Loser Pays in Patent Litigation?
With the America Invents Act and its overhaul of U.S. patent system just barely behind us, Congress has introduced eleven bills for further reform this year. Each of these bills addresses the abusive litigation tactics of certain patent plaintiffs—the so-called “patent troll problem”—to some degree, though the bills consistently fail to adequately define who is or is not among the trolls. Highlighting the apparent urgency of the problem (or so goes the optimistic story), the U.S. House of Representatives passed its most comprehensive patent reform bill, Rep. Goodlatte’s Innovation Act (H.R. 3309), in a 325-91 vote merely six weeks after the bill’s introduction. Though the bill provides everything from discovery stays to heightened pleading requirements, its fee-shifting provisions have proven the most controversial (excepting expanded Covered Business Method Review, which was ultimately dropped from the bill). While the bill passed by a landslide, an amendment to remove the fee shifting provisions only lost by a 14 vote margin.
The bill’s fee-shifting provisions would modify 35 U.S.C. § 285 such that the losing party in patent litigation would have to pay the prevailing party’s attorneys’ fees unless the losing party’s positions were objectively reasonable. . Currently, the court may award attorney’s fees to the prevailing party only in exceptional cases. For defendants this requires showing both that plaintiffs filed their suit in bad faith and that the suit is objectively baseless.
In essence, the provisions would be substituting the “British rule”—where the losing party pays the attorneys’ fees of both parties—for each party bearing its own costs under the “American rule.” As Professor Samuel Issacharoff explained in a 2008 panel on the two systems, the introduction of a loser-pays system radically shifts the incentive structure in litigation. For example, the American rule provides no financial incentive for pursuing cases where the expected award is less than the expected litigation costs. Given litigation’s exorbitant costs, this prevents plaintiffs from bringing many suits, meritless or otherwise. Further, this value barrier limits how much a party will be willing to spend on litigation so as to avoid negative-value cases. The British rule substantially disincentivizes such self-restraint, as any costs are discounted by the probability that they will fall to the opposing party, and even low-value cases will be value-positive given a sure enough case.
In fact, such a cost-increasing shift seems rather contrary to most of the other reform provisions, such as staying discovery until claim construction, aimed at decreasing the costs of patent litigation. And if a loser pays system were generally preferable, treating patent litigation so very different from the main of civil litigation calls for considerable policy justifications. The patent trolls provide some basis: their abusive litigation tactics ultimately stem form their miniscule litigation costs relative to defendants. They can often retain counsel on contingency bases and, as entities that don’t actually practice the asserted patents, they need not produce much any discovery. But the fee-shifting provisions aren’t limited to such bad actors; they apply equally to all patent litigants. And, given the amount at stake in the average patent litigation, you can bet that every prevailing party will argue that their opponent’s positions weren’t reasonable. Thus, fee-shifting fears will linger behind any patent litigation between small businesses and larger corporations, with even a small probability of taking on the larger corporations massive attorneys’ fees militating towards settlement and given the greater entity further leverage in negotiation.
Regardless of whether fee shifting is an appropriate response to trolls, Congress should perhaps hold off on deciding the issue for the moment. The Federal Circuit just eased the requirements for fee shifting in Kilopass Tech v. Sidense Corp., and the Supreme Court is set to hear two pending cases, Octane Fitness, LLC v. Icon Health & Fitness, Inc. and Highmark Inc. v. Allcare Health Management Systems, Inc., on the interpretation of 35 U.S.C. § 285 in February, addressing both the Federal Circuit’s standard for determining whether a patent case is “exceptional” and the standard appellate courts should using for reviewing such awards. Though the Supreme Court rarely clarifies patent law, it’s at least worth waiting to see if their interpretation will yield a more equitable solution than loser-pays.
Cort Welch is a J.D. candidate, ’15, at the NYU School of Law.