Paying for Unreasonable Conduct – Attorney Fee Awards under § 285

The Federal Circuit recently reversed and remanded a district court’s denial of attorney’s fees to ADS after Rothschild sued ADS for infringement.¹ The Federal Circuit found that the lower court abused its discretion for (a) failing to consider Rothschild’s willful ignorance of the prior art; (b) misjudging Rothschild’s conduct in other litigation and (c) improperly conflating Rule 11 with 35 USC § 285.

Rothschild, sued ADS for infringement of claim 1 of Rothschild’s patent directed to “[a] system and method for creating a personalized consumer product.”² In response, ADS asserted that the patent covers ineligible subject matter under 35 USC § 101, and that claim 1 is anticipated by prior art under 35 USC § 102(a). ADS then offered to settle if Rothschild its attorney fees, which Rothschild refused. ADS sent Rothschild a Safe Harbor Notice under Federal Rule of Civil Procedure 11(c)(2), which included a proposed motion for sanctions and allegedly anticipatory prior art. Rothschild moved to dismiss its action, which was opposed by ADS, who also filed a cross-motion for attorney fees pursuant to 35 USC § 285 (2012).³ ADS argued that Rothschild’s lawsuit was “objectively unreasonable because Rothschild knew or should have known that claim 1 covers patent-ineligible subject matter under § 101 and is anticipated by prior art under § 102(a),”⁴ and that the suit was only filed to “exploit the high cost to defend complex litigation to extract nuisance value settlements from various defendants.”⁵ With the cross-motion, ADS cited several prior art references.

The DC granted Rothschild’s motion to dismiss the action and denied ADS’s cross-motion for attorney fees, finding that “Rothschild did not engage in conduct sufficient to make the action ‘exceptional’ under § 285,”⁶ also noting that “Rothschild’s decision to voluntarily withdraw its Complaint within the safe harbor period is the type of reasonable conduct Rule 11 is designed to encourage.”⁷

In reversing the DC, the Federal Circuit explained that an “exceptional” case is “one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated,”⁸ and that “[a]n exceptional case determination must find support in preponderance of the evidence.”⁹

The Court found that the DC abused its discretion for three reasons. First, the DC failed to consider Rothschild’s willful ignorance of the prior art. In the affidavits submitted by Rothschild, both the counsel and founder stated that they had not considered the prior art asserted by ADS in the cross-motion, yet they believed in “good faith” that the ‘090 patent was valid, and that ADS’s motion should be found meritless. The Court stated that it was unclear how both good faith in validity of the patent and the merit of ADS’s cross-motion could be established without analyzing the prior art. Thus, the Court noted that the statements from Rothschild on the validity of the patent are “unsupported” and “have no evidentiary value.”¹⁰

Second, the Court also found that the DC misjudged Rothschild’s conduct in other litigations. Rothschild had filed at least 50 other lawsuits against various parties for infringement of the ‘090 patent, which ADS asserted to be “vexatious litigation.”¹¹ The court explained that the DC was wrong to reject this contention because it relied on statements from Rothschild that have no evidentiary value, as addressed in the first part of the decision. Since there is no evidence disputing Rothschild’s vexatious litigations, the Court found an affirmative exceptional case under § 285.

Lastly, the Court found that the DC improperly conflated Rule 11 with § 285. The DC stated that the awarding of attorney fees “contravenes the aims of Rule 11” and that Rothschild’s voluntary withdrawal of its complaint “is the type of reasonable conduct that Rule 11 is designed to encourage.”¹² The Court concluded that whether “a party avoids or engages in sanctionable conduct under Rule 11(b) is not the appropriate benchmark,” ¹³ but rather whether the party engaged in unreasonable conduct that would be considered exceptional.

In concurrence, Judge Mayer agreed with the Court’s opinion and wrote separately that the infringement complaint filed by Rothschild was “frivolous on its face”¹⁴ because the broad view that Rothschild took on the scope of its patent was “risible rather than simply unreasonable.”¹⁵ Further, Judge Mayer stated that patent eligibility under § 101 is a relative concern of “how much future innovation is foreclosed relative to the contribution of the inventor,” and that Rothschild’s patent is ineligible because “its potential to disrupt future innovation is staggering while its technological contribution is non-existent.”¹⁶ Thus, attorney awards should have been awarded under § 285 because the this was “a case presenting exceptionally meritless claims”¹⁷ and “never should have been filed.”¹⁸

Thus, evidence of frivolous claims and vexatious litigation include failure to consider relevant prior art and repeated filing of infringement actions. Arguments of good faith are not considered concrete evidence of reasonableness.