Will Relaxed 'Loser Pays' Standards in Patent Claims Result in Increased Demand for Litigation Funding?

Fee-shifting resulting in ‘loser pays’ standards in patent cases recently underwent a nip-tuck  via proposed legislation in Congress as well as in two recent decisions handed down by the Supreme Court of the United States (“SCOTUS”).  Both SCOTUS decisions focused on the language in Patent Act §285, which states “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”  Relevant to their analysis was a necessary review of  the Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378 (2005) (“Brooks Furniture”) test that set the standard for determining when a case is deemed to be ‘exceptional’. 

In Brooks Furniture, the U.S. Court of Appeals for the Federal Circuit determined that a case is ‘exceptional’ under §285 in two limited instances:  1)  “when there has been some material inappropriate conduct” or 2) “when the litigation is brought in subjective bad faith” and is “objectively baseless.”  In Octane Fitness v. Icon Health & Fitness (“Octane”), SCOTUS tackled the Brooks Furniture test and held that ‘material’ need only be attributed its ordinary meaning  to include cases that are “uncommon,” “rare,” or “not ordinary.” With respect to the second prong of the Brooks Furniture test, SCOTUS determined it was too strict in requiring a case be both ‘objectively baseless’ and brought in ‘subjective bad faith’.  A District Court would be able to shift fees if either condition is met.

SCOTUS further elaborated on the use of the term “exceptional” in §285 and stated simply that such a case is one that “stands out from others with respect to the substantive strength of the party’s litigation position … or the unreasonable manner in which the case was litigated.”  The decision as to whether a case amounts to an “exceptional” one should be left to the District Court, who is in the best position to make such a determination on a case-by-case basis considering the totality of the circumstances under a preponderance of the evidence standard. In Highmark v. Allcare Health Management Systems, SCOTUS provided additional support for the notion that the Federal Circuit should not intrude on a District Court’s decision in awarding fees.

Fee-shifting to a loser pays scenario has also gained some attention in Congress, where the House of Representatives recently passed a ‘losers pay’ bill aimed at patent trolls.  While this bill hit a roadblock last December in the Senate, patent reform is still on the radar.  In coming to an agreement on the necessary language intended to curb patent trolls, Congress must be wary to preserve a loser pays remedy for those claimants with legitimate patent infringement claims.

With patent reform legislation on the horizon in addition to the recent SCOTUS decisions relaxing the ‘loser pays’ rules, the unintended cumulative effect may very well result in patent claimholders looking to litigation funders to share in the risk of a potential ‘loser pays’ scenario.  At Bentham IMF, we are experienced at providing this type of funding as the “loser pays” rule applies in all of the Australian litigation we finance.  As patent reform gets underway, it will be interesting to watch the impact, if any, on the landscape of the litigation funding market.