Over the past decade, damages awarded in patent litigation have risen to an unprecedented level. [ ¹ ] As the potential infringement damages have increased, so has the cost of conducting the trial. This has led to attorneys’ fees often exceeding $5.5 million per client. [ ² ] With each side of a case routinely asking for attorneys’ fees, a recent case could change the way patent litigation is developed and brought in the Federal Circuit.

There has been an interesting case making its way through the Federal Circuit this year. On its face, it appears to be a basic patent infringement/patent improvement case. The decision was simple: Netflix won, the plaintiff is appealing, and that should be it. Netflix was still not satisfied with the decision though. Despite an easy win, the court denied Netflix attorneys’ fees. So Netflix has appealed to the court for a new legal standard to determine how attorneys’ fees are awarded in patent infringement cases. To make matters entirely more complicated, Amazon.com, Facebook, Microsoft, Oracle, Samsung, Toyota and Yahoo! have all asked the court to clarify its jurisprudence regarding the awarding of attorney fees to successful defendants in patent infringement suits. With this many hands in the ring, the court’s decision will have ramifications for years to come.

The case of Media Queue v. Netflix started with J. Nicholas Gross, a patent attorney. [ ³ ] Mr. Gross became dissatisfied with the Netflix movie rental system. [ ⁴ ] He noticed that he had not received movies in the mail from Netflix for several months. [ ⁵ ] Mr. Gross logged into his online account to find that he had not manually updated he rental “queue.” [ ⁶ ] Since his queue had no movies in it, Mr. Gross would not receive movies. [ ⁷ ] Soon after his discovery, Mr. Gross envisioned an “intelligent queue monitoring” system. [ ⁸ ] Instead of requiring a subscriber to monitor his rental queue and manually update it, the system would allow a subscriber to define rules that would allow computers to either notify the subscriber that his or her queue was almost empty or would allow computers to fill the queue with movies automatically. [ ⁹ ] Mr. Gross documented this system and eventually received a patent for it. [ ¹⁰ ] According to Netflix, Gross tried to sell the patent to Netflix. [ ¹¹ ] When Netflix refused, Mr. Gross sold the patent to Media Queue. [ ¹² ] Soon after that, Media Queue filed suit. [ ¹³ ]

Media Queue brought suit against both Netflix and Blockbuster for patent infringement, and both decided to litigate. Media Queue alleged that Netflix infringed Media Queue’s patent on “notification rules,” “a separate set of queue replenishment control rules,” and defining a set of rules “authorized by the subscriber.” [ ¹⁴ ] The district court found that the first two sets of terms were defined too broadly by Media Queue and too narrowly by Netflix, so the court adopted its own construction of the terms. [ ¹⁵ ] For the final term, the court agreed with Netflix’s assertions. [ ¹⁶ ] Despite the initial disagreements over how to interpret the terms, the court issued a summary judgment that Netflix did not infringe on Media Queue’s patent. [ ¹⁷ ] Netflix’s system never offered a set of notification rules regarding the rental queue. [ ¹⁸ ] Media Queue was instead making much weaker allegations that e-mails and Facebook notifications about movie reviews and recommendations were “notification rules.” [ ¹⁹ ]

After their victory, Netflix asked the court to award it $1,035,077.19 in attorneys’ fees and costs totaling $77,067.10. [ ²⁰ ] The Court determined that Netflix had “not met its high burden to show the clear and convincing evidence that Media Queue’s claims were brought in bad faith or that the claims were objectively baseless.” [ ²¹ ] The court followed the standards set by the Federal Circuit and denied all attorneys’ fees and costs to Netflix. [ ²² ]

That could have been the end of the story. Media Queue appealed the decision, Netflix responded and we went to court again. Instead, Netflix took this opportunity to go for the brass ring. Netflix appealed the district court’s decision regarding the awarding of attorneys’ fees and challenged the Federal Circuit to re-examine the standards used and the discretion given to the district courts to award attorneys’ fees. [ ²³ ]

The current legal standard to award attorneys’ fees in the Federal Circuit to a successful defendant was established in 2003. The standard is an interpretation of the U.S. Code. United States Code title 35, section 285 provides that in regards to patent litigation, “[t]he court in exceptional cases may award reasonable fees to the prevailing party.” A case is “exceptional” when the conduct related to the litigation is materially inappropriate, such as “willful infringement, fraud or inequitable conduct in procuring the patent, unjustified litigation, or a violation of Federal Rule of Civil Procedure 11.” [ ²⁴ ] If there is no misconduct, a case is exceptional only if the litigation is brought in subjunctive bad faith and the litigation is objectively baseless. [ ²⁵ ] The case Forest Labs, Inc. v. Abbott Labs adds to the standard, requiring a two-step process to determine if fees can be awarded. [ ²⁶ ] The first requirement is that the district court must decide if the prevailing party has shown that the case is “exceptional” though clear and convincing evidence. [ ²⁷ ] The second requirement is that if the case is found to be exceptional, the court can award fees according to its own discretion. [ ²⁸ ]

Prior to the current standard, the burden on successful defendants to show enough evidence to receive attorneys’ fees was much lower. There was not as clear of a definition of what an “exceptional” case was, allowing district courts to employ a more expansive reading of §285. [ ²⁹ ] While the Federal Circuit still required the case to be “exceptional,” district courts were not forced to find objectively baseless and bad faith claims through clear and convincing evidence. [ ³⁰ ] The more expansive reading used an “objective recklessness” standard, where if the plaintiff knew or should have known they were highly likely to lose the case, the district court could award attorneys’ fees. [ ³¹ ]

While the Federal Circuit has altered the standard for when a successful defendant is able to receive attorneys’ fees, the standard to award attorneys’ fees to a successful patentee has been long-established and unchanging. As a plaintiff, the winning party can receive attorneys’ fees by showing that the defendant was or should have been aware of an “objectively high likelihood” that the plaintiff would prevail. [ ³² ] As long as one reasonable person would have found the defendant’s argument as weak or frivolous, the defendant could be ordered to pay attorneys’ fees. [ ³³ ]

Netflix has taken the position that the older standard interpreting the awarding attorneys’ fees to prevailing defendants is the more proper of the two and has submitted several arguments justifying its position. [ ³⁴ ] The first is that the Supreme Court’s standard for awarding attorneys’ fees in intellectual property cases cannot be squared away with the Federal Circuit’s current standard. [ ³⁵ ] The case of Fogerty v. Fogerty established “that the federal fee-shifting statutes in the patent and trademark fields, which are more closely related . . . to that of copyright, support a party-neutral approach.” [ ³⁶ ] The Supreme Court stated that defendants with meritorious copyright infringement cases are able to litigate their cases just as plaintiffs with meritorious copyright infringement cases, and such a standard should apply to patent and trademark cases as well. [ ³⁷ ] The Fogerty case, according to Netflix, encourages litigation on either side of a patent claim and does so by allowing recovery of attorneys’ fees on both sides equally. [ ³⁸ ] Netflix argues the Federal Circuit’s differing standards for prevailing plaintiffs and defendants in the recovery of attorneys’ fees goes against the Supreme Court’s standard in Fogerty. [ ³⁹ ]

Netflix has also asserted that the trademark fee-shifting statute, which is nearly identical to its patent counterpart, is interpreted through a much broader standard than the current standard used for the patent statute. [ ⁴⁰ ] The trademark statute, found in title 15, section 1117 of the United States Code, says that “[t]he court in exceptional cases may award reasonable attorney fees for the prevailing party.” Netflix claims there is no reason for nearly identical statutes to be interpreted using such different standards. Previous trademark cases in other circuits have found bad faith standards, like the one used by the Federal Circuit for patent cases, to be inappropriate when determining awards for attorneys’ fees. [ ⁴¹ ] In addition, the Supreme Court, in Fogerty, asserted that “prevailing defendants are to be treated more favorably than prevailing plaintiffs” because the awarding of attorneys’ fees is the only possible way to make the defendant whole. [ ⁴² ] Netflix therefore assumes that such findings for trademark cases should at least make it easier for the patent defendants to secure attorneys’ fees. [ ⁴³ ]

Netflix goes onto make various statements alleging that fee-sharing standards for prevailing defendants are still too high for numerous other reasons, but their final argument is the one that the legal community will undoubtedly feel ramifications from the most. Netflix bluntly states that the current standard encourages patent litigation abuse. [ ⁴⁴ ] If plaintiffs can easily recover their attorneys’ fees and also run a significantly smaller chance of being forced to pay a successful defendant’s fees, plaintiffs are more likely to bring more erroneous charges. [ ⁴⁵ ] In addition, defendants might be discouraged to litigate because if they are unable to recover the cost of a trial, settlement is generally the cheaper option. [ ⁴⁶ ] Had Netflix or Blockbuster settled, how much of the $1.1 million could they have saved? Netflix says that should not matter.

After appeals were filed and Netflix’s case was made available to the world, the cavalry arrived. The law firm Klarquist Sparkman filed an Amici Curiae brief in the Federal Circuit on behalf of Amazon.com, Facebook, Yahoo!, Toyota, Samsung, Oracle and Microsoft. [ ⁴⁷ ] They asked the Federal Circuit to clarify its stance and jurisprudence on section 285 and what constitutes an “exceptional” case. [ ⁴⁸ ] The brief goes onto describe each of the interested parties and how each company’s patents are under constant assault from litigation. [ ⁴⁹ ] The parties make it very clear that they favor the previous “party-neutral” legal standard to interpret section 285 over the current standard. [ ⁵⁰ ] The brief’s primary argument focuses on the “epidemic” that is unreasonable patentee litigation, citing numerous facts and figures about the financial and administrative burdens placed on companies by “non-practicing entities.” [ ⁵¹ ] Such entities often bring frivolous lawsuits, hoping for quick and profitable settlements from the nation’s largest corporations. [ ⁵² ] While the Klarquist Sparkman is looking for clarification as to what the jurisprudence of the circuit is, it is clear that the corporations already know what they want and that the current legal standard will not give it to them.

So what is the alternative to the standard? According to Netflix and Klarquist Sparkman, it is simply the “objective recklessness” standard. [ ⁵³ ] The “objective recklessness” standard previously used by the Federal Circuit is purported by Netflix to be much more “even-handed” with the awarding of attorneys’ fees. [ ⁵⁴ ] Instead of requiring clear and convincing evidence of objectively baseless litigation and bad faith, knowledge of the likelihood of success is all that is needed. [ ⁵⁵ ] This standard more closely resembles the criteria for prevailing plaintiffs to obtain attorneys’ fees, but it is still unclear if the Federal Circuit would be willing to return to such a standard.

The challenge has been laid before the circuit and only time will tell how this case will end. It seems that if the decision is not what Netflix or its compatriots in litigation prefer, they would be willing to take it to the Supreme Court. The chance for corporations to recoup millions in attorneys’ fees every year is no doubt enticing for Netflix and others, but awarding those millions back to some of our nation’s most profitable organizations could be just another “win” for corporate America. No matter how this decision turns out though, the attorneys’ fees for the appeals will no doubt be enormous.

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