July 5, 2017

Weak Infringement Position Makes Troll-like Behavior Exceptional

In Adjustacam LLC v. Newegg, Inc., [2016-1882] (July 5, 2017) the Federal Circuit reversed the district court’s decision not to award attorneys’ fees to defendant after plaintiff voluntarily dismissing its complaint after a Markman hearing.

AdjustaCam sued a large number of defendants for patent infringement, voluntarily dismissing most defendants early in the litigation.  The case against Newegg went through a Markman order and extended expert discovery.  However, just before summary judgment briefing, AdjustaCam voluntarily dismissed its infringement claims against Newegg with prejudice.  Newegg then filed a motion for attorneys’ fees.  The district court initially denied Newegg’s motion, and Newegg appealed to the Federal Circuit, which remanded in view of Octane Fitness.  On remand, the district court again denied attorneys fees.

A district court abuses its discretion when its ruling rests on an erroneous legal conclusion or on a clearly erroneous assessment of the evidence.  The Federal Circuit held that the district court abused its discretion by not awarding fees to Newegg for two independent reasons: (1) it failed to follow the Federal Circuit’s mandate on remand; and (2) its decision was based on “a clearly erroneous assessment of the evidence.”

As to the first reason, the Federal Circuit said that the district court erred by ignoring the mandate “to evaluate whether this case is ‘exceptional’ under the totality of the circumstances and a lower burden of proof” in the first instance.  Instead of engaging in an independent analysis, the district court adopted the previous judge’s factual findings wholesale — the Federal Circuit noting that the entirety of the court’s analysis based on those adopted fact-findings consists of three sentences.  This wholesale reliance on the previous judge’s fact finding was an abuse of discretion.

As to the second reason, the Federal Circuit found that the record developed over the past five years points to this case as standing out from others with respect to the substantive strength of AdjustaCam’s litigating position.  While the infringement claim may have been weak at the time of filing, after the district court’s Markman order, the lawsuit was baseless.  The Federal Circuit found that no reasonable fact finder could conclude that Newegg’s products infringe; therefore, AdjustaCam’s litigation position was baseless, and the district court’s conclusion otherwise was clearly erroneous.  The Federal Circuit further found that AdjustaCam litigated the case in an “unreasonable manner.”  The Federal Circuit also noted that AdjustaCam relied upon a supplemental declaration making new infringement arguments executed two years after the initial fees determination, although the Federal Circuit did not appear to consider that the standard for award of fees changed in the intervening two years.

The Federal Circuit concluded that the totality of the circumstances demonstrates other dubious behavior that, when considered collectively, warrants fees under §285.

The Federal Circuit specifically commented on AdjustaCam’s damages model.  While asserting seemingly low damages against multiple defendants — or settling with defendants for less than the cost of litigation — does not necessarily make a case “exceptional” under § 285, asserting nuisance-value damages against many defendants, settled with them for widely varied royalty rates, and continuing to press baseless infringement contentions well past an adverse Markman order and expert discovery as enough to tip the balance in favor of exceptionality.