moneyOn December 26, 2013, the U.S. Court of Appeals for the Federal Circuit decided Kilopass Technology, Inc. v. Sidense Corporation, (Case No. 2013-1193). In this case, the defendant-appellant, Sidense Corporation (Sidense), had appealed from the district court’s denial of its motion for attorney’s fees under 35 U.S.C. § 285. In its opinion, written by Judge O’Malley, the Federal Circuit vacated and remanded the district court’s decision to deny the attorney’s fees because it erred to the extent that it did not consider the totality of the circumstances, including any evidence of objective baselessness, in determining that Sidense had not met its burden of establishing that Kilopass Technology (Kilopass) had brought the litigation in bad faith, which is a prerequisite to a finding of exceptionality.

More specifically, Kilopass and Sidense are competitors in the “embedded non-volatile memory market,” which consists of memory devices that retain their stored information when power is removed. In 2010, Kilopass filed a complaint against Sidense in the U.S. District Court for the Northern District of California, alleging both literal infringement and infringement under the doctrine of equivalents of its U.S. Patent Nos. 6,940,7516,777,757; and 6,856,540. The district court granted summary judgment of non-infringement in favor of Sidense, which the Federal Circuit affirmed in Kilopass Technology, Inc. v. Sidense Corporation., 501 F. App’x 980 (Fed. Cir. 2013).

While the appeal in the Federal Circuit was pending, Sidense filed a motion in the district court for an award of attorney’s fees under 35 U.S.C. § 285. Relying on Brooks Furniture Manufacturing v. Dutailier International, Inc., 393 F.3d 1378 (Fed. Cir. 2005), the district court denied the motion. Particularly, the court found that the case was not exceptional because although Sidense was the prevailing party on the patent claims, it had not met its burden of establishing with clear and convincing evidence that Kilopass had brought or maintained its claims in bad faith, as Kilopass had performed pre-filing investigation and independent analysis to determine the appropriateness of the litigation.

On appeal, the primary issue was whether the district court applied the correct legal standard in determining whether the case was exceptional. As the Federal Circuit explains, the decision to award attorney’s fees under 35 U.S.C. § 285 is a two-step process. First, the court must decide whether the prevailing party has proven by clear and convincing evidence that the case is exceptional. Pursuant to Brooks Furniture, absent material misconduct related to the patent or during litigation, a case is exceptional only if (1) the litigation is brought in subjective bad faith and (2) the litigation is objectively baseless. Second, if the court ultimately finds that a case is exceptional, it must then determine whether attorney’s fees are appropriate.

In this case, the Federal Circuit held that the district court erred to the extent that it required that the plaintiff have actual knowledge of the baselessness of its infringement claim to prove subjective bad faith. Although certain previous cases, particularly MarcTec LLC v. Johnson & Johnson, 664 F.3d 907 (Fed. Cir. 2012), have suggested that actual knowledge is required, the Federal Circuit concluded that these case are not controlling. Instead, subjective bad faith only requires that the defendant acted recklessly, meaning that the objective baselessness of the claim was either known or so obvious that the plaintiff should have known it was baseless. See Highmark, Inc. v. Allcare Health Mgmt. Sys. Inc., 687 F.3d 1300 (Fed. Cir. 2012). Accordingly, a plaintiff with a misguided belief in its case can still be found to have brought the case in bad faith if the baselessness of the claim would have been obvious to someone reasonable.

Additionally, the Federal Circuit determined that the district court erred by misinterpreting the type of proof needed to establish bad faith. Specifically, the district court focused exclusively on the plaintiff’s subjective good faith without evaluating the objective merits of the claims or any circumstantial evidence. According to the Federal Circuit, noting its decisions in Highmark and Eltech Systems Corp. v. PPG Industries, Inc., 903 F.2d 805 (Fed. Cir. 1990), bad faith must be assessed in light of the totality of the circumstances with “particular attention paid to the objective merits of claims and other objective evidence of bad faith.” Overall, although subjective bad faith must be proven by clear and convincing evidence, it can be established through a variety of direct and circumstantial evidentiary proof. In sum, the Federal Circuit thereby vacated and remanded the case for further consideration.

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