Since the 2014 Supreme Court decision in Octane Fitness LLC v. ICON Health & Fitness Inc., 134 S. Ct. 1749, made it easier for successful patent litigants to recoup attorney fees and costs, legislative attempts to further curb bad-faith litigation have largely stalled. As a result, much of the work in addressing bad-faith litigation has played out in the courts—and particularly in the U.S. District Court for the Eastern District of Texas. Because it remains the most popular patent venue, how the Eastern District of Texas has interpreted and applied the Octane Fitness standard is of particular import. As such, tracking that court’s decisions in the context of Octane Fitness provides insight into the still-developing post-Octane Fitness world.
Octane Fitness Lowered the Standard for Section 285
Section 285 of the Patent Act, 35 U.S.C.A. § 285, allows district courts to award attorney fees to a prevailing party in “exceptional cases.” The U.S. Court of Appeals for the Federal Circuit in Brooks Furniture Manufacturing Inc. v. Dutailier International Inc., 393 F.3d 1378 (2005), set the pre-Octane Fitness standard, defining an “exceptional case” as one in which a party engaged in material inappropriate conduct, or where the claim was both objectively baseless and brought in subjective bad faith. Under this standard, “exceptionality” needed to be shown by clear and convincing evidence. The Supreme Court in Octane Fitness rejected the Brooks Furniture test, finding that its high demands made recovery under Section 285 nearly impossible. Further, recognizing that the common law allows for an exception to the general rule against fee shifting in instances of disobedience, bad faith or oppressive acts, Octane Fitness also lowered the clear and convincing evidence standard to one of preponderance of the evidence. Now, an “exceptional case” is merely one that “stands out from others.”
Texas’ Eastern District Sees Increases
As expected, the Eastern District of Texas has seen a significant uptick in both number of Section 285 motions filed and the percentage of successful motions since Octane Fitness was decided. For example, Section 285 motions increased from three in 2012 to 30 in 2017.1 And where none were granted in the years leading up to Octane Fitness, almost a full one-third were successful in 2017.2
Iris Connex Sets Upper Boundary
In early 2017, U.S. District Judge J. Rodney Gilstrap gave insight as to how broadly the Eastern District of Texas could apply Octane Fitness’ lower standard for recovery. Iris Connex LLC v. Dell Inc., 235 F. Supp. 3d 826 (E.D. Tex. 2017), shows that the Eastern District of Texas will give teeth to Section 285.
Iris Connex sued Dell in November 2015. Dell immediately moved to dismiss, and Judge Gilstrap ordered early claim construction. At the claim construction hearing, the judge said Iris Connex advanced a “frivolous” claim construction, prompting Dell to ask that the case be found exceptional under Section 285 and that Iris Connex be sanctioned. In response, Iris Connex filed for bankruptcy and amended its initial corporate disclosure statement, which falsely indicated residency in Texas and omitted an interested parent company. Dell supplemented its request for fees to include not only Iris Connex but also the parent company, principals and attorneys, accusing all of them of scheming to file hundreds of sham patent suits through underfunded shell companies.3
Based on this conduct, the Texas District Court found the Iris Connex case exceptional under Section 285. Moreover, given the extremely troubling facts, the District Court not only found Iris Connex but also its parent company and principals liable. Thus, Iris Connex showed the potentially broad reach of Section 285 and created a new test for liability against nonparties in exceptional cases. Plainly, a nonparty can be found liable if that actor is responsible for conduct that makes the case exceptional, the actor is afforded due process and the decision is equitable. Because the conduct in Iris Connex went so far beyond exceptional, the decision offered little clarity as to the precise threshold that must be met to make a case “stand out.”
Conduct May Not Need to Rise to Iris Connex Level
While the Iris Connex case showed how the Eastern District of Texas may view exceptionality in the most extreme cases, other recent decisions from the same court demonstrate that the standard can be met in cases involving less absurd facts. The plaintiffs in both Opal Run LLC v. C&A Marketing Inc., No. 16-cv-24, 2017 WL 413163 (E.D. Tex. Nov. 29, 2017), and My Health Inc. v. ALR Technologies Inc., No. 16-cv-535, 2017 WL 1129904 (E.D. Tex. Dec. 19, 2017), sued a large number of defendants. The plaintiffs in each case sought settlement amounts indicating their cases were “nuisance” cases; they repeatedly attempted to ensure the defendants waived the right to obtain attorney fees; and they offered shaky legal arguments.
The Opal Run Case
The District Court found the Opal Run case exceptional because the plaintiff in that case sought an early settlement—to avoid a decision on the merits—and vigorously attempted to avoid exposure to attorney fees. For instance, Opal Run filed more than 20 lawsuits in one day, most of which it promptly settled for between $3,000 and $15,000. Moreover, in seeking these settlements, Opal Run maintained that it would dismiss the cases only if the defendants would agree to waive any request for attorney fees. This indicated to the District Court that Opal Run was more concerned with avoiding attorney fees than the merits of its claims.
Underscoring this point, the District Court noted that Opal Run served no written discovery and sought only one deposition, for which it did not issue a notice until a week before the end of discovery. Further, during claim construction, Opal Run argued that no terms required construction even though it knew that the District Court’s preliminary constructions would make a noninfringement judgment inevitable. Instead, Opal Run simply changed its theory of infringement after the claim construction hearing.
The court concluded that, though none of this conduct individually violated any specific rules, it is rare for a patent case to go to trial with so little litigation effort. Opal Run, according to the District Court, merely tried to outlast the defendants. The court said Opal Run acted unreasonably when it continued to litigate only to avoid a Section 285 motion.
The My Health Case
In My Health, the defendant moved for attorney fees after gaining dismissal on the ground that My Health’s patent was directed toward ineligible subject matter pursuant to Section 101 of the Patent Act, 35 U.S.C.A. § 101. While the District Court found the weakness in My Health’s Section 101 position was enough to deem the case exceptional, it also listed five factors that made the case stand out.
First, the Supreme Court’s decision in Alice Corp. Pty. Ltd. v. CLS Bank International, 134 S. Ct. 2347 (2014), which effectively expanded the definition of unpatentable abstract idea, made My Health’s positions under Section 101 demonstrably weak. My Health’s patent was directed to nothing more than mental steps and high-level compliance tracking, both of which were already deemed unpatentable by the courts. Thus, the timing of the lawsuit meant that a litigant should have known as much before filing. Moreover, the District Court said it would be a mistake to overemphasize the preemption of validity because My Health’s patent issued before Alice changed the way courts view abstract subject matter.
Second, My Health engaged in an extensive litigation campaign, working against the likelihood that it acted in good faith. My Health filed 31 lawsuits, prompting 11 declaratory judgment actions and five inter partes review proceedings. But no determination on the merits was reached until five years after the campaign started. The large number of lawsuits and merits challenges, coupled with a pattern of consistent settlements on the eve of merits determinations, supported the conclusion that My Health was filing nuisance suits.
Third, the District Court indicated that consistent settlements between $25,000 and $50,000 further indicated that these were nuisance suits. Since these amounts are far less than the amount needed to defend a patent suit, these relatively insignificant settlements ensured that the Section 101 issues with My Health’s patent were never evaluated and remained unexposed.
Fourth, My Health’s attorneys would contact defendants directly, even when they knew that parties were represented by counsel, which violated ethical rules.
Fifth and finally, My Health initially appealed the Eastern District of Texas’ Section 101 decision to the Federal Circuit but then moved to voluntarily dismiss the appeal on the day its appeal brief was due. The motion was granted based on My Health’s false claims, which included a claim that each party had agreed to dismiss the appeal and bear its own costs.
Though this pattern of conduct made the case stand out, the District Court found My Health’s weak Section 101 positions alone made the case exceptional. It ordered My Health to pay attorney fees to four defendants.
The District Court Has Remained Stingy
Even though conduct need not rise to the level of egregiousness displayed in the Iris Connex case to be found exceptional, the Eastern District of Texas still denied attorney fees by a 2-1 ratio in 2017. Thus, the District Court seems determined to remain true to the “exceptional case” requirement of Section 285, as it denied motions for attorney fees even in the face of conduct that may stand out to some.
Take, for example, 3rd Eye Surveillance LLC v. e-Watch Corp., No. 14-cv-725, opinion issued (E.D. Tex. July 13, 2017). After a jury held that U.S. Patent No. 7,323,980 was valid but not infringed, e-Watch moved for attorney fees after post-trial briefings showed that 3rd Eye did not have standing to sue. Even though the District Court found 3rd Eye did not own the substantive rights to the ’980 patent and found 3rd Eye had admitted as much in earlier litigation, it denied e-Watch’s motion for attorney fees.
While recognizing the “significant shortcomings” in 3rd Eye’s litigating position, the District Court was also quick to point out that it was inappropriate for e-Watch to raise the issue of standing for the first time shortly before it filed its motion for fees. Specifically, the District Court identified a date nearly a year before e-Watch moved for fees as the latest date that e-Watch would have been aware of the possible standing issue. In doing so, the District Court pointed out that the time and expense wasted by the parties was exceptional “in the sense that neither party at any point in the proceedings provided any true assistance to the court with respect to the issue of plaintiff’s standing to sue, let alone the myriad of other issues raised over the course of litigation.”
The District Court concluded that, in addition to not meeting the preponderance of the evidence standard laid out by Octane Fitness, awarding fees would give e-Watch an undeserved windfall. Moreover, the District Court admonished both parties for failing to litigate in a reasonable manner, underscoring that parties who plan to move for attorney fees under Section 285 should prepare to identify the basis for their claims as soon as possible.4
Since Octane Fitness
While the increase in filings and success rates is notable, over two-thirds of motions for attorney fees were still denied in 2017. Those cases that have been found exceptional tend to fall into two tiers. In the first tier are Iris Connex-level cases, where a litigant’s conduct has gone far beyond any acceptable behavior. The second tier involves more typical—but still unreasonable—conduct, such as the conduct displayed in the Opal Run and My Health cases. Truly incredible cases such as Iris Connex—effectively two or three standard deviations from the norm—allow for truly exceptional recovery, but that level of egregiousness is not necessary for an award of fees under Section 285. Cases such as My Health and Opal Run stand out too—even if less so than Iris Connex—and still warrant fee awards. Thus, the successful Section 285 motions in 2017 demonstrate that litigants need not show the Eastern District of Texas, which has seen everything, something it has never seen before to convince the court that a case is exceptional. Moreover, parties who notify their opponents and the District Court of any “exceptional” conduct or legal positions when they happen—as opposed to only after the case has concluded—will maximize their chances of success on Section 285 motions.