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The Federal Circuit has loosened the standard for recovering attorneys’ fees in patent infringement cases, making it easier for winning defendants to obtain their fees from plaintiffs.

The case is Kilopass Technology, Inc. v. Sidense Corp. (Fed. Cir. Dec. 26, 2013), 2013 U.S. App. LEXIS 25671. Kilopass and Sidense were competitors in the market for memory cells used in transistors. Kilopass obtained several patents on its technology. After reviewing a published patent application of Sidense for its memory cells, Kilopass embarked on an interesting course of conduct.

First, Kilopass engaged counsel to determine whether Sidense infringed Kilopass’ patents. Based on the product described in Sidense’s patent application, Kilopass’ counsel believed that there might be an infringement case, and sent Sidense a letter inviting Sidense to license Kilopass’ patents or explain why Sidense’s products did not infringe Kilopass’ patents. Sidense replied with a specific explanation of why its products did not infringe Kilopass’ patents. Sidense also offered to subject its products to a confidential infringement analysis by a third party expert to prove its position. Kilopass then obtained a diagram of Sidense’s product and provided it to Kilopass’ counsel.  Counsel then concluded that Sidense had designed around Kilopass’ patents and that its products probably did not literally infringe the patents. In response, Kilopass retained a second counsel to analyze infringement. The second counsel made a preliminary finding that Sidense’s products probably did not literally infringe the patents, but might infringe under the doctrine of equivalents, and said that further investigation was needed to confirm this. Kilopass did not conduct further investigation with this counsel, but instead engaged a third counsel to analyze infringement. Then, based primarily on Kilopass’ own engineer’s findings, Kilopass concluded that Sidense infringed under the doctrine of equivalents.

In 2010, Kilopass sued Sidense in the Northern District of California for patent infringement. Kilopass alleged claims for both literal infringement and infringement under the doctrine of equivalents. During the litigation, the district court admonished Kilopass for making claim construction arguments in the case that contradicted its arguments in a concurrent reexamination of the patent before the United States Patent and Trademark Office. The court also found that Kilopass had improperly attempted to assert different infringement contentions than it had disclosed to Sidense in discovery.

Sidense moved for summary judgment of noninfringement. The district court granted the motion. Kilopass appealed to the Federal Circuit Court of Appeals, who affirmed the district court’s decision. Sidense then moved for attorneys’ fees under 35 U.S.C. §285. The motion was denied on the grounds that Sidense had not shown by clear and convincing evidence that Kilopass had prosecuted its case in bad faith.  In denying the motion, the district court relied on its prior 2005 decision in Brooks Furniture Manufacturing v. Dutailer, Inc. (Fed. Cir. 2005) 393 F.3d 1378.

Sidense appealed to the Federal Circuit. The Court of Appeals held that the district court had not applied the correct legal standard, vacating and remanding the case.

The appellate court explained that an award of attorneys’ fees under 35 U.S.C. §285 requires two steps: (1) the prevailing party must show by clear and convincing evidence that the case is “exceptional;” and (2) the court must decide whether it is appropriate to award attorneys’ fees. The court discussed its Brooks Furniture decision. There, the court had held that a case could be found to be exceptional if there was inappropriate conduct by the losing party, such as willful infringement, or misconduct during the litigation, such as a violation of Rule 11. If there was no misconduct in the litigation, the court had held that fees could be awarded only if: (1) the case had been brought in subjective bad faith; and (2) the case was “objectively baseless.” In ruling on Sidense’s motion, the district court had applied this standard and found that Sidense had not proved that Kilopass had acted in subjective bad faith.

On appeal, Sidense argued that it had proved that Kilopass had acted in subjective bad faith or that, alternatively, the legal standard should be changed.

The appellate court first clarified that prior Federal Circuit cases that suggested that a defendant had to prove that a plaintiff had actual knowledge of the objective baselessness of its suit were dicta, and not the law.

“[S]ubjective bad faith only requires proof that the ‘lack of subjective foundation for the claim “as either known or so obvious that it should have been known” by the party asserting the claim’ [Citations omitted.]”

Id.  at *19. This finding was necessary to make the burden on a defendant seeking fees the same as that on a plaintiff seeking fees: that the other party acted willfully or recklessly.

Next, the court held that subjective bad faith need not be proved by direct evidence, but may be inferred from the objective baselessness of the case. Id.  at *23-25. The court stated “[l]ack of direct proof of subjective bad faith should not alone free a party from the threat of assessment of attorneys’ fees under §285…” Id. at *22. The court held that district courts should consider the totality of the circumstances, especially the objective merits of the case. Id. Because direct evidence of subjective bad faith is so rare, district courts should consider circumstantial evidence of bad faith, including objective evidence of baselessness, as well as factors such as failure to perform a proper pre-litigation investigation, vexatious litigation tactics, or an oppressive purpose. Id. at *24.

According to the court, at *23:

“The totality of the circumstances does include an evaluation of subjective good faith, but mostly as a negative. If a smoking gun is found, revealing that a patentee knew that he had no chance of winning a lawsuit, then subjective bad faith is easily shown. But one’s misguided belief, based on zealousness rather than reason, is simply not sufficient by itself to show that a case is not exceptional in light of objective evidence that a patentee has pressed meritless claims.”

The appellate court declined to adopt Sidense’s request that it eliminate the subjective bad faith prong of the standard for an exceptional case. However, the court emphasized that its new interpretation of subjective bad faith was not the “obstacle to fee shifting that the district court…believed.” Id.  at *33.

“[A] wide variety of proofs can provide the requisite showing of bad faith under § 285, which must be assessed in light of the totality of the circumstances. Objective baselessness alone can create a sufficient inference of bad faith to establish exceptionality under § 285, unless the circumstances as a whole show a lack of recklessness on the patentee’s part. [Citation omitted.] Thus, the retention of the subjective bad faith requirement may prove to have little effect on this case, as well as many that follow.” Id.

The court also considered, but chose not to alter, the moving party’s burden of proof from clear and convincing evidence to a preponderance of the evidence. Id. at *38. In addition, the court did not accept Sidense’s argument that the objectively baseless standard should be lowered.

The court remanded the case to the district court to determine whether Kilopass’ theories of infringement were objectively baseless, and, if so, whether the totality of the circumstances supported a finding of subjective bad faith. If both prongs were met, then the district court should determine, in its discretion, whether to award fees to Sidense.

This case is significant in that the standard for awarding attorneys’ fees to a successful defendant has been relaxed and the importance of the objective test of merit has been elevated. Subjective bad faith, although still required, has been loosened to allow inferences to be drawn from an objective analysis of the merits of the case. Patent infringement defendants should be encouraged, while plaintiffs should be careful in analyzing infringement and deciding to file suit.