By James Juo.

At the end of patent litigation, a district court may award reasonable attorneys' fees to the prevailing party in “exceptional cases.” 35 U.S.C. § 285. If the district court find the case to be “exceptional,” then the district court exercises its discretion to determine whether to award attorney fees based on the “totality of the circumstances.” If appealed, the district court's factual and equitable determinations are given deference and only overturned based upon an abuse of discretion. The appellate court “must give great deference to the district court's exercise of discretion in awarding fees,” see Highmark Inc. v. Allcare Health Mgmt. Sys., Inc., 572 U.S. 559, 564 (2014); and that the abuse-of-discretion standard requires the appellant to show that the district court made “a clear error of judgment in weighing relevant factors or in basing its decision on an error of law or on clearly erroneous factual findings,” see Bayer CropScience AG v. Dow AgroSciences LLC, 851 F.3d 1302, 1306 (Fed. Cir. 2017) (quoting Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 150 F.3d 1374, 1377 (Fed. Cir. 1998)).

An “exceptional” case under § 285 is “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.” Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545, 554 (2014). The party seeking fees must prove that the case is exceptional by a preponderance of the evidence, which the district court determinates on a case-by-case basis considering the totality of the circumstances. Id.

In Energy Heating, LLC v. Heat On-the-Fly, LLC, No. 20-2038 (Fed. Cir. Oct. 14, 2021), the court previously had held that U.S. Patent No. 8,171,993 (owned by Heat On-The-Fly or “HOTF” for short) was unenforceable due to inequitable conduct because the HOTF had used the invention commercially more than one year prior to the patent filing date, but did not disclose those nearly $2 million dollars of commercial uses and sales to the U.S. Patent and Trademark Office (“USPTO”) during prosecution of the patent application. This inequitable conduct finding was upheld in a prior appeal, and was the law of the case. See Energy Heating, LLC v. Heat On-The-Fly, LLC, 889 F.3d 1291, 1308 (Fed. Cir. 2018). In that prior appeal, the Federal Circuit also vacated the portion of the judgment denying attorneys' fees on the basis that this is not an exceptional case under § 285, and remanded the case to the district court for reconsideration to provide further explanation or reconciliation of the court's reasoning with regard to its finding of inequitable conduct.

On remand, the district court then awarded attorney fees to the accused infringer (Energy Heating) because the the number of undisclosed prior sales and the amounts HOTF received from those prior sales constitute “affirmative egregious conduct” and HOTF pursued claims of infringement “despite [its] knowledge that its patent was invalid” and without any apparent attempt to minimize litigation costs. On appeal, the Federal Circuit affirmed the district court again.

On appeal, HOTF raised three arguments, namely that the district court ignored a jury verdict of no “deceit” with respect to a separate counterclaim under North Dakota law, that the district court had failed to address factors such as a lack of specific litigation misconduct by HOTF, and that the district court had improperly viewed an inequitable conduct finding as mandating a finding of exceptionality.

First, the issue of inequitable conduct was tried to the district court, not the jury; so the jury's separate finding of no tort of “deceit” under North Dakota state law “simply has no bearing on inequitable conduct” under federal patent law.

Second, the Federal Circuit also held that the district court had provided ample support for its conclusion that HOTF's case was “substantively weak”—for example, that HOTF knew “its patent was invalid” and “no reasonable person could expect to prevail on claims of the patent's validity.” The Federal Circuit also agreed with the district court that the USPTO's subsequent issuance of continuation patents after HOTF had disclosed the prior commercial activity did not alter the finding of inequitable conduct that had already been affirmed in the prior appeal.[1] Furthermore, the district court was not required to affirmatively weigh HOTF's purported lack of litigation misconduct because “while the ‘manner' or ‘broader conduct' of litigation is relevant under § 285, the absence of litigation misconduct is not separately of mandatory weight.” Here, the district court properly considered the totality of the circumstances, including that “HOTF litigated the case in an unreasonable manner by persisting in its positions.” The Federal Circuit held there was “no abuse of discretion in the district court's apparent refusal to credit HOTF for not further engaging in litigation misconduct.”

Third, although the district court commented that “it appears other courts have universally” found “exceptionality if inequitable conduct is found,” the Federal Circuit noted that the district court also had acknowledged that a finding of inequitable conduct does not mandate a finding of exceptionality. See Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1289 (Fed. Cir. 2011) (en banc) (“prevailing on a claim of inequitable conduct often makes a case ‘exceptional'”).

In sum, the Federal Circuit held that the district court did not abuse its discretion in finding this case to be exceptional under § 285.

The patent litigation attorneys are Thomas P. Howard, LLC are experienced in litigating patent cases and seeking recovery of attorneys' fees.

[1] The apparent focus on res judicata here seems a bit curious. It is correct that the inequitable conduct claim was adjudicated to finality in the prior appeal, and thus may not be relitigated. It is the law of the case that HOTF, as the losing party, must live with. But, depending on the timing, could the subsequent continuation applications prosecuted before the USPTO have caused HOTF to reasonably expect to prevail on claims of the patent's validity in persisting with litigation; and thus possibly be relevant to the exceptionality determination?