Patent-Suit Abuse Targeted as Supreme Court Accepts Case

The U.S. Supreme Court will hear two appeals that would make it easier for targets of patent suits to collect attorneys’ fees, agreeing to consider steps that some companies say would deter groundless litigation.

The court today said it will hear arguments from Octane Fitness LLC, which is seeking $1.3 million in fees after defeating a patent suit over exercise equipment. The justices also accepted an appeal by Highmark Inc., a Pennsylvania insurer asking for $5 million from a company that unsuccessfully sued for patent infringement.

Companies targeted by patent suits, including Google Inc. (GOOG), say fee awards are needed to stem a costly trend of frivolous litigation. A White House report said more than 100,000 companies were threatened last year with infringement suits by businesses whose sole mission is to extract royalty revenue. Those entities, dubbed “patent trolls” by critics, filed 19 percent of all patent lawsuits from 2007 to 2011, according to the Government Accountability Office.

“With the average patent case costing millions of dollars to litigate, the threat of paying the prevailing party’s attorney’s fees is a powerful deterrent to frivolous claims and litigation mischief,” the Blue Cross and Blue Shield Association, a Washington-based trade group, argued in court papers urging the high court to intervene in the Highmark case.

‘Exceptional Cases’

The U.S. Patent Act says fees can be awarded “in exceptional cases.” Octane contends the federal appeals court that handles patent cases, the U.S. Court of Appeals for the Federal Circuit in Washington, has developed a “rigid and virtually insurmountable test” for implementing that statutory language.

Under the Federal Circuit test, a suit must be “objectively baseless” and have been filed in bad faith. Octane says trial judges instead should be able to award fees when a patent holder “unreasonably pursues a case having an objectively low likelihood of success.”

Octane was sued by Icon Health & Fitness Inc., a rival exercise equipment maker, over a component in elliptical machines. Icon urged the Supreme Court not to take up the case, saying Octane is seeking a standard that “is nowhere to be found in historical precedent or the legislative history” of the Patent Act.

Icon said its suit against Octane, while unsuccessful, was “not exceptional by any precedential measure.”

Allcare Health

Highmark raises a related issue, saying the Federal Circuit should have deferred to a trial judge’s conclusion that the suit was so frivolous that fees were warranted.

The Federal Circuit said it wouldn’t accept U.S. District Judge Terry Means’s assessment of the suit by Allcare Health Management Systems Inc. Voting 2-1, the panel reversed part of the judge’s finding that the suit was objectively baseless. The appeals court ordered recalculation of the fee award.

Allcare’s patent, which it acquired from an inventor for $75,000, covers a method of using a computer to generate a list of possible treatments based on symptom data entered by a doctor.

Allcare contended the patent also covers a method for determining whether a proposed treatment will require pre-approval from the insurer. In rejecting Means’s conclusion, the Federal Circuit said Allcare’s reading of the patent, while wrong, was “not unreasonable.”

Icon, the company that makes NordicTrack machines, is based in Logan, Utah. Octane is based in Brooklyn Park, Minnesota.

Retail Federation

Google and its allies, including the National Retail Federation, are also pushing Congress to make it easier for penalties to be imposed. One proposal, by House Judiciary Committee Chairman Bob Goodlatte, a Virginia Republican, would force the losers of patent cases to pay the winners’ expenses in most cases.

Judges rarely order patent owners who lose their cases to pay the other side, and the Federal Circuit has been grappling with the issue. In December, it ordered a federal judge in Texas to impose sanctions against a company for making unreasonable claims of what its patent covered.

Chief Judge Randall Rader, co-authoring an opinion piece published by the New York Times in June, urged courts to impose more penalties.

The high cost of litigation often prompts companies to pay the patent owner even if they think it is a spurious claim, the GAO found.

The Supreme Court will hear arguments and rule by early July in the two cases. The cases are Octane Fitness v. Icon Health & Fitness, 12-1184, and Highmark v. Allcare Health Management Systems, 12-1163.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.