Will an award of attorneys’ fees curb US troll activity? – Lessons from Australia

By Philipp Orth

By Philipp Orth

The phenomenon of US patent trolls has generated considerable coverage around the world of intellectual property. Though debate remains as to the extent of the problem, it is certainly true that some US businesses in recent years have been faced with threats of legal action over patent infringement on questionable grounds, and have had to make the difficult choice between settling the claim or paying high legal costs in defending against it. Two recent decisions of the US Supreme Court may have made some progress toward preventing these threats in the future, and a comparison with the system in Australia may give some indication of the likely impact of these decisions.

Contact Paul Davis

For more information on intellectual property protection, contact Paul Davis.

In the two recent cases, Octane Fitness, LLC v. ICON Health & Fitness, Inc. and Highmark, Inc. v. Allcare Health Management System, Inc., the Supreme Court overturned the “unduly rigid” rules concerning the circumstances under which a court can award attorney fees to a successful party. This framework had previously been defined in a 2005 case, Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc..

In typical patent cases the American Rule applies; “each litigant pays his own attorney’s fees, win or lose . . . ”. However, §285 of the US Patent Act provides that “[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party”.

The definition of exceptional cases defined in Brooks Furniture was rigid and inflexible, requiring that “[a] case may be deemed exceptional” under §285 only in two limited circumstances: “when there has been some material inappropriate conduct,” or when the litigation is both “brought in subjective bad faith” and “objectively baseless”. To make those circumstances even more limited, Brooks Furniture also required that because “[t]here is a presumption that the assertion of infringement of a duly granted patent is made in good faith[,] . . . the underlying improper conduct and the characterization of the case as exceptional must be established by clear and convincing evidence.”

The recent Supreme Court decisions reject the Brooks Furniture framework as “unduly rigid and inconsistent with the text of §285”. The Supreme Court explains that an “exceptional” case, in accordance with its ordinary meaning, “is simply 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.” The Supreme Court has provided more flexibility to §285, instructing that “[d]istrict courts may determine whether a case is ‘exceptional’ in the case-by case exercise of their discretion, considering the totality of the circumstances.”

Going further, the Supreme Court held that “nothing in §285 justifies such a high standard of proof. Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.” Instead, the Supreme Court observed that “patent-infringement litigation has always been governed by a preponderance of the evidence standard,” and that standard is the standard “generally applicable in civil actions”. In general terms this means that the Supreme Court believe proving a case meets the “exceptional” requirement should not be overly onerous on the party and an assessment on this should be possible based, largely, upon evidence already provided to the courts or which is readily available.

Considering that a troll’s standard operating procedure is to threaten litigation and offer to settle for an amount that is typically less than what it would cost to successfully defend against an action for patent infringement, the spectre of having to pay the attorneys’ fees of a successful party may just be the light that turns the trolls to stone.

In assessing the likely success of this measure, it is helpful to make a comparison with the situation in Australia. In Australia, patent troll activity is rare. And that is likely due to several differences between US and Australian Patent Law.

In Australia, the Federal Court has jurisdiction to award costs in all proceedings. In patent cases an award of costs typically follows the decision, and the losing party normally pays the winning party’s reasonable attorney fees. Although reasonable attorney fees are typically less than the actual costs incurred by a winning party, such an award of costs is a significant risk that the average troll may not be willing to take.

Section 128 of the Australian Patents Act provides that a person who is threatened with infringement proceedings can apply to a court for:

  • a declaration that the threats are unjustifiable;
  • an injunction against the continuance of the threats; and
  • the recovery of any damages sustained by the applicant as a result of the threats.

A court will allow these applications if the threats are not proved to be justified. As the difference between a patent troll and a non-practicing entity legitimately monetising a patent is whether or not their claims are justified, this measure goes a long way toward preventing trolls.

Under Australian law, there is also no presumption of validity of a granted patent, making it easier to revoke a patent. Section 20(1) of the Patents Act provides that “[n]othing done under this Act or the PCT guarantees the granting of a patent, or that a patent is valid, in Australia or anywhere else”. By itself, this would not deter a troll, but in combination with the risk of paying the other party’s reasonable attorney fees, and the possibility of threats being dismissed at an early stage, this helps to level the playing field.

The newly modified US framework does not by any means replicate this Australian approach. Given the relatively large sums that patent trolls can secure by patent infringement actions in the US, it seems likely that not all threats will be deterred. However, comparison with the Australian system suggests that we can expect this new framework to reduce the number of frivolous claims being pursued, and give IP owners more confidence to defend their cases in court.