Contractual Copyright Attorneys Fees in the Ninth Circuit

In a case of first impression for the Ninth Circuit Court of Appeals, the court reviewed whether the Copyright Act of 1976 would preclude enforcement of a contractual attorneys fees provision in copyright-based litigation. The case of Victoria Ryan v Editions Limited West, Inc. (9th Cir. May 19, 2015)(available here) tackled this issue, as well as whether the court abused its discretion in calculating the fees.

Ryan is a pastel artist who entered into an agreement with Editions Limited West, Inc. (ELW) to receive a license to publish a limited number of her works in exchange for royalties. The agreement permitted ELW to produce posters of Ryan’s original works, it was silent on subsequent use of those posters for production of derivative works. Ryan believed that her works were improperly being used as derivatives, and made inquires to ELW. Those inquires allegedly went unanswered and she initiated th lawsuit.

In separate motions, ELW filed and was awarded summary judgment on all of Ryan’s claims. However, Ryan filed competing motion for summary judgment seeking afinding that she was the prevailing party within the meaning of the Agreement, despite the fact that ELW obtained judgment on all claims.  Ryan appealed once, and the Court affirmed all summary judgment orders, except for the contributory and vicarious copyright infringement claims, with the instruction: “I the district court finds that ELW is liable for contributory or vicarious infringement, it should reconsider whether Ryn is the prevailing party under the broad language of the contract, and whether she is entitled to a permanent injunction against ELW.”

    Upon return to the District Court, and prior to the bench trial, Ryan filed motion for sanctions based on alleged spoilation by ELW of evidence. This was denied by the lower court. After the bench trial, th court found in favor of Ryan on her contributory infringement claim, but that she could not substantiate a claim to any portion of ELW’s profits or any other damages award. The lower court also ruled that she was the prevailing party under the Agreement. She submitted an affidavit of fees from her counsel, and the court apportioned her request of $328k down to $51k, claiming this represented those fees in connection with the contributory infringement claim.  

    Ryan conceded that she was not entitled to fees under 17 U.S.C. 412, and instead sought fees under the fee shifting provision of the Agreement. The 9th Circuit began its review by discussing preemption. Specifically, the Court discussed whether the Copyright Act would preempt the state law allowing for the execution and enforcement of contractual fee-shifting provisions. The Court concluded the Copyright Act did not preempt Ryan’s rights under th Agreement and in accordance with California state law.

False Endorsement Under the Lanham Act – Unauthorized Use of Bob Marley Image

In Fifty-Six Hope Road Music, Ltd. et al. v. A.V.E.L.A., Inc. et al., Case No. 12-17502, Feb. 20, 2015 (9th Cir.) the Ninth Circuit Court of Appeals found that the district court did not err in denying defendant’s motion for judgment as a matter of law on plaintiff’s Lanham Act Section 43(a) false endorsement claim.  Defendants were found to have (a) used Bob Marley’s image (b) on their t-shirts and other merchandise and (c) in a manner likely to cause confusion as to plaintiff’s sponsorship or approval of the t-shirts or merchandise.  The Ninth Circuit recognizes a § 1125(a) (Lanham Act § 43(a)) claim for misuse of a celebrity’s persona.  

The likelihood of confusion factors considered in celebrity cases include: (1) the level of recognition that the celebrity has among the segment of the society for whom the defendant’s product is intended, (2) the relatedness of the fame or success of the celebrity to the defendant’s product, (3) the similarity of the likeness used by the defendant to the actual celebrity, (4) evidence of actual confusion, (5) marketing channels used, (6) likely degree of purchaser care, (7) defendant’s intent on selecting the celebrity and (8) likelihood of expansion of the product lines.  The evidence in this case supported a finding of a likelihood of confusion.  The Ninth Circuit stated that the § 43(a) claim did not establish a “federal right of publicity,” rather a false endorsement claim, which requires that the use be likely to confuse as to the sponsorship or approval of defendant’s goods.  

The Court further found that defendants waived several defenses to the plaintiffs’ claims by failing to properly raise them in the district court.  These defenses included aesthetic functionality (raised in its answer but never developed at trial), Copyright Act defense under Dastar Corp. v. Twentieth Century Fox Film, Corp. (that the Bob Marley image had fallen into the public domain and could not be resurrected under federal unfair competition law) and the First Amendment defense under Rogers v. Grimaldi.

Further, the Ninth Circuit found that the trial court did not err in calculating and awarding to plaintiffs the net profits of defendants.  Defendants willfully infringed, because the vice president of licensing knew that plaintiffs had the right to merchandise Marley’s image before defendants began selling similar goods.  A claim for profit disgorgement under §1117(a) is equitable in nature and a jury traditionally does not calculate these profits.  The trial court correctly awarded to plaintiffs, defendants’ profits ($781,427) from Marley merchandise.  AVELA failed to meet its burden to prove deductions from its gross profits, as its claimed royalty fee arrangement was not an arm’s length transaction.  Rather the sole shareholder of the licensor was a girlfriend of one of the defendants.  The Appeals Court also found that the district court did not err by denying plaintiffs an increased award of profits as generally, actual, proven profits will adequately compensate the plaintiff.  

The Ninth Circuit found that the district court did not abuse its discretion in ordering defendants AVELA to pay plaintiffs’ attorneys’ fees ($1.5 M) because (a) plaintiffs were the prevailing party and (2) the case was exceptional as defendants’ conduct was willful.  There was significant evidence that AVELA defendants were aware their conduct conflicted with plaintiffs’ rights.  The court did not abuse its discretion in denying attorneys’ fees as to defendants Jem and Freeze, because the evidence of their willfulness was too weak to merit an award of attorneys’ fees.

In support of defendants’ positions, the Ninth Circuit affirmed the trial court’s grant of summary judgment to defendants on the right of publicity claim, because the state statute clearly provides that a publicity right successor waives its publicity rights when it fails to timely register its rights.

Supreme Court Lowers Bar For Prevailing Party In Patent Litigation To Collect Attorneys Fees

The U.S. Supreme Court, in Octane Fitness LLC. v. Icon Health & Fitness Inc., case no. 12-1184 (Apr. 29, 2014) (available here), overturned a decade of Federal Circuit law by redefining when a case is exceptional under the Patent Act.  A prevailing party in patent litigation may obtain its attorneys fees if the “case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”  opn. pg. 7-8.

“Section 285 of the Patent Act authorizes a district court award attorney’s fees in patent litigation. It provides, in its entirety, that ‘[t]he court in exceptional cases may award reasonable attorney fees to the prevailing party.’ 35 U.S.C. §285. In Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F. 3d 1378, 1381 (2005), the United States Court of Appeals for the Federal Circuit held that ‘[a] case may be deemed exceptional’ under §285 only in two limited circumstances: ‘’when there has been some material inappropriate conduct,’ or when the litigation is both ‘’brought in subjective bad faith’ and ‘objectively baseless.’”   opn. pg. 1.

The trial court and later the Federal Circuit Court had determined that the accused infringer Octane, who won the infringement action below, could not show that (i) ICON’s patent infringement claim was objectively baseless or (ii) ICON had brought the action in subjective bad faith.

The Supreme Court found that the Federal Circuit had “abandoned” the “holistic, equitable approach” when it issued its Brooks Furniture decision.  In Brooks, the trial courts were to find material inappropriate conduct such as willful infringement, fraud or inequitable conduct.

The Supreme Court held “that an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”  opn. pg. 7-8.

As for the Federal Circuit’s concepts that exceptional case findings be based upon litigation which is objectively baseless and brought in subjective bad faith, the Supreme Court pointed to Noxell Corp. v. Firehouse No. 1 Bar -B-Que Restaurant, 771 F.2d 521 (CADC 1985).  In Noxell, the appeals court stated “we think it fair to assume that Congress did not intend rigidly to limit recovery of fees by a [Lanham Act] defendant to the rare case in which a court finds that the plaintiff ‘acted in bad faith, vexatiously, wantonly, or for oppressive reasons’ …. Something less than ‘bad faith,’ we believe, suffices to mark a case as ‘exceptional”‘.

Lastly, the Supreme Court lowered the evidentiary standard to find exceptional case.  “[W]e reject the Federal Circuit’s requirement that patent litigants establish their entitlement to fees under §285 by ‘clear and convincing evidence,’ Brooks Furniture, 393 F. 3d, at 1382.  Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.”

As a practice note, counsel for patent owners and accused infringers should be wary of the new, lower standard for attorneys fees.

“Oh What A Night!” Ed Sullivan’s Charisma Not Enough To Overcome Fair Use Defense For The Jersey Boys’ Use Of A Seven-Second Clip

The Ninth Circuit affirmed the lower court’s summary judgment and award of attorneys’ fees in a copyright infringement case finding that a 7-second clip from The Ed Sullivan Show used in the musical Jersey Boys constituted fair use because of its historical significance.  SOFA Entertainment, Inc. v. Dodger Productions, Inc., Case No. 10-56535 (9th Cir. March 11, 2013) (available here).  The clip was from the introduction of the band the Four Seasons on The Ed Sullivan Show and was used in the Jersey Boys musical about the Four Seasons.  SOFA owns the copyrights to the entire Ed Sullivan Show, including the clip in which Ed Sullivan introduces the Four Seasons.  Dodger produced the musical Jersey Boys, which is a historical dramatization about the Four Seasons.  The clip portrayed Ed Sullivan in his “signature pose” introducing the Four Seasons to his studio and television audiences.

SOFA Entertainment, Inc. (“SOFA”) sued Dodger Productions, Inc. (“Dodger”) alleging copyright infringement.  Dodger argued that the use constituted fair use under the U.S. Copyright Act (17 U.S.C. § 107).  Both parties moved for summary judgment and the lower court granted it in favor of Dodger.  The lower court then awarded Dodger attorneys’ fees and costs, finding SOFA’s lawsuit unreasonable.  SOFA appealed.  The Ninth Circuit affirmed.  “By using the clip for its biographical significance, Dodger has imbued it with new meaning and did so without usurping whatever demand there is for the original clip.”  SOFA, Slip Op. P. 3.

The fair use doctrine allows the use of copyrighted works without the permission of the copyright owner for purposes such as criticism, comment, news reporting, teaching, or research.  The Copyright Act lists four factors to aid courts in their fair use analysis: “(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.”  17 U.S.C. § 107.

In analyzing the purpose and character of the use, the Ninth Circuit noted that Dodger’s use of the Ed Sullivan clip was to mark an important moment in the Four Season’s career as a band.  “At that point in rock & roll history, many American bands were pushed into obscurity by the weight of the “British Invasion,” which was kicked off by the Beatles’ performance on The Ed Sullivan Show. The Four Seasons, however, thrived. Being selected by Ed Sullivan to perform on his show was evidence of the band’s enduring prominence in American music.”  SOFA, Slip Op. P. 9.  As a result, even though Jersey Boys is a commercial production, Dodger transformed the clip by citing to its historical significance and therefore met the first prong of the fair use test.

In looking at the nature of the Ed Sullivan clip, the Ninth Circuit stated that “[a]n alleged infringer will have a more difficult time establishing fair use when he appropriates a work [creative in nature]. While the entire episode of The Ed Sullivan Show or the individual performances may be near to the core of copyright, the clip conveys mainly factual information – who was about to perform. Therefore, the second factor also favors Dodger.”  SOFA, Slip Op. P. 9.

For the third prong, SOFA did not challenge the conclusion that the 7-second clip was insignificant compared to the length of an Ed Sullivan episode, but argued that Dodger attempted to capitalize on the favorite part of the Ed Sullivan Show, when Ed would introduce the bands.  However, the Ninth Circuit rejected this argument for two reasons.  First, the 7-second clip is not qualitatively significant because Ed Sullivan simply identifies the Four Seasons and it is unlikely that the clip would be copyrightable on its own.  Second, SOFA was incorrect in arguing that Ed Sullivan’s signature pose and style are copyrightable because, while movements and intonations are elements that can be protected, SOFA sought to protect Sullivan’s personality as well.  “Charisma, however, is not copyrightable.”  SOFA, Slip Op. P. 10.

Finally, in examining Dodger’s use of the clip on the market for the Ed Sullivan Show, the Ninth Circuit concluded that the factor weighed in favor of Dodger.  When the use is not a substitute for the original and allows the copyright holder a derivative use, the factor weighs in favor of fair use.  “Jersey Boys is not a substitute for The Ed Sullivan Show. The clip is seven seconds long and only appears once in the play. Dodger does not reproduce Jersey Boys on videotape or DVD, which would allow for repeated viewing of the clip. Dodger’s use of the clip advances its own original creation without any reasonable threat to SOFA’s business model.”  SOFA, Slip Op. P. 11.

Turning to attorneys’ fees, the Ninth Circuit found that an award of attorneys’ fees would further the purpose of the Copyright Act, which is to “encourage the production of original literary, artistic, and musical expression for the good of the public.” Fogerty v. Fantasy, Inc., 510 U.S. 517, 524 (1994).  The Ninth Circuit affirmed the summary judgment in favor of Dodger under the fair use doctrine and affirmed the award of attorneys’ fees.

Florida Supreme Court Authorizes Defense Attorneys Fees Under FDUTPA

In a case certified by the federal appeals court, the Florida Supreme Court held that a prevailing defendant in a Florida Deceptive and Unfair Trade Practice Act (FDUTPA) lawsuit is entitled to attorney’s fees for the period prior to dismissal of the FDUTPA count.  (Fla. Stat. § 501.2105)(prevailing party in a FDUTPA action may recover reasonable costs and attorneys’ fees).  The Court also held that Fla. Stat. § 768.79, the offer of judgment statute, is not applicable in cases where the plaintiff seeks equitable relief and damages, and the defendant responds with a general offer and requests a release from all claims.  Under § 768.79, in Florida state court civil litigation cases, if a plaintiff rejects a defendant’s timely offer for judgment, the defendant is entitled to recover reasonable costs and attorneys’ fees.  Diamond Aircraft Industries, Inc. v. Horowitch, 38 FLW S17, Case No. SC11-1371 (Fla. January 10, 2013) (available here).

Dr. Horowitch, a resident of Arizona, entered into a contract with Florida-based Diamond Aircraft Industries, Inc. (“Diamond”) to purchase a small jet for $850,000.  Diamond never delivered the jet and demanded Horowitch pay at least $1,380,000.  Horowitch sued Diamond in Florida state court for specific performance of the contract.  The case was removed to federal court and Horowitch raised four claims: (1) specific performance; (2) breach; (3) breach of fair dealing and good faith; and (4) deceptive trade practices under FDUTPA.  Horowitch requested attorneys’ fees if he prevailed.  See Fla. Stat. § 501.2105.  Pursuant to Fla. Stat. § 768.79, Diamond offered Horowitch an offer of judgment of $40,000 if Horowitch released Diamond from all claims of liability.  Horowitch did not accept the offer and both parties moved for summary judgment.  The federal trial court granted summary judgment in favor of Diamond on specific performance, breach of contract, and breach of implied covenants of good faith and fair dealing.  The court denied summary judgment under FDUTPA, but applied the Arizona Consumer Fraud Act (ACFA).  At trial, the court found in favor of Diamond.

Diamond moved for attorneys’ fees under FDUTPA and Fla. Stat. § 768.79.  The trial court denied Diamond’s motion, holding that (1) § 768.79 did not apply because Horowitch asserted an equitable claim for non-monetary relief (specific performance) and, in the alternative, a claim for monetary damages; and (2) FDUTPA did not apply.  Diamond appealed to the 11th Circuit (the federal appeals court), who then certified questions to the Florida Supreme Court.

First, the Florida Supreme Court held that the prevailing party attorneys’ fee provision under FDUTPA entitled Diamond to its defensive attorneys’ fees because “Horowitch invoked FDUTPA.”  Horowitch, Slip Op. P. 6.  “Horowitch exposed himself to both the benefits and the possible consequences of that act’s provisions” and “simply because FDUTPA is ultimately held to have no application and does not provide a plaintiff with a basis for recovery after the provisions of the act have been invoked does not negate a defendant’s status as a prevailing party in an action filed by a plaintiff under that act.”  Horowitch, Slip Op. Pp 11-12 (emphasis in original).

Second, the Court held that Diamond is entitled to attorneys’ fees under FDUTPA, but only for the period of litigation until the trial court dismissed the FDUTPA claim.

As for Florida’s offer of judgment statute, Fla. Stat. § 768.79, applied to the case, the “Florida Legislature enacted section 768.79 to deter individuals from rejecting purportedly reasonable settlement offers through the imposition of the sanctions of costs and attorney’s fees.”  Horowitch, Slip Op. P. 20. Fla. Stat. § 768.79 is inapplicable in cases that seek equitable relief as an alternative to monetary relief and that there is no exception for instances where the claim for equitable relief is meritless.  Florida case law dictates that when the plaintiff seeks only monetary relief, the statute applies, but when the plaintiff seeks only nonmonetary/equitable relief, it does not apply.  The statute limits its applicability to civil actions “for damages.”

Finally, the Florida Supreme Court held that Fla. Stat. § 768.79 does not apply because Diamond’s offer of judgment to Horowitch failed to satisfy Florida Rule of Civil Procedure 1.442(c)(2) (requires a proposal for settlement to include the names of the parties; the claims to be resolved; a statement of relevant conditions; a statement of the total amount of the proposal; a statement with particularity to all nonmonetary terms to the proposal, statement with particularity any offer for punitive damages; statement as to whether the offer includes attorneys’ fees and whether the fees are part of the legal claim; and include a certificate of service).

Toy Companies Can Be Bratz Too

On a second appeal, Mattel and MGA still can’t “play nice.”  Mattel, Inc., famous for producing the Barbie dolls, sued MGA Entertainment, Inc., who produces the Bratz dolls.  Both filed claims for trade secret misappropriation.  Mattel filed its misappropriation claim in 2006, but it was filed as a counterclaim.  In 2010, MGA filed its claim as a counterclaim-in-reply to Mattel’s misappropriation counterclaim.  Mattel moved to dismiss MGA’s claim, arguing that the statute of limitations had run since the events giving rise to the claim had occurred more than 3 years earlier.  The district court denied Mattel’s motion, stating that Mattel’s claim was logically related to MGA’s claim, and therefore MGA’s claim was compulsory and permissible.  At trial, MGA won, and was awarded over $80 million in damages.  Mattel appealed, and the Appeals Court reversed, stating that MGA’s claim was factually distinct from Mattel’s.  Mattel, Inc. v. MGA Entertainment, Inc., Case No. 11-56357 (9th Cir. January 24, 2013)(available here).

The 9th Circuit had previously remanded the case for a new jury trial, and the second jury rejected Mattel’s copyright claim over MGA’s Bratz dolls.  The jury found that Mattel had misappropriated MGA’s trade secrets, and MGA was awarded attorneys’ fees and costs under the Copyright Act.  Mattel did not challenge the copyright infringement claim, but it did challenge the misappropriation of MGA’s trade secrets, and the award of attorneys’ fees.  The 9th Circuit held that MGA’s counterclaim for trade secret misappropriation under California law was not compulsory, and therefore should not have been allowed since it was not based on the same facts as Mattel’s trade secret misappropriation claim.  The Court also vacated the jury’s verdict that Mattel had misappropriated MGA’s trade secrets, and vacated the relevant damages, fees, and costs.  However, the Court affirmed the award of attorneys’ fees and costs to MGA under the Copyright Act.

A compulsory counterclaim is one that arises out of the same transaction or occurrence of the opposing party’s claim, Fed. R. Civ. P. 13(a)(1)(A), a logical relationship test, which “exists when the counterclaim arises from the same aggregate set of operative facts as the initial claim, in that the same operative facts serve as the basis of both claims or the aggregate core of facts upon which the claim rests activates additional legal rights otherwise dormant in the defendant.”  In re Pegasus Gold Corp., 394 F.3d 1189, 1195-96 (9th Cir. 2005).  The Court reiterated that “what matters is not the legal theory [of the claims] but the facts.”  Mattel, Slip Op. p. 6 (emphasis in original).

Applying the logical relationship standard, the Court determined that MGA’s misappropriation claim did not rest on the same facts as Mattel’s claim.  Instead, Mattel’s claim focused on the allegation that several of Mattel’s employees disclosed trade secrets to MGA, while MGA’s claim focused on allegations that Mattel’s employees stole MGA’s trade secrets by engaging in trickery at toy fairs, such as by pretending to be buyers.

The Court then examined whether the award of attorneys’ fees to MGA under the Copyright Act was proper.  Case law dictates that the award of attorneys’ fees under the Copyright Act is completely under the discretion of the district courts.  The district courts must determine whether the award of attorneys’ fees would further the purpose of the Act of inducing artistic creativity for the good of the general public.  Mattel, Slip. Op. P. 7.  The Court acknowledged the public interest with respect to the Bratz dolls.  In addition, the Court agreed with the district court that MGA’s involvement in the case was important because MGA’s “failure to vigorously defend against Mattel’s claims could have ushered in a new era of copyright litigation aimed not at promoting expression but at stifling the ‘competition’ upon which America thrives.”  Mattel, Slip. Op. 7 (quoting the district court).

The Court concluded that the district court’s award of attorneys’ fees to MGA was acceptable because of Mattel’s extremely broad and unreasonable claims for relief.  MGA did not have to show that Mattel’s claim was frivolous or in bad faith.  Mattel, Slip Op. p. 8.  The Court affirmed the award of attorneys’ fees to MGA under the Copyright Act with the hope that “Mattel and MGA can take a lesson from their target demographic: play nice.”  Mattel, Slip Op. p. 9.

Attorneys Fees in Defense of Patent Infringement – Exceptional Case Fees

The Federal Circuit in Old Reliable Wholesale, Inc. v. Cornell Corp., Case No. 2010-1247 (Fed. Cir. March 16, 2011) (available here) reversed the trial court’s ruling that attorneys fees be assessed against patent owner Old Reliable and in favor of the accused infringer, Cornell Corp. See Cornell Corp. at .Unless a party engages in litigation misconduct, sanctions should only be imposed on the patentee if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless. See slip opn. pg. 8 and Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005). The “objectively baseless” standard under 35 U.S.C. section 285 is identical to the objective recklessness standard for enhanced damages and attorneys’ fees against an accused infringer for willful infringement. See 35 U.S.C. section 284 and In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc); iLOR, LLC v. Google, Inc., Nos. 2010-1117, 2010-1172, 2011 U.S. App. LEXIS 516, at *11 (Fed. Cir. Jan. 11, 2011).

Objective baselessness does not depend upon the state of mind of the targeted party but instead depends upon “an objective assessment of the merits” of the challenged claims and defenses. See pg. 8 and iLOR, 2011 U.S. App. LEXIS 516, at *12. Proof of objective baselessness must be established with clear and convincing evidence. pg. 7.

Unless the Patentee asserts an argument or claim in the litigation “so unreasonable that no reasonable litigant could believe it would succeed,” it cannot be deemed objectively baseless for purposes of awarding attorney fees under section 285. See pg. 8, and Dominant Semiconductors Sdn. Bhd. v. OSRAM GmbH, 524 F.3d 1254, 1260 (Fed. Cir. 2008).

In Old Reliable, the inventor at his deposition testified that an earlier version of the patented product did the same thing as his invention. Since the Patentee pressed forward with the litigation after the deposition, the trial court determined that the patent was invalid and there was no reasonable basis to go forward from the inventor’s sworn testimony. The Federal Circuit stated that the initial position of the USPTO that would have confirmed patentability of the invention over the earlier version of the product established that an argument could be made by Patentee Old Reliable and thus it had a reasonable basis for going forward with the trial.

When Patentee Asserts Infringement, There is a Good Faith Presumption of Correctness

The Court of Appeals for the Federal Circuit recently ruled that when a patent owner sues another asserting a valid patent, there is a presumption of good faith.  To “overcome that presumption and show that the patentee’s infringement claims were vexatious, unjustified, or frivolous, and were pursued in bad faith,” defendant must provide clear and convincing evidence. Medtronic Navigation, Inc. v. Brainlab Medizinische Computer Systeme Gmbh, Case no. 2009-1058 at slip opn. 13-14 (Fed. Cir. April 26, 2010) (available here).  In support, the Federal Circuit cited Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1382 (Fed. Cir. 2005); Springs Window Fashions LP v. Novo Indus., L.P., 323 F.3d 989, 999 (Fed. Cir. 2003); Serio-US Indus., Inc. v. Plastic Recovery Techs. Corp., 459 F.3d 1311, 1322 (Fed. Cir. 2006); and Forest Labs., Inc. v. Abbott Labs., 339 F.3d 1324, 1328-29 (Fed. Cir. 2003).

Medtronic Navigation, Inc. (Medtronic) brought suit against Brainlab Medizinische Computer Systeme Gmbh, (Brainlab) alleging that Brainlab infringed the patented image-guided surgical navigation devices that use an array of cameras to detect the position of surgical instruments through triangulation.  Medtronic not only lost the case in the U.S. District Court but the judge found that the case was exceptional under 35 U.S.C. § 285 of the Patent Statute and awarded Brainlab over $4,000,000 ($4m) in damages for attorneys fees, costs, expenses and interest.  Further, the trial court assessed this award against Medtronic’s attorneys.  The Federal Circuit reversed this ruling.

The trial court, in an early ruling, refused to accept certain Medtronic claim construction theories (a Markman ruling).  Brainlab moved for summary judgment arguing non-infringement and, in response, Medtronic asserted infringement under the doctrine of equivalents, withdrawing its assertions of literal infringement of the claims.  Confirming the trial court judge’s earlier statement that infringement under the doctrine of equivalents is a factual finding relegated to the jury, the court denied Brainlab’s motion for summary judgment two weeks before trial.

Following Medtronic’s case in chief, Brainlab moved for judgment as a matter of law (“JMOL”) under Rule 50(a) of the Federal Rules of Civil Procedure raising the same arguments in its summary judgment motion.  Brainlab also added an argument that infringement by equivalents under one of the Medtronic patents was barred by amendment-based prosecution history estoppel.  The trial court denied the motion ruling that he wanted to hear Medtronic’s evidence and more carefully review the law.  Brainlab again made the same motion at the close of the entire case, before the case went to the jury.  The judge again denied the motion.

The jury found that Brainlab infringed Medtronic’s patents and awarded damages in excess of $50m. Brainlab then re-filed its JMOL motions. The trial court finally granted Brainlab’s JMOL motion, threw out the jury’s decision and found non-infringement on all counts.  The trial court held that Medtronic’s doctrine of equivalents theory was barred by prosecution history estoppel, adopting both the argument-based and amendment-based theories advanced by Brainlab.  Medtronic appealed the district court’s judgment for Brainlab and the Federal Circuit, in a non-precedential opinion, upheld the trial court’s rulings.

After the first appeal, Brainlab sought an award of attorney fees and expenses based on 35 U.S.C. § 285, 28 U.S.C. § 1927, and the court’s inherent powers arguing that the case was exceptional and that Medtronic and its trial counsel had prolonged a frivolous lawsuit and had obtained an improper jury verdict through litigation misconduct and abusive advocacy.  The trial court agreed and held that under Section 285, the case was exceptional and awarded over $4m for attorneys fees and costs to Brainlab.  The court also found that Medtronic’s attorneys engaged in abusive litigation conduct.  The award was assessed against Medtronic and its attorneys. The Federal Circuit overturned these rulings.

Although such trial court findings are reviewed under a highly deferential standard, see Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004, 1026 (Fed. Cir. 2008), the size of the award and the “reputational impact” on Medtronic’s attorneys required a careful review of the record.  The Appeals Court stated:

We have held that there is a presumption that an assertion of infringement of a duly granted patent is made in good faith.   Clear and convincing evidence is required to overcome that presumption and show that the patentee’s infringement claims were vexatious, unjustified, or frivolous, and were pursued in bad faith.  The district court’s characterization of Medtronic’s claims as frivolous is undermined by the fact that the court denied BrainLAB’s motions for summary judgment and denied each of its motions for JMOL filed during the trial.  Absent misrepresentation to the court, a party is entitled to rely on a court’s denial of summary judgment and JMOL, as well as the jury’s favorable verdict, as an indication that the party’s claims were objectively reasonable and suitable for resolution at trial.  Slip opn. pg. 14-15 (citations omitted).

As for the award of fees under 28 U.S.C. § 1927, the Federal Circuit stated:

Even if McDermott [Medtronic’s attorneys] had concluded that Medtronic’s prospects for ultimately prevailing in the litigation were significantly diminished by the court’s claim construction order, it was not unreasonable for McDermott to continue to press its client’s case in light of the arguments that remained available to it.  See Mezibov v. Allen, 411 F.3d 712, 719 (6th Cir. 2005) (“[A]n attorney is ethically bound to make reasonable arguments on behalf of his client, even if the attorney disagrees with them.”); Stitt v. Williams, 919 F.2d 516, 528 (9th Cir. 1990) (“[A] lawyer should not be sanctioned for failing to abandon his client’s case at the drop of a summary judgment motion, unless there is no colorable defense to the motion that can be advocated and no possible merit to any argument that can be advanced.”).  Slip opn. pg. 37.

As for the trial courts “inherent power” to sanction counsel, the appellate court “ require[s] a finding of fraud or abuse of the judicial process before a trial court can invoke its inherent sanctioning power, and … [the] case must be sufficiently beyond exceptional within the meaning of section 285 to justify . . . a sanction under the court’s inherent power.” Slip opn. pg. 38; quoting Amsted Indus., Inc. v. Buckeye Steel Castings Co., 23 F.3d 374, 378-79 (Fed Cir. 1994).

The result, as noted above, was a reversal of the $4m attorneys fees award.