‘Exceptional’ Cases for Attorneys’ Fee Recovery Get More Clarity

The general rule in American litigation is that each party must pay its own attorneys’ fees. In patent litigation, a court can award attorneys’ fees to the prevailing party if it determines the case is “exceptional.” But even in exceptional cases, not all categories of attorneys’ fees are recoverable.

While defendants are always weary of frivolous litigation, having clearer boundaries of what is and isn’t an “exceptional” case and who may be a “prevailing party” under the law will help accused infringers recoup some litigation costs, and may deter parties from bringing unreasonable suits because of the potential risks of attorneys’ fees.

The US Court of Appeals for the Federal Circuit tackled this issue in Dragon Intellectual Property v. DISH Network, rejecting DISH’s bid to recoup $3.3 million in fees. The appeals court held accused patent infringers seeking attorneys’ fees under the patent law’s fee-shifting provision can’t recover fees incurred in a parallel inter partes review proceeding, nor can they recover fees from the patent owner’s counsel by holding them jointly and severally liable for an award.

This decision clarifies that attorneys’ fees incurred during an inter partes review proceeding aren’t recoverable under the patent law’s fee-shifting provision. As a result, accused infringers with a strong basis for prevailing on non-infringement or non-prior-art invalidity grounds may opt not to file petitions for inter partes review in the future.

Evaluating Exceptionality

The Federal Circuit, in the case handed down May 20, characterized arguments during inter partes review as a “voluntary” parallel proceeding before the Patent Trial and Appeal Board rather than a federal district court.

A district court, it said, was “particularly well-positioned to determine whether a case before it is exceptional” because the case is before it over a prolonged period.

If the patent law’s fee-shifting provision encompassed IPR proceedings before the PTAB, “district court judges would be tasked with evaluating the exceptionality of arguments, conduct, and behavior in a proceeding in which they had no involvement,” the Federal Circuit wrote.

The court also said the patent owner’s counsel couldn’t be held jointly and severally liable for the accused infringer’s attorneys’ fees under the patent law’s fee-shifting provision—especially when basing exceptionality on the patent owner’s “substantive litigation position and not on counsel’s manner of litigating.”

Supreme Court Influence

To put the Federal Court’s decision into context, it’s important to understand how previous Federal Circuit rulings, and US Supreme Court cases, have evaluated fee-shifting in the patent context.

The Supreme Court in 2014 defined an “exceptional” case 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 Federal Circuit has ruled that whether a case is “exceptional” depends on the totality of the circumstances. Factors that weigh in favor of exceptionality and an award of attorneys’ fees include inequitable conduct during patent prosecution, misconduct during litigation, vexatious or unjustified litigation, and frivolous suits.

A plaintiff is the prevailing party, the Supreme Court said in 2016, whenever the plaintiff achieves its primary objective of materially altering “the legal relationship between the parties.” The justices also said a defendant is the prevailing party whenever it has “rebuffed” the plaintiff’s primary objective and doesn’t have to “obtain a favorable judgment on the merits.”

Applying that 2016 opinion, the Federal Circuit held that the accused infringer in a patent case can be the prevailing party even without a substantive decision on the merits. For example, in 2018, it found that dismissing a patent owner’s case with prejudice for lack of standing is sufficient to confer “prevailing party” status on the accused infringer.

A year later, the Federal Circuit concluded that an accused infringer is deemed the prevailing party when there is a dismissal with prejudice for mootness because the patents at issue were invalidated, or, in this year’s ruling in Luv n’ Care v. Laurain, when there is a judgment of unclean hands based on egregious litigation misconduct.

However, the Federal Circuit in 2020 found that a dismissal without prejudice is insufficient to confer “prevailing party” status on the accused infringer.

Outlook

In general, an accused infringer can be declared a prevailing party without a substantive judgment on the merits. But the prevailing party can be awarded its attorneys’ fees only if the court determines the case is “exceptional.” And even in “exceptional” cases, whether to award attorneys’ fees is up to the sound discretion of the court.

Going forward, accused infringers with a strong basis for prevailing on non-infringement or non-prior-art invalidity grounds should consider whether initiating a parallel IPR proceeding makes economic sense, as Dragon Intellectual makes clear that attorneys’ fees incurred in such an IPR aren’t recoverable under the patent law’s fee-shifting provision.

The case is Dragon Intell. Prop. LLC v. DISH Network L.L.C., 2024 BL 171705, Fed. Cir., 2022-1621, 5/20/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jonathan Tuminaro is a director in Sterne Kessler’s trial and appellate and electronics practice groups.

Summer Associate Ashley Kim contributed to this article.