'Exacting Standard' for Attorneys' Fees Award Not Met Despite Admissions in Depositions

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• Case Summary: A $184,000 award for attorneys' fees is vacated because the patent owner had reasonable grounds for continuing an infringement lawsuit despite deposition testimony that suggested patent invalidity.

• Key Takeaway: The Federal Circuit will apply an “exacting standard” for an award of attorneys' fees, looking at each reason given by the lower court for an exceptional case finding, and judging whether the plaintiff's reasoning for continuing is objectively baseless.

Faulting a lower court on six different reasons behind an award of attorneys' fees, the U.S. Court of Appeals for the Federal Circuit ruled March 16 that the plaintiff's grounds for continuing patent infringement proceedings were not objectively baseless, despite admissions by the patent owner's founder and expert that suggested the asserted claims were anticipated ( Old Reliable Wholesale Inc. v. Cornell Corp.,Fed. Cir., No. 2010-1247, 3/16/11).

The court's decision comes only two months after a different panel came to the same conclusion and defined the boundaries of an exceptional case finding as an “exacting standard,” in which “the plaintiff's case must have no objective foundation.” iLOR LLC v. Google Inc., No. 2010-1117, 97 USPQ2d 1597 (Fed. Cir. Jan. 11, 2011) (81 PTCJ 342, 1/21/11).

In addition, the court took judicial notice of a decision by the Patent and Trademark Office to issue a reexamination certificate affirming the validity of the patent at issue, even though the district court's award of attorneys' fees preceded that notice and the PTO later withdrew its decision.

District Court's Judgments Favor Defendant.

Old Reliable Wholesale Inc. is the assignee of a patent (5,069,950) directed to a composite insulated roof board, comprising a main portion of solid insulating material as a bottom layer, covered by spaced blocks “integral” with the main portion, and a top layer adhered to the tops of the blocks.

Cornell Corp. is a manufacturer of roofing products. Old Reliable sued Cornell in 2006, claiming that Cornell's VT-1 product infringed five claims of the '950 patent. Cornell argued that the patent was invalid as anticipated and obvious in light of other products that were sold prior to the critical date of the '950 patent, including Cornell's own VT-2 product.

In a 2007 deposition, Old Reliable's founder stated that the VT-1, VT-2, and his company's competitive product did “[e]xactly the same thing.” Testimony in two separate depositions suggested that a third-party Air-Flo product met the relevant claims' limitations. Old Reliable's expert said that the product lacked a cross-channel structure, but an employee of the product's manufacturer testified that the company had filled one order with cross-channels prior to the critical date.

In a claim construction order, Senior Judge David D. Dowd Jr. of the U.S. District Court for the Northern District of Ohio construed the term “integral” to mean “formed with or joined to” and the term “adhered” to mean “attached.” He consequently granted Cornell's motion for summary judgment of patent invalidity.

Dowd found that the VT-2 product anticipated the patent even though the product included a layer of “oriented strand board,” or OSB, between the main portion and the spaced blocks. He further found that the Air-Flo product anticipated the patent, relying on the employee's deposition.

“Anticipation is the epitome of obviousness,” Dowd said further, concluding that the '950 patent was rendered obvious by both products.

Old Reliable appealed. In December 2009, the Federal Circuit affirmed without opinion pursuant to Fed. Cir. R. 36.

Dowd subsequently declared the case exceptional and awarded about $184,000, per 35 U.S.C. §285, to cover attorneys' fees and expenses incurred after the founder's deposition.

PTO Changes Mind in Reexamination Review.

While the case was proceeding, Cornell requested and the PTO granted ex parte reexamination of the '950 patent. The PTO reviewed the VT-2 and Air-Flo products and, in June 2010, issued a notice of intent to issue a certificate confirming the patentability of the claims at issue.

However, the PTO soon withdrew the June 2010 reexamination notice and stated that the claims were invalid, noting the Rule 36 affirmance by the Federal Circuit. It appears that the PTO was unaware of the Federal Circuit's invalidity ruling when it initially confirmed the claims' patentability.

In any case, Old Reliable appealed the lower court's award of attorneys' fees on in March 2009, prior to the PTO's 2010 actions involving the '950 patent.

Old Reliable's Arguments Reasonable.

“While the discretion granted to a trial court under section 285 is broad, it is not unbridled,” Senior Judge Haldane Robert Mayer began.

He followed the iLOR court's adherence to the “exacting standard” created by Brooks Furniture Manufacturing Inc. v. Dutailier International Inc., 393 F.3d 1378, 1381, 73 USPQ2d 1457 (Fed. Cir. 2005) (69 PTCJ 251, 1/14/05): “Absent misconduct in conduct of 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.”

That standard was not met in the instant case, the court said, because “Old Reliable had reasonable grounds for its [validity] argument,” rejecting the district court's conclusions on six different points.

First, the court noted, the company's founder's deposition identified only the functional equivalence of the VT-2 product and Old Reliable's commercial embodiment of the '950 patent. However, the plaintiff continued to allege structural differences in the products such that the VT-2 product did not necessarily disclose all the structural limitations of the asserted claims.

Second, the district court found contradictory Old Reliable's claims that the VT-2's OSB layer defeated the “integral” limitation--and so was not anticipatory--while a felt layer in the VT-1 product did not render the connection between the bottom layer and the blocks non-integral. But the appeals court said that combination of arguments was not objectively baseless, distinguishing “a thin layer of felt facing” from “a bulky layer of OSB.” Further, Mayer explained, “The undisputed commercial success of the VT-1 provided a legitimate basis for Old Reliable's assertion that secondary considerations weighed against any finding that the '950 patent was invalid over the prior art.”

The court then faulted the district court for confusing its analysis of the integral nature of the products, in that both the felt and OSB layers were indeed integral with the blocks, but that did not mean the blocks were integral with the bottom main portion.

As to the Air-Flo product, the Federal Circuit concluded that Old Reliable “had non-frivolous grounds for asserting that [the manufacturer's employee's] testimony was inadequate to establish anticipation,” because the employee appeared uncertain as to when the special order with cross-channels had been filled and the testimony was uncorroborated.

Fifth, as to the reexamination proceedings, the appeals court credited the PTO's initial June 2010 notice signaling that the claims were patentable. “Although the results of the PTO reexamination proceedings were not available to the district court,” Mayer said, “this court can take judicial notice of the fact that the PTO, after assessing the relevant prior art, issued a notice of intent to issue a reexamination certificate confirming the patentability of all claims of the '950 patent.” He ignored the PTO's ultimate decision withdrawing the notice, saying that the lower court's decision is on appeal, not the PTO's.

Finally, the court also rejected the argument that it was litigation misconduct for Old Reliable to refuse to engage in settlement negotiations. “Because Old Reliable had an objectively reasonable basis for maintaining an infringement suit, the refusal to make or accept an offer of settlement is not, in and of itself, sufficient to establish litigation misconduct,” Mayer concluded.

Because Old Reliable's litigation thus did not meet the objective baseless prong of the Brooks Furniture standard, the court did not consider the issue of subjective bad faith.

The court therefore reversed the exceptional case judgment and vacated the award of attorneys' fees.

Judges Pauline Newman and William C. Bryson joined the opinion.

R. Eric Gaum of Hahn Loeser & Parks, Cleveland, represented Old Reliable. Cornell was represented by Matthew J. Schaap of Severson, Sheldon, Dougherty & Molenda, Apple Valley, Minn.

By Tony Dutra