Federal Circuit Clarifies Criteria for ‘Exceptionality’ Finding in Awarding Attorneys’ Fees

The U.S. Court of Appeals for the Federal Circuit (CAFC) issued a precedential decision today in which it affirmed a district court’s finding of exceptionality under 35 U.S.C. § 285 in favor of Energy Heating et. al., thus upholding an award of attorneys’ fees based on inequitable conduct. The opinion was authored by Judge Prost.

The case stems from a 2018 CAFC ruling in which the court upheld a district court’s finding that Heat-On-the-Fly’s (HOTF’s) U.S. Patent No. 8,171,993 was unenforceable due to inequitable conduct, but remanded the district court’s denial of Energy Heating’s motion for attorneys’ fees. As reported at the time, the CAFC said that, while courts are not required to award attorneys’ fees upon a finding of inequitable conduct, they must “articulate a basis for doing so.” Thus, the CAFC remanded for the court to reconsider and supply its reasoning in the case that it again chose not to award attorneys’ fees.

On remand, the district court asked a magistrate judge to hear the renewed motion for attorneys’ fees and the magistrate judge recommended that the case be found “exceptional” because “the case stands out from others within the meaning of § 285 considering recent case law, the nature and extent of HOTF’s inequitable conduct, and the jury’s findings of bad faith.” In particular, the magistrate judge found that HOTF “litigated the case in an unreasonable manner”; that “[t]he number of undisclosed prior sales and the amounts HOTF received from those prior sales constitute affirmative egregious conduct”; and that HOTF “pursued claims of infringement without any apparent attempt to minimize litigation costs” “despite [its] knowledge that its patent was invalid.” The district court ultimately adopted the magistrate’s report and recommendation and awarded attorneys’ fees.

On appeal to the CAFC, HOTF argued that: “1) the district court based its decision on an erroneous factual finding, (2) that the district court failed to address or properly weigh the relevant factors, and (3) that the district court failed to properly apply the law.” The CAFC maintained that the district court did not abuse its discretion on any of the three grounds.

CAFC Clarifies Exceptionality Standard

In particular, the court explained that HOTF’s argument that the district court failed to properly weigh the factors for a finding of exceptionality under Section 285, i.e., “the ‘strength or weakness’ of HOTF’s litigation position, the absence of a finding of litigation misconduct, and the PTO’s subsequent allowance of certain continuation patents claiming priority to the ’993 patent,” was without merit. The court found that the district court had provided “ample support” for the finding that HOTF’s case was weak, including that HOTF knew its patent was invalid. Secondly, the district court was “not required to affirmatively weigh HOTF’s purported ‘lack of litigation misconduct,’” said the CAFC. While HOTF attempted to cite Electronic Communication Technologies, LLC v. ShoppersChoice.com, LLC in support of its position that “evidence that a party did not engage in [litigation] misconduct is equally relevant [to evidence of litigation misconduct] and must be considered,” the CAFC explained that Electronic Communication “merely held in relevant part that ‘the manner in which [patentee] litigated the case or its broader litigation conduct’ is ‘a relevant consideration.’” The court continued:

In other words, while the “manner” or “broader conduct” of litigation is relevant under § 285, the absence of litigation misconduct is not separately of mandatory weight. See Octane Fitness, 572 U.S. at 554 (concluding that there is “no precise rule or formula” for making determinations under § 285 (citation omitted)).

The CAFC added that litigation misconduct is not a prerequisite to find a case exceptional, and that the district court “properly considered the totality of the circumstances, including the manner of HOTF’s litigation, finding that ‘HOTF litigated the case in an unreasonable manner by persisting in its positions.’”

Inequitable Conduct and Exceptionality

The court likewise rejected HOTF’s contention that the U.S. Patent and Trademark Office’s allowance of several continuation patents claiming priority to the ‘993 patent bolstered its defenses to the inequitable conduct claims, agreeing with the district court that the continuation patents were “of little or no relevance to its exceptionality determination.”

Finally, the CAFC disagreed with HOTF’s argument that the district court improperly misapplied the law by viewing an inequitable conduct finding as mandating a finding of exceptionality. Although the district court did state that, following the decision in Octane Fitness, LLC v. ICON Health & Fitness, Inc., “it appears other courts have universally” found “exceptionality if inequitable conduct is found,” in this case the district court nonetheless “appropriately considered the governing law and the facts of this case in reaching its conclusion,” said the CAFC.

The court declined to consider the appellees’ request for attorneys’ fees for the CAFC appeal as premature under Federal Circuit
Rule 47.7, which requires that the application for such a request “must be made within thirty (30) days after entry of the judgment or order denying rehearing, whichever is later.”