The following was issued by Brian O’Shaughnessy, Regional Vice President, USA for the Licensing Executives Society (USA and Canada), Inc.

The debate over patent litigation abuse, and its effect on innovation and our economy, continues to rage. Various interests, and now members of Congress, argue that immediate action in the form of legislation is needed. Those intimately involved in the daily administration of our patent system, however, urge caution, saying that focused, incremental approaches are more suited to solving the problem, and will do so at less risk to our economy. Now, in Kilopass Technology, Inc. v. Sidense Corp., the U.S. Court of Appeals for the Federal Circuit has weighed in, demonstrating that courts do indeed have the authority and the will to combat litigation abuse.

The final implementation of the America Invents Act (AIA) is now less than a year old. The AIA effected the most sweeping change in US patent law in decades. Given the changes contemplated, it is not surprising that legislation took over seven years to wind its way through Congress. Despite all the informed input and consensus-building over those seven years, many of its provisions remain controversial.

One would expect a certain amount of patent fatigue prevailing on Capitol Hill. Not so. Now we hear the din of a putative rise in patent litigation wrought by “patent trolls” as threatening our economy and stalling innovation. Some members of Congress and certain special interests urge that still more patent legislation is immediately needed. In the last year alone, the two houses of Congress crafted at least six different bills styled as anti-troll legislation, and offered innumerable amendments to those under consideration.

Recently, the House passed H.R. 3309, with lightning speed despite calls from judges, federal agencies (e.g., FTC), and two former USPTO directors, all urging caution, further amendment, and additional investigation and debate. The Senate is now considering a companion bill, S. 1720, and seems bent on similar fast action. The speed with which those bills and amendments have moved through the legislative process has wrought disbelief and consternation throughout the innovation economy. The implications of a legislative fix are myriad and complex, and the repercussions for our economy and our role as world leader in innovation will be profound.

The Federal Circuit has now shown that courts have the wherewithal and the inclination to combat litigation abuse. The incremental approach to reform on a case by case basis by learned judges witnessing the acts of litigants firsthand offers an effective solution with greater predictability and less risk to our economy.

On December 26, the Federal Circuit decided Kilopass Technology, Inc. v. Sidense Corp. The holding in this case makes it easier for an unjustly accused patent defendant to recover its attorneys’ fees. This ups the ante on patent owners who fail in their pre-suit due diligence or deliberately bring patent suits on dubious grounds.

Before bringing suit, Kilopass had sought an opinion of counsel that Sidense infringed its patent, but that opinion was based on a product disclosed within a Sidense patent, not the accused product itself. Kilopass later learned that the accused product differed from that in the Sidense patent. Kilopass then sought an opinion of a second counsel, which, at Kilopass’s direction, was never concluded. Kilopass then hired a third-party to reverse engineer the Sidense product, and it concluded from an “engineer’s perspective” that there was infringement. Kilopass thus had no opinion of competent counsel as an objective foundation for its claim of infringement.

Ultimately, the district court granted summary judgment in favor of Sidense on non-infringement. Sidense then moved for attorneys’ fees urging that Kilopass lacked a sound basis for bringing the suit. The district court denied the motion for fees.

The Federal Circuit found the district court’s application of the test for fees insufficient and unduly rigid, and vacated and remanded the case for further consideration.

The Federal Circuit noted the two-part test for awarding attorneys’ fees under § 285. It first requires determining “whether the prevailing party has proved by clear and convincing evidence … that the case is ‘exceptional.’” If so, the court “must then determine whether an award of attorneys’ fees is appropriate.” “Absent misconduct in the litigation or in securing the patent, sanctions may be imposed against the patentee only if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”

The panel held the district court erred in requiring too great a showing of subjective bad faith, and in its unduly narrow view of the proof that can satisfy the subjective prong of the § 285 analysis. The court clarified the standard saying that “subjective bad faith only requires proof that the ‘lack of objective foundation for [the patentee’s] claim ‘was either known or so obvious that it should have been known’ to the party asserting the claim.’”

The Federal Circuit analogized to Seagate and its progeny. “Like a plaintiff seeking to recover attorneys’ fees under § 285 based on alleged willful infringement, a defendant need only prove reckless conduct to satisfy the subjective component of the § 285 analysis.” By clarifying the standard for sanctions under § 285, the two cases foster an efficient free market that respects intellectual property rights while facilitating entry of new products. Seagate relaxed the due diligence required to avoid sanctions for willful infringement. Kilopass lowered the burden to prove objectively baseless litigation, and thereby increased the due diligence required to assert infringement. Together, they insulate the market from patent overreach, while nonetheless encouraging responsible conduct on both sides.

Finally, the panel’s decision is significant for what the panel chose not to do. The panel favorably acknowledged Sidense’s arguments for removing the subjective element altogether, and eliminating the higher “clear and convincing” burden of proof; however, it also acknowledged that, sitting as a panel, it was constrained to abide by the court’s precedent. Chief Judge Rader concurred with particularly telling commentary (“I welcome and join the court’s thoughtful analysis, legal scholarship, and improvement in the application of our fee-shifting law. I also endorse the changes proposed by Sidense that objective baselessness alone should be sufficient for an award of attorney’s fees, and that proof by a preponderance of the evidence should suffice.”). While the legal significance of this commentary is quite limited, it is nonetheless a telling indication that the court’s fee-shifting precedent is poised for still further change.

What Now?

For private litigants, there are several lessons to be learned. Patent owners bringing suit must be able to establish an objective foundation for a claim of patent infringement. The best means for doing so is a thorough, complete and competent opinion from outside counsel rendered prior to bringing suit. The opinion should address the accused product, per se, and set forth an objective, well-reasoned basis for the claim of infringement. An opinion by other than the litigation counsel would likely be strong evidence of an objective foundation for the litigation.

For those defending themselves against a claim of infringement, act quickly to explore the patentee’s basis for bringing suit. The absence of an objective basis might support dismissal, and an award of attorneys’ fees. The key inquiry is not whether the patentee can establish an objective basis after filing the complaint, but whether the patentee conducted adequate investigation prior to bringing suit.

On the public policy front, there is good cause for legislators to pause, weigh their actions, and re-assess the need for legislation. Targeted, incremental reform specifically addressing the acts of specific, culpable litigants offers an effective fix without compromising, or further complicating, our patent system as a whole. Our patent system is the most effective economic engine known to man. Prudence dictates that we tinker with it cautiously.

Brian O’Shaughnessy is Regional Vice President, USA for the Licensing Executives Society (USA and Canada), Inc., and a shareholder in the Washington DC office of the law firm RatnerPrestia. The views expressed herein are not necessarily those of RatnerPrestia, its shareholders, or its clients.