Judge Rodney Gilstrap of the US District Court for the Eastern District of Texas is, by many measures, the busiest patent judge in the country. So when he awarded (0) $500,000 in attorney fees to Dell last month in what he called “the clearest example of an exceptional case” he’s seen, nobody doubted his seriousness.
Gilstrap’s ruling came at a time of uncertainty over legislative patent reform in general and changes to how attorney fees are awarded in particular.
Under the current patent statute (1), a trial court “in exceptional cases may award reasonable attorney fees to the prevailing party.” As I’ve previously explained in this space (2), the “exceptional case” standard, as one might expect, rarely results in attorney fee awards, unlike courts outside the US, which typically adopt a “loser pays” approach to inhibiting frivolous patent lawsuits.
Thus, some industry advocates and members of Congress — most prominently House Judiciary Committee Chairman Bob Goodlatte (R-VA) — have sought for years to shift the burden of proving attorney fees from the prevailing to the losing party. Specifically, in the Innovation Act Goodlatte originally introduced in 2013, an award of fees to the winning party would become the default, absent a showing by the losing party that its lawsuit was “substantially justified” or that other “special circumstances” warrant foregoing a fee award.
But as we’ve seen countless times, the Innovation Act ran aground in Congress not once (3) but twice (4), and the prospects for further progress are uncertain at best. Even the participants in AEI’s 2017 patent reform panel expressed skepticism (5) last month about attorney fee provisions.
In the meantime, the US Supreme Court intervened, ruling in two (6) key (7) 2014 opinions that lower courts had applied the “exceptional case” standard too narrowly. Instead, the Court held, the prevailing party in a patent suit no longer had to prove the case was exceptional by “clear and convincing evidence,” a higher burden than a simple preponderance of the evidence.
The Court also ruled that a case is exceptional if it “stands out from others with respect to the substantive strength of a party’s litigating position . . . or the unreasonable manner in which the case was litigated.” And, as predicted (8), the Supreme Court’s ruling has modestly impeded frivolous patent cases, as the prospect of paying fees has deterred would-be abusive litigants from filing suit.
Decisions such as Gilstrap’s have also served notice to would-be patent abusers that their shenanigans will no longer be tolerated. In the Texas case, Iris Connex, LLC v. Dell, a nonpracticing entity (sometimes called a “patent troll”) asserted that its patent covering a “multi-position reading head” was infringed by the cameras in Dell’s smartphones and tablets — a term Gilstrap interpreted to mean “physically moveable.”
The problem for the patent owner, though, was that Dell’s cameras were undisputedly fixed in place and therefore immovable. After entering summary judgment in favor of Dell on the ground that no reasonable jury could find that Dell’s cameras were “multi-position reading heads,” Gilstrap ordered further discovery into Iris Connex’s business practices and ultimately found something fairly extraordinary:
It became obvious that Iris Connex was not simply a non-practicing entity seeking to vindicate its patent rights—albeit with an exceptionally bad infringement case. Rather, as explained hereinafter, Iris Connex is the first level of two shell corporations which were intended to shield the real actor, Mr. Brian Yates, from personal liability. The Court is persuaded that Mr. Yates and those in active concert with him exploited the corporate form to operate largely in secret and to insulate the true party in interest from the risk associated with dubious infringement suits—that risk being fee shifting under [the exceptional case statute].
In other words, the court found that Iris Connex had gone to great lengths to manipulate the patent system to shield the actual party-in-interest from having to pay attorney fees.
In unusually piquant language, Gilstrap concluded that “this case crossed the Rubicon of exceptionality when the Court concluded that Iris Connex’s case was so weak from the outset that it lacked any real merit.” On that basis, and because of the patent owner’s corporate shell games, the court declared that it “will not look the other way as to Mr. Yates’ exceptional conduct while forthright litigants must come to court knowing they face the risk of fee shifting if their case is deemed exceptional.”
Gilstrap’s ruling met with approval from Dell, whose spokesperson called (9) the suit “an egregious case from its inception” and noted that “we are very pleased by the Court’s finding that this case is exceptional under the patent statute and for sanctioning those responsible for the misconduct.”
So even as Congress sits on the sidelines, the courts continue to do the hard work of thwarting patent abuse.