unjustified because there was no evidence of fraud or abuse of the judicial process. Mylan further argued that there was no basis for allocating two-thirds of the award to Mylan.

The Federal Circuit affirmed the award, noting that while award of the total amount of a fee request is unusual, such a determination lies within the discretion of the district judge. The Court also affirmed the allocation because Mylan acted as the lead counsel for discovery of the obviousness claims and further added to the case’s complexity by its untimely assertion of an inequitable conduct claim. The majority opinion supported the award of expert fees under the district courts’ inherent powers because, although appellants’ conduct did not amount to fraud, courts may use sanctions where there is bad-faith conduct that cannot be otherwise reached by rule or statute.

Judge Bryson concurred with the majority that the district court did not abuse its discretion in determining the case to be exceptional and awarding Takeda attorneys’ fees. With respect to the award for expert fees, however, Judge Bryson concurred with the resulting award, but on a narrow ground. Judge Bryson noted that while district courts can grant expert fees in patent cases under their inherent authority, he cautioned that not every case qualifying as exceptional will also qualify for sanctions. Where the award of attorneys’ fees under § 285 and expert witness fees under the district court’s inherent authority were predicated on the same conduct, Judge Bryson stated that a court must offer a reasoned explanation for why attorneys’ fees and expenses under § 285 are not a sufficient sanction for the conduct in question. Here, while Judge Bryson questioned whether the district court’s explanation was sufficient, because the district court made clear that the amount of the overall award did not depend on the award of expert witness fees, Judge Bryson concurred in upholding the district court’s award to Takeda.